What Economic Policies Do We Need?

[This is the third and final part of a ZNet commentary series about global economic crisis and relating to Greece, by Peter Bohmer and Robin Hahnel. Hahnel spoke at the Greek anti-authoritarian movement’s B-Festival in Athens last May and Bohmer will be speaking at the festival in Thessaloniki in September.]


If stonewalling financial reform and fiscal austerity will only make matters worse, what should be done instead? When unable to defend bad policies advocates always resort to TINA – There Is No Alternative. This is what Prime Minister Papandreou and PASOK now claim in defense of caving to financial speculators, the European Commission, and the IMF, and imposing an austerity budget on ordinary Greeks who did nothing to cause the economic crisis. Papandreou now claims fiscal austerity is regrettable but unavoidable. In the words of Bill Clinton, “he feels his fellow Greeks’ pain.” However, there is a better alternative for Greece, just as there is for the world at large.


(1) Instead of imposing wage freezes, reducing vacation and retirement benefits, and laying off public employees providing useful services and public goods, taxes should be raised on the wealthy, and financial transaction taxes should be levied to discourage speculative, destabilizing activity. Raising the value added tax (the European equivalent of a sales tax) is highly regressive. Going after taxi drivers for tax evasion is small change and petty. Tax evasion by wealthy Greeks is notorious, and forcing the wealthy to pay their fair share of taxes is where fiscal austerity should begin – and end for the foreseeable future!


 (2) Greece needs fiscal stimulus not fiscal austerity to pull its economy out of the recession. Moreover, the world needs fiscal stimulus not fiscal austerity to end the Great Recession. Governments everywhere, including Greece, should engage in aggressive fiscal stimulus. Greece has every reason to be angry at Germany for not engaging in more fiscal stimulus, while Germany has no reason to criticize Greece for running a budget deficit — since it should be! Right now Germany can borrow at very low interest rates to finance a deficit, whereas financial speculators are forcing Greece to pay much more than is warranted by objective circumstances. All the so-called PIGS – Portugal, Ireland, Italy, Greece, and Spain — should unite and (a) refuse to accede to counterproductive demands that they engage in useless fiscal austerity, (b) demand that the stronger European economies like Germany launch strong fiscal stimuli as the best way to reduce unsustainable trade imbalances within the EU, and (c) demand underwriting protection from the EU sufficient to earn smaller EU countries reasonable interest rates to refinance their debt. 


The only way to save the EU is for the EU to use its considerable powers to do what its citizens need it to do to engineer an economic recovery. The EU needs to be insisting on meaningful international financial reform at IMF and G-20 meetings, and imposing restraints on those who would speculate at the expense of European governments who merely want to roll over their sovereign debts on reasonable terms. Unlike the Greek government, or the government of a small third world country, the EU has the power to stare down financial markets. What it lacks is the will to do so. The reason it lacks the will is because so far EU governing institutions are more beholden to financial interests than they are to the EU citizens they are supposed to represent.


(3) In the immortal words of former US Treasury Secretary Hank Paulson who told the US Congress in October 2008 that they had no choice but to approve his $700 billion TARP bailout request for US banks because Congress was “already on the hook,” this time it was Greece who had the stronger countries in the euro zone “on the hook,” and PASOK needed to take advantage of its leverage. Much of Greek debt is owed to banks from other European countries, and Germany in particular. And as everyone knows, the euro would take a serious hit if Greece defaulted. After incompetent delay which multiplied the size of the necessary bailout several times, German Chancelor Angela Merkel finally agreed to a bailout package to save Germany’s own banks and protect its precious euro – certainly not to help Greek workers who German politicians and newspapers slander as lazy and greedy. Had PASOK hung tough and defended the Greek economy against demands for greater austerity they could have gotten financial backing on much better terms. PASOK was a lousy negotiator on behalf of Greek citizens and deserves to be fired for incompetence as well as for trying to force Greek workers to tighten their belts to pay the bill for a party the previous conservative government threw for its wealthy Greek supporters.


But what if the Greek government cannot secure sufficient backing from the EU to roll over its debt without engaging in budget cuts that will cripple the Greek economy? There are advantages as well as disadvantages to defaulting on sovereign debt. The Russian economy was far better off after the government defaulted in 1998 than it would have been had they acceded to onerous IMF conditions in exchange for a bailout. The Argentine economy was in free fall before the government defaulted on international loans in 2001, but has enjoyed strong positive growth ever since. But of course when PASOK made clear to all that it would do anything international creditors and the European Commission demanded to avoid default, it lost any chance of securing favorable terms. Unless a government is willing to say “no” to a deal that should not be accepted there is no chance to secure a favorable outcome.


(4) Similarly, there are both advantages and disadvantages of being inside the euro zone. The principle advantage is a large and stable currency that is relatively – although not entirely — immune from speculative attacks. The chief disadvantage is Greece cannot devalue its currency relative to the stronger economies in the euro zone to reduce unsustainable trade imbalances. But for Greece it is becoming increasingly apparent that the disadvantages may outweigh the advantages. And even if the advantages still outweigh the disadvantages, it is better to leave the euro zone now, rather than agree to damage the economy severely for three years and have to leave the euro zone in any case — which is what current policies will lead to. According to the calculations of IMF officials who helped negotiate the bailout deal, even if Greece carries out the austerity program to the letter, its sovereign debt will be even higher in three years than it is today!


If the EU will not offer Greece a way to grow out of the crisis Greece is better off leaving the euro zone. From 1998 to 2001 Argentina tried what PASOK is trying now, internal devaluation, only to drive half its population into poverty. After devaluing and defaulting, Argentine GDP dropped for one more quarter and then climbed 63% over the next six years.


Coordinate stimulation across countries with increased public investment to provide “green jobs,” maintain wages and benefits for both public and private sector workers, maintain social programs and transfer payments to low income people, impose competent financial regulation, and make the government the employer of last resort!  That is a viable program in general, and a viable option for Greece as well. Greeks deserve a government committed to this option, which means a government willing to default and/or leave the euro zone if creditors and the EU are unwilling to provide the Greek people an opportunity to grow their way out of a crisis that was not of their making.


Peter Bohmer is Professor of Political Economy at Evergreen State University in Olympia Washington. Robin Hahnel is Professor Emeritus at American University in Washington DC, and Visiting Professor of Economics at Portland State University in Portland Oregon.

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