By Mark Blyth and Cornel Ban
It may be odd to use a Roman metaphor to describe a Greek political event, but in this case, it’s apt. Just as Julius Caesar crossed the Rubicon river because he could, in spite of the warnings of the Roman Senate not to, so Alex Tsipras, leader of the anti-austerity party, Syriza, has decided to try to end austerity in Greece, in spite of Europe’s leaders saying he shouldn’t. Whether Tsipras will succeed is still unclear, but whatever happens, his victory represents a crucial turning point for Europe—a signal that time has run out on austerity policies.
A “Tsipras” had to happen somewhere eventually, because there’s only so long you can ask people to vote for impoverishment today based on promises of a better tomorrow that never arrives. If voting for impoverishment brings only more impoverishment, eventually people will stop voting for it—and the timing of “eventually” will depend on when people’s assets run out. In the Greek case, backers of the incumbent New Democracy party and its austerity policies constitute that quarter of the electorate who still have assets (pensions, paper, and portfolios) after five years of depression and who want to preserve what they have. The 36 percent that voted for Syriza were the young, the asset-less, and the unemployed—people who either lost what they once had or never had much to begin with. Greece’s 1.9 percent of growth last year means essentially nothing to a society thathas lost nearly 30 percent of GDP in a little over half a decade; on the current course, it would take, by latest estimates, two generations for the country to get back above water.
Syriza’s victory presents two lessons for the rest of Europe. First, no one votes for a 15-year-long recession. Second, you can’t run a gold standard in a democracy. Either the gold standard goes, or democracy goes, and that is the choice Europe may face sooner than it thinks.
The Euro is the gold standard that pretends that it’s not one—and therein lies the rub. While Europe has a plethora of national parliaments and free and fair elections, as well as a European parliament and multiple institutions with delegated power to represent the interests of citizens, once a country is a member of the eurozone, certain things happen that bypass any possible democratic checks. On the upside, its credit history gets rewritten. Greece and Italy get to borrow like Germany (with predictable results). On the downside, when a eurozone country is hit with an economic shock, it cannot respond to it through the exchange rate (devaluation) or by using the printing press (inflation). It must choose between default, which is not allowed, and balancing its books through internal devaluation (austerity). And if that means a couple of constitutional coups d’état have to happen in the heart of democracy to get the policies through, as happened in Italy and Greece in 2011, then so be it.
So austerity becomes the only game in town. Although it may be rational for any one country to be austere, when multiple countries that share the same currency with no common fiscal policy do so, the result can only be a massive contraction of GDP and a corresponding increase in debt—which is exactly what has happened in Europe in recent years. The boost in consumer and investor confidence that austerity was supposed to provide never materialized, and the eurozone as a whole slid into recession, and then, in the periphery, into depression and deflation. Now that all of this has occurred, however, the politics of sustaining the euro have changed, and changed utterly.
Until now, Eurozone policymakers’ obsession with fighting inflation has given them a one-sided understanding of politics. In fact, Europe has not had an inflation problem of any magnitude since the 1970s. What it now faces is deflation—and since the politics of inflation and deflation are very different, the wrong policy choices produce Syrizas.
Inflation, after all, is not a general malaise that hurts all members of society equally, but a class-specific tax. Those with assets, particularly paper assets, lose harder and faster than other groups that can pressure the state to accommodate them, which is why under inflation creditors suffer and debtors prosper. Consequently, periods of inflation produce a type of politics where creditor interests come to the fore and the state is forced to retreat. The 1920s were one such period and the 1970s another—which is when Europe, and the euro, began to take their current form.
Deflation is different. Rather than creditors losing and debtors benefitting, in a deflation almost everyone loses, regardless of asset class. Consider the choice of whether to work. A worker who decides to take a pay cut to price herself into a job is individually rational. But collectively, if all workers try this, the result is a collapse in consumption. Employers get cheaper labor, to be sure, but also less demand for their products. Their logical individual responses are to cut prices to spur sales—but once again, the aggregate effect of such responses is to lower prices further. This increases real wages at a time when the economy is shrinking, which leads to more layoffs. In such a world, with practically everyone losing, calls ring out for state intervention to stop the bleeding, and eventually, they are heard. It happened in the 1930s, and it is happening once again today.
This is what Tsipras and Syriza represent: the moment Europe drifted from ever-deeper and ever-wider open capital markets and institutionalized neoliberalism to a system in which the state comes back to reassert sovereignty over markets. At that point, either democracy trumps markets (which need not be a progressive move, as Syriza’s immediate choice of coalition partners demonstrates) or markets undermine democracy to protect their asset values. Which course European countries choose will be determined in the next few years, but a glance around the continent suggests that such a choice is indeed coming.
Greece may have crossed the Rubicon first, but due to its size in the European economy, Spain may be the game changer. In Spain, Podemos is likely to form a winning left-wing coalition after that country’s general elections this fall, especially after the demonstration effect of Syriza. In Ireland, Sinn Fein is cut from the same anti-austerity cloth and has risen substantially in the polls. Although such parties are often called extreme, it is important to stress that their support bases, regardless of their leader’s dodgy connections, are democratic political forces whose core claims—an end to self-defeating austerity and impoverishing wage policies—echo mainstream social democracy and the recommendations of many prominent economists on both sides of the Atlantic. With regard to debt relief, these parties are merely restating the standard economic case that their countries’ debt overhangs are too big for investment to be resuscitated to levels that would permit high growth. Maturities can be extended indefinitely, but unless growth is restored, thegame is over, and not just for Greece.
For those who fear Syriza and its left-wing counterparts, it is worth looking at the alternatives on the radical right. From Britain to Hungary, political parties—whose ideology spans the spectrum from the explicitly Nazi (the Golden Dawn in Greece) to the nationalist–populist (the United Kingdom Independence Party and the French National Front)—are busy working to channel public anger in a different direction. Harkening back to Europe’s darkest days, they translate negotiable conflicts over economic policy into non-negotiable conflicts over ethnic identity. They attack European integration even more than the left-wing parties, question the democratic rights of existing citizens, and fan the flames of xenophobia toward ethnic minorities and immigrants. If Europe’s ruling elites want to save the European project, and the Euro at the heart of it, they need to start actively engaging with democratic left-wing parties such as Syriza and Podemos rather thanshunning them. If they don’t, they will drive some of these parties into volatile left–right alliances, or, if they fail in their mandates, leave the stage open to political forces whose goals will be far more radical than mere debt restructuring and opposition to austerity.
What is at stake now is not simply Syriza’s next moves or even a possible “Grexit.” These are symptoms, not causes. The problem is that European authorities, driven by Germany, are enforcing a politics of deflation under a pseudo-gold standard, expecting citizens to vote indefinitely for their own impoverishment in order to save the asset values of creditors. In such a world, both radical left- and right-wing forces can only stand to gain ground across many supposedly stable countries, and quicker than we think. To avoid that fate, the continent’s powerbrokers shouldmake some sort of deal with Syriza now—because what may follow it may be far worse.
So the answer is a giant wealth transfer from Germany to the profligate southern economies? How well will that go over with German voters. Do German voters count? Or are some democracies more democratic than others? Further, the only austerity Greece has engaged in is austerity in the form of being locked out of the capital markets. What Greece, as all socialists, want is to fund their dysfunctional economy by borrowing more. Greece needs to reform its economy otherwise it is best excluded from the Euro.
glennwire @jacmeoff •
In the case of Greece, the oligarchs and the Troika have run out of other people's blood and suffering.
How can you possibly be so autistic and ideological as to think that the present course of homicidal "austerity" with its appalling record of human suffering, destruction and devastation is in any way successful or sustainable? Let alone moral?
The ECB was going to launch into a programme of "quantitative easing" anyway.
The previous Greek governments singularly failed - out of complete cowardice and avarice - to tax the nation's oligarchs.
This is one major source of fiscal revenue.
Which has got nothing to do with Germany.
If the EU is to mean anything all nations should have an equal say with regards EU policy as a whole. And with regards to their own sovereign affairs.
You seem to think the EU should be a new hyper-Capitalist Reich with the Troika installed as Emperors.
Mark Blythe, the author of this article is interviewed here:
"Europe tightened too early. It also began to tighten (late 2010) just as
the scale of the problems in its banking system was becoming apparent.
European bank assets in 2011 were around 45 trillion Euros. The
underlying economies were around 15 trillion Euros. The single biggest
economy was Germany at around 3.5 trillion Euros. As I put it in Der Spiegel in October 2013 - Deutschland schafft das nicht! European
banks used Euro sovereign debt to fund themselves, so they were funding
leverage structures bigger than those in the US with impaired assets,
just as their underlying economies began to contract. The markets began
to price this in, beginning in 2010. Policymakers called it a spending
problem. It was a liquidity and lending problem. The proof. Almost all
Euro Zone countries debts have gone up since 2011 when Drahgi did the LTRO programs (longer-term refinancing operations) and
yet everyone's yields (even Italy which hasn't cut a thing) went down.
Debt up - yields down. The opposite of the austerity case. It was the
banks. It remains the banks. Cutting public spending is a sideshow that
simply aggravates the underlying problem."
JONATHAN BRADLEY •
Endlessly pushing money south isn't a solution either, being an Eurozone member has its benefits and its costs. One of those costs is a loss of some flexibility on monetary policy. If Greece cannot find an acceptable way out of its situation, a situation of its own making, within the existing framework of the Eurozone then perhaps it should leave it. But the solution cannot possibly be to ride a gravy train of debt forever. The creditors of Greece's debt should sit down and talk with the new Greek government, they were elected and as the representative of a sovereign nation they deserve to have their voices heard. Perhaps there will be a way to find a different solution that the Greek people can stomach a little better, but no free passes on poor financial management that sets a dangerous precedent.
Failing that I suppose Greece could start printing drachma again, I would have a source of bird cage liner cheaper than yesturday's paper.
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