![Greek Prime Minister paid tribute to Greek patriots executed by Nazis during WWII. His message to the Germans was clear: we bailed you out, now it's our turn. [Credit: The Guardian]](https://i0.wp.com/www.dougsbriefcase.com/blog/wp-content/uploads/2015/01/credit-guardian.jpg)
Greek Prime Minister paid tribute to Greek patriots executed by Nazis during WWII. His message to the Germans was clear: we bailed you out, now it’s our turn. [Credit: The Guardian]
Tsipras’s message was not lost on Angela Merkel and other European leaders: the world forgave most of Germany’s debt; now it’s Greece’s turn.
In 1953, Germany needed a bailout. The Versailles Treaty that ended the First World War required the German government to pay reparations to the war’s victors. During the 1920s, these payments, which the English and French insisted be made in gold, contributed to the hyperinflation and social displacement that brought the Nazis to power. Hitler repudiated this debt and defaulted on other money borrowed during the inter-war period.
After the Second World War, the cash-strapped West German government agreed to negotiate repayment. The Allies understood that forcing Germany to repay all of its debt would have crushed its crippled economy. The London Debt Agreement forgave half the debt, spread repayment of much of the rest over 30 years, and deferred payment of back interest until East and West Germany reunited.
Tsipras argues that if Greece could forgive Nazi atrocities, the Germans should be willing to forgive Greece’s fiscal improvidence. He would like a deal along the lines of the London Debt Agreement.
Greece and Germany took very different roads to penury. Germany went bankrupt the old-fashioned way: by losing wars. War once depleted public coffers; today it is peace that brings governments to their knees.
Public social welfare spending in developed countries averaged 22 percent of economic output in 2012, according to the OECD. Sustaining these levels of public spending requires onerous tax regimes and substantial government borrowing, both of which weigh on national economies.
For Greece, that weight has become unbearable. Its debt reached 176 percent of GDP last year. Unemployment is nearly 26 percent. A series of bailouts that began in 2010 provided near-term relief but appear to have done more harm than good. The government has no means of repaying the 7 billion euro ($7.8 billion) in bonds that mature this summer. Pension cuts and layoffs of public workers, on which past bailouts were conditioned, spread resentment, resulting the election of Tsipras and his Syriza party.
That party – whose full name translates to “Coalition of the Radical Left” – ran on an anti-austerity platform. The party consists largely of neo-Marxists who see the recent bailouts as a capitalist plot to subjugate Greek workers to bankers. The new government’s finance minister has described the austerity on which Greece’s creditors insisted as “fiscal waterboarding.” Syriza wants a bigger bailout and an end to austerity. They have pledged to defy their European paymasters by undoing cuts in social spending and rehiring government workers. Which is why they won the elections.
The theoretical framework behind his party’s platform was set forth in a recent piece by three Greek economists, including John Milios, who before the elections served as Syriza’s chief economist. The Milios paper (as I’ll call it here, since his is the only name I can spell), published by the Levy Economics Institute of Bard College, sets forth “a plan for solving the sovereign debt crisis in the euro area in line with the interests of the working classes and the social majority.”
Past Greek bailouts did not serve those interests, according to Milios and his co-authors. “Their aim,” Milios and his colleagues argue, “was never to tackle sovereign indebtedness.” Instead, Greece’s European creditors had a hidden agenda. They used the Greek debt crisis to “promote and embed neoliberal reforms at all levels of the economy and society” to the detriment of workers. They lent Greece just enough money to survive the immediate crisis and in return demanded austerity that cut wages, benefits, pensions and public sector jobs, advancing the interests of capital over those of labor.
What is needed is “disengagement from the austerity trap.” That can only be accomplished by a “major shift in the role of the European Central Bank (ECB).” The shift Milios and his co-authors want would be major indeed: they propose that the ECB generate 4.3 trillion euro ($4.8 trillion) to buy down the debt of all 18 eurozone countries, reducing each country’s outstanding debt to 50 percent of its GDP. The ECB would then issue interest-free loans to each country’s central bank (Greece would borrow 228 billion euro ($253 billion) under the plan; France, 895 billion ($996 billion). No interest would be due on these loans, but countries would have to repay principal. Eventually. Such payments would not commence until the loan balance represented no more than 20 percent of GDP. Milios and his co-authors estimate that it would take Greece 58 years to repay the loan, assuming that its annual economic growth would average 4.2 percent.
The Milios paper also offers an alternative plan. Roughly half the debt of several Eurozone nations matures over the next five years (2016–2020). The authors propose that the ECB declare a five-year moratorium on both new debt and interest payments on existing debt. As bonds mature, the ECB would extend to each government an interest-free loan to cover the redemption cost. It would issue similar loans to cover interest payments during that five-year period. No country would have to begin paying down the loans until their balance fell to 20 percent of GDP.
Either proposal, Milios writes, would “overthrow austerity forever” and give the European Left a new slogan: “We will not sacrifice the welfare state to debt. The European social model must be refounded!”
Catchy. But improbable. While the Tsipras government may win better terms on the next bailout than its predecessors did, they won’t get a deal quite this generous, even by inviting all European countries to partake of the largesse. If the Greeks were to take this position in their negotiations and refuse to budge, their expulsion from the euro would become a near certainty.
Still, one has to admire the insights of the European Left, especially when compared with the rather naïve views of American progressives. Our homegrown experts typically shrug off the debt problem and suggest that future productivity and tax hikes on the wealthy are sufficient to sustain entitlement spending over the long term.
The Milios paper, by contrast, acknowledges that there is little “fiscal space” for social welfare spending. Higher taxes can’t keep pace with growth in promised benefits; nor can they surmount the debt incurred to pay those benefits. Since Milios and his colleagues find benefit cuts unacceptable, their only way to create fiscal space is through massive debt monetization. The “refounded” welfare state would depend for its survival not on higher taxes, economic productivity or fiscal reform, but on the ability of central banks to create credit out of thin air.
Milios and his colleagues may prove prophetic. Central banks have become hyperactive since the onset of the last financial crisis. Quantitative easing and other unconventional monetary interventions, as Milios correctly observes, have so far principally benefited the investor class by inflating equity prices amid stagnant wages. If financial crisis were to recur, the pressure on central banks to take even more unconventional actions will mount. The consequences of such approaches, though potentially disastrous, may at some point become politically irresistible.
Alexis Tsipras is reportedly fond of the Cuban revolution. He named his son Ernesto, in honor of Che Guevara. Tsipras sees himself a white-collar Che, preferring starched shirts to military fatigues and berets.
An old-school Marxist, Che wanted workers to seize the means of production. Tsipras wants them to seize control of the production of money.