The Greek crisis and the blame game
Greece’s woes have revealed a Euro-elite more interested in blame-shifting than tackling the economic crisis.
Despite the huge amount of media coverage on the Greek financial crisis, there is a remarkable omission. Instead of probing the underlying causes of Greece’s troubles there’s a bizarre blame game in which every player is intent on holding someone else responsible.
The list of potential culprits is long. Not surprisingly the alleged greed of Greek workers and the laxness of the Greek authorities are among the favourites. Financial speculators and the credit-rating agencies are also near the top. Then there is the prevarication of the European authorities and particularly the German government. Even ordinary Germans have come under attack in the British media for being too concerned about their own prosperity to bail out Greece.
All of this resembles a playground game of ‘It’ rather than an attempt to grapple seriously with the crisis. Beyond the ritual denunciations of Greece, and other southern European states, for allowing public spending to surge, there is little discussion of economics. The possibility of a relationship between the state of the real economy and the financial crisis does not even seem to occur to most commentators.
The immediate cause of the crisis was Greece’s difficulties in repaying its debt to foreign creditors. As creditors became increasingly nervous about Greece’s ability to repay its debts, higher interest rates have been demanded, leaving Greece with even more to repay. In effect, the country got caught in a vicious circle from which it could not escape.
After months of prevarication about striking a deal to resolve the crisis, other members of the eurozone (also known as euro area) – the 16 European Union (EU) members that use the euro as their currency – were also becoming at risk. Fears were growing that Portugal and Spain, too, could find it increasingly difficult to service their debts. What had started as a financial crisis in Greece – one of the smaller eurozone economies – was threatening to engulf the whole region.
That was the backdrop to last weekend’s €110bn (£95 billion) deal involving Greece, the European Commission, the European Central Bank and the International Monetary Fund (IMF). In return for external financing, Greece has had to accept a savage austerity programme including cuts in public sector pay, job losses, reduced pensions and increased taxes. These austerity plans provide the economic backdrop to the sometimes violent protests by Greek workers. Although the new deal is still subject to approval by eurozone member states, it looks likely to be passed. Whether it will quell the turmoil remains to be seen.
Perhaps the first thing to notice about the crisis is that, in a sense, it should never have happened. The idea behind the formation of the eurozone in 1999 was the creation of a unified monetary bloc. All member states would share the same currency and interest rates across the region would be set by the European Central Bank (ECB).
There were also strict rules designed to stop large deficits emerging. Eurozone member states are meant to observe the Maastricht criteria (also known as the euro convergence criteria) which include limiting the fiscal deficit to three per cent of GDP every year and limiting government debt to 60 per cent of GDP.
If the system had worked properly there would have been no difference between the yields (returns to investors) on, say, German debt and Greek debt. Yet from early 2009 onwards, yields between German and Greek debt were widening while other countries, notably Portugal and Spain, also had to pay more than Germany to borrow. By the end of last week, the extra yield foreign investors were demanding to buy Greek debt was more than eight percentage points higher than German debt. The country was on the verge of financial collapse.
So what went wrong? The obvious target to blame is Greece itself. Perhaps Greek workers, particularly those in the public sector, are to blame for demanding too cosseted a lifestyle. For example, they often received thirteenth and fourteenth month pay every year as well as bonuses for Christmas and Easter. Alternatively the blame could be put on the Greek authorities for allowing such a situation to come about in the first place.
In terms of the financial measures beloved of economists, Greece’s fiscal deficit had reached 13.6 per cent of GDP by 2009 as against the three per cent allowed by the convergence criteria. Government debt had reached 115 per cent of GDP rather than the 60 per cent allowed.
In the more sober financial media much of the talk of austerity is expressed in terms of reducing the fiscal deficit and, eventually, the overall government debt. The implications for the Greek population are clear. In the more mainstream media, particularly in other eurozone member countries, the attacks of Greeks are more explicit.
But although Greece’s public finances were in a worse state that most other countries by 2009, the Maastricht criteria were being widely ignored. The average government deficit in the eurozone was 6.3 per cent of GDP, while government debt averaged 78.7 per cent. The largest fiscal deficits in the eurozone were Ireland (14.3 per cent), Greece (13.6 per cent), Spain (11.2 per cent) and Portugal (9.4 per cent). Britain, which is not a member of the eurozone, had a fiscal deficit of 11.5 per cent – not that much less than Greece.
No doubt each country would claim that its circumstances are different from those of Greece. But the striking thing is that so many members states ignored the basic rules of the eurozone.
Greedy speculators – or ‘the markets’ – are also often held to blame. From this perspective, financial institutions somehow undermined a basically healthy economy so they could benefit from the resulting chaos. For example, France’s President Nicholas Sarkozy was heard complaining about the ‘speculation targeting Greece’.
Sometimes the same criticisms are wrapped in medical metaphors. Critics often talk of contagion as financial troubles spread from one country to another. Angel Gurria, the secretary-general of the Organisation for Economic Cooperation and Development (OECD), told the Bloomberg news agency that the eurozone crisis was spreading ‘like Ebola’.
Such criticisms invariably miss the bigger picture. It is true that financiers often try to take advantage of financial turmoil to make money for themselves or to protect themselves against losses. But the structural economic problems afflicting Greece, and indeed the eurozone in general, were not created by financial institutions.
A variant of this approach is to blame credit-rating agencies such as Moody’s and Standard & Poor’s. The role of these agencies is to assess the quality of the debt issued by countries or companies. The higher the assessed quality, the higher rating – and the less the borrower has to pay in interest. Most coveted of all is the highest possible rating of AAA. Critics of the rating agencies argue they were too harsh on Greece, too ready to downgrade its debt at signs of trouble. This is the exact opposite of the criticism levelled at them during the 2008-9 financial crisis in America when they were often judged too lenient on awarding credit ratings.
Criticisms of the agencies were made at the highest levels. Guido Westerwelle, the German foreign minister, called for the creation of an alternative European credit-rating agency and argued that ‘conflicts of interest are guaranteed’ with the existing agencies. Dominique Strauss-Kahn, the managing director of the International Monetary Fund (IMF), argued that the agencies simply reflected investors’ perceptions rather than the fundamental realties of a country’s economic health.
But this argument also stretches credulity as an explanation of the Greek crisis. Simply awarding Greece’s credit rating a different set of letters is not sufficient to explain a financial collapse even in conditions of great uncertainty. There has to be a more fundamental explanation for the country’s vulnerability.
An alternative to blaming the financiers is to criticise the prevarication of the European authorities, particularly those of Germany, before then finally coming to accept a deal on Greece. For example, the Economist argued that:
’The chief culprit is Germany. All along, it has tried to have it every way – to back Greece, but to punish it for its mistakes; to support the Greek economy, but not to spend any money doing so; to treat this as just a Greek problem, when German banks and German citizens, who lend to Greece, stand to lose money too. German voters do not favour aiding Greece. But rather than explain to them why it is in Germany’s interest, the chancellor, Angela Merkel, has run scared of upsetting them before a big regional election on May 9th.’
As it happens such prevarication is easy to explain. Germany and the other stronger eurozone states were caught between contradictory forces. On the one hand, they wanted to distance themselves from Greece’s economic problems and avoid giving the impression that financial laxness was acceptable. By attacking Greece, they could present its burgeoning debt problem as a peculiarly Greek phenomenon rather than an extreme version of what was happening across the eurozone.
On the other hand, the major eurozone countries were worried about a Greek financial collapse and the likely consequence of a break-up of the eurozone. When the integrity of the euro itself was threatened, they felt compelled to act.
Perhaps the lowest attack of all came in the Guardian, a British newspaper which likes to see itself at the pinnacle of enlightened liberalism. Phillip Inman, an economics correspondent on the newspaper, wrote a comment piece blaming ordinary German baby boomers not only for the Greek crisis but for endangering the European recovery. After carefully distancing himself from xenophobia or stereotypes about the Second World War he denounced Germans in terms that might even have made Winston Churchill blush:
‘Those peace-loving, social-democratic Germans are selfishly jettisoning ailing European Union countries, starting with Greece, to maintain probably the richest, most all-embracing cradle-to-grave welfare state on the planet. The fault lies mainly with Germany’s large baby-boomer middle class, which now share the same aspirations as the aristocrats of the past – namely, a long and prosperous and supremely idle retirement. Like a rogue elephant in search of food, German investors have stripped the bark from almost every tree in the savannah. To maintain an artificially high standard of living and that promised retirement, they seem intent on eating what remains.’
Perhaps Inman once had a bad experience on a beach holiday – still, it is hard to see how his argument can be justified. The desire to have a prosperous life is virtually universal – whatever values the Guardian professes – rather than peculiarly German. If anything, the desire for progress pushes society forward by providing the motivation to overcome problems that it confronts.
In contrast, those who raise questions about the inherent inflexibility of the eurozone raise legitimate points. It is true that the stability of a monetary bloc can come under enormous strain if some economies perform much worse than others. For example, if Greece still had the drachma as a currency its value could have fallen to compensate for the country’s economic weakness. Alternatively if it had its own central bank it could have raised short-term interest rates to help subdue domestic demand and make Greek debt more attractive to foreign investors. Neither option was available to Greece as a member of the eurozone.
However, the peculiarities of the eurozone as a monetary bloc do not explain most of the story. The striking thing about Greece’s economic problems is that they are only a more extreme version of those facing not just other eurozone members but countries, such as Britain, outside the region.
The general problem facing all the developed economies, to a greater or lesser extent, is one of sluggish economic growth. This chronic weakness was disguised by an artificially created consumption boom up until the start of the financial crisis of 2008. But in the past two years countries have had to start to come to terms with the debt they built up in the good times.
For many years relatively low interest rates and high state spending kept economies relatively buoyant even if the underlying growth dynamic was weak. Easy money helped bloat the financial sector and paved the way for future bad debt problems. Meanwhile, this state spending meant that even the stronger members of the eurozone, such as France and Germany, have never really complied with the Maastricht criteria. In the early days creative accounting was used to circumvent the rules and penalties for breaching them were not applied.
The onset of the global financial crisis in 2008 added a new dimension to the global debt problem. Governments bailed out troubled financial institutions in a desperate attempt to avert collapse. To an extent it worked – the financial system was stabilised – but the underlying economic weaknesses were never addressed.
Essentially what happened was bad debt was transferred from the books of the banks to governments. High debt remained as a symptom of economic sluggishness but it was, in effect, nationalised. The state had taken on the burden from individual financial institutions.
Yet the underlying structure of the developed economies has changed little. There has been no large scale restructuring to allow for a new round of strong growth. Even the large amounts of fiscal stimulus money seem to have given a temporary boost to consumption rather than being invested in infrastructure for the future.
Under such circumstances the economy exists in a state of permanent drift. Often it manifests itself as a financial crisis centred on one place or another. One time Thailand, then Russia, then America and now Greece. It is not possible to predict with certainty where it will strike next. A Greek default, or even the break-up of the entire eurozone, remains a possibility. Alternatively another crisis may manifest itself somewhere else entirely.
What is certain is that until the problem of fundamental economic weakness is resolved, the world will remain vulnerable to such crises.
Previously on spiked
Guy Rundle reported from Greece on the much caricatured crisis. Brendan O’Neill argued that the 2008 riots in Greece exposed the state’s historic lack of legitimacy, and criticised Britain’s response to the collapse of Iceland’s financial system. Frank Furedi looked at how EU bureaucrats are destroying public life. Mick Hume argued that the economic crisis has shattered the facade of European unity, and also asked what will happen to the UK economy when the state turns off the life support. Or read more at spiked issues: Politics and Europe.
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