Austerity is a Greek Tragedy

Jeff Berger —

ef00da24068535ca40f9add7e5c0c653In his most recent book Welcome to the Poisoned Chalice: The Destruction of Greece and the Future of Europe (Yale University Press, 2016), James K. Galbraith explains the modern Greek tragedy, which is really the tragedy of Europe that seems to be on a downward slide. Galbraith is a professor of economics at the University of Texas where he became friends with Yanis Varoufakis, the Greek finance minister during the first six months of January 2015 when Galbraith was in Europe trying to help his friend. These were the last six months during which the newly elected Greek government tried to negotiate a solution to its economic morass, but which resulted in the defeat of “Grexit” whereby the Greeks voted to keep the Euro as its currency rather than create a new Greek Drachma currency.

Galbraith explains the origins of Greek’s economic problems. Greece provided good social benefits to its population. Compared to other countries, Greeks could retire earlier with pension benefits. Greece sought to avoid privatization of many of its public assets such as its ports and public utilities. All of these objectives were the opposite of what was practiced in more conservative European countries that had begun to resent Greece. Many Europeans believed that unemployment rates in Greece were always higher than the rest of Europe, in part, because Greeks were culturally less motivated to work or to work as hard.

Greece sought to prevent the takeover of its small businesses by foreign multinational corporations in order to preserve its natural character and beauty, without which Greece might fail to be the tourist attraction that it is. Much of the Greek economy is based on tourism, especially tourists who are attracted to the beautiful Greek islands. Tourists are also attracted to Greece because it is thought to be the cradle of democracy and western philosophy.

Many Europeans considered the Greek government, which borrowed money heavily from European banks to finance its spending, to be corrupt. By loaning Greece money, however, one must wonder if Europe’s primary objective all along was to enable multinational corporations to penetrate Greece’s economy rather than to help the Greeks. In any case, excessive borrowing led to a downward spiral, the same way that it did in the United States during the 2007-2009 financial crisis. While the American banks were bailed out by the U.S. government, homeowners lost their homes due to foreclosures. The banks had foolishly stopped requiring down payments and no longer verified borrowers’ employment to check whether they had the capability to pay back the loans. In many cases, the banks sold their loans to third parties, thereby offloading the risk of their loans to unsuspecting creditors. The impact of banking malfeasance was unloaded onto homeowners, taxpayers who bailed out the banks, and many individual investors and pension funds throughout the world.

So what did Europe do to solve its problems that resulted from the 2007-2009 financial crisis? They did whatever they needed to do to keep the banks solvent. Rather than write off the bad loans to Greece, they made more bad loans. In so doing, European banks increased their financial exposure, which resulted in losing even more money if Greece was unable to pay back the loans.

68183722_Protester_3345196bIn exchange for more loans, Greece was also forced to accept an “austerity” program, forcing the government to spend less money and increase taxes. Increasing taxes was supposed to raise money for the Greek government to pay back the loans. Austerity was the medicine that U.S. President Herbert Hoover tried to use in 1930-1932 in reaction to the start of the Great Depression. Austerity exacerbated the Great Depression and Americans became destitute. But at least Hoover didn’t borrow excessively, nor did he raise taxes. European banks knew that austerity would induce a recession—publicly European officials said they believed the recession would be temporary and that Greece would recover. And yet, as public spending was reduced, tax revenue also decreased, making it more difficult for Greece to pay back the loans. As austerity increased, unemployment rose and tax revenues decreased. The impact was felt most by poor people who could afford austerity the least.

As it turned out, the recession turned into a permanent downward spiral in the Greece economy. The U.S. depression in the early 1930s began with a run on the banks, with people rushing to get their money out of the banks. In Greece people with the ability to do so withdrew their savings and moved their money out of the country to protect themselves. In order to prevent a run on the banks, bank withdrawals became limited, further undermining confidence in the economy.

Why did the European banks do this? To answer this question requires some speculation. The real question is, did they know that austerity would induce a permanent recession and guarantee that Greece could not pay back the loans? If they knew it, why did they do it anyway? Is it possible that Europe’s real intent was to reduce the social benefits, to increase privatization, and to make it possible for multinational corporations to take over the economy? James Galbraith believes so.

But Europe also knew they were taking a risk that Greece would simply withdraw from Europe, as was the case in the United Kingdom, which voted last June to leave the European Union in a referendum called Brexit. The name Brexit was derived from the name Grexit, which was Greece’s version of Brexit. Fortunately for the UK, they do not use the Euro as does Greece. In order for Greece to leave the EU, it would also have to create a new Greek Drachma currency. Adapting to a new currency would be difficult, but Galbraith spent six weeks in the spring of 2015 coming up with a plan, believing that a new currency was achievable.

Nevertheless, the Greeks defeated Grexit in an election, choosing instead to stay with the Euro. Greek voters were motivated by fear. They had been repeatedly warned of economic gloom and doom if the Grexit vote succeeded, that soaring interest rates and high unemployment would follow. Economic and political authorities, including the National Bank of Greece, had made statements contributing to these fears. But by June 2015 Greeks could already see that the status quo was resulting in the same problems.

Galbraith believes that in punishing Greece, the other European countries were motivated more by politics than by economics. Indeed, many politicians and economists believed that Grexit was inevitable or a good thing, or that Europe should have allowed Greece to default on its loans without Grexit. But few were willing to speak up and run the risk of being attacked or proven wrong. Galbraith believes that European governments and banks realized that Greece would never pay back its loans, but they feared contagion. If the Greeks were allowed to default on their loans, Portugal and Spain would be next, then perhaps Ireland and Italy. Punishing Greece was thought to be a deterrent to the other countries who were at risk of default if they didn’t also reduce the size of their governments and move to a more privatized economy.

Greece was once proud of its culture, which excluded the usual chain stores and restaurants that pervade other western countries in order preserve its charming small businesses. That unique culture is disappearing. Ownership of the Greek ports are now owned by China. Henceforth multinational chain stores like Walmart and McDonalds will get their customary tax breaks at the expense of local businesses who will disappear. These corporations will buy up the land, provide plenty of low wage jobs, and take their profits out of the country. The Greek islands will continue to be a great place for tourism, but tourists will no longer need to step off the cruise ships unless they want to see the golden arches standing underneath the Acropolis.

In order to place this Greek tragedy in perspective, let us contrast its austerity approach with how the U.S. responded to its financial crisis of the Great Recession of 2007-2009 by passing the Troubled Asset Relief Program (TARP) and American Recovery and Reinvestment Act (ARRA). TARP authorized the federal government to purchase toxic assets from troubled financial institutions and auto companies, while the American Recovery and Reinvestment Act (ARRA) saved and created jobs. The ARRA stimulated the economy by authorizing the government to spend money on infrastructure, education, health and energy, and to expand benefits for unemployed workers and social welfare programs. Since the U.S. has already given away its businesses to multinational corporations and driven down wages to near poverty levels, Americans were already complaining about the suffering of the middle class and poor.

As a result of these spending policies, the U.S. recovered much more quickly from the 2007-2009 recession than Europe, while avoiding a deterioration of the social safety net for the less advantaged portions of American society as did Greece. The U.S. did not slash Social Security benefits, unemployment insurance or Medicare. The U.S. did not eliminate its progressive tax system—by decreasing taxes for the rich but by increasing taxes for the poor. Would Americans have tolerated such a solution or would it have revolted? Would they have tried to emigrate to another country? Or would they have simply thrown up their hands and blamed the problems on immigrants? I don’t know the answer to these questions.

Regarding Greece, Galbraith concludes by asking “What will happen next?”

“Greek businesses and households will continue on their downward trend, with tax shortfalls leading to spending cuts, loan defaults to foreclosures, and bankruptcies leading ultimately to a foreign takeover of the banking system. Meanwhile the country will be transformed, its marketable assets and real estate sold out. Greece will become something much less like a proud and self-sufficient European nation, and much more like (say) a Caribbean dependency of the United States. Its professional population will continue to leave, and its working classes will also either emigrate or sink into destitution. Or perhaps they will fight….In a world where so many countries have suffered this treatment—where outside certain charmed circles it is practically routine—does it matter if one more small and distant place is added to the list? Perhaps not. But Greece is a bit closer to our sensibilities than other places. Its familiarity, its link to the concept of democracy, its European identity are, for better or worse, distinctive. The place pulls at us, it evokes words that [the economist John Maynard] Keynes applied to Germany in 1919: ‘The policy…of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow decay of the whole civilized life of Europe.’”

2 Comments on Austerity is a Greek Tragedy

  1. I need to learn more about international economics. I don’t understand the austerity argument at all. It seems to me that when in a recession stimulus of the economy is called for, but the austerity advocates want to enforce savings, which seems to me to be a recipe for slowing down the economy even more. Am I missing something here?


  2. You aren’t missing anything. You are describing classic Keynesian economics. The tragedy is that the European troika did the exact opposite. It is difficult to prove why the troika (the IMF, the banks and the EU) acted this way, but Galbraith argued that this was done for political reasons–for example, to deter other debtor countries from also defaulting, or to punish the Greeks for providing a better social safety net then the creditor countries, or to simply enable multi-national corporations to penetrate the Greek economy, or whatever.


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