"The Greek government is stuck between two different strands of the same form of neoliberal idelogical extremism"
Interview with Thomas Fazi, journalist, writer, documentary filmmaker, activist. You can find him at thomasfazi.net
by Nikos Tzanetakis, Policy Coordinator @Bridging Europe
1. How do you assess the latest developments with regards to the Greek bailout negotiations?
Well, I’d say that the troika is living up to the world-class standards of surrealism, sadism and (apparent) illogicality that it has accustomed us to in recent years. Jokes aside, it’s quite clear that the Greek government is stuck between a rock (the European institutions) and a hard place (the International Monetary Fund).
On one side you have the European official creditors insisting on a mind-bogglingly ridiculous primary surplus target of 3.5 per cent of GDP in the “medium term” – which essentially means austerity ad infinitum, or at least until they deem fit, since at this point no one know exactly how many years that means – in a display of blatant disregard for the well-being of the Greek people, economic theory and logic (which teaches that forcing such a large primary surplus on a country that has already suffered an unimaginable output loss and is mired in mass unemployment will only further cripple the economy in every possible respect) and, well, the reality of various European countries during the past decade, first and foremost Greece itself, which demonstrates beyond the shadow of a doubt that the policies of so-called “fiscal consolidation” have led to lower output and higher debt-to-GDP, unemployment, poverty and inequality levels, plunging the continent – and especially the countries of the periphery – in the worst social and economic crisis in modern times, as a great number of non-mainstream economist had predicted.
In fact, the only real “success” of austerity has been the transfer of huge amounts of wealth from the lower-middle classes to the upper classes and financial elites and the rise of anti-Europeanism all across the continent.
To try to taper over this obvious fact – and to make things even more absurd – the European institutions (echoed, alas, by the Greek government) are now claiming that the primary surplus target they are demanding can somehow be achieved without resorting to austerity, as Pierre Moscovici recently implied. As if a large primary surplus were not intrinsically a form of permanent austerity, regardless of how you obtain it, since it essentially means that year after year you are sucking more money out of the real economy than you are putting in.
Finally, Europe continues to refuse to seriously take into consideration any form of debt relief for Greece, despite the various commitments and promises to that end made in recent years. And the reason is quite obvious: debt is the chain that keeps Greece from straying “off course” and it is understandable that they don’t want to give that up. Then you have the IMF, which has a more reasonable approach to the issue of the government deficit and debt – as well know, the IMF supports a lower primary surplus target (though it insists on pension cuts) and a significant reduction of the debt, which the Fund has repeatedly deemed to be absolutely “unsustainable” – but has a much more inflexible position than the Europeans on the issue of so-called “structural reforms”, particularly on labour market liberalisation and the return of any form of collective bargaining to the country, despite the fact that there are countless studies – many of which by the IMF itself! – that show that in a context of low and stagnant internal demand such as the one that Greece faces, flexibilisation/precarisation of labour and the absence of collective bargaining mechanisms lead to lower wages and employment and thus to lower demand (not even taking into account the human toll).
As I said, the Greek government is truly stuck between a rock and a hard place: or, to put it differently, between two different strands of the same form of neoliberal ideological extremism. In this sense, there really are no easy choices and no easy ways out for the Tsipras government. That said, I am having a hard time understanding what game Tsipras is playing by going along with the fantasy that the government can meet the 3.5 per cent primary surplus.
It’s clear to everyone – including Tsipras himself, I would hope – that he cannot sustain that target for a prolonged period of time without causing further social and economic damage and facing a popular revolt. So is it an attempt to trick the European institutions into disbursing the latest bailout trance, after which he plans to ditch the target? If that is the plan, I find it dangerously delusional: Tsipras should know better than anyone else that there are many ways in which Europe can discipline a country – controlling the flow of the bailout money is just one of them. If Greece were to steer off course, the ECB could swiftly put the pressure back on the government, as we saw in the infamous summer of 2015. Of course, if the plan is to actually meet the target, that would be even worse.
Moreover, the government’s idea that the negative economic effect of further budget cuts (which it has already committed to, on pensions, etc.) can somehow be compensated by raising taxes and spending that money on compensatory measures doesn’t really make any sense from a macroeconomic perspective. We are still talking of a shift of tax burdens in the context of overall fiscal tightening. So I am sorry to say that I fear there is more pain to come to Greece, as to other European countries. After all, the IMF itself predicts that under the current policy framework “Greece will continue to struggle with high unemployment rates for decades to come”.
As I said, however, there is really not much that the government can do within the current institutional framework. What Greece really needs, like other countries of the periphery, is a massive public spending and investment boost – i.e., relatively high deficits for a prolonged period of time – and a lower and more flexible exchange rate. Neither of these two conditions, of course, can be met within the framework of the single currency. Ultimately, the experience of the SYRIZA government shows that implementing truly progressive, redistributive policies within the framework of eurozone is impossible. I am not saying that Tsipras has not succeeded in softening the blow of austerity – of course he has, and the hardship of ordinary citizens under a right-wing government would have been even worse – but “austerity-lite” is no basis on which a left-wing government can hope to maintain consensus and support. And the polls are showing that, with New Democracy now around 10 points ahead of SYRIZA, if I’m not mistaken. I’m not surprised.
The bottom line is that the Greek crisis continues to be a humanitarian one as much as a financial one: unemployment is at 23 per cent and 44 per cent of those aged 15-24 are out of work; more than a fifth of Greeks get by without basics such as heating or a telephone connection; 15 per cent of the population lives in extreme poverty. It’s clear that Greek society can’t bear any more cuts to the medical sector or to pensions, regardless of the government’s claims. SYRIZA will pay a heavy price for that.
2. According to your opinion, what the EU and Eurozone leadership should do to address the debt crisis?
I disagree with the term “debt crisis”. It implies that the main problem facing Greece and the other countries of the periphery was/is the high level of public debt (in turn caused, it is implied, by excessive social welfare spending).
This was not true for most countries – with the possible exception of Greece, in fact – back in 2009-12 and it is not true today. Before the financial crisis of 2007-09, some of the periphery countries that were hit the hardest also had among the lowest deficit/debt levels in Europe. It was only with the crisis that the deficit and public debt soared, all across the Eurozone but especially in the periphery, as governments stepped in to save their over-leveraged banks. Overall, by 2010, the average public deficit in the Eurozone had jumped from 0.7 per cent to 6 per cent; while the Eurozone’s overall public debt had gone from 66 to 85 per cent. The only two periphery countries that could be said to have a relatively “high” public debt before the crisis (at least from the standpoint of the totally arbitrary criteria of the Maastricht Treaty) were Italy and Greece. But in both cases it had been hovering stably at around 100 per cent in the years leading up to the crisis.
Ultimately, in all countries except Greece, the crisis was caused by a build-up of private – not public – debt; in all cases, including Greece, this can be attributed to the massive increase in cross-border capital flows following the introduction of the euro (which in turn led to the emerge of equally massive intra-European current account imbalances). So it is important to acknowledge the structural causes of the debt build-up, both before and after the crisis, which can all be traced back to the creation of the monetary union.
That said, insofar as most countries today do indeed register relatively high levels of public debt, is that a problem? From a technical standpoint no, absolutely not. This was proven in the summer of 2012, when – after three years of incessant psychological terrorism about the need for high-debt countries to implement harsh reforms and austerity measures and in most cases accept the onerous terms of various bailout packages, all this to “reassure the markets” and to quell the destructive speculative attacks by financial markets – Mario Draghi put an end to the speculation basically overnight simply by saying that he was “ready to do anything it takes to preserve the euro”. Draghi’s message to financial markets was clear: if they continued to demand excessively high interest rates the ECB would step in and buy the bonds itself. This did not got as far as transforming the ECB into a “normal” central bank, but it was a telling reminder of the fact that public debt is never a problem, so long as it is guaranteed by the central bank that issues the currency in which the debt is denominated.
Moreover, it showed that it is the central bank that sets the interest rates, not the markets. It also made clear that, to the extent that Europe experienced a “debt crisis” during 2009-12, this was the result of the dysfunctional architecture of the Eurozone – where governments borrow in what is effectively a foreign currency, i.e., a currency that they don’t control –, not the debt itself. It also exposed that the allegedly “painful but necessary” policies imposed on a number of countries were absolutely unnecessary from the perspective of the reduction of the debt, which in fact has grown exponentially precisely as a result of these policies, but were politically and ideologically motivated class-based decisions. All this pain, in other words, could have been avoided.
So is Europe facing a “debt crisis” today? From a financial standpoint, not at the present: thanks in part to the ECB’s quantitative easing (QE) programme, interest rates on ten-year government bonds are still relatively low across the Eurozone, despite a small uptick in recent months. However, the main political issue remains unresolved: the fact that the ability of euro area countries to service their debt essentially depends on the “good will” of a central bank that it not subject to any form of democratic accountability or control.
Today the debt appears to be under control: at any moment, however, the ECB could bring the QE programme to an end or exclude a country from the programme, thus pushing it back into the jaws of the financial markets. From a popular-democratic standpoint, this situation is unacceptable. The same argument goes for Greece, to a certain extent: as long as the troika disburses the latest bailout trance, the country does not face serious repayment issues for many years to come. So even in Greece the debt does not raise pressing financial problems; it does, however, raise, more than in any other country, serious political issues. Namely the fact that Greece is to all intents and purposes a debt colony, whose financial survival depends entirely on the decisions made by its creditors.
In conclusion, I would say that Europe does not face a debt problem; it faces a euro problem. Certainly, there are many measures that could be undertaken at the European level to stimulate the economy, reduce social injustice, make the debt permanently sustainable, etc., even within the current treaties, as demonstrated by countless proposals put forward in recent years, but these – let alone a more wide-ranging reform of the treaties in a more solidaristic and Keynesian direction, which would require the ability of EMU itself to run budget deficits with the support of the ECB (which itself should be subject to sweeping institutional reform), a full mutualisation of the debt, permanent fiscal transfers from richer to poorer countries, etc. – are simply not politically viable in light of the current balance of power, among countries as much as among classes. As you might have guessed, I am not optimistic about the prospects for progressive reform within the EU/EMU.
3. What is the current situation in Italy with respect to its banking system and the non-performing loans?
Much has been said in recent months about the mismanagement of Italian banks: the rampant corruption, fraud and abuse; the widespread practice of distributing loans to friends and family; the unsavoury ties to politics, etc. There is some truth to this: a change in banking practices is desperately needed and those responsible need to be held legally accountable for their misdoings.
But this is not the chief cause of the Italian banking crisis, as many commentators have asserted or implied. The crisis is “the consequence of the longest and deepest recession in Italy’s history”, as the governor of the Italian central bank, Ignazio Visco, recently stated. In macroeconomic terms, Italy has been the hardest hit country in the Eurozone after Greece. Its GDP has shrunk by a massive 10 per cent since 2007, regressing to levels of over a decade ago. As a result, around 20 per cent of Italy’s industrial capacity has now been destroyed. In terms of per capita GDP (PPP) the situation is even more shocking: according to this measure, Italy has regressed back to levels of 20 years ago. Of course, none of this is particularly surprising if we consider that Italy has essentially been in recession for the past six years. Italy’s endemic structural problems – its supposedly hyper-rigid labour market, its bloated bureaucracy, its excessive tax rates, etc. – are notorious but it’s undeniable that the post-2011 economic collapse is a direct result of the austerity policies implemented by the Monti government in 2011-13 and since, including by the former Renzi government.
After all, Monti himself admitted in an interview to CNN that his policies’ aim was “to destroy domestic demand through fiscal consolidation”, with the aim of rebalancing Italy’s current account deficit. On its own terms, the policy worked, as in Greece: private consumption collapsed, imports fell and Italy’s current account deficit was turned into a minor surplus. But in an economy heavily dependent on domestic demand – Italy’s exports account for less than 30 per cent of total output – this was bound to take a very heavy toll. And it did. Just between 2009 and 2013, more than 1.7 million small and medium enterprises (SMEs) were forced to close. This, in turn, inevitably sent shockwaves throughout the banking system, which was and is heavily exposed to SMEs.
This is not just an Italian problem: the ECB’s recent stress tests have revealed that the banks with the largest capital shortfalls are all located in periphery countries. According to a recent study, for the EU as a whole, non-performing loans (NPLs) stood at over 9 per cent of GDP at the end of 2014 – equivalent to €1.2 trillion, more than double the level in 2009. Now, after years of muddling through, the situation has finally exploded in the Italian government’s face. As a result, the government recently approved a 20 billion euro plan to prop up the country’s weaker banks, starting with the largest, Monte dei Paschi di Siena (MPS).
The government’s plan, however, doesn’t resolve any of the Italian banking system’s underlying problems. It follows in the tradition of the many infamous bank bailouts that we have witnessed throughout the crisis: blank cheques of taxpayers’ money given to the banks in exchange for no conditionality whatsoever. At the very least the government should use its newfound role as MPS’s controlling shareholder to impose radical, sweeping reforms in the bank’s practices and strategies, for example using the bank to direct investment where it is most needed. However, none of this is likely to happen. More worrying, though, is the fact that not even this will provide a long-term solution for Italy’s banks, or for the European banking system in general. The bottom line is that unless we see a sustained recovery in the real economy, these and other problems will just keep re-surfacing. Unfortunately, there is no prospect of recovery ahead. The IMF has recently estimated that Italy’s economy will not return to its pre-crisis size until 2025. That means that Italy faces not one, but two lost decades.
Finally, one cannot help but notice how the Italian government’s bailout of MPS testifies to the utter failure of the EU’s banking union, which was created precisely with the aim of avoiding future bank bailouts at the taxpayers’ expense. This was supposed to be achieved by making the bail-in – that it, by making shareholders, junior creditors and, depending on the circumstances, even senior creditors and depositors with deposits in excess of the guaranteed amount of €100,000 to take losses before any public funds can be disbursed – the primary method of bank resolution. The problem with this approach is that it doesn’t take into account the potential economic, financial and political consequences of making the bail-in mandatory in all situations, regardless of the nature of the bank’s problems, of the wider macroeconomic context, etc. In some cases, such as MPS, imposing losses on the bondholders – many of which are small savers/taxpayers, who in many cases were fraudulently mis-sold these bonds by the banks as being risk-free (as good as deposits basically) – can be politically and ethically very hard to defend.
The new bail-in rules also make countries susceptible to bank-run-style self-fulfilling panics. There is reason to believe that this process is already underway: by looking at the ECB’s TARGET balances, an excellent measure of intra-EMU capital flows, it would appear that periphery countries are experiencing massive capital flight towards core countries, almost on par with 2012 levels. It wouldn’t be far-fetched to imagine that this is due to depositors in periphery countries fleeing their banks for fear of looming bail-ins, confiscations, capital controls and bank failures of the kind that we have seen in Greece and Cyprus.
4. Eurozone’s average growth rate remains hardly around 2% for a long period of time, with crisis-affected periphery of the European South struggling to attract investments and tackle high unemployment and poverty rates. What is your opinion on that?
It is a testament to the complete and utter failure of the European Monetary Union. The global financial crisis exposed the euro’s original sin of depriving member states of their fiscal autonomy without transferring this spending power to a higher authority. This left member states utterly defenceless in the face of economic crises, as the 2008 booms-gone-bust would make amply clear. Yet, the crisis didn’t bring about, as one may have expected, a loosening of the budgetary constraints imposed on individual governments (thus allowing them to pursue counter-cyclical stimulus policies) or by moving towards a fully-fledged fiscal union (or at least a modicum of economic coordination between surplus and deficit countries). Instead, we got the worst of both worlds: further restrictions on the fiscal autonomy of member states and no increase in the fiscal capacity at the federal level in Europe. The result, predicted by many non-mainstream economists, has been a deeper and more prolonged crisis that of the 1930s (resulting in all-out humanitarian crises in a number of countries). Millions of people today are suffering as a result of these decisions. We will pay the price for decades to come.
5. What political and economic alternatives exist against austerity and divergence politics in Eurozone?
Since the start of the crisis, civil society organisations, trade unions, think tanks and grassroots campaigns have put forward an endless amount of proposal for ending austerity and restoring shared prosperity, reducing inequality and making Europe more inclusive, achieving environmental sustainability and reacting to climate change with green economic alternatives.
Most of these proposals aim at reforming the EU rather than dismantling it. I have talked at length about these in my 2014 book The Battle for Europe and more recently I have provided an overview of them in a study I have conducted titled How can Europe change? Civil society proposals for policy alternatives on socially inclusive and sustainable growth (downloadable here). These proposals are all very reasonable and could be implemented very easily from a technical standpoint, alleviating the suffering of millions.
Personally, however, I have come to the conclusion that reforming the Eurozone in a more progressive, Keynesian direction – which would require an unlikely alignment of left governments/movements to emerge simultaneously at the international level – is simply not politically viable. More crucially, however, the “reforming the EU from within” position ignores that the EU’s economic and political constitution is structured precisely to produce the results that we are seeing – the erosion of popular sovereignty, the massive transfer of wealth from the middle and lower classes to the upper classes, the weakening of labour and more in general the rollback of the democratic and social/economic gains that had previously been achieved by subordinate classes – and is designed precisely to impede the kind of radical reforms to which progressive integrationists or federalists aspire to.
In this regard, the Greek negotiations were a watershed moment for many European progressives, including me. SYRIZA’s election, in January 2015, reawakened hopes of the possibility of a different Europe, one of solidarity and democracy instead of competition and top-down decisions – “another Europe” of social justice and popular participation. These hope were soon dashed, as the Greek government was made to accept, by means of blackmail and coercion (such as forcing the Greek banks to close for five days preceding the referendum), the onerous terms of yet another loan agreement conditional on further austerity and deregulation measures.
In particular, the experience of SYRIZA proved that the ECB can easily paralyse a country’s banking system by cutting off its banks’ access to central bank liquidity, thus effectively bringing a defiant government to its knees without actually expelling that country from the monetary union. Many, including me, have taken this as the confirmation of the fundamental impossibility of reforming the EU.