Class Conscience

Goin to Occupy Wall Street for the first time since the eviction

“Debts that can’t be paid won’t be paid.”

-Dr. Michael Hudson, Economics Professor at University of Missouri at Kansas City.

I thought I’d lead this post with a quote from one of the few economists who actually predicted the current economic crisis in advance, in a profession of over 5,000.

The recent resignation of Greek Prime Minister Papandreou coincides with the emergence of the news that no referendum for the Greek people to accept or reject economic suicide will be forthcoming after all.

Though this news has been cheered and has led to mild optimism in financial markets and in the rhetoric of the financial and political elites of Europe (German and French banks and their political allies), it actually will only deepen the crisis when Greece inevitably leaves the Euro.

The “rescue” package that would have been voted on in the scrapped referendum, as I laid out in my first Class Conscience post, will only further depress the Greek economy. Not one cent of the “rescue” package goes to the Greek people to fight unemployment and revive their bubble-devastated economy. Every single cent will be transferred to the German and French banks who lent so irresponsibly to Greece even after it was learned that their deficit was larger than was publicly known.

The conditions of the package are harsh and severe, and anyone with an elementary grasp of real-world economics knows that when you cut spending and transfers from the government at a time of weak or collapsing private sector demand, you shrink the economy and make its problems worse: more unemployment, lower wages, lower living standards.

By virtue of this dynamic, it is inevitable that Greece leaves the Euro because it is impossible for them to repay their foreign debts under conditions of foreign-imposed economic depression. Remember, national debt must be looked at as a ratio of output:

national debt / GDP

Therefore, when you gut GDP, as this “rescue” package will do, like every package before it, the burden of the national debt becomes even greater because you are reducing the economic capacity to service that debt.

The riots and social unrest in Greece will only worsen under these conditions.

If this package goes through, without the Greek people’s direct consent, it will be inevitably lead to a subsequent Eurozone withdrawal by a later government.

This withdrawal will be far less orderly and volatile than if a more balanced debt forgiveness package was instead what was on the table: a package that would pay some of Greek’s debts to its creditors now, while still allowing it room to expand its economy.

Collapse of the Eurozone at large has only been delayed. Greece will become the next Argentina, and that will be a good thing.

 Making headlines around financial  markets and international news is  the announcement of Greek Prime  Minister George Papandreou that he  has proposed holding a national  referendum for Greece to accept the  terms of the most recent bailout package that was put forward last  week:

Opinion polls in Greece show that most people do not support the austerity deal.

Mr Papandreou told a meeting of his governing Socialist party that Greek people would have the final say on the package, which is designed to reduce Greek debt by about 100bn euros. “The command of the Greek people will bind us”, he was quoted as saying by AFP news agency. He set no date for the referendum, but indicated that it would be held after details of the deal have been finalised with the EU and the country’s creditors.

The austerity package in question, or, in more frank terms, the characteristics of further imposed economic suicide in question, involve:

• New pay and promotion system covering all 700,000 civil servants
• Further cuts in public sector wages and many bonuses scrapped
• Some 30,000 public sector workers suspended, wages cut to 60% and face lay off after a year
• Wage bargaining suspended
• Monthly pensions above 1,000 euros to be cut 20% above that threshold
• Other cuts in pensions and lump-sum retirement pay
• Tax-free threshold lowered to 5,000 euros a year from 8,000

Not one euro,  not one cent of this package, involves any kind of shared sacrifice from the wealthy. It’s simply the debasement of public sector workers (who needs teachers?) and of course, slashing pensions and retiree benefits. Because taking money out of the pockets of helpless old people is fair and responsible. Such a package will only further depress economic growth in Greece, as every single other “rescue” package has done.

This package will, like the others, only further shrink the economy because it will reduce public spending and therefore aggregate demand, thus worsening employment and growth, especially in the climate of continued weak private sector demand. Greece has been in recession due to mass unemployment which resulted from the collapse of their housing bubble, and cutting government spending only aggravates this dynamic. Even the IMF, as of September 2011, has forecast continued high unemployment and negative growth in its Global Report, Autumn 2011:

• 18.5% unemployment (2nd only to Spain’s forecast of 19.7%)
• -2% growth

And by implementing more austerity, these figures will only be aggravated, since reduced government spending, or, increased government savings on domestic purchases of goods, services, and social transfers, serve only to increase private sector deficits. These are accounting identities and there is no way around them.  

Although, according to the BBC article linked above, Papandreou supports this package, it is only just and fair that the Greek people, for once, directly decide whether they will allow foreign banks to collude with their politicians in order to depress their economy and impose years and years of unemployment, social unrest, lower living standards, and mass emigration upon Greek society. And not only just to keep a currency that was fraught with structural flaws since the beginning, but to prop up the mostly French and German banks who lent so irresponsibly to Greece.

A defeat of the package via national referendum sets the stage for Greece to default and withdraw from the Euro. It is not a given yet, and there’s still a chance that fear-mongering by Europe’s financial elites in Germany and France will combine with the collaborators in Greece’s political leadership to scare the public into accepting the austerity deal and stay within the Eurozone.

But with today’s news, there’s at least a little hope. A default is not without precedent, just ask Argentina. Or, if the Greeks want to see what debt forgiveness is all about, they can look at the greatest debt transgressor of the 20th Century: Germany.

Moving forward, will Italy, Ireland, and Portugal follow suit?