Eric Toussaint: “Europe Gets Shock Therapy like Latin America in the 1980s and 1990s”

2 March 2012 by Eric Toussaint , Carlos Bedoya


How would you define the predicament of those EU countries which, like Greece, have huge public debts?

Their situation can be compared to that in Latin America during the latter 1980s.

In what ways?

The debt crisis in Latin America erupted in 1982. The crisis of the private banking sector started in the US and in Europe in 2007-2008 and by 2010 had turned into a crisis of the sovereign debt Sovereign debt Government debts or debts guaranteed by the government. triggered (among other things) by the socializing of private banks’ losses [1] and by lower tax revenues as a consequence of the crisis. In Europe, as in Latin America, several years after the beginning of the crisis private creditors and their representatives have managed to impose conditionalities onto all governments. They force them to implement brutal adjustment policies that result in cuts in public expenditure and a fall in purchasing power for most people. This in turn means that economies sink into permanent recession.

And yet, even at the worst moments of the crisis, Latin America never reached levels of indebtedness comparable to what we are now seeing in most eurozone countries (over 100% of their GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
).

The levels European debt has reached are indeed impressive. In Greece it amounts to 160% of its GDP and several other countries in the European Union face public debt that amounts to or exceeds 100% of their production. Clearly there are differences between the two crises but they are not fundamental to my comparison.

You mean that your comparison focuses on the political consequences of the two crises?

Yes, indeed. When I compare the current situation in Europe with the situation in Latin America in the second half of the 1980s, I wish to point out that creditors — in the case of Europe, European banks and the Troika Troika Troika: IMF, European Commission and European Central Bank, which together impose austerity measures through the conditions tied to loans to countries in difficulty.

IMF : https://www.ecb.europa.eu/home/html/index.en.html
— impose measures on Greece (and no doubt on other countries soon) that are strongly reminiscent of the Brady Plan in Latin America at the end of the 1980s.

Could you explain in more detail?

At the end of the 1980s the creditors of Latin America, i.e. the World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

, the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
and the Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

as well as the US Treasury and the London Club London Club The members are the private banks that lend to Third World states and companies.

During the 70s, deposit banks had become the main source of credit for countries in difficulty. By the end of the decade, these countries were receiving over 50 per cent of total credit allocated, from all lenders combined. At the time of the debt crisis in 1982, the London Club had an interest in working with the IMF to manage the crisis.

The groups of deposit banks meet to co-ordinate debt rescheduling for borrower countries. Such groups are known as advisory commissions. The meetings, unlike those of the Paris Club that always meets in Paris, are held in New York, London, Paris, Frankfurt or elsewhere at the convenience of the country concerned and the banks. The advisory commissions, which started in the 80s, have always advised debtor countries immediately to adopt a policy of stabilisation and to ask for IMF support before applying for rescheduling or fresh loans from the deposit banks. Only on rare occasions do commissions pass a project without IMF approval, if the banks are convinced that the country’s policies are adequate.
for bankers, succeeded in imposing their agenda and their conditions. Private creditors transferred part of their loans to the multilateral institutions and to the States via securitization, i.e. through turning bank loans into securities. Other bank loans were downgraded and were turned into new fixed-rate securities. So the Brady Plan played a significant role, both in defending bankers’ interests and in imposing permanent austerity. The rescue plan for Greece does the same thing: it reduces the value of debt stocks, which will then be swapped for new bonds, as in the Brady Plan. Private banks thus reduce their exposure to Greece (Portugal, Ireland…) as they did with Latin America. Gradually but massively, public creditors take over and exert enormous pressure to ensure that the new bonds held by banks be fully repaid (interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. and capital). Every cent of the loans to Greece will be used to repay its debts. Meanwhile its public creditors (the Troika) demand permanent austerity in terms of social expenditure cuts, massive privatizations, regression in terms of economic and social rights, the like of which has not been seen since the end of the Second World War 65 years ago, and a significant surrender of sovereignty in those countries unfortunate enough to have recourse to their loans. In Latin America this period was called “the long neoliberal night”.

Creditors also forced Latin American countries to reduce wages, retirement benefits and social spending, and to comply with the absolute demand that debts had to be repaid.

This is why I am saying that we are in a similar situation. Not all European countries are yet involved; only the weaker links such as Greece, Portugal, Ireland, Italy, Spain, Hungary, Romania, the Baltic Republics and Bulgaria are. However, these countries together account for about 170 million inhabitants out of the total EU population of 500 million. Most other European countries also implement conservative social policies, though in a less brutal way: the United Kingdom (62 million inhabitants), Germany (82 million inhab.), Belgium (10 million inhab.) and France (65 million inhab.), for example.

The political consequence of the debt crisis in Latin America was the creation of the neoliberal state. Is this what we are heading towards in Europe?

This is nothing new. For the past three decades neoliberal policies have been implemented in Europe. It is obvious that the response to the crisis that is formulated by the IMF, governments that defend the interests of the ruling classes, big banks and large companies, consists in implementing a shock therapy of the kind described by Naomi Klein. Their aim is to finalize the neoliberal project as it was launched by Margaret Thatcher in the UK in 1979-1980 and spread through the rest of Europe in the 1980s. For Central and East European countries that used to be part of the Soviet block, it is actually the second shock therapy in 25 years.

But in Europe there is still some social welfare.

As I’ve just said, governments have started destroying the Social Pact and doing away with social rights acquired between 1945 and 1970. This is what Thatcher started. After the Second World War, and for thirty to thirty-five years, peoples had won a number of victories and obtained a fairly solid system of social protection: collective conventions, labour laws, etc. that protected workers and prevented the abuse of casual labour. Thatcher wanted to do away with it all, but after thirty years of neoliberal policies they still haven’t completed the destructive work they set out to do: some things remain.

And the debt crisis provides the opportunity to consolidate what Thatcher had started.

The crisis allows for a shock therapy of the kind creditors and the ruling classes enforced in Latin America in the 1980s and 1990s.

In Peru it was implemented in August 1990.

We have entered a stage of new privatizations of public companies. In Europe they intend to privatize the significant public companies that still subsist.

Will Europe also have to face the security doctrine that was implemented in Latin America, where the trade unions were defined as terrorist?

A trend towards more authoritarian forms of power is clearly present in Europe. Over the past decade, anti-terrorist laws that criminalize social movements have been voted in. Repression is on the increase but does not involve the physical elimination of activists as was the case in Latin America at the end of the 1970s and in the early 1980s. In this, too, the European situation is similar to that of Latin America countries. After the bloody dictatorships (Argentina, Chile, Uruguay, Brazil), transition regimes (Chile, Brazil) or democracies implementing harsh neoliberal policies were set up. In Europe we are going through a period when legislative power is pushed aside, business people become heads of state as in Italy, social dialogue is abandoned while the right to go on strike is restricted, picketting forbidden and demonstrations repressed.

How do European national parliaments respond to these austerity measures?

They are pushed aside, since the Troika tells governments: ‘If you want to get loans, you have to implement adjustment measures and there is no time for parliamentary debate’. Some plans have to be adopted within a few days, sometimes even within 24 hours.

As can be seen in Greece.

Yes, this is what has just happened in Greece. The Troika demanded a new plan. It eventually received the parliament’s assent on Sunday 12 February late at night. But on the next day the European Commissioner for Economic Affairs said that 325 million euros of additional cuts were needed which were to be decided by the Greek government within the next 48 hours. This shows that the Greek parliament has no power to decide and the government is actually run by the Troika.

This led to huge demonstrations.

Not only in Greece actually, but also in Portugal, Spain, France and Italy, with less intensity so far, but they are bound to become more massive. There are mobilizations in several European countries, including in the UK. In Belgium we had the first general strike for 18 years at the end of January 2012. It paralyzed the Belgian economy and transport for 24 hours.

What should Greece do to get out of this quandary?

Greece must stop obeying the diktats of the Troika by unilaterally suspending repayment of its debts, to force its creditors to negotiate in unfavourable conditions. If Greece stops repaying as Ecuador did in November 2008, all bondholders will sell them off at 30% (at most) of their face value. This will jeopardize the positon of security holders and give more purchasing power to the Greek government, even in this precarious predicament.

Ecuador stopped paying for securities in November 2008 after an audit of its debt, though it was not as badly off as Greece today. Argentina stopped paying in 2001 in a situation that was similar to that of Greece.

Indeed the comparison works better with Argentina which was short of money to pay. It suspended payment and did not resume paying for three years (from December 2001 to March 2005) as regards financial markets; as for the Paris club (i.e. over 10 years) it hasn’t started repaying yet. As it did that it relaunched economic growth and imposed on creditors a debt rescheduling Debt rescheduling Modification of the terms of a debt, for example by modifying the due-dates or by postponing repayments of the principal and/or the interest. The aim is usually to give a little breathing space to a country in difficulty by extending the period of repayment and reducing the amount of each instalment or by granting a period of grace during which no repayments will be made. at 60% below its initial value.

The consequence of which is that Argentina has been excluded from financial markets up to this day.

This is correct, but Argentina, while exluded from the financial markets for the past ten years and not repaying anything to the Paris Club over the same period, enjoys an average yearly growth rate of 8%. It shows that a country can find alternative financing sources outside the financial markets. Ecuador does not float any new securities on the markets either and its growth rate was 6% in 2011, while Greece’s GDP fell by 7%.

But Ecuador borrows from China at very high rates.

True. It will have to find a way of protecting its sovereignty as regards these new financing sources. This is why it is so urgent to get the Bank of the South functioning.

Let us get back to Greece. Many analysts, including yourself, claim that most of the Greek debt is illegitimate.

Of course.

But surely, this can only be determined through an audit.

Part of the European social movement has drawn the lessons of the Latin American experience. Our proposal to set up a citizens’ audit of the debt has been widely taken up. Citizens’ audits are either currently under way, or about to be, in seven European countries (Greece, France, Portugal, Spain, Ireland, Italy, and Belgium), without any government backing.

Do you think this will lead to an official audit of the debt, particularly in Greece?

We shall see. This would require a change of government, which means that the social movement needs to be strong enough to put an end to governmental solutions that favour creditors and to bring an alternative government to power. Latin America needed 20 years to begin to achieve this.

A lot still needs to be done, then, before we see a change in the orientation of European governments such as that of Greece.

Indeed the current crisis may last for ten to fifteen years. This is only the first stage of resistance. It is going to be a long hard struggle. It is of the utmost urgency for European social movements to join forces to express their active solidarity with the Greek people and to set up a common European platform of resistance to austerity so as to get illegitimate debts cancelled.

Translated from the Spanish into French by Virginie de Romanet and Eric Toussaint, and from French into English by Christine Pagnoulle and Vicki Briault




Interview by Carlos Alonso Bedoya published in the Peruvian daily paper La Primera (the present version was entirely revised by Eric Toussaint).
Eric Toussaint, Doctor of Political Science and President of the Committee for the Abolition of Third World Debt (CADTM), is a member of the Commission for an Integral Auditing of Public Debt in Ecuador (CAIC) whose findings resulted in Ecuador stopping its repayment of part of its debt. He claims that Greece must stop paying its debt and must rise up against the Troika (the European Central Bank, the IMF and the European Commission) otherwise it will sink into the doldrums of permanent recession.

Footnotes

[1The cost of rescuing banks has been taken on by European governments. Countries on which the debt impact has been most acute are Ireland, the UK, Spain, Belgium, and the Netherlands. Other bailouts are in the offing.

Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France.
He is the author of Debt System (Haymarket books, Chicago, 2019), Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012 (see here), etc.
See his bibliography: https://en.wikipedia.org/wiki/%C3%89ric_Toussaint
He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. He was the scientific coordinator of the Greek Truth Commission on Public Debt from April 2015 to November 2015.

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