Greece must default and quit the euro. The real debate is how

20 September 2011 by Costas Lapavitsas

Greece is facing an economic and social disaster, the result of its so-called rescue by 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.

” of the EU, the International Monetary Fund 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.
and the European Central Bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

. Greece must change course to avoid a grim future for its people: it must default on its debt and exit the eurozone.

Consider first the scale of the crisis. After contracting in 2009 and 2010, 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.
fell by a further 7.3% in the second quarter of 2011. Unemployment is approaching 900,000 and is projected to exceed 1.2 million, in a population of 11 million. These are figures reminiscent of the Great Depression of the 1930s.

The causes clearly lie with the programme of the troika. In early 2010 Greece was effectively bankrupt. In its wisdom, the troika imposed policies of severe austerity and deregulation consistent with the neoliberal ideology of the EU. Quite predictably, demand collapsed and banking credit became scarce, with the result that the core of the Greek economy was crushed.

The social implications have been catastrophic. Entire communities have been devastated by unemployment, losing the means to live as well as the norms, customs and respect of regular work. Barter has appeared among the poor and the not so poor. Medical services in working-class areas are running low on basic provisions. Schools and transport are disintegrating. People are abandoning cities to return to agriculture, a sure sign of social retrogression.

As the recession deepened, the programme failed to meet even its own targets. The budget deficit for 2011 is on course for 10% of GDP, when the target was slightly above 7%. The debt-to-GDP ratio could reach 200% in 2013, up from 115% in 2009. But the troika has refused to acknowledge failure and in early September blackmailed Greece: take further austerity measures or there will be no more lending. The government has buckled, introducing the equivalent of a heavy poll tax on property. A further meeting with the troika was scheduled for today, following which there would be mass layoffs of civil servants, further wage and pension cuts, still higher indirect taxes, and so on.

These measures are also likely to fail: they will intensify the recession and be opposed politically. George Papandreou’s government is isolated, and the ruling party has lost any ability to generate grassroots support. The official opposition, New Democracy, has been critical of troika policies, hoping to make electoral gains. The parties of the left have already called for open defiance and non-payment.

In practice Greece is on the brink of defaulting and abandoning the euro. This is the harsh reality, though none of the major parties is prepared to acknowledge it. The tragedy is that Greece now has a far weaker economy than in 2010. It is likely, therefore, that there will be major economic and social upheaval with unpredictable outcomes.

With the best interests of its people in mind, what should a government do? The first step would be to default, but without entrusting the process to bankers, the EU and the IMF, for we have evidence of what that would mean. Last July Greece agreed on an exchange of old for new debt that would reduce its debt to banks by 21%. Yet it also had to provide massive collateral Collateral Transferable assets or a guarantee serving as security against the repayment of a loan, should the borrower default. guarantees Guarantees Acts that provide a creditor with security in complement to the debtor’s commitment. A distinction is made between real guarantees (lien, pledge, mortgage, prior charge) and personal guarantees (surety, aval, letter of intent, independent guarantee). to banks, with the result that its total debt might actually increase. Even so, many banks have not accepted this incredibly favourable deal, hoping instead for full repayment.

If default is to secure a deep cancellation of debt, it must be driven by Greece and it should be coercive as far as the banks are concerned. But it must also be democratic, based on an independent auditing of debt to ascertain how much might be illegitimate. Greece is not without advantages in this regard. Most public bonds are subject to domestic law that means terms of repayment can be altered through an act of parliament. Moreover, the “rescue” loans by the EU and the IMF may be declared illegitimate by an independent audit. The Greek people could thus regain a modicum of self-respect, savagely destroyed during the last couple of years.

The second step would be to exit the eurozone, but in a manner that would be in the long-term interests of working people, not big business or banks. Contrary to what is often asserted, Greece would not collapse if it quit the euro. After all, monetary unions have a limited shelf life, and Europe’s is a particularly badly structured one. Exit is the most sensible way for Greece to restore competitiveness and start to recover. The alternative is to continue with austerity packages that do not work and will lead to long term decline.

A progressive government would take several decisive steps: switch to a new drachma quickly; nationalise the banks; and impose capital controls. There would need to be administrative measures to ensure supplies of oil, food and medicine, along with income and wealth redistribution to support the poorest. Recovery should start in a few months, spurred by devaluation Devaluation A lowering of the exchange rate of one currency as regards others. that would allow industry to increase exports and recapture the domestic market. If progressive forces showed sufficient will, it would then be possible to transform the economy deeply, changing the balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. of power in favour of working people.

Default and exit would cause international turmoil. Greek debt may not be large enough directly to threaten European banks, but world banking is in a fragile state. Greek action would disturb the secondary markets for sovereign bonds, potentially leading to a major crisis. But the EU authorities would have only themselves to blame, since their policies are in effect driving Greece out of the eurozone.

Costas Lapavitsas

is a member of Popular Unity, Professor of Economics at SOAS and former member of the Greek Parliament.

Other articles in English by Costas Lapavitsas (16)

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