No Catharsis in Sight: The Greek crisis revisited

Since the beginning of the year, Greeks have been pinching themselves. All of a sudden, Greece became front page news every day, everywhere. Just like 2008 made Lehman Brothers a household name, 2010 has put Greece on everyone's lips.

Newspapers, radio and television programs play on Greek words (tragedy, catastrophe, drama etc.) to tell a tale of woe. Greeks are presented as insufferable spendthrift over-reachers who gained entry into the rich people's club under false pretences and proceeded to feast on other people's money. Now, we are being told, the day of reckoning has come. Not only for Greeks, who are responsible for their own ruin, but also for Europe, which allowed such profligacy to go unpunished and bent its own rules of fiscal stringency. The joint IMF-European Central Bank-Eurozone (IMF-ECB-EZ) intervention (which extends credits worth €110 billion to Greece in exchange for severe austerity) is presented as a bail out but also as the nemesis that naturally follows hubris, as every Greek schoolchild knows.

Great lies are founded upon a myriad small truths. The above exegesis of the crisis that began in Greece, and spread like a wildfire to every corner in Europe, is a case in point.

·         Yes, it is true that the Greek state has accumulated an unsustainable level of debt.

·         Yes, there is no doubt that Greek society has tolerated tax evasion and corruption for too long.

·         Yes, both employers and trades unions, unwilling to struggle against each other for a share of the national income, jointly pushed the timid state into acquiring more public debt and use it to reduce social tensions.

And yet, none of the above either explain the crisis that began in Greece or legitimise the response to it by the IMF-ECB-EZ troika and the 'bail out' package it forced upon a spineless Greek government eager to please its northern masters.

After the Crash of 2008, Europe in general and Germany in particular sailed into a mighty storm. For the past thirty years, Germany's trade surplus was being sucked up by the United States' trade deficit. Global capitalism was ruled by what I call a Global Minotaur: a beast whose voracious appetite for other people's capital was the epicentre of global capital and trade flows. The Minotaur was none other than the US deficits. On a daily basis the rest of the world sent, in a manner reminiscent of the Athenians' tributes to King Minos, between $2 and $5 billion to Wall Street. These capital flows, in turn, financed the United States trade deficits and became the flow of funds upon which the whole edifice of financialisation was built.

The great surplus generators (Germany, Japan, China and the oil exporters) lived happily on the Minotaur's back. But when the latter broke, under the strains of its own profligate financial sector, suddenly these countries were left puzzled, apprehensive, with no US customers for their fabulous, shiny wares. So, what did they do?

Japan receded back to stagnation-mode, a state from which it had not really emerged since the awful 1990s. China went on a massive investment spree that has kept its industry going. And Germany? It turned its attentions to the Eurozone; to its own backyard from where, after 2008, it has been extracting more than 2/3 of its surpluses.

And this is the rub: On the one hand, Germany is keeping its head above water by strengthening its surplus position with the rest of the (deficit-prone) Eurozone. And, on the other hand, it insists that the rest of the Eurozone ought not be in... deficit. Yes, dear reader, this is a structural incongruity that even a small child would recognise.

The result of this incongruity is that the deficit countries are getting more into deficit at a time of falling global demand. A debt spiral begins and the weakest links in the European chain eventually start snapping. Greece was the first such link. Its governments have been criminally responsible for putting Greece in the position of Europe's weakest link. But even if they hadn't, then some other European country would have been that unfortunate link.

Europe's tragedy is that, like a small child, it tries to look the other way. To pretend that the crisis was caused by too much debt, sweeping under the carpet the inconvenient fact that debt was a byproduct of the crisis, rather than its cause. In a fit of ritualistic nastiness, the IMF-ECB-EZ troika dealt with the anxiety caused by denial by venting its anger on the weakest link. They thus imposed on Greece a 'treaty'  which not only condemns Greece to a never ending downward cycle of debt and depression but, additionally, which condemns Europe to a similar fate.

If I were to sum up the IMF-ECB-EZ 'bail out' for Greece, and the accompanying austerity package, I could do no better than quoting from Keynes' introduction to his 1920 book on the consequences of the Versailles Treaty:

Moved by insane delusion and reckless self-regard, the Greek people overturned the foundations on which we all lived and built. But the spokesmen of the European Union have run the risk of completing the ruin, which Greece began, by a financial assistance package which, if it is carried into effect, must impair yet further, when it might have restored, the delicate, complicated organisation, already shaken and broken by the 2008 crisis, through which alone the European peoples can employ themselves and live.[1] 

Yanis Varoufakis is Professor of Economic Theory at the University of Athens. He is the author of Foundations of Economics (Routledge, 1998).

(This article is from BOL ASIA /Naked Punch Asia issue 04, Summer 2010)