Greece: the Road to Bailoutistan (2017)

Book Review from the August 2017 issue of the Socialist Standard

In his new book, Adults in the Room: My Battle with Europe’s Deep Establishment, Yanis Varoufakis sets out to portray himself as the political outsider who more than spoke truth to power: he stood up to power, and earned its scorn. He details his period as the Greek Minister of Finance as he tried to negotiate a write-down on Greece’s unsustainable debt, and an end to the practice of extend and pretend: his characterisation of the previous two bailouts from the European Central Bank, European Commission and the International Monetary Fund (known collectively as the Troika) which gave Greece more debt, turned it into a debtor colony (he names it Bailoutistan), and pretended that it could ever hope to pay the debt back.

Throughout, though, he reveals himself as a form of insider, a member of the international financial and academic set, with ‘good friends’ in major institutions throughout the world, including Lord Norman Lamont. He even had prior for working as an advisor for PASOK, the leftist Greek party that held political hegemony there for so long. He was, however, not a member of Syriza, and not part of the Eurogroup club of time-served politicians.

Like most politicians’ memoirs, though, he does go out of his way on point-scoring and dredging up old wounds. He claims Alexis Tsipras went and learnt to speak English on his advice; he recounts the reason why he turned up on British news in a tight couture shirt (he was travelling at short notice, and an aide was sent to buy him a shirt as he had no luggage); a vital document was not sent to the Eurogroup in time to be considered, and apparently this was deliberate political sabotage by a rival he claims was in hock to the Greek oligarchs.

The biggest betrayal was he says was that of Tsipras: they had an express agreement, Varoufakis claims, that they would stay the course. He gives us the game theory behind his strategy with the Troika: Varoufakis wanted a write-down on the value of the Greek debt, and a smaller required budget surplus to service, to allow some room for Greece to start growing again. He theorised that only a credible threat to default on some Eurogroup bonds, and thus destabilise the currency, would lead to that agreement. By his account, the refusal to sign up to a third bailout depended on being willing to issue the threat. In the end, Tsipras refused to issue the threat (in his review of this book, journalist Paul Mason suggests Tsipras backed down rather than risk civil war).

Varoufakis hung on to his post, trying to carry through some of his other reforms to tax collection and public spending. Tsipras launched the famous Greek referendum, to which the people replied “Oxi!” to a third bailout. Varoufakis reveals that Syriza players were secretly hoping for a yes vote, enabling them to back down and accept the bailout. At that point, Varoufakis resigned.

The book is useful on revealing the state of international institutions and Greek banks. Here’s how Varoufakis describes the deep corruption in Greek finance (worth quoting at length):

  ‘Here’s how our two bankers – let’s call them Aris and Zorba – did it.
  Aris’ family founded offshore companies, to which Zorba agreed secretly to lend without guarantees the millions that Aris’ bank needed. Why such generosity towards a competitor? Because Aris and Zorba were sitting under the same proverbial oak. Desperate to raise money for his own bank, Zorba agreed the loan on condition that Aris’ bank lent a similar amount to Zorba’s family’s offshore outfits. Aris’ and Zorba’s families then used money from their offshore accounts to buy new shares in their own banks, thus fulfilling the regulator’s requirements that new capital be raised and thereby qualifying for the real money that the poor taxpayer was borrowing from the troika.
   … they ended up owing nothing to anyone. Both sets of loans … were written off soon after being granted and transferred to the banks’ long list of non-performing loans….
  …An even more outrageous trick was employed: in addition to millions from Zorba’s bank, the Aris family’s offshore companies also borrowed millions from Aris’ own bank. These loans were also written off as unserviceable or non-performing, or were used to buy office space that was resold to other parties only to be leased back by the bank or sold to it at inflated prices. The newly conjured up funds, or ‘profits’ would be used to buy new shares in the bank, keeping up the pretence that investors were injecting private capital into them.’

This is nothing less than institutional corruption and financial fraud. This, seemingly, didn’t just apply to Greece, as executives at Barclays have recently been accused of a similar money-go-round with their bailout loan from Qatar.

Something similar happened with what the European Central Bank concocted to enable Greece to make a €3.5 billion repayment. It was literally a case of a central bank creating money, but money for the sake of money, nothing useful is bought with all this effort, except to the political right to keep Greece subservient to its creditors (of course, as is made clear above, this pretend money creation is only possible with the political connivance of the state’s central bank which is the only type of bank that really can just issue as much money as it wants).

That is the central lesson of this book: Varoufakis’ position would have been sensible in any business, but this wasn’t business. It was politics. He recounts talking to Wolfgang Schäuble, the German Finance Minister and apparent Eminence grise of the Eurogroup, who seemed to believe that there was no alternative to but to continue what he was doing, and impose extreme austerity on Greece. Varoufakis tells of how many people, individually, expressed sympathy, but in practice, stuck to the organisation line in any committee or in public. Interestingly, the only person to come out with praise was Emanuel Macron, then working in the French finance ministry. He apparently backed Varoufakis’ ideas, which may be significant for the coming years.

The need for the Eurogroup to have credibility internationally, to maintain the line that debts cannot be written down or off, that economic union, ultimately means political union to avoid such destabilisation, meant it had to pursue the only policy it had. In the end Syriza complied, after Greece was subject to a medieval siege that saw essential drug supplies cut off (including insulin and thyroxin) and a humanitarian crisis ensued.

Varoufakis describes how the institutions gave him the run-around: not letting him know who or where the decision-makers were; treating any speech by him as if they were listening to ‘the Swedish National Anthem’; and releasing misleading briefings to the press about events at meetings (there were no proper minutes, but Varoufakis recorded them secretly). The EU, he says, is likely to give Britain the same treatment during the Brexit talks.

His book is a warm and witty account of a period of significant turbulence in a country of 10 million, with a government prepared to try and stand up to the financial power structures of the world. It is also a story of their failure to achieve even limited reform and compassion for the people of Greece. What they were asking for hardly amounted to revolution, but was an attempt to shore up capitalism. Sometimes, the system just works against itself.

Pik Smeet

Greece, Austerity, and Capitalism (2015)

From the August 2015 issue of the Socialist Standard

When Syriza won the elections in Greece in January on a 'No to Austerity' platform left-wing opponents of austerity throughout Europe were delighted. ‘If they can do it, so we can’, they chanted. Yes, but do what? Saying 'No' to austerity is one thing. Ending it is another.

Why there is austerity

Knowing how capitalism works, we were sceptical; maybe Syriza could mitigate austerity a little for some workers, but end it, no. 'Austerity' , i.e. cutting back on government spending, is a policy that all governments are obliged to apply when capitalism is in one of its periodic downturns, at least if they don't want to make the situation worse.

The capitalist economy is driven by business investment and businesses only invest with a view to making a profit. A slump is an expression of the fact that, for one reason or another, production on the previous scale is no longer profitable. The only way that capitalism can get out of a slump is if profitability is restored. The main way this comes about is through the devaluation of capital assets: some firms go under and their assets pass cheaply to rivals, which means that less profit needs to be made to achieve the previous rate of profit on capital invested.

Another factor increasing profitability is the fall in labour costs: with higher unemployment there is a downward pressure on wages. The government can help by reducing taxes on profits as businesses are only interested in after-tax profits. But, as in the end all taxation falls on profits and property by being passed on to them wherever it initially falls, it isn't just by decreasing direct taxes on profits that the government can help. It can also reduce taxation generally by cutting its own spending, including on 'welfare' and 'benefits' for workers, undoing past social reforms.

Besides the pressure to reduce taxation to help restore profitability, governments are under an additional pressure in a slump to cut their spending. With the fall in economic activity there is also a fall in their tax receipts.

All this is why governments can be legitimately said to be 'obliged' to pursue a policy of austerity in a slump. Of course governments have the power, both in law and in theory, to decide not to do this. But the consequence would be that they would make things worse, by prolonging and perhaps deepening the slump in economic activity.

More government spending no way out

Those who say that a government should refuse to impose austerity in a slump offer a seemingly plausible and common sense argument: as total purchasing power falls in a slump, increase government spending to compensate and that will get the economy growing again. Surely, reducing it only makes matters worse? If capitalism was a system driven by paying demand this might make sense. But it's not. It's driven by business investment for profit. It's the effect of increased government spending on this that's relevant. The key question is: where is the government to get the extra money to increase its spending from?

As governments don't produce anything themselves (except marginally if they happen to directly operate some profit-seeking business) there are only three possible sources: taxation, borrowing, or the printing press.

Since all taxation falls in the end on profits, increasing it will have an adverse effect on business investment for profit, which is what drives the capitalist economy.

Borrowing needn't have this effect, but the interest on the extra borrowing would have to come out of taxation (as would in the end repaying the loans).

Printing more money might give a temporary boost to production, but would eventually lead to a rise in prices, creating other economic problems such as making exports more expensive and so less competitive; imports would be cheaper so threatening the jobs too of workers employed by businesses producing for the home market.

So, however financed, government spending in a slump is not a way out of it. When tried, as with the Labour governments in Britain in the 60s and 70s and with Mitterrand in France in the early 80s, it hasn't worked. The economic situation got worse and the governments which tried it had to resort to austerity. Basically, both theory and practice demonstrate that there is no way in a slump in which a government can avoid imposing austerity without making things worse.

Greek debts

The Greek state was hit particularly hard by the crash of 2008 because, with the drop in economic activity that followed, its revenue from taxes fell while its debt – what it owed those who had lent it money by buying its bonds – increased as, like other states, it had to borrow money to bail out its banks.

Critics have blamed the scale of the problem on the profligacy of the Greek State, even on the Greek people in general, for borrowing and spending money recklessly. But it takes two to tango and in the period up to 2008 banks from other European countries were buying Greek government bonds as part of the general lending spree which nobody thought would end. If there were reckless spenders there were also reckless lenders. But the economic boom did end and it is this that has caused the Greek sovereign debt problem. In fact the various Greek bail-outs are aimed at bailing out the Greek government’s creditors as well as the Greek government.

Other European countries, whether or not they were in the Eurozone or even the EU (think Iceland), suffered from a similar problem, even if not on the same scale, and adopted austerity to try to deal with it.

The Eurozone is basically an agreement between the EU Member-States involved to maintain a fixed exchange rate between their currencies, all renamed the euro. To do this the member-states must pursue broadly similar economic and monetary policies. In a slump, austerity. This is imposed by capitalism but, because it has been made a condition for Eurozone countries to borrow money from other Eurozone countries, it appears to be imposed by the Eurozone. This has led – misled – some anti-austerity campaigners in Greece and elsewhere into blaming austerity on  being in the euro and not being in capitalism and into imagining that this could be avoided if their country exited the euro. This, for instance, is the position of Costas Lapavitsas, professor at the School of Oriental and African Studies in London who was elected a Syriza MP in January, as expressed in his frequent articles in the Guardian. 'Forget the euro, Greece needs a new currency' he commented on the Greek deal. This, he claimed 'would also allow the government to finally get started on a productive reconstruction of the economy' (13 July).

But it's a delusion. If Greece withdrew from the euro, it still could not escape austerity. It would just take a different political form and could even be worse. Tsipras and most of Syriza seem to have realised this or at least were not prepared to put it to the test and preferred to have it imposed from Berlin. And just where would the money to finance ‘a productive reconstruction of the economy’ come from? Maybe Lapavitsas is thinking of the same sort of state-capitalist siege economy as in Cuba (or formerly in Russia and East Europe), as if that avoids austerity.

Incompatible with capitalism

According to Nigel Farage the deal imposed on the Greece government 'shows that national democracy and membership of the Eurozone are incompatible' (Times, 14 July). Others, from the left as well as the right, have made the same point, but it's misleading. If Greece withdrew from the Eurozone – or if Britain withdrew from the EU – the trappings of 'national democracy' would be restored, but what its 'sovereign' government would be able to do would still be restricted by the pressures of capitalism in a slump. Austerity would still be the order of the day, only it would now be decided by an independent decision of a government exercising unrestricted sovereignty.

The Greek deal does show an incompatibility between democracy and capitalism. The Greek people voted 'No' to austerity twice – when they elected the Syriza government in January and when they voted OXI in the 5 July referendum – but it made no difference. They still got austerity. The people may propose, but capitalism disposes.

It's not just carrying out democratically-made decisions that is incompatible with capitalism. It's also meeting human needs. In April the Greek parliament appointed a Truth Committee on Public Debt (on which Trotskyist economists such as Eric Toussaint and Michel Husson were appointed, as if Syriza wasn't stuffed full of its own left-wing economists). In its preliminary report in June (http://cadtm.org/Preliminary-Report-of-the-Truth) it argued that most of the Greek debt was 'illegal, illegitimate and odious' and suggested that these were grounds for repudiating it which would hold up in court (which planet are they living on?). One section, on 'The impact of the “bailout programme” on human rights', argued that, because repaying and servicing it imposed savage cuts on people's education, health, housing and other basic needs, it infringed their 'human rights' under UN and other charters. This is an excessively legalistic way of putting it, but the general point is valid: austerity does mean that human needs are ignored and come to be met even less than normally.

Capitalism is incompatible with meeting basic human needs too. In fact, austerity is a prime example of the capitalist imperative to put Profits before People.

There is a lesson in Syriza’s abysmal failure to even mitigate austerity in Greece, let alone end it. It’s that as long as capitalism is in a slump it can’t be ended. All the articles by left-wing economists saying that it can are not worth the paper they are printed on. All the (quite legitimate) protests and demonstrations against austerity are misdirected when they call on governments to end austerity. This is an impossible demand. All this energy would be more effectively directed instead at replacing the capitalist system of class ownership and production for profit by a socialist system of common ownership, democratic control and production directly to meet people’s needs. Only then will austerity be ended forever. Only then will what people vote for be able to be carried out.

Adam Buick