Talks into the middle of the night. Frantic last-minute negotiations. An economy sinking ever deeper into despair. A painful round of budget cuts and tax rises, which will have to be pushed through Parliament while riot police control the protesters outside.
Yup, you guessed it. Greece is back in the news.
This week, the European Union has cobbled together another round of bail money that will keep the country afloat for a few more months, and avoid any more difficult headlines ahead of elections in France and then in Germany. And yet, in reality, the deal is a disaster, condemning the country to yet another year of pointless recession.
The one person who could make a difference is the American president.
If Donald Trump stepped in, and refused to allow the International Monetary Fund to prop up this charade any longer, while simultaneous offering Greece the kind of recovery package that it actually needs, then he could make a real difference. It would certainly be a lot more impressive than anything else he has managed to do in his first hundred days — even if that is, admittedly, not setting the bar terribly high.
The Greek saga has been running for so long that most of us have understandably started to tune out. The endless round of political crises and bailouts no longer arouse much interest, and certainly not the way they did in 2011 and 2012. But that doesn’t mean it has gone away.
On Monday night, the Greek government agreed to a round of budget and reform measures that unlocked the path towards receiving the latest chunk of cash in its €85 billion bailout program. In the markets, that was understandably welcomed. On Tuesday, the Athens index
was up 1.6% on the news.
It now looks reasonably certain that over the next few weeks a final deal will be hammered out that keeps the whole show on the road for the rest of this year.
And yet, while the short-term crisis may have been averted, the longer term one just keeps getting worse and worse. Under the original bailout plan, Greece was meant to have been recovering by now. It would have done the pain, and now it should be seeing the gain. The trouble is, there is not much sign of it.
In 2016, the country’s economy shrank by another 0.1%, in a year when the rest of the eurozone was recovering, and the European Central Bank was flooding the economy with 2.2 trillion of freshly printed euros. For this year, the IMF has already cut back its growth forecast to just 2.2%, but so many of those targets have been missed it is hard to believe even that will be met.
Meanwhile, the data out of the country remains shocking. Overall, the economy is 25% smaller than it was at the start of the crisis, a contraction on a similar scale to the United States in the Great Depression (with this important difference — by the late 1930s the U.S. was recovering). Unemployment is stuck at 24% of the workforce. It has the region of the EU with the highest unemployment rate at 31%, and one of the regions with the highest youth unemployment at 53%.
Overall, 35% of people are defined as living in poverty by Eurostat, the second highest rate in the EU after Romania (and in Romania the rate is going down, while in Greece it is rising relentlessly). Even the birth rate has fallen — it is back to World War One levels — because people can’t afford to have children any more. On top of all its other problems, Greece is heading into a demographic crisis.
And what is the proposed fix for that? More austerity, it seems.
The latest bailout deal includes yet another round of cuts to pensions — although the current rate is only €664 a month, hardly a fortune — as well as taking down the tax-free threshold from around €8,000 a year to less than €6,000, which amounts to a hefty tax rise for the lowest earners. Greece is already running a primary surplus of more than 3% of gross domestic product, but the latest package will see that increased even further.
At some point, this madness has to stop. You don’t exactly have to be John Maynard Keynes to work out that when an economy is on it knees the last thing you do is slash government spending, reduce the income of the poorest people in society, and rack up government surplus to pay down debt.
The EU shows no interest in getting to grips with the Greek problem. It is content to let the country gradually slide to Third World status so long as it can kick the can down the road and keep the rescue packages as cheap as possible. The only country that can break the deadlock is the United States.
There is no mystery about what Greek needs. Ideally, it should ‘”suspend” its membership in the
and devalue sharply with a parallel currency backed by the European Central Bank to restore its competitiveness. But if that is politically impossible, there is still plenty that could be done to improve its position. Its debts could be rescheduled, and linked to GDP per capita, so that they were effectively cancelled until it was out of intensive care.
Then it could be offered a massive reflation package of €100 billion or more. Taxes should be cut, pensions raised, and government spending on infrastructure should be boosted. Greeks need to be back in the shops spending money again. That is the only way to get it back to the 3% or 4% growth rates that would give it a chance to recover.
Can that happen? As the largest shareholder in the IMF, the U.S. should refuse to allow it to participate in any package that included more spending cuts. Next, it should lead an international package to restore Greek competitiveness, and pressure Germany to pay the largest share.
True, it is long shot. But at some point Greece needs to be rescued from the endless spiral of austerity and recession. If the U.S. doesn’t lead that, no one will.