Why Greece will be forced to leave the Euro unless it's offered a better deal ; the other problems with the EU and the Euro ; and the mass starvation they are distracting us from

(If this article is too long for you to read as a blog post see my website version with contents links between different sections)

Greece's keep the Euro, reject austerity option?

Greece has the option of rejecting the austerity bail-out package and disowning it's debts, while keeping the Euro as a currency, with or without remaining Euro-zone governments' permission. First Minister Alec Salmond similarly plans to keep the pound as a currency if Scotland becomes independent, based on many countries using the US dollar as their currency (1).

Despite the myth that defaulting on large debts leads to instant bankruptcy for debtor countries, South Korean economist Ha Joon Chang's book '23 Things they don't tell you about capitalism' notes numerous examples of indebted countries defaulting on their debts and immediately finding new creditors willing to lend to them (2).

This option might result in even worse austerity problems than the bail-out package in the short term though and might lead to the same end result of Greece leaving the Euro unless the bail-out package is renegotiated to reduce the austerity element, increase the stimulus element and crack down on tax havens to increase tax revenues for Greece and all other governments.

The remaining Euro zone countries could try to force Greece to drop the Euro by blanket trade sanctions, but that might lead to currency crises in Portugal, Spain and even Ireland and Italy, with the Euro zone ending up restricted to Northern and central Europe.

There is the possibility that some politicians and voters in Northern European countries might prefer this, but it would hurt their exports. Germany's exports have increased massively as a result of the Euro. This is because while the Deutsch mark was very high in value due to Germany's strong economy, making German exports expensive (as international trade involves currency exchanges), the Euro's value is based on the average strength of the economies of the entire EU and so is lower in value than the Deutsch mark. This made German exports cheaper to buy in other countries and so more competitive against their rivals exports (and against goods produced in the countries Germany exports too.) (3)

A Northern and central Europe only euro-zone, composed of stronger economies, would mean the value of the Euro would rise, making exports from Euro-zone countries more expensive for consumers outside the Eurozone (in countries using currencies other than the Euro), so reducing orders for and sales of those exports.

The problem with Greece keeping the Euro without a Eurozone agreement

More likely, Greece might run out of money if it tried to remain in the Euro without the agreement of Eurozone governments, as it's government can't print Euros - only the European Central Bank (ECB) can - and the ECB is mostly under the control of the German and French governments as the two largest economies in the Eurozone.

That could force Greece to return to the drachma as a currency.

A return to the drachma?

The drachma, based on the weak Greek economy, might well fall further in value at least in the short term due to the crisis.

This would have the effect of increasing the cost of all Greece's imports - most importantly fuel (especially oil, gas, coal and refined petrol), with Greece relying on imports for two-thirds of it's energy requirements (4).

That would certainly hurt the Greek economy, but would it hurt it any worse than EU (or Eurozone) governments' austerity measures and enforced sell-off of it's remaining assets at the bottom of the market (including state owned utilities which could bring in revenue if the economy recovered)?

A Greek government after the second elections in June might decide it wouldn't.

However it would also allow Greece to print it's own money and would make it's exports more competitive (it's problem being that it doesn't export enough at the moment and would need to export far more).

This could also (in the longer term, once it re-stabilised) allow Greece to invest more in e.g solar power to reduce its dependence on energy imports.

The need for Germany to allow Greece to re-negotiate the bail-out deal

German Chancellor Angela Merkel says agreements made must be honoured, but those agreements were made without any democratic consultation of the Greek people, with the elected Greek Prime Minister ( George Papandreou ) forced to resign when he suggested a referendum on the bail-out deal (5). He was replaced with an unelected bureaucrat Lukas Papademos, who had previously been vice President of the European Central Bank (which issues the Euro).

If there had to be referenda for countries to join the Euro, why wasn't there one an agreement to impose austerity for the majority in Greece, especially when austerity has shown itself to be counter-productive?

So why shouldn't 17% of Greeks have voted for Syriza, the Green-socialist anti-austerity coalition? And why shouldn't over 20% of them be saying they'll vote for it in the emergency repeat elections in June? (6) (Though the centre-right pro-bail-out deal New Democracy was ahead of Syriza in one poll it's apparent poll lead was within the margin of error of the poll ) (7).

Syriza may be unrealistic in demanding no austerity measures whatsoever - some cuts may be necesary - but it is right that there is no democratic legitimacy to the bail-out deal imposed by Euro-zone and EU governments so far; and right that the level of austerity demanded is counter-productive and unfair (as well as letting the richest Greeks off with tax avoidance through tax havens while the rest suffer.

Syriza has every right to use it's existing electoral mandate and any votes it gets in the new elections to demand a renegotiation of the terms of the bail-out deal. Stimulus measures such as public works and government funded infrastructure building and training programmes may well be necessary.

Austerity taken to the current extremes chokes off any chance of the economic growth that Greece requires to be able to pay off it's remaining debts. This only benefits Greece's creditors, primarily Eurozone governments and big US, British, German and French banks, who can continue to farm the Greek population for interest payments as long as they remain in debt (8). Is it a co-incidence that allowing tax havens also benefits them? Or that forcing the sell off of state utilities on the cheap benefits them and investors from Northern Europe and the US?

Given a fair deal Greeks might well be able to stay in the Euro - polls show most would prefer to.

Merkel's statements have already begun shifting towards suggesting there could be a bigger stimulus element to the bail-out package, which is encouraging (9).

(Merkel also suggested to the current caretaker Greek Prime Minister that the new Greek elections should be accompanied by a referendum on whether to stay in the Euro - which the PM said he could not as a caretaker government did not have the authority.) (10)

Why Greeks feel oppressed by larger countries :
the history

The reason that many Greeks feel oppressed by larger countries is that for centuries to present, they have been. Since gaining their independence from the collapsing Ottoman Empire in the 19th century they were invaded and occupied by German forces in World War Two.

After Greek Communist partisans kept several German divisions occupied for most of the war, the 'liberating' British forces' and regular Greek military's reward to them was to shell thousands of Communist demonstrators and partisans with artillery with Churchill's approval in 1944.

This was followed by a civil war from 1946-1949 in which the US and British governments backed the Greek military against Communist groups. Communists and suspected communists were hunted down and persecuted for decades.

Under the US backed military government of the 'Colonel's regime' from 1967 to 1974, the assassination, jailing, torture or disappearance of anyone critical of the ruling military was commonplace, with CIA assistance.

President Lyndon B Johnson responded to the complaints of the Greek ambassador to the UN about US operations in Greece and Cyprus in 1967 by saying "Listen to me, Mr. Ambassador! Fuck your parliament and your constitution! America is an elephant. Cyprus is a flea. Greece is a flea. If those two fleas continue itching the elephant, they may just get whacked by the elephant’s trunk, whacked good.… We pay a lot of good American dollars to the Greeks, Mr. Ambassador. If your prime minister gives me talk about democracy, parliaments, and constitutions, he, his parliament, and his constitution may not last long."

So many Greeks see the current crisis as more of the same - few people have been killed (some demonstrators by police), but so far they have had larger countries governments imposing 'agreements' on them without any democracy.

The myth of laziness and corruption as the causes of under-development

German, British and French politicians have found it convenient to allow the myth that Greece's debt is mainly due to Greeks being lazy or corrupt. South Korean economist Ha Joon Chang points out that in the early 19th century, when Germany and Japan were less industrialised than France or England, Japanese and Germans were seen as lazy and backward. Chang comes to the conclusion that rather than changed culture resulting in development, cultural changes come about as a result of development, which is why people in poor, undeveloped countries are stereotyped as lazy. A society riddled with bribery is similarly usually the result of poverty and lack of economic and governmental development, rather than a cause of it (11).

James Steadway, chief economist at the New Economics Foundation, found figures suggesting Greeks on average retire older than Germans - and work 50% longer hours (12).

Tax avoidance and Evasion which increases government deficits and debts is facilitated by tax havens - why no EU or member state action on this?

While there was too much tax evasion in Greece, EU member governments have not closed down the tax havens which continue to facilitate tax avoidance and evasion by big banks, firms and the wealthiest across the EU and the world. Switzerland is a favourite tax haven for wealthy Greeks and Greek companies, while Greece's creditors include banks like the US based Goldman Sachs and the British based Royal Bank of Scotland, both of which, like most of the UK's FTSE 100 companies, are heavily involved in tax avoidance through tax havens (13) - (15).

This is surely a form of corruption on a grand scale - especially when parties in government are receiving large donations to party funds for election campaigns from the billionaires, banks and firms using the tax havens - and former government ministers involved in regulating (or more often de-regulating) industries end up on the boards of companies their department or government regulated.

The need to recycle the trade surpluses of stronger economies into developing weaker ones

Many economists (e.g Will Hutton and former World Bank economist Joseph Stiglitz) say the Eurozone's major weakness is the lack of any sufficient regional development fund to even out the inevitable trade imbalances between strong economies like Germany's and weaker ones like Greece, Portugal and Spain. A sufficient fund would act to recycle a large part of the trade surplus money of countries like Germany into investment in the weaker economies like Greece (16) - (17).

The insufficiency was exacerbated by the redirection of regional development funds from Portugal, Greece, Spain and Ireland to new member states as the EU expanded eastwards, arguably too fast, without referenda in the existing member states and without any EU minimum wage.

This is just as true of the EU as a free trade area as it is of the Euro-zone as a single currency area.

The US is a huge country made up of many states with significant differences in the strength or weakness of their economies, but this is moderated by large infrastructure and investment projects in poorer states by the US Federal Government.

Why complete free trade plus a single currency across countries at hugely different levels of development can't work

South Korean economist Ha Joon Chang's book 'Bad Samaritans' has something relevant to say here too. His book takes numerous historical examples to show that the British, US and other developed economies built up key industries over centuries by subsidising them and protecting them from the imports of foreign rivals. Only once they were strong enough to defeat any competition internationally did their governments become advocates of free trade - and even now advocate it for developing countries (and make it a condition of aid and trade deals) while often subsidising and protecting their own industries. Similarly foreign investment does not create growth first, but is attracted by building up a strong economy by publicly funded infrastructure and investment (18).

So is the EU free market and Eurozone project one that makes it impossible for weaker economies to ever develop their own industries when forced to open their markets to imports from stronger economies built up over centuries of protectionism? Does the Euro make things even harder for them by making the more developed economies' exports even cheaper? Should exceptions be made on the bans on protectionism and state subsidies for some of the industries of the weaker economies in the EU (just as poorer developing countries outside it desperately need to be allowed to protect and subsidise their agriculture and industries to develop them without being penalised by losing aid or trade deals as a result)?

Without these kind of exceptions being allowed for weaker economies, their electorates may end up concluding that they will be less badly off out of both the euro currency zone and the EU itself.

Contrary to Germany's image of itself as paying to bail out irresponsible Greeks, the current system gives all the benefits to the wealthier countries in the EU and the euro-zone with the costs largely paid by the poorer ones.

While this is true of trade between relatively developed nations of different economic strengths and levels of development within the EU and the developed world, it all holds even more true for trade between the developed countries and the almost entirely undeveloped former colonies in Africa and much of Latin America and Asia.

The need to resolve the developed world crises in order to deal with much bigger ones -
the starvation, hunger and lack of clean drinking water crisis in the developing world and the energy, resource and climate change one worldwide

Germany and the other strong economies in the EU should offer these kind of concessions in order to end the crisis quickly and move on to dealing with far more serious crises - such as the hundreds of millions of people in other parts of the world who are going without enough food to eat and without clean water to drink - and the coming catastrophic energy, resource and food crisis if we don't reduce our wasteful over-use of energy and resources.

Oxfam estimate that a billion people or one in seven of the world's population can't afford enough to eat each day for themselves or their children - a problem made worse by the rising price of food partly due to the rising price of fuel for transporting it, while the UN and other experts estimate between 800 million and 4 billion (probably more like 4 billion) have no access to clean drinking water, resulting in them suffering illness and often death from water borne diseases (19).

You can sign an avaaz petition which will be handed to G8 and other government's leaders at the G8 summit demanding they act to provide food security for the growing numbers of hungry people here.

The focus on developed world debt and currency crises is distracting from the need for the upcoming G8 summit to deal with those two major problems that result in millions dying each year from starvation, under-nutrition and lack of clean water.

The developed world crisis are relatively minor by comparison and only affect the majority here due to huge inequality, plus tax havens letting the wealthiest and big banks and firms avoid paying massive amounts of tax with the collusion of governments and politicans, plus rampant deregulation and the failure to re-regulate. Even with all that few people are starving or going without clean water here, though some are going hungry or dying of cold.

Sources

(1) = Scotsman 27 Jan 2012 'Alex Salmond: ‘Chancellor would bite our hands off to keep the pound’',
http://www.scotsman.com/the-scotsman/politics/alex-salmond-chancellor-would-bite-our-hands-off-to-keep-the-pound-1-2081286 ; 'However, Mr Salmond said there were 67 countries in the world that were using another nation’s currency, “either in formal or informal monetary unions at the present moment”, while remaining independent.'

(2) = Ha Joon Chang (2010) ‘23 Things they don’t tell you about capitalism’, Allen Lane, 2010

(3) = Business Insider 20 Nov 2011 'Why German Taxpayers Should Be Forced To Bail Out Italians And Greeks',
http://articles.businessinsider.com/2011-11-20/markets/30421346_1_german-banks-german-state-eurozone

(4) = Trading Economics 'Energy imports; net (% of energy use) in Greece', http://www.tradingeconomics.com/greece/energy-imports-net-percent-of-energy-use-wb-data.html

(5) = guardian.co.uk 06 Nov 2011 'Eurozone crisis: Greek PM George Papandreou to resign', http://www.guardian.co.uk/world/2011/nov/06/greece-george-papandreou ; 'The socialist prime minister has faced growing calls to step down at home and abroad since shocking markets and world leaders with an ill-timed decision, announced last Monday, to put the 27 October bailout agreement to popular vote. After being publicly dressed down by French President Nicholas Sarkozy and German Chancellor Angela Merkel, the 59-year-old politician was forced to back down and shelve the referendum plan...'

(6) = Wall Street Journal Online 16 May 2012 'Greece's Radical Leftist Syriza Secures First Place- Poll', http://online.wsj.com/article/BT-CO-20120516-711097.html

(7) = Bloomberg 17 May 2012 'New Democracy Moves Ahead of Syriza, Greek Poll Shows', http://www.bloomberg.com/news/2012-05-17/new-democracy-moves-ahead-of-syriza-greek-poll-shows-1-.html

(8) = Bloomberg 23 Feb 2012 'European Banks Take Greek Hit After Deal', http://www.bloomberg.com/news/2012-02-23/rbs-reflects-greek-debt-damage-with-credit-agricole-days-after-aid-accord.html ; On US banks see (12) below

(9) = guardian.co.uk 17 May 2012 'German stance on Greek crisis softens as eurozone fears mount', http://www.guardian.co.uk/world/2012/may/17/germany-greek-crisis-eurozone

(10) = Guardian Business Blog 18 May 2012 'Eurozone crisis live: Row after Angela Merkel 'suggests Greece holds euro referendum'', entries for 6.15pm BST and 6.23pm BST, http://www.guardian.co.uk/business/2012/may/18/eurozone-crisis-stock-markets-greece-spain#block-31 and http://www.guardian.co.uk/business/2012/may/18/eurozone-crisis-stock-markets-greece-spain#block-32

(11) = Ha Joon Chang (2007) ‘Bad Samaritans’, Random House, London, 2008 , Chapter 9 'Lazy Japanese and Thieving Germans'

(12) = New Economics Foundation (NEF) 16 Feb 2012 'Greece should reject the Troika and default on its own terms', http://neweconomics.org/blog/2012/02/16/greece-should-reject-the-troika-and-default-on-its-own-terms by James Meadway, Senior Economist, NEF

(13) = Bloomberg 06 Mar 2012 'Goldman Secret Greece Loan Shows Two Sinners as Client Unravels', http://www.bloomberg.com/news/2012-03-06/goldman-secret-greece-loan-shows-two-sinners-as-client-unravels.html

(14) = Scotsman 18 May 2012 'Greek debt deal set to cost RBS £825 million' http://www.scotsman.com/news/international/greek-debt-deal-set-to-cost-rbs-825-million-1-2154674

(15) = Guardian 11 Oct 2011 'Tax havens and the FTSE 100: the full list', http://www.guardian.co.uk/news/datablog/2011/oct/11/ftse100-subsidiaries-tax-data

(16) = Observer 13 May 2012 'This crushing debt trap threatens to bring down the whole of Europe', by Will Hutton , http://www.guardian.co.uk/commentisfree/2012/may/13/will-hutton-euro-in-danger

(17) = guardian.co.uk 05 May 2010 'Reform the euro or bin it', by Joseph Stiglitz (former World Bank economist, also quoting nobel prize winning economist Robert Mundell) , http://www.guardian.co.uk/commentisfree/2010/may/05/reform-euro-or-bin-it-greece-germany

(18) = Ha Joon Chang (2007) ‘Bad Samaritans’, Random House, London, 2008 , Chapter 2 'The Double life of Daniel Defoe - How did the rich countries get rich'? ; also Chapters 3 & 4

(19) = BBC News 13 May 2012 'Harrabin's Notes: Safe assumptions' , http://m.bbc.co.uk/news/science-environment-18020432

Private creditors and banks' refusal to write down Greek debts likely to lead to Argentina style default

The Guardian has reported that German Chancellor Angela Merkel tried to get Greece’s private sector creditors, including the banks, to forgive some of Greece’s debts to them as part of a bail-out package for the Greek government. Some IMF and other economists argued for the same thing (1) – (2). The banks and other private creditors refused (3).

If they continue in their greed in refusing to give up any of the money owed to them Greece will most likely default on it’s debts and they will get not one penny.

French President Nicholas Sarkozy has claimed that leaving the Euro is not an option for either France or Greece as if they did their debts would still be denominated in Euros, the Greek and French currency would be worth far less than 1 euro per unit of currency and so their debt would effectively increase (4).

However if Greece has defaulted on all it’s debts this would not be a problem for them. It might affect their balance of payments negatively (i.e increase the value of what they import compared to what they export) but compared to the harsh conditions set for bail-out and the massive size of Greece’s debts this might seem like a minor problem.

The IMF and Greece’s governmental creditors in the EU have set the usual conditions of privatisation of public services and assets, sacking of public sector employees and cuts in welfare payments (5).

The privatisations demanded include the privatisation of water, which will price many of the poorest out of being able to afford water at all. Privatisation of water supplies led to cholera epidemics when it was done in South Africa as many people couldn’t afford piped water any more; and to riots in Cochabamba in Bolivia after the foreign water firms who bought up Bolivian water infrastructure started charging for the entire cost of new investments by raising prices in advance to cover the whole cost of major investments up front (6)  - (9).

They also include electricity (10). This would remove the revenues of one of the few public services that could turn a profit from government.

If the Greek government agrees to all this the likelihood is that the country will be tipped into a second even worse ‘double dip’ recession. Given that and massive public opposition to the rescue package conditions, since most Greeks don’t see why they should pay for the decisions of bankers and politicians who caused the crisis through lobbying for and implementing deregulation of the financial sector across most of the developed world, it seems likely the Greek government will either have to default, partially or entirely, on it’s debts, or else it will fall and whatever government replaces it will be forced to.

The IMF and EU conditions on the bail out are not addressing the main cause of Greece's debts either. This is tax avoidance through corruption. Many people and companies who can afford to, bribe officials or politicians to allow them to evade taxes altogether, resulting in the gap between tax revenues and government expenditure and placing the tax burden on those who can least afford it - the people and small businesses who can't afford to pay bribes (along with those who could but decide it would be wrong to) (11).

Defaulting on a large percentage of their other foreign debts did not work out badly for Argentina, in fact leading to it finally getting out of a situation of mass unemployment and massive debt. The debt default and repudiation of IMF conditions was followed by rapid growth which was interrupted briefly in 2009 by a recession caused by the global financial crisis, followed by more rapid growth. (The table on this link shows Argentina’s growth rate since 2002 if you change the start year to 2002.)   (12) – (14).

 Argentina did have help from Venezuela’s government, which had a surplus when oil prices were high due to the Iraq and Afghanistan wars and tension over whether there’d be war with Iran. Venezuela funded Argentina paying off it’s debts to the IMF. Foreign creditors were then forced to accept 25% of the money initially owed to them (15) – (16).

As a result last year Argentina was  able to pay off  it’s debts at a rate equivalent to creditors getting 51% of what was initially owed to them despite suffering a recession due to the global financial crisis and having to default on debt payments again in 2009 (17) – (18).

Development economist Ha Joon Chang has pointed out that many developing countries have defaulted on their debts without disaster ensuing in the past and they were rapidly able to get new loans from new investors (19).

The IMF is usually far more concerned with what is good for foreign creditors than what’s good for the people of countries it’s imposing conditions on for loans and grants, because it’s funded by the richest countries and they appoint it’s head.

 

(1) = guardian.co.uk 17 Jun 2011 ‘Germany climbs down over Greece bailout demands’,http://www.guardian.co.uk/world/2011/jun/17/greece-bailout-germany-private-banks

(2) = guardian.co.uk 03 Jun 2011 ‘Anger mounts in Greece as eurozone ministers edge nearer to bailout deal’,http://www.guardian.co.uk/business/2011/jun/03/greece-debt-crisis-second-bailout-talks

(3) = See (1) above

(4) = EU business 27 Jun 2011 ‘Sarkozy says France will propose new plan to aid Greece’, http://www.reuters.com/video/2011/06/27/greece-debates-new-austerity-plan?videoId=216516632

(5) = Reuters 14 May 2011 ‘EU,IMF pushing Greece to fully privatise utilities – reports’,http://www.reuters.com/article/2011/05/14/greece-economy-idUSLDE74D02920110514

(6) = See (5) above

(7) = J. Pauw (2003)‘The politics of underdevelopment: metered to death-how a water experiment caused riots and a cholera epidemic’ in  Int J Health Serv. 2003;33(4):819-30. http://www.ncbi.nlm.nih.gov/pubmed/14758861

(8) = Water Justice 19 Oct 2004 ‘The UK Government and Water Privatisation’,http://www.waterjustice.org/analysis.php?componentID=2&articleID=83

(9) = The Nation 28 Jan 2005 ‘The Politics of Water in Bolivia’,  http://www.thenation.com/article/politics-water-bolivia

(10) = See (5) above

(11) = BBC Radio 4, 11 Feb 2010 'From Our Own Correspondent - No Tax Please we're Greek', http://news.bbc.co.uk/1/hi/programmes/from_our_own_correspondent/8509244.stm

(12) = BBC News 21 Nov 2002 ‘Crisis-hit Argentina defaults on debt’, http://news.bbc.co.uk/1/hi/business/2471617.stm

(13) = Guardian 02 Apr 2009 ‘Argentina heads for return of debt default that 'left it out of the world' seven years ago’, http://www.guardian.co.uk/world/2009/apr/02/argentina-debts-economic-crisis

(14) = Trading Economics -  ‘Argentina GDP Growth rate’, http://www.tradingeconomics.com/argentina/gdp-growth

(15) = guardian.co.uk 19 Dec 2005 ‘Goodbye and Good Riddance’,http://www.guardian.co.uk/business/2005/dec/19/argentina.internationalnews

(16) = See (11) above

(17) = Guardian.co.uk 16 Apr 2010 ‘Argentina to repay 2001 debt as Greece struggles to avoid default’,http://www.guardian.co.uk/business/2010/apr/16/argentina-to-repay-2001-debt

(18) = See (12) above

(19) = Ha Joon Chang (2010) ‘23 Things they don’t tell you about capitalism’, Allen Lane, 2010