Greece needs a tide-over loan from the rest of the EU – not free-market fundamentalism

and harsh budget cuts there could stall economic recovery in Greece and across the EU

Strikers in Greece demonstrate against public pay freezes and public spending cuts imposed by the Greek government due to pressure from the EU and currency speculators targeting the Euro. (Photo by Petros Giannakouris/Associated Press)

With the EU currently enforcing big cuts on the Papandreou government in Greece there’s a serious risk of turning recession there into depression – and of it spreading across the EU. Sacking lots of public sector workers or cutting their pay is not going to help end the recession – and those economic problems wouldn’t just affect Greece, but the entire EU, which trades with it. What’s more the cuts may well not end currency speculation on the Euro – if they create a depression they might increase it and create another recession across the EU just when it’s economy is starting to recover.

There’s also a risk of forcing Greece to leave the Euro, as the majority of Greeks won’t back these kind of extreme cuts or the kind of economic depression likely to be caused by them.

As Nobel prize winning economist Joseph Stiglitz points out there is no danger of Greece defaulting on it’s debts and it’s government does not have significantly higher debts as a proportion of it’s GDP than the big three in the EU – Britain, France and Germany. Stiglitz also points out that France has broken EU rules on debt exceeding 3% of GDP without having the same scale of cuts enforced on it – and that a large part of the problem is speculation in currency markets on the Euro. He also points out that Greece is in no worse a position economically than the US is currently (1).

Stiglitz has also compared the speculators’ attack on the Euro to that on the pound in 1992 and on Asian currencies in the 1997 Asian financial crisis (2). The solution, he says, is for the rest of the EU to come to Greece’s assistance to ensure the speculators’ gamble doesn’t pay off and avoid a deeper recession which would also damage market confidence, possibly by changing interest rates on the loans and intervening in the stock market (3).

Update - 11th February 7p.m.:

The EU seems to have decided that their ‘aid package’ to Greece will amount to a statement saying they back the Greek government, some vague talk of ‘co-ordinated measures to defend the Euro’ and
a demand that Greek budget cuts continue, along with a suggestion that Greece go to the IMF for money. The IMF might have changed its spots, but has a history of making its loans conditional on privatisation and public spending cuts. There have been suggestions that the EU statement might mean low interest loans provided jointly by the EU and the IMF, which would be slightly more hopeful, but no-one has confirmed this (1). (4).

No wonder the speculators don’t seem to be deterred.

The EU needs to provide concrete help to Greece, possibly by new low interest loans or grants - and stop demanding budget cuts on a scale that the British, German and French governments would rightly never consider in their own countries - particularly during a recession.

(1) = guardian.co.uk 25 jan 2010 ‘A principled Europe would not leave Greece to bleed’, http://www.guardian.co.uk/commentisfree/2010/jan/25/principled-europe-not-let-greece-bleed

(2) = Telegraph 08 Feb 2010 ‘Greek crisis intensifies as Joe Stiglitz calls for Europe to 'teach the speculators a lesson'’,
http://www.telegraph.co.uk/finance/economics/7191113/Greek-crisis-intensifies-as-Joe-Stiglitz-calls-for-Europe-to-teach-the-speculators-a-lesson.html

(3) = BBC News 03 Feb 2010 ‘Joseph Stiglitz on Greece: 'Speculators pose risk'’,
http://news.bbc.co.uk/1/hi/business/8496770.stm

(4) = guardian.co.uk 11 Feb 2010 ‘EU leaders reach Greek bailout deal’,
http://www.guardian.co.uk/business/2010/feb/11/eu-summit-greece-bailout-imf

Tobin Tax campaign returns as Robin Hood Tax

An expanded version of the Tobin tax first proposed by Nobel winning economist the late James Tobin in 1972 has been renamed the Robin Hood tax and already has the support of the British Prime Minister, the German Chancellor and the French President. It also has the support of hundreds of economists.

Another Nobel winner, American economist Paul Krugman; and former World Bank economist (and now a critic of it) Joseph Stiglitz both back some kind of Tobin tax. Oxfam, the World Development Movement and many other charities and trade unions on both sides of the Atlantic and the Channel back the Robin Hood tax.

The tax would be on large scale currency transactions by banks and other financial institutions, most of which are speculative (i.e basically gambling on a huge scale). So it wouldn’t affect buying some currency for a holiday for instance. The proposed rate is about 0.05% - a very low rate but enough to bring in considerable tax revenues given the vast size of many currency transactions. (The ‘Robin Hood Tax’ covers some categories of transaction not covered by the original Tobin tax – perhaps because new forms of currency and stock market speculation have developed since the 1970s)

The tax would discourage currency speculation, like the current speculative trading on the Euro or the run on the pound on Black Wednesday in the 1990s, by making it less profitable. At the same time it would generate large amounts of tax from big banks, hedge funds and other large firms which would mean first that if banks went under again the tax would mean they would be paying for their own bail-outs – and it would leave plenty left over to spend on helping the poorest, education and protecting the environment we all rely on for our survival.

The Obama government has been being lobbied heavily by the hedge funds, the banks and their representatives in ‘free market’ (read oligopoly) ideologue groups like ‘The Heritage Foundation’.

A Mr. Duvet (was that name chosen to sound warm and safe during cold weather?) was a spokesman for the Heritage Foundation on the UK’s Channel 4 News a few months ago. He explained that the 0.05% tax (half a per cent) was more than the banks and the hedge funds (massive gambling outfits) could bear. (After all they’d only just been bailed out for billions). He went on to suggest a VAT tax be introduced in the US, presumably on the grounds that the Heritage Foundation couldn’t give a toss about the effect of a tax with no relation to income on the vast majority of people.

On 8th November 2009 Obama’s Finance Secretary Timothy Geithner rejected the Tobin tax saying “A day-by-day financial transaction tax is not something we are prepared to support” and that the economy required a stimulus rather than more taxes.

Obama’s falling approval rating in the US and the Democrat’s loss of Ted Kennedy’s seat to a Fox News and Tea-Party backed Republican may change that yet though. Immediately after the loss of that seat Obama announced that banks taking deposit accounts would not be allowed to continue hedge funds and other speculative operations – they would have to become separate firms. He may yet be open to being persuaded that a Tobin or ‘Robin Hood’ tax won’t do his poll ratings, his election results or his prospects of reducing the US budget deficit any harm.

To read more or to sign up as a supporter of the Robin Hood tax go here.