Keynes never existed. The General Theory of Employment, Interest and Money was never written. Economic history ended on the day former US president Franklin Roosevelt replaced former US president Herbert Hoover.
That is the gist of the deal that keeps Greece in the euro, an agreement that deepens the country’s recession, makes its debt position less sustainable and virtually guarantees that its problems come bubbling back to the surface before too long.
One line in the seven-page euro summit statement sums up the thinking behind this act of folly, the one that talks about “quasi-automatic spending cuts in case of deviations from ambitious primary surplus targets.”
Translated into everyday English, what this means is that leaving to one side the interest payments on its debt, Greece will have to raise more in revenues than the government spends each year. If the performance of the economy is not strong enough to meet these targets, the “quasi-automatic” spending cuts kick in. If Greece is in a hole, the rest of the eurozone is to hand it a spade and tell it to keep digging.
Most modern governments operate what are known as “automatic stabilizers,” under which they run bigger deficits in bad times because it is accepted that raising taxes or cutting spending during a recession reduces demand and so makes the recession worse.
British Chancellor of the Exchequer George Osborne has seen it as his job to repair the hole in the UK’s budget deficit caused by worldwide economic downturn of 20008, but allowed the automatic stabilizers to work when the economy was struggling in the last parliament. The chancellor’s new fiscal rules requiring the UK Treasury to run a budget surplus is suspended if the economy’s annual growth rate dips below 1 percent.
At the insistence of Berlin, this sort of flexibility is not going to be open to Greece. German Chancellor Angela Merkel and German Minister of Finance Wolfgang Schaeuble have got everything they were seeking before Greek Prime Minister Alexis Tsipras called the referendum — and more.
Athens has been forced to accept the “streamlining” of its value added tax (VAT) system to raise more tax revenue. That means more goods and services included in the 23 percent main rate of VAT. It has also dropped its resistance to immediate changes to the pension system, which might mean higher health charges and an end to the solidarity supplement, a top-up payment to the poorest pensioners. The seemingly innocuous pledge to “reduce further the costs of the Greek administration” means sacking civil servants employed since Tsipras was elected in January.
The per-referendum terms have been made tougher, both through the “quasi-automatic” spending cuts and through the enforced sell-off of Greece’s assets. Over the next three years, the expectation is that Greece can raise 50 billion euros (US$54.49 billion) through privatizations, of which 25 billion euros are to be used for the recapitalization of its banks. The other 25 billion euros is to be split evenly between repaying debt and for investment in the Greek economy.
Greece, to borrow former British prime minister Harold Macmillan’s phrase, might be forced to sell off the family silver — along with the airports, the ports and the banks — to pay for its bailout and to recapitalize its own banks. That is the plan.
There is not the remotest prospect of Greece raising 50 billion euros through privatizations in the next three years. The target was first announced in 2011, since then the value of the Greek stock market has fallen by 40 percent, making its assets far less valuable. In the past four years, privatization proceeds have raised about 3 billion euros.
Greece remains in the euro but it should be obvious by now that there are only two ways of resolving the crisis. The first is to write off a large chunk of its debts. The other is to let it grow at a pace that allows it to service its debts. This deal offers neither. Its one minor concession is that there are likely to be talks about giving Greece longer to pay its debts provided it takes steps that are certain to lengthen and deepen the recession.
This is not a solution. It is a chink of light filtering through the bars of the debtors’ prison.
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