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The Troika are celebrating the end of negotiations with Greece, proclaiming that thanks to their tireless efforts the Eurozone remains whole. And why wouldn’t they celebrate. They have demonstrated their power to crush, at least for now, the Greek effort to end austerity and its associated devastating social consequences. Tragically, Syriza has not only surrendered, the nature of its defeat is likely to leave the country worse off, at least both economically and very likely politically as well.
At this point, one of the most important things we can do is try to draw lessons from the Greek experience.
- Perhaps one of the most obvious lessons is that visions of a more humane Europe are not real. European leaders were more than willing to pursue the complete collapse of the Greek economy in order to break Syriza and the movement that gave it power for fear of the demonstration effect a successful Syriza might have had on broader European politics. Using the lever of a European Central Bank cut off of funding for Greek banks, the Troika pressed Syriza to the wall.
Here is how a Guardian blog post described the nature of the discussions leading up to the final Greek surrender:
Alexis Tsipras was given a very rough ride in his meeting with Tusk, Merkel and Hollande, our Europe editor Ian Traynor reports.
Tsipras was told that Greece will either become an effective “ward” of the eurozone, by agreeing to immediately implement swift reforms this week.
Or, it leaves the euro area and watches its banks collapse.
One official dubbed it “extensive mental waterboarding”, in an attempt to make the Greek PM fall into line.
An unpleasant image that highlights just how far we have now fallen from those European standards of solidarity and unity.
- Second, the vicious nature of the European response to the Greek government’s initial offer of moderate austerity, symbolized by the stance of its dominant power Germany, reflects more than ignorance or petty mindedness on the part of European leaders. It reflects the increasingly exploitive nature of contemporary capitalism everywhere. Capitalists, pursuing profits in an increasingly competitive and unstable global system, demand ever greater power to intensify the exploitation of workers everywhere and that is how dominant states approach social policy in their respective countries and international institutions.
- Third, class interests dominate so-called “economic rationality”. A case in point: in the period before the July 5 referendum we learned that IMF staff believed that Greece would be unable to pay its debts under the best of conditions and that therefore any agreement with Greece had to include debt relief while at the very same time the head of the IMF was aggressively joining with European leaders to reject Greek government pleas for just such relief.
- Fourth, since dominant powers will do everything in their power to block meaningful social transformation, those seeking to lead it must prepare people as best they can for the expected class struggle and opposition. In this case Syriza can and should be faulted for not engaging people about the difficulty of achieving both an end to austerity and Eurozone membership under current conditions and doing its best to develop the technical and political capacities necessary for a break from the Euro on its own terms if and when the situation called for it.
Greeks elected a progressive government, voting Syriza into power in January 2015, on the basis of the party’s commitment to both anti-austerity and continuing Eurozone membership. The leadership of Syriza never wavered from encouraging Greeks to believe that both were possible and most Greeks, for many reasons, were eager to believe that this was true. Although the results of the July 5 referendum showed that the Greek working class has a strong fighting spirit, polling also revealed that most of those who voted No hoped that their vote against the European austerity plan would lead to a better deal from Europe, not a break from the Eurozone. They no doubt felt this way because of government pronouncements.
For example, below are the results of polling done the day before the referendum:
Tragically, immediately after the vote the Greek government surprised everyone by returning to negotiations with the Troika with an offer to accept an austerity program much like the one that had been originally placed before the people and rejected. The only meaningful addition was that it included the long held Greek proposal for debt relief. This decision was a serious mistake for two reasons—it generated serious confusion on the part of the Greek population and perhaps even more importantly convinced the Troika that the Greek government was not prepared to use its new domestic support to challenge the status quo. This only emboldened the Troika to proclaim that the referendum had changed everything and now that trust had been lost between the Troika and Syriza leaders, the austerity demands had to be intensified.
In fact, we have learned that Syriza’s leaders did not expect to win the referendum and were prepared to and in fact perhaps hoped to be able to resign and let more conservative forces negotiate and approve a new austerity package. Here is part of an interview with James K. Galbraith, a strong Syriza supporter:
The recent Ambrose Evans Pritchard piece is very much on the mark (” Europe is blowing itself apart over Greece – and nobody seems able to stop it“). The Greek government, and particularly the circle around Alexis, were worn down by this process. They saw that the other side does, in fact, have the power to destroy the Greek economy and the Greek society — which it is doing — in a very brutal, very sadistic way, because the burden falls particularly heavily on pensions. They were in some respects expecting that the yes would prevail, and even to some degree thinking that that was the best way to get out of this. The voters would speak and they would acquiesce. They would leave office and there would be a general election.
It all went downhill from there. In short, Syriza leadership had no plan B. The Troika knew that Syriza was unwilling to pursue its own break from the Eurozone, which meant that its leadership would do anything to remain in the Eurozone. The following is from an interview with Yanis Varoufakis, the former Greek finance minister, that provides insight into the somewhat self-inflicted weakness in Syriza’s bargaining stance:
The referendum of 5 July has also been rapidly forgotten. It was preemptively dismissed by the Eurozone, and many people saw it as a farce – a sideshow that offered a false choice and created false hope, and was only going to ruin Tsipras when he later signed the deal he was campaigning against. As Schäuble supposedly said, elections cannot be allowed to change anything. But Varoufakis believes that it could have changed everything. On the night of the referendum he had a plan, Tsipras just never quite agreed to it.
The Eurozone can dictate terms to Greece because it is no longer fearful of a Grexit. It is convinced that its banks are now protected if Greek banks default. But Varoufakis thought that he still had some leverage: once the ECB forced Greece’s banks to close, he could act unilaterally.
He said he spent the past month warning the Greek cabinet that the ECB would close Greece’s banks to force a deal. When they did, he was prepared to do three things: issue euro-denominated IOUs; apply a “haircut” to the bonds Greek issued to the ECB in 2012, reducing Greece’s debt; and seize control of the Bank of Greece from the ECB.
None of the moves would constitute a Grexit but they would have threatened it. Varoufakis was confident that Greece could not be expelled by the Eurogroup; there is no legal provision for such a move. But only by making Grexit possible could Greece win a better deal. And Varoufakis thought the referendum offered Syriza the mandate they needed to strike with such bold moves – or at least to announce them.
He hinted at this plan on the eve of the referendum, and reports later suggested this was what cost him his job. He offered a clearer explanation.
As the crowds were celebrating on Sunday night in Syntagma Square, Syriza’s six-strong inner cabinet held a critical vote. By four votes to two, Varoufakis failed to win support for his plan, and couldn’t convince Tsipras. He had wanted to enact his “triptych” of measures earlier in the week, when the ECB first forced Greek banks to shut. Sunday night was his final attempt. When he lost his departure was inevitable.
“That very night the government decided that the will of the people, this resounding ‘No’, should not be what energised the energetic approach [his plan]. Instead it should lead to major concessions to the other side: the meeting of the council of political leaders, with our Prime Minister accepting the premise that whatever happens, whatever the other side does, we will never respond in any way that challenges them. And essentially that means folding. … You cease to negotiate.”
Of course, it is easy to call for a break with the Eurozone but in reality such a break would not be a walk in the park. For example, Varoufakis makes clear that there were no certainties for what would happen if the government decided on a break:
“He [Tsipras] wasn’t clear back then what his views were, on the drachma versus the euro, on the causes of the crises, and I had very, well shall I say, ‘set views’ on what was going on. A dialogue begun … I believe that I helped shape his views of what should be done.”
And yet Tsipras diverged from him at the last. He understands why. Varoufakis could not guarantee that a Grexit would work. After Syriza took power in January, a small team had, “in theory, on paper,” been thinking through how it might. But he said that, “I’m not sure we would manage it, because managing the collapse of a monetary union takes a great deal of expertise, and I’m not sure we have it here in Greece without the help of outsiders.” More years of austerity lie ahead, but he knows Tsipras has an obligation to “not let this country become a failed state”.
To be a bit more specific, a break from the Eurozone would require nationalization of the banks—an act that would immediately draw the country into a serious legal test with Europe since the banks are technically under the control of the European Central Bank. It would require the government to quickly issue new script as it prepared a new currency, and aggressively engage in an expanded public works program. At the same time it was unclear whether the new script would be accepted and whether the country would have sufficient foreign exchange to maintain minimum purchases of key import items such as food and medicine. Moreover, many businesses, holding debts denominated in euros, would likely be forced into bankruptcy necessitating government takeover. And, all this would take place in a relatively hostile international environment. No doubt some countries would offer words of solidarity, but it appears unlikely that any would or could offer meaningful financial or technical assistance. Still, with proper preparation the possibilities for success could have been greatly enhanced.
Strikingly, Varoufakis mentioned that Syriza had established a small team to think about what a break would mean shortly after their January 2015 election, a team that no doubt was kept small because the government wanted to keep the planning secret. But that was a mistake. Planning should have happened on a large scale and in a visible way. Discussions should have been held with international legal experts as well as with the Brics countries concerning possible use of their new lending and investment facilities. There was no need to keep this planning quiet, quite the opposite—Eurozone leaders should have been made aware that Syriza was seriously studying its alternatives. And the population should have been brought along—that the government would do all in its power to stay in the eurozone as long as this was consistent with an end to austerity.
As it was, Tsprias went back into negotiations unarmed, desperate for a bailout. Once the ECB tightened its support for Greece’s banking system it should have been clear, if not before then, that a German-led Europe was only interested in total surrender on the part of Greece. And as far as I can tell total surrender is what they got.
Greece has agreed to austerity program that is far worse than any previously rejected. Here is the Guardian summary of what was agreed:
Greek assets transfer
Up to €50bn (£35bn) worth of Greek assets will be transferred to a new fund, which will contribute to the recapitalisation of the country’s banks. The fund will be based in Athens, not Luxembourg as Germany had originally demanded.
The location of the fund was a key sticking point in the marathon overnight talks. Transferring the assets out of Greece would have meant “liquidity asphyxiation”, Tsipras said.
As the statement puts it: “Valuable Greek assets will be transferred to an independent fund that will monetise the assets through privatisations and other means.”
The “valuable assets” are likely to include things such as planes, airports, infrastructure and banks, analysts say.
Some of the fund will be used to recapitalise banks and decrease debt, but analysts are sceptical about how much money there will really be to work with.
“Given the experience of the last few years’ privatisation programme, these targets appear overtly optimistic, serving as a signalling mechanism of Greek government commitment to privatisation rather than a meaningful source of financing for bank recapitalisation, growth and debt reduction,” said George Saravelos, a strategist at Deutsche Bank.
Greece has been told that it needs to pass measures to “improve long-term sustainability of the pension system” by 15 July.
The country’s pensions system, and its perceived generosity relative to other eurozone states, has been a key sticking point in the past five months of negotiations with creditors.
The so-called troika of lenders believes that Athens can save 0.25% to 0.5% of GDP in 2015 and 1% of GDP in 2016 by reforming pensions.
Greece had wanted to draw out reform of early retirement rules, starting in October and running until 2025, when everyone would retire at 67. The EU wants the process to start immediately, by imposing huge costs on those who want to retire early to discourage them from doing so. The lenders also say Athens must bring forward the reform programme so it completes in 2022.
VAT and other taxes
Another source of contention in the months of failed negotiations that preceded Monday’s tentative deal, VAT is now also on the block for immediate reform.
The latest agreement demands measures, again by 15 July, for “the streamlining of the VAT system and the broadening of the tax base to increase revenue”.
One of the key objections from Greece’s creditors to its VAT system is a 30% discount for the Greek islands. Athens proposed a compromise on 10 July under which the exemptions for the big tourist islands – where the revenue opportunities are greatest – would end first, with the more remote islands following later.
The onus on Greece to “increase revenue” is likely to mean more items will be covered by the top VAT rate of 23%, including restaurant bills, something that had until recently been a red line for Tsipras.
Another demand for legislation by 15 July is on “the safeguarding of the full legal independence of ELSTAT”, the Greek statistics office.
Balancing the books
Greece has been told it must legislate by 15 July to introduce “quasi-automatic spending cuts” if it deviates from primary surplus targets. In other words, if it cannot cut enough to balance the books, it should cut some more.
In the past, the troika has demanded that Greece commit to a budget surplus of 1% in 2015, rising to 3.5% by 2018.
Talks will begin immediately on bridging finance to avert the collapse of Greece’s banking system and help cover its debt repayments this summer. Greece must repay more than €7bn to the European Central Bank (ECB) in July and August, before any bailout cash can be handed over.
Greece has been promised discussions on restructuring its debts. A statement from Sunday night also ruled out any “haircuts”, leaving the €240bn Greece owes to Brussels, the ECB and the International Monetary Fund (IMF) on the books.
Angela Merkel, the German chancellor, said the Eurogroup was ready to consider extending the maturity on Greek loans. She argues that a delay in loan repayments and a lower interest rate act in the same way as a write-off, which is why many analysts point out that the Greek debt mountain is worth the equivalent of 90% of GDP in real terms and not the 180% commonly quoted. Merkel said that for this reason there was no need for a Plan B.
Tsipras pledged to implement radical reforms to ensure the Greek oligarchy finally makes a fair contribution. The agreement thrashed out overnight would allow Greece to stand on its feet again, he said.
Implementation of the reforms would be tough, he said, but “we fought hard abroad, we must now fight at home against vested interests”.
He added: “The measures are recessionary, but we hope that putting Grexit to bed means inward investment can begin to flow, negating them.”
Liberalising the economy
The new deal also calls for “more ambitious product market reforms” that will include liberalising the economy with measures ranging from bringing in Sunday trading hours to opening up closed professions.
Greece’s labour markets must also be liberalised, the other eurozone leaders say. Notably, they are demanding Athens “undertake rigourous reviews and modernisation” of collective bargaining and industrial action.
Pharmacy ownership, the designation of bakeries and the marketing of milk are also up for reform, all as recommended in a “toolkit” from the Paris-based Organisation for Economic Co-operation and Development.
The statement from the euro summit stipulates that Greece will request continued IMF support from March 2016. This is another loss for Tsipras, who had reportedly resisted further IMF involvement in Greece’s rescue.
Greece has been told to get on with privatising its energy transmission network operator (ADMIE).
Greece has been told to strengthen its financial sector, including taking “decisive action on non-performing loans” and eliminating political interference.
Shrinking the state
Athens has been told to depoliticise the Greek administration and to continue cutting the costs of public administration.
The Guardian highlights one of the hidden landmines in the agreement:
Our economics editor Larry Elliott has been going through the details of this morning’s deal and concludes it will deepen the country’s recession, make its debt position less sustainable and that it “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 and every year. If the performance of the economy is not strong enough to meet these targets, the “quasi-automatic” spending cuts will kick in. If Greece is in a hole, the rest of the euro zone will hand it a spade and tell it to keep digging.
This approach to the public finances went out of fashion during the 1930s but is now back. Most modern governments operate what are known as “automatic stabilisers”, under which they run bigger deficits (or smaller surpluses) in bad times because it is accepted that raising taxes or cutting spending during a recession reduces demand and so makes the recession worse.
At least according to press reports, Tsprias put up his greatest fight over inclusion of the IMF in monitoring the agreement and privatization. The IMF is definitely in. As for privatization or what the Guardian calls “Asset Transfer,” gains were minimal. One can question in fact whether at least the latter area is one where Tsprias should have tried to draw lines. At least on the face of it, it would seem that it would have made more sense to fight the demand to “liberalize” labor markets. A victory here would have given the state freedom to encourage the development of a strong labor movement, regardless of ownership.
Moreover, as noted in the summary, Greece is still not guaranteed new loans or debt relief. Its parliament has to pass all of the above and then the government gets to start negotiations again.
As the Guardian reports:
European leaders lined up to say Grexit has been averted, but this snappy soundbite glides over the fact the eurozone has simply agreed to open negotiations on an €86bn (£62bn) bailout. Although this is a step to shoring-up confidence in the euro, it is only a promise to have more talks with no guarantee of success.
Talks on the bailout plan are forecast to last around four weeks. “We know time is critical for Greece, but there are no shortcuts,” said Klaus Regling, the official in charge of the the European Stability Mechanism, the eurozone’s permanent bailout fund that Greece hopes to tap.
But these formal talks can only begin, if eurozone leaders avoid several political and financial tripwires. The Greek government has until the end of Wednesday to ensure that sweeping reforms to its pension system and VAT rates are written into law. If Greek lawmakers meet this eurozone-imposed deadline, the baton will pass to the creditors. At least five countries, including Germany, the Netherlands and Finland, will have to put the idea of opening negotiations on a bailout to a parliamentary vote.
Politics could be overtaken by financial deadlines. Athens faces demands to repay €7bn of debts in July, including €3.5bn due to the European Central Bank on Monday (20 July).
Eurozone officials are working round the clock to come up with emergency funds that will help Greece bridge the gap before a permanent bailout kicks in. “It’s not going to be easy,” said Jeroen Dijsselbloem, the hawkish Dutch politician, who was re-elected chair of the eurozone group of finance ministers on Monday. Several options were being discussed on bridge finance, but no one had found “the golden key to solve the problem”, he said, although he hopes to see progress by Wednesday.
The ECB will also continue to maintain a choke hold on the Greek economy perhaps for months, tightening if any deviations take place.
They told clients tonight that the European Central Bank is unlikely to cut Greece much slack until the third bailout is agreed.
We suspect the ECB will stall an ELA decision until Greece begins to legislate the new deal later this week.
Greece would still face a tight ELA cap, however. We expect the ELA cap will remain carefully calibrated and controlled at least until the new ESM loan is fully in place. Access to banks could be fully normalised only in the fall.
It is hard to see this agreement as anything but failure. Clearly the main responsibility for this disaster rests with the leaders of Germany and the European Union. They showed that they had no interest in meaningful, honest negotiations, fearing that they would likely lead to a real challenge to their power. But unfortunately Syriza’s leadership did not make the best of the bad hand they were dealt. They needed to talk more truthfully to the population about the political/class nature of and reasons for the difficult challenges they faced and do the maximum possible to strengthen their negotiating position and prepare the population for the failure that they thought likely.
Hopefully, the Greek people will find the time and space necessary to digest and learn the lessons from this struggle and successfully regroup. We all must.
“Reports From The Economic Front” will soon be moving to its future home.
It seems certain that the political economy textbooks of the future will include a chapter on the experience of Greece in 2015.
July 5, 2015, the people of Greece overwhelmingly voted NO to the Troika’s austerity ultimatum. According to the Greek government, “61.31% of the votes for the 5th of July Referendum voted “NO” whereas 38.69% voted “YES”. There was also a 5.8% of invalid/blank votes. Turnout was 62.5%.”
The Greek government, led by its prime minister, Alexis Tsipras, refused to accept Troika dictates. Instead, recognizing how important the decision was, he put the Troika’s “take it or leave it” ultimatum up to referendum. Win or lose, that was an inspiring vote of confidence in the Greek people. And by the extent of their participation and choice in the vote the Greek people showed that his confidence was not misplaced.
Background To The Referendum
Greece has experienced six consecutive years of recession and the social costs have been enormous. The following charts provide only the barest glimpse into the human suffering:
While the Troika has always been eager to blame this outcome on the bungling and dishonesty of successive Greek governments and even the Greek people, the fact is that it is Troika policies that are primarily responsible. In broad brush, Greece grew rapidly over the 2000s in large part thanks to government borrowing, especially from French and German banks. When the global financial crisis hit in late 2008, Greece was quickly thrown into recession and the Greek government found its revenue in steep decline and its ability to borrow sharply limited. By 2010, without its own national currency, it faced bankruptcy.
Enter the Troika. In 2010, the European Commission, European Central Bank, and the IMF penned the first bailout agreement with the Greek government. The Greek government received new loans in exchange for its acceptance of austerity policies and monitoring by the IMF. Most of the new money went back out of the country, largely to its bank creditors. And the massive cuts in public spending deepened the country’s recession. By 2011 it had become clear that the Troika’s policies were self-defeating. The deeper recession further reduced tax revenues, making it harder for the Greek government to pay its debts. Thus in 2012 the Troika again extended loans to the Greek government as part of a second bailout which included . . . wait for it . . . yet new austerity measures.
Not surprisingly, the outcome was more of the same. By then, French and German banks were off the hook. It was now the European governments and the International Monetary Fund that worried about repayment. And the Greek economy continued its downward ascent.
Significantly, in 2012, IMF staff eventually acknowledged that the institution’s support for austerity in 2010 was a mistake. Simply put, if you ask a government to cut spending during a period of recession you will only worsen the recession. And a country in recession will not be able to pay its debts. It was a pretty clear and obvious conclusion.
But, significantly this acknowledgement did little to change Troika policy to Greece.
By the end of 2014, the Greek people were fed up. Their government had done most of what was demanded of it and yet the economy continued to worsen and the country was deeper in debt than it had been at the start of the bailouts. And, once again, the Greek government was unable to make its debt payments, now to Troika institutions, without access to new loans. So, they elected Syriza in January 2015 because of the party’s commitment to negotiate a new understanding with the Troika, one that would enable the country to return to growth, which meant an end to austerity and debt relief.
Syriza entered the negotiations hopeful that the lessons of the past had been learned. But no, the Troika refused all additional financial support unless Syriza agreed to implement yet another round of austerity. What started out as negotiations quickly turned into a one way scolding. The Troika continued to demand significant cuts in public spending to boost Greek government revenue for debt repayment. Syriza eventually won a compromise that limited the size of the primary surplus required, but when they proposed achieving it by tax increases on corporations and the wealthy rather than spending cuts, they were rebuffed, principally by the IMF.
The Troika demanded cuts in pensions, again to reduce government spending. When Syriza countered with an offer to boost contributions rather than slash the benefits going to those at the bottom of the income distribution, they were again rebuffed. On and on it went. Even the previous head of the IMF penned an intervention warning that the IMF was in danger of repeating its past mistakes, but to no avail.
Finally on June 25, the Troika made its final offer. It would provide additional funds to Greece, enough to enable it to make its debt payments over the next five months in exchange for more austerity. However, as the Greek government recognized, this would just be “kicking the can down the road.” In five months the country would again be forced to ask for more money and accept more austerity. No wonder the Greek Prime Minister announced he was done, that he would take this offer to the Greek people with a recommendation of a no vote.
Here is the New York Times version of events:
ATHENS — Last Friday morning [June 26], the Greek prime minister, Alexis Tsipras, gathered his closest advisers in a Brussels hotel room for a meeting that was meant to be secret. All the participants had to leave their phones outside the door to prevent leaks.
A week of tense negotiations between Greece and its creditors was coming to an end. And it was becoming increasingly clear to the left-leaning prime minister that he could not accept the tough economic terms that his lenders were demanding in exchange for new loans.
As Mr. Tsipras paced and listened on the 25th floor of the hotel, his top aides argued that neither Germany nor the International Monetary Fund wanted an agreement and that they were instead pushing Greece into default and out of the euro.
The night before, at a meeting of eurozone leaders at the European Union’s headquarters, Mr. Tsipras had asked Chancellor Angela Merkel of Germany about including debt relief with a deal, only to be rebuffed again.
This is going nowhere, the 40-year-old Greek leader said in frustration, according to people who were in the room with him. The more we move toward them, the more they are moving away from us, Mr. Tsipras said.
After hours of arguing back and forth about possible responses, Mr. Tsipras made a decision to get on a plane and go home to call a referendum, according to the people who were in the room. . . .
But a close look at the events of the last week — based on interviews with some of the participants and others briefed on the discussions — reveals an accumulation of slights, insults and missed opportunities between Greece and its creditors that led the prime minister to conclude that a deal was not possible, regardless of any concessions he might make.
Greece’s creditors see it differently, of course. In their view, Mr. Tsipras, who swept into power on a wave of anti-austerity support, was only interested in a deal that would go light on austerity measures and deliver maximum debt relief. He could not and would not comply with any agreement that required more sacrifices from the Greek people.
Still, for a week that ended with so much enmity, its start was auspicious.
That Monday, June 22, Greece’s technical team in Brussels submitted an eight-page proposal to their counterparts. The paper was an effort to bridge a six-month divide on how Greece planned to sort out its future finances.
For political reasons, the Tsipras government had said it would not cut pensions or do away with tax breaks that favored businesses serving tourists on the Greek islands. Instead, the new Greek plan envisaged a series of tax increases and increases in pension contributions to be borne by corporations.
The initial response seemed positive. Both Pierre Moscovici, a senior finance official at the European Commission who is known to be sympathetic toward Greece, and Jeroen Dijsselbloem, the head of Europe’s working group of finance ministers who is one of Greece’s harshest critics, said on Tuesday that the plan was promising.
The Greek team was elated. For the first time, the Greek numbers were adding up.
The next morning, though, that optimism evaporated.
Greece’s creditors — the I.M.F., the other eurozone nations and the European Central Bank — sent the Greek paper back and marked it in red where there were disagreements.
The criticisms were everywhere: too many tax increases, unifying value-added taxes, not enough spending cuts and more cuts needed on pension reforms.
The Greek team couldn’t believe it. The creditors had seemed to dial everything back to where the talks were six months ago. . . .
Instead of bending as the deadline neared for Greece to make a payment of 1.5 billion euros to the I.M.F., Germany and the fund appeared to be hardening their positions.
On Wednesday night, Greece was presented with a counterproposal. At the behest of the I.M.F., the tax increases had been reduced and, crucially, the government was told that it needed to increase value-added taxes on hotels.
Moreover, several requests by the Greeks to discuss debt relief had been rejected — you need to agree to reforms first, they were told.
On Thursday, Mr. Varoufakis and Mr. Tsipras agreed that they could not present this latest proposal to their cabinet back in Athens. In recent weeks, radical factions within the ruling Syriza party in Greece had become more vocal in opposing any deal that crossed certain lines on pensions and taxes.
Moreover, some within Syriza were even pushing Mr. Tsipras to walk away from Europe altogether and return to the drachma, an approach that the prime minister and Mr. Varoufakis had promised never to consider. . . .
Mr. Schäuble began criticizing Mr. Moscovici, the senior European Commission official, over his positive comments regarding the Greek offer.
Even the latest proposal from the creditors was too lenient toward the Greeks, Mr. Schäuble argued, saying that he saw little chance that he could get it past the German Bundestag, the national parliament of the Federal Republic of Germany.
The only solution here is capital controls, he said, his voice rising.
But Mr. Varoufakis persisted on the issue of Greece’s staggering debt load, ignoring the admonitions of Mr. Dijsselbloem and others.
Then Mr. Varoufakis turned on Christine Lagarde, the French director of the I.M.F.
Five years ago, the fund had given its blessing to the first bailout, doling out loans alongside Europe despite internal misgivings that Greece would be in no position to repay them.
Now the I.M.F. was pushing Greece to sign up to yet another austerity program to access more loans even though the fund had now concluded that their initial misgivings were correct: Greece’s debt was unsustainable.
I have a question for Christine, Mr. Varoufakis said to the packed hall: Can the I.M.F. formally state in this meeting that this proposal we are being asked to sign will make the Greek debt sustainable?
Yanis has a point, Ms. Lagarde responded — the question of the debt needs to be addressed. (A spokesman for the fund later said that this was not an accurate description of the exchange.)
But before she could explain, she was interrupted by Mr. Dijsselbloem.
It’s a take it or leave it offer, Yanis, the Dutch official said, peering at him through rimless spectacles.
In the end, Greece would leave it.
Almost immediately after the Greek government announced its plans for a referendum, the leaders of the Troika intervened in the Greek debate. For example, as the New York Times reported:
By long-established diplomatic tradition, leaders and international institutions do not meddle in the domestic politics of other countries. But under cover of a referendum in which the rest of Europe has a clear stake, European leaders who have found Mr. Tsipras difficult to deal with have been clear about the outcome they prefer.
Many are openly opposing him on the referendum, which could very possibly make way for a new government and a new approach to finding a compromise. The situation in Greece, analysts said, is not the first time that European politics have crossed borders, but it is the most open instance and the one with the greatest potential effect so far on European unity. . . .
Martin Schulz, a German who is president of the European Parliament, offered at one point to travel to Greece to campaign for the “yes” forces, those in favor of taking a deal along the lines offered by the creditors.
On Thursday, Mr. Schulz was on television making clear that he had little regard for Mr. Tsipras and his government. “We will help the Greek people but most certainly not the government,” he said.
European leaders actually actively worked to distort the terms of the referendum. Greeks were voting on whether to accept or reject Troika austerity policies yet the Troika leaders claimed the vote was on whether Greece should remain in the Eurozone. In fact, there is no mechanism for kicking a country out of the Eurozone and Syriza was always clear that it was not seeking to leave the zone. As the Guardian explained:
One day before Greece’s bailout ends and the country’s financial lifeline melts away, Europe’s big guns have lined up one after another to tell the Greeks unequivocally that voting no in Sunday’s referendum means saying goodbye to the euro.
There was no mistaking the gravity of the situation now facing both Greece and Europe on Monday. Leaders were by turns ashen-faced, resigned, desperate and pleading with Athens to think again and pull back from the abyss.
There were also bitter attacks on Alexis Tsipras, the young Greek prime minister whose brinkmanship has gone further than anyone believed possible and left the eurozone’s leaders reeling.
One measure of the seriousness of the situation could be gleaned from the leaders’ schedules. In Berlin, Brussels, Paris and London, a chancellor, two presidents and a prime minister convened various meetings of cabinet, party leaders and top officials devoted solely to Greece.
The French president, François Hollande, was to the fore. “It’s the Greek people’s right to say what they want their future to be,” he said. “It’s about whether the Greeks want to stay in the eurozone or take the risk of leaving.”
Athens insists that this is not what is at stake in the highly complicated question the Greek government has drafted for the referendum, but Berlin, Paris and Brussels made plain that the 5 July vote will mean either staying in the euro on their tough terms or returning to the drachma.
In what was arguably the biggest speech of his career, the president of the European commission, Jean-Claude Juncker, appeared before a packed press hall in Brussels against a giant backdrop of the Greek and EU flags.
He was impassioned, bitter and disingenuous in appealing to the Greek people to vote yes to the euro and his bailout terms, arguing that he and the creditors – rather than the Syriza government – had the best interests of Greeks at heart.
Tsipras had lied to his people, deceived and betrayed Europe’s negotiators and distorted the bailout terms that were shredded when the negotiations collapsed and the referendum was called, he said.
“I feel betrayed. The Greek people are very close to my heart. I know their hardship … they have to know the truth,” he said.
“I’d like to ask the Greek people to vote yes … no would mean that Greece is saying no to Europe.”
In a country where the hardship wrought by austerity brought a sharp increase in suicides, Juncker offered unfortunate advice. “I say to the Greeks, don’t commit suicide because you’re afraid of dying,” he said.
Juncker’s extraordinary performance sounded and looked as if he were already mourning the passing of a Europe to which he has dedicated his long political career. His 45-minute speech was both proprietorial and poignant about his vision, which seems to be giving way to a rawer and rowdier place.
That was clear from the trenchant remarks of Sigmar Gabriel, Germany’s vice-chancellor and the head of the country’s Social Democratic party. He coupled the Greek situation with last week’s foul tempers over immigration and said that Europe faces its worst crisis since the EU’s founding treaty was signed in Rome in 1957.
Gabriel was the first leading European politician to voice what many think and say privately about Tsipras – that the Greek leader represents a threat to the European order, that his radicalism is directed at the politics of mainstream Europe and that he wants to force everyone else to rewrite the rules underpinning the single currency.
The unspoken message was that Tsipras is a dangerous man on a mission who has to be stopped.
Standing alongside his boss, Angela Merkel, as if to send a joint nonpartisan national signal from Germany, Gabriel said that if the Greek people vote no on Sunday, they would be voting “against remaining in the euro”.
Unlike Juncker and Hollande, who pleaded with the Greek people to reject Tsipras’s urging of a no vote, the German leaders sounded calmly resigned to the rupture.
For Merkel, it was clear that the single currency’s rulebook was much more important than Greece. In this colossal battle of wills, Tsipras could not be allowed to prevail.
Having whipped up popular fears of an end to the euro, some Greeks began talking their money out of the banks. On June 28, the European Central Bank then took the aggressive step of limiting its support to the Greek financial system.
This was a very significant and highly political step. Eurozone governments do not print their own money or control their own monetary systems. The European Central Bank is in charge of regional monetary policy and is duty bound to support the stability of the region’s financial system. By limiting its support for Greek banks it forced the Greek government to limit withdrawals which only worsened economic conditions and heightened fears about an economic collapse. This was, as reported by the New York Times, a clear attempt to influence the vote, one might even say an act of economic terrorism:
Some experts say the timing of the European Central Bank action in capping emergency funding to Greek banks this week appeared to be part of a campaign to influence voters.
“I don’t see how anybody can believe that the timing of this was coincidence,” said Mark Weisbrot, an economist and a co-director of the Center for Economic and Policy Research in Washington. “When you restrict the flow of cash enough to close the banks during the week of a referendum, this is a very deliberate move to scare people.”
Then on July 2, 3 days before the referendum, an IMF staff report on Greece was made public. Echos of 2010, the report made clear that Troika austerity demands were counterproductive. Greece needed massive new loans and debt forgiveness. The Bruegel Institute, a European think tank, offered the following summary and analysis of the report:
On July 2, the IMF released its analysis of whether Greek debt was sustainable or not. The report said that Greek debt was not sustainable and deep debt relief along with substantial new financing were needed to stabilize Greece. In reaching this new assessment, the IMF stated it had learned many lessons. Among them: Greeks would not take adequate structural reforms to spur growth, they would not sell enough of their assets to repay their debt, and they were unable to undertake sufficient fiscal austerity. That left no choice but to grant Greece greater debt relief and to provide new financing to tide Greece over till it could stand on its own feet. The relief, the IMF, says must be provided by European creditors while the IMF is repaid in whole.
The IMF’s report is important because it reveals that the creditors negotiated with Greece in bad faith. For months, a haze was allowed to settle over the question of Greek debt sustainability. The timing of the report’s release—on the eve of a historic Greek referendum, well after the technical negotiations have broken down—suggests that there was no intention to allow a sober analysis of the Greek debt burden. Paul Taylor of Reuters tells us that the European authorities worked hard to suppress it and Landon Thomas of the New York Times reports that, until a few days ago, the IMF had played along.
As a result, the entire burden of adjustment was to fall on the Greeks before any debt reduction could even be contemplated. This conclusion was based on indefensible economic logic and the absence of the IMF’s debt sustainability analysis intentionally biased the negotiations. . . .
But, of course, as the IMF now makes clear, if a country has to repay about 4 percent of its income each year over the next 40 years and that country has poor growth prospects precisely because repaying that debt will lower growth, then debt is not sustainable. If this report had been made public earlier, the tone of the public debate and the media’s boorish stereotyping of Greeks and its government would have been balanced by greater clarity on the Greek position.
But the problem with the IMF report is much more serious. Its claims to having learned lessons from the past years are as self-serving as its call on other creditors to provide the debt relief. The report insistently points at the Greek failings but fails to ask if the creditors misdiagnosed the Greek patient and continued to damage Greek economic recovery. Protected by the authority and respect that the IMF commands, it is easy to lay the blame on the Greeks whose rebuttals are treated as more hysterical outbursts of an (ultra) “radical” government. . . .
This is why the IMF’s latest report is disingenuous. The report says that growth in Greece has failed to materialize because Greeks are incapable of undertaking sustained structural reforms. There is so much that is wrong with that statement. First, my colleague Zsolt Darvas of Bruegel argues persuasively that the Greeks have, in fact, undertaken significant structural reform. He notes that the “Doing Business” index has improved materially and labor markets are now more flexible than in Germany. Second, the IMF had set unrealistically high expectations of structural reforms: productivity was to jump from the lowest in the euro area to among the highest in a short period of time and labor participation rates were to jump to the German level. Again, the IMF’s own research department cautions that the dividends from structural reforms are weak and take time to work their way through (see box 3.5 in this link). The debt-deflation cycle works immediately. If it has taken decades for Greece to reach its low efficiency levels, it was irresponsible to assume that early reforms would turn it around in a few years. Finally, when an economy spirals down in a debt-deflation cycle, demand falls and that, in itself, will show up in the less productive use of resources. So, it is even possible that productivity has increased more but is being drowned by shrinking demand.
In other words, the leaders of the Troika were insisting on policies that the IMF’s own staff viewed as misguided. Moreover, as noted above, European leaders desperately but unsuccessfully tried to kill the report. Only one conclusion is possible: the negotiations were a sham.
The Troika’s goals were political: they wanted to destroy Syriza because it represented a threat to a status quo in which working people suffer to generate profits for the region’s leading corporations. It apparently didn’t matter to them that what they were demanding was disastrous for the people of Greece. In fact, quite the opposite was likely true: punishing Greece was part of their plan to ensure that voters would reject insurgent movements in other countries, especially Spain.
And despite, or perhaps because of all of the interventions and threats highlighted above, the Greek people stood firm. As the headlines of a Bloomberg news story proclaimed: “Varoufakis: Greeks Said ‘No’ to Five Years of Hypocrisy.”
The Greek vote was a huge victory for working people everywhere.
Now, we need to learn the lessons of this experience. Among the most important are: those who speak for dominant capitalist interests are not to be trusted. Our strength is in organization and collective action. Our efforts can shape alternatives.
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The Greek drama continues to play out. Greece is supposed to make a 1.6 billion euro loan payment to the IMF by June 30. The Syriza-led government says unless the Troika—The European Commission, European Central Bank, and International Monetary Fund (IMF)—releases the 7.2 billion euros authorized as part of the 2012 Greek bailout agreement it won’t have enough money to pay the IMF. And it also won’t be able to make a July loan payment to the European Central Bank.
The Troika is adamant that the money will only be transferred to the Greek government if Syriza agrees to abide by the terms set by the past bailout, which was itself an extension of a 2010 bailout. Those terms include further rounds of austerity, privatization, and labor market liberalization. But that is the problem. As the Levy Institute explains, these bailout terms are largely responsible for years of economic crisis (see Figures 1 and 2):
Estimates of real output for the Greek economy, published by the Hellenic Statistical Authority (ElStat), showed some signs of recovery up to 2014Q3, after six long years of uninterrupted fall in output, even though the fourth quarter of 2014 and preliminary estimates for the first quarter of this year show a reversal that, if it continues in the second quarter, will indicate the economy has slipped back into recession. Real output, at the end of 2014, was below its 2000 level, marking a more than 26 percent drop from its peak in 2007, while an even larger fall—30 percent—in employment has been recorded. More than one million workers have lost their jobs relative to the previous peak in 2008, with an increase of 800,000 unemployed—the total now stands above 1.2 million—while the active population is shrinking, as workers leave the country in search of better opportunities abroad.
The Los Angeles Times provides a more ground level view of the devastation:
Estimates vary, but some experts peg the number of new homeless as high as 20,000. Moreover, nearly 20% of Greeks no longer have enough money to cover daily food expenses, according to a recent study by the Organization for Economic Cooperation and Development. The nation’s unemployment rate is 26%, the highest among 28 European Union members.
At Athens’ many apartment buildings, stories are rampant of people delinquent on so many months of rent that they simply leave behind keys and furniture, sneaking out in the middle of the night.
Until five years ago, it was hard to imagine masses of people living on the streets here; homelessness was so negligible that almost no one even bothered to measure. At the time, this was a strong welfare state with a rich tradition of family bonds. But austerity has eroded the former, and economic recession has frayed the latter.
The crisis has played out in a kind of domino effect. What might begin as a hard-luck case or two soon cascades through families and social groups. At some point there are too few roofs for too many relatives or friends.
The Greek people elected Syriza precisely because the austerity policies promoted by the Troika have left their country devastated. See the video below for a five minute history of the forces propelling Syriza’s January 2015 election victory. To this point, Syriza has offered several proposals involving compromises of its initial position. However, these have all been rejected. Syriza, for its part, continues to reject the Troika’s “take it or leave it” demand.
Experts claim that if Greece defaults on its loan to the IMF the government will be unable to sustain the country’s economic activity; Greece no longer prints its own currency so the government would not have the funds to pay salaries or support services. It will be forced to put capital controls into place, nationalize the banking system, leave the euro area, and reintroduce its own currency.
Everyone agrees that the Greek economy and people will suffer in the short run regardless of whether it leaves the Euro Area or accepts Troika dictates and gets the money. However, it is the long run view of future events that is up for debate.
The Troika argues that without a deal the Greek economy will enter a downward spiral leading to total collapse. In contrast, some in Syriza argue that the above policy steps are precisely what the country needs to lay the ground work for a sustained recovery. They point to Iceland’s use of similar policies to rapidly overcome its own devastating collapse after the great financial crisis of 2008.
One thing is clear, euro membership has not produced the benefits promised for Greece and the other weaker euro area countries. In fact, these countries actually did better before they adopted the euro, during the period when they had their own respective currencies which gave them some control over their interest rates and exchange rates.
As Brett Arends points out:
There’s a secret fear gripping the powerful across Europe.
It has policy honchos lying awake at nights in Brussels. It has bankers in Berlin tossing feverishly on their silken sheets. It has eurocrats muttering into their claret.
It isn’t that if Greece leaves the euro, the Greeks will then suffer a terrible economic meltdown.
Take a look at the chart, above.
As you can see, Greece with the bad old drachma had double the economic growth of Greece under the euro. Double. And it wasn’t alone.
Italy, Spain and Portugal tell similar stories. Their economic growth back in the 1980s and 1990s, when they were “struggling” with the lira, the peseta, and the escudo, makes a mockery of their performance under the German-dominated euro.
Of course nothing is certain. To this point a majority of Greeks want their country to remain in the Euro Area and Syriza is hoping that the Troika will modify their demands for austerity, accept Syriza’s program which includes a moderate increase in spending for social programs and employment creation, and release the funds.
In the meantime, Syriza has taken a number of steps in respond to popular demands. One on-the-ground commentator, Quincey, offers the following summary of some of them:
What the hell has the SYRIZA-ANEL government been doing all this time, apart from negotiating with its creditors?
The answer may be found below, through a list I compiled from various sources. The list is not exhaustive, I focused on issues which I consider interesting for an international audience.
So, here it goes:
The SYRIZA-ANEL government initiatives’ list, as of today.
1. The government passed the humanitarian crisis bill, which will provide some 300,000 families with food stamps, free electricity, and a rent supplement.
2. It confirmed universal, free access to uninsured Greeks (not migrants) to the public health system.
3. Abolished the 5 euro public hospital entrance fee/ticket.
4. Abolished pension cuts (which were scheduled to take place automatically in February 2015).
5. Reopened the Public TV/radio broadcaster (ERT). ERT had been shut down 2 years ago, by the right-wing Samaras government.
6. Re-hired some 4,000 public officers who had been sacked by the previous government, among which the cleaning ladies of Finance Ministry (who achieved nation-wide fame thanks to their long and consistent struggle).
7. Canceled the “hood law”, under which dozens, perhaps hundreds of people arrested during protests, were risking up to 7 years imprisonment.
8. Theoretically speaking, the government abolished the new maximum security prison where political prisoners were held (not all prisoners have been transferred to normal facilities).
9. Non-regularized migrants held in detention camps are –supposedly- gradually released (the extent to which this process is actually taking place is debatable); police controls on migrants are significantly milder.
10. Generally speaking, police repression of protest is significantly milder (compared to the previous governments, one could say non-existent).
11. The Greek Parliament introduced an Odious Debt Committee to control for the legitimacy of the public debt (a mostly symbolic move).
12. The Greek Parliament founded the German War Reparations Committee (Greece has not been repaid the obligatory “loan” Nazi occupiers extracted during WWII, nor any war reparations).
13. The government introduced installments and discounts to help citizens and companies pay their debts to the state and pension funds.
14. A new bill will grant Greek citizenship to second generation migrants.
15. A bill is about to be voted, which will expand civil union to cover homosexual couples, granting them equal rights to the ones married couples enjoy.
16. An educational reform has been announced. The reform re-establishes academic asylum (abolished in 2011), reduces high-school students’ workload and allows for the so-called “perpetual students” (those who failed to get their degree on time) to retain their university student status.
17. The Minister of Labour, Panos Skourletis, has just announced that a (most-needed) labor reform, which would re-establish collective bargaining and collective agreements (practically abolished in 2012) will be introduced in the forthcoming days. The legislative proposal should – logically – include another major SYRIZA electoral promise, the gradual increase of the minimum monthly wage from approximately 550 euros (gross) to 750 euros (gross), during a period of 18 months. But we have to wait and see for that, as the reform has already been announced a couple of times, only to be blocked the day after by the country’s creditors.
So far, Syriza maintains majority support despite Troika efforts to discredit it as reckless and incompetent for rejecting the status quo.
More to follow in another post.
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Growth is not development. The Chinese labor experience is a good example of this. In brief, despite record rates of growth, the Chinese economy has failed to generate formal sector jobs. In fact, there were fewer formal sector urban workers employed in 2010 than in 1990. All the job growth has been outside the formal sector, which means that a growing percentage of Chinese workers are not covered by the country’s labor law, and their wages, benefits, and working conditions are not captured by official Chinese labor statistics.
From 1979 until 2010, China recorded an average annual GDP growth rate of approximately 10%, a thirty year growth rate unmatched by any other country. The country’s rate of growth is now slowing, from 10.6% in 2010, to 7.7% in 2012, and 7.4% in 2014. Of course those are official rates of growth. According to most analysts, Chinese growth was probably closer to 5% in 2014 and, despite government efforts, likely to continue to slow.
But what about the labor experience? In “Misleading Chinese Legal and Statistical Categories: Labor, Individual Entities, and Private Enterprises,” a 2013 article published in the journal Modern China, Philip C.C. Huang describes the evolution and application of Chinese labor law, highlighting its relevance for and growth of different categories of labor. As he explains, Chinese statistical categories recognize four main types of labor activity based on the legal standing of the employing firm: labor by “employee-workers,” labor by workers employed by legally registered “private enterprises,” labor by people in legally registered “individual entities,” and “unregistered” labor.
Only “employee-workers” are considered formal sector workers and covered by the country’s labor law. The following table, with numbers expressed in units of 10,000, shows that there were almost 128 million urban formal sector workers employed in China in 2010.
Significantly, as the next table illustrates, both the number and percentage of workers employed in the formal urban economy are shrinking. The number employed in the formal economy in 2010 was less than the number employed in 1990. As of 2010, only 36.8% of all workers in the urban economy were employed in formal sector jobs. In short, all the growth in urban employment over recent decades has been in categories not covered by Chinese labor law, which means that those workers are not covered by legally established minimum wage, overtime regulations, and social benefit requirements.
Who are the workers employed outside the formal sector? “Private enterprises” are mainly legally registered small-scale businesses averaging 13-15 people. As Huang describes: “They are also as a rule not formally incorporated as a limited liability entity with separate ‘legal person’ status and are therefore not considered legal ‘employing units’ that are involved in ‘labor relations’. . . . These small businesses rely mainly on the cheapest labor available, the majority of them on disemployed workers and peasant-workers, who are considered to be only in a casual work relationship with them and for whom they need provide no benefits.”
“Individual entities” include legally registered small scale operations employing one or perhaps two people, usually the owner and a family member or friend. In the largest cities, these workers are “largely engaged in wholesale and retail trade (mainly of daily necessities and clothing), followed by small and modest eateries and hostels, domestic and other services, and transport work. . . .Regardless, the great majority of the people operating the individual entities come from the ranks of the disemployed urban workers and the migrant peasant-workers.”
“Unregistered” workers are those, as the category name implies, whose work is unregistered and therefore largely illegal or extralegal. They are primarily “newer and less established peasants-workers working in the lowest levels of the informal economy, as temporary construction workers, janitors, itinerant peddlers or stall keepers, guards standing outside residential compounds and commercial buildings the help in eateries and hostels domestic servants manual transport and loading-unloading workers, and the like, many of whom work in the shadow of the law without permits, truly members of the so-called floating population.”
Unregistered workers “appear in the official state statistical tallies only as the difference between those who have registered with the official state administrative entities and the actual numbers of laborers counted up by the decennial population censuses (which have made every effort to enumerate every person living and working in the cities).” As we can see from the table above, the number of unregistered urban workers are quickly catching up to the number of formal sector urban workers.
The critical point here is that despite record rates of growth few formal sector jobs have been created in urban areas. That means that official Chinese labor laws and regulations cover a relatively small and declining share of Chinese urban sector workers. As a consequence, the great majority of urban workers suffer from conditions far worse than do formal sector workers.
At the same time, things are far from rosy for most formal sector workers. For example, many companies, especially foreign owned companies, have been actively seeking to weaken formal sector job rights by employing so-called dispatched workers and student interns to avoid paying the wages and benefits mandated by Chinese labor law. It is therefore not surprising, as recent labor struggles make clear, that even workers in the formal sector have been forced to take direct action to ensure compliance with their country’s labor laws and improve their working conditions.
My latest article, on capitalist globalization, appears in the current issue of the journal Critical Asian Studies. For a limited time the journal is making it freely available. Here is the abstract and below it a link to the article itself.
From the Claw to the Lion
A Critical Look at Capitalist Globalization
This article argues that capitalist globalization is largely responsible for creating or intensifying many of our most serious economic and social problems. It first describes the forces that drove core country transnational corporations to create a complex system of cross-border production networks. It then maps the resulting new international division of labor, in which Asian countries, especially China, import primary commodities from Latin American and sub-Saharan African countries to produce exports for core countries, especially the United States. In core countries, globalization has led to the destruction of higher paying jobs, financialization of economic activity, and stagnation. While the new international division of labor has boosted third world rates of growth, especially in Asia, it has also left the third world with unbalanced and inequitable economies. Moreover, contradictions in the globalization process point to the spread of core country stagnation to the third world. Capitalist globalization has increased third world dependence on core country consumption while simultaneously undermining core country purchasing power. The article ends by discussing a process and program of transformation that highlights the feasibility of an alternative to global capitalism as well as the organizational capacities and institutional arrangements that must be developed if we are to realize it.
The article can be read or downloaded for free here.
The corporate nature of the Trans-Pacific Partnership (TPP), a so called free-trade agreement, is becoming more obvious thanks to a recent leak of the investment chapter by Wikileaks.
While the U.S. government likes to promote agreements like the TPP as good because they lower restrictions on trade, the fact is that trade liberalization itself does not automatically improve worker and community well-being. In fact, most studies show negative consequences. Even more importantly, pure trade issues play only a small part in these free-trade agreements; they are primarily designed to boost corporate power and profits through multiple chapters, each of which limit public regulation or control over different aspects of corporate decision making.
The investment chapter of the TPP is a case in point. Here is what the New York Times has to say about the chapter:
The Trans-Pacific Partnership — a cornerstone of Mr. Obama’s remaining economic agenda — would grant broad powers to multinational companies operating in North America, South America and Asia. Under the accord, still under negotiation but nearing completion, companies and investors would be empowered to challenge regulations, rules, government actions and court rulings — federal, state or local — before tribunals organized under the World Bank or the United Nations. . . .
The sensitivity of the issue is reflected in the fact that the cover mandates that the chapter not be declassified until four years after the Trans-Pacific Partnership comes into force or trade negotiations end, should the agreement fail. . . .
“This is really troubling,” said Senator Charles E. Schumer of New York, the Senate’s No. 3 Democrat. “It seems to indicate that savvy, deep-pocketed foreign conglomerates could challenge a broad range of laws we pass at every level of government, such as made-in-America laws or anti-tobacco laws. I think people on both sides of the aisle will have trouble with this.”. . .
Under the terms of the Pacific trade chapter, foreign investors could demand cash compensation if member nations “expropriate or nationalize a covered investment either directly or indirectly.” Opponents fear “indirect expropriation” will be interpreted broadly, especially by deep-pocketed multinational companies opposing regulatory or legal changes that diminish the value of their investments.
Included in the definition of “indirect expropriation” is government action that “interferes with distinct, reasonable investment-backed expectations,” according to the leaked document.
Critics say the text’s definition of an investment is so broad that it could open enormous avenues of legal challenge. An investment includes “every asset that an investor owns or controls, directly or indirectly, that has the characteristic of an investment,” including “regulatory permits; intellectual property rights; financial instruments such as stocks and derivatives”; construction, management, production, concession, revenue-sharing and other similar contracts; and “licenses, authorizations, permits and similar rights conferred pursuant to domestic law.” . . .
All of those disputes would be adjudicated under rules set by either the International Centre for Settlement of Investment Disputes or the United Nations Commission on International Trade Law. . . .
There are . . . mitigating provisions, but many have catches. For instance, one article states that “nothing in this chapter” should prevent a member country from regulating investment activity for “environmental, health or other regulatory objectives.” But that safety valve says such regulation must be “consistent” with the other strictures of the chapter, a provision even administration officials said rendered the clause more political than legal.
One of the chapter’s annexes states that regulatory actions meant “to protect legitimate public welfare objectives, such as public health, safety and the environment” do not constitute indirect expropriation, “except in rare circumstances.” That final exception could open such regulations to legal second-guessing, critics say.
There are many other chapters in the TPP, most of which are tailored to promote specific corporate interests—for example, there is a chapter that strengthens patent protection and monopoly profits for drug companies—an outcome that flies in the face of liberalization claims.
The corporate bias in these agreements is not surprising given that corporate leaders and lobby groups are the main advisers to the U.S. trade representative.
The media’s recent attention to the TPP’s investment chapter and the growing cries of alarm by politicians is somewhat surprising given that such chapters have been part of all recent trade agreements involving the U.S., for example the Korea-U.S. Free Trade Agreement.
Corporate use of these investment chapters and their associated investor state dispute settlement mechanisms [ISDS] is intensifying as the charts below highlight.
And, since the tribunals that rule on corporate initiated suits against governments are heard by corporate lawyers, it should not be surprising that most rulings go against governments. In one of the largest, the tribunal agreed with Ecuador that Occidental Oil had violated its contract with the government but still ruled in Occidental’s favor to the tune of $2.4 billion.
Regardless of the reason, it is positive that the terms of the TPP are now sparking outrage. However, since its investment and other chapters have been regularly included in past agreements with little fanfare or Congressional opposition, we need to recognize that current cries of alarm by politicians are more the result of unexpected public disclosure than real disapproval.
If we want to defend our interests we need to take advantage of the moment and strengthen our opposition to this and other free trade agreements. But we shouldn’t stop there. After all corporate dominance of public policy is not limited to international trade and investment agreements.
Syriza won the Greek election and its leader, Alexis Tsipras, is now prime minister—the Greek people showed bravery and intelligence and we should be studying as well as supporting the efforts of Syriza and the Greek people to build a responsive, democratic, and solidaristic economy.
What follows are some articles that I have found helpful in understanding current developments.
Social and economic conditions and popular responses to them in pre-election Greece:
Few in Greece, even five years ago, would have imagined their recession- and austerity-ravaged country as it is now: 1.3 million people – 26% of the workforce – without a job (and most of them without benefits); wages down by 38% on 2009, pensions by 45%, GDP by a quarter; 18% of the country’s population unable to meet their food needs; 32% below the poverty line.
And just under 3.1 million people, 33% of the population, without national health insurance. . . .
The Peristeri health centre is one of 40 that have sprung up around Greece since the end of mass anti-austerity protests in 2011. Using donated drugs – state medicine reimbursements have been slashed by half, so even patients with insurance are now paying 70% more for their drugs – and medical equipment (Peristeri’s ultrasound scanner came from a German aid group, its children’s vaccines from France), the 16 clinics in the Greater Athens area alone treat more than 30,000 patients a month.
The clinics in turn are part of a far larger and avowedly political movement of well over 400 citizen-run groups – food solidarity centres, social kitchens, cooperatives, “without middlemen” distribution networks for fresh produce, legal aid hubs, education classes – that has emerged in response to the near-collapse of Greece’s welfare state, and has more than doubled in size in the past three years.
- Audit of the public debt and renegotiation of interest due and suspension of payments until the economy has revived and growth and employment return.
- Demand the European Union to change the role of the European Central Bank so that it finances states and programs of public investment.
- Raise income tax to 75% for all incomes over 500,000 euros.
- Change the election laws to a proportional system.
- Increase taxes on big companies to that of the European average.
- Adoption of a tax on financial transactions and a special tax on luxury goods.
- Prohibition of speculative financial derivatives.
- Abolition of financial privileges for the Church and shipbuilding industry.
- Combat the banks’ secret [measures] and the flight of capital abroad.
- Cut drastically military expenditures.
- Raise minimum salary to the pre-cut level, 750 euros per month.
- Use buildings of the government, banks and the Church for the homeless.
- Open dining rooms in public schools to offer free breakfast and lunch to children.
- Free health benefits to the unemployed, homeless and those with low salaries.
- Subvention up to 30% of mortgage payments for poor families who cannot meet payments.
- Increase of subsidies for the unemployed. Increase social protection for one-parent families, the aged, disabled, and families with no income.
- Fiscal reductions for goods of primary necessity.
- Nationalisation of banks.
- Nationalisation of ex-public (service & utilities) companies in strategic sectors for the growth of the country (railroads, airports, mail, water).
- Preference for renewable energy and defence of the environment.
- Equal salaries for men and women.
- Limitation of precarious hiring and support for contracts for indeterminate time.
- Extension of the protection of labour and salaries of part-time workers.
- Recovery of collective (labour) contracts.
- Increase inspections of labour and requirements for companies making bids for public contracts.
- Constitutional reforms to guarantee separation of church and state and protection of the right to education, health care and the environment.
- Referendums on treaties and other accords with Europe.
- Abolition of privileges for parliamentary deputies. Removal of special juridical protection for ministers and permission for the courts to proceed against members of the government.
- Demilitarisation of the Coast Guard and anti-insurrectional special troops. Prohibition for police to wear masks or use fire arms during demonstrations. Change training courses for police so as to underline social themes such as immigration, drugs and social factors.
- Guarantee human rights in immigrant detention centres.
- Facilitate the reunion of immigrant families.
- Depenalisation of consumption of drugs in favor of battle against drug traffic. Increase funding for drug rehab centres.
- Regulate the right of conscientious objection in draft laws.
- Increase funding for public health up to the average European level.(The European average is 6% of GDP; in Greece 3%.)
- Elimination of payments by citizens for national health services.
- Nationalisation of private hospitals. Elimination of private participation in the national health system.
- Withdrawal of Greek troops from Afghanistan and the Balkans. No Greek soldiers beyond our own borders.
- Abolition of military cooperation with Israel. Support for creation of a Palestinian state within the 1967 borders.
- Negotiation of a stable accord with Turkey.
- Closure of all foreign bases in Greece and withdrawal from NATO.
The story behind Syriza’s victory:
Syriza’s victory has electrified the left in Europe – even moderate social democrats who have floundered in search of ideas and inspiration since the 2008 crisis. Now there is talk everywhere of “doing a Syriza” – and in Spain, where the leftist party Podemos is scoring 25% in the polls, more than talk.
But Syriza’s route to becoming Europe’s first far-left government of modern times was neither easy nor inevitable. For the past 22 days, I have been part of a Greek documentary team following its activists and leaders on the campaign trail to watch how they did it. I have seen them offering new hope to farmers on the breadline, and drumming up supplies for their network of food banks. I have watched them win over old-school communists in the dockers’ union, smarting from seeing their workplace sold off to the Chinese, and present a modern, youthful alternative to a political establishment serving a corrupt elite. And I have seen their leader, Alexis Tsipras, in action in his private office at critical moments. . . .
In the weak January sun, the mountains along the Gulf of Corinth are topped with snow. Dotted along the hillsides are villages known as political “castles”, normally so wedded to one or other of the main parties – Pasok and New Democracy – that you could navigate at election time by following the posters. But this is a troubled land; two-thirds of the vineyards and lemon groves here are technically in foreclosure. The farmers have been forced to take morgtgages, the banks are clamouring to repossess and suicides in these quiet farming towns are on the up.
Giannis Tsogkas, a 56-year-old grape grower from Assos, tells us: “[The government] pushed us into the IMF deal and all they do is obey the rightwingers. The little man will die. We keep hearing about suicides. So we tried to find somebody on the left to protect us. And we found it in Syriza.”
As night falls, the taverna in nearby Psari is full of the old and children – most of the young adults are gone. The battered faces of farmers on the breadline stare cautiously as one Syriza man delivers a Bolshevik-style oration: “Why do the IMF want to destroy us? Is it because the sun shines here? Is it because we’re a hospitable people? Do they hate southern European life?”
But, says election candidate Theofanis Kourembes, it’s not rhetoric that has turned villages like this red. “We go out and help people. When they tell us something, we listen. When they ask for help, we are here. You never see Pasok or New Democracy.”
It’s small meetings like this, miles from the main towns, that have helped turn Syriza from a party polling 4% 10 years ago to, by the last week of campaigning, a party leading on 32%.
“You journalists have come all the way up here to interview us,” says one farmer. “Syriza is the only party that did the same. They came and talked to us. If we wanted to talk to the main parties, how would we find them?”
Greece’s prime minister, Alexis Tsipras, has lined up a formidable coterie of academics, human rights advocates, mavericks and visionaries to participate in Europe’s first anti-austerity government.
Displaying few signs of backing down from pledges to dismantle punitive belt-tightening measures at the heart of the debt-choked country’s international rescue programme, the leftwing radical put together a 40-strong cabinet clearly aimed at challenging Athens’s creditors.
Syriza appears serious—much to the surprise and dismay of the European elite:
In his first act as prime minister on Monday, Alexis Tsipras visited the war memorial in Kaisariani where 200 Greek resistance fighters were slaughtered by the Nazis in 1944.
The move did not go unnoticed in Berlin. Nor did Tsipras’s decision hours later to receive the Russian ambassador before meeting any other foreign official.
Then came the announcement that radical academic Yanis Varoufakis, who once likened German austerity policies to “fiscal waterboarding”, would be taking over as Greek finance minister. A short while later, Tsipras delivered another blow, criticising an EU statement that warned Moscow of new sanctions.
The assumption in German Chancellor Angela Merkel’s entourage before Sunday’s Greek election was that Tsipras, the charismatic leader of the far-left Syriza party, would eke out a narrow victory, struggle to form a coalition, and if he managed to do so, shift quickly from confrontation to compromise mode.
Instead, after cruising to victory and clinching a fast-track coalition deal with the right-wing Independent Greeks party, he has signalled in his first days in office that he has no intention of backing down, unsettling officials in Berlin, some of whom admit to shock at the 40-year-old’s fiery start.
“No doubt about it, we were surprised by the size of the Syriza victory and the speed with which Tsipras clinched a coalition,” said one senior German official, who requested anonymity because of the sensitivity of the issue. . . .
Even as Greek stocks plunged and bond yields soared on Wednesday, Tsipras continued to promise “radical” change.
Over the past 24 hours, his government has put two big privatisations, of Piraeus port and Greece’s biggest utility, on ice, and his ministers have pledged to raise pensions and rehire fired public sector workers.
Now the euphoria in Greece has subsided, it is being matched by astonishment in Berlin and the European Union institutions.
On its first day in government yesterday, Syriza cancelled a privatisation progamme of the ports and energy sector, pledged to re-employ around 15,000 workers, and announced minimum wage and pension rises costing around 12bn euros.
The astonishment in Europe cannot be expained by lack of foreknowledge. Numerous journalists who cover Greece, including me, reported in detail what Syriza planned to do: cancel the austerty and privatisations, run a balanced budget and massively hike the tax take from the so-called oligarchs and the black economy.
The astonishment comes because all the political centre’s contingency plans come apart. The centre-right did not win, the centre-left parties formed to create a moderation mechanism on Syriza in coalition did not get asked into the government (and in the case of Papandreou’s party, To Kinima, failed to get into parliament).
By tying up an immediate coalition with a far-right nationalist party, Tsipras was able to seize the apparatus of the Greek executive faster than anybody expected. That is what drove yesterday’s collapse of Greek bank shares, and the fall on the stock exchange.
Most market analysts thought before the election that Syriza would be forced into a U-turn. As someone who has grilled all of its economics team on camera, and Mr Tsipras himself, I can report they have no intention of backing down.
Might Spain be next with a Podemos election victory?
Something is happening in Spain. A party that did not exist one year ago, Podemos, with a clear left-wing program, would win a sufficient number of votes to gain a majority in Spanish Parliament if an election were held today. Meanwhile, the leaders of the group G-20 attending their annual meeting in Australia were congratulating the president of the Spanish conservative-neoliberal government, Mr. Mariano Rajoy, for the policies that his government had imposed. (I use the term “imposed” because none of these policies were written in its electoral program.) These included: (1) the largest cuts in public social expenditures(dismantling the underfunded Spanish welfare state) ever seen since democracy was established in Spain in 1978 and (2) the toughest labor reforms, which have substantially deteriorated labor market conditions. Salaries have declined by 10% since the Great Recession started in 2007, and unemployment has hit an all-time record of 26% (52% among the youth). The percentage of what the trade unions defined as “shit work” (temporary, precarious work) has increased, becoming the majority of new contracts in the labor market (more than 52% of all contracts), and 66% of unemployed people do not have any form of unemployment insurance or public assistance.
Most economists now recognize that income and wealth inequality has significantly increased over the last few decades. Many, however, refuse to see it as a problem.
Several sessions at the January 2015 annual meeting of the American Economic Association [AEA] addressed French economist Thomas Piketty’s book Capital in the Twenty-First Century which highlighted both the growth of inequality and its negative consequences. Piketty works within the established framework of mainstream economics and his call for a global wealth tax is far from a challenge to the existing system. Yet his argument that capitalism left unchecked produces a steady and destructive growth in inequality doesn’t appear to sit well with many leading economists. [Useful reviews of the book are here and here.]
A case in point: one panel at the AEA meeting was organized by the influential Harvard economist Greg Mankiw, the author of widely used introductory and intermediate economics textbooks. Chuck Collins, from the Institute of Policy Studies, described the panel session as follows:
Three neoclassical economist critics, assembled by Mankiw, embarrassed themselves by quibbling with the incontrovertible evidence of growing concentrations of wealth and surging plutocratic trends.
As an outsider to academic economics, I was struck by just how compartmentalized and smug the field appears. At one point, Mankiw even put up a slide, “Is Wealth Inequality a Problem?” Any economist who ventures across the disciplinary ramparts will, of course, find a veritable genre of research on the dangerous impacts of extreme inequality.
We now have over two decades of powerful evidence that details how these inequalities are making us sick, undermining our democracy, slowing traditional measures of economic growth, and turning our political system into a plutocracy.
Mankiw, at another point in his presentation, had still more embarrassing comments to make. Piketty, he intoned, must “hate the rich.” Piketty’s financial success with his best-selling book, Mankiw added, just might lead to self-loathing.
There can be little doubt as to the growth in inequality as the following charts demonstrate. The first chart shows that the top 1 percent of households boosted their share of all pre-tax income from 8.9 percent in 1976 to 22.46 percent in 2012.
The second shows changes in real family income between 1979 and 2012. While the top 5 percent saw their real incomes grow 74.9 percent, the bottom 40 percent suffered actual declines.
At issue is the cause of these trends and the appropriate response to them. One obstacle to clarity is the fact that most economists, even liberal ones, refuse to acknowledge the limits or perhaps better said blinders of mainstream economics. See here for an example. And Piketty’s work for all its benefits in documenting inequality trends suffers from the same limitations. As the economist Michael Roberts explains:
The real problem is that Piketty’s explanation for rising inequality is faulty and his proposals for action either utopian or ineffective. This is where the heterodox/Marxist view of inequality comes in. While the likes of Piketty and Joseph Stiglitz entertained thousands in the big halls at [the AEA meetings], heterodox economists (including me) in the Union of Radical Political Economics [URPE] presented papers to about 30-40 on Piketty exposing the flaws in his explanation. My paper argued that by deflating productive capital into a wider definition including property and financial wealth, Piketty cannot really explain rising inequality. Indeed, when housing and financial assets are stripped out, Piketty’s rate of return on assets becomes Marx’s rate of profit. And, instead of being steady and invariable as Piketty claimed, it falls.
Two main arguments have been presented by Piketty, both based on mainstream economics, to explain why the ratio of capital (wealth) to income has been rising. Piketty relies on neoclassical marginal productivity theory. This theory suggests that the more capital invested should lead to falling returns but Piketty claims there is a high rate of substitution of labor for capital in production, so the share of income going to capital rises. But as Fred Moseley showed in a paper at [the AEA], marginal productivity is logically incoherent and empirically false (Moseley-Piketty).
The other argument from Piketty is that, over the long term, as the savings ratios of households rises, it will eventually lead to a rising capital share. Well, a paper by Frank Thompson at the University of Michigan showed that, while this is theoretically possible, it is extremely unlikely to be achieved (URPE@ASSA Piketty presentation (n 9) and indeed, others calculated that it could take 200 years of balanced economic growth to explain rising capital share and inequality by rising savings rates!
As the URPE sessions showed, a simpler and clearer explanation of rising inequality in the last 30 years in most economies is increased exploitation of labor by capital. There has been a rising rate exploitation along with a huge switch of value into the financial sector which is owned and controlled by the top 1%, or even just the top 0.1%. Marx’s exploitation theory is a better explanation of inequality compared to marginal productivity or rising savings rates. The so-called neoliberal period was characterized by holding down wages, globalization, a reduction in job security and privatization of public services, all of which boosted the rate of surplus value. So we entered the world of super-managers, oligarchs and top families that Piketty describes in his book.
But suggesting that rising inequality is the result of increased exploitation of labor by capital is not comfortable for mainstream economics, including Piketty, as it suggests something nasty about the capitalist mode of production, which the likes of Piketty, Stiglitz and others still support.
As to responses, if exploitation is the key explanation, organizing working people and their communities becomes the best response. Thankfully there are signs that those suffering from capitalist dynamics well understand the situation and are beginning to challenge it.
One of the arguments against an increase in the minimum wage is that it will lead to higher unemployment. One can make theoretical arguments for and against this proposition. And, of course, the income gains from an increase in the minimum wage are likely to produce overall benefits for both low wage workers and the economy as a whole even if there is a rise in unemployment.
Economists have tried to estimate the employment effects of a rise in the minimum wage. As a Vox article describes, two of them, Hristos Doucouliagos and T.D Stanley, looked at almost 1500 estimates of the effects of minimum wage increases on employment and found that the estimates “clustered right around zero effect, but with more of those estimates showing a slight downward pressure on employment.”
They concluded, “with sixty-four studies containing approximately fifteen hundred estimates, we have reason to believe that if there is some adverse employment effect from minimum wage rises, it must be of a small and policy-irrelevant magnitude.”
The International Labor Organization recently published its Global Wage Report 2014/15. The report looks at global trends in wages and income inequality and its findings are far from positive for working people in the developed world.
The ILO summarizes its findings as follows:
Wage growth around the world slowed in 2013 to 2.0 per cent, compared to 2.2 per cent in 2012, and has yet to catch up to the pre-crisis rates of about 3.0 per cent . . . .
Even this modest growth in global wages was driven almost entirely by emerging G20 economies, where wages increased by 6.7 per cent in 2012 and 5.9 per cent in 2013.
By contrast, average wage growth in developed economies had fluctuated around 1 per cent per year since 2006 and then slowed further in 2012 and 2013 to only 0.1 per cent and 0.2 per cent respectively.
“Wage growth has slowed to almost zero for the developed economies as a group in the last two years, with actual declines in wages in some,” said Sandra Polaski, the ILO’s Deputy Director-General for Policy. “This has weighed on overall economic performance, leading to sluggish household demand in most of these economies and the increasing risk of deflation in the Eurozone,” she added.
As Figure 7 from the report makes clear, the wage slowdown in the developed world is not due to a slowdown in productivity, or output per worker. The fact is that workers contribute far more in production than they receive in compensation. The growing gap between the two helps to explain the recent explosion in corporate profits.
Figure 9 lets us look at productivity-compensation trends in several different individual developed countries. The figure includes two different ways of measuring compensation. The blue dots measure worker compensation adjusted for changes in consumer prices. The red dots measure worker compensation adjusted for changes in the prices of both consumer and non-consumer goods and services. In general, the blue dots provide a more accurate picture of worker purchasing power and well-being.
If earnings and productivity grew at the same rate, the different national blue dots would all be on the 45 degree line. If a nation’s productivity grew faster then its compensation over the period then its blue dot would fall below the 45 degree line. If its compensation grew faster than its productivity, then its blue dot would be above the line.
Looking just at the big-3–the U.S., Japan, and Germany–we see that the U.S. recorded the highest rate of productivity growth over the period, followed by Japan, with Germany last. But the rise in worker compensation fell short of the growth in productivity in all three countries, with the largest gap in Japan.
The gap between productivity and compensation in most of the developed world also helps to explain the decline in labor’s share of national income. As illustrated in Figure 10 below, the share of GDP going to workers in the form of wages and benefits, despite some fluctuations, declined in all the selected countries over the period 1991 to 2013. In the U.S., the adjusted labor income share fell from approximately 61% to 56% over the period.
The ILO report does offer suggestions for improving worker well-being, including higher minimum wage and stronger union protection laws, as well as better funded social programs. These all deserve our support. However, there are real forces opposing these reforms and ongoing initiatives to promote greater freedom of movement for large corporations, such as the Transpacific Partnership free trade agreement, only strengthen these forces. Said differently we need a broader agenda for change if we are to defend majority living and working conditions, one that directly challenges contemporary globalization dynamics.