Economist Graham Turner explains how Greece’s creditors are demanding that the country meet its debts—no matter what the cost to ordinary people
The Greek economy is sliding deeper into recession. Its deficit is getting worse. So why are Western powers insisting on making Greece honour debts that it has no chance of repaying?
The European Union, International Monetary Fund and European Central Bank have recently been wrangling over whether to loan Greece 8 billion euros as part of a bailout package for the country.
But this figure is based on the optimistic assumption that Greece’s deficit would come to 8.5 percent of its GDP this year. Bank of Greece numbers suggest the deficit is actually heading for around 13 percent.
Now even the CIA is getting worried. It writes that “ongoing street protests in crisis-hit Greece could turn into escalated violence and a rebellion… the Greek government could lose control”.
Tax collectors are on strike. Small businesses are refusing to collect VAT payments.
The economy has deteriorated sharply since the early months of this year. This will drive the deficit even higher.
Greece is broke. Money is leaving the country. More than a fifth of its bank deposits have disappeared abroad in just over two years—to Switzerland, but also into German banks. If Greek banks collapse, financial border controls may not be far behind.
Meanwhile Greece’s overall debt is spiralling upwards. Total Greek government debt equals 147 percent of its GDP. The comparable figure for Britain is 82 percent. Greece’s debt to GDP ratio is on track to hit 169 percent by the end of this year. Next year it will probably rise to 194 percent.
This is why the West is so keen to force Greece to meet its debts. The real motivation for Greek austerity is to preserve French, German, Belgian, Spanish and Italian banks.
In the first three cases, a number of banks in each country would go under if Greece defaults.
This in turn could scare investors into pulling even more money out of Spain and Italy. Banks in the latter two countries would then be acutely vulnerable.
Europe’s rulers fear that the euro project would then disintegrate. But there are huge problems for them even if Greece doesn’t default. Greece cannot compete with the industrial might of Germany as long as it remains tied into the euro.
Even if current negotiations lead to an “orderly” default and a substantive debt write-off, Greece will remain in recession and unemployment will continue to rise.
A default will probably mean Greece leaving the euro. This is something that is seen in official circles as a retrograde step—which it would be for many of the banks.
But it could also give some control over the economy back to the Greek people. Greece is currently run by officials based in Brussels, Frankfurt and Washington DC.
Of course, there is every chance that markets will turn on Spain should Greece default.
Without a general economic recovery, we can count on deep political upheaval across Europe in the months to come.