At one level, the Greek crisis is a familiar tale of market blackmail and bullying. Through giving up its own currency and joining the euro, Greece attached itself to one of the world’s major economies, Germany.
This allowed the Greek state to borrow money through issuing government bonds at lower interest rates. So Greece in the mid-2000s enjoyed a credit boom. Then came the bust.
The banks that precipitated this crisis were, of course, rescued at great expense by their governments. Now they are outraged at the resulting increase in government borrowing and demanding austerity measures and cuts in services.
Greece is particularly vulnerable because it is a relatively small and weak economy—and because the financial markets don’t have much confidence in its political elite’s capacity or inclination to impose the cuts they are demanding.
They should know. The US Federal Reserve Board is investigating the role played by Goldman Sachs, probably the most hated Wall Street bank, in helping Greece to massage its debt figures at the time of the euro’s launch in 2001.
The present Greek government under George Papandreou is in a tight bind. It has to raise about £20 billion in the next three months to replace expiring bonds. It had hoped that cuts announced last month would keep the markets happy.
But on Thursday last week Greek bond prices fell sharply. Papandreou is reported to be feeding the beast with a new round of cuts demanded by the European Union. These would be the equivalent of 1.5 percent of national income, three times the size of the previous package.
But the Greek crisis is also about Germany, the giant of the eurozone. Under the “Red-Green coalition” between 1998 and 2005, Germany experienced a harsh economic reorganisation that forced down wages and increased the competitiveness of its firms.
Germany, like China, is an economy geared towards exporting manufactured goods. The comparison goes further, as last Sunday’s Washington Post newspaper pointed out:
“As a result of lopsided trade, Germany now enjoys a relationship with its partners in the euro not unlike that of China and the United States, with one acting as supplier and financier and the other as an overextended buyer.
“Over the past decade, Germany—which now has the world’s largest trade surplus after Saudi Arabia—saw sales to Greece, Spain and Portugal soar 66 percent, 59 percent and 30 percent, respectively.
“German banks have also invested heavily in Greek, Spanish and Portuguese debt. But Germany imported relatively little from those nations in return.”
The smaller European economies are shackled through their membership of the eurozone to an economy that their firms can’t compete against. Moreover, because they participate in the euro, they can’t devalue their own currencies and thereby cheapen their exports.
Hence the growing pressure on Germany to bail Greece out. So far chancellor Angela Merkel has ruled this out. The German media is full of ridiculous stories about the privileges of Greek public sector workers.
Greek workers are probably the most militant in Europe. After last week’s general strike, the Greek ruling class is worried about a “workers’ December”—a working class version of the youth revolt that shook Greece in December 2008.
So it’s not surprising that Josef Ackerman, boss of Deutsche Bank, met Papandreou in Athens on Friday last week, apparently to discuss a possible deal. But Greece itself represents only 2 to 3 percent of the eurozone’s output. Spain, however, accounts for nearly 12 percent.
An article in Monday’s Financial Times newspaper headlined “Markets Poised to Punish Spain” warned, “Whatever happens in Athens, it is all but certain that the markets will soon turn their icy gaze once more on the other vulnerable economies of the eurozone.”
The beast wants to be fed again.