Many mainstream analysts, government and IMF/EU officials, and journalists argue that the austerity programs in Ireland, Spain, Portugal and Greece have been a “success”. The IMF has made the exact same arguments about austerity programs in the last half century about countries under similar programs, using its own monetarist criteria while ignoring that austerity exacerbates the socioeconomic gap, further concentrates capital, alters management-labor relations in favor of business at the expense of labor, and dilutes or ends democratic institutions.
From the perspective of finance capitalism and gearing the economies under austerity toward neoliberalism, IMF-EU austerity in the last four years in Greece has been a “success” because the US securities rating agencies have upgraded the debtor nations. After government bailouts, banks are stronger and more secure, public sector has cut spending in everything from welfare to health care and education, the public sector had shrunk significantly, and the weaker and smaller businesses have perished to make room for the healthier larger domestic and foreign enterprises.
When Fitch, Moody's and Standard and Poor's use credit metrics as the only criteria to lower the credit rating of a country under austerity, then one must necessarily conclude that all of southern Europe (and the entire population in the region) was worse off before austerity than afterwards. When the ratings agencies raise the rating after austerity, the conclusion is that the countries and their people are better off because of IMF-EU imposed policies. The question is whether any of this is true.
Of course, Greece lags behind all of the rest of its EU counterparts, but it is still a “success story” because it remains in the euro zone contrary to those shorting the euro, Greek securities, and betting on a return to a national currency. Moreover, Greece is integrated into the euro zone closer than ever, after billions have been paid in interest to bondholders; a process representing a massive transfer of capital from Greece to German and northwest European banks.
Although it is certain that Greece cannot possibly service the public debt, mostly owed to foreign institutions and institutional investors, without either another "debt reduction (haircut) scheme" or payments extension and interest rate reduction, the apologists of austerity insist that the recipe constitutes a “success”. Therefore, the economy has experienced “success” and so has society as a whole.
There is a glaring contradiction at the core of austerity, one of many contradictions that essentially assumes austerity tries to eliminate if not minimize “growth by debt” policies that bring a country to near bankruptcy. In fact, IMF austerity as imposed in all developing countries in the last six decades is intended to keep the debtor nation closely integrated in the world system and the way to do it is by using “debt repayment” as leverage to impose policies in public and private sectors.
In this brief article, I will examine why the apologists of austerity embrace such a position, while they candidly admit that the program has not reduced the debt as a percent of GDP from 2010 to 2013, why indeed Greece is now deeper in debt than it was before IMF-EU austerity. I will also examine why the program has repeatedly missed all of its IMF-EU publicly stated goals with regard to economic growth. At the same time, I will explain the case of critics who argue that far from a success, austerity measures have devastated society and left it in ruins, taking Greece back several decades, while radically changing the integration model of Europe by creating a two-tiered economic union with the rich northwest and the poor South and East.
1. Austerity Defined:
Austerity measures are designed to engender monetary stability and fight inflation by reducing public spending and invariably consumption by the middle classes and workers. The assumption is that inflation is detrimental for owners of capital needed to be concentrated for investment and development. Austerity measures can and have been used to inject fiscal discipline into what could be an out of control spending regime that allows for the public sector to absorb capital away from the private sector, thereby choking off private initiative. At the same time, austerity has always been a mechanism to open a country’s markets to more foreign trade and capital investment under favorable terms to the foreign companies.
The IMF made austerity famous or infamous, depending on one’s viewpoint, during the 1950s in Latin America (Chile was the first) and throughout the rest of the “underdeveloped world”. Backed by the World Bank that only offered development loans on condition IMF austerity came first, the IMF demanded currency devaluation, budgetary cuts combined with reductions in credit regime, cuts in public sector jobs, wages and benefits, along with lower taxes for foreign investment, hikes in indirect taxes and public services such as utilities that the IMF wants privatized. By imposing IMF-style austerity in EU member countries, the IMF cannot demand devaluation of the euro that is a reserve currency. Therefore, only fiscal measures along with a series of others from trade and investment to management-labor relations issues apply.
The message that Germany and the larger EU members sent when they demanded austerity regime on the weaker debtor members was the introduction of a new integration model that would relegate the periphery economies to a role comparable to the non-Western developing nations. The immediate impact of austerity is a stronger currency that helps fight monetary inflation and strengthens finance capital and the export sector that becomes the basis for stimulating growth. A stronger euro currency best serves the strongest EU member, Germany to the detriment of the weaker members needing liquidity and inflationary monetary policy for development. Austerity also entails a drop in GDP growth, deteriorating terms of trade, higher unemployment, lower living standards, temporary spike in price inflation accompanied by slow growth, especially on the part of small businesses that lack the financial strength to withstand the austerity cycle that could last several years. All of the consequences described above mean massive capital concentration.
Do governments make a convincing case for the majority of the people about austerity measures? Using terms such as "reform", less government and stronger private sector that benefits people, the need to clean up public sector excesses including corruption, and the necessity to make the country more "competitive" against the rest of the world by lower wage costs, governments convince the public to go along with austerity. Behind, governments always enjoy the support of the mainstream media, and “respectable” analysts and business leaders. Apologists of austerity insist on a series of policies intended to strengthen big capital, and to better integrate the national economy with the international. The net result is transfer of capital from the periphery to the core.
Do austerity measures accomplish their publicly stated goal of restoring monetary stability and achieving external equilibrium for the duration? On a short-term basis, austerity does much of what it promises, but at an enormous cost to economic growth, national sovereignty, and at the expense of the middle class and workers living standards. Austerity measures are invariably for countries that are not part of reserve currency regimes. Greece, Portugal and Ireland were unprecedented cases.
2. Austerity: A “success” economic story:
From 2010 until the present, austerity as a pretext to impose neoliberalism and the new German-imposed integration model resulted in the elimination of smaller and weaker businesses, while strengthening larger domestic and foreign enterprises. While the fundamental question is how the new regime would build political consensus that would create a strong and viable base of the economy, the IMF-EU insists that the "free market" will take care of the issue without the state intervening to support domestic enterprises against foreign competition.
a) Fiscal policy is a way to redistribute income and it reflects the degree of social justice in society. Under the austerity regime, fiscal policy has been directed toward the mass consumer with high indirect taxes, and direct taxation hitting hardest at the low and middle income groups. Because the government is not collecting taxes from the five thousand or so families that own the lion's share of the wealth most of which is outside of the country, it has resorted to imposing high tax rates on the middle and low income groups, thus reducing consumption and sinking the economy and the budget deeper into the abyss. Although the wealthy have their money locked in "off-shore accounts", the Greek government has actually lowered the tax liability of these accounts where the bulk of the wealth rests. This has taken place at a time that the government claims it is seeking to find "tax evaders", including those that the French government and other EU authorities have provided in various "tax evader lists".
The domestic economy has reduced consumption in Greece as income decline has precipitated a drop in purchasing between 25 and 40 percent, depending on the source. Given that the GDP has fallen by 27% during 2010-2013, and incomes/ social security benefits, combined with much higher taxes have suffered an average of 40% drop, the domestic consumption sector has dropped sharply and resulted in a rise of exports. This improvement in the balance of payments, however, combined with a rise in tourism income has been so anemic that it has not been able to compensate for the loss of GDP because domestic demand continues to drop sharply as government redistributes income from the middle and low-income groups to foreign and domestic finance capital.
b) Cheaper asset and labor values combined with privatization of public assets has been at the center of the austerity/neoliberal measures. Wages have fallen sharply as have all asset values, reflecting a picture closer to the northern Balkans than to northwest Europe. To their credit, German government and banks did not conceal their view that Greece is a Balkan country and that means assets and labor values must reflect as much. However, the cost of living remains at pre-austerity levels reflecting Western European rather than Balkans standards. High living standards account for an elastic labor force, forcing a large segment of the population to accept work at much lower pay scales and giving the opportunity to the larger and healthier businesses to maintain profitability.
c) The low labor and asset values have entailed friendlier foreign and domestic investment climate, though there has not been much interest because of the persistent political and social instability that investors fear, along with the sharp decline in purchasing power. Moreover, nothing prevents multinational corporations from investing freely in the Balkans, Eastern Europe and Turkey under even better conditions that exist in Greece.
d) Weakened state structure is something that neoliberals and IMF-EU officials applaud along with banking consolidation. With government pouring billions into the banking system and financing its consolidation, there has been massive finance capital consolidation. This process has made the four remaining banks strong and very profitable, albeit with massive capital injections from money the government borrowed under austerity to keep banks afloat. That the banks used the capital from the government to consolidate, reward management and their investors instead of pouring the money back into the "real economy" has meant persistent negative GDP growth. However, these banks have laid the foundations for takeover by even stronger international banks down the road, completing the goal of the IMF-EU, which is capital concentration.
While consolidation in the banking sector along with massive capital concentration has helped to create the image that the banking system is now safe, banks have failed to be the engines of growth. This is because they are far too timid to risk making business loans amid a very uncertain climate that stems from a weakened state structure. In short, the IMF-EU deliberately weakened the public sector, while on the other hand they have a private sector fearing for a weakened public sector.
e) As a result of austerity and neoliberalism, the European Union, multinationals and comprador bourgeoisie have become stronger than they were during the recession of 2008-2012 that finance capital created. The euro as reserve currency has retained its value against all hard currencies, the public sector weakened and the weaker smaller and mid-sized businesses that have failed make room for the healthier strongest enterprises to remain.
Examples of neoliberalism in practice under the austerity regime:
i. Janitorial services:
In the quest to privatize, the government began to outsource services previously carried out by the public sector. One of those includes cleaning of office buildings. In a specific case, the government contracted the services of a private cleaning company for hospitals and other buildings. The women working for the company are invariably immigrants, divorced, and over fifty years old. The contractor signed with the government to pay a basis scale with these women. However, the contractor demanded and received from from them one-third of their wages as soon as they cashed their checks. As far as the tax system is concerned the workers are taxed for the amount shown, but in reality the company receives kickbacks, which are laundered and tax free for the employer. If any employee refuses the kickbacks, she is dismissed. Meanwhile, this well know practice goes unchecked by the government where corruption continues to prevail, given that government contracts cannot be secured in the absence of political connections and kickbacks.
ii. Toll Roads:
The government has handed over to large contractors the building and maintenance of toll roads. In return, the government receives a set amount for long-term contracts, while the contractor receives all fees from the toll as well as upfront capital, partly funded by the EU, to build the roads. In no case does the contractor place a single dime of the company money, while the contracts received are designed to guarantee profits to the contractor. In this case, the contractors are owners of media outlets - TV, radio, newspapers - molding public opinion in favor of corporate welfare and privatization under austerity. The most 4recent case, involves a government proposal to provide $2.5 billion to contractor to finance road building, while also giving them the green light to raise tolls by as much as 60% because the four years of austerity and recession have meant a drop in tolls collected. In short, the government guarantees profits to the private contractor, paying at least 40% higher for road building and maintenance than if government carried out such projects. However, if the public sector carried out the work, the bribing process to everyone from the minister of public works all the way down to trade union bosses would make sure the project would cost as much.
3. The political arena:
PASOK, (Socialist) and New Democracy are the two major political parties that have ruled Greece since the downfall of the military Junta in summer 1974. The two parties that have been partners in government from June 2012 until the present adopted the austerity measures and neoliberal policies, arguing that this is what the country needs, and nothing else will do. The reasons the government provides for following the austerity/neoliberal path are as follows:
a) To modernize and conform to EU policies that best serve to stabilize the euro zone economy. After all, this what other debtor nations are doing as well.
b) To become more competitive and achieve greater economic prosperity in the future so that there would be greater “national prosperity”.
c) To fight endemic public sector corruption by ending the welfare state and the politics of clientism and baksheesh capitalism.
d) Liberalization of all professions, from taxis and truckers to pharmacists and freeing of professions that would entail best prices and service for consumers.
It is true that the EU insists there is no alternative if a member wants to remain in the zone. The question is whether austerity and neoliberalism have achieved the publicly stated goals of best serving the consumers, putting an end to corruption, clientist politics and replacing baksheesh capitalism with legitimate free enterprise, considering that illegal means remain a core issue in doing business, partly to avoid paying taxes. Moreover, there is the issue of whether the country will emerge stronger or much weaker in the next ten to twenty years, and whether the political economy will be closer to that of a northwest European country like Denmark or somewhere between a Balkan and Middle Eastern one.
a) Domestic political developments under austerity:
i. Baksheesh capitalism continues to permeate the entire society to such a degree from top to bottom that austerity has done nothing except to make the bribes smaller and only on the margins has the hand of the law reached out to contain the problem. According to OECD, Greece remains the EU’s most corrupt country.
ii. As a result of the austerity regime, there is a much stronger executive branch that has emerged to impose fiscal discipline and neoliberal policies that would otherwise never pass through the parliamentary and judicial mechanisms. This has entailed authoritarian capitalism, otherwise common in non-Western democracies, has become a mechanism to impose policies against the background of massive public resistance.
iii. The IMF and EU have not complained about the erosion of democracy, attributing it to “local and national cultural and political factors” rather than the economy’s sharp downfall. Apologists of austerity and neoliberalism insist that such policies transcend democracy and entail the triumph of the new model of German-imposed patron-client integration. In short, austerity has meant the political consolidation in Greece and in the EU of the neoliberal monetarist forces representing finance capital.
4. International status:
Austerity and neoliberal policies have entailed that Greece along with Portugal and much of southern and eastern Europe have become more competitive as far as the IMF, ECB, EU and the multinational corporations and banks are concerned. That the country is much friendlier to international capital owing to much lower asset and labor values makes it attractive for foreign investment. However, the north Balkan countries are even more attractive to foreign investors because of even lower taxes, wages and few complications with bureaucratic entanglements.
One could argue that all of EU experienced recession, but the weaker EU countries suffered greatly, given that the entire regional economy was contracting. The integration model change from inter-dependent to patron-client has entailed that the role of Greece, along with Portugal, has been downgraded from a semi-developed country trying to move closer to the core (G-20), to a country falling closer in terms of living standards and position in the international economy to the Balkan and East European countries.
5. Austerity’s Failures
After it borrowed $110 billion euros in 2010 (to service existing loans for the next two years), Greek debt-to-GDP ratio will be about 170% by 2014, or larger than in was before austerity. Much more pessimistic than the Greek government and the EU, the OECD has argued that all savings from the Greek haircut of $140 billion was lost owing to the persistence of economic contraction induced by austerity measures. Therefore, Greece without the state as a force to stimulate new growth, the economy is utterly dependent on direct foreign investment that would only come if the government offers very attractive terms.
No matter how well the national economy performs in the next ten years, Greece will not be in a position to service its debt, in the absence of some policy measures that result in payments adjustments. Meanwhile, billions will be made by bondholders in extra payments primarily at the expense of Greek workers and the middle class who are enduring lower living standards and higher costs for the privilege of keeping foreign bondholders and their governments managing the Greece debt crisis.
The OECD maintains that every dollar "saved" from the Greek haircut of $140 billion was actually lost owing to the persistence of economic contraction induced by austerity measures. The most resounding contradiction of the “success” myth under austerity is that the IMF-EU saved country (inside the euro zone), but incomes and social security benefits declined by one-third, while poverty rose from about 18% before austerity to one-third of the population at the end of 2013, with more to come in 2014.
a. Political polarization
The history of IMF austerity programs throughout the world in the last six decades has been characterized politically as divisive, diverting a country’s political institutions from a democratic route toward authoritarianism. In many cases, from Latin America, Africa and Asia where austerity was imposed in the last six decades, the political result was often the decline of democracy and emergence of dictatorship.
Decline of democracy and constitutional rights along with sociopolitical polarization to reflect socioeconomic chasm are realities of austerity/neoliberalism. To justify crushing the labor unions, which for the most part were appendages of the two ruling parties now in government, media and government equate constitutionally protected rights of workers to strike and demonstrate with the illegal activities of the extreme right wing using force and violence against immigrants and leftists. This early Cold War tactic essentially stigmatizes the left and deprives its struggle for social justice of legitimacy in the eyes of voters.
At the same time, the rise of neo-Nazism (Golden Dawn Party) amid a weakened democracy signals loss of public confidence in a parliamentary system that people no longer see as protecting their rights and interests. When average citizens believe that the country under austerity/neoliberalism is under a form of dictatorship by foreign creditors, then it becomes difficult to convince them that democracy works in their interest. Besides looking to neo-Nazism, many people, especially the young are so disillusioned that they have embraced a form of neo-nihilism and simply reject all political parties and all institutions. Apathy and neo-nihilism, of course, works as much in favor of the austerity/neoliberal apologists as does neo-Nazism as far as it means keeping people away from embracing leftist politics. Therefore, political polarization and apathy are part of the “success story” that the defenders of austerity and neoliberalism try to sell to the public. Finally, there is the core issue of the degree to which IMF-EU austerity has serious diluted national sovereignty as much as it has liberal democracy. This is an issue around which both rightist and leftist groups have rallied, leaving the neoliberals in the center attemtping to project themselves as nationalists while they are agents of closer international integration and loss of national sovereignty.
b. Economic decline
Every year, apologists of austerity promise that next year the country will see growth, reduce unemployment and lower debt to GDP ratio. The reality has been higher debt, lower GDP, and higher unemployment. Government claims to have a budgetary surplus, but is has unpaid obligations that far exceed the fake "surplus" created as a result of pressure from the EU and IMF. The ultimate absurdity in this claim is not the infamous “Greek statistics” claim intended to show symbolically how fiscal conservatism has prevailed. Rather, this misleading claim becomes the basis on which the government can secure more EU (band aid) funds, and project the political image of “success” on paper against the background of a society that will have lost its vibrant middle class and will be a debtor colony for the balance of the 21st century. For a very long time, the economy will feel the impact of the decline of small shopkeepers and national bourgeoisie, of incomes for two-thirds of the population, of social security system, health care, education and social services, and a sharp increase in the “brain drain” (young college-educated people) leaving the country.
Naturally, there will be economic growth at some point in 2015, after five years of a deep recession. Growth will come with very low wages and benefits, no job security, and slim chances of upward socioeconomic mobility for the vast majority. Moreover, the economy will be producing few quality jobs, as the focus will be in capital-intensive enterprises rather than labor-intensive ones. Whether it is on the matter of medications and hospital care, foodstuffs, or any other essential product or service, the result of austerity and neoliberalism is loss of market share of domestic producers and increase of multinationals.
One obvious sign of how public debt results in income redistribution from the middle and lower classes to the upper income group is a) sharp rise in private debt as a result of higher living standards and higher taxes under austerity - in Greece, the unserviceable private sector loans could reach 50% in 2014 or early 2015; and b) the sharp drop in salary and wage scales has meant a sharp drop in the social security system receipts, which is expected to run into serious trouble by 2015. This means that retirement age will rise sharply and benefits will drop to reflect levels closer to Portugal and the Balkans, while cost of living will continue to rise.At the same time, the income gap between the bottom one third and the top ten percent of the population has risen significantly under austerity, making it one of the worst in Europe.
c) Social Injustice
Among some of the more significant aspects of austerity’s impact on people is the rise in scavenging through garbage and dumps, homelessness, soup kitchens, suicides, psychological depression and related emotional illnesses, and crime rates rising. In a country, where about 5000 people own most of the wealth and avoid paying taxes, poverty is between 25 and 30 percent, depending on the source, and it will be rising much higher in the next three to five years.
The government has been unable to deal with the social ills resulting from austerity. Besides having the media on its side, its strategy has been to place one group of workers or professionals against the other, and all of them theoretically against society, against God and Country. By attacking one group and insisting it does not serve the public by going on strike to demand its rights, government stigmatizes and marginalizes it, using all kinds of tactics from exposing its corrupt trade union officials to exposing workers cheating by calling in sick, etc.
In record time under austerity, the governments of PASOK and New Democracy have smashed trade unions effectiveness, ended collective bargaining, ended worker protection from layoffs with compensation, and created conditions where some employers refuse to pay their workers for weeks or months, without any repercussions. In one extreme case, a strawberry field owner actually shot his Pakistani workers for demanding back pay wages. Human rights organizations and the EU have repeatedly accused Greece of violating the basic human rights of immigrants, but the government has refused to permit legislation that would protect minorities from hate crimes. Playing the nationalist and religious/traditionalism card at a time of austerity actually mobilizes support for the government that has absolutely nothing else to offer to the middle class and workers.
In various reports, the IMF has acknowledged that the austerity experiment in Greece as carried out failed, although a great deal of the blame must go to Greek officials who refused to implement it exactly as the IMF-ECB-EU demanded. Given that massive capital injections into the Greek financial system and government in bailout programs, the IMF agreed the result is hardly satisfying. Apparently, the lesson from all this according to the IMF is not that there is anything wrong with austerity or neoliberalism, but with the mechanisms of implementation. That is what they intend to fix when they move on to the next country.
The case of Greece under austerity from spring 2010 to the present ought to give people pause to all analysts and interested observers about what they read and hear regarding policies that prestigious institutions like the IMF, ECB as well as governments and large banks advocate as “successful” policies. This case goes to the heart of the obsolete and anachronistic Bretton Woods system of the 1940s that the core countries are trying to keep alive in order to retain their advantage in the international economic order. Naturally, if one believes that society is best served by concentration of money in the hands of a few people, then the success story I have described holds true. On the other hand, if one sees that the persistence of the decaying Bretton Woods system is devastating societies and representative democracies, then the question is at what cost to retain a system so destructive to the social fabric and political system that is rooted in bourgeois democracy.
Partly because the former Communist bloc and Communist China are thoroughly integrated into the Western-rooted capitalist system, there is no discussion of alternative the existing system based on geographic and social inequality on a world scale. The assumption one the part of apologists of the system is that the economy along with society experience upward growth and improvement over the long term, while having some bumps along the way. Even those who may be experiencing downward instead of upward socioeconomic mobility support the system because of the promise it holds rather than the reality of the present. The proof of this is that some of the more enterprising individuals have managed to experience upward mobility. Therefore, the system must work for all, were it not for individual instead of institutional deficiencies.
Others believe that achieving the ideal of lowering poverty and raising living standards along with quality of life materially and culturally is unattainable because people and societal institutions have limitations. The question is whether there ought to be struggle for a better society, or should people be docile as the mainstream public institutions, the media and corporate capitalism wants them. What is the ideal solution? Is the solution:
a) Maintain the status quo by going along with IMF-EU policy directives. After all, a country under austerity is one that is thoroughly integrated into the world capitalist system and there is not much it can do except to follow directives of the core countries. When former Greek premier Papandreou proposed a national referendum on continuing austerity, EU leaders forced him out of power, with former French President Sarkozy calling him a “f----ing psychopath” for daring to ask the voters what path they wished government to take.
b) Remain in the EU and the euro zone while restoring some semblance of social justice in fiscal policy, welfare and labor-wage measures that would address health, education and pensions. This would be the position of reformist elements, including Greece’s main opposition SYRIZA. A center-left party that tries very hard to present itself as Socialist and its opponents label Communist, this party is a reincarnation of the early 1980s PASOK that is now a hard core behind neoliberal and austerity policies.
c) Forging coalitions with the debtor members of the EU and acting in concert with them. This sounds easy, but each country tries to secure the best terms for itself and cooperation within the EU is difficult unless it enjoys the backing of Germany and the creditor countries.
d) Leave the eurozone, create a national currency and build a national capitalist economy. This option would cost the EU more than keeping Greece in the zone, and it would be devastating for Greece short-term, with possible longer-term benefits depending what policies the government follows.
e) Build a Socialist society by electing the Communist party and go at it alone. This is highly unlikely in a country where the Communist party receives just six percent of the vote. Moreover, it would be very difficult to find allies around the world that would provide sufficient aid and trade to maintain the economy and regime.
f) Help to organize a grassroots revolution that has no links to existing political parties but represents different disgruntled social forces that come together out of despair. This too is highly unlikely for the immediate or inter-mediate future, but a very realistic possibility for the future. If political, economic and social conditions deteriorate further and people lose all faith in existing institutions, grassroots revolution is a realistic possibility.
There is no ideal solution, and we certainly have no ideal citizens in Greece or anywhere else. Nor is there an easy solution on which all people would agree given that they have a strong sense of immediate and long-term personal interest combined with ideological/political leanings. If the existing system is flawed to the degree of destroying much of society, people, at least a segment of them will eventually build a consensus around a new social contract. What we know for certain now is that the existing system does not serves society as a whole, but only the political and socioeconomic elites that own most of the wealth and control society’s destiny.