Discussion of the Eurozone crisis is again catching public attention as yet a fifth bailout has been disbursed to the Greek government worth about 2 billion Euros ($2.3 billion). The cost of this particular bailout payment was the Greek Parliament’s passage of yet further austerity measures which include, but are not limited to, “...raising the retirement age, cutting pensions, liberalizing the energy market, opening up cosseted professions, expanding a property tax that Greeks already revile and pushing forward a stalled program to privatize state assets.” Such measures only serve to cause more suffering while failing to expand the Greek economy making it eternally dependent on foreign aid and bailouts while leaving all the structural weaknesses in place such as ever declining terms of trade with stronger Eurozone powers such as Germany. Thus, the Troika’s demands for more austerity seems to be a long term disaster as most of the disbursement will only be used to pay down existing debt but not make growth oriented structural improvements to the Greek economy.
Since the Euro, the zone’s common currency, has only served to exacerbate economic inequality between countries instead of bridge them it is appropriate to revisit monetary theory in the ongoing search for answers. In a brilliant article in the current New Left Review, Wolfgang Streek reminds us that Marx’s insight that money-and all forms of capital-is actually best conceived as a social relation rather than a neutral medium of exchange or factor of production is today as important as ever in shining a light on the current global economic crisis. What Streek means is that money is not simply a way of reducing transaction costs by providing an easy medium of exchange or a means of creating liquidity to allow exponential GDP growth. It is an institution itself whose nature is ultimately political and which has distributive effects through the power it necessarily confers upon the elite. In essence, money itself has a class nature. Money is thus an object of social conflict itself which favors certain interests while ignoring or even harming others in civil society. Above all money’s political nature-aside from the obvious imperative created by the state which accepts taxes only in a given national currency-as Streek explains, using a “social constructivist” vs a neo-liberal monetarist paradigm, how money and monetary policy privileges certain sectors over others using the example from early post-Civil War US history;
The alternative view, based on a remarkably well-developed social-constructivist theory of the value of money, espoused the introduction of freely created paper money. As was to be expected, the advocates of gold stressed the public interest in a value-symbolization that could inspire confidence, while the supporters of ‘greenbacks’—printed dollar bills—emphasized the divergent distributive effects of the two concepts of money, representing different material interests. And indeed the rival approaches were rooted in different accumulation practices and ways of life: advocates of the gold standard represented East Coast ‘old money’ and were interested above all in stability; the paper-money contingent was based in the South and West and wanted free access to credit, either to help devalue the debts they had incurred or to boost expansion. Conflicting interests over which development path the fast-growing capitalist economy should take were linked to opposing structures of class power and privilege: the lifeworld of a patrician urban class, above all in New York, against that of the indebted farmers and ‘cowboy operators’ in the rest of the country.
One is here reminded of populist William Jennings Bryan’s oft quoted refusal to be “crucified on a cross of gold” in his plea for the popular interest, particularly of that of farmers, vs that of “eastern establishment bankers” whose concern for the stability and strength of the US Dollar reflected their search for the Dollar’s reserve currency status in an era of expanding international trade. Gold, however, was notoriously deflationary and harmed not only farm prices but the overall working economy as well. Streek goes on to apply his institutional view of money and its role in mediating class conflicts in the Eurozone crisis by explaining the differing economic strategies of differing parts of the Eurozone. Just as in the American case monetary policy was biased in favor of certain sectors and regions privileging some over others, the same is true of the Eurozone today in which countries like Germany were ultimately privileged over those like Greece. Streek notes that differing monetary systems became embedded in differing development strategies and that the search for a single currency and thus monetary system allowed the political and economic hegemony of one part of the Eurozone over another. In essence, it made possible the imposition of neo-liberal, free market economic policies on that part of Europe seeking more Keynesian, egalitarian policies and allowed the former to use thereby use austerity to discipline the latter. Hence, this attempt to homogenize economic policy throughout the Eurozone allowed the economic domination of the stronger, export oriented economies over the weaker internal demand driven ones to the benefit of global corporate finance capitalism. Streek explains;
The European South produced a type of capitalism in which growth was driven above all by domestic demand, supported where need be by inflation; demand was driven in turn by budget deficits, or by trade unions strengthened by high levels of job security and a large public sector. Moreover, inflation made it easier for governments to borrow, as it steadily devalued the public debt. The system was supported by a heavily regulated banking sector, partly or wholly state owned. All these things taken together made it possible to harmonize more or less satisfactorily the interests of workers and employers, who typically operated in the domestic market and on a small scale. The price for the social peace generated in this way was a loss of international competitiveness, in contrast to hard-currency countries; but with national currencies, that loss could be made good by periodic devaluations, at the expense of foreign imports. The northern economies functioned differently. Their growth came from exports, so they were inflation-averse. This applied to workers and their unions, too, despite the occasional use of ‘Keynesian’ rhetoric—and all the more so in the era of globalization, when cost increases could so easily lead to production being relocated to cheaper zones. These countries do not necessarily need the option of devaluation. Despite the repeated revaluations of its currency, due in part to the revaluation of its products, the German economy has thrived since the 1970s, not least by migrating from markets that compete on price to those that compete on quality. Unlike the Mediterranean states, the hard-currency countries are wary of both inflation and debt, even though their interest rates are relatively low. Their ability to survive without a loose monetary policy benefits their numerous savers, whose votes carry significant political weight; it also means they don’t need to take on the risk of market bubbles.
One of the reasons the above quote is so instructive is that during the financial bubble created by Greece’s joining the Euro between 2002 and 2008, the ECB interest rate was lower than the Greek inflation rate (and higher than the German inflation rate) initially favoring rapid public and private credit expansion in Greece and a surge in economic growth which drew in billions in foreign capital investment, particularly in Greek government bonds. Greek growth was dynamic but highly dependent on foreign investment generated by financial bubbles. This led to a process that created an unsustainable rate of growth of capital stock given the limits of long term effective demand which was only temporarily sustained by financial bubbles. The problem was that Greek debt service could continue due to nearly four percent average annual growth rates between 2002 and 2008; in the seven years before 2004, about during this time Greece paid its creditors about 208 billion Euros. It was the artificial bubbles that furthered Greece’s dependence on foreign creditors who profited immensely before the 2008 crash. According to Greek economist C.J. Polychroniou, this process, intimately tied to the Maastricht Treaty, resulted in the colonization of the Greek economy. Greek debt service as a share of GDP grew markedly up to the crash. Polychroniou explains that in the early years of Greece’s entry into the Eurozone, the rate of capital formation was well over twice that of consumption while labor productivity growth exceeded the growth of real wages by more than threefold. The problem was the financial system and the distortions created by membership in the Eurozone. Polychroniou explains;
In sum, Greek economic growth between 2001 and 2007 was largely based on overconsumption, ever-increasing debt levels, and a capital accumulation process divorced from the real economy. It was a period of economic growth in the midst of bubbles. Moreover, under the euro regime, Greece's competitiveness declined by almost 25 percent - the icing on the cake to the nation's participation in a currency union that has so far proven itself to be a massive failure.
The main point of all of this is that the financial system and the terms of the Maastricht Treaty allowed the colonization of the Greek economy by the stronger core countries in the Eurozone and the enforcement of neoliberal policies and draconian austerity measures for the benefit of foreign creditors. During the 1960s and ‘70s, the Greek economy experienced rapid growth but slowed in the 1980s and early ‘90s due to the global recession’s effects. The Keynesian welfare state policies of the 1960s and ‘70s worked well for Greece until the world economy turned recessionary. By the late 1990s, European elites began to see ways to “discipline” what they saw as profligate fiscal policies on the continent. The terms of entering the Eurozone was controlling inflation and the debt to GDP ratio, two major deflationary impediments to economic growth based on internal demand forcing a reliance on foreign capital for development. Instead of internal growth based on growing middle class income much of Greece’s income goes to foreign debt service. The Troika’s policy mix of fresh loans in exchange for austerity only creates a vicious cycle to the benefit of foreign creditors. Currently, Greece’s debt to GDP ratio is about 177% indicating a clear failure of the Troika’s strategy! This is hardly a substitute for growth based on real wage increases for a financially stable Greek middle class. But this is the era of globalization. Most economic strategy is based on redistributing income from the local poor to the global rich all the while blaming the victim for the financial mess this inevitably creates!
A recent VOX article shows that debt was brought on by the post 2008 crash/recession not the reverse! A fall in GDP growth due to recessions always raise debt to GDP ratios; this is what the Republicans in the US couldn’t understand during Obama’s first term as they stupidly demanded more and more austerity as if debt caused recessions and not the reverse. The Republicans were wrong about the US economy. The Troika is similarly wrong about Greece. The main problem was the loss of monetary/fiscal policy independence. VOX explains;
“...the original source of the trouble is actually quite simple. The main tool modern countries use to recover from recession is monetary policy, but the nature of the eurozone is that when countries fell into recession they didn't have central banks of their own that could help promote recovery. Outsourcing monetary policy to the European Central Bank in Frankfurt left Ireland, Portugal, Greece, and Spain defenseless against the 2008 recession.”
The problem lies squarely with globalization. Greece’s sudden entrance into the Eurozone made it look artificially attractive to foreign financial investors who endlessly fed local Greek banks investment capital leading to a low interest credit binge and a real estate market bubble to boot. In the early days, Greek bond yields were nearly as low as German ones but all that changed once capital flight began after the 2008 crash. One brief report from the Leibniz Institute in Germany estimates that the “flight to safety effect” lowered German bond yields after 2010 saving the German government about 100 billion Euros between 2010 and 2015! Worse still is the “internal devaluation” demanded by the Troika-given a single currency-which has the distinct disadvantage of lowering wages and benefits without also lowering debt as occurs in exchange rates involving different currencies (although local prices decline a bit as well). It is usually the cheapening of debt that results in spending and growth for an economic recovery. This has yet to occur in Greece.
David Beckworth of Western Kentucky University argues that it was not debt that led to the recession but the ECB’s monetary tightening after 2008. This policy was clearly favored by the core countries such as Germany and opposed by high debt countries such as Greece. Though one can argue about the efficacy of monetary easing alone during a deep recession (one thinks of Keynes’ well known description of such a solution as “pushing on a string”) it is a clear example of the class nature of monetary policy and the way in which EU policy has tended to reflect dominant core country interests and economic strategy preferences. That ECB monetary tightening, which is only now being somewhat eased, prolonged the crisis in Greece is beyond dispute. While monetary easing alone won’t bring a recovery, it is important as a first step.
The recovery of the Greek economy may yet require an exit from the Euro. What is clear is that poor and declining terms of trade with core Eurozone members like Germany mixed with austerity and system wide deflationary policies can only worsen the situation delaying recovery still further. It is very clear that money is not a neutral medium of exchange but an institutionalized political tool for pursuing class interests and hegemonic power. Monetary institutions reenforce the existing inequality between classes and nations. This is especially true in the global age when independent economic strategies at the national level can be thwarted by monetary union schemes such as the Eurozone which act to transfer surplus wealth from poor countries to rich ones. This is the real lesson of the ongoing Greek crisis.