Greek debt crisis: a warning from history

Greece has moved centre stage as the global debt contagion engulfs Europe. But Italy, Portugal and Spain are not far behind, whilst France and even Germany, whose banks have many billions invested in the other countries, are waiting in the wings. No wonder EU leaders are holding a crisis meeting tomorrow.

Greek public sector workers are taking to the streets today in protest against the government’s austerity programme. This is designed to appease the hedge fund managers who are raising the cost of borrowing, and the foreign exchange dealers who have launched an unprecedented assault on the euro.

The Panhellenic Socialist Movement (PASOK) was elected in October and pledged to rescue Greek capitalism after the break-up of the previous right-wing government. But PASOK has struggled to get to grips with the worsening economic and social crisis.

Today’s strike by unions PASOK could once count on against pay and pension cuts is accompanied by a continuing blockade of main roads by farmers, including the border with Bulgaria. They are demanding financial support the government can’t afford to give.

The immediate threats to the country’s political stability arise from the payments due on its mountainous debts, now proving impossible to service as its economy – largely dependent on tourism and shipping – has taken a big hit from the global recession.

But the Greek government is not alone. It just happens to be the weakest of the pack of highly indebted countries which includes Portugal, Italy, Ireland, Spain, France, the UK and the US, not forgetting Dubai.

Greece’s public spending deficit exceeds 13% of the value of annual output of goods and services, Spain’s 11.4% and Portugal’s 9.3%. All these are far in excess of the 3% safe limit determined by rules set by the EU for countries using the euro currency.

These deficits are funded by borrowing – selling bonds to investors, speculators on the private markets whose only interest is “interest” or “yield”, the amount they can charge. As the problems of repayment mount, so does the cost of borrowing. The principle is the same whether we’re talking about global investors or doorstep, pay-day lenders. Fail to make a payment and the interest due is added to the principal - and then the rate rises. Defaulters are treated very severely. Brutally.

Some consider the UK safer from the effects of debt contagion, because it is outside the euro zone. But its deficit is way up there at more than 12%, and the pound is also under pressure from the foreign exchange traders.

Bankers and hedge fund managers now call the shots, demanding public sector wage and benefit cuts, tax rises, pension reductions and the ending of vital services. Respected figures like George Magnus, senior economic advisor to UBS Investment Bank, talk in hushed tones about the need for governments to balance the risks of a breakdown in “social cohesion” arising from the prescribed “structural reforms” needed to attract investors like him.

The system of elected government that Europeans have got used to during the thirty years of corporate-led globalisation cannot survive the scale of the devastation needed to sustain the capitalist system. Greece was ruled by a military Junta between 1967 and 1974; Spain’s fascist dictatorship lasted from 1939 until Franco died in 1975. The Salazar government in Portugal lasted from 1933 until his death in 1970. The Nazis came to power in 1933 as the effects of the Great Depression were felt throughout the world.

That Depression only came to an end when fascism and the Second World War eliminated the surplus productive capacity produced by the speculative growth of the 1920s. Today’s globalised financial, economic and political crisis exceeds by far the conditions of the 1930s. The costs of resolving it within the capitalist framework cannot be countenanced.

We invite you to join the discussion of alternative, revolutionary solutions put forward in our draft Manifesto.

Gerry Gold
Economics editor