Debt crisis in Greece – a harbinger of rev storms to come

Greece’s financial problems have been dominating the pages of the financial press throughout the months of January and February, since they represent a huge embarrassment to the eurozone, of which Greece is a member.

What has set off what is being called “the Greek tragedy” is a downgrading in early December by Moody’s of Greek sovereign debt to BBB+, that effectively declares that there is a danger of sovereign default on that debt.  The downgrading was a response to economic data that show that Greece’s public debt has hit 113% of its GDP, and its budget deficit 12.7%. How serious this is can be judged from the Maastricht requirement imposed on all members of the eurozone to keep their public debt below 60% of GDP and their budget deficit below 3%. At the same time the growth of Greece’s GDP has plunged from nearly 3% in 2008 to -0.8% in 2009.

Because of the downgrading, there is a real danger that Greece will be unable to borrow enough (i.e., issue enough bonds) this year to meet the government’s spending needs. It did have a successful bond issue in January – investors were falling over themselves to buy Greek bonds:

“Investors placed about €20bn ($28bn, £17bn) in orders for the five-year, fixed-rate bond, four times more than the government had reckoned on. However, in a sign that Greece is being made to pay for years of fiscal profligacy, the bond carried a record high interest rate spread relative to the rate for German bonds, the eurozone’s benchmark.” In other words, yields on Greek bonds are in the region of 7%, while on German bonds they are only about 2%.

However, if Greece can continue to borrow at these high rates of interest, it will put even more pressure on its faltering economy, bringing closer the day when it is forced to default.

In fact its ability to borrow in previous years in spite of its shaky finances has been due to the European Central Bank relaxing its lending rules in the face of the credit crunch: As Gillian Tett explains in the Financial Times of 4 February:

Back in the autumn of 2008, after the collapse of Lehman Brothers, the ECB loosened the rules which govern how banks can get central bank funds. In particular, it let banks use government bonds rated BBB or above in ECB money market operations, instead of merely accepting bonds rated A-, or more.

“This was initially presented as a “temporary” policy, slated to last until late 2009. But last year the ECB extended the policy until the end of 2010. Thus, during 2009, banks which were holding Greek bonds have been merrily exchanging these for other assets via the ECB. This, in turn, has helped to support Greek bond prices (and, by extension, Greek banks that hold a large chunk of outstanding Greek bonds).

“Earlier this year, senior ECB officials indicated that they intended to “normalise” the policy, as planned, at the end of 2010, as part of their exit strategy. That has removed one key source of support for Greek debt (and spooked investors, such as German insurance companies, which also hold large chunks of bonds)” (The race is on for Greece before the ECB exits’).

As a result, the risk is still high that within the next few months, the Greek government, which has €53 billion to raise, will have a bond issue that fails.  The question is then what will the European Union, of which Greece is a member, do about it, and what will be the effect on the eurozone, of which Greece is part?

Why is the Greek economy in such poor shape?

First, however, it is necessary to look at the causes of Greece’s ballooning indebtedness.  Obviously it is living beyond its means, and to an even greater extent than the rest of the EU countries.  The factors that are involved here are mainly two: on the one hand Greece spends a lot on its public services; and on the other hand its industries are uncompetitive, with the result that the profits of Greek industry are low, unemployment is high, wages are among the lowest in Europe averaging about €800 a month, and therefore the revenues that the government can collect in the way of taxes to pay for its public expenditure are increasingly paltry.

As far as public services are concerned, what seems profligate to capitalism is the meeting of the basic requirements of the masses of the people – health services, schools, universities, pensions, etc. At present Greek pensions are about 90% of wages at retirement, school and university education are free, as indeed is healthcare. These cannot be regarded as outrageous luxuries, bearing in mind that with such low wages there is no way ordinary Greek people could actually pay for them from their own pockets.

With such low wages it might be thought that Greek products should be cheap.  It seems, however, that notwithstanding low wages Greece is unable to compete effectively against more modernised economies.  Even with its low wages, “Greek unit labour costs rose by 23 per cent against Germany’s between early 2000 and the second quarter of 2009” (see Martin Wolf, ‘The Greek tragedy deserves a global audience’, Financial Times, 20 January 2010).

And further:

 “A ballooning budget deficit, coupled with inappropriately low interest rates imported from abroad [a result of being part of the eurozone], sets the stage for the end-game. It does so not simply by putting the country’s public finances on an unsustainable path but also by eroding its international competitiveness, which gives rise to a massive external imbalance. In this department as well, Greece has managed to outdo the Argentina of old by losing over 30 per cent in competitiveness through consistently higher wage and price inflation than its European partners.” (Desmond Lachman, ‘Why Greece will have to leave the Eurozone’, Financial Times,12 January 2010).

Loss of competitiveness when one is hitched irretrievably to a strong currency is a sure recipe for disaster.  Since Greece’s currency is the euro, it cannot devalue it with a view to making its products cheaper for foreign purchasers and its imports more expensive so as to give a boost to internal producers. 

Rectifying the situation

What should be done to try to rectify the situation is being hotly debated.  On one point, there is barely a dissenting voice: Greece must severely tighten its belt!

In the short term, prime minister George Papandreou is saying everything to please other EU countries, since he will more than likely need them to guarantee Greece’s borrowing in the foreseeable future so that he can obtain the necessary loans at all.  In the hope of help from Europe, prime minister George Papandreou’s social-democratic government is of course pledging to bring about massive cuts in public expenditure with a view to bringing Greece’s budget deficit down to 3% of GDP by 2013. Wages and pensions, which make up 51% of Greek government expenditure, are the primary target.  Measures already announced and/or demanded by Europe include reducing spending on pensions and healthcare, making changes in Labour law to reduce the effectiveness of Greece’s unions (“improving the labour market and wage bargaining systems”), cutting the public sector wage bill by replacing only one in five retiring civil servants, introducing tax rises and raising the retirement age. In addition Papandreou has announced an across-the-board wage freeze for public sector workers and a 10% reduction in allowances, equivalent to a pay cut of 4%.

Swingeing though these measures are, however, and even assuming that they can be implemented in practice, they are unlikely to do the trick.  Numerous economists have pointed out that measures such as these, that take demand out of the economy by slashing both public and private consumption, have the unavoidable effect of reducing GDP (since nothing counts as “production” unless it is actually sold), thereby reducing still further the amount of borrowing that represents 60% of GDP and the amount of budget deficit that represents 3% of GDP.

An attempt to cut a fiscal deficit by 10 per cent of GDP, via cuts in spending, would require an actual reduction of 15 per cent of GDP, once one allows for falling fiscal revenue. GDP would also shrink 15 per cent.” (Martin Wolf, ‘Europe needs German consumers’, Financial Times, 10 February 2010).

And further, “… a big structural fiscal tightening will generate a deep recession. That is sure to increase the cyclical deficit. Assume, cautiously, that for every percentage point of structural tightening there would be 0.2 points of offsetting fiscal deterioration. Then the structural tightening needed to reduce the actual deficit to 3 per cent of GDP would be close to 12 percentage points. The Greek government would find that, for every step it takes forward, it would slip a bit backwards. So far Greece has not suffered a significant recession. That seems sure to change. The government will soon be facing miserable public and private sectors, with no policy levers.”

What needs to happen is for production to expand even though internal consumption is severely restricted.  This can only be achieved by exporting.  With low wages and low public expenditure, and departure from the eurozone, Greece could make its exports much better value, but then it would still be up against some of the most competitive economies in the world and, given the fact that as a result of the credit crunch virtually every capitalist country is massively reducing its spending as well as Greece’s relative lack of development and shortage of funds to spend on development, this is a race it is very unlikely to be able to win. Martin Wolf points out the obvious when he says:

“Meanwhile, the eurozone as a whole, having lost its erstwhile internal demand engines, must now hope for faster growth of net exports. So do countries hit by the financial shock, such as the UK and US. So, too, does recession-hit Japan. So, not least, does China. Either the rest of the world has a spending binge, or these countries – which make up 70 per cent of the world economy – are going to be disappointed.” (‘Europe cannot afford a Greek default’, Financial Times, 15 January 2010

Will Greece leave the eurozone?

International capital, however, is only interested in how best to protect its own interests. Would it be better to let Greece default, should Greece leave the eurozone and/or would it be better to bail it out?

It is undoubtedly the case that if it were only a question of Greece, then Europe would let Greece default and take the consequences.  The Greek economy represents about only about 2.5-3.0 percent of the euro area’s GDP so a few bondholders would lose out, but then that’s life – under capitalism, that is.  For the stronger EU economies that would be expected to guarantee Greece’s dodgy debts – Germany in particular – it seemed initially obvious that Greece would have to be left to its own devices for “by organising a bail-out Germany would be seen as providing unfair support for a country which had proven itself incapable of fiscal rectitude. Such a move would not only be hideously unpopular with German taxpayers, it would potentially encourage poorer countries to follow Greece’s lead”. (Edmund Conway and Bruno Waterfield, ‘Can anyone solve the euro puzzle?’, New York Times, 14 February 2010).

However, as Martin Wolf so pertinently points out, “Greece is merely the canary in the fiscal coal mine”, adding “… Default cannot be a solution. Greece would then be forced to close its deficit in the midst of a national economic debacle. Leaving the eurozone would be a political catastrophe. Either of these eventualities (let alone both together) would also create lethal contagion for vulnerable members. Suddenly, the unthinkable would be thinkable. The eurozone could then confront a wave of sovereign debt and financial sector crises that would make what happened in 2009 look like a party”. (‘The Greek tragedy deserves a global audience’, 20 January 2010).  If Greece were to default, the economic viability of the whole of the European Union would be cast into doubt, especially the weaker countries such as Portugal, Italy, Ireland and Spain. As Simon Tilford elaborates, “If the eurozone fails to support Greece or makes the terms of any bail-out politically impossible for the country’s authorities to meet, Greece could default on its sovereign debt. The eurozone would then face a big problem. The financial markets would quickly turn their attention to other euro bloc economies with unsustainable fiscal positions and poor growth prospects. Italy, Spain and Portugal would find themselves paying dramatically higher borrowing costs, raising the likelihood of further fiscal crises. Such a scenario would almost certainly deter the European Union’s remaining central and eastern European member states joining the eurozone any time soon. And the political fallout would be huge” (‘Europe cannot afford a Greek default, Financial Times, 15 January 2010.).

But other countries too are vulnerable: “Austria could still be drowned by its banking crisis; Belgium has a much higher level of debt than either Spain or Portugal and a financial sector heavily shaken by the global crisis.” (Wolfgang Münchau, ‘Europe needs to show it has a crisis endgame’, Financial Times, 8 February 2010).  As can be seen from the Table reproduced here, hardly any of the European Union countries meet the fiscal prudence criteria that are supposed to be obligatory for eurozone countries.  The end result of letting Greece sink may be the end of the single currency and indeed of the European Union. 

Leaving Greece to be bailed out by the IMF has its own problems.

Realising that such an outcome would be suicidal for European imperialists, Germany has been forced to accept that, in the very last resort, the German taxpayers are going to have to fork out.  They have not been easy to persuade:

“The big moment – the heads of state meeting which is supposed to be the centrepiece of every European summit – was scheduled to begin at 10am in the wood-panelled Bibliothèque Solvay in Brussels’ European quarter, but as the hour approached, it became clear that nothing was doing. As more time passed, it became clear that something was wrong. Eventually, Herman van Rompuy – the new European president, in charge of his first big set-piece – explained that a snowstorm had held up a number of the participants. The meeting would be delayed by two hours. …

“But it wasn’t ice and water that delayed the summit. That morning, the key players – Merkel, Sarkozy, Papandreou, Jean-Claude Juncker, head of the euro group of nations, and Trichet – held a last-minute meeting. According to insiders, voices were raised with Trichet and Merkel banging fists on the table as Sarkozy and Juncker tried to push for a bail-out plan. The statement that emerged from the meeting was a thinly-disguised compromise. Three-quarters of it seemed to be focused only on insisting that the Greeks cut their budget deficit by 4pc this year; the final paragraph, which appeared to be specifically aimed at appeasing the French, said: ‘Euro area Member states will take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole’, before adding: ‘The Greek government has not requested any financial support’.” (Edmund Conway and Bruno Waterfield, op.cit.).

In passing we might note that it is not only Europe that is swimming naked as the economic tide goes out.  We have inserted in the Table the data for the United States, which is positioned right there amidst the countries with impossible debts and deficits, which include, incidentally the UK – quite high up on the list. In the case of the US, however, it is not that the present debt situation is so bad – it is the rate at which it is adding to that debt which bodes ill for the future.

To quote Niall Ferguson (op.cit), “… even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941”.

Even if the better-off countries of the EU do bail Greece out, and even if for the moment they are able to prevent the contagion spreading, the fact remains that the economies of the whole of Europe are patently in trouble.  Every single European country has a budget deficit, which puts us in mind of Mr Micawber’s only too timely advice:

Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. The blossom is blighted, the leaf is withered, the god of day goes down upon the dreary scene, and – and, in short, you are for ever floored. As I am!”  (Charles Dickens, David Copperfield, Chapter 12).

Whatever measures Europe takes to bail out Greece or any other country, in the long term, assuming capitalism remains, it is most certainly ‘floored’, and we along with it.

As for Greece leaving the eurozone, Desmond Lachman (op.cit.) takes the view that this is sooner or later inevitable, just as Argentina a few years ago had to cut off its fixed dollar exchange rate: “If there is anything that the Greek authorities might learn from Argentina, it is the folly of attempting to fight the inevitable. Not only does this saddle a country with a mountain of official debt that cannot be rescheduled; it also deepens and prolongs the recession from which any post-devaluation recovery might begin. Athens should leave the eurozone sooner rather than later. However, that is not the way that Greek tragedies play out.”

The resistance

Greek trade-union spirit has not yet been broken, and unions are mounting energetic action to resist the cuts that are being imposed on their members. A whole series of one and two day strikes have been mounted by various unions.

Greek customs and tax officials on Thursday launched a 48-hour strike on 5 February against the government’s austerity programme that shut down ports and border crossing points. Adedy, the civil servants’ union, held a 24-hour strike on 10 February and a march to parliament in protest against pension reform, followed the next day by Pame, a militant communist-led union. In addition, the country’s largest union, the General Confederation of Greek Workers (GSEE), which represents private sector employees, announced a one-day General strike on February 24 in solidarity with public sector workers.

Striking is a bit of a national sport in Greece,” remarked Landon Thomas Jr. (‘Is Greece’s Debt Trashing the Euro?’, New York Times, 7 February 2010).  But what remains to be seen is whether it remains at the one or two day strike level of a sport or whether it will develop into a real fight to preserve at least the modestly respectable standard of living currently enjoyed by Greek workers.  In the recent past – since Greece joined the euro in 2001 in fact – most strikes have been resolved amicably with ‘bonuses’ being paid to the workforce to persuade them to give up their action. Clearly on this occasion the government, which is also in most cases the employer, is not going to be in a position to grant any concessions.  Clearly if the working class is going to be dissuaded from resistance, a social-democratic government is best placed to do this. Landon Thomas interviewed the Greek Socialist Party Finance Minister, George Papaconstantinou, who told him, from the comfort of his art-bedecked office, “that only a center-left administration like the ruling Socialist party would be able to reach a deal with Greece’s trade unions.”

However, we know from the events in Athens last December that Greeks will not necessarily wait for permission from their unions before they protest. Besides this, not all Greek unions are in the pocket of the ruling social-democratic Socialist Party as the communists too have significant syndical forces.

All in all, a storm is mounting.  If imperialism and its defenders within the working class movement cannot persuade the working class meekly to capitulate in order to help their embattled ‘socialist’ government, they will undoubtedly seek to focus the blame on the European Union – especially the Germans! – for imposing unreasonable demands on the Greek nation.  The choice increasingly facing the Greek working class and peasantry is whether meekly to accept the dictates of capital, sink lower and lower, and eke out a miserable existence, or to adopt a new weapon – that of Leninism – in the struggle to emancipate itself from imperialist exploitation once and for all. The Greek working class, with its fine communist traditions, stands a good chance of effecting a radical outcome in the present debacle.  With correct, imaginative and courageous communist leadership, Greece could prove to be the weak link in the imperialist chain which shatters under the hammer blows of the Greek working class to herald a new age of proletarian revolutions.


World ranking in order of 2009 public debt


(eu countries that meet eurozone criteria in bold)

Public debt as % of GDP


Public debt as % of GDP


2009 budget deficit as % of GDP





































United Kingdom
































































Czech Republic







































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