The strange case of the missing growth plan in the SYRIZA-EU debt deal

by Jehu

If things go as rumored, tomorrow SYRIZA finance minister Yannis Varoufakis will meet withgermanys-finance-minister-had-a-frightening-plan-to-deal-with-greece Germany’s finance minister, the vile and much hated Wolfgang Schauble. The meeting is widely anticipated by both bourgeois simpletons and Europe’s radical activists alike. On it hinges much of the hope on the part of the radical Left for successfully breaking out of the austerity regime said to responsible for much of the unemployment and slow growth across Europe.

The problem: nothing in the rumored deal explains how Greece will restore growth and end austerity

Folks like the International Committee of a Fourth International are trying to make heads or tails of the rumored SYRIZA-European Union deal on offer by Varoufakis. The outlines of the debt deal look very similar to the one described by James Meadway and carried in the Financial Times of London — the writers are clearly working off the same set of notes.

In the predicted agreement, perhaps to be presented to Germany on Thursday, the current debt package would be replaced by two packages. In the first, with the EU, bonds would be indexed to the growth in GDP; and in the second, the ECB would carry the debt on its books forever. Essentially, the first bond (owed to the EU) would only be paid if Greece’s economy grew; while the second bond would be carried on ECB books until such time as a Greece government chose to pay it. In both cases the repayment of the debt would be pushed back at least until Greece’s economy began growing.

The deal is a thinly disguised agreement to let Greece’s default on its obligations. There is no question that the ratings agencies will treat it as a default, but the package seems to be marketed as a way for Angela Merkel to save face.

To make an analogy, suppose you wanted to buy a house and need help on a down payment. If you are loaned a partial down payment on a house by your parents, they agree never to ask you to pay it back. The debt is still there in theory, but since your parents insist they will never press you for it, it is effectively a gift.

Another source for the down payment on your house might come from a friend. In this case, your friend fully insists on being paid, but he agrees you only need pay him from any raises you get from future employment.

Now, both of these deals have to be approved by the IRS — or, in this case, Ms. Merkel. The IRS can classify the loan from your parents as a gift or a loan, and this decision has tax implications. If the IRS classifies the loan from your parents as a gift, you are going to get socked with a crapload of taxes.

Will Merkel hold her nose and sign off?

In the same way, Ms. Merkel may not buy the face-saving cheat being offered here that the ECB debt is still on the books. She may rightly point out that the ECB has actually agreed to wipe out Greece’s debt — as it has.

On the second bond swap, Ms Merkel has to agree to demand a debt payment from Greece only if Greece’s economy grows; but, who knows when that will happen? (And there are real questions about this as I will show.)

Honestly, what has been crafted here by all accounts is Greece’s default on its debts to the EU and ECB thinly disguised as a new agreement framework. People like the ICFI, who call this a repudiation of SYRIZA’s election plank, are simply being assholes because the term. “default”, never appears on paper. However the ratings agencies will most probably label this a default event.

If the deal has any fault, it is that, as Meadway explained, it is just a little too cute for its own good. No one in their right mind is going to judge this as anything other than what it is: full-blown default. And this means everyone is expecting Ms. Merkel to hold her nose and sign off on a deal she knows grants permission to Greece to default.

Spain, Portugal, Ireland, etc. will also know that Greece was just given permission to default by Ms. Merkel. And, in contrast to Greece, Spain is one of the largest economies in the eurozone. If Podemos goes to its voters and say “See, Merkel, the EU and ECB are a bunch of cowards who back down when we stand up.”, this will have a big political impact in other countries hit hard by the troika’s austerity regime. Even the right parties in Spain will begin talking about renegotiating Spain’s debt.

The unanswered question: Where will the growth come from?

The reports so far assume Merkel will go along with the SYRIZA deal when it is not at all clear, but this is not even the big issue here. The debt is not, as the ICFI and the focus of most media attention would have you believe, the central plank in SYRIZA’s platform; it is more like an obstacle preventing SYRIZA from actually working on its central plank: reversing austerity.

Even if Merkel agrees to this tissue-thin default deal, SYRIZA will still face 27% unemployment, massive poverty and a depression that has shrunk the economy by nearly 30%.

And the deal includes the ultimate neoliberal (even Austrian) talking point: a permanent commitment to budget surpluses. Essentially, SYRIZA has agreed to forever avoid any Keynesian countercyclical deficit spending — even in the middle of a crisis.

In short, if this agreement is signed off on by all parties, the fascist state and Keynesian counter-cyclical policy is dead in Europe and neoliberalism has won on the continent.

The Greece of the future will rely on attracting capital from other countries for its growth like New York and Chile.

The playbook SYRIZA is likely working off of now was written with two fascists, James Galbraith and Stuart Holland. One thing that will be noted is that the Varoufakis-Holland-Galbraith plan concentrates even more power in the hands of the ECB. Essentially, the ECB is the critical institution for mobilizing global capital for investment in the various member states. And all economic growth in the EU will be forced to rely on four unelected bureaucracies:

  • The European Central Bank – ECB
  • The European Investment Bank – EIB
  • The European Investment Fund – EIF
  • The European Stability Mechanism – ESM

This implies a lot of new jobs for technocrats with economics backgrounds, but a whole lot less democracy in Europe. It is not even a little bit clear whether these folks gave any thought to democracy at all, except as an impediment. For instance, at one point they write:

“At the political level, the four policies of the Modest Proposal constitute a process of decentralised europeanisation, to be juxtaposed against an authoritarian federation that has not been put to European electorates, is unlikely to be endorsed by them, and, critically, offers them no assurance of higher levels of employment and welfare.”

This misses the point that their own plan, no less than “authoritarian federation”, will never be put to the European electorate either. Pot meets Kettle.

Grexit … Stage Left?

However, if the SYRIZA plan is agreed to, there will still be little room for addressing the severe impact of five years of austerity. The plan will partially solve the immediate problem of the crushing debt, however SYRIZA will lock itself into a commitment to avoid running deficits. Much like Massachusetts or California, SYRIZA will be locked in a balanced budget regime where, during downturns, it must reduce spending.

This pro-cyclical fiscal policy will mean Greece cannot get out of a recession on its own through Keynesian stimulus, but will be utterly dependent on EU policy. The problem for Greece will be that there is no Washington to run trillion dollar deficits when a crisis erupts. Certainly Massachusetts balanced its budget in 2008, but Obama stepped in with billions in “infrastructure investment”. In every state all those signs suddenly blossomed by the side of the road proclaiming the Obama stimulus was funding road construction. There will be no road signs in Greece.

Thus, even with Merkel’s acquiescence, SYRIZA will still face the possibility of a Grexit. This is because, within the limits of strict assumptions of bourgeois political-economy, each new job created in the economy must now produce an average rate of profit. Jobs will not be created simply because the capitalists like bossing workers but because they believe they can accumulate still more capital.

The easiest way to create jobs rapidly in an advanced economy is still the tried and true Keynesian method of cutting wages through currency devaluation. Just off the top of my head — i.e., pure speculation — what is missing in the discussion of Greece debt and future plans for a eurozone-wide investment plan is the announcement of a temporary Greece exit from the euro to allow a sharp devaluation to occur. And, not surprising, this idea was already floated by Germany in 2012:

“It all comes down to the fact that Greece will need a third loan. Even if everyone denies it, we all know it’s unavoidable,” this official said. But because of rising political pressure in Germany and other core Eurozone countries, “this decision will be delayed as much as possible.”

He added that, “the hawkish team of the German finance ministry believes that since Greece will need more money, it would be better given as a bridge loan to facilitate a temporary exit.”

The official noted: “It would be better received politically within Germany, the Netherlands, Finland and other countries like Slovakia and Estonia if the new loan were sold as the final one and tied to a Greek exit from the Eurozone, which would be regarded as punishment.”

So, KKE and the rest of the dumb Marxists may get their fascist fantasy of a return to the drachma, but the result will be nothing like what they imagine. If SYRIZA is allowed to leave the euro, even temporarily, wages in Greece will be crushed on a scale not even seen in the depression so far.