Mass hysteria in Greece: Compliments of the European Central Bank
At what point will SYRIZA tell the Eurogroup and ECB to go fuck themselves?
This was the thought that occurred to me after reading Yves Smith’s latest post, “Greece: Default or Grexit?. Smith explains there is an impasse between Greece and its creditors where the options facing SYRIZA are default or Grexit.
Impasse? What sort of impasse?
Everybody knows Greece is broke. Everybody knows Greece cannot squeeze more out of its population to pay the debt. If this were not true, SYRIZA would not be in power. The impasse on display is that Greece is broke and has already defaulted, but no one wants to admit to it. There is no real impasse here; only people who don’t want to recognize losses that are already on the books.
Smith argues, “the best of Greece’s bad options is a default while staying within the Eurozone”. She states this option depends on what the European Central Bank (ECB) decides to do; only, it turns out, the ECB can pretty much do whatever it wants. This is not unlike the case in Michigan, where Washington arbitrarily decided to bail out GM and let Detroit go bankrupt.
Her default scenario is interesting:
- Eventually Greece will get to the point it cannot pay debt service.
- The ECB will use this default as a pretext to withdraw support for Greece’s banks.
- Without liquidity, the banks will begin failing.
- With the banking system collapsing, the SYRIZA government would be forced to step in and add liquidity, eventually by issuing neo-drachmas.
- According to Smith, then, SYRIZA would essentially be forced to leave the euro common currency by the ECB.
To be clear: If Smith is correct, there are no rules or laws that state the ECB has to stop providing liquidity for Greece’s banks; it is an unregulated authority that can do whatever it wants in this situation. The ECB is basically playing the role of leg breaker for Greece’s creditors — threatening to break Greece’s banking system should it not pay up.
The question is whether the ECB has real power in this situation or only an apparent power? Is Greece’s banking system really that critical to Greece such that SYRIZA should be in fear of the power of the ECB? If the Greece state stiffed its creditors, would Greece businesses be unable to meet payrolls? Why should the state ability to pay its debts affect private capitalist firms, which employ almost 80 percent of the workforce? Basically, what the ECB is threatening — or is said to be threatening — is to crash the entire Greece economy to punish the Greece state.
The Grexit scenario, according to Smith, essentially relies on the mass psychology of fear, confusion and a manufactured collapse of confidence in the SYRIZA government:
- The prospect of a Grexit means an acceleration of the ongoing bank run.
- The imposition of capital controls would fray nerves domestically, given that polls show majority opposition to leaving the Eurozone.
- Ongoing cash hoarding plus uncertainty will further weaken the already very sick Greek economy.
- That will hit tax receipts.
- If Greece has to resort to issuing TANs or scrip to pay workers and pensioners, that will likely further damage confidence.
- Thus Greece will remain in the Troika’s sweatbox.
Mind you, nothing in this scenario is economics; it is all about a mass hysteria created by an oligarchy of finance capitalists. Against a backdrop of a generalized and ill-defined fear that SYRIZA intends to exit the euro, the ECB’s withdrawal of liquidity would force the government to impose capital controls., This imposition would lead to hoarding; which would constrict the supply of currency and lead to a decline in real output; which would, in turn, lead to a fall in tax revenues for the government; which, ultimately, leads to a parallel currency and even to the neo-drachma.
In other words, Smith argues that fear of Grexit in this highly charged situation, combined with ECB actions to deliberately crash the banking system, will result in the fear of Grexit becoming a self-fulfilling prediction.
The aggravating factor in all of this seems to be the state sector: “Syriza may be forced to [contemplate] a Grexit as it struggles to finance its budget after its primary surplus has vanished.” In other words, the argument has now gone full circle: Greece is bankrupt and cannot pay its debts and even after a default Greece will still be broke and unable to service deficit spending. The Smith article is only a weak attempt to prove default on past debts do not solve the problem that Greece is bankrupt.
But why would Greece need to borrow even after it has shed its current debt? According to Smith, Greece will remain dependent on bondholders, “to meet commitments that it has defined as red lines, such as paying pensions and spending on humanitarian relief.”
Smith assumes, in other words, that once Greece has shed its past debts through default, it will once again turn to the bond market to fund new deficit spending — this time to reverse five years of austerity. The entire scenario of a Greece exit from the euro rests on the assumption there is no way Greece can ever escape its unpayable debts because it cannot escape the need for more borrowing.
In fact, all Greece has to do is repudiate its present debt and reduce state spending so as to not incur future debt. Repudiating its present debt is a simple matter of a parliamentary act. Reducing state spending is a simple matter of cutting hours of labor in the state sector by at least forty percent.
There is no law that states the Greece state must operate on a five day work week schedule. It can reduce operations to three days, without reducing public employee wages. Reductions in expenditures would then be realized in non-wage spending — like military spending.
There is nothing the ECB can do about this if SYRIZA doesn’t try to use the banks to fund unsustainable deficit spending. And Greece would not have to do this, if it simply reduces its public sector non-wage expenditures across the board by forty percent (perhaps with certain critical functions excluded) as it reduce hours of labor.
Greece is in the position of being at the very bottom of European development, which paradoxically makes its problem very easy to solve. On the one hand, Greece works wage laborers longer than any other country; while, on the other hand, it suffers massive unemployment, i.e., a massive excess supply of workers. No amount of additional capital investment in Greece’s economy can fix the sheer excess supply of labor power in Greece.
And this imbalance requires no additional capital investment to fix. The problem in Greece is that it expends too much labor on production of commodities and this expenditure has to be reduced in a way that does not threaten the survival of the working class. Capital must absorb the cost and it has ample idle resources tied up in financial speculation to do this.
It is simply a matter of bringing Greece work week into line with the rest of Europe — a reform that requires reducing hours of labor by 30-40 percent, beginning, in first place, with the state sector.