Europe On the Brink

by James Galbraith

Athens this October was a city on the edge, and not just because of the protests. Rather it was the empty storefronts, the addicts sprawled on the sidewalks, the beggars and the squeegee men that caught my eye. And there was the polite conversation with working professionals about their 40% pay cuts, their escalating taxes, and moving their money out of the country while they can. The data show total output falling at a 5% annual rate but specialists are sure the final figures will be worse. The business leaders I spoke with all said there is no hope at all.

Greece is a country with weak public institutions and they are being destroyed. It is a country with fairly low wages and they are being driven down. The government has accepted the terms imposed upon it, but the cuts and tax increases are never enough, and the “troika” comes back time and again for new measures, such as breaking the national wage bargain or (as I heard) using up funds held in reserve to protect the banks. Looming in the background is a plan to place all of Greece’s public assets under private management from abroad. Though floated by a consultant, this was described to me, by a high European official, as the “secret German plan.”

It is obvious that nothing happening today in Greece will produce economic recovery or forestall default. On the contrary, even though the Greek government refuses to take the step of defaulting, it will be forced into that position when- ever the Germans and French pull the plug on new loans. This they are plainly preparing to do. Meanwhile, they are punishing Greece and the Greeks — not for any specific crimes, but in order to make sure that when Greece is permitted to default and restructure, the other peripheral countries and especially Italy will not be tempted down the same path. This is called “ring-fencing.” It is also called the principle of collective guilt, destroying the livelihoods of 13 million people for political reasons.

This is economic policy as moral abomination. It is not designed to succeed as economics. And it will also fail as object lesson. What it may achieve, is stringing out the destruction, as it proceeds eventually from Greece to Ireland and on to other countries, so that the effect of the popular rebellion now getting under way does not shake the foundations of the Eurozone. But then again, maybe it won’t even do that.

There are technical solutions; these were discussed and debated at a workshop at the LBJ School on November 3-4, sponsored by the European Center of Excellence, with participation from faculty in the Government Department. These proposals involve European bonds, bank recapitalization and an investment program. But the obstacles are political, insofar as important constituencies in Germany and France oppose them, and then financial, insofar as they would require recognition of losses to European banks that the banks would like to deny. The issue is therefore whether the political leadership in Berlin and Paris is interested in technical solutions. It may be that Europe’s leaders place their political survival in first place, the survival of the European project second, and the people of the periphery dead last.

That being so, it is only a matter of time before desperate populations erupt in revolt, forcing a change of course — or a crack-up.