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Commentary on the European financial crisis

No way out for Greece inside the euro zone

Commentary by Masao Suzuki |
October 5, 2011
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On Sunday, Oct. 3, the Greek Cabinet voted on a new budget proposal for 2012 that includes 6.5 billion euros ($8.5 billion) in spending cuts and tax hikes, including cutting 30,000 government jobs. This budget will go to the Greek Parliament on Monday, Oct. 4, in hopes of getting another 8 billion euros ($10.5 billion) from the European Financial Stability Facility (EFSF) in order to pay back German, French and other European banks that own large amounts of Greek bonds.

This austerity has cost the working people of Greece. This year the Greek economy is expected to shrink by 5.5%, as more and more businesses are failing. With the unemployment rate at 16% and rising, Greek workers and their supporters have been organizing huge street protests and strikes to protest the austerity plans of the social democratic (socialist in words, pro-business in deeds) PASOK government.

As the Greek government spending cuts and tax increases deepen their recession, tax revenues fall, making the government budget deficit even bigger and leading to calls for even more cuts and tax increases, which increase unemployment and poverty even more. This vicious cycle has gotten to the point where hospitals are running out of medicines and suicides are way up.

Greece is not alone. Over the last year, more and more European governments have had problems selling their bonds to borrow money. The crisis began in Greece, but has since spread to Portugal, Ireland, Spain, and now Italy. With big German and French banks set to lose billions, and perhaps even fail if Greece or another euro zone country defaults on the its government bonds, the other governments in the euro zone (the 17 countries that share a common currency, the euro) have arranged a bailout fund, the EFSF, and are demanding austerity from Greece and other countries..

The mainstream media and politicians try to blame Greece for the crisis by saying that Greece borrowed and spent too much. Politicians in the United States (and other countries) are using the example of Greece to try to get the United States to cut spending and reduce our budget deficit. If done here, this would have the impact of pushing the United States back into a recession, causing the unemployment rate to go up, and the amount of tax revenues to go down, which would tend to increase the budget deficit.

But the European financial crisis is not fundamentally a problem of too much government debt. While the Greek, Portuguese and Italian governments have been running sizable budget deficits for years, Spain and Ireland both had budget surpluses in the years before the 2008 financial crisis. Japan has been running large government budget deficits for 20 years and has a total government debt (compared to the size of the economy) much larger than Greece, but has no debt crisis. Indeed, while interest rates on some Greek government debt has risen to 85% (showing that bond buyers think that Greece will default), Japanese government bonds have interest rates of less than 2%!

What Greece, Portugal, Ireland, Spain and Italy all had in common was that they all depended on large flows of foreign capital to pay for their trade deficits as they imported more than they exported. This is why Japan is not facing a financial crisis like Europe, because Japan has a large trade surplus, as it exports more than it imports. Japan, despite its huge government debt, does not rely on inflows of foreign capital; instead Japan is exporting capital to other countries, such as the United States.

The euro zone crisis is similar to the 1997 financial crisis that began in Thailand and spread to Indonesia, Malaysia, South Korea and other Asian economies. Then, as now, big inflows of foreign capital turned to outflows, causing financial crisis and a deep recession. What happened in Asia was that the value of Asian moneys plunged. This led to higher inflation that cut the purchasing power of working people, but it also making their goods cheaper on world markets, so that these countries were able to export more.

This is what Greece, Portugal, Ireland, Spain and Italy cannot do, because they are a part of the euro zone. So instead, what is being done is to try to lower the wages of working people in those countries, through high unemployment and cuts in government services, in order to make their economies even more attractive to businesses searching for the lowest possible wage.

Argentina also tried to do this following the economic crisis in Latin America in 1998. For many years, Argentina set the value of its money, the peso, as equal to the U.S. dollar. The government of Argentina, like the governments of Greece and other euro zone countries, tried to maintain the value of its currency on par with the U.S. dollar and Argentina’s economy fell deeper and deeper into a depression. But then in 2001, Argentina defaulted (stopped paying back) its government debt, and allowed the peso to fall dramatically in value, allowing Argentina’s economy to export more and grow again.

More and more austerity will just further impoverish the working people of Greece and won’t solve the Greek debt problem. Greece needs to follow the example of Argentina, default on their government debt and go back to their own currency, the drachma. This is not a cure-all for the people of Greece who will have to cope with higher prices, but it will free the economy from the euro-chains that are helping to destroy their economy right now.

Working people here in the United States should support the working people of Greece, who have organized massive street protests and strikes to oppose the austerity plans of their government. We also need to understand that whether it is common currency such as the euro, or free-trade agreements promoted by the United States, that these international agreements are all about boosting profits by allow capital to move to wherever it can find the cheapest labor. In the end, it is the workers who pay.

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