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Banks in Greece shut down as European Central Bank stops lending

Commentary by Masao Suzuki |
June 30, 2015
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San José, CA - On June 28, the European Central Bank (ECB) stopped emergency lending to Greek banks. With depositors trying to withdraw money and banks without access to cash, the Greek government called for a six-day bank shutdown from June 29 to July 6. ATM withdrawals were limited to 60 euros (about $66) a day per account holder. In addition, capital controls mean that money cannot flow out of Greece unless permitted by the government.

Because banks loan out most of their deposit money, a wave of withdrawals can leave banks short of cash. Here in the U.S. (or any country with its own currency) a wave of bank withdrawals could be met by our central bank, the Federal Reserve, simply printing more money to lend to the banks to tide them over. But in Greece, only the ECB can print euros, their refusal to lend more cash to Greek banks forced the banks to limit withdrawals.

The Great Recession/Lesser Depression that swept the world in 2008 in the wake of the U.S. financial crisis also exposed more problems with the euro. Here in the U.S., the almost zero interest rates, coupled with the largest federal budget deficits since World War II, helped restore economic growth. These so-called ‘Keynesian’ policies (named after British economist John Maynard Keynes), are meant to prevent the cyclical crisis of overproduction, which are a feature of capitalism, from turning into depressions. However, they have not restored economic health, as the expansion has been one of the weakest ever, with chronic high unemployment and slow growth. But in Greece, where the ECB sets interest rates and government spending has been cut while taxes raised at the behest of the IMF and the European Union, there is an ongoing depression with unemployment above 20% and GDP down 20% as compared to 2008.

The left-of-center Syriza government of Greece won the election on a platform of staying in the Euro and ending austerity. But as these two goals are incompatible, and the Greek government has offered to accept more and more of the austerity called for by the European Union (EU), the International Monetary Fund (IMF) and ECB. Syriza Prime Minister Tsipras made his last offer on June 22, which called for the primary budget surplus (which doesn’t include interest payments) to rise to 3.5%, less than, but not far from the EU/IMF/ECB goal of 4.5%. If the U.S. federal government were to run the same level of surplus offered by Tsipras, we would have to cut spending and/or increase taxes by about $900 billion, which would throw the economy back into a recession and maybe into a depression.

The biggest source of taxes would be increased contributions to pensions, followed by increases in the Value Added Tax (VAT) which is like a sales taxes, and then higher corporate income taxes. Despite Greece having the highest military spending (as a percent of GDP) of any country in Europe, there is only a small proposed cut to military spending, coming to only 2.5% of total proposed tax increases and spending cuts.

The Syriza government has called for a referendum on July 5 on the latest EU/IMF/ECB proposal. They are calling for a no vote, and saying that this means support for their slightly milder austerity proposal. But while only the pro-business parties are campaigning for a yes vote, simply voting no and supporting milder austerity is not a good solution for the Greek people.