Mar 23 2012

Are the European banks saving Greece or saving themselves?

The financial institutions overseeing the bailouts are ignoring the domestic impacts of austerity measures

Who is rescued by the bailouts of the European debt crisis? The question won’t go away. Last week, Greece was granted a second bailout in order to avoid a catastrophic disorderly default. Few observers believe it will be enough to avoid the need for a third bailout, at least in the medium term. This week, the story of the euro crisis has shifted to Portugal as expectations rise on the financial markets that she too will need a second bailout. It wasn’t supposed to be like this: Greece’s first bailout almost two years ago was to be a one-off; more recently, EU leaders have repeatedly insisted that there would be no repeat of its second package. Once again, they appear King Canute-like: whatever their claims, they cannot turn back the waves of scepticism from the markets.

The Greek banks – vital to the provision of new investment in an economy facing a sixth year of continuous recession – have certainly not been “rescued”. The haircuts on the Greek debt of 53%, imposed in the name of PSI (private sector involvement), have severely damaged them, but this is compounded by their losses of about a further 20% on the new bonds they were forced to accept. The banks now face large-scale nationalisation. So, a sector that has only in the last two decades been freed to operate as private institutions and has shown a vibrancy for growth and foreign takeovers unmatched in other parts of the Greek economy, is now to be returned to the hands of a political class lambasted for its lack of economic discipline. How this might be a stimulus to a more competitive economy is decidedly unclear.

There are starker social costs, of course. In an economy without a welfare regime to speak of, the impact of five consecutive years of recession has taken its toll. Charitable foundations that used to fund educational programmes have taken a big hit themselves in their bank deposits and have now shifted to paying for soup kitchens on the streets of Athens. Neighbourhoods are marked by buildings that owners are desperate to sell or rent and a major increase in the homeless sleeping rough. Almost half of Greece’s young people are unemployed, as are one in five of their older peers. Despondency is everywhere, despite the “rescue”. If future Greek governments keep to the terms of the bailout, by 2020 public debt will be back to what is was when the crisis erupted in 2009.

The problem is in how Greece is being rescued. The bailouts have increasingly shifted to the imposition of severe cuts across the board. In the past two years, Greece has implemented a reduction of its budget deficit unprecedented not only in the EU, but in the entire OECD area. But the new terms insist on the sacking of 15,000 public servants each year for the next 10 years. The number has been arrived at purely from the budget constraint.

I know from my own involvement with Greek policymaking in the area of research policy that the bailout constraint is being imposed as a series of short-term fixes, eschewing efforts at long-term planning.

Crucially, there is no steer or stimulus here as to how the Greek system should be remodelled in order to shift to a better path of development. The obsession is with the budget balance, not with selectivity or design. The political effect at home is to create a simplistic divide between those for or against austerity, rather than leading a substantive debate on real structural reforms.

With such a charge, the EU and IMF representatives – composing the troika overseeing the Greek bailout – march into ministerial offices on a weekly basis to check that the targets are being met. These second- or third-level officials bask in their unprecedented authority. Stories abound of them walking into meetings with senior ministers, discarding the niceties of a polite greeting, and shouting straightaway, “So, what have you achieved, then?” Young bureaucrats from Brussels lead meetings with ministers ostentatiously giving scant attention to the oral reports offered to them, as they turn sideways and play with their BlackBerrys. In the name of “Europe”, a neocolonial arrogance underscores the fixation with the budget accounts.

A real rescue requires a serious engagement with remodelling Greece. And this must recognise that a culture changes gradually, needing long-term support. But the “rescue” of the Greek economy is taking place with little regard to its domestic impacts: it could hardly be more ham-fisted. This inevitably begs a question not only of European capability, but also of will. Has the intention shifted: not to rescue Greece, but to rescue Europe from it? Athenians might well turn the aphorism around and warn their partners in Lisbon: “Beware of Europeans bearing gifts.”

This piece first appeared in The Guardian ‘Comment is free’ column (22 March 2012).
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This entry was posted in Kevin Featherstone, The Greek Debt Crisis, The Greek Economy. Bookmark the permalink.

2 Responses to Are the European banks saving Greece or saving themselves?

  1. PJM says:

    Here is a set of steps that constitute a solution to the present problems for every one of the PIIGS, as well as all the other members of the European Union:
    1. Understand that the most important aspect of a nation’s sovereignty is having its own currency, issued debt-free and interest-free exclusively by the nation’s state-owned central bank, and that as soon as a nation enters into a common currency agreement it is no longer a sovereign nation. Indeed, as soon as a nation allows commercial banks to issue digital currency as interest-bearing debt by making loans and creating digital currency out of nothing while so doing, it is effectively no longer a sovereign nation.
    2. Withdraw from the EUROZONE.
    3. Repudiate the debt owed to the ECB and commercial banks, for it was all created out of nothing in the first place.
    4. If the nation’s central bank is not already owned by the government, nationalise it without compensation.
    5. Re-introduce the nation’s national currency.
    6. Ensure that ALL new money — coins, notes and digital money (the kind in bank accounts) — is created exclusively by the state-owned central bank, under the instructions of an absolutely independent monetary policy committee, at a rate to just match the rate of inflation, to ensure that the long-term average of the rate of inflation is zero. This would ensure that commercial banks no longer create new digital money out of nothing every time they make a loan, and ensure the corollary that when the principal is paid back, it no longer disappears into the nothing from whence it came. Commercial banks would then have to act as financial intermediaries, which is what most people believe is ALL they do now. No bank would be too big to fail, and banks that got into trouble would be simply allowed to fail, just like any other business.
    7. Legislate to achieve Step 6 above by enacting legislation adapted from the proposed Creation of Currency Bill on the websites of Positive Money UK ( and Positive Money NZ (

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