Greece and Germany are playing a dangerous game of chicken: this cannot last
Burning buildings, teenagers throwing stones, armoured police, in gas masks, standing on graffiti-covered steps; the scenes from Greece on our TV screens this morning look more suited to Jerusalem or Beirut than to a modern, European capital. The country is in meltdown, or so it appears. And meanwhile, the austerity which is crushing the life out of the country goes on: last night, the Greek parliament passed measures designed to cut another £3.3 billion of spending. As Ambrose Evans-Pritchard noted last week, this is what a death spiral looks like:
Greece’s manufacturing output contracted by 15.5pc in December from a year earlier.
Industrial output fell 11.3pc, compared to minus 7.8pc in November.
Unemployment jumped to 20.9pc in November, up from 18.2pc a month earlier.
This can’t last. The crisis is literally killing people: the suicide rate in Greece has doubled since the start of the crisis. Youth unemployment is close to 50 per cent. People, as well as money, are emigrating in large numbers. Schools have no paper, hospitals are running low on medicine and homelessness – once unseen on the streets of Athens – is now apparently rife.
So why on earth have the Greeks opted for another €3.3 billion of cuts? Well, frankly, they have little choice. Despite over a year of austerity, Greece probably still runs a primary deficit (the government spends more than it collects in taxes, even if you exclude debt interest). That means that if the country were to default on all its debt, it would still emerge with a large deficit to fund, and so it would have to impose more austerity. This wouldn’t be a choice: Greece doesn’t have its own central bank, so it couldn’t print the money to fill the gap. The only non-austerity option would be the forcible confiscation of wealth.
So despite what Eurosceptics and Leftists alike are saying, default is simply not an option. This is not a subversion of democracy: the Germans are handing over the money, and the Greeks’ democratic government is choosing to take it. The only sovereign power the Greeks lack is the one to print and inflate their way out of this crisis, and they surrendered that a decade ago. That’s not to forgive the Germans, who designed this disastrous currency, and who continue to make things worse. But the Greeks got into this themselves.
However, Greece’s powerlessness might not last. As the graph below shows, Greece’s primary deficit has actually improved sharply. Indeed, Stephanie Flanders reports the country already has a primary surplus. Surprise surprise, cutting spending does actually work in a small economy like Greece’s.
(Greece’s primary deficit, millions of euros. Source: European Central Bank)
The problem for Greece is that the whole of Europe is now entering an austerity-induced depression, which might undo all of last year’s good work. However, if we assume that Greece will achieve a sustainable primary surplus this year, as Italy has, then suddenly everything changes.
With a primary surplus, Greece would be able to default on all of its debts relatively safely (staying inside the euro), leaving Germany and France to mop up the utter devastation it would cause in Europe’s banking sector. With a surplus, Greece would become the powerful one in any negotiations, and the Troika could go hang. John Maynard Keynes’s famous dictum, “If I owe you a pound, I have a problem; but if I owe you a million, the problem is yours”, would apply as never before.
Greece is being forced to take its unpleasant medicine today precisely because tomorrow, it may not be possible to force it to. We are entering a dangerous game of chicken between creditor and debtor – one that could start a total collapse of the European banking system if it goes wrong. And if that happens, the shocking photos will start coming from countries other than Greece.