A new deal has been agreed for Greece by the EU which will enable it to extend and defer payments on its accumulated debt for another 10 years and means that it will receive Euro 15 billion of new money. The Greek Finance Minister, Euclid Tsakalotos (an IDS alumni), has said that he is ‘happy with the deal’ and that Greece ‘has turned a page’, but what does the new deal mean in reality for Greece? And are the lessons from austerity measures implemented in both developing and developed countries being learnt and how might we do things differently in the future?
A new deal for Greece
Greece is a tragic and extreme case, but by no means unique example, of the consequences of current economic orthodoxy, the dominating power of international finance, weak global governance, at least in the West, and the costs of giving highest priority to reducing debt. In 2010, Greece was severely hit by the Eurozone debt crisis, which it also helped precipitate. Over the eight years since, one Brussels led-effort after another, with support from the International Monetary Fund (IMF), forced the country through one of the most severe and prolonged examples of austerity the world has seen, with major cutbacks and a very sharp decline in GDP. Real wages fell by 20 per cent, pensions and welfare were cut by 70 per cent and the public sector reduced in size by 26 per cent. Unemployment level have decreased somewhat but is still about 20 percent and youth unemployment 43 per cent, even after many young Greeks have left seeking work abroad.
Under these new arrangements, Greece will have to continue austerity and generate major budgetary surpluses for over 40 years, though now under direct Greek government control rather under terms enforced by Brussels. Indeed, the Greek primary budget surplus will have to stay at, or above, 3.5 per cent till 2022, and at or above 2.2 percent till 2060. Will this restore the country to growth, full employment, poverty reduction and social services for all? And is there an alternative route?
Responses to the Asian Financial Crisis 1998-2000
It is surprising that the lessons (there is ample literature – see for example, Cornia, Jolly and Stewart, 1988; Griffith-Jones and Rodriguez, 1992 and Harrigan, Mosley and Toye, 1995) about the severe costs of austerity of the type imposed in the 1980s and 1990s in developing and emerging economies, often in the framework of IMF and World Bank programmes, were not learnt by the international community, and by the IMF itself. Perhaps then the tragedy of austerity in Greece, and its human as well as economic cost could have been sharply reduced.
There are alternatives of the sort which began to be introduced for Asia after the Asian financial crisis of 1998-2000. Following the Asian financial crisis, many Asian countries were forced to adopt swingeing austerity measures by the IMF – after which the countries said never again. New regional measures were adopted, including setting up swap arrangements and the Chiang Mai Initiative, which provided a back-stop for growth and poverty reduction actions, directed by the governments themselves. Furthermore, Asian governments accumulated major foreign exchange reserves, so they could avoid another crisis, which would force them back to the IMF, and probably renewed austerity.
Austerity and the UK experience
After ten long years since the financial crisis of 2008, signs are afoot that austerity cutbacks are being somewhat eased and financial stimulus being used to expand GNP growth, raise incomes and revive the government sector.
Signs of austerity easing are also evident in the UK with the recent announcement of some increases in government salaries and that the National Health Service (NHS), in its 70th anniversary year, will receive an additional £20 billion, an increase of 3.4 per cent per year until 2022.
However, even this stimulus will leave many central and local government supported services severely strained – with implications for children in poverty, care for older people, bus and other transport services, especially in rural areas. It has been argued that easing the constraints on expenditure is dangerous and premature as long as government spending exceeds revenue from taxation. This ignores history. In1945, UK debt was four times as high as in 2010 in relation to GNP, but this did not hold back the government from establishing the NHS, pensions for all and other elements of the welfare state – pursuing Keynesian policies for full employment while reducing debt on a more gradual timetable. By 1970, UK debt was half its present level in relation to GNP.
Where next? A Keynesian approach
It is worth remembering the analysis and proposals of John Maynard Keynes when the IMF and World Bank were being set up. Keynes argued that imbalances in payments between countries were as much the fault of countries in surplus as of those in deficit. It required action, he explained, by both, even though countries in surplus have a sense of economic success and power and feel no need to do anything. In contrast, Keynes built into his proposal for an International Clearing Union – a sort of global Central Bank arrangement – that countries in surplus as well as countries in deficit would pay monthly the equivalent of an annual interest rate of 1-2 per cent on their surpluses or deficits, as a strong incentive to reduce these imbalances.
At a time when the global economic system is threatened by unilateral trade action, it is time to go back to these debates and proposals, at least to learn from them and update the lessons.
It is also important for the current account surplus countries, especially Germany but also Holland, to bolster their own economies, by expanding much needed public investment and wages; this would be a win-win, as it would favour their own economies and peoples, and also provide the aggregate demand that the rest of the Europe, and especially countries like Greece need to help achieve higher economic activity and higher employment levels. Higher aggregate demand in countries like Germany would also favour growth in the rest of the world, especially developing and emerging economies, whose exports would be boosted, facilitating higher growth and employment.
By Stephany Griffith-Jones and Richard Jolly