With Europe behind it, Greece is being pushed into further peril
Keynes never existed. The General Theory of Employment, Interest and Money was never written. Economic history ended on the day Franklin Roosevelt replaced Herbert Hoover as president of the United States.
That’s the gist of the deal that keeps in the euro, an agreement that will deepen the country’s recession, makes its debt position less sustainable and virtually guarantees that its problems come bubbling back to the surface before too long.
One line in the seven-page euro summit statement sums up the thinking behind this act of folly, the one that talks about “quasi-automatic spending cuts in case of deviations from ambitious primary surplus targets”.
Translated into everyday English, what this means is that leaving to one side the interest payments on its debt, Greece will have to raise more in revenues than the government spends each and every year. If the performance of the economy is not strong enough to meet these targets, the “quasi-automatic” spending cuts will kick in. If Greece is in a hole, the rest of the euro zone will hand it a spade and tell it to keep digging.
This approach to the public finances went out of fashion during the 1930s but is now back. Most modern governments operate what are known as “automatic stabilisers”, under which they run bigger deficits (or smaller surpluses) in bad times because it is accepted that raising taxes or cutting spending during a recession reduces demand and so makes the recession worse.
George Osborne has seen it as his job to repair the hole in Britain’s budget deficit caused by the recession of 2008-09, but allowed the automatic stabilisers to work when the economy was struggling in the last parliament. The chancellor’s new fiscal rules requiring the Treasury to run a budget surplus will be suspended if the economy’s annual growth rate dips below 1%.
At the insistence of Berlin, this sort of flexibility is not going to be open to Greece. Angela Merkel and Wolfgang Schäuble, her finance minister, have got everything they were seeking before Alexis Tsipras called the Greek referendum – and more.
Athens has been forced to accept the “streamlining” of its VAT system to raise more tax revenue. That means more goods and services included in the 23% main rate of VAT. It has also dropped its resistance to immediate changes to the pension system, which will mean higher health charges and an end to the solidarity supplement, a top-up payment to the poorest pensioners. The seemingly innocuous pledge to “reduce further the costs of the Greek administration” means sacking civil servants employed since Tsipras was elected in January.
The pre-referendum terms have been made tougher, both through the “quasi-automatic” spending cuts and through the enforced sell-off of Greece’s assets. Over the next three years, the expectation is that Greece will raise €50bn (£35bn) through privatisations, of which €25bn will be used for the recapitalisation of its banks. The other €25bn will be split evenly between repaying debt and for investment in the Greek economy.
Greece, to borrow Harold Macmillan’s phrase, will be forced to sell off the family silver (along with the airports, the ports and the banks) to pay for its bailout and to recapitalise its own banks. That’s the plan.
In truth, there is not the remotest prospect of Greece raising €50bn through privatisations in the next three years. The €50bn target was first announced back in 2011, since when the value of the Greek stock market has fallen by 40%, making its assets far less valuable. In the past four years, privatisation proceeds have raised just over €3bn.
For the moment, Greece remains in the euro but it should be obvious by now that there are only two ways of resolving the crisis. The first is to write off a large chunk of its debts. The other is to allow it to grow at a pace that allows it to service its debts. This deal offers neither. Its one minor concession is that there will be talks about giving Greece longer to pay its debts provided it takes steps that are certain to lengthen and deepen the recession. This is not a solution. It is a chink of light filtering through the bars of the debtors’ prison.