Ecuador, Iceland, and Argentina have a message for Greece and the EU
By Daniel Ozarow
In the midst of Friday’s Bundestag vote to approve a third $94 billion bailout deal for Greece, its humiliating and impossible Versailles-style debt repayment terms are igniting increasingly vociferous opposition from several quarters. This peculiar alliance of bedfellows, including the International Monetary Fund, the White House, the European Central Bank as well as taxpayers and campaign groups across Europe, warn that the latest austerity plan will categorically fail without substantial debt relief. Yet German Chancellor Angela Merkel and several Eurozone governments stubbornly refuse to entertain such a possibility.
Ironically, it seems to be Thursday’s renewed call from Germany’s Finance Minister Wolfgang Schäuble for Greece’s “temporary” exit from the Eurozone that is rapidly gaining traction as the only compromise solution that can break the impasse by reconciling the disparate interests of all parties. Indeed, advocates argue that the return of the notion of this so-called “velvet Grexit” (first mooted in 2012) to the negotiating table has changed everything by offering the shattered Greek people a way out of their despair and a chance to regain competitiveness at a stroke, while also clearing the way for meaningful debt relief.
I suggest that Europe look to Ecuador, Iceland, and Argentina for counsel (see below).
Yet as one of the key architects of five years of failed austerity and contraction that has reaped misery on the Greek people, shouldn’t Schäuble’s apparent act of benevolence be greeted with more than a mild dose of cynicism?
Indeed some analysts allege that the 72-year old’s proposal of a Greek “time-out” from the Eurozone is a veiled attempt to push it out of the 19-member currency union for good, by couching it in temporary terms to make it sound both less onerous and more compliant with the legal complexities that a Grexit would entail.
However, in reality, the Minister’s proposition represents a far more sinister attempt at a slow-burn state coup against the Greek people.
Should such an offer be formally put to them, Alexis Tsipras and the Syriza-led government must be in no doubt that the plan is in fact concocted straight from the shock doctrine recipe book as decoded by Naomi Klein. If enacted, the true four-fold motivations of this plan will reveal themselves about a year from now, when a temporary Grexit would offset a chain of events that will spell catastrophe for Greek society.
These objectives are; first, (and contrary to the proposals’ declared aims), the rapid re-integration of Greece into the Euro in order to save the single currency’s ailing legitimacy; secondly, the silencing of international condemnation of Greece’s treatment by the troika and the German government overseas; thirdly, to urgently extinguish the “threat of a good example” that Syriza presents in term of its potential to proliferate a broad, anti-austerity project in Europe which could spread to Spain and Ireland (where there are elections in 2016) and then beyond; fourth, the further deepening of austerity measures in Greece as part of the neoliberal project.
If you think the prospect of the above sounds both frightening and alarmist, it is actually based on real events in the global economy from the last ten years.
Here is why.
An iron fist in a velvet glove
Although the global economy is once again teetering on the brink of a major debt crisis, recent history is littered with examples of countries that suffer dramatic economic collapse, but soon bounce back to experience unprecedented growth and prosperity.
The policy formula always combines the following; unilateral declaration of debt default, negotiating significant “haircuts” of remaining debt and the implementation of Keynesian or even socialist economic programs and wealth redistribution in order to both stimulate domestic demand and protect the vulnerable. Crucial to this is also either withdrawal from hard-currency pegs or massive devaluation of their national currencies so as to induce an export and investment-led recovery that stimulates foreign revenues to once again flow into state coffers. Increased export tariffs and corporate tax avoidance clampdowns also feature to aid the creation of twin trade and fiscal surpluses which then fuels rapid economic expansion.
For instance, Argentina defaulted on $93 billion of debt in 2002 and devalued its currency by 70 percent after removing the peso from the US-dollar peg. It also negotiated the write down of two thirds of its public debt and became the fastest-growing economy in the western hemisphere in 2003-2007 under the stewardship of the avowedly anti-neoliberal Nestor Kirchner government.
Meanwhile in Ecuador, in 2008 President Correa declared 70 percent of its debt to be “illegitimate”, part-defaulting on it then buying back bonds at a third of their value which wiped billions of dollars off its liabilities. In pursuing the socialist reconstruction of society, Ecuador has since achieved a spectacular “economic miracle” which has ridden the waves of the global crisis.
Closer to home in Europe, in 2009, faced with one of the worst financial crises in history, Iceland’s government overcame its banking collapse by devaluing the Krona by 50 percent, refusing to implement austerity measures and instead letting the banks fail. It also paid off consumer loans and permitted forgiveness on all household debts exceeding 110 percent of home values. The economy is booming once again and unemployment is just 4 percent.
Sounds great right? But here is the thing.
In all three cases these miraculous economic success stories came at a high immediate price; an incredibly painful initial post-default year for their citizens. In each scenario, as the currency value fell through the floor, inflation rose, industry ground to a halt due to the imported capital goods needed to produce becoming prohibitively expensive for businesses and unemployment went into ascent. Many imported necessities such as medicines were also priced out of the financial reach of the average consumer. For instance in Argentina in twelve months following default and exit from the US-dollar peg, capital controls remained in place, growth slumped by a fifth and millions were plunged into poverty, which rose to 54 percent.
Imagine if this scenario were repeated in Greece.
Yet all of the key factors that permitted Argentina, Ecuador and Iceland to experience socio-economic renaissance are already in place. The potential for the country to benefit from a permanent Grexit in the same way are enormous, were it to return to a weak currency like the Drachma. This would allow its small but potentially lucrative infant industries (cheese, cotton, fish) to thrive, whilst presenting windfalls for their predominant tourism, petrol-based product and shipping sectors. China and Russia stand ready to invest billions to help expand their productive capacity and given that these two economic powerhouses currently only account for 3 percent of all Greek exports, the potential for demand to receive an enormous boost is unimaginable. Further, Greece benefits from the fact that in Syriza, they also have a government that (as in our three case studies), will manage the economic recovery in a way that prioritizes the needs of its population over the interests of capital.
However, a velvet Grexit (as opposed to a permanent one alongside declaring unilateral default which would emancipate the country from its debt burden while restoring economic sovereignty), would be the worst of all possible worlds for Greece, precisely because after this agonizing first year, the Greek people would be on their collective knees, begging to return to the Euro at any price. Lacking that one essential ingredient –allowing time for the economic recovery to play out in 2017– the Greeks, soaked by the proverbial storm, would understandably rush for shelter rather than hold out to enjoy witnessing the rainbow that follows.
Cue the troika offering them an early-entry back into the single currency in mid-2016 as “salvation,” in exchange for an austerity program “on acid”.
The Greek government of the day will have no choice but to cede to the popular will, even though the offer to return to the Eurozone will likely lead to a scenario that makes Greece’s humanitarian crisis of the last five years look like a walk in the Pedion Areos Park.
Nevertheless, in doing so, the outcome will be that the detractors of the Troika will have been silenced, and most importantly any hope of an alternative anti-austerity model being articulated in the heart of Europe will have been decisively crushed.
A shock doctrine for Greece
In The Shock Doctrine: The Rise of Disaster Capitalism, Naomi Klein argues that libertarian free market policies have risen to prominence in some developed countries because of a deliberate strategy in which political and corporate leaders exploit crises to execute controversial exploitative neoliberal policies while citizens are too emotionally and physically distracted by disasters or upheavals to mount an effective resistance. Could it be that Schäuble’s tantalizing offer of a temporary Eurozone exit is in fact a ruse for the extension of this master plan?
Compelling evidence suggests that Greece’s shock doctrine strategy is occurring in three stages and which involve the country being dishonestly maintained in a permanent state of crisis.
In the first stage (2010-2015) it is important to recognize that Greece’s economy did not fail on its own. It was made to fail. In summary, the financial institutions sabotaged the Greek government and deliberately pushed it into unsustainable debt so that oligarchs and global corporations could profit from the ensuing chaos and misery. For instance now well-cited analysis from British NGO, Jubilee Debt Campaign revealed that at least 90 percent of the Greek bailout has paid off reckless lenders, with only a fraction actually reaching the Greek people. The European Central Bank alone stands to make between €10 and €22 billion profit out of loans to Greece and has acted exactly like a vulture fund, buying up debts cheaply during the crisis, refusing to take part in a necessary restructuring of the debt, and demanding to be repaid at exorbitant profit. More obvious an example of racketeering only exists on the set of The Godfather.
Greece’s shock doctrine’s second stage occurred only last week. When Merkel appeared to be incensed by her Finance Minister’s temporary Grexit proposal, the fact that she latched on to it rather quickly as a useful negotiating ploy seems all too convenient. In the reigning confusion and amid media scaremongering of financial armageddon if Greece were to refuse to agree to the memorandum, the trick worked. The prospect of a permanent ejection from the Eurozone terrified Mr Tsipras into submission and to signing the deal for more austerity.
The third and final stage would be the proposed “time-out” from the Eurozone that may still await in coming months. A dazed and despairing Greek population would soon dispose itself to any austerity measures demanded of them as Klein’s prophecy becomes a reality once again. The prospect of a “velvet Grexit” which has been rekindled this week as a means to bring a fairer and more agreeable ending to this Greek tragedy is a Trojan horse. We must have the courage to tell the Greek people that. But we must go further still and insist, until they believe it, that if the bailout plan to keep them in the monetary union represents what Greece’s ex-Finance Minister Yanis Varoufakis describes as “the greatest disaster of macroeconomic management ever”, a Euro time-out will be even worse. Only default, together with repudiation of what is an illegitimate, illegal and odious debt by the Greek government and permanent Grexit with the restoration of the Drachma will provide Greece a lifeline to resurrection. A “velvet Grexit” may be a trick.
Argentina, Ecuador and Iceland proves default can work.
Credit: Open Democracy, www.opendemocracy.net