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TRNN Replay – Gerard Dumenil: Cutting wages and social spending will make the crisis worse

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. On Tuesday, the European Union’s top economic official told Greece it had a matter of a few days to explain how they used Goldman Sachs to cover up the true size of the Greek debt, which to my mind’s a bit rich given how many European banks invested in precisely these kinds of derivatives swaps and things that Goldman Sachs was providing for Greece. But, at any rate�and European Union has also given Greece till March 16 to show that it can make massive budget cuts, particularly an increase in the goods and services tax, which is the kind of sales tax people pay at the point of purchase, cuts to pensions, and other things that will come directly out of the pockets of ordinary Greeks. Now joining us from Amherst, Massachusetts, from the PERI institute, is G�rard Dum�nil. He’s an economist at the University of Paris. He’s the author of an upcoming book, The Crisis of Neoliberalism, from Subprime Crash to the Great Contraction. Thanks for joining us, G�rard. Talk a bit about what’s going on in Greece and why it matters to ordinary people everywhere.

G�RARD DUM�NIL: We have a country which has a very large deficit of its budget, and this deficit had been hidden, you know, to some extent, because they were cheating on the accounts in many respects. But now they discover that this deficit is big. You know, it’s 12 percent of the total production of the country, which means that it’s as big as the deficit of the US economy. Okay? Not in total size, you know, but in comparison to the country. But Greece is a small country, so people, they believe that this is threatening, you know, the world economy and the European economy, while they are not too concerned, apparently, by the size of the US deficit.

JAY: Well, I guess it’s a completely different story when you happen to be the country that prints the world’s reserve currency, and Greece doesn’t have that privilege.

DUM�NIL: We are in a situation, you know, where deficits of the government are extremely important to maintain output, you know, in various countries, and in particular to maintain the level of employment. Okay? So the idea of cutting deficits, you know, in a country�in the US, in France, in Greece, or any country�in a situation of the contraction of output, in the situation of growing unemployment, is something very dangerous. Okay? It seems that we are back to the 1930s, to after 1929, you know, where reactionary government were not really willing to let the deficit of the government grow. Okay? So now we have an example here, because Greek is a small country, maybe it’s a weak country, despite the fact that they belong to the European Union and the euro. So what are they doing? They are asking, you know, cuts, cuts of expenses, cuts in wages. You know. And so this is typical, you know, rightist policy. These guys, I mean, financial interests and the capitalist classes, they created the present crisis. But in order to respond to the present crisis and as a consequence of the present crisis, we have growing deficits of government.

JAY: Now, the critique of the debt of Greece�first of all, at some point there was talk about whether they would actually default ’cause they wouldn’t be able to make debt payments. So that’s one of the issues that’s raised. And then the other is you can’t just�according to these school of economists, at any rate, you can’t just keep growing the deficits without any end in sight�it at some point leads to inflation. So are these not legitimate issues?

DUM�NIL: No. You see, the idea that the growing debt would lead to inflation under present circumstances is completely ridiculous, because the risk now is deflation. We are in a situation where output and employment are contracting, so in no way, you know, this could create inflation. This is completely ridiculous, okay? They are concerned about inflation. Why? Because maybe after the crisis�if there is an after-the-crisis�you know, then�.

JAY: Which is still the big question.

DUM�NIL: Yeah. The government might want to let inflation develop in order to pay for the debt. Okay? But this is a different story. This is a story for the future. But, of course, you know, rich people are always concerned that in the future the government might need to tolerate some inflation in order to diminish the debt of the government.

JAY: Part of the issue here is that they’re claiming that Greece hid how much debt they had�from the European Union chief economist, I suppose�through these derivatives swaps with Goldman Sachs. I mean, somewhat it’s the very same problem that happened with the American banks: the big banks didn’t trust each other’s books. But there they had the American government to come in and throw trillions of dollars to try to solve it. But is there not some legitimate concern they don’t know what to believe about Greece’s finance?

DUM�NIL: [inaudible] Europe we have rules. Okay? Government are not supposed to have a deficit of the budget larger than 3 percent of their ledgers and 3 percent of the budget. They are not supposed to have a total debt larger than 60 percent of the total output, the total production of the country. So Greece tried to cheat. Everybody in Europe now is above the limit. You know. For example, in France, we are at 80 percent. Greece is at 100 percent. The US economy is at 80 percent. Like Greece, okay? How did they cheat? They asked the best cheater in the world, who are big banks. Big banks. And big banks told them, don’t worry, we exactly know how to cheat, because we do it constantly; so we’re going to tell you, but it’s going to be very expensive. And so, of course, they had to pay a lot of fees, a lot of money, to know exactly how to cheat. And so they cheated. And, of course, when the European, you know, authority discovered that Greece was cheating on its debt, they were not too pleased, you know, of course, because they define rules, and now one country is cheating. So now they corrected that and they understood that the deficit of the budget in Greece is actually 12 percent, as we said before. How did they do that? Through derivative market. And this would be very technical to explain, but this is a type of mechanism that the private sector is constantly using.

JAY: Now the question is who’s going to pay, and it’s pretty obvious the European Union wants the Greek people to pay, but the Greek people don’t seem to be cooperating. What’s happening now?

DUM�NIL: If you are spending more [than] you are making, you know, through your revenue, it means that you have to go into debt. So the problem now is who is willing to lend money to Greece. Okay? So the IMF, you know, stepped in and said�the [managing director] Strauss-Kahn, you know, said, we might lend some money to Greece, to the Greek government. But the European Union, you know, is not so pleased with that, so the government of the main country in Europe decided that they are going�in particular Germany, you know, but also other government�we are going to lend money to Greece, but under certain condition, and the condition are: you have to diminish your deficit; you have to correct for the deficit to be able to pay your debt. If you want to correct for your deficit, it mean you have to cut expenses. Cut expenses means freezing all wages of civil servants, diminishing pension [inaudible] which are very well known now. So, of course, the burden of that will be on the people.

JAY: So if one believes�which I think most serious economists believe�that at least one of the fundamental reasons for the current crisis is lack of real purchasing power, then to decrease people’s purchasing power even further is not going to end this crisis. But that seems to be the solution being proposed in most countries right now.

DUM�NIL: Yeah, I don’t believe personally that the cause of the present crisis was, you know, the lack of purchasing power from the people at all. But, you know, if in present situation, which is a situation of big recession, if you want�the economy is plunging, you know, and unemployment is growing. Now, in a situation like this, if you cut expenses, you know, if you cut wages, obviously this will increase the crisis, this will deteriorate the situation even more. So this is what I tried to say at the beginning. This is actually the wrong policy now. It’s very, very dangerous. But above all, you know, you have to understand that we are in a crisis which was caused by the madness of neoliberalism, the present state of the world economy, and the problem is it was caused by big capitalist family, it was caused by large enterprises, was caused by large banks. And now what do they want to do? They want to increase the rules, you know, of neoliberalism, they want to deteriorate even more the situation of popular classes.

JAY: Thanks for joining us, Gerard.

DUM�NIL: Thank you.

JAY: And thank you for joining us on The Real News Network.

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Gerard Dumenil is an economist and Former Research Director in the French National Center for Scientific Research. He is the co-author of The Crisis of Neoliberalism and presently working on a new book, entitled The Stability Frontier.

Thank you for joining us.