The Modern History of the Greek Debt Crisis
John Weeks, the author of Economics of the 1%, explains the history behind the Greek debt burden
SHARMINI PERIES, EXEC. PRODUCER, TRNN: Welcome back to The Real News Network. I’m Sharmini Peries, coming to you from Baltimore.
I’m joined by John Weeks. He is a professor emeritus at the University of London and author of his new book The Economics of the 1%: How Mainstream Economics Serves the Rich, Obscures Reality and Distorts Policy.
Thank you so much for joining me again, John.
JOHN WEEKS, PROFESSOR EMERITUS, UNIV. OF LONDON: Thank you.
PERIES: John, so in the earlier segment, we were talking about how Greece got to where it is now–in great debt–and the new finance minister, Yanis Varoufakis, negotiating in Europe with European finance ministers and the troika on what can Greece do in order to make sure it doesn’t default, but at the same time meet its mandate and its commitment to its voters that just elected them into power.
But this segment is dedicated to how Greece got there. So, John, how did Greece get there?
WEEKS: Well, it’s a long story, which I’ll shorten with, you might say–which I’ll bullet-point.
But first let me say one thing everybody should get sorted out, that there’s brinkmanship being played in the European Union, but it’s not by Greece. The Greek government is accused of intemperate language and pushing things to the brink. The brinksman or the brinksmen are in Germany. They aren’t in Greece.
Okay. How did we get to this situation? We need to go way back. We need to go back to World War II, when Germany occupied Greece for three and a half years. The Nazis invaded Greece. They occupied it for three and a half years. For three to half years, tens of thousands of people were killed. But the relevant thing for the current Greek debt is that during that occupation, the Nazi government required the puppet government in Athens to make loans to the German government to pay for the occupying forces. You know, you might get your head around that for a moment. So you had the Greek people paying for the soldiers that were occupying them.
PERIES: They were forced to do that.
WEEKS: They were forced to do that. There was no choice. And loan’s at zero interest rate.
At the end of World War II, the German government recognized that this was unfair and it promised to repay it. If that were now increased at the market rate of interest all those years, it would be close to 100 billion euro, about 40 percent of the Greek debt. That debt that Germany owes Greece is not included in the reparations agreements which were made in 1953, and at several other meetings that finally cleared up what Germany owed the victorious powers–by the way, Greece got relatively little of it; most of it went to the major powers, as you might expect.
Okay. So why is that relevant? It means the Greek finance minister has raised this, and it is probably something that even could be litigated. But it gives a tremendous moral strength to the Greek argument. I would say that’s the first point to make about how we got here.
The second point, before we actually get to the Greek debt, is in 1953 there was a meeting in London over the debts which the German government owed to the victorious powers, and banks and the governments who were the creditors received a haircut. That is to say, the German government managed to get a renegotiation of the debts that it owed, which I think under no circumstances could be considered odious, except in the sense that the German government could have said, well, we are no longer Nazis in power, so we shouldn’t have to pay this. Now all the Greek government is asking for is a similar type of treatment.
So how did they get so much debt? I would say probably one of the most important things was in the 1990s, when the Greek government wanted to enter the euro. And this is an example of be careful of what you want, because you might get it. So I’d have to stabilize the drachma in order to enter into what was called exchange rate mechanism.
PERIES: Explain that, John. What do you mean destabilize the drachma to enter the euro?
WEEKS: In the 1990s, in the planning for the creation of the euro, every government that wanted to join the euro–I forgot the British did not want to join. But every government that wanted to join had to link to, in effect, the Deutsche Mark and hold their currencies stable in relationship to the Deutsche Mark. So their currency was only allowed to fluctuate a little bit. And at the same time, they were required to have a certain rate of inflation and fiscal deficits and debt and so on. But those things were really secondary, because a lot of people were doing a bit of quick and dirty finance about it, such as the Italians, and also the French, in order to make those rules. So the main thing is you have to stick to the movements of the Deutsche Mark.
And the way the Greek government did that was by borrowing hard currency to support the drachma in relationship to the German currency. So they built much of this debt not for wild spending on social expenditures or pensions or early retirement, all of these myths about the lazy Greeks. They built most of it up in order to enter the euro.
So you got to the year 2000, and they had a substantial debt. And then you come the crisis of 2008 and the bottom falls out of the European economy, revenue declines in every country in Europe, including, of course, Greece. As revenue declines, they go from a fiscal deficit of about 2 or 3 percent, not very large at all, in 2006, 2007, until–in 2000 [sic] it’s up to 15 percent of GNP.
Being in the euro, they couldn’t print money. They couldn’t borrow from themselves. So, therefore what they had to do was borrow in–from commercial banks, borrow euros from commercial banks. And that’s how they built up the debt even larger.
PERIES: And so now they go into a crisis where their debt is growing at a faster rate and unable to pay it back and is unable to provide any of the basic services necessary for a state to function. And they go back to be bailed out and ask for more money in order to sustain itself.
WEEKS: Yeah. You’re right. I’m going to make a couple of points on that. The first point is that the actual absolute debt is more or less stable. The problem is the ratio of debt to GNP. And when you have a declining economy–you know, you don’t have to be a statistician, you don’t have to be a Nobel Prize winner in economics to realize that if one of the your measures or criterion for success, if one of those is a ratio of debt to GNP and GNP is falling, then you’re in trouble, because the major way that countries reduce the heavy debt burden is through growth, not through reduction in how much you owe. So, for example, the United States in 1945 had a deficit coming out of the war that was 250 percent of GNP. Ten years later, it was down to 100 percent.
PERIES: Okay. In the minds of the troika and the European powers, how is it that austerity actually works in their mind? Because to ordinary people, this makes no sense. You know, if government cuts back, lays off people, and there’s less revenue being generated for the state by the taxes that they would be paying otherwise, how do they see the economy growing in order to be able to pay back the loans by implementing austerity?
WEEKS: Well, it’s a mystery to me, but I’ll attempt to do it.
You know, some people half-seriously say, well, the German government is the moving spirit by this austerity. And in German the word for debt and the word for guilt are the same word. And so there’s this underlying idea that debt is a sinful thing. I think there is some truth to that. But I don’t think the German finance minister and Merkel and so on are coming from that place.
I think that there is something more sinister going on here, if I could put it that way. Much of those debts are held–Greek debts were held by German banks. And those banks wanted full payment. Just as in the 1980s, the Latin American debt crisis that U.S. banks particularly–but there were also banks in Britain and other places held a debt of Latin American countries. They were saying, we want full payment. And they kept pressing for that until you reached a point where it was obvious that it was impossible. And only then did the U.S. government step in with some mild measures to facilitate sort of a easier repayment of the debt. That was the Baker Plan and then, subsequently, another plant in the mid 1980s.
What we have now is a German government still with banks that hold about 20 percent of the Greek debt, plus Germany is benefiting quite a lot from its position of control in the European Union. And it is running a large trade surplus with the rest of the European Union, with the rest of the Eurozone in particular. And I think it is to the benefit of German big business that this austerity, these austerity policies are maintained. Now, so I think that that’s partly–if you want to know the–the formal argument that–they’re down to a very simplistic argument now. They’re just saying with this huge debt, it discourages investment; until you get it down, the economy won’t recover. This is not clear.
PERIES: Now, the danger of this, of course, is it’s not just Greece, but there are several other countries that are in a similar situation, as you said earlier. Now we’re looking at Spain in a similar situation. Ireland could possibly be in a similar situation. And this could grow throughout Europe to the point that their whole continent might be in crisis. So what is the solution?
WEEKS: Well, first of all, let me say you’re absolutely right. And it has finally become obvious to people throughout Europe that austerity is a class question. The austerity falls on the poor and the middle class and doesn’t fall on the rich.
And debt is a class question. The debt is incurred by the rich. They–for the most part the banks and other financial institutions–hold the debt, and it’s the people who pay it off.
In addition, that one thing that’s been absolutely crucial to these austerity plans is the reversal of the balance of trade of the countries suffering from austerity policies, into which they’re supposed to run a net surplus and trade. Well, again, you don’t have to know a lot of economics to understand that. So not only has Greek GNP been going down, but the amount available to Greeks has been going down, because if you run a trade surplus, what that has to mean is that what you consume domestically is less than what you produce domestically. And that trade surplus is funding repayment of the debt. It is a unrequited outflow. It’s as if the German government came and picked up in big trucks, you know, Greek olive oil and Greek whatever else Greeks export and shipped it off and didn’t pay for it. That’s in effect what it’s happening. And I think in Spain, in Ireland, that’s beginning to be recognized as what is happening. I think it’s also beginning to be recognized in France. But, unfortunately, the response in France is the rise of far right, not the rise of the left, and that is a real danger.
I was–up until just a few months ago, I was quite pessimistic. I thought that the austerity policies were going to provoke a rise of fascism again in Europe. But, fortunately for all of us, in Spain and Ireland and Greece, the progressives are leading the fight against austerity, and I hope that dampens down the rise of the fascists in the other countries.
PERIES: Right. And, John, we’re going to be following what the Greek finance minister has tabled in terms of what’s a more rational plan for the Greek people and how the finance ministers of Europe is going to respond, as well as the troika. And I hope you join us for further analysis on this in the near future.
WEEKS: Well, I would very much like to do that and I would say to all of your listeners, keep your eye on this, because this is not some strange, arcane thing that’s going on in some small country in the corner of Europe. This is something that affects all of us in every country.
PERIES: Thank you so much, John.
And thank you for joining us on The Real News Network.
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