Charting a path out of impasse for Greece, and other countries (part 1)

There is no Greek solution to the crisis of Greece, only a European or international solution.

The internal logic of neoliberal austerity – or, more to the point, the systemic development of capitalism and the concomitant social forces arrayed by the amassers of capital who insist that “markets” should decide ever more social and political outcomes — has reached its most advanced stage in Greece. The crisis confronting Greeks is not the unique outcome of an unprecedented collision of circumstances, nor, as I wrote in my Feb. 22 post, is it a punishment for supposed slothfulness.

International solidarity among the working peoples of the world’s capitalist countries — actively opposing the dictation of industrialists and financiers, of late most forcefully channeled through bond traders and their financial institutions — is the route out of ongoing economic crisis. That is so for Greece as well as all countries.

Temple of Zeus photo by Andreas Trepte (

That is taking a longer-term viewpoint. But what should be done in the short term? There seems to be a widespread, if not near unanimous, consensus among those who do not agree entire countries should be reduced to penury to ensure full profits to speculators that Greece has no choice but to default on its debt and re-orient its national budget toward investment instead of austerity.

But how should that be accomplished, and what other policies should accompany default? Crucially, should Greece drop the euro as its currency and bring back the drachma? Here, there is considerable divergence of opinion. In this and my next post (what you reading is the first of two parts), I will present arguments by several economists and social scientists who differ not only in some of the details but also on the question of Greece leaving the eurozone. I will also present a roundup of the positions of the main Greek Left parties, who are at odds with one another.

The question of the ‘Argentina option’

My own opinion (albeit with doubts) has been that of Greece taking the “Argentina option” — following the basic prescription of Argentina a decade ago when it reached a similar impasse. In short, this option would mean Greece leaves the eurozone, nationalizes its banks, defaults on its debt and whatever small portion it ultimately pays back would be denominated in devalued drachmas rather than euros. Doing so would require that strong capital controls be imposed ahead of time and would inevitably mean at minimum a short period of freezing bank holdings.

In this scenario, the Greek government would value the new drachma at one euro, but foreign exchange markets would immediately attack the new currency and the drachma would likely lose something like two-thirds to three-quarters of its value in short order. Repayments in drachmas would be at the initial exchange rate, not at the later devalued rate. This would constitute a “big bang” devaluation, making Greek products cheap for export and Greek vacations cheap for foreign tourists. It would also make imports very expensive for Greek consumers and machinery imported into Greece also very expensive. There would be considerable pain in the short term for Greeks – there should be no sugar-coating.

Argentina suffered through several months of considerable pain (although Argentines already were suffering greatly from economic collapse), but within a year, Argentina’s exports became attractively cheap and because imports became expensive, a stimulus to internal production was created. Within a year, Argentina’s unemployment rate fell by two-thirds and it had achieved budget and trade surpluses.

Argentina had agricultural and manufacturing strengths that Greece does not possess, although Greece is not without an infrastructure and it does have a tourist sector that Argentina did not have. Greece, moreover, is more integrated with its powerful neighbors than was Argentina with its equivalents. And, again, a European-wide problem has to have a European-wide solution.

Arguments for Greece staying within the eurozone

Adding to my doubts is that as I read various papers and commentaries, the arguments that call for radical change with Greece continuing to use the euro are strong, perhaps stronger than the other side. So although I began my studying for this post from the perspective of an advocate of Greece leaving the eurozone, I will present more arguments for the contrary position.

Supporting Greece remaining within the eurozone, but advocating a vigorous program of radical structural transformation, economist Özlem Onaran argues that the European Union should be leveraged in spite of its current structure to internationalize the resistance of working people and that an anti-euro position risks mobilizing the Right.

In her paper, “Fiscal Crisis in Europe or a Crisis of Distribution?“, an excellent summation of the European economic crisis, Professor Onaran writes that Europe is undergoing a crisis of distribution and that a “reversal of inequality at the expense of labor is the only real solution, which in turn connects the demands for full employment and equality with an agenda for change beyond capitalism.” This is an argument for an “alternative Europe” that can be built only from an international response to the international power of capital.

Defaults across the European Union and caps on wealth are necessary but can only be imposed if they are coordinated, Professor Onaran writes:

The most important obstacle today to initiate any progressive economic policy in Europe is the speculation on public debt and the governments’ commitment to satisfy the financiers. Public finance has to be unchained via debt default in both the periphery and the core. This has to be coordinated at the EU level as part of a broader public finance policy to make the responsible pay for the costs of crisis and to reverse the origin of the crisis, i.e. pro-capital redistribution. This involves a highly progressive system of taxes, coordinated at the EU level, on not only income but also wealth, higher corporate tax rates, inheritance tax, and tax on financial transactions. A progressive income tax mechanism could also introduce a maximum income with the highest marginal tax rate increasing to 90% above a certain income threshold in relation to the median wage. A progressive wealth tax on government bonds with the highest marginal tax rate reaching to 100% for holdings above a certain amount of bonds could be formulated as a way of restructuring the debt; this would make the banks, the private investment funds, and the high wealth individuals pay the costs of the fiscal crisis.

Spending should be re-oriented toward social good and the environment, the European Central Bank should be under democratic control and allowed to lend to member countries, and wages should rise to account for the productivity gains of the past three decades that have gone to capitalists:

To facilitate convergence a minimum wage should be coordinated at the EU level. Fiscal policy and incomes policy should also be coordinated: higher productivity growth in poorer countries of the EU will help to create some convergence in wages, but regional convergence should be supported by fiscal transfers and public investments to boost productivity in poorer regions. Furthermore a European unemployment benefit system should be developed to redistribute from low to high unemployment regions. This requires a significant EU budget financed by EU level progressive taxes.

Full employment policies would also be adopted under Professor Onaran’s program:

To maintain full employment, a substantial shortening of working time, again coordinated at the EU level, in parallel with the historical productivity growth is also required. This is also an answer to the ecological crisis: if the use of environmental resources is to maintain a certain ‘sustainable’ level, economic growth, in the long term, has to be zero or low, i.e. equal to the growth rate of ‘environmental productivity’. However, for such a regime to be socially desirable it has to guarantee a high level of employment and an equitable distribution of income; i.e. shorter working time and substantial redistribution via an increase in hourly wages and a decline in the profit share.

Such a program would be accompanied by measures that would enable workers to assume control of firms whose private owners attempted to shutter them, such as has been done in Argentina, where a wave of factories came under workers’ control when owners decided to asset-strip their factories for short-term gain rather than continue operating them. Banking would become a public utility with social participation in investment decisions.

Financial regulations including capital controls are important but not enough. Finance is a crucial sector which cannot be left to the short-termism of the private profit motive. This sector has already been de facto nationalized, but without any voice for the society and with a commitment to privatization as soon as possible. The crisis has shown us that large private banks are exploiting their advantage of being “too big to fail.”

Underlying Professor Onaran’s program is that national solutions in small countries can lead to “a persistence of underdevelopment” and that a low-wage periphery for multi-national corporations “is a threat to the wages and jobs in the core as well.” Indeed, such a process has long been under way as manufacturing is continually moved to take advantage of still lower wages in newer locations.

A call for investment within an intact eurozone

Another economist based in Britain, Michael Roberts, disagrees with Professor Onaran’s thesis that the European crisis is caused by a lack of purchasing power by European workers, but does agree with much of her proposed solutions and that Greece should not exit the eurozone. “The Greek or even the British working classes will not be saved by having their own currency in a capitalist Europe,” Professor Roberts wrote in a September 11, 2011, post on his blog.

In a more recent post, on March 28, 2012, Professor Roberts re-iterated the view that investment is necessary to end the downward spiral of living standards:

[M]y objection to the Keynesian solution would not be that wages should not be increased but that the Keynesian alternative puts the cart before the horse. What the likes of Greece or Portugal need is investment. That leads to jobs and then to higher incomes and spending. Sure, boosting incomes would help demand but it would not provide sustainable growth if the increased income merely eats into profits, curbing private investment. Increasing wages is not enough or even counter-productive if investment decisions remain under the control of the private sector.

Further, Professor Roberts wrote, “Leaving the euro and devaluation on its own would not provide sustainable growth.” He argues that winning Europe-wide support would be better than simply dropping the euro; countries such as Portugal and Greece are too weak to disconnect themselves.

Private investment is in free fall in these weak European economies. There is a clear case for public investment. This can be financed by public ownership and control of the banks to direct credit to infrastructure projects and to revive small businesses. Governments can reduce their debt burdens by restructuring (defaulting on) their debts with Europe’s banks that caused the mess in the first place. This is the alternative to taking Troika money to bail out the banks and complying with fiscal austerity, ‘internal devaluation’ and depression for a decade or more.

It is indisputable that “socialism in one country” can’t survive a hostile capitalist world, and a small country such as Greece all the more so could not survive as a socialist island in a capitalist Europe. The arguments presented above seek to find a long-term solution to the European economic crisis that are applicable to the rest of the world’s advanced capitalist countries.

Arguments in favor of Greece (or other small European countries) leaving the eurozone also take a long-term perspective. I should also be careful to distinguish that arguments for dropping the euro and re-adopting a national currency are not advocacy for any of these countries to leave the European Union, an entirely different matter. Solidarity among working people across borders is the indispensable ingredient to a radical transformation of Europe or any other geographical region toward a system that benefits everybody rather than only a minuscule minority at the top of financial and industrial enterprises.

Professors Onaran and Roberts present formidable arguments in favor of Greece (and others) remaining within the eurozone. In my next post, on April 11, I will present arguments in favor of Greece exiting the eurozone, and I will also briefly summarize the different positions of the main Left parties and blocs within Greece. Polls give the three about 30 to 40 percent of the vote for the upcoming election, now speculated to be scheduled for May 6.


3 comments on “Charting a path out of impasse for Greece, and other countries (part 1)

  1. kaneprior says:

    Really good article, the only thing I would add is that if Greece left the euro, they would definitely suffer more than Argentina.

    I think you touched on it that Argentina have much better exporting strength to rely on, but there are other factors too. Argentina were lucky that their situation was rare in a time of prosperity, while Greece are having to deal with a world still recovering from the recession and a Europe which as their biggest trade partners are still in recession. Greece would also have to print a new currency, a long and expensive process, while Argentina still had their own currency (albeit fixed to the dollar). Finally, the world Greece lives in is much more connected than at the start of the century and I don’t think they will let Greece fall, too much is invested and tied up in the region and I think bailouts will continue to happen.

    Though I actually think you are right, if I was Greece I would accept the sharp fall now and plan long term, rather than precede over a decade of deep cuts enforced by the EU.

  2. You have summed up the situation very well, and I have no argument against what you have just written. The more I have thought about it, the more the positions of those who say Greece should not bring back the drachma give me pause. But, as to your last point, there is still an argument to be made for getting the most pain over with now.

    But whether or not Greece stays in the eurozone, “a decade of deep cuts enforced by the EU” is indeed unacceptable. The complication is that elections are weeks away, and the three main Left blocs are badly divided – they are going to have to formulate a policy very quickly, as is in before the elections.

    The response of Greek working people from below will ultimately have to be decisive.

  3. […] furono argomenti sia a favore del restare sia a favore del lasciare l’eurozona ma i sostenitori del contrasto all’austerità di entrambi […]

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