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Greek Debt Crisis - Austerity Set To Kill Greece

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Contributor:
Chris Ford
Chris Ford

 Last week the people of Greece rightfully revolted against their government's latest austerity plan to manage the country's debt crisis.

Essentially, the plan, passed by the country's Socialist Government, has pledged ongoing belt tightening for the next five years. This is the case as the IMF (International Monetary Fund)/European Union imposed plan includes severe public sector spending cuts, mass privatisations, cutbacks on welfare payments, further erosions of worker's rights and mass deregulation as far as the eye can see.

The consequences could be the same as those faced by similarly debt-laden Argentina in the late 1990s/early 2000s when, under similar IMF pressure, the Argentine Government was forced to impose severe measures in order to allay that country's debt crisis. What was the outcome? A massive and severe depression which saw unemployment soar into the high 20 percent range. Political instability ensued as the masses revolted against the unfairness of the plan which saw three Argentinian presidents come and go in one year during 2001. Subsequently, Argentina defaulted on its debt and devalued its currency. After the election of a left-leaning Peronist Government in 2003, the positive impacts of the devaluation began to be felt as, alongside more protectionist trade measures and increases in social spending, the country began to boom again. Even employment in many new worker and co-operatively owned businesses (a very socialist innovation) began to boom.

Eventually, I predict that Greece will default on its debt regardless. Already, the negative cycle that engulfed Argentina has begun for Greece with greater austerity producing more unemployment precipitating less tax revenues for government. Combined with the need for more spending on unemployment benefits and other forms of social assistance, the deficit continues to widen, not close, with every attempt at reduction. Thus, a dark self-fulfilling prophecy has come into play for the country.

Yes, I can hear the calls from the right-wing fans of this blog who will say that Greece's crisis was caused by high government spending. In many respects, this is true but the increase in debt was financed by foreign banks and financial speculators who dined out on the profits from Greek government bonds. Also, prior to 2008, Greece enjoyed one of the highest GDP growth rates in the Eurozone. Accordingly, the Greek Government had the income to meet its growing spending and debt obligations. What changed matters, however, was the global economic crisis of 2008 which saw banks and financial institutions become more risk averse. This change in attitude on the part of global capitalism towards underwriting sovereign debt came at the wrong time as nations across the globe faced the prospect of instituting neo-Keynesian policies to stimulate economic demand. Further, corporate bankers and speculators received government bail outs while ordinary people did not. And now it is these same financiers and speculators who, in cahoots with the IMF, are demanding that the ordinary people of Greece as well as Spain, Portugal, Ireland and Iceland, pay the price. 

What is excerbating matters for Greece too is the need to meet Eurozone government deficit targets. Currently, government deficits cannot be run at more than 3 percent of national GDP without endangering the stability of the Euro currency. However, it has been suggested by a number of economists that Greece's withdrawal from the eurozone and its establishment of a 'New Drachma' currency, heavily devalued against others, might help generate the export growth needed to help meet its debt problems and restore internal confidence. Also, Greece may have to consider defaulting on part of its debt or even asking other nations to forgive large portions of it (this has been done with a number of African countries). Otherwise, the risk of protracted austerity threatens Greece's economic and social stability (and that of Europe's as well) going forward.

Otherwise, austerity may well kill Greece and the rest of Europe with it.

 

 

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