By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Jointly published with New Economic Perspectives
In my January 18, 2015 column, I explained that German Prime Minister Angela Merkel’s sweetest triumph was successfully extorting George Papandreou, Greece’s Prime Minister, head of the Greek Socialist Movemnt (PASOK), and President of the Socialist International, to inflict austerity and a war on workers’ wages on the Greek people. I quoted a passage from the Papandreou administration’s May 3, 2010, “Memorandum of Economic and Financial Policies” (the Papandreou Plan) agreeing to the European Commission’s (EC) austerity and anti-worker demands that was made part of The EC’s Occasional Papers No. 61 “The Economic Adjustment Programme for Greece” (May 2010).
In this column I explain how radically right-wing the Papandreou Plan was and the completeness with which it embraced rather than resisted the troika’s theoclassical nostrums that forced Greece, Italy, and Spain into gratuitous second Great Depressions. In Greece’s case, the Merkel Great Depression has proven more severe and longer in duration than the Great Depression of 80 years ago. The EC’s Economic Adjustment Programme for Greece description of the Papandreou Plan was accurate. The Greek leaders “strongly own and support the [austerity] programme policies and objectives.”
Austerity and the Confidence Fairy
My prior article showed that the Papandreou Plan expressly adopted the troika’s claim that restoring confidence was the core goal and austerity was essential to restore confidence. A small fraction of economists in America share this belief, but it has become an article of faith among the conservatives that dominate the EC and the ultra-conservatives that dominate the ECB.
The IMF is even more revealing because its leadership has often come from French “socialists.” The IMF has published studies showing how superior the results of fiscal stimulus are compared to austerity, but it continues to insist on inflicting austerity
As with the United States and the United Kingdom, however, the self-described centrist parties (respectively, the Democrats and Labour parties), the dominant wing of the French Socialist Party has embraced the finance industry, the three “de’s”, deregulation, desupervision, and de facto decriminalization, “modern finance,” and neoclassical economics. Each of these parties is incoherent on the subject of austerity. The Party leaders know intellectually that austerity will not simply fail, but actually make things worse – but their instinct as “new Democrats” and “new Labour” is to be “serious and responsible.” They conflate “serious and responsible” with austerity at some instinctual level. They ignore the bulk of their economists and waffle on austerity.
The German “socialist” party is generally a fanatic supporter of austerity. The troika successfully extorted the Spanish socialist party to lead the infliction of austerity on Spain.
Given this pattern, it is not astonishing that PASOK came to embrace austerity. Yes, the troika put a canon to Papandreou’s head to force him to sign on to austerity. But none of this removes the symbolism of the president of the international socialist movement praising austerity and a war on workers’ wages by preparing the Papandreou Plan that reads like it was drafted by a hard-right German central banker.
The Papandreou Plan Embraced “Front-Loaded” Austerity at the Worst Possible Time
“Front-loading” means that the government makes heavy reductions in net government spending in the early years – when the economy is sure to have seriously inadequate demand. The vast majority of economists consider this to be economic malpractice that is likely to make a downturn much more severe. The fuller quotation from the EC reads:
2. Importantly, the authorities are fully aware of the challenges, and they strongly own and support the programme policies and objectives. They realize the seriousness of the situation and the need for bold measures are needed to help Greece out of the current situation. Their resolve to restore market confidence through large, frontloaded fiscal consolidation measures is strong,
“Large” and “frontloaded” means making fiscal policy highly pro-cyclical, which means that it makes the recession worse. It actually made it so much worse that it forced Greece into a Great Depression that is more severe and longer-lasting that Greece’s Great Depression of 80 years ago. There are three remarkable things about the EC document on this subject. First, there is no indication that they cared what they did to Greece and the Greek people by inflicting austerity. Second, they had no “Plan B” to respond to the catastrophe that economic theory and economic history predicted that “large, frontloaded fiscal consolidation.” Third, the EC and Papandreou did know that what they were about to do to Greece needed to have a bodyguard of euphemisms. The word “austerity” does not appear, but the euphemisms are frequent. Austerity was a policy that dared not speak its name.
The Illusion of Care
It was, of course in the interests of Papandreou and the troika to claim that they cared about the Greek people and acted to protect them. There are several expressions of care, but the substantive provisions tell the opposite story. Here is the EC’s claim about the depth of care throughout the Plan.
41. The fiscal adjustment is fairly distributed across the society, and protects the most vulnerable. These are important conditions to ensure broad support for the programme. The choice of the fiscal consolidation measures and structural reforms has taken into account the social dimension, and the government has made a commitment to fairness in their implementation. The lowest-income and lowest-pension earners, as well as the most vulnerable and those requiring family support, will all be protected and compensated for the adverse impact of the adjustment policies The pension reform will introduce a means-tested social pension for all pensioners above 65 years. The decision of not forcing a quick reduction in nominal private sector wages was also taken with social considerations in mind. Moreover, the authorities have committed themselves to forging consensus on policies to overcome the crisis, and to inviting representatives of businesses and labour to sign a social pact that should contribute to the objectives of the program.
The claim that the poor would be “protected and compensated for the adverse impact of the adjustment process” and that the Plan was so fair that it would “ensure broad support for the programme” are two of the most cynical lies ever foisted. The reality has been massive misery and enormous opposition to the Plan’s economic malpractice and the inhumanity of austerity.
The Plan was internally inconsistent about the harm it was about to inflict on the Greek people. It later conceded that an “obvious risk” of the plan was that harm.
Implementation risk — Policies supporting the arrangement are very ambitious and the associated social costs are significant. Relatively weak administrative capacity and risks of social unrest and acute political tensions are important threats to the programme. The frontloading of the fiscal adjustment and their rapid adoption by parliament are mitigating factors.
The Plan concedes that it will cause “significant” “social costs” to the Greek people. It concedes that these social costs are likely to cause “social unrest and acute political tensions.” The delusional part of the paragraph is the last sentence – the claim that because the austerity Plan will inflict these social harms on the Greek people so quickly and so severely it “mitigate[es] the risk of “social unrest.” The Plan also assumed that if PASOK approved the Plan and the Plan caused “significant” “social costs,” PASOK’s approval would prevent “acute political tensions.” That would make sense if Greeks would never blame a political party for approving a plan that (a) betrayed all its campaign promises, (b) betrayed the interests of the workers when PASOK claimed to be the party of the workers, and (c) made their lives a nightmare.
There was one reference to the poverty rate in the EC “programme” for Greece: “Greece has a substantially higher rate of in-work poverty risk compared to the EU, though, given the high share of undeclared work, this figure need to be treated with caution.” What needed “to be treated with caution” is the Greek people. Before the infliction of austerity, Greece had large numbers of willing workers who received wages that were so low that they remained in poverty. As I will show, the EC/Papandreou plan sought to cut Greek wages sharply. There was no discussion or estimate of the increased poverty that austerity and the Plan’s war on workers’ wages would cause.
There are two references to the projected unemployment rates under the EC/Papandreou plan, but no comparisons as to the unemployment rate under austerity, non-austerity, and stimulus. The key is that the troika and the Papandreou Plan set no standards, goals, or even reporting for unemployment and poverty. No matter how terrible the suffering of the Greek people, even if austerity forced Greece into a Great Depression, nothing was to be done to reevaluate austerity to relieve that suffering.
The EC projection: 2009 2010 2011 2012 2013 2014
Unemployment rate 9.5 11.9 14.8 15.3 14.9 14.6
The Papandreou Plan has virtually the same projections. Unemployment was projected to rise sharply in 2011, drift only slightly higher in 2012, and fall continuously thereafter. The reality is that unemployment more than doubled after the infliction of austerity and remains near the peak in early 2015.
No Plan B for a Great Depression
The EC and Papandreou write in terms that suggest that they have a Plan B if the plan fails, but it turns out that they have a cramped definition of the failure of austerity and a grotesquely illogical and inhumane idea of how to respond to such a failure. The points I have just explained above about the utter indifference of a Plan to causing a Great Depression explain the oddness and further demonstrate the inhumanity. Plan A was not defined as a failure if it forced Greece into a Great Depression. The suffering of the Greek people, regardless of severity and length, could not cause the Plan to fail. The Plan could only fail if (a) Greece defaulted on repaying the troika’s loans or (b) Greece’s deficit rose.
44. But there are obvious risks.
Growth — The reaction of the economy to ongoing financial stress is highly uncertain and prolonged social unrest could imply a sharper contraction of economic activity than assumed in the programme. This would directly impact fiscal accounts, both through lower revenue and a faster increase in the debt ratio, putting fiscal sustainability further at risk.
Parse that passage carefully. The Plan admitted that there was an “obvious risk” that austerity could produce “a sharper contraction of contraction of economic activity than assumed in the programme.” Yes, austerity could make the recession far more severe and even force Greece into a Great Depression. That would seem to most humans a good reason not to inflict austerity on Greece when it was in a recession. But, not to the troika and Papandreou. No, if austerity failed, it would be the Greek people who caused that failure by engaging in “prolonged social unrest.” (Note that only a few paragraphs earlier the Plan assured us that it was so fair that broad social support for the Plan was assured.) In any event, if the Plan caused both “prolonged social unrest” and a Great Depression the problem from the Plan’s perspective was neither the disorder nor the Great Depression with its record unemployment, spreading poverty, hunger, deforestation, suicide, and emigration. The Plan’s only concern for what would be (and in fact is) a catastrophe for Greece was the impact of the Great Depression on Greece’s “fiscal accounts” (the government’s budget deficit) “putting fiscal sustainability” (which the troika pretends means balancing the budget) “further at risk.”
The EC’s describes its Plan as “flexible” and “symmetrical,” in its ability to adjust, but it actually confirms the point I just made.
45. The programme allows sufficient flexibility. The authorities made a commitment in the context of the programme to respond flexibly to economic developments. In case of better economic and fiscal outcomes than assumed in the programme, they will speed up fiscal consolidation and, whenever possible, they will refrain from drawing on planned disbursements. Symmetrically, the authorities signalled their readiness to take additional measures so as to reach fiscal targets and accelerate the adjustment in external competitiveness if needed.
There are two scenarios, if Greece begins to recover more promptly than forecast it will increase austerity. If austerity causes Greece to fall into a Great Depression that it is catastrophic for the Greek people then Greece will – increase austerity! That’s “flexible” – if bleeding the patient makes them sicker the scientific answer is obviously to bleed them more. Notice that whether austerity works or acts like a poison the answer is always the same – more austerity – that’s’ “symmetrical.” The harm to the Greek people inflicted by austerity is always irrelevant.
The Greek description of the Papandreou Plan is disturbingly similar to the EC’s.
14. The program will be closely monitored and measures will be taken as necessary. There are risks to the program from lower revenue, higher social transfers, further downward revisions of growth, additional fiscal liabilities from the public and financial sector, and higher interest costs. However, these can be managed and the government stands ready to take appropriate measures to preserve the program objectives, including by reducing discretionary spending, as necessary. At the same time, there is some upside potential. Our 2010-2011 projections include cautious estimates of the measures taken, positive confidence effects could boost GDP growth and reduce market risk premia, and our revenue administration efforts could start to yield more revenue gains than currently assumed in the program. Should confidence rebound and the market support Greece earlier than expected, or the supply response from reforms comes in more vigorously, these benefits will be saved and the correction to the intended deficit will be brought forward to achieve a speedier return to fiscal sustainability.
Yes, “the program” was “closely monitored,” but not in order to ensure that “measures will be taken as necessary” in the interests of the Greek people or Greece. The “risks to the program” of debt reduction arising from the Great Depression that austerity caused were the only concerns that were being “closely monitored.”
There are 23 separate reporting requirements imposed by the Papandreou Plan on Greece, most of them weekly or monthly. Other documents that are part of the Plan include many reporting requirements for their GAO. The Greek Plan requires reports to the public providing information on the publicly owned businesses that experience the largest losses as a means of trying to maximize public hostility to public ownership. There are no reporting requirements to the Greek people or the troika on unemployment, underemployment, suicides, poverty, deforestation, the number of employees terminated, or emigration. The reason those matters are not “closely monitored” is that helping the Greek people was never even an element of “the program.” There was never an intention to ensure that “measures will be taken as necessary” to prevent the catastrophic harm to the Greek people that austerity was likely to cause.
There was never any intention if (as was exceptionally likely) the austerity and war on workers’ wages plan forced a Great Depression to stop the madness and help the Greek people. If austerity Plan caused a catastrophe there was a provision in the Plan to adjust the degree of austerity – by doubling down on its severity.
The program will be closely monitored and measures will be taken as necessary. There are risks to the program from lower revenue, higher social transfers, further downward revisions of growth, additional fiscal liabilities from the public and financial sector, and higher interest costs. However, these can be managed and the government stands ready to take appropriate measures to preserve the program objectives, including by reducing discretionary spending, as necessary.
If (really, when) austerity proved to cause catastrophic damage to the Greek people, Plan B called for further “reducing discretionary spending.” Plan A was to hit government spending hard during a serious recession when demand was already seriously inadequate. When reducing already inadequate demand further and Greece spiraled toward disaster Plan B was to use austerity to smash the Greek economy even harder and force Greece into a Great Depression.
The concept of having a Plan B is to change one’s policies when they are failing, or worse, causing harm. But with the troika and Papandreou wedded to the fiction of TINA – there is no alternative to austerity – Plan B must be premised on the fantasy that the answer to the problems austerity causes is to make the austerity far more severe.
An Absurdly Optimistic Plan Portrayed as Based on Conservative Projections
The Plan assumed, contrary to economic theory and history, that severe austerity would cause the confidence fairy to arrive in Athens promptly – it forecast that GDP would fall sharply but then promptly begin rising in 2012.
6. The government foresees an extended adjustment period:
Real GDP growth is set to contract significantly in 2010-2011, but should gradually recover thereafter. The economic program assumes negative growth of 4 percent in 2010 and 2½ percent in 2011. While fiscal consolidation is bound to weigh on economic activity at first, it is expected that confidence effects from the front-loaded fiscal measures and the strong medium-term economic program in combination with comprehensive structural reforms will create the conditions for a return to growth from 2012 onward.
Note that they concede that austerity reduces already inadequate demand for goods and services and makes a recession more severe, but they assert that in some unexplained and undefined manner “confidence effects” quickly lead to strong growth. They also claim that the bigger the hammer you take to the Greek economy at the start of the austerity program, the faster the recovery.
The first point to realize is that the EC/Papandreou Plan’s projections had to be grossly optimistic because they were based on the confidence fairy fiction that austerity spurs growth. The related point is that they asserted that there fabulously overoptimistic assumptions were actually conservative and that it was likely that Greece’s “bold” austerity would produce a prompter, more robust recovery than they had projected. Indeed, they claimed that even if the economy tanked austerity would succeed because the Plan was “robust.”
43. Moreover, the design of the programme makes it robust to a number of unfavourable developments:
The fiscal programme is based on conservative assumptions. Measures were quantified in a prudent way and applied to a rather cautious baseline scenario.
Overall, the perception of the Commission staff is that, assuming that growth does not surprise on the downside, over performance on the fiscal deficit is possible, including in the short term.
As I explained about Plan B, “robust” meant that the troika could always pummel the Greeks with an even bigger hammer of more brutal austerity. That is, of course, a significantly insane policy.
The Plan Welcomed Deflation
But the Plan is far worse than that. Another of the “obvious risks” that the EC lists from austerity is deflation – except that the Plan assumes that deflation is probably desirable in Greece.
Inflation — A steeper fall in inflation is possible, given the large cuts in public wages and pensions. Lower inflation – or larger deflation – would be positive for competitiveness, as the REER would move faster towards equilibrium. However, it could have a negative impact on government debt dynamics.
Readers are likely sick to death of reading explanations of why very low inflation (well before deflation) can reduce growth and even push a nation back into recession – and the fact that the eurozone is very close to deflation and its growth has stagnated (again). The Plan does not even discuss these risks. The Plan seems, on balance, to welcome deflation. Be careful what you ask for, for you may receive it. Hoping that austerity produces deflation adds to the already significant insanity of the Plan.
The Greek description of this part of the plan is even scarier for it calls for a reduction in Greek demand for goods and services – in what was already a recession!
Inflation needs to be reduced significantly below the euro area average for Greece to regain swiftly price competitiveness. Domestic demand tightening, both through fiscal adjustment and efforts to moderate wages and pensions, together with cost-cutting measures in the economy, will be essential to bring inflation down in a meaningful way.
The Papandreou Plan, in the midst of the Great Recession thought that the essential economic struggle was not against the recession, unemployment, and poverty, but inflation! His Plan called for reducing Greece’s “domestic demand.” It called for using austerity to reduce Greek government demand for Greek goods and services and to reduce the demand of Greek citizens for Greek goods and services by reducing their wages and pensions (and increasing the VAT). The Plan called for sparking a “competitiveness” “race to the bottom” in workers’ wages in the eurozone periphery.
The Plan Sought Austerity Forever
But the EC Plan is not done with piling on austerity.
46. The authorities committed to keep a large primary surplus after the programme horizon. At the end of 2013, the government debt ratio will remain at historically high levels. To ensuring continuity of private financing at acceptable conditions beyond the programme horizon, it will be important to maintain a large primary surplus and ensure a reduction of the debt burden as a share of GDP. In the context of the programme, the authorities committed themselves to keeping the primary balance in a sizeable surplus (at least 5 percent of GDP) up to 2020. This would ensure under almost all scenarios a decline in the government debt ratio (Figure 12).
Yes, Greece agreed to inflict austerity on the Greek people for a decade (2010-2020) – regardless of whether running a large budget surplus would sensible or catastrophic. Running “a large primary surplus” would typically be a terrible thing for Greece to do – it involves super-austerity – and none of us can foresee what Greece’s economic needs will be in 2017-2020. It is beyond significantly insane to demand that nations commit many years in advance to take actions that could prove horrific in these unknowable future circumstances. The troika appears to thing that it is virtually always desirable for nations to run a budget surplus, but there is no economic basis for that fable.
The Breadth of the War on Greek Workers’ Wages
I have explained that the Papandreou Plan sought to reduce Greek wages in order to “win” a race to the bottom in which the workers of the eurozone were forced – often by “socialist” leaders – to form a eurozone-wide reserve army of the unemployed that would be forced into competition with each other to drive wages down sharply. The Plan was a multiple launch rocket system that unleashed barrages of attacks on workers’ wages and rights. The workers, however, were supposed be reassured by the following clause of the Plan.
To explain and forge consensus on policies to overcome the crisis, the government will invite representatives of businesses and labor to sign a social pact for the duration of the program. The spirit of the above considerations is to maintain strong social cohesion, fight poverty, and maintain employment.
The Plan proposed many reductions in rights for workers and increased powers for businesses. All the power changes boosted the employers’ power and, they have frequently used the reserve army of the unemployed to intimidate and abuse workers. There is no meaningful “social pact” in Greece. Instead of “maintain[ing] employment” the Plan more than doubled unemployment and poverty became widespread. The employers were able to pervert the workplace into a commercial coliseum that sets worker against worker to compete for the lowest wages if they wished to survive in the marketplace for jobs.
The Plan expressly (but euphemistically) called for reducing workers’ wages substantially. The goal was not simply to have reduced wages or even the lowest wages in the eurozone. The Plan called for cuts so large that Greek wages would be “well below the euro area average.” It is rare that a government calls for reducing its workers’ incomes “well below” their peers.
Realigning incomes to sustainable levels is necessary to assist fiscal correction, support a reduction in inflation well below the euro area average, and improve price and cost competitiveness on a lasting basis.
In short, the Plan was to impoverish millions of Greek workers and retirees for the indefinite future. Recall that the EC admitted that coming in to the recession many Greeks that were employed earned so little that they were in poverty.
The initial focus of the Plan’s war on workers was public employees. It froze public sector wages, dramatically reduced national government hiring of workers, and sought to eliminate many local and regional governmental jobs.
[W]age and entitlement program costs need to be curtailed as they represent the bulk of the primary budget expenditures, and thereafter wages and pensions will be subsequently frozen in nominal terms for the duration of the program. The government has also planned other reductions in government spending, including by replacing over time only 20 percent of retiring employees, and by consolidating municipalities and local councils.
The Plan’s goal, however, was not to freeze wages, but reduce them.
C. Structural Policies
22. Structural policies are strengthened in order to boost competitiveness and emerge from the crisis quickly. These will enhance the flexibility and productive capacity of the economy, ensure that wage and price developments restore and then sustain international competitiveness, and progressively alter the economy’s structure towards a more investment and export-led growth model.
Recall that the Plan’s goal is to reduce the income of Greeks, knowing that this will reduce domestic demand for Greek goods and services and cause the economy to contract even more. That means as quoted immediately above that the theory is for Greece to grow primarily through being a substantial net exporter. But that is the same strategy the entire eurozone is being forced to adopt. We cannot, of course, all be net exporters, much less substantial net exporters. The greater Germany’s success as a huge net exporter, the harder it is for the eurozone periphery to be net exporters. The eurozone’s universal substantial net exporter strategy requires the euro to depreciate (which it has recently) and for eurozone wages to fall sharply and stay lower than other developed nations over the long run.
The Plan adopts the troika’s insistence on TINA (there is no alternative) to austerity. The Greek people were never told this consequence of adopting the euro: “in a monetary union” “policies to restore external price competitiveness … have to rely on reductions in domestic costs and prices policies to restore external price competitiveness….” In plain English (or Greek) that means that if you adopt the euro and your nation falls into recession the only thing you are allowed to do to “recover” from the recession is to slash your workers’ wages in the hopes that you can export your way to recovery. The propaganda in favor of the euro didn’t come with that warning. Economists understood that would be the inevitable result of adopting the euro, but neo-classical economists delight in reducing workers’ wages because it boosts the profits of their corporate sponsors.
The breadth of the attack on workers’ incomes is scary.
The government will adopt legislation for minimum entry level wages in order to promote employment creation for groups at risk such as the young and long-term unemployed. In parallel, the government will implement the new control system for undeclared work and modernize labor market institutions.
Employment protection legislation will be revised, including provisions to extend probationary periods, recalibrate rules governing collective dismissals, and facilitate greater use of part-time work.
Again, it is important to recall that many employed Greeks, prior to the Plan, received wages so low that they were in poverty. Now, the Plan moved to create new, even lower poverty wages for the young and the long-term unemployed. The government could have provided a jobs program at a living wage for the long-term unemployed. Instead, it was taking primary victims of the financial crisis and declaring that they were a special category of Greeks that could be exploited by employers.
The Plan was also to make it easier for firms to engage in the mass firing of employees and to aid the greater use of part-time work without normal protections for workers. There were a series of changes to pensions and social security to make it harder to retire even from “arduous” physical labor they were no longer capable of performing without being injured. The Plan promised to push back the age at which workers could receive full benefits. The Plan also made it harder for workers to discharge their debts in bankruptcy.
The “Socialist” Plan Attacks Effective Regulation
One of the standard right-wing memes is the evils of regulation. The Papandreou Plan was drafted in 2010 when, once again, the radical pursuit of the three “de’s,” deregulation, desupervision, and de facto decriminalization proved so criminogenic that it generated the most destructive fraud epidemics in history. The lesson that the President of the international “socialist” movement learned from this disaster was to double-down on the three “de’s.” The Plan provided:
Government ensures full operation of the Better Regulation Agenda to reduce administrative burden by 20% compared with 2008 level, and sends report to the Commission.
“The Better Regulation Agenda” is an oxymoron that degrades regulation.
The Papandreou Plan is also logically inconsistent on the subject of regulation. In the areas the troika is worried about, they demand the end of the three de’s. This provision provides an example of these areas.
20. The Bank of Greece will implement intensified supervision and increase the resources dedicated to banking supervision. This will include an increase in the frequency and speed of data reporting, and the further development of a comprehensive framework for regularly stress-testing financial institutions. Staffing will be increased both for on-site inspections and off-site review, also taking into account the new responsibilities of the Bank of Greece with respect to insurance supervision. Additional flexibility will be introduced in the management of human resources, and all Bank of Greece staff will be granted strong legal protection for actions performed in good faith.
The Plan Does Have One Excellent Idea
Following ideas made famous by the economist Hernando de Soto, the Plan calls for making it far easier to start a new business.
“Improving the business environment and bolstering competitive markets. The government will shortly adopt legislation establishing one-stop shops for starting new enterprises to cut procedures, costs and delays. Legislation will be introduced to cut licensing and other costs for industry.”
That is a very good idea, particularly the combination of reducing licensing requirements and creating a one-stop shop for regulatory approvals to start a new business that would allow the legal formation of a new business within 24 hours.