The Disaster of Greek Austerity

Yves here. This report includes on-the-ground details.

By Evita Nolka, a Greek political scientist, holder of a MSc. in Strategic Studies and International Politics from the University of Macedonia. Her current research interests include the European financial crisis in the Mediterranean region. Originally published at Triple Crisis

Sticking with Austerity

For six years now Greece has lived under unprecedented austerity policies demanded by its lenders and accepted by a succession of governments. The social and political reality created by austerity was sharply shown by two events that occurred on the same day in October.

First, a report on poverty and social exclusion in Greece was released by Eurostat, the European statistical service, indicating that, in 2014, 22.1% of the population lived in conditions of poverty, 21.5% were severely materially deprived, while 17.2% lived in families with very low work intensity. Altogether, 36% of the population faced one or more of these terrible conditions. The percentage was 7.9% higher than in 2008.

Second, the Greek parliament approved a new piece of legislation imposing further austerity measures as demanded by its creditors – primarily the EU and the IMF – to meet the terms of Greece’s recent, third, bailout agreement. The new package involves cutting 14.32bn euros of public spending, while raising 14.09bn euros in taxes over the next five years. The measures will affect primarily private-owned businesses, homeowners and employees close to retirement.

Austerity policies were first adopted in 2010 as a “solution” to the economic crisis that burst out in 2009-10. Severe cuts in public spending, deep reductions in wages and pensions, enormous tax increases, and a stripping back of labor protections have sought – presumably – to stabilize the economy and gain the confidence of financial markets.

In practice the measures have plunged the Greek economy into a prolonged recession that has had the disastrous social implications outlined by Eurostat. Unfortunately, the current Greek government, formed by the left-wing SYRIZA party, appears determined to keep the country on the same path.

The Crushing Burden of Unemployment

In the course of the recession the Greek economy has shrunk by more than 25%. At present more than one in four of the workforce is currently unemployed (one in two among the youth), and more than one million jobs have disappeared. The prospects for improvement, given the third bailout, are dim at best.

In Thessaloniki, Greece’s second largest city, located in the heart of Macedonia, Giannis and Lena agree to discuss the economic crisis over a cup of coffee. Both in their early 30s and MBA degree holders consider themselves lucky to be employed. Giannis is a merchandise buyer at a company that imports household items and Lena works in the export department of a pasta-producing enterprise.

“Every Greek family is experiencing the crisis their own way”, Lena tells me, “Unemployment, wage and pension cuts, taxes and increases in prices of basic goods have caused despair to millions of people”.

Giannis shares a bit more. His family’s income has taken a real hit. His father’s wage has been reduced by one third and his mother got laid off three years ago. She used to work at a ready-made garments industry that went bankrupt soon after; for a year and a half she hasn’t been paid and she is still claiming the money she is owed.

Like so many others, Giannis has been unemployed for years. There was nothing he could do other than hope to get accepted at one of the five-month temporary work programs in the country funded by the EU.

“You’re being deprived of the opportunity to work during the most productive years of your life”, Giannis tells me as he explains the psychological burden of unemployment. “There’s a feeling that you’re standing still even though the whole world keeps moving and after a while you feel numb, you accept that’s how things are and you are unable to get out of the rut”.

“No legislation can guarantee even the most basic labor rights”, Lena says describing the way employers have systematically exploited people’s need to work using the specter of unemployment as an excuse to further reduce wages. “It’s no wonder that so many well-educated young people choose to leave the country”, she adds.

Brain Drain

Since the unemployment rate for people with tertiary education is current just under 20% – the highest in the world – it is no surprise that more than 200,000 young Greeks have already left the country in search of better opportunities abroad.

I discuss Greece’s brain drain with Victoria, a first-year electrical and computer engineering student at the University of Thessaly. Victoria is just 18 but she is already considering leaving Greece once she finishes her studies. Who can blame her? She is highly unlikely to find a job in her chosen field after graduation.

“Don’t be mistaken”, she says, “all those young people that seek a better life abroad care deeply for Greece and won’t hesitate to return once things have improved”.

Collapse of Production

The austerity policies have also led the country’s productive sector to near collapse. The decline in industrial production after 2008 reached a staggering 35%. Industrial production in Greece is currently below 10% of its GDP.

To be sure the deindustrialization of the Greek economy started a lot earlier, in the early 1980s. The country’s development model, systematically favoring the services sector and ignoring the primary and secondary sectors, limited its competitiveness and contributed decisively to the dismantling of its production base.

A case in point is provided by United Textiles (ENKLO), a 140-year-old company operating in Central Macedonia and Thrace with a strong presence in international markets, skilled workforce, advanced technology and excellent product quality. The company closed down in 2009, sinking under a debt burden of 350 million euros

The laid-off workers, unable to find another occupation and refusing to accept that the company would never operate again, have been guarding the buildings and maintaining the equipment ever since its shutdown

“We are here night and day to make sure that the machines remain unharmed”, says Petros, who has worked as an electrician for 25 years.

But things got immeasurably worse after 2009. During the recession, about 250,000 Small and Medium Enterprises have closed down. Many more have been at the verge of closure due to reduced income and increased financial obligations to social security funds, tax offices and banks. Thousands of small business owners have opted to relocate to neighboring Balkan countries that offer lower labor costs and corporate tax rates

“Reality has shown that the austerity measures applied across Europe are not the most effective response to the crisis”, says Costas, a civil engineer from Patra, the third largest city of Greece in the southern region of the Peloponnese. Costas is 45 years old and a former member of SYRIZA, the current governing party

“No other country in the Eurozone has had to impose such far-reaching austerity programs”, he says, “and I just don’t see how the Greek society can sustain the burden of yet another bailout”.

The policy is simply not working even on its own terms. After five years of austerity and three bailout agreements, Greece’s national debt currently amounts to 320bn euros – it is right where it was in 2010. But the ratio of its debt to GDP has shot up to 174%, and it is projected to rise to 200%. The country’s destroyed economy would never be able to sustain this huge volume of debt.

The first article in a series

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  1. JTMcPhee

    Monty Burns tents his fingers and hisses “Excellent!” through his canines… Will this reportage go on to explore how the post-Greek kleptocrats and oligarchs are “doing” as the nation, the oikos, the idea of Greece, evaporates, as it “burns” away?

    1. JTMcPhee

      Should have said how the Elites are doing PERSONALLY as the looting and killing they’ve catalyzed and connived at and gotten rich off of, following the usual course of human events, has amped up… Detail and anecdote might help “sharpen the contradictions” and the billhooks and pitchforks…

  2. Keith

    The IMF and World Bank have been implementing similar reforms in third world nations for decades with pretty much the same results.

    Bankers and psychopaths never learn from experience because they never take responsibility for anything.

  3. Keith

    Bankers and psychopaths never learn from experience because they never take responsibility for anything.

    More of the same ……..

    Many years ago when Alan Greenspan first proposed using monetary policy to control economies, the critics said this was far too broad a brush.

    After the crash Alan Greenspan loosened monetary policy to get the economy going again. The broad brush effect stoked a housing boom.

    When he tightened interest rates, to cool down the economy, the broad brush effect burst the housing bubble. The teaser rate mortgages unfortunately introduced enough of a delay so that cause and effect were too far apart to see the consequences of interest rate rises as they were occurring.

    The end result 2008.

    With this total failure of monetary policy to control an economy and a clear demonstration of the broad brush effect behind us, everyone decided to use the same idea after 2008.

    Interest rates are at rock bottom around the globe, with trillions of QE pumped into the global economy.
    The broad brush effect has blown bubbles everywhere.

    1. IDG

      A majority of Greeks have been companions of Tsipras believing the bullshit of can-kicking or worse political options, pretending otherwise anymore is naive.

      You can only avoid your own responsibility for so long… same goes for all others in Extend-Pretend EU Land.

  4. German native speaker

    “For six years now Greece has lived under unprecedented austerity policies demanded by its lenders”,
    How come the article fails to include, once more, that for many years before that, Greece had its hands very very deep in the cookie jar of the lenders.

    Second, it has been reported that the current Tsipras government failed to pass half the laws that were agreed upon as a condition of the new bailout, and of the laws that were passed, almost none were actually implemented.

    1. Portia

      Just because governments and banks collude to make piles of money and crushing obligation through debt creation does not mean that people who knew nothing and did not profit should pay with their lives. This is a pretty common tactic of economic enslavement. Criminals who perpetrate this do not get punished, they are elevated to judge, jury and executioner.

      1. Piotr

        But they profited, they got tons of vote-buying pork over the years. Sure enough they profited LESS than guys upstream. Just look at how their public sector bloated at these times. Shuffling paper, living the dream.

        I would agree that people can’t be held to account for what their democratically elected leaders do – if they jail said leaders. If USA shoots Bush, or gives lethal injection to Obama for their wars – victims of these wars should not look for any further grievances from population of USA. If Greeks jail their previous leaders, they should be no longer held accountable.

        Still. Even if 100% of debt is forgone but nobody lends Greece a dime they will have even more austerity. They have not gone down to 0% deficit and this is the only sane, moral maximum deficit that is (anything more is indebting your own children!).

        Instead of bailouts they should have repudiated debt, jailed their leaders and get a massive crash as public sector burns down to the ground (it was bloated above any sustainability – and the people that got hooked on this… that’s their own goddamn problem). By now they’d be out of UE but already rapidly recovering.

  5. Portia

    I am puzzled that economic enslavement is flourishing in a time when slavery is deplored.
    So many organizations exist to stop sex trafficking, slave labor around the planet. How is this any different? Where are the “Free the Slaves” type organizations to help people around the world stop participating in economic slavery perpetrated by the financial industry? The purpose of the euro was clearly described by its “inventor”, Robert Mundell as a means to circumvent the will of people and governments. Too big to fight?

    1. Knute Rife

      Switching from political slavery to economic slavery has always been the norm (e.g. sharecropping) and has been a boon for the rentier class. No need for overseers and slave-catchers; debt does the trick quite nicely, thank you. And the masters get to play on the moral high ground. “You’re free now in a free economy. If you aren’t making it, there must be something wrong with you.”

  6. Klaus Kastner

    Regarding the “unprecedented austerity policies demanded by Greece’s lenders”, one ought to be precise in defining that. Otherwise, readers might jump to the conclusion that everything would have been much better in Greece if only the lenders had not demanded so much austerity. The latter is wrong!

    Greece, to this day, and despite the enormous expense reduction on the part of the state, still needs to borrow to pay all of its bills. “Austerity” did not and does not mean that the Greek state could spend a lot more if only the lenders let them. “Austerity” means that the lenders, while they recognize that they need to lend more for Greece to pay all of its bills, those lenders do not want to lend Greece so much that the state could run an even larger deficits. I admit that those are two sides of the same coin but there is a huge difference between (a) forcing austerity upon a borrower who could otherwise easily finance his expenses and (b) austerity being the result of lenders constraining the amount of new loans they are prepared to make.

    1. Synoia

      Greece, to this day,… still needs to borrow to pay all of its bills

      Read about sector balances in Wray’s Modern Monetary Theory.

      With a balance of payment deficit, the Government has to “borrow” create money in interestbearing account to pay for imports, because if the private sector continually runs a deficit the economy collapses…

      Oh wait, I've just described Greece, Portugal, Ireland, Italy and Spain.

      And the US.

      1. Klaus Kastner

        Thank you for pointing out that one country’s current account surplus is offset by current account deficits in the rest of the world. But that has nothing to do with my argumentation.

        BTW, you can leave the government out of your simple formula. The current account refers to the country, to the entire economy. The Spanish state was in good shape before the crisis but the rest of the country, primarily banks, were overindebted with foreign debt (and then the state assumed that debt…).

        Again, try to remember this: Balance of Payment and, specifically, Current Account refer to the entire economy and not the state (even though the state is the largest player in the entire economy).

        1. John Zelnicker

          @Klaus Kastner – ““Austerity” means that the lenders, while they recognize that they need to lend more for Greece to pay all of its bills, those lenders do not want to lend Greece so much that the state could run an even larger deficits.”

          From Investopedia (since we are talking about economics):

          “A state of reduced spending and increased frugality in the financial sector. Austerity measures generally refer to the measures taken by governments to reduce expenditures in an attempt to shrink their growing budget deficits.”

          So, you can’t really take government out of the equation and still say something relevant about austerity. That’s the reason why the sectoral balance framework is the best way to understand what is going on in Greece and the EMU from a financial perspective.

          The most important point in some ways is that one person’s spending is another person’s income and if the spending of any sector is restrained then income is also restrained, which means less spending, leading to lower sales, causing layoffs and business failures, resulting in increased unemployment. I’m sure you can see that this is not a prescription for growing an economy.

          Austerity is rooted in fatally flawed economic theories which were used to justify limiting government spending (and regulation) so the “animal spirits” of the “free market” would have the confidence to magically appear and motivate businesses and people to spend and spend. Except, without sales and jobs, they have nothing to spend.

          1. Klaus Kastner

            “So, you can’t really take government out of the equation” – my comment did not refer to austerity in general but only to the simple formula which Synoia postulated and which was: “With a balance of payment deficit, the Government has to “borrow” create money in interestbearing account to pay for imports, because if the private sector continually runs a deficit the economy collapses…”. And, obviously, that formula is wrong!

            You simple formula that “one person’s spending is another person’s income”, while correct in and by itself, ignores the all-important question of what the spending is FOR. In simple terms, particularly since the Euro, Greece borrowed to spend on imports and to finance capital flight. There is a direct correlation between government spending and imports. While imports do create some jobs iin the internal distribution system, in the long term they suffocate domestic production.

            You should read up on Keynes, I suggest. He wrote “O patriotic housewives, sally out tomorrow early into the streets and go to the wonderful sales which are everywhere advertised”, but he added that this would only work if the spending was on domestically manufactured products.

            To be sure, I have never argued that austerity was the perfect cure. In Greece, it suffered from faulty application. My only point was that no one really told the Greeks to spend less. All they told the Greeks was that if you want to spend more money, you have to use your own savings, particularly the savings which you have abroad. And if you don’t do that, don’t be surprised that you will suffer because we will lend you money to finance your deficits but there is a limitation of how much of a deficit we will finance.

            1. John Zelnicker

              Austerity is always and everywhere damaging to economies that are not at full employment. Application methods are irrelevant.

              The correlation between government spending and imports cannot be accurately specified without including the domestic non-government sector (individuals and firms). You keep leaving out one or another of the three sectors in the Sectoral Financial Balances framework, which leads to misunderstanding the true effects of austerity.

              What Greece and the rest of the Eurozone need is a massive increase in effective demand and if the domestic non-government sector won’t spend because they have no income, then the government must deficit spend or depend on exports which Greece certainly can’t provide.

              1. Klaus Kastner

                Let’s not forget that Greece could also work a bit on the supply side. The shelves of supermarkets in the North are full of produce from all parts of the world – except from Greece. Greek olive oil is sold cheaply in bulk to Italy. Bear in mind that if you don’t make products but still like to have them, you have to import them. And if you don’t export anything, you will have a living standard only as long as someone gives you the financing for the imports. And when sudden stop occurs, the living standard tanks. In the longer term, living standards correlate with the domestic economic value generation and if Greece doesn’t figure out fairly soon how to generate more economic value domestically, their living standard will decline further, and I mean really decline.

                Austerity alone is no answer just like spending alone is no answer. The problems of the Greek economy have remained the same since Independence 180 years ago: little domestic economic value creation. As long as living standards were low, that was ok. Beginning in 1981, the living standards catapulted whereas domestic economic value creation did not increase in line (in fact, much industry began being destroyed during the 1980s). Sure, with the tsunami of foreign money rather high living standards could be enjoyed but they were fake, i. e. financed with long-term foreign debt. If a poor man hits a jackpot of 10 million and decides to spend it all on consumption, and if he spends 1 million a year, he will have a great life for 10 years and the community where he spends his money will prosper. At the end of the 10 years, he will have to return to the living standards of 10 years before (unless he hits another jackpot) and the community where he had spent his money will suffer, too.

        2. TheCatSaid

          but the rest of the country, primarily banks, were overindebted

          This is what is not made clear enough. It wasn’t the average, “ordinary” citizens who were racking up the debts–yet they are the ones bearing the burden of austerity.

          It makes no sense–at least, not in a fair way–to talk about “Greece’s debts” as if they were the result of profligate citizens.

          Why aren’t the banks (i.e., any corrupt officials, owners, and financial elites) shouldering the pain?

          I understand Germany prevented Greece from cutting back on military spending.

          And Greece should be forced to reduce its many kinds of corrupt payments/loophopes, such as to fraudulent media/PR organizations, and the tax loopholes granted to the Greek Orthodox Church.

          It’s the whole massive corruption of the upperclass that needs to be addressed, but for some “strange” reason the IMF/EU doesn’t seem to be wanting much movement in that direction.

          1. Klaus Kastner

            When 300 BEUR in new debt flow into an economy the size of Greece’s, EVERYBODY benefits in one way or another. As one Greek politician once said in an attack of honesty: “We all enjoyed the lunch together!” When I tell my brother-in-law that he benefited from the country’s debt, he hits the ceiling. He owns a small earth moving and building materials company, is a workaholic and never borrowed a cent. And yes, he did very well during the go-go years. But then I ask him where he got his orders from and where those people got the money to pay him. And then it turns out that his business boomed because the village and other public bodies spent money like there was no tomorrow, money which the state had borrowed and which now became income to a private individual who had never borrowed a cent.

            Remember: when the state borrows abroad, a miraculous transformation from sovereign debt into private incomes and wealth occurs. The state borrows money to spend it and on the other side of the spending equation are eventually private economic agents. So yes, the gravy of the Euro-party was not spread out evenly throughout all Greeks. A smaller group, the clever ones, benefited unproportionally, not to say unethically. But even the last pensioner in the last small village benefited, if in no other way than that his pension increased way above realistic terms.

  7. Jim

    So what can Greece do? According to Yves defying the Troika in the last crisis would have been disastrous because the Greek government had not taken the necessary technical measures to survive on its own. Shouldn’t they now undertake the technical measures they neglected in order to prepare for default and a withdrawal from the Eurozone?

    1. Banana Breakfast

      Probably, so that next time they at least have SOME leverage. This should have been their approach in 2009, and certainly putting all possible resources into preparing for an exit was the only wise and responsible decision for SYRIZA upon election last year. But with every year that passes the situation is more desperate, and the consequences of exit more dire. At this point, it seems probable that the cure will kill as surely as the disease, at least for a long time after the currency switch.

  8. blert

    Greece is the victim of macro-embezzlement — which is now practiced on a global scale — everywhere.

    It’s kakistocracy — writ financial.

    The stash that might reduce the pain is secreted in the West — largely Switzerland.

    The insane real estate prices at the top end of the market are wholly due to theft.

    If the purchasing power of thieves were removed, prices would collapse.

    Hence, the high end real estate market is our BEST barometer of macrco-theft.

    We’re describing entire governments riven with thieves — and their cronies.

    Brazil, Argentina, Greece, on down the line… you have rulers that play and ply the populace with bread and circuses — while they march the national liquidity off to Switzerland.

    And this is a liquidity largely generated by loans extended from the First World.

    The first step to stop this epic ruin: stop lending money to the Third World. It will all be diverted into booty. Only the loan will remain.

    We are going to have strong arm Switzerland into coughing up the lucre.

    And we are going to have to write off the old loans.

    It’s going to HAVE to be strictly cash and carry with the Third World.

    You can’t give the crooks credit cards. For the end game is always the same.

    And we are looking at it.

    1. Synoia

      Oh dear, there you go again blerting out in ignorance.

      If a country has a balance of payments deficit, the government must fund the deficit, and the private sector must run a surplus.

      Greece is the victim of macro-embezzlement

      No Greece is the victim of trying to run a government of a country with a trade deficit with a and sharply reduce the government deficit. The private sector collapses.

      The stash that might reduce the pain

      The stash is caused by lack of death duties (estate taxes) and of high marginal tax rates on income, coupled with unequal taxation on capital gains, wages, and unearned income (rents).

      Part of the solution is using some of that NSA surveillance by the IRS.

      top lending money to the Third World

      It is called “recycling the surplus”. Itis a part of sector balances.

      And we are going to have to write off the old loans.

      True. But it is only a balance at the Fed. Name one person hurt by writing off those loans. (Hint, not taxpayers),

      And we are looking at it.

      True. And what we are looking at is an economic illiterate idiot,.

      1. blert

        You really ought to be restricted to reality.

        The macro corruption of these nations staggers the imagination.

        Athens can’t collect its taxes on the books — from the trival to the absurd.

        As for your total non-solution… which then must leave the loans to crush these nations ?


  9. financial matters

    Bill Mitchell discusses how the ECB can act in an anti-austerity manner, similar to other central banks.


    “It is clear that recession in Europe could have been avoided had the ECB used its currency issuing capacity to fund all Member State deficits up to the level necessary to offset the fall in non-government spending after the GFC began.

    Mass unemployment arose in Europe because the government deficits were too small. In the specific institutional context, this meant that the ECB had to overcome the bond market aversion to fully fund the necessary deficits and use its currency issuing capacity accordingly.”


    I don’t think this works for the ECB because of the lack of an enforcement mechanism. Other central banks work in concert with a state taxing authority to give value to the currency. This is what overcomes the bond market aversion to fund the necessary deficits.

  10. Gerard Pierce

    You are dealing with a psychopath who has the gun is not only willing but eager to use it.

    Tsipras , only chance is to survive until France or Spain start the revolution.

    All of the other choices are worse.

    1. Carlos

      They need enough like minded Governments to challenge Germany and a change of leadership in Germany who can back down whilst saving face.

      Quite a challenge. Need Italy and France on board.

  11. Peter Cornell

    Why do people who get themselves into a hole always think it is someone else’s fault and that taxpayers of completely different countries should bail them out?

    1. Lambert Strether

      Algernon: Really, if the lower orders don’t set us a good example, what on earth is the use of them? They seem, as a class, to have absolutely no sense of moral responsibility. –Oscar Wilde, The Importance of Being Earnest

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