Lynn Parramore: Austerity Without Debt Relief Courts New Unrest in Greece

Dave here. I recognize the strong editorial position on Greece and Syriza here at Naked Capitalism. This piece gets us updated on the current state of play, and the exasperation with the continued pillaging of the country. Note the IMF/Germany split. I’m not sure there will be a day of reckoning on the part of the Greek government – it’s certainly not foreordained, especially when the creditors have a strategy and the resistors don’t. But Galbraith worked pretty closely with the government last year, so I’d consider his exhaustion as somewhat revelatory.

Yves here. As we discussed yesterday, in fact, Eurogroup meeting that Galbraith discussed below led to what was deemed to be a “breakthrough.” It looks more to be the parties admitting they were willing to discuss issues that were widely expected last year to be part of an eventual Greek deal…that of some debt “relief.” The problem is that the IMF let the cat out of the bag last summer: that even the IMF, with its belief that the failed approach of austerity works, which is even more dubious with a failed economy like Greece’s, could not make the bailout math work unless Greece got reductions in the principal amount of its debt, not mere extensions of maturities and interest rate reductions and deferrals.

What was presented in the media yesterday as a German climbdown was actually much more of an IMF climbdown, unless the IMF is playing a waiting game, of not getting tough again until after the Brexit vote.

Finally, we’ve repeatedly played the role of being the bearers of unpopular truths. The Greek population is up in arms over the latest round of Parliamentary capitulation, and deservedly so. Greece is being put on the rack out of a misguided faith in a bad orthodoxy which is guaranteed to rip the Eurozone apart if the refugee crisis doesn’t do the job first. Germany is using austerity to try to make its contradictory goals work. Germany wants to continue to run trade surpluses with the rest of the Eurozone, and not finance its trade partners, either directly or via fiscal transfers.

The problem with virtually all of the sympathizers with the long-sufferig Greek public is they fail to understand the degree to which Greece is trapped. As terrible as austerity is, trying to go back to the drachma would produce even worse dislocation. Greece is not self sufficient in food, petroleum or pharmaceuticals. And it also has a tourist industry that amounts to roughly 18% of GDP. Greek imports and its tourist system depend on having payments system as the basis for buying foreign goods and for tourism (tourists are heavy users of cards for hotel payments and car rentals). It took eight years of planning and three years of execution for the euro to be introduced smoothly (see here, here, here and here for discussion, and be sure to read the comments sections, where banking IT professionals weighted in). As we summed up in a comment:

Greece’s banking system need to be able to interface with international banking systems, which included electronic point of sale terminals, which involves a large industry of fragmented intermediaries. So Greece needs to make changes on its end in all its systems to be able to interface to Swift and other systems. and it won’t be allowed to do so until things on its end are up to the very high standard required.

Moreover, tourists require access to EPOS [electronic point of sale] systems. Tourists expect to be able to use credit cards and get cash with their ATM cards. Not having that pretty much kills Greece’s tourism industry, which is 18% of GDP. And Greece has NO power over how quickly all those fragmented service providers get around to doing what they need to do to allow for conversion from drachma in Greece to other currencies.

Not having a banking system that connects to Swift means no imports, unless you think trucking cash across the border and opening banking accounts and making transfers there is a reasonable way to do business. And that assumes that those banks will allow for accounts to be opened with Greece’s new parallel currency and will accept it for foreign exchange transactions. Branches won’t have the latitude to do it until head office has the requisite systems in place.

No/restricted imports means shortages of food, petroleum, and drugs. Those are all essentials.

And before you pooh pooh this discussion, please read the news stories on how the Greek economy came to a standstill with a mere two-week bank holiday in 2015. Food shortages were starting right before the banks went back to a semblance of normal operation.

In other words, as unpopular as it is to say it, Greece is in a terrible position. It has no bargaining leverage and ignorant, abusive ideologues control its fate.

By Lynn Parramore, Senior Research Analyst at the Institute for New Economic Thinking and a Contributing Editor at AlterNet. Cross posted from INET Economics.

A breakdown in negotiations may be the best outcome of Monday’s Eurozone finance ministers’ meeting on debt relief for Greece, warns INET grantee and University of Texas economist James K. Galbraith. That’s because, he believes, Greece’s debtors continue to demand unsustainable austerity measures as the price for bailout funds — measures the Greek government will, sooner or later, be forced to halt.

“A breakdown of the [Brussels] discussion would be the best outcome,” Galbraith says. “That would move some of the creditors a little bit more towards reality, perhaps. There’s no point in making more concessions to them. They just keep on asking for more. There’s no way to satisfy these people. They’re engaged in a land grab. They have a strategy to achieve that, but the time of reckoning will come sooner or later.”

The Brussels meeting follows a day of dramatic protests by thousands of citizens in Athens and Thessaloniki on Sunday, as Greece’s parliament passed a controversial new round of pension and tax reforms demanded by creditors.

Monday’s meeting is the first in six years to focus on the issue of debt relief measures, which may be necessary to avoid a Greek default in July, when the country’s next major repayment to the International Monetary Fund (IMF) and the European Central Bank comes due. Jeroen Dijsselbloem, the head of the Eurogroup of finance ministers, has expressed hope that a deal can be reached later this month. And Greek Prime Minister Alexis Tsipras has said that the Brussels meeting is critical to achieving debt relief and breaking a vicious economic cycle.

But the creditors are divided on the issue, with the IMF favoring debt relief, while Germany leads opposition. Galbraith expects the IMF to capitulate. “The IMF is making noises,” he says, “but they are not going to have the cojones to stand up to the Germans.”

Galbraith, author of The End of Normal and professor at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin, has been a close observer of the Greek crisis. His forthcoming book, Welcome to the Poisoned Chalice: The Destruction of Greece and the Future of Europe, will be published in June by Yale University Press. He discusses what is at stake and whether any chance of debt relief exists in the current climate. He believes that on the current path, a Greek default is inevitable, and with it a halt to unsustainable austerity measures.

To the extent that the government pursues the current policy, social instability is likely to escalate.

“There will be more resistance,” Galbraith warns. “It’s the only sensible thing. The Greek people are being maneuvered into a position where they cannot pay their mortgages and they are being dispossessed from their homes. For what? For debts that were incurred under previous governments for completely useless things where the benefits went to German construction companies and French arms firms. The notion that this debt should be paid is absurd.”

New research confirms that the vast majority of the bailout funds Greece is receiving are, in fact, being paid to existing creditors, with less than 5% going to Athens’ fiscal budget. Similar conclusions were reached in Pablo Garcia Bortz’s Institute working paper “The Greek ‘Rescue’: Where Did the Money Go?”

Galbraith believes that the capitulation to the creditors’ terms in July 2015 by Tsipras, despite having been elected on a wave of anti-austerity protest, reduced Greece to a colony. “From that point forward, all policy has been dictated by the outside and the government is simply a colonial administration, nothing else.”

He does not foresee a change of course from Greece’s creditors. For that, he says, “There would have to be a general uprising through the south of Europe.”

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About David Dayen

David is a contributing writer to He has been writing about politics since 2004. He spent three years writing for the FireDogLake News Desk; he’s also written for The New Republic, The American Prospect, The Guardian (UK), The Huffington Post, The Washington Monthly, Alternet, Democracy Journal and Pacific Standard, as well as multiple well-trafficked progressive blogs and websites. His has been a guest on MSNBC, CNN, Aljazeera, Russia Today, NPR, Pacifica Radio and Air America Radio. He has contributed to two anthology books, one about the Wisconsin labor uprising and another on the fight against the Stop Online Piracy Act in Congress. Prior to writing about politics he worked for two decades as a television producer and editor. You can follow him on Twitter at @ddayen.


  1. EndOfTheWorld

    I wonder if you can get some good deals right now vacationing over there—island hopping, beach bumming, maybe a little biking or hiking?

    1. TheCatSaid

      Last year I saw posts elsewhere about great bargains and extra transport being required due to the influx of tourists. People brought over cash and it wasn’t an issue, including for car rental. It was a contrast to the claim that Greek tourism was dependent on functioning cash machines.

      It would be good to have many sources of information to understand the current reality.

      1. Yves Smith

        You need to make an extremely large deposit to rent a car, a minimum of 1000 pounds, to secure against theft or damage. Moreover, you seem unaware of the fact that most tourists use credit cards for hotels not just out of convenience, but to allow them not to have to pay for the vacation effectively in advance (by bringing cash). Lots of stats on that. I personally do not like carrying more than $1000, ever, and would not be able to go to Greece and use cash for that reason.

        I have a contact who had a great time in Greece last year and brought cash. He’s also rich enough to have his own private jet and not mind carrying lots of cash.

  2. TomDority

    Notice how the pensions and cuts to the people who have actually worked their lives for a better society have been kneecaped by ‘creditors’ who have not contributed nor worked for anything better. The so called ‘failed economy’ is a misleading statement as it was a deliberate take down. Its like saying that any one of the 19 toddlers who shot and killed themselves with handguns were faiIed humans.

  3. Larry

    I suppose this is not much different with what we do here in the United States, where cities that are “failing” can be put under enormous pressure and deprived of essential resources. The city of Detroit was largely destroyed to the point where it became such a deal financial predators like Quicken Loans came crawling back. Flint MI is an example of how austerity can be used to justify literally poisoning people to save a few bucks. Corrupt politicians hand over pension funds and government contracts to enrich a select elite, and then when it comes time to pay contracts owed to workers or invest in infrastructure cry poverty. Greece should be an example of how failed and corrupt capitalist principals are, but instead Greece must be sacrified to hold up a bankrupt system.

    1. Yves Smith

      Yes, I can’t quote it exactly, but Varoufakis said not long ago something along the lines of, “America does not allow states to go bankrupt,” and I almost fell out of my chair. NYC’s fiscal crisis? California having to issue IOUs? And now Detroit? We’ve done quite the PR job overseas.

  4. tegnost

    Thanks, yves, for being the bearer of unpopular truths.the greek crisis has actually proven to be a red line for my tech friends, who always think the answer to everything is more tech, in this case, the line that was supposed to shut me up was, “they’ll switch to bitcoin” but this series of articles (over the entire span of the mess) makes the complete impossibility of that clear. Thanks again, and of course to lambert and dave as well.

  5. DanDaniel

    There are over 100,000 very well paid bureaucrats in Brussels. If Greece defaults, if Britain succeeds in Brexit, what will happen with the house of cards of EU? Ask yourself whether any one of these 100,000 bureaucrats whether that any of them will risk their job for the good of Greece, Britain or EU – because they are the ones making daily decisions as how the EU should go forward. The group thinking for preserving the current status is much more powerful and it will prevail. Whoever thinks that the EU system will change for the better from inside is just naive.

    1. Irrational

      Slightly exaggerated if you are speaking of EU officials. It’s 55k in all institutions and locations.

  6. steelhead23

    ignorant, abusive ideologues control its fate

    Yes, I think that is the dominant issue, but when otherwise intelligent people do dumb things, perhaps we misunderstand their motivations. Given the scale of Greece’s outstanding debt, its seems pretty obvious that the global financial system could withstand a wholescale Greek default without a whimper. But, were other southern European countries to also cry for relief, countries with larger debts, things could get interesting. I also wonder about the knock-on effects of a credit event – given the system’s propensity for creating derivatives. So, while I think your assessment is mostly correct, I do wonder if there is a certain heartless rationale involved as well.

    1. reslez

      Elites create a heartless system
      And enforce its heartless rules
      On others, never themselves
      And we somehow misunderstood their motivation?
      Judge by outcomes, not intent. Outcomes never lie.

  7. Robert Dudek

    According to Varoufakis, Schauble was very open to a negotiated exit from the Eurozone – it was chiefly Varoufakis himself that didn’t want such a thing. A two year transition during an amicable divorce would have been the best result.

    1. Synoia

      The Greek people themselves wanted to stay in the Euro.

      However I don’t remember in the referendum that the questions were directly posed.

      1. Do you want to stay or leave the EU?
      2. Do you want to continue with the Euro or the Drachma? (If Greece keeps the Euro, it becomes a colony, as it was under the Turks.)
      3. If Greece changes to the Drachma are you willing to pay the replace the banking system (with software from the UK, Czech Republic, South Africa or equivalent)

      The IT problem is surmountable, not by changing all the Greek software, but by acquiring a set of software (for a price) from an country with its own currency, and living with the “Greekification” of the software.

    2. Yves Smith

      I’ve read Varoufakis’ account and I took it differently. This was a taunt from Schauble, not a serious proposal. “Do you want to leave? We’d be willing to pay 50 billion euros to have you gone.”

      With the four-month runway to drop dead date, the failure to do any prep for this idea in Germany, much the less the other countries that would also have to get Parliamentary approval, no way was this napkin-doodle of an idea gonna happen. And that’s before you get to the IT issues we’ve documented at length.

  8. Chauncey Gardiner

    The self-described “Magic People” at Draghi’s ECB are back in action, creating the euro equivalent of $80 billion per month out of thin air, a river of Cash flowing into the primary dealers, and from them on into … well, into what?…

    Who are the lucky recipients of the Magic People’s largesse? And if they’re so special, then why aren’t the Greeks?… and why not increase the distribution amounts?

    …“We are magic people. Each time we take something and give to the markets — a rabbit out of the hat.” —ECB Governing Council member Vitas Vasiliauskas

  9. Laughingsong

    This has been such a disturbing train wreck- I don’t have sufficient writing chops to express here how awful I feel following it, but of course one has to stay informed. And bar ideology (surrounding Greece and the neoliberal expletive that led to it) it would have been so avoidable.

    So I get the difficulty of Grexit. But do they truly have no other options?!? Anything! Is this an actual ‘TINA’ moment? Or are they completely at the (cough)(hack)mercy(cough) of these seemingly psychopathic officials and creditors. I truly would like to see a discussion here (or anywhere really, I guess) of people with the wherewithal to present realistic ideas.

    I would just like to think the Greek people aren’t entirely doomed to twist forever in this slow motion hanging. :-(

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