Opinion: The Great Ceausescu Plan for Greece
By Dr Zoltan Pogatsa, economist, Greek crisis specialist
Adapted and introduced by Henry Charalambous
The Sigmalive expert draws similarities between two very different countries in quite opposing historical eras-Greece and Romania- but sharing one basic element that seems to transcend any sociological perspectives, unique to the periods in question. The erosion of the real economy through an austerity that brought the countries to their knees, with its leaders privatizing public utilities unchecked, accumulating debt and depleting national sources of income, both natural and monetary. The austerity adopted was mostly a result of trying to pay off lenders for these reckless actions. As Dr.Pogatsa argues, going back to the taxpayer again and again is a vicious circle that will gradually erode purchasing ability, leave liquidity in tatters and public finances a mission impossible. Here’s how he sees the situation unfolding.
In the 1980s the Romanian Communist dictator sought to repay his country’s debt by draining the resources of his nation. Famously, the result was economic collapse and a nation bled dry.
Something similar is happening to Greece. If there ever was a clear and blatant policy failure, the years of austerity imposed on Greece from 2010 onwards is the obvious choice.
The extent of the devastation is widely known: a collapse of the economy by 25%, an increase in debt from a level barely manageable (110% of GDP) to unmanageable (180%), massive unemployment (up to 30% unemployment and 60% youth unemployment) and widespread poverty. Governments implementing any other economic philosophy would have been chastised by the business media for far less flop, and certainly pressured out of office.
In this five year period the net tax burden on the top half of society was increased by no more than 9%, and on the lower half by 338%.
Yet Greece, a devastated society, is about to get even more austerity. This is in spite the fact that the EU has adopted the Lisbon/Europe2020 strategy for competitiveness, which refers to the exact opposite: raising productivity by investing into human capital.
There is no mention of excluding any member state because they are heavily indebted. The strategy applies to all. Yet in reality the EU’s own official strategy is all but relinquished, effectively banned just like the Keynesian alternative manifested in Syriza’s original Thessaloniki Programme.
The European Commission has not been seen pushing Greece to raise its dismally low spending on education or research in order to increase the ability of the country to produce value. The Eurogroup, an informal consultative body without formal rules and regulations or records of proceedings rules supreme over official EU strategies and formal institutions, and only allows one kind of economic philosophy: the neoliberal one based on draining resources dry. Greece is getting a Great New Ceausescu Plan.
Let us now differentiate between austerity and reform.
Austerity is based on culling public investment that is vital for the economy to produce value in the future. It means raising taxes, which in and of themselves reduce competitiveness even according to neoliberal dogma.
It also calls for severe cuts in wages and pensions, a severe dose of which has not only failed to restore external competitiveness in recent years, but gone the other way, leading to increased poverty and a missing demand in the economy leading to high unemployment.
Reforms are meant to release the value creating potential of business. They would mean a comprehensive, meritocratic overhaul of bureaucracy and state functions, based on a nuanced review of capacities and competencies in a very long list of policy areas. No such process has been launched or is foreseen.
Reform does not mean labour market liberalisation, a neoliberal dogma rejected by many leading economists, amongst them the Nobel prize laureate Robert Solow. (More at http://www.britac.ac.uk/pubs/proc/files/97p189.pdf)
It does not mean denying Greece industrial collective bargaining that exists in almost all Northern and Western European states, including Germany. It does not mean liberalising Sunday trading, banned in many Northern European economies, including Germany. It does not mean liberalising product markets that are themselves often tightly regulated in many Northern European economies.
What is Greece undergoing? Taxes have been raised on restaurants and the islands. How that is going to make Greece more and not less competitive is an open question. The “one sided” measures adopted by the democratically elected Syriza government will be overturned. This includes scrapping social support for the poorest pensioners, while ignoring the effects of increased unemployment and undeclared labour on the sustainability of the pension system.
Once again, how that will raise competitiveness, rather than decrease local demand, is a real mystery. In fact the new plan even instructs the government to compensate for a 2012 Constitutional Court ruling against certain cuts to the pension system!
The new plan will mean that a very unfair property tax that uses pre-crisis prices as a basis for taxation, and which was sometimes applied retrospectively (!) in recent years will remain in place. It means Syriza’s new law on transfer pricing, meant to capture vital revenues from transnational companies, will be reversed.
It almost goes without saying that after two memoranda which never mentioned the word ‘offshore’, once again there are no provisions on what to do about the massive tax base leakages from Greece to tax havens. Public sector rehiring will also be reversed, leading to social anguish, frustration and further loss of local demand.
The plan takes Ceausescu’s philosophy to a whole new level by introducing robot austerity! If the target deficit is not achieved, there are further automatic spending cuts, no questions asked, no negotiations possible. It has to be said that the target deficit will certainly not be reached, since the government itself has called the plan recessionary in the recent parliamentary debate.
Theoretically there is a developmental element in this plan, but only revenues from privatisation materialise. The family silver will be sold, at asset prices depressed by the crisis itself. Even then, the initial part of such revenues will be spent on recapitalizing the banks that were asphyxiated by the European Central Bank as a form of political intervention, an action detailed by leading Eurozone academic experts Charles Wyplos and Charles de Grauwe. Just like after 2010, when Western European and Greek banking losses were transferred to European taxpayers in the form of a ‘bailout’ forced on Greece, banks once again take priority before public investment. We know from the experience of past years that only a fraction of planned privatisation is likely to materialise, leaving little if anything for investment.
At the same time Greece will be burdened by yet another massive loan it does not need, taking the country’s debt burden above 200% of GDP, on a programme that is recessionary and unsustainable, and in which no one believes, from the Greek government through the IMF (that insists of partial debt relief) to Wolfgang Schaeuble. In addition, Greece remains out of the European Central Bank’s bond buying programme, which would have provided a cheap source of financing since the start of the year.
The bizarre, self-defeating philosophy of austerity is supposed to reinstate growth in an economy by restoring the confidence of investors. In reality, what it does is eliminate the trust of investors who know very well that recessionary measures and a lack of public investment are likely to lead to a collapse of demand for their goods and services.
NOTE-Dr.Zoltan Pogatsa is detailing his personal views.