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Defending Greece against failed neoliberal policies through the creation of sovereign debt for the productive economy

photo of Michel Bauwens

Michel Bauwens
6th February 2010


Below is a first excerpt from a very important, crucial editorial by Costas Douzinas in the Guardian, which calls for resistance against EU/IMF imposed policies which have already a record of destroying many economies. But resistance is not enough, alternatives are needed. The second excerpt is from Ellen Brown, who has a set of concrete monetary reform proposals, that have been successfully applied by for example Argentina.

1. Costas Douzinas

“Greece is in the eye of a profiteering storm,” Papandreou complained at his broadcast. He was referring to the reduction of Greece’s credit rating by three non-accountable private companies and the subsequent market speculation on Greek bonds financing the deficit, which led interest rates on sovereign borrowing to rise 4% above baseline. This is a repetition and intensification of the 1992 Soros attack on Britain’s currency, which led to the humiliating exit from the European Exchange Rate Mechanism, and the speculators’ attack on British banking in 2008. It marks a dismal state of affairs accepted by the European Union and governments: a few uber-capitalist hedge funds having brought down major banks are now betting on a country’s bankruptcy, hoping to bring it about through their self-fulfilling, short-selling positions.

There is no doubt that public sector employment and patronage have been used by the Papandreous and Karamanlis, , the ruling dynasties of post-war Greece, for political benefit, hugely augmenting the sector and its debt. There is no doubt that substantial tax evasion, corruption, and clientellism have contributed significantly to the current woes. But the cure is much worse than the disease and will be born as always by the usual victims: wage-earners, low-income groups, subsistence farmers and the unemployed.

On a broader front, Greece is becoming a test case for the new phase of neo-liberal correction in the wake of the economic and financial crises. The fiscal and taxation “stability” measures continue an idolatrous set of economic dogma that came to grief in 2008 but still dominates the thinking of European political leaders. The privatisation, deregulation and financialisation black arts have been theoretically rejected by many erstwhile believers, but are still dominant in the environs of a few elite business schools and the European commission. Obama launched last year a $787bn fiscal stimulus, which includes tax cuts, expansion of unemployment benefits and increased spending in education, health care, infrastructure and the energy sector; European Greece is condemned to fiscal starvation. Japan’s public debt is 225% of GDP and is financed through internal borrowing, with only 6% in foreign hands ; Greece is condemned to borrow on the foreign markets, paying interest that can only be called usurious. Economics commissioner Joachim Almunia was cynically clear about the aim of the “stability” plan, saying that Greece needs further “pension reform, healthcare reform, labour reform”. This is a brazen attempt to use a comparatively small debt problem to radically alter the class and state-society balance in a country known for its radical politics and militant unions.

The legitimacy of the European Union is based on principles of social justice and solidarity. Joseph Stiglitz reminded Europeans of their traditions in these pages by calling for a euro-bond issue to help Greece and other indebted economies. Such an immediate palliative would act as the tragic deus ex machina, but the neoliberal ghost has displaced god from the machine.

There is an even more worrying aspect to these catastrophic developments. Papandreou was elected four months ago on a platform of redistribution and social justice. He has now accepted to do exactly the opposite. This is a radical attack on politics and the best expression of the neoliberal hatred for democracy. Commissioner Almunia advised Greek politicians and the public to support the measures, adding a thinlyguised threat that revealed the staggering idolisation of the markets and the feigning of regulatory impotence. The markets could speculate successfully against Greek bonds, driving the cost of borrowing to unsustainable levels, only because the EU has set the public debt ceiling at an unrealistic 3%. The result is that the EU pushes Greece from one end, the markets from the other. This is a man-made perfect storm. Politicians and Eurocrats have accepted the role of bit players in a casino economy that has been declared above politics.

The violent impoverishment of large masses, the extensive privatisation of services and utilities through the radical reduction of the state sector, and the extensive dependency on foreign markets for servicing the debt amount to a loss of sovereignty compared to a state under foreign occupation, to an extensive re-arrangement of national assets in favour of capital and a serious European legitimation crisis.

Greeks are a proud people. They have been constantly bombarded by the media, the government and pliant academics intent on making them believe that they are to blame for the failures of a system none has ever voted for. Here in Britain we are well used to TINA; but we also know that there is always an alternative. Their current predicament puts Greeks at the forefront of a wider attack on the European principles of democracy, social justice and solidarity, always a little rhetorical but now comprehensively breached. Ideally, the government would forget the bogus orthodoxy that makes Greece as sovereign as Iraq and call for a national front to resist this barbaric attack. Such a move would mobilise national pride and a sense of injustice. It would divert Greek nationalism from its recent extreme, rightwing, xenophobic pathology to something much closer to the Hellenic tradition: the defence of democracy. Iceland called a referendum to decide on the repayment of its debt; so should Greece.

This is unlikely to happen, however, because the ruling party is too mortgaged to old clientelism and neoliberalism. The absence of a government-led reaction raises the stakes for the left, one of the strongest in Europe. The left has the historic responsibility to mobilise the Greek public against this tsunami of anti-democratic idiocy and injustice. The Greeks have shown that they know how to resist, from classical Antigone to December 2008 Athens. Already farmers have blocked main roads leading to the north and Bulgaria, making Barroso threaten legal action. Public servant strikes and a general strike have been called for later this month.

Additionally, the left must mobilise European public opinion. If the attack on mining communities and the NUM in the UK became emblematic of early neoliberalism, the attack on Greece is the beginning of its second phase. If Greece falls, the markets will no doubt attack Spain, Portugal, Italy and Britain next, with the European commission washing its hands Pontius Pilate-like, while sporting the robes of a tragic chorus. The future of democracy and social Europe is in the balance – the Greeks must fight for all of us.”

2. Ellen Brown

“Iceland, Latvia and Greece are all in a position to call the bluff of the IMF and EU. In an October 1 article called “Latvia – the Insanity Continues,” Marshall Auerback maintained that Latvia’s debt problem could be fixed over a weekend, by a list of measures including (1) not answering the phone when foreign creditors call the government; (2) declaring the banks insolvent, converting their external debt to equity, and having them reopen with full deposit insurance guaranteed in local currency; and (3) offering “a local currency minimum wage job that includes healthcare to anyone willing and able to work as was done in Argentina after the Kirchner regime repudiated the IMF’s toxic package of debt repayment.”

Evans-Pritchard suggested a similar remedy for Greece, which he said could break out of its death loop by following the lead of Argentina. It could “restore its currency, devalue, pass a law switching internal euro debt into [the local currency], and ‘restructure’ foreign contracts.”

Standing up to the IMF is not a well-worn path, but Argentina forged the trail. In the face of dire predictions that the economy would collapse without foreign credit, in 2001 it defied its creditors and simply walked away from its debts. By the fall of 2004, three years after a record default on a debt of more than $100 billion, the country was well on the road to recovery; and it achieved this feat without foreign help. The economy grew by 8 percent for 2 consecutive years. Exports increased, the currency was stable, investors were returning, and unemployment had eased. “This is a remarkable historical event, one that challenges 25 years of failed policies,” said economist Mark Weisbrot in a 2004 interview quoted in The New York Times. “While other countries are just limping along, Argentina is experiencing very healthy growth with no sign that it is unsustainable, and they’ve done it without having to make any concessions to get foreign capital inflows.”

Weisbrot is co-director of a Washington-based think tank called the Center for Economic and Policy Research, which put out a study in October 2009 of 41 IMF debtor countries. The study found that the austere policies imposed by the IMF, including cutting spending and tightening monetary policy, were more likely to damage than help those economies.

That was also the conclusion of a study released last February by Yonca Özdemir from the Middle East Technical University in Ankara, comparing IMF assistance in Argentina and Turkey. Both emerging markets faced severe economic crises in 2001, preceded by chronic fiscal deficits, insufficient export growth, high indebtedness, political instability, and wealth inequality.

Where Argentina broke ranks with the IMF, however, Turkey followed its advice at every turn. The end result was that Argentina bounced back, while Turkey is still in financial crisis. Turkey’s reliance on foreign investment has made it highly susceptible to the global economic downturn. Argentina chose instead to direct its investment inward, developing its domestic economy.

To find the money for this development, Argentina did not need foreign investors. It issued its own money and credit through its own central bank. Earlier, when the national currency collapsed completely in 1995 and again after 2000, Argentine local governments issued local bonds that traded as currency. Provinces paid their employees with paper receipts called “Debt-Cancelling Bonds” that were in currency units equivalent to the Argentine Peso. The bonds canceled the provinces’ debts to their employees and could be spent in the community. The provinces had actually “monetized” their debts, turning their bonds into legal tender.

Argentina is a large country with more resources than Iceland, Latvia or Greece, but new technologies now allow even small countries to become self-sufficient. See David Blume, Alcohol Can Be a Gas.

Issuing and lending currency is the sovereign right of governments, and it is a right that Iceland will lose if it joins the EU, which forbids member states to borrow from their own central banks. Still, the people of these crisis-struck countries could continue to develop their own resources if they had the credit to do it; and with sovereign control over their local currencies, they could get that credit simply by creating it on the books of their own publicly-owned local banks.

In fact, there is nothing extraordinary in that proposal. All private banks get the credit they lend simply by creating it on their books. Contrary to popular belief, banks do not lend their own money or their depositors’ money. As the U.S. Federal Reserve attests, banks lend new money, created by double-entry bookkeeping as a deposit of the borrower on one side of the bank’s books and as an asset of the bank on the other.

Besides thawing frozen credit pipes, credit created by governments has the advantage that it can be issued interest-free. Eliminating the cost of interest can cut production costs dramatically.

Government-issued money to fund public projects has a long and successful history, going back at least to the early eighteenth century, when the American colony of Pennsylvania issued money that was both lent and spent by the local government into the economy. The result was an unprecedented period of prosperity, achieved without producing price inflation and without taxing the people.

The island state of Guernsey, located in the Channel Islands between England and France, has funded infrastructure with government-issued money for over 200 years, without price inflation and without government debt.

During the First World War, when private banks were demanding 6 percent interest, Australia’s publicly-owned Commonwealth Bank financed the Australian government’s war effort at an interest rate of a fraction of 1 percent, saving Australians some $12 million in bank charges. After the First World War, the bank’s governor used the bank’s credit power to save Australians from the depression conditions prevailing in other countries, by financing production and home-building and lending funds to local governments for the construction of roads, tramways, harbors, gasworks, and electric power plants. The bank’s profits were paid back to the national government.

A successful infrastructure program funded with interest-free national credit was also instituted in New Zealand after it elected its first Labor government in the 1930s. Credit issued by its nationalized central bank allowed New Zealand to thrive at a time when the rest of the world was struggling with poverty and lack of productivity.

The argument against governments issuing and lending money for infrastructure is that it would be inflationary, but this need not be the case. Price inflation results when “demand” (money) increases faster than “supply” (goods and services). When the national currency is expanded to fund productive projects, supply goes up along with demand, leaving consumer prices unaffected.

In any case, as noted above, private banks themselves create the money they lend. The process by which banks create money is inherently inflationary, because they lend only the principal, not the interest necessary to pay their loans off. To come up with the interest, new loans must be taken out, continually inflating the money supply with new loan-money. And since the money is going to the creditors rather than into producing new goods and services, demand (money) increases without increasing supply, producing price inflation. If credit were extended for public infrastructure projects interest-free, inflation could actually be reduced, by reducing the need to continually take out new loans to find the elusive interest to service old loans.

The key is to use the newly-created money or credit for productive projects that increase goods and services, rather than for speculation or to pay off national debt in foreign currencies (the trap that Zimbabwe fell into). The national currency can be protected from speculators by imposing exchange controls, as Malaysia did in 1998; imposing capital controls, as Brazil and Taiwan are doing now; banning derivatives; and imposing a “Tobin tax,” a small tax on trade in financial products.

If the creditors are really interested in having their debts repaid, they will see the wisdom of letting the debtor nation build up its producing economy to give it something to pay with. If the creditors are not really interested in repayment but are using the debt as a tool to exploit the debtor country and strip it of its assets, the creditors’ bluff needs to be called.

When the debtor nation refuses to pay, the burden shifts to the creditors to make themselves whole. British economist Michael Rowbotham suggests that in the modern world of electronic money, this can be accomplished by creative banking regulators simply with a change in accounting rules. “Debt” today is created with accounting entries, and it can be reversed with accounting entries. Rowbotham outlines two ways the rules might be changed to liquidate impossible-to-repay debt:

“The first option is to remove the obligation on banks to maintain parity between assets and liabilities . . . . Thus, if a commercial bank held $10 billion worth of developing country debt bonds, after cancellation it would be permitted in perpetuity to have a $10 billion dollar deficit in its assets. This is a simple matter of record-keeping.

“The second option . . . is to cancel the debt bonds, yet permit banks to retain them for purposes of accountancy. The debts would be cancelled so far as the developing nations were concerned, but still valid for the purposes of a bank’s accounts. The bonds would then be held as permanent, non-negotiable assets, at face value.”

If the banks were allowed either to carry unrepayable loans on their books or to accept payment in local currency, their assets and their solvency would be preserved. Everyone could shake hands and get back to work. “

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