Europe’s Marshall Plan Scenario

It should now be obvious to all that the Greek bailout is not about saving Greece, professor George Irvin states in his recent blog post, pointing out that the whole charade now is a matter of  squeezing the country enough to make sure a number of large EU banks who hold Greek debt – and an even larger number of banks that have lent money to them- don’t go broke. Well, that is obvious, all right. However, professor  Irvin also points to two possible solutions to the crisis.

“The alternative is for all or most of Greek sovereign debt to be “forgiven” – it is unpayable anyway; for the German, French (and Greek) banks to be recapitalized; and for Greece to receive enough assistance to bring its social and economic infrastructure up to a level which would help “crowd in” private investment and restore its economy to health. This is the “Marshall Plan” scenario.”

George Irvin

Until recently, many northern Europeans appeared to believe that Greece had been living beyond its means and therefore needed to tighten their belts—just as most Brits appear still to believe that Britain faces such a fate. But has austerity helped Greece pay its way?

Here’s the rest of professor Irvin’s commentary, published at the EUobserver.com:

Not at all; austerity has only made things worse. Before the crash of 2007-08, Greek GDP was growing at 4.5% per annum. Mainly as a result of the draconian programme of cuts imposed by the EU/IMF last year, Greek GDP has fallen 8.5% since early 2010.

Moreover the burden of the cuts has fallen not on the rich (who don’t pay their taxes) but on the poor (who can’t avoid them).

As Martin Wolf recently reported, when last year’s cuts were announced, the spread between German and Greek bonds was about 460 basis points (4.6%). It is now 1460 basic points.

In effect, Greece has been locked out of the world’s private financial market. The country’s debt-to-GDP ratio is now 160% and rising.

The Greek Parliament has now effectively approved the latest €28bn austerity package demanded by the EU/IMF in order for them to disburse an extra €12bn in funding which Greece needs to get through the next month without defaulting. But this package is so deeply unpopular that it seems unlikely to be fully implemented.

As protesters are now chanting on the streets: “First they robbed us, now they have sold us.”

Even if it were fully implemented, the package would merely deepen the Greek recession making it even less likely that the debt-to-GDP ratio will fall.

Nor does the latest French “Brady-bond” proposal really fit the bill? While lengthening the maturity on Greek debt to 20-30 years and establishing a fund to guarantee its repayment may be a good idea in principle, there are several problems with the plan.

First, it covers only a relatively small proportion of Greek sovereign debt; secondly, it is unlikely to satisfy the private banks (Deutsche Bank has already criticized it) and, most important, even if accepted ‘voluntarily by the banks, the rating agencies may still consider Greece to be in default.

Is there any way out? Basically, there are two possible paths.

The first scenario is for the EU/IMF to keep pouring money into Greece, in essence buying time for private banks to reduce and write off their debts. Once this is done—and assuming ordinary Greeks will accept being squeezed for several more years—Greece will be allowed to default.

The problem here is twofold. First, will the speed with which the ECB, the IMF and the ESF (European Stability Facility, which starts working in 2013) buy up debt be enough to prevent a Greek political meltdown.

Remember that if the Papandreou government falls, the opposition leader Mr Samaras has said he will reject EU/IMF conditionality. The second problem is that outright default might lead to Greece leaving the euro.

A return to a (rapidly falling) drachma would leave the country facing high inflation, falling real wages, and an even higher debt mountain.

There is another possible outcome – although it would require an astonishing U-turn on the part of the EU/IMF.

The alternative is for all or most of Greek sovereign debt to be “forgiven” (it is unpayable anyway); for the German, French (and Greek) banks to be recapitalized; and for Greece to receive enough assistance to bring its social and economic infrastructure up to a level which would help ‘crowd in’ private investment and restore its economy to health.

This is the ‘Marshall Plan’ scenario, if you will.

Such a plan could be financed by E-bond emission (Mr Juncker’s proposal), by ECB quantitative easing or by a Tobin tax (or some combination of the three); thus, the “cost to the European taxpayer” could be negligible.

I can hear the reader object that pigs are more likely to fly supersonically.

But the longer the EU/IMF continues along its current foolish path, the greater the chance of a second major financial catastrophe engulfing not just Greece but much of Europe.

By George Irvin

George Irvin is a retired professor of economics and for many years was at ISS in The Hague. He is now honorary  Professorial Research Fellow in Development Studies at the University of London, SOAS.

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