On Wednesday the European Central Bank (ECB) announced that it would no longer accept Greek government bonds and government-guaranteed debt as collateral. Although Greece would still be eligible for other, emergency lending from the Central Bank, the immediate effect of the announcement was to raise Greek borrowing costs and squeeze its banks, and to increase financial market instability within Greece.
We should be clear about what this means. The ECB’s move was completely unnecessary, and it was done some weeks before any decision had to be made. It looks very much like a deliberate attempt to undermine the new government. They are trying to force the government to abandon its promises to the Greek electorate, and to follow the IMF program that its predecessors signed on to.
Clarity is important here because the European authorities, or the troika, as they are commonly called, plunged the eurozone into at least two additional years of unnecessary recession that began in 2011 because they were playing a similar game of chicken. The ECB, for its part, deliberately and repeatedly allowed the eurozone to go the brink of financial meltdown during this period. It was not because the financial markets had the power to collapse the euro when they pushed the yield on the 10-year sovereign bonds of Italy and Spain to unsustainable levels in the range of 7 percent. It was because the ECB deliberately allowed these market actors to create an existential crisis for the euro, in order to force concessions from the governments of Spain, Italy, Greece, Portugal, and Ireland.
These concessions were not just about paying off debt but also “structural reforms” that sought to remake the European welfare state in the weaker countries, including shrinking the size of the state; cutting spending on health care, pensions, and unemployment compensation; and changing labor laws that favored workers.
The European authorities were willing to take great risks in order to force these changes, and as is now widely recognized by most economists, their macroeconomic policies added additional years of unnecessary recession and mass unemployment (currently at 11.5 percent, more than twice that of the United States).
If we understand this recent history, we can see clearly what they are doing to Greece right now. The main difference is that, since the ECB reversed course and made a firm commitment to the survival of the euro in July of 2012, the blows that they are dealing to the Greek economy are much more contained. The yields on Italian and Spanish bonds have risen a bit since Syriza was elected but are still very low — 1.58 percent for Italy, and 1.47 percent for Spain.
The ECB could also stabilize Greek bond yields at low levels, but instead it chose this week to go to the opposite extreme — and I mean extreme — to promote a run on bank deposits, tank the Greek stock market, and drive up Greek borrowing costs.
Syriza’s leadership, headed by Prime Minister Alexis Tsipras and Finance Minister Yanis Varoufakis, are playing it smart. They responded to the ECB’s assault without animosity or denunciations. They are not going to voluntarily leave the euro or even suggest the possibility. Like the peaceful protesters of the U.S. civil rights movement in the 1960s, they are facing down the police dogs and fire hoses with courage and equanimity.
They want the world to know who is the aggressor here and who is being reasonable. This is important because we are witnessing a political battle for democracy in Europe, and the outcome of this chapter will be partly decided by what the troika can get away with politically. Much noise is made about German voters opposing concessions to the Greeks, but this is only possible because the whole fight has been misrepresented to them for years. The European authorities transferred massive amounts of debt from reckless private lenders to EU governments (including Germany) and at the same time increased Greece’s debt load from 115 percent to more than 170 percent of GDP by shrinking the Greek economy at a rate comparable to the worst of the U.S. Great Depression. Most Europeans, including Germans, would not blame the Greek people for the resulting unpayable debt if they understood what really happened.
The troika should be happy with what they have already “accomplished.” The Greek state has been shrunk by 19 percent of its labor force. Six years of depression and a 25-percent decline in living standards (actually much greater than that if you count the decline in imports) should discourage any European country from ever reaching the terrifying predicament of having to borrow from the punishers at the troika. The economic adjustment has been done: The country is running a primary (not including interest payments) budget surplus and a current account surplus.
Syriza has backed off from its initial demand that Greece’s debt stock be reduced and is offering reasonable proposals to allow them the fiscal space to be able to recover (i.e., a primary budget surplus of 1 to 2 percent of GDP rather than 4 to 5 percent under the troika’s program). After six years of depression, that is hardly too much to ask. Nor is reversing some of the worst abuses such as the minimum wage cuts.
The ECB should be ashamed of its latest assault on Greek democracy. And they should not be able to get away with disguising it as anything less than that.