Greece: at the edge of the abyss 18 juin 2013 Par Jacques Sapir This note has been kindly translated by Anne-Marie de Grazia. Today, the situation in Greece has become catastrophic, a fact stressed by the unprecedented government measure to close the State radio and television services for “economic reasons.” The political bias behind this decision is however obvious. The Supreme Court stated that the decision was unlawful, and the Greek government will be forced to re-open the State Radio and television services. This decision is just but one example of the highly anti-democratic path followed now by right wing Prime Minister Samaras and his PASOK associates. This situation is only the most extreme example to date of the effects of the austerity policies which have been carried on since 2010 in the Eurozone for the purpose of “saving” the Euro. It has led to a true disaster. The closing of the public radio and television stations (ERT) has stirred a huge and legitimate emotion, in Greece as well as abroad. The Italian public service channels have integrated the logo of the Greek state company and solidarity movements have been initiated all over Europe. Large demonstrations have taken place in Athens and the legitimate outrage provoked by such a gesture is not close to winding down. This action, which is actually an offence against the rules of the European Union which stipulate that each country must have a public service radio and television, is a panic reaction on the side of the government, seeing tax revenues crumble. Greece is in fact launched on the fatal trajectory of all economies onto which attempts are made to impose brutal austerity. Graph 1 SOURCE: IMF, Greece, STAFF REPORT FOR THE 2013 ARTICLE IV CONSULTATION, 20 mai 2013, Washington DC, p. 37. 2013 = estimation, 2014 = forecast In reality, such policies prove to be self-destructive and are not without reminding one of those which were carried out in Russia from 1992 to 1998. The same pathologies are showing. Whence the idea that Greece may be in the process of becoming, all other things being equal, a “little Russia.” First of all, it confronts us with the problem of the political foundations of austerity, and therefore to the “multiplier of public spending,” but also with the problem of the reaction of banking firms and of the effects of the strong contraction in liquities which is observed in these countries. The situation is dominated today by a considerable contraction in credits and bank deposits. This phenomenon affects businesses as well as households. Its importance tends to increase since the summer of 2010 and seems to have taken a tragic turn since the beginning of 2012. I. The dynamics of economic policies of austerity It is henceforth acknowledged, even by the IMF [1], that austerity policies have had, and always have, a very negative impact on the level of activity. Yet this recognition of a de facto situation does not preclude imprecisions and illusions, some of which are deeply anchored in the ideological culture of this organization [2]. I.I. The consideration of the multiplier of public spending. This topic has invaded the political space dominated by economists with the publication of a text by Olivier Blanchard, the chief economist of the IMF. But it had been evident for several years that the evaluations of the multiplier of public spending had been wrong all along. Even authors from the “mainstream” had analyzed why, when an economy finds itself at the edge of recession (with a growth rate inferior to 1%), the multiplier of public spending is substantially above 1 (between 1.7 and 2.5). [3] (i) The value of the Public Spending Multiplier, in other words, of the variable measuring the relation between these spendings (or the increase/decrease in taxes) and economic activity is evidently crucial if one is to judge the efficacity – or lack thereof - of austerity policies. If the value of this multiplier exceeds 1, then an increase in public spending will create a more than proportional increase in activity, but in the case of a contraction, the latter will also be more than proportional. Until July 2012, the consensus of economists working within the international organizations was that this multiplier was inferior to 1, close to 0.5 which was the value being upheld in the forecasting models [4], and that therefore a contraction in public spending would have a less than proportional effect upon activity. This constituted the theoretical base of the austerity policies, some authors maintaining that this multiplier was in fact very low. The evolution of the countries subjected to drastic austerity plans has contradicted this result which in the most cases had been no more than a postulate. Recent calculations released by the research services of NATIXIS estimated this value to be 1.7 for Spain and 2.2 for Italy [5]. Such values imply the failure of austerity policies. These latter, put in place in order to restaure the balance in public finances (even indeed to obtain a excedent in budget) brought about a more than proportional fall in activity which translates in reduced end-of-the year tax revenues. Concretely, one finds oneself saddled with the same budget deficit (if not with a worse one) than before the implementation of the austerity plan! (ii) In reality, the Multiplier in Public Spending is unstable over time and depends largely on the context in which the austerity plans, or the measures of budgetary boosting are implemented. The study by NATIXIS (n°686), already cited, insists on the simultaneity of budgetary and fiscal adjustments. But, knowing that the preferences of the agents are largely influenced by context, one is entitled to think that other phenomena may be coming to the fore. For authors belonging to the keynesian movance, when an economy finds itself at a weak level of production, and when the incomes of households are constricted (and when the financial system doesn’t function well), consumption and investment depend far more on immediate income than on future income. Under these conditions, the multiplier is necessarily limited [6]. This has been demonstrated in the case of the United States [7]. In a period of restart, if the agents can be induced into thinking that this restart is only temporary, they will not necessarily modify their behavior. The shifting of part of their income from consumption into precautionary savings will result in considerably worsening the effects of austerity and makes one understand why the contraction of the economy is more than proportional to the contraction in public spending. (iii) This is the situation dominating today in Spain, in Greece and in Portugal. The various austerity plans have had but a small effect on the budget deficit (9% in Spain) because they translated into a more than proportional drop in public revenue, itself depending on the economic activity level. The models of the DSGE kind have been introduced in the 1980s in answer to the multiple theoretical problems presented by the models of the previous generation [8]. They derive largely from the work of Robert Lucas, and make a massive use of rational anticipations in their construction. These models have several characteristics which in reality constitute as many problems. First of all, they conceive of economy as a set of markets covering all possible domains. Then, they posit that the inter-temporary budgetary constraints of agents are always respected at all times, in other words, that there exists no possible bankruptcy or default. [9]. This hypothesis, which denies, among others, the possibility of credit rationing, however well it had been established by J. Stiglitz [10], gives birth to what has been called the “transversality clause” [11], through mathematical manipulations. This “clause” ends up denying the specifity of the banking firm, and considering finance as a large market of borrowable funds to which every agent has access, [12] whether he can offer financing capacities, or has needs to satisfy [13]. Insofar as austerity plans have been imposed without their end being known, nor the latter being predictable, we should expect the Multiplier of Public Spending to be largely above 1. The impact of austerity onto economic activity is therefore more than proportional, which explains why two of the countries in consideration (Greece and Portugal) have plunged into depression and why the third (Spain) is going through a recession which should logically lead to a depression. I.II. Disappearance of liquidities In the countries considered (Spain, Greece, Portugal and, in part, Italy) one notices a strong contraction in the offer of credit which is tied to the following problems: (i) The anticipation of a possible return to national currencies leads to an attitude among banks where the latter use the capitals collected in one country (considered as potentially “soft” if it should recover its monetary sovereignty) in order to lend them in countries considered as potentially “hard,” such as Germany, France, the Netherlands, etc… This leads at best to an increasing scarcity of credit (case of Portugal and Spain) and, at worst, to its quasi-disappearance (Greece). Now, the disappearance of such banking credit, which plays an important part in the liquity of supplier credit, and in furnishing the circulating capital of businesses, leads to a contraction of activity EVEN in the presence of a solvent demand. (ii) A flight of capital from countries considered as having potentially “soft” currencies to countries with potentially “hard” currencies. This is noticeable by way of the TARGET-2 account of the European Central Bank [14]. This phenomenon, which is very notecieable since 2011, translates also into an increased scarcity of liquidities, and therefore of credit, in the economies under consideration. (iii) The elevated banking risk in Greece, Spain and Portugal explains finally the reticence of the banks to take additional risks. In Spain it is estimated that « bad loans » amount to 180 billion euros (in August 2012), representing 10,5% of the assets of the banks [15]. This reaction has lead to a sharp drop in the internal credit activity of the banks. In Greece, the same reasons have combined with the two aforementioned factors to result in a quasi-stop of credit operations. In Portugal, the phenomenon tends presently towards the level which can be observed in Spain. The consequence of this is to precipitate the economies into depression by adding a (larved) liquidity crisis to a sharp reduction in demand. In fact, one finds itself in Greece and in Spain in a situation similar to that which would have occurred if the banks had collapsed. The fact that these banks remain “technically” alive changes nothing to the situation. It means that provisioning the economy with liquidities will depend more and more on the state and on that part of the banking system which is still under its control. This implies that activity will depend on public spending to a greater extent than what had been previously expected because, to the “demand” dimension of this spending is now added a dimension of “supply of liquidities.” And this when public spending is in fact the first victim of austerity policies. It is understandable therefore why we are witnessing a collapse in investment in these countries. Now, this has brought a drop in the hourly productivity of labor (noticed in Greece and in Spain) which increases the gap with the countries which are not subjected to such policies, and will tend to reduce the effect of the decrease in the real cost of labor. This renders stabilization and exit from the crisis only more problematic. With the collapse in investment, the middle range conditions of competitivity are put in question. Now, if the competitivity of these countries decreases in the middle term, the efforts which they will have consented to in the processes of wild internal devaluation policies will turn out to have been useless. From this point of view, the situation in Spain and Greece, where the drop in investment has been the strongest, appears to be the most dangerous. II. The Greek tragedy: a typical example of the application of austerity policies. If one is to focus on the violence of the bugetary and fiscal adjustment which Greece is presently implementing, the effects of the brutal contraction in liquidities tends to remain hidden. Now, this contraction has specific particular effects on the trajectory of the Greek economy. One of these effects is the development of barter, an indisputable reality, but one for which we are confronted with a difficulty of measurement. Now, the development of barter has, in its turn, results which are as much economical as sociological. It induces the development of an economy which is not so much “dual,” than it is functioning in two relatively separate sectors. Graph 2 Source : Greek Central Bank. II.I. The consequences of a shortage in liquidities This collapse is partly due to a constraint of the liquidities of households which has sharply increased since the beginning of the so-called “debt-crisis” in Greece. The saving deposits have thus been reduced by over one third since January 2010. Graph 3 Source : Central Bank of Greece. Graph 4 Source : Central Bank of Greece. But this increase in the constraint of liquidities doesn’t explain everything. The evolution in the amount of credits is very interesting but also assuredly disturbing. The amount of credits, for households as well as for businesses, shows a netto decrease since the spring of 2010. But an acceleration in the process is noticeable since the beginning of 2012. As for the deposits coming from businesses, they are contracting rapidly since the beginning of 2010 and this contracting movement is relatively regular. These deposits have lost ca 55% of their nominal value since december 2008. One may think that businesses might have shifted part of their deposits to banks situated in countries of the Eurozone that are less exposed to the crisis. Nevertheless, such a very sharp drop can only be an indicator of severe liquidity problems for businesses. II.II. The development of barter and of systems of alternative payment In fact, as reported by numerous sources, we are witnessing a return to barter economy in Greece [16]. This movement may be considered part of the survival strategies of a population having savage austerity measures imposed upon it. But the development of alternative systems of payment (TEM in Greek) indicates that these strategies are in a process of consolidation. The city of Volos (which is the 5th city in Greece) serves as a laboratory for this development and already during the past spring many shopkeepers, and even small industrialists, were seen to have accepted this system. [17] It goes without saying that such systems cannot entirely substitute for a currency space still dominated by the Euro. But their rapid development might explain instances of resilience on the part of small industries and small shopkeepers. [18]. The negative point is that, for the state, the fiscal base will vanish, unless it accepts to recognize the TEMs. But, in this case, it would mean acknowledging that part of the Greek economy has already left the Eurozone. More deeply, these systems, while ensuring the resilience of the local economy, are incapable of providing the financing of export activities, of which Greece is desperately in need. In fact, the development of barter and of TEMs exposes those businesses which have stayed in the economy in “euros” to more and more frequent and repeated non-payments, which not only fragilize their position but further discourage the banks from granting them loans. This survival system is incapable of generating a positive dynamic for the Greek economy. At the beginning of October 2012, a survey carried out by the economists of the Central Bank of Greece estimated that one third of businesses (and more than 50% of Small and Middle-sized Businesses and Entreprises) resorted to barter or TEM. The fraction of the population resorting to barter or TEM amounted to 40%, with very sizeable regional differences. [19]. II.III. The situation of businesses The analysis of the movements of credits to businesses by large sectors is, from this point of view, most enlightening. The amount of credits to commercial entreprises reduces itself regularly over the whole period. One notices, nevertheless, an acceleration in the process beginning in the summer of 2011. But after this date, the drop is very sharp. Outstanding credits of all maturities decrease by 15% in one year. Graph 5 Source : Central Bank of Greece. If one takes into account the credits the maturity of which exceeds one year, we can see that this drop affects short term credits very strongly, that is, those which are the most important for the production cycles of enterprises. This point is of capital importance. Indeed, if Greek businesses can no longer finance their production cycles satisfactorily, it is illusory to hope that they will be in a position to profit from the considerable decrease in salaries which has been implemented through the various austerity plans. In others words, the internal devaluation which the government implemented will be of no use under these conditions. II.IV. The impact of the effects of the economic trajectory of Greece. This can be verified in the production and investment process. As far as industrial production is concerned, we observe a collapse of the latter in its various branches, beginning to occur in the summer of 2012. Production is here indicated in percentage of the corresponding month in 2005. It is not surprising that the results are markedly inferior to 100. But what is significant is the turn which the majority of industrial branches seem to have taken beginning in the summer of 2012. Graph 6 (a) Source : Hellenic Statistical Service Graph 6 (b) These figures confirm that we are truly faced with a collapse of industrial production. Branches such as those which produce capital goods or durable consumption goods seem to be practically at a stop, with amounts of monthly production equalling 30%, if not less, of the amount of the corresponding month in 2005. Morevoer, investment decreases considerably while unemployment is increasing rapidly, and this has been occuring for several years now. Graph 7 Graph 8 Source : HELSTAT This is of course the direct consequence of the credit contraction affecting the cash-flow of Greek businesses. But, indirectly, credit contraction, which is also affecting households, has an effect on investment which is not negligible. Graph 9 Source : Hellenic Statistics Service HELSTAT. Not only do businesses invest less because they are in a more difficult financial situation and experience greater difficulties in procuring liquidities, but the drop in household demand, implying a contraction in internal demand, does not incite investment either. The anticipations of businesses can only be negative. This confirms the movement of departure out of Greece, despite a decrease in costs, of a certain number of large companies. The collapse in trade, the index of which (on a basis 100 in 2005) has gone from 148 in the first quarter of 2008 to 90 in the second quarter of 2012 (that’s a drop of 40%) can only bolster the very negative anticipations of entrepreneurs about the situation of Greece. We must add to this that the combination of objective factors (the exit of part of the actors from a monetary economy, the fall in credits and therefore in deposits, the sharp drop in activity and investment) combined to subjective factors (anticipations of the entrepreneurs but also of a large part of the population) can only have a very deleterious effect on the situation, economic as well as social. This prevents Greece in fact from “profiting” from the effects of the internal devaluation which it is being subjected to. If one has a look at the external trade, one is struck to see that the exports, after a very slight rebound in 2010, remain relatively unresponsive to the internal context. From the point of view of external trade, the gain is essentially due to the collapse in imports. Graph 10 Source : IMF, World economic outlook, April 2013, data base. In fact, one can think that potentially exporting businesses in Greece are henceforth limited on the side of offer by the contraction of credit, but also by the accelerated aging of the production equipment induced by the collapse in investments. III. Is Greece a “little” Russia? These developments irresistibly bring to mind those which have been observed in Russia, particularly between 1995 and 1998 [20]. III.I. Convergences. The transition in Russia was indeed characterised by relatively similar phenomena, with a development of barter and the beginning of a break-up of the monetary space. Besides transaction in kind, or through the intermediary of financial instruments (Veksels) which cannot be redeemed in currency, we witnessed the development of the use of monetary instruments alternative to the national currency: the use of the dollar, but also of Veksels now issued by regional banks and circulating like a true alternative currency. These latter phenomena can be found in other countries of the former USSR, such as Ukraine. Graph 12 The demonetarisation of the Russian economy, in the period 1993-1998, constituted the most spectacular phenomenon of the first phase of transition. For the first time, one witnessed the development of barter and of parallel currencies when inflation was in fact decreasing and the frames of a normalized economy where falling into place. Gradually, as inflation relented, businesses stopped using the ruble in their transactions. This phenomenon was probably the most corrosive from the point of view of the theoretical bases of standard marcoeconomics.[21]. We are reminded that, during this period which corresponds in fact to the first phase of transition, the policy of the Russian government had been to fight inflation at all cost, idenfying it essentially as of monetary origin, [22] and to seek to reestablish as fast as possible a balanced budget. The measures used, such as cuts in spending, a hike in interest rates, nominal anchoring of the ruble to the dollar, non-payment by the state of sums it had contracted for, precipitated the country into economic chaos and lead to the opposite effect of what had been sought. If inflation decreased, the drop in GDP was spectacular and the deficit reproduced itself year after year because the collapse in GDP brought with it a collapse in tax revenues[23]. The country’s debt soon became unsustainable, production having, moreover, gone down by nearly 50%. In 1998, Russia had no other choice than to default on its debt by devaluating massively. [24] Some of the events of this period strangely remind one of what is happening today in Greece and, in some way, in Spain as well. Russia went at the time through a phase of regional disintegration, which was largely the product of the disastrous effects of austerity. [25] III.II The economy of monetary fragmentation Barter and monetary fragmentation can be jointly analyzed as a major sign of the dysfunctioning of the economy under the impact of policies said at the time to be of “stabilization,” but the violence of which was by no means second to the austerity policies imposed on Greece [26]. If we add barter and Veksels, it is probable that barter, in a direct or indirect form, represented between 60% and three-quarters of the inter-enterprises exchanges taking place at the eve of the financial crisis. This phenomenon was doubly spectacular. First by its starting point and by its amplitude; indeed, the use of barter was not unknown, quite in the contrary, in soviet economy. Illegal trade from one enterprise to another using the means of barter has been estimated to 50% of official trade during the last years of the regime [27]. The goal of the liberalization of prices in 1992 was, among others, to break the back of this system and to make possible a monetarization of the economy. It seems to have initially achieved this goal, for the share of barter in exchanges appeared to be small, and so to speak merely residual by January 1993. Which makes the ulterior rise, becoming apparent as early as at the end of 1993, the more astonishing. The steadiness and rapidity of the phenomenon between the end of spring 1995 and the beginning of 1997 constitute the second surprise.
Posted on: Thu, 20 Jun 2013 08:40:12 +0000
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