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Darkness at noon: the third Greek bailout will fail and should be rejected

The path to the new bailout of Greece was dramatic. But with final details of the agreement yet to be revealed, the emerging truths lead Dimitris Sotiropoulos to argue it must be refused

July 28, 2015
5 min read

Greece - moral hazardThe Greek people wait to see what is in store for their country, knowing the answer will be morally bankrupt. Photo: Georgios Giannopoulos (CC BY-SA 4.0)

The new bailout of the Greek economy followed a series of grotesque events. Capital controls were practically imposed by the European Central Bank (ECB), contrary to its mission to safeguard the financial stability of the Eurozone. Amid crude financial blackmail based on a prolonged bank holiday and bail-in rumours, people overwhelmingly against austerity in the referendum. The Greek parliament transformed 61 per cent of votes opposing such proposals into an 83 per cent parliamentary majority in favour of a new memorandum of austerity, the third in a row. A left-wing government coalition of Syriza and ANEL endorsed the neoliberal TINA dogma that says ‘there is no alternative’.

It is against this canvas that the scale of the political and economic impasse faced by Greek society becomes clear. It also reveals the contradictions and political crisis of the Eurozone which, for the first time, seems to losing its historical momentum and irreversible character. The finance ministers of core Eurozone countries openly supported a Grexit – withdrawal from the currency union – regardless of the devastating consequences that it might have for that union.

Anticipating the future is always a tricky enterprise. Based on the experience so far however, we can be quite certain of some developments. First, the new bailout programme will fail, indeed it is designed to do so. Austerity and the fire-sale of public assets will delay recovery even more. Sovereign debt will exceed double the size of GDP. The ongoing recession will wipe out the banking sector. Greece will be pushed further towards the exit—and the Eurozone closer to the end of irreversibility.

These outcomes will be devastating for European economies but they are not unthinkable any more. Trust in the irreversibility of the common currency was keeping the whole Euro edifice together. Should this trust break, financial markets will sooner or later take care of the rest as they look for the next vulnerable link.

The dukes of hazard

The concept of moral hazard is key to understanding how European elites and policymakers conceive of and design their policies. That is, where one party, often possessing undeclared knowledge or intent, takes more risks because someone else bears the burden of those risks.

There is a clear logic, carrying the stamp of capital promoting its own interests. If recession had been tackled, the neoliberal agenda and related reforms could not be implemented. They would meet resistance in different societies. So bailout packages carry a recessionary design as the only way to undermine the welfare state, sell public property and promote internal devaluation of labour. This explains the poor economic performance and fragile, uncertain recoveries seen in European economies with few exceptions.

The Syriza-led government in Greece was the first major political impediment. Once the austerity agenda was challenged on political grounds, European elites had to make a choice between moral hazard and defending the irreversibility of the Euro. Any reassurance of the latter would undermine policies based on the former. This strategic dilemma captures the discussions and debates that led to the third bailout of Greece. Elite representatives, seeing their contradictions for the first time, seem to have sacrificed the idea of irreversibility in favour of moral hazard and the related conservative agenda. This is not a mistake but a strategic decision.

The government was defeated because it did not choose to negotiate. As it became clear after the agreement of February 20, Greek representatives were trying to compromise without any concrete anti-austerity plan. The introduction of a new national currency is not a suitable ground to challenge recessionary policies. Instead, Syriza bet on the goodwill of European officials and vested interests inside Greece. This strategy was smashed, limiting the actual alternatives.

If pro-austerity elites are willing to sacrifice the irreversibility of the Euro in order to secure moral hazard, the financial markets may stop being their allies. The new Greek bailout is definitely a game changer. From now on, the ground is slippery and the strength of the Eurozone will be the same as the strength of its weakest link.

What happened in Greece is a clear message to anti-austerity forces all over Europe—be that  Greece, Spain, Italy, Ireland or France and Germany. The message is that there is a way out of TINA but it is not easy and cannot be based on goodwill. Both the bailout offers and the exit plan—possibly a bluff by Wolfgang Schäuble—were practically mirror images of the very same recessionary strategy. This is a big lesson for the anti-austerity political approach.

Contrary to its current intentions, the Greek government should reject the offered plan, default on debt payments within the Eurozone and let the ECB deal with the banking mess created by politically biased decisions and the ill-designed bailout. This would be a painful choice but a much better one in the long term than the proposed programme which will only deepen economic recession and sovereign indebtedness, and most importantly, add to the political crisis by eliminating any radical alternative.

Syriza should stay loyal to its political mandate: tax the rich, modernise state administration, fight corruption and tax-evasion, deal with the humanitarian crisis and secure a path out of the crisis that tackles unemployment and reduces the debt overhang. Syriza has been the only hope for significant parts of the Greek population, mostly those without privileges and power. Nothing positive can come out of hopeless societies. European history of the 20th century tells us what could.

Dimitris Sotiropoulos is a senior lecturer in finance at the Open University Business School in the UK and a member of Syriza