|NY Times Op-Ed, July 26 2015
Greece, the Sacrificial Lamb
By JOSEPH E. STIGLITZ
ATHENS — AS the Greek crisis proceeds to its next stage, Germany, Greece
and the triumvirate of the International Monetary Fund, the European
Central Bank and the European Commission (now better known as the
troika) have all faced serious criticism. While there is plenty of blame
to share, we shouldn’t lose sight of what is really going on. I’ve been
watching this Greek tragedy closely for five years, engaged with those
on all sides. Having spent the last week in Athens talking to ordinary
citizens, young and old, as well as current and past officials, I’ve
come to the view that this is about far more than just Greece and the euro.
Some of the basic laws demanded by the troika deal with taxes and
expenditures and the balance between the two, and some deal with the
rules and regulations affecting specific markets. What is striking about
the new program (called “the third memorandum”) is that on both scores
it makes no sense either for Greece or for its creditors.
As I read the details, I had a sense of déjà vu. As chief economist of
the World Bank in the late 1990s, I saw firsthand in East Asia the
devastating effects of the programs imposed on the countries that had
turned to the I.M.F. for help. This resulted not just from austerity but
also from so-called structural reforms, where too often the I.M.F. was
duped into imposing demands that favored one special interest relative
to others. There were hundreds of conditions, some little, some big,
many irrelevant, some good, some outright wrong, and most missing the
big changes that were really required.
Back in 1998 in Indonesia, I saw how the I.M.F. ruined that country’s
banking system. I recall the picture of Michel Camdessus, the managing
director of the I.M.F. at the time, standing over President Suharto as
Indonesia surrendered its economic sovereignty. At a meeting in Kuala
Lumpur in December 1997, I warned that there would be bloodshed in the
streets within six months; the riots broke out five months later in
Jakarta and elsewhere in Indonesia. Both before and after the crisis in
East Asia, and those in Africa and in Latin America (most recently, in
Argentina), these programs failed, turning downturns into recessions,
recessions into depressions. I had thought that the lesson from these
failures had been well learned, so it came as a surprise that Europe,
beginning a half-decade ago, would impose this same stiff and
ineffective program on one of its own.
Whether or not the program is well implemented, it will lead to
unsustainable levels of debt, just as a similar approach did in
Argentina: The macro-policies demanded by the troika will lead to a
deeper Greek depression. That’s why the I.M.F.’s current managing
director, Christine Lagarde, said that there needs to be what is
euphemistically called “debt restructuring” — that is, in one way or
another, a write-off of a significant portion of the debt. The troika
program is thus incoherent: The Germans say there is to be no debt
write-off and that the I.M.F. must be part of the program. But the
I.M.F. cannot participate in a program in which debt levels are
unsustainable, and Greece’s debts are unsustainable.
Austerity is largely to blame for Greece’s current depression — a
decline of gross domestic product of 25 percent since 2008, an
unemployment rate of 25 percent and a youth unemployment rate twice
that. But this new program ratchets the pressure up still further: a
target of 3.5 percent primary budget surplus by 2018 (up from around 1
percent this year). Now, if the targets are not met, as they almost
surely won’t be because of the design of the program itself, additional
doses of austerity become automatic. It’s a built-in destabilizer. The
high unemployment rate will drive down wages, but the troika does not
seem satisfied by the pace of the lowering of Greeks’ standard of
living. The third memorandum also demands the “modernization” of
collective bargaining, which means weakening unions by replacing
None of this makes sense even from the perspective of the creditors.
It’s like a 19th-century debtors’ prison. Just as imprisoned debtors
could not make the income to repay, the deepening depression in Greece
will make it less and less able to repay.
Structural reforms are needed, just as they were in Indonesia, but too
many that are being demanded have little to do with attacking the real
problems Greece faces. The rationale behind many of the key structural
reforms has not been explained well, either to the Greek public or to
economists trying to understand them. In the absence of such an
explanation, there is a widespread belief here in Greece that special
interests, in and out of the country, are using the troika to get what
they could not have obtained by more democratic processes.
Consider the case of milk. Greeks enjoy their fresh milk, produced
locally and delivered quickly. But Dutch and other European milk
producers would like to increase sales by having their milk, transported
over long distances and far less fresh, appear to be just as fresh as
the local product. In 2014 the troika forced Greece to drop the label
“fresh” on its truly fresh milk and extend allowable shelf life. Now it
is demanding the removal of the five-day shelf-life rule for pasteurized
milk altogether. Under these conditions, large-scale producers believe
they can trounce Greece’s small-scale producers.
In theory, Greek consumers would benefit from the lower prices, even if
they suffered from lower quality. In practice, the new retail market is
far from competitive, and early indications are that the lower prices
were largely not passed on to consumers. My own research has long
focused on the importance of information and how firms often try to take
advantage of the lack of information. This is just another instance.
One underlying problem in Greece, in both its economy and its politics,
is the role of a group of wealthy people who control key sectors,
including banks and the media, collectively referred to as the Greek
oligarchs. They are the ones who resisted the changes that George
Papandreou, the former prime minister, tried to introduce to increase
transparency and to force greater compliance with a more progressive tax
structure. The important reforms that would curb the Greek oligarchs are
largely left off the agenda — not a surprise since the troika has at
times in the past seemed to have been on their side.
As it became clear early on in the crisis that the Greek banks would
have to be recapitalized, it made sense to demand voting shares for the
Greek government. This was necessary to ensure that politically
influenced lending, including to the oligarchic media, be stopped. When
such connected lending resumed — even to media companies that on
strictly commercial terms should not have gotten loans — the troika
turned a blind eye. It has also been quiescent as proposals were put
forward to roll back the important initiatives of the Papandreou
government on transparency and e-government, which dramatically lowered
drug prices and put a damper on nepotism.
Normally, the I.M.F. warns of the dangers of high taxation. Yet in
Greece, the troika has insisted on high effective tax rates even at very
low income levels. All recent Greek governments have recognized the
importance of increasing tax revenues, but mistaken tax policy can help
destroy an economy. In an economy where the financial system is not
functioning well, where small- and medium-size enterprises can’t get
access to credit, the troika is demanding that Greek firms, including
mom and pop stores, pay all of their taxes ahead of time, at the
beginning of the year, before they have earned it, before they even know
what their income is going to be. The requirement is intended to reduce
tax evasion, but in the circumstances in which Greece finds itself, it
destroys small business and increases resentment of both the government
and the troika.
This requirement seems at odds, too, with another of the demands with
which Greece has been confronted: that it eliminate its cross-border
withholding tax, which is the withholding tax on money sent from Greece
to foreign investors. Such withholding taxes are a feature of good tax
systems in countries like Canada and are a critical part of tax
collection. Evidently, it is less important to ensure that foreigners
pay their taxes than that Greeks do.
There are many other strange features of the troika bailout packages, in
part because each member of the troika has its favorite medicine. As
doctors warn, there can be dangerous interactions. The battle, however,
is not just about Greece. It’s not even just about the money, although
special interests in the rest of Europe and some within Greece itself
have taken advantage of the troika to push their own interests at the
expense of ordinary Greek citizens and the country’s overall economy.
This is something I saw repeatedly firsthand when I was at the World
Bank, most noticeably in Indonesia. When a country is down, there is all
manner of mischief that can be done.
But these policy debates are really about ideology and power. We all
know that. And we understand that this is not just an academic debate
between the left and the right. Some on the right focus on the political
battle: the harsh conditions imposed on the left-wing Syriza government
should be a warning to any in Europe about what might happen to them
should they push back. Some focus on the economic battle: the
opportunity to impose on Greece an economic framework that could not
have been adopted any other way.
I believe strongly that the policies being imposed will not work, that
they will result in depression without end, unacceptable levels of
unemployment and ever growing inequality. But I also believe strongly in
democratic processes — that the way to achieve whatever framework one
thinks is good for the economy is through persuasion, not compulsion.
The force of ideas is so much against what is being inflicted on and
demanded of Greece. Austerity is contractionary; inclusive capitalism —
the antithesis of what the troika is creating — is the only way to
create shared and sustainable prosperity.
For now, the Greek government has capitulated. Perhaps, as the lost half
decade becomes the lost decade, as the politics get uglier, as the
evidence mounts that these policies have failed, the troika will come to
its senses. Greece needs debt restructuring, better structural reforms
and more reasonable primary budget surplus targets. More likely than
not, though, the troika will do what it has done for the last five
years: Blame the victim.
Joseph E. Stiglitz is a Nobel laureate in economics, a professor at
Columbia and the author, most recently, of “The Great Divide: Unequal
Societies and What We Can Do About Them.”