“ The puzzle of European integration: Will Greece be the first piece to fall through?” Marica Frangakis Nicos Poulantzas Institute

Section 1 - The ‘puzzle’ of European integration; Section 2 - The case of Greece; brief historical overview, profiling of the economy, the social situation, the bail- outs, the private sector involvement and the political process; Section 3 - The impact of austerity in Greece; the current outlook Section 4 - Some thoughts on alternatives

EU: An ill-fitting puzzle Inherent deficits in European construction: social, environmental, democratic Euro architecture reflects belief in ‘free’ market as arbitrator of social and economic relations; financial deregulation Fiscal co-ordination = fiscal discipline; SGP Narrow ECB mandate Wage moderation : main convergence tool Crisis has exacerbated EU deficits Fiscal view: austerity as the cure to the crisis Imbalances view: adjustment goes both ways

Fiscal profligacy all around?

Average Labour Unit Costs indices for non-core and core countries (2000=100)

The Greek saga - Brief historical overview ‘growth at any cost’, based on ‘social compromise’, tolerating various tax digressions 1980s - beginnings of the welfare state; former national champions nationalised, with the state taking over their liabilities; sluggish growth, high inflation & a worsening of public finances. 1990s s - Joining the eurozone, strategic goal; manufacturing and agriculture – fell further behind; privatization & market liberalisation deepened financialisation of the economy Public finances ‘massaged’ through derivatives with the help of Goldman Sachs

Profiling the Greek economy – Basic Indicators

Ranking of the Greek economy in EU27; EU17 ( ) Growth rate9 th ; 4 th Growth rate/capita11 th ; 4 th Domestic demand growth8 th ; 5 th HICP6 th ; 3 rd Employment8 th ; 6 th Unemployment (% of labour force)6 th ; 3 rd Labour productivity11 th ; 4 th Real LUC 9 th ; 5 th Gen. Government expenditure (% GDP)12 th ; 9 th Gen. Government Revenue (% GDP)16 th ; 12 th Interest expenditure (% GDP)2 nd ; 2 nd Public Deficit (% GDP)2 nd ; 1 st Public Debt (% GDP)2 nd ; 2 nd Trade balance (% GDP)3 rd ; 2 nd Current account balance (% GDP)3 rd ; 2 nd

Cost of government produced and government funded goods and services (% GDP)

Employment in general government (% labour force)

Structure of general government expenditure by function 2008 (%)

The social situation in Greece Catching-up country: average per capita income fell from 89.2% of former EU15 in 1980 to 72.3% in 2000; it increased until 2009, when it reached 84%, only to decline again to 74.4% in 2011, going back to the level of the early 1990s Share of wages in GDP also fell from 69.3% on average in to 61.7% in Distribution of income is highly unequal: income of top 20% 5 times greater than that of bottom 20% High rate of poverty: in % of population at risk of poverty or social exclusion; Greece: poorest country in the eurozone and 7 th poorest in EU27. Social transfers & benefits do not ameliorate the situation significantly

Crisis management – Bail out I Loan of €110 billion, of which €80 bn intergovernmental loans by the eurozone countries & €30 bn by the IMF; Until February 2012, €73bn disbursed. Of this, approx. 64% used to repay bonds and loans that matured between May December 2011; Greek banking system has received €23bn through the HFSF 3.5% interest rate; maturities of years; grace period of 10 years. Strictly conditional on implementation of harsh austerity measures Disbursement to be made in 13 tranches, each conditional on a review of fiscal developments.

Crisis management – Bail out II €130 billion loan from eurozone & IMF; Greek banks to get €25 bn through the HFSF Additional fiscal austerity measures Priority given to debt servicing payments; segregated account ‘Enhanced and permanent presence’ of the Task Force already set up under the first bail-out agreement Obtaining political assurances from the leaders of the two major political parties Reservations about the holding of national elections! PSI to reduce value of GGB by 53.5% = 30% of debt; will absorb 72% of bail out II (Euro 93.5 bn)

Private sector involvement (PSI) ‘Voluntary restructuring’ of Greek government bonds (57% of total debt) to be governed by English law – Investors to absorb 53.5% reduction in the nominal face value of their bond holdings; to exchange 31.5% for new government bonds ranging from 11 to 30 years & a further 15% to be paid out through short-term securities issued by the EFSF; also GDP linked securities; The coupon on the newly issued bonds will gradually increase from 2% to 4.3% by Collective Action Clause to be included in new bonds Debt equal to €197 bn – 57% of total Greek debt - is being exchanged for a new loan of €156 bn!

Crisis management – The political process According to the OECD Better Life Index, 44% of people say they trust their political institutions, lower than the OECD average of 56%. The lower than average turnout in the elections is a further indicator of the low public trust the Greeks have in their government Such trust has been eroded by the management of the crisis both by the Greek political ruling class and by the European elites. The democratic legitimacy of the “technocratic” government was openly questioned and the pressure for elections mounted Massive shift towards the radical left

The shift in the electorate’s political preferences 2009 – 2012 (% share of votes) May June 2012 New Democracy SYRIZA (Radical Left Alliance) PASOK (Panhellenic socialist movement) Independent Greeks (split from ND) Golden Dawn (fascists) Democratic Left (split from SYRIZA) KKE (Communist Party) LAOS (extreme right wing)5.63--

elections: Seats/party (left to right) Communist Party (12); Radical Left Coalition (71); Democratic Left (17); PASOK (33); New Democracy (79+50 ‘bonus’); Independent Greeks (20); Golden Dawn (18)

Running faster to stand still? The Greek experience of austerity Fiscal consolidation – Over the period , fiscal austerity measures are expected to amount to over 30% of GDP, 54% of which is going to come from expenditure cuts and 46% from increases in revenue. Labour market reforms – Employment protection and worker rights under attack (min. wage, collective agreements, etc.) Structural changes – Privatization programme, expected to raise €35 billion by end-2014 and €50 billion by end- 2017; market deregulation (energy, road transport, regulated professions); reform of pension system

Greece is in its fifth year of recession

Sectoral economic activity indicators (year-on-year change %)

External trade deficit (% GDP)

Structure of exports by type and destination (%) Agricultural products Raw materials Fuels Industrial products Other Total EU Eurozone N. America Balkans M. East & N. Africa S.E. Asia3.61.5

“… avalanche of serious environmental losses” (World Wildlife Fund Greece 8 th Annual Review) Econ crisis used as an excuse for the weakening of environmental legislation and policy; Illegal buildings legalised without any assessment as to the implications; 95% of Green Fund resources (national environmental fund established in 2010) to be absorbed by gen govt budget; Natural public land sold or leased under obscure rules and pre-existing illegal land uses de facto legalised; Impact assessment and permit regulations for Natura 2000 areas being cut Exemption from Environmental Impact Assessment of legislation for infrastructures - eg waste management

Current outlook

Comparison of forecasts of selected economic indicators 2012 – 2013 (const market prices, annual % change and level) EUOECDIMF GDP Investment (GFCF) HCPI Unemployment (% labour force) Gen. government balance (% GDP) Current account balance % GDP) Public debt (% GDP)

Some thoughts on alternatives The narrative needs to be altered A more just distribution of income and wealth necessary The ECB must become a lender of last resort for governments and not just for private banks.. Austerity needs to be replaced by a programme of economic restructuring over a long time period Public investment, that is ecologically and socially sustainable, needed to kick-start the economy The role of public services needs to be reinstated. Financial policy reform should be given new impetus The deterioration of worker rights and of the conditions of the labour market must be halted and reversed

What about Greece? Firstly, a change in narrative - The debt audit campaign, a good starting point. Secondly, some breathing space - The Greek economy needs to start growing again. Thirdly, the domestic problems can only be dealt with by the Greek social and political forces themselves Fourthly, the Greek austerity experience already feeding into the European collective mind Overall, need a policy that is European in reach & Greek in origin – ie explicitly dealing with the idiosyncracies of the Greek economy

To conclude … If what is happening at the moment goes on for much longer, life may become so unbearable for the Greeks, that, albeit a traditionally pro-European people, they may opt for default and most probably exit from the euro. Greece may be the first piece of the puzzle to go. This is going to be unfortunate both for the Greeks and for the rest of Europe in a long- term perspective