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Breaking up? A route out of the eurozone crisis

Research on Money and Finance, Occasional Report 3 // November 2011

C. Lapavitsas, A. Kaltenbrunner, D. Lindo, J. Meadway, J. Michell, J.P. Painceira, E.Pires, J. Powell, A. Stenfors, N. Teles, L. Vatikiotis.



Nominal and Real Aims of Austerity Programs: the Greek (extreme) Case

Leonidas Vatikiotis & Petros C. Kosmas (International Conference: Neoliberalism and the Crises of Economic Science, Istanbul May 2011)


One year after the adoption of the Memorandum between the Greek government and the IMF-EU, many official data allows us to check, whether the objectives were implemented for which imposed. The dominant opinion in Greek political circles supports strong cuts, which will in exchange save the Greek economy from relying on the high cost of borrowing on the financial markets. This report examines the detail of the adjustment programme ofGreeceand leads to the opposite conclusion. In particular we examine: Firstly, the reasons invoked to legitimize the society the use of IMF-EU. Secondly, the measures implemented this year. Thirdly, the real causes of the Greek financial crisis. Fourthly, these results were provided in terms of social measures and the conclusions were reached in relation to the real goals of austerity. On this basis we argue that the real challenge was to improve fiscal imbalance, but with a major shift in macroeconomic policy that will allow to increase the profits of capital. Finally, reports in direct workable proposals have been produced that can solve the debt crisis faced byGreeceand the mean improvement in the position of the social majority.

1. Nominal aims

In May 2010 the government ofGreeceagreed with the IMF-EU for a set of economic austerity measures, which is supposed to solve the financial problem inGreece.

The basic outline of the financial problem inGreeceis defined by a combination of high debt and fiscal deficit. Specifically, in 2009 and 2010, Greece’s government debt to GDP ratio was 127% and 143% when the average mean of the 17 countries of the Eurozone was 79% and 85% and the of EU 27 was 74% and 80% of GDP respectively. And the budget deficit in 2009 and 2010 was 15% and 11% of GDP when the corresponding mean for the EU-27 was 7% and 6% of Eurozone’s GDP for both years (Eurostat, 2011).

The action mechanism of EU-IMF inGreeceaccelerated by rising interest rates, which made it unusually expensive to be prohibitive to fund borrowing theGreekRepublicand this in turn by the continuing degradation of the Greek economy from the credit rating agencies.

The resort to IMF- EU and the measures that accompanied the four Memoranda to date have been applied to correct these distortions.

2. Measures that imposed by IMF–EU

  • Outlining the measurements that have been imposed until today in order to confront the crisis of the public debt we observe that they concern:
  • Reductions in wages in the public and private sector by removing working allowances and cropping the 13th and 14th salary.
  • Against insurance law with reduces pensions and promotes the contributory system.
  • Sharp reduction in social expenditure having as a direct consequence the closure of 1056 schools – something unprecedented in the history of the Greek public sector, the dismantling of public health, as shown by the “working on the limits” of historic public hospitals and clinics and the shrinkage of public transport.
  • Dismissal of tens thousands of contracted employees meeting fixed and permanent needs in the broad and narrow public sector by not renewing the contracts.
  • Abolition of collective bargaining agreements and transferring the weight of trading in an increasingly low level: from the collective – in general area, then to the operational, and finally to the individual, where reigns the employing and managing arbitrariness.
  • Abolition of the institution of arbitration.
  • Increase the working hours in the public sector.
  • Reduction of compensation in order to facilitate redundancies.
  • Increased indirect taxation and in particular of the VAT and excise duties at the same time reducing the tax rate from 24% to 20% for business.
  • Facilitating business activities of multinational corporations and limited liability companies through the liberation of closed professions.
  • Sell-off public assets by privatization programmes of 50 billion euros, which were announced by the Troika, when its existence was initially denied by the government ofGreecein a categorical manner.

3. Real causes of Greek sovereign Debt Crisis

The evaluation of the real goals of the austerity programs requires the examination of the actual causes of the Greek budget crisis which are seven in total.

3.1 Measures to tackle Depression

The collapse of Lehman Brothers in September 2008 increased the interbank interest rates, limited bank financing in the economy, reduced the consumer spending as well as the public and the public tax revenues in all EU countries. Furthermore, the government intervention aiming to mitigate the effects of the crisis increased public spending and widened the gap across the EU. This situation is much worse inGreece, where from 2008 until now the banks have absorbed a total of 108 billion (of which 85 billion. were guarantees and 23 billion. were cash or equivalent bonds). Likewise, the 20 most developed countries in the world were confronted with a comparable situation. Consequently, the only times in history that recorded a similar increase in debt to that of 2009 (13%) where in time of war and especially in 1944: 22% and 1919: 14 % (IMF, 2010).

Comprehensively, it is estimated that the current crisis in advanced countries led to output loses of 25% of GDP and a consequent increase in public debt of around 24% of GDP (Laeven andValencia, 2010).

3.2 Addiction of the Greek capital in Direct Subsidies

The rescue of problematic firms in the 80s and the Olympic Games in 2004 -with an initial cost of 9.5 billion and probably a final cost of 20 billion- are the tip of the iceberg of direct aid to enterprises in the form of cash. However, in recent decades the Greek companies, especially the elite, have been steadily supported by billions each year in the form of development incentive through the Public Investment Program. The scandals are fostered by accomplices of the two powerful political parties (PASOK and ND) as well as of the big companies. The latter were imposed by the Memorandum and appear to be concerned about deficits.

3.3 Privatizations

By invoking the rationalization and the reduction of the state, the government revenues lost revenue source. The most popular but not unique example is the case of OTE Telecommunications, which was sold to the German Deutsche Telecom from the government of New Democracy under completely non-transparent procedures and a price equal to the public revenue for a year.

3.4 Equipment for Defense

The amounts spent nationally on armaments gives the impression thatGreeceis a military superpower inEuropeandMediterranean.

For the purpose of illustration, when on average in the EU of the 27 spends 1.6% of GDP on armaments, Greece spends 3,3% (SIPRI, 2011), which is twice the EU average and three times more of what other neighboring countries such as the Mediterranean Europe, spend. Although this equipment is not necessary, it is however enforced by NATO and not by the national defense.

TABLE 1: Total Expenditure for Payment of Debt, in Euro (1991-2011)
























































































































Source: Ministry of Economics, Government Budgets

3.5 Low Taxes on Capital

Greecehas one of the lower reasons for tax revenue to GDP: 32.6% of GDP when the average in the EU of the 27 and the euro area is 37% and inDenmarkthat has the highest ratio of 48%. The low tax revenues are a consequence of the almost symbolic taxation of the capital.

This reflects from the great discrepancy that display the rates of capital taxation inGreececompared to the EU: the rate is 15% inGreecewhile the corresponding tax rates are 27% in the EU (Eurostat, 2010).

3.6 Participation in the Eurozone

The participation of Greece in the European Union in 1981 and in the Eurozone in 2002 initially accelerated the liquidation of capital at the expense of manufacturing, agriculture, livestock and total employment and, of course, of government revenues. Furthermore, the reason for the low rate of exports in total GDP (21%vs.40% for the euro area) should be sought in the adoption of a monetary policy that is not only inappropriate but diametrically opposite to the interests of the Greek economy. Suffice it to say that the Greek economy is required to survive in an environment of appreciation of the “national” currency by 64% within a decade (this how much the euro has appreciated against the dollar since the01/02/2002), while in the past every seven years was devaluated.

The causes of the current crisis in the Eurozone are related to the separation of the Eurozone in periphery and center respectively.  The intensification of conflicts within was a result of depressed wages policy that was followed byGermanyover the last decade (RMF, 2010).

3.7 Servicing Public Debt  

The costs of servicing the public debt between 1991 and 2011 amounted to 513 billion € (Table 1). The redemption of short-term securities or titles only in the last 9 years (2003 – 2011) amounted to 151 billion. Evidently, it is easy to conclude that over the last 20 years we have paid the debt twice. (A clear case of compound interest!)

The destructive role of the public debt on public finances is evident by the fact that tax revenues this year (52.9 billion) is more than enough for the necessary social expenditure, i.e., wages and public pensions, pension funds and financing, costs for Department of Health, Education and Defense (51.6 billion). The public debt will instead absorb interest and amortization of 62 billion. Three times more than the salaries and pensions, and ten times more than the expenses for education will be.

4. Implications to the Society and Real Aims of the Austerity Programmes 

Although it is still early there is considerable evidence of the worsening social problem inGreece, as a result of the austerity policy imposed by the IMF and the EU.

4.1 Explosion Unemployment

Based on recent evidence of the Greek Statistical Service, the official unemployment rate in February 2011 amounted to 15.9% (affecting 787.229 people). Compared with last year this was increased by 30.1% (then hit 605,277 people) [1].

4.2 Elastification in Labour Relations

According to statement by Minister L. Katseli, businesses inGreeceusing the new workplace, in 2010 necessitated the change of contract full-time flexible in a number greater by 55% compared with 2009.

4.3 Decreases in Salaries and Pensions

On the basis of a statement of the Governor of the Bank of Greece, George Provopoulos, 2010, in the first year implementation of the Memorandum wages inGreecefell by 14% and pensions by 11%. Also, the hourly labor costs inGreecein 2010 recorded a record drop of 6.5% when the EU-27 increased by 2% and the 17 euro zone increased by 1.4% (Eurostat, 42/2011).

4.4 Increases in Poverty

Based on data released last year by the Bank of Greece, the poverty rose by one quarter and now it reaches 25.07% of the population. Obviously, workers and the social majority did not benefit from the Memorandum, while the bourgeoisie was benefited by reversing gains of several decades.

Notable gains were recorded by foreign banks, in particular the Franco-German that had the highest exposure in Greek bonds. To corroborate recent evidence showing that while the beginning of the crisis involving the foreign banks in the Greek debt was around 150 billion, now stands at 50 billion. On the other hand European banks were from 115 to 40 million. More specifically, Germans and French had the greatest exposure to the Greek debt by 30 to 8 and 45 to 12 billion euros (BIS,21 April 2010) respectively. As a result of this economic policy, the main creditors ofGreecewill not risk more than a possible cessation of payments that was initiated by the debtors. In this way, the IMF confirmed its role as negotiator and organizer of creditor’s cartel, just as had happened inArgentina(Cibils, Weisbrot and Kar, 2002).

All these measures were not only ineffective but also class-biased as the crisis deepens. Witnesses: Firstly, the increase in public debt of 127% in 2009, when decisions are taken on appeal to 160% of GDP when it is supposed to complete the memorandum. Secondly, the deterioration of the reliability ofGreecewith the explosion of interest in the secondary market and the continuing deterioration of credit rating agencies.

Table 2 below shows the trend of interest rates in the time since the adoption of the Memorandum.

Table 2: Interest Rates in the Secondary Market for 2 years, 5 years, and 10 years – Greek Government Bonds




5 May 2010




5 May 2011




Source: Bloomberg Generic

Thirdly, plans to restructure the debt and new loans will result in a failure ofGreeceto come to market in 2012. In conclusion, the simplicity and the Memorandum have not been applied to overcome the debt crisis, but to change the balance between the forces of labor and capital. In this occasion,Greecedeficits have been the testbed of the economic attack, which unleashed the hawk’s deficits (Polin, 2010). Also, the IMF, as in the case ofArgentinaandSoutheast Asia, proved unable to manage the crisis (Cibils and Vuolo, 2007).

5. An Alternative to the “Chemotherapy” of IMF-EU

In contrast to these measures a condition for overcoming the financial crisis and improve the position of the majority is to implement the following measures:

  • Stop paying the debt with responsibility of the debtor on the basis of emergency (RMF, 2010),
  • Exit from the Eurozone to halt the creation of deficits,
  • Devaluation of the new national currency[2],
  • Nationalisation of banks,
  • Barriers to entry and exit of capital,
  • Production restructuring of the economy.

This is a minimum set of measures on which the Greek society will leave from the position of Ulysses, who spent a decade to return from where it started, and will go in place of Prometheus, who pioneered the effect of helping all humanity.

6. Conclusions

The only thing in reality the packet of measures achieves is an important change in the ownership of the debt, where the national debt ofGreeceis transferred from European bank accounts to labour class. The claim that fiscal austerity during a recession is “economically correct”, in reality is “economically incorrect” and is designed to avoid public criticism. As far as to why, that many dominant circles support today this catastrophic policy, is simple: those circles are concern for the purpose of the capital, less for the interest of the workers and the poor, but rather they identify their interest with those of the Wall Street and the City, and the higher classes. The obvious beneficiary from the ‘rescue packet’ of the Eurozone governments will not be the Greek workers and pensioners who suffer from extreme cuts and resection, but the financial centres.

6. References

Cibils, A., Weisbrot M., and K., Debayani, (2002), ‘Argentinasince Default: The IMF and the Depression’, Center for Economic and Policy Research, Briefing Paper.

Cibils, Alan and R., L., Vuolo, (2007), ‘At Debt’s door: What can we learn from Argentina’s recent Debt Crisis and Restructuring’? Seattle Journal for Social Justice, Vol. 5, Issue 2.

EEAG (2011), Report on the European Economy, GoverningEurope.

Eurostat (2011), Euro Area and EU27 Government Deficit, 60/2011.

Eurostat (2010), Taxation trends in the European Union, Main Results.

Eurostat (2011), Fourth quarter 2010 compared with fourth quarter, 42/2011.

IMF (2010), ‘A Historical Public Debt Database’, S. Ali Abbas, Nazim Belhocine, Asmaa El Ganainy and Mark Horton, WP/10/245,

IMF, (2010), ‘Greece: Staff Report on Request for Stand – By Arrangement’, Country Report, No.10/110.

Laeven, L., and F., Valencia(2010), ‘Resolution of Banking Crisis: The Good, the Bad and the Ugly’, IMF Working Paper, No. 10/146.

Pollin R., (2010), ‘Austerity is not a solution, why the Deficit Hawks are Wrong’, Challenge, November / December 2010.

RMF (2010), ‘The Eurozone between Austerity and Default’, RMF Occasional Report, September 2010.

SIPRI (2011), ‘Stockholm International Peace Research Institute Yearbook, 2011.


[1]           The explosion of unemployment is the most typical failure among many other false predictions of the IMF related to inflation, the depth of the recession, etc. For unemployment in particular the IMF forecasts that this year will fall only to 14.6% (IMF, May 2010).

[2]           The option of leaving the euro and the depreciation in response to tackle the Greek tragedy is not displayed only by radical school of thoughts. It is referred for example from European Economic Advisory Group Report on the European Economy 2011: “The two options (exiting the euro and introducing a devalued drachma, the first and a radical internal depreciation, with Greek prices and wages falling sharply relative to those in the rest of the euro area, the second) impose very large costs and will not work quickly. Both will increase the burden of foreign debt expressed as a share of GDP and have dangerous effects on the balance sheets of many firms and financial institutions. An internal depreciation as large as required can certainly not be achieved without a painful and sustained contraction of the economy and higher unemployment. An external depreciation is likely to be preceded by rumours that can cause a bank run and lead to a currency crisis. There is therefore no alternative that is clearly more palatable than the other in every respect. The choice is between two evils” (EEAG Report, 2011).