“There will be blood “: Austerity and Democracy in Greece and The Eurozone

This post was written by Reuben Bard-Rosenberg on December 28, 2009
Posted Under: Economy

It is rare to hear  government ministers predicting revolt. Yet in recent days, the Minister for Labour in Greece’s social-democratic government has done just that. Mr Lomberdos has warned that the package of austerity measures that his government are poised to implement  will lead to “blood”. Already Greece has seen strikes and occupations.

Like Britain, Greece is faced, on the one hand, with deteriorating public finances, and on the other hand with a situation which seems to necessitate serious deficit spending. In situations such as the one we face now, the ability of governments to to run budget deficits – to tax less and to spend more – represents perhaps the most substantial tool by which the economic pain felt by ordinary people can be mitigated. For all of their faults, the Labour government have, through spending far more and reducing certain taxes, been able to prop up demand, and ensure that unemployment – while huge and immensely damaging – has risen relatively slowly compared with previous recessions.

Greece too is running a huge fiscal deficit. Yet the situation it faces is rather more severe. This is in part because it is seen as a less reliable borrower, making it costlier and more difficult for the government to keep up its borrowing. Yet it is also because the Greece is part of the single currency. Whereas the UK Government plans to reduce the deficit relatively slowly – so that in 5 years time it will still exceed 5% of National Output – Greece plans to rapidly reduce its deficit to from 12.4% to under 3% of GDP. Why? Because the rules mandate that it must. Membership of the Eurozone officially obliges governments to keep budget deficits beneath 3% of GDP.

Such a course of action will be disastrous for the economy and for social welfare. When one considers the level of cuts, privatisations, and public sector job losses necessary to conjure up one tenth of GDP from the public purse, it is possible to imagine why even government ministers are fearing blood on the streets. To offer just one illustration, the governments plans to hire just one civil servant for every 5 that retire.

Yet this situation also illustrates the impact of the EU and the Euro upon democracy. Hundreds of thousands, if not millions, of jobs will depend upon how quickly and how much the Greek government cuts public spending. It would seem obvious to anybody with the most basic democratic instinct that such decisions should be taken by elected politicians, by people accountable to those who stand to suffer. Yet in the Eurozone these decisions are mandated by a set of semi-permanent rules, and enforced by unelected EU commissioners. The conversations that Greek politicians should be having with Greek people about how to move forward, they are instead having with bureaucrats in Brussels. That membership of the Euro is supported people who claim to be democrats, and indeed people of the left – for whom economic democracy represents the most important form of public power – continues to amaze me.

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Reader Comments

Owain

It will be interesting to see how the Eurozone does in the next few years, as the very different economies in it exert different pressures. It seems to me to be a system so complicated as to be effectively unpredictable. The optimum economic “settings” such as interest and exchange rates , may be very different for a Greece than for a Germany. All we can say for sure now, is watch this space.

#1 
Written By Owain on December 29th, 2009 @ 7:44 pm

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