The slashed veins of Greece (and Cyprus too…)

17 mars 2013
Par

This paper is the result of the kind translation by Anne-Marie de Grazia of my previous note "Les Veines Ouvertes de la Grèce", but has been augmented as things are moving fast in Cyprus.

The interruption of negotiations between Greece and the TROIKA (EU, ECB and IMF) has brought this unfortunate country brutally back into the limelight. But this time i twill not be alone. Just as we learnt the sudden departure of TROIKA emissaries from Athens, disturbing news were coming form Cyprus.

Greece : back to the drawing board ?

It is known that this interruption was caused by willingness of the TROIKA to slash 150,000 civil servant jobs in the coming two years. Even the conservative government of Samaras refused such cuts. Applied to the scale of France, a country whose population is 6.5 times bigger, these cuts would be equivalent to axing  975,000 jobs among the 2.15 million state employees1. One understands the refusal of the Greek government. In fact, Greece has impoverished itself by one quarter of its GDP since the second quarter ot 2008. The economic subsidence is continuous, whatever indicator one choses to consider, be it the constant-price GDP or current price GDP. Source: HELSTAT data

Graph 1

PIB-GrèceSource: Hellenic Statistical Authority (HELSTAT)

Industrial production is experiencing an even faster collapse, having lost one third of its reference level (2005), a major part of which since the beginning of the crisis. This is largely the consequence of the « internal devaluation » implemented for the sake of reducing the trade deficit. Imports for sure decreased form 32.1 billions Euro for 2011 to 30.2 billions in 2012. But exports increased only by a small margin, from 16,2 to 16,8 billions euro.

Graph 2

Prod-Indus GrèceSource: Idem as graph 1

One can measure to what extent austerity is not functioning for, for every percentage of taxes increased or spending reduced (either Fiscal or budget austerity), we have today between 1.4 and 1.7 reduction in growth, which mechanically creates a reduction in tax revenue of the same level. The governement therefore tried to counteract this decrease in taxes (VAT and duties) through an increase in the contributions of direct taxes on the population. But by now, combined with dramatic effects of the austerity policy, a vast majority of the population is insolvent. After having grown up during 2012, taxes on persons and on households are in the process of collapsing. Austerity cannot function, because the logic of internal devaluation, which one might take into consideration in the case of a country surrounded by strongly expanding neighbors, becomes suicidal when it is practiced by a number of countries simultaneously. Consequently, rigor leads to austerity which leads to mass unemployment, now reaching 26% of the active population.

The Cyprus event

In this context came the announcement on Saturday, March 16, of the agreements just signed in the night between Cyprus and the EU and of their consequences. The governmenent in Nicosia, in order to obtain the support of the EU for a new bail-out of 10 billions euros (it has initially hoped to got 17 billions), had to put into effect an extremely dangerous measure: a direct levy on bank accounts. This is to be seen, theoretically, as a kind of taxes on wealth which could provide for 5.8 billions euros and nothing in its principle is really scandalous. But the way this has been implemented is an unmitigated disaster. It will probably not take long before we will see the effects of such a measure in other countries. Indeed, in Cyprus itself, queues formed in front of the banks in order to withdraw the money from the accounts (there was even a case of a bank assault with an earth moving machine), but without effect. The government had frozen the amounts the day before. The government then postponed the vote of the bail-out plan to Monday as i twas facing a strong opposition in the Parliament. Banks will have to stay closed probably on Tuesday 19th.

Contagion and contamination

But what has happened to the Cypriots will serve as a lesson for other countries. Such a measure is perfectly conceivable in Greece because of the collapse of tax revenues. The government is already frantically looking for new tax incomes. Actually the special EU-Troïka envoy in charge of Cyprus banks in Greece, Mr. Paul Koster, walked out of his job (see here). The logic of the situation would be that we will see probably a panic “bank run” in Greece, slow moving but potentially as disastrous as ever, and then probably in Spain and Italy as well. Population confidence in the banking system, wich was at a very low ebb, is to be dramatically affected by what is now happening in Cyprus. The situation can’t be assessed by the share of the country GDP in the whole Eurozone. It is above all a problem of confidence. What the Nicosia government has done is in a symbolic sense shaking what confidence was left in the banking system down to the foundations.

Actually, the situation in Greece has known a new worsening, the effects of which will be manifest by next July. But the combination of this situation and of the faux-pas of the authorities in Cyprus risks confronting other countries which find themselves in the middle of an open crisis, such as Spain, Portugal and possibly Italy, to the perspective of bank runs.  Even if they are not justified in a rational sense, and bank runs rarely are, the mass psychology will play heavily on this issue. If they happen, they will be extremely difficult to control.

The TROIKA wants to continue to see the blood of Greece flowing from its slahed veins, but it will not be long before we ourselves are spattered with it.

Translated from:

Jacques Sapir, “Les veines ouvertes de la Grèce", note published on the carnet Russeurope le 16/03/2013, URL: http://russeurope.hypotheses.org/1028

Citation

Jacques Sapir, “The slashed veins of Greece (and Cyprus too…)”, note published on the carnet Russeurope le 17/03/2013, URL: http://russeurope.hypotheses.org/1034

 

  1. Strictly speaking, civil servants number 2.151 millions in France. To which must be added 3.126 million agents of the civil service which are not civil servants by status. One must add to this global number of 5.277 millions around 700,000 persons who are paid by the state but who are employed under contract in private education or private hospitals. []

Jacques Sapir

Ses travaux de chercheur se sont orientés dans trois dimensions, l’étude de l’économie russe et de la transition, l’analyse des crises financières et des recherches théoriques sur les institutions économiques et les interactions entre les comportements individuels. Il a poursuivi ses recherches à partir de 2000 sur les interactions entre les régimes de change, la structuration des systèmes financiers et les instabilités macroéconomiques. Depuis 2007 il s'est impliqué dans l’analyse de la crise financière actuelle, et en particulier dans la crise de la zone Euro.

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Présentation

Ce carnet a pour fonction de rendre accessible mes travaux, qu’il s’agisse de working papers, de note de positionnement ou de notes brèves, portant sur l’économie européenne et sur la Russie. Il comprend des textes qui portent à la fois sur la crise de l’Euro et les origines de cette crise et sur l’économie de la Russie (depuis les problèmes macroéco- nomiques jusqu'à ceux de l'économie régionale, en passant par la finance).

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This blog aims at the dissemination of some of my research works, including working papers, position papers or brief notes focusing either on the Russian economy (from macroeconomy to regional economics and finance) or on the European one, with a special attention to the Eurozone crisis.

Jacques Sapir

Jacques Sapir

Diplômé de l'IEPP en 1976, a soutenu un Doctorat de 3ème cycle sur l'organisation du travail en URSS entre 1920 et 1940 (EHESS, 1980) puis un Doctorat d'État en économie, consacré aux cycles d'investissements dans l'économie soviétique (Paris-X, 1986).
A enseigné la macroéconomie et l’économie financière à l'Université de Paris-X Nanterre de 1982 à 1990, et à l'ENSAE (1989-1996) avant d’entrer à l’ École des Hautes Études en Sciences Sociales en 1990. Il y est Directeur d’Études depuis 1996 et dirige le Centre d'Études des Modes d'Industrialisation (CEMI-EHESS). Il a aussi enseigné en Russie au Haut Collège d'Économie (1993-2000) et à l’Ecole d’Économie de Moscou depuis 2005.

Il dirige le groupe de recherche IRSES à la FMSH, et co-organise avec l'Institut de Prévision de l'Economie Nationale (IPEN-ASR) le séminaire Franco-Russe sur les problèmes financiers et monétaires du développement de la Russie.


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