No one wished for the current crisis in Europe, but that it happens is still an expression of conscious politics. The EU’s four freedoms and the introduction of the euro is the basis for the crisis we see today. The EU-system changes power conditions in the labor market, high unemployment reduces the unions power – that is why we have both the crisis and the constant attacks on the rights of working people.
When Greece adopted the euro, two very important things happened. First of all, interest rates fell dramatically, money was cheap. Investors the world over decided that all euro countries suddenly was equally safe payers and that it therefore was logical to demand the same rate from Greece as from Germany. It meant that Greece could borrow money and for whatever they wanted. They imported German interest rates without importing the German budget discipline.
The second thing that happened was that Greece no longer had the ability to devalue to make their debts bearable. A country like the U.S. can never go bankrupt. We hear a lot about the large U.S. government debt, but unless the United States wants to,it cannot go bankrupt. Their borrowing is in U.S. dollars. If the debt becomes too large, it is easy for the U.S. to start the printing press and make more than enough dollars to pay all they have loaned. This opportunity does not exist for Greece, nor any of the other euro countries.
When the “normal” form of devaluations no longer exists the alternative is what is called internal devaluation. Now, what is an internal devaluation?
It is to reduce wages of ordinary working people in a country. This makes production cheaper, exports improves and the debt may be possible to pay. Many countries have tried this cure, Argentina, CFA area, the Baltic countries. For most it went very badly. Argentina finally had to break the peg with the dollar and devalue, the Baltic countries ended up with a sharp decline in GDP and very much lower wages for most people.
An internal devaluation leads (almost) always fall in GDP, which means that the debt is more difficult to bear. Furthermore, many people point out that the internal devaluation in Greece, means that the debt will rise from today’s impossible level to almost 200% of GDP.
The failure is almost inevitable.
But in today’s discussion is the major focus on banks, government debt, bonds, and investors. It is much less focus on those who must bear the burden of an internal devaluation.
In Greece, wages has declined by around 30 percent, both in private and public sectors. 100 000 public employees have been dismissed, pensions have gone down considerably and taxes are rising sharply. To use a random example, a clerk in a municipality in Greece has seen their pay fall from 2000 dollar a month to 1300 dollars a month. At the same time VAT has increase from 13 to 23 percent, all have received additional incometaxes of between one and four per cent and a significant property tax has been instituted.
It should be mentioned, of course, the Greeks might not have always been the most observant at paying their taxes, either with joy or grief, especially rich Greeks have failed to pay. But it is ordinary people who get the burden.
In short, if a country devalues the banks and the investors must carry most of the loss, while with an internal devaluation (at least initially working people most of the burden. Now the EU must allow Greece to go “bankrupt”, the debt must be hammered down.
Afterwards let us handle a possible bankcrisis. It is better to let the banks be nationalized than to let ordinary people bear the burden of the crisis.
PS. I know this is simplified, a banking crisis will have serious consequences for ordinary people, but I think the consequences will be much less.