How to Resolve the Greek Crisis

This post originally appeared on Opera Mundi.

Greece is emblematic of today's general crisis of national indebtedness. Since 2010, the country has been subjected to nine different austerity plans, each one of an extreme severity. The Greek people have responded by calling fourteen general strikes. Yet, a solution exists.

The Greek debt crisis is a textbook case and illustrates the utter failure of neoliberal policies. Indeed, despite the intervention of the European Union, the International Monetary Fund and the European Central Bank (ECB), despite the imposition of nine extreme austerity plans that include massive increases in taxes, including the VAT, price rises, a reduction of salaries (for example, a 32 percent cutback of the minimum wage!), retirement benefits and raising the legal retirement age, the destruction of essential public services such as education and health, the elimination of welfare and the privatization of strategic sectors of the economy (ports, airports, railways, natural gas, water, gasoline), the population has been brought to its knees. Yet, in spite of all of this, the debt is greater today than it was before the intervention of the international financial institutions in 2010.

Still, the Greek crisis could have been avoided. Indeed, all that was necessary would simply have been for the European Central Bank to grant the necessary loans directly to Athens at the same rate of interest it charges when lending to private banks, that is to say, between 0 percent and 1 percent. This is something that would have prevented any speculation on the part of the private banks. However, the Lisbon Treaty, drawn up by Valéry Giscard d'Estaing, prohibits this possibility for reasons that are difficult to understand if one starts with the assumption that the BCE is working in the interest of citizens.

Yet, Article 123 of the Lisbon Treaty states:

"Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of Member States (hereinafter referred to as 'national central banks') in favor of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments."

In fact, the ECB directly serves the interests of the financial market. Thus, private banks borrow from the ECB at rates as low as 0 percent to 1 percent. They then speculate on this debt by loaning the same money to Greece at rates ranging from 6 percent to 18 percent, thereby worsening a debt crisis that becomes mathematically unpayable. Further, Athens now finds itself in the position of having to borrow simply to pay the interest on the debt. Worse still, the ECB sells its debt securities back to Greece at a high price, that is to say 100 percent of their value, even though the ECB had acquired them at 50 percent. Thus, they speculate on the fate of a nation.

For these reasons, it is essential that the European Treaty be significantly revised in order to allow the ECB to lend directly to individual states, thereby avoiding speculative attacks by the financial markets on sovereign debt, such as was the case in Greece, Ireland, Spain, Portugal and Italy, to name but a few.

Lessons to be learned from the new Latin America

Europe has much to learn from the new Latin America represented by Brazil's Dilma Roussf, Venezuela's Hugo Chávez, Bolivia's Evo Morales, Cristina Kirchner of Argentina and Ecuador's Rafael Correa, both in terms of the struggle against international finance and the recovery of sovereignty and control of national destiny. All of these nations have chosen to put human beings at the center of social development and to rid themselves of the burden of debt by putting an end to the influence of such international financial institutions as the International Monetary Fund and the World Bank.

Ecuador's President Correa has shown the way. Indeed, without applying austerity measures he has succeeded in lowering Ecuador's national debt from 24 percent to 11 percent of GDP. Contracted in the 1970s by dictatorial regimes, this debt is essentially illegitimate and falls into a category known as "odious debt."

The concept of "odious debt," that is to say debt illegitimately imposed, can be dated back to 1898 when the United States, following its military intervention in Cuba, unilaterally cancelled Havana's debt to Madrid because it had been contracted under an illegitimate colonial regime.

Between 1970 and 2007, Ecuador paid 172 times the amount of debt it had accrued by 1970. Because of the exorbitant interest rate imposed upon the nation, however, the total amount due had been multiplied by 53. Similarly, between 1990 and 2007, the World Bank lent 1.44 billion dollars to Ecuador for which the country repaid the sum of 2.51 billion dollars. The interest alone on this debt represented, between 1980 and 2005, 50 percent of the national budget, clearly to the detriment of all social programs.

Upon coming to power in 2007, Correa reduced interest on the debt to 25 percent of the national budget and established a Commission for the Integral Audit of Public Debt, charged with assessing the debt's legitimacy. In its published report, the Commission concluded that the Ecuadorian commercial debt was illegitimate. In November 2008, President Correa ordered a suspension of payment for 70 percent of the public debt.

As a logical consequence, Ecuador's debt lost 80 percent of its value on the secondary market. Quito took the opportunity to buy back three billion dollars of its own debt for 800 million dollars, thereby realizing a saving of seven billion dollars in interest that the country would otherwise have paid through 2030.

Thus, by a single international audit and at no cost, Ecuador reduced its debt by nearly 10 billion dollars. Public debt fell from 25 percent of GDP in 2006 to 15 percent of GDP in 2010. At the same time, social spending (education, health, culture, etc...) rose from 12 percent to 25 percent.

Europe would be wise to follow the path traced out by the new Latin America. It has become clear that the problem of public debt can never be solved by the application of austerity measures. Inevitably, these are politically disastrous, socially unjust and economically inefficient. The waves of privatization in key sectors of national economies and the undermining of hard-won social rights will not resolve the problem of a mathematically unpayable debt. The solution is nonetheless simple: the European Central Bank must lend directly to the states at the same rate of interest it charges private banks and the power of money creation must be made the exclusive right of the central banks. Public interest must prevail over the narrow interest of private banks. Who in Europe will dare to emulate the new Latin American and have the political courage to challenge the world of international finance?

Translated from the French by Larry R. Oberg