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5 Reasons Greece and the Rest of the Eurozone Are On the Road to Hell

Despite mainstream press claims to the contrary, the crisis has by no means been averted.
 
 
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Sunday's elections in Greece brought victory to the center-right New Democracy, which has favored a bank-friendly bailout of the economy, over the leftist Syriza party. The middle class, it seems, got scared of losing everything and looked to the conservatives for protection. So what will the New Democracy party do with the harsh austerity package Greece has been handed? Will it even be able to form a government? Will Greece get any real relief? And what does it all mean to you and me?

For the short term, it appears we won't have a "Grexit" (a Greek exit from the euro), which has led many commentators to suggest (laughably) that a crisis has been averted. A typical Bloomberg article takes that line: “Greece avoids chaos; Big Hurdles Loom.” But how, exactly, is the acceptance of an ill-advised austerity program (even if cosmetic adjustments are made) going to help, say, hospitals get access to essential medical supplies? If the Greek government is made to enforce a program that is killing its private sector by cutting spending and not paying legitimate bills, and the unemployment rate creeps toward 25 percent in general and 50 percent for youth, you can be sure that the social fabric in Greece will continue to fray. 

To paraphrase Pete Townsend, meet the new chaos, same as the old chaos. Greece and the entire eurozone are continuing down a road to hell where financiers are the highway robbers and ordinary people are attacked at every step. Here's why.

1. Pretend Politics.Prior to the June 17 vote, Greek voters were intimidated with a massive number of threats from Germany and elsewhere of what would happen if they didn't vote "the right way" (i.e. anybody but the "radical leftists" in Syriza who would have negotiated harder with the financiers). The conservatives barely led the vote count from their main anti-austerity rival. Yet New Democracy leader Antonis Samaris suggested in his victory speech that the results reflected a vote for "growth." There is more than a touch of Orwell at work when you can redefine the kinds of programs the Greeks will be forced to swallow as "growth policies." Germany's suggestion to cut the minimum wage, for example, will only take more money out of the pockets of regular people, which, as Keynes taught us, further weakens the economy.

But it looks like the Greek government will continue to plug away at austerity. And the "Troika" -- the three organizations that have the most power over Greece's financial future, namely the European Commission (EC), the International Monetary Fund (IMF) and the European Central Bank (ECB) -- will continue to pretend that such policies will ultimately lead to a Greek economic recovery. There will be some fake advertising about Europe making it easier on the Greeks, but it will be a "something" without substance.

Then things will get worse to the point where New Democracy leader Antonis Samaras might have to take a helicopter to flee the crowds.

From the Opposition Syriza's perspective this is not the worst outcome, since the third place Pasok (Greece's ostensible "socialist" party) is likely to join New Democracy (despite some posturing which suggested that they wouldn't join a coalition in the absence of Syriza's participation, thereby ensuring that all parties are tarred with these awful austerity policies). In that event, both Pasok and New Democracy will have to watch as Syriza leads the opposition and probably wipes them out in another election within a year. Maybe even, within the year.

2. Nothing Fundamental Will Change. In the meantime, nothing fundamental will change in Greece. It can't, given that the circuits of credit in Greece are so badly damaged that even efficient, profitable firms have been cut out of not only the capital markets, but also out of the international markets (their suppliers will no longer accept the Greek bank guarantees, without which Greek firms cannot import raw materials, as economist Yanis Varoufakis has pointed out). I asked Varoufakis why those profitable Greek businesses don't simply shift their deposits to, say, a German bank, in order to get "reputable" letters of credit, and his response was that a German bank would simply not issue a guarantee on these businesses if they are registered in Greece.

So the upshot will be that even profitable businesses will be forced to sell out to outside interests, after which the letters of credit will be forthcoming. If this isn't an example of "hit-man economics," it's hard to know what is.

3. Wrong Diagnosis, Deadly "Cure."In the eurozone we have a solvency problem and a crisis of people not having enough money to spend on goods and services, which stalls the economy. Unfortunately, within the European Monetary Union (EMU) these twin crisis ultimately fall entirely in the realm of the issuerof the currency -- the  ECB -- and not theusers of the currency -- the euro member nations. So without the ECB, directly or indirectly, underwriting the currency union, solvency is always an issue, whether that be Greece, Portugal, Spain, Italy, or indeed, Germany. Likewise deficient spending power has been exacerbated by the austerity imposed as a condition of the ECB's help. The patient (Greece) can't recover under these circumstances, and the "cure" will only cause more agony.

4. Flaw in the Euro Architecture. Nobody seems to want to acknowledge that the eurozone has a fundamental architectural flaw. Right now, there is no fiscal authority over member nations that can adequately respond to economic crises. This has been the story of Greece, the rest of the European periphery and now the disease is spreading into the core (Dutch April retail sales were down 11 percent year-over-year, so this is no longer a "north vs south" problem in the eurozone). A good economy with rising public deficits and ECB support to keep it all going isn't even a consideration at this point. The eurozone apologists have painted themselves into an ideological corner, as Europe's banking system continues to suffer from the throes of a massive bank run. The Greek election results won't change that fact.

5. The German Problem. German Chancellor Angela Merkel may actually understand the nature of the problem, and it is likely that she is also aware (via her economic advisers) of the extent of the eurozone's bank run, which is now massive (probably in the trillions of euros). But to draw attention to the real problem risks highlighting Germany's legal conundrum in which unintended losses to the German people due to risks involved in bailing out countries like Greece may go against their constitution. Ironically, the more Mrs. Merkel says "Nein" to any genuine proposal that could avert a solvency crisis, the more likely that these risks become real. Merkel rejects policies that would be better for the eurozone because they are politically unpalatable and because she hasn't been honest with her own electorate in spelling out the real implications of Germany's position if the eurozone blows up. She's in a corner.

Back to Greece. It looks like the economic torture chamber of mass unemployment can persist indefinitely in practice, even in the face of massive political resistance. Increasing evidence in the last few weeks or so suggest that the public deficits across the EU are propping up demand just enough to stop the currency union from blowing up.

But the actions of the Troika are neither politically desirable, nor sustainable over the longer term. The recent election results, not just in Greece, but all across Europe, continue to demonstrate this. Note that the Socialists claimed a huge majority in France's Parliamentary elections held this past weekend. And thank goodness for that! Because if misguided austerity economics continues, the crisis will surely spread to America's shores, just at a time when the American ideological soulmates of Europe's austerity brigade are seeking to shred what's left of our own social safety net through a manufactured fiscal crisis. 

You know the drill by now. The financiers create an economic crisis; their political puppets demand budget cuts; and the rest of us are left holding the bag while the fatcats pop the champagne.

Marshall Auerback is a market analyst and commentator.
 
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