Is Ireland Getting More Equal?

James Wickham:  Latest CSO figures...
 
On February 1st the CSO released the latest Irish results of the EU-SILC (European Union Survey on Income and Living Conditions).   It’s important to notice that these figures are for the year 2015 so they don’t necessarily describe the situation today in February 2017.  If the trends identified in these figures in 2015 have continued, the situation today should be even better.

Things are getting better?

Overall these figures show some welcome improvements: employment of course has been rising, but also for nearly everyone income has risen and for most people deprivation rates have fallen.  Crucially there has been a small but significant reduction in income inequality.

Do these results challenge the claim that inequality and deprivation continue within the recovery?  In terms of the Gini coefficient as a simple measure of inequality, certainly inequality has fallen somewhat:  in 2015 the Gini coefficient for annual equivalised income was 30.8, down from 32.0 the year before (Chart 1). 

Chart 1

But there is an enormous caveat.  These figures refer to the amount of disposable income that people have.  They say nothing about what people spend this money on.  If essential services (childcare, health, education, public transport) are effective and free, then the society will be more equal than in a society with a similar level of inequality in disposable income.  Furthermore, it may be the case that specific price increases (or increased taxes or charges) effect those on low incomes most.  In Ireland this seems to have happened with housing costs increasing – but most for those in the lower income groups. Nonetheless it is certainly possible that there has been some small reduction in income inequality. 

Measuring poverty

A crucial aspect of inequality is the extent of poverty.  This gets us closer to people’s actual experience.  The simplest measure of poverty is the so-called ‘at risk of poverty rate’, that is to say those people whose income is less than 60% of the median.  That hardly means that the poor are always with us.  It’s perfectly possible for nobody to have an income less than 60% of the median. Indeed in these terms some societies with broadly similar GDP to Ireland do better than us    – and many do worse (Chart 2).  Unsurprisingly, the at risk of poverty rate is lower in Denmark and Sweden than in Ireland.  Equally unsurprisingly, the rate is dramatically higher in Greece.  According to the latest CSO figures, the proportion of those at risk of poverty in Ireland stood at 16.9% of the population in 2015 – a non-significant fall compared to 2014.

Chart 2

Source: Eurostat [from EU-SILC]

Measures of material deprivation get us closest to the real experience of inequality.   The CSO defines the deprivation rate as the proportion of the population unable to afford two or more items from a list of eleven basic requirements (e.g. heating the house, a warm waterproof coat…).  This deprivation rate did fall from 2014 to 2015 but was then still 25.5% of the population.  The deprivation rate is significantly higher in households with children.  As Chart 2 shows, in Ireland the deprivation rate is significantly higher than in Scandinavia and indeed marginally higher even than Greece.  However, if we focus on extreme deprivation, the lack of four or more items, then Ireland appears more like a normal European country and now very different to Greece (and indeed most of the New Member States).    

A final statistical measure is that of ‘consistent poverty’, that is to say, the proportion of the population who both have an income below 60% of the median and live in a household without two or more of the list of basic necessities.  The new data shows the rate of consistent poverty staying essentially unchanged between 2014 and 2015 (it fell from 8.8% to 8.7% but this is not statistically significant).  As we have seen, overall deprivation rates have fallen, but worryingly for those in consistent poverty they have hardly changed at all.  In many ways therefore, those most at risk of poverty have actually been falling behind.

Comparing what matters

All of this depends on looking at net income – income after tax and social benefits. Every now and then you will hear people claiming that Ireland is the ‘most unequal society in Europe’ because of the inequality of gross incomes (i.e. before tax and transfers). Yet what matters for people’s living standards is not their gross pay, but how much money they actually have to spend – after tax and after any benefits.  To focus on gross income inequality while ignoring tax and benefits is like saying that Ireland’s summer is sunnier than Spain’s. Well, if you just count the hours of daylight that’s true, but there is the little matter of clouds and rain…

Chart 3

Source: Eurostat

In these terms the problem in Ireland is not that compared to other European countries we are uniquely unequal.  Chart 3 shows the Gini coefficients for all EU28 member states and ranks them from left to right in terms of inequality of disposable income:  states range from Slovakia, in these terms the most equal, to Lithuania, the most unequal.  Ireland is roughly in the middle.  Just a normal European country you might say.  However the right hand column shows the inequality of gross income, excluding transfers, and here Ireland is clearly the most unequal.  Furthermore, we have the largest gap between gross income and disposable income.

In Ireland the state has to work extraordinarily hard even to ensure our ‘normal’ level of inequality.  So much state expenditure has to go on income support that there is little left over for services and capital investment.  And in turn, the resulting deficiencies in education, childcare and health mean that as soon as they can afford it (and even if they can’t), people opt for private provision.  Rather less obviously, there is the question of state competence.  In some areas the Irish state is efficient and effective, but it clearly lacks the competences skills and institutional knowledge to organise effective healthcare and social services and is notoriously incompetent in physical planning and infrastructure.

Reflections on Greece

In a commentary written yesterday, Paul Krugman noted that the "Greek election [...] ended up settling nothing. The governing coalition may have managed to stay in power, although even that’s not clear (the junior partner in the coalition is threatening to defect). But the Greeks can’t solve this crisis anyway. The only way the euro might — might — be saved is if the Germans and the European Central Bank realize that they’re the ones who need to change their behavior, spending more and, yes, accepting higher inflation. If not — well, Greece will basically go down in history as the victim of other people’s hubris".

You can read the rest of his piece here. Comments?

Remote scenarios?

Consider the following scenario. After a victory by the left-wing Syriza party, Greece’s new government announces that it wants to renegotiate the terms of its agreement with the International Monetary Fund and the European Union. German Chancellor Angela Merkel sticks to her guns and says that Greece must abide by the existing conditions.

You can read the rest of Dani Rodrick's post on 'The end of the world as we know it' over on Social Europe Journal.

The crisis in Greece and arms purchases

Jim Stewart: Recent comments by the Head of the IMF (Christine Lagarde, Guardian Newspaper 26th May) in laying the blame for the crisis in Greece on Greek people (Greek people should help “themselves collectively by all paying their tax”, and that it was now “pay-back time” for Greece) have proved controversial. Overall Lagarde is quoted as stating that “she has more sympathy for children deprived of decent schooling in sub-Sahara Africa than for many of those facing poverty in Athens”.

Hostility to Greece

Taking these views at face value, and ignoring the calculus as to how different levels of deprivation might be compared and the role of the IMF in fostering such deprivation, they are not unique. The head of Deutsche Bank has described Greece as “a failed state ... a corrupt state” (Guardian newspaper May 26, 2012). Der Spiegel (5/10/2012) quotes newspaper coverage citing growing sentiment in Germany that Greece may leave the Euro and that this might be a good thing as a Greek exit could make the euro stronger and could also have a “disciplinary effect on other countries”. At the same Spain and Italy are regarded with sympathy in contrast to Greece. An article in the New York Times states ‘Greece, on the other hand, is roundly criticized for lying about the true state of its finances again and again, before and after joining the euro zone, and its failure to take any of the numerous steps demanded by its creditors to modernize its economy and — a particularly sore point — its tax collections. Its status as a special case is underscored time and again’.

Recent comments by the minister for Finance in Ireland to the effect that Greece leaving the Euro would have little effect in Ireland as “it is very far away” and the only item purchased from Greece is Feta cheese are part of the same pattern. Such comments are far removed from EU declarations on solidarity.

What has changed? In Ireland Greece is the example to be avoided. The Minster for Foreign Affairs in Ireland is quoted as stating a default would “place Ireland in the same situation as Greece” (Irish Times, 27/4/2012).

In the case of Germany, anti-Greek sentiment is partly motivated by economic nationalism. Der Spiegel quotes the head of CSU (Horst Seehofer) as seeing a Greek withdrawal from the Euro as the best option and states “We must preserve Germany’s economic strength. That’s more important than Greece remaining in the euro zone”.

A key feature of much of the comment about Greece and the Euro is its relative lack of analysis. One reason for this is that much of the comment originates from a political position which is closely aligned to the position of the current government in Germany.

Take for example comments by Mr Asmussen (described by the Guardian newspaper as Germany’s representative on the ECB council) who stated: "Greece needs to be aware that there are no alternatives to the agreed bailout program, if it wants to stay in the euro zone" (Reuters May 8 2012). More political still are comments by the President of the Budesbank who is quoted by Reuters as stating "If Athens does not stand by its word, then that's a democratic decision. The result is that there is no more basis for further financial aid" (Reuters, November, 5, 2012).
This lack of analysis is reflected in comments that Greece will be required to leave the Euro. Greece cannot be required to leave the Euro. Greece may itself decide to leave the Euro but again the mechanism for this is unclear, but there is no mechanism by which other countries can require Greece to leave the Euro. Even if Greece were in some sense to leave the Euro, the large black economy is likely to mostly trade in Euros, and elements of Greek banking will move offshore to other Euro area countries.

Military Spending by Greece

A lack of analysis is also reflected in the failure to consider the implications of the size of military expenditures by Greece as indicated by stocks of military equipment (see Table (1).

Greek Military Equipment (In Service)

Source:Wikipedia.
(1) Wikipedia note that military equipment is from German, French, American, British and Russian suppliers
(2) A total of 170 new Leopard (German) tanks were delivered between 2006-2009.


Greece was among the world's top five largest recipients of major conventional weapons for 2005-2009, and was third place for 2000–2004. The transfer of 26 F-16C from the United States and 25 Mirage-2000-9 combat aircraft from France accounted for 38 per cent of the volume of Greek imports for the period 2005-2009 (SIPRI Trends in International Arms Transfer 2009, p. 5). Greece was the largest importer of German conventional weapons in the period 2007-2011 and the second largest importer of French conventional weapons (source: SIPRI Trends in International Arms Transfers 2012). Since Greece joined the Eurozone until 2010 military expenditure has varied between 2.3 and 3.4% of GDP, compared with 1.4 to 1.5% of GDP for Germany and 0.6 to 0.7% for Ireland. Since joining the eurozone cumulative military expenditure for Greece amounts to around €63 billion (Source here). Even in 2011, Greece continued to import arms and has outstanding orders for five German submarines.

Yet it is difficult to find any reference to arms spending as a contributory factor to the fiscal and economic crisis in Greece, by outside commentators or by Greek commentators (see for example Costas Simitis, former Greek Prime Minister, writing in the Guardian 27th April, 2012).

It is also inconceivable that the Minister for Trade in France in 2005-2007 (Christine Lagarde) did not approve of arms exports and it’s likely financing by French Banks. Again it is inconceivable that exports of arms from Germany were not approved at a political level and financing provided by German banks. Expenditures on imported military equipment do not lead to economic growth but rather the growth of international debt. By facilitating such expenditures Germany and France bear some culpability for the predicament now faced by Greece. This should be recognised in terms of bilateral aid to Greece to help achieve genuine economic reform, productive investment and basic levels of affordable health care provision. Lecturing Greeks to pay tax while at the same time offering no positive vision will ensure the Greek crisis continues inside or outside the Euro.

How bad is Greece?

Rory O'Farrell: Government deficits can be broken down into two parts: interest payments and the 'primary balance'. The primary balance includes everything other than interest payments; so it includes social welfare, money raised through taxation, salaries etc.

Greece is often portrayed as a basket case that just can't get its act together. However, as can be seen (click graph to enlarge), Greece's primary balance is better than France and Netherlands. Greece's problems are largely due to the legacy of the past.

Solving the Euro Crisis without Germany Paying More

Nat O'Connor: It seems that domestic politics in Germany are focused on dealing with a perception by German taxpayers that they are at risk of 'paying' for the euro crisis.

Yet, there seem to be obvious political institutional solutions, using the ECB, that could help resolve the immediate euro crisis without the Germans having to 'pick up the bill'.

First of all, and partially an aside, it is calculated by German development bank, Kreditanstalt für Wiederaufbau (cited by the influential Hans Böckler Stiftung, bottom of page 5, in German), that Germany benefitted from having the euro, as a relatively weaker currency than the Deutschmark would have been. They argue Germany benefited by €50-60 billion in the last two years by not having their own currency (which would have been stronger and therefore raised the cost and lowered the competitiveness of their exports). Although this argument is circulating within Germany, it is not influencing the European debate as much as it should.

Secondly, even leaving aside this important line of argument about the less-often-calculated benefits to Germany, there is the obvious solution to any euro crisis: change the rules governing the European Central Bank (ECB). Currently the ECB is constrained to only focus on inflation. It should have a new mandate: to remain strongly independent, but to also focus on maximising employment and also act as a lender of last resort, which John Bruton spoke about very clearly on RTÉ Morning Ireland yesterday (17 Nov).

What the lender of last resort means is that the ECB would buy the government bonds of any state that is having a hard time getting a sustainable rate of interest on the private markets. Of course, if some countries benefit from this facility more than others, that would be effectively a form of fiscal transfer between eurozone members. The ECB would remain independent and could not be instructed when to buy bonds, but it would still be open to excess use.

The risk (to Germany and other stronger economies) is that currently weaker economies (like Italy, Greece or Ireland) might lean heavily on this facility instead of making the necessary (and politically difficult) structural reforms in their own economies and public spending.

One possible solution (and this is open to constructive criticism as I may have missed an equally obvious flaw!) is for a simple mechanism to be instated to resolve this: the ECB could simply keep track of how much each country benefits from it acting as lender of last resort. This record could in turn affect the annual contributions each country has to make to the EU. So although stronger countries like Germany would pay in the short term, this would be equalised in the long term by relatively poorer countries paying a little over the odds in their annual payments to the EU for a period of years (or decades if necessary). Such a mechanism should provide a disincentive for countries to lean too heavily on the lender of last resort and be obliged to make harder domestic decisions. Yet it would prevent the kind of unnessary crisis that Italy and others are facing at this time. (Note that Italy has been running a Government surplus, not a deficit - as I think John Bruton pointed out in the above interview).

The proposal of such an equalisation mechanism might also be the sugar-coating necessary for German voters to accept the need for the ECB to have as full a mandate as the Bank of England or US Federal Reserve.

Abandon hope all ye who enter here

Tom McDonnell: Martin Wolf has an excellent and honest appraisal of the chances of the Euro crisis being successfully resolved in a way that is sustainable in the long term here.

When we have shuffled off this Greek coil

Tom McDonnell: The sounds out of Germany are becoming more confused by the day. Increasingly there is a growing expectation of a Greek default. Yanis Varoufakis asks whether Greece is finished over at the Social Economic Journal.
While a Greek default may be inevitable Yanis argues that Germany will not allow Greece to default before the Germans have put in place a plan for splitting Greece’s monetary system from that of the surplus countries. He fears the German plan will precipitate an uncontrolled disintegration of the Eurozone leading to a hard recession across the continent.

Austerity plus uncertainty equals more contraction

Slí Eile: Voxeu had an interesting contribution by Miguel Kiguel [Argentina and Greece: More similarities than differences in the initial conditions] here.

Kiguel recounting the experience of Argentina over a decade ago writes:

"The fiscal contraction failed to restore confidence. It made the recession worse, thereby reducing tax revenues. The reaction was to embrace more draconian austerity which deepened the recession and further cut tax receipts. This was a vicious circle with no way out.The fundamental problem was that the fiscal adjustments did not—as had been expected restore solvency and investor confidence, just the opposite. Something similar is happening today in Greece, where fiscal austerity is failing to restore confidence and is making the recession worse. In the end, investors know that growth is the only way to get out of the debt trap and it does not seem that it will happen through reductions in government expenditures or increases in taxes. Deflation is not happening either, and therefore the big question is how and when Greece can grow. ......

A first lesson is that reductions in the fiscal deficit through decreases in nominal expenditures or increases in taxes in the midst of a recession do not work austerity just makes the recession worse.

The second lesson is that when the public sector is large and there are powerful unions, it is extremely difficult to correct an overvalued currency through deflation.

A third lesson is that a devaluation in a dollarised economy (euro-ised in the case of Greece) can be problematic as it can lead to significant balance-sheet problems that need some form of government intervention.

A fourth lesson is that non-convertible quasi-currencies (QCs) can be a roundabout away to restore a limited degree of monetary and exchange rate policies."

Anybody doubting that the Greek Government is not doing enough to deflate the real economy should check the summary of actions on the Greek Ministry of Finance website here. Cuts of over 15% in nominal wages in the public sector, closure of 2,000 schools, across the board cuts in health, social security, privitisation. It is a thorough package to embed debt in a contracting economy and ensure continuing insolvency along with a very limited private sector participation in debt write-downs via a bail-in.

Cost/benefit analysis of complying with the ECB’s wishes

Tom McDonnell: Namawinelake has put up part of the transcript from Minister Noonan's interview yesterday on 'The Week' programme. Evidently the ECB doesn't threaten sovereign countries. Except when it does.

On the ECB stonewalling of burning bondholders Namawinelake makes the following reasonable statement:
"The point of this is we have serious economic considerations on the bonds but we also have serious considerations on what the cuts and austerity will do to our society. And it is logical, is it not, that there is some tipping point in the cost/benefit analysis of complying with the ECB’s wishes that we say “that’s not worth it”. If bondholders cost us €1tn then the decision might be black and white. If the cost was €1m, it would also be black-and-white at the other end. I tend to think that the costs are too much and when we consider the sort of society we’ll have with the cuts and taxes, the larger class sizes, the lower healthy life expectancy, the fear and fact of crime.

So let’s have the debate, acknowledge the ECB funding of our banks (which is not costing the ECB a penny though there is risk), consider the savings, consider Plan B and its costs and benefits, set out the likely cuts and taxes and then decide for better or worse to accept this or not.."

Over at Economic Incentives
Seamus Coffey takes a look at default options and concludes:
"it does not seem that default could generate the required savings to make it a viable policy option.."

These are debates whose time has come. Of course events may overtake everything. Reuters (citing Markit) reported on friday that five-year credit default swaps on Greek government debt rose 138bp to 2025bp, implying a more than 80% default probability.

The Eurozone crisis: in the trenches

Slí Eile: It never ends. One last deflationary-bail-out-shock the markets-slash the deficit push on the plains of Picardie and this will see us home for Christmas and recovery will return and we can get back to normality. Two pieces offer themselves for careful consideration this morning - Colm McCarthy in the Sunday Independent here and Michael Burke writing on Socialist Economic Bulletin here. The writing is on the wall. If domestic deflation is not impressing the angry gods why do we continue to sacrifice our children's future in the name of the modern day gold standard? Martyn Turner said it all in a picture cartoon in the Irish Times earlier this week.

How will it end?

Tom McDonnell: It is too early to tell but there are worrying signs that the Euro zone crisis may spread. Bond spreads for Spanish and Italian 10-year bonds have shot up in recent days. A WestLB Strategist is quoted by Reuters as saying: 'The key point is that the crisis seems to be taking hold even if peripheral countries regarded as solid'

Daniel Gros over at VOXEU has run the numbers and is arguing that it is actually foreign debt rather than public debt that is driving the solvency turmoil in the Euro zone. Meanwhile Paolo Manasse is adding to the chorus pointing out the likeihood of a Greek default.

There are three ways this can end (assuming the monetary union doesn't break up):

1. Roll over existing debts for the forseeable future (at a more sustainable cost of borrowing)
2. Restructure the debts, or
3. Introduce Euro bonds
   

The ball is clearly in Germany's court. Eurointelligence provides a useful overview of the current thinking in that country.

The economic consequences of the ECB - "an unrepayable debt is an unrepayable debt"

Tom McDonnell: It seems the war dogs of the ECB have threatened to cut off Greece’s access to liquidity if it defaults. Jean-Claude Trichet even attacked Jean-Claude Juncker for daring to say what everybody knows. Greece need to restructure yet the ECB continues to insist that the circus must go on.

Zsolt Darvas, Jean Pisani-Ferry and André Sapirrover at Voxeu have helpfully run the numbers on the Greek debt, and their findings uncategorically show that Greece cannot support its debts.
Even the following three measures:

1. a lowering of the interest rate on all official EU loans,
2. maturity extensions on EU and IMF loans, and
3. the repurchase by the European Financial Stability Facility (EFSF) of all sovereign bonds held by the ECB at market value and the retrocession of the corresponding haircut to the issuing country ...

...would not be sufficient to return Greece to solvency. Under their most optimistic scenario, bringing public debt down to 60% of GDP by 2034 would require the country to maintain a 6% primary surplus every year for 20 years. The more cautious scenario estimates a 10.9% primary surplus would be required. Finally, they find that the haircut on marketable public debt necessary to return Greece to solvency would be in the range of 30%.

And the Financial Time’s Alphaville column points to research from Barclays capital estimating that a 67% haircut must be made on Greek debt in 2012 to push Greece towards sustainability.

The Euro zone has badly mishandled this crisis from day one. Its policy of providing a loan facility in exchange for extreme austerity has failed. The design of its chosen panacea, the European Stabilization Mechanism, simply makes it less likely that the peripherals will be able to return to the market in the short-to-medium term. Greece will remain a ward of the official lenders for the foreseeable future unless it restructures. A change of policy is now needed.

Unfortunately what we are getting is ‘blame the victim’ rhetoric. Chancellor Merkel’s seems to be playing the ‘lazy southern Europeans’ angle -
“[There’s also an issue] that people in countries such as Greece, Spain and Portugal should not be able to retire earlier than Germans – rather, everyone should labour equally – that is important. [...] We cannot have one currency, while some people enjoy very lengthy holidays and others have very short holidays.”

Hopefully these threats and abuse are signs that the issue of the inevitable Greek restructuring is finally coming to a head.

Viable solutions will have to address the core problem, which is that the current architecture of the monetary union is dysfunctional and inherently unstable. Europe’s great currency project cannot survive without fundamental reform. As Paul De Grauwe puts it, “A monetary union can only function if there is a collective mechanism of mutual support and control.”

Guest post by Andy Storey: Call for debt audit

Dr Andy Storey is a lecturer in the School of Politics & International Relations at UCD. A number of prominent Irish academics, writers and activists have backed a campaign to audit Greece’s public debt, amid suggestions that such an audit might also be required in Ireland. Greek campaigners are calling for an independent and international Audit Commission to find out why the debt was incurred and the uses to which borrowed funds were put. As Costas Lapavitsas, one of the organisers of the petition, puts it:

“Can we be certain that the bulk of Greek public debt is legal, given especially that it has been contracted in direct contravention of EU treaties which state that public debt must not exceed 60% of GDP? The creditors – mostly core European banks – were fully aware of flouting this legal requirement when they lent to the Greek state. Is Irish public debt legitimate, given than much of it is speculative bank lending with a public tag placed on it? Is debt in both countries ethically and morally sustainable if servicing it implies the destruction of normal social life?”

Debt audits have been used across the world to allow civil society to hold to account those responsible for the damage caused by their countries’ indebtedness. An audit in Ecuador in 2008 encouraged President Correa to default on some of Ecuador’s most unjust debt, leading to a write-down by borrowers. Two former Ecuadorian ministers are amongst those who have signed the call to support an audit in Greece.

One of the most alarming aspects of the Irish debt crisis is the lack of transparency or clarity on the numbers involved. For example, the Irish Central Bank says that total Irish bank bonds outstanding amount to €63.4 billion, but Goodbody stockbrokers put the figure at €59.4 billion, while NCB stockbrokers come up with an estimate of €74.8 billion. When we get down to the detail of who this money is owed to, it gets worse. For example, a repayment of €750 million was made by state-owned Anglo Irish Bank in January this year to a creditor who was not covered by the bank guarantee but we do not know who that creditor was and why an unguaranteed debt had to be honoured. An Irish debt audit would allow us answer such questions.

The full list of Irish signatories to the Greek debt audit campaign is:
Professor Sean O’Riain, Head of Department of Sociology, National University of Ireland, Maynooth;
Cathleen O’Neill, Community Activist, Kilbarrack Community Development Programme, Dublin;
Frank Keoghan, General President, Technical, Engineering and Electrical Union (TEEU);
Des Derwin, executive member, Dublin Council of Trade Unions;
Professor Peadar Kirby, Director, Institute for the Study of Knowledge in Society (ISKS); Professor of International Politics and Public Policy, Department of Politics and Public Administration; Member, Governing Authority, University of Limerick;
Professor Cormac O’Grada, School of Economics, University College Dublin;
Dr Iain Atack, International Peace Studies, Irish School of Ecumenics, Trinity College Dublin;
John Baker, Associate Professor of Equality Studies and Head of School of Social Justice, University College Dublin;
Fintan O’Toole, author and journalist;
Kathleen Lynch, Professor of Equality Studies, University College Dublin;
Denis J. Halliday, former United Nations Assistant Secretary-General;
Kevin O'Rourke, Professor of Economics, Trinity College Dublin;
John Maguire, Professor Emeritus of Sociology, National University of Ireland, Cork;
Jimmy Kelly, Irish Regional Secretary, UNITE Trade Union.

Ireland and Greece – A tale of the good twin and the bad twin and their common fate

Terry McDonough and CJ Polychroniou: The Celtic Tiger was one of the most famous economic success stories of recent times. Ireland was the poster boy of the globalised, low tax, business friendly economy. Foreign direct investment poured in at least in the early years. Recorded exports rose to close to 100 percent of GDP. The economy achieved full employment while at the same time profit shares rose. The government deficit was paid down. Ministers and economic pundits travelled the world dispensing advice on how others could emulate ‘the Irish Model.” On the opposite pole, Greece had one of the worst economic reputations in the EU. The public sector, while not especially large by European standards, was notoriously corrupt and fragmented, catering to the needs and demands of an industrial and financial elite and their political collaborators.

At the same time, a swiss cheese of loopholes and tax evasion meant that tax revenues had no hope of catching up with expenditures. The deficit grew to unsustainable levels. Greek exports could not expand fast enough to cover the rising demand for imports. Employment was stagnant and a proper welfare state was never really achieved despite the deficits.

Now the good boy and bad boy of Europe sit side by side like frogs in a pan of water, closed in by IMF-style stabilization programmes, while their European “allies” turn up the heat with unsustainable interest rates. Both economies entered crisis and collapsed. How could this have happened? What did two such disparate actors have in common?

Both economies emerged from the stagflationary crisis of the 1970s and early 80s trying to successfully navigate in the context of the emerging global neoliberal order. Both countries' politics were governed by populist parties throughout much of this period. In Greece the socialists dominated the political scene, while in Ireland Fianna Fail was known for a conservative variety of populist nationalism. Both countries pursued an international model characterised by globalization, neoliberal policies, the financialisation of the economy and a weakened labour movement. This is the fundamental thing they had in common. Each country implemented this programme in its own way with initially differing results. While Ireland caught the neoliberal tide and Greece wallowed in the global shallows, both countries eventually foundered.

Both nations opened their economies to the international markets. EU membership and the adoption of the Euro were central to this strategy. Ireland attracted investment in information and communications technology, pharmaceuticals, and international services. For Greece, it was tourism, shipping and services. While Ireland often ran a trade surplus, Greece was chronically in deficit. Both Ireland and Greece would come to regret, for different reasons, their involvement in international financial markets. A pro-business globalization strategy led both nations to institute a low tax regime. In Greece income tax rates were low and indirect taxation was relied on. Widespread tax evasion was openly tolerated. The Greek government ran a continual deficit building up an impressive stock of national debt consistently well over 100% of GDP.

By contrast the Irish state often ran surpluses, but it did so by heavily relying on property related taxes. This revenue rose as international financial markets and domestic banks pumped funds into the Irish property market and blew up a bubble of monumental proportions.

A weakening labour movement in both countries failed to translate growth into social progress. Inequality increased in both countries. In Greece this resulted in pressure on an inadequate and fragmented welfare state. Coupled with low tax take, this added stimulus to the national debt. In Ireland, people compensated by going into debt. Irish household debt rose from around 40% of disposable income to 180%.

In both countries developments were justified by the aggressive importation of neoliberal ideology. In Ireland, market fundamentalism justified an over-reliance on foreign direct investment, low taxes, privatisation, labour market flexibility, and light touch financial regulation. The Irish deputy prime minister famously claimed that, spiritually, Ireland was closer to neoliberal Boston than supposedly social-democratic Berlin. In the past ten years or so, Greece has been selectively implementing neoliberal policies, engaging in asset stripping of its most profitable public enterprises and the liberalization of the financial landscape, It has been rolling back labour rights, social programmes and entitlements. It has also sought to entice foreign direct investment and to compete at the low end of the index against nations like Estonia and Bulgaria.

The globalization, the neoliberalism, the international financial markets and the rising inequality so central to the growth strategies of both nations would ultimately also prove to be their undoing. Ireland’s financially driven property bubble stalled in 2007 and the international financial crisis in 2008 accelerated the decline. This collapsed property-related revenues and the much lauded low tax regime triggered the fiscal crisis of the Irish state. The collapse of the construction industry, the drying up of credit, radical reductions in state expenditure and tax increases added to consumers lumbered with debt have decimated Ireland’s domestic economy.

Similarly, the Greek crisis was violently brought to surface when the global crisis reached Europe. Inequality in the private economy had driven a halting and uneven expansion in the public sector. A neoliberal commitment to low taxes and “competitiveness” in the global economy had dictated that revenues would lag behind. A massive national debt built up. The government had no reservations in relying on a bloated and lightly regulated Goldman Sachs in order to quietly borrow billions in order to join the euro in 2001 and later on to mask sovereign debt from public eyes through the use of fake statistics. The revelation of these deceptions hastened the EU/IMF intervention.

It is part of the Celtic Tiger myth to believe that the Irish economy was motoring along just fine until Lehman Brothers collapsed. Both Ireland and Greece collapsed very much in the context of the failure of the global neoliberal model.of which they were local variations. This should not obscure the fact that domestic institutions and local policies, supported enthusiastically by local elites, played important roles in both cases. Thus, the Irish and Greek crises are both international and local.

Now both economies are trying to escape their crises by “doubling down” on the very neoliberal policies that brought them to this pass. In both countries inequality is being pursued through cuts affecting the most vulnerable. The wealthy are being sheltered from the tax increases loaded onto the rest of the population. Greece and Ireland have become an early testing ground for the effort of the ECB (and its collaborators) to save the banks and the euro. In Ireland the banks have swallowed tens of billions of taxpayer money. Both governments surrendered sovereignty with no resistance, as if there were no alternatives, and are now trying to convince their citizens that it their “patriotic” duty to offer support to ruthless anti-labor, anti-popular measures of the kind that the IMF, was imposing in Third World dictatorships in the ‘60s, ’70s and ‘80s, under the threat of guns. Ironically, in this regard, the EU appears more ruthless than the IMF.

Further financial turmoil has demonstrated that even “the markets” know that these “bailouts” will only intensify the problem. For both the good frog and the bad frog the choices are stark. They can poach when the crisis reaches the boiling point. They can take a leap in the dark, gambling on an abandonment of the Euro. Or Europe can turn off the heat. This would first involve allowing the radical restructuring of both bank and sovereign debt. Secondly, the EU as a whole should reflate its economy led by trade surplus nations like Germany. The peripheral countries alone cannot, and ultimately will not, bear the cost of addressing a crisis affecting the whole of the Eurozone.
Terry McDonough is Professor of Economics at the National University of Ireland; CJ Polychroniou has taught in universities in the US and Greece and is an Associate in the Freire International Program for Critical Pedagogy at McGill University.

(II) What is the likely outcome of the Greek Crisis?

Jim Stewart: Some likely outcomes can be anticipated from a recent speech by German Chancellor Angela Merkel:-

(1) There will be new rules and penalties for Eurozone members. The Commission and/or the member States will become more active in monitoring annual budgets. Aspects of the annual budget may be agreed/negotiated with Brussels. In the case of Ireland this is not necessarily a bad thing given our over reliance on tax expenditures as a policy instrument (See TASC: Failed Design). Some implications:-

(a) Those countries with largest deficits are likely to have the greatest scrutiny;
(b) Measurement of key variables and comparisons with other eurozone economies is key. For example, few international commentators have noticed that Ireland's net debt as a fraction of GDP is a little over one third the gross debt position. Many countries have large off-balance sheet financial liabilities (France, Germany and Ireland) because of the banking crisis. Should these be included in net debt positions?
(c) Negotiations and alliances with other Member States, active involvement in policy formation at an EU level, and persuasive argument, will become central for Governments that wish to deviate from EU (and especially eurozone) norms. That is a new political economy will emerge.

(2) A country using the Euro would be allowed to become ‘insolvent’. It is because of this risk that Greek bond yields have increased from around 5% at the start of the year to over 10%. This effectively means that there is minimal trading in Greek Government bonds. The rise in yield and fall in price also means that the market value of Greek Government debt as a percentage of GDP is far lower than the nominal value. Hence on a market value basis the ratio of government debt to GDP is far lower than the often quoted figure of 120%. The markets have solved one aspect of the Greek Crisis! Some implications:-

(a) Banks holding Greek Government debt will face large losses if the debt were sold. France accounts for €75.7 billion of Greek government debt, Switzerland €64 billion and Germany €43.2 billion (Anne Seith, Der Spiegel, 28/4/2010). Greek banks will face large losses. Conversely, financial assistance (especially the financial stability program) which prevents insolvency is of direct benefit to banks, which is why German and French banks have been required to contribute to the bail out.
(b) If Greece remains a member of the Euro, but becomes ‘insolvent’, This is likely to mean existing debt will be rescheduled, meaning the redemption date could be extended, or there may be a write down in the nominal value to current market values, or interest rates could be renegotiated down. This has implications for issuers of CDS instruments. Given the size of Greek Government debt many of these could in turn face liquidity/solvency difficulties, thus unmasking the false claim that such instruments provide “insurance”.
(c) But even with ‘insolvency’, an issue still remains - how will new finance be raised? One solution would be to issue Euro denominated debt by for example the European Bank for Reconstruction and Development (EBRD), and then hand this to Greece. This debt could then be ranked ahead of existing debt. Alternatives have been discussed, for example allowing the ECB to buy Greek debt directly. Proposals do not make clear whether this would be new debt (thus financing Greece) or existing debt thus supporting the market. ECB intervention is more likely to happen in the case of other countries affected by the Greek crisis such as Portugal and Spain, and in some lists Ireland.

(3) Proposals to expel a country from the Euro area as advocated by the German finance minister (Schaeuble) would require a renegotiation of EU treaties. This is unlikely in the short term, and such a proposal may be merely for domestic political reasons in Germany.

Conclusion

It is likely that key countries such as France and Germany will support other Eurozone countries if required, by providing loans. But the rules under which countries in the Eurozone will operate has changed fundamentally. There will be far greater emphasis on external control over budgetary decisions.

The main effect of the crisis so far has been a welcome devaluation of the Euro against Sterling, (partly reversed post the UK general election), and the dollar but an unwelcome increase in interest rates in countries such as Portugal, Spain and Ireland. It is also likely to mean the further evolution of the single currency area towards economic coordination and in effect fiscal transfers, although these take place via the ECB on loans at subsidized rates of interest.
These developments will require the development of a new political economy – the subject of the next post on the crisis by David Jacobson.

The Crisis in Greece - Part I

Jim Stewart: One puzzling aspect of the Greek crisis is that the greater the aid promised the worse the crisis seems to become. Commentators, while noting this effect, ascribe it to scepticism in the financial markets as to whether the bailout will work (Ian Traynor, Guardian Newspaper, 6 May, 2010). Other views expressed in the Financial Times (see David Shellock, May 5) are that it is not enough, that it addresses liquidity rather than solvency issues, and that is provides finance without addressing the underlying structural issues.

Such comment misses the point that the Memorandum of Understanding agreed with Greece is unworkable. For example a levy on illegal buildings is proposed to raise €1.5 billion over the period 2011-2013 and it is also stated a levy on unauthorised establishments will raise “at least €800 million per annum” (p. 5). It is fantasy to consider that these targets can be met.

Proposed measures to foster growth will probably impede growth, such as introducing competition amongst providers of railway services, and in the wholesale electricity market. Other measures to increase competition in particular sectors are likely to be growth enhancing, but are unlikely to be implemented. Many will be familiar with the particular sectors from our own experience – such as the legal profession, pharmacists, auditors, etc.

The proposal to introduce “a strong audit program to defeat pervasive evasion by high wealth individuals and high income self employed” (p. 5) is highly desirable but, as in many other countries, difficult to achieve. At least the proposals to extend the age of retirement will ensure that trained professionals in tax administration will continue at work to the benefit of the Greek state's finances, in contrast to the position in Ireland where many of these individuals have been encouraged and given incentives to retire early!

Some proposals will help economic recovery, for example improve the “absorption rates” of Structural and Cohesion funds, but even here the requirement that, in consultation with the Commission, there is a rapid implementation of a “financial engineering instrument” has the potential for great harm.

Take the recent case of the use of Credit Default Swap (CDS) instruments on trading in Greek government debt. James Rickards (The Financial Times 11/2/2010) had a particularly clear account of the role of CDS trading in the value of Greek Government debt. Essentially, the problem with these instruments is that they allow insurance but with no insurable interest (one analogy is with rival criminal gang members taking out life insurance on their opponents). Furthermore, Goldman Sachs was one of the central parties in developing innovate financing that enabled Greece to massage its true borrowing, and at considerable cost in terms of fees to the Greek State (see “The eurozone: Athenian arrangers” by Kerin Hope, Megan Murphy and Gillian Tett, Financial Times 17/2/2010).

A key part of the Memorandum of Understanding is the establishment of a Financial Stability Fund of €10 billion, financed from the aid package, with key officers appointed by the Governor of the Bank of Greece, but with no control or influence by the Greek State. This fund is designed to ensure the stability of the Greek banking system, and to reduce risks to banks and the banking system in other countries.

The program requires a great deal of data provision in order to allow quarterly disbursements. This data and compliance reports will be provided to the European Commission, the ECB and IMF. The program will involve new laws, changes in the tax system, pension system and wholesale reorganization of public administration, including a review of official macroeconomic forecasts by “external experts”. If Greece had difficulty in implementing existing laws and regulation prior to this intervention, how can they conceivably implement drastic change now - even without political opposition?

The whole program is unlikely to be implemented for a number of reasons: for example, administrative difficulties (there is an extensive and complex legislative program); or because it is irrational; or because of political opposition. It is also likely that the tax-raising measures will reduce economic growth, while the measures designed to improve economic performance will be insufficient, resulting in no deficit reduction.

In a recent speech by German Chancellor Angela Merkel, reported in The Guardian 6 May), the commitment of Germany to the Euro was emphasized. The German Finance Minister Schaeuble has been quoted as stating "it would be disastrous to risk ... a member of the European currency union, Greece, now becoming insolvent." (New York Times May 7). Some have argued (Wolfgang Munchau in the Financial Times) that the decision by the last German Government to pass an amendment to the constitution limiting the federal budget deficit to 0.35% of GDP by 2016 will cause the breakup of the Euro (See also Adam Tooze, Financial Times, May 5). It is more likely that a further constitutional amendment will be introduced, although reluctantly, to allow for a deficit that is consistent with maintaining services at the German State and local level, as well as meeting commitments consistent with membership of the Eurozone.

A central issue is - will enough of the program be implemented to satisfy donors and if not what are the effects? This will be the subject of my next post.

Lessons from Greece

Michael Burke: Irish Economy has a thread on the impact on Ireland on the decision to downgrade Greece and Portugal.

The credibility of the ratings' agencies ought to have been dealt a fatal blow by the sub-prime debacle. But, as far as sovereign debt is concerned, it seems financial market participants like to have an additional, outsourced voice of neo-liberal orthodoxy as well as their own. The FF-led government has done everythng demanded of them by the ratings' agencies, and more, so it might be impolitic to downgrade Irish government debt too.

However, the bond markets reflect the nature of the crisis. The yield levels at 10yr maturities for govt. debt were as follows as of close of business Tuesday (%, FT bond table);
Austria 3.38
Belgium 3.52
Finland 3.21
France 3.26
Germany 2.93
Greece 9.54
Ireland 5.25
Italy 3.95
Netherlands 3.20
Portugal 5.61
Spain 4.03

Greek yields rose 81bps yesterday, Portugal up 59bps and Ireland up 46bps. Portugal is widely thought to be next in line from the ‘contagion’ effects of the Greek crisis. If so, in terms of both level and change in yields, Ireland cannot be far behind.

Of course, Ireland’s unique experiment in fiscal contraction was designed to “reassure the financial markets”. It has clearly done nothing of the kind. No-one, not even Greece, has a higher projected general government budget deficit this year. And many countries with higher levels of debt now have considerably lower yields, including Belgium, Italy and France.

Yield levels which exceed nominal growth rates, or more accurately the growth rate in taxation revenues which derive from them, cannot be sustained indefinitely. Perhaps, post the German elecions all will return to normaility and yields subside. Perhaps not.

But even in the optimistic scenario, it is clear that Irish government policy has failed in its own terms. Growth has not resumed, taxes continue to decline and the deficit continus to widen. Unsurprisingly, none of this has reasured financial markets and relative borrowing costs have continued to climb.

Perhaps it is worth trying to learn something from the Greek experience, as well as from others. The Greek recesion had been milder than the EU average, and recovering, before austerity measures were adopted, as both the PMI and GDP charts here show.

Now the Bank of Greece warns that the austerity measures themselves have lowered taxation revenues and argues therefore (!) for greater austerity measures. This sounds depressingly familiar.

By contrast, other EU countries adopted fiscal stimulus measures. Their debt has stabilised along with economic activity and they have been rewarded with much lower bond yields than Ireland.

EU calls on Greek population to tighten belts to support wealthy Greek tax dodgers

Michael Burke: Tactical manoeuvring is continuing among European governments to decide exactly how much of the bill will be picked up by who for the financial debacle in Greece. The one thing they all agree is that Greek workers will not be enjoying a bailout of any kind.

Along with the lowest paid and those dependent on public services, Greek workers will bear the brunt of the 'adjustment process', through wage and welfare cuts, pension reductions, an increased retirement age and other austerity measures. The tactical squabbling is that Greece is being pressed by the European Central Bank and leading EU to go even further in the austerity measures it has already announced.At the same time the Greek PASOK government is facing mass demonstrations and strikes, which have encouraged resistance to further austerity measures.

It is noteworthy who will not be targeted. Greece has one of the lowest tax takes in the Euro Area. In the 15 years to 2006, Greek total general government revenues, as a percentage of GDP, were 37.9% compared to an average rate across the Euro Area of 45.3%.[1] This low level of taxation was, in the Greek case, the source of long-standing budget deficits which were hidden from a gullible or complicit EU (or Eurostat) inspectorate over a number of years.

Greek absence of taxation is also a long-standing burden borne by the poor in the country. The Financial Times reports that, according to the official tax returns, there are literally only a handful of Greek citizens who earn more than €1mn per annum registered for tax purposes, and that the Greek shipping magnates and the other rich are registered as 'non-domiciles' in Britain, and consequently pay tax nowhere.

Greece is not in the financial firing line because of a particularly severe recession or an especially blighted banking sector. The latest estimates from Eurostat show that Greece's GDP fell 2% in 2009, but this compares to -4% for the Euro Area and -4.1% for the EU as a whole. This is shown in Figure 1. At the same time, Greece has committed funds to its banking sector equivalent to 11.4% of GDP - far less than the 31.2% EU average (and 232% for Ireland).[2]

Figure 1

The cause of the turmoil in Greece is its high level of government debt, which existed long before the current crisis, combined with a sharply rising budget deficit. Greek government debt as a percentage of GDP has been hovering close to 100% of GDP in all years this century, and is forecast by the EU to rise to 125% of GDP. Greek bond yields were already rising, but were pushed sharply higher by the decision of the European Central Bank, in effect, to remove Greek government bonds from the list of assets it would hold at the end of this year. A reversal of that announcement alone would transform the attitude to Greek government debt, but has not been forthcoming. Likewise, a genuine transformation of the tax system in Greece, as well as rigorous clampdown on tax evasion by the wealthy, would have a dramatic impact on the deficit.

Instead, it seems as the European institutions are trying to get their act together to act as a quasi-IMF, with any support conditional on a deepening of current austerity measures. This is no more likely to be successful in Greece than it has been in Ireland’s case, where deficit projections continue to rise.

As in other countries the rise in the Greek deficit is caused by a slump in taxation receipts, which have fallen by 8.1% in 2009 and which are forecast to fall by over 10% in 2010 [3]. This hole in government finances is itself linked to plummeting levels of investment in the economy. The recession in investment began a year earlier, in 2008, and has already fallen in total by 22.5%, with further falls expected this year [4]. By contrast, the recession-related rise in government spending over the same two years has been just 3.5% [5]. This is shown in the Figure 2 below.

Figure 2

Greece has a narrow tax base, with an unusually wide range of tax-exempt activities. The tax exemptions are revealing as to whose interests are being protected. Among the tax exempt activities:

* Proceeds from the sale of shares that are traded on the Athens Stock Exchange.
* Income from ships and shipping.
* Any dividend received from a Greek company.
* Capital gain from sale of a business between family members.

As a result, any decline in taxable activity leads to a disproportionate decline in tax receipts. This appears to be the case in Greece, where the slump in investment, which is taxable through a variety of levies on goods and services, has led to the decline in aggregate tax receipts and rising public deficits.

Further, the concealment of the actual size of the public deficits appears to have gone unchecked by the EU Commission - as its own 2004 Report into false public accounting in Greece provided no more than a public admonishment, and no programme for change. The new EU investigation however shows that in the years 2000 to 2003, the public deficit was understated by 10.6% of GDP. And, in a tell-tale sign of the unreformed nature of Greek society since the 1970s, more than half of that, 5.5% of GDP, was on military spending.

There is no economic logic behind spending cuts to close the deficit. Higher spending was not the cause of the budget deficit, lower tax receipts are. Worse, since tax evasion is endemic among Greek businesses and the rich, cutting the income of the one section of society that does pay tax, the poor and salaried workers, will reduce taxation revenues further.

The austerity measures now foisted on Greece stand in sharp contrast to the reflationary measures adopted by the major countries across nearly the entire the Euro Area -a policy led by Germany. German has adopted a reflation/stimulus package amounting to 4% of GDP. Germany's measures could have been better targeted. But despite a stagnant 4th quarter of 2009, forecasts for Germany's growth and its deficit are both on an improving trend.

The question is therefore posed, why is a reflationary recipe that clearly works for 'core' Europe deemed unsuitable for Greece? Why can government investment work for Germany, France, Belgium, and so on, but is ruled out in the case of Greece?

The answer may lie elsewhere, in the countries of Eastern Europe. There a number of countries had been hoping to benefit from further EU enlargement, which now seems postponed. Prior to enlargement, the EU demanded continual reform of the Eastern European economies – including further privatisations, liberalisation of the labour markets and a reduction of social spending.

These privatisations facilitated the arrival of Western European and US telecomms, agribusiness and other firms, but above all banks and financial firms. The drive to lower wages and social spending allowed a cheapening of labour, which could be exploited by Western firms, and led to widespread emigration. The removal of local producers in turn expanded the market for Western goods.

This sounds like the package of 'reform measures' to be demanded of Greece in return for any loans. The Greek population is finding that, while all members of the EU are equal, some are more equal than others.



Sources

1.EU Commission, EcoFin, Europea Economic Forecast Autumn 2009, Statistical Annex, Table 36.

2. EU Commission, Euro Area Report, Winter 2009, Table 2.1.

3. Table 36

4. Table 9

5. Table 35

This post has been cross-posted from the Socialist Economic Bulletin.

With friends like these (once more on Greece)

Michael Burke: There are widespread reports including here, that the meeting of European Finance Ministers will agree to a series of measures aimed at preventing a deepening of the financial crisis as it affects Greece, and threatens to engulf a number of EU countries.

The terms of the bailout and its extent are unclear. But what is clear is that Greek workers will not be enjoying a bailout of any kind. Along with the lowest paid and those dependent on public services, Greek workers will bear the brunt of the 'adjustment process', through wage and welfare cuts, pension reductions, an increased retirement age and other austerity measures.

It is noteworthy who will not be targeted. Greece has one of the lowest tax takes in the Euro Area. In the 15 years to 2006, Greek total general government revenues as a percentage of GDP were 37.9% compared to an average rate across the Euro Area of 45.3% (and 36.3% for Ireland)*. This low level of taxation was, in the Greek case, the source of long-standing deficits which were hidden from a gullible EU (or Eurostat) inspectorate over a number of years. Greece taxation is also a long-standing burden borne by the poor. The FT reports that, according to tax returns, there are only literally a handful of Greek citizens who earn more than €1mn per annum, and that the Greek shipping magnates and others are registered as 'non-domiciles' in Britain, and consequently pay tax nowhere.

Greece has been in the firing line because of its high level of government debt, which existed long before the current crisis. Greek government debt as a percentage of GDP has been hovering close to 100% of GDP in all the years of this century, and is forecast by the EU to rise to 125% of GDP. The bond market fear which has pushed Greek yields higher was exacerbated by the decision of the European Central Bank in effect to remove Greek government bonds from the list of assets it would hold at the end of this year. A reversal of that announcement alone would transform the attitude to Greek government debt, but has not been forthcoming. Likewise, a genuine transformation of the tax system in Greece, as well as rigorous clampdown on tax evasion by the wealthy, would have a dramatic impact on the deficit.

Instead, it seems as if the European institutions are intent on acting as a quasi-IMF, with any support conditional on a deepening of current austerity measures. This is no more likely to be successful in Greece than it has been in Ireland. Greece is actually experiencing a mild recession compared to most industrialised countries. GDP is expected to fall by just 1.4% over 2009/2010. Yet investment is expected to decline by 25.5%, having started to fall a year earlier. It is this investment slump which has caused tax revenue to decline by 8.8%, which in turn is the source of the rise in the deficit. By contrast, the recession-related rise in government spending over the same two years has been just 3.5%.

The austerity measures foisted on Greece stand in sharp contrast to the reflationary measures adopted all across the Euro Area, and led by Germany (with the stark exception of Ireland). German reflation has amounted to 4% of GDP. The measures could have been better-targeted. But despite a stagnant Q4, forecasts for Germany's growth and its deficit are both on an improving trend. The question is therefore posed, why is a reflationary recipe that clearly works for 'core' Europe deemed unsuitable for Greece? Why can government investment work for Germany, France, Belgium, and so on, but is ruled out in the case of Greece?

The answer may lie elsewhere, in the countries of Eastern Europe. There, a number of countries had been hoping to benefit from further EU enlargement, which now seems postponed. Prior to enlargement, the EU demanded continual reform of the Eastern European economies – including further privatisations, liberalisation of the labour markets and a reduction of social spending.

The privatisations facilitated the arrival of Western European and US telecoms, agribusiness and other firms, but above all banks and financial firms. The drive to lower wages and social spending allowed a cheapening of labour, to be exploited by Western firms, and led to widepsread emigration. The removal of local producers expanded the market for Western goods.

This sounds like the package of 'reform measures' to be demanded of Greece in return for any loans. Greece may soon find that, while all members of the EU are equal, some are more equal than others.

* All data from the EU Commission Area Report, Winter 2009, Statistical Anne, unless otherwise stated.