Greece may be forced to exit euro zone to achieve its reform proposals

In order to renegotiate its debt burden, the Syriza government of Prime Minister Alexis Tsipras has been forced to abandon most of its campaign promises including a write off of some of its debt, and removing most of the austerity conditions that were part of the original agreement. Indeed, the new agreement is simply an extension of the old one and will give Syriza just four months breathing space before huge payments will be required for maturing European Central Bank bonds. Germany has been insistent that there be continued onerous conditions placed upon extension of the bailout. Commentators such as the economist Paul Krugman and Joseph Stiglitz claim that the imposition of strict austerity conditions is counter-productive. The policies reduce demand producing depression and high unemployment. Increased public spending is needed to spur growth.

 While liberal economists are no doubt correct about the negative consequences not only for the populace but for economic growth that austerity produces, the aim of the austerity policies are to restore profitability and improve conditions for capital. The reforms involve cutting back on government and privatizing public facilities and services. The reforms increase unemployment resulting in a larger "reserve army of the unemployed" that will reduce labour costs and weaken union power. Expectations about what the government is able to provide in terms of social services will be reduced. All of these types of measures increase the power of capital over labour and make capital more competitive eventually improving the profit picture over the longer term. Proponents of the austerity measures point out that Greece has already reached a point where it has a surplus. The fact that it also has twenty five percent unemployment rising to fifty percent among youth is neither here nor there. Indeed it ensures that labour costs are lower. It also supplies a flow of frustrated but often skilled Greek workers into other parts of Europe helping to lower labour costs in other areas.

 The Germans have support from governments in Spain, Portugal, and Ireland who also were subjected to painful austerity policies. The Germans and their allies do not want to see their policies undermined by giving Greece less harsh terms and conditions for dealing with their debt situation. Italy and France are also attempting to impose structural reforms on their labour force. The electorate in Germany and elsewhere support harsh treatment of the Greek. Two thirds of the German populace do not want Greece to receive any concessions. Many think that Greeks are lazy, get huge pensions, and are corrupt. Of course some are, but actually the Greeks who do work are working more hours than in any other European country. If measured in hours worked, it is the Germans who are the laziest Europeans!

 The European Central Bank put pressure on the Greek banks by withdrawing their ability to use Greek sovereign debt as collateral for liquidity provisions. Depositors became worried and withdrew billions of euros each day.The Greek government was also faced with obtaining funds to pay debts and wages.Unless a deal was reached the Greek government faced an ever worsening financial crisis. T he Eurogroup, led by Germany. used these conditions as leverage to force the Syriza government to accept a deal with very few concessions. In order just to stay alive for another four months, the Greek government promises to achieve appropriate surpluses, and refrain from any unilateral actions that would impact negatively on fiscal targets.

Most of the reforms that Syriza campaigned upon will be impossible under the terms of the agreement, including raising the minimum wage and reversing privatizations, although there are signs that the government may attempt some of the reforms under the rubric of relieving the humanitarian crisis. However, they may find that their EU partners simply refuse to send money on the grounds that the government is not meeting the terms of the agreement.

 Costas Lapavitsas, an economics professor and Syriza MP, notes that not only did the Greek government pay a high price to stay alive, the situation is made even more difficult by the state of the Greek economy. The economy grew only 0.7 per cent last year and actually declined in the last quarter. It had been shrinking ever since the austerity policies had been imposed. Even during the Xmas season retail sales fell by 3.7 percent. There is evidence of a deflationary spiral with prices declining by 2.8 percent in January alone. Lapavistas claims: "This is an economy in a deflationary spiral with little or no drive left to it. Against this background, insisting on austerity and primary balances is vindictive madness." At the end of the four months, Greece will face even more demands and will need more funds to make even larger payments than during the four month reprieve. Lapavistas maintains that Greece should go ahead implementing measures that it campaigned on, including forbidding house foreclosures, writing off domestic debt, raising the minimum wage and stopping privatizations. He claims that carrying out these policies rather than fiscal calculations must be the main priority of the government in order to keep popular support.

 There is some evidence that Lapavistas viewpoint is being accepted in part, as the government forges ahead with some policies that will bring it in conflict with the EU. In Lapavistas' view the euro zone is not capable of being reformed and he claims the common currency has become an absurdity. He believes that in the next negotiations the Greek government should present radical proposals. No doubt these will not be accepted by the Eurogroup but then Lapavistas' said that the government should prepare the people for a possible exit from the zone. This position appears not to be shared by Finance Minister Varoufakis who promises he will do anything to stay in the euro zone. He has kept that promise.

 A majority of Greeks support the manner in which the Greek government carried out negotiations. A large majority also favor staying in the euro zone. Perhaps within the next few months it will become clearer to the population that if they stay in the zone then they will be subject to more austerity and a continuing debt trap. Lapavistas is not alone in suggesting an exit from the euro zone or Grexit as it is called. This article argues in a similar vein. An exit from the zone will be very difficult.