If You Can't Kick Out California, You Can't Kick Out Greece
The governor of the Bank of Greece says the recession has cut Greece’s economic output by 20.1 percent between 2008 and 2012. Earlier this week George Provopoulos says the country is “clearly improving,” but Greece’s economy would remain stuck in recession in 2013.
Alison Johnston is a comparative political scientist at Oregon State University, and studies economics and labor markets in the European Union. She says Greece will only leave the eurozone voluntarily.
“Are countries going to get kicked out of the euro?” Johnston asks. “Whenever I'm asked this question, I like to ask people, 'Well how likely is it that you think that a state like Massachusetts could kick a state like California out of the dollar because California might be borrowing from the U.S. government?'”
Johnston says even though the European Commission is imposing strict austerity measures on the country, Greek support for the euro remains high, and leaving the EU would be a logistical nightmare.
“Basically, these debts would likely remain in euro denominations,” Johnston says. “Greece would get their devalued currency back, and there would be no way that Greece could repay these high debts. So they would probably mass default on a much greater scale than if they were left within the currency union.”
Successive tax hikes and other austerity measures have pushed unemployment up to 27 percent, according to data for last November, while 61.7 percent of Greeks under the age of 24 are out of work.
Information from the Associated Press was used in this report.
On the logistics of Greece leaving the eurozone
If you think about it from the creditors’ perspective of Greece, they also have a huge interest in Greece not leaving. Basically, these debts would likely remain in euro denominations. Greece would get their devalued currency back, and there would be no way that Greece could repay these high debts. So they would probably mass default on a much greater scale than if they were left within the currency union. So I think in terms of the currency union breaking up, I think it's in a time of crisis. It's its first crisis. It's a very young currency union, but as to whether it will actually break up, I'm very doubtful of this scenario. I think a more common scenario is it might enter a period of prolonged stagnation, much like we saw in Japan into he 1990's, but I doubt a breakup is in the cards anytime soon.
On Greece accounting for 1/3 of general strikes in Europe from 1982-2009
They strike quite frequently, and I think as a result of such frequent strike activity their governments are very unlikely to give concessions to unions. They don't cater to unions' requests or demands during general strikes. But you do see general strikes in countries like the Netherlands, as well as Finland, where they happen a little bit less frequently, but when trade unions do call them, or when they threaten to call them, governments do stand up and take notice. Oftentimes it's very common, particularly within Northern European countries, for governments to try and include unions at the table, in terms of policymaking, to alleviate that political pressure that may be associated with very unpopular welfare reforms, and labor market reforms.
SUZETTE GRILLOT, HOST: Dr. Alison Johnston, welcome to World Views.
ALISON JOHNSTON: Thank you very much.
GRILLOT: So, your area of expertise is the European Union. We hear a lot about the current financial crisis and economic situation in Europe. Anybody who's been to Europe these days knows they are struggling a bit, just like we have been. Can you give us a little background? What is the back-story on this European financial crisis? When did it start? Why did it start? Because there's some real debate there, about the source of the European Union crisis.
JOHNSTON: Well, I think there's general consensus that if there can be one catalyst that is blamed for bringing the crisis to light, it's really what happened in the U.S. with the sub prime mortgage crisis and the financial crash. But in terms of systematic factors that led to this crisis even before then, I think generally amongst the debate you have two camps: One, is this camp that countries just spent too much fiscally, and your typical poster child of this camp is Greece. You have high government spending, particularly in boom years when government should be saving, and along comes this crisis, and basically the deficits get much worse, and they become unsustainable, and markets become more worried about these countries paying them back. So this is why, particularly some countries within the south, are having difficulties with the markets on their bonds. Now, there's another camp, basically which really ties what's going on in Europe prior to the crisis to the relationship that we essentially have with China. They say it's not necessarily a fiscal problem, because if you look at some countries that are being heavily targeted right now - Ireland, Spain - these countries had very good fiscal balances prior to the crisis, but they're nevertheless being target very much by speculators. They argue that it's a competitiveness problem. Basically, the South, including Spain and also including Ireland more recently, have run up these trade deficits with the North, which was very, very competitive. [They] had very restrained wage growth, and were very price-competitive relative to the South. In order for the South to buy the North's goods, the North had to lend to the South. Basically, it was a total borrowing problem, not just a fiscal problem. So in terms of these two camps, you really have the first one, and I think European leaders more prominently identify with the first fiscal camp - that the solution to this is austerity. We have to impose budget cuts, etc. on these governments. Whereas with the second camp, I think scholars and policymakers within this camp realize that the problem really is much bigger than the South. That the North, too, also had a bit of a hand in terms of having these balances stem out of control, and they very much benefited from over-lending to these countries in the boom years.
GRILLOT: So the response, obviously, throughout the European Union has been varied. You have those, Germany for example, that have a little stronger economic position, and is being asked to help carry some others through. You have countries like Great Britain that want to bail out entirely of the European Union. So how is this crisis really affecting the strength of the European Union? We always look at the European Union as that really strong institution. We hold it up as an example of the international organization that can last forever. Is that the case, or is this really the crisis that can bring this institution down?
JOHNSTON: It's a very important crisis for Europe, and I think particularly for countries like Germany. They really are going through this soul-searching period, because Germany's history, particularly given its history with World War II, has always been with Europe. It has always been with the EU. And really prior to even the financial crisis, and the fiscal crisis, the EU has really been this trading bloc which has benefited Germany tremendously. The difficulty now with this crisis is now Germany is actually being asked to make commitments that it hasn't been asked before. Namely, bailing out countries. Now, admittedly, if you do talk to the average German, they're very realistic on the fact that it's not necessarily Greece we're bailing out. It's our own banks that lent to Greece when they perhaps shouldn't have. But nevertheless, you're having these cross-border bailouts that the EU never really considered. Indeed, some of the EU treaties - the Maastricht Treaty - designed it so there would not be bailouts. There were no bailout clauses, and basically the leaders of the EU and the Commission have had to try to work around this. So I think for different countries you are seeing this soul-searching, particularly in Germany. Britain has always had a precarious relationship with the EU. They've always seen it just as a trading group. That integration has proceeded a bit faster than they would've liked. Again, I think particularly in Britain there's a lot of doubt as to how this referendum is going to be perceived - that it was relatively a political move for [UK Prime Minister David] Cameron to get reelected with the next election.
GRILLOT: And that's the referendum to decide whether they want to stay in or get out of the European Union. They never did join the monetary union anyway, right? So the impact of all this, because you have a very strong institution of which only a few of the members, but most of the members, are part of the monetary union. But the longer-term impact on the euro, so OK, let's say the European Union weakens some, and you see some select members that decide to exit the institution. But what about that euro? Is that likely to survive? It's a pretty strong currency around the world, right?
JOHNSTON: Absolutely. And I think there's a lot of talk about this "Grexit." Is Greece going to exit the euro? Are countries going to get kicked out of the euro? Whenever I'm asked this question, I like to ask people, 'Well how likely is it that you think that a state like Massachusetts could kick a state like California out of the dollar because California might be borrowing from the U.S. government?' And the problem with this kind of currency union is while this is always being floated around in the press, the idea of a currency union broken up, particularly by one country forcing another country out, has not really been legally thought through. Indeed, I think the only case-scenario in which a country could possibly leave the common currency, the euro, to a huge cost among themselves, is if they do it unilaterally. And right now, at least support in Greece, even though it's not happy with the euro, and the European Commission is imposing a lot of austerity on them, there's still a lot of support for and trust of the euro. They don't want to leave the euro. I think there's concerns as to lessen the terms of these austerity measures. But in terms of the legal breakup of the EU, I think when people discuss this, they don't really realize all the logistics that have to happen.
GRILLOT: And the cost. I mean, it was very expensive to create the monetary union. It's extremely complicated and costly to divide it up.
JOHNSTON: Exactly, and if you think about it from the creditors perspective of Greece, they also have a huge interest in Greece not leaving. Basically, these debts would likely remain in euro denominations. Greece would get their devalued currency back, and there would be no way that Greece could repay these high debts. So they would probably mass default on a much greater scale than if they were left within the currency union. So I think in terms of the currency union breaking up, I think it's in a time of crisis. It's its first crisis. It's a very young currency union, but as to whether it will actually break up, I'm very doubtful of this scenario. I think a more common scenario is it might enter a period of prolonged stagnation, much like we saw in Japan into he 1990's, but I doubt a breakup is in the cards anytime soon.
GRILLOT: So you mentioned austerity, and that relates in some way at least to another area that you've focused on, and that's the issue of strikes in the European Union. I mean, who hasn't traveled to Europe and not experienced some sort of transportation strike, for example, where buses shut down. Taxis shut down. Pilots go on strike. Something to affect the mobilization of people, and goods. So what is it about strikes that seem to be so much more prevalent in Europe. Obviously unions play a role. But also, could you tell us a little bit about why we see, in some places, violent response to some of these austerity measures. In other places, strikes with minimal violence, or no violence related to these kinds of measures.
JOHNSTON: Well, I think in terms of austerity strikes, we see a lot of them in the countries that are most affected by the crisis. For good reason, because this is where austerity is most acute. These are where austerity measures are being enforced with the greatest pain. So it's really been an effective way for unions to go out and mobilize mass opposition to policies, which not only hurt their own members, but hurt the public at large. As for other countries, you do see dissatisfaction with austerity policy. The UK is a really good example. But you don't necessarily see general strikes. In some cases, it's because they're calling general strikes. There are a lot of legal provisions against the capacity to do so. So in the UK, in Germany for example, it's actually illegal for unions to call general strikes. If they want to call strikes, they have to go through various conditions and implement various procedures in order to call strikes against employers. So in that sense, a lot of the divergence that we see has to do with country context, but also the institutional constraints that are upon unions in calling these strikes.
GRILLOT: So, the response in Greece versus the response in the UK, I mean there's this considerable difference. That's local context, local culture, there's some explanation that would suggest that all these European countries really aren't all the same.
JOHNSTON: Right. Exactly. And particularly with Greece. Greece from a general strike perspective is a huge outlier. In terms of our data, we look at general strikes within Europe from 1982 to 2009. And Greece accounts for about 1/3 of that. They strike quite frequently, and I think as a result of such frequent strike activity their governments are very unlikely to give concessions to unions. They don't cater to unions' requests or demands during general strikes. But you do see general strikes in countries like the Netherlands, as well as Finland, where they happen a little bit less frequently, but when trade unions do call them, or when they threaten to call them, governments do stand up and take notice. Oftentimes it's very common, particularly within Northern European countries, for governments to try and include unions at the table, in terms of policymaking, to alleviate that political pressure that may be associated with very unpopular welfare reforms, and labor market reforms.
GRILLOT: So labor then is well-integrated into the activities of the European Union? They work together? So do these activities, these strikes, labor stoppage, does this have an impact on the European Union? So what is the outcome here? Are we seeing that those kinds of strikes are really having a positive or negative impact on the overall European situation?
JOHNSTON: So again, we really look at it from these national contexts. In terms of outcomes, we see that with austerity strikes it's very unlikely that unions will receive outcomes of any sort from governments. Basically the reason why is if you're imposing an austerity measure, generally the situation has gotten so bad, where the government has very little maneuvering room to act in order to give concessions to unions. But we have seen that in the 90's, 2000's, that unions have been effective at securing some concessions from government in terms of pension reforms, welfare reforms, labor market reform, et cetera. And we see that they're particularly effective from securing these from more center governments. Also when union confederations are all united in a strike call, they're very effective at securing concessions from coalition governments - governments that rely upon this consensus. And where unions are really ingrained in policymaking, mainly in Northern European countries, where you have this history where unions, employers, and government all work together on policy issues. You do see that unions still have this influence, even though organizationally, they've witnessed a decline in union numbers quite significantly over time.
GRILLOT: Well you mentioned the pension system, and I know that this is a major issue across Europe. Here you have a general demographic where you have population that's growing old. You have fewer people in the workforce. You have these massive pension programs that are way under funded. It makes our Social Security system perhaps look like it's in a good place. So how are they going to fix that? As if we should have the answer to our own Social Security system, but that is something that is particularly troubling, right? Labor and all of these particular interest groups, and then of course these movements, these strikes and these austerity measures, all of that stuff is very much related to what they're going to do with these social programs. These social nets.
JOHNSTON: Absolutely, and I think especially with pensions, the real cause for concern with pensions is it's not necessarily a financing problem, it's an output problem. We have the Baby Boom generation retiring soon. The labor force that is currently in place, compared to the number of pensioners that are retiring, is going to be significantly reduced. So there is concern. Is there going to be enough output to go around and service both pensioners and people that are working within the labor force. Now, various countries have gone about different policies in terms of trying to address these issues. A popular one is changing contributions. Increasing contributions, or reducing pension payouts. A second one is raising the retirement age. This is something that's very much been advocated and implemented by various European governments.
GRILLOT: They're quite controversial as well, right?
JOHNSTON: Very controversial. Exactly. And we see that here again, unions are, in some countries, having a lot of influence in terms of how these reforms are being made, particularly also within Europe. Within the U.S., there might be a kind of similar context. But especially within countries like Italy and France in the 1990's you see unions also very involved, surprisingly, willing to come to the table to discuss reform of public pensions, which tend to be more generous than private sector pensions. So in this sense, I think generally within the United States we have unions as these ardent defenders of generous pensions, and generous wages. But at least within Europe, and we see within certain contexts, unions are willing to sit down and negotiate and make concessions in terms of reducing the generosity of pensions, as long as it might result in greater protection of part-time workers, or atypical workers.
GRILLOT: Well, it seems like they may not have much choice but to negotiate on this issue, given their situation. Well, Dr. Johnston, thank you so much for joining us today on World Views to discuss a very interesting topic.
JOHNSTON: Thank you.
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