GREECE is on the financial brink – this time it is for real. Tomorrow Greece is likely to default on a key payment to the International Monetary Fund after the so-called Troika of the IMF, EU and European Central Bank (ECB) rejected a plan by the left-wing Syriza Government in Athens to call a referendum over international demands for even further austerity. The Troika is refusing to give the Syriza Government a week’s grace to consult the Greek people and looks likely to block further financial aid as a result.

The narrative being spun in Europe (with the help of our own pro-austerity Tory regime in the UK) is that the feckless, profligate Greeks have only themselves to blame. The economic reality is much more complicated.

Certainly previous Greek governments ran massive, unsustainable budget deficits. But a significant proportion of the borrowing went to underwrite massive defence spending – only the US spends more proportionate to its economy among Nato members.

There is a strong connection between the endemic corruption in Greek civil life and foreign arms dealers paying backhanders to get contracts.

OK, high military spending has helped keep the colonels in barracks – so far. And for decades Greece was able to keep its economic head above water by routinely de-valuing the Drachma to remain competitive and attract significant foreign income from tourism. Then Greece made the big mistake of joining the Eurozone in 2001.

The traditional Greek establishment wanted to join partly for access to the financial gravy train, but mostly to bolster its political clout inside the EU, the better to keep Turkey (its traditional enemy) locked out of Europe.

Joining the euro meant giving up the possibility of devaluing the currency. At the time, Greece was running an annual budget deficit at over 8 per cent, in order to finance the Athens Olympic Games. Technically, the country did not meet the legal criteria to join the euro.

But the Germans were willing to overlook that for two reasons. First, Berlin was desperate to get the euro show on the road and the more countries that signed up, the greater the euro’s credibility. Second, German banks were lending hand over fist to the Greeks.

The inevitable happened – with euro interest rates at rock bottom, Greek governments borrowed more than they could ever pay back. And German bankers were daft enough to lend it to them. When the global credit crisis struck in 2008, the game was up.

Creditor banks wanted their money back but the Greeks could not pay. Of course, it could have defaulted on its loans, like Argentina or Russia. But Berlin was not going to let tiny Greece get away with that.

Why was Berlin so worried? Because ill-regulated German banks had made profligate loans, with minimal collateral, right across Europe, funding poorly managed governments and over-indulgent property speculation. So had banks in the UK and France. So had banks in America. Western governments decided to save their own bankers are the expense of the smaller nations of Europe.

First in line were the Irish. In 2008, the ECB (with the help of Gordon Brown) browbeat the Irish government – then a paragon of financial conservatism – to guarantee the claims of private German and French bondholders of in the Dublin-based Anglo-Irish Bank.

This international political blackmail saddled Irish taxpayers with fresh national debt equal to 20 per cent of GDP, ushering bone-crushing austerity. Greece was next in the firing line.

First the European Central Bank in Frankfurt engineered a change in the Greek government – on pain of pulling out emergency liquidity support for the high street banks in Greece – putting in a technocratic administration that was guaranteed to impose massive austerity.


NEXT the Troika got together and came up with emergency loans to Greece, so the country could restructure its debts. But there was guile in this plan. The IMF and EU funds were actually used to pay off those private bank loans, getting German banks permanently off the hook. The burden of the long-term debt now passed to the IMF and European institutions. Greece is the IMF’s biggest ever bailout – $35bn for a population of only 11 million.

Now the Troika is set on squeezing Greece in order to make a profit on these restructured loans. In doing so, it has made a huge tactical blunder. If Greece defaults, the main losers are the IMF and the ECB, not private capital. This has emboldened Syriza to resist the worst of the Troika’s demands.

In fact, the latest Greek plan is amazingly moderate. For starter, it does not propose a debt reduction. Instead Syriza wants the period over which repayment is made to be lengthened – hardly a problem for international agencies which print their own funds. But that’s only the start. Syriza has said from the outset that it is eager to team up with the International Labour Organisation to improve flexibility in the labour market. That might sound a bit right wing but access to jobs in Greece is too often the result of who you know, or cash bribes to middle management. So the creation of equal access to employment based on merit is seen as a progressive reform, even on the radical left.

Syriza is also pledged to cut defence spending and outlaw the endemic cronyism and financial corruption that riddles Greek capitalism – something only a party of the left can accomplish. Instead, the Troika remains fixated with demanding that Syriza sells off the profitable parts of the Greek state to the very corrupt Greek business class that that ruined the economy in the first place.

What next? A Greek default would lead to the reintroduction of the Drachma, devaluation and a rebooting of local economic growth. There will be inevitable disruption resulting from changing currencies but this will be short-lived compared to the misery of permanent austerity. 

Above all, Greece will be free of the tutelage of the Troika which has placed the interests of Western finance capitalism over that of the democratic rights of ordinary Europeans.

Yet the most disturbing aspect of the crisis is political, not economic. Both the IMF (now Greece’s largest creditor) and the ECB have crossed the line from being neutral technocratic bodies, to behaving as agents with political motives. In the past week the IMF and ECB have publicly talked up the prospects of a Greek default in order to blackmail Athens into conforming. They are there to manage crises not inflate them. 

But Syriza was not to be blackmailed and appealed to the Greek people. As I write, the ECB has just announced it is cutting off liquidity to Greek banks. Why? To try and block the referendum. Imagine if the Bank of England behaved like that.

Tory Euro-sceptics are using the crisis to attack the European project as a whole. We should conclude just the opposite. 

The genesis of the post-war European unity project was solidarity among the nations of the continent – something that has been denied to Greece. European institutions were invented to further that solidarity – not to act as independent agencies, or to represent private financial interests. The time has come to reject austerity and rebuild a People’s Europe.