Greece's fiscal crisis — and ours

Democracy was born in Greece just over 2,500 years ago, but last week I had a ringside seat in watching it die for all practical purposes in the land of its birth.

On June 29 and 30, the Greek Parliament narrowly but unsurprisingly approved the crushing "austerity" program imposed on it by the European Central Bank a formula for national subservience, exploitation and impoverishment that no one expects will significantly relieve Greece's sovereign debt crisis and in all probability will make it more difficult to resolve.

So what, you will ask, was the point of the exercise, which provoked violent riots in Athens and the ugliest scenes in Europe since the ethnic cleansing in Kosovo?

The Greeks owe some 400 billion euros in sovereign debt, a sum significantly but not catastrophically beyond their annual gross domestic product. This debt, which is common to the countries of Europe's southern and western tiers Ireland, Spain, Portugal, Italy is a consequence of the Eurozone, which in covering much of the continent with a single currency ignored centuries of unequal development.

Connecticut vs. Alabama

For comparison, Connecticut, a rich state, can coexist under the dollar with Alabama, a poor one, because because both were responsible for a state budget that they are legally mandated to balance, and both are under the control of the federal government, which silently effects transfer payments. But there is no comparable arrangement for the federated states of the European Union. Each of them remains sovereign, and each pursues its own banking, investment and tax policies.

The inevitable result has been excessive and largely unregulated borrowing by the poorer countries of the EU, partly to finance their colonization by industrial and banking combines to the north and partly to cope with the inflationary pressures of the euro on their economies. This arrangement brought, until recently, a striking but illusory patina of prosperity to these countries. With the financial collapse of 2007, the bankers decided it was time to pay the piper to wit, themselves.

As in other countries, the Greeks were partly responsible for their own fate. Their social system, as in many underdeveloped economies, is still based on baksheesh the payment of bribes for social services of every kind, including those supposedly provided by public funds. Since no one likes to pay for the same services twice, this situation naturally leads to tax evasion, which starves the government of revenue and requires deficit financing.

Enter Goldman Sachs

The Greek political elite is, meanwhile, notoriously corrupt, and there has been an almost unending rollout of public scandals, including a long-running one with Siemens, the German industrial giant, that's gone on for a generation now. (When you have a scandal that continues that long, you know you're dealing not with corruption but colonization.)

The easy lending practices of the 1990s and early 2000s, in Greece as elsewhere, exacerbated the credit bubble. The Greek government hired Goldman Sachs to teach it how to tap international markets and hide deficits. The Athens Olympics of 2004, a financial boondoggle of the first order, put the icing on the cake.

But not until world markets tightened generally did the banks decide to make an example of Greece. A serious balance of payments problem was converted into an economic crisis.

There is no doubt about the source of this problem. French and German taxpayers, whipped up by European political and financial elites, were incensed about a Greek bailout, relatively trivial as it was. The price exacted was savage cuts in Greek salaries, pensions and social services, as well as forced unemployment.

Line in the sand

When, predictably, these steps further incapacitated Greece, the president of the European Central Bank, Jean-Claude Trichet, "drew a line in the sand," as the New York Times financial columnist Floyd Norris put it. For a second and even more punitive bailout, Norris continued, "Nothing [was to] be done to compel banks to take losses on the bad loans they [had] made to Greece. As a result, there could be no arrangement that required Greek bondholders to share in the pain."

Translation: No haircut for the banks. Full decapitation for the Greeks.

Under ordinary circumstances, the Greeks would have few options. But with several other EU economies also teetering precariously, the Greeks enjoy considerable leverage. The banking system can absorb Greece's debt, but it cannot deal with similar defaults by other and larger southern tier economies.

Weak leadership

That could crash the euro, the linchpin of the European Union. It could undo the last 50 years of continental history. Even the threat of a default by Greece could trigger a chain reaction that might topple the whole system and trigger severe worldwide repercussions. That's a lot of power for a small country to wield.

The Greeks, however, haven't played their cards. Their prime minister, George Papandreou of the ruling Panhellenic Socialist Party, is an extremely weak figure who has capitulated to EU dictates on virtually every point.

The leader of the opposition New Democracy Party, Antonis Samaras, has opposed the austerity package. But both parties share equal responsibility for the economic debacle, and few doubt that, were New Democracy in power, Samaras would be dancing to the bankers' tune with Papandreou in symbolic opposition.

So the public, which is overwhelmingly opposed to the bailout terms, has no political representation.

Canary in the mineshaft

In Tunis, in Cairo, in Damascus and half a dozen other Arab capitals, this year has seen a broad-based insurrection against dictatorial regimes and (at least putatively) on behalf of democratic reforms. But the Greek season of revolt has made the paradox of democracy under the regime of capital clear. When you already have a democracy, what do you revolt against then?

The Greek answer is that what Greece has is not in fact a democracy but, in the popular slogan, a "debtocracy," in which power is exercised by the banks, and rolling back the social welfare gains of a century public health and pensions, workers' rights and a modest redistribution of income is the political goal behind the present crisis. In that sense, the Greeks are the canary in the mineshaft. What can be imposed on them will be the model for everyone else.

Meanwhile, back in the States….

A similar tale is being played out in the U.S. in the duet between Obama and Congressional Republicans over raising the federal debt ceiling. Just as the Greeks lurch from one installment of their crisis to the next, with each step bringing a further degradation of living standards and the forced privatization of public assets, so the price of each debt ceiling extension by the Republicans is a further contraction of social welfare in this country.

In this respect the Republicans play the role of Europe's bankers or, rather, simply carry water for our own. Here, too, President Obama has an easy means of calling their bluff, for a default on America's debt, even of the briefest duration, would panic world markets from Wall Street to Beijing.

Some observers are puzzled why Obama, like Papandreou, doesn't play his high cards and bring an end to this game of blackmail. Those who elected him in hopes of reviving the liberal state have found in him instead the willing and active collaborator of the forces that are dismantling said state's tattered remnants.

It was Obama who, in creating the Bowles-Simpson Commission, legitimated the Republicans' mantra about the debt crisis (a crisis that curiously raised no concern while they were in power), and he continues to do so by negotiating away his own budget piece by piece. Nor does any serious resistance come from within his own party or anywhere else except on the Internet, that universal pacifier of democratic politics.

A hero returns

At least the Greeks are in the streets about the outrage being done to them. That's where popular democracy has always begun.

It isn't an easy task. Seventy years ago, a teenager named Manolis Glezos climbed to the top of the Athenian Acropolis and tore down the swastika the German occupying army was flying above it. He put a Greek flag in its place.

This past week in Athens, Glezos, who is now 87, joined the protests in front of the Greek Parliament.

He was gassed.