On Monday, August 3, 2015, Puerto Rico defaulted on its debt four weeks after Greece did the same on July1. Ukraine is bordering on a cease of payments, while their backers are providing them with arms and munitions on credit, in spite of their financial situation. The only solution for strangling debt problems is to have a haircut and reduce their stock, as we saw in Latin America with the Brady Plan and with the HIPC Programme. All situations of debt relief seen in history come from political decisions taken in support of a government. The greatest relief known in history was the German debt in 1952 and the previous great relief was that of war reparations of Germany as well, in 1931. These are followed by haircuts given to the debts of European countries indebted during the first world war to the United States but unable to rebuild their economies during the 1920s, which obliged them to negotiate with the creditor. It was the US that granted significant relief to everyone from Great Britain to Italy in the 1920's and to Germany indirectly in the 1930's. In this way European countries were rebuilt after the First World War. Lesser haircuts in terms of creditor GDP were the relief granted to Latin America with the Brady Plan and that for highly indebted poor countries (HIPC in the 1980s and 1990s).

It is important to remember this because two countries that belong to monetary unions are trying to resolve their problems. Greece and Puerto Rico are in analogous situations. Both pertain to political unions with other member States, both have currencies they cannot manage, and both receive transfers from a central government amounting to several points of their GDP. Greece received 7 billion euros from the European Commission in budget support towards the 107 billion that it spent in 2013. The Greek public expenditure is equivalent to 59% of their GDP. That is to say that the budget support is equivalent to 6,5% of the total budget expenditure and is destined to certain specific targets. It cannot go either for defence or social expenditures.

According to the European Commission "Greece is one of the State members of the European Union that receives more from the budget of the European Union than it pays and will remain the same in the next budget period (2014-20). One has to note that this net balance does not reflect exactly many advantages of being a member of the European Union. Many of these, such as peace, political stability, security, the freedom to live, work, study and travel everywhere in the union cannot be measured. In addition the European investments have as their end to benefit the European Union in total, since financing one European country can benefit the other members of the European Union as well.” (1).

The unconditional support of these 7 billion euros annually involves obligations such as respecting the Treaties, the basis of the European Union, and when appropriate, incorporating legal changes in order to make the legal base uniform. At the same time, a lack of compliance could lead to a suspension of a member country of the community body.

According to the European Commission "All the member States of the European Union are part of the Economic and Monetary Union, which means that they coordinate their economic policy in benefit of the whole European Union. Nevertheless, not all of the member States of the European Union are in the euro zone -- only those that have adopted the euro are members of the euro zone." (2).

With these arguments the Troika (IMF, European Commission and the Central European Bank) proceeded to negotiate its calendar of payments with Greece. As is usual in debt negotiations, this is a lever for the change of direction of economic policy, which in Europe is an important aspect since it is a political union. What is asked of Greece will be what is asked of the others at the time of their respective negotiations.  In the end all governments (3) are highly indebted with very low growth projections. Any rise in basic interest rates of the European Central Bank, something which could happen at any time, could lead to a fiscal strangulation. Every 1% rise in the interest rate is equivalent to 1% of the GNP of a heavily indebted country, that is to say with 100% of debt in relation to its GNP. Currently Europe, the United States and Japan, are undergoing the longest period in history with negative interest rates. Thus the Troika is telling Greece and everyone else how it will manage the problem of highly indebted rich countries in the future, except the United States which as we know is exceptional and no one will impose conditions on them. They issue their own universal money.

The Greek Prime Minister and the Greek government, presided over by Syriza, like many analysts, thought that having a referendum in face of the European conditions in order to see if they were socially acceptable or not, would give them weight in the negotiations. Tsipras, as the Greek Prime Minister, received the support of 61% of the population and went back to the negotiation table on Monday July 6 seeking an agreement reasonable for both parties. Finance Minister Varoufakis resigned that Sunday in order not to antagonize the creditors. The problem was that for the European Commission, the issue of Greek democracy was not part of the agenda. The EC wanted and believed that they had reached an agreement that reflected a coordination of European economic policy, but in fact they had not. They had not because today there is no such thing as a coordination of European economic policy. What there is with Greece is the imposition of specific conditions that continue the logic applied since 2011. To impose is not to coordinate. The Greek debt has risen from 131% to 177% of GDP between 2011 and 2015 as an effect of the contraction of GDP due to a 25% fall in wages and consumption ordered by the Troika between 2012 and 2014.

The point of the conflict is the reduction of the stock of the debt. As is known, in history there is no resolution of any serious debt problem without a debt haircut. Even the IMF backs this idea (!!). In the process of the accumulation of a very high debt level, it is important to know the reason why the borrowed money was taken, but also the reason why creditors continued lending to the client country. Debt audits are made in order to know how the debt was incurred, as happened in Argentina, Ecuador and Peru. On a more universal plane, in 2009 UNCTAD created and circulated its Principles of Sovereign Lending and Borrowing (PRSLB) with the support of Eurodad. Among the few countries that have supported this initiative was Germany that signed on April 22 2012.  Even though such issues of debt policies seldom or never receive the endorsement of governments of capital exporting countries, in this occasion Germany had signed. That is to say that Germany has the obligation to know to whom the loans were made and how the borrower is faring. The only problem is that "the markets" are not guided by this State reasoning but by the risk premium. The higher the premium, the more interesting the loan becomes. In the end there is no risk for the private creditor, given that his government intervenes in his favour, and transforms the negotiation into a government to government negotiation, something that has been done since the beginning of the XIX Century with the creation of the American republics. What has happened in Greece is the transfer of risk from private creditors and debtors to the State on both sides. Those who made money with the loans now sit behind the governments that are facing each other.

One question is why Germany has assumed such an important role, when any European mechanism is paid with the European budget and Germany is one amongst 27 countries. A debt reduction would be covered by the budget of the European Commission with an official repurchase at a high rate of discount. The transformation of the European Commission into a bilateral agency recalls the European project of 1942 rather than that of 1950 that was finally constituted. In this way, what the member governments of the European Union are doing is to say to each other, and Germany to all of them, what will happen when interest rates return to normal and payment problems appear in other highly indebted European Governments. One question is what does a weak and privatised Europe, with a growth rate near 0%, a strong commercial restriction with its principal external market, Russia, that is also their source of energy, have to gain from this. Who benefits from this in the greater scheme of things?

After his resignation from the office of Minister of Finance, on July 6, 2015, Professor Yanis Varoufakis made some annotations to the Agreement of the Eurosummit of 12 July, a week later, in an effort to translate into ordinary language what the agreement with the European Union said, that led to his resignation.

It is extraordinary that the agreement says that the Greek government must accept it as its own. That is to say that the victim is made responsible for his own death. What is remarkable is that the mainstream press has manipulated public opinion so that Greeks are perceived as irresponsible, lazy, corrupt and poor administrators, while the European Commission extorts Greece hand-in-hand with the IMF and the ECB and the spokesperson is the popular Frau Merkel. It is an exact repetition of what was said of Latin America in the decade of the 1980’s. If Greece does not comply with what this memorandum of understanding says then the Greeks are an irresponsible gang and the memorandum says verbatim.

- A euro area Member State requesting financial assistance from the ESM is expected to address, wherever possible, a similar request to the IMF. This is a precondition for the Eurogroup to agree on a new ESM programme. Therefore Greece will request continued IMF support (monitoring and financing) from March 2016.

The response of the IMF to the Greek request was that there would be no support if debt reduction was not coming from the other creditors. Meanwhile the IMF will not support Greece if it does not comply with the conditions of explicit reform agreed in the memorandum of agreement. Varoufakis comments are below in italics in parenthesis.

These are some of the more violent clauses:

- the streamlining of the VAT system [i.e. making it more regressive, through rate rises that encourage more VAT evasion]and the broadening of the tax base to increase revenue [i.e. dealing a major blow at the only Greek growth industry – tourism].

- upfront measures to improve long-term sustainability of the pension system as part of a comprehensive pension reform programme [i.e. reducing the lowest of the low of pensions, while ignoring that the depletion of pension funds’ capital 2 due to the 2012 troika-designed PSI and the ill effects of low employment & undeclared paid labour].

- the safeguarding of the full legal independence of ELSTAT [i.e. the troika demands complete control of the way Greece’s budget balance is computed, with a view to controlling fully the magnitude of austerity it imposes on the government.]

- full implementation of the relevant provisions of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, in particular by making the Fiscal Council operational before finalizing the MoU and introducing quasi-automatic spending cuts in case of deviations from ambitious primary surplus targets after seeking advice from the Fiscal Council and subject to prior approval of the Institutions [i.e. the Greek government, which knows that the imposed fiscal targets will never be achieved under the imposed austerity, must commit to further, automated austerity as a result of the troika’s newest failures.]

- in line with the Greek government ambitions, to modernise and significantly strengthen the Greek administration, and to put in place a programme, under the auspices of the European Commission, for capacity-building and de-politicizing the Greek administration [i.e. Turning Greece into a democracy-free zone modelled on Brussels, a form of supposedly technocratic government, which is politically toxic and macro-economically inept] A first proposal should be provided by 20 July after discussions with the Institutions. The Greek government commits to reduce further the costs of the Greek administration [i.e. to reduce the lowest wages while increasing a little the wages some of the Troika-friendly apparatchiks], in line with a schedule agreed with the Institutions; SN 4070/15 5 EN

- to fully normalize working methods with the Institutions, including the necessary work on the ground in Athens, to improve programme implementation and monitoring [i.e. The Troika strikes back and demands that the Greek government invite it to return to Athens as Conqueror – the Carthaginian Peace in all its glory.] The government needs to consult and agree with the Institutions on all draft legislation in relevant areas with adequate time before submitting it for public consultation or to Parliament [i.e. Greek Parliament must, again, after five months of short-lived independence, become an appendage of the Troika – passing translated legislation mechanistically.] The Euro Summit stresses again that implementation is key, and in that context welcomes the intention of the Greek authorities to request by 20 July support  from the Institutions and Member States for technical assistance, and asks the European Commission to coordinate this support from Europe;

The Eurosummit Agreement says these are the minimal requirements to begin to talk. What one can appreciate is that this is an enslavement not only in the way to manage the economy, as is the custom of the IMF, but also enters into the branches of public administration and who and how debates are held for legislation relevant to the economy. This is an unacceptable interference with sovereignty and in addition an outrage for the principle of democracy when Greek legislation is debated first in Brussels and after some adjustment sent back for automatic approval by the Greek Parliament. This mechanism does not exist in any legislation because it involves an open interference in the internal affairs of a state. This is colonialism and it looks more like the project of German Europe of 1942 than the project of 1950. This is a Europe that colonizes its highly indebted members. How would the consequences of this sort of interference on France or Italy – if one considers that this is a European Union precedent and the role of the European Commission – result in political terms? Greece seems to be to Europe what Chile was to Latin America after 1973.

Finally since these conditions and interference are unacceptable and the German Minister of Finance Schäuble knows it, what Germany proposes is that Greece should leave Europe and he may be right. The 7 billion euros that Greece receives yearly from Brussels does not justify this treatment. If Tsipras does not withdraw from Europe now, Golden Dawn will do so when they win the next election. That is Brussels' objective, to ensure that no-one in Europe considers the idea of a debt reduction. Least of all Spain, Portugal, France or Italy.

(Translated for ALAI by Jordan Bishop)

Ciudad Universitaria,UNAM, August 5 2015

- Oscar Ugarteche is a researcher with the Institute of Economic Investigations UNAM, Member of the SN/Conacyt, Coordinator of the Obela project www.obela.org

Email  ugarteche@iiec.unam.mx

[1] http://ec.europa.eu/budget/mycountry/EL/index_en.cfm

[2] http://ec.europa.eu/economy_finance/euro/adoption/who_can_join/index_en.htm

[3] Using the criterion of the World Bank, Rich Countries are defined as those with a Net National Income above $12,736 dollars per capita, and Highly Indebted Countries are those whose current debt-GNP ratio is greater than 80%.  https://stats.oecd.org/glossary/detail.asp?ID=1221

[4] The Hellenic Statistical Authority.

[5] The Fiscal Council is defined as an independent public institution that has as its objective strengthening the engagements for sustainable public finances. In agreement with the so-called package of two, European countries should have an independent body as a Fiscal Council, responsible for the supervision of the fulfillment of fiscal goals with numerical rules and where appropriate to evaluate the need to activate the mechanism of correction foreseen under the Fiscal Compact. In addition, the macroeconomic projections should be produced or endorsed by an independent body, even though this this not necessarily the Fiscal Council. The monthly bulletin of the BCE, April, 2013, wrote that “On 20 February 2013 the Council of the European Union (EU Council), the European Parliament and the European Commission reached an agreement on two EU regulations (the “two-pack”), which aim to strengthen further the existing economic governance framework for euro area countries by complementing the “six-pack” and the fiscal compact, in accordance with the Euro summit statement of 26 October 2011. The two EU regulations, which are based on two proposals published by the Commission in November 2011, consist in: (i) “monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the Member States in the euro area”; and (ii) strengthening the “economic and budgetary surveillance of Member States experiencing or threatened with serious difficulties with respect to their financial stability in the euro area.”