It is sometimes difficult to see the actual human suffering behind the rioting and burning buildings in Greece's cities.  Even with private bondholders agreeing to accept a "haircut" of 68.5% on the value of Greek bonds they hold (receiving new bonds in the value of €315 for every €1,000 in old bonds[1]), the austerity imposed thus far, and projected to continue for a minimum of five years, gives Greece no real hope of digging itself out of spiraling debt.

            A few pertinent facts reveal the scope of the disaster which European Central Bank (ECB) and International Monetary Fund (IMF) policies have imposed on Greece:

            • Greece has been in a steep recession for five years already, losing 17% of its GDP.

            • Greek GDP contracted by 7% in 2011 and is forecast to lose 4.5% this year, stagnate in 2013, and make a modest 2% gain in 2014 - but these projections are based on wildly optimistic assumptions by ECB consultants and it is equally possible that Greece will have lost 27% or more of GDP by 2014 according to some Greek economists.

            • Current Greek unemployment hovers around 20%, and underemployment raises that figure to near 40%; unemployment for 2012 is projected to remain above 18%, to decline to 17% in 2013 and remain above 15% in 2015.  Again, these projections are based on wildly optimistic models of Greek economic performance.

            • For those Greeks who are employed, austerity measures have imposed wage cuts of 30% since 2009.  The EU bailout plan demands a further 15% reduction in wages in 2012-2015, and imposes even more drastic cuts in ensuing years. 

            Is it any wonder that the Greek working class is expressing its white-hot anger in the streets?

            The projected cut of 150,000 Greek public sector jobs which the current bailout plans include would represent in the context of the larger U.S. economy a layoff of 4.6 million workers.  This would boost unemployment immediately to 11.3% and secondary effects would probably double the loss.  Does anyone imagine that an American administration could be reelected after inflicting that kind of austerity while demanding that still employed workers accept additional wage reductions above and beyond the 15% already imposed?

            The shocking extraction of wealth from a less developed EU country to primarily German and French finance capital in more developed EU countries forms a modern example of what amounts to the most savage sort of primitive accumulation.

            Even more shocking is the way that the EU leaders, finance ministers, and the ECB have demanded dismantling of even the pretense of bourgeois democracy in Greece.  From the humiliating forcing of former Prime Minister George Papandreou to withdraw his proposal for a democratic referendum on austerity measures, to the imposition of  Lucas Papademos, a former Vice President of the ECB, as Papandreou's replacement, to the formal pledges extracted from party leaders that new elections would not be permitted to alter in any way the austerity arrangements demanded by the ECB and IMF, to demands that Greece rewrite its constitution to place debt repayment above all other priorities, the fact that the people of Greece no longer have any say in their country's economic affairs has been rammed down the Greek people's throat.  Angela Merkel and Nicholas Sarkozy control Greek political life more completely than any time since German tanks actually enforced Germany's will in the streets of Athens in 1941.

            Grzegorz Kolodko, the former deputy prime minister and minister of finance of Poland and a professor of economics at Kozminski University in Warsaw, points out that the civil-societal fabric of Greece is being rent asunder by ECB/IMF austerity policies:

            In three years of austerity Greece's debt has risen from 113 per cent of gross          domestic product to 163 per cent. Homelessness has jumped by 25 per cent.   Unemployment has risen to 21 per cent, among the highest in the industrialised         world, with 48 per cent of young people out of work. It is naïve to think they will             watch TV, not demonstrate or fight in the streets. This policy is senseless.[2]

            Already market analysts and rating firms are touting the likelihood of a Greek default in late March, 2012, clearly not believing that the current ECB bailout will be sufficient to stabilize the Greek economy,[3] irregardless of sufficient bondholders appearing to have accepted the debt swap.   And, yet, despite all this vicious extraction of wealth from the Greek working class and its transfer to European financiers and the open speculation that default and Greece's departure from the euro zone is inevitable, there are still economists and analysts who treat a Greek debt default and withdrawal from the euro zone as the most cataclysmic economic event possible with far more dire consequences for the Greek people and the rest of Europe than the draconian austerity policies the ECB is forcing down Greece's throat. 

            Whether this is so is an entirely legitimate question. The fact that the Communist Party of Greece (KKE) has called for default and withdrawal from the euro zone, given its vanguard role in popular protest against EU policies and the collaboration of the Greek government with EU finance capital, makes this a vital issue for European and world capitalism.  While there are a number of technical issues involved, a Marxist analysis must proceed first from evaluation of the interests of the working class not merely the interests of finance capital.

            The starting point for any serious assessment of Greece's options is the realization that the Greek government, even before the additional austerity measures required by the EC for the latest bailout installment, is already verging on a primary surplus.  With the issuance of domestic tax-bonds and with a more effectively-enforced progressive tax system the Greek public sector could finance itself in equilibrium for the foreseeable future.[4]  The new wave of austerity measures - and the promise of a minimum of five more years of even more intense austerity - are designed to pay off the foreign holders of €270 billion in Greek sovereign debt, a mix of European bankers and private creditors like hedge funds.  And continuing to pay off that debt is the condition on which the ECB is insisting to meet its obligation as a central bank to provide liquidity for Greek banks.

Moreover, while a significant part of the outstanding debt did go to finance social welfare spending for the last two decades, it is a gross distortion of the facts to present Greeks as profligate social spenders who must now be bailed out by thrifty Germans.  The table below traces the social welfare spending of several EU countries from 1980 to 2010:

From 1980 to 2010 Greek social welfare spending (omitting education) ranges from -1.72 standard deviations below the EU mean to 0.19 standard deviations above the mean.  Greek social welfare spending is substantially below the EU mean until 2010 and then just barely exceeds it.   German social welfare spending, on the other hand, exceeds the EU mean in every period.  Furthermore in absolute terms only Portugal has engaged in lower social welfare spending than Greece among the EU countries. 

European workers have experienced an unprecedented assault on their living standards in the last decade, and the austerity measures imposed on Greece, as elsewhere, are part of this assault.  To the extent that German taxpayers are being made to pay for the bailout, it is to bailout the Greek ruling class and German and French bondholders, not the Greek people.

Europe is not the only place wherein this assault on working-class living standards is going on.   In the U.S. austerity measures are being pursued which threaten recovery from the recession and impose considerable hardship on American workers to pay holders of the state and national sovereign debt of the U.S.  Those debtholders are not ordinary working people - they are banks and investment houses and foreign governments.  There are lessons in the Greek experience for the American working class, and the international working class, too, has a stake in what happens in Greece.

Moreover, much of Greece's sovereign debt consisted of bonds to pay for expenditures which were of great benefit to the European and Greek ruling classes and little to the Greek people.  For example, according to the Stockholm International Peace Research Institute, Greek military spending rose from €5.9 billion in 2000 to €7.3 billion in 2009, then dropped to €6.7 billion in 2010.  In 2011 military expenditure was 3.2% of GDP - the highest percentage of GDP spent on the military in the EU and 2.43 standard deviations higher than the EU mean.  Even as austerity cuts to the bone in Athens, France is continuing to press Greece to take delivery of two to four stealth frigates with a payment of €300 million per vessel due in 2016. 

            What would be the costs and benefits for the Greek working class of a debt default and withdrawal from the euro zone? 

            First, the withdrawal from the euro zone.  French economist Eric Dor of the IESEG School of Management at Lille Catholic University has concisely outlined the technical, legal, and economic problems associated with withdrawal from the euro zone.[5]   A key issue is conversion of old contracts and debts into the new currency.  Greece would want this to be automatic, but since a policy of monetization of public debt would be the most significant reason to withdraw from the euro zone, litigation will ensue as creditors resist conversion.  Dor spends five extremely dense pages outlining technical issues which would have to be resolved to avoid disruption of financial markets, which leads him to conclude that "it is difficult to expect a sudden overnight withdrawal of a country."[6]  However, it clear that making things easy for financial markets does not outweigh the crushing burden which austerity has imposed on the Greek people.

            Let us assume that the withdrawal from the euro zone begins with an opening exchange rate for the New Drachma 25% lower than the previous euro exchange rate.[7]  As of December 2012, 59% of Greece's imports and 48% of her exports were to the EU.  Hence a large portion of Greece's trade would benefit literally overnight from a 25% discount over Greece's Southern Mediterranean euro zone peers.  The 52% of Greece's exports which go outside the euro zone would also become immediately more competitive even in the face of the world recession.  Improving Greece's balance of trade is the principal strategy available to the government to avoid recurrence of unsupportable debt.  Furthermore, a 25% devaluation of the New Drachma will make Greece's vital tourism sector immensely more competitive and attractive almost overnight, bringing harder currency into the financial system.

            There will certainly be hardship arising from the currency devaluation, particularly given the immediate 33% increase in prices which results from a 25% devaluation, but it will certainly be less costly in the long term to the Greek people than the austerity measures.  The consequences can also be eased to an extent by price controls, but the impact will be felt in those areas where Greece must import, particularly oil and raw materials.  There are will be liquidity problems for Greek banks.  Protection of retail depositors is essential and some capital controls will still have to be imposed after the initial freezing of accounts for twenty-four or so hours after announcement of withdrawal from the euro zone, but there is an up side to refusing to bail out the banks - it will impose costs on a financial sector which has immensely profited by Greece's indebtedness and materially contributed to the crisis.

            As indicated above, some capital export controls will be necessary, but those who fear a massive euro exodus from Greece on withdrawal likely fear an already accomplished fact: the Greek Finance Minister, Evangelos Venizelos, revealed to parliament that the immense figure of €65 billion has been withdrawn from Greek banks by depositors since 2009, while only €16 billion were transferred to banks abroad.  The other €49 billion has been withdrawn from the banks but remains within Greece and it will behoove the Greek government to offer domestic holders of euros a privileged rate of exchange in the short term to encourage return of the €49 billion to the banking system.

            The current austerity measures rule out any remediation of the recession's toll on the Greek working class.  A policy of monetizing the public debt by inflating the new currency opens the possibility of some increased spending for job creation, although the Greek government will have to be extremely careful to bolster public confidence in the New Drachma, since a worst-case scenario involving a 25% devaluation spiraling through successive devaluations into hyperinflation will have to be avoided.

            Withdrawal from the euro zone represents return of popular sovereignty to Greece even more than debt default.  It is only by restoring control of monetary policy to the Greek government and that government to the control of the people that real solutions to the contradictions of capitalism can begin to be addressed.  Even shorter term, Keynesian and Neo-Keynesian solutions of the immediate crisis involving fiscal policy and the balance of trade can only be implemented by a Greek government which has regained national control of its monetary policy.  The Greek Communist Party acknowledges that Greece's entry into the euro zone was a mistake, a mistake which arose from the intersection of the interests of finance capital and the Greek ruling class, and a mistake which has heightened the contradictions of European capitalism by increasing the sacrifice of the Greek working class and its interests to European financiers.  With or without the assent of the EU Greece must leave the euro zone.

            Now, for debt default.  The possibility of a debt default is built into the current swap of Greek sovereign debt bonds for devalued instruments.  If participation of at least 75% of creditors is not forthcoming, then Greece will not accept the tenders of the bondholders.  Debt default would be much like that, only all the creditors would be given a take-or-leave-it offer by Greece. 

            The example of Argentina, which defaulted on its sovereign debt in 2005, is probably most pertinent.   Faced by a political crisis brought on by IMF austerity policies, in March 2005 Argentina presented a complex offer with varying terms for 152 affected bonds and the three new bonds which would replace them, devaluing the bonds by between 64% to 82%; on average the original debt was reduced by 75%.[8]  A 75% to 85% devaluation of Greece's sovereign debt would be the expected offer in any default.  Those creditors who refused to accept the offer would have their bonds permanently repudiated, i.e., they would get nothing.  76.15% of Argentina's accepted the default offer.  It remains an open question how many of Greece's creditors would accept.

            The composition of the holders of Greek sovereign debt is interesting, as shown in the following table:

Percent of Greek Sovereign Debt by Holder

ECB and EU National Central Banks                        21.89

Greek financial institutions                             10.53

Major Asian financial institutions                     9.10

German financial institutions                            2.21

French financial institutions                              1.23

Italian financial institutions                              1.05

Belgian financial institutions                            0.63

Netherlands financial institutions                     0.49

UK financial institutions                                   0.39

Austrian financial institutions                           0.25

Other bond and bill holders                            52.23

Slightly more than 28 percent of Greek sovereign debt is held by the ECB, EU member central banks, and other EU member financial institutions outside Greece.  Something on the order of half of the 52.23% of Greek sovereign debt attributed above to "other bond and bill holders" represent private creditors in EU countries.  Thus, slightly more than 54% of Greek sovereign debt is in the hands of the EU, EU member governments, and EU member investors.

            Resolving the 10.53% of outstanding sovereign debt held by Greek institutions and investors is straightforward.  However, resolving the claims of other creditors in light of a Greek default is more complex, particularly if the EU insists on denominating the debt in euros and rejecting revaluation in the new Greek currency.

            One issue which can likely be safely dismissed is Nobel laureate Joseph Stiglitz's concern that ECB and EU policy is driven by fear that a Greek default will trigger a largely unknown number of credit-default swaps (CDS) which will bring the European, and by implication the international, financial system down catastrophically.[9]  However, the Deposit Trust and Clearing Corporation does track outstanding CDS (there are 4,263 CDS on Greek sovereign debt), and while the gross notional amount of outstanding Greek CDS is $69.9 billion, the net notional amount is only $3.2 billion, which is 1.19% of the Greek sovereign debt.[10]  This is a hugely technical issue and one which rests on some significant accounting sleight-of-hand - the offsetting of obligations which results in the net notional value makes it the worst-case payout.

            The hard line taken by the German and French leadership in negotiations with Greece suggests that the EU and ECB would react harshly to a Greek default and demand Greek withdrawal from the EU, possibly impose economic sanctions.  However, there is reason to believe that this may be in part bluff.  Britain, after all, is an EU member which has never joined the euro zone.  Still, Greece is not Great Britain.  Ultimately it is difficult to see European integrationists exiling a European country from the EU because it can no longer economically sustain participation in the euro zone.  And there is a much greater danger to the EU than to Greece here.  If the EU were to react punitively to a Greek default, even imposing trade or other sanctions, it would signal to every other Southern Mediterranean euro zone country with a serious debt problem - Spain, Portugal, and Italy, for example - that default and withdrawal from the euro zone is something to be done sooner rather than later because the EU cannot sustain punitive action against multiple simultaneous defaults and withdrawals from the euro zone without the European financial system imploding.  It is unlikely that the European ruling class will play Russian roulette with a fully loaded revolver. 

            However, in the event the other troubled euro zone countries fail to act in solidarity with Greece, EU retribution may be sharp.  The imposition of tariffs would cripple the Greek agricultural sector, which accounts for 3.6% of Greece's GDP.  Prohibition on travel to Greece would be unprecedented and is highly unlikely; in fact, Greek tourism, which accounts for 18.2% of GDP, is likely to benefit considerably from an exchange rate which privileges the euro over the New Drachma.  Litigation in EU courts will be a decades-long burden on the Greek government.  However, there are also other EU vulnerabilities in too sharp a response to Greece: more than 50% of the Greek domestic manufacturing sector was acquired by non-Greek EU nationals; if the European ruling class threatens the economic survival of Greece, these are strong candidates for nationalization.  Wilder speculation about European finance capital enforcing its claims with military action is likely no more than just that - wild speculation - since both Germany and France lack the necessary land force projection capabilities.  U.S. participation would be necessary, which is unlikely for both political and technical reasons.

            Supposing, then, that 75% or more of Greece's creditors accept the default terms, what are the consequences for Greece?

            The case of Argentina may, again, give us some indications.  Admittedly, Argentina faced rather different circumstances in its default and devaluation, and a considerably different economic climate, but it still represents a best-case scenario.  Direct foreign investment in Argentina declined by two-thirds during the five years after the default.  A similar decline for Greece is likely, although not necessarily a bad thing: beginning in 2001 with Greece's entry into the euro zone, entire sectors of Greece's national economy were oligopolized by German and other EU firms who drove their local Greek competition out of business.  Reduction in direct foreign investment will offer opportunities for local businesses to return.   Argentina's default was aided by Venezuela's decision to continue buying Argentine bond offerings, specifically cited by President Hugo Chavez as an expression of solidarity with Argentina against the international financial system.[11]  Certainly, such shows of solidarity from progressive and socialist governments, the Peoples Republic of China and Venezuela to name two, could ease Greece's post-default financial distress.

            Ultimately, international finance capital showed that making profits counted more than making examples: by 2006 Argentina had reentered international financial markets and successfully sold $500 million in Bonar V five-year, dollar-denominated bonds with Moody's Investors Service increasing Argentina's debt rating from B- to B.  Furthermore, Argentina's default strategy has contributed to an extraordinary turn-around of the Argentine economy.  Two years after the default, GDP increased by 8.7%.  Five years after default, GDP was growing at 9.2%, while the primary account surplus was 1.9%.  GDP growth in 2011 was at 6%.  The strategy of default and devaluation appears to have worked remarkably well for Argentina, despite the howls from finance capital in 2005.  Still, Greece is not precisely in Argentina's situation and the world economy is in recession.  The disincentive to renewed foreign investment and withdrawal of access to international credit will probably be longer and harsher than in the Argentine case.  Yet, the costs are still less than those of EU-imposed austerity.

            Default and withdrawal from the euro zone are not the ultimate solution for Greece's economy, nor is a more favorable balance of trade - the ultimate solution for Greece as well as the rest of the EC is socialism and the final resolution of capitalism's contradictions.  However, as a strategy for ending the cruel austerity which impoverishes the Greek people for the profits of European finance capital one could do far worse. The KKE is right - debt default and withdrawal from the euro zone are necessary first steps.

[1] Bondholders will also receive European Financial Stability Facility notes with a face value of 15% of the face value of the bonds, e.g., €150 for every €1,000 of bonds tendered, although details have not been finalized.

[2] Gregorz Kolodko, "ECB must rescue Greece - or pay more later," Financial Times, Feb 21, 2012 (http://www.ft.com/intl/cms/s/86d3d470-5bb8-11e1-a447-00144feabdc0,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F86d3d470-5bb8-11e1-a447-00144feabdc0.html&_i_referer=http%3A%2F%2Fwww.guardian.co.uk%2Fbusiness%2F2012%2Ffeb%2F22%2Feurozone-crisis-greece-bailout-protests#axzz1n6TiVRnz)

[3] E.g., the remarks of Fitch Ratings' Managing Director Edward Parker to Bloomberg/Business Week (http://www.businessweek.com/news/2012-01-25/greece-is-insolvent-will-default-on-its-debt-fitch-says.html): "The euro area's most indebted country is unlikely to be able to honor a March 20 bond payment of €14.5 billion."

[4] For this reason Yanis Varoufakis, the chair of the Department of Economic Policy at the University of Athens and an advisor to former prime minister George Papandreou from 2004 to 2007, has suggested that a Greek default on its sovereign debt could occur while Greece still remains in the euro zone (http://yanisvaroufakis.eu/2012/02/18/greek-default-does-not-equal-greek-exit/).  His description of the fiscal situation of the Greek government is accurate, but it will take some political legerdemain to extract Greece from the Economic and Monetary Union without severing the link to the EU.

[5] Eric Dor, "Leaving the eurozone: a user's guide," IESEG School of Management, Lille Catholic Univ., Working Paper 2011-ECO-06, Oct. 2011. (http://my.ieseg.fr/bienvenue/DownloadDoc.asp?Fich=1046781054_2011-ECO-06_Dor.pdf).

[6] Ibid., 10.

[7] The figure is not arbitrary.  The European Central Bank published harmonized competitiveness indicators based on unit labor costs indices for the total economy (http://www.ecb.int/stats/exchange/hci/html/hci_ulct_2011-07.en.html).  For the third quarter of 2011 the indicator for the EU's strongest economy, Germany, was 106.5; that for Greece was 82.3.  The difference is 24.2.

            Also, the technical details of circulating a new currency are considerable, e.g., new bills will have to be printed, new coins minted, ATMs will have to be recalibrated, etc.  However, if need be the Greek government can simply declare Greek-printed euro notes to be New Drachmae[7] or stamp euro notes with a "New Drachma" stamp like the Austrian-Hungarian krone was overstamped to identify interim currencies of its newly independent states until new notes can be printed and circulated.

[8] R.J. Shapiro and N.D. Pham, "Discredited - The Impact of Argentina's Sovereign Debt Default and Debt Restructuring on U.S. Taxpayers and Investors," American Task Force Argentina, Oct. 2006 (http://atfa.org/resources/atfa_1006.pdf), 14.

[9] http://www.project-syndicate.org/commentary/stiglitz148/English.  The pertinent example is the role CDS played in the collapse of AIG in the United States.

[10] http://www.dtcc.com/products/derivserv/data_table_i.php?tbid=6.  The relevant entries are under "Hellenic Republic" in Table 5.

[11] Venezuela also financed a significant part of Argentina's payout of $9.8 billion in IMF debt in 2005.