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Why the Debt Crisis Hit Europe Harder Than the Emergent Countries of the South


Europe’s current indebtedness is deeper than that of South American countries. In most cases the ratio between external debt and GNP has reached 40% in 2010 in South American countries; in Greece, Spain, Portugal or Ireland, it is well beyond 100%. Though governments and the European Commission focus on public debt, private debt is far higher. In Spain, public debt accounts for some 17% of the total debt. The increase in the European public debt is the consequence of three elements: the tax counter-reform that started in the 1990s and reduces state revenues by offering tax breaks to the wealthy and to private corporations; the cost of governments bailing out private banks from 2007 onward, and the fall in tax revenues due to the economic recession in 2009. While social expenditures of European governments have in no way increased public debt, these will be slashed by austerity measures. Moreover the huge debt of some private companies might be turned into public debt if we do not watch out.

This is the way Eric Toussaint, an economist and historian who has studied public finances in countries of the South since the 1980s, analyzes the situation. According to this Belgian expert who works within the Committee for the Abolition of the Third World Debt, Greece ought to default, set up an audit of its debt to determine creditors’ responsibilities and renegociate repayment while enforcing a radical reduction of its debt. While in Geneva to present his latest book, La crise, quelles crises? (Editions Aden), he emphasized that this solution would save the country from the austerity measures currently imposed by the IMF and the EU, which affect the whole population. Some ten European countries are currently ‘helped’ by the IMF.

‘Many of the loans were granted to Greece to buy military material from France and Germany,’ Eric Toussaint explained. ‘After the crisis became manifest, the military-industrial lobby even succeeded in maintaining the defence budget while social expenditure was slashed by more than 20%.’ He recalled that in the very heart of the Greek crisis at the beginning of the year Recep Tayyip Erdogan, the Prime Minister of Turkey, i.e. a country with tense relationships with its Greek neighbour, went to Athens and proposed a 20% reduction of the military budget in both countries. The Greek government did not respond for it felt the pressure of the French and German authorities that wanted to support their arms sales. We should add the many loans granted by mainly German and French banks to private companies and Greek authorities in 2008-2009. These banks borrowed from the ECB at low interest rates and granted loans at higher rates, which made for juicy short term benefits. They did not stop to wonder whether the borrowers could repay the borrowed capital in the longer term. Private banks thus bear great responsibility for current over-indebtedness. Loans from EU member states and from the IMF are not granted with a view to serving the interests of the Greek population but to repaying German and French banks jeopardized by their own over-adventurous policies, Eric Toussaint claims.

When Eric Toussaint recommands defaulting, he knows what he is saying. He was a member of a committee for the auditing of the Ecuadorian debt set up in July 2007. ‘We noticed that several loans contravened basic rules. In November 2008 the new government relied on our report and stopped repaying bonds that come to maturity in 2012 and 2030. Eventually the government of this small South American country was victorious in a tug of war with North American bankers that held bonds on the Ecuadorian debt. It bought back securities for one billion dollars that were valued at 3.2 billion. Ecuador’s public treasury thus saved some 2.2 billion dollars on its debt stock to which we must add $300 million of yearly interest that has not been paid since 2008. This gave the government the financial resources needed to increase social expenditure in health care, education and help to the poorer layers of the population,’ he explained. He also mentioned the example of Argentina that refused to repay its debt from 2001 to 2005 and pointed to the creditors’ responsibility. ‘Thanks to its unilateral moratorium on debt securities for about $ 100 billion, the country could invest its resources and turn to economic growth again,’ he added. ‘Argentina still has a $6 billion slate with the Paris Club. Since December 2001 it has not paid anything to Paris Club members and feels all the better for it. The Paris Club stands for the interests of industrialized countries and does not wish to make a fuss about Argentina not paying for fear that other governments might follow suit.’ Greece too defaulted for over 60 years in the 19th century and in the first half of the 20th century.

The IMF has got it wrong

Eric Toussaint further claims that the IMF is deeply wrong when it insists on imposing austerity on indebted countries in Europe, as had been the case for developing countries. ‘Slashing budgets and freezing purchasing power in some ten countries means sabotaging recovery plans. This is insane since in Europe consumption amounts to 70% of the GNP.’

Our expert further points out that not all countries can respond like Germany. Thanks to its industrial apparatus and a policy of wage squeezing, Germany managed to boost its exports. Eric Toussaint explains that the IMF and the EU enforce the Washington consensus – deregulation – in Europe when it has already had disastrous consequences in developing countries. ‘I cannot see how measures that have failed elsewhere would yield different results in Greece, Spain or Portugal. Countries like India, China or Argentina have managed because of policies in which the state still plays an important part in economy. India, for instance, will not privatize its railways. Year after year the government spends huge amounts on them, but this also means saving a million jobs and good quality public services. The public railway company runs at a profit each year. Similarly, in spite of pressures, the Indian government has not deregulated the banking sector, which sheltered it from the 2007 financial crisis.’

Translated by Christine Pagnoulle in collaboration with Vicki Briault

RAM ETWAREEA writes for Le Temps in Genève, Switzerland.


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