From the Treaty of Versailles to the Greek Bailout

In June, Greece voted for status quo rather than a solution to the country’s enormous fiscal and macroeconomic problems. Since then I have been predicting that because the EU continues to force destructive austerity measures upon the country, the crisis is only going to get worse. Today the EU Observer reports that time is running out and things are indeed about to get worse:

Greek Prime Minister Antonis Samaras is next week meeting top EU leaders in a bid to negotiate a two-year deadline extension of the current bailout terms due to the worsening recession. But patience among eurozone donors is wearing thin. Samaras is due to receive Eurogroup chief Jean-Claude Juncker in Athens on 22 August, after which he will travel to Berlin and Paris to meet Chancellor Angela Merkel and President Francois Hollande to lay out why Greece needs two more years to meet the agreed terms, Greek daily Ekathimerini reports.

The bailout from the EU, the ECB and the IMF is conditioned upon Greece continuing its harsh austerity measures. These measures in turn mean that Greece continues to lay off government workers, cut welfare spending, ration health care and, if possible, raise taxes. All of this has already pushed Greece to the brink of social and political chaos, which in turn threatens to spread to other countries in Europe. The democratically elected government in Greece is literally fighting with its back against the wall, with radical, non-democratic anti-EU, anti-austerity parties lurking in the hallways of the parliament, waiting to strike and take over once social despair has spread far enough.

EU Observer again:

According to internal documents obtained by the Financial Times, the €11.5 billion worth of spending cuts the government is still struggling to cobble together would be spread over four years until 2016, instead of the 2014 deadline that is currently expected by Greece’s lenders. In order for the plan to work, Greece would need an extra €20 billion to support the budget as the annual deficit reduction in 2013-2014 would be smaller than planned. But Athens would not seek extra money on top of the €130 billion bailout agreed in March, FT reports, and instead would ask for its repayment of the first bailout it received in 2014 to be postponed until 2020.

This repayment plan is reminiscent of what Germany was forced into after World War I. At the Treaty of Versailles the winners of the war forced Germany into such payment terms that John Maynard Keynes, the British economist who was present at the negotiations, foresaw the rise of totalitarianism as a direct result.

In support of his plea, Samaras is likely to invoke the worsening recession – 6.2 percent of GDP according to the latest Eurostat figures published on Tuesday – and its record unemployment rate of over 23 percent. “The deficit reduction demanded for the period 2013-2014 is excessive. An overdose of austerity is self-defeating,” said Iannis Mourmouras, the prime minister’s chief economic adviser, according to the FT.

See, I told you so.

But whether his case will be heard in the German chancellery is doubtful, as leading coalition politicians in recent weeks have floated the idea of a “manageable” Greek euro-exit, a scenario even Jean-Claude Juncker confirmed. The Greek government is struggling to get by on the first tranche of the €130 billion bailout agreed in March, as the second one is pending a troika report and has been delayed amid political turmoil in Athens and two successive elections. On Tuesday, it managed to raise a record of €4 billion from its banks – also propped with bailout money – so that it can repay the European Central Bank (ECB) a €3.2 billion debt in bonds maturing on 20 August.

And since the banks are living off the same kind of EU-sourced loans as the government itself, that faucet will soon be turned off as well.

What will happen after Greece leaves the euro? Will the EU demand its bailout money back? Will the failure of the democratically elected government prompt the aggressive totalitarian parties to move forward and make bigger inroads to Greek politics and society? It is difficult to predict. But if history from Versailles and on is any indication, we are about to witness the first transition of a welfare state into a totalitarian state since the days of Weimar.