posted December 28, 2016
The German Origins of Greek & Euro Periphery Debt’ (Complimentary Chapter 2 from my 2016 ‘Looting Greece’ Book)

The Greek debt crisis of 2010—and the subsequent second and third crises of 2012 and 2015 respectively—are all ultimately rooted in the 1999 creation of the European Monetary Union (EMU). That historic event established the Eurozone and its single currency, the Euro, as well as activated the European Central Bank (ECB) as the central bank for the region. It also introduced a set of related monetary and fiscal policies that, together with the single currency and central bank, have led directly over time to the excessive buildup of debt in Greece (and throughout the periphery of the Euro region) and that country’s periodic debt crises since 2010.

The 1999 creation of the EMU set in motion a monetary policy driven, export-centric economic strategy that has been the hallmark economic policy ever since. The newly created central bank, the ECB, was now able to inject increasing amounts of the new currency, the Euro, thereby increasing the money supply and in turn devaluing the new currency. Devaluation by means of central bank money injection meant lower costs for Euro exports—the aim of which was to enable Euro region business to gain a larger share of external global trade. At the same time, expanding the supply of the new currency also resulted in a significant increase of available credit for investment internally, within the Euro region. That boosted internal exports-imports flow within and between the Eurozone states as well. Stimulating both ‘external’ and ‘internal’ Euro exports was clearly one of the primary strategic objectives behind creating the EMU.

Complementing this central bank, exports-driven economic strategy was a Euro fiscal policy based on austerity. Austerity policy is designed to reduce government social benefits spending, cap or cut government jobs and wages, and to privatize and sell off public works. But austerity policy also includes programs to contain and compress wage costs in the private sector by means of what is referred to as ‘labor market reform’. Fiscal austerity reduced government workers wages and benefits, as well as compensation benefits costs (pensions, paid leave, etc.) to the private sector working class. Often overlooked, however, is that fiscal austerity also includes labor market reform measures targeting the private sector workforce as well—also designed to reduce business wage and benefits costs. Lower unit labor costs translates into more competitive ‘external’ exports—i.e. exports sales from the Eurozone to the rest of the world. Thus ‘external devaluation’ by means of central bank currency and monetary policy is complemented by ‘internal devaluation’ by means of labor market restructuring and wage compression.

Both forms of devaluation that aimed to boost exports were key objectives behind the creation of the EMU 1999. The former—external devaluation—was to be achieved by the creation of the single currency and the new central bank; the latter—internal devaluation—to be achieved in what was called the ‘Lisbon Strategy’ at the time.

Whichever country could successfully control the policies of the new central bank, the European Central Bank, could benefit most from the monetary policy and the single currency. And which country within the EuZ carried out labor market reform-labor cost compression first and most aggressively would also capture a lion’s share of intra-Eurozone trade at the expense of its Eurozone country partners.

In other words, the Eurozone’s monetary and fiscal austerity policies were complementary; both targeted reducing the cost and price of Eurozone exports—the one by means of monetary driven currency devaluation; the other by means of fiscal driven wage compression under the cover of ‘labor market reforms’.

From its very inception, therefore, the creation of the Eurozone was a neoliberal class-based, incomes redistribution project—i.e. the ECB-Euro and monetary policy designed to boost corporate profits through expanding exports; the fiscal austerity and labor market reform policies designed to contain and compress wage and benefits incomes.
The ECB monetary policy had the added income inequality effect of providing excess liquidity that was also designed to stimulate financial asset prices (stocks, bonds, etc.) and consequently buttress and expand capital gains incomes; whereas Eurozone austerity fiscal policy contributed to income inequality by containing, and even lowering, working incomes by reducing government employment, cutting public sector wages and benefits, and reducing national pensions costs, subsidies, and other social benefit forms of compensation involving the general working populace.

The Lisbon Strategy and ‘Internal Devaluation’

The labor market reform and labor cost compression elements behind the creation of the Eurozone in 1999 were initially represented in what was called the ‘Lisbon Strategy’, which was launched soon after 1999.

Beyond the grandiose sounding cover phrases about creating a 21st century European capitalism, in its essence the Lisbon Strategy 2000 called for ‘flexible labor markets’. Translating that into real terms meant the new Eurozone economic elite would restructure their labor markets and reduce wage and benefits costs by hiring more contingent labor—i.e. part time, temp, and contract workers—in lieu of traditional full time labor which would be reduced by attrition and other means and replaced with contingent labor. The vast majority of new hires would be contingent. The workforce would grow increasingly by means of contingent labor. That was not all. Greater ‘flexibility’ in labor markets, as it was called, also meant stretching out the workweek to raise productivity, which in turn meant rolling back the gains of the shorter workweek achieved in some economies like France and elsewhere. That required weakening the role of unions and bargaining—also a strategic goal of the Lisbon Strategy—and reducing state support for unemployment and other social benefits. Reversing the trend toward early pensions and retirement was another major element. So was eliminating the various legal restrictions on laying off or firing full time employed workers. Creating more labor mobility was the code word; forcing more workers to become more mobile by reducing job security was the precondition for more mobility. They called it ‘flexible’ labor markets and even coined the term, ‘flexicurity’ to represent the reduction of job security.

The Lisbon Strategy was a 10-year plan for transforming the labor markets in such way as to reduce the rate of labor compensation gains and raise productivity in order to lower total labor costs. But all of that was for the purpose of making Eurozone exports more competitive in global markets. In its essence, it was about making workers produce more at less cost in order to subsidize exports at their expense. But while this may result in boosting Eurozone exports in relation to the rest of the world economy, so far as the distribution of exports within the Eurozone was concerned, which country moved first and most aggressively to implement labor market reform (and reduce labor costs) would gain a relative advantage with regard to the share of intra-Eurozone exports and trade. ‘Internal devaluation’ thus had a secondary effect. Not only could it complement currency (euro) devaluation to boost external exports to the rest of the world. It could also boost a given Eurozone country’s share of intra-Eurozone exports and thus result in severe trade and money flow imbalances within and between Eurozone partner countries.
Now that there was one currency, the Euro, and one central bank, the ECB, no member of the Eurozone could devalue their respective currencies independently against another Eurozone member in order to boost its exports and growth in order to remain competitive within the Eurozone. That traditional ‘currency exchange rate’, an ‘external’ devaluation route was now left up to the ECB only, and whoever controlled the ECB controlled that action. And at the apex of that control of the central bank and monetary policy was Germany and its northern banker allies. Other Eurozone member countries, especially in the periphery (like Greece) could only compete with Germany and its northern friends by depressing the wages and intensifying the work of their respective labor forces. Internal devaluation by means of labor market restructuring and labor cost reduction was the only open option. The Lisbon Strategy thus marked the commencement of an internal ‘race to the bottom’ with regard to wage incomes within the Eurozone. And whichever country and economy began that race first, ran the hardest, and thus resorted to internal devaluation by means of labor market reform the most aggressively, would be the country and economy that would garner the lion’s share of intra-Eurozone exports and growth. And that country and economy would prove to be Germany.

Germany’s Lisbon Strategy Implementation

A review of the Lisbon Strategy 2000 at mid-decade showed that indeed Germany had begun implementing restructuring and labor market reforms earlier and more aggressively than its EuZ counterparts. Between 2003 and 2005 Germany embarked on a major labor market restructuring, called in German the ‘Hartz Reforms’, for the director of personnel for Volkswagen, Peter Hartz, who was tasked with developing the formal proposals.

The German labor market reforms aimed at reducing German workers wages by converting many full time workers into part time, or what were called ‘mini-jobs’, and cutting hourly wages. Mini jobs were limited to 16 hours work a week. The reforms were successfully imposed because of the high unemployment afflicting German workers at the time, who were unable to resist. Assisting the implementation was the complicity and support for the reforms by the Social Democratic Party, who were ‘rewarded’ with a junior seat in the new neoliberal government and regime.
German unemployment remained chronically high throughout the 1990s, in the 9%-10% range, rising to 10%-10.5% during the EMU transition years of 1999-2003. It was often referred to as the ‘sick man of Europe’ in the latter half of the 1990s and early 2000s. In the 2003-2005 ‘Hartz’ labor market reform phase, German unemployment rose still higher, average 11%-12% as late as 2005-2006. Unemployment was necessary to tame the German working class and get it to accede to labor market reforms.

German worker labor costs did not rise at all in the first half of the decade as labor reforms were implemented. And once they were fully implemented, labor costs began to decline from 2005 on. German unit labor costs were essentially flat for the entire period from 2000 to 2008, as a consequence. That kept German export costs low and even declining. Stuck with the Euro, the rest of the Eurozone economies could not compete by lowering their own currency exchange rates, as before 1999. They could only cut wages or raise productivity by reducing employment. And they were well behind the German curve by 2005-2006. The EuZ internal devaluation by labor cost reduction allowed Germany to sweep up intra-Euro exports share at the expense of many of its Eurozone partners, especially in the southern periphery economies of the Eurozone which included Greece, for whom Germany was its single largest source of Greek imports.

The successful internal devaluation effects of Germany’s labor cost reductions at mid-decade are evident in the shift in Germany’s intra-Eurozone exports to other Eurozone countries after the labor market restructuring in Germany.
In the 1990s, two thirds of German trade was with other European Union countries. Germany ran trade deficits most of that decade. In other words, it imported more than it exported until 1999. But whereas its exports significantly lagged imports before 1999, German exports after 2003 accelerated. Exports as a share of its overall GDP rose from 37% at the start of 2005 to 50% by 2008, as exports surged from 731 billion euros at the beginning of 2005 to 984 billion euros by 2008—a 34% gain.

Even more impressively, Germany’s trade surplus (exports exceeding imports) rose from 731 billion euros in 2003 to 984 billion in 2008, or more than 250 billion more annually. Its cumulative trade surplus (exports over imports) over same five year period, 2003 to 2008, totaled 853 billion Euros—or more than $1 trillion in equivalent dollars. More than half of that surplus 853 billion came at the expense of its other Eurozone and EU partner countries, representing intra-Eurozone trade. And much of that was no doubt due to the wage compression-labor cost reduction advantages Germany achieved as a result of its early and aggressive Lisbon Strategy implementation launched in the 2003-2005 period. German exporters gained a massive $853 billion Euro trade surplus; but German workers initially paid for it.

However, labor cost reduction via internal devaluation wasn’t the only means by which Germany obtained for itself a greater relative share of both external (rest of world) and internal (intra-Euz) exports sales. Germany’s domination of the early ECB and the ECB’s monetary policy also helped Germany attain that massive 853 billion trade surplus.

Germany’s Bundesbank Dominates the ECB

The ECB is a federation of national central banks. Factions have existed within it from the very beginning. The German central bank, the Bundesbank, with allies in other Euz members, has succeeded in dominating the decisions of the ECB in most cases. That was especially true during the beginning period of 2000-2003 and up to 2008, although that influence has been recently weakening.

The single currency, Euro, facilitated the expansion of credit within the EuZ. The Bundesbank’s influence insured that the ECB would enable a sufficient supply to German and other northern ‘core’ banks. Much of that supply was eventually directed to investment into the periphery economies, and much in turn was recycled back in the form of purchase of German exports by the periphery. The ECB made loans to German-core banks, which in turn loaned to private banks in the periphery or invested directly themselves in the periphery. Another channel was ECB loans to periphery economy central banks, which in turn re-loaned to private banks in their economies. The periphery private banks then made loans to local businesses, consumers, and even local governments in the periphery economies. These are the roads by which the Euro money capital flowed from the ECB into the periphery economies like Greece. Residential and commercial real estate was a particular beneficiary of money flows to the periphery, and the excess lending to the sector led to housing bubbles in a number of periphery economies. Still another channel of money flows to the periphery was non-bank German and core business providing what is called ‘foreign direct investment’ (FDI). Core northern EuZ companies expanded into the periphery by acquisitions, by buying majority stakes in companies there, providing capital for partnerships with periphery businesses, or by establishing wholly-owned subsidiaries in the periphery economies, especially after 2005.

Through the various channels, massive money capital flowed into the periphery economies, including Greece, from the German-core north, made possible by the ECB’s new Euro currency creation. The new Euro resulted in money creation by the ECB. And much of that headed south and into the Euro periphery economies, as real estate construction, housing, and relocated manufacturing boomed in the periphery. And much would eventually again flow back again to the German-core north—either in the form of interest payments on private loans and debt, repatriation of profits by subsidiaries and operations of northern businesses that relocated to the periphery, and, not least, in the form of rising purchases of German-core exports by businesses, households, and governments in the periphery economies that experienced significant economic growth and income gains in the period leading up to the 2008 global crash.

Money capital was being recycled, as the EMU 1999 project intended. However, while that recycling was producing rising profits and income in the German-core north it was leaving a massive residue and overhang of debt in its wake in the periphery economies.

So long as new money capital was provided by the ECB to German-core banks and businesses, and so long as the latter continued to extend credit and expand in the periphery, the recycling would continue to work. But the cycle broke with the banking-financial crash of 2008-09. Credit to the periphery reduced from a flow to a trickle, from both private and ECB sources. And with money capital and credit inflows to the periphery evaporating, periphery purchases of German-core exports plummeted in turn.

Germany would address the break by abandoning its key role of ensuring that the ECB continued the flow of credit to the periphery. Without a continuing flow, the ‘twin deficits’ mechanism of credit provided to the periphery in order to purchase northern EuZ exports would break down. Which it did.

Levels of ECB credit flows to the periphery were reduced and blocked by German domination of ECB policy. The de facto ‘German rule’ established when the ECB was created was that the ECB could not provide credit to governments or private businesses, only to Eurozone member central banks. Eurozone private banks were not lending, due to the 2008-09 crash. And Eurozone member central banks were not bailing them out very well either—unlike the massive bank bailouts underway in the US and UK by their central banks at the time.
When EuZ periphery business and household demand for German-northern core exports declined sharply in 2008-09, Germany and the northern core exporters made a strategic error. Instead of ensuring money capital cycling to the periphery, Germany shifted its exports strategy. It de-emphasized intra-Eurozone exports and focused more on external exports sales abroad—especially to China and emerging markets whose economies would boom beginning in 2010.

The Eurozone periphery economies were left to figure out for themselves how to restart their economies after 2008-09, without sufficient credit, without German-core FDI, and with their own domestic banking system having collapsed. What they were ‘left with’, however, was a residue of massive debt overhang from the pre-2009 period. No economy in the Eurozone periphery was more exposed to this post-2008 dilemma than was Greece.

Greek Debt as Private Bank-Investor Debt

Greek government debt over the 2005 though 2008 period rose only modestly. Most of the pre-2008 debt buildup was on the private side, not public, during this period. Private Greek banks, as well as northern core banks doing business directly in Greece, may have been accumulating private debt. But, according to Eurostat statistics, Greek government debt rose only 13% from 2005 through 2008.

In contrast, Greek imports of German goods over the period rose by 70%. Germany was Greece’s biggest trading partner. Greece’s cumulative trade deficit with Germany alone—i.e. imports of German goods minus Greek exports to Germany—rose between 2005 and 2008 by 201 billion Euros. That 70% and 201 billion required money capital from somewhere. That somewhere was borrowing either from Greek banks, who borrowed from the Greek central bank who in turn obtained the Euros from the ECB; or private Greek borrowing from other Eurozone banks who ultimately got their money from the ECB; or else credit extended by German-Core businesses directly to Greek households and businesses. The Greek private banking system had become bloated with debt, not the Greek government. At least, not yet. That would come, as the essence of the first Greek bailout of 2010 was to reduce the debt for private investors and banks, in effect transferring that debt to the Greek government. With an only 13% rise in government debt over the period, 2005 to 2008, a sovereign or government debt crisis was not a problem as late as 2008. It was private debt that was accumulating.

That private debt, moreover, was owed primarily to German-northern core banks. According to a Bank of International Settlements report in early 2010, Greek debt owed to foreign banks was $303 billion. Of that, $43 billion was owed to German banks and $75 billion to French banks, as of third quarter 2009. And that did not count credit default swap debt held by the eight large German ‘Landesbanks’, the total of which was not reported.
The first Greek debt bailout that occurred in May 2010 was therefore not really about bailing out Greece’s government. It was about ensuring that German banks would not have to be bailed out if Greek banks and the Greek government failed to make required payments on their debt held by German and other northern core banks. It was about bailing out the banks.

As a former finance minister for Greece, Yanis Varoufakis, summed up the 2010 Troika imposed debt deal “more than 91 percent went to make whole the French and German bankers, by buying back from them at 100% euros bonds whose market value had declined to less than 20 euros”.

The Myth of Greek Wages as Cause of Debt

German-core apologists and economists—both then and today—like to argue that escalating Greek purchases of German-core exports was the consequence of rapidly escalating Greek wages, excessively generous increases in Greek pensions, excessive public employment hiring, rising Greek public workers’ wage, and overly-generous Greek government subsidies spending which freed up real wages to purchase the exports. It was true that Greek workers’ wages were 25% higher than German workers by 2008. But the differential was more due to German workers’ real wage compression relative to the Greeks’, than it was excessive Greek workers nominal wage hikes.

For example, average annual wages in Greece rose, but moderately, in the first half of the decade, until 2005. Thereafter, annual wages were stagnant from 2005 through 2008. The average annual wage for a Greek worker was at around 22k euros per year in 2005. Wages thereafter rose by only 238 euros from 2005 to 2008. That’s about 1%. After 2010 wages then declined sharply, due to the global crisis of 2008-09, falling annually to 21.8k euros annually in 2010. Wages would plummet after 2010, as austerity policies and a long economic depression became the norm in Greece.

What the record does show is that, while Greek purchases of German exports amounted to 289 billion euros in the four years from 2005 through 2008, Greek wages were stagnating and then declining. Greek purchases of German-Core exports could therefore not have been caused by rising Greek wages; it could only have been enabled by escalating credit and debt, a good part of which was eventually recycled back to Germany and others in the form of Greek household purchases of German exports.

Yet another way to deflate the myth that the Greek wages and consumer spending was the cause of the debt buildup is to consider household debt as a percent of GDP. According to Eurostat figures, in 2008 German household debt as a percent of German GDP was 55%. France was also 55% and Spain 80%. But Greek household debt as a percent of GDP was still lower—at 50%.

Private Debt was only the beginning, however. The flow of credit from German-Core north to Greece and the south, in order to buy exports from the German-Core north, was not the only cause of the total Greek debt build up. Sovereign or government debt would soon be added to total overall Greek debt.

From Private to Government Debt

Afflicting not only Greece but the entire global economy, the 2008-09 crash led to growing budget deficits in Greece as it did elsewhere globally. As in all deep economic contractions, Greek tax revenues fell sharply and government spending on essential ‘safety net’ programs rose. Private sector banks and businesses also required more government subsidies, more business tax cuts, and thereafter bail outs beginning 2008. All that meant more government borrowing and thus rising government debt as well. So the deep contraction of the Greek economy in 2008-09 represents a second major cause of the rise of Greek total (private plus government) debt.
Greek sovereign debt as a percent of GDP rose by only 13%–to 113% of GDP—over the four years from 2005 to 2008. But, as the 2008-09 recession hit hard, Greek debt in 2009 alone accelerated 17%, to 130% of GDP. Clearly the harsh recession and rising deficits caused by falling tax revenues and rising social spending was largely responsible for the 17% jump in government debt.

But government debt rises not solely as a result of a slowing economy that creates deficits and a rising volume of borrowing. It can expand as well as a consequence of rising interest rates on that accumulating debt. As Greek sovereign debt grew in the course of the 2008-10 crisis, global financial ‘vulture’ speculators—i.e. shadow bankers like hedge funds, asset managers, fund managers, investment banks, etc.— flocked in and drove up the cost of Greek government bonds. That increased Greece’s debt financing costs, driving up sovereign debt levels even further.
Debt from government bond speculation thus piled upon government debt incurred from deficits due to the economic crash of 2008-09, which piled upon debt from imbalances in exports and money (credit) flows to Greece. Debt is insidious. It develops multiple ways and begets itself.

The ECB could provide more credit (debt) to the Greek central bank, to lend in turn to Greek banks and businesses requiring bailout. But the ECB could not directly lend to governments to refinance their government debt. German rules set up in 1999 and soon after prohibited this, and German and its majority faction on the ECB’s governing board of represented Eurozone central banks enforced the practice. So what EuZ institutions apart from the ECB could extend credit to the Greek government—i.e. provide credit to make payments on its previous Greek government debt?

The International Monetary Fund was one possible source. But the IMF’s long standing policy is not to provide funding alone. Other institutions would have to participate in any government ‘bail out’ loan package. So too would the economy in question have to ‘put some skin in the game’, so to speak, before any IMF lending agreement. That is, Greece would have to cut spending, raise taxes, sell off public assets, or whatever in order to generate a surplus budget to ensure debt repayments on the loan package would be ensured. The ECB could not bail out Greece’s government debt. The IMF would not alone and only in part. Where would the rest of the lending come from then? From the third member of what would be called the ‘Troika’, in this case the European Commission, the pan-Eurozone fiscal governing body.

When the Greek government’s debt load continued to grow due to the deep 2008-09 crash and lack of robust recovery 2009, plus rising interest on the growing debt due to speculation in government bonds, Greece had to obtain further credit somewhere. Eurozone fiscal (German) rules also set up in 1999 did not allow a Eurozone member government to run budget deficits more than 3% of annual GDP. Just as Eurozone member states could not exercise any independent monetary policy to boost exports, they could not engage either in fiscal deficit spending beyond a very narrow range up to 3% of GDP.

Government debt also rose as a consequence of Troika debt restructuring. In exchange for a new, restructured debt and loan, a member government had to make a clear commitment as to how it would repay the new (plus old) loans and debt. And in an environment of slow or no growth, with a 3% deficit cap, that meant debt repayment at the expense of government spending reductions and tax hikes and public works and public asset sales—i.e. from fiscal austerity. Yet fiscal austerity leads to still further slowing of growth and the need for still more debt borrowed in order to service prior debt.

This was still not the entire picture with regard to causes of government debt escalation. As the Greek debt crisis ‘matured’ from late 2009 on, and concern over government debt and potential default spread to Spain, Portugal, Italy and other periphery economies, the value of the Euro currency in declined. This meant, for Greece, that it would have to borrow more—i.e. increase Greece’s government debt—because the Euro would now buy less given its decline. Greece would have to issue more Greek government bonds—i.e. raise debt even further—to obtain the same amount of money from bond sales.

And there was yet another related debt issue. With the Eurozone and global economy not recovering much from the 2008-09 global crash, Greece was earning far less from exports sales than before. That meant it had less income with which to make its payments on interest and principal on prior debt. Debt crises are the result of not only excess debt but of insufficient liquid income available necessary to ‘service’ (i.e. pay principal and interest) that debt; also, the terms and conditions under which debt servicing is arranged.

Greece’s government debt crisis, which erupted in late 2009-early 2010, did so due not only to the rising debt levels caused by the recession of 2008-09 and the intensification of speculation on Greek government bonds, but also due to the fall in the euro’s value and the lack of Greek export income and flow of funds into Greece from northern banks and investors that occurred with the banking crash of 2008.

In short, in addition to private debt, there were multiple causes behind rising government debt after 2008: in addition to private debt from money capital inflows there was

• government debt due to the 2008-09 global economic and banking crash and lack of normal economic recovery in the aftermath;

• there was government debt increase due to global financial speculators driving up the cost of Greek bonds in 2009-10;

• there was government debt rise as a consequence of fiscal austerity measures imposed on Greece by Eurozone ‘Troika’ members as part of the debt restructuring of spring 2010;

• and there was additional debt caused by the decline in the euro currency itself at the time.

The German Origins of the Greek Debt

Greek private debt escalation is tightly correlated with the arrangements described above, by which massive credit from German and northern core banks (enabled by the ECB) flowed into Greece to finance German export purchases by Greece. German origins of Greek government debt was more opaque. It originates in German insistence in early 2010 that Greece solve its own debt problems, which was an invitation for global speculators to drive up Greek bond rates and therefore debt. It also originates in the dictating by German and allied core bankers of the severe austerity terms imposed on Greece in the eventual May 2010 first debt deal.

Data shows that the escalation of Greek private sector debt occurs only after 2004. Private debt to purchase German-northern core exports escalates beginning 2005. Greece’s trade deficit with Germany and Greek private sector debt is thus highly correlated with the structural reforms implemented by Germany circa 2005. Greek government, or sovereign, debt thereafter only begins to escalate 2008-09, correlated with the global economic crash and the government bond speculators that followed.

Between 2005 and 2008 German exports to Greece almost doubled, from roughly 54 billion to 92 billion and amounted to more than $250 billion by the time of the first Greek debt crisis in 2010. During the same period, Greek exports to Germany rose from only $17 billion to $20 billion, for a total of $112 billion. Greeks were buying far more German goods and boosting German GDP than vice-versa. Greece therefore had to ‘borrow’ $138 billion from somewhere to pay for the difference. That borrowing, and thus debt, flowed directly from German and northern Europe banks, from Greek banks ultimately owned or provided capital from German and other northern Banks, or from Greek banks that borrowed from northern banks. Germany and the ‘core’ got export-driven growth; Greece got German imports and in turn also got an ever-rising pile of debt.

Greek private debt is thus a phenomenon of the post-2004 period, a point which corresponds to Germany’s ascendance to a position of intra-Eurozone trade dominance, and a period of German and allies’ dominance of the ECB, culminating with Germany’s blocking and/or limiting ECB money capital loans to the Greek government after 2008 needed to service its debt.

Stuck with the Euro single currency, Greece could not compete with the German-northern core export juggernaut after 2005, by lowering their own currency exchange rates to devalue their own currency. The euro was now the currency and Germany controlled its fate through its faction on the ECB. Greece had only one vote in 17 in the ECB. Greece was further hamstrung with regard to fiscal policy, prevented by additional rules that required a Eurozone member country to run deficits of no more than 3% of GDP. Nor did Greece, or the other periphery economies, launch their own ‘internal devaluation’ via labor market reforms to compress wages and the cost of their own exports. That would be embedded later, in the austerity packages of debt restructuring imposed upon them.
In short, Greece—like the other periphery economy members—in effect gave up any sovereignty with regard to monetary policy, and for all but a narrow scope of action concerning fiscal policy, when it accepted the Euro as single currency, the ECB as its central bank, and the 3% deficit rule. Germany and its northern allies now indirectly controlled decisions concerning those parameters—as well as the ability to impose penalties on those periphery states like Greece attempting to break ranks.

Both Greek economic growth and Greek government debt during the decade 1995 to 2005 was no more excessive or unstable than other Eurozone economies at the time. Greek GDP in 1995 was equivalent to 110 billion euros and had doubled to 200 billion euros by 2005. After growing by nearly $100 billion in the 1995-2005 decade, Greek GDP rose only by $25 billion in the five year period 2005-2010. Greece’s sovereign debt to GDP ratio in 1995 was 97%; by 2007 it had risen to only 107%. But by 2009—in the wake of the 2008-09 crash—government debt rose to 130% of GDP and a year later, in 2010, to 148%. The surge in government debt was thus clearly a consequence of the 2008-09 global banking crash and deep recession, the speculation on Greek government bonds by ‘vulture’ shadow bankers and investors, and the debt terms imposed on Greece by the Troika itself.

What happened around 2005 on the private side, and then after 2008 on the public side, and immediately after thus provides the true explanation for Greece’s debt acceleration and the debt crises that began to erupt in 2010. What happened was German and ‘core’ banks plowed credit and money capital into Greek banks and businesses. In addition to bank provided money capital, German private foreign direct investment (FDI) into Greece also rose from 1.4 billion euros in 2005 to more than 10 billion by 2008. As the money and capital to Greece was recycled back to Germany and the northern core economies in the form of exports, Germany got business profits, economic growth and its money capital returned to it. In addition, as financial intermediaries in the recycling of money capital, both core and Greek banks got interest payments from the Greek loans and Greek bonds. Greeks got German and ‘core’ export goods for a few years, but loaded up on credit and debt in the process for what appears will remain an interminable period of debt repayments well into the future.

German-Core provided money capital, credit and debt-fueled export binge after 2005 hobbled Greece’s real economy, to put it lightly. The problems were covered up so long as credit flows from the northern core continued and economic growth in Greece up to 2008 continued. But once the credit flows, and income from economic growth, collapsed in Greece the growing mountain of private debt could not be ‘serviced’—i.e. paid. Greek banks, and northern banks operating in Greece, then experienced massive losses requiring bailout. The first casualty of the excess private debt run-up were the banks. The 2010 debt restructuring would be all about bailing out those banks and northern core Eurozone investors, institutional and individual, as well as non-Eurozone global speculators. In bailing out the banks and investors, their private debt would in effect be ‘transferred’ into Greek government debt. The Greek debt crisis thus may have originated ultimately in the German-northern core, but it would be dumped on the Greek banking system at first, to be eventually dumped thereafter to Greek taxpayers and especially Greek workers who would be required to ‘pay the bill’ through various fiscal austerity and de facto labor market reform measures imposed on Greece by the Troika. German-northern core gain thus became Greece and Greek workers’ pain.

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