Economic history a nightmare from which Greece is trying to escape

Alexis Tsipras has now become Greece’s very own Ramsay MacDonald.

MacDonald, the first Labour party prime minister in the UK, came to power, briefly in 1924, then again in June 1929. That November, the US stock market suffered a rout that precipitated the Great Depression – Black Tuesday.

The Labour Party at that time had no better idea of how to stave off depression than the opposing right-wing parties that preached fiscal retrenchment in the face of crisis. Philip Snowden, an evangelising Scottish Socialist and MacDonald’s chancellor of the exchequer, demonstrated a fiscal rigour that could make Wolfgang Schäuble blush.


So-called “experts” recommended drastic cuts to public sector wages and welfare spending. This split the Labour Party – just as last week’s bailout deal split Syriza. Greece’s creditors, demanded, among other things, cuts to public sector wages, and the phasing out of a top-up payment to Greek pensioners on low incomes.

For parliamentarians who, as trade unionists, had spent their lives pushing for higher living standards for the working classes, the idea of launching dramatic assaults on pensions and public sector wages was unconscionable, and they refused to vote in favour of the measures.

Here is a quick test: did the last paragraph refer to the Labour Party, or to Syriza?

Prime minister MacDonald did not, in the euphemism of the time, “command the confidence of his cabinet”, and resigned. He then formed a National Government with the Labour Party’s arch-rivals, the right-wing Conservative party. The government took an axe to the state, thereby prolonging the Great Depression.

Mr Tsipras has reshuffled his cabinet, and appears to be preparing the ground for a snap election this year. He has relied on the support of Greek conservative parties including New Democracy to get the austerity measures through.

“I was blackmailed, there were no good options and I chose the least bad. The MPs should recognise this and accept the same choice,” Mr Tsipras told politicians before the vote.

Mr Tsipras and MacDonald have been forced into the same bind: ordered to cut the state in a time of depression by experts trained in classical economics, as they were in the 1930s, and in its modern-day liberal equivalent, as espoused by Mr Schäuble and the Troika – the tripartite committee led by the European Commission with the European Central Bank and the IMF.

And so MacDonald, the avowed Socialist who wrote, in his 1906 treatise Socialism and Society, that “society exists for mutual aid” and that “poverty … is not merely physical but mental and moral”, presided over the largest secular increase in poverty that had been seen in more than a generation.

John Maynard Keynes, who found the time to be a Liberal party parliamentarian alongside his part-time careers as an academic, fund manager and pamphleteer, urged MacDonald to abandon the Gold Standard, which pegged the British pound to a fixed exchange rate. When the exchange rate was set too high, exports were uncompetitive, and economic growth was slow. MacDonald did not devalue.

Paul Krugman, a renowned Princeton economist in the tradition of Keynes, has argued that if Greece were to leave the euro zone, a devaluation would not impose the level of apocalyptic harm Grexit jeremiads have warned against. Membership of the euro functions as a fixed exchange rate peg in exactly the same way as the Gold Standard did. With Greece’s economy producing more expensive products than its euro-zone competitors, its exports are uncompetitive, and economic growth slower than it could be.

Yanis Varoufakis, Mr Tsipras’ former finance minister, considered the idea of leaving the euro and launching a new currency, but was adamant that the Greek civil service lacked the expertise to introduce the drachma.

Keynes believed that Winston Churchill, the Conservative chancellor who introduced the Gold Standard in 1925, was trying to force a recession on the UK to lower wages and prices. He imagined advice given to Churchill by his civil servants in his pamphlet, The Economic Consequences of Mr Churchill.

Keynes imagined Churchill’s advisers as saying: “We ought to warn you that it will not be safe politically to admit that you are intensifying unemployment deliberately to reduce wages. Thus you will have to ascribe what is happening to every conceivable cause except the true one.”

Mr Krugman argues that the European Central Bank tightened monetary policy during 2011 to cater to the German desire for low inflation. But by aiming for low inflation – and low wage growth – in Germany, the ECB imposed additional, unnecessary deflation on Greece.

The former president of the European Central Bank Jean-Claude Trichet, after the fashion of Churchill, never said in public that he was intensifying unemployment in Greece to reduce wage growth in Germany.

The UK lost an estimated 25 per cent of its economic activity during the Great Depression. Greece has lost more than 20 per cent of its output since 2010.

The UK’s debt-to-GDP ratio rose from 127 per cent in 1918 (meaning that for every £1 of output, the UK owed £1.27 of debt) to 179 per cent in 1933. Greece’s debt-to-GDP ratio rose from 113 per cent at the start of 2010 to 174 per cent this year.

Economic history is a nightmare from which Greece is trying to awake.

abouyamourn@thenational.ae

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