The krieg of nations

Two years ago, the IMF, the EU, and the European Commission agreed to lend Greece 110 billion euros, imposing onerous terms requiring the country to further cut public spending in order to reduce its debt-to-GDP ratio. The austerity measures have plunged millions into poverty, at the same time failing to tackle the country's structural problems. Greeks are angry, and feel humiliated.

British daily The Guardian interviewed Christine Lagarde, the French managing director of the International Monetary Fund, at the end of May. Asked about the impact of the drastic cuts in public spending imposed after the EU and the IMF took over the running of the Greek economy in return for bailing the country out - which have seen hospitals unable to offer basic services or doctors prescribe medicines - Lagarde replied by referring to Nigeria. She mentioned a run-down school in a small village where children receive just two hours basic education a day, and where there are three pupils for every desk. "I can't get those children out of my mind," she said, barely concealing her contempt, and adding: "because they need help much more than people in Athens do."

Lagarde later explained herself, and her arguments - had they been better expressed initially - are to a large degree convincing. But the IMF chief essentially seemed to be saying that the Greeks' woes are very much of their own making, and that the country's situation would be much better if people paid their taxes "as they ought to." She added that the IMF cannot be expected to treat wealthier nations like Greece differently to poorer countries when administering aid.

Her comments sparked uproar in the international media, and particularly in Greece. It was widely agreed that she had made a tremendous faux pas, although few arguments were put forward to counter hers. The French left limited itself to pointing out that Lagarde herself does not have to pay tax on her $467,000 salary. Largely overlooked perhaps was the possibility that Lagarde's comments were a response to the results of the general elections in Greece earlier that month, when large numbers of voters registered their protest at the IMF and EU by voting for fringe parties opposed to the austerity measures, and in some cases calling for an exit from the single currency.

In short, for a government to have to accede to harsh conditions in return for keeping its economy afloat is one thing; that a people should have to accept humiliating comments accusing them of being tax dodgers and mired in corruption, as Lagarde was seen to be doing, is something else entirely.

The way that Greeks voted in early May - although support for the fringe parties fell in the fresh elections that took place last week - illustrated that having their country's economic policy dictated by Brussels not only rankles, but carries with it a moral stigma. What's more, in the two years since the IMF, the EU, and the European Commission agreed to rescue Greece, imposing deep cuts in public spending and cutting jobs in the public sector in the process, the economy has gone from bad to worse, while health and education have suffered particularly.

Germany suspects euro-zone countries will not comply without a noose around their necks"

The public health system has been run down to the extent that there are no midwives in the hospitals, and many among the sick are being denied medicine and treatment. Unemployment has risen to 22 percent, and sits at 50 percent among the young. Meanwhile, the goal of fiscal consolidation - reducing the debt-to-GDP ratio - as demanded by German Chancellor Angela Merkel, is no nearer.

The reality of the situation is that what Greece saves on public spending or civil service paycuts is simply being used to finance its debt, a process that perpetuates the same vicious economic cycle that led it to the point where it needed the EU to intervene. At the same time, the collateral effects will be felt for many decades to come: the structure of public debt has long since passed the point of being simply unjust and unequally distributed, and will require future generations of Greeks to foot the bill without resolving any of the problems of the present.

The victory of François Hollande's Socialists earlier this month in legislative elections brought an end to France's support for Merkel's austerity measures, and possibly marked the beginning of a shift away from cutbacks and their consequences, intentionally or otherwise. But why is Germany so determined to persist with a policy that has so far proved unsuccessful in reducing Greece's deficit, and is wreaking havoc with the country's economy and the lives of its people?

"The German government suspects that the euro-zone countries in difficulty will not do what they have to do unless their necks are in a noose," says Maurici Lucena, an economist and former member of the previous Socialist Party administration in Spain. "It might be right, but it is a dangerous strategy." Lucena fears that the German approach could bring about the collapse of the euro, regardless of the result of Greek elections last week.

On Thursday a new cabinet was sworn in, putting an elected government in charge of the country for the first time in 224 days. The new governing coalition is made up of three parties: the center-right New Democracy, which placed first in Sunday's vote; Pasok (socialists); and the Democratic Party of the Left.

New Democracy lawmakers dominate the 38-member government, with only a handful of representatives coming from Pasok and the Democratic Left.

Harsh measures are setting off a chain reaction in other weak economies

The administration has pledged to push for a renegotiation of some of the painful austerity measures imposed under the terms of an international bailout, but it faces significant challenges. The country is struggling to get out of the political and financial mire that threatens to drag down Europe's common currency and spark a new global financial crisis.

Germany and the IMF have indicated that they will show patience with the new Greek government, at least until September, basically because any alternative would be far more radical and anti-European.

The incoming leadership will continue to implement the IMF's restructuring program, which means that for the foreseeable future the situation in Greece will continue to worsen. There has also been no decision about how the new administration will actually deal with the immediate problems of acute poverty in parts of society, and problems of tax collection.

The country must identify additional budget cuts by the end of June to be considered compliant with the terms of its bailout.

Greece will attend a summit of European leaders in Brussels next week determined to push them to renegotiate the terms of the country's bailout, most likely by extending the timetable for certain elements.

"The economic model has changed," says Lucena. "Europeans are now part of monetary union, and the sense of humiliation that an intervention by Brussels in a country's economy provokes comes from not having fully understood the reality of the new situation," he adds.

The intervention in the Greek economy is a sign of internal devaluation"

If Greece considers it denigrating to have its economy taken over, this must be to some extent because Germany has made it abundantly clear that it does not entirely trust some members of the European Union to handle their economies in a manner that it regards as being fit. That mistrust is seen by countries like Greece as inappropriate among supposedly friendly fellow members of a bloc that is still in pursuit of political integration, and dreams occasionally of a federal Europe.

But the stark choices of austerity measures and ceding economic policy to the IMF, the EU and the EC go far beyond gestures and require long-term commitments that are in open contradiction of the way things have been done so far in building a new Europe. Monetary union, the main achievement in a long and arduous process, has suddenly become a rat trap in which the demands of the wealthier members are imposed on the poorer states without discussion.

"The intervention in the Greek economy is a sign of internal devaluation," says Jorge Fabra, who helped set up Economistas Frente a la Crisis (Economists Against the Crisis), inspired by a French group of economists in the run-up to the elections there in May, and which aims to fight the austerity policies being pushed through by Germany. Fabra and his colleagues argue that there are alternatives to austerity, but that they are not being discussed because the EU has effectively become a battleground between those who want it to extend and deepen social policies, and those who want to dismantle the welfare state - or, at the very least, cut it back.

He defines "internal devaluation" as: "privatizing public services and cutting social spending," at a time when they are needed more than ever. The humiliation felt by countries forced to choose between extreme austerity and intervention is the result of a perception that they are no longer exercising any choice, because they are options imposed from outside that must be obeyed by whichever party wins elections. The European social democratic project is being undermined, while conservative parties suddenly find themselves overrun by populist and extreme rightwing groups.

During the 1930s, some countries systematically used currency devaluations to undermine their neighbors' economies. This is clearly not the goal of the austerity programs being imposed under the threat of intervention. But it is the actual result of the huge differences between euro-zone member states when it comes to financing their debt while being forced to apply a uniform policy in doing so. Merkel backs her approach by arguing that a decade ago, when most countries in the euro zone were running up huge debts and inflating a construction boom that would collapse in 2008, her country's governments were applying austerity policies, with the outcome that Germany's economy is now the strongest in Europe.

Nobody would question the Germans' moral authority to have their opinions heard on how best to manage the crisis, but they may well be losing it by pushing the euro toward the abyss, while overseeing the sudden plunge into poverty by the more fragile economies of the single currency.

In the first place, because, as Fabra and Lucena point out: "accidents happen." The fiscal consolidation that the Greeks, the Spanish and the Italians are being forced to pursue is not taking place under the same economic conditions as those of a decade ago, nor are they being undertaken with anything like the same speed or scope. Secondly, because harsh austerity measures are setting off a chain reaction in other vulnerable economies in Europe facing difficulties in financing their debt that Germany can no longer ignore in Europe's interests, as well as its own.

Greece is a small country; it is not a world power, as Germany was a century ago. What's more, nobody believes that the political consequences - despite the seven percent of the vote garnered in the first round of elections by a neo-Nazi party - are currently a threat. But Greece is not alone: Ireland and Portugal's economic policies are also being dictated by the IMF, the EU and Brussels; and who knows whether Spain or Italy, where austerity measures are not making any impact on reducing the debt-to-GDP ratio, will be able to resist intervention in the coming weeks and months.

Of course, we've been here before, and nobody knows that better than Germany: "The policy of reducing Germany to servitude for a generation," wrote John Maynard Keynes in 1919, "of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable - abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilized life of Europe."

Despite the warnings, at the end of World War I, the victors - France, Britain and the United States - chose to make Germany pay for the cost of the conflict, despite its already ruined economy, leaving successive governments there with no option but to follow policies dictated by outsiders. The Germans' sense of debasement is the same as that sweeping through some European nations today, even if the situation then and now is markedly different and the roles have been reversed.