Greece’s slide into depression became a cautionary tale told by Tories to get the UK to do its austerity duty. But a decade on, where there is now hope in the Aegean there is division here. Frances Coppola looks into the dark.

The twenty-first century is leaving its troubled teenage years behind. The deepest global recession since the 1930s is only ten years old, but already it seems a lifetime ago. And yet it has left deep and lasting scars. Even if the 2020s end up being calmer – which is by no means certain – things will never be the same again.

Ten years ago, the news was dominated by Greece’s growing debt crisis. On 8 December 2009, the ratings agency, Fitch, downgraded the Aegean country’s sovereign debt. The Greek stock exchange crashed, falling 6% within minutes. As the shock rippled across Europe, other stock markets followed suit: in London, the FTSE 100 fell 1.65% while the pan-European FTSEEurofirst index slipped 1.5%. Amid fears that Greece might be about to default on its debt, threatening the integrity of Europe’s single currency, the Euro sold off, falling against all major currencies. It was the beginning of what in Greece is now known as “the decade of crisis”.

In the first half of 2010, Greece’s government embarked on an ambitious programme of spending cuts and tax rises to bring its ballooning public deficit under control, triggering strikes and social unrest across the country. But the deficit continued to rise. In May 2010, it received the first of what was eventually to be three sovereign bailouts.

Greece’s crisis dominated the decade. And it set the stage for what, with hindsight, were catastrophic policy errors by Western governments – and particularly, by the UK.

By the end of 2009, bank bailouts and a 6% fall in gross domestic product (GDP) had raised the UK’s public deficit to 10% of GDP. The Conservative Party fought the May 2010 election on a platform of austerity measures, warning that if the UK did not reduce its deficit substantially it could end up “like Greece”. The Conservatives didn’t win an outright majority in that election and were forced to enter into coalition with the centrist Liberal Democrats. But they nevertheless went on to enact deep front-loaded spending cuts and tax rises.

“The economic metrics show that the Coalition’s front-loaded austerity was a mistake.”

Many economists at the time warned that these measures would squash the UK’s fragile recovery. They were right. In 2010, the UK economy was bouncing back from the crash. But as the Coalition government’s austerity measures started to bite, it flatlined. Ten years on, the growth path for the economy has not returned to the trend of the previous 40 years. Wages and productivity remain below their 2010 level.

The economic metrics show that the Coalition’s front-loaded austerity was a mistake. But the myth that the Conservatives created to justify it is still believed by many on the right of UK politics. Recently, on the BBC’s flagship Politics Live programme, a young MP, Chris Philp, claimed that austerity was “necessary” because in 2010 the UK was “on the verge of bankruptcy”. Chris Philp wasn’t even in Parliament at the time: he was first elected in 2015. He has been taught a myth.

Why do I say this is a myth? In 2010, the UK’s deficit was not much less than that of Greece, and few would dispute that Greece’s experience over the last decade has been one of near-bankruptcy. Greece’s debt was restructured in 2012, with private sector creditors taking substantial losses. Despite this, it still has one of the largest debt piles in the world, and there continue to be questions over whether it will eventually default on its debt again.

But the UK is not Greece. It was never at risk of bankruptcy. The UK issues its own currency, and its sovereign debt is denominated in its own currency. Greece, in contrast, is a member of the Euro: it does not issue its own currency, and its sovereign debt is denominated in a currency it does not control. Greece can literally run out of money, and its sovereign debt can – and was – rejected by financial markets. The UK cannot run out of money it creates, and if financial markets reject its debt, it has a central bank that can support the price. In reality, there was never any indication that financial markets would do anything of the kind. If anything, throughout the period of Conservative austerity, financial markets were clamouring for the fiscal taps to be turned on to relieve a desperate shortage of high-quality sterling debt assets – a shortage partly caused by the Bank of England’s asset purchases, upon which the Coalition government relied to offset the damaging effect of its unwise fiscal consolidation.

“Creating a myth for political purposes is like deliberately starting a fire in a tinder-dry forest.”

Why did the Conservatives insist upon fiscal austerity in the aftermath of the deepest recession since the 1930s? The myth that the UK was on the verge of bankruptcy was repeatedly debunked. And so was the myth that fiscal austerity would kickstart growth. It is hard not to conclude that the Conservatives propagated these myths to conceal their real agenda, which was to shred the welfare state and hack back the size of the public sector. Small-state ideology took advantage of post-crisis economic myths.

But Greece too has been the victim of myths. Yes, it really did face default, and probably Euro exit and hyperinflation. But the size and nature of the austerity imposed on it by its creditors was extremely damaging. As its GDP collapsed, it was forced to impose more and bigger tax rises and spending cuts, triggering further falls in GDP. The result was the longest and deepest depression experienced by any Western country since the 1930s. Greece’s GDP fell by as much as the US’s in the Great Depression, and it has taken longer to recover.

Now, at last, there is recovery in Greece. Banks are lending to businesses again, property prices are rising, and investment is returning. The Athens stock exchange has just reported 47% growth in market capitalisation in 2019, the best performance in the Western world. But households still have no money, and unemployment is still very high, particularly among young people. A whole generation is paying the price for the policy mistakes of their elders.

“The British have a long history of creating myths about other nations that in reality are stories about themselves.”

The UK has not suffered the deep depression that was Greece’s fate. But ten years of stagnation have caused growing anger against what is seen as an out-of-touch and corrupt “establishment”, which, in the minds of those obsessed with “national sovereignty” and desperate to “take back control”, is epitomised by the European Commission. In 2015, the third phase of Greece’s crisis sharpened and focused British attention on the European Commission as the “architect” of misery. Many British people mistakenly saw the resounding “No” in Greece’s referendum as rejection of the EU, and the fact that Greece then remained in the EU as betrayal by its Socialist government. The Greek people themselves don’t see it like this. But the British have a long history of creating myths about other nations that in reality are stories about themselves. This is the latest in a very long line.

Myths are useful political tools. UK politicians successfully blamed the EU for their own policy errors. But creating a myth for political purposes is like deliberately starting a fire in a tinder-dry forest. The fire spreads to places they did not intend, and they themselves may be burned. In the 2016 referendum, the people of the UK delivered their own resounding “No” to the EU – and to the prime minister who had staked his political career on that referendum. Now, those who believe the myth of the “evil uncaring EU” are doing their level best to ensure that a Socialist government doesn’t betray them as – in their minds – the Syriza government did to the people of Greece.

As the new decade dawns, there is renewed hope in Greece. But in the UK, politics is polarising between a nationalist Right and a Socialist Left, while those who try to remain in the middle are in no-man’s-land, shot at by both sides. The demons of the 1930s are back. The future of the UK is dark and uncertain.

Frances Coppola

Frances is a writer and commentator on banking, finance and economics. Her blog Coppola Comment is widely read and her writing has featured on the Financial Times, City AM, The …

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