My last post (in which I suggested that Greece will never be pushed out of the euro) generated a spirited debate with readers and friends who chipped in their views on this and related matters. Rather than allowing these exchanges to stay within the margins of the previous post’s Comments section, I reproduce them here as a fresh post. Enjoy! (And do comment further if you will.)
Brother – Two details appeared in the FT article published Sunday night, which you leave off: (1) the IMF imposed its own condition – withholding its next payment tranche unless Athens has a credible plan quote-unquote for the next 12 months; (2) that as much as half of the new financing needed in the period through end-2013 will come from readjusted terms for existing creditors.
So the IMF plays the role of “heat” or “heavy” – ‘he’s crazy and he has a loaded gun’. And there is a quiet haircut in the to-be-negotiated terms. Democracy in action?
YV’s reply: Brother Gary, I never thought the moment would come when I would defend (even for a passing second) the IMF but, alas, it has come: What its hapless functionaries have said makes perfect sense: They cannot hand out more money to Athens in June 2011 as part of a multiple year support project (the purpose of which is to prevent a Greek sovereign default) when it is, presently, clear that unless the EU comes up with a new funding formula for Greece, the country will deafult in 2012 even if it receives the IMF’s funds now. Effectively, the IMF is telling the Europeans: Guys, get your house in order. When and only when you do can you expect more money from us. Reasonable, don’t you think? As for the FT report concerning the need for ” readjusted terms for existing creditors” this is yet another euphemism for a debt restructure. This is right too. What the FT is reporting, in an admittedly candid manner, is that the EU cannot have its cake and eat it. If it does not find a way to unify part of the debt mountain weighing the eurozone’s periphery down (e.g. by issuing a eurobond, as we suggest in the Modest Proposal), the debt is so enormous that it will have to be restructured (however powerfully the ECB is kicking and screaming). While none of this is part of an IMT-Financial Times drive toward greater democracy, it is at least a position not totally devoid of logic. In sharp contrast, the EU’s position and practices are both undemocratic and idiotic…
I agree with every point in the chain of events of your catastrophic ‘ND’ scenario except with its starting point. The blackmail – which amounts to an Ultimatum reiterated with increasing severity at the end of every quarter whenever an installment (this time, the fifth) from the 110bn euro loan is due for approval by the troika – entails the certainty of a disorderly Greek DEFAULT the moment the scheduled installment is withheld. In other words, the Ultimatum on Greece (the first of such weight since 1940) is also an ultimatum on Europe, every time Mr Thomsen or Herr Stark gnash their teeth to the Greeks: “surrender to our diktat or default”. And no Greek government – especially one as compromised as the present one – needs to “bite the bullet” to slip into the abyss, merely for failing to meet impossible and self-defeating conditions set by its creditors. After the Armageddon of a Greek default and its global repercussions, which you have enumerated with astute precision, there will be no Euro left to lean back on, and no viable new drachma either.
Only some form of global fiat currency (the Ameuro or Eudollar?), based on a common denominator of grossly undervalued “hard” currencies is “predicted” to take their place amidst the ruins. But at the moment, it seems that the barons of high finance in Frankfurt and New York are not yet fully prepared to pull the plug simultaneously on Greece, the euro and some 60-trillion-dollar worth of toxic financial bubbles (including sovereign euro debt) left in dormant bank or hedge-fund accounts and CDS/CDO ‘exposure’ since the Lehmann Brothers debacle. But with every reissuance of their Ultimatum, they manage to eliminate one countervailing force to their plans after another (as they did with DSK and his pipedream of an SDR-based global reserve currency – and as they now threaten to do with the last remaining friend of Greece, Wolfgang Schauble, unless he stops mumbling about the need for a debt restructure).
At every turn, they also manage to extract full and unquestioned compliance from their erstwhile ‘free-thinking’ pawns, old and new (be it ECB bigshots or assorted wannabe IMF chiefs). So, unless a full-fledged European alternative (like your Modest Proposal) is pushed through with resolve and urgency, the countdown to your “incredible” catastrophic scenario will remain on the cards.
We can’t afford the complacency of thinking that it will not or – worse – that it never was. No wonder your M-P has already won some valuable new recruits in Belgium over this weekend. However, it needs a steering committee of public individuals and like-minded folks to lobby for it as widely, effectively and continuously as possible, instead of consuming themselves in semantic refinements or in rebuttals of the pro-troika and anti-euro crowds.
Start it off with Stuart, and we (I suppose Y-patia, Krimbas and myself at the moment) shall sign up to it unconditionally.
YV’s reply: Dimitri, I wish I could disagree forcefully with you. All I can is to present a feeble and half-hearted suggestion that there may be more nous in Frankfurt and New York than you acknowledge. But then again there may not…
Can anyone explain to me why the Modest Proposal does not cost the taxpayers of DE, NL & FI any money? I assume the interest rate at which the ECB would borrow will be above what DE, NL & FI pay today. So who pays the delta? There is no free lunch! “The market, like the Lord, helps those who help themselves. But, unlike the Lord, the market does not forgive those who know not what they do.” Warren Buffett
YV’s reply: Dear Knut34, Since you asked, let me explain: The ECB bonds that we envisage will sell at rates less than 3% and have no effect whatsoever on the rates at which DE, NL and Fl borrow. Why? Because international investors (e.g. Chinese Sovereign Wealth Funds) are desperate for good quality paper that can help them diversify away from US Treasuries. The ECB has a solid reputation and its bonds will be massively oversubscribed. So, in answer to your question “Who pays the delta?” let me say this (while agreeing entirely with the time honoured dictum that “there is no such thing as a free lunch”): The ECB acts as a go between international investors and Europe’s member-states, thus securing better terms for them but only for the part of their debt that is Maastricht compliant (therefore not raising moral hazard concerns). Two additional supprting arguments: (1) Even the highly problematic (almost toxic) EFSF secures extremely low interest rates when raising money to fund the ill-conceived bail-outs for Ireland and Portugal. (2) President Roosevelt utilised US Treasury Bills in order to finance recovery not by lending money to the different states (or having California guarantee expensive loans for Illinois) but by using the US’ clout in the international markets to act as a lever of investment and recovery. Permit me to say that your thinking could do with a Gestalt Shift…
The problem with the Euro is very much deeper than any will admit for the very simple reason that in ALL circumstances; there is simply insufficient free money in circulation to enable the redemption of the issued value of the leverage imposed upon the savings. The problem is value, not debt. http://www.itulip.com/forums/showthread.php/17889-We-need-a-Truth-of-Value-Reconciliation-Commission?p=184064
YV’s reply: You are certainly onto something. However, I would put it slightly differently: Debt is a means by which to transfer value not already produced from the future into the present. Presently, we have tried to transfer too much to the least productive (e.g. to the financial sector), the result being that existing capital does not find the return that would justify its existence. Thus the Crisis…
I think the bulk of problem must come from Greece nation otherwise implications on Eurozone as mounted today will be substantial. In a 5-7 year period with right composition of measurements to be taken Greece can come out strengthen and credit worthy with house balance in order. I refer to recent article in WELT ONLINE: “Was die Griechen von den Deutschen lernen sollten” Conclusion: Restore Financial stability and good housekeeping key efforts to regain International confidence for Eurozone. Political consensus from Greece on action plan “To be or not To be”? (Active Trader)
YV’s reply: Dear Lennart, the whole point is that Greece cannot do this. No matter how hard a national economy tries to reform itself, and bring its finances in order, when caught in a vicious triple crisis (debt-banking-recession), without even having the capacity to devalue its currency, the only way is down, down and further down. And since (if my post was accurate) Greece cannot (even if it wants to) exit the common currency (without bringing it down with it), the “bulk of the problem” does not fall just on Greece but is shared by the whole of the eurozone. In short, I have some terrible news for you: Greece’s problems cannot be decoupled from those of the rest of the eurozone. But such is life in any currency union. Moreover, it works both ways: A country whose long term growth depends on maintaining large trade surpluses with its partners is as much a problem for a currency union as one that is generating chronic deficits…
I completely agree that the scenarios you paint are the ones that would occur, and you described them. But…if the Germans responded as you say they would in para 7 above eg., by aiding Greece and recapitalizing their own banks, then they would be doing precisely what they would be trying to avoid and thus pushing Greece out. If they are willing to do what you say, it would not be necessary for Greece to leave.
YV’s reply: Precisely Jerry! Thus, the only issue that is now taxing the best and the brightest in Berlin is how best to keep the show on the road, and in particular how to deal with what I call the Great Banking Conundrum…
Furthermore, any eurozone country exit from the euro is not just an exit from a monetary union. The Euro is part of the EU institutional framework although not all the EU countries belong to the eurozone. As explained by Luigi Spaventa in MIlan’s Il Corriere della Sera last year, exit from the eurozone entails an exit from the European Union. This eventaulity is totally opposed also by Germany, unless… something is changing there also in relation to the EU as such.
YV’s reply: This is a crucial point. Joseph is highlighting the political defeat for the very idea of a European Union that a gradual dismantling of the eurozone will trigger. Germany is (or ought to be) painfully aware of it. Otherwise a postmodern 1930s will dawn upon a continent that ought to know better.
If they only wanted to solve the debt problem and keep the Euro down they could just adopt a simplified version of your Modest Proposal, isn’t it so? i.e. make ECB buy – in fear allegedly of a default – as much Greek and other ailing paper as possible, then write-off all of this tranche of debt, and avoid in this way any haircut on private investors and pension funds the ECB making itself momentarily insolvent. Through printing money it would keep the Euro exchange rate perhaps below parity with the Dollar as it would be re-capitalising itself by some form of Quantitative Re-plenishing (they like the Re- prefix in Europe…). But they will not do it before they see the last hospital they can close closed and the last orphanage take the orphans under the bridges for shelter…Am I so off the mark thinking they are just imposing incredible austerity and above all money transfers and that they are not playing (misguided) “constructive destruction???”
YV’s reply: I think it is important, as Europeans, to acknowledge each other’s fears and concerns. Unless we do this across Europe, there will be no European Union to save. In this sense, I may not share in the majority of Germans’ fear of the inflationary effects of dealing with the debt crisis in the manner of Ben Bernanke (quantitative easing, printing money, quantitative replenishment, call it what you will) but I think it is important to respect these fears. They are grounded both in history (the mid-war hyperinflation) as well as in culture (I believe that, unlike in the rest of Europe, where debt is known as credit – meaning trust or belief – in German debt and guilt are the same word). The whole point about the Modest Proposal is that it shows the way out of our current impasse while respecting these fears and pointing at ways in which Europe’s overall debt burden can be reduced without transferring part of it to German taxpayers.
I like Yannis’ reasoning and exposing of some unfounded statements. But I would not go down a slippery slope of accusing ‘they’ (who is the ‘they’) of deliberately trying to make people suffer in Greece. The problems of the country are largely of our own making. What I think Yanis and other people have been arguing is that the solution to the problem was misguided because it did not take into account the features of the Greek economy and society. having said this there is a lot to say about the Greek government lacking the courage to implement some reforms while carrying forward other reforms (e.g. what about opening up the famous closed professions), and about Greek citizens having become ostrich-like – many of us have dug their head deep in the sand and pretend they do not see the collapse coming. everybody is angry at the government and the creditors and the ECB etc. but forget to see what they have been doing wrong. but I do not want to open up again a rather old discussion. Let’s see what the future holds for us. I hope not the exit from the Euro. but I do not know what kind of ‘controlled’ ‘bankruptcy’ can there be??….
YV’s reply: Dear Anna, two responses:
First, the answer to your question “Who are they?” is terribly easy to answer: The leaders of the four surplus countries (Germany, Holland, Austria and Finland) plus the President of the pretend triple-A rated country (France). Do not get me wrong. I do not think they “have it in” for Greece or for the Greeks. What they have in their hands is a very hot political potato (of their own making, mind you): How to go to their Parliaments, only a year after the massive ‘bail-out’, and request another €60 billion on Greece’s behalf on top of the €110 billion secured on the basis of false promises of ‘ring-fencing’ Greece, of returning Greece to markets by 2011 etc. They know that, in their own political parties, cabinet, Parliament, there will be great resistance to the new loans. So, to overcome such spirited resistance in all four capitals, they must have some bone to throw at their own functionaries; something the latter can then throw at their own dispondent electorates to create the necessary consensus. As even the least qualified anthropologist knows, at such moments a little bit of suffering and scapegoating of the aid recipient goes a long way. The opportunity to report that the Greeks sold off in short order, and on the cheap, an electricity grid that it took generations to put together; the news that the Greeks gave up ownership of airports, ports, valued land etc. without any serious public scrutiny; the sight of a Greek PM in visible distress; a fast rising poverty rate in Greece; all these ‘news’ would carry enormous symbolic value in these Parliaments/cabinets/ electorates and might just help Mrs Merkel et al secure the loans that Greece must have to continue a little longer on the current unsustainable path.
Secondly, I am startled by your observation “The problems of the country are largely of our own making.” Let me reverse your own (earlier) question: “Who on earth are we?” Just like I would never generalise vis-a-vis the Germans or the Chinese for that matter (being a true believer in the proposition that there is more variation between a nation than across nations), I will be damned if I generalise about us Greeks either. The whole world, dear Anna, spent the past twenty five years digging, as you write, “their head deep in the sand and pretend they do not see the collapse coming”. We are all in it together. The sin is evenly spread across the whole planet. From California and Miami to the City of London and from today’s Shanghai to Athens: The global economy was living on the thin crust of a bubble (and a significant part is still continuing to do so – my recent visit in booming bubble-ridden Australia confirmed this). Returning to Greece, let us not forget that even before the crisis struck, official poverty rates were the highest (by far) in the Eurozone and only second (after Latvia) in the Europe of 27 nations. To portray Greeks, wholesale, as spendthrift over-reachers is to fall prey to the worst instincts of the tabloid press (and equivalent, in reverse, to celebrating Greeks as somehow superior to all others – a trait of Greek nationalists).
In short, if this crisis has revealed anything it is that Europe has failed singularly to look at itself in the Crisis’ unforgiving mirror, reflect and try to remodel itself in a manner consistent with its supposed interest in building a Union. Instead, it is indulging in scapegoating, generalisations and a beggar-thy-neighbour policy that can only lead to a postmodern Hobbesian war of all against all.
I agree with Anna. When the economy was “working” people were quite happy not to pay their taxes, work in protective professions or work in public administration. But since 2008 that model does NOT function. Greek society has to accept its role in the debacle and it must change its ways.
YV’s reply: Nor does the European model, I am very much afraid. Even if a cruel (or compassionate?) God were to erase Greece from the planet’s surface, the European crisis would continue. Think about it: If Ireland (which was a model country by your exalted standards; free of corruption, tax evasion etc.) is sitting on the same dock as Greece, there is something rotten in the Kingdom of Europe, don’t you think?