In the interests of fostering dialogue on the issues that matter, I welcome today’s blog entry from long time contributor (and regular critic of my scribblings) Jerry Goldstein. Jerry has a strong background in banking but, and this is highly pertinent, spends most of his time in Athens.
So the euro and the union is to be saved by means of international treaty rather than a tortuously negotiated revision of the existing EU “constitution”. The 3% of GDP and 60% of output will be agreed again, but will become cemented into place and supervised by a new guard dog , which will activate automatic penalties should they be breached – unless not. The penalties can be stopped by a qualified majority of the insiders. In short, it’s the old deal with more teeth, the sharpest of course, belonging to Germany and France, the very countries which tore the old arrangement to pieces. In any discussions leading up to the vote of the qualified majority, who can doubt that the two will be making their influence very much felt.
Question: will this solve the problem of funding the euro zone, assuming the legality of the inter-governmental treaty is even established. The answer is clearly – no. Specifically, statutorily – no.
First, the euro zone still lacks a central bank in the true sense of the word. Simply put, the ECB cannot engage in the operations necessary to address the whole range of possible adverse conditions which could develop within its monetary zone, and the stability fund has been ruled out as a borrower.
Second, the stability fund is just not big enough, even with the extra €200 billion of loans to the IMF. The €1.1 trillion of EU government loans coming due next year, taken with the amount the banks will need to meet their capital requirements, will create strains that seem simply overwhelming.
The fact that for over two years the world has been witness to the pusillanimous scurrying of what appear to be clueless elites struggling to deny what they are trying to address, baby stepping from one non-event (and press release) to the next, makes one wonder about even the wisdom of the 3%-60%.
Is it wise to tie a ball and chain around yourself, when instead of keeping one from doing harm, it might block running the very deficits one might need in a serious depression? Isn’t the 3% – 60% nothing more than a religious talisman, a head of garlic hanging in the doorway to keep the ghouls away?
Remember – all the other arrangements in the forthcomings treaties, the meetings twice a year and the penalties, do nothing to create a central Treasury, or a flexible, fully equipped central bank, capable of dealing with crisis.
Will Germany and France live with this 3%-60% talisman? Will not the qualified majority be arm twisted into submission? There is no strong edifice to come out of last week’s meetings. What has come is better that what existed before, but it’s still a real sleight of hand, one card tricksters and magicians use to divert attention from what their other hand is really doing. Which as yet, is more than unclear. All this of course assuming it’s determined that a treaty outside the EU can bind nations to acts within the EU.
Critically, In spite of the drum rolls and flag waving, none of this does anything for the countries near collapse now. How can you solve the problems of today by seemingly preventing the problems of the future? What future?
The only credible performer during a period such as now, when Italy, Spain, Greece, Portugal, Ireland, Belgium and even France are in play, is the ECB. And even then it will be necessary to mandate the ECB (or the EU itself) to be able to raise funds via what has come to be called a Eurobond; for the ECB to be unleashed to lend directly to governments, rather than open market operations it now engages in by lending against government bonds presented to it by the banks – themselves insolvent. For the moment, what we have is insolvent banks buying the bonds of insolvent or illiquid governments in order to borrow against them from a pseudo central bank whose hands are tied. Not good.
The fact is that Greece’s debt continues to grow every day, and will continue to grow every day not matter how perfect the arrangements created and formalized by the intergovernmental treaty.
Everything which how gone on to date (except for PSI which is still an ugly duckling yet to be hatched) is in fact, irrelevant to Greece. The Europeans have, like the military, fought the last war by creating tools for the next one. This one remains almost totally unaddressed.
What needs to be addressed is how Greece is going to get out of this mess. So far, the prescriptions would have done 19th century physicians proud. We’ve gone back to blood letting and the patient is getting paler by the minute. Taxes have been increased while salaries have been cut, payrolls have been reduced (even the Prime Minister became unemployed), pension reform has begun. There is talk (but no action) about other remedies, from opening up competition to reform of the judiciary.
Greece’s problems fall basically into four baskets. The first is the huge public and private debt that has been run up, the servicing of which is dependent on the good will of others. the second is the intractability of the public sector, including judiciary, not so much to reform (which is far too timid a word) as to total reinvention. The third basket is the current morphology of the Greek economy, imbalances one sees in the public/private sector relationship, the imbalances in investment/consumption/savings, export/imports, tax base and research/innovation. The fourth, which is not so much a basket as a world in itself, is the reshaping of the Greek civil mind set, the norms, ways of thinking, relation to civil society and the state, attitude towards ones fellow citizens, one’s civic obligations. My guess is the that second and third are impossible to take on, but even if possible, will take generations to improve.
None of the above begins to be addressed by what has been done so far.
The central conundrum is that Greece has to run primary surpluses to reduce its debt, and without that, the EU support, tranche after tranche, is simply making the day of reckoning slightly delayed, and more painful by allowing outstanding debt to increase. If compounding national debt now while Greece reforms itself is going to work, the problems described about have got to be taken by the neck and shaken like a dog with a rag doll.
Raising taxes, cutting incomes, culling the civil service, on their own will achieve nothing except economic regression, bigger debt loads as the economy contracts, an increasingly skeptical and detached population, and a political/social miasma that will deter investment, foreign or domestic.
Greece needs not only to address the negative side of what has to be done…cutting expenses and increasing the tax take, critically what has to be done, is to free the private sector. Greece has abundant entrepreneurial agents, abundant technical and creative skills, an abundance of intelligent, educated, energetic people. This has to be liberated, encouraged, barriers removed, risk taking encouraged.
But not only has almost nothing non-trivial been done , I hear of no discussion what should be done, except in the most general and insipid terms – motherhood statements – and nothing has been done. I hear of no plans; there has been no start.
Has any political leader or intellectual come out and actually described what Greece should look like in twenty years, in five years? Like Denmark? Maybe Hong Kong? Presumably not the US. What is the idea – what are we aiming for? What does Greece want to be?
Given that there seems to be no consensus on what type of society the Greek voter wants to emerge, given the almost unimaginable task of reshaping the entire economy and civil structure, from education, to judicial, legal, bureaucratic, the incentives and disincentives, one wonders how it can be done.
What is clear is that what emerged last week has no real bearing on the outcome for Greece, while the real work of creating a viable Greece has barely been discussed, let alone begun.