From Ponzi Growth to Ponzi Austerity

Austerity is meant as a belt-tightening exercise the purpose of which is to reduce debt. Pure and simple. Of course, for austerity to work one of the following two conditions must hold.

One is that you are imposing austerity on your country (i.e. hefty reductions in the public sector’s expenditure) at a time when your trading partners are growing fast. This is how Canada’s austerity (and also Scandinavia’s, even Germany’s) succeeded in the mid-1990s: the losses of public sector jobs and expenditure were immediately replaced by private sector jobs and private demand caused by the rapidly grown American economy next door (and, of course, the rest of the world that was on a growth spurt at the time).

Another scenario under which austerity might work is if, while the rest of the world is not growing robustly, austerity coincides with the creation of large bubbles within the private sector of one’s own country. This was the case of the Thatcher and Reagan Economic Miracles in the 1980s: A boom period predicated upon a growth wave underpinned by two major bubbles; one in the real estate market and one in finance.

In short, austerity can work well either against the background of a healthy global economy or of internal Ponzi Growth. Come to think of it, the two cases may, indeed, be one and the same. For the Canadian, Scandinavian and German examples mentioned above, worked only because of world growth that was fuelled by America’s twin deficits; i.e. also a case of austerity piggybacking on the hegemon’s Ponzi Growth.

To recap, the pre-2008 era was a period of Ponzi Growth which was, in turn, essential for balancing the global capitalist economy (in a manner that I have explained in my Global Minotaur). Then came the Crash and, after a short period of G20-led coordinated action, the UK and the Eurozone entered, by choice, a period of Ponzi Austerity (while the US, after a meek stimulus period, became ungovernable in November 2010 and could, therefore, enact neither stimulus nor austerity).

What do I mean by Ponzi Austerity? It is not just a case of pretend austerity of the sort that we had, say, in the UK under Mrs Thatcher, when education, health etc. were cut back with a vengeance, in austerity’s name, while the public sector’s borrowing requirement grew on the back of a massive expansion of the state’s (primarily centralised, authoritarian) activities (and all in the name of a ‘smaller’ state). No, Ponzi Austerity requires more than that. It requires the symbiosis of:

(a) large scale reductions in public services and a squeeze on the taxpayer (in the name of reining in public finances), and of

(b) a new mechanism for refinancing the debt of one branch of the macro-economy (including bank losses) by creating new unsustainable debts in some other branches.

In short, Ponzi Austerity increases aggregate debt intentionally by shifting it about the macroeconomy in the hope that the public’s eye will be distracted from all this movement, time will purchased by the powers-that-be at the expense of solvency and, in the end, those with the most to gain from taking their money out of the ‘system’ before they inevitable collapse will manage to do so, leaving the hapless taxpayer to pick up the pieces when the whole thing ends up belly-up. One only needs to look furtively at what is happening in Europe today in order to draw the unavoidable conclusion that the austerity practiced in the Eurozone today is perhaps the most glaring case of Ponzi Austerity possible.


Yesterday I participated, as a ‘witness’, in an Intelligence Squared Debate where the motion under deliberation was the rather obvious ‘Austerity is not the solution’. The advocate in favour of the motion was Oliver Kamm, of The Times, while the advocate opposing it (presumably in the belief that austerity is the solution) was Martin Vander Weyer, of the Spectator. Interestingly, as it turns out, I was called to ‘testify’ not by Kamm but by the ‘austerian’ Mr Vander Weyer. It was clear that he wanted to paint me as a Greek extremist whose rejection of Greek austerity was evidence of austerity’s importance. Obviously, I deserved all I got, since accepting to be part of these facetious Oxford Union-type, utterly childish, debates is a risk one can only blame oneself for. Still, not having managed to kill off the child in me, I enjoy these charades (and this is why I agreed to participate).

During the 90 minutes of the debate (which is curiously not available on youtube, even though the event was sponsored by its owner, Google) I was asked two questions: One by the austerian side and one by the moderator. The first question was: “You are recommending to the Greek government to say No to the austerity package and try to argue that this is not blackmailing Greece’s European partners. But is this not precisely this? Is it not blackmail?” The second question, almost an hour later, came from the moderator, Emily Maltlis, who asked something similar: “Would you like to negotiate Greece’s bailout deal with the troika? And if so what would you say to them?”

In answering the first question, I argued that austerity (as fiscal conservatism) is a total misnomer for what is going on in the Eurozone. That what we have is a Ponzi Austerity which is, by definition, jeopardising not only the Eurozone and the European Union but the global economy as a whole. This is why I am recommending that the next Greek government issues a loud and clear No! to the powers-that-be at the ECB, the EU and the IMF: someone must break this death cycle. And since our richer European partners are too timid to do so, perhaps it is the task of the government of a distraught, destroyed and disillusioned nation to do it. We have reached the point where sticking to our ‘bailout’ terms and conditions is simply impossible (nb. the collapse in the tax intake due to the destruction of Greece’s social economy). We might as well say so!


  • What would you say in renegotiating with Troika?

    That the goods sold to Greece were defective. And like with any other defective product, one has to return it for either a full refund or replacement with something better.

    How does this sound as an opening statement?

    • Dean,

      This was exactly my line of thinking. Greece is an adult, it made a decision now it has to live with it.

      But I was wrong.

      I was watching the keiser report on Russia Today (YouTube) and they were talking about fraudulent conveyance.

      let me set the scene.

      you own your own house. and you want to buy a brand new car outright.

      your employer tells you things are fine, your job is secure and better than that, the business is booming and will be for the foreseeable future and better than that your employer tells you he is even willing to lend you the money over 10 years to buy the car you want with good interest rate.

      you tell him the car you want is on the limit of what you can afford and he says no worries, as the business grows your pay will increase.

      you trust your boss, you’ve been working together for years, so you say okay.

      so your 2 years into your repayments your boss says sorry, I have to cut your wages by half, things have not gone as well as I thought.

      you cant afford the repayments any more and you default on the loan so your boss says he wants your house.

      the thing is, your boss was lying to you, he knew the finances of the business were unsustainable but he knew you had a house and he wanted it.

      so he made you the loan knowing you would default so he could get your house.

      and this is exactly what has happened to Greece.

      google “Greece 2012 – Why Greek Government Debt Could Be Illegal” top 2 results, for the full background and video

  • And here how Socrates will say it:

    “Esteemed friend, citizen of Athens, the greatest city in the world, so outstanding in both intelligence and power, aren’t you ashamed to care so much to make all the money you can, and to advance your reputation and prestige–while for truth and wisdom and the improvement of your soul you have no care or worry?”
    ― Socrates

  • And here is another thing Socrates might say on the debate:

    “And therefore if the head and the body are to be well, you must begin by curing the soul; that is the first and essential thing. And the care of the soul, my dear youth, has to be effected by the use of certain charms, and these charms are fair words; and by them temperance is implanted in the soul, and where temperance comes and stays, there health is speedily imparted, not only to the head, but to the whole body.”
    ― Socrates,

  • You answered very well Dr. V to these primitive pro-austerity amateurs. Just a slight detail about Canada’s austerity measures in the 90’s. Attached find an article published by me and Ambassador Kimon Valaskakis few days ago at The English version of the article can be found at In reality and according to the Canadian government itself, our austerity measures have contributed to only 20% reduction of the Canadian public debt in the 90s. The rest of the reduction was achieved throughout the positive economic cycle of the late 90s and the increase of taxes via passing the bill from the federal government to the provinces and the municipal governments. I don’t know if Mr. Paul Martin informed you about these facts, If he didn’t, well if you have the time take a look in these two articles.

    Good luck in your new career. It’s a pity that you are not anymore Athens based. But keep the good work and continue to inspire people like myself.


  • On same day with that debate, Mr. G. Papakonstantinou was saying on BBC things you couldn’t believe your ears:

    So, our finance minister from 2009-2011, who’s motto was “no growth without first eliminating the deficit” now talks about how bad austerity is for the country!

    • Krugman is making a critical error. He fails to realize that the austerity terms can be negotiated. He assumes that they are not. That’s precisely the German position.

      Of course Krugman shows his Germanic character here. He is basically a moron who assigns disproportionate weight on arbitrary rules because of course Germans never think of challenging rules.

      But that his problem. And he needs to cut the crap out that Greece has to leave the euro because obviously will we not. And we will change the rules; just watch.

      I will say it again. The “pottery barn” rule applies here. Germany broke Greece’s economy and now Germany has to pay.

      To suggest that we will leave the euro and leave the Germans unscathed is beyond idiotic. It’s naive.

    • BTW, the criticism of Krugman within his own intellectual circles is brutal.

      I don’t believe for a moment that Krugman is a liberal (he so confesses), he is rather an ambulance chaser in search of an accident. And the fact what he has a Jewish grandfather from Belarus is not enough to qualify him as part of the US intelligencia in his field. One needs real work to enter such circles.

      Apart from huge controversies stemming from his Reagan years and his own Enron participation, he is also un balanced man in his private life. A loner, childless, and shy (or so he says, aka a Pisces).

      Rogoff, the other non-talent displayed in the clip above, is just another clown. Don’t even get me started on this Harvard trash.

      The bottom line is that both Krugman and Rogoff they are not really economists. They are specialists of some sorts in steering public conversations in the wrong direction and for the wrong arguments because their real profession is to then argue on opinion columns the falsehoods that they have already propagated.

      Krugman, Rogoff and Roubini are for me the 3 stooges of modern economics. They are entertainment people not scientists.

    • BTW Chris N.:

      There are much better pieces for Krugman where actually he comes across as a rational man. However, when he engages in this latent patently FALSE talk about Greece, one can realize that something has gone seriously wrong in his internal wiring.

      My point is that you can get fooled by Krugman as a rational economist, until he says something profoundly wrong and then you realize the emptiness of the space where his incomplete self really resides.

    • @Dean:
      I think it is courageous to say Krugman, who is not exactly a hard-line austerity fan, has got his internal wiring wrong just because you don’t like what he says.
      Have you ever thought that he may be right? He’s a Nobel Prize winner in economics so this is a bit of his area of expertise, wouldn’t you agree?

      Greece only has got ugly options left. They don’t want belt-tightening “Baltic-style” but still think they will get endless transfers. But the seem unlikely to happen – especially after seeing how Greece has handled it’s part of responsibility for it’s current mess so far.

      I think exiting the Euro and defaulting on the debt is the best option for everybody involved – including Greece. It would make the internal adjustments necessary less painful and there’s no way Greece can carry the debt it’s amassed even after the partial default that’s just happened. But with trying the Argentinian way, it could hit bottom within a Year or so and then get out of this hopeless situation. Greece would start from a lower base than what it had 2008 – but that base was never really supported by economic fundamentals. As you now painfully discover, nobody wants to sponsor Greece it’s beyond-its’-means lifestyle long term.

      So when Greece is unable or unwilling to make the necessary adjustments within the Euro Zone, try outside where you can devalue and have a realistic chance again. Also, Greece could then concentrate on it’s own performance and no longer have to focus on fighting with e.g. Germany which only distracts Greece from the true problems.

    • Then Martin i would love to see Greece isolated.
      So the pain that is not Greek comes near to where it should have been from the begginning. Germany.

      Because when the global crisis hits ,i would love to see all of you saying sorry to Greeks and asking for humanitarian help as Greeks are always ready to offer.

    • Sorry Martin but we already made the adjustments needed. It is you that want more.
      But unfortunately the power of propaganda is yours too ,so as to say we didn’t do anything. But the facts exist and true businessmen and women will look at these ,not German propaganda.

      These policies no longer work. Never worked. They destroyed the economy even more.
      Whatever we think ,past or present ,you always had the finger in the honey.
      You can say all you want now ,but history hasn’t changed yet.

      It is only fair to say ,since you gained so much by european corruption ,it is your turn to pay as well.

    • Martin:

      I am fully aware that he is a Nobel prize winner and summa cum laude material in his studies at the very best of American universities.

      But his position towards Greece is odious and what’s behind it is his deep fear on the outcome of the American elections.

      Here is how it works, if you can follow:

      1. He assume two extremes. Either you take the medicine a la Germania or you exit. 100% the German position. When in fact the German rules are arbitrary and could be changed as fast as they were originally adopted. So, why is he doing this – you might add?

      2. Because the clock is running out in the US elections. Instead of adopting the morally correct position of having Germany to change, he quickly calculates that based on the German character that’s not likely to happen any time soon.

      3. So, he is then willing to sacrifice Greece so that the euro situation could be rectified fairly soon. He fears that a possible severe crisis in Europe does not bring the Republicans in office. He knows that the number 1 vulnerability of Obama is the economy, so his expeditious solution is to suggest the departure of Greece lest the Germanic position is somewhat restored and things could move forward again before next November.

      4. Krugman’s position is that the Republican party in the US has gone mad. He might be right, but he also fears the Europeans going mad so that his mad countrymen end up in the top position of US Presidency by default.

      So, this is all politics. And Krugman is an economist. And he has been given a Nobel prize for some work he did with equations attached to it. But the kind of politics we are talking about here don’t obey his equations. So, his Nobel prize work is irrelevant here. He is simply trying to ram through a position based on his bias using his fame as a tool. He does not seem to be an honest broker in this.

  • Yanis

    Do you believe that the truth will come out eventually?

    It won’t by politicians admitting their own malpractices. At least not now ,if we take for granted that nothing bad will happen. Ofcourse this is not the case.
    So ,during or after this curse has completed its destructive actions ,will the truth become known?
    Will they apologise?

    Or it will be ,once more ,someone else’s fault?

  • I have to admit, austerity is a bizarre concept that only an economist would have envisioned as the answer to “too much debt”.

    If someone borrowed too much money and could not pay it back, I would suggest that they get a second job or put in some overtime hours at their current job. In other words work harder to earn more so they can pay it back.

    Austerity measures have created unemployment in Greece, Spain, Portugal and Ireland to unsustainable levels. How are these countries going to pay back any of their loans? What they really need is investment so that they can work harder to pay back what they borrowed.

    The Germans also need to relax and take an extra vacation in Greece or Portugal. Keeping 25% of a population unemployed is obviously not the way to reduce debt. Too complex of an idea for the European leadership?


    • “Keeping 25% of a population unemployed is obviously not the way to reduce debt.”

      That’s not a bug. It’s a feature. For, the ideology behind these policies has nothing to do with “reducing the debt” or providing sensible solutions.

    • Why would anyone go to Greece or Portugal if he can have the same in Turkey for half the price?

  • “Is it not blackmail?” – oxford union-like talking shop is unfortunately what BBC is most of the times … this is why the same question of blackmail was repeatedly possed to Yiannis Milios at BBC Radio Hardtalk interview … including the much more outrageous, also repeated 2-3 times during the interview, question of “are you and your party not out of your depth in this? … since your leader and you never governed?”. Gavin Esler’s understanding of electoral process is typical of BBC’s medieval take on society: only those who governed in the past, their relatives, business partners and school mates are eligable to govern – the rest ought to be considered unfit. BBC makes sure the people understand the ‘fit to govern’ criteria. Of course, this is the class criteria, made so blatantly visible in the times when upper classes fear that the members of the wrong class might get into the position of power.

    • Greece and the UK have one thing in common: feudalism is the prevailing methodology and ideology in politics.

  • The professor is using a few hundred letters again to demand something which he could say in a much shorter way: “Subsidize my country forever.” And you know very well that any form of transfer would become permanent like in every transfer union. And all your fiscal alchemy in your bullsh…., sorry, I mean “modest proposal” are exactly that: Back door transfers.

    The professor is not talking about Greece’s real issue which is desastrous competitiveness. The fiscal situation and “austerity” are just about symptoms.

    Professor, when do you really tell your audience “the truth” which is the fact that there are only three options for Greece: 1) Internal devaluation – probably 30%-40%; 2) Permanent transfers or 3) Grexit and external devaluation

    If Greece gets option 2), and that is exactly what the professor would like to have, all other troubled EZ countries would like to have the same treatment. And these “all other” are quite a lot. The population in the “few other” donator countries would not accept that in the long run, there would be a rise of anti-Euro parties and the Euro would be burried sooner than later.

    And that’s why you’ll get option 3) because option 2) is not possible in Greece where politics are such a mess. Option 3) will be a lesson for other countries and motivate them to become a bit more ambitious and then we have a truely competitive Eurozone… maybe a bit smaller, but that’s definitelly worth it.

    And btw., there have been some more countries which implemented successful austerity measures. You should have a look at the Baltics for example. The question if a population is tough enough depends pretty much on the culture as well as on the political landscape and the ability for “consensus”. Unfortunatelly, Greece is lacking the latter. Too bad.

    • Sorry, I meant “because option 1) is not possible in Greece where politics are such a mess.”

    • Let’s take door number (1), the 30-40% internal devaluation. How can you logically recommend a country loosing 30 or 40% of its income (even if you assume that this will only be ‘temporary’ until it regains competitiveness) and yet demand that its liabilities are not decreased.

      The Greek government paid €12bn in interest payments in 2009 but these payments increased to €13bn in 2010 and €15bn in 2011. As a percentage of GDP, payments increased from 5.1% in 2009 to 5.8% in 2010 and 7% in 2011.

      If you want an internal devaluation you have to *start* with a debt reduction for both the government and private sector (it’s the latter one which increased its debt from 40% to 105% of GDP during the euro years).

      Well, i ‘m sorry but that is equivalent to door number (2), a ‘permanent’ transfer in the form of debt reduction, lower interest payments and a recapitalization of domestic banks (in order to be able to provide private sector debt reduction).

    • you have absolutely no idea what you are talking about

      “In fact, a closer look shows that the current Baltic recovery has not resulted from the internal devaluation but rather from other factors not under the control of the Baltic governments. While many analysts hasten to call the internal devaluation successful, the downward adjustment of prices and wages in the Baltics was relatively modest – especially in the light of how overheated the economies had become by the end of the boom. None of the three countries actually experienced any significant deflation; in fact, in 2010 and 2011, inflation in all three countries resumed an upward trajectory. The reduction of real wages was from peak to trough about 15% in all countries. By the end of 2009, the real effective exchange rates had fallen by 3-5 percentage points from their boom-time peaks. ”

      btw I’m not Greek, and as such I din’t know what Greek ‘Lack’, yet, being myself half-German and living in Germany I perfectly well know what the German society generally ‘lacks’: humanity

    • How about Troika telling the truth? That they want us to give up the whole country?
      This ain’t happening. If they want Greece they’ll have to come with arms.
      Not economic hocus pocus and bad propaganda.

      What Troika should have done:
      1) The replacement of themselves because they are first in corruption.
      2) Admitting the malpractices of banks and the architectural problem of the euro.
      3) Informing the public for the imminent problems
      4) Taking measures everywhere (reforms) starting from the top and optimising the rules which they first broke.
      5) Exposing the corruption in each and every country ,first their own.
      6) Not asking for people to give up their country.
      7) Not hiding behind the corruption of others which corruption they were feeding until now.
      8) Not demonizing a whole nation to gain legitimacy for their own crimes from ignorant citizens of other countries.

      Thank you very much.

    • “The professor is not talking about Greece’s real issue which is desastrous competitiveness. The fiscal situation and “austerity” are just about symptoms.”

      You obviously haven’t been in this blog enough time ,because we have mentioned the competitive problems of Greece.
      Again ,know that one of the prerequisites for Greece (and i suppose other southern countries as well) to enter the union ,was to destroy production so as to help the exports of the northern countries ,because that would be good for all (supposedly). We did what was agreed. People didn’t know this at the time.

      Now they should man up ,admit their mistakes ,take responsibility for their actions and get off the Greek citizens back.

      This is the kind of leaders we supported all these years. You are just lucky they didn’t start all of this in your own country.

    • Dear TMK, can you please point out to me where exactly in Holland – Varoufakis ‘ s Modest Proposal V3 have you found a reference to Greece or simila (Portugal, Ireland).[Actually there is only one and this is not limited to them but to all Eurozone and only for questioning their ‘non high profile- awareness about Euro Investment Bank (page 11 of 18) need not count on national debt’]. Nowhere a ref to a country of a the so low importance (in any economic index wise) of Greece in Eurozone (just think of what happens in Spain now and its ‘ transfers’ to Bankia)
      And of course MPV3 is totally against ‘transfers’, by energizing each country’s potential and ability to forget past bad habits. And surely NOT in the expense of other countries’ taxpayers.
      If you had ever read MPV3 even elusively you could understand what is the real problem of the euro.
      A shaky founded common currency that European Union should have never adopt it in the first place- that could never become a reserve one like the dollar, economic bubbles, a zombie -banking system, the ‘white elephants’ and the Brussels’ eurocrats’ clergy were a such explosive mixture , that any logically thinking human is wondered only on why the explosion delayed so much.
      George Kakarelidis.

    • So the culture has to be tough enough. Where you from tough guy?

    • To sum it up and spare the readers of having to wade through your TL;DR comment:

      1. You have no idea what you’re talking about.
      2. You are way too much into the “tax the lower incomes to fund the super-rich”.
      3. You’re distorting facts to get your “point” across.

      Thank you very much, now please drive through.

    • Only because he spoke as if he was in opposition to his ministerial self. Total duplicity. This is the man who for 18 months argued that we cannot have growth unless we first repay the Greek public debt (and that Greece would be returning to the markets if only it sticks to the Memorandum)! To come out now with the ‘austerity was too deep’ argument is to attempt to re-write his historical role – so as to absolve himself of his horrendous responsibility.

    • That’s exactly why people and especially “politicians” must be judged upon their doings and not their sayings. Why is he being interviewed? to witness failure?

      Having watched many of his interviews, i think he has such confidence that he honestly believes he can get away with everything. But that does not make him right.
      He is very aware of the impression game.
      He can say anything, knowing that the audience doesn’t have the necessary background to criticize him, as long as he says that with confidence.
      He blackmails and put dilemas against his audience, while at the same time he injects guilt and fear. He pretends to be a technocrat.
      He reminds me of Bakogianni or Mitsotakis. They can think one thing and say another in no time, with great confidence. Such a duplicity. He can lie anywhere, anytime. A rare skill.
      The worst kind of politicians. Keep him away of governmental positions.

    • I should post pre-election interviews of Bakoyanni in Crete. You will be surprised what a politician can say to get elected. You will think that Venizelos the elder himself is speaking. She is unbelievable.
      Also, it’s a good lesson to see pre-election speeches of Andrea Papandreou in Crete in 1977. You would say that i will vote this guy right now!!! not back then. Right now! with both of my hands!!

      Judge upon actions not words. We must learn this lesson or else we are doomed to repeat the same mistakes.

    • Yes, I hear you. But my point is a bit different.

      Since these debates are basically beauty contests, a person with some insider view could and may sound as the most reasonable. So if you don’t know more about the person, you can walk out of the debate swayed by his/her arguments.

      On the surface such person might sound as the most reasonable, yet he/she could be the most flawed.

      Your aversion to Papakostantinou resembles my aversion to Krugman. They can both occasionally sound right but an in depth examination of their positions reveals otherwise. There is a big difference between those who “give a good show” and those providing “substance”.

  • Yanis,

    This Ponzi austerity seems to require the support of national governments for the banks in each of their countries. Based on bond performance, deposit trends, cross-border bank subsidiary ownership and government action, a re-nationalization of euro-zone banking systems seems to be underway.

    Are you concerned that re-nationalization could reduce the willingness of euro-zone policy makers to implement your ideas (e.g., euro-TARP) about stronger euro-zone financial sector integration?

    • Yes. But more importantly I am concerned that this re-nationalisation is simply causing the death dance of insolvencies (between sovereigns and banks) to spin out of control.

  • Yani,

    I haven’t had the chance to watch the debate.. But I am curious … Was Martin Vander Weyer able to come up with any examples of countries coming out of a deep recession without massive government stimulus?

    • Good point.

      BTW, are there any examples of countries coming out of structurally caused deep recessions without massive restructuring efforts?

      Ah, and are there any examples of countries coming out of overdebt without defaulting 1st?

      And since we are talking about it: are there any examples of countries actually paying back debt (means: reduce the absolute debt, not the relative to GDP figure. Since absolute debt matters a lot, as Greece had to learn the hard way) in boom times, as Keynes demanded?

    • “Countless. Australia, Canada and the Scandinavians for instance”

      Hm, they did not default, but what about the other two questions?

    • “Australia, Canada and the Scandinavians for instance”

      Compared to Southern Europe ith the exception of Northern Italy and parts of France these are very advanced countries and have been that for a long time.

      Very different from Greece & Portugal.

    • Sorry to tell you, but you are dead wrong if you claim that Scandinavia came out of the crisis without reform. The Scandinavian countries went through massive reforms in the 90’s. I happen to know, because I’m Swedish.

      Sweden has always had a strong industry, but during the two decades preceding the crisis the ruling Social Democrats had let public sector employment grow, at the expense of the private sector. It can be seen in the following graph:

      Growth had been low for two decades, but the deregulation of credit markets in the 1980s spurred a consumption-driven boom which eventually ended in bust and led to the banking crisis in the early 90s. The banking crisis put enormous strain on our public finances, and about 600.000 thousand jobs were lost in a few years. However, unlike Greece today the public sector had to accept its part of burden sharing and about 300.000 public sector jobs were cut during the crisis.

      Today many people in Scandinavia view the 90’s crisis as a blessing in disguise. It was a transitional decade, but I think it helped us to reform our economies and the Scandinavian countries came out of it stronger and a lot more competitive than before.

    • “But if you want an example of a country that used default successfully in order to grow again”

      No. I asked the contrary: “are there any examples of countries coming out of overdebt without defaulting 1st”

    • Yanis, I realized I misinterpreted your response to VSS. Or actually, I misread VSS’s question and thought he asked about countries coming out of recessions without massive reform efforts.

      Anyway, I hope my account of the Swedish crisis in the 90s may be of interest to some readers.

    • Btw, are there any examples of countries with a structural current account deficit and a currency peg where stimulus has worked?

  • So how do you fix the lack of competiveness issue? The truth is you don´t. You either go to Drachme (devalue externally) which you do not want or you reduce cost/wages (devalue internally) which is “austerity and you also do not want.

    This has nothing to do with existing debt and even the Europhiles get that point now: “Germany has continued to resist the creation of “Eurobonds”, which would see German taxpayers stand behind the debts of poorer southern countries. Mr Rehn yesterday warned that, even if that scheme were ever approved, it would still not be sufficient to save the euro. ”

    And don´t tell me its Germany´s fault, because wages are too low. Greece etc. compete more with Turkey, China, India etc.

    • No i am not going to tell you is Germany’s fault ,because you look now at your interest. This is normal.
      I am going to say it was everybody’s fault and everybody should pay the equivalent price. And since in the EZ Germany exported unemployment ,Germany should now do the opposite. So should Greece.

      This is called ,everybody admitting mistakes and correcting them so as to keep living in the community. That simple.

      Greece already did.
      But what Germany does is give more debt to Greece.

      This is illogical. Simply illogical.

    • “But what Germany does is give more debt to Greece”

      Who said I agree what our government does. I think they are idots. They should stop the “bailouts” and decide who needs to exit the Euro Zone: The North or the South,

  • Hi Yanis,
    I enjoyed reading this article. I would say that it might be worthwhile examining Australia in some detail. What you have described resonates quite strongly with what is happenining here. On 1 July we get a Carbon Tax, along with severe cuts to public spending across the board. The Carbon Tax is set to inflate the renewables energy sector in Australia. Why? Our economy has serious issues. It is effectively supported by mineral exports from Western Australia, while the populated east cost is starting to loose hundreds of thousnds of jobs. Australia is held up as a shining example of success in our uncertain times as one of the few nations spared the effects of the GFC and its consequences. We are just digging really big holes, selling dirt & hoping Europe sorts itself out!

  • “Is it not blackmail?”

    Of course it is, no matter how many words one spends to more or less creatively mask this fact.

    As for ‘I am recommending that the next Greek government issues a loud and clear No! to the powers-that-be at the ECB, the EU and the IMF’ I also hope it does.

    Of course I have different reasons than you.

    • Well then vss ,we are a continent of blackmailers and we should all be destroyed.

      In the not so far future we will see who was right and who was wrong. Although history already proves that we did well to oppose.

  • Questions about Αυτά που μας έμειναν.
    1 and 2) I found this correct but for reasons that have to with us. Not foreigners. Combined with (9)

    (7) We must realize that we don’t reside alone on this planet. Challenge ourselves globally. Not for what others will think of us, but for our own wellbeing and progress. No one is going to help us.

    3) why μεταχρονολογημένες επιταγές is wrong. I am not an economist or businessman but it works. no? What are the greater consequences of that?

    4) the problem with the taxation system is that it is unjust. In fact it is so unjust that is not implementable. The problem with taxation is justice, not tax-evasion. And justice has to do with politics.
    Governmental officials and authority greatly favor the un-just so that they can appear as helpers and mediators and get re-elected. The solution is sue them! Put them behind bars. The solution is in court. We should demand more just taxation system.
    And that goes to (6) as well. Facebook and tweeter is a means of awareness but not action. You may accuse and be a couch-potato as well. That’s not enough. Real action is in court. Is in everyday life. If we are half proud of what we say we are, we must sue them! Demand that law is enforced! That would indicate the non-applicable nature of it, and thus there would be a demand to change it.

    (8) is wishful thinking.

  • The Telegraph (UK) on the growth “solution”:

    “And though it is true that austerity is proving counter-productive, what do its opponents suggest? That Spain and Ireland build even more houses, redundant regional airports, motorways, and spanking new municipal facilities? This was the kind of stuff that got the banking system into trouble in the first place. Just how much more construction can a country sensibly take?”

    • It was a theory in the begginning but as time passes ,it may very well prove itself.

      That ,they never cared about euro salvation and just wanted to buy everything at bargain price in every country. I guess they succeeded more in the rest of the south.

      Pedro when/if the euro goes up in smokes ,we’ll roast a lamb over it.
      You bring the beers.
      If there still is lamb and beers.

    • I will buy 1000 liters of beer and hand it out for free the day that the Euro blows up entirely or Germany exits. Promised.

      Location: ECB Frankfurt

    • Pedro:

      You are asking for the German national currency to collapse. Germany has already a national currency and it’s called the euro.

      Forget about dreams of destroying the euro. Such could never happen.

    • The banking system has only itself to blame, not growth.

    • “Forget about dreams of destroying the euro. Such could never happen”

      You sound like Erich Honecker a few months before the Berlin wall came down! Of course the Euro will be destroyed. It is (A) a paper currency and (B) a currency union. Both have limited life times. Currency unions never survive the first crisis and paper money/fractional lending have to collapse. It is pure mathematics.

  • Let’s just remember some of the oldies which are always modern ,shall we?

  • How about the trilateral commission?

    See who is chairman. Before him Mario Monti.
    Also there you’ll find Michael Fuchs ,Chairman of Germany’s exports who so many exports he wanted towards Greece.

    Many of Goldman Sachs (and not only) are there.

    And ofcourse our own Lucas Papademos amongst other Greeks.
    Also see how they have divided in zones the continent. Anyone knows what the colours mean?

    • Wherever there is public money to be spent on precisely nothing worth doing (but with a neoliberal agenda), you can be sure to find Papademos. Obviously, he was the ideal person to assist with reform of the Greek economy!

    • The exact organization that doesn’t really like democracy: remember their report titled “The Crisis of Democracy” in which they blamed the problems in governance on an “excess of democracy” (sic).

      That explains quite a lot about the constant ultimatums issued by the European Union to the countries that the lobby-funded EU mandarins, Germany, the banksters and the IMF are looting.

      Heh, methinks Robespierre hit the nail on the head…

  • How about changing a bit the narrative in the comments here? Cause sometimes the debate goes to so detailed and trivial subjects that I personally cannot follow.

    • clap ,clap ,clap ,clap.

      I like. Yes ,i do.
      We should have more people doing this in Greece.

  • George Soros Remarks

    Festival of Economics

    June 2, 2012

    Trento, Italy

    Ever since the Crash of 2008 there has been a widespread recognition, both among economists and the general public, that economic theory has failed. But there is no consensus on the causes and the extent of that failure.

    I believe that the failure is more profound than generally recognized. It goes back to the foundations of economic theory. Economics tried to model itself on Newtonian physics. It sought to establish universally and timelessly valid laws governing reality. But economics is a social science and there is a fundamental difference between the natural and social sciences. Social phenomena have thinking participants who base their decisions on imperfect knowledge. That is what economic theory has tried to ignore.

    Scientific method needs an independent criterion, by which the truth or validity of its theories can be judged. Natural phenomena constitute such a criterion; social phenomena do not. That is because natural phenomena consist of facts that unfold independently of any statements that relate to them. The facts then serve as objective evidence by which the validity of scientific theories can be judged. That has enabled natural science to produce amazing results.

    Social events, by contrast, have thinking participants who have a will of their own. They are not detached observers but engaged decision makers whose decisions greatly influence the course of events. Therefore the events do not constitute an independent criterion by which participants can decide whether their views are valid. In the absence of an independent criterion people have to base their decisions not on knowledge but on an inherently biased and to greater or lesser extent distorted interpretation of reality. Their lack of perfect knowledge or fallibility introduces an element of indeterminacy into the course of events that is absent when the events relate to the behavior of inanimate objects. The resulting uncertainty hinders the social sciences in producing laws similar to Newton’s physics.

    Economics, which became the most influential of the social sciences, sought to remove this handicap by taking an axiomatic approach similar to Euclid’s geometry. But Euclid’s axioms closely resembled reality while the theory of rational expectations and the efficient market hypothesis became far removed from it. Up to a point the axiomatic approach worked. For instance, the theory of perfect competition postulated perfect knowledge. But the postulate worked only as long as it was applied to the exchange of physical goods. When it came to production, as distinct from exchange, or to the use of money and credit, the postulate became untenable because the participants’ decisions involved the future and the future cannot be known until it has actually occurred.

    I am not well qualified to criticize the theory of rational expectations and the efficient market hypothesis because as a market participant I considered them so unrealistic that I never bothered to study them. That is an indictment in itself but I shall leave a detailed critique of these theories to others.

    Instead, I should like to put before you a radically different approach to financial markets. It was inspired by Karl Popper who taught me that people’s interpretation of reality never quite corresponds to reality itself. This led me to study the relationship between the two. I found a two-way connection between the participants’ thinking and the situations in which they participate. On the one hand people seek to understand the situation; that is the cognitive function. On the other, they seek to make an impact on the situation; I call that the causative or manipulative function. The two functions connect the thinking agents and the situations in which they participate in opposite directions. In the cognitive function the situation is supposed to determine the participants’ views; in the causative function the participants’ views are supposed to determine the outcome. When both functions are at work at the same time they interfere with each other. The two functions form a circular relationship or feedback loop. I call that feedback loop reflexivity. In a reflexive situation the participants’ views cannot correspond to reality because reality is not something independently given; it is contingent on the participants’ views and decisions. The decisions, in turn, cannot be based on knowledge alone; they must contain some bias or guess work about the future because the future is contingent on the participants’ decisions.

    Fallibility and reflexivity are tied together like Siamese twins. Without fallibility there would be no reflexivity – although the opposite is not the case: people’s understanding would be imperfect even in the absence of reflexivity. Of the two twins, fallibility is the first born. Together, they ensure both a divergence between the participants’ view of reality and the actual state of affairs and a divergence between the participants’ expectations and the actual outcome.

    Obviously, I did not discover reflexivity. Others had recognized it before me, often under a different name. Robert Merton wrote about self-fulfilling prophecies and the bandwagon effect, Keynes compared financial markets to a beauty contest where the participants had to guess who would be the most popular choice. But starting from fallibility and reflexivity I focused on a problem area, namely the role of misconceptions and misunderstandings in shaping the course of events that mainstream economics tried to ignore. This has made my interpretation of reality more realistic than the prevailing paradigm.

    Among other things, I developed a model of a boom-bust process or bubble which is endogenous to financial markets, not the result of external shocks. According to my theory, financial bubbles are not a purely psychological phenomenon. They have two components: a trend that prevails in reality and a misinterpretation of that trend. A bubble can develop when the feedback is initially positive in the sense that both the trend and its biased interpretation are mutually reinforced. Eventually the gap between the trend and its biased interpretation grows so wide that it becomes unsustainable. After a twilight period both the bias and the trend are reversed and reinforce each other in the opposite direction. Bubbles are usually asymmetric in shape: booms develop slowly but the bust tends to be sudden and devastating. That is due to the use of leverage: price declines precipitate the forced liquidation of leveraged positions.

    Well-formed financial bubbles always follow this pattern but the magnitude and duration of each phase is unpredictable. Moreover the process can be aborted at any stage so that well-formed financial bubbles occur rather infrequently.

    At any moment of time there are myriads of feedback loops at work, some of which are positive, others negative. They interact with each other, producing the irregular price patterns that prevail most of the time; but on the rare occasions that bubbles develop to their full potential they tend to overshadow all other influences.

    According to my theory financial markets may just as soon produce bubbles as tend toward equilibrium. Since bubbles disrupt financial markets, history has been punctuated by financial crises. Each crisis provoked a regulatory response. That is how central banking and financial regulations have evolved, in step with the markets themselves. Bubbles occur only intermittently but the interplay between markets and regulators is ongoing. Since both market participants and regulators act on the basis of imperfect knowledge the interplay between them is reflexive. Moreover reflexivity and fallibility are not confined to the financial markets; they also characterize other spheres of social life, particularly politics. Indeed, in light of the ongoing interaction between markets and regulators it is quite misleading to study financial markets in isolation. Behind the invisible hand of the market lies the visible hand of politics. Instead of pursuing timeless laws and models we ought to study events in their time bound context.

    My interpretation of financial markets differs from the prevailing paradigm in many ways. I emphasize the role of misunderstandings and misconceptions in shaping the course of history. And I treat bubbles as largely unpredictable. The direction and its eventual reversal are predictable; the magnitude and duration of the various phases is not. I contend that taking fallibility as the starting point makes my conceptual framework more realistic. But at a price: the idea that laws or models of universal validity can predict the future must be abandoned.

    Until recently, my interpretation of financial markets was either ignored or dismissed by academic economists. All this has changed since the crash of 2008. Reflexivity became recognized but, with the exception of Imperfect Knowledge Economics, the foundations of economic theory have not been subjected to the profound rethinking that I consider necessary. Reflexivity has been accommodated by speaking of multiple equilibria instead of a single one. But that is not enough. The fallibility of market participants, regulators, and economists must also be recognized. A truly dynamic situation cannot be understood by studying multiple equilibria. We need to study the process of change.

    The euro crisis is particularly instructive in this regard. It demonstrates the role of misconceptions and a lack of understanding in shaping the course of history. The authorities didn’t understand the nature of the euro crisis; they thought it is a fiscal problem while it is more of a banking problem and a problem of competitiveness. And they applied the wrong remedy: you cannot reduce the debt burden by shrinking the economy, only by growing your way out of it. The crisis is still growing because of a failure to understand the dynamics of social change; policy measures that could have worked at one point in time were no longer sufficient by the time they were applied.

    Since the euro crisis is currently exerting an overwhelming influence on the global economy I shall devote the rest of my talk to it. I must start with a warning: the discussion will take us beyond the confines of economic theory into politics and the dynamics of social change. But my conceptual framework based on the twin pillars of fallibility and reflexivity still applies. Reflexivity doesn’t always manifest itself in the form of bubbles. The reflexive interplay between imperfect markets and imperfect authorities goes on all the time while bubbles occur only infrequently. This is a rare occasion when the interaction exerts such a large influence that it casts its shadow on the global economy. How could this happen? My answer is that there is a bubble involved, after all, but it is not a financial but a political one. It relates to the political evolution of the European Union and it has led me to the conclusion that the euro crisis threatens to destroy the European Union. Let me explain.

    I contend that the European Union itself is like a bubble. In the boom phase the EU was what the psychoanalyst David Tuckett calls a “fantastic object” – unreal but immensely attractive. The EU was the embodiment of an open society –an association of nations founded on the principles of democracy, human rights, and rule of law in which no nation or nationality would have a dominant position.

    The process of integration was spearheaded by a small group of far sighted statesmen who practiced what Karl Popper called piecemeal social engineering. They recognized that perfection is unattainable; so they set limited objectives and firm timelines and then mobilized the political will for a small step forward, knowing full well that when they achieved it, its inadequacy would become apparent and require a further step. The process fed on its own success, very much like a financial bubble. That is how the Coal and Steel Community was gradually transformed into the European Union, step by step.

    Germany used to be in the forefront of the effort. When the Soviet empire started to disintegrate, Germany’s leaders realized that reunification was possible only in the context of a more united Europe and they were willing to make considerable sacrifices to achieve it. When it came to bargaining they were willing to contribute a little more and take a little less than the others, thereby facilitating agreement. At that time, German statesmen used to assert that Germany has no independent foreign policy, only a European one.

    The process culminated with the Maastricht Treaty and the introduction of the euro. It was followed by a period of stagnation which, after the crash of 2008, turned into a process of disintegration. The first step was taken by Germany when, after the bankruptcy of Lehman Brothers, Angela Merkel declared that the virtual guarantee extended to other financial institutions should come from each country acting separately, not by Europe acting jointly. It took financial markets more than a year to realize the implication of that declaration, showing that they are not perfect.

    The Maastricht Treaty was fundamentally flawed, demonstrating the fallibility of the authorities. Its main weakness was well known to its architects: it established a monetary union without a political union. The architects believed however, that when the need arose the political will could be generated to take the necessary steps towards a political union.

    But the euro also had some other defects of which the architects were unaware and which are not fully understood even today. In retrospect it is now clear that the main source of trouble is that the member states of the euro have surrendered to the European Central Bank their rights to create fiat money. They did not realize what that entails – and neither did the European authorities. When the euro was introduced the regulators allowed banks to buy unlimited amounts of government bonds without setting aside any equity capital; and the central bank accepted all government bonds at its discount window on equal terms. Commercial banks found it advantageous to accumulate the bonds of the weaker euro members in order to earn a few extra basis points. That is what caused interest rates to converge which in turn caused competitiveness to diverge. Germany, struggling with the burdens of reunification, undertook structural reforms and became more competitive. Other countries enjoyed housing and consumption booms on the back of cheap credit, making them less competitive. Then came the crash of 2008 which created conditions that were far removed from those prescribed by the Maastricht Treaty. Many governments had to shift bank liabilities on to their own balance sheets and engage in massive deficit spending. These countries found themselves in the position of a third world country that had become heavily indebted in a currency that it did not control. Due to the divergence in economic performance Europe became divided between creditor and debtor countries. This is having far reaching political implications to which I will revert.

    It took some time for the financial markets to discover that government bonds which had been considered riskless are subject to speculative attack and may actually default; but when they did, risk premiums rose dramatically. This rendered commercial banks whose balance sheets were loaded with those bonds potentially insolvent. And that constituted the two main components of the problem confronting us today: a sovereign debt crisis and a banking crisis which are closely interlinked.

    The eurozone is now repeating what had often happened in the global financial system. There is a close parallel between the euro crisis and the international banking crisis that erupted in 1982. Then the international financial authorities did whatever was necessary to protect the banking system: they inflicted hardship on the periphery in order to protect the center. Now Germany and the other creditor countries are unknowingly playing the same role. The details differ but the idea is the same: the creditors are in effect shifting the burden of adjustment on to the debtor countries and avoiding their own responsibility for the imbalances. Interestingly, the terms “center” and “periphery” have crept into usage almost unnoticed. Just as in the 1980’s all the blame and burden is falling on the “periphery” and the responsibility of the “center” has never been properly acknowledged. Yet in the euro crisis the responsibility of the center is even greater than it was in 1982. The “center” is responsible for designing a flawed system, enacting flawed treaties, pursuing flawed policies and always doing too little too late. In the 1980’s Latin America suffered a lost decade; a similar fate now awaits Europe. That is the responsibility that Germany and the other creditor countries need to acknowledge. But there is now sign of this happening.

    The European authorities had little understanding of what was happening. They were prepared to deal with fiscal problems but only Greece qualified as a fiscal crisis; the rest of Europe suffered from a banking crisis and a divergence in competitiveness which gave rise to a balance of payments crisis. The authorities did not even understand the nature of the problem, let alone see a solution. So they tried to buy time.

    Usually that works. Financial panics subside and the authorities realize a profit on their intervention. But not this time because the financial problems were reinforced by a process of political disintegration. While the European Union was being created, the leadership was in the forefront of further integration; but after the outbreak of the financial crisis the authorities became wedded to preserving the status quo. This has forced all those who consider the status quo unsustainable or intolerable into an anti-European posture. That is the political dynamic that makes the disintegration of the European Union just as self-reinforcing as its creation has been. That is the political bubble I was talking about.

    At the onset of the crisis a breakup of the euro was inconceivable: the assets and liabilities denominated in a common currency were so intermingled that a breakup would have led to an uncontrollable meltdown. But as the crisis progressed the financial system has been progressively reordered along national lines. This trend has gathered momentum in recent months. The Long Term Refinancing Operation (LTRO) undertaken by the European Central Bank enabled Spanish and Italian banks to engage in a very profitable and low risk arbitrage by buying the bonds of their own countries. And other investors have been actively divesting themselves of the sovereign debt of the periphery countries.

    If this continued for a few more years a break-up of the euro would become possible without a meltdown – the omelet could be unscrambled – but it would leave the central banks of the creditor countries with large claims against the central banks of the debtor countries which would be difficult to collect. This is due to an arcane problem in the euro clearing system called Target2. In contrast to the clearing system of the Federal Reserve, which is settled annually, Target2 accumulates the imbalances. This did not create a problem as long as the interbank system was functioning because the banks settled the imbalances themselves through the interbank market. But the interbank market has not functioned properly since 2007 and the banks relied increasingly on the Target system. And since the summer of 2011 there has been increasing capital flight from the weaker countries. So the imbalances grew exponentially. By the end of March this year the Bundesbank had claims of some 660 billion euros against the central banks of the periphery countries.

    The Bundesbank has become aware of the potential danger. It is now engaged in a campaign against the indefinite expansion of the money supply and it has started taking measures to limit the losses it would sustain in case of a breakup. This is creating a self-fulfilling prophecy. Once the Bundesbank starts guarding against a breakup everybody will have to do the same.

    This is already happening. Financial institutions are increasingly reordering their European exposure along national lines just in case the region splits apart. Banks give preference to shedding assets outside their national borders and risk managers try to match assets and liabilities within national borders rather than within the eurozone as a whole. The indirect effect of this asset-liability matching is to reinforce the deleveraging process and to reduce the availability of credit, particularly to the small and medium enterprises which are the main source of employment.

    So the crisis is getting ever deeper. Tensions in financial markets have risen to new highs as shown by the historic low yield on Bunds. Even more telling is the fact that the yield on British 10 year bonds has never been lower in its 300 year history while the risk premium on Spanish bonds is at a new high.

    The real economy of the eurozone is declining while Germany is still booming. This means that the divergence is getting wider. The political and social dynamics are also working toward disintegration. Public opinion as expressed in recent election results is increasingly opposed to austerity and this trend is likely to grow until the policy is reversed. So something has to give.

    In my judgment the authorities have a three months’ window during which they could still correct their mistakes and reverse the current trends. By the authorities I mean mainly the German government and the Bundesbank because in a crisis the creditors are in the driver’s seat and nothing can be done without German support.

    I expect that the Greek public will be sufficiently frightened by the prospect of expulsion from the European Union that it will give a narrow majority of seats to a coalition that is ready to abide by the current agreement. But no government can meet the conditions so that the Greek crisis is liable to come to a climax in the fall. By that time the German economy will also be weakening so that Chancellor Merkel will find it even more difficult than today to persuade the German public to accept any additional European responsibilities. That is what creates a three months’ window.

    Correcting the mistakes and reversing the trend would require some extraordinary policy measures to bring conditions back closer to normal, and bring relief to the financial markets and the banking system. These measures must, however, conform to the existing treaties. The treaties could then be revised in a calmer atmosphere so that the current imbalances will not recur. It is difficult but not impossible to design some extraordinary measures that would meet these tough requirements. They would have to tackle simultaneously the banking problem and the problem of excessive government debt, because these problems are interlinked. Addressing one without the other, as in the past, will not work.

    Banks need a European deposit insurance scheme in order to stem the capital flight. They also need direct financing by the European Stability Mechanism (ESM) which has to go hand-in-hand with eurozone-wide supervision and regulation. The heavily indebted countries need relief on their financing costs. There are various ways to provide it but they all need the active support of the Bundesbank and the German government.

    That is where the blockage is. The authorities are working feverishly to come up with a set of proposals in time for the European summit at the end of this month. Based on the current newspaper reports the measures they will propose will cover all the bases I mentioned but they will offer only the minimum on which the various parties can agree while what is needed is a convincing commitment to reverse the trend. That means the measures will again offer some temporary relief but the trends will continue. But we are at an inflection point. After the expiration of the three months’ window the markets will continue to demand more but the authorities will not be able to meet their demands.

    It is impossible to predict the eventual outcome. As mentioned before, the gradual reordering of the financial system along national lines could make an orderly breakup of the euro possible in a few years’ time and, if it were not for the social and political dynamics, one could imagine a common market without a common currency. But the trends are clearly non-linear and an earlier breakup is bound to be disorderly. It would almost certainly lead to a collapse of the Schengen Treaty, the common market, and the European Union itself. (It should be remembered that there is an exit mechanism for the European Union but not for the euro.) Unenforceable claims and unsettled grievances would leave Europe worse off than it was at the outset when the project of a united Europe was conceived.

    But the likelihood is that the euro will survive because a breakup would be devastating not only for the periphery but also for Germany. It would leave Germany with large unenforceable claims against the periphery countries. The Bundesbank alone will have over a trillion euros of claims arising out of Target2 by the end of this year, in addition to all the intergovernmental obligations. And a return to the Deutschemark would likely price Germany out of its export markets – not to mention the political consequences. So Germany is likely to do what is necessary to preserve the euro – but nothing more. That would result in a eurozone dominated by Germany in which the divergence between the creditor and debtor countries would continue to widen and the periphery would turn into permanently depressed areas in need of constant transfer of payments. That would turn the European Union into something very different from what it was when it was a “fantastic object” that fired peoples imagination. It would be a German empire with the periphery as the hinterland.

    I believe most of us would find that objectionable but I have a great deal of sympathy with Germany in its present predicament. The German public cannot understand why a policy of structural reforms and fiscal austerity that worked for Germany a decade ago will not work Europe today. Germany then could enjoy an export led recovery but the eurozone today is caught in a deflationary debt trap. The German public does not see any deflation at home; on the contrary, wages are rising and there are vacancies for skilled jobs which are eagerly snapped up by immigrants from other European countries. Reluctance to invest abroad and the influx of flight capital are fueling a real estate boom. Exports may be slowing but employment is still rising. In these circumstances it would require an extraordinary effort by the German government to convince the German public to embrace the extraordinary measures that would be necessary to reverse the current trend. And they have only a three months’ window in which to do it.

    We need to do whatever we can to convince Germany to show leadership and preserve the European Union as the fantastic object that it used to be. The future of Europe depends on it.

    • Dean ,

      i just had sex with this article.
      If i smoked i’d have lit a cigar already.

    • But i’d rather see capitalism die. Not Germans give more money.

      This time the capitalists blue it up HUGE. They wanted to demonize the Greeks as well and exactly because of that ,the Germans do not want to give money. They (German citizens) may do the right thing for the wrong reasons.
      A blessing in the sky?
      Here we only need a NO bailout from the Greeks ,and the agonizing death of the little guy can become the agonizing death of just another system that has caused such pain.

      NO FEAR.

    • Aided and abetted of course by countless Greeks who have been spreading these lies within Greece – and still do. Dean, this is not a good Greek bad German story. This is a clear case of an alliance of Greek and German rent seekers that caused a great deal of pain on the remaining Greeks and Germans.

    • o.k. Yani, I will give you that.

      It so happens that I was making exactly the same point today speaking to some Greek friends. That they have turned themselves into obedient instruments of German propaganda for free. Repeating the same falsehoods without any forethought and actually damaging things even further by confusing their own fellow citizens.

      Of course is not a bad German, good Greek story. It’s a minority of bad Germans story, with the complicity of an overwhelmingly stupid German electorate – which is as illiterate and politically naive as they come – which is meeting its match on equal Greek stupidity which is turning into an instrument of destruction into the hands of a few bad Greeks.

      If you wish, you can then remove the small German and Greek bad part on both ends and have to deal with the vast stupidity of the Greko-German remainder in the middle.

      BTW, when we speak of Germany here the most frequent reference is to the official Germany and not to the German people.

  • Yanis, I’m going to tackle the whole “competitiveness” issue now, as I happen to be an engineer; an industrial engineer, at that. Let me tell you that the problem with Greece is not what the pro-austerity Neanderthals tell us (i.e. high workers’ wages, high social security fees and “high corporate tax”). Before I go any further, I’m going to deal with the brouhaha presented to us by these Neanderthals who think that buying a vulgar Armani “power suit” and degree from the LSE or from Harvard will make them any more credible than they really are:

    1. Wages in Greece have NEVER been particularly high, especially if you consider the multitude of (mostly indirect, i.e. affecting mainly the lower incomes) taxes, “urgent” taxes and the skyrocketing post-Euro living cost (a direct result of the action of local and foreign cartels).

    2. Social security fees are indeed high, but only because the governments periodically put their hands in the social security funds’ till and grab all the money paid by the taxpayers to bail out their bankster buddies. Oh, and the governments of the two parties that Merkolland (formerly Merkozy) and the Troika support have historically failed to make big public works contractors cum media magnates cum weapons dealers pay their due taxes and the fees for their employees’ social security funds.

    3. Corporate tax in Greece is NOT high, as long as you’re an LLC or an SA.

    Greece is not competitive for other reasons. Let me state some:

    1. For far too long, Greek universities did not have organized postgraduate and doctoral programs. To make things even worse, research (especially technological) has always been something of an anathema to Greek “academics”: they did everything they could to prevent it, because it’d mean they’d actually have to work and be compared to their peers (no, it’s not about communism – enough with the “evil communist” conspiracy theories, they’re every bit as bad as the “new order/zionist/translational elite” conspiracy theories of the “Inclusive Democracy” nutjobs).

    2. Staying on the topic of the Greek academia, it has historically showed that it’s full of luddites.

    3. Not that Greece’s industrialists ever gave much of a damn about research and improving their products and production techniques. They didn’t. Very few of them actually had (have) R&D departments in their companies. Most were happy with the role of the subcontractor who assembled CKD kits.

    4. The State itself never gave much of a damn about research: no specific scientific criteria were set for most of the ’70s and ’80s – this meant that most of the research done was actually crap. The fact that a nationalist mysticist fraudster named Georgios Giolvas (or Ghiolvas) who claimed that the Artemis 30 anti-air flak gun was designed by him and featured systems that used subsonic waves to destroy enemy aircraft, or that he designed the Bevatron, is still regarded by many as a leading Greek scientist goes a long way to prove that the Powers that Be in Greece have always had an aversion to logic and real science even worse than Ian Fraser “Lemmy” Kilmister’s aversion to personal hygiene.

    5. And then came the stock market bubble, a bubble helped not only by the government, but also by institutions that should know better, but instead misled an entire generation of students. I was a 3rd-year undergrad student at the Technical University of Crete in 1997 when a walking tub of lard (about the same size and shape as Theodore Pangalos) from the Helllenic Management Association held a workshop in our premises and told us that (a) Greece does not need an industry, (b) Greece does not need engineering, (c) Greece does not need to produce ANY tangible goods, but instead that it should (a) become a haven for financial and investment services, (b) turn to the stock market game entirely. Needless to say, the vast majority of my colleagues after that turned to a pseudo-scientific and utterly charlatanic “profession” named “financial engineering”.

    Yanis, you once said that people show way too much respect to economists. My experience shows you’re 100% right in that.

  • First off I want to say awesome blog! I had a quick question
    that I’d like to ask if you do not mind. I was curious to know how you center yourself and clear your head before writing. I’ve
    had trouble clearing my thoughts in getting my thoughts out.
    I truly do enjoy writing but it just seems like the first 10 to 15 minutes are usually wasted simply just trying to figure out how to begin.
    Any ideas or hints? Thank you!

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