Was Chancellor Merkel right (about Greece)?

02/09/2013 by

Is Chancellor Merkel right when she recently said: “Greece should not have been admitted into the euro area”?

Naturally. However, the way that the euro was designed, it was not only Greece that stood no chance of surviving without a major social disaster within the Eurozone. The same applies to the rest of the Periphery and, also, to… France. In short, a common currency without a substantial surplus recycling mechanism in its midst (as the Eurozone is and remains) can only survive long term if it comprises surplus countries. The Eurozone should, in this reading, consist of Germany, the Netherlands, Austria, Finland and Luxembourg. Alternatively, if France et al were to be included, we would have needed a proper banking union (as opposed to the one currently ‘implemented’), a degree of commonality of public debt, and a large scale aggregate investment mechanism which recycles surpluses in the form of productive investments in the deficit regions/countries (see our Modest Proposal for more on this).

Is the scale of adjustment that Greece is facing (after accepting previous bailouts) unprecedented?

Yes. Especially in view that the bailouts did not have the purpose of solving Greece’s problems. The original bailout was a cynical ploy for transferring losses from the books of the German and French banks onto the shoulders of the Greek, German and French taxpayers. The second and third bailouts were merely attempts to hide the truth about the first one.

Would you say that it is remarkable that Greece has been able to (just barely) keep social cohesion? 

Not really. A Great Depression tends to depress people psychologically to an extent that they become ready to accept the unacceptable. At least for a while.

Would Germany have held together if it had to implement such draconian measures?

Under no circumstances. In any case, the German leadership was the first to set aside the Maastricht limits when it had a choice between a deep recession and a milder one. Of course, it could afford to do this being the Eurozone’s surplus nation. As is always the case, the rules do not apply equally between the surplus and deficit nations of any currency union of fixed exchange rate regime.

Why is Greece getting so much of the blame for the Euro crisis when it is the bigger economies like Spain and Italy that pose greater threats to the Eurozone?

Because it was the canary in the mine. It was the first and flimsiest economy to betray the common secret that our Eurozone project was badly flawed. It was thus a prime scapegoat candidate.

Do you believe that part of the reason why Greece’s financial crisis is so acute is because it is such a young democracy?

No, I do not. Perhaps the root problem (which is linked to our dictatorial past, but which is similar to the Italian experience) is the Greek elite’s incapacity to act as a national elite. Instead, it milks the country dry on the promise that it will pass the task of reforming the nation’s institutions to something it vaguely refers to as ‘Europe’. Alas, ‘Europe’ is neither interested in nor capable of such a feat. Initially, ‘Europe’ was only interested in Greece as a market with low levels of private indebtedness. Now, it just wants to get rid of it but knows not how to do it without losing Spain, Italy and, ultimately, France.

What do you think is the answer to Greece’s problems?

To try out a policy we have never tried out before: To tell the truth both within the EU’s institutions and in public: The Greek state is insolvent, the bailouts have created a new cleptocracy amongst our bankers, and the quadruple crisis (banks, debt, investment and poverty) cannot be addressed through more loans under the imposition of greater austerity (which shrinks the incomes from which the burgeoning debts must be repaied).

Do you think that a third bail-out can solve any of Greek problems, or the Troika is just “buying time” (even if there’s no MoU, as Mr Stournaras has suggested)?

None of the bailouts had the purpose of solving Greece’s problems. The original bailout was a cynical ploy for transferring losses from the books of the German and French banks onto the shoulders of the Greek, German and French taxpayers. The second bailout was merely an acknowledgment that the first bailout had imposed upon Greece conditions that it could never meet. Similarly with the one being prepared now: Greece has committed, as part of the second bailout, to return to the troika €27 billion from the time the loans dry out April 2014) to the end of 2016. This would necessitate primary surpluses of nearly 5% every year for three years, all of which should be transferred out of the bleeding country and to the coffers of the troika. Everyone knows that this is economically impossible and politically explosive. So, this is what they propose to do: Adopt the bankers’ favourite trick of ‘extending and pretending’ bad loans. They will, in practice, allow the Greek government not to pay anything much back between 2014 and 2016 (they will, in effect, reduce interest to zero over that period) and extend the repayment period for principal plus interest by an additional decade or so. This way, they will be extending Greece’s insolvency ad infinitum.

Is there any possibility for Greece to ‘survive’ inside de euro? Is bankruptcy inevitable?

Greece defaulted twice already and will be defaulting a third time – since the reduction in interest rates coupled with the extension of the repayment period is an effective haircut of its debts to the troika. So, the bankruptcy has already happened, in doses. Can Greece survive inside the euro? The answer is that Europe is planning to allow it to languish inside of the Eurozone, tending toward a state that resembles Kosovo. Will the Greeks tolerate this? Probably. However, the most pressing, and interesting, question is: Can the euro survive? I have no doubt that, if the present policies continue, it cannot.

Note: The above Q&A took place a week ago between a German journalist and myself. More details will be published here soon.

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