Once more up to the brink, or should that be over the precipice?

by niamh on June 18, 2012

It’s getting pretty exhausting living inside the Eurozone. We screw up our nerves for the next moment of crisis, which is narrowly averted, only to find that the same old problems lie in wait just around the corner; but worse this time, because they were’t properly sorted out the first time.

Last week’s worries were put to rest for a short while: Greece is still in the Eurozone, the Euro hasn’t imploded, the banks are still open. Spanish banks teetered; a fix was found for the time being. But it doesn’t mean anything has been solved, and the moments of respite get shorter and shorter.

It seems to me that we’re strung out on Dani Rodrik’s trilemma of global politics in an increasingly dangerous way. His contention is that you can only have two of these three things:

‘hyper-globalization’ (in the EU context, the free market in goods and services and mobility of capital and labour);

‘national sovereignty’ (in which national governments have realistic choices to make between options that may be ideologically quite distinct);

and ‘democratic politics’ (in which there is meaningful involvement by actors and electoral accountability for decisions made).

Kevin O’Rourke (whose work I’ve mentioned here before) pointed out that the odd design of the Eurozone was meant to avoid it getting definitively boxed into any two options in this triangle. Trans-national oversight of the currency was delegated to the ECB. Nation states were charged with making fiscal and financial policy within a loose-ish trans-national framework of rules. Democratic debate was expected to internalize the requirements of pooled sovereignty.

But the sharp ends of the trilemma are becoming more and more difficult to span. The fuzzy compromises are under growing strain, and the Eurozone is being pushed into classic trilemma trade-offs. It’s at growing risk of ripping apart entirely.

First, the fuzzy compromise between supposedly depoliticized trans-national rules (run by the ECB), and national-level responsibility for compliance, is now increasingly problematic. Countries in loan programmes find their national capacity for choice dwindling to nothing. National autonomy is subordinated to the requirements of the transnational official lenders. What gets squeezed out is the democratically determined policy choice at national level. They are in Rodrik’s ‘golden straitjacket’. It’s politics without policy choice.

The two recent rounds of Greek elections show that you can blow off anger once, but the second time, when real fear strikes, the politics of ‘no alternative’ seems horribly compelling. Most Greek voters hate the austerity, the five-year recession, the unemployment of over 22%. But 87% want to stay in the Eurozone because the alternative is even more horrible to contemplate. Greece desperately needs a game-changing five-year plan. But notwithstanding Paul Krugman’s bland optimism about the potential gains from leaving the Euro, the wrenching destabilization and future uncertainties seem deeply unattractive to most people. The deliberate ambiguity of the left-wing anti-bailout but pro-Euro SYRIZA coalition seemed too risky for many voters. The conservative New Democracy party seems set to form a new government.

Something very similar happened in the referendum Ireland was obliged to hold recently to ratify the fiscal treaty (and future eligibility for ESM loans). I have no doubt that most of the ‘yes’ voters behind the 60:40 win did so with little conviction and no enthusiasm. The fear factor of finding yourself at the wrong end of both market opinion and future loan options had a pretty concentrating effect on many minds.

But it’s hard to see this as a stable political option over the long term. People may endure harsh policies for a year, two years, three years; they may acquiesce for longer if they feel under severe enough duress. But what kind of way is this to run a democratic polity? It hasn’t proven to be sustainable historically, whether our examples are Argentina a little more than a decade ago, or Germany’s catastrophic deflation in the 1930s.

Secondly, although the country-by-country approach clearly isn’t working, we don’t have any real capacity to generate a politics of common interest across the Eurozone. ‘Austerity’ is clearly having seriously deflationary effects across the Eurozone. Krugman regularly advocates a coordinated Keynesian stimulus programme to prioritize growth, led by a Germany willing to bear higher inflation and more domestic consumption.

But while this might seem like an attractive solution from afar, we don’t have either the political capacity or the economic space to get anywhere near this at the moment. It is far from clear how we could have proper debates about alternative policy options, nor is it clear in what political forum new ideas could gain traction.

And in any case, while dearth of demand has crushing effects, it is not necessarily the most urgent problem that has to be addressed right now. We have slow-motion capital flight in one country after another. We have a rolling banking crisis – Spain’s problems won’t be the end of it. We have a sovereign debt crisis – both Spain and Italy face growing problems with their borrowing, and that won’t be the end of it either, the way things are going. Banks and sovereign debt are deeply entwined with one another, making the markets very nervous indeed about extending further loans. Market confidence requires political stability. European leaders at the G20 are under growing pressure from the others to sort out the chaos. But what we see instead is official insistence upon a country-by-country response to systemic crises that can really only be controlled at a European scale. It’s ‘sauve qui peut’, which translates as  ’every man for himself, and the divil take the hindmost’ – a far cry from earlier EU ideals of solidarity.

The logic of this would suggest that we desperately need a radical shift away from the usual EU summitry, which typically entails yet another fuzzy patch to the fuzzy compromise, and toward building systemic and Eurozone-wide political responses. We need risk pooling through some form of Eurobonds. We need scope for emergency fiscal transfers to distressed countries. We need the ECB to change its mandate so it can inject money directly into banks. The implication is that we have to move toward deeper political integration in order to get more coherent economic responses. It would mean a decisive shift toward the ‘global federalism’ point on Rodrik’s triangle. This would move real political decision-making to the transnational level, with a form of democratic accountability. But it would entirely bypass national sovereignty.

There are huge sequencing problems with all of this, as Wolfgang Münchau points out:

The Bundesbank said there should be no banking union until there is a fiscal union. Angela Merkel said that there should be no fiscal union until there is political union. And François Hollande said that there should be no political union until there is a banking union.

But that’s only the half of it. Cutting national sovereignty out of the picture could have lots of unforeseen consequences. Consent through gritted teeth can only be relied on for so long. In one country after another, and not just the countries in loan programs, support for further European integration is growing seriously problematic. EU institution-building was always an elite rather than a popular project – the democratic deficit is built into the woodwork. But people could live with this as long as it produced growth and stability. If ‘EU’ means your national concerns become invisible to your rulers, it’s hard to see how ongoing consent could be assured. If ‘EU’ equates to austerity and recession, the legitimacy of the whole project comes under increasing threat. You might end up trying to force closer integration on ever more fractious and resentful societies. How long could this last?

In Greece, for example, the conservative New Democracy party have won almost 30% of the votes, and with the bonus of 50 seats accruing to the party gaining the largest vote share, will control 128 out of 300 seats. With PASOK (punished more severely than ND at the polls for its past mismanagement) obtaining 12.3% votes and 33 seats, and Democratic Left (also strongly pro-Euro) with 6.2% and 17 seats, giving a total of perhaps 178 seats, they might be able to form a government the EU-ECB-IMF Troika will talk to, and they might be able to wring a few marginal concessions in the process.

But this policy stance should not be taken to reflect a settled disposition among Greek voters. SYRIZA is now is a pretty happy position as far as its concerns go. It’s gone from 7% just a few years ago, to 16.8% on 6 May, to 27% now, and it will control 72 seats. There’s no incentive for it to join a government of national unity, as the other parties propose. They plan to play an opposition role, both anti-bailout and pro-Euro, with different elements of its coalition of 13 organizations always available to argue the most plausible case, depending what flavour message suits the occasion. They are channelling an anger and despair that is undoubtedly more widely spread than their vote share reflects. They are likely to do even better in the next election. There’s also the nearly 15% of the votes that have gone to the extreme right, and the 5% to the extreme left, and altogether we’re looking at about 47% support for anti-bailout and anti-austerity policies.

Greece is not the only country tearing itself apart over the prospect of having to implement politics without policy choice, and where the electorate is likely to be highly resistant to further European centralization of political power. In Ireland, Spain, Portugal, Italy, and France, incumbent parties have already taken heavy electoral defeats. The rise of the Front National in France was contained in the National Assembly elections by the majoritarian election system. But Marine Le Pen came a strong third in the presidential elections in May, with a policy stance that is nationalistic, hostile to immigration, suspicious of the EU. The British Conservative Party is more Europhobic than it’s been in a long time. Germany’s usual allies in the ‘strong North’ axis – the Netherlands, Finland – are increasingly prey to instability coming from anti-austerity and anti-EU sentiment. In addition to all this, the pull toward territorial devolution and political segmentation in many European countries makes it even more difficult to sell the prospect of a stronger trans-national centralization of powers.

It’s hard to picture a less propitious time to be thinking about giant leaps toward deeper political integration. Yet it’s hard to picture a way out of the current mess without some form of deeper political integration. The next European Council meeting on 28 and 29 June will be the latest in the series of last-chance opportunities. We don’t yet know what, if anything, will result from this. But the implication seems to be the yet more politics without policy choice, and more sidelining of national concerns – deeply unappealing, deeply worrying.

{ 127 comments }

1

John Quiggin 06.18.12 at 10:51 pm

“We need the ECB to change its mandate so it can inject money directly into banks.”

It already does tha with long-term refinancing operations . What’s needed is for the ECB to buy government bonds. That would put the eurozone in pretty much the same position as the UK and US, not good, but not on the brink of catastrophe.

2

shah8 06.18.12 at 11:06 pm

No, what is needed is in effect, a well managed jubilee policy, with firewalls between public and private debts (and the excessively cozy relationship between bankers and politicians), and strong anti-usury regulations. Some idea at a growth promoting would help, but the only real growth promotion available is probably from ending popular discriminatory policies that shut out women and minorities from full participation in society. That would take a long time. This is going to be a long depression, I think, and the lack of political leadership, along with the deathsgrip on societal-controlling wealth by social elites, is probably going to make it longer. With war as the cherry on top.

3

bob mcmanus 06.18.12 at 11:21 pm

“a well managed jubilee policy”

We did it twice, let’s do it again. I do believe Bernanke and the Fed have the authority and means to buy up any and every European bond, national of Euro-wide, that people care to put up for sale. Greek bonds, Spanish bonds, Euro-bonds, buy them all.

Just start small, like 250 billion, and move up to the tens of trillions or until they make us stop.

I advocated this in 2008.

4

bob mcmanus 06.18.12 at 11:30 pm

LoLR and Hegemon are us, my fellow Amurricans. Time to buy Yurrup, once again.

5

bjk 06.18.12 at 11:30 pm

How about have Germany withdraw, print Euros like crazy, revive the Eurozone ex-Germany. Germany will turn into Switzerland. Switzerland is currently printing francs like mad, and then all of the Eurozone would get into competitive devaluations. The dollar and yen would spike, creating a rationale for worldwide competitive devaluations. Krugman does a jig. Luckily, there is a glut of oil and other commodities as China hits a hard landing and stops saving nuts for winter.

6

shah8 06.18.12 at 11:41 pm

Eeeeh, no–some of y’all are just distracting.

The key issue in the first world is the lack of credit worthy clients, from individuals to businesses. Sure there are billionaires and global conglomerates, but the rest? The main reason there are so few credit worthy potential clients is because

a) Predatory lenders that have spiraled the costs of important services. Everything from divorce laywer-ing, to education, to health services, etc, etc…

b) Social dynamics, which are popular, such as NIMBY, removing potential nexuses for business and customers. Everything from incumbents preventing the building of new living spaces to denying certain localities needing funds and services (and which makes it hard for anyone to locate there, taking advantage of low prices, which also delivers jobs).

So forth and so on. Giving money to banks so they can burn it is not a solution to our problems. Some debt will have to be written off, but the primary project has to be ending the dynamics that made debt aquisition beyond healthy levels mandatory.

7

MPAVictoria 06.19.12 at 12:14 am

Read Atrios.
/ Seriously.
//Please…

8

chris 06.19.12 at 12:27 am

Some debt will have to be written off, but the primary project has to be ending the dynamics that made debt aquisition beyond healthy levels mandatory.

Uh, that would be lending money at interest, wouldn’t it?

Some days I feel like predatory lending is the only kind. Nobody beats the vig; some of them think they will because they’re in the grip of Dunning-Kruger and the rest don’t understand the deal until it’s too late.

Is there a real case (i.e. not based on assumptions of perfect information or similar) that this is too cynical?

9

Sebastian 06.19.12 at 12:29 am

Re the trilemma, haven’t we already pretty much settled on giving up the democratic part? Hate him as much as you want, but Silvio Berlusconi was pushed out by the ECB and related EU-level establishments threats to blow up the Italian banking system and that process was about as anti-democratic as you get without actually calling in the army.

The interesting thing is that Italy runs very close to balanced budget and is tied down by legacy debt from decades ago. They are probably in the best position to effectively declare bankruptcy and move on from there (unlike for example Greece or Spain). But even they felt the pressure from the ECB.

10

felwith 06.19.12 at 3:31 am

Everyone says that the only way for Spain to get monetary traction without approval from the ECB is to leave the Euro, but what if the Spanish government occupied the Spanish NCB and threatened to start printing Euros unless the ECB relented? Sure, it would be a major crisis that could easily cause to Euro to collapse, but would it be *that* much worse than what we have now? Well, I guess it could provoke an armed response, which would be much worse.

11

wilfred 06.19.12 at 3:53 am

Is it binary thinking that creates binary problems or binary problems that create binary thinking?

So all this is reduced to the other guy, system, solution, idea, is worse? The Greeks went from deserving sympathy to deserving contempt. They voted from fear; they deserve what they get.

12

Hidari 06.19.12 at 5:57 am

Here’s an interesting fact. There have been many many many currency unions throughout history .

Every single one has failed. Every. Single. One.

Now: that last statement is kind of untrue, because actually there have been a few currency unions that have succeeded. Of these, obviously the most successful is the dollar, some the reasons for whose success are listed in ad hoc fashion here.

Essentially, with a few exceptions, currency unions succeed if they are linked to ‘nation building’ (i.e. the creation of a new country with a new currency): generally speaking they fail if they are not.

So, in the long term, I think, based on past experience we have two main options:

1: The Euro fails. Completely. Everyone leaves and we go back to the Deutschmark, the Franc, the Drachma etc.

OR

2: We move towards a true ‘United States of Europe’ with shared national anthem, flag, language, our national parliaments becoming regional assemblies and so on. So ‘Yet it’s hard to picture a way out of the current mess without some form of deeper political integration’ is correct. But we should not be under any illusions. This will not solve the problems, and by this logic, the only solution will be more political integration, which leads to more crisis, which leads to more political integration etc. etc. Until eventually ‘France’ and ‘Germany’ are simply regions in a greater European country. (Where this leaves countries outside the Euro, like the UK, is anyone’s guess…..like Puerto Rico in the US?).

The problem here is that both these ‘solutions’ seem kind of impossible. But the proposed ‘alternative’ is also impossible. We are walking into a 1930s style situation, and we all know where that led.

So we have three basic options: go forward, go back, or stay where we are, and all three are basically impossible. This is where we are, in the Eurozone, in 2012.

13

Hidari 06.19.12 at 6:08 am

Incidentally, and just one more piece of evidence that you should never listen to a word I have to say about anything, it seems that there are a (very very very) small number of currency unions that have survived (so far).* For example the East Caribbean Dollar. So mea culpa. Whether this has any implications for my basic argument is not clear. A quick look at the map of the East Caribbean would suggest not.

*This point about ‘so far’ is worth stressing, when you realise how long some other currency unions lasted before their inevitable demise.

14

Data Tutashkhia 06.19.12 at 6:08 am

A good 5-6-year-long world war would help. It’s just that time.

15

Afu 06.19.12 at 6:13 am

“Krugman regularly advocates a coordinated Keynesian stimulus programme to prioritize growth, led by a Germany willing to bear higher inflation and more domestic consumption.

But while this might seem like an attractive solution from afar, we don’t have either the political capacity or the economic space to get anywhere near this at the moment. It is far from clear how we could have proper debates about alternative policy options, nor is it clear in what political forum new ideas could gain traction.”

I don’t understand why Europeans are always so quick to excuse German inaction because of “politics”. The fact that many aspects of the war on terror are politically popular doesn’t excuse US politicians from their responsibility for the harm that the war on terror has caused.

As the leaders of the largest economy in the Eurozone and the main architects of the EU, the German Political elite have a responsibility to maintain the welfare of all of Europe, instead of acting like the are merely representing a small open economy. Currently that would mean Germany acting as a Kindlebergerian hegemon by doing just what Krugman proposes.

I’m not sure why you say there is no “economic space” for Krugman’s proposal, all it would require would be German expansion, a higher inflation target at the ECB and the direct buying of sovereign bonds by the ECB. These are all politically very difficult, but economically orthodox.

16

Hidari 06.19.12 at 6:38 am

Is anyone, incidentally, going to comment on a post about the Euro coming almost immediately after a seminar on Red Plenty? Russian Communism, after all, was a top down, ‘rational’ attempt to control the vagaries of the market by binding the various economies of the Soviet Union together under one central ‘control centre’. Likewise, the Soviet Union itself was a ‘rational’ attempt to bind all the nationalities and languages and cultures of ‘Russia’ into one supra-national unit, all committed to a system of rational economic control: and all with a single currency, of course.

17

lupita 06.19.12 at 7:16 am

The IMF came up with the notion that countries should be run like corporations and get their funding from capital markets and not by selling bonds to their central bank. Nations should also have a credit rating, never nationalize, have open capital markets, and never default. These conditions were imposed around the world, speculative capital rushed in, then out, and many economies in Latin America and Asia crashed.

Why would the Eurozone impose the IMF’s best practices on itself, particularly when the US and UK do not follow them and have rigged everything in their favor? Perhaps because Europeans thought they were special and would not receive the 3rd world treatment? That following these rules would lead to prosperity? Because you believed markets are not only rational but just? Because of the head of the IMF is always a European?

From what I have read, the prime ministers and finance ministers of countries under attack have begun to complain about credit agencies that downgrade them at the worst possible moment, of certain countries (US and UK) retaining their high rating despite higher levels of debt, of being at the mercy of speculators.

Perhaps Europeans will react to this realization as their 3rd world brethren: send the IMF packing, do not rely on capital markets, build up reserves, nationalize, default.

18

QS 06.19.12 at 7:25 am

#17, well stated. On one hand, it is a spectacular inversion of power where the core (EU) is cannibalizing itself with the ideology that allowed it to extract so much capital out of the Third World. On the other, we basically have an intra-Europe North-South power dynamic with the South suffering for the demands made by Germany. Remember, Germany has sailed through the “crisis” and achieved growth like no other country in the EU (Turkey’s growth is tops if we go outside the circle). This obvious fact is almost always hidden in the media discourse on the eurozone.

19

Zamfir 06.19.12 at 7:29 am

I don’t understand why Europeans are always so quick to excuse German inaction because of “politics”.
The EU already has a severe problem with democratic accountability as it is. It becomes rather annoying when people cheerfully proclaim that it needs less democracy on top in order to do The Right Thing.

Krugman’s expansion plan is, in practice, a federal European state. Perhaps that’s orthodoxy for economists, but it’s rather big politically.

20

niamh 06.19.12 at 7:34 am

John (@1), yes, you’re right of course: we need the ECB to be a proper bank of last resort, and able to buy government bonds directly again. The ECB’s long-term financing provision staved off one bit of crisis, that of bank liquidity, for a while, though this hasn’t made commercial borrowing any easier because the banks end up buying more government bonds, generating more of another kind of risk. What I had in mind though was the way the recent Spanish bank recapitalization seems likely to work: if it’s backed up by the government, it adds to the reported government debt liabilities and risks worsening the perceived risk of lending to the sovereign.
Hidari (@16), I think the point about parallels with Red Plenty and contemporary capitalism in general have been made by a number of people in the comments threads. Not necessarily applied specifically to EU politics though, as you suggest. Francis Spufford has welcomed the sense of strangeness with which we might return to our own world after reading his book – we have lots of ideas knocking about, and many lessons to draw on (this time is never different), but we don’t know the ending of our own story yet.

21

robotslave 06.19.12 at 8:10 am

The can, she is kicked once more down the road.

The risk, it steams ahead, unmanaged. The wolf remains at the door, and the shepherd’s boy continues to cry its presence to all within earshot.

Popcorn production was ramped up long ago, but the vendors can’t seem to sell it to anyone new; the customers are the same ones who lined up last week, and the month before.

Until the storm actually breaks, we might have to consider the possibility that practitioners of the outdated, universally maligned system of crisis management might not be quite as stupid and shortsighted as Any Thinking Person would tell you.

22

Niall McAuley 06.19.12 at 8:34 am

The people who designed the Euro understood the trilemma. They knew the Euro can never work without full European integration. The plan is that by the time voters figure that out, they will want the Euro more than they want national sovreignty.

It seems to have worked on Greece and Ireland. Spain is next, then Italy, then France.

Then Germany steps in and backstops the whole shebang with Eurobonds, and we all stumble along the road after the can.

23

Alex 06.19.12 at 8:51 am

The problem with “political union” is that political union is transfer union. If it isn’t, then it’s not meaningfully a political union and it’s not a solution. If it is, the Germans won’t have it, in the last analysis. If German policy is “no transfer union”, political union is code for “stop kicking the can and instead kick the ball into touch, let’s spend the next couple of years doing what the EU does best, holding an Intergovernmental Conference”.

24

Walt 06.19.12 at 9:42 am

Zamfir, bullshit. The ECB is already in a position to implement most of Krugman’s suggestions. They can cut interest rates. They can raise their inflation target. They can buy sovereign debt on the secondary market. The ECB is deliberately not doing those things in order to bring democratically-elected governments to heel, as we saw in Italy.

25

Walt 06.19.12 at 10:08 am

I think that the nationalist issues are getting in the way of understanding here. The Euro has long-term problems that require delicate negotiations to solve. But the Euro has to survive them long enough to have a long-term, and that requires competent short-term management of the currency. The body responsible for that short-term management, the ECB, has neglected to respond appropriately, and at several points deliberately acted inappropriately. They increased interest rates in 2011, an action widely decried by economists at the time, and were rewarded with the blow-out of Italian sovereign debt yields, which they levered into forcing out Berlusconi.

The ECB is a rogue institution that has used the crisis to increase its own power. Not only that, they have made the crisis worse, perhaps deliberately. Europe cannot recover and the euro cannot survive until and unless the ECB is gotten back under control. That’s the key issue facing Europe in 2012, and not questions of political union.

26

CharlieMcMenamin 06.19.12 at 10:37 am

Clearly, by the current standards of the possible, it is not within the Overton window to give up on hyper globalisation ornational sovereignty or democratic politics.

So we get what we have: an impressive – to this non economist, anyway – series of more and more recherche exercises in plate spinning by the European and global elites of the financial and political worlds. More and more crockery is set a-turning on more and more poles as the performer rushes from one end of the stage to another to prevent a crash. Wobbly plates are caught just before the disaster and the poles set a-spinning once more. Like the rest of the audience, I am gasping in amazement: I didn’t imagine anyone could fend off disaster for this long.

But the central thing about a plate-spinning act is that it ends successfully: at some point the entertainer catches all the plates and takes a bow to thunderous applause. The lights go up and normality has returned.

& this is where this metaphor breaks down for me. I’m not convinced anyone has any kind of plan to safely rescue all those plates – in other words, it seems increasingly likely to me that the Overton window has to be smashed, one of the three points of the trilemma has to give.

But I think it a brave person who predicts which one it might end up being. Personally, I’m not convinced that the ‘deeper political integration’ option will come out on top. In fact I’m not even convinced this is desirable without a (currently ‘unimaginable’) transformation of the EU into a popular mass project rather than just a top down one.

27

purple 06.19.12 at 10:52 am

The rich got too damn greedy and there isn’t a middle class to absorb what is massive global over capacity.

It’s been amusing to see people proposition China as the savior for a bankrupt Western middle class, this, a country based upon the Asian export model.

There is no solution because the elites know they are deserving of their wealth and are determined to squeeze the workers even more. The whole thing is going to collapse in another wave of bankruptcies that will include countries.

28

Cranky Observer 06.19.12 at 11:28 am

= = = Hidari 06.19.12 at 5:57 am

Here’s an interesting fact. There have been many many many currency unions throughout history .

Every single one has failed. Every. Single. One.

Now: that last statement is kind of untrue, because actually there have been a few currency unions that have succeeded. Of these, obviously the most successful is the dollar, some the reasons for whose success are listed in ad hoc fashion here. = = =

I’m not sure that the people who live (or used to live) in Michigan, northern Indiana, and northern Ohio can really count the 50-state-linked dollar as an unmitigated success.

Cranky

29

bjk 06.19.12 at 11:32 am

OK which of these doesn’t belong – Greece, Italy, Spain, Portugal . . . Germany. It’s clear that the deflation spreading across the EMU is coming from Germany. When Germany leaves, the deflation will recede. Germany leaves before Greece or Italy reform, because reform simply ain’t gonna happen.

30

chris 06.19.12 at 11:57 am

Why would Germany leave? They’re the ones profiting from the misery they are inflicting on everyone else.

Being the vampire squid to the rest of the continent is nice work if you can get it.

31

bjk 06.19.12 at 12:09 pm

You can’t profit from misery if you’re the lender to the immiserated.

32

Agog 06.19.12 at 12:17 pm

There’s some interesting ‘discussion’ on related stuff at RWER between Robin Pope and others (the ‘discussion’ is a tiny bit weighted to one side). The discussion starts off on the euro crisis, but Pope’s concerns are broader.

My summary of her position:

- neuter the FIRE sector
- neuter the pharmaceutical sector
- neuter tax avoiders
- instate a single world currency

Full paper (pdf) here.

33

Agog 06.19.12 at 12:17 pm

Uck – newlines between the dashes!

34

QS 06.19.12 at 12:24 pm

Germany is indeed the Euro “vampire squid” but it is also not a black box. Germany is effectively routing money from its taxpayers into its banks, which can and will continue until its taxpayers revolt. Domestic politics will likely be the determinant here — when taxpayers begin seeing actual domestic costs (say to the social safety net) of bailing out their banks, they will force the politician’s hand. Boomerang payments (Germany->Greece->Germany) will cease.

I quite like the term “boomerang payment” as it makes clear the actual terms of the “bailout”.

35

rf 06.19.12 at 12:37 pm

“I have no doubt that most of the ‘yes’ voters behind the 60:40 win did so with little conviction and no enthusiasm.”

I’m not so sure. For my own part I’ve become much more pro EU in the last couple of years – as it seems the only real way of controlling the lunatic financial sector, and cutting the chord with the British and Americans before the whole country turns into Detroit/Liverpoool.
I’ve heard more than once on visits back, in the solidly anti EU fishing village I live beside, a variety of ‘this country was a kip before the Europeans came in’. Its not enthusiasm, but I don’t see outright hosility to greater integration.

I’d be interested in someone expanding on why the resolution to this crisis has to be greater fiscal and political integration – especially since so few alternatives have actually been attempted the past couple of years. Aren’t there a whole number of stop gap measures short of full integration that could possibly work? If these arent feasible politically, then greater integration as imagined is a non starter.

36

Mr. Violet (@EuropeanViolet) 06.19.12 at 12:51 pm

I know it is just a modest contribute, but I tried to give a name to the present idea that German Government, actually BuBa behind it, has of fiscal union, which corrispond very much to your “politics without policy choice”, I called it reformatory fiscal union, in order to distinguish it from a federal transfer union like the US, in particular I have identified, theoretically, several possible reformatory fiscal unions and defined the present European one as a repayment-oriented loan-based reformatory fiscal union
See this post for more details: http://europlay.blogspot.it/2012/06/taxonomy-of-fiscal-unions.html
At the end of the post I also tried to explore the theoretical possibility of third type of fiscal union which is not a reformatory union or a *fully* federal one.
Hope this contribute can help in some way.

37

rici 06.19.12 at 1:34 pm

The two recent rounds of Greek elections show that you can blow off anger once, but the second time, when real fear strikes, the politics of ‘no alternative’ seems horribly compelling.

How exactly do the recent Greek elections demonstrate that? The linked article in To Vima was written a week before the second election; had its predictions materialized, it might have some credibility but as it is it stands simply as a pre-election puff piece based on the unfulfilled dreams of an anonymous analyst, presumably connected with PASOK (“one of the former major political parties”). His claim: “the so-called ‘pro-system voting’ will strengthen, followed by a contraction of anti-system voting.”

So, did that happen? In a word, no. It’s true that the pro-system vote went from 34.6% to 41.9% [1]. But the anti-system voting, to the extent that it is represented by Syriza, clearly did not contract. Syriza registered an increase from 16.8% to 26.7%; my guess is that much of this came from the collapse of the KKE (communist) vote (8.5% to 4.5%) and the Green vote (2.9% to 0.9%), as well as votes for various other smallish left parties. That would be better described as a consolidation than as a contraction.

In fact, the increase in the “pro-system” vote also had an element of consolidation, since it was accompanied by decreases in the vote for LAOS, Drasi, Recreate Greece and other right-wing splinters.

In short, far from a shift from “hatred” to “fear”, the shift in voting from May to June seems to me to be in large part a pragmatic and strategic consolidation, in which many voters chose to support one of the two parties most likely to win the election.

In any event, I cannot see how you can possibly justify the statement “The deliberate ambiguity of the left-wing anti-bailout but pro-Euro SYRIZA coalition seemed too risky for many voters”, in part because Syriza in fact attracted 60% more voters in June than it did in May, and in part because the perception of Syriza presented in that statement is less a reflection of Syriza’s actual performance (which is basically untested) and more a reflection of received wisdom from the “European” press.

fn1: I’m taking “pro-system vote” to be the combination of ND, PASOK, and the splinter Democratic Alliance formed by former (and probably future) ND cabinet minister Dora Bakoyannis after being expelled in 2010 for supporting the austerity measures then opposed by the opposition ND, but now reunited with the mothership; the alliance did not present in the June election. One could also add presumable coalition partner Democratic Left (which consists of both disaffected ex-PASOK MPs and the PASOK-leaning edge of the former Synaspismos, out which was born Syriza, which would make the figures 40.7% and 48.2%, respectively. (In 2007, the combined PASOK/ND vote was 79.9%, down from 85.9% in 2004.)

38

rici 06.19.12 at 1:44 pm

@Hidari (12):

Here’s an interesting fact. There have been many many many currencies -unions- throughout history.

Every single one has failed. Every. Single. One.

With a few notable exceptions. (Up to now.)

FTFY.

Actually, I agree that in an ideal world, we would be debating increased political union rather than saving a currency union. But in that world, the political union might be based on a social consensus which regarded desperate pensioners committing suicide in public squares to be a more pressing issue than bankers complaining of not having enough profit in the Financial Times.

39

MattF 06.19.12 at 2:06 pm

Just a historical note: the path of US currency union had some potholes:

http://en.wikipedia.org/wiki/Panic_of_1819

It may all seem rather quaint at this distance but in the first half of the 19th century, the US was not a paragon of stability.

40

Random Lurker 06.19.12 at 3:01 pm

@Sebastian 9
“Hate him as much as you want, but Silvio Berlusconi was pushed out by the ECB”
and
@Walt 25
“The ECB is deliberately not doing those things in order to bring democratically-elected governments to heel, as we saw in Italy”

The impression I had here in Italy is that the ECB did not force Berlusconi, rather Berlusconi (who was very umpopular because he just had his sex scandal) realized that he was forced to very umpopular politics (mostly raising taxes), and had the good idea of leave someone else to face public rage.
In fact, when Monti was selecting his government, he directly asked for “high profile” politicians from major parties to join his government, but both party refused to take responsibility for Monti’s choices (while completely backing him in the parliament).
In other words Italian parties (both Berlusconi’s PDL and center-left PD) behave in a very hypocrital way, backing up most Monti’s decisions but then screaming that they are forced by Evil EU|Evil Germany|Evil Markets|Evil Whatever for political posturing.

The problem is that we have a sort of class war with creditors on one side and workers[1] on the other, while most middle class guys still identify with creditors so that also debtor countries governments side with creditors for austerity.

One more tought that is a bit OT but I think should be stressed: the ECB has a mandate of “stable prices”, however it is actively asking for “internal devaluation”. How is deflation compatible with price stability? Answer: it isn’t. However no government of the GIIPS countries ever said to the ECB “you are going against your mandate”. Also, Draghi was proposed by the Italian government (I think by Berlusconi) so it is a bit hard to say that the ECB is not influenced by national governments.

[1] I say “workers” because the obvious solution would be to manifacture big time wage-driven inflation, but this would mean to give more bargaining power to workers and destroy the real value of “savings”. The choice today is instead to squeeze workers in various ways in order to get the money to pay on interests, thus saving the creditors but damning the workers.

41

Data Tutashkhia 06.19.12 at 3:38 pm

So, no one likes my proposal for WWIII? You don’t really need to kill anybody, just to destroy excess capacity (and then some). A re-enactment sort of thing: you could send all the Germans to a nice holiday in Portugal, Italy, Greece, and Spain, and then ask the Yanks to bomb all their factories, burn them to the ground. And a few cities. Also industrial parts of England, if they still have any. Make it look like an accident. Then ask Hu to lend some stuff for rebuilding. That’s one method that definitely works, for a few decades; we know that much.

42

ajay 06.19.12 at 3:40 pm

Shut up, Data.

43

Data Tutashkhia 06.19.12 at 4:06 pm

Typical. That’s what you get for thinking outside of the box.

44

mpowell 06.19.12 at 4:17 pm

I also feel like setting reasonable monetary policy aside as politically impossible is rather silly. No actual solution, even the worst meddling through variety, is really politically possible in the sense that the votes are there at this minute. If enough people were saying, “no this is really the way we need to go”, that would greatly increase the chance that you could get there.

Two things really need to happen. First, the ECB needs to raise it’s inflation target to 4% and make it clear that lower than desired inflation is just as bad as higher than desired inflation. I don’t think this would require any voting, new treaties, or whatever. It would just require the people at the ECB deciding to do this. That’s a specific available pressure point that could be attacked. The charter is price stability. Maybe someone should ask Draghi what he will have accomplished for price stability in the context of a euro breakup? That guy deserves public mockery for his comments and actions so far.

The second thing that should really happen is that the ECB should start buying sovereign debt as part of an attempt to hit it’s inflation target. This is better than the alternatives. To be fair, it should buy debt in a per capita neutral fashion. I think this implies no redistribution. My understanding is that this would require adjusting the ECB’s charter. But this seems like a reform that really needs to happen. The ability of a central bank to buy sovereign debt is a crucial instrument to hit an inflation target in the face of deflationary pressure, so this is something that should be a policy goal for smart people interested in the success of this project.

Rodrik is absolutely right about the trilemma faced by the members of the euro (and goverments in general). But bad policy is making this trilemma more cutting than it needs to be. Instead of 20%+ unemployment in the periphery (which is simply catastrophic) we could have a situation with 6% inflation in Germany and maybe 10% unemployment in the periphery. Not good, but tolerable on both sides. And if the core and periphery want a monetary union that bad, I believe they would happily tolerate these kinds of sacrifices. 20% unemployment on the other hand, they will not tolerate indefinitely.

45

Bruce Wilder 06.19.12 at 4:52 pm

The European Parliament could enact provisions for member-state bankruptcy protections: an orderly process for “jubilee”, plus a Glass-Steagall Act, creating a fenced-off set of banks and mutually-owned credit unions, with deposit insurance, to stabilize the payments systems, underlying the Euro.

The curious complexity of the existing arrangements is a Gordian knot, not worth untying, when the requirements of a stable payments system are well-known: fair and expeditious bankruptcy and a financially-repressed payments and common credit system, off-limits to the wizards of Wall Street, the gnomes of Zurich, the boffins of the City and whatever they are in Frankfurt.

46

Bruce Wilder 06.19.12 at 5:20 pm

To be clearer: the core problem is financial fraud.

How does one constrain through public governance the tendency of the financial system to create financial fraud? Ponzi schemes, shell games, usury and manufacture of volatility — they all belong to the same realm. Focusing policy on the rescuing of failed banks, while demolishing local mutual credit institutions, trade unions and democratic governance, looks very much like a policy of deliberating making the world “safe” for predatory finance on an ever-larger scale.

47

Bruce Wilder 06.19.12 at 5:25 pm

And, yes, I’m echoing what shah8 wrote @6.

48

lupita 06.19.12 at 6:39 pm

Mexico, and many other countries, had central banks that bought government bonds plus political integration and they crashed nonetheless, so the solution to the Eurozone crisis cannot be tinkering with the ECB’s mandate or greater integration, unless one believes that Europeans “are not 3rd world nations” – meaning corrupt, lazy, inefficient, pre-modern, and stupid – characteristics that 3rd world nations share and that brought them financial ruin.

Europeans innocently and voluntarily built a financial and monetary system following the directives of the IMF, something 3rd world countries did under duress. Why? I think it is because of this notion, i.e., “we are not like a 3rd world nation”, meaning, we are superior. Now it is different. I have read about Barroso’s humiliation while stating that the crisis is the fault of Americans (typical 3rd world view: blame the Americans) and to stop patronizing him. I have seen Rajoy’s surprise and frustration at not being able to inspire confidence in the markets despite knowing and following all of the IMF’s directives. By this point, they both know they have been had, exactly like a 3rd world country. The solution will come from this realization.

49

lupita 06.19.12 at 6:54 pm

So, no one likes my proposal for WWIII? You don’t really need to kill anybody, just to destroy excess capacity (and then some).

The IMF loves it and has been using it for three decades. Crashing a financial system produces the same devastation as war. Then comes the profitable reconstruction in the form of bailouts and the return of “growth”.

50

Data Tutashkhia 06.19.12 at 7:30 pm

Hmm, I don’t think crashing the financial system produces the same devastation as war. Crashing the financial system produces an even lower capacity utilization. What you need is to destroy capital, physically destroy it. Most of it. So that for a while everyone is driving Fiats. Otherwise, as long as all those VW factories are still there, in Germany, what can you do?

51

niamh 06.19.12 at 7:49 pm

Niall McAuley @22: I favour the cock-up theory of history myself, at least in this case, rather than the deep conspiracy you seem to discern. They all probably did think that a rolling impetus toward deeper integration would follow from monetary union. But the law of unintended consequences is a damn devious thing.
rici @37: Thank you for these comments. My thoughts about Greece are set out in two parts, firstly trying to understand why the pro-bailout parties did better than projected (since it was far from obvious that SYRIZA would not be the next government), and secondly pointing out that the anti-austerity parties are gathering strength, and that as long as nothing fundamental changes in Greece’s situation, the next election could be pretty explosive.
Random Lurker @40: On the ECB’s mandate, deflation is just fine as long as it keeps price rises below 2% – see this… They really do mean it.

52

shah8 06.19.12 at 7:52 pm

I have been thinking (or haunted?) by the notion that this crisis is essentially the parable of King Midas, in terms of a system that could only perceive control of wealth in it’s umwelt, and not thing things that generally creates wealth, and so it’s starving to death from the demand crash that’s happening now. All of the methods it’s willing to acquiesce to, leaves control of wealth where it is, but not where it could generate more of it. And it’s slowly, but surely becoming ineffective, from being seen as the shell game it is. Bailouts, for example, leads to subordinated bonds, and chase out anyone who doesn’t have a political “in”. Solutions that could work, like allowing serious wage inflation, are rejected out of hand because that redistributes *power* and *control of wealth*. And now, we have to wait for the system to die from demand starvation.

53

Bruce Wilder 06.19.12 at 8:21 pm

Data Tutashkhia: “What you need is to destroy capital, physically destroy it. Most of it. So that for a while everyone is driving Fiats. Otherwise, as long as all those VW factories are still there, in Germany, what can you do?”

The idea that the physical destruction of WWII was necessary, or even contributed to, the post-war economic miracles of the 1950s and 1960s has got to be one of the crazier notions to ever gain currency. Of all the available factors to sort out in analysis, to focus on that, and insist on causality, borders on insane. Fiats? VWs? What are you talking about?

54

lupita 06.19.12 at 8:21 pm

What you need is to destroy capital, physically destroy it.

That is so WWII. Contemporary sensibilities will not stand photos of smoking ruins of factories any more than people during the 70s could tolerate the picture of a naked, little girl running down the highway, her skin on fire.

Capital is destroyed by financial meltdown just as certainly as it is by bombs. However, the image it leaves behind is of a young Greek woman, crying in her apartment surrounded by expensive exercise machines. She had to close her gym because of lack of clientele and now owes more for her machines than she could ever possibly sell them for. In terms of capital destruction, what is the difference between this situation and a person desperately salvaging what she can from the rubble of what used to be her gym?

As for VW, wait, all in good time.

55

Bruce Wilder 06.19.12 at 8:23 pm

lupita: “Capital is destroyed by financial meltdown just as certainly as it is by bombs.”

Obviously not.

56

Data Tutashkhia 06.19.12 at 8:43 pm

The idea that the physical destruction of WWII was necessary, or even contributed to, the post-war economic miracles of the 1950s and 1960s has got to be one of the crazier notions to ever gain currency.

Oh. Well, could we at least agree that it didn’t contribute to any excess supply?

57

Mandos 06.19.12 at 9:01 pm

mpowell@44:

You underestimate the extent to which the German public rejects an iota of inflation more than current, and the consensus that has developed between the BuBa and the public in Germany. That idea that inflation should happen in Germany is viewed as theft in a society that is used to hoarding cash.

58

Niall McAuley 06.19.12 at 9:06 pm

The biggest winners from the destruction of German industry in WWII were the neutral Swedes. Their heavy industries were untouched, and they used the proceeds to fund all kinds of socialism, big brother alcohol registers and ultimately, ABBA.

So that’s a no to another WWII from me.

59

Data Tutashkhia 06.19.12 at 9:07 pm

According to this:
http://en.wikipedia.org/wiki/Template:World_motor_vehicle_production_by_country_in_2011
there are 6.3 million cars produced in Germany, and only 0.8 million in Italy. The number for Italy seems kind of low, but, hey, wikipedia can’t be wrong. So, if it’s true, this is a serious disbalance, and, I imagine, this disbalance is typical, and it exists in many other industries as well. And this disbalance seems to be the source of all this whole mess. No?

60

Alex 06.19.12 at 9:10 pm

Data: the Nazis never actually delivered any VWs to the customers who saved up for them. It was mostly a means of inflation-financing. All the vehicles actually built were commandeered by the military and, basically, consumed – destroyed, lost, driven to ribbons, etc.

61

Bruce Wilder 06.19.12 at 9:12 pm

Data Tutashkhia: “. . . this disbalance seems to be the source of all this whole mess. No?”

No.

Glad I could clear that up, for you.

62

rici 06.19.12 at 9:55 pm

niamh @51: That’s certainly clearer, but:

… trying to understand why the pro-bailout parties did better than projected (since it was far from obvious that SYRIZA would not be the next government)

better than projected by whom? Two weeks ago, when the poll publication embargo went into effect, the projections were pretty close to the actual results; you can see a combined graph in Wikipedia (the graph is here in case the Wikipedia article gets redacted; also, Athens News has a recompilation of poll results with a slightly misleading headline). The Wikipedia graph shows a projection of ND 27.75 (actual 29.6), Syriza 27 (actual 26.9) and Pasok 13.75 (actual 12.3). That’s all well within margins of error, particularly for samples taken two weeks before the election.

I agree that it was not obvious that Syriza could not have achieved a plurality in the election, and its failure to do so was probably the result of a fear campaign being spread. But I think it was obvious, looking at those numbers, that Syriza wasn’t going to form the next government. Suppose the Syriza and ND vote had been reversed, which was probably the most “optimistic” scenario for a Syriza supporter. Then Tsipras would be making the rounds today, with 129 MPs in his back pocket, trying to find another 22 to make up a majority. Where will those come from? The only parties with more than 22 MPs are Pasok and ND, but it’s very hard to see either of them agreeing to a coalition at this point. Their best strategy would be to let Tsipras fail, and then hope to put together some kind of “anyone-but-Syriza” coalition with the ND trial mandate. KKE is not going to join a coalition with anyone — unlike Syriza, they don’t believe the European project is worth trying to save — and no-one will join a coalition with Golden Dawn. So that would leave Tsipras trying to convince the mildly pro-bailout Democratic Left and the anti-bailout but rightwing “Independent” Greeks to both join up (rejoin in the case of the former). Good luck with that.

So the fallback (other than another election) is a government supported by 125 MPs, and “tolerated” by the rest. That’s another recipe for disaster, and it’s not at all obvious that Syriza has an advantage in putting that scenario together either.

OK, so much for counter-factuals. With the actual results, Tsipras can happily be the leader of the opposition, leaving Samaras to try to put together a pro-bailout coalition, a much easier task. To this end, Samaras is actually aided by the fact that he and his party were originally also anti-bailout, allowing them the luxury of presenting an ambiguous posture. In contrast, Venizelos and Tsipras are both clearly committed to their respective sides.

This is particularly problematic for Venizelos, who is ostensibly a socialist but who has become the clearest advocate for starving pensioners, giving away state assets, and bailing out bankers. (OK, I’m not neutral on these issues either.) Accepting an ND government supported by Pasok would put Venizelos clearly in the role being played by Nick Clegg, and we’ve all seen how well that’s working out. On the other hand, he can’t sit things out either, because doing so would open him up to the charge of sabotaging a result (a pro-bailout government) which he himself claims is necessary to the very survival of Greece. His desperate attempt to convince Tsipras to take on the Clegg role was obviously not going to work; Tsipras is not stupid, either. Using Kouvelis as a foil might not be a great play either, but it seems to be the best move he’s got available. Hence, his insistence that Pasok will support the coalition for the good of the nation, but will not be seen to be active in the government.

Athens News got some nice pictures from today’s meetings (search for “9.45am” on that page). Look at Samaras chatting with Tsipras and tell me which one of them thinks they’ve won :)

… and secondly pointing out that the anti-austerity parties are gathering strength, and that as long as nothing fundamental changes in Greece’s situation, the next election could be pretty explosive.

Yeah. Barring miracles, I think the explosion is likely to happen before the next election. It’s really hard to see anything good coming out of this.

63

lupita 06.19.12 at 10:35 pm

And this disbalance seems to be the source of all this whole mess. No?

Relative total production does not matter as long as a company’s earnings are growing. Furthermore, it does not matter if growing profits come from increased production, financial speculation, fraud, or exploitation. As long as earning are shown to rise, stock price will rise, the company will be deemed profitable, and it will avoid a hostile takeover.

In the case of countries, governments need also to develop an obsession with short-term GDP growth to retain the confidence of investors and to avoid capital flight, bond spreads spiking, and financial Armageddon. It does not matter whether growth is the product of real development, a real estate bubble, fraud, exploitation, or taking over the markets of previously destroyed countries.

The disbalance resides in CEOs and prime ministers accepting that they must produce short-term capital gains or face extinction. This is the source of the mess.

64

Random Lurker 06.19.12 at 11:18 pm

@Niamh 51
I understand this, however price stability is a broader concept than controlled inflation.
I think that the original idea of monetarism is that the great depression was caused by deflation and that central banks have to fight it too.

@Data 58
I don’t. know. if this is relevant, however. Fiat has a lot of factories outside Italy (mostly wage arbitrage).
wikipedia gives a production of more than 2 million cars in 2011 on the fiat page. also,wouldn’t it be simpler to raise wages?

65

P O'Neill 06.20.12 at 12:29 am

In terms of media portrayal, it’s a tad weird that Syriza are the CRAAAZY radicals who think that raising taxes would raise revenue, while ND are the sensible, EU-saving moderates who believe that cutting taxes will raise revenue.

66

Niall McAuley 06.20.12 at 12:30 am

rici writes (of a minority government): That’s another recipe for disaster

The only kind of government which is not a recipe for disaster for Greece is a federal European government.

Just like Ireland.
Just like Portugal.
Just like Spain.
Just like Italy.
Just like Belgium (though no-one ever points it out).
Just like France.

And (since if all those economys tank, so does Germany’s export drive)

just like Germany.

So, folks, what’ll Ireland be referendumming about next?

Next March, shall we say?

Meanwhile, in a concrete vote for Greece, the Euro and a federal Europe, I’m about to pay for my summer holidays in Crete. In Greece. In advance. In Euros.

Because I’m just that keen on a united Europe.

(Also, sunshine, ancient ruins and retsina)

67

Andrew F. 06.20.12 at 12:32 am

There’s an awful clash of interests waiting at the end of this road, no? Germany insists on a closer political union as a condition to certain types of transfers and guarantees because, in part, it doubts the willingness of certain troubled governments to see through structural and fiscal reforms (and of course, in part because the German populace believes that they already painfully reformed their economy and saved their money, and why should they now have to pay for the imprudence of others?). Meanwhile the same troubled governments want those transfers and guarantees because the fiscal and structural reforms are too painful/unpopular.

I suppose the hope is that a closer political union could get the Germans both actual and perceived accountability by other governments, and simultaneously ease the pain of the fiscal and structural reforms.

And it’s probably true that the burden would ease relative to what it would be otherwise, but there would still be a significant burden, presumably.

Is the hope that either greater perceived political legitimacy, or a timely easing of deleveraging, will save the day?

I don’t see much hope here – other than to muddle along, keep the core of the eurozone fully invested, achieve what small steps to union/coordination are possible, and pray that economic activity increases. It might even work.

68

John Quiggin 06.20.12 at 12:49 am

The Guardian is running a story saying that Merkel has agreed that the European Stability Fund (not quite right name, I think) will be allowed to buy government bonds. Once this happens, the obvious question will be whether the ECB should finance (or expand existing financing of?) the Fund. If that happens, we finally have quantitative easing.

At that point, the eurozone will be no worse than the UK and US – combining fiscal austerity with monetary easing.

But I’m still not sure if I understand this. I, and I suspect lots of financial market participants, originally thought the “no strings” bailout of the Spanish banks was being paid for by the ECB, not added to the debts of the Spanish government. So maybe I’m misunderstanding what’s happening here.

69

Niall McAuley 06.20.12 at 12:49 am

No, the hope is that the prospect of economic Armageddon will make stubborn people all over Europe realize that they are better off together.

Just as the aftermath of actual firebombing, Billy Pilgrimming, pre-nuclear destruction inspired the original European Coal and Steel Community.

But hey, fuck it, let’s quit the union and devalue, what’s the worst that could happen?

70

chris 06.20.12 at 1:21 am

You can’t profit from misery if you’re the lender to the immiserated.

You can if you can convince the marks, er, I mean Greeks to make not defaulting a higher priority than feeding and educating their own children, fixing their roads, providing pensions to their elderly, etc. — you know, all that wasteful government spending Very Serious People are now telling the Greeks they can’t afford because they have to repay German bankers instead.

71

Data Tutashkhia 06.20.12 at 5:49 am

also,wouldn’t it be simpler to raise wages?

Raise wages in Italy? Nah. This is more or less the same as the ‘Chimerica’ situation. You give them more money, they’ll buy more stuff from Braun.

72

niamh 06.20.12 at 8:31 am

@rici, 61: Thanks for the nice links. The series of pictures on the (not so) love seat is great.
@ P O’Neill, 64: Both could surely be possible, in principle at least, depending on the distributive impact. The Greek tax system is massively inefficient and imposes heavy burdens on people it’s easy to capture, i.e. employees esp in the public service, while the scale of tax evasion by professionals, self-employed and others is pretty notorious.
@ Niall McAuley 68, chris 69, and others: I agree that Germany bears an enormous responsibility for charting a way through the current mess. But they’re also
up to their oxters in the whole bailout/ refinancing thing already. ‘Nobody said it was easy’, as the man sang…

73

Anon 06.20.12 at 9:10 am

Great summary on the current Eurozone situation. The condescending description of Syriza (“always available to argue the most plausible case [...] depending what flavour message suits the occasion”) is disappointing, though not unpredictable. It’s rather sad that that so many lefties abroad have uncritically borrowed the perspective of neoliberal media to describe the party. Just because you think their negotiation platform is unrealistic doesn’t mean that they are insincere about it. In fact, Syriza has surprisingly managed to transition from a 5% party to a 25% one with little compromise to its message.

74

QS 06.20.12 at 9:43 am

#69, you also have to convince the Germans to keep sending money to Greece so they can pay up on their debts (to German banks). It’s corporate welfare that uses the Greek people as hostage (pay up or they will suffer), and eventually the Germans are going to care more about themselves than the Greeks. Though Germany’s economy had a nice expansion in Q1 2012, so who knows when that moment will come…

75

ajay 06.20.12 at 9:45 am

You can if you can convince the marks, er, I mean Greeks to make not defaulting a higher priority than feeding and educating their own children, fixing their roads, providing pensions to their elderly, etc. —you know, all that wasteful government spending Very Serious People are now telling the Greeks they can’t afford because they have to repay German bankers instead.

1) No one – no one! – is telling the Greeks that they have to repay their debts. Everyone who holds Greek sovereign debt has already agreed to write off about three-quarters of it and to accept much more lenient repayment terms on the rest.

2) German bankers hold a miniscule amount of Greek sovereign debt – about €10 billion out of a total of €350 billion – and have taken extensive provisions against default. The assets of the German banking system total €2.5 trillion.

76

QS 06.20.12 at 9:46 am

The idea that the physical destruction of WWII was necessary, or even contributed to, the post-war economic miracles of the 1950s and 1960s has got to be one of the crazier notions to ever gain currency.

I find this statement a “crazy notion”.

77

Anon 06.20.12 at 9:51 am

No one – no one! – is telling the Greeks that they have to repay their debts. Everyone who holds Greek sovereign debt has already agreed to write off about three-quarters of it and to accept much more lenient repayment terms on the rest.

So you’re saying that they’re willing to let Greeks default and still recapitalize their banks? Because I find that highly unlikely, because it’ll send a bad precedent of Greeks getting a free ride and lead to a capital flight out of the Eurozone, although it’s the most optimal scenario for Greece. Given that a return to the drachma would be preposterous, I really don’t see how Greece is not effectively forced to repay its debts.

78

QS 06.20.12 at 9:53 am

#74, figures I have seen consistently show Germany and France as the most exposed to Greek debt in case of a default. Bank of Intl Settlements has it as Germany 22.6b, France 14.9b.

79

Tim Wilkins0n 06.20.12 at 10:25 am

This should be a tractable dispute – perhaps both ajay and QS could provide links to back their positions. QS currently ahead, having provided a named source which could probably be followed up.

80

bert 06.20.12 at 11:01 am

John Quiggin @67:
http://ftalphaville.ft.com/blog/2012/06/19/1051371/exclusive-to-all-newspapers-efsfesm-bond-buying/

So, the mechanism is already on the books. What’s absent is the political agreement to proceed down this path. And the Germans aren’t playing. More pressure will be applied at the EU summit starting on the 28th. It now seems everyone, including the Germans, wants to be able to come out of that meeting talking about a “growth agenda”. But there’s no agreement about what that means in practice.

The FT writeup on the G20 communique: “No grand bond-buying roll-out for the eurozone though. Nothing much at all (who was really expecting anything more?). In fact ‘sustainable borrowing costs’ get shoved at the end of a sentence starting ‘The adoption of the Fiscal Compact…’ — take the hint.”

81

bert 06.20.12 at 11:14 am

Larry Elliott’s commentary on this has been given the headline “Germany surrenders”.

82

ajay 06.20.12 at 12:04 pm

76: I really don’t see how Greece is not effectively forced to repay its debts.

Because the holders of Greek sovereign bonds have already agreed to a writedown, or “haircut”, in which a very large part of the total debt has been written off. Greece has already defaulted – it is not going to repay all its debt on the terms on which the money was borrowed. That is a default. It is going to repay some of its debt, on more lenient terms. If you believe that Greece is being forced to repay its debts, you are wrong. But you aren’t alone, because every time this topic comes up on Crooked Timber someone pipes up and says “Well, the Greeks should just announce that they’re only going to pay half their debt from now on” only to be reminded that this has already happened.

78: To be frank, it doesn’t matter which of us is right. €22.6 billion is still tiny as a share of total assets. And it’s decreasing: Deutsche Bank said recently that it’s down to €94 million (http://www.bloomberg.com/news/2012-05-25/deutsche-bank-s-fitschen-says-failed-greek-state-lacks-leaders.html)
More importantly, it’s wrong to say that Germany and France are most exposed – the ECB and the IMF hold far more Greek sovereign debt than the commercial banks of any single country. Greek institutions – banks and pension funds – also hold a lot, don’t forget. Any bailout is bailing out Greek institutions to a far greater degree than it bails out German ones.

83

Metatone 06.20.12 at 12:15 pm

@ajay – we shouldn’t forget that the ECB and IMF are exposed because part of the success of the action so far has been to transfer exposure from commercial banks to those institutions.

Further of course, we shouldn’t forget that euro-denominated debt held by the ECB really should be classified as “normal exposure” since they are the sovereign for the currency. That’s not to say that default has no effect, but given that we’re basically in ZIRP-land, there’s a number of good ways to ameliorate the exposure that the ECB has.

84

niamh 06.20.12 at 12:20 pm

Kevin O’Rourke has blogged on this piece on The Irish Economy</a.

He adds two further comments that I fully agree with:

1. At this point the Eurozone needs a game-changing policy shift, not another incremental nudge.
2. Competing views about austerity and bailouts should not be labelled pro- or anti- 'European':
‘The moment that “Europe” is defined with any one set of policies, rather than with a framework for deciding policies collectively, it is (or ought to be) finished as a political project'.

85

bert 06.20.12 at 1:50 pm

Right now those articles are still prominently linked on the Guardian front page.
Expect however Larry Elliott’s next column to report that the Wehrmacht fights on.
And that incoherent briefing rather than a Guardian fuckup is to blame.
__________

Tim Wilkinson thinks he’s going to adjudicate something?
His name at the top of a comment is a trusted brand of skippability.

86

Bruce Wilder 06.20.12 at 3:04 pm

“Competing views . . . “

The legitimacy of the ECB demolishing the welfare state or brokering the sale of public properties and common wealth to foreign, private interests will be called into question, eventually.

The policy of bailing out banks is certainly not “pro” Europe. The insistence of the center-left that the policy of bailing out failed banks is stupid, and not evil, however, is obscuring the extent to which the idea of Europe as a means of reforming and strengthening member-state institutions has failed, because it has been hijacked by a predatory financial system out of control.

The Germans and the French are not going to embrace a policy of letting failed banks fail, because the banks that would have to fail include French and German banks, while the people on the immediate precipice are Greeks and Spaniards. Yet, the banks have failed, and there’s no way to put Humpty Dumty back together again.

There will be a morning after, a period of judgment for the aftermath. Whether we can imagine the idea of Europe surviving long enough for there to be an aftermath is less important than whether the idea of Europe can survive the aftermath, itself.

People wanted the Euro. It was intensely popular in Greece, Ireland, Italy. It represented the achievement of a kind of political and economic maturity, and Europe was seen as a means of reforming domestic national political institutions. The political problem in Greece has been that returning to the drachma has never been a credible alternative with the people. As a consequence, Greece has never had negotiating leverage, or an alternative to bailouts of failed banks and deflation.

The trauma of these times will be tattooed onto the experience of two or three generations. The devastation — personal and national — will become its own debt, that must be paid.

87

Josh G. 06.20.12 at 3:39 pm

We all know that what Greece needs is looser monetary policy. What stops them from doing this unilaterally?
I don’t mean leaving the Euro and going to the Drachma. According to Wikipedia, the Bank of Greece is one of the locations where Euros are printed. So what stops the Greek government from taking over the bank facilities and cranking out Euro notes 24/7?
And when I ask what would stop them from doing this, “it would violate some treaty” isn’t really a valid answer. Nations break treaties all the time. The only question is whether the cost of breaking a treaty is greater or less than the cost of upholding it. What would Germany do if Greece just started printing Euros without constraint? Go to war?

88

mpowell 06.20.12 at 4:03 pm


You underestimate the extent to which the German public rejects an iota of inflation more than current, and the consensus that has developed between the BuBa and the public in Germany. That idea that inflation should happen in Germany is viewed as theft in a society that is used to hoarding cash.

I’m well aware of public attitudes in Germany regarding inflation, but they don’t have all the power here (or it is not my understanding that they do, EU politics is confusing because it seems to be based on quite a good deal of informal power- basically, why does everyone listen to the Germans? With their inflation mongering they are basically idiots driving the euro project off a cliff.) And anyways, no matter how much Germans hate the idea of it, 6% inflation would, in fact, be far more palatable once they are actually exposed to it than 20% unemployment is for the Spanish. Or put it this way: the Spainards are not going to honor any agreements that leave them with 20% unemployment for any sustained amount of time, even if breaking those agreements might make them worse off. Maybe with 6% inflation the Germans would leave the Euro, but I am not sure because if they do the value of their currency will skyrocket compared to the Euro and their export driven economy will promptly tank. I’m not sure how much their public realizes this, of course.

89

politicalfootball 06.20.12 at 4:53 pm

the moment that “Europe” is defined with any one set of policies, rather than with a framework for deciding policies collectively, it is (or ought to be) finished as a political project.

Eh, if Europe were to be defined by a set of non-foolish policies, it would be okay.

And if we’re saying that Europe is dead the moment that it’s defined by a foolish set of policies, then it’s dead. That moment has passed. Syriza is anti-Europe.

90

Anon 06.20.12 at 6:52 pm

@ajay (#82): You’re misrepresenting the situation. Yes, the 75% write-down occurred. But in order for the write-down to happen, Greece had to effectively borrow the amount that was written down (this time from the official sector), so its debt-to-GDP remained pretty much the same. That’s completely different from suspending payments, and rejecting any new ‘bailouts’, which is what should’ve happened. Let me remind you that when the write-down took place, Greece was close to a primary surplus. By performing some additional austerity, Greece could’ve remained in the Eurozone without having to bear the burden of having to repay a clearly unsustainable debt, and actually concentrate its efforts on recovering from the depression. All that on the condition that the ECB kept propping up its banks.

91

Tim Wilkins0n 06.20.12 at 7:28 pm

bert loses the thread.

92

Tron 06.20.12 at 9:08 pm

The EU deserves to be packed up. It has regrettably ceased to be about the European nations that constitute it but simply about turning a quick buck. Niamh you wonder why the far right is rising across Europe. One example in my home country in central europe is because they are pointing out hard truths.
One being if Europe is so concerned about the greying of our population then why is the creation of the states focussed on child friendly policies encouraged. In germany there are too few creches, in Nederland the creches are very dear and new fathers get very small leave. Europe opted for the easy cheap option of keeping a broken anti-children model. But nobody except the right has ever pointed out if you want to prevent greying of sociey then the very first thing is to ensure that Europeans are incentivised to have children and society works with them rather than simply looking for a quick fix from abroad. The right is challenging Europe’s model and voters like what they hear.
They will only get stronger until other parties also feel free to challenge sacred cows.

93

Mario 06.20.12 at 9:25 pm

Very few people understand the mechanisms behind this crisis. It seems reasonable to most people that sovereign debt is the same as personal debt, and that if we all save we will all have more in the end (which isn’t true). Very few people understand checking account money, and how a financial system works. When the average voter reads news to try to understand the crisis, he reads bad articles by clueless and/or cynical writers. Without a chance of understanding what is /actually/ going on, what can he be expected to choose? I mean – I’ve heard from people I regard as very smart the claim that the US has a worse debt situation as Greece!

If we get out of this crisis soon, it will most likely be because someone does the right thing entirely by mistake.

94

bjk 06.20.12 at 9:27 pm

I think we’ve discovered the one person left who has any faith left in “Europe.” Apparently the total collapse of southern Europe wasn’t a big enough clue.

95

bert 06.20.12 at 10:02 pm

Don’t take it too personally, Tim.
There are worse things in the world than adding to the prolix waffle surplus.

96

Tim Wilkins0n 06.20.12 at 11:36 pm

Knock it off.

97

bert 06.21.12 at 12:36 am

Tim, your standard contribution – interminable, meandering, weighed down with throat clearing and pointlessly laboured digressions presumably intended to convey profound thought – all that I can take, generally by ignoring it.
You presenting yourself as the arbiter of arguments on bank balance sheets? That grates.
Hope that clarifies for you what just happened.
With that, I’m happy to knock it off.
And I’m serious about not taking me too seriously. It’s certainly not something I do with you.

98

robotslave 06.21.12 at 6:48 am

@84

The fact that you agree with both #1 and #2 there suggests that you haven’t thought thing through enough to realize how fundamentally opposed they are to each other.

The calls for (extremely) various “game-changing policy shifts” are all coming from members of the wisdom-dispensing class who are increasingly exasperated at the fact that the lumpen European peoples still seem to be too dense to understand Why The Euro Crisis Means You Must Embrace My Politics.

Meanwhile, “a framework for deciding policies collectively” is one in which, by definition, no “game changing policy shift” can be adopted, because there will be very strong objections to any shift meriting that description from one too-big-to-ignore quarter or other of the politically diverse population of Euroland.

The more whinging I read about “kicking the can down the road,” and the longer this fails to result in utter disaster, the more I am inclined to believe that this is exactly the right way to respond to the crisis.

99

JW Mason 06.21.12 at 7:18 am

The more whinging I read about “kicking the can down the road,” and the longer this fails to result in utter disaster, the more I am inclined to believe that this is exactly the right way to respond to the crisis.

I think this is right. I’m feeling cautiously optimistic that this crisis may end with the welfare state and labor protections still in place and with the beginning of some kind of fiscal union, just thanks to the stubborn Schweikian (or Brechtian anti-hero-like) refusal of European politicians to do the “responsible” thing.

100

ajay 06.21.12 at 8:49 am

in order for the write-down to happen, Greece had to effectively borrow the amount that was written down (this time from the official sector), so its debt-to-GDP remained pretty much the same.

This is a very odd description of events. Your contention is that no Greek debt has been written off at all? I’m not sure there’s much more to add to this thread.

101

Anon 06.21.12 at 9:00 am

@ajay (#100): I said the debt-to-GDP ratio has remained more or less the same, i.e. that the second bailout package added as much debt as was written off. You are unnecessarily aggressive, so I’m ending this here as well.

102

ajay 06.21.12 at 9:09 am

Ah, OK. But the reason that happened is because Greece needed to borrow more money to stay afloat! By saying “in order for the write-down to happen, Greece had to effectively borrow the amount that was written down” you are putting things in a very odd way – as though taking the bailout loans was somehow the price Greece was paying for having its debt written down. As though Greece was somehow doing the IMF a favour by borrowing money from it.
No.
The price Greece agreed to pay for the bailout – consisting of writedown and loans – was to introduce austerity measures.

103

Andrew F. 06.21.12 at 10:47 am

The great limitation here, imho, is less the divergent interests of eurozone nations viewed as black boxes – as unitary actors with coherent preferences – and more the domestic politics within each nation. What I would love to see is the troika encourage pro-euro popular vote results, which are now on dangerously thin margins, by extending some additional, popular measures as rewards. The trans-eurozone governance institutions may not be terribly democratic, but that doesn’t mean they need not act somewhat democratic by engaging segments of populations within various countries as constituencies and even partners.

In other words… Bargain as much with voting constituencies internal to countries as with the national governments and parties that represent them. To some extent, obviously, this is already happening – the pressure being exerted on the business and political elites is immense. But why not campaign more directly with “lower” segments? Too likely to be seen as intrusive? Unlikely to be effective? Or is this being done already?

It could involve the German government taking out ads in Greece to frame certain issues appropriately, or more direct coordination with unions in Italy or Spain. Yes, the eurozone has the same democracy deficit it’s been running since birth – but it need not wait for progress in formal political union to aggressively pursue more democratic, trans-euro politics via the national sub-national institutions that exist.

104

ciaran 06.21.12 at 10:51 am

The Greek budget deficit for last year was about 20 billion. Clearly the bailout money wasnt just to keep the ship afloat.

105

Aidan R 06.21.12 at 1:13 pm

Interesting article. Parties and government change but the policy remains the same. This, in my opinion, can be traced to one thing – ideology.

Whilst policies remain the same across western capitalist countries, I would not conclude that no policy choices exist. They certainly do. The problem is that no government in Europe has the political will to pursue them. At a European level, given the multi-level governance system, there is no institutional capacity to respond to the crisis in much the same as the US did, over the past 36 months.

A change in European multi-level decision making, to empower a coordinated transnational response will take a long time. There are pros and cons to muddling through. Presently, we can clearly see the negative effects. One of them is the re-emergence of inter-governmental bargaining, led by the conservative interests of Germany. In a context where European nation-states are dominated by the center-right, and European market making clearly prioritized by the Commission and ECB, we should not at all be surprised that a conservative economic paradigm dominates political decision making. But, empirically speaking, this not mean alternative policy choices do not exist.

In Ireland, the government has taken the domestic fiscal policy choice to shift 60+ percent of burden of adjustment on to current and capital expenditure. There is nothing in the Troika program that says it must do so. The government could, if they wanted, choose to reduce public sector pay or introduce higher taxes – both on income and corporate profits. One of the problems is that there is no scientific, social or political dialogue in the public sphere, or parliament, that would enable political actors to engage in an exchange of validity claims, as to which is the fairest political strategy. It is dominated by economic orthodoxy – which is not only terrible science (or supposed evidence based policy making) but defeatist politics.

The problem with ideological induced constraints on political choices at European level is much the same. But the relationship between European transnational’s and nation-states is far more nuanced. Therefore I am not sure Danni Roderik’s approach to the world economy is applicable to the complex system of Europe. It is applicable to a world of independent states not complex regional structures such as the EU. Philippe Schmitter, Wolfgang Streeck and Jurgen Habermas discuss these issues under the theme ‘liberal democracy in hard times’, here:

http://www.youtube.com/watch?v=abjRH6Nq0RI
http://www.youtube.com/watch?v=Kcx0mabB3dY
http://www.youtube.com/watch?v=kE1RnzF_fIg

There is clearly a global tug of war taking place between the powerful interests that constitute global finance markets and the democratic nation-state. Until the interest of its citizens are prioritized over financial interests, national governments will continue down a path of evolving into debt collection agencies for an unaccountable ‘market’. If they cannot, the era of liberal democracy is over.

106

niamh 06.21.12 at 1:32 pm

A note to Tim Wilkinson and bert, for future reference -
Please keep your personal gripes out of Crooked Timber.
If you post here, please stick to the point, don’t stick it to the person.

107

Mandos 06.21.12 at 1:44 pm

mpowell:

Germany has a very big say for a large number of reasons, especially the way the Maastricht criteria are written to ensure that the ECB is run by the same philosophy the Bundesbank is run.

Which is: no noticeable inflation, ever.

What’s more the German constitution is written (and the Bundesverfassungsgericht has made no secret of its interpretation in cahoots with the BuBa) to prevent the adoption of changes in economic policy that haven’t been adopted by the Bundestag. And, well, rightly so. People worry that the Target2 system itself is unconstitutional in Germany. If this eventually is tested, it may force Germany out of the Eurozone unless it can change its constitution, which is very difficult indeed.

So why don’t German politicians start preparing for this? Well, the German public is convinced, not least by the fact the Jens Weidmann appears on TV periodically to tell them so, that there is no necessary connection between the anti-inflation policy and the 20% unemployment in Spain, etc.—which can be solved by making these countries more export competitive and in creating investor confidence.. Everyone can be export competitive, all at once! Productivity is wealth! Keynesians are liars and Paul Krugman is either irresponsible or in the pay of Wall Street (!!!). The BuBa is basically run by crypto-Austrian gold bugs.

And if they need inflation in order to fix what are really internal structural problems (“Wachstum auf Pump”—fake growth by the pump) then clearly the Eurozone is not sustainable, because these problems will keep rearing their ugly heads until either the German saver is totally destroyed or the Eurozone breaks up anyway. “Lieber ein Ende mit Schreken als ein Schrecken ohne Ende”: better an end to terror than terror without end. A structurally sound economy does not live in constant fear of disequillibrium. So let the calamity come.

Wolfgang Munchaeu just tried to take this popular belief on at the Der Spiegel online blog, and the comments that ensued were universally appalled. After all, why did the SPD government institute Agenda 2010 if not to ensure that Germany was productive, and therefore prosperous?

Like I said, people misunderstand the extent to which Germany lives in a parallel universe when it comes to economics.

108

Mandos 06.21.12 at 1:53 pm

For example, the BVG just requested that President Gauck hold off on the ratification of the ESM so that it can look it over and determine whether it exists in violation of the German constitution. And whatever else, that, at least, is correct.

109

ajay 06.21.12 at 2:01 pm

The Greek budget deficit for last year was about 20 billion. Clearly the bailout money wasnt just to keep the ship afloat.

There’s also the need to roll over existing debt, remember. Every year a country will need to issue bonds equal in value to its deficit plus the total maturing debt. In the US in 2011, for example, the budget deficit was $1.5 trillion (DoT). But in the same period it issued over $7 trillion in Treasury bonds and coupons (SIFMA). The difference represents the cost of retiring matured Treasury bonds. Normally rolling over debt isn’t a problem – people holding three-year debt want to keep on holding three-year debt, so they want to roll it over as much as you do. But this isn’t the case with Greece – if Greece wants to roll its maturing debt over, then that has to be done through the bailout, because no one else wants to buy Greek debt, even people who are already holding it.

110

Data Tutashkhia 06.21.12 at 2:34 pm

If you post here, please stick to the point, don’t stick it to the person.

I must say, that was probably the wimpiest flame war I have ever seen. Both of them should be ashamed.

111

bert 06.21.12 at 2:37 pm

Andrew F, you’ll remember the aborted attempt to insert Angela Merkel into the French presidential campaign. You might want to read something into last week’s concerted effort by the French business lobby to build pressure on the new government re deficits, which could be more along the lines you suggest.
I think however the dominant role of national politics is inescapable, particularly in the midst of the crisis. It’s baked into the central role of the European Council, which is itself determined by the centrality of the nation states, in a mutually reinforcing pattern. What’s more, taking Europe as a whole, I don’t think there’s an available democratic mandate for ambitious integrationism right now. If you could construct a Europe-wide majority in the present mess, I suspect it might look rather Greek: let’s keep the euro, and have an end to austerity. Small-c conservative, in other words. The clarity you’re looking for by bypassing the nation states doesn’t seem to me to be there.

With all that in mind, watch what comes out of Brussels next week. As ever, it’ll be the lowest common multiple. Let’s hope the multiple is greater than zero. (Nonsense maths! See, I’m getting in the spirit already.) It’s entirely possible that direct intervention in sovereign bond markets via the firewall funds could be part of what emerges. The last big innovation – the LTROs – was a crisis response to a very similar dynamic of market pressure on Italian and Spanish sovereign rates. But I’d be very cautious about calling it in advance.

112

bert 06.21.12 at 2:38 pm

Naimh, that very much came from me rather than Tim – I scratched a longstanding itch. Not too many hard feelings I hope, and message received.

113

bert 06.21.12 at 2:39 pm

Ah, Data wanted blood. Other sites are available.

114

chris 06.22.12 at 12:45 am

As though Greece was somehow doing the IMF a favour by borrowing money from it.

Considering that they’ll end up paying more than they got… how aren’t they? Like almost all loans, the lender will end up richer and the borrower poorer. The fact that the borrower was too desperate to refuse doesn’t really change this.

The opportunity to dig yourself deeper isn’t much of a bailout.

115

hartal 06.22.12 at 3:17 am

Yeah! Dollar remains world’s reserve currency, and enjoying the exorbitant privilege of not having a balance of payments constraint, President Romney will be able launch another $500 billion war while Europe implodes.

116

Agog 06.22.12 at 8:16 am

DUKE: . . . Thou’lt show thy mercy and remorse more strange
Than is thy strange apparent cruelty,
And where thou now exacts the penalty,
Which is a pound of this poor merchant’s flesh,
Thou wilt not only loose the forfeiture,
But, touched with human gentleness and love,
Forgive a moiety of the principal,
Glancing an eye of pity on his losses,
That had of late so huddled on his back. . . .

117

ciaran 06.22.12 at 10:50 am

@ajay
Yes but that’s my point, the money is going to creditors. What’s needed is a proper default to take debt down to sustainable levels.

118

ajay 06.22.12 at 10:59 am

117: by “proper” default you mean a decision by the Greek government to cease payment on all its debt, immediately, regardless of who it’s owed to? The problem then is that, at least in the short term, it’s very likely that no one will want to lend Greece any more, and even though it was close to a primary surplus (ie still in a primary deficit) a while back, it isn’t now: tax compliance has gone way down and the economy’s shrinking fast. That can’t get turned around immediately even if you cancel all the country’s debt. Essentially what you’re calling for then is immediate, extremely harsh austerity policies, harsh enough to take Greece back into surplus. That, or you’re calling for the IMF and Europe to go on lending to Greece without a pause, even though their first batch of loans have just been written off; or a vastly increased level of aid from the EU to Greece, far more than current transfer payment levels; or some combination of the three.

119

ciaran 06.22.12 at 11:39 am

Yeah i do actually understand the dynamic, they need to balance the budget first. What i object to is people saying, “but they’ve defaulted already!” when you know that isnt exactly the whole story.

What im actually saying is that i oppose the socialisation of private debt. I think that since the private sector clearly made bad investment decision it should be the private sector that takes a lot of the pain(with some punitative conditions for the greeks to make it seem like a fair deal), rather than having the the tax payers in the core countries pay to rescue them, via the funnel of the Greek government. Obviously that ship has sailed and most if not all of the losses have been socialised.

120

ciaran 06.22.12 at 11:48 am

The historic parallels are i believe instructive
http://www.economist.com/blogs/freeexchange/2012/06/economic-history

121

ajay 06.22.12 at 11:54 am

What i object to is people saying, “but they’ve defaulted already!” when you know that isnt exactly the whole story.

Too many people think that either
a) Greece is being forced to pay its debts in full
b) the only way to default on some debt is to refuse to pay any of it
c) both; I was trying to clarify things a bit.

But I think you are focussing on the wrong bit of the problem: “Greek debt suddenly worthless” would have been bad for the banks, but catastrophic for Greece, which relies on borrowing and needs the money. Yes, the bailout was good for the banks, but I would argue that most of the benefit is going to Greece. If you tow a holed liner to port to stop it sinking, then you have done the owners some good, but most of the benefit has gone to the undrowned passengers…

122

ajay 06.22.12 at 11:57 am

The historical parallel is interesting, thanks for the link. Quite remarkable how Germany has managed to build most of its 20th century economy on running up vast amounts of debt and then not paying it, in a way that leaves the rest of Europe behind and the US ahead. Twice.

123

guthrie 06.22.12 at 12:19 pm

Interestingly, re. German reparations and defaults and the like pre-WW2, I have been reading a book called “Germany from defeat to conquest” by W M Knight-Patterson, in which he lays out the roots of the german desire to conquer Europe, from pre-WW1 to 1943, the book being published in 1945.
It is written somewhat polemically, with lots of selected quotes from speeches and texts by prominent Germans, but what he lays out is a more in depth version of what Ciaran’s link at #120 goes through.
It seems to be a little worse though – the germans were finally let off their reparations ni the 20′s, but the allied nations weren’t let off repaying the debts they had used to fight germany, which obviously Knight-Patterson thinks is more than a little unfair.

In fact it seems the German rebuilding and modernisation of industry was funded to a great extent by foreign investors, who naturally ended up years later without much of a return…

124

bert 06.22.12 at 12:32 pm

Excellent link, thanks.
Something to discuss during any dull patches in the match tonight.

125

mpowell 06.22.12 at 4:36 pm

Mandos @ 107:

Germany has a very big say for a large number of reasons, especially the way the Maastricht criteria are written to ensure that the ECB is run by the same philosophy the Bundesbank is run.

Which is: no noticeable inflation, ever.

What’s more the German constitution is written (and the Bundesverfassungsgericht has made no secret of its interpretation in cahoots with the BuBa) to prevent the adoption of changes in economic policy that haven’t been adopted by the Bundestag. And, well, rightly so. People worry that the Target2 system itself is unconstitutional in Germany. If this eventually is tested, it may force Germany out of the Eurozone unless it can change its constitution, which is very difficult indeed.

Thanks for taking the time to explain this, because it has never made sense to me. Are you saying that the Bundesbank has a formal veto over the ECB or is this just an informal veto? Or do you mean to say that the ECB charter is written in such a way as to make it very difficult for the ECB to take action that will cause inflation to rise without being in pretty clear violation of the law? Because on the latter point, it seems to me that it would be extremely difficult to write a charter in such a way as to make it impossible to create inflation if you just say: ‘well, we didn’t think this would cause inflation’. And then you have to get to the question of who is really in charge of determing whether the law is being followed. If the ECB has the formal authority to buy sovereign debt and they institute a program to do so and someone challenges them on the likely consequences of it, can’t they just say:’ well we disagree with your interpretation’? And then it’s just a matter of persuading the decision makers at the ECB that it’s the right thing to do.

And if at the end of the day the ECB is credibly backstopping sovereign debt and this violates the German constitution which forces them off the euro, I’m not sure this is such a bad thing. The euro cannot afford to be hamstrung by such absurd monetary policy, even if it costs them German membership.

126

Stephen 06.22.12 at 7:30 pm

mpowell@125

Yes, but if the ECB does succeed in forcing Germany off the Euro, does not that extensively bugger up the whole point of having the Euro in the first place? To create a currency, then a fiscal and political union containing Germany, sine qua non?

127

mpowell 06.23.12 at 8:09 pm

Stephen @126:

I think the euro with Germany is more valuable than one without, but there is still more total trade between euro members that are not Germany than between Germany and other euro members, so I think it would still be a worthwhile project. And certainly a more useful one than the suicide pact that everyone is currently signed up for.

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