Thursday, November 03, 2011


Reading various papers this morning, the thought occurred that Brussels now has more power over Greece than Madrid has over the Spanish regions. And Portugal and Spain, some say, have also been reduced to the status of satrapies of Brussels, with Italy being next in line.

The other thought that sprang to mind was that Mr Papandreou - who may no longer be in his job by the time you read this - is being punished for attempting to please/pacify his voters, whereas Presidents Sarkozy and Merkel face no such castigation. Even when many see Mrs Merkel's obdurate refusal to countenance either a proper bank of last resort for the eurozone or even a beefed up stability fund as the main reason for the failure to solve the EU existential crisis. And, indeed, as an unsurmountable obstacle to any future resolution.

Putting this another way, Mrs Merkel is allowed to save her own skin by condemning the euro for domestic electoral reasons whereas Mr Papandreou isn't. Wasn't it another German (Hegel?) who said that might is right? In peace as in war, it seems.

Anyway, a Guardian columnist tells us the that the model which has served the EU elite for 50 years has failed and that - as I touched on the other day - a new world order is being forged even as we witness the death throes of the old one. Selected citations:-

Voting is not how things are done in the EU. And whenever a state does actually consult its people – Denmark and Ireland had a go – they are made to vote again until they get it right.

But the democratic deficit has now tipped over into a democratic crisis. To protect the banks that lent to Greece and to protect its elite from unwelcome tax demands, the country is being systematically stripped of its sovereignty, as EU and IMF officials swarm over its ministries drafting budgets, setting policy deadlines, "advising" on tax and pushing through state selloffs.
No wonder nationalist anger is growing. And all this to deliver a death spiral of spending cuts and tax increases that are sending Greece ever deeper into slump and debt. It makes no sense.

It's not the Greek economy that's being rescued, but European and US banks exposed to Greek debt. To protect the rentiers and prevent their own failures from seizing up the European credit system, Greece has undergone the deepest ever fiscal squeeze in a developed state without the possibility of any compensating monetary stimulus or devaluation – because of its euro membership. As a result its economy is collapsing and its debt is mushrooming.

But Greece is only the extreme end of the eurozone crisis. Portugal and Spain, the other two EU members ruled by fascist dictators until the mid-70s, have also been reduced by stringent bailout conditions to the status of a protectorate run from Brussels, Frankfurt and Washington – with dire economic and social consequences.

The eurozone faces potential breakup and is highly unlikely to survive in its current form. It's not as if the dangers and flaws at the euro's heart weren't clear from the beginning, though, to critics on both left and right.

But everywhere the crisis is turning the orthodoxies of the past generation on their head – and it's going to be a different world by the time the debris has cleared.

Meanwhile - These bailouts are for the banks, not Greece – and they're deepening the crisis of democracy at the heart of the EU

Here's extracts from a Times article, penned by a Greek who feels there's not a lot of understanding around of how that benighted country works (or, rather, doesn't):-

So what was Mr Papandreou thinking, indulging in a Gaddafi-like moment of delusional grandiosity? It looks like madness from the rest of Europe, but the rest of Europe does not understand Greece — which, of course, is a large part of the eurozone’s problem. Greece is not a fully functioning capitalist economy; it is more similar to an emerging market with conglomerates and a jumbo public sector than to Germany or the Netherlands. We are misgoverned by a corrupt political elite in alliance with powerful local oligarchs.

Once you try to understand Mr Papandreou’s predicament, a referendum has a certain rationality. It is almost the only way out for him: if he wins, he can proceed with the austerity programme. If he loses, the crisis becomes someone else’s problem — or everyone else’s problem.

[A few] families control the banks, media companies and other big industries. The oligarchs and the many politicians that are connected to them have very little interest in pursuing the difficult reforms needed to make Greece function in the eurozone. They are willing to risk crashing out of the euro because preserving the status quo matters most to them. With a new drachma, they could be kings again.

Greece is starting to show the alarming symptoms of a failed state: its ruling institutions are losing legitimacy; there is endemic corruption or profiteering by ruling elites; there is drastic deterioration in public services; the economy is carved up by cartels; and the economy is shrinking.

The EU, the ECB and the IMF have been addressing the fiscal symptoms of the Greek crisis, not the causes.

This troika needs to understand that this is a crisis of politics, governing institutions and corruption, not a deficit imbalance that a bit more austerity and financial engineering can solve. Corrupt government contracts have played a large part in swelling the public sector deficit and no attention has been given to political reform such as the need to repeal Article 62 that gives immunity to parliamentarians from prosecution.

What now happens in Greece has to be more than clever financial wizardry or a reduction in debt repayments; we need a real attempt to change the way we are governed.

If that does not happen, the prospects of disorderly default and a return to the drachma take another treacherous step forward.

Over in the Daily Telegraph, Jeremy Warner views events as a theatrical 'revenge tragedy' - albeit one with an end that can't be predicted - and comments trenchantly on the significance of this:-

We have reached the final act of the revenge tragedy that is the eurozone crisis. We’ve had the melodrama, the comic flourishes, the lunatic interludes – but there’s still no telling how it’s all going to end. If it remains true to the genre, it will be in an orgy of murder and violence.

The plot so far? We know that the single currency as presently constituted only really works in benign economic conditions, and so was very probably doomed from the outset. We know, too, that the leading players won’t yet accept that fact, remaining locked in a state of denial. And we also know that everything they’ve tried to correct the problem hasn’t worked. On the contrary, it only seems to have made matters worse.

That Europe’s leaders might be adopting the wrong policies doesn’t seem to have occurred to them. But then, the euro appears constitutionally incapable of allowing them to pursue the correct ones. The virtuous nations of the single currency’s core want only to impose self-defeating penury on the wicked of the periphery.

As it is, the mass slaughter that finishes all true revenge tragedies has begun. By calling a referendum on the bail-out package, Greece has hit the ejector button. It’s a small economy, and a default wouldn’t much matter, despite the damage to the eurozone banking system, if everything else was fine and dandy. But it’s not. The problem is that Greece is but an outrider. Bond yields in Italy, the world’s third largest sovereign debt market, have risen to levels that require it to take on more debt just to service the existing stock. Nobody’s got any faith in Italy’s ability to live up to its promises. The corruption of its bunga bunga economy constantly triumphs over efforts at reform.

All that’s now required to bring matters to their calamitous close is a Kreditanstalt-type event – this being the name of the bank whose collapse in 1931 triggered the second leg of the Great Crash, and plunged the world into depression. Is there any way of avoiding such an outcome? Only if the European Central Bank radically changes its approach and acts swiftly to generate growth. Mario Draghi, its incoming president, is under enormous pressure to act. But he’s so hemmed in by doctrine and tradition that it’s not clear he will.

Two options are open to the eurozone in supporting its over-indebted periphery. Either the excess debt can be paid for by taxpayers in the more solvent core, or it can be bought up by the central bank.

To date, policymakers have been most reluctant to adopt either strategy. Instead, Germany and Co have acted as all creditors tend to when they want their money back, forcing ever more implausible levels of counter-productive austerity on their over-indebted neighbours. Any fiscal and monetary assistance offered has been half-hearted and insufficient.

Politically, it’s proving virtually impossible to persuade hard-working Germans to pay for profligate Greeks and Italians. The bail-out fund has thus been made too small and ineffectual to offer meaningful support. In any event, it is only there at all as a surrogate for the European Central Bank, which refuses to do its proper job as lender of last resort, and provide the unlimited liquidity necessary to douse the flames.

Again, there are good reasons for the ECB’s stance, not least that it is actually banned from direct purchases of sovereign bonds. Its intervention in the bond markets – where that debt is subsequently traded – to support the eurozone’s periphery may also be technically illegal, which helps explain both its limited scope and the sophistry of the explanations used. In any case, for the ECB to be funding government spending by even the most indirect route is a definite no-no for Germany, with its memories of Weimar hyperinflation.

Yet to prevent a crisis from spiralling out of control and causing an even greater mess, it is sometimes necessary for central banks to ignore even the best-intentioned rules. Walter Bagehot in the 19th century argued that, in a financial panic, only the central bank has the ability to lend without limit – and therefore, only the central bank can convince investors that they’ve got nothing to worry about.

There is a big difference between acting to stem a banking panic, and buying up the debt of essentially insolvent eurozone states. But the principle is the same – and if the current crisis is not to end in calamity, it’s hard to see the alternatives.

With the eurozone as a whole seemingly sliding rapidly back into recession, such bond purchases could be justified in terms of demand management, in the same way as was the “quantitative easing” applied by the Bank of England and the US Federal Reserve. Of course, a broad programme of QE across all eurozone nations would suffer from the flaw that has always been at the heart of European monetary union: that what’s appropriate for the periphery is unlikely to be appropriate for the core, and vice versa.

However, these are issues for the future. What’s important for now is to prevent the crisis dragging everyone into a depression. But will Mario act? Don’t hold your breath.

1 comment: said...

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