In May 2023, when the British Office of National Statistics (ONS) released the March-quarter national…
Regular readers will note that I have consistently advocated the abandonment of the Euro and especially the immediate exit of Greece, Spain, Portugal, Ireland and Italy to push things along. The basic design flaws in the ideologically-constructed monetary union were always going to bring it down. It wasn’t a matter of if but when. The when was always going to be the first major negative aggregate demand shock that the union experienced. Come 2008 we saw very starkly how quickly the region unravelled and now the situation is getting worse not better. Not many commentators agreed with me and most argued that with some tinkering and some harsh austerity the zone could rescue itself. The problem is basic though and has little to do with behaviour of the member states, although I will write tomorrow how the conduct of the Germans has exacerbated the crisis. It is clear that governments like Spain were more frugal than Germany’s government prior to the crisis and they now have 20 per cent unemployment and worse. As the crisis deepens though more commentators are now arguing for a Greek default and/or both default and exit. The sooner the southern states get out of the bind they are and free of the pernicious ideology of the EU/IMF/ECB troika the better. Tomorrow is not a day too soon.
Over the weekend, there were two pieces of news that told me that “tomorrow is not a day too soon” for the ailing Eurozone countries to announce default and exit.
The EU Finance Ministers met in Wroclaw, Poland last Friday and received the US Treasury Secretary Timothy Geithner who urged them to reverse their current fiscal austerity and to spend more via the “debt rescue fund”. He wanted the European Financial Stability Fund to be able to draw on ECB credit lines.
The Europeans responded by claiming that there was “no room for tax cuts or extra spending” despite their economies now heading back into recession and the monetary system being on the brink of collapse. Of-course, just last week, they were only too willing to draw on the US Federal Reserve (without collateral) to renew the US dollar swap lines to the European banks. When their capitalist mates are in trouble anything is possible but when it comes to saving jobs for the low- or middle-income workers such action becomes impossible.
Why Geithner thinks he can lecture other nations on the virtues of fiscal stimulus when the US government is now undermining real GDP growth in America is another matter altogether. But then two wrongs do not make a right and his entreaties to the EU were sound – spend more before the system collapses.
This Bloomberg report (September 17, 2011) of the meeting – Europe Rules Out Stimulus, Shuns Geithner Plea – quoted the deficit terrorist aka the Luxembourg Prime Minister Jean-Claude Juncker:
We have slightly different views from time to time with our U.S. colleagues when it comes to fiscal stimulus packages … We don’t see any room for maneuver in the euro area which could allow us to launch new fiscal stimulus packages. That will not be possible.
“That will not be possible” – I saw him saying this on a Belgian TV news report and my heels got an immediate urge to click together in obediance.
What does he mean that will not be possible? What he means is that they are so overwhelmed by their neo-liberal ideology that the EU bosses refuse to acknowledge their system is falling apart. Europe is a curious place in some ways (for an outsider). There is a strong recognition of tradition and in some ways tradition is a very sound basis on which to operate. It protects heritage from capitalist developers who only care about profits etc.
But tradition is also stifling and when combined with a conservative economics it becomes destructive. The people of Europe are enduring this conservative yoke now. As the nations found out in 1848, the brutal suppression of workers’ rights does not provide for social or political stability. The whole continent is festering and things are getting worse.
The Euro bosses did manage to agree on new Stability and Growth Pact rules that “make it easier to impose sanctions on countries that overstep the budget-deficit limit of 3 percent of gross domestic product”. The new rules come in at the start of 2012 and are nonsensical in the extreme. Jean-Claude Trichet called the new rules a “substantial improvement” which just goes to show how far gone the logic is over here.
The following graph shows the sectoral balances for the Eurozone as a whole since 1999. I used data available from the ECB data warehouse. To keep the graph clean I have not included the external balance which for the overall EMU is more or less balanced – slight criss-crosses either side of the zero line. What it effectively means is that the private domestic balance (the difference between total private spending and income – the green line) is the mirror image of the government budget balance.
As Modern Monetary Theory (MMT) emphasises, a government sector deficit (surplus) has to equal to the penny the non-government surplus (deficit).
I have also included the real GDP growth rate (per cent per annum) – grey bars and the 3 per cent deficit to GDP SGP rule. You can see that the budget deficit (blue line) often violated this rule in the earlier years of the Eurozone and that outcome was largely driven by deficits incurred in Germany and France – as real GDP growth laboured.
You can also see how dramatic the collapse has been in private spending and the extent to which the automatic stabilisers have driven the overall EMU budget into significant deficit. It makes no sense in a situation of negative growth to try to buck against the automatic stabilisers by imposing discretionary fiscal contraction. The worst thing a government can do in a recession that is driven by a collapse in private spending is to introduce pro-cyclical fiscal policy changes – that is, policy changes that reduce overall spending even more.
That is exactly what the EU bosses are doing. They are so obsessed with fiscal aggregates (public debt ratios) that they have lost any sense of comprehension of what budget deficits actually do. It is clear the private domestic sector is intent on saving overall to reduce the massive debt overhang that was built up during the credit binge.
In that context (and given that the institutional arrangements that see the governments matching their deficits with debt-issuance), the reduction in private debt (as households and firms seek to reduce risk) has to be accompanied by an increase in public debt. There is no way of avoiding that.
The ECB also has the capacity to allow that process to proceed in an orderly manner without the private bond markets having any influence on bond yields. The fact that this has not happened reflects on the failure of the ECB to act in an appropriate manner.
The other problem that is causing paralysis is the insistence by Finland (backed by Germany) that any further assistance to Greece be made conditional on the latter providing collateral – “in the form of real estate or shares in nationalized Greek banks”.
The EU Finance Ministers could not agree on that at this meeting but the dispute was not about the principle. The Austrian finance minister was quoted as saying:
There is unity that collateral, first of all, must be open to all and, second, must cost something.
In other words, the vultures are lining up for their share of Greek antiquity and the tourist islands. I mused (without humour) that when the deflation being imposed on Greece by the European elites reduces wages and conditions to some irreducible minimum and makes the tourist industry attractive to the fat northerners that the profits from the activity will be repatriated to the new “collateral owners”, presumably some other fat northerners.
It beggars belief really how unashamed all these characters are.
The other piece of news that came out over the weekend was the leaked E-mail sent by a senior official in the Greek government to various Greek government ministers outlining 15 new austerity measures that the EU/ECB/IMF (hereafter “the Troika”) are demanding from the government in return for continued fiscal assistance (bail out loans).
The EU finance ministers’ meeting essentially concluded that Greece would not get any further aid unless further austerity conditions were agreed to. The Troika apparently demanded that the Greek government agree to these conditions by Monday (September 19, 2011). Mr. Ilias Pentazos, Secretary General of Fiscal Policy, Ministry of Economy and Finance relayed the 15 demands via and urgant E-mail over the weekend to his ministers and general secretaries noting that the Troika would not pay the sixth instalment of the 8 billion euros bail-out unless they were met in full.
He wrote that in the earlier austerity measures, the Government had agreed to “reduce the number of civil servants by 80,000 by 2015”. But now the Troika were demanding 100,000 jobs be scrapped in the public sector.
The Troika is demanding that 60,000 public servants be sacked in 2011 alone. The labour redundancies in the public utilities had to begin immediately with 20,000 positions identified for culling.
Here is a Google translation of the article in the Greek newspaper VIMA (September 19,8 2011) – The 15 Troika conditions. My Greek readers can tell me how accurate the translation is.
Here is a translated version of the E-mail which lists 15 conditions and the area of Government that will be held responsible. You can click the E-mail link to see the details of which Departments and Officials are to be held accountable.
The 15 measures demanded of the Greek government by the Troika are:
1. Issue ministerial decisions/circulars to make the cut in fixed and temporary contracts effective across all general government entities (including for teachers so as to meet the savings target in the MEFP)
2. Issue presidential decree/ministerial decisions to make the furlough effective, extend the scheme to include all general government employees, and issue letters to the employees to be transferred into the furlough
3. Issue ministerial decisions/circulars to the start collection of excise on natural gas and heating oil measures.
4. Legislate withholding as the instrument for collection of the solidarity surcharge
5. Take board decisions to make the cut in the NAT/OTE pensions effective
6. Cut subsidy to Hellenic Post for the distribution of newspapers. Issue ministerial decisions to make already legislated part effective
7. Pass the law on the new wage grid for the general government (including SOEs), which includes a cut in overtime pay and remuneration
8. Pass law to extend freeze of main and supplementary pensions through 2015
9. Pass law to revaluate fines on unauthorized buildings and settlement of planning and issue any
10. Issue ministerial decisions with respect to the closure/merger of the 35 entities specified in the second implementation bill and a closure of an additional 30 entities
11. Issue ministerial decision to determine closure/merger of KED, ETA, ODDY, National Youth Institute, EOMEX, IGME, OSK, DEPANOM, THEMIS, ERT
12. Issue ministerial decision to approve completed registry for all mobile and immobile assets of concerned EBFs that pass under State’s property
13. (i) Issue ministerial decision to uniformly regulate health benefits for all social security funds; (ii) sign uniform contracts of private hospitals (16) and health care centers; (iii) sign contracts between NHS hospitals and private insurance companies for the leasing of beds
14. Pass and implement law to reduce OGA pensions
15. Pass legislative amendments to establish drug rebate for SSFs and sign contract with the pharmaceutical companies to make it effective/Establishment of insurance price for pharmaceuticals
These are in addition to the harsh austerity measures already in place. The intent is clear – kill aggregate demand in the country. The motivation – the most Machiavellian that one could imagine. Certainly, the democratic rights of the Greek people no longer mean much to the Euro elites.
Within that context, the cries for Greece to give these elites the bird are growing. I am feeling less alone as the days pass on this point.
UK Guardian economics journalist Larry Elliot argued (June 20 , 2011) that – Greece must exit the eurozone. He notes that
Europe’s leaders have no plan B. They see no need for it because they are still committed to plan A – the European dream of fraternity and solidarity. This must be defended at all costs, even if it means permanent austerity for Greece, Ireland, Spain, Portugal and any other country that can’t cut the mustard.
To think that the Euro elites can continue to impose permanent austerity on the weaker EMU nations is a pipe dream. To think that communities and citizens will tolerate the neo-liberal mantra – that wages and conditions have to be cut to render the nation competitive in the absence of a fixed exchange rate and no currency sovereignty is a dream.
It will not work because as Larry Elliot notes ” it runs counter to the basic principles of democracy” and ultimately people rebel against this sort of dictatorial rule.
But moreover, it defies economic logic. The financial ratios that the Euro elites claim are their target (budget deficit and public debt ratio) are all moving in the opposite direction. Why? Answer: they are dependent on growth. The austerity is killing growth which then increases the deficit and the public debt ratio. To then impose harsher fiscal contraction on the nation will further undermine growth and promote a further dislocation from the the stated aims.
The way to reduce the deficit, ultimately, is to spend for growth. The projections that Larry Elliot provides a frightening:
… to stabilise Greek debt at 140% of GDP, the country has to run a very large budget surplus once interest payments are stripped out … [the] … primary budget surplus has to be in the 7-10% of GDP range. To illustrate the scale of that challenge, in 2010 Greece appears to have run a primary budget deficit of at least 4% of GDP. Running a primary budget surplus requires revenues from taxes to be higher than government spending. What then are the chances of Greece running a primary budget surplus of 7-10% of GDP if subjected to further austerity measures? None whatsoever, which is why either default or devaluation – and perhaps both – seem increasingly likely.
That is, the strategy being imposed on Greece by the Troika is either incredibly stupid (that is, they think it will work but it cannot) or evil (that is, they want to make an example out of Greece and destroy its public sector and collective-oriented society). I wouldn’t mind betting it is a combination of the two.
Larry Elliot concludes:
… there are no good options for Greece … it is clearly not going to deflate its way to solvency. Providing a second, or even a third or fourth, bailout cannot disguise the fact that monetary union is fundamentally flawed, with zero chance that the weaker members can become as competitive as those at the core.
I totally agree.
Last week (September 14, 2011), the former Argentinean central bank manager Mario Blejer said that – Greece Should ‘Default Big,’ Says Man Who Managed Argentina’s 2001 Crisis.
He was the central bank boss when Argentina successfully pulled off the “world’s biggest sovereign default” and is now saying that “Greece should halt payments on its debt to stop a deterioration of the economy that threatens the European Union”. He was quoted by Bloomberg as saying:
This debt is unpayable … Greece should default, and default big. A small default is worse than a big default and also worse than no default.
He joins the growing chorus that now recognises clearly that the conditions being imposed on the euro nations by the Troika are “recession-creating” and “will leave Greece saddled with more debt relative to the size of its economy in coming years and stifle growth”.
He is quoted as saying:
It’s totally ridiculous what is going on … If you assume that these countries do everything that is in the program, they do all these adjustments and privatizations, at the end of 2012 debt-to-GDP will be bigger than this year.
Blejer said that Portugal and Ireland should join the Greeks in defaulting but didn’t make a case for an exit of the Eurozone.
Former British Chancellor of the Exchequer Norman Lamont (1990 to 1993) also wrote yesterday (September 19, 2011) that the – Break-up of euro looks inevitable. Lamont never liked the idea of the euro in the first place and now says that Europe should admit “it has taken a wrong road” although as he notes “facing reality has never been its strong point”.
He also traces the problem to the Euro itself – that is, the basic design flaw from the inception – rather than the behaviour of Greece or Spain or wherever.
Unless the straitjacket of the single currency is removed, citizens on its periphery will face a dismal and prolonged future of stagnant living standards. Politicians may be prepared to put their people through that, but the public will not accept it.
I totally agree (and I don’t normally agree with the likes of Lamont).
Also yesterday (September 19, 2011), the default and exit case was made by Nouriel Roubini in the Financial Times article – Greece Should Default and Abandon the Euro.
Nouriel Roubini recognises the current reality that seems to have escaped the Euro bosses:
Greece is stuck in a vicious cycle of insolvency, low competitiveness and ever-deepening depression. Exacerbated by a draconian fiscal austerity, its public debt is heading towards 200 per cent of gross domestic product. To escape, Greece must now begin an orderly default, voluntarily exit the eurozone and return to the drachma.
He rejects the arguments that Greece can become “more competitive” by domestic deflation, a lower euro overall or increased productivity growth. He think the reality is that if the export-led strategy is continued under present conditions Greece would face “ever-deepening depression”.
It is thus logical that the only viable path is exit. Why?
A return to a national currency and a sharp depreciation would quickly restore competitiveness and growth, as it did in Argentina and many other emerging markets which abandoned their currency pegs.
There is no doubt that the drachma would depreciate (probably considerably) against the Euro. The Germans have been claiming “the currency could lose as much as 50 percent of its value, leading to a drastic increase in Greek national debt” (Source).
There is a lot of conservative fluff about the collapse of the drachma if Greece exits. The point is that it would clearly depreciate and probably significantly but that process would be finite and relatively short-term in duration. Once the shock factor dissipated the exchange rate would settle to reflect the differential unit labour costs.
The price impacts would also likely be one-off (especially if the Greek government ensured there was no flow-on to the wage system from the higher import prices). The reality is that the Greeks would have to accept a “real income” loss as a result of the depreciation but via import substitution this process would also be finite. It is likely that foreign investment would ultimately move into the import-competing sector as their exports fell.
The Germans would also ensure the drachma didn’t free fall. How? The sunny islands would become even more tempting for the northerners and they would bring Euros in exchange for the drachma. Countries that float their exchange rates typically see a rise in exports and a fall in imports both movements which promote higher growth.
I plan to write a blog – a sort of exit blueprint to combat some of the myths that the Euro elites are perpetuating because it is in their interests (politically) for Greece to stay under their thumb.
The point is that as Roubini notes an exit would be “traumatic”:
The most significant problem would be capital losses for core eurozone financial institutions. Overnight, the foreign euro liabilities of Greece’s government, banks and firms would surge. Yet these problems can be overcome. Argentina did so in 2001, when it “pesified” its dollar debts. America actually did something similar too, in 1933 when it depreciated the dollar by 69 per cent and repealed the gold clause. A similar unilateral “drachmatization” of euro debts would be necessary and unavoidable.
In other words, once the Greek government restored its currency sovereignty it could offer a conversion of euro liabilities into drachma without any solvency issues. If rejected it could just default and let the creditors wear the costs.
The conservatives suggest there would be capital flight from Greece. A lot of funds have probably already gone and the Troika have been seeking ways to estimate that. But ultimately where people choose to store their saving is one thing but if they have to pay taxes in the local currency then they have to ensure they can get hold of that currency.
In a sovereign currency, no matter if there is a second “trading” currency, the local currency always is in demand as long as the national government can enforce its tax laws.
It is true that the Greek banks would record major euro losses but they could also be “properly and aggressively recapitalised” by the Greek government in drachma without on-going losses. The short-term approach would be to close the banks immediately to prevent major capital losses and then guarantee the deposits in drachma (at an agreed transitional exchange rate – which could be higher than the ultimate market determined parity).
The Germans also claimed that the introduction of a new currency in Greece “would consume the entire capital base of the banking system and the country’s banks would be abruptly insolvent” (Source) . That is, until the now sovereign Greek government recapitalised (and nationalised if necessary) the commercial banks. Greece would be well advised to introduce widespread reforms of its banking system at the same time restoring the basic role of banking and reducing the scope for unproductive speculation.
Please read the following blogs – Operational design arising from modern monetary theory and Asset bubbles and the conduct of banks for further discussion.
The claims that the banks in France and Germany would incur major losses is not something the Greek government should consider. That is a problem for their national governments (if they also exit) or the ECB. Either way, the commercial banks can be supported to avoid insolvency. This reality would offend the ideology of the neo-liberals but it is clearly within the scope of the national governments and/or the ECB to support their banking systems.
The other claim is that the ECB would lose. Please read my blog – Better off studying the mating habits of frogs – for more discussion on why the ECB faces no problem even if it makes losses on assets it currently holds.
I will write more about this when I have more time.
I also recognise that there are other MMT approaches (see for example, ) but they assume that Greece will stay in the Eurozone. I have never supported the basic concept of the Eurozone and therefore think that approaches which maintain the zone, no matter how ingenious, just prolong the problem.
Nouriel Roubini also addresses the claims by the conservatives that default and exit will be more damaging to growth than the current policy path (austerity):
Some argue that Greece’s real GDP will be much lower in an exit scenario than in the hard slog of deflation. But this is logically flawed: even with deflation the real purchasing power of the Greek economy and of its wealth will fall as the real depreciation occurs. Via nominal and real depreciation, the exit path will restore growth right away, avoiding a decade-long depressionary deflation.
While I agree with that assessment, it also remains that the restoration of Greek government currency sovereignty will allow it to promote domestic growth. It doesn’t have to sack the 100,000 public servants for example or decimate public programs.
The conservatives also claim that Greece would “also be cut off from capital markets for years to come”. That is what they said about Argentina which demonstrated what the World’s financial masters didn’t want anyone to know about. That a country with huge foreign debt obligations can default successfully and enjoy renewed fortune based on domestic employment growth strategies and more inclusive welfare policies without an IMF austerity program being needed. And then as growth resumes, renewed FDI floods in.
One commentator wrote a few years ago that that the Argentinean Government appears to have perpetuated the perfect crime. The Government offered the world financial markets a ‘take-it-or-leave-it’ settlement which was favourable to the local economy. At the time, the rhetoric claimed that countries that treat foreign creditors so badly would surely stagnate and suffer a FDI boycott. This is the standard neo-liberal line that is used to coerce debtor nations into compliance with the needs of ‘first-world’ capital largely defined through the aegis of the IMF. But the Argentinean case shows this paradigm to be toothless because the Government defied the major players including the IMF and the Argentine economy went on to boom despite it.
It is clear that many foreign firms came back into Argentina after the default in addition to strong investment from Argentine interests. The country’s biggest real estate developer explained (in 2005) the quandary facing the neo-liberals as such: “there has never been a better time to invest in Argentina … [as for foreign banks, after shunning Argentina for a while] … now the banks are coming to us … It’s been tough. We will have restrictions … But in terms of access to capital, what defines access? Greed. When opportunities look profitable, access to capital will be easy.”
This is a lesson all countries should learn. International capitalism, ultimately does not really take ‘political’ decisions – it just pursues return. The clear lesson is that sovereign governments are not necessarily at the hostage of global financial markets. They can steer a strong recovery path based on domestically-orientated policies – such as the introduction of a Job Guarantee – which directly benefit the population by insulating the most disadvantaged workers from the devastation that recession brings.
My view is that the international financial markets would not wreak havoc on the Greek economy which would look very competitive after restoring its own floating currency. The tourist opportunities would be very enticing to FDI and the its dominant shipping industry would also be very attractive under the new parity.
The international investment community would soon realise that rather than being a threat to their activities, the competitive Greek economy would provide them with an even better investment climate in which to chase return than one that is in more or less perpetual deflation and recession. It is time that we abandoned the neo-liberal myths and instead realise that in capitalism ‘greed comes before prejudice’.
There is a growing chorus now for Greece to default and exit. I see this as the only way forward for the nation. The Euro elites will fight that every step of the way but, ultimately, the Greek people should determine the future of their nation.
My assessment is that shock trauma of the default/exit strategy would quickly give way to growth and adjustment is always easier in a growth environment. There are clearly aspects of the Greek economy that I would fix (for example, tax avoidance by the high income earners).
The alternative being offered by the Troika is extended depression and ultimate failure. There is not enough tolerable “adjustment” room to render that strategy successful.
That is enough for today!