There was once a country named Greece

Sometimes good things come out of bad – not often but sometimes.Yesterday was an example. I merrily set off for my bit over an hour flight from Newcastle to Melbourne with meetings organised in the late afternoon. Weather fine and warm. Upon approaching Melbourne airport we were informed that there were severe storms and after circling for an hour were diverted to Canberra – half-way back to Newcastle to refuel. After an hour doing we renewed our attempt to land in Melbourne and about 45 minutes later we succeeded. Phone calls made meetings rescheduled no problems. Except the airport was in chaos and we were stranded for 3 hours on the tarmac waiting for a gate. So 8 hours after leaving Newcastle – about 21:30 we leave the plane very frustrated and tired. See ABC News report. During the extended “flight” I read a detective novel. So what is good about that? Answer: being stuck in the plane I didn’t have the opportunity to read the WSJ, the FT, IMF papers, World Bank reports – in fact, I managed to avoid reading any financial or economic material. I ate dinner at around midnight – relaxed! But I lie. I did actually read the French financial paper La Tribune which carried the story – Les détails du plan secret allemand pour sauver la Grèce – which translates to “the details of a secret German plan to save Greece”. The headline grabbed me before sleep. As the zzzz’s started to overtake me I concluded that the Eurozone will be one less nation soon – there was once a country named Greece.

The La Tribune story is about the – EURECA project – Hellenic Recovery Fund – which has been devised by high-profile German management consultant firm Roland Berger. The company has purported close links to the German government.

The name Roland Berger came up in my database today. I keep snippets of information from my research and reading which I call on in writing etc. The database has my notes, bits of cut and paste from articles, and all sorts of other bits and pieces – and it allows me to forget everything but recall everything. I learned to do this from the very succesful book writer and friend Michael Perelman when I spent time with him in California during a study leave earlier on in my career.

So search – Roland Berger – and I retrieved what I had summarised as the Opel-Fiat scandal. This November 5, 2009 Spiegel story has some information – Germany’s Economics Minister on Fight to Save Opel Jobs. It interviewed the German Economics Minister about “Fiat’s possible investment in carmaker Opel” and the loan guarantees and other public payments to make the deal work.

The issue raised was the role played by Roland Berger (a management consultant) working working for “Opel parent company General Motors” but also sitting on the “board of directors at Fiat”. Was there a conflict of interest?

The Minister claimed that “No one has my ear. Roland Berger is not acting on behalf of the German government. This doesn’t mean that we don’t sometimes listen to what he and others have to say. He is a well-connected expert”. In response to the question whether it was “routine that Roland Berger represents the interests of the two main companies involved”, the Minister said “What is so objectionable about having the right connections when it comes to relationships between companies?”

The sale to Fiat didn’t occur but the issue was clear.

Anyway, back to “Eureca”.

In the official presentation (linked to above) we read:

It will not be possible to protect the integrity of the euro zone without austerity (substantial savings in the affected countries), solidarity (a willingness to share the burden) and creativity (understanding the workings of the capital market and playing the game by the corresponding rules)

First, they could “protect the integrity of the euro zone” without fiscal austerity if they agreed to create a “federal fiscal authority” which provided spending support to troubled nations while at the same time abandoning the Stability and Growth Pact and allowing budget deficits to move in sympathy with the business cycle rather than trying to impose pre-ordained fiscal rules with deny the possible variations in tax revenue and government spending that can automatically occur over the business cycle.

If this fiscal authority was consolidated with the ECB the dominance of the private bond markets could be eliminated and strong regional growth stimulus could be sustained. No austerity would be needed. Clearly that innovation would satisfy the solidarity principle.

But the “creativity” principle tells you all. Why should any national government that is democratically elected to advance public purpose play a “game” by the “rules” set by capital markets. When we talk of inefficient state-owned enterprises we tend to overlook that among the most inefficient areas of the economy is the FIRE sector. It is mostly unproductive and operates as a large casino shuffling enormous wealth and feeding itself by pressuring governments to make it easier to redistribute real income from workers to profits.

A lustful, wasteful and corrupt sector should never set the ground rules for public policy design.

I will leave it to you to read the full details of the “Eureca” proposal. It aims to reduce “Greek debt from 145% to 88% of GDP in one step” without default (so protecting all northern European banks); reduce ECB exposure to Greek debt (that is, force Greece to pay the ECB for the bonds it has purchased in secondary bond markets) and it claims that it will “kick-start the Greek economy and revive growth and job creation” and promote “structural reform”.

So how is it going to do all of that? Simple: take all the public assets – hand them over to a holding company funded by the EU which pays Greece who then pay off all it debtors. End of process – severely diminished public space in what used to be called Greece!

The proposal claims that a “fire sale” of Greek public assets as demanded by the current austerity agreement is likely to depress prices (Duh!) and a medium-term privatisation (that is, you wait a little while before selling the assets off to your mates at discounted prices – like virtually nothing if the East German example is anything to go by) will be too late – Greece will have defaulted by then.

So their proposal is to “(c)reate a European asset purchase and privatization vehicle combined with a conditional residual guarantee to drive down funding costs”. This is reminiscent of the way the German government approached to fire sale of East German publicly-owned assets.

When West Germany colonised and asset stripped East Germany they created a “trust agency” – The Treuhandanstalt – which organised the privatisation of all state-owned (that is, publicly-owned) East German enterprises. I prefer publicly-owned to state-owned to make the point clear – that these assets are for all people. We are the state which is a point that is often overlook. We might allow the state to go off on its own tangent and undermine our best interests. But that is our fault and as I have noted in the past the only sustainable solution to the current crisis is for “us” to reassert our power and force “the state” to work for us.

In the Truehand case, it was a scandal-ridden exercise and was terminated with heavy debts. In many cases, they handed over public assets for hardly any payment claiming that the new private owners would use what would have otherwise been a purchase price to “invest” in the asset’s value. A very neat ploy.

In all the pro-privatisation literature you will read statements by economists saying that the price of the asset should represent its expected lifetime earning capacity. The more reasonable empirical literature shows that prices are always discounted – to avoid embarrassing the government in the event of a “no sale”.

So the “Eureca” plan would force the Greek government to hand over “all of its public assets” to this Special Purpose Vehicle (SPV) and group the “assets into participating interests (banks, industry, utilities, etc.), real estate, etc.”

My mate Marshall Auerback quipped in an interchange we had today “is this proposal the biggest Asset Strip in history?” Of-course, why would anyone be interested in these assets? Haven’t we been reading for the last 3 years or so that the publicly-owned assets in Greece are “hopelessly inefficient” and “drains on the public purse”? Clearly, the elites don’t think that – they want to get their hands on the Greek public wealth just as soon as they can.

The assets are currently valued at 125 billion euros which would then be paid to the Greek government to allow them to “repurchase Greek bonds held by ECB and other European institutions and states”. The SPV would be bankrolled by the member states and would then “(m)anage privatization program … with private cooperation partners (public-private partnership) to leverage best practices in restructuring, asset management and placement”. We have read that sort of narrative before. Management consultant companies, brokers and lawyers always reap a bonanza in privatisation fees even if the asset is disposed of cheaply.

There is also considerable evidence that these companies often face impossible conflicts of interest – whereby sales are facilitated to buyers which are in some way related to the advisors. That sort of complaint was behind the Opel-Fiat story noted above.

So the 125 billion euros will then reduce the Greek public debt ratio to 88 per cent of GDP (rather than 145 per cent at present). La Tribune claimed that paying back the ECB:

… ce qui ne peut qu’exercer un effet apaisant sur les contribuables européens

That is, would calm the European taxpayers down. Why would it do that? The ECB holds bonds it bought in the secondary bond markets. If the Greek government fails to honour those bonds on redemption no-one in the Netherlands, or France is exposed. The ECB could write them off immediately and it should without consequence.

Why should Greece surrender its public wealth – which has cultural and historical significance that is likely to dwarf the economic returns – to pay back the ECB when it can simply default without any damage being caused to the ECB, which after all, can create Euros at the stroke of a computer keyboard.

This is more about the tones in the Merchant of Venice than it is about good economics.

The “Eureca” proposal also would see the SPV invest “EUR 20 … to optimize asset values and thus maximize sales revenue (asset restructuring)”. The claim is that this investment would increase the value of the assets by some 50 billion Euros. So if the EU was really interested in helping Greece why wouldn’t it lend the government the 20 billion euros so that it gained the 30 billion euro capital gain before privatisation.

I am not suggesting here I support the privatisation under any guise. But if 2 can be made into 5 then it would surely reduce the “Greek problem” (as seen by the EU bosses) if Greece enjoyed that conversion factor rather than the SPV. The obvious point is that they do not trust the Greeks to manage the ownership or sale of their public assets.

You appreciate that from this comment in La Tribune:

Il porte la conviction que les opérations de privatisation ainsi centralisées hors de Grèce (même si les capitaux grecs se voient accorder une priorité dans les opérations de cession) échapperont au risque de corruption et d’opacité.

The proposal claims that the 20 billion euro investment (equivalent to 8 per cent of current GDP) will underwrite sustainable growth of around 5 per cent per annum. So why not just let the Greek government expand its budget deficit accordingly and enjoy the growth and increased tax revenue itself without forcing it to sell off its public assets?

The reason is that the proposal wants Greece to stay strait-jacketed within the SGP framework and continue to cut its spending and reduce the size of the public sector. But if investment in the publicly-owned assets in Greece will resolve its budget issues – as is claimed by the “Eureca” proposal then why would the Greek government go along with this asset-stripping exercise.

The “Eureca” proposal also claim it will “(r)educe the interest burden by reducing CDS spreads from currently over 20% to less than 5% virtually overnight” and allow Greece to re-enter the bond market. With what effect? The problem for Greece is not the CDS spreads – they are just a symptom. If Greece doesn’t grow it cannot meet the bond market demands no matter if they have 88 per cent public debt ratios or some other ratio.

Finally, what happens if the privatisation (by 2025) yields a “profit” – where the costs include the purchase price, the “interest burden on funding costs” and all the fees paid to management consultants etc – then they “Eureca” proposal would further pay down Greek debt.

If the sales cannot earn a profit by 2025, the Greek government would have to buy back the assets. The proposal claims that even if there was “no privatisation” by 2025, the reduction in the Greek debt ratio from today would be beneficial.

Which raises the question – why bother with this exercise at all? Why not just write the ECB and EFSF debts off immediately (with the ECB compensating the EFSF so that other member states are not bearing the “loss”) and let Greece enjoy the lower debt ratio without the asset stripping. Answer: we don’t have to bother providing one!

The “Eureca” proposal says that by avoiding a Greek default the speculators who had bet on such an event would “suffer severe losses triggered by falling CDS spreads” but they forget to mention that all those with long positions would stand to gain.

I loved the last page of the Berger Proposal:

Its character that creates impact.

All class.

The IMF is up to their necks in this – and that is enough because there is not much coherence above the neck level when it comes to the IMF. On September 19, 2011 the “Senior IMF Resident Representative in Athens, Greece” one Bob Traa gave a Speech to a business conference in Athens. Among other things he made this extraordinary statement by way of justifying dramatic cuts to government spending:

… the public sector is very large and another essential element of a credible fiscal strategy must be to reduce the public sector’s claim on resources.

First, what meaning is there in the statement “the public sector is very large”? Relative to what? It is certainly smaller than the public sector in the US (yes, in absolute terms). Where is there a coherent model that determines the optimal size of the public sector?

I can tell you that there is no analytical result that you can derive from mainstream economic theory – even within their own logic – that determines an optimal size of the public sector. The body of theory is silent on that question. Mainstream economists who are honest will concur with that conclusion.

However while analytically the models are silent, that doesn’t stop mainstream from inferring that small government is better and leaving you with the impression their models have proven that result. The reality is otherwise and when the IMF or any other mainstream economics organisation makes any statement about the “size” of the public sector then you can conclude – immediately – that those sort of statements are at the deep end of their religion – their ideology.

Second, there is nothing in the body of mainstream economics that can show you that a definition of a “credible fiscal strategy” can be related analytically to the size of government. I can easily write out a “neo-classical” model (which would satisfy all the assumptions they make about the economy) which would have the public sector at 90 per cent of the total output and running a balanced budget with full utilisation of resources satisfying all neo-classical efficiency principles. I could also write a similar model where the public sector was only 10 per cent of the total output.

The point is that while neither model would make any sense in helping us understand the world we live in, both would be consistent with a rigorous application of mainstream modelling principles. In other words, it is a lie to say that small government is the only way to attain what the mainstream economists (erroneously) would consider to be a “credible fiscal strategy”.

Conclusion: the IMF representative in Greece is pushing ideology – what Joseph Stiglitz referred to in an 2000 Interview as “a rejection of the state’s activist role and the promotion of a minimalist, noninterventionist state”.

In that same interview he repeated his call for the closure of the IMF saying it does “harm than good” and noted that the IMF always has a “strategy for job destruction” but “no strategy for job creation” and that “(m)any of the policies the IMF pursued as they were killing off jobs made job creation almost impossible”.

The IMF Greece representative also said that public “expenditure cuts”:

… inevitably will require closure of inefficient state entities as well as reductions in the exceptionally large public sector work force and in generous public sector wage (which in several cases are above their private sector counterparts). As we go forward, it is essential not to be constrained by taboos regarding closure of inefficient enterprises and involuntary redundancies.

Upon what basis is the “efficiency” of the state enterprises being judged? Security of employment? Skill development within the workforce? Desirability of working conditions? Profit potential for private owners? The answer is obvious and points to how

In the aforementioned interview, Joseph Stiglitz reflects on past IMF interventions into East Asia, Russia etc and says that despite the IMF having “choices” the IMF acted as if there “were no choices”:

In the midst of the East Asian crisis, there were choices. One choice would have been to encourage countries to implement a bankruptcy law that could have threatened the interests of the lenders. But the mindset of IMF officials was so strong that they acted as if there were no choices.Even as debate on reforming the international economic architecture has proceeded, the people who would inevitably face many of the costs of the mistaken policy have not been invited to the discussions. Workers’ rights should be a central focus of development. But nowhere, in all of these discussions, did issues of workers’ rights, including the right to participate in the decisions which would affect their lives in so many ways, get raised. Conditionalities are adopted without social consensus. It’s a continuation of the colonial mentality. I often felt myself the lone voice in these discussions suggesting that basic democratic principles be followed. I recommended that not only should workers’ voices be heard, but they should actually have a seat at the table. You have the old boys’ club discussing how the old boys’ club should be reformed.

In terms of the IMF conditionalities, Joseph Stiglitz said they were always to “protect foreign creditors” which was a denial of the basic notion of risk and enterprise where “bankruptcy is an essential part of capitalism”. The point is that while the IMF and the EU cry out about free markets they actually don’t believe in them. What these institutions represent is an elaborate organisational framework to protect the wealth of the elites at the expense of everyone else. They clothe it as being the application of optimal market theory but their policies options actually deny some of the essential principles relating to that theoretical edifice.

In his 2002 book – Globalization and Its Discontents – Joseph Stiglitz presents a very coherent case against privatization which he said has been more focused on asset-stripping and providing for “huge movements of capital” from poorer to richer nations. He said that the policies undermined job creation and promoted “fiscal austerity” above all else. I don’t agree with a lot of what Joseph Stiglitz says about macroeconomics but his understanding of the way the developing world has been raped by the “Washington Consensus” (the simultaneous obsession with fiscal austerity, privatisation and deregulation to create a “minimalist, noninterventionist state”) is consistent with the evidence and stark.

If I was advising the Greek government (send them my E-mail address!) I would tell them to close their borders to management consultants from Gemany. The problem is that economists find it very hard to think about things broadly. An asset is only has “financial” worth. Public assets have a much more intrinsic worth to a nation in historical, social and cultural terms. The fabric of a society is defined, in part, by the collective wealth.

The bean counters will be saying that the Greek government earns X euros from public enterprise A but spends Y euros on its on-going operation (where Y > X). In other words, they would conclude it was a drain on the budget and inefficient and a prime privatisation target.

I would ask questions like – Are the workers happy in this enterprise? Do they have secure jobs which allow them to plan for retirement and support local industry through their purchases? Do these enterprises offer services that are valued by the community? Do they operate in an environmentally-sustainable manner? And all sorts of questions like that?

Each one of those questions probes a broader concept of value although they don’t ignore economic value. Positive answers to those sort of questions would tell me that the Y-X differential is smaller and might actually be a positive sum.

The other point is that this proposal doesn’t address the underlying design flaw of the Eurozone.

Conclusion

This will not “fix” Greece’s problems. It might make the “books” look different for a while. But it will not spur growth and even if Greece stabilises with diminished living standards and stagnant growth, as soon as the next negative aggregate shock arrives from the rest of the world, it will be back into crisis. The reason? The basic design of the Eurozone is the problem not so-called inefficient state-owned enterprises or a “lazy” tax base.

Today – no planes to catch or should I say “sit in” for several hours.

That is enough for today!