I read an article in the Financial Times earlier this week (September 23, 2023) -…
“Don’t mention the war”! was a classic line from the episode – The Germans – in the comedy Fawlty Towers. Basil Fawlty implored his meagre staff to stay silent in case they offended some German tourists staying at his hotel. His attempt at self-censorship failed and led to hilarious consequences. I was reminded of the sketch (see it below) when I was reading the – Greek finance minister’s letter to the Eurogroup (February 24, 2015). Apparently, it is now a case of ‘Don’t mention the Troika’, ‘Don’t mention the Memorandum’ and never ever talk about the ‘Lenders’. The bullying threesome (European Commission, ECB and the IMF) are now known as “the institutions” and the “Memorandum” (the bailout package) is now to be called “The Agreement” and the “Lenders” have been recast as the “Partners”. Okay, and that is progress. The Reform package surely lets the Greeks choose which nasty policy they will implement but it is still nasty. Yes, it “buys them time”. The damage from massive unemployment and poverty eats into people every day. 4 months is a long time when you are on the street starving. And by the time this agreement is done – will the Germans be happy to unleash billions of euros via the European Investment Bank to allow the Greek government to continue running fiscal primary surpluses and keep pumping interest income on outstanding debt into ‘foreign’ coffers? Pigs might fly.
Two days ago, Eurostat published the latest inflation data for Europe – Annual inflation down to -0.6% in the euro area – and reported that:
Euro area annual inflation was -0.6% in January 2015, down from -0.2% in December. This was the lowest rate recorded since July 2009 … negative annual rates were observed in twenty-three Member States. The lowest annual rates were registered in Greece (-2.8%) …
Greece is deflating at a monthly rate (January 2015) of 1.2 per cent – that is a dramatic negative inflation rate.
The following graph is taken from the Eurostat publication. It tells you that the ECB is now a total failure given that its charter is clearly specified in Article 127(1) of the Treaty on the Functioning of the European Union:
The primary objective of the European System of Central Banks … shall be to maintain price stability.
With deflation, prices are not stable and they have not been stable for some years. The deceleration, which preceded the deflation, began in September 2011.
The pace of deflation is now gaining speed.
Who is resigning from the ECB Board? Who is being sacked?
I know that I am an armchair observer. I know the Greek Finance Minister personally and he is very bright. I know that.
I know that the US economist, James Galbraith, who many mistakenly label as a proponent of Modern Monetary Theory (MMT), is in Athens and knows ‘inside stuff’ and assures us all is going to plan – see Reading The Greek Deal Correctly
He lectures those who would claim that the Greeks have surrendered again as being incorrect! Okay. We will see on that one.
There are several others – mostly ‘progressives’ – who are constructing the Reforms and the process to date in a positive light – almost as if they want to hang onto the thinnest thread of hope given how bleak the overall situation is.
Hope is good. But deception is bad.
One Syriza MP clearly believes that the Greek people are being sold out by his own party. I guess Alex Tsipras and the Finance Minister “respect” the national Greek hero from World War II – Manolis Glezos – but don’t think much of what he has to say.
Glezos was the person who was in the Greek resistance against the Nazis during the World War II occupation. Together with another resistance member he tore the swastika flag down from the Acropolis on May 20, 1941, which was a famous historical act that inspired broader resistance.
He has a history of travail and imprisonment in the face of oppression – first the Nazis, then against the right-wingers during the – Greek Civil War, and then during the Cold War.
He is now a Syriza Parliamentary Member and has written in Monthly Review (February 22, 2015) – Before It Is Too Late – that the Greek peope voted on January 25, 2015 for “what SYRIZA promised”.
He said it was unambiguous:
We will overthrow the regime of austerity that is not only the strategy of the oligarchy in Germany and other EU creditor states, but also the Greek oligarchy.
We will get rid of the Memoranda and the Troika and repeal all the austerity laws. The day after the elections, with one law we will overthrow the Troika and overturn its consequences.
The developments to date have clearly not honoured those pledges.
Glezos then said:
For my part, I apologize to the Greek people because I, too, was a collaborator in the creation of this illusion.
The EUObserver reported (February , 2015) – Greece tables reforms, awaits eurozone approval – that:
Tsipras’ spokesman said that Glezos is “someone whom we will never cease to honour,” but that his comments were “misguided and wrong”.
Glezos clearly understands external oppression and he is right to say that the whole Eurozone arrangements with the Eurogroup as one of the central enforcing groups is an oppressive regime. There are no guns involved but the oppression and the undermining of democracy and national sovereignty is real.
It is invasion and occupation by another means.
You will note they don’t mess around with “The Institutions”. They conducted their – Troika inquiry – into the way that the Troika’s actions affected Cyprus, Greece, Portugal and Ireland.
I guess they might have to cut and paste “The Institutions” in everywhere now to conform with the latest madness.
The Report discussed in the European Parliament in the March 2014 plenary:
… calls on the Troika and the Member States concerned to end the programmes as soon as possible and to put in place crisis management mechanisms …
that expectations of a return to growth and job creation through internal devaluation, in order to regain competitiveness, have not been fulfilled … [as a result of the Troika’s] … tendency to underestimate the structural character of the crisis as well as the importance of maintaining domestic demand, investment and credit support to the real economy.
Why would anyone want to go along with the Troika for a single extra day?
Galbraith, writing on February 23, 2015, answers that it is a “poisoned chalice” anyway.
He also lectured critics for assuming that the “loan agreement” would be terminated, despite Syriza making this a central part of their electoral platform. They got their mandate in no small part because of that pledge as Manolis Glezos tells us.
Galbraith claims we are stupid for thinking that the loan agreement would go because:
… there was never any chance for a loan agreement that would have wholly freed Greece’s hands.
Insider-stuff! So Syriza tells the people one thing but always knew another. Is that it? Okay, if so, then we have no way of knowing what is going on really nor do the Greek people.
He went on to articulate the point:
The only choices were an agreement with conditions, or no agreement and no conditions. The choice had to be made by February 28, beyond which date ECB support for the Greek banks would end. No agreement would have meant capital controls, or else bank failures, debt default, and early exit from the Euro. SYRIZA was not elected to take Greece out of Europe. Hence, in order to meet electoral commitments, the relationship between Athens and Europe had to be “extended” in some way acceptable to both.
Galbraith is on the public record as supporting Greece staying the euro. I completely disagree with his rationalisation of that position.
Further, whether the ECB would end its funding of Greek banks is not something Galbraith actually knows from the basis of his ‘inside’ information. He is repeating assertion.
As I wrote in this blog – Greek bank deposit migration – another neo-liberal smokescreen – it would be an extraordinary act by the ECB if it allowed the entire Greek banking system to enter bankruptcy because it refused them the necessary reserves to satisfy the regular demands on the payments facilities.
The ECB does not have a legal charter to allow that to happen. Indeed, their charter requires them to maintain financial stability and that does not include, under any Troika-stretched imaginative definition, the deliberate bankrupting of an entire nation’s private banking system.
Further, it seems he thinks there was a priority of electoral commitments. The no exit trumps all and austerity continues.
I understand the problem. I wrote about it previously – Conceding to Greece opens the door for France and Italy and Greek elections – a solution doesn’t appear to be forthcoming and Greece – two alternative views.
It is clear that Syriza could not honour its end austerity pledges and still stay in the Eurozone. They should have been honest about that in the first place.
Sure enough, the Reform document was produced by the Greek government and not delivered to them by some Troika goon or another with a pen to sign on the dotted line.
Imagery is important and that is a change. They determine the nature of the austerity. With 25 per cent unemployment I don’t see that imagery as being a very good substitute for immediate and large-scale job creation.
The Reform document makes it clear that the Greek government will promise to undergo a raft of fairly generally (that is, unspecified) ‘structural’ changes but will stick within the fiscal straitjacket imposed by the Stability and Growth Pact and the Bailout requirements (with marginal changes).
The document says that the Greek government will:
Ensure that its fight against the humanitarian crisis has no negative fiscal effect.
What exactly is a “negative fiscal effect”. Well, for you etymologists, it is neo-liberal Groupthink speak for increasing the fiscal deficit.
We now think of rising fiscal deficits as a negative and increasing surpluses as positive irrespective of what is happening in the real economy to income growth and unemployment.
And then there is the rub – the Greek plan which includes a commitment to run a primary fiscal surplus this year of 1.5 per cent (that is, surplus net of interest income paid out) apparently is based on their belief that a massive fiscal stimulus is going to come from the European Investment Bank (EIB) which will end austerity by boosting growth and employment.
It is like a massive export income boost or a federal injection to a state.
Galbraith continued his lecture:
There is no money in Greece; the government is bankrupt. Large-scale Keynesian policies were never on the table as they would necessarily imply exit – an expansionary policy in a new currency, with all the usual dangers. Inside the Euro, investment funds have to come from better tax collection, or from the outside, including private investors and the European Investment Bank.
Which is true.
But the reforms offered and now agreed to are not conditional on any EIB activity. Trying to exploit different propensities to consume among different taxpaying cohorts is not going to provide sufficient spending capacity in Greece to dent the crisis much less solve it.
A massive fiscal intervention is needed even though we know that the potential growth path of the economy is significantly lower than it was pre-crisis.
It is clear that the Finance Minister supports an EIB fiscal stimulus. He was the co-author Stuart Holland of their so-called Modest Proposal.
One recalls Jonathan Swift’s satire of the same name, published in 1729, where Irish parents were encouraged to ease their economic travails by selling their children as food to provide culinary pleasure to the rich. The latest version (July 2013) was co-authored with James Galbraith.
The Modest Proposal is motivated by the assertion is that “a Eurozone breakup would destroy the European Union, except perhaps in name” which would pose a “global danger”. I disagree with those assertions and my forthcoming book tells you why.
You can read the book text as it was written in unedited form via this link – Euro Book. Search for ‘Modest Proposal’ for a full critique.
I do not consider an exit to be a disastrous option. For example, the Finance Minister wrote in 2012 a critique – Weisbrot and Krugman are Wrong: Greece cannot pull off an Argentina – who both advocated an exit.
One of his arguments was related to two two mythical Greeks Dimitri and Kiki who will shift their savings into offshore banks (in euros) in anticipation of the exit. They might also “stuff them in their mattresses or hide them in freezers”.
The Finance Minister wrote that:
This means that, by the time we come to an exit from the euro, the stock of savings will be in euros and the flow of incomes and pensions (once the banks re-open) will be in drachmas.
And the conclusion:
Moreover, the very availability of such large quantities of ‘hard’ currency savings, in the hands of the average Dimitri and Kiki on the street, will ensure that the decline in the value of the new drachma will be precipitous …
This is a common claim. That the currency will depreciate so much it will wipe out any real prosperity as a result of the devalued savings (expressed in drachma).
It have considered the claim that a new Greek currency would significantly depreciate against the euro once issued previously.
Why would that happen? Foreign exchange parities are determined by supply and demand.
Who would be issuing the new Drachma? Answer: Only one institution – the Greek government via the central bank.
What is the current volume (supply) of new Drachma in the foreign exchange markets? Answer: zero – it doesn’t exist.
If the Greek government restricted its supply but were able to require people to demand it – to pay taxes etc – then why would the currency depreciate violently in the period after issue?
You are thinking (like most people) of an existing tradable currency that is unpegged or something like that. Then the depreciation can be sudden because there is a lot of supply.
A significant exchange rate depreciation of the new drachma in the short-term given the fact that supply would be limited. The examples often used, such as Iceland and Argentina, all relate to currencies that were already supplied in volumes to the foreign exchange markets.
The basic conclusion is that it is hard to see how a proposal that involves no fiscal transfers or changes to the Treaty can provide a lasting solution to the mess.
The modesty of the proposal is its shortcoming. It will not solve the inherent problems within the Eurozone, which are defined by the very political constraints that the authors recognise force them to adopt these ‘modest’ proposals, in lieu of more effective and lasting solutions.
The political constraints they identify include those that prevent the ECB from funding governments directly, the inability to issue euro-bonds, the impasse over the creation of a “properly functioning federal transfer union” (p.3); and the time delays that would be involved in activating any Treaty changes, once agreed.
One element of the proposal was sensible.
They promote a large-scale, European-wide “Investment-led Recovery and Convergence Programme” (IRCP). It is one of the few proposals of the many that have emerged in the literature that explicitly seeks to reverse the austerity mindset by increasing total spending and, as a consequence, directly addresses the core short-run problem of stagnant growth
The argument that substantial new investment could kick-start growth if put into productive use, is sound. It mimics the emergency responses that marked the New Deal in the US between 1933 and 1937.
The questions are whether the scale of the program would be sufficient to generate a recovery, given how large the output gaps are at present, and whether a massive investment program could be absorbed without creating damaging imbalances.
Juncker’s plan is so small in scale that it will not do the trick. And Germany will not agree to any larger Eurobonds-type scheme.
The authors merely assert that the scale of the program would be sufficient. If Germany is excluded, real GDP in 2013 for the remaining Eurozone nations was some 4 per cent below its 2007 level (some 253 billion euros).
Similarly, investment was about 27 per cent lower. Even assuming a very generous spending multiplier, the injection that would be required to make up that gap would dwarf the previous allocations that the EIB has handled.
Further, investment has a dual characteristic – it adds to spending in the current period but also to the supply capacity of the economy in the subsequent periods. Would the growth in consumption spending pick up quickly enough to absorb the new capacity?
While the authors have characterised their proposal as akin to the New Deal (see Varoufakis et. al., 2013), it should be remembered that the US program was heavily weighted towards providing relief to unemployed and impoverished citizens in the form of cash payments and direct public sector job creation.
This sort of relief is outside of the ambit of the ‘Modest Proposal’ and thus it is questionable whether an investment-led answer to the deficient total spending will generate the gains necessary to lift household consumption in say Greece, where in 2013, it was around 25 per cent below its 2007 value.
But the necessary funds that would be necessary to implement this external fiscal stimulus are not in the wind.
As I explained in this blog – Greece – two alternative views – Greece will not achieve growth with balanced fiscal positions.
How does the Party plan to fill the massive output gap that Greece has? Output gaps can only be closed by increasing output. That requires increased net public spending not balanced fiscal positions or even surpluses.
Purchasing power taken of the ‘rich tax evaders’ might be at the expense of saving but will still not deliver the required net boost
Greece has lost 25 per cent of its real GDP since 2008. While potential output has also surely declined (as firms have scrapped productive capital) in the face of a massive decline in the investment ratio, it remains there is a huge unused capacity in the country. The mass unemployment is testament to that.
While there might be good reasons for redistributing the existing fiscal outlays across the competing interests, the overwhelming fact is that the Greek public deficit has to rise substantially – by multiples of the current Stability and Growth Pact fiscal limits of 3 per cent.
Running a fiscally-neutral policy to help people will only partially stimulate overall spending in the nation. The reality is that Greece needs a public stimulus that is way beyond anything that is allowed under the current rules.
A balanced budget position doesn’t resolve that issue.
But the Greeks can fix that in a single decision – leave the Eurozone and restore currency sovereignty.
But that is off the agenda because the progressive left in Greece appear to have bought the line that the ‘European Project’ requires a monetary union and being in the Eurozone is a sign of sophistication and a break with the Colonels!
I have some sympathy for their fears that the early 1970s is not far in the past and that the military is being bought off with new military toys etc (imported from Germany no less) which have largely escaped the clutches of austerity.
The likelihood of a military coup if Syriza advocated leaving the Eurozone is something I cannot assess.
But the idea that Greece will return to some backwater if it is not part of the Eurozone is a delusion.
After several weeks since the election we are still not exactly clear what is happening.
But the only reasonable conclusion to date is that Syriza’s stated policy aims are not mutually consistent and that is why they have given significant ground to the Troika – er, The Institutions!
They cannot achieve the (motherhood) aspirations of higher growth and increased incomes and equity while allowing Brussels to dominate the magnitude of their fiscal deficits.
They cannot achieve their aims with a fixed exchange rate (effectively no independent exchange rate) with Germany as a partner in the monetary union.
Their policy pledges resonate with the suffering population. But the reality is that the population is not being educated by progressive forces about the self-inflicted damage that retaining the euro as their currency is causing.
Political parties that make it a root-and-branch commitment to remain in the Eurozone do not help.
Don’t mention the War
In case you have forgotten the sketch, here is Basil in all his goose-stepping glory after his continual mentions of “the War” had upset one of the German tourists.
British Green’s leader can’t say “we will increase the deficit”!
The UK Green’s leader gave an interview on the party’s housing policy, which was reported on ABC News today (February 26, 2015) – Natalie Bennett, leader of Britain’s Greens, apologises after struggling on party polices in ‘very bad’ interview.
She was asked how the Party would pay for the land necessary “to build 500,000 new social rental homes” and replied:
Right, well, that’s, erm, you’ve got a total cost, erm, that will be spelt out in our manifesto …
You can listen the interview via the ABC report. Cringe a while then think about the problem.
She could have simply said – “If we are in government, then the British people will understand we issue the currency and we will pay for this by increasing the deficit and instructing the Bank of England to credit the necessary bank accounts to facilitate the purchases.”
That is the plain truth of it.
They can do that. If there is a need for 1/2 million more social houses then they should do that as long as it is within the real economy’s capacity to provide the housing.
If it is not in the capacity then they would have to assess priorities and perhaps have to raise taxes to withdraw spending capacity from the private sector.
The reason she stumbled is that the Greens are generally ‘neo-liberals on bikes’ and cannot bear to talk about deficits etc because they are constrained by the current orthodoxy.
The consequences of that are (a) no social housing will actually emerge; and (b) she sounds like an idiot when being interviewed.
That is enough for today!
(c) Copyright 2015 William Mitchell. All Rights Reserved.