There is a lot of discussion at present about the historical inconsistency of the German position with regard any debt relief to the Greek government. Angela Merkel has reiterated over the weekend that there would be no further debt relief. Why she is now a spokesperson for the Troika that does not include the German government is interesting in itself. In this context, I recall a very interesting research study published in 2013 – One Made it Out of the Debt Trap – by German researcher Jürgen Kaiser, who examined the London Debt Agreement 1953 in great detail. After becoming familiar with the way the Allies handled the deeply recalcitrant Germany and its massive debt burden in that period, one wonders why the German government is so vehemently against giving relief to Greece. This is especially in the context that the only mistake that Greece made was joining the Eurozone and surrendering its own capacity to deal with a major financial crisis. The ‘mistakes’ of the German nation before the London Agreement have been paraded before us all again with the 70th anniversary of the liberation of the Auschwitz death camp featuring in world events last week.

The economics news is currently dominated by the Greek election results and their implications, and, rightly so. Without assuming anything about how much Syriza will compromise (although I suspect too much), the voting has demonstrated that a large proportion of voters in Greece have rejected the basis of the European Commission strategy. The Greek voters know from personal experience, what armchair commentators like me know from theory, that fiscal austerity fails to achieve its aims. It is not rocket science – spending equals income and if you hack into it then the economy contracts. A private spending resurgence is not going to happen when sales are falling, unemployment is sky-rocketing, and incomes are being lost. The basis of Keynesian economics – that when the private economy is caught in a malaise the way out is for government deficits to kick-start economic activity, which, in turn, engenders confidence among private spenders and allows a sustainable recovery to occur – has been amply demonstrated by the GFC in all nations. Where that strategy has been employed the nations have been recovering (at a macroeconomic level). Where it has been defied, such as the Eurozone, the economies have stagnated. Thinking ahead (speculating) the election results have clearly shocked the cosy ECOFIN club, which has smugly swanned around Europe over the last 6 or so years dishing out misery to the disadvantaged citizens in the Member States. But I doubt that they will agree to a 50 per cent write-off in Greece’s debt because then the citizens of Spain, Italy and, even France, would line up for the same. Then it is game-over for the Eurozone. More likely, if Syriza sticks to its promises, then there will be an organised way to ease them out of the game. Greece will win either way.

“In its current form, EMU is not viable in the long run”. That quote comes from a Report – Repair and Prepare – Strengthening Europe’s Economies after the Crisis – jointly published by the – Jacques Delors Institut (located in Berlin) – and the Bertelsmann Stiftung – (located in Gütersloh, Germany). The Report purports to lay out a blueprint to prepare Europe for the “next potential threat to its very existence”. It proposes a “path towards renovation” to create an “ever closer union”. They claim that they have taken up this task because there is “extensive ‘crisis fatigue’ and ‘euro area debate fatigue’ in “in governmental circles and the media”. I would call it adherence to ideological Groupthink rather than fatigue. There has been a major failure yet none of those who created the failure have put their hands up to take responsibility. Once they dismissed the problem as being caused by “profligate and fat Greeks (insert vilified nationality as to your preference)”, various policy makers and media commentators resorted to the even more amorphous “structural problems” to explain the on-going crisis. The media has been full of captive writers who just reiterate press releases from neo-liberal politicians and/or mainstream economists. So is this new Report different? Is their plan viable?

It is late Sunday afternoon as I write this in Colombo, Sri Lanka and about 4.5 hours to the west the Greeks are getting ready to vote in their national election. It has been hailed as a make or break-type of affair but from what I know from inside-type conversations with some of the players and from general reading it has the hallmark of a fizzer, even if Syriza wins the ballot. Essentially, none of the main players seem to be willing to actually solve the problem. The entrenched interests have helped create the problem and are impoverishing the Greek people (themselves excepted). So they are part of the problem. Syriza talks bit about freeing Greece from the Troika-yoke but has a set of proposals that are mutually inconsistent. They might help around the edge and redistribute income a bit but what is needed is a massive boost in national income and that can only come from a massive increase in spending. The non-government sector is not going to do provide the source of that spending boost to get things moving again. So, ladies and gentleman you know what the answer is – there is only one other sector left in town to do it. And, you also know what is stopping them – membership of the Eurozone and the requirement to obey fiscal rules that restrict necessary spending to stagnation-enduring levels. That is why Syriza’s strategy is mutually inconsistent. Even a debt jubilee – the current favourite of the progressives, which warms their hearts so they can convince themselves that they are different from the neo-liberals will not solve the problem. Repeat: a massive fiscal boost is required, which means deficits above 10 per cent of GDP for many years forward. Repeat: that can only be accomplished within the current political reality if Greece leaves the Eurozone. It should have done that in 2008. It should never have joined. It should do it next week.

In my soon-to-be-published book on the Eurozone I examined the case of Denmark in some detail in the context of the evolution of the European Monetary System, the European Exchange Rate Mechanism (ERM), and the ratification process of the Treaty of Maastricht. Denmark was a participant in all the attempts to maintain fixed exchange rates after the Bretton Woods system collapsed in 1971. Further, while Denmark did not formally enter the monetary union by adopting the euro that doesn’t mean that they have maintained their currency independence. They chose instead to peg the Danish kroner against the euro (effectively continuing the ERM parities), which immediately meant that its central bank had to follow ECB monetary policy. Fiscal policy then became a passive player to ensure it didn’t exacerbate the peg parity and Denmark also bought into the Stability and Growth Pact fiscal rules. This meant that internal devaluation (wage cutting) was the only real counter-stabilisation option available to them when facing external imbalances and domestic recession. It hasn’t worked well as one would expect. In fact, the euro peg works against the interests of the Danish people, particularly low income workers prone to unemployment. Yet the nation has an obsession with maintaining it. Groupthink abounds. The correct policy strategy which would give the Danish government a wider range of policy tools to enhance the well-being of its people would be for Denmark to abandon its euro peg. It should do that virtually immediately.

Switzerland – homeof the secret bank vaults, which house treasures stolen from people (particularly the Jewish victims) by the Nazis during WW2 and ill-gotten cash by capitalists who wish to evade scrutiny of prudential and tax authorities of their domiciled nations. Now it is the canary, which has just sung to tell us that all the hubris about Eurozone recovery cannot cover up the reality that the crisis is not yet over and requires root and branch reform to the policy ideology that exposes the floored design of the monetary union. The – Decision – last week (January 15, 2015) by the Swiss National Bank (SNB) to both break the peg of the Swiss franc to the euro and cut its interest rate on sight deposits to -0.75 per cent signals the surrender by that nation to the reality surrounding its borders. The interest rate decision was required after it decided to scrap the exchange rate peg, given that it didn’t want a credit crunch killing the domestic economy. The appreciation of the exchange rate, which has been held artificially low by the peg, will already undermine domestic spending. The SNB said its decision as reversing its previous “exceptional and temporary measure”, which “protected the Swiss economy from serious harm” as the exchange rate became overvalued. But the decision itself was rather extraordinary given it was seemingly so surprising for most and central bankers are meant to be cautious types.

The German Magazine Der Spiegel ran a story over the weekend (January 3, 2015) – Austritt aus der Währungsunion: Bundesregierung hält Ausscheiden Griechenlands aus dem Euro für verkraftbar (Exit from the Monetary Union: Federal government considers Greece’s exit from the euro is manageable). This so-called “radical change of position” is presumably designed to impart external pressure on the Greek democratic process, which is about to elect a new national government presumably on January 25, 2015. The claim is that the German government is prepared to make Greece expendable because it thinks it has shored up the rest of the Eurozone so that what happens to Greece is immaterial. I think Germany should be careful what it ‘allows’.

When I was in Europe recently, I had interesting discussions about the future of Italy, Greece and Spain with various people, particularly in relation to trying to understand the apparent dissonance between the strong support for the euro and the devastation that membership of the common currency has created in these countries. It is, of course, a very complex issue that goes well beyond economics (as most things do). I formed two alternative views from what I was heard from those on the so-called progressive side of the debate. Either they are kidding themselves or that they have crafted a plan to force Germany (mainly) to break up the currency union. The alternative scenarios was also quite distinct along national lines with Italians more likely to be in the former group and Greeks in the latter group, although my sample sizes were relatively small.

It seems that Greece is still in trouble with the Athens Stock Exchange share prices tumbling rather abruptly in recent weeks. In the last 6 days or so the Athens Stock Exchange Composite Index has plunged by around 19 per cent on the back of growing political tension and the strong likelihood that the pro-austerity, Troika surrender monkeys in power at present will be tossed out and a new dialogue with Europe will begin. The snap election call has spooked the markets it seems. But I have also been puzzling about (read: been deeply suspicious of) the growth narrative that is being peddled about Greece by the European Commission and the IMF. There remain unsolved puzzles about the third-quarter 2014 Greek national accounts data, which is another way of saying they don’t quite add up. It may be that the alleged real GDP growth of 0.7 per cent was a statistical artifact – the case of incomes falling less slowly than prices. The evidence certainly suggests that is the case. That is what this blog is about.