Merkel invited the new French president over today to play a round of what is her and the rest of the EU leadership’s favourite game, kicking the Greek can a little further down the road. There seems to be an unwillingness of many in her administration to accept reality the European people have rejected this policy of austerity. In elections in Greece and France, as well as local elections in Italy and Germany, anti-austerity candidates have triumphed. Clearly even if the Greeks can be bullied or scared, in the now imminent second election in their country, to vote for pro-austerity parties, it doesn’t really matter as there is no way that the further public sector cuts that the German/IMF want will ever get implemented. Its simply not a realistic political possibility, in Greece or anywhere else in Europe. Some alternative strategy, as seems to be Hollande plan, must be tried instead, but unfortunately the window of opportunity is rapidly closing.
Austernity doesnt work, it just makes things worse
It is with good reason that the Greeks have rejected austerity It simply does not work and has in all likelihood made the deficit problem worse, not better, while plunging millions into grinding Dickensian poverty. It, like so many other supply side economic ideas, is fatally flawed. The economies worldwide that went for austerity (Greece, Ireland, Italy and the UK) are all struggling, while those that followed the more traditional Keynesian approach (the US, Iceland) are showing signs of recovery.
The reason for this failure is not really surprising, economists, in particular those who support supply-sided economics, simply don’t understand human nature. Of course this may have something to do with the fact that many of them are psychopaths (studies suggest the many of the top business leaders worldwide are psychopaths). The belief of neo-liberal economists is that if you shrink the government down everyone will be better off and people will be incentivised to go off and get jobs or start a business.
Of course in reality if there’s no jobs available, then sacking a load of public sector workers simply depresses the economy. A shrunken public service hurts the very poorest in society. And, as shown by many of the UK’s privatised utilities (such as the water companies or railways), there is no guarantee a private company will run a better service.
With everyone (businesses and individuals) scared that they are next, they put off all major spending decisions, start hoarding cash, which pushes down tax receipts, which worsens the deficit and creates a dangerous debt spiral. I mean who in their right mind would set up a business in the middle of the worse recession in living memory? Further, you’d need to arrange a line of credit from a bank, which any unemployed Greek civil servant will currently find impossible. A cafe owner in Athens who guesses that maybe 10-20% of his customers are public sector workers is not, under the present climate, going to hire a builder to do up or expand his shop, nor is he going to hire new staff. In fact, fearing that revenue will fall in future, he’s going to put off any such spending decisions, maybe even get rid of a few staff members, and more than likely move his money into a foreign bank.
Indeed this last point is significant, there has been a considerable and quiet capital flight out of countries like Greece and other troubled eurozone countries. Anecdotally I’ve heard from many Greeks and Irish who’ve been moving their savings abroad where they can. Naturally this leaves Greek (and other) EU banks in a precarious position.
So clearly, other tactics have to be tried to solve the current crisis. Options, which Ive discussed in prior post include, stimulating growth by increasing government spending, raising tax revenue by taxing the wealthy or alternatively a carbon tax. If such measures prove insufficient we could look at the ECB simply buying European debt, a moderate level of Quantitative Easing (read print more money), the issuing of Euro bonds or as a last resort devaluation of the euro. Of course many of these options have been ruled out due to the sensitivities of German taxpayers. Unfortunately those German taxpayers need to wake up and smell the coffee! They are in the same boat as the Greeks and will go down with the ship if the eurozone implodes. Now while, as a saver, Im not exactly happy with the idea of some of these options (I described in a prior post). But its important to get this crisis solved. Given the choice between two scenarios (collapse of the euro and a deep recession with the spivs profiting from it all or savers loosing a tiny portion of their savings) I know which of these two Id prefer to see happening, so I guess well have to just take one for the team.
Indeed its worth remembering that it was the German’s who were the first country to break the previous set of Eurozone rules on deficits back in the 2000’s, and they got away without any punishment…yet now they seem to want to drag Greece over the hot coals….anyone know the German for “Hypocrite”.
But I worry given events in Greece it might be too late. There seems to be an assumption, one reinforced by statements from Berlin and the IMF that if the Greeks reject the austerity measures or default on their debts that they have to leave the Euro. This is a very dangerous myth that needs to be debunked and ruled out as a possibility.
Firstly for Greece to leave the Euro, it would have to leave the EU. That would take months or years of negotiating. And what if they refuse to leave? How will the rest of the EU force them out? While the effects on Greece will be bad, anyone with savings or investments left in the country will see them wiped out, the effects on the rest of the EU of a likely messy Greek exit will be catastrophic.
It will be the euro’s Lehman Brothers Moment. After this, everyone will be looking out for who is next….likely Ireland, Portugal or Spain. What little co-operation exists between EU nations will evaporate, as many nations will adopt an everyman for himself view (as the banks did post-Lehman brothers). International lenders will go running for cover, citizens will withdraw their savings, making it impossible for some EU countries, even stable ones without debt problems (such as Germany, France and Belgium) to raise credit. A messy collapse of the euro is thus very likely after a Greek exit….and the bulk of the bill for this collapse will probably arrive in Berlin and London!
As I’ve pointed out before, a messy Euro implosion would essentially wipe out many trillions of euros from various banks across the world, with German and British banks taking the worst of the hit. Once you start forcing countries out of the euro its no longer just a matter of a Sovereign debt crisis, but a national debt crisis.
The bulk of any nation’s debt‘s are held, not by the government (public debt), but by the people (i.e. our credit cards, mortgages, loans, etc.). The public debts of Ireland and Spain for example were (per capita) much lower than that of the UK prior to this debt crisis, with them now slightly higher, but still lower than those of Germany or France. But the private debts held by Irish and Spanish citizens, is much higher, about 1000% of GDP for Ireland, about 1.2 trillion euros worth of it. If Ireland were, like Greece forced out of the euro, then one has to question how any of this trillion euro’s will get ever repayed. Further, the obvious solution to the problem would be for the Irish government to solve its public debt problems by simply printing so much money as to make its debts (and thus these private debts) effectively worthless, or drastically devalue the newly introduced Punt in the opening weeks of its introduction to achieve the same effect. This would leave banks, mostly British banks I might add, looking at many tens of billions (actually as I’ve pointed out before it would be about £104 billion…and that’s just the impact from Ireland!) worth of losses. This is easily enough to trigger the collapse of a few UK banks, or a second round of bank bailouts.
And obviously if you think the exit of Greece or Ireland from the EU sounds scary, inevitably such a calamity could knock over the much larger Spanish or Italian domino. The consequences of that? the savings and pension plans of all Europeans (whether you’re in the euro or not) get pretty much wiped out. Most German banks and pension funds will go to the wall, indeed the survival of the Bundesbank is even at stake. As the Beeb point out here, the bill to the Bundesbank of a eurozone collapse could be as much as 644 billion euros….and that’s just accounting for public debts, private debts could greatly increase this figure! This is more than enough in losses, if it happened in a sufficiently short a time period, to bankrupt Germany, or force her into the self imposition of the very same debt spiral that Germany has forced on Greece (what goes around comes around!).
So there are lots of good reasons to keep Greece, come what may, in the euro and treat the Greek patient within the hospital…as opposed to the neo-liberal plan, which amounts to dragging the Greek patient outside to die on the kerbside. A managed default of Greek debt is better handled within the EU, not outside it. Indeed, least we forget such a plan has already been implemented in Greece and the sky did not fall on our heads (contrary to what the neo-liberal critics claimed). Clearly this is the way forward. The only obvious reason for anyone to call for Greece to leave the Euro is out of some sadistic desire for revenge.
Of course socialists would argue that the whole reason why conservatives such as Merkel, or the IMF leadership or Osborne favour austerity is actually because they don’t really care about the deficits at all. They’re agenda is to essentially conduct class warfare against the working and middle classes by removing state benefits that the wealthy rarely need, while putting lots of juicy state assets up for sale, thus increasing the power of the wealthy. As Ive mentioned before with the UK, the socialists might have a point here, as one cannot conceive of any other logical reason for backing austerity, other than fanatical stupidity.
Mythbusters part Deux
What’s that I here you say? Greeks work only two hours a day and retire when they are thirty? There are a number of vicious rumours running around about Greece, often put out by UK or German tabloids and they simply do not add up to rational scrutiny. The Beeb have been fact-checking a number of them (as they point out here the average Greek works longer hours than the average German) and the only one that comes close to being true, is the in-efficiency of the Greek railway system…course we in Britain are hardly in a position to snear on that point…and the beeb analysis is slightly flawed on that point as it neglects to consider the costs of maintaining the road network.
Putting the “unity” back in the EU
Its clear that something has to give. In the 4 weeks we have to the next Greek election, again with this Irish referendum due soon also, it gives a last chance to try something new. Clearly if François Hollande plans on changing things he’ll have to act fast. My advice to him is to state very clearly that a Greek exit from the euro, regardless of what happens in Athens, even if the Greeks tear up the IMF treaty, is simply off the table. He could (and should) bluntly tell the Germans that France will veto any such attempt to force or pressure Greece into leaving. Or he could make clear that France will no longer finance any bailout fund that relies on a policy of austerity (forcing Germany to go it alone, greatly increasing their exposure in the event of a eurozone collapse). That would I suspect force new ideas onto the agenda, but like I’ve said before when discussing such options, the window of opportunity to implement them is rapidly closing.
Either way, we are all in this together, even if you’re a brit! So a little bit of pan-European cooperation is what this situation needs. After all, that’s was the whole point of the EU to begin with!