G. G. Bain Asbury Park, Jersey Shore 1914
Can they refuse?
Greece has lodged a formal request for a bailout loan with the eurozone’s special support fund, a spokesman for the European Stability Mechanism (ESM) said on Wednesday. “The ESM has received the Greek request,” he said. The Eurogroup of finance ministers is due to consider the application, which is formally addressed to its chairman Jeroen Dijsselbloem, in a conference call on Wednesday.
As it careens from one crisis to the next, many see Greece – and its prime minister, Alexis Tsipras – as a rudderless ship heading aimlessly toward inevitable and total economic collapse. But the editor of a major German newspaper, Die Zeit, believes Tsipras’ “very clever game of chicken” will almost certainly pay off. German Chancellor Angela Merkel “knows she does not want to have a dead body on her hands – not in Europe, not in her Europe,” Josef Joffe told CNN’s Christiane Amanpour on Monday. “German threats, and everybody else’s threats, are not credible.” “There will be no Grexit, neither enforced nor voluntary,” Joffe said, using the shorthand term for a Greek exit from the eurozone.
“The simple reason, which many people don’t understand, is that even with a Grexit, Greece still remains in Europe, and therefore it will have access to all kinds of zillions of money. … The only thing that will change is the spigots where the money runs through.” Two days after Greeks overwhelmingly rejected the austerity inherent to Europe’s bailout offers, Tsipras will discuss the path forward with European leaders on Tuesday. There appears to be some splintering of resolve among the so-called “institutions”. French President Francois Hollande took a somewhat softer tone after meeting with Merkel in Paris on Monday, and the IMF has bucked the line by releasing a preliminary report last week that admitted Greece would likely need the debt relief its government is so desperately trying to get.
“They said, listen, boys and girls, Greece cannot pay,” Joffe said. “If the IMF tells you that, that’s a resounding victory for Tsipras.” European leaders – despite their, by varying degrees, hardline rhetoric – understand that the country will collapse without an injection of money, he said. “Merkel knows that; Hollande knows it; and, above all, who else knows this? Tsipras.” “He has told Europeans, ‘You know what? Come and punish us. You’ll punish yourselves even more. Do you really want to collapse your economy? Do you really want chaos in the streets? Do you want another storm on the Bastille? You don’t, do you?’ “Nobody wants to be in the position where he cuts his nose to spite his face. “And that’s why it is my considered bet that the Greeks have won this game of chicken. Wait a few days and you’ll see.”
Commodities traded in China are collapsing along with the country’s stock market. Raw materials from silver to lead and sugar to eggs fell to daily trading limits as the Shanghai Composite Index crashed to a three-month low Wednesday. A raft of measures to stabilize equities is failing to stop the bear-market rout in the country’s stock market, which had lured a record number of amateur investors and grown to become the world’s second-largest outside the U.S. “People are selling everything in sight to get their hands on cash,” Liu Xu, a trader at private asset-management company Guoyun Investment Co in Beijing, said by phone. “Some need to cover their margin calls in the stock market while others are gripped by fear that the Chinese economy will be affected by this crisis.”
Commodities prices globally this year have cooled, in part on slowing economic growth in China, the world’s largest consumer of energy, metals and grains. The Bloomberg Commodities Index, which tracks 22 raw materials, is down 7 percent so far this year. The gauge has lost 4.6% in the last three days, the most since 2011. Even as sentiment had soured on speculation demand is weakening, Wednesday’s sell off was fueled more by the rout in the country’s equity market, according to Ivan Szpakowski, a commodities strategist at Citigroup Inc. in Hong Kong. “It’s less commodity specific, and it’s not even reflective of a deterioration in economic growth or commodity demand,” Szpakowski said. “That’s not what we’re seeing. We’re seeing a deterioration in sentiment and a spillover from the equities market.”
What a surprise, right?!
China stocks tumbled to four-month lows on Wednesday as panicky investors dumped shares across the board, even as the government tried to unveil supportive measures throughout the day session to stop the plunge. To insulate themselves from the meltdown, more than 500 China-listed firms announced trading halts before the market opened, bringing the total number to around 1,300, almost half of China’s roughly 2,800 listed firms. “I’ve never seen this kind of slump before. I don’t think anyone has,” said Du Changchun, analyst at Northeast Securities. “Liquidity is totally depleted.” The CSI300 index of the largest listed companies in Shanghai and Shenzhen fell 6.8%, to 3,663.04, while the Shanghai Composite Index lost 5.9%, to 3,507.19 points.
In an unprecedented sign of desperation, all of China’s three futures index products for July delivery slumped by their 10% daily limit, meaning investors are extremely bearish on all type of stocks – small, mid, and big cap. Most blue chips, the target of government’s intensified purchases, saw previous session’s gains wiped out. Some analysts attributed the sell-off to share suspensions by a huge number of companies. “Given the suspension of stocks comprising a large part of the onshore markets, there are fewer stocks available to sell for those investors needing to meet their margin call requirements,” said John Ford, chief investment officer for Asia Pacific at Fidelity Worldwide Investment.
“This …is in large part responsible for the current liquidity squeeze.” Stocks fell across the board, with only 83 stocks rising, and 1,439 falling. Even Shanghai’s top blue chip exchange-traded funds, the target of purchases by a stabilization fund set up by Chinese brokerages, and state investor Central Huijin, also fell sharply. In an unusual manner, various Chinese government agencies published a series of measures throughout the trading session, including urging major shareholders and top executives of listed companies to buy their own shares, and allowing insurers to buy more blue chips. Bank of America Merrill Lynch said China’s deleveraging and margin calls could be far from over, with no bottom seen until the government becomes buyer of last resort.
Not going to work.
In any discussion of historical precedents for China’s ongoing battle with stock traders, Japan’s epic “price-keeping operations” deserve pride of place. In the early 1990s, stock traders started getting spooked by bad debts from Japan’s 1980s bubble years. In response, Tokyo marshalled one of history’s biggest government-buying sprees to hold the Nikkei stock market above 17,000. Untold billions of yen from national pension funds and postal savings accounts were channeled through the Ministry of Finance into shares, and authorities also clamped down on short selling. China, confronted today with plunging shares on the Beijing and Shanghai stock markets, has now organized an intervention that makes Tokyo’s look downright lame.
And that strategy will almost certainly come back to haunt Xi Jinping’s Communist Party, just as it did the Liberal Democratic Party of Japan’s then-Prime Minister Kiichi Miyazawa. So many of the forces behind Japan’s last several lost decades of economic stagnation and deflation can be traced back to the moment Miyazawa’s government decided to treat only the symptoms of the country’s economic frailty, rather than its underlying causes. More than a decade would pass before the LDP admitted Japan’s economy was suffering from the many bad loans the government had encouraged and the bailouts of zombie companies it had organized.
But in many ways, Tokyo never stopped confining its reform efforts to the symptoms of the country’s malaise. The country’s 15 prime ministers over the past two decades have avoided addressing the country’s excess of regulation, rigid labor laws and high trade tariffs. And for all his talk of sweeping change, current Prime Minister Shinzo Abe has been no different. His revival plans, like those of his predecessors, center on boosting asset prices. Abe’s nudging of the $1.1 trillion Government Pension Investment Fund to buy domestic stocks is a reprisal of the price-keeping operations of years past. And the yen’s 34% plunge since late 2012, encouraged by Abe’s government, has pumped up corporate profits and, in turn, the Nikkei stock exchange.
“In May 1998 Mr Hague used a speech to warn that some countries in the Euro would find themselves ‘trapped in a burning building with no exits’.”
Former foreign secretary William Hague has broken cover to urge Greece to abandon the Euro or be stuck in a ‘permanent crisis’. Mr Hague, who stood down from politics at the election, said Greece had no chance of turning its economy around within the single currency unless Germany agreed to hand over big subsidies ‘forever’. But the former Tory leader went even further, warning that the ‘Greek debacle of 2015’ will not be the end of the euro crisis ‘but its real beginning’ – eventually dragging in Italy, Spain, Portugal and other southern European countries. Mr Hague’s warning comes ahead of a crisis summit of Eurozone leaders in Brussels tonight amid warnings from Germany that the single currency could ‘blow apart’ if Greece is allowed to blackmail the rest of the Eurozone.
Angela Merkel and Francois Hollande were locked in a bitter stand-off ahead of yet another bid by eurozone leaders to prevent the debt-ridden state crashing out of the single currency. Athens yesterday extended its ‘bank holiday’ until at least Thursday after the ECB deferred a decision on whether to continue propping up the country’s financial institutions. But one American hedge fund, Balyasny, yesterday warned investors that Greek banks were on the verge of running dry, leaving the country 48 hours from civil unrest. Writing in the Daily Telegraph today, Mr Hague hit out at European leaders for pushing ahead with the single currency despite warnings that it would trap some countries in permanent recession.
In May 1998 Mr Hague used a speech to warn that some countries in the Euro would find themselves ‘trapped in a burning building with no exits’. The then Tory leader predicted ‘wage cuts, tax hikes, and the creation of vicious unemployment blackspots’. Speaking today Mr Hague said: ‘I hope the Eurozone leaders meeting today will remember that those of us who criticised the euro at its creation were correct in our forecasts. ‘Otherwise they risk adding to the monumental errors of judgement, analysis and leadership made by their predecessors in 1998.’
“China has more than 120 times the population of Greece..”
As the Greek debt drama plays itself out one 60-euro withdrawal at a time, some economic observers are saying the world is paying attention to the wrong crisis. That’s because in the space of three weeks, China’s Shanghai Composite stock index has lost nearly 30% of its value, wiping out some $2.3 trillion U.S. in wealth. As Bloomberg News put it, that’s a loss of $1 billion for every minute of trading. Regulators have halted trading in more than 700 listed companies, and at least two dozen IPOs have been cancelled. And some economists fear the country’s response to the downturn could be worse than the stock market crash itself.
“China could well be setting the stage for another financial time bomb to match its local government debt and real estate bubbles,” said Sherry Cooper, the former chief economist at the Bank of Montreal, in a note issued Tuesday. She described the Greek crisis as a “sideshow” to the real drama unfolding in China. “China has more than 120 times the population of Greece and is the second largest economy in the world, dominating demand for natural resources,” writes Cooper, who is now chief economist at Dominion Lending Centres. It’s that demand for natural resources that makes China very important to Canada’s economy, even if the two countries’ trade relationship isn’t that large.
By largely determining demand for natural resources, China effectively sets the prices Canada gets for its resources on global markets. And China’s crash is already having an impact on Canada, Cooper said in an email to HuffPost. “It has already led to lower commodity prices and therefore further damaged the resource sector of our stock market,” she said. “Today’s very weak trade figures reflect the slowdown in energy exports. Not good news for the Canadian economy.”
“They just didn’t want us to sign. They had already decided to push us out..”
Like a tragedy from Euripides, the long struggle between Greece and Europe’s creditor powers is reaching a cataclysmic end that nobody planned, nobody seems able to escape, and that threatens to shatter the greater European order in the process. Greek premier Alexis Tsipras never expected to win Sunday’s referendum on EMU bail-out terms, let alone to preside over a blazing national revolt against foreign control. He called the snap vote with the expectation – and intention – of losing it. The plan was to put up a good fight, accept honourable defeat, and hand over the keys of the Maximos Mansion, leaving it to others to implement the June 25 “ultimatum” and suffer the opprobrium. This ultimatum came as a shock to the Greek cabinet.
They thought they were on the cusp of a deal, bad though it was. Mr Tsipras had already made the decision to acquiesce to austerity demands, recognizing that Syriza had failed to bring about a debtors’ cartel of southern EMU states and had seriously misjudged the mood across the eurozone. Instead they were confronted with a text from the creditors that upped the ante, demanding a rise in VAT on tourist hotels from 7pc (de facto) to 23pc at a single stroke. Creditors insisted on further pension cuts of 1pc of GDP by next year and a phase out of welfare assistance (EKAS) for poorer pensioners, even though pensions have already been cut by 44pc. They insisted on fiscal tightening equal to 2pc of GDP in an economy reeling from six years of depression and devastating hysteresis.
They offered no debt relief. The Europeans intervened behind the scenes to suppress a report by the IMF validating Greece’s claim that its debt is “unsustainable”. The IMF concluded that the country not only needs a 30pc haircut to restore viability, but also €52bn of fresh money to claw its way out of crisis. They rejected Greek plans to work with the OECD on market reforms, and with the International Labour Organisation on collective bargaining laws. They stuck rigidly to their script, refusing to recognise in any way that their own Dickensian prescriptions have been discredited by economists from across the world. “They just didn’t want us to sign. They had already decided to push us out,” said the now-departed finance minister Yanis Varoufakis.
So Syriza called the referendum. To their consternation, they won, igniting the great Greek revolt of 2015, the moment when the people finally issued a primal scream, daubed their war paint, and formed the hoplite phalanx. Mr Tsipras is now trapped by his success. “The referendum has its own dynamic. People will revolt if he comes back from Brussels with a shoddy compromise,” said Costas Lapavitsas, a Syriza MP. “Tsipras doesn’t want to take the path of Grexit, but I think he realizes that this is now what lies straight ahead of him,” he said.
The European Central Bank warned that “moral hazard” could be a reason to object to the emergency liquidity assistance it allows lenders to access, just a day after it tightened conditions on the aid for Greece. The Eurosystem’s functioning could be disrupted by “provision of ELA at overly generous conditions, which, in turn, could increase the risk of moral hazard on the side of financial institutions or responsible authorities,” the ECB said in a document published on its website Tuesday. “The objective of ELA is to support solvent credit institutions facing temporary liquidity problems. It is not a monetary-policy instrument.”
The document on the ECB’s financial-risk management clarifies the conditions surrounding emergency bank aid at a time when policy makers are restricting the provision of such funding to Greek banks. The reference to moral hazard indicates that officials are worried that bending the liquidity rules for Greece, as the country heads for a possible default, may lead future recipients to act less responsibly. On Monday, the ECB increased the discounts on collateral for lenders receiving ELA from the Bank of Greece. That makes it more difficult for banks to access the funds that have kept them alive as deposit withdrawals accelerated amid uncertainty over the country’s place in the euro. While the risk of ELA is nominally borne by the national central bank that provides it, the Frankfurt-based ECB has broad discretion over the terms. The new document didn’t specify what would quantify “overly generous” provision.
More left wing.
Euclid Tsakalotos, the mild-tempered professor who was appointed as Greece’s new finance minister on Monday, is a clear change in style from his combative predecessor Yanis Varoufakis.The 55-year-old Tsakalotos studied at prestigious private London school St Paul’s and at Oxford University, speaks Greek with a British accent and rarely appears in public, let alone wearing the torso-hugging T-shirts Varoufakis favors.But if European officials expect Athens’ new finance chief, who has already been a key negotiator in drawn-out meetings between the Greek government and creditors, to take a softer approach in the substance of new talks, they can think again.
As the brainchild of Syriza’s economic thinking, Tsakalotos is likely to redouble efforts to put one of the most contentious issues in the five months of financial aid negotiations between Greece and its creditors — debt relief — back on the table. In a news conference after being sworn in, Tsakalotos said he was anxious about the task before him. “I cannot hide from you that I am quite nervous. I am not taking on this job at the easiest point in Greek history,” he said. But the minister, who sat beside his predecessor, said he was keen to restart talks with European partners, in order to act on a decision taken by Greeks in a Sunday referendum to reject previous terms offered by creditors in exchange for aid.
“We want to continue discussions, to take this mandate given to us by the Greek people [to strive] for something better…for all these people who have been suffering so much.” Tsakalotos, who co-authored a book with Greek central bank governor Yannis Stournaras, has been dubbed in leftist jargon a “Revolutionary Europeanist” — an economist who supports European Union integration, but not its capitalist principles. Like Varoufakis, Tsakalotos has often decried Europe for big democratic deficiencies and argued that ill-guided fiscal austerity imposed by the core of the euro zone has unnecessarily impoverished Greece and other countries on the periphery.
Not going to listen.
Prominent economists called on German Chancellor Angela Merkel to change her policy course and stop “force-feeding” the Greek people “never-ending austerity” in an open letter published in leading European newspapers on Tuesday. “The medicine prescribed by the German finance ministry and Brussels has bled the patient, not cured the disease,” the economists wrote in an open letter to Merkel published on the website of Germany’s Tagesspiegel. “Right now, the Greek government is being asked to put a gun to its head and pull the trigger,” they said in the letter, which will also appear in France’s Le Monde and in English in The Guardian and The Nation.
“Sadly, the bullet will not only kill off Greece’s future in Europe. The collateral damage will kill the eurozone as a beacon of hope, democracy and prosperity, and could lead to far-reaching economic consequences across the world.” At an emergency eurozone summit on Tuesday, Greek Prime Minister Alexis Tsipras launched a desperate bid to win fresh aid from skeptical creditors. But Merkel, under domestic pressure to take a hard line on Greece, has made it clear that it is up to Tsipras to put forward credible proposals before negotiations with Athens can reopen.
The open letter, which was signed by Thomas Piketty of the Paris School of Economics and Jeffrey D. Sachs from Columbia University among others, urged Merkel to make concessions towards Greece. “To Chancellor Merkel our message is clear: we urge you to take this vital action of leadership for Greece and Germany, and also for the world.” “History will remember you for your actions this week. We expect and count on you to provide the bold and generous steps towards Greece that will serve Europe for generations to come.”
Greece may be financially bankrupt, but the troika is politically bankrupt. Those who persecute this nation wield illegitimate, undemocratic powers, powers of the kind now afflicting us all. Consider the International Monetary Fund. The distribution of power here was perfectly stitched up: IMF decisions require an 85% majority, and the US holds 17% of the votes. The IMF is controlled by the rich, and governs the poor on their behalf. It’s now doing to Greece what it has done to one poor nation after another, from Argentina to Zambia. Its structural adjustment programmes have forced scores of elected governments to dismantle public spending, destroying health, education and all the means by which the wretched of the earth might improve their lives.
The same programme is imposed regardless of circumstance: every country the IMF colonises must place the control of inflation ahead of other economic objectives; immediately remove barriers to trade and the flow of capital; liberalise its banking system; reduce government spending on everything bar debt repayments; and privatise assets that can be sold to foreign investors. Using the threat of its self-fulfilling prophecy (it warns the financial markets that countries that don’t submit to its demands are doomed), it has forced governments to abandon progressive policies. Almost single-handedly, it engineered the 1997 Asian financial crisis: by forcing governments to remove capital controls, it opened currencies to attack by financial speculators. Only countries such as Malaysia and China, which refused to cave in, escaped.
Consider the ECB. Like most other central banks, it enjoys “political independence”. This does not mean that it is free from politics, only that it is free from democracy. It is ruled instead by the financial sector, whose interests it is constitutionally obliged to champion through its inflation target of around 2%. Ever mindful of where power lies, it has exceeded this mandate, inflicting deflation and epic unemployment on poorer members of the eurozone. The Maastricht treaty, establishing the European Union and the euro, was built on a lethal delusion: a belief that the ECB could provide the only common economic governance that monetary union required. It arose from an extreme version of market fundamentalism: if inflation were kept low, its authors imagined, the magic of the markets would resolve all other social and economic problems, making politics redundant. Those sober, suited, serious people, who now pronounce themselves the only adults in the room, turn out to be demented utopian fantasists, votaries of a fanatical economic cult.
“..the troika has been “mak[ing] an example of Greece” for at least five years.”
It is often the moral and economic blindness of New York Times articles about the EU crisis that is most striking. The newest entry in this field is entitled “Now Europe Must Decide Whether to Make an Example of Greece.” That is a chilling phrase most associated in our popular culture with a Consigliere and his Don deciding whether to order a mob “hit.” It is, therefore, fitting (albeit over the top) as a criticism of the troika’s economic, political, and propaganda war against the Greek people. Except that the article is actually another salvo in that war. Let’s start with the obvious – except to the NYT. “Europe” isn’t “decid[ing]” anything. The troika is making the decisions.
More precisely, it is the CEOs of the elite German corporations and banks that direct the troika’s policies that are making the decisions. The troika simply implements those decisions. The troika consists of the ECB, the IMF, and the European Commission. None of these three entities represents “Europe.” None of them will hold a democratic referendum of the peoples of “Europe” to determine policies. Indeed, they are apoplectic that the Greek government dared to ask the people of Greece through a democratic process whether to give in to the troika’s latest efforts to extort the Greek government to inflict ever more destructive and economically illiterate malpractice on the Greek people.
Second, the troika has been “mak[ing] an example of Greece” for at least five years. It extorted Greece to inflict the economic malpractice of austerity in response to a Great Recession. The result was just what economists warned – Greece was forced, gratuitously, into worse-than-Great Depression levels of unemployment that persist today seven years after Lehman’s collapse. In this process, the troika blocked a prior referendum proposed by Greece’s Socialist Prime Minister George Papandreou in late 2011 and forced him to resign for daring to propose democratic decision-making. Read the Guardian’s risible account of the 2010 coup that the troika engineered in Greece for an unintended insight as to how the UK’s “New Labour” Party has become an anti-labor party of austerity and “aspirational” hostility to efforts to contain the City of London’s criminal culture.
“Nominal growth of around 2% annually would be enough to stabilise Greek sovereign debt as a share of GDP.”
Due to earlier debt restructuring, official statistics in Greece vastly overstate its effective debt burden. As a result, Greece’s debt repayments should be manageable provided the European Union and the IMF can devise a reform package that enables the Greece economy to grow at a modest pace. Unfortunately, in the current political environment – which continues to favour harsh austerity over economic growth – it appears as though Greece will need to default or leave the euro before its economy can return to any sense of normality. Government debt in Greece officially sits at around 180% of nominal GDP. Due to earlier debt restructuring, however, effective government debt is functionally much lower.
This has occurred via two distinct channels: the decision by private creditors to accept significant haircuts on existing debt during 2012 and the significant rise in the average maturity of Greek government debt. Average maturity on existing sovereign debt is now around 16 years, double that of Germany and Italy. Further restructuring, assuming that there isn’t a Greek exit, could see the average maturity increase to between 20 and 25 years. As a result, the interest burden on existing government debt in Greece has fallen to 4% of nominal GDP (down from over 7% in 2011), which is considerably lower than the interest burden in both Italy and Portugal. Interest payments in Greece are just 2.2% of outstanding sovereign debt.
By comparison, interest payments in Spain and Italy are estimated at 3.4% and 3.6% of government debt, respectively. The ratio for Greece has declined by two-thirds since 2011. The key difference between Greece and these other countries is that Greece remains firmly in a state of economic depression. Harsh austerity measures have undermined its productive capacity, killed off its banking sector and made it almost impossible for the region to recover in any meaningful sense. The solution to Greece’s problems almost certainly requires a combination of further debt restructuring, growth enhancing reforms, and fiscal or monetary stimulus. Austerity isn’t the answer and will achieve little more than prolonging Greece’s financial and economic crisis.
Nominal growth of around 2% annually would be enough to stabilise Greek sovereign debt as a share of GDP. Growth beyond that would see their debt burden gradually decline towards more normal levels. Unfortunately, the ECB and the troika continue to assume that Greek government debt really does sit at 180% of nominal GDP. They continue to assume that the interest burden of Greece exceeds that of other member countries. In doing so they have done irreparable damage to the Greek economy. In blindly pursuing the interests of private and sovereign creditors, they have all but ensured that Greece will eventually default on their debt and leave the euro.
Yeah, why not another ultimatum?!
European leaders gave debt-stricken Greece a final deadline of Sunday to reach a new bailout deal and avoid crashing out of the euro, after Greek voters rejected international creditors’ plans in a weekend referendum. In the first step of its renewed bid for funding, Greece’s leftist government must submit detailed reform plans by Thursday, EU President Donald Tusk said after eurozone leaders held an emergency summit with Greek Prime Minister Alexis Tsipras. All 28 European Union leaders will then examine the plans on Sunday in a make-or-break summit that will either save Greece’s moribund economy or leave it to its fate. “Tonight I have to say loud and clear – the final deadline ends this week,” Tusk told a news conference.
“Inability to find an agreement may lead to bankruptcy of Greece and insolvency of its banking system,” he added. European Commission President Jean-Claude Juncker warned “we have a Grexit scenario prepared in detail” if Greece failed to reach a deal, although he insisted he wanted Athens to stay in the euro club. German Chancellor Angela Merkel meanwhile warned Greece would need a debt program lasting “several years” and insisted writing off any of Greece’s €320 billion debt mountain was out of the question. The deadline came after Tsipras and his new finance minister Euclid Tsakalotos came to Brussels to discuss the fall-out from the dramatic referendum. Greeks voted by 61% to reject creditor demands for more austerity in return fresh EU-IMF bailout funds.
From his book, 2011.
Picture the scene when a sheepish finance minister enters the chancellor’s Berlin office bearing a control panel featuring one yellow and one red button, and telling her that she must choose to press one or the other. This is how he explains what each button will do:
The red button If you press it, chancellor, the euro crisis ends immediately, with a general rise in growth throughout Europe, a sudden collapse of debt for each member state to below its Maastricht limit, no pain for Greek citizens (or for the Italians, Portuguese, etc), no guarantees for the periphery’s debts (states or banks) to be provided by German and Dutch taxpayers, interest rate spreads below 3% throughout the eurozone, a diminution in the eurozone’s internal imbalances, and a wholesale rise in aggregate investment.
The yellow button If you press it, chancellor, the situation in the eurozone remains more or less as it is for a decade. The euro crisis continues to bubble along, albeit in a controlled fashion. While the probability of a break-up, which will be a calamity for Germany, remains non-trivial, the chances are that, if you push the yellow button, the eurozone will not break up (with a little help from the ECB), German interest rates will remain extremely low, the euro will be nicely depressed (‘nicely’ from the perspective of German exporters), the periphery’s spreads will be sky-high (but not explosive), Italy and Spain will enter deeper into a debt-deflationary spiral that sees to a reduction of their national income by 15% over the next three years, France shall slip steadily into quasi-insolvency, GDP per capita will rise slowly in the surplus countries and fall precipitously in the periphery.
As for the first “fallen” nations (Greece, Ireland and Portugal), they shall become little Latvias, or indeed Kosovos: devastated lands (after the loss of between 25% and 40% of national income, a massive exodus of their skilled labour) on which our people will holiday and buy cheap real estate. In aggregate, if you choose the yellow button, chancellor, eurozone unemployment will remain well above UK and US levels, investment will be anaemic, growth negative and poverty on the up and up. Which button do you think, dear reader, the chancellor would want to push?
“Anti-establishment voters are always underrepresented in establishment polls.”
There are decades where nothing happens; and there are weeks where decades happen.
– Vladimir Lenin (1870 – 1924)
In 1914, Europe had arrived at a point in which every country except Germany was afraid of the present, and Germany was afraid of the future.
– Sir Edward Grey (1862 – 1933)
Last week’s email, “1914 is the New Black”, was the most widely read Epsilon Theory note to date, and given the weekend ’s events it bears repeating, as the echoes of 1914 are growing louder and louder. We are, I think, likely embarked on the death spiral phase of a game of Chicken, just as in the summer of 1914. The stakes are, for now at least, not nearly as cataclysmic today as they were a century ago, but the social and political dynamics are eerily alike. I’m often asked how to get a better take on a historical event like the lead-up to World War I, and the answer is that there’s no substitute for immersing yourself in what people were actually saying and writing at the time the events transpired.
If you’re lucky, perhaps you’ll pick a period that also attracted the attention of a gifted historian like a Robert Caro or a David McCullough. Second best, I’ve found, is to find a gifted editor or anthologist to smooth the path a bit. One such anthologist is Peter Vansittart, who collected a wide range of original texts in his classic books, “Voices: 1870 – 1914” and “Voices from the Great War”. I’ve taken some of those texts and appended them below. They speak for themselves, I hope, to illustrate the defining characteristic of a spiraling game of Chicken – all sides begin to speak in terms of “having no choice” but to take aggressive actions to defend their own interests. Before the quotes, though, three other historical observations:
• The Austrian ultimatum to Serbia – long seen as the proximate cause of World War I – was accepted by the Serbian government almost in its entirety. Unfortunately, that “almost” part made all the difference. An important anecdote to remember the next time someone calls your attention to Tsipras’s acceptance of 90% of the Eurogroup reform ultimatum.
• Anti-establishment voters are always underrepresented in establishment polls. Noted segregationist and Alabama governor George Wallace won the 1972 Democratic Party primary in Michigan despite showing third in polls. Daniel Ortega and his Sandinista regime lost the 1990 Nicaraguan election by 10 percentage points to Violeta Chamorro despite leading by more than 10 points in every pre-election poll. The Syriza NO landslide was no surprise here, and this is an important phenomenon to keep in mind when you start to see opinion polls from Italy and France published over the next few days.
• Politics always trumps economics. My favorite 1914 quote in this regard is from Lord Cunliffe, governor of the Bank of England from 1913 – 1918, who famously declared that war was impossible because “The Germans haven’t the credits.” So what if Greek banks run out of euros? The Greek government will make their own, or maybe issue California-style IOUs and dare the Eurogroup to boot them out of the currency. If you think that an ECB squeeze can put this political genie back in the bottle, you’re making the same classic error as Walter Cunliffe did.
Petty personal politics.
Yanis Varoufakis was sacrificed to placate the European creditor powers. Germany let it be known that there could be no possible hope of an accord on bail-out conditions as long as this wild spirit remained finance minister of Greece. In a moment of condign fury, Mr Varoufakis had accused EMU leaders of “terrorism”, responsible for deliberately precipitating the collapse of the banks in one of its own member states. (This is objectively true, of course) “I shall wear the creditors’ loathing with pride,” he signed off in his parting shot, ‘Minister no More’. It is an odd end to the ‘OXI’ landslide in the referendum, a 61pc stunner that seemed at first sight to be a vindication of Syriza’s defiant stand over the last six months.
He had looked like the hero of the hour threading through ecstatic crowds in Syntagma Square in the final rally. Fate plays its tricks. “Soon after the announcement of the referendum results, I was made aware of a certain preference by some Eurogroup participants, and assorted ‘partners,’ for my … ‘absence’ from its meetings; an idea that the prime minister judged to be potentially helpful to him in reaching an agreement. For this reason I am leaving the Ministry of Finance today.” His sacking is a paradox. He is the most passionate pro-European in the upper reaches of the Syriza movement, perhaps too much so since he thought it his mission to rescue the whole of southern Europe from ‘fiscal waterboarding’ and smash the 1930s contractionary regime of Wolfgang Schauble’s monetary union for benefit of mankind.
But then he was starting to harbour ‘dangerous’ thoughts. When I asked him before the vote whether he was prepared to contemplate seizing direct control of the Greek banking system, a restoration of sovereign monetary instruments, Grexit, and a return to the drachma — if the ECB maintains its liquidity blockade, forcing the country to its knees – he thought for a while and finally answered yes. “I am sick of these bigots,” he said. His fear was that Greece did not have the technical competence to carry out an orderly exit from EMU, and truth be told, Syriza has already raided every possible source of funds within the reach of the Greek state – bar a secret stash still at the central bank, controlled by Syriza’s political foes – and therefore has no emergency reserves to prevent the crisis spinning out of control in the first traumatic weeks.
For the United States, Greece is a valued NATO ally and a land of relative stability, between the faltering Balkans, North Africa, and the Middle East. Its strategic importance throughout the Mediterranean has increased following the failure of the Arab uprisings and the falling-out of two US allies, Turkey and Israel. Greece’s cooperation is crucial in counter-terrorism and in efforts to cope with the flow of refugees from Syria and the Horn of Africa. It has become a security partner for Israel, a relationship reflected in growing links between the Greek and Jewish communities in the United States. The United States has an interest in Europe’s drive for greater energy security and diversification of supply away from Russia.
Greece aspires to an important role in Europe’s energy security through its own offshore exploration for oil and gas and potential future production and through new interconnectors to the Balkans and up into central Europe. Overall, the “Europeanization” of Greece has saved it from the tribulations of its Balkan neighbors. Much would be lost for the Greek people, the region, the EU, and the United States if Greece became a failed state in an increasingly troubled neighborhood. Russian President Vladimir Putin’s efforts to seduce wayward European states might then have greater success.
Against this background, US President Barack Obama and senior administration officials have repeatedly urged the ECB, the European Commission, and the IMF to show greater flexibility to reach an agreement with Greece. Cabinet members have made dozens of phone calls urging compromise. While the president has not publicly taken a position on the Greek referendum and its implications, he observed earlier this year that “You cannot keep on squeezing countries that are in the midst of depression.” A senior White House official has called for a socially just solution. Clearly the administration would prefer less draconian demands by the creditors but is sensitive to possible accusations of interference.
Always a good idea.
Covering the Greek crisis for the past few months, the question I am asked most commonly is: “Why won’t Greece just stop whining and pay its debts?” It is quite depressing to realise there are so many people out there who think there is a mattress somewhere in Greece stuffed with a trillion euros, which we are refusing to hand over simply out of radical leftism. The second most commonly asked question, however, cheers me up significantly: “Is there any way we can help?” There is: visit Greece. The weather is just as stunning as it ever was this time of year; the archaeological sites just as interesting; the beaches just as magical; the food just as heart-healthy. The prices are significantly cheaper than usual. It is one of those rare everybody-wins situations.
The people are even more welcoming, more hospitable and more grateful than ever. The reaction to difficulty has been a broader smile, a wider embrace. We understand that you have a choice and we understand why you have chosen Greece right now. Tourism is liquidity. Tourism is solidarity. If you are thinking of helping my country in this way, there are ways to do so perfectly safely and to maximise the benefit. It is important to say that there has been no violence, at all, anywhere. And whenever there has been any trouble in the past, it has always confined itself in a very small and easily avoidable area, in the very centre of Athens. If you are feeling even a little nervous about it, plenty of airlines fly directly to dozens of resorts and stunning, out-of-the-way destinations.
A British friend, Kris, who just came back from Athens, says: “It would be very easy not to know that anything was even going on … There were some queues at ATMs, but no more than in the centre of London during a busy weekend. There is no rationing or shortages. The only exception was the night of the rival rallies, for Yes and Oxi; I was absolutely amazed that they were held less than half a mile apart and there was no trouble whatsoever. From our hotel terrace, it was like listening to democracy in stereo … I would go back in a heartbeat.”
In this episode of the Keiser Report, Max Keiser and Stacy Herbert discuss the Greek referendum results, financial terrorism and bail-in fears induced velocity of money. In the second half, Max interviews Professor Steve Keen about the Greek ‘OXI’ (No) vote and the dictatorship of the ECB.