‘It [Greece] was the first and flimsiest economy to betray the common secret that our Eurozone project was badly flawed.’
Facts and an outlook regarding Greece. In short: no bail-out can save Greece and ‘Greece defaulted twice already and will be defaulting a third time – since the reduction in interest rates coupled with the extension of the repayment period is an effective haircut of its debts to the troika.’
A Modest Proposal for Resolving the Eurozone Crisis – Version 4.0
Europe is fragmenting. While in the past year the European Central Bank has managed to stabilise the bond markets, the economies of the European core and its periphery are drifting apart. As this happens, human costs mount and disintegration becomes an increasing threat.
It is not just a matter for the Eurozone. The fallout from a Eurozone breakup would destroy the European Union, except perhaps in name. And Europe’s fragmentation poses a global danger.
Following a sequence of errors and avoidable delays Europe’s leadership remains in denial about the nature of the crisis, and continues to pose the false choice between draconian austerity and a federal Europe.
By contrast, we propose immediate solutions, feasible within current European law and treaties.
There are in this crisis four sub-crises: a banking crisis, a public debt crisis, a crisis of under-investment, and now a social crisis – the result of five years of policy failure. Our Modest Proposal therefore now has four elements. They deploy existing institutions and require none of the moves that many Europeans oppose, such as national guarantees or fiscal transfers. Nor do they require treaty changes, which many electorates anyway could reject. Thus we propose a European New Deal which, like its American forebear would lead to progress within months, yet through measures that fall entirely within the constitutional framework to which European governments have already agreed.
“Markkinat ja vapaus”
Mielenkiintoista lukemista Pertti Haaparannalta. Aihe sopii hyvin siihen, mitä Yanis Varoufakis on kirjoittanut tässä kirjassa markkinoista (tai ainakin talousteorioista markkinoista).
I had a bad dream, or maybe even vision last night, that Europe’s political elite, led by Germany and its preference for rule-based policy, would not give up on austerity and other contractionary policies. We were already a few years from now, and living in a wasteland, because the rigidities of the various pacts and so-called Fiscal Compact had demolished the social safety nets in all European countries, because it was failed to be acknowledged that it is a) bad that a country doesn’t have control over the currency it uses when there is no proper fiscal redistribution system (like in the US) and b) governments simply cut everything that they didn’t have money for because of that.
I had flashes of Grapes of Wrath in a post-industrial, European setting. I saw Europe as a Belgium on a larger scale. A wasteland, in which there is insufficient demand and the crisis is never over, because Europe could not rely on external demand. Even Germany got stuck at some point.
Fortunately I woke up and I hope it is like said in this book, that there are still outsiders who see what is wrong and that may have some influence.
Cyprus is still a mess. Let’s seen what happens over the weekend and at the latest on Monday, when ECB emergency loans could be cut off.
Naked Capitalism makes mention of the dire straits of Slovenia and France. France has been kind of almost on the radar for a long time, at least in the connection of its banking system being burdened by the problems of Spain, Portugal and Greece. Slovenia has been more invisible, but Edward Hugh already anticipated this early Summer 2012.
The big problem in European terms is nonetheless France, in connection with the European Financial Stability Fund. Yanis Varoufakis alluded to the structural (toxic) problem of the EFSF in 2011, which is essentially that it relies on the strong countries to leverage the money in the EFSF. If France wobbles, then the whole structure starts to collapse:
But what makes EFSF bonds even worse is that the structure of these eurobonds is heavily dependent on the underlying risk. Lest we forget the lessons of 2008, financial disasters strike when bankers and authorities neglect the effect of their instruments and trades on the solvency of the underlying assets in question. It is in this sense that EFSF’s eurobonds are, clearly, part of the euro crisis rather than a solution to it. To see this, consider the destructive dynamic inbuilt within the EFSF bonds: Suppose Portugal exits the markets, as it is bound to, and runs to the EFSF for loans. The EFSF will have to issue new debts, on behalf of the remaining eurozone countries. This means that, with Portugal out of that group, a greater burden will be shared by the N-1 countries remaining as pillars of the EFSF. This means that the markets will immediately focus on the new ‘marginal’ country: the one that is currently borrowing at the highest interest rates within the EFSF in order to loan the money to Portugal. Immediately, it’s own spreads vis a vis the German bond rates will rise until that country (Spain in all probability) is also pushed out of the markets. Then there will be N-2 countries left to borrow of EFSF’s behalf and the markets will focus on the newer ‘marginal’ country. And so on, until the band of nations within the EFSF is so small that they cannot bear the burden of total debt on their shoulders (even if they wish to). At that point, led by Germany, these remaining. solvent, states they will leave the euro.
I can’t say how much the OMT-program can prevent this dynamic but the stalling of France is a really bad sign in this regard.
On Bloomberg there is yet another analysis of the potential consequences of the Cyprus-bailout. Among them is the damage this has done to the project of building a banking union and the potential for bank-runs whenever a country gets into trouble (Portugal comes to mind for this in the near term). To quote Ed Harrison:
My view? It was inevitable that we would be in crisis again. The austerity world view of crisis resolution is completely at odds with the capacity of the euro zone’s institutional architecture to handle a crisis. And so, we keep doubling down on the same policy of austerity in exchange for reforms which has created the downward spiral to begin with. I wish I could be optimistic here. But I think it is going to get worse. I hope I’m wrong. And I certainly hope that periphery depositors still have enough faith in the euro to ride this one out. If the Cyprus panic metastasizes, it will get ugly.
OK, politics is difficult, and I understand that Merkel wants a) to be re-elected, b) needs the Social Democrats for passing this bailout and c) Germans have a totally different view of economic reality and its solutions re: the crisis than what is sensible and (factually) true. But is clinging on to power and not telling voters the truth really so important to throw yet another economy under the bus? Like Yanis Varoufakis says, we need a benevolent hegemon (Germany) – see this post:
Germany should take another leaf out of the New Dealers who put it on the road to recovery all those years ago: Europe needs its own New Deal, funded by a new class of public finance instruments. Germany can realise such a Recovery Program centred around the European Investment Bank. The EIB already has a proven track record of creating a liquid market for debt instruments that fund successful projects. In collaboration with, and supported by, the European Central Bank, an EIB-ECB partnership has the capacity to energise mountains of hitherto idle savings on pure banking principles, with minimal involvement of member-states and no need for Treaty changes.
All it will take is a German resolve to shift from panicky authoritarianism to a hegemonic, to an enlightened self-interestedness.
But at the moment we are stuck with ‘panicky authoritarianism’ or maybe even plain stupidity or evilness in the view of a wrong understanding of what ails Europe. Germany wake up, we need you!
On Reuters’ website. In one short piece, the core of the whole problem: intra-EU trade imbalances, which caused the banking system of the EU to (nearly) collapse – in Greece, Ireland and now, Cyprus. And let’s not forget the state support for the German Ländesbanken, several Dutch banks, a host of French banks. The key point is that Germany’s giant trade surplus was possible because of the institutional set-up of the Eurozone, i.e. the interest setting by the ECB created the possibilities for cheap loans in ‘the periphery’, which were often provided by French and German banks on the prowl for profit.
The only thing that can rescue the Eurozone is a great correction to the trade imbalances, which Yanis Varoufakis could be accomplished by a Surplus Recycling System between surplus and deficit countries. This exists for any country – the Finnish Helsinki region pays for the poor northern regions of Finland, similarly the rich ‘Randstad’ region in the Netherlands coughs up the funds to support the North-East of the Netherlands.