http://foreignpolicy.com/2015/03/06/is-the-euro-compatible-with-democracy/

"The Germans lean on eurozone authorities to get off the hook, and the European Commission bows to Berlin. But voters elsewhere want to change things, even just in their own countries? Nein, nein, nein: There is no alternative."

@radx

As I mentioned in our previous conversations, my expectation is that once significant structural reform goes through, all the things I talked about before - much of the debt will be forgiven to speed up recovery for Greece and the rest of Europe. If that's not the case, then I agree that the policy was misguided. But it's the whole issue of trust again. Debt forgiveness certainly won't come before the fact, especially when a country like Germany is the main decision maker.

Putting that in perspective, I still think Merkel is broadly making the politically realistic best of a bad situation. I mean Merkel herself, from what I have read, is facing not insignificant opposition from a euro-skeptic right. Suppose she were more bold in funding Greece, was thrown out of office, and the policy abruptly reversed, what would that accomplish?

I can't speak to the specifics, but all those examples you mention of corruption and/or bad policy throughout the austerity process do not sound good. I have no doubt there were instances of malpractice or favoritism, and I hope if they are credible, they are investigated. I can only really argue on the merits of the broad intentions of the policy.

I would agree that the general attitude towards the Greeks being lazy and reaping what they sowed is unjustified. As an example, public sector workers did enjoy unjustified job security and there was a generously low retirement age compared to the rest of Europe. But much of the population didn't benefit from that early retirement or work in the public sector. From memory, actually measures like hours worked per capita were roughly in line or higher than the rest of Europe.

But unfortunately the brunt of the repercussions are borne by the populace who at best are responsible for not demanding more from their politicians because like mentioned before, the beneficiaries have emigrated and squirreled their ill gotten money away.

Wall of text incoming. Again.

Sorry. Again.

tl;dr:

Debt relief right away was proposed, was neccessary, and was skipped to protect the European financial system.



You are 100% correct, we both are as convinced as one can be that a disorderly collapse would have been much worse for Greece. Might have turned it into a failed state, if things went really bad.

But the situation in Greece at the time the Troika got involved suggested a textbook approach would work just fine. Greece was insolvent, no two ways about it. A debt restructuring, including a haircut, was required to stabilise the system. Yet it was decided against it, thereby creating an enormous debt bubble that keeps growing to this day, destabilising everything.

Why?

People in Brussels, Frankfurt and Berlin knew in May of 2010 that Greece cannot service its current debt, nevermind pay it back. I remember rather vividly how it was presented to us, as it stirred up a lot of dust in Germany. They pretended as if the problem was a shortage of liquidity, even though they knew it was in fact an insolvency. And to provide an insolvent nation with the largest credit in history (€110-130b) is... well, we can all pick our favorite in accordance to our own bias: madness, idiocy, incompetence, a mistake, intent. They threw Greece into permanent indebtedness(?), and also played one people against another. People in Germany were pissed, still are. Not at the decision makers, but the Greek people.

Again, why?

Every European government, pre-crisis, drank the Cool Aid of deregulation, particularly with regards to the financial sector. When the crisis hit, they had to bail out the banks, a very unpopular decision in Germany, given the scandalous way it was done (different story). Like I pointed out before, when Greece was done for, German banks were on the hook for €17b+, and the French for €20b+. So no haircut for Greek debt.

It gets even better. The entity most experienced in these matters is, of course, the IMF. But IMF couldn't get involved. Its own regulations demand debt to be sustainable for it to become involved in any debt restructuring. Strauss-Kahn had the rules changed in a very hush-hush manner (hidden in a 146 page document) to allow the IMF to lend vast sums to Greece, even though they knew it would not be payed back. Former EC members are on record saying the Strauss-Kahn decided to protect French banks this way as a part of his race for President in France. So they changed IMF rules and ignored European law to bail out German and French banks, using the insolvent Greek government as a proxy.

Several members of the IMF's board were in open opposition. The representatives of India, Russia, Brazil and Switzerland are on record, saying this would merely replace private with public financing, that it would be a rescue package for the private creditors rather than the Greek state. They spoke out in favor of negotiations of a debt relief.

And if that wasn't bad enough, there's an IMF email, dated March 25th, 2010, that was published by Roumeliotis, formerly IMF. They put it very bluntly:

"Greece is a relatively closed economy, and the fiscal contraction implied by this adjustment path, will cause a sharp contraction in domestic demand and an attendant deep recession, severely stretching the social fabric."

Even the IMF, who chose parameters according to their own ideology, thought the European program to be too severe. That's saying something.

All that is just about the initial decision. The implementation is another story entirely, with unelected and unaccountable bureaucrats telling a democratically elected government what to do. There are former Greek ministers on record, telling how Troika officials basically wrote legislation for them. Blackmail was common, bailout money held as leverage. The Memorandum of Understanding was to be followed to the letter, and the Troika program was as detailed as a government program, so they really had their hand in just about everything.

The specifics of the program are a discussion of their own, with all the corruption going on. The Lagarde list (2000+ Greek tax dodgers) was held in secret by order of an IMF official – that alone should trigger major investigations. The nationalisation and sell-off of the four largest Greek banks, or the no-bid sale of the Hellenikon area to a Greek oligarch – all enforced by Troika officials.

The haircut of 2012, ~€110b wiped out, came two years late. As a result, it didn't hit any German or French institutions in a serious way. Most of the debt was in the hands of these four largest Greek banks -- NBG, Piraeus, Euro, Alpha – who subsequently had to be recapitalised by Greece to the tune of €50b. Cut by 110, up by 50 right away. Banks were nationalised and shares later sold again, at 2/3 the price. Lost another €15b, because the Troika demanded the sale to appease the markets.

The legal aspects of all this are nightmare-inducing as well. They violated numerous European laws, side-tracked parliaments, used governmental decrees, etc.

Let me just say this: when they forced Cyprus to give away two banks' branches in Greece for a fraction of their worth, Cyprus lost €3.5b, at a GDP of €17b, and those two banks went belly-up. It was pure blackmail, do it or you're out. Piraeus Bank received those €3.5b, and its head honcho had €150m of personal bad credit wiped clean right then and there, all at the command of the Troika. Those €3.5b had to be taken from ordinary folks by "suspending" the deposit insurance, perhaps the most stupid decision they had made so far.

Why did they do it? Because Greece was more important than Cyprus, and Cypriot banks were involved in shady deals with Russian oligarchs. Still illegal, and massively so.

Edit: I cut my post in half and it's still too long.

@oritteropo

There is a long history of Latin American currency crises which I would refer you to as examples of disorderly collapse. That Tsipras would break most of his electoral promises in his recent 4 month extension agreement should tell you that he knows how catastrophic it would be. You can't quantitatively approximate these kinds of events but qualitatively* (TYPO) the following is likely to occur:

1) Bank run - You saw significant withdrawals even leading up to the meeting with the Troika because of the possibility funding will abruptly stop. A stop to euro lending will see mass outflows with the expectation of bank collapse which will itself likely lead to the collapse of multiple banking institutions.

2) Foreign flows of currencies will dry up - Greek bond yields will spike, in effect no one will lend to the Greek government from overseas. Since like any economy, Greece needs to pay its public sector workers and requires foreign capital for imports, to preserve what it has, it will rapidly convert back to using the Drachma which it can issue and print/create. It is likely the banks will follow in turn and convert deposits to Drachma (another reason why people will withdraw money from banks as soon as they think euro support is over).

3) Drachma collapse - The Drachma will then depreciate rapidly. Again, the expectation of depreciation pretty much causes the depreciation. If people expect their currency to be worth less in the future, they will sell it, causing it to be worth less. Any existing savings accounts remaining will be decimated in value. Wages will fall drastically for everyone. Suddenly the cost of anything that relies on imported products (hint, a lot in any economy, especially Greece) will rise several-fold. This will lead to further job cuts, collapse of industries, which will precipitate further job loss, unemployment, output loss etc etc etc.

The tl;dr version of this is that government funding crises whether caused by debt or currency collapse in the first instance are self reinforcing and the consequences of an unmanaged collapse are all but guaranteed to be much worse than austerity but order. There is some evidence that countries who have a massive collapse and see their currency depreciate are then about to recover faster afterwards (a cheap currency boost exports, tourism etc) but the human toll is much more sudden and much more severe.

As far as IMF estimates being unrealistic, sure. All I'm arguing about is what is likely to happen and which outcome Greeks should prefer.

Sure Syriza has talked about the good kind of reform, but he's also promised the rest of what I talked about. None of which the Troika will let him do if he wants retain their funding. Anyone following this should have known he would not be allowed any of these promises he made in his election. Surely Tsipras himself knew this. It was either posturing/bluster or pure politics. Now the stability of his government is going to depend on how he can manage down his unrealistic expectations.

http://www.theguardian.com/world/2015/jan/28/alexis-tsipras-athens-lightning-speed-anti-austerity-policies

@oritteropo

There are analyses floating around by just about every major player. A majority seems to agree that it would be manageable for the Eurozone and better for Greece. Others, including Varoufakis, argue that Grexit would destablize the Eurozone and be a catastrophe for Greece. Too many variables, too many vested interests... who knows what would happen.

The projections on the other hand were a hoot. What a joke they were.

What was the fiscal multiplier in their initial projections? Something along the lines of 0.75, right? Reduce public spending by a Euro and the economy contracts by just 75 cents. Too bad it turned out to be at least 2.5, probably even far more during certain phases. Ricardian equivalence, my ass.

Here is the IMF outlook of 2010. Bill Mitchell made a nice table for comparison. They did a crackerjack job, didn't they.

IMF research admitted their mistake in 2012, but the policy department doesn't seem to care. Shouldn't come as a suprise to anyone, given the role the IMF played in the application of the shock doctrine all over the world in the last decades. Chicago School of Economics, all the way.

If I look at the list of countries that were ruined by the IMF through policy advisory and loans with strings attached, I wonder just how they still manage to paint Syriza as the ones lacking credibility. Is it because they lack the experience of destroying an economy?

Yet with all that in mind, the Greeks actually prefer the IMF as a partner if the alternative is German officials. How depressing for me as a German.

Remember what Christine Lagarde said about Greece in 2012? The Grauniad still has the goods. Or how she argued for expansionary austerity in 2010? Krugman, to his credit, made fun of the concept back then, but even he severly underestimated just how willing these people are to turn this stuff into policy.

But still preferrable to German officials. Ouch.

This one is good. Very good. I'd say it's one of the most interesting pieces on the background of the current Euro crisis I've seen so far.

http://www.nakedcapitalism.com/2015/02/michael-pettis-syriza-french-indemnity-1871-73.html

Well, Syriza is an acronym for Coalition of the Radical Left (roughly), and everything left of the Berlin Consensus is considered to be radical left. So they are going to call Syriza a radical leftist party until the political landscape itelf has been pulled back towards more leftist positions. But you're right, if they were judged by their positions, they'd be centre-left in theory, if centre-left hadn't turned into corporatism by taking up the Third Way of Schröder/Blair/Clinton.

They are, without a doubt, radically democratic though. As your Grauniad article points out, they haven't turned on their election promises yet, which is quite unheard of for a major European party. Francois Hollande in particular was a major letdown in this regard. Few people expected him to bow down to German demands so quickly. Aside from his 75% special tax for the rich, he dropped just about every single part of his program that could be considered socialism.

Grexit... that's a tough one.

Syriza cannot enforce any troika demands that relate to the programmes of the Chicago School of Economics. Friedman ain't welcome anymore. No cuts to wages or pensions, to privatisation of infrastructure, no cuts to the healthcare system, nor any other form of financial oppression of the lower class. That is non-negotiable. In fact, even increases in welfare programs and the healthcare system are pretty much non-negotiable. Even if Syriza wanted to put any of this on the table, and they sure as hell don't, they couldn't make it part of any deal without further damages to an already devasted democratic system in Greece.

So with that in mind, what's the point of all the negotiations?

Varoufakis' suggestions are very reasonable. The growth-linked bonds, for instance, are used very successfully all over the world in debt negotiations, as just about any bankrupty expert would testify. Like Krugman wrote today, Syriza is merely asking to "recognize the reality everyone supposedly already understands". His caveat about the German electorate is on point as well, we haven't had it explained to us yet – and we chose to ignore what little was explained to us.

Yet the troika insists on something Syriza cannot and will not provide, as just outlined above. Some of the officials still expect Syriza to acknowledge reality, to come to their senses and to accept a deal provided to them. Good luck with that, but don't hold your breath. Similarly, Varoufakis is aware that Berlin is almost guaranteed to play hardball all the way.

Of course, nothing is certain and they might strike a deal during their meeting in Wednesday that offers Greece a way out of misery. Or maybe the ECB decides that to stabilize to Euro, as is their sole purpose, they need to keep Greece within the EZ and away from default. That would allow them to back Greece, to provide them with financial support, at least until they present their program in June/July. Everything is possible. However, I see very little evidence in support of it.

Therefore Grexit might actually be just a question of who to blame it on. Syriza is not going to exit the EZ willy nilly, they need clear pressure from outside, so the record will unequivocally show that it wasn't them who made the call. No country can be thrown out, they have to leave of their own. Additionally, Merkel will not be the person to initiate the unravelling of the EU, as might be the consequence of a Grexit. That's leverage for Greece, the only leverage they have. But it has to be played right or else the blame will be put squarely on Greece, even more so than it already is.

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Edit #1: What cannot be overstated is the ability of the EZ to muddle through one crises after another, always on the brink of collapse, yet never actually collapsing. They are determined to hold this thing together, whatever the cost.
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Speaking of blame, Yves Smith linked a fantastic article the other day: Syriza and the French Indemnity of 1871-73.

The author makes a convincing case why the suppression of wages in Germany led to disaster in Spain, why it was not a choice on the part of Spain to engage in irresponsible borrowing and how it is a conflict between workers and the financial elite rather than nations. He also offers historical precedent, with Germany being the recipient of a massive cash influx, ending in a catastrophe similar to Spain's nowadays.

It strikes me as a very objective dissection of what happend, what's going on, and what needs to happen to get things back in shape. Then again, it agrees with many points I made on that BBC videos last week, so it's right within my bubble.

I liked the way the Reuters article closed:

It was not clear what support the German position, which appeared to take no account of the political change in Greece, will have in the wider euro zone talks.

I went against your advice and had a look at a DW article on the subject, and I see what you mean, there is quite a big disparity between the accepted position in the article and anything else I've read from outside Germany. I am now also left wondering how on earth any compromise could be made acceptable to German politicians, and then sold to the public. Since Ireland and Portugal are starting to recover despite The Austerity, it's entirely possible that the usual suspects will say "Look! It works!". They do have much more debt now though...

I can understand a certain aversion to excessive inflation, after the chaos caused by hyperinflation in 1923, but you'd think that if they remember that then they'd also remember where that led (and particularly with the rise of Golden Dawn).

As for Italy, it has somehow managed to muddle along on the edge of disaster for so long that I'm starting to think it can keep doing so forever.

+ a central bank whose mandate is limited to inflation
+ the lack of a treasury
+ the lack of a harmonized tax system
+ the crippling deficits in democratic control that make it very hard to turn the will of the people into policy
+ etc

The last point is of particular interest if you look at Greece as a shock & awe induced suspension of democracy. Many nations are held in a permanent state of emergency through the war on terror, while Greece's permanent state of emergency was imposed through debt.

Previous governments did what they were told by troika officials, with parliament left aside and judicial decisions left ignored. The return of democracy into some parts of the system caused rather vicious reactions from both the press and European officials. Just look at what Martin Schulz or Jeroen Dijsselbloem said about Syriza officials in the last few days.

Debt is a tool powerful enough to suspend democracy in a heartbeat, even quicker than our famous war on/of terror.

Parliamentary decisions are superceded by transnational treaties and obligations. And if you take the thought one step further, you end up at TTIP/TTP/CETA/TISA. If Greece demonstrates that democratic decisions at a national level still overrule transnational treaties, governments lose a scapegoat for unpopular decisions ("treaty X demands it of us"). Should Syriza manage to end the state of emergency, to return control over the decision back to the elected bodies, it will become infinitely harder to impose draconian or even just highly unpopular measures.

But I digress. Twin Euro blocks (South/North) were part of the discussion, just like parallel currencies in troubled nations. A German exit is still being discussed as well, but I don't think its advocates within Germany thought it through. Switzerland just uncoupled its Swiss Francs from the Euro and it did a real number on their exports. A new DM would appreciate like a Saturn V, instantly shattering German exports. Without a massive increase in wages to compensate through domestic demand, Germany would bleed jobs left, right and center. A fullblown recession.

I'd say it would take very little to stabilise the union, even in its currently flawed configuration. Krugman had a piece this morning, calling one of Syriza's core demands reasonable. And judging by what I have read over the last five years or so, it is. He said Germany would be crazy if they demanded payment on full, no reliefs. And that's where it shows that he cannot follow the media or the political discussions in Germany to any meaningful degree, language barrier and all. Public discussion on economics in Germany stands completely separate from the rest of the world.

Ignorance, stubbornness, cultural bias, a feedback-loop of media and politics, group pressure -- we have everything. And the fact that Germany has been comparatively successful in the face of this crisis makes it practially impossible to pierce this bubble. We're doing fine, our way must be correct, everyone else is wrong.

The obvious flaw here is that a single currency and a single interest rate rob member states of some of the tools they would normally use to deal with their slowing economies, and the union never implemented any other mechanism to replace them.

Earlier in the crisis I heard it suggested that perhaps the southern states would leave the euro and form a "euro south" union, and from what I've heard of negotiations in Brussels it might actually be easier than a better fix! I've never heard anyone suggesting that Germany should go it alone though, even if your statement seemed to suggest the idea Perhaps a less radical reading would suggest a New Deutsche Mark rather than a complete break with the EU... but there are still major problems with the idea.

@RedSky

Selling assets and, to a certain degree, the reduction of public employment is an unreasonable demand. There's too much controversy about the effects it has, with me being clearly biased to one side.

Privatisation of essential services (healthcare, public transport, electricity, water) is being opposed or even undone in significant parts of Europe, since it generally came with worse service at much higher costs and no accountability whatsoever. Therefore I see it as very reasonable for Syriza to stop the privatisation of their electricity grid and their railroad. There are, of course, unessentials that might be handed over to the private sector, but like Varoufakis said, not in the shape of a fire sale within a crisis. That'll only profit the usual scavengers, not the people.

Similarly, public employment. There's good public employment (essential services, administration) and "bad" public employment. Troika demands included the firing of cleaning personnel, who were replaced by a significantly more expensive private service. And a Greek court decision ruled the firing as flat out illegal. For Syriza to not hire them back would not only have been unreasonable financially as well as socially, it would have been a violation of a court order. Same for thousands of others who were fired illegally, according to a ruling by the Greek Supreme Court.

Troika demands are all too often against Greek or even European law, and while the previous governments were fine with being criminals, Syriza might actually be inclined to uphold the law.


On the issue of reforms, I would argue that the previous governments did bugger all to establish working institutions. Famously, the posts of department heads of the tax collection agency were auctioned for money, even under the last government. Everything is in shambles, with no intent of changing anything that would have undermined the nepotic rules of the five families. Syriza's program has been very clear about the changes they plan to institute, so if it really was the intent of the troika to see meaningful reform the way it is being advocated to their folks at home, they would be in support of Syriza.

Interventions by the troika have crashed the health care system, the educational system and the pension system. Public pension funds were practically wiped out during the first haircut in 2012, creating a hole of about 20 billion Euros in the next five years.

I would like to address the issue of taxation specifically. Luxembourg adopted as a business model to be an enabler of tax evasion, even worse than Switzerland. In charge at that time was none other than Jean-Claude Juncker, who was just elected President of the European Commission. He's directly involved in tax evasion on a scale of hundreds of billions of Euros every year. How is the troika to have any credibility in this matter with him in charge?

Similarly, German politicians are particularly vocal about corruption and bribery in Greece. Well, who are the biggest sources of bribery in Greece? German corporations. Just last week there was another report of a major German arms manufacturer who paid outrageous bribes to officials in Greece. As much as I support the fight against corruption and bribery, some humility would suit them well.


As for the GDP growth in Greece: I think it's a fluke. The deflation skewers the numbers to a point where I can't take them seriously until the complete dataset is available. Might be growth, might not be. Definatly not enough to fight off a humanitarian crisis.

Surpluses. If everyone was a zealous as Germany, the deficit would in fact be considerably narrower, which is a good thing. Unfortunatly, it would have been a race to the bottom. Germany could only suppress wage growth, and subsequently domestic demand, so radically, because the other members of the Eurozone were eager to expand. They ran higher-than-average growth, which allowed Germany to undercut them without going into deflation. Nowadays, Germany still has below-target wage growth, so the only way for Greece, Spain, Portugal and Italy to gain competetiveness against Germany is to go into deflation. That's where we are in Europe: half a continent in deflation. With all its side effects of mass unemployment (11%+ in Europe, after lots of trickery), falling demand, falling investment, etc. Not good. Keynes' idea of an International Clearing Union might work better, especially since we already use similar concepts within nations to balance regions.

Bond yields of Germany could not have spiked at the same time as those of the rest of the Eurozone. The legal requirements for pension funds, insurance funds, etc demand a high percentage of safe bonds, and when the peripheral countries were declared unsafe, they had nowhere to go but Germany. Also, a bet against France is quite a risk, but a bet against Germany is downright foolish. Still, supply of safe bonds is tight right now, given the cuts all over the place. French yields are at historic lows, German yield is negative. Even Italian and Spanish yields were in the green as soon as Draghi said the ECB would do whatever it takes.

The current spike in Greek yields strikes me as a bet that there will be a face-off between the troika and Greece, with very few positive outcomes for the Greek economy in the short run.

QE: 100% agreement. Fistful of cash to citizens would not have solved any of the core issues of the Eurozone (highly unequal ULCs, systemic tax evasion, tax competition/undercutting, no European institutions, etc), but it would have been infinitely better than anything they did. If they were to put it on the table right now as a means to combat deflation, I'd say go for it. Take the helicopters airborne, as long as it's bottom-up and not trickle-down. Though to reliably increase inflation there would have to be widescale increases in wages. Not going to happen. Maybe if Podemos wins in Spain later his year.

Same for the last paragraph. The ECB could have stuffed the EIB to the brim, which in return could have funded highly beneficial and much needed projects, like a proper European electricity grid. Won't happen though. Debt is bad, even monetised debt during a deflation used purely for investments.

@radx

The liquidity/insolvency line is just a fancy way of asking for more money than is being provided. As I said, I expect once structural reform is fully implemented, the ECB (tacitly instructed by Germany et al) will take a much more active role in buying the debt of these countries but it's not at that stage yet. The problem is they've been slow to sell off assets, reform government and reduce public employment to levels demanded.

Again what you propose is easing that eliminates the pressure to reform, which is the intent of the troika/Germany as I see it. I just don't see any of those things happening. As I mentioned before, Greece's debt has largely stopped rising and GDP has been edging upwards since 2010 and is now positive:

http://www.tradingeconomics.com/greece/government-budget-value
http://www.tradingeconomics.com/greece/gdp-growth

As far as running surpluses, I would argue if everyone was nearly as zealous as Germany, then the deficit/surplus gap between countries would narrow - which would be the best outcome globally. As you'd probably know Germany's attitude towards fiscal stability and inflation is fairly hawkish given its history with hyperinflation. But it has clearly served them well when their bond yields didn't spike during the euro crisis because of a shortage of funds.

I wouldn't characterise it as beggar thy neighbour, that's generally reserved for active measures to prevent trade from other countries (such as through tariffs or subsidies). Instead Germany from what I've read, has carved out a competitive niche for itself with it's Mittelstand. I don't know Germany history particularly here, but I assume it led to companies in industries like retail which can't compete globally reducing or being bought out.

I would compare it to what happened here in Australia with the car industry when government support for it vanished. In our case at least, the only reason the industry existed for the past couple of decades is because of that support and it should never have been propped up by the government in the first place. I don't see that really being any different to typewriters being replaced by computerisation, whale oil being replaced by fossil fuels or US manufacturing going to China (and now leaving to other areas of Asia).

Coming back to trade surpluses, for similar reasons to Germany, most Asian countries also run large trade surpluses because of their history with capital flight in the Asian financial crisis of 97. This is despite many of them developmentally being far behind Greece let alone Germany or France. There has been no Asian crisis this time around and investment into these countries (like Malaysia, the Phillippines, Vietnam and China) has hardly been low over the past 10 years.

I'm not a huge fan of QE as a policy either. Part of the problem is central banks like the ECB weren't designed with the intent of using QE, merely adjusting interest rates, let alone any direct purchases of bonds. I was a big fan of what they did here in Australia where they just gave a one off wad of money to everyone who is earning an income. We ended up avoiding a recession entirely, although our economy was doing quite well at the time.

In effect that's more fiscal policy and I can imagine it being difficult to implement in the EU across countries in an even way. Merkel is certainly too hawkish overall. Policy along those lines, unbiased investment via the EIB or let alone just implementing QE earlier (like the US did) would have helped everyone.

@RedSky

The need to be kept afloat by European funds is pretty high on the list of things Syriza is keen to do away with. Varoufakis was clear on this pretty early on, at least 2009 as far as I know. They treated it as a problem of liquidity instead of a problem of insolvency, and therefore any funds funnelled into Greece were basically disappearing down a black hole. They are bleeding cash left, right and center, and the continuous flow of credit from Europe doesn't help a bit in its current form.

As of now, they can't pay shit. Any additional credit has to be used to pay back interest on previous credit. Their meagre primary surplus is less than their interest payments. With that in mind, some of the ideas floating around sound rather intriguing, especially given the horrendous failure all the previous agreements have produced. These ideas include: cap interest payment (1.5% of primary surplus), use the rest for investment or humanitarian relief; no payments on debt below 3% growth, 50% of agreed upon payments at 3-6% growth, full payments at 6+% growth.

Yet even those ideas are purely theoretical, because there is no growth in Greece. The celebrated growth in Q3 2014 of 0.7% might very well be a fluke, as Bill Mitchell described here (prices falling faster than incomes). For Greece to be able to have any meaningful growth, they'd require not just a complete reconstruction of its institutions (structural reforms), but also massive investment.

And there's where it breaks down again, since you rightfully pointed out that the Germans in particular won't spend a dime on Greece, especially not with investment in Germany in equally dire shape (shortfall of about a trillion € since 2000).


Which brings me to another point: Germany vs France.

Productivity in both countries was en par in 1999, and productivity in France in 2014 was only slightly below German numbers. "Living within your means" is a very popular phrase in the current discussion, which basically means living in accordance with your productivity.

Subsequently, there should be a similar development of unit labour costs within a monetary union, with growth targets set by the central bank. In our case, that would be just below 2%. Like I've previously said, Greece lived beyond its means in this regard, and significantly so.

But what about France and Germany? The black line marks the target, blue is France, red is Germany. That's beggar-thy-neighbour. That's gaining competetiveness at the cost of your fellow Euro pals. That's suppressing domestic demand in order to push exports.

German reforms killed its domestic market (retail sales stagnant since early '90s) and created an aggregate trade surplus to the tune of 2 trillion Euros. That's 2 trillion Euros of deficit in other countries. And we're looking at an additional 200-210 billion Euros this year. If running trade deficits is bad, so is running trade surpluses.

Ironically, there's even been legislation in Germany since 1967, instructing the government to balance its books in matters of trade (and other areas). They've been in violation of it for 15 years.

With this in mind, everytime a German politician calls for the other countries to run trade surpluses just like Germany, I get furious. Some of them, on the European level, even have the audacity to say that everyone should run trade surpluses, and all it takes to get there is massive wage cuts. That's open lunacy and a failure of basic math. No surplus without deficits, no savings without debt.

And while we're at it, it's not the savings rate in Germany that bothers me. It's the moral superiority that is being ascribed to running surpluses in every way imaginable. Every part of society is expected to have a positive savings rate, because debt is bad. Well, if everyone's saving and nobody's accruing the corresponding debt, you get the current situation where there is no investment whatsoever, a gargantuan shortfall in demand given the national productivity, and a cool 200 billion Euros of debt a year that foreign actors have to rake up so that Germany can have its massive growth of 0.5-1.5% annually.

Finding borrowers for all that cash is getting more difficult by the day. The ECB's QE is basically one big search for new borrowers, since everyone either doesn't want to borrow or cannot borrow anymore.

If Germany wanted to help the Eurozone, they'd start by increasing their ULC vis-á-vis the rest of the countries. Competitiveness should be regulated through the foreign exchange rate, not this parasitic race to the bottom within the zone. Ten years of 4% increase in wages, annually. That ought to be a start.

Additionally, allow the ECB to fund the European Investment Bank directly, instead of this black hole of QE.

Or go one step further and seriously consider Varoufakis' ideas, including the old Keynesian concept of a global surplus recycling mechanism.

But all that is pure fantasy. I don't think a majority of Germans would support either of these measures, not with the overwhelming fear of inflation this society has. Add the continuous demonisation of debt and you get a guarantee that very few countries might be compatible to be in a longtime monetary union with Germany.

@radx

I think the problem with say a 20 year time frame for Greece, is that same lack of trust and political inability to essentially prop up these governments with cash, year on year, for a period of that kind of time frame. I don't see Merkel being able to support this and not get pushed out of government. Functionally money has a time value so in essence, a long time frame is just more money. Rumour is Merkel is considering extending time frames on Greek loans (because most people don't understand that last point) but that will only come with a greater commitment to reform.

As far as collective punishment, it's more an issue that none of the other EU countries are responsible. I wouldn't characterise anything as being forced upon Greece, although I'm sure many feel that way. If they were to leave and reject aid they would be far worse though. The majority of Greece rightly wants to stay in. The Syriza win was about 'dignity' and basically getting better terms. But they won't get it because it would lead to parties in Portugal/Spain emerging and demanding the same thing. Morality doesn't really come in to it, I'm just looking at what's likely and/or possible.

As you mentioned, Germany went through its own period of austerity. It certainly constrained wage growth (which contributed to making its exports particularly competitive and put it in a good position to weather a downturn in the eurozone, when it can export to foreign markets) but I don't believe its inflation rate was vastly off. It was 1-2%, not vastly different to France for example. Either way politically, I don't see the German people being willing to pay these countries out of their troubles in effect.

I certainly agree though that eurozone rules were broken before the euro crisis, e.g. both Germany & France ran budget deficits in excess of agreed terms. Really it came down to the structural weakness of the eurozone's design. You can't have a monetary union (shared currency and central bank policy) without a fiscal union. What they had at best were fiscal guidelines and those weren't followed.

I don't see the eurozone collapsing though. Parties that want to leave are generally still fringe parties (excluding in the UK but it is the least integrated). France doesn't need bailouts, it just lacks growth (due to lack of the reforms Germany went through). The ECB's QE and the loose banking union for bailing out banks that they've developed will mean if Greece collapses these is unlikely to be any serious bank collapses or Lehman moments (or so the theory goes).

I don't really agree at the end with your characterization of a high German savings rate being culpability for inflating bubbles. That fault falls on the lack of domestic bank regulation within the respective countries, the lack of regulation to curb bad lending. In the same way I wouldn't blame China's saving rate for encouraging sub-prime US loans. Cash/liquidity is globally mobile and fungible. It's the responsible of the borrowers and their regulators to ensure they don't dig themselves into a hole. The lenders already stand to lose their investment if the loan goes bad.

Nothing is good about this situation and there is no reason to think this will end in anything but Greek default.

Greece's government, elected by its citizens ran up a large and unsustainable debt which was masked by easy credit before the GFC and fraudulent accounting.

There were many contributors. Corruption, hugely wasteful state owned enterprises, joining the euro zone before they were ready to lose the ability to devalue their currency and lower interest rates, and flagrant tax evasion.

But as a country they're collectively responsible for not demanding the necessary reforms of their politicians to ensure they were not vulnerable to a credit crisis when the GFC hit and lenders began to look more scrupulously at individual European countries rather than Europe as a whole. Equally, Italy is responsible for voting Berlusconi into power for every year their economy recorded negative growth under his government. Spain is responsible for not providing sufficient oversight to bad bank lending leading a huge indebting bailout package.

Some of Syriza's reforms are reasonable. Tackling corruption and trying to break up oligopolies are worthy ideas, but they are unlikely to be easy and yield any immediate benefit. Raising the minimum wage and planning to hire back state workers as they have already promised will almost guarantee they will cease to receive EU funding/ECB assistance and later IMF funding.

The simple truth from the point of view of Germany and other austerity backing Nordic countries is if they buy their loans (and in effect transfer money to Greece) without austerity stipulations, there will be no pressure or guarantee that structural reforms that allow Greece to function independently will ever be implemented. These lender government and by extension its people have no interest in transferring wealth to Greece if it stalls its reforms.

Yes fire sales of state owned enterprises suck but the likely alternative at this point if the Troika lending is stopped is that all other lending stops and Greece defaults. At that point there would be mass loss of state sector jobs and sky-rocketing unemployment relative to what is now being experienced. It would take years of reform for the Greek government to be lend-worthy again. There is simply no trust for any alternative to austerity on the part of north Europe.

Currently Greece has reported positive growth in the past quarter and excluding debt repayments is running a budget surplus. Realistically, yes they cannot pay back the 180% of GDP. The likely way forward is after several more years of real reform they (+ Spain & Portugal) would get better terms from the EU as politically, leaders in Germany and elsewhere will be able to make the case that their objective has been achieved.

The ECB's QE package is in some ways already part of this. What I guarantee won't happen is electing Syriza to oppose bailout terms helping to secure that. Germany et al will quite rightly see that if they acquiesce to Greece they will encourage other populist parties in Spain, Portugal, Italy and France and stall reforms.

Could Germany and others in theory provide a huge cash infusion to Greece, Spain and Portugal now? Sure. And those parties would be voted out in the next election and the terms reversed. Even with the relative stinginess of current loan terms, the likes of UKIP and the National Front with their anti-EU stance, have gained political standing in the EU parliament and will likely see huge boosts in upcoming domestic elections.