By Mike Whitney
”The Greek economy is truly broken. The circuits of credit are so badly damaged that even efficient, profitable firms have been cut out of the capital markets …. Moreover, the new spending cuts… will give the forces of recession another boost. To cut a long story short, there is no doubt that such loosening up will simply prolong the agonising death of the Greek social economy.” –Yanis Varoufakis, economist, University of Athens
The Greek electorate has changed captains on the Titanic, but the ship is still sinking. So what difference did the elections make? None.
Unemployment is still rising, the deficits continue to widen, and the economy is in tatters. Everything is fundamentally the same as before, with one exception, the victor (New Democracy’s Antonis Samaras) remains firmly committed to staying-the-course and meeting the terms of the bailouts, whereas, the loser (Syriza’s Alexis Tsipras) rejects the austerity measures laid out in the Memorandum Of Understanding (MOU) and promises to renegotiate the agreement with the troika. (The European Commission, the IMF, and the European Central Bank)
Samaras’s slim victory means that Greece will get more financial aid (loan installments), but will be required to implement another round of savage cuts to social spending, this time in the amount of $11.5 billion. These cuts will further inhibit growth, which will reduce tax revenues leading to even bigger budget deficits. When the government is unable to hit its deficit targets, (as everyone expects) then EZ policymakers will suspend the bailouts and the crisis will flare up again.
It’s a vicious circle that can only end one way, with Greece leaving the eurozone and returning to the drachma.
So, what happens next?
New Democracy leaders will try to cobble together a coalition government with other “pro bailout” parties (like PASOK) while trying to win meager concessions to extend the length of existing loans and reduce the rates on others. Some analysts think that the troika will try to be more flexible on the terms of the bailouts to reduce growing social unrest, but that doesn’t seem likely.
German chancellor Angela Merkel nixed the idea of greater forbearance or debt reduction just hours after the election results were announced. Here’s the account from Reuters:
“German Chancellor Angela Merkel said on Monday a new Greek government had to meet commitments made to international lenders. Speaking to reporters at a Group of 20 leaders’ meeting, Merkel said any loosening of agreed reform pledges after Sunday’s narrow election victory for Greece’s pro-bailout parties would be unacceptable.” (Reuters)
Merkel is not going to cut Greece any slack. Either the deficit targets are reached and Greece complies with its obligations, or the loans will be cut off. “Either pay up or get out”: that’s the massage from Berlin. Judging by the reaction in German newspapers, Merkel’s hardline approach is wildly popular across the political spectrum. Just look at these clips from Monday’s editorials. This is from the center-right Frankfurter Allgemeine Zeitung:
“The Greek electorate is obviously divided. But the country needs a government that has the power and courage to pass and implement the unavoidable reforms: a government that can convince the people that their country needs a fundamental renewal. It won’t be easy to form such a government — ‘not easy’ being a gross understatement. The coming days will show just how difficult it will be.”
This is from the Financial Times Deutschland:
“The Greeks must provide clear affirmation of reforms. They don’t just owe this to their fellow Europeans, from whom they are accepting aid, but also to themselves. The population must understand that there can be no going back to the pre-crisis state of affairs.”
Finally, from the conservative Die Welt:
“Chancellor Merkel insists on shared responsibility. She emphasizes that austerity and reforms are the way to solve Europe’s debt crisis. This clarity is even making many Germans uneasy. And yet these conclusions, which are actually banal, are being made within a political context that is increasingly volatile.
Germany is showing strength, without trying to dominate, and yet it is punished by being despised. If Angela Merkel were to change course, if she were to buckle to criticism, then it would really not be good for Europe or for Germany.”
Reforms, reforms, reforms. German pundits love reforms, which is why they admire their reform-minded chancellor, Frau Merkel. But where have these reforms–which are more commonly called “austerity measures”–worked? In which country has debt consolidation, structural adjustment, privatization, and union busting led the way out of recession to a strong recovery? Ireland? Spain? Portugal? Italy?
The evidence suggests that Merkel’s policy doesn’t work which is why many of the world’s leading economists have blasted austerity as counterproductive.
So how is it that these “experts” still think they are right when 2 years of experience demonstrates that they’re wrong? Just look at bond yields. Just look at the banks. Just look at unemployment. Just look at GDP. By every objective standard, the policy has failed. This is no longer a debatable point. The facts speak for themselves.
On Tuesday, while leaders of the world’s major economies met in Los Cabos, Mexico for a G20 summit, a failed auction of Spanish debt set off alarms reminding the gathering that the crisis was still unresolved. Here’s the story from Reuters:
“Spain paid a euro era record price to sell short-term debt on Tuesday, pushing it closer to becoming the biggest euro zone country to be shut out of credit markets. The soaring borrowing costs highlight the shortcomings of a June 9 euro zone deal to lend Spain up to 100 billion euros ($126 billion) for its banks. They also illustrate how Europe’s problems run much deeper than Greece, brought back from the brink of default in Sunday’s parliamentary election….” (Reuters)
Spanish 10-year bond yields remain above 7 percent at present after hitting a high of 7.28 percent yesterday. Economists think that anything above 7 percent is unsustainable.
So, while one fire has been doused in Greece another has broken out in Spain. It’s only a matter of time before the European Central Bank chief Mario Draghi will be summoned to reopen the Securities Market Program (SMP) and resume buying Spanish debt to push down bond yields and avoid a meltdown.
Why is the crisis spreading? And why has it shifted to Spain, after all, up until 2007, the Spanish government’s balance sheet looked better than Germany’s. They had lower public debt, had never broken the EZ’s deficit rules, and had consistently ran budget surpluses.
So why Spain? The problem isn’t Spain. Nor is it Ireland, Greece, Portugal or Italy. It’s the monetary union itself.
The EZ’s creators were warned that a monetary union outside a fiscal and political union would not work, but they proceeded anyway. Now they’re trying to correct their error by inflicting pain on the members, (internal devaluation) because the only other choice they have is to create a United States of Europe, which would require public referenda in all 17 countries. They know that their chances of success in that effort would be quite small, so they’re not even going to even try, which why the band-aid remedies will continue until one member leaves and the race for the exits begins.