By Mike Whitney
“Austerity has failed because Greek society has been destroyed, the production base has been dissolved. Our country has been in a deep recession for five consecutive years. This has never happened in Europe in peacetime.” –Alexis Tsipras, leader of Greece’s Coalition of the Radical Left (SYRIZA)
Europe is a trainwreck. The signs of a credit crunch are popping up in countries on the periphery, a slow-motion bank run is underway in Greece and Spain, the ratings agencies have slashed the ratings on banks in Italy and Spain, and the British money printer, De La Rue, has been contacted to “draw up contingency plans to print drachma banknotes should Greece exit the euro.” Also, unemployment is at a 10-year high, defaults, delinquencies and bankruptcies are soaring, and nearly half of the countries in the EZ are mired in a severe recession. The grim situation is getting grimmer, and yet, after 3 years of emergency meetings, summits, and myriad other can-kicking confabs, EU managers are no closer to creating a viable fiscal and political union than they were on Day 1. Here’s more from the Financial Times via CNBC:
“Extensive use of “emergency liquidity assistance” (ELA) to help banks in the weakest economies has been one of the less-noticed features of the eurozone crisis…. (The ECB’s) weekly financial statement published on April 24, showed an unexpected €121 billion increase in the innocently titled heading “other claims on euro area credit institutions,” the result of putting all ELA under the same item. By definition, €121 billion was the minimum amount of ELA being provided by the “eurosystem” — the network of eurozone central banks.” (“Secret Central Bank Aid Props Up Greek Banks”, CNBC)
Can you believe it? The ECB provided 1 trillion euros to EZ banks just 3 months ago, and already they’re back at the trough. The so-called Long-Term Refinancing Operation or LTRO was supposed to fix everything. As it turns out, it fixed nothing. The banks are still rat-holing hundreds of billions of euros at the ECB’s overnight facility, while lending to businesses and consumers has fallen off a cliff. Perhaps, the ruling bureaucracy should have pursued a different strategy altogether, like marking down bank assets to their current value and nationalizing institutions that are insolvent. But that would have meant applying the same standard to banks that’s applied to everyone else which, of course, just won’t do. When a bank is upside down, it’s the market’s fault, not the bank’s. To imply otherwise, would be to suggest that banks have made horrific errors in judgement, which we know cannot be true.
President Barack Obama thinks that the way forward for Europe is to give the banks more money. Here’s what he said at the G-8 meetings:
“We’ve got to make sure that banks are recapitalised in Europe so that investors have confidence. And we’ve got to make sure that there is a growth strategy to go alongside the need for fiscal discipline, as well as a monetary policy that is promoting the capacity of countries like a Spain or an Italy to put in place very tough targets and some very tough policies….We’ve got to put in place firewalls that ensure that countries outside of Greece that are doing the right thing aren’t harmed just because markets are skittish and nervous.”
Obama is wrong on all counts. In the US, the TARP was implemented to recapitalize the nation’s largest banks. Did that vastly unpopular program build “investor confidence”?
No. And what about the idea of “a growth strategy alongside fiscal discipline”?
Absurd. Stronger growth requires more spending. Fiscal discipline requires less spending. One policy cancels out the other. This is just more political gibberish like Obama’s opining on “firewalls”, another meaningless buzzword. Why would you need a firewall if bank deposits and government debt (bonds) were insured by the “full faith and credit” of the ECB as they are in the US by the FDIC and the US Treasury. You wouldn’t. A firewall–which is nothing more than a big pile of cash that’s supposed to calm investors–is a poor substitute for blanket guarantees on government bonds, which is how every other country in the world backstops its debt.
Not so, in Europe. The Eurocrats would rather reinvent the wheel than follow that well-trod path. Besides blanket guarantees mean that Germany might have to dig a little deeper into its surplus windfall and pay more of its fair share. Lord knows, they don’t want that. Oh, no. They’d rather see the Club Med states plunged into a decades-long slump instead of trying to level the playing field by making a bigger contribution or by collectivizing the EZ’s debts. (Merkel rejected the idea of eurobonds just yesterday) And what is the result of this idiocy? Well, for one thing, capital is fleeing Greece and Spain while the ECB is desperately trying to plug the hole with billions in emergency funding. The situation will only get worse as more depositors wake up to the fact that EU leaders are not really interested in fiscal union, but just want to nibble at the edges.
Considering the glaring flaws in the monetary union’s architecture and the rise of anti-austerity parties in Greece, it’s surprising the eurozone didn’t split up long ago. As it stands, things are just coming to a head now. The popular Radical Coalition of the Left or Syriza party has called for an end to the bailout memorandum and a repeal of it’s belt tightening provisions. Despite the happy talk at the G-8 meetings, the German magazine Der Speigel says that the knives are already out for Greece. Here’s an excerpt from the article:
“Officially, euro zone governments say they’re not talking about a Greek exit from the euro zone. But it’s a different story behind closed doors. Finance ministers meeting in Brussels last Monday threatened to evict Greece…Despite official claims to the contrary, the governments of the euro zone are threatening to kick Greece out of the currency union….
“If we now held a secret vote about Greece staying in the euro zone,” Euro Group Chairman Jean-Claude Juncker warned his Greek colleague, “there would be an overwhelming majority against it.” (“An Ultimatum for Greece–Europe Raises Threat Level against Athens”, Der Speigel)
While the majority of Greeks want to remain in the eurozone, a clear majority also wants to see an end to austerity. If the anti-memorandum parties win the June elections , the other EZ members will assume that Greece will refuse to meet the terms of its bailout agreements. That will set the wheels in motion and the eurogroup will begin the process of removing Greece from the union. And while that scenario seems more likely now than ever, it will certainly exacerbate the downturn and send tremors through the global economy. Here’s an excerpt from an article in the Wall Street Journal that helps to explain:
“Nobody believes the current bailout funds—capped at €700 billion ($891.1 billion)—are anywhere near big enough to impress the markets, so the decisive crisis response will fall upon the European Central Bank. To head off a possible run on peripheral European banks, it would need to offer to provide unlimited liquidity—and since many banks are already short of eligible collateral, it would have to do so with very little security. That will expose the ECB—and by extension, European taxpayers—to credit risk.
The ECB will also need to deploy its unlimited firepower to stabilize government bond markets. But simply reactivating the Securities Markets Program in its current format is no solution. The ECB’s insistence on being ranked senior to other creditors in Greece means the more bonds the ECB buys, the more likely a country will be permanently shut out of markets. The only way around this problem is for member states to commit to fully indemnify the ECB against losses, putting taxpayers further on the hook…. Given the added strain from a Greek exit on peripheral banking systems, major bank bailouts are inevitable.” (“Europe’s Missing Contingency Plan as Greek Exit Fears Rise”, Wall Street Journal)
The WSJ believes that a Greek exit will trigger a Lehman-type meltdown, but others–particularly in Germany–are not so sure. Merkel and Co. seem to believe that the rift will be manageable and that it will send a powerful message to other deficit-stricken countries that they need to play by the rules. Whatever the outcome, it looks as though the matter will be settled on June 17 when Greeks go to the polls and decide whether to throw their support behind the pro-bailout or anti-bailout parties. The results of the balloting will decide whether Greece has a future in the eurozone or not.
There are significant discrepancies in the media coverage of leftist Syriza party and it’s 37-year leader, Alexis Tsipras. Tsipras has led the charge against austerity saying it’s turned a slump into a humanitarian crisis increasing homelessness, food insecurity, unemployment, and severe poverty by many orders of magnitude. But while Tsipras opposes austerity, he does not want Greece to leave the euro, so his position is not really radical at all, merely left-of-center.
“We are proposing a way to save the euro,” Tsipras said. “If Syriza wins the election on June 17, it won’t mean we will leave the euro, on the contrary it offers a big chance for us to save the euro. If the austerity continues, Greece will need a third bailout in a few months, and a further debt restructuring, and that could enforce a return to the national currency.”
Other members of Syriza have denounced austerity, too, (but still support staying in the EZ) like MP Panayiotis Lafazanis who recently gave an interview Athens News where he said the following:
“The memorandum (aka–austerity measures) will be annulled. ….. the treaties do not say Greece must have a memorandum or perpetual austerity policies. All of that throws us into a vicious circle of recession, which leads to an abyss….
We will seek to negotiate the writedown of most of the debt. If we do not succeed, we will proceed with a moratorium, stopping debt repayment. Certainly, the Greek governments and politico-economic elite are to blame for saddling the country with a nearly 400bn euro debt that did not serve the genuine developmental and social needs of the country and the Greek people.
The creditors have a huge responsibility. They should first look at the ability of the borrower. Would you lend to someone who you know is over-indebted? No. We had a frenzied lending spree by banks that sought and received excessive benefits. The debt cannot be paid off unless the Greek people are annihilated. No government has the right to do that to the Greek people.” (“Panayiotis Lafazanis: Farewell to the memorandum”, The Athens News)
So, Syriza’s position on the issues is pretty straightforward, right?
Not exactly. There are conflicting reports that indicate that Tsipras may not the man he appears to be. According to the World Socialist Web Site, Tsipras has embarked on a tour of Europe “to reassure the banks and the major imperialist powers that, despite his criticisms of the bailouts, he …. intends both to repay the banks and to continue “reforms” begun by PASOK.”
The article continues:
“Tsipras discussed the Obama administration’s economic policies with Reuters, praising them for making “recession less severe than in Europe.”….(and) that Europe has to adopt the policies the Obama administration adopted in response to the economic crisis. In a May 18 New York Times interview, he explained that his message for the G8 is that “we have to press Merkel to follow the example of America, where the debt crisis wasn’t tackled with austerity measures but with an expansionist approach.”
The New York Times commented, “Mr. Tsipras’ arguments are not so different from those of some of the leaders gathered at the Group of 8 summit at Camp David.” (“Greek SYRIZA leader Tsipras pledges to repay banks in European tour”, World Socialist Web Site)
So, is Tsipras a radical leftist, a Greek Obama, or something in-between? There’s no way of knowing for sure, not yet at least.
One way or another, Greece will survive, but given the troika’s (The European Commission, the ECB, and the IMF) abysmal track record, one would have to conclude that the quickest way to recovery –involving the least amount of pain for the Greek people–would be a clean break with the EZ, a return to the drachma, and a reestablishing of national sovereignty. The euro experiment has failed, now it’s time to move on.