Monday, March 26, 2012

Europe has chosen a harsh future. All the paths for Greece lead into darkness.

Europe has chosen a harsh future. All the paths for Greece lead into darkness.

24 FEBRUARY 2012

by Fabius Maximus

Summary: This week Europe’s leaders faced a choice somewhat similar and perhaps equally momentous as America’s leaders faced in 1787. But this week they chose a path that looks punitive and short-sighted, pursuing European unification but likely to generate discord and eventually fragmentation. Seldom does one act determine the future, but they might find it difficult to undo what’s been done this week. The only certain result is much suffering and humiliation for the Greek people. We can only guess at how this will work for Europe as a whole

Contents

The new bailout: the EU imposes Carthaginian deal on Greece
For Whom the Bailout tolls
Why are the EU member nations doing this?
Lord Keynes explains the hidden truth behind this news
For more information: posts explaining what’s happening and likely consequences

(1) The latest bailout: the EU imposes Carthaginian deal on Greece

Greece passed their last easy exit. Signing the latest bailout agreement (not yet done) leaves them no way to leave this highway to ruin, except by smashing through the guard rails and off the causeway. Only fools commit a nation to a course of action without providing an emergency out — but Greece’s leaders have do exactly that. We don’t yet know the exact terms of the deal, as it gains the necessary legislative approvals. But these seem likely forecasts:

Exchanging their existing bonds — issued mostly under Greek law — for bonds issued under creditor-friendly UK law both diminishes their sovereignty and makes the eventual default far more difficult.
Exchanging bonds issued to private investors for loans from quasi-governmental agencies makes the eventual default far more difficult.
Pledging their gold reserves eliminates a vital resource needed to buy imports during the default and devaluation process.
Little, perhaps none, of the new money goes to the Greek people. Rather it goes to banks and other Greek creditors.
After this bailout, Greek sovereign debt will be almost twice GDP, with little hope for significant growth during the next few years.
The EU demands severe restructuring of the Greek government, difficult in good times but perhaps impossible during the coming downturn.
In exchange for bailing our EU banks, the EU imposes crippling austerity on Greece. A long severe recession seems the best possible outcome.
This occasion, like the dozen or so previous major summits, provides an opportunity for politicians to falsely claim “~~peace~~ prosperity in our time” — but few economists concur.
The coming months will further weaken Greece, so that the eventual necessary default and devaluation occur under conditions far worse than today’s.

Extreme outcomes seem likely, which might include depression (GDP already 17% below peak) and collapse of Greece’s political regime (probably not in the April elections, but in 2013 or 2014). Contagion to the rest of Europe is a high risk, especially to Portugal, Spain, and Italy.

(2) For Whom the Bailout tolls (willl be updated)

Here are some perspectives on the Euro-crisis.

(A) What should Europe’s leaders do (brilliant as usual): ”Euro Agonistes“, Paul Krugman, New York Times, 23 February 2012

(B) ”Athens told to change spending and taxes“, Financial Times, 23 February 2012 — Debt now becomes servitude for Greece. Will they bow before their new masters? Don’t answer without thought; Star Trek provides an inaccurate guide to both history and human nature. To take the extreme case, people usually make excellent slaves.

(C) This was a terrible error of judgement by Greece’s leaders: “For Whom the Bailout Tolls“, Edward Hugh, Roubini Global Economics, 21 February 2012

The Troika representatives didn’t “sign off” on the new deal, they effectively washed their hands of the whole messy situation. Naturally Greece won’t be able to comply with the conditions, and at the next review, or the one after, the country will be face to face with the inevitable.

… It is hard to remember a time when such an important decision was taken with so many of those involved expressing the view the solution was not going to work. Thus conservative leader Antonis Samaras, a strong contender to become next prime minister, stressed that the rescue package’s debt-reduction targets could only be met with economic growth.

“Without the rebound and growth of the economy … not even the immediate fiscal targets can be met, nor can the debt become sustainable in the long-term.” Hardly inspiring words from the person who is most likely to have to take responsibility for all of this, especially since he appreciates perfectly well that all that growth simply isn’t coming.

… Essentially, if the unsustainability of the Greek debt path and the inability to comply with conditionality are accepted, then a further default will be inevitable, but such a default will undoubtedly be a very, very hard one, and most likely an uncontrolled one. In the first place if the country were to leave the Euro after the debt swap, then the new Greek bonds could now not be converted to New Drachma (or equivalent) by a weekend session of the Greek parliament, and the country would have to default on bonds denominated in Euros, which would presented them with all kinds of problems.

Secondly, given the terms of the debt swap, and the condition of an escrow fund to protect the interests of private bondholders, then the only liabilities on which the country could still default would be those commitments it has with the official sector, which means defaulting on the IMF, the ECB, the EU and Germany. These would not be especially nice people for the country to default on, since if Greek reaches such a point the country would almost surely be made an example of, which means effectively establishing a pariah state.

(3) Why are Germany and the other members of the EU doing this?

“Dans ce pays-ci, il est bon de tuer de temps en temps un adiral pour encourager les autres.” (In Europe it is good to destroy, from time to time, a nation to encourage the others to pay their debts)

— From Voltaire’s novel Candide, slightly paraphrased to better fit today’s news

We can only guess at motives. Probably Europe’s leaders (especially German’s) have decided to make an example of Greece, so that Portugal and the other PIIGS comply enthusiastically — even abjectly — with EU demands. Supporting this theory: the video of German finance minister Wolfgang Schauble promising Portugal an adjustment to its programme after a deal with Greece is sealed. Carrot and stick, the two reliable tools of rulers.

Putting this in a larger context makes it easier to understand. Germany has exploited their control over monetary policy in the poorly conceived European Monetary Union so that they benefited at the expense of the PIIGS. Now they plan for the PIIGS to bear the burden of the necessary readjustment. The PIIGS might object, hence the need to make a example of Greece – probably resulting in its painful exit from the EMU and perhaps the EU as well. Does this lay the foundation for a stronger European polity? Stranger things have happened. Although a nice method of unification than the wars of ”blood and iron” Bismark, it will just a surely result in German dominance of Europe (as Bismark’s plan resulted in Prussian dominance in Germany).

While the US news media remain oblivious to this dimension of the crisis — its purposeful nature — that has long been described on the FM website. For example in The Wehrmacht failed to take Greece. Now Germany tries again, with a different method.

(4) Lord Keynes explains the hidden truth behind this news

Change two words to the introduction of The Economic Consequences of the Peace (1919) and it describes Europe of today as seen by a European.

The power to become habituated to his surroundings is a marked characteristic of mankind. Very few of us realize with conviction the intensely unusual, unstable, complicated, unreliable, temporary nature of the economic organization by which Western Europe has lived for the last half century. We assume some of the most peculiar and temporary of our late advantages as natural, permanent, and to be depended on, and we lay our plans accordingly. On this sandy and false foundation we scheme for social improvement and dress our political platforms, pursue our animosities and particular ambitions, and feel ourselves with enough margin in hand to foster, not assuage, civil conflict in the European family.

Moved by insane delusion and reckless self-regard, the German people overturned the foundations on which we all lived and built. But the spokesmen of the French and British peoples have run the risk of completing the ruin, which Germany began, by an ~~Peace~~ agreement which, if it is carried into effect, must impair yet further, when it might have restored, the delicate, complicated organization, already shaken and broken by ~~war~~ the great recession, through which alone the European peoples can employ themselves and live.

Keynes urged the people of Europe to see themselves as tied together by a common fortune, and so act in a generous and far-sighted manner. It was not to be then, and the consequences were horrific. As for the results of today’s action, we can only wait and see.

(5) For more information: posts explaining what’s happening and likely consequences

About another nation on a dark path: As Japan sails into the shadows, let’s wish them well and wave good-by

Explanations of what’s happening and likely consequences:

Government policy errors as a cause of the Great Depression, 1 November 2008
Fetters of the mind blind us so that we cannot see a solution to this crisis, 1 April 2009
A lesson from the Weimar Republic about balancing the budget, 10 February 2010
All about deflation, the quiet killer of modern economies, 19 July 2010
The simple explanation of why night falls over Europe, 9 December 2011
Explaining the gold standard, the Euro, Default, Deflation, and Hyperinflation, 12 December 2012

Forecasting the crisis:

The post-WWII geopolitical regime is dying. Chapter One , 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
Can the European Monetary Union survive the next recession?, 11 July 2008

Monday, March 26, 2012