The two sensible choices

There are two sensible and realistic choices for solving the Euro crisis. The sensible and realistic choices are:

  • Surplus areas like Germany give deficit areas like Greece free money, indefinitely, or,
  • Weak economies like Greece and Spain leave the Eurozone.

These really are the sensible and realistic choices. You need one of these if you want roughly equal purchasing power across the Eurozone. Otherwise, money will flow from unproductive deficit areas to productive surplus areas, people in surplus countries will get steadily richer, people in deficit countries will get continually poorer, and eventually this will come to a head by revolt or other radical means.

Free money recycles this flow, exchange rates stop it. Economically the first is better because more flow of goods and services and money turns the economy forward and makes everyone consume more in aggregate. The latter choice aims for fairness, sacrificing total volume of trade and industry in the process.

Right now we’re still discussing the free money idea. Free money could be given as tax-and-transfer grants like most states do internally, as endless monetary expansion like the US, or by recurrent debt default and restructuring. The only advantage of the third option is it makes a policy look like an accident.

If free money won’t fly, leaving the Eurozone is the choice. Greece should have left the Eurozone… any time from 2001 till tonight would be good. Cynics would say stay until 2011 while the free money vision of Europe looked ascendant, but certainly Greece should have dropped after that. Greece should leave now.

Dropping out of the currency union has only advantages for the weaker economy. The disadvantages for the stronger economy are that it stops the flow of funds from the poor to the rich and removes demand for their exports. Germany selfishly wants the Euro. Greeks are stupidly attached to it because they equate the Euro with the EU and three decades of progress.

There are also a couple of totally fantastical choices that people might believe would fix the Eurozone, but they won’t work.

  • Economies like Germany and Greece become similarly productive any time soon.
  • Regions fix trade imbalances through fiscal discipline and austerity.

These are myths. It would be great if Greece was a bit more prosperous like Germany and that would take a venture investment ethos, congenial labour relations, an orientation to global markets, nourishing a boutique economy, branding, IP rights, stability and democracy. Well, at least Greece has democracy.

Different economies may become more alike, but they won’t become the same. The Mississippi delta is less productive than Silicon Valley and that’s why the meagre social policies of the US transfer funds indefinitely from rich Californians to poor Louisianan’s. Convergence doesn’t remove the need for transfers, it makes them smaller.

As for austerity, austerity is the null policy. Austerity means to just accept the dynamic of unproductive regions being steadily poorer and productive regions being steadily richer without asking for free money to mitigate it. And fiscal discipline means don’t try the free money by monetary expansion or default routes.

Until 2011 it looked like Europe was going to work like a superstate using free money transfers. This would have been better for all, including Germans. This idea now looks dead. Weak economies should ditch the Eurozone, now.

Greece and Europe are in a confrontation over democracy

You wouldn’t think so given a week of awkward handshakes, public contradictions, sternly worded demands to fall into line, and galling bankers’ ultimatums to destroy an economy, but Greece and Europe agree on most things:

Europe: You must reform your economy.
Greece: We plan to reform and modernise our economy even more than has been already accomplished. However we want growth oriented changes, not ones that are just destructive.

Europe: You must reduce graft and waste.
Greece: Our finance minister travels economy. He fired the ministry “consultants” and re-hired the outsourced cleaning ladies. Down to earth is the new normal.

Europe: You must collect taxes properly.
Greece: We’re the first Greek government determined to do that, including going after the big fish. Intrnational help would be appreciated. But sending German in tax inspectors at this time would be unwise.

Europe: You must pay your debts.
Greece: We have the interest of all European taxpayers in mind so please hear our case. During the bubble years your banks lent recklessly to Greece while our government committed financial fraud. We’re sorry. Then your governments transferred private investment losses onto the shoulders of European taxpayers. At the same time the Troika imposed austerity that crushed our economy by 25% and raised debt to GDP from 115% to 170%. European governments mismanaged the crisis and lied to you that you were helping Greece.

Right now we need to end the most damaging aspects of austerity so that we can have growth, and then agree a debt service schedule that this small economy can sustain. Greece is already making a surplus and paying back money to Europe. You are not “financing Greece”, we’re paying you back. We want to make that repayment slower, 1.5% of GDP instead of 4.5%, so that it’s possible to have an economic recovery.

Your central banks won’t get back the full value of the debt at commercial rates. You’ll get less in total or less interest or over a much longer time. However these are by now paper losses in the books of central banks. We’re trying to bury a loss of around €150 billion at a time when the ECB is crating €1.1 trillion of new money on the books of the same banks. That means there’s no need for Europeans to lose money or pay higher taxes over this, and if your politicians make you take this loss it’s their choice.

Europe: You must privatise everything.
Greece: If that’s not letting go of a profitable asset at fire sale prices, sure. Right now the income stream from public enterprises is worth more than the sale price.

Europe: You must stay in the Euro.
Greece: We want to stay in the Euro but the ECB is kicking us out.

Why then all the bluster? Greece’s new government is a popular government. The good kind. We don’t want to see the other one. With the exception of Merkel, the people they face are mostly technocrats. I don’t understand German politics, but from outside it seems clear that capital rules politics and is spinning a morality tale for the people.

Where Greece and Europe don’t agree is where people (in Greece and elsewhere, even Germany) want one thing and narrow capital interests want another:

Europe: You must continue with Austerity.
Greece: We won’t continue with this policy that destroys wealth and evidently doesn’t work.

Europe: You must take this money from our taxpayers.
Greece: We have no right to take any more money from your taxpayers.

Europe: You must do as the previous governments.
Greece: Have you heard of democracy? We have a strong popular mandate for change.

Europe: We have agreements with Greece, not a government.
Greece: It’s like marriage. If you offer solidarity we’ll do the same, and by coercion no.

Europe: You must comply with the Troika inspectors.
Greece: We were elected to end this humiliation. We’re committed to reforms but we’re not a debt colony.

Europe: We have rules here.
Greece: We’re bankrupt, party as a result of bad rules. We’ll follow the rules we can, and if we can’t you may throw us out.

Europe: You’re one country versus 18.
Greece: Have you noticed that the Eurozone is increasingly a club people want to leave? How much democratic opposition to these failed policies will it take to change them?

And that’s really the the point of disagreement this past week, and probably next week or until Greece’s democratic flare is resolved. Greece is arguing for a democratic Europe that works for its people. The establishment is arguing for a largely undemocratic status quo that doesn’t work, or works only for large industrial capital.

It’s been a while since Greece had a government that actually represents the interests of the people. Maybe more than two thousand years. If the other governments in Europe were similar, or Europe could be jolted into reviving democracy, we would find many more parallels than differences and the crisis would be quickly over.

Europe’s two problems

Europe has two big problems. Doubtless one of them is political, or to put it more precisely, it’s in the space of national politics.

The post-national European project has  stalled. It has certainly taken us a long way, from warring nation-states to an open community where we feel free and entitled as citizens throughout the continent. We’ve largely lost our national identities, and it may come as a surprise to Americans that we don’t care about our flags. National cultures are cherished as heritage, but not something to be defensive or overly proud of – certainly not something to kill or die for. The nation state was born in Europe in the 1700s and it died in Europe in 1945. Generations of visionary leaders have taken the people of Europe from the aftermath of an existential war to a point where the state is little more than an old-fashioned cultural and administrative unit. It took a lot of paternalism and manipulation to get us here, but on the whole we are grateful. Even the insular British do not prefer to go back to a time of animosity where crossing the border to Germany or France had the significance that entering Israel or Iran has today.

The problem is that after the Maastricht treaty and the introduction of the Euro the post-nationalist transformation has stopped. The Euro obviously came too soon for Europe, but also obviously it was the first of a sequence of bold steps that the then heads of state could not take all at once. Having the Euro is like putting one foot on a moving streetcar, but not climbing on board, instead limping desperately after it with the other foot on the street. The onward steps were very much expected and obvious, but they didn’t come: an elected European presidency; real powers for the European Parliament or some reformed elected chamber; continent-wide taxation, social security, and pension systems; business reform to allow companies to operate across the zone without country subsidiaries; stronger education, development, and technology agencies. None of this happened. The Euro and the ECB were the last post-national institutions that Europe saw.

We haven’t stopped to ask why. Continue reading

Economic newspeak in the EU

There’s no shortage of voices explaining what Europe needs. I tried to collect the main recommendations here. The de-facto leaders of Europe, Merkel and Draghi, are doubtless very smart individuals who can clearly see what ought to be done if one had the common good in mind. I don’t believe the hyperinflation argument is anything but a populist stalling tactic.

What we are observing is the elite of the Eurozone accurately picking up a democratic demand and then deliberately offering something that sounds like the demand but is in fact the opposite, an attempt to distort and defuse what is earnestly demanded.

Eurobonds – what is needed:
Eurozone states need to pool their debt into a common type of bond, or “Eurobond”, so that a billion Euros of Greek debt is indistinguishable from a billion of German debt, much like US treasury bonds are all alike and not denominated by state. Bond markets initially perceived Euro sovereign debt that way, creating a somewhat unhealthy credit boom in the periphery. When markets realized the bonds were not the same they attacked the debt rollover of the weakest economies in turn, Greece being the first, with loan shark rates that predictably destroy the indebted economy. Eurobonds would restore the ability for the whole zone to manage debt at the same rate, which will be low since zone-wide deficit is a few percent.

Eurobonds – what was offered:
The red-blue Eurobond proposal by a German think tank was an attempt to offer something called a Eurobond that expressly doesn’t have the desired effect. That proposal calls for “blue”, essentially high credit rating, bonds that meet tight fiscal criteria and “red” junk rated bonds that don’t. The scheme is no different from the status quo, as countries like Greece would package some existing “senior” debt as blue bonds and would only be able to issue new red bonds for their deficit and rollover needs. The red-blue Eurobond proposal is thus a distraction that protects creditors and bond speculators.

Continue reading

Greeks should vote against Merkel tomorrow

I’ll vote against Angela Merkel in the upcoming Greek elections, and I think it’s very important that all with the right to vote in Greece do so. The choice is as follows:

If Antonis Samaras, the conservative New Democracy party gets elected his government will implement the austerity, deflation, and asset-stripping recipe/punishment prescribed by big European Capital through the German government. The economy will continue to deteriorate, a lot, until whatever is left of Greek capital (mostly small and medium business) is destroyed and Greece becomes a cheap labour and no social safety net state. There will be riots, fascism, and widespread hardship in Greece especially amongst old people and the self/family employed. The successful enforcement of austerity and de-capitalisation will be roundly seen as a triumph by EU and international capital, and Spain and Italy will be next in line for the same treatment. That is why the Greek press and even the German edition of the FT are practically intimidating Greeks to accept it. Vote this way or unspecified bad things will happen.

If Alexis Tsipras of the left SYRIZA (means “from the root”) party wins, his government will reject the terms of the austerity and impoverishment package and force a re-negotiation. He is not especially anti-Euro and neither is Greek public opinion. A hard rejection of the austerity terms by Greece will force the Eurozone, meaning the ECB and Ms. Merkel, to shelve the “austerity for the losers” doctrine and come up with something else. There will be a period of frantic deliberation, whose possible outcomes include: very optimistically reforming the Euro to a model that works and is under political control like the US Fed; realistically some form of flawed compromise with the Euro and ECB in the hands of private capital but with a human face; and pessimistically and unlikely a breakup of the Euro. In the latter case, Greek savers will lose another chunk of their savings (unless they move them to other EU banks, in which case they may lose them outright due to unpaid Target 2 balances). Germany will be stuck with a strong currency and exposed banks, which will require inflation. More to the point, the Merkel government will be seen to have presided over a colossal failure and will likely lose power, perhaps prematurely.

Merkel has to go

The German leader ought to be defeated in the next elections for blowing the handling of the Greek debt crisis. She’s been incredibly naive to treat the matter as a solvency issue for one country. Greece, for all it’s failures, just happened to be the weakest of the small indebted Euro economies. Financial markets speculated against it, and Europe failed to see the problem as what it was and stop it in time. Sarkozy and even Obama urged Merkel to bring solidarity in the Euro but she thought voters wouldn’t like it. Then the Greek crisis became a Euro credibility crisis, with markets devaluing the Euro and influential economists such as Krugman and Mankiw writing that the Euro may be “over”. To be sure, German voters won’t be happy, but they’ll be unhappy about Merkel’s colossal failure of leadership over the Euro zone.