Friday, April 24, 2015

Greece: Enough is Enough

In Alexis Tsipras’ shoes I would apply immediately for Greece to leave the EU, as envisaged by Art. 50 of the TEU (Consolidated Version of the Treaty on European Union, Official Journal of the European Union, C 115/15, 9/5/2008).

Since Greece’s 2010 crisis the Troika (sorry, the “international institutions”) have sunk about €245bn into its rescue, i.e. more than would have been sufficient at that time to pay off the entire Greek debt. It is well known that these funds did not benefit the Greeks but went almost entirely to save French, Swiss and German banks from their exposure to Greek government bonds. And in the FT or 21 April Martin Wolf debunks Greek “mythology” including the myth that “Greece has done nothing”: 

“Greece has undergone a huge adjustment of its fiscal and external positions. Between 2009 and 2014, the primary fiscal balance (before interest) tightened by 12 per cent of gross domestic product, the structural fiscal deficit by 20 per cent of GDP and the current account balance by 12 per cent of GDP.”
“Between the first quarter of 2008 and the last of 2013, real spending in the Greek economy fell by 35 per cent and GDP by 27 per cent, while unemployment peaked at 28 per cent of the labour force. These are huge adjustments. Indeed, one of the tragedies of the impasse over the conditions for support is that the adjustment has happened. Greece does not need additional resources.”

The cost of such adjustments to the Greek people were immense. Unemployment reached 28% (48% for youth unemployment), the dismantling of collective bargaining lowered real hourly wages by 25% by 2014. The minimum wage fell to its level of the 1970s. The minimum pension fell below the poverty threshold. As many as 35.7% of the population and 44.1% of children aged 11 to 15 are now at risk of poverty or social exclusion. And Gechert and Rannenberg (of the German Hans Böckler Foundation) show that without austerity the Greek economy would only have stagnated, avoiding the deep recession, while tax increases without spending cuts would have been much more effective in lowering the Debt/GDP ratio.

Another myth debunked by Martin Wolf is that Greece will pay its debt in full. As a a result of fiscal consolidation and the bailout its debt has gone from about 120% of GDP in 2010 to over 177% today. Thus Greece needs either further debt relief or, in order to continue to service the debt, it needs the €7.2bn bail-out funds due last year that were not disbursed on the ground of alleged delays in Greek implementation of “structural reforms” agreed in the Memorandum of Understanding negotiated by the previous right-wing government with the “institutions”.

After the 25 January elections the new government, democratically elected on a specific anti-austerity campaign, and reported by post-election polls to consistently command the support of 80% of the population, an agreement with the “institutions” was reached in principle on 20 February for the release of the €7.2bn on condition of somewhat different but yet unspecified structural reforms. However there have been continuous wrangles about whether or not the Greek reform proposals were or were not sufficient to warrant the release of the residual bail-out funds.

Up to now Greece has paid punctually interest and debt instalments as they became due, such as $450mn owed the IMF on 9 April and a batch of Treasury Bonds that also fell due. But the IMF is still owed €203mn on 1 May and €770mn on 12 May, plus €1.6bn in June, while some of the debt with the ECB is also due for repayment. The Greek government has scraped the bottom of the barrel by requisitioning the liquid balances of state enterprises and local authorities. It has announced that it is not in a position to make these payments, unless it stops payment of pensions and public sector wages and salaries.  Without access to these €7.2bn Greece is likely to default on its payments to the IMF and the ECB.

On 15 April the FT reported that Greek officials had approached the IMF informally proposing to delay the repayment of loans due in May but were told that no rescheduling was possible; indeed they were persuaded not to make that request officially, presumably to avoid an open refusal.

At the same time Germany’s finance minister Wolfgang Schäuble was reported in an interview to have virtually ruled out that at the Eurogroup meeting in Riga on 24 April a deal might release bailout funds to Athens. "You can't pour hundreds of billions... into a bottomless pit."

However Die Zeit reported that Ms Merkel now might support emergency measures that would give Greece continued access to ECB Emergency Financial Assistance even in case of default. The possibility of a Greek default not being followed by Grexit is being discussed more and more widely (see for instance Wolfgang Munchau and Martin Wolf in the FT).  It might be possible, perhaps, but would still be very messy, and if there is sufficient goodwill to make it possible it would be much more effective to disburse the wretched €7.2bn.

The Financial Times on line of 18 April (Breaking News, 6.57 pm) reports that ECB president Mario Draghi told the IMF spring meeting the euro area was better equipped than it had been in the past (in 2010, 2011 and 2012) to deal with a new Greek crisis but warned of “uncharted waters” if the situation were to deteriorate badly.

On 21 April BloombergBusiness reported that “The European Central Bank is studying measures to rein in Emergency Liquidity Assistance to Greek banks, as resistance to further aiding the country’s stricken lenders grows in the Governing Council”. The writing is on the wall.

Grexit costs would be very serious not only for Greece but for the entire Eurozone and beyond, but unilateral withdrawal from the whole of the European Union rather than simply the Eurozone would make more sense. An application to withdraw would only take effect two years later, leaving ample time for a possible change of mind and for re-negotiations, but might be an effective and quick way of sobering up Mr Schäuble and the other Troika hawks that have been bullying Greece, pushing it towards default regardless of consequences. Greece might as well take back the initiative, not least to avoid an internal government crisis.

What is particularly deplorable is the IMF duplicity and bad faith: in Greece and everywhere else on a global scale they have been calling relentlessly for fiscal consolidation and structural reforms (a euphemism for enterprise freedom to dismiss employees and for the systematic destruction of the welfare state) but at the same time they have played a leading role in discrediting consolidation and "reforms" as policy instruments to fight a recession.

The IMF World Economic Outlook of October 2012 (Box 3.1 untypically signed by Chief Economist Olivier J. Blanchard and Senior Economist David Leigh, presumably to suggest that their views are personal and not official) raised previous estimates of fiscal multipliers for several reasons. First, the ineffectiveness of countervailing monetary expansion close to the zero floor of the interest rate'; second, lack of opportunities for exchange rate devaluation especially in the Euroarea; third, the existence of  a large gap between potential and actual income (for fiscal multipliers are higher in a downturn than in a boom) and finally, the simultaneous consolidation across many countries.  Such revision of estimated multipliers implied an upwards revision of the costs of consolidation, to the point of theorizing that tax increases and especially expenditure cuts would actually raise, instead of lowering, the ratio between Debt and GDP, thus setting up a vicious circle. This of course is what happened punctually in Greece and in other highly indebted economies – like Italy – as a result of fiscal consolidations.

Further the IMF World Economic Outlook 2015 (Ch. 3, Box 3.5 on The Effects of Structural Reforms on Total Factor Productivity, pp.104-107) issued on 14 April candidly recognizes, on the basis of available econometric evidence, that total factor productivity can be increased by using more skilled labour and ICT, by investing more in research and development and by lowering the level of regulation in product markets. In contrast, the IMF does not find any statistically significant effects on total factor productivity that result from lowering labour market regulation (See also Ronald Janssen Social Europe).
Such schizophrenic duplicity on the part of the IMF has not even incompetence as a conceivable justification. A Greek unilateral withdrawal from the European Union would sober up lots of people in Washington as well as in Brussels, Frankfurt and Berlin. Go for it Alexis and Yanis on behalf of all of us, not just on behalf of Greece. 

UPDATE (13 May)

Last Monday (11 May) Greece paid the $750mn owed to the IMF, one day before the deadline, ending days of uncertainty over funds availability and whether payment might be withheld in order to put pressure on creditors. 

Where did the money come from? The FT reminds us that “The Greek government ordered hundreds of state entities — among them hospitals, universities and local authorities — to deposit their cash reserves with the central bank. But many such entities, including an overwhelming majority of municipalities, have declined to comply”.

An unmissable piece of news, which appears to have gone largely unreported in the financial press: TSIPRAS TO FIRE [FIRED] BANK OF GREECE BOSS FOR UNDERMINING SYRIZA POSITION: Bank of Greece Governor Yannis Stournaras will be quitting his post today (last Sunday). Alexis Tsipras will ask for his resignation in the light of documentary proof that the former New Democracy Finance Minister personally gave specific briefs to a top journalist about “putting the most negative spin possible on the news” about Greek finances.

Yannis Stournaras was Greek Minister of Finance from 5 July 2012 until he moved to the BoG last year. As a senior consultant to the Bank he was personally involved in the entry of Greece into the euro. As a senior Governor he sits on the Board of the IMF, a position that places him in a serious conflict of interest with the Greek government.  “Meanwhile, the forensic investigation into debt overstatement in 2010 and how much Greek debt can be objectively defined as ‘odious’ continues”. 

Wednesday, March 25, 2015


Si vis pacem, para bellum – If you want peace, prepare for war, said Vegetius in the 5th-6th century b.C.  Just as then, and by the same token, Si vis euro, para exitum: if you want to keep the euro, prepare for exit.

In 2012 Willem H. Buiter and Ebrahim Rahban, respectively chief economist and global economist of Citygroup, writing in the Market Insight section of the Financial Times (Greece far from safe even after debt swap, 13 February), coined the word Grexit – a euphonic synthetic neo-logism for Greek exit from the Eurozone.  They wrote then:

There is some good news. Plentiful ECB liquidity has pushed back the risk of disorderly default of systemically important euro area banks and, combined with financial repression in euro periphery nations, has eliminated the near-term risk of a disorderly default by a systemically important sovereign. The external damage caused by a Greek euro area exit (or ‘Grexit’, as we call it) could, given appropriate policy response from the ECB and euro area creditor countries, be limited and need not trigger waves of “exit fear contagion” to other fiscally weak peripheral countries. The second LTRO on February 29 may buy more time but until the fundamental drivers of the euro area sovereign debt and banking crises are addressed, volatility will remain a constant companion and recovery and growth absent friends”

Since the unexpected victory of Alexis Tsipras and his Syriza Party, elected on 25 January 2015 on a programme rejecting European austerity and its embodiment the Memorandum imposed by the Troika (EC, ECB and IMF) on the Samaras government, references to Grexit have become increasingly frequent, including its variation Grexident (Wolfgang Schauble) to indicate the possibility of Greek “accidental” exit, in spite of neither the Greek government nor European authorities (perhaps not including Schauble) actually wanting to provoke that event.

Three observations are in order.

1) There are serious legal problems involved in Grexit. 

For a start, there is no legal provision in the Treaties for an EMU member state to withdraw from or be compelled to leave the Eurozone. The decision to introduce the euro is “irrevocable” (Art. 140 TFEU).  The same was true for the EU as well. Article 50 TEU, however, grants EU member states the right to withdraw from the European Union. It is inconceivable, though it has not been explitly stated, that a country could leave the EU and still maintain all the rights reserved to EMU members. Conversely, membership of the EMU is part of the obligations of membership, the so-called acquis communautaire, unless a derogation had been successfully negotiated in 1992 at the time of signing the Maastricht Treaty.  Therefore a State that left EMU or, by some unspecified measure, was no longer a member of EMU would have to leave the EU as unable to fulfil its membership requirements.  And even if a country was allowed such a derogation ex-post, thus maintaining EU membership, it would still be subject to the fiscal straightjacket of the so-called Growth and Stability Pact and the Fiscal Compact, i.e. the exit from EMU would not restore a country’s fiscal sovereignty.  Unilateral exit from the EU would take effect only two years after its declaration, but we must presume that exit from the EU of an EMU member would involve its immediate exit from the Monetary Union.  The immediate implementation of capital controls and ceilings on cash withdrawals from banks, in order to avoid capital flight and bank runs, would certainly follow. That the Council, the European Parliament and the relevant Greek institutions would have to be consulted beforehand would also and detrimentally make secrecy impossible.

2) Grexit would involve the problems of managing the new currency. 

The rate of conversion of the old into the new currency would have to be identical, at least to start with, with the rate of conversion of euro prices and wages into the new currency. Without loss of generality therefore at time 0 the new currency could be initially issued at par with the euro.  Immediately afterwards, however, the exchange rate between the old euro and the new currency, let us call it the drachma, would necessarily have to be floating, fully determined by the market. At any managed exchange rate different from the market rate Gresham's Law would operate: “Bad money [i.e. the currency overvalued with respect to the market rate] drives out good [the undervalued currency]”. One of the oldest economic discoveries, anticipated in 1519 by Copernicus, even earlier by Nicole Oresme in the fourteenth century, the law was first stated clearly by Aristophanes in his play The Frogs, around the end of the fifth century b.C.

The new currency would have to be devalued, very soon after issue, for the exiting country to obtain the benefits of greater international competitiveness and devaluation of debt payable in that currency.  (Wolfgang Munchau expects the new currency to continue to circulate at par with the euro voluntarily on a significant scale, but this is unrealistic). However the currency to be used for discharging earlier obligations cannot be chosen at will; it is determined by the law of the country where the transaction has taken place.  Thus, for instance, much and probably most of the outstanding import and export orders, as well as past unpaid tax, and the servicing of already existing debt will have to continue to take place in euro, under penalty of default; overall, something like 30% of debt and almost all of derivatives trade. Target 2 large balances – a purely technical construct while the euro lasts – would become real and would have to be settled or canceled, coming to a head.  And furthermore Dual currencies are always a bad idea” (this Blog, 10 February 2010).  

Euro denominated obligations contracted under the law of a non-Eurozone country like Britain will have to be discharged by converting the new currency into euros at the market exchange rate.  Thus the introduction of the new currency would not avoid default, it would simply be the form that a default would take.  As well, a default would involve the inability to access international financial markets for the next 10 or 15 years and/or a much higher cost of finance.

The devaluation of the new currency would necessarily involve an acceleration in inflation with respect to euro inflation, and therefore an increase in the interest rate with respect to euro rates, and especially a higher spread with respect to German Bunds. The impact of the new currency on external accounts, income and employment, will depend both on its subsequent impact (“pass-through”) on the path of wages and prices inflation, and on trade elasticities of both demand and supply; in principle perverse effects cannot be ruled out.  In the end the success of a euro exit would depend on the flexibility of real wages and prices, as well as on the country’s ability to implement productivity-enhancing policies, which are the same conditions under which the maintenance of a common currency would work.

3) Grexit would never be accidental.

Grexit would be the result of a deliberately destructive strategy adopted by Germany and the Nordic countries (Finland, the Netherlands, France, the Baltics) aided and abetted by Spain and Portugal for fear of opposition parties ousting their governments should Syriza’s example succeed, and by Italy out of perceived self-interest.  The Greek refusal, backed by the new elected government and today reportedly supported by 80% of the Greek population, to continue with the self-defeating, ruinous austerity policies imposed from Brussels, Frankfurt, Berlin and Washington, is a completely rational and democratic choice rather than the reckless strategy in an irresponsiblee game of “chicken” of which Greece has been accused. 

The most likely course of events leading to Grexit would be: the continued denial of Greek access to any of the €7.2bn residual funds provided by the Troika’s earlier rescue package, while Troika officials slowly verify compliance with outdated conditions, impossible for a poor country to satisfy; the continued prohibition by the ECB of the Greek government raising finance through the issue of short term Treasury bills, indeed the imposition of ceilings on banks’ holdings of such bills, under the pretext that in Greek circumstances this would amount to funding the government deficit directly (a peculiar dysfunction of the ECB, seeing that the independent Bank of England and the independent Central Bank of Japan are allowed to fund government deficits all the time). 

At the end of March the Greek government is facing a bill of €1.7bn for wages and pensions; on 9 April the IMF is owed a loan repayment of €450mn, and in mid-April two Treasury bills for a total of €2.4bn also are due for repayment.  

Since the elections of 25 January Greek corporations and households have cut their tax payments drastically; a government running a primary surplus, even at the reduced rate of 1.5% of GDP, should always be able to finance current public expenditure but now the position is unclear.  The Greek government has been particularly skilled at mobilizing cash belonging to the National Health Service and state-owned corporations to  keep the government afloat. But cash withdrawals from the banks have been accelerating since the new year, both before and after the elections.  According to Barclays on Wednesday 18 March withdrawals reached a record €300mn per day, at which rate they regarded a block on deposits as unavoidable (not least because of this kind of malicious rumour).  The Greek government has admitted that without fresh funds they will not be able to meet all payments due in April: we should believe them.  Failure to repay the IMF loan instalment would not have immediate adverse implications, but would involve the loss of all IMF credits.  Failure to repay the €2.4bn Treasury bills would trigger-off cross-default clauses in other loans and precipitate a deeper crisis, including the likely loss of ECB Emergency Liquidity Assistance.  At that point a run on the banks, stricter limits on bank withdrawals, capital controls and actual default would become self-fulfilling prophecies.  In order to avoid the de-monetisation of the economy and its vast contractionary implications the government would be forced to issue a euro substitute, i.e. a new currency parallel to the Euro.

The transition to the new currency presumes that the new banknotes and coins can be produced quickly or, better, well in advance in complete secrecy. Normally this would take about six months; it has been suggested that the new currency could be introduced by stamping old euro notes as drachmas, but this would be a silly waste of good money.However a cash shortage could be initially tackled by means of the issue of small denomination Treasury notes, or by the issue of bank cheques like those that were introduced in Italy in the 1980s to deal with a shortage of coinage. At least initially, and indeed for some time, the euro and the new currency would circulate in parallel, but as long as the rate of exchange between the two was market determined this should not create problems other than some confusion and uncertainty.

It might be safest to turn our deposits into bricks and mortar, withdraw as much cash as we can as fast as we can while we still can, and hide it under the mattress to avoid negative interest rates. Actually, si vis pacem para pacem, as Pope Francis might have said, and if you want to keep the Euro get on with completing a banking Union, promote fiscal and political integration; above all Growth and Stability suicide Pact must be imaginatively re-interpreted and accompanied by a serious, large scale, European public investment effort. Together with the felicitous large reduction in oil price, overdue but welcome Quantitative Easing by the ECB and substantial euro de-valuation, this might still do the trick without the drama and trauma of Eurozone and European Union dis-integration.

Thursday, February 12, 2015


In 1988 my old friend, teacher and mentor Luigi Spaventa was made Treasury Minister in the Italian government.  The Communist Party had been offered a few posts in the government, including Vincenzo Visco at the Ministry of Finance, but had refused; Luigi belonged to the left but was not a party member, and fortunately accepted.  On that occasion, I sent him a postcard with the following verses:

Visco al Fisco! Noo? Peccato,
Il Partito s’e’ imbranato.
Per fortuna c’e’ Spaventa
Che al Tesoro s’arroventa,
E la fine e’ ormai per via
della Cachistocrazia.

[Visco at Finances! No? Pity./The Party has goofed./But fortunately Spaventa/At the Treasury is getting fired-up,/And at last we are on the way/To end our kakistocracy.]

Naively I thought I had coined the word, from the Greek kakistos, superlative of kakos(bad), government by the worst citizens, but on googling the word there are almost half a million entries: kakistocracy was first used in 1829 by the English satirical writer Thomas Love Peacock. The American poet James Russell Lowell wrote in a letter in 1876: "Is ours a government of the people, by the people, for the people, or a kakistocracy rather, for the benefit of knaves at the cost of fools?"

Luigi, a wonderful teacher and a great economist, died prematurely in 2010.  Had he lived longer he might have been appointed premier in 2012 instead of Mario Monti (for he was President Napolitano’s economic adviser), or to even higher office later: Italian recent history would have taken a turn for the better.  In any case I was patently wrong: not only does kakistocracy – the mafia in collusion with the political Casta- still rule Italy, now it has spread to the entire world.  Whenever the best men come to power in a country, the global kakistocracy tries to squash them.  This is the case right now in Greece.

All that Alexis Tsipras is asking of the European and global rulers is six months of breathing space to prepare an alternative plan for debt management and economic recovery.  After all, the elections of 25 January had been called only on 14 December and he could not conceivably have been expected to have a plan ready when his outstanding surprise victory was proclaimed.

His first moves were directed at reassuring the global community: Greece would honour its debts in full, without insisting on a debt haircut; the country would remain in the Eurozone, as preferred by a large majority of its citizens; it would fight tax evasion and raise the living standards of those who had suffered most from the austerity imposed by the Troika (the ”Memorandum” issued by the EC, ECB and IMF): the unemployed, especially those unfairly dismissed, the poor, old age pensioners and the other economically weak groups.  ”If the country’s sacrifices were conducive to recovery and growth I would be the first to advocate them” – he said to Parliament last week (I am quoting from memory) – ”if the bitter pill was necessary to recover health I would readily swallow it”.  But the austerity imposed by the European and globalist kakistocracy demonstrably leads only to cumulative impoverishment and ruin, as it has already done.  Thus Tsipras rejected at once the continuation of the programme agreed with the Troika by his predecessor, renouncing the €7.2bn aid that Greece otherwise expected to receive at the end of February, asking only for the €1.9 bn repayment of ECB profits made on its Greek bonds, with a view to using the next six months to negotiate a new agreement and in the meantime to meet all outstanding obligations by issuing around €10bn short-term Treasury bonds. 

So far the Kakistos and Tsipras are set on a collision course. The Greek Finance Minister Yanis Varoufakis and German Finance Minister Wolfgang Schäuble would not even “agree to disagree”.  On 11 February in Brussels at a meeting of Eurozone Finance Ministers talks collapsed after six hours.  There is no way the debt owed to the ECB or the IMF can be cut, under penalty of losing access to assistance from these institutions – though Greece might be allowed to repay ECB credits by borrowing on very long terms from EFSF, the Eurozone bail-out fund.  Moreover Tsipras has promised that private investors will not be hit.  The only room for debt renegotiation is with European governments, to whom Greece owes directly or indirectly about €195bn, around 62 per cent of its total debt (of which almost 148bn or 45 per cent to the bail-out fund EFSF). True, Greece has already benefited from a debt cut in 2010 and 2012, and from the lengthening of maturities right up to 2057; and from a reduction of interest on its debt down to 2.6% of GDP, equivalent to that paid by Italy or France (and only 1.5% on its debt with the EFSF, which could not possibly be cut further).

But according to the Troika Memorandum Greece is committed to running a primary surplus (before paying interest) of 4.5% of GDP a year, which is an exceedingly heavy burden on an impoverished country.  Such a surplus requirement could very well be cut at least temporarily, by an interest moratorium until growth is resumed, back to earlier income levels, to the 1%-1.5% primary surplus that Syriza’s current plans would require. This is the purpose of the proposal put forward by Yanis Varoufakis, of swapping debt owed to European governments with new bonds indexed to the Greek growth rate.  

The ECB was certainly within its rights to cancel the waiver allowing Greek banks the use of Greek government bonds as collateral, thus denying Greece access to liquidity at 0.05% interest, once Tsipras had indicated his unwillingness to continue on the agreed course at the end of February.  But it was certainly not ”legitimate and opportune” as declared by Matteo Renzi, who presented Tsipras with an elegant tie instead of solidarity (”So that he could go and hang himself with it”, commented Giorgia Meloni, leader of the right-wing party Fratelli d’Italia).  As long as Greece has access to Emergency Liquidity Assistence (even at the higher cost of 1.55%) Greek banks can cope even with the slow run on deposits that has already begun (€15 bn in the two months preceding the elections); but such access has to be confirmed every fortnight and its possible suspension is a Damocles’ sword. Greece really needs the Tsipras really needs the €10bn Treasury bonds that Tsipras wishes to issue.

The trouble is that Greece is already right up against the €15bn limit to short term indebtment that has already been imposed by the Troika, and the additional €10bn bonds have to be, but have not been, authorised.  Yet this is the only and therefore the best way out of the Greek-Troika confrontation.  Wolfgang Schäuble declared that ”Europe is not in the business of granting bridging loans”, but the €10bn would be no skin off his nose, they would be raised – at a price, that current delays make rise all the time – in the international market.  By giving up its entitlement to €7.2bn under the Memorandum surely Greece can have its €15bn borrowing ceiling lifted at the same time?  The Troika cannot have it both ways, tying Greece to its borrowing limit when it is renouncing some of the benefits of its current deal with the Troika.

Germans display the memory typical of elephants when they evoke the ghost of their 1922-23 hyper-inflation to justify their opposition even to ECB quantitative easing.  But they have a shorter memory than goldfish when it comes to the 1953 cancellation of German debt of over 200% of its GDP at the time, much in excess of the current Greek debt burden of under 180%.  According to the economic historian Albrecht Ritschl (LSE), Germany was ”the “biggest debt transgressor of the twentieth century”;Robert Skidelsky recently reminded us that“Germany experienced eight debt defaults and/or restructurings from 1800 to 2008. There were also the two defaults through inflation in 1920 and 1923. And yet today Germany is Europe’s economic hegemon, laying down the law to miscreants like Greece.”

Tsipras’ mention of war reparations was not commented on by Merkel but both vice-Chancellor Sigmar Gabriel and Wolfgang Schäuble immediately said that the issue was definitively closed years ago, and its re-opening was out of the question.  Tsipras mentioning the War was treated as an inappropriate gesture in bad taste.  Shades of Basil Fawlty of Fawlty Towers, shouting at the Hotel’s Spanish waiter Manuel: ”Don’t mention the War!” when German guests arrived.  But why ever not?  If memories of 1922-23 hyper-inflation are not buried, a fortiori neither should more recent and tragic ones.  Such a combination of a good memory for distant events with forgetfulness of recent ones is typical of dementia.

A secret Greek Finance Ministry report is said to provide detailed evidence of ”atrocities and forced loans during Nazi occupation of Greece in World War II”.  Apparently ”in 1960 Germany paid DM 115 million in reparation payments to victims of the Nazi terror regime in Greece in accord with a bilateral reparation agreement”. But 1) the Netherlands suffered much less and received a much larger compensation; 2) “the 1953 London Agreement on German External Debts, between the Federal Republic of Germany and creditor nations, stipulated that payment obligations from World War II were to be deferred until ‘after the signing of a peace treaty’", and 3) apart from the cost of war suffering, casualties and loss of material assets, there was a loan the GreekCentral Bank was forced to give the Nazi regime in 1942, 476 million reichsmarks which the occupiers not only acknowledged but had actually started repaying shortly before the end of the war.  Even at a modest interest rate of 3% a year (though German loans after the War generally had a 6% interest rate) after 70 years that loan would have built up to a handsome three digit billion sum in today's euros.  Professor Hagen Fleischer, a historian from Athens University, explains that "Before 1990, Germany tended to point out [that] it was too soon, because Germany was divided and it was the entire country that had gone to war, not just one half. So the issue was supposed to be canned until Germany was again reunified".  After reunification, however, "Germany's response was suddenly, 'So much time has passed - now it's too late’".  Clearly the Greek Ministry of Finance should publish its secret report in full on the Internet at once, together with all the body of evidence of post-2009 Greek negotiations with the Kakistos of the Troika that led to the ”Memorandum”.

There is a perfectly feasible solution to the otherwise potentially catastrophic losses involved in the confrontation between Greece and the Troika: lifting the €15bn ceiling on short-term debt in exchange for Greece renouncing the aid otherwise payable under the Memorandum.  Paradoxically, Angela Merkel is standing firm and and wisely stopping Europe from joining the USA and its jejeune warmongering President Barak Obama in arming Ukraine and fighting Vladimir Putin.  Let’s hope that she might come to her senses also in her dangerous confrontation with Greece. 

On Thursday 13 February it was announced that fiscal revenue for the month of January was €1bn lower than forecasts (a shortfall of 23%). The ECB extended another EUR5bn in emergency loans to banks in Greece after fears that a spate of bank withdrawals could dry up funding. In fact according to JP Morgan withdrawals from bank deposits since the beginning of 2015 amounted to €21bn.  But ELA is subject to fortnightly verification and is not a permanent solution.  On Friday 14 it was announced that in the fourth quarter of 2014 the Greek economy had contracted slightly, reversing the trend after nine months growth.

The Greek government claims that it does not need any fresh cash: “We do not want new loans, we need time, not money to implement reforms” – the Greek premier said in an interview to the German weekly Stern.  But a spokesman for the Commission commented: “We fear that the available liquidity is shrinking faster than anticipated”.

Monday 16 February was supposed to be the day of reckoning. But the Brussels meeting of Eurozone Ministers of Finance with Tsipras and Varoufakis ended with a bitter row, with general recriminations and yet another postponement of the final decision until no later than Wednesday next.  The Union offered Greece only the extension of the pre-existing agreement, at the same conditions; the Greeks rejected the proposal as “absurd and unacceptable”

Time is running short, for some countries, like Germany, the Netherlands, Finland and Estonia, need parliamentary approval not only for a new Memorandum but also for an extension of the last one.

One might think that the difference between the positions of the two antagonists is minimal and purely formal. After all, what big difference there might possibly be between the extension of a pre-existing agreement subject to consensual renegotiation within six months, and a slightly different stipulation also subject to consensual renegotiation within the same term?

The difference however is immense.  The extension of the current agreement would involve the acceptance not only of the general principle of austerity but also of new privatizations of public assets at derisory prices, and the reversal of policy measures already taken by the Tsipras government, such as the reinstatement of public employees especially if unfairly dismissed, the adoption of a higher minimum wage and higher pensions.  It would be a capitulation on the part of the Greek government, involving the rejection of the main principles of their electoral campaign and popular mandate.  And for the kakistos European leaders it is a serious question of asserting who is really Master in Europe.

We could say that the Troika, like Shylock The Merchant of Venice, is demanding of Greece its pound of flesh in payment of its debt, whereas Greece is willing to pay a pound of its flesh only on condition that it does not include any of its blood.  This Shakespearean drama is being replicated next Wednesday, with an open ending. 

Greeks and eurozone agree bailout extension

“Greece and its eurozone bailout lenders agreed an 11th-hour deal to extend the country’s €172bn rescue programme for four months, avoiding bankruptcy for Athens but setting up another potential stand-off in June when a €3.5bn debt payment comes due”. Financial Times, 20 February 2015, 8.18pm

Hip Hip Hip! Hooray!

Thursday, February 5, 2015

Moderate optimism

The month of January 2015 gave us several, interlocked reasons for moderate optimism about the prospects for economic recovery in the Eurozone and in Italy.

First, the further fall in oil prices, strengthening the trend already present from last summer. From mid-June 2014 to the end of January 2015 the price of crude oil fell by as much as 60 percent, reducing the energy costs of Eurozone producers in spite of the parallel but much lower depreciation of the euro against the dollar (on which more below). Quantitative estimates of the effect of this cost reduction on the rate of GDP growth are uncertain and vary around 0.5% -0.8%, but undoubtedly the positive effect is present and is not negligible.

The second reason for moderate optimism is the ECB decision on 22 January to implement Quantitative Easing, albeit with the disapproval of the Bundesbank president Jens Weidmann and a minority of other representatives of the Nordic  member states of the Eurorozone: € 60 billion per month for 19 months, from March 2015 to September 2016, and if necessary even further, until the Eurozone inflation target "below but close to 2 percent" is reached.  This amount however includes other interventions already decided previously, so that the additional amount really is not €1,140bn but only about €900bn, and the surprise effect (important for example in the Swiss frank large appreciation of 15 January) had been diluted by months, indeed years, of announcements, discussions and debates. However the size of the intervention was still greater than earlier expectations, of the order of €500bn, and therefore there still was some element of surprise. The provision that National Central Banks should take on 80% of the risk of default on 80% of their country’s bonds purchased by the ECB is an important limitation of the Monetary Union but an acceptable price for this massive intervention.

Third, the depreciation of the euro down to a rate of $ 1.11, then stabilized at $1.13 (below the rate of $ 1.17 at which the euro was first introduced and a far cry from its peak of $1.47), for several reasons: ECB Quantitative Easing; the expectation of the Fed raising interest rates, repeatedly announced and now postponed probably to next June; expectations - rightly or wrongly - of the worsening of the Greek crisis and even a possible exit of Greece from the Eurozone (Grexit).  Such devaluation should have a significant impact on the competitiveness of all member countries and therefore their exports and growth, improving the relative position of those who like Italy have seen labour productivity stagnate or even decline over the last decade. Predicting the quantitative impact of euro devaluation on the rate of GDP growth is difficult and risky, but this effect could have an order of magnitude of 0.8-1%.

Fourth, the resounding victory of Alexis Tsipras and his party Syriza in the Greek elections of 25 January, which has called into question the austerity policy adopted by European institutions under the hegemonic influence of Germany as the only strategy response to the Great Recession of 2007, along with so-called "structural reforms".  These last are a euphemism for the dismantling of the welfare state, privatization of under-valued public assets and the cancellation of decades of achievements of the labour movement.

The first moves of the new Greek government were reassuring: Greece has no intention to leave the euro (a choice supported by 60% of the Greek population), nor to press for further cancellation of public debt, nor to request additional aid.  At the end of February Greece expected to receive €2 bn aid from the European Union and €5 bn from the IMF, conditionally on reform implementation.  Now the Greek government requests only €1.9bn from the ECB as reimbursement of the additional interest earned by the Bank on the Greek bonds in its portfolio. As Finance Minister Yannis Varoufakis rightly said, "A Monetary Union responding to a serious financial crisis by granting more loans to deficit countries on condition that they shrink their national income is not sustainable”.  Varoufakis proposes a " menu of swaps " of Greek bonds with new bonds of two types: one indexed to nominal economic growth, whose service therefore would be conditional on the resumption of growth, and the other a "perpetual bond" that would replace the Greek government bonds in the hands of the European Central Bank. The Greek budget would remain in primary surplus, but only on a more modest scale of 1-1.5%, thanks to the decision to pursue big tax evaders.  In this way Greece could effectively honour existing commitments, while creating a fiscal space sufficient to finance the reconstruction of the welfare state, to increase the minimum wage and pensions, as well as to grant the benefits in kind or subsidies (for example in electricity and transport) promised and partly already introduced by the new government.  Otherwise, Varoufakis says, "Greece will become deformed rather than reformed." Varoufakis' plan was received favorably at its presentation to the City of London, and provides an excellent and credible basis for discussions and negotiations with the European institutions.

Why, then, the "moderate" nature of optimism rooted in so many positive developments?

First, the fall in the oil price is the result of lower demand in the recession, the Saudi decision not to cut production to match lower demand, and the significant growth of the US production obtained from bituminous shale.  But the price reduction undermines its causes: not only does it stop investment in the development of alternative energy sources, but at the current price of around $ 50 per barrel it makes most of the production to be sold at a loss and therefore not sustainable. On 30 January the announcement of the closure of one hundred high-cost wells in the United States raised the price of oil by more than $ 8 in a single day although production had continued to rise. And if the low oil price were maintained there would be - and are already experiencing them - negative effects on the demand for imports by oil-producers and therefore on income and employment in the non-oil-exporting countries.

Second, in the opinion of many observers and businessmen, monetary easing by the ECB was "too little too late", in comparison with the $ 4.5 trillion mobilized by the Fed already commenced in 2008, and further, in view of the greater use by US companies of credit and securities to finance investments, compared to the larger component of profit reinvestment by companies in Europe and especially in Italy.  But there is no doubt that monetary easing - in addition to its impact already mentioned on euro devaluation - will facilitate the recapitalization of banks that have an excess of government bonds in their portfolios.

Third, the devaluation of the euro could unleash a war between currency areas with rounds of competitive devaluations, and the associated de-stabilization of financial markets.

Finally, European and German economic authorities have immediately taken rigid and hostile positions adverse to any form of restructuring of Greek debt.

Matteo Renzi has been likened to Alexis Tsipras but unfortunately we are not so lucky, all they have in common is their young age; Italy also has €40bn credits towards Greece, and our excellent Pier Carlo Padoan has neither the imagination nor the tenacity of Yanis Varoufakis.  If anything Alexis Tsipras has something more in common with our new President Sergio Mattarella: immediately after their election both went to visit a monument to the victims of Nazi atrocities, a gesture that cannot have been greeted with enthusiasm by Angela Merkel.  The French are watching from the sidelines; in order to widen the breach in European austerity opened by Syriza we will have to wait for a parallel Podemos victory in the next elections in Spain.

The danger is that the game of chicken played by Germans and Greeks might lead to a lethal crash, perhaps in the form of an "accidental Grexit" (an expression coined by Wolfgang Munchau): the expiry of any deadline before a new agreement is reached, the loss of Greek access not only to Quantitative Easing but also to emergency liquidity provided by the ECB, capital flight and a panic run on the banks by the public seeking to withdraw cash from their accounts.  At that point, a severe liquidity crisis could force Greece to issue some form of national currency, perhaps initially notes issued by the Treasury circulating in parallel with euro cash now in short supply: from there to a formal exit is only a small step. Cyprus came within a breath of this predicament.

Marcello De Cecco noted that while a Greek exit from the Eurozone could very well happen in the way I described, it would be the result of a deliberate policy of not wanting to help Greece, instead of a series of casual fatalities, when there is will there is always a way, and if deadlines are not met this means that Greek exit is not so much feared but wanted.

In any case, a possible Greek exit from the Eurozone – whether accidental or deliberate - cannot be ruled out completely, and would be catastrophic for the entire Eurozone, with contagion spreading first to Portugal, then to the other southern countries including Spain and Italy, eventually turning against Germany itself and the other Nordic countries. That is enough to temper anybody’s optimism.


On 4 February the ECB Governing Board decided that Greek government debt will no longer be accepted as collateral starting next week.  This appears to be like undue ECB interference in Greek negotiations with the EU, but 1) it is well within the Bank’s discretionary powers; 2) it is likely to be part of the price paid by Mario Draghi for the large size of his Quantitative Easing and 3) it is also a way of raising the stakes which might, in the end, favour Greece by raising the cost of a Greek exit for Germany and the hawks as well as for Greece.  After all, Yanis Varoufakis is an accomplished game theorist and should know what he is doing (see Varoufakis Y., Rational Conflict. Oxford, Blackwell, 1991; Varoufakis Y. and S. Hargreaves-Heap, Game Theory: A critical text. London and New York, Routledge, 2004).  At least, this is what we might still hope.

For assessments supporting this last point see the excellent post by Frances Coppola, What on Earth is the ECB up to? and the other posts listed at the end of it.