Grillo's Zombies

"You are a Dead Man talking!" - said Beppe Grillo to Pierluigi Bersani who had asked for M5S support for a legislative platform that included some of Grillo's pet initiatives. Admittedly Bersani is a lugubrious, funereal figure, totally un-charismatic, indeed "de-tumescing", to use a term coined by a former Cambridge colleague to damn Tony Giddens, then a candidate to College high office . After all, Bersani now demands respect, after calling Grillo "a Web fascist", which is worse and unwarranted. The 5 Star Movement is marked for its non-fascist, non racialist, non right-on rightist stance. And Bersani has been utterly inconsistent: he criticised Mario Monti, but aided and abetted his disastrous recessionary policies for fourteen months. A Bersani-led Democratic Party was only stopped from forming a new government with him by Monti's electoral debacle.

The problem is that Beppe Grillo is treating his brand new, clean and youthful 54 Senators and 109 "Onorevoli deputati" (or rather "citizens", as he wants them to be called, rejecting traditional titles), precisely like Zombies. "We will not give a vote of confidence to any government, let alone a PD-PDL government: we will vote on a law by law basis, according to our programme". Which is plainly silly: the M5S 163 parlamentarians will not get an opportunity to vote law by law unless there is a government in power that commands a confidence vote in both houses. The 163 citizen are turned by Grillo into Dead Men Who Do NOT talk.

 

Frozen, hibernated, silenced, ready to be resurrected only to leave their respective Houses when Parliament is soon going to be dissolved. A rather inglorious end to such an extraordinary, auspicious, revolutionary success. And when new elections are called, the protest voters that concentrated on Beppe Grillo on 24-25 February, now frustrated by the complete waste of their votes, will turn back to traditional parties, most probably PDL that will also drain some of Monti's support - unless the magistrates send Berlusconi to jail.  

Grillo's suggestion, of forming a government on his own, with the confidence vote support of PD and PDL, is as much of a non-starter as Bersani's offer to Grillo of a PD government with M5S support on specific policies plucked from their programme. What is needed is effective power sharing, with a precise division of Ministries, not the unaccountable, unspecified support for policies presumed to be jointly desired (how many? to what extent? accompanied by what else?). Grillo seems to favour a PD-PDL "Governissimo" which would not last long and cause the PD to lose half of their electorate (as happened to the Left in Greece and in Spain). D'Alema would pay this high price, for it is the only government which would give him office. Napolitano and Veltroni would, out of concern for Italy's stability and place in Europe, but Bersani and his cronies are unlikely to bite. 

Nevertheless, there are three tenuous prospects for a way out of this unprecedented constitutional crisis.

First, last Friday Dario Fo - Grillo's stated candidate as Napolitano's successor, though unavailable - said that there is a possibility of a deal with the PD under the leadership of someone other than Bersani (Matteo Renzi? Fabrizio Barca? Dario Fo did not say). Earlier on the same day Massimo D'Alema had already said, on television, that if Grillo sets this condition it should be immediately accepted.

 

Second, the 163 parlamentarians treated like Zombies by Grillo are nothing of the kind. Leading personalities are emerging within their group, and they are a diverse and articulate lot. They do not have to revolt, they can simply ignore the attempts to make them do as they are told. Give them a taste of Roman parliamentary life, and they will prefer to stay on rather than to return to the provinces.

Finally, it might actually dawn on Beppe Grillo that rejecting the opportunity to change, at last, some of the fundamental ills of Italian political life might actually jeopardise his current command of the protest vote. He simply will not get a second chance.

Irreversible Euro

“The Euro is Irreversible” - said Mario Draghi at least twice in the last few weeks, both in his 26 July Speech in London, and at the 2 August Press Conference in Frankfurt following the ECB Governing Body meeting. On the second occasion, the ECB President was specifically asked by a journalist: “What is the real meaning of the statement that the euro is irreversible?”

Draghi explained: “There is no going back to the Lira or the Drachma or to any other currency. It is pointless to bet against the euro. It is pointless to go short on the euro. That was the message. It is pointless because the euro will stay and it is irreversible.”

On Thursday 6 September Mario Draghi delivered on his promise. Outright Monetary Transactions (OMTs) are the new instrument being added to ECB powers, without any need for a change in the Treaties, making the ECB all that much closer to the Fed precisely because of its own independence in monetary policy and the requirements of effective mechanisms of monetary transmission.

These transactions involve “unlimited” purchases of government bonds (i.e. without pre-set limits in quantities and time), mostly within the one-to-three-years-residual-maturity range (in place of the earlier programme of bond purchases, now terminated), immediately sterilised, without asserting ECB seniority. And (in cauda venenum) OMTs are conditional on a specific request by a country for EFMS/EMS assistance and the strict monitoring of agreed fiscal policies and structural reforms associated with the programme, under penalty of cessation in case of non compliance.

The spread of Italian and Spanish bonds quickly dropped by over 100 points; the euro strengthened significantly; stock exchanges surged. But by Monday 10 September a new hurdle was placed in Draghi’s path, in the form of an emergency case brought by German MP Peter Gauweiler (and 37,000 other signatories) to the German Constitutional Court to treat the OMTs as a significant change to the EMS already under consideration by the Karlsruhe Court, whose ruling was due the following day, with a view to obtaining a postponement. But the Court promptly rejected the new case, and on 12 September it swept away that final hurdle, as widely and confidently expected, though reserving to a later date the assessment of the implications of OMTs. Spreads, euro exchange rate and stock exchanges resumed their initial response.

"Super Mario to the Rescue" read a New York Times column praising Draghi for his latest plan on Sunday 9 September (and on Monday 10 in The International Herald Tribune), comparing Draghi to “a star soccer player able to dodge through opposition and turmoil to achieve his goals.”


"I prefer to see him as Andrea Pirlo, the Italian midfielder with 360-degree vision, never hurried, always assured, master of the short and the long pass, bane of Germany, a fantasist who hits the target with precision," reads the column.


In particular the columnist Roger Cohen praised Draghi's ability to overcome German opposition to seeing his bond-buying plan come to life, describing how "Super Mario" is able to undo Germany "...with a series of feints that have left hardline Bundesbank bruisers looking as nimble and effective as beached whales"... "Little by little, Mario Draghi, the Italian president of the European Central Bank, has taken an institution whose overriding mission was to keep inflation in check...and turned it into a lender of last resort prepared to throw everything into buying the distressed euro-zone sovereign debt of countries like Spain and Italy and so preserve the euro".

After the European Summit of 28-29 July Mario Monti had been likened to Mario Balotelli, another footballer who also had contributed to the Italian team’s victory over Germany a few days earlier. But Monti’s would have remained a Pyrrhic victory without the subsequent backing of Draghi’s unerring diplomacy and inventiveness, that produced the “Big Bazooka”.

The OMTs have been widely criticised, not only by the usual adversaries of the euro (for instance in the British press, that immediately disparagingly dubbed them On My Tab), but also by respectable, pernickety commentators nitpicking on some aspect or other of Draghi’s scheme.

In his FT column, Martin Wolf argues that a conditional programme of bond purchases is not credible “because the ECB is unlikely to cause a financial crisis the moment a country fails to meet conditions”, by cessation or, worse, reversal of OMTs. But a bazooka can always change its target, trifling with the ECB on conditionality would - of course - be very dangerous; it would be more worrying if there were no penalties, or only lenient ones. Wolf is right, of course, in recommending a more aggressive monetary policy promoting more growth and jobs in the periphery. Since Germany is unlikely to accept this, he concludes that the ECB has only won some time. Even so, for once time comes cheap, and the progress is undeniable.

It has also been alleged that concentration on the short-end of maturities would have no effect on longer and especially 10-year bonds on which the spread over Bunds is measured. Worse than that, investors would sell 10-year maturities to buy those under three years, thus worsening the spread. But the proof of the pudding is in the eating: 100 points fall in the spread as a mere announcement effect is no joke. And the fall in the yield on shorter maturities (capable of rising above longer to signal an imminent danger of default) is usually followed by a yield fall in longer maturities.

We are now confronted with a dilemma, whether to starve because of the austerity imposed by a programme, or to starve because of the high spread (argues Marcello de Cecco, Repubblica A&F of 10 September). But a 100 points fall in the spread, other things remaining equal, frees non negligible resources (the best part of €20bn in Italy’s case) that can be used to stimulate the economy and promote growth.

However, one remaining ambiguity of OMTs is whether the up-to-three-years-bonds would or would not be renewed at maturity. If they were not, this would set a limit, possibly a very serious limit, to the ECB control over monetary transmission mechanisms. But if they were renewed, Mario Draghi could no longer argue that OMTs do not represent debt monetisation. And if they were not, the possibility would return of the spread rising to non-sustainable levels when a country re-attempts market access, or even of failure to access financial markets at any price.

In this case the likely ensuing default would inflict a loss on the ECB, falling fairly and squarely on all of its shareholders (including non EMU members) proportionately to their ECB shares. This could be regarded as a form of genuine mutualisation of the failing government’s debt, without the burden unfairly falling on the richer EMU members as it would be the case with the ill-starred, ill-conceived standard Eurobonds, understood as bonds covered by joint and several responsibility of EMU member states. Importantly the ECB loss in case of default could be covered by the present value of the seigniorage that the ECB possesses in the hidden depths of its balance sheet, all €3.5 trillions in the famous, unchallenged estimate by Willem Buiter (2011).

The ECB Firepower

The idea of multiplying the EFSF/ESM firepower by using purchased government bonds as collateral to borrow from the ECB thus proceeding to buy more bonds, and so on, was firmly rejected by Mario Draghi at the press conference of 2 August after the ECB Governing Body meeting.

Draghi said that he was “a little surprised by the amount of attention that [the possibility of an EMS banking licence had] received in recent press coverage, and in public opinion”… “After all, I have said at least twice that the present design of the ESM does not allow this. It is not up to us to issue a banking licence – this is a matter for the governments. What is up to us to decide is whether the ESM – evenwith a banking licence – can actually be a suitable counterparty that is eligible for central bank financing. And I have said at least twice – at a press conference, and on other occasions – that the current design of the ESM does not allow it to be recognised as a suitable counterparty”  (emphasis added).

Moreover, Draghi referred to “a legal opinion of the ECB on this, which was issued way back [on 17] March 2011”. The Press Conference report actually gave the link to that legal opinion.

Specifically, the ECB legal opinion argues that “Article 123 TFEU would not allow the ESM to become a counterparty of the Eurosystem under Article 18 of the Statute of the ESCB [European System of  Central Banks]. On this latter element, the ECB recalls that the monetary financing prohibition in Article 123 TFEU … is one of the basic pillars of the legal architecture of EMU both for reasons of  fiscal discipline of the Member States and in order to preserve the integrity of the single monetary policy as well as the independence  of the ECB and the Eurosystem”.

Article 123 of the Consolidated Treaty on the Functioning of theEuropean Union of 2009 (ex-Article 101 of the earlier consolidated version of 2006) stipulates that:

“1. Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.”

Although: “2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the European Central Bank as private credit institutions.”

The legal merits of the case rest exclusively on the ECB's own interpretation of its own rules, not on a Higher Court or on an “authentic” interpretation. Nevertheless, clearly we must take no for an answer: regardless of the legal position there is no willingness in the ECB Governing Body to transform the ESM into the Lender of Last Resort (to governments) arm of the ECB. Draghi’s rejection of this weapon is compounded by similar declarations by Merkel, Schauble, CDU politicians, the Dutch and the Finns.

What about the ECB acting as an EFSF/ESM agent, within the relatively small EFSF residual budget (about €150bn) and/or - subject to the approval of the German Constitutional Court expected on 12 September - the limited but more substantial ESM (€500bn), with a view to reduce the spread on the bonds of “virtuous” governments?
Here there are more encouraging developments:

1)      On 20 August the Bundesbank Monthly Report confirmed its President’s view that “bond purchases are problematic and lead to risks for stability”. At the same time Jorg Asmussen, the other German representative on the ECB Governing Body, actively and loudly supported “unlimited ECB [government bonds] purchases, for the ECB wants to take out any doubts among market participants about the future of the euro” (Eurointelligence.com, 21 August);

2)      The details on the use of the EFSF/EFM as an anti-spread shield are still under discussion, but the proposal has already been endorsed by Angela Merkel repeatedly over the last month, while the (bad) idea that threshold spread levels would automatically trigger bond purchases has been denied by the ECB;

3)     The credibility of Jens Weidman’s stance has been pre-emptively eroded by the revelation that, back in 1975, the Bundesbank had actually broken its own policy principles and possibly its own statutes by purchasing German government bonds to the equivalent of 1% of its own GDP at the time. (see FT, 7 August, and the excellent piece by Evelyn Harriman of BNP Paribas.

True, the German Central Bank buying German bonds is not the same as the ECB buying Italian and Spanish bonds, but if the ECB bought government bonds of all the EMU member countries, in the same proportions in which they hold ECB shares, re-distribution should not be an issue. As I wrote in my previous post in answer to a comment by a reader:

"Suppose the ECB bought a balanced packet of 100bn of EMU government bonds in the same proportions in which EMU countries hold shares."

"Roughly 30% of ECB shares are held by 10 EU members who are not EMU members (with the UK at 14.5%), the rest is divided among EMU members: Germany 18.9%, France 14.2%, Italy 12.5%, …, Spain 8.3%, Greece 2%, Portugal 1.75%, , Ireland 1.11%, … Malta 0.06%. Therefore the bond packet bought by the ECB would contain 100/70 or roughly 1.43 times each EMU member’s share in ECB capital, eg Spain €11.869 bn."

"Suppose that subsequently Spain defaults and its bonds lose 50% of their value. Germany [as ECB shareholder] loses 0.189*0.5*11.869bn euro, or €1.1216205 bn. An equivalent amount out of the €18.9bn outstanding German debt purchased by the ECB could be cancelled, and so on for all  corresponding losses of other EMU members."

"Non-EMU-member Shareholders would have to be compensated by the ECB for 30% of the loss of value of Spanish bonds, i.e. would have to be paid dividends of 0.30*11.869 bn euro; all ECB outlays to come from ECB profits (including seigniorage if need be, in which case non-EMU members might not be entitled to compensation …)."

"In conclusion, EMU non-members would be compensated for their participation in the cost of Spain’s default with dividends, while EMU members would be compensated by the withdrawal of a corresponding value of their bonds (without prejudice for the present entitlement of non-EMU members to benefit or not to benefit from euro seigniorage)."

So, there is no reason for peripheral (i.e. high spread) eurozone members to panic - yet. Where there is a will there is a way. And financial markets believe in the “Draghi rally”.

The ECB weaponry

The current euro crisis was named by Nouriel Roubini and several bloggers as “a slow motion train wreck”. In the last twelve months the trains have continued their collision course and actually have accelerated their speed, but the crash is not a foregone conclusion. There are still courses of action - though admittedly problematic - that might avoid the collision.

Germans are opposing the so-called “mutualisation of European government debt”, through the issue of bonds for which each and all EMU member states would be responsible jointly and severally. Quite reasonably, we argued in our last post, for inevitably they and the few AAA-rated members would end up paying for all.

Germans are also opposing an increase in the funds of the European Stabilisation Mechanism, much less reasonably in view of German exposure to the euro crisis. Indeed, the operation of the ESM as an anti-spread shield, which seemed to have been agreed at the Economic Council of 28-29 June and would gain a bit of time to look for other solutions, is being delayed when it is most urgently needed, by the temporizing tactics adopted by the German Constitutional Court. 

Also, Germans are not even contemplating the sheer possibility of reflating the German economy, most unreasonably because this not only would cost them nothing but would benefit them first and then the whole eurozone by reducing the German trade surplus and facilitating overall re-balancing of the entire eurozone. Paul Krugman had suggested that Germany should pay all of its citizen a 1000 euro voucher to spend in Southern Europe - an excellent proposal which naturally fell on deaf ears.

The current euro crisis has reached a new depth, with bankrupt regions and metropolitan cities in Spain (Valencia, Mursia, Cataluna) and in Italy (Alessandria; allegedly Sicily; with another 10 cities feared to be at risk of default given high debt and bad investment in derivatives, see La Stampa, 23 July); record spreads; rating downgrading and negative outlooks leaving only Finland at a stable AAA grade; a tough line on Greece taken by the troika (EU, ECB, IMF); and the inexorable recession induced by excessively fast fiscal consolidation.

In these circumstances, the European Central Bank is the only institution left that has the means to intervene with any effectiveness. Granted, the ECB is not allowed to act as Lender of Last Resort to governments, because of the No Bail-Out clause in the Treaties. It can acquire government bonds of countries under speculative attacks on a limited scale under its Securities Markets Programme (SMP), that started on 10 May 2010, which however has already come under criticism. And in December and February the ECB has injected a total of €1 trillion of liquidity into the European banking system through its Long Term Refinancing Operations (LTRO, also re-labelled as Lourdes Treatment and Resuscitation Option, Eurointelligence.com 28/04/2012). This could be repeated, but not indefinitely, and in any case it is a rather blunt instrument, for only a fraction of the injected liquidity finds its way to support government bonds.

Nevertheless there are still two awesome, unused arrows in the ECB’s quiver.

One of the ECB weapons is the possibility of leveraging the European Stability Mechanism (and/or the European Financial Stability Facility for its residual life) via a banking licence. The government bonds purchased by this/these institution(s) would be used as collateral to borrow from the ECB additional funds to finance further purchases, and so on.

Last December the European Union President Herman Van Rompuy himself suggested that the ESM would be more effective if it becomes a "credit institution." The Germans immediately (WSJ on line, 8/12/2011) and repeatedly afterwards rejected such an idea, with reference to both ESM and EFSF. But it turns out that this is a matter of ECB policy, not subject to a German veto: the ESCB [European System of Central Banks] and ECB Statutes,  Art. 18 on Open Market and Credit Operations, stipulates that:

“18.1 In order to achieve the objectives of the ESCB and to carry out its tasks, the ECB and the national central banks may:

— operate in the financial markets by buying and selling outright (spot and forward) or under repurchase agreement and by lending or borrowing claims and marketable instruments, whether in Community or in non-Community currencies, as well as precious metals;

— conduct credit operations with credit institutions and other market participants, with lending being based on adequate collateral [emphasis added].” And

“18.2. The ECB shall establish general principles for open market and credit operations carried out by itself or the national central banks, including for the announcement of conditions under which they stand ready to enter into such transactions.”

The EFSF/ESM are undoubtedly “other market participants”, and Italian and Spanish bonds are still regarded by the ECB as “adequate collateral”. And it is the ECB itself to establish “general principles” and announce the “conditions” for such transactions. (I am grateful to Carlo Clericetti for pointing this out in a comment to my earlier post and in his article in Repubblica - Affari e Finanza). No German veto can be exercised, Mario Draghi can do it if he really wants to do it.

The second arrow in the ECB’s quiver is the conduct of a monetary policy like the Federal Reserve Quantitative Easing. This has been recommended by many commentators in the past, but Eurointelligence.com of 24/7/2012 reports an article by Federico Fubini in Il Corriere della Sera of the same date.  “According to Fubini, a European QE is not against the EU Treaties, if the ECB would buy governments bonds from every Eurozone countries [emphasis added]. … Bank of America-Merrill Lynch also said yesterday that the ECB should start a QE as soon as possible. "It’s a way to change that situation, to break the European stalemate," analysts said.”

The odd thing is that both the original article by Fubini, and the earlier statement by BoA-ML, do recommend Quantitative Easing but make no mention of the alleged compliance with EU Treaties “if the ECB would buy governments bonds from every Eurozone countries”. Maybe this was an after-thought by the Eurointelligence.com Director Wolfgang Munchau, or by another collaborator. In any case, the qualification is brilliant. If the ECB purchases a balanced package of government bonds in the same proportions in which countries hold shares in the ECB, there is no mismatch between the two, and nobody - including the Germans - has any reason to complain. Presumably a satisfactory way of compensating gains (including the capital thus raised by the richer countries) with losses (inflicted by the poorer ones in case of default) could always be settled beforehand.

It is true that the ECB has a capital of only €6bn in the process of doubling over 5 years, but - even setting aside Paul de Grauwe’s powerful argument that a Central Bank does not need equity capital at all - the ECB has off-balance-sheet resources of the order of at least €3.5 trillion being the estimated present value of its seigniorage (see Buiter, 2011).

The existence of such formidable weapons in the ECB armoury does not indicate whether and when they will be used. But the very fact that they might ought to set a limit to the downwards spiral of credit ratings and the escalation of spreads. 

Today Mario Draghi, in London at the Global Investment Conference, declared:  “We are ready to do everything that is needed for the euro. And, believe me, it will be sufficient”… "It is impossible to immagine that a country might exit the Eurozone”, … and “the control over spreads is part of the BCE mandate when they impede monetary transmission mechanisms”. He was not bluffing, and financial markets believed him, bringing Italy’s spread down by over 50 points to below 470 points, and the euro exchange rate up by over 1.5 cents.

POSTSCRIPT

Mario Draghi's speech at the Global Investment Conference, London, 26 July 2012. 

The Monti-Merkel Double Act

A simpleton, or a con-man, might attempt to persuade the richer members of a club, like the Germans the Dutch and the Finns in the Euro-zone, to accept the mutualisation of European governments debt through the large scale issue of Eurobonds with joint and several responsibility of all members. For inevitably those richer members would end up paying for all. No other kind of Eurobonds would solve the euro crisis, whether project bonds or mini-Euro-bills on a small scale, or with pro-rata responsibility, or Eurobonds issued by any European agency other than the European Central Bank (that is statutorily prevented from issuing them) and which in view of the minute size of the EU budget would be necessarily treated as junk bonds.

A simpleton or a con-man, or perhaps a wrecker, someone knowingly making unacceptable suggestions thus providing an alibi for the refusal of more plausible, useful suggestions, such as raising the size of the European Stabilisation Mechanism, or re-balancing and reflating the German economy.

Why, then, have Mario Monti and Francois Hollande so insistently and persistently, indeed obsessively pressed for the issue of such Eurobonds, ignoring loud and clear, repeated refusals? That Hollande should do it should not surprise: he is a well-meaning socialist, and an ill-advised beginner with no previous experience in government. But why Monti, the shrewd economist and experienced former Eurocrat?

There is a rational explanation. By knowingly making an unacceptable demand, Mario Monti gave the German Chancellor a wonderful opportunity to take a spectacular stance: “Not in my lifetime!”. It is no accident that according to a poll conducted after the EU summit her popularity rating rose to the highest level recorded in the last three years.  The poll also confirmed strong support for her stance in the euro-zone debt crisis, showing that 66% of Germans were satisfied with her performance, an increase of eight percentage points from a month before and the highest reading since 2009 when she won a second term. “Some 58% of Germans believe Merkel's stance in the euro crisis is correct and decisive, although 85% of those polled also expect the crisis to get worse.” (Eurointelligence.com, 7 July). 

At the same time, Angela Merkel obliged by making, in return, moderate, ambiguous and double-edged concessions, that involved support for the re-capitalisation of Spanish banks, the deployment of ESM funds to provide Monti’s “anti-spread shield” through the purchase of virtuous governments’ bonds (and not just to finance imbalances by rogue governments under troika’s supervision), as well as the Europe-wide monitoring of major banks with ECB involvement, a step construed as an anticipation of a banking Union. Francois Hollande got a modest investment injection of 120-130 bn euro, of which only 10 bn could be regarded as additional to already available resources. A win-win solution for all, then? Certainly enough for Mario Monti to return home to a hero’s welcome, portrayed on Facebook like the footballer Balotelli who on the same day scored the crucial winning goals against the German team. The threat of the Monti government crisis subsided. Italy’s 10 year bonds’ spread over German Bunds fell significantly though temporarily.

It is immaterial whether Merkel and Monti staged a concerted Double Act, or Merkel reacted predictably to Monti’s Eurobonds pressing, with Monti then demanding a modest reasonable concession which Merkel made more comfortably than otherwise might have been the case.

That Merkel’s concessions were moderate, ambiguous and double-edged it became clear very soon; indeed it took financial markets only 48 hours to have second thoughts about the deal. Partly, the devil is in the details, and the concessions were downsized when the details were specified.

The ESM was expected to inject equity directly into banks, breaking the link between banks and government debt, whereas it was clarified by officials that a national government guarantee would be retained; and the Karlsruhe Constitutional Court is taking its time to study the ESM and Fiscal Pact before taking a decision; and the ESM involvement will have to wait for new Europe-wide monitoring of banks to be established to the ECB satisfaction, probably not before 2013.

The size of the ESM remains what it was before, 500 bn euro of which 275 bn are already earmarked and committed to the support of Greece, Portugal, Ireland and Spain. The maximum liability that might be incurred by the Germans as a result of ESM operations therefore remains unchanged, in spite of the broadening of ESM responsibilities towards banks and holding down spreads of “virtuous” countries. We do not know yet what the spread ceiling will be; the ESM intervention will not be automatic but will require a specific request by a country, which might be deterred from making it by the stigma that will necessarily be attached to such a request. The ESM will buy government bonds through the ECB as its agent, thus to a Martian the process will be initially indistinguishable from the ECB acting as Lender of Last Resort to Governments; but any earthly investor will be aware that the ECB intervention will be limited at the very outset to the residual 225 bn funds uncommitted at present and, as pointed out cogently by Paul de Grauwe, will start selling his bonds of the governments involved long before those modest funds come to an end, thus triggering off the rise instead of the fall of the spread.

“Monti obtained the Anti-Spread Shield”. “Yes, and he was given a brand new Damocles’ sword in return” (a cartoon in Il Fatto Quotidiano of 10 July).  The so-called Anti-Spread Shield provides a mouthful of oxygen ("una boccata d’ossigeno", commented an Italian former Premier, or rather we should call it "una Bocconi d’ossigeno").  It is not a solution, but a way of “buying time for a solution without actually providing one” (Paul Collier, 10/07/2012). At a cost, of course: the probability of a crisis is reduced, at the cost of making the crisis all that much more serious if and when it occurs - not necessarily a superior trade-off.

At a Press Conference of 9 July in Rome, Monti was asked whether he regarded the current and unchanged size of the ESM as adequate. He answered that interventions could be effective even on a small scale, but that he “might be wrong”. So he might, just think  how the UK and Italy were kicked out of the European Monetary System by a couple of Hedge Funds in 1993.

Clearly the time has come now to forget and bury Eurobonds, even in the long term. To recognise that so-called structural reforms will have no positive effect on growth for at least the next five years; and that austerity has already gone too far and more austerity can only yield more recession, worsening debt/GDP ratios and spreads. That the ESM size needs increasing, the sooner the better, and/or be granted a banking licence so as to enable to ECB to legitimately lend to it and raise the scale of its operations. And that the time has come for Germany to end its rabid obsession with inflation and austerity, and raise wages and public and private expenditure reducing its external imbalance (surplus) and turning on its growth wheels.   

After the Global Crisis

Conjectures about the post-crisis future of the global economy are path-dependent, i.e. they necessarily depend on the course of events envisaged for getting out of the crisis.

The current global crisis was the consequence of financial de-regulation and the general dominance of hyper-liberal policies in the United States, in the UK and in the global economy. It started around August 2007 as a US banking crisis arising from toxic sub-prime assets in banks’ balance sheets; it turned into a credit crisis that depressed enterprise investment; it spread globally through the decline of foreign trade and the slowdown and often reversal of capital flows, including Foreign Direct Investment; and then - with the large scale cost of rescuing financial institutions by government budgets, the rising cost of labour unemployment and the decline in governments revenue - it grew into a fiscal crisis and, ultimately, a widespread crisis of sovereign debt, particularly in the Euro-zone.

Initially the decline in industrial output, foreign trade volume and stock exchange values replicated the scale and the pattern of the 1929-32 crisis. Soon the impact of the crisis and cross-country contagion were mitigated by simultaneous, internationally co-ordinated, monetary expansion and fiscal stimulus, introduced at the end of 2008 and early 2009. But monetary expansion failed to re-launch economic growth, while concern about fiscal sustainability soon led to a simultaneous, premature exit from fiscal stimulus in most countries. Current prospects - apart from those of BRICS (China, Russia, India, Brasil, South Africa, now accounting for 18% of world GDP and the bulk of its growth) - are of widespread stagnation and double-dip, indeed of a second and even more serious recession.

The macroeconomic policies followed appeared to have a keynesian flavour, stimulating aggregate demand via tax cuts, monetary expansion and low interest rates. But keynesian remedies would have required public investment instead, whereas tax cuts temporarily fuelled private consumption, and the effectiveness of low interest rates - which mostly were not passed on to borrowers and simply involved higher profits for financial intermediaries - was limited by liquidity preference.

The rescue of financial institutions involved a massive transfer of wealth from taxpayers to bank creditors, including depositors and shareholders. This solution was clearly inferior to any of the alternatives, whether support for bank debtors, or partial nationalization of supported financial institutions, or outright loss-taking by imprudent lenders. Income inequality, whose depressive effect on effective demand had been reduced by credit expansion - one of the contributory factors of the crisis - increased further as a result of labour unemployment and continued payment of managerial super-bonuses awarded mostly to those responsible for the financial debacle not by markets but by a semi-feudal process of self-serving decisions by a managerial caste.

The current generalized advocacy of strict fiscal discipline, demanded by international financial institutions and often enshrined in national constitutions as a balanced budget obligation, is particularly anti-keynesian, and is bound to be counter-productive in the middle of a recession.

First, a balanced budget is neither sufficient nor necessary to the sustainability of government debt, because a primary surplus (net of interest payments) may or may not be necessary to debt sustainability - depending on whether the economy grows at a rate slower or faster than the average interest paid on government debt.

Second, the keynesian lesson has been forgotten or ignored, that the balance of government expenditures minus revenues, plus the balance of private investment minus savings, plus the external balance of exports minus imports, must necessarily add up to zero as a matter not of theory but of accounting consistency. Therefore the budget balance cannot be a policy instrument, but only a target that may or may not be achievable depending heavily also on the behavior of national economic agents and of global trade partners (including the elimination or large reduction of Germany’s trade surplus vis-à-vis the rest of Europe, and China’s gigantic trade surplus). Generalized efforts by all governments to balance their budgets simultaneously might actually result in a perverse combination of budgetary (and trade) imbalances as well as a lower level of employment and income worldwide than would be the case without such efforts.

By the same token, generalized efforts to promote employment and growth via higher international competitiveness - whether achieved by external devaluations or by domestic deflation of wages and prices - can also be competitively self-defeating: another clear keynesian lesson is that lower wages can raise employment through higher exports in one country, but cannot resolve unemployment as a world problem. Nor can world unemployment necessarily be reduced by a generalized reduction of employment tenure and other labour welfare provisions, or the replacement of collective bargaining by firm-level bargaining: the only certain effect of such policies, also very popular in anti-crisis policy packages under the pretext of “structural reforms” (e.g. see the European Central Bank’s guidelines to the Italian government in their letter of 5 August 2011) is the deterioration of the quality of work and labour incentives.

Often it is believed that the impelling necessity of environmental improvements, required by the reduction of global warming and of general pollution, and the forthcoming exhaustion of natural resources, will create a new important opportunity for investment and growth. However - apart from the observably controversial nature of global warming - these are all opportunities for public or public-funded investment, desirable in itself (not absolutely but up to some point) but competing with alternative uses of scarce public funds whose expenditure today is supposed to be kept under control in the interests of fiscal sustainability.

The chances of world leaders suddenly learning keynesian lessons, and implementing them with the speed and on a scale adequate to propel the global economy out of stagnation are remote, indeed would amount to a miracle. Even those who would like to do it are prevented by the electoral challenge of populist competitors (as is Barack Obama by his Tea-Party Republican challengers). By comparison the prospect of Wealth Sovereign Funds coming to the rescue of highly indebted governments might seem a more normal occurrence, but this would be the true miracle and is simply not going to happen: it worked in 2008 to the advantage of financial stabilization, but now WSFs have run out of trust.

The fact that the US can always “print” the dollars it owns to pay its creditors does not make the US debt indefinitely sustainable: at some point the resulting dollar inflation will make dollar bonds unpalatable at less than crippling interest rates so high that they would necessarily involve eventual insolvency. Other countries face even stricter debt sustainability conditions, without the same initial room for manoeuvre. Where private wealth largely exceeds the difference between current debt and its sustainable level, it is always possible to apply a once-and-for-all or recurring wealth surcharge to achieve solvency. Italy, for instance, has a public debt of euro 1,900 bn, but in 2008 it had a household wealth of euro 8,600 bn, 45% of which was concentrated in the top 10% of households; but wealth taxation is unpopular and the political will to introduce it is scarce. Privatization of public assets is often considered as a way to reduce sovereign debt, but the potential revenue obtainable from this source is usually overstated with respect to the depressed values realizable during a crisis, when it is infelicitously timed.

An insolvent country, like Greece, has only three alternative options: 1) instant orderly default with significant “hair-cuts” negotiated with creditors; or 2) instant dis-orderly default; or 3) delayed default, whether orderly or dis-orderly, preceded by roll-over of debt with the assistance of international financial organizations (like the IMF, or the European Financial Stability Fund soon to become the European Stability Mechanism, or the European Central Bank with its controversial purchases of government bonds in secondary markets) followed eventually by actual default, as in all schemes of pyramid banking, to which such rollover of uncovered debt has been likened.

The three default options are ranked above in order of increasing cost. However it should be remembered that non-default by insolvent debtors is also very expensive, as witnessed for instance in the large scale fall (of the order of 25%-30% in just one quarter in mid-2011) in the capitalization value of stock exchanges in temporarily solvent Euro-zone countries with uncertain longer-term solvency.

Partly the probability of default, assessed by Rating Agencies (like the oligopolistic three: Standard and Poor’s, Moody’s, Fitch), reflected in the interest spreads with respect of bonds regarded as totally secure (like German Bunds) and in the price of insuring bonds against default by buying Credit Default Swaps, expresses political as well as economic judgments (as in the recent case of Italy, handicapped by a corrupt, disreputable and divided government short on credibility).

Of course Rating Agencies have proven to be highly fallible and often biased, for they have their own agendas to drive forward, have positions of conflict of interests (“issuer pays” instead of “buyer pays”) and opportunities for insider trading. Alternative, public Rating Agencies have been advocated, for instance in Europe, but such institutions could not be regarded as independent and therefore their credibility would be low. Better still, “the use of ratings in financial regulations should be significantly reduced over time” (as was suggested in the de Larosière Report of 2009 under Recommendation 3, but never acted upon by European authorities).

In order to contain the unavoidable disruption and turmoil involved by a country’s default, it would be essential to anticipate its adverse effects and counteract them beforehand, by re-capitalizing commercial banks exposed to the cross-effects of default, including central banks and above all the European Central Bank that has been acting (probably exceeding its mandate) as Lender of Last Resort to the governments of “peripheral” (meaning “high spread”) countries. An experience of default is bound to depress the price of, and thus raise yields on, old and new government bonds for the whole area; therefore contagion would worsen the sustainability conditions of debt, and therefore slow down the speed of subsequent recovery.

Furthermore, a post-crisis global economy should have renewed efforts to establish some form of global governance rather than have in place the many and inadequate ad hoc institutions cobbled together to, at present, provide some semblance of governance. But in order to be established global government now would have to be universally accepted not only in its initial form, but also in all its rules for the continuous adjustment to future, unforeseen and unforeseeable, circumstances: such acceptance now is probably out of the question. Besides, the demotion of the nation state is not necessarily desirable. For the nation state provides a layer of authority that can protect citizens from global corporations as well as from a necessarily monopolistic global governance authority that could easily misbehave out of democratic control, and without any remaining territory to which one could run for cover.

Eventually the post-crisis economy - sooner or later - will begin to recover, thanks to the profitability of production and investment being raised by depressed wages (due to mass unemployment), the accumulation of new profitable technical inventions and opportunities, the progressive depletion of existing inventories and production capacity. Once started, recovery would tend to be amplified by indirect effects, such as the usual interaction between multiplier and accelerator, until potential capacity constraints are met again and some cyclical mechanism is set in motion again in reverse. Such is the inexorable logic of the market economy. But reliance simply on market self-regulation will most probably lead to recovery much later than possible with government intervention and jump-starting. It is unfortunate that the inadequate policy responses of 2008 and their premature withdrawal should have grossly diluted their effectiveness thus making the implementation of growth policies harder today.

Changes must also be attempted in order to prevent the operation of factors that facilitated the last global crisis, or to better cope with them. The increase in banks’ capitalization, envisaged by the Basel-3 new rules, will have an initial adverse effect on the volume of lending but longer term benefits for financial stability. A new composite currency is bound to emerge, in place of the US dollar or the euro.

Regulations on the separation of credit and investment operations of banks (à la Glass-Steagall Act) are bound to be reintroduced, as already proposed in the UK by the Vickers Commission. The Over The Counter derivatives trade might be subjected to stricter regulations, such as the requirement of an underlying “insurable” interest for taking up a position in that market, or the prohibition of short-selling, temporarily introduced in the European Union on shares and government bonds. The traditional principle of Central Bank independence in the exclusive pursuit of inflation targeting - based on the now discredited theory of rational expectations and the consequent de-coupling of inflation and unemployment - is bound to change into the even more independent pursuit of multiple targets including employment and competitiveness. We might witness attempts to protect domestic industries and stop immigration - largely unsuccessful in view of the irresistible force of underlying trends.

Currently, by and large, the economic system emerging from the crisis is bound to be substantially very similar to the pre-crisis one, improved in some respects, but worsened by large scale cuts in welfare expenditure made necessary by the (debatable) purpose of achieving fiscal balance. The post-crisis system will be more conflictual and insecure, more unequal and less cohesive, less rather than more “green” - basically a more unpleasant world in which to live. It need not be so.

Los Indignados

These days indignation is a right and proper, indeed compelling, not to say compulsory, sentiment. It was forcefully advocated by Stéphane Hessel, the 93-year-old former French resistance fighter, in his influential though somewhat over-rated pamphlet Indignez-Vous (2010). “ In this world of ours – Hessel writes - 'there exist intolerable things… Indifference is the worst of all possible attitudes… One of [man’s] indispensable capacities is the capacity to feel outraged, and the commitment that derives from it”. Gramsci said it long before him.

In Spain at the beginning of March, a minor social network connected via e-mails, Facebook and Twitter, that called itself Democracia Real Ya, gathered mounting consensus and called on its adherents to take to the streets on 15 May. Which they did, punctually and massively, over 60,000 of them, in spite of the extant prohibitions due to the coming administrative elections of 22 May. They became El Movimiento 15M; they called themselves Los Indignados. In Madrid they occupied Plaza del Sol, in Barcelona Plaza de Catalunya, as well as the main squares in most of Spain’s provincial cities. They responded to provocations with peaceful and orderly meetings, discussions and free collective catering. They left on the last week-end, after cleaning up the square after themselves, but planning repeat action.

On 15 June they met again in front of the Catalan parliament in Barcelona. El Pais reported that “the protests were among the most violent since the restoration of democracy”, but a Youtube video provides incontrovertible evidence that the violent demonstrators were agents provocateurs. An identifiable small group of young people who turned nasty, in the end left 'under police escort' (sic); the peaceful demonstrators had chanted at them “Secreta, idiota, te crees que no se nota” [You are from the secret police, you are idiotic if you think we don’t know].

Who are Los Indignados? They are “the excluded” ( Los excluidos) – mostly educated, unemployed youth and those in precarious short-term employment – and their sympathizers. Los mileuristas (as christened by Espido Freires) and los zero-euristas, i.e. those earning 1,000 euro a month, or nothing at all. El Pais celebrated cartoonist El Roto – who is also a very good economist judging from his take on the global crisis - sums it up thus:

- The excluded are rebelling
- Sack them!
- No way, they don’t have jobs
- Cut their subsidies!
- We can’t, they don’t get any
- Demolish their homes!
- Impossible, they haven’t one
- Then, we are lost!

The socialist government led by Zapatero since 2004 initially made good economic and political progress, with a booming economy, high employment, secular distance from the Catholic Church, the protection of civil rights, and income redistribution. But in 2009 the global crisis hit Spain particularly hard, in spite of its earlier record of virtuous fiscal policies (as was Ireland’s). It was its worst setback since EU accession: real estate and the construction boom came to an abrupt end, investment fell by a quarter, consumption and exports were badly hit. In 2009 GDP fell by 3.6%, in 2010 GDP growth was only 0.8%; the Economist predicts 0.6% in 2011 and 1.1% in 2012.

The crisis had a devastating impact on the labour market. In the last three years Spain, with a population of 46 million, has lost more than 2 million jobs - 623,000 in 2008, 1.21 million in 2009, and 238,000 in 2010. By the end of 2010 Spain had 20.3% unemployed, or 4.69 million – more than twice the European Union average of 9.6%. In the first quarter of 2011 Spain had 21% unemployment, and youth unemployment reached 45% (860,000 people among 16-29 year-olds; 15% of youth in the 16-24 age bracket are the "ni-ni generation”, short for ' ni estudian, ni trabajan' —neither study, nor work). Those employed hold precarious, short-term jobs. They are educated, they are “the lost generation”. In their view, power is in the hands of “markets” and the bankers (as exemplified by Santander President Emilio Botin), in whose hands, they believe, politicians are simply puppets.

Zapatero’s expenditure cuts (recortes), aimed at reducing the government deficit from 11.1% in 2009 to 5.5% by the end of next year, have destroyed the confidence of the Indignados. Furthermore, in 2010 pensions were frozen and retirement age raised from 65 to 67, civil servants salaries were cut, the cheque bebé of €2500 and a planned €426 increase in unemployment benefits were shelved. A labour legislation reform that made layoffs easier to carry out generated Zapatero’s first general strike last September. The long-term viability of the banking system, and especially the savings banks (the cajas) is in doubt. The rich become richer, while there is no money for education and health. The Partido Popular would be no better. On the eve of the elections Zapatero declared that Spain would “very probably” have needed a bail-out by the European Union last year without the government’s imposition of a harsh austerity plan, but the Indignados did not accept that this was the case.

Is there contagion from the North-African Arab spring? Avenue Habib Bourguiba in Tunis, Tahrir Square in Cairo, and the Pearl Roundabout in Bahrain provide images similar to those of Madrid’s Plaza del Sol, but there is a significant difference: “In the Arab world, they are demanding the vote,” former Socialist prime minister Felipe González said on Spanish television. “Here they say there is no point in voting.” As in Italy, in Spain voters cannot pick and choose among individual candidates.

Their slogans are telling:

Adopt a politician. Educate him!
Violence is 600 euro per month.
We are excluded by neo-liberal decree; we are rebels by human dignity.
They piss on you then tell you it’s raining.
When the doors of justice close, those of revolution open.
Democracy now is voting for those you despise to stop government by those you fear.
Parliament is on brain strike.
Politics for the people, but … without the people?
To kick them out, do not vote them.
Wanted – a decent politician.
Bankers!!! As we did not vote for you, why do you govern us?
Problems do not arrive by boat, they arrive in limousines.
If you don’t let us dream, we won’t let you sleep.
We are not anti-system, we want system-change.

What do they want? At first they didn’t know. Slowly they hammered out some kind of manifesto in their open assemblies, committee and sub-committee meetings and working groups. On 19 May, Los Indignados put up their proposals to re-generate Spain, calling for: the elimination of the privileges of the political class; measures against unemployment; housing rights; quality public services; control of banking; a more egalitarian taxation; greater participation, and reduced military spending.

Some of their proposals are straightforward and desirable, such as the expropriation of unoccupied houses to be let out at a controlled rent, or the proposals on the elimination of privileges for the political class: sanctions for absenteeism and dereliction of duty by political appointees, abolition of privileged tax regimes, pension and pensionable services, indexation of their salaries to the average wage, abolition of immunity for actions taken on duty, and of proscriptions for corruption charges. But nobody really knows how to limit corruption of politicians. Should they be banned from working in the private sector (as so many do) once they leave office? The US have a two-year ban, which really does not achieve much. Perhaps they should be banned for life, but this creates a real caste of politicians, like in India and Greece, which is no better.

Some of the proposals are ambiguous, if not outright economically naïve, for instance work-sharing and a reduction of working hours to reduce unemployment – without specifying a parallel earnings reduction without which higher unit labour costs would raise unemployment instead of reducing it. Most proposals are expensive: the welfare state of Western Europe of the 1960-70s, i.e. 40 years ago, has been unsustainable for some time, given both globalization, i.e. the mobility of capital and the willingness of poor people elsewhere to work for much lower real wages, and the public debt accumulated by maintaining the welfare state under such adverse conditions. Some complaints are contradictory: you cannot have Europe and complain of a European democratic deficit and then ask that every EU decision be subjected to a national referendum. And what does “street democracy” (democracia de la calle) mean? Are we to reproduce Soviets? And how on earth can abstentions and spoiled ballots achieve “representation in the legislature”?

Four comments are in order:

First, the Spanish Indignados mis-timed their demonstrations terribly, just in the run up to administrative elections in which they could – and many did – demonstrate their feelings without occupying public space.

Second, there were large scale abstentions (34%) and the number of spoiled ballots doubled to 4% representing the third largest “party” in Spain after the Socialists and the People’s Party, which contributed to the PP victory.

Third, the Spanish electorate – as happened virtually everywhere after the crisis, with the exception of Turkey – was not particularly discerning and did not match its votes with its aspirations. Indiscriminately electorates have voted against the incumbent government, right or left, in debtor as in creditor countries (in Greece, Ireland, Portugal, as well as in Germany and Finland), supporting, instead, parties which were most unlikely to pursue their desiderata. They cut off their noses to spite their faces. Thus in the regional and municipal elections of 22 May José Luis Rodríguez Zapatero’s PSOE lost 19% of votes with respect to the previous round, and was resoundingly defeated by the opposition conservative People’s Party led by Mariano Rajoy, that gained 7% involving a 10% lead that gave them control of 9 out of 17 regional governments, and 36 out of Spain's 50 provincial cities, including several traditional PSOE strongholds like Barcelona and Seville and the regions of Castilla La Mancha and Aragon; while in the Northern Basque country a new radical separatist party, Bildu, won 25% of the vote. Last April Zapatero had announced that he would not lead his party into the general election next year, but any repeat performance by the PP is bound to hand them a parliamentary majority.

Fourth, Los Indignados did not really know what they wanted and – as indicated above – most of their proposals were vague, or infeasible, or outright contradictory.

These may sound highly critical, even adverse comments on Los Indignados, but they are not. Their approach and strategy may be debatable, but are perfectly legitimate and right and proper political behaviour. Lack of intra-party democracy debases the contest between parties leaving the electorate feeling unrepresented and frustrated. Abstentions and spoiled ballots are a wasted opportunity – and there is little point claiming that they should be counted and count – but, again, a perfectly respectable strategy, though not one that most voters (including me) would advocate. Alternation in power facilitates renewal of the political class – though not enough by itself; Gordon Brown's re-election would have been as much a tragedy for the British left as his self-imposition, and for Great Britain at large, though Brown’s protégé Ed Miliband has yet to learn any lessons from Labour’s defeat. At least Zapatero has not, like Blair/Brown Labour, launched an imperialistic war, presided over increasing inequality, liberalized and subsidized the financial sector and attacked civil rights, but he has certainly failed to honour the social contract with those who have elected him. And dissenters have no duty (though it would be in their interest) to provide well-developed credible alternatives: this is what parties, professional politicians and their think-tanks are supposed to provide, garnering and formulating as policy the wishes of their electorate.

Democracy allocates votes to alternative political ends - like markets allocate resources to the production of alternative competing goods and services. And just like markets, democracy can function too slowly or too fast, over- or under-react, produce cycles and unwanted results. At least democratic processes, at their simplest, are égalitarian, one person one vote, in theory, while markets are equivalent to multiple voting weighted by wealth; though in practice income and wealth inequality naturally biases and perverts democratic processes. But both markets and democracy - though defective - are the best instruments we have to organize our societies.

Indignation has proven to be contagious. The Spanish example has been followed across Europe: young people, though in much smaller numbers, have taken to the streets in Hamburg, Vienna and Rome. The lost generation has voiced its indignation in Lisbon, Paris, Athens and elsewhere. In Paris 2,000 young demonstrators occupied the entrance to the Bastille Opera and half the Place de la Bastille, demanding "démocratie réelle" and measures against a 20% rate of youth unemployment. Eventually they were dispersed by tear gas.

In Portugal as early as 12 March, 200,000 people marched down the Avenida de Liberdade in Lisbon - the biggest demonstration in Portugal since the 1974 Carnation Revolution. Again, it started with an appeal on Facebook by students of Coimbra University, calling upon the Geração [à] rasca (or the “troubled generation") to join together in protest. "We, the unemployed, the underpaid and the interns, are the best educated generation in the country's history," they wrote. "We are protesting so that those responsible for our precarious situation quickly change this untenable reality." (See “The Rage of the 'Indignants' - A European Generation Takes to the Streets”, Spiegel Online, 7 June). “Portugal is the fourth-poorest country in the euro zone. Even in Greece, the per capita gross domestic product is higher. Unemployment has almost doubled to 12.6 percent in six years; among people under 25 the jobless rate is 27 percent. Of those who do have jobs, more than half are working in temporary positions. Many are pseudo self-employed, earn very little and must pay a tax rate of up to 50 percent. They receive no social insurance benefits.” (Ibidem).

In Greece resistance to the austerity measures forced on Papandreu’s Socialist government by EU authorities and the IMF, to reassure financial markets, last Sunday elicited the eleventh general strike. More than 50,000 protesters, self-professed “Indignant Citizens” after the Spanish model, gathered around Syntagma Square and were involved in violent clashes. It is certain that this kind of resistance will raise the interest rate spread on Greek sovereign debt over German bonds (already of the order of 15%), and the probability of sovereign default. Yet if this is the cost of popular sovereignty, which is what democracy means, it is still cheap at the price.