Back Into The Frying Pan

The eurozone crisis – history is repeating itself … again

Larry Elliott, The Guardian

Sunday 14 December 2014 06.09 EST

Let’s start with Greece, which was where the eurozone crisis began all those years ago. The French statesman Talleyrand once said of the Bourbons that they had learned nothing and forgotten nothing. The same applies to the bunch of incompetents in Brussels, Berlin and Frankfurt responsible for pushing Greece towards economic and political meltdown.

Greece’s recent economic performance has been pretty good. The economy is growing, unemployment is on the decline and the debt to GDP ratio has come down a bit. Time, you might think, to cut Athens a bit of slack. Not if you are the German government, the European commission or the European Central Bank. No, they are insisting on even more austerity and continued surveillance by the International Monetary Fund.

But the Greeks have had a bellyful of austerity. They have had enough of being pushed around. Predictably, support for the anti-austerity Syriza party is strong and the mood is angry. In an attempt to regain the initiative, the government in Athens brought forward the dates for the votes in parliament to elect a new president. If by the time of the third vote at the end of the December, the centre right’s candidate Stavros Dimas, a former EU commissioner, has not secured 180 votes out of 300 – unlikely as things stand – there will be an election that Syriza could win.

The chances of it doing so will certainly be enhanced unless the Bourbon-in-chief, Jean-Claude Juncker, learns when to keep his mouth shut. By saying he wanted “known faces” rather than “extremist forces” in charge in Greece, the European commission president was the perfect recruiting sergeant for Syriza.

The gamble seems to be that Syriza, assuming that there is an election in which it emerges victorious, will either do a U-turn on austerity voluntarily or be forced to do a U-turn due to hostile market reaction. The collapse of a Syriza government will herald the return of a centre-right government who will do what Juncker and Angela Merkel tell them to do.

But this has not been properly thought through. A crisis in Greece will take months to unfold. Bond yields will rise in every eurozone country seen as vulnerable: Portugal, Spain, Italy and, perhaps, Belgium. Business and consumer confidence will be hit. Concerns about the non-performing loans held by Europe’s shaky banks will be reignited.

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A fresh Greek crisis will have spillover effects. It will lead to a fresh recession and deepen deflation. Weak growth and falling prices are a toxic combination for highly indebted countries, because they raise the real value of debts while cutting national output.

Beppe Grillo of Italy’s Five Star Movement has said. “Eventually will come a time when a politician will hold up a copy of the EMU [European Monetary Union] treaty, declare it null and void, and the debt null and void right along with it. That politician will be elected.”

And the moment that politician will be elected may not be all that far away. The only conceivable way to solve some – if not all – of the design flaws in the euro is for a strategy that involves debt forgiveness, expansionary policies in the countries – such as Germany – that can afford it, a large-scale quantitative easing programme from the European Central Bank and much more aggressive attempts to rid the banks of their toxic assets.

Unfortunately, this is not on the table. Eventually, once the crisis is raging, the ECB may well overcome Germany’s misgivings about buying sovereign bonds and dip its toe in the water with a limited QE programme. It will be too little too late, and in any case contingent on further so-called structural reforms, shorthand for wage cuts and the dilution of labour rights.

Mad as Hellas

Paul Krugman, The New York Times

DEC. 11, 2014

The Greek fiscal crisis erupted five years ago, and its side effects continue to inflict immense damage on Europe and the world. But I’m not talking about the side effects you may have in mind – spillovers from Greece’s Great Depression-level slump, or financial contagion to other debtors. No, the truly disastrous effect of the Greek crisis was the way it distorted economic policy, as supposedly serious people around the world rushed to learn the wrong lessons.

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What happened last time, you may recall, was the exploitation of Greece’s woes to change the economic subject. Suddenly, we were supposed to obsess over budget deficits, even if borrowing costs were at historic lows, and slash government spending, even in the face of mass unemployment. Because if we didn’t, you see, we could turn into Greece any day now. “Greece stands as a warning of what happens to countries that lose their credibility,” intoned David Cameron, Britain’s prime minister, as he announced austerity policies in 2010. “We are on the same path as Greece,” declared Representative Paul Ryan, who was soon to become the chairman of the House Budget Committee, that same year.

In reality, Britain and the United States, which borrow in their own currencies, were and are nothing like Greece. If you thought otherwise in 2010, by now year after year of incredibly low interest rates and low inflation should have convinced you.

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(T)he devastation in Greece is awesome to behold. Some press reports I’ve seen seem to suggest that the country has been a malingerer, balking at the harsh measures its situation demands. In reality, it has made huge adjustments – slashing public employment and compensation, cutting back social programs, raising taxes. If you want a sense of the scale of austerity, it would be as if the United States had introduced spending cuts and tax increases amounting to more than $1 trillion a year. Meanwhile, wages in the private sector have plunged. Yet a quarter of the Greek labor force, and half its young, remain unemployed.

Meanwhile, the debt situation has if anything gotten worse, with the ratio of public debt to G.D.P. at a record high – mainly because of falling G.D.P., not rising debt – and with the emergence of a big private debt problem, thanks to deflation and depression. There are some positives; the economy is growing a bit, finally, largely thanks to a revival of tourism. But, over all, it has been many years of suffering for very little reward.

The remarkable thing, given all that, has been the willingness of the Greek public to take it, to accept the claims of the political establishment that the pain is necessary and will eventually lead to recovery. And the news that has roiled Europe these past few days is that the Greeks may have reached their limit. The details are complex, but basically the current government is trying a fairly desperate political maneuver to put off a general election. And, if it fails, the likely winner in that election is Syriza, a party of the left that has demanded a renegotiation of the austerity program, which could lead to a confrontation with Germany and exit from the euro.

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This is what happens when an elite claims the right to rule based on its supposed expertise, its understanding of what must be done – then demonstrates both that it does not, in fact, know what it is doing, and that it is too ideologically rigid to learn from its mistakes.

Repeat after me- Neoliberal Economics Does.  Not.  Work.