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Greek Crisis to Transform EU?

by Frank Schnittger Mon Jul 6th, 2015 at 06:54:10 AM EST

When I wrote Beware of Greeks bearing gifts: a study in negotiating styles, it was because I had grave doubts that Yanis Varoufakis' negotiating style would yield the kind of results he sought. Of course I had even graver doubts that any kind of negotiating style would yield a reasonable result for Greece, and so that question was essentially moot:  We where heading for a diplomatic disaster one way or the other. The neo-liberal fantasy of austerian "reform" was simply too deeply embedded in the culture of the EU governing elite for a successful outcome to be possible.

It is as yet unclear whether the Greek referendum result will prompt a fundamental re-think on the part of the EU elite. Merkel's hastily arranged visit to Hollande at least provides a signal that there is some awareness that a new approach is required. Krugman encapsulates the EU dilemma nicely: Ending Greece's Bleeding - The New York Times

The [European] central bank now faces an awkward choice: if it resumes normal financing it will as much as admit that the previous freeze was political, but if it doesn't it will effectively force Greece into introducing a new currency.

Specifically, if the money doesn't start flowing from Frankfurt (the headquarters of the central bank), Greece will have no choice but to start paying wages and pensions with i.o.u.s, which will de facto be a parallel currency -- and which might soon turn into the new drachma.

Suppose, on the other hand, that the central bank does resume normal lending, and the banking crisis eases. That still leaves the question of how to restore economic growth.

In the failed negotiations that led up to Sunday's referendum, the central sticking point was Greece's demand for permanent debt relief, to remove the cloud hanging over its economy. The troika -- the institutions representing creditor interests -- refused, even though we now know that one member of the troika, the International Monetary Fund, had concluded independently that Greece's debt cannot be paid. But will they reconsider now that the attempt to drive the governing leftist coalition from office has failed?

I have no idea -- and in any case there is now a strong argument that Greek exit from the euro is the best of bad options. Imagine, for a moment, that Greece had never adopted the euro, that it had merely fixed the value of the drachma in terms of euros. What would basic economic analysis say it should do now? The answer, overwhelmingly, would be that it should devalue -- let the drachma's value drop, both to encourage exports and to break out of the cycle of deflation.

The problem with any negotiating style is that if you as negotiator become an issue, you're losing. That is why Corporations and Governments change their key negotiating personnel so regularly. If you become identified with a failure, you become part of that failure, and it doesn't matter how brilliantly you conducted yourself during that debacle.  


At one point during my corporate career I was a key assistant to a Chief executive pushing through a major change programme within the company which was necessary to secure its long term future. We succeeded, but at a price.  Head Office, which at that stage had moved to London, was extremely unhappy at the price which they had had to pay to get the change programme agreed. Even though the price was absolutely justified, and delivered a significant return on investment for the company, my bosses' days as Chief executive were numbered. I was destined to go down with him unless I too could move smartly, stage left.

Whilst he negotiated a high profile position in the public sector, I switched career from Human Resources to Information technology.  I had been convinced, for some time, that IT was the key to the organizational transformation that would be required to keep the business in Ireland afloat.  So the change was not as dramatic as it might have seemed to others. The issue with our IT department at that time was not any lack of technical expertise, but its inability to bring in major projects to specification on time and within budget. My experience in that area made up for a lack of technical qualifications.

I have absolutely no doubt that Yanis Varoufakis will remain an absolutely key figure in the future of Greece, whatever his formal role. His departure from the Finance Ministry gives the Eurogroup the fig leaf of blaming his personality on their previous failure. The fact that Tspiras, too, has been the victim of a concerted campaign of character assassination will be conveniently forgotten.  Victory in a major election or referendum has the effect of granting him a fresh start.  

The EU now has one chance of getting this right, otherwise the parallel currency option followed by effective Grexit as also outlined by Krugman will become the only game in town.  My best guess is that a deal on the following lines will be agreed:

  1.  The ECB will provide more or less unlimited ELA support to enable the Greek banking system return to normality. If the solvency of a bank is at issue, the ESM will also do the job it is supposed to do.

  2. No new debt forgiveness will be agreed as this has become politically toxic for many Eurozone members, but maturities will be extended to prevent defaults and ease cash flow difficulties, and the interest rate charged will be reduced to virtually zero. Inflation and growth in the Greek economy will then be tasked with making this sustainable over time.

  3. Most "reforms" i.e. public expenditure reductions and tax increases will be retained if only to provide a fig leaf for Eurogroup ministers but they will be counterbalanced, to some degree, by a European investment Bank funded programme of infrastructural investment and modernization to mitigate the deflationary effects of the above, and to improve the prospects for real growth and employment creation within Greece.

  4. A relatively small programme of "humanitarian aid" to alleviate the worst aspects of poverty and youth unemployment in Greece will be included perhaps mainly as a PR exercise and to salve collective consciences. However, this could include the seeds of a future longer term commitment by the EU to guarantee the provision of minimal unemployment, healthcare and educational services within the EU on the lines of previous regional, cohesion, and structural aid programmes and to put some flesh on the bones of The Charter of Fundamental Rights which is a legally binding part of the Treaty of Lisbon.

All of this presupposes a level of basic competence and decency on the part of the EU, but also a degree of enlightened self interest.  The consequences of a Grexit are extremely damaging for the EU, and sometimes, if rarely, a crisis like this can lead to an imaginative step forward by all concerned.  For all her dominance in EU politics, Merkel has yet to put her stamp on European history.

Adenauer led Germany into economic recovery after a disastrous war; Brandt initiated his Ost Politik out of the debacle of the cold war and Berlin blockade; Schmidt assisted in the rehabilitation of Germany within a growing EU, and Kohl re-united Germany. Will Merkel succeed in re-uniting and re-invigorating the EU by making the preservation of basic human dignity and living standards a competence and responsibility of the EU?

Merkel risks losing the UK if she tries to do so too blatantly, and much of it will probably be clothed in  neo-liberal jargon. A two speed Europe with the Eurozone as its inner core seems an unavoidable consequence, but I remain optimistic that it is still possible to achieve a positive and even trans-formative outcome from the disaster that has been the management of the Greek crisis to date.

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EUR-Lex - 12007P - EN - EUR-Lex

Article 34

Social security and social assistance

1.   The Union recognises and respects the entitlement to social security benefits and social services providing protection in cases such as maternity, illness, industrial accidents, dependency or old age, and in the case of loss of employment, in accordance with the rules laid down by Union law and national laws and practices.

2.   Everyone residing and moving legally within the European Union is entitled to social security benefits and social advantages in accordance with Union law and national laws and practices.

3.   In order to combat social exclusion and poverty, the Union recognises and respects the right to social and housing assistance so as to ensure a decent existence for all those who lack sufficient resources, in accordance with the rules laid down by Union law and national laws and practices.

Article 35

Health care

Everyone has the right of access to preventive health care and the right to benefit from medical treatment under the conditions established by national laws and practices. A high level of human health protection shall be ensured in the definition and implementation of all the Union's policies and activities.

The articles say "in accordance with the rules laid down by Union law and national laws and practices", so the legal basis for EU competence has been established.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Jul 6th, 2015 at 07:33:43 AM EST
Merkel succeed in re-uniting and re-invigorating the EU by making the preservation of basic human dignity and living standards a competence and responsibility of the EU?

I think Merkel is trying to do just that. The problem is that she belives that to 're-unite and re-invigorate the EU' we need a continant wide Thatcherite revolution.

by rz on Mon Jul 6th, 2015 at 08:43:49 AM EST
What are you talking about, Frank?

FastFT: Merkel sees no basis for new Greek negotiations (6 July)

"With regard to yesterday's decision by Greek citizens the pre-conditions for entering into negotiations over a new aid programme do not currently exist," said Steffen Seibert, her spokesman, even though he added that the door for talks was "always open".

Mr Seibert also dashed lingering hopes that Ms Merkel's visit today to French president Francois Hollande would result in new rescue proposals, reports Stefan Wagstyl Chief Germany Correspondent.

...

Martin Jäger, the finance ministry spokesman, was just as tough. The basis for any new negotiations was the ESM treaty, he said. His words imply there will be no shortcuts to striking a new deal and that any new agreement will have to meet the ESM's tightly-worded rules. These include two votes in the German parliament - one to authorise negotiations and the second to approve any agreed deal.

In other news, Martin Schulz wants the various summits today and tomorrow to discuss "humanitarian aid" to the Greek people, since "the banks will remain closed". As if that were some freak act of nature.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Jul 6th, 2015 at 08:44:25 AM EST
From the Diary:
1. The ECB will provide more or less unlimited ELA support to enable the Greek banking system return to normality. If the solvency of a bank is at issue, the ESM will also do the job it is supposed to do.

This is not going to happen. The Banks are going to be closed indefinitly.

by rz on Mon Jul 6th, 2015 at 08:56:25 AM EST
[ Parent ]
This also means that it is now clear that any nation in the EU is at risk of Bank runs and capital controls, if a gouvernment is elected which does not agree with the general EU consensus.

I think this changesteh calculus of staying or not staying in the Euro quite a bit. The destruction of the means to transfer money by the ECB is a very serious act. I really wonderif the guys from Podemos and 5 Stars fully understand the impliciations of what is going on.

by rz on Mon Jul 6th, 2015 at 09:00:00 AM EST
[ Parent ]
I don't think they do.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Jul 6th, 2015 at 09:00:50 AM EST
[ Parent ]
I give it about another week - and then if there is no sign of banks opening and liquidity returning then Greece will have to go down the Eurious route - and then we are in an entirely new ballgame.  Perhaps it will require Greece to go down that route for the creditors to realize that their current game is up.  If so, it will be a sad reflection of their learning skills. It will be like Sunningdale for slow learners as the Good Friday Agreement was once described - an agreement, v, similar to the Sunningdale agreement but which was arrived 25 years and thousands of deaths later.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Jul 6th, 2015 at 09:21:26 AM EST
[ Parent ]
We shall see. Perhaps I am too optimistic.  Perhaps it is all part of the pre-negotiation ritual of damping down expectations.  There is an understandable euphoria in Greece right now. I wouldn't worry too much about what down the line spokesmen have to say.  They have their  master's constituencies to keep sweet but are ultimately expendable if something else is agreed.

If I'm wrong we simply revert to plan B as mentioned by Krugman and described in my diary Greece: The next step; introducing the Euriou.  

The thing is, the Creditors aren't in a very strong negotiating position right now.  They risk losing everything if things stay as they are or if Greece is forced down the Euriou route.

Once Greece starts issuing Eurious, they lose almost all bargaining power.  They have a week to re-open the banks or else Greeks will have no choice but to go their own way, and then the creditors can sing for their supper.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Jul 6th, 2015 at 09:04:10 AM EST
[ Parent ]
Banks will stay closed till at least Wednesday. This is only the beginning.
by rz on Mon Jul 6th, 2015 at 01:13:56 PM EST
[ Parent ]
Well, according to the news, Merkel and Tsipras just talked on the phone and agreed on one point: Tsipras will make new proposals tomorrow at the European summit.

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Mon Jul 6th, 2015 at 09:04:15 AM EST
[ Parent ]
The "creditors" have been very good at demanding and rejecting Greek proposals since the February 20 agreement. What's another month or three of the same? It's not their economies languishing under import restrictions.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Jul 6th, 2015 at 09:36:32 AM EST
[ Parent ]
Any negotiating style would probably have led to the same situation. However, Varoufakis's style certainly did not help. I know some on ET just love Vartoufakis as a rock star. But rock stars are not known for their negotiating skills...

Indeed, you don't facilitate a negotiation by lecturing your interlocutors or calling them terrorists. I had to negotiate with rogue employers and I didn't start by telling them they were vile exploiters, even when they were. And more recently, I had to negotiate with leaders of armed groups who had blood on their hands. I did not tell them they were murderers, which they were.

Besides, it is possible that Varoufakis did upset some people in the Greek government by speaking before Tsipras after the referendum...

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

by Melanchthon on Mon Jul 6th, 2015 at 09:01:10 AM EST
Helena Smith and her like were prepared to hate Varoufakis long before he was ever appointed FM. I saw that on the morning of the referendum, one of my aquaintances wrote the front piece for the Kathimerini newspaper (Greek version) where she equated the NO with childish petulance. I can tell you in no uncertain terms that the journalist/chattering classes/mainstream authors in Athens had an unfounded opinion of Varoufakis that long predated his negotiating, and it was all predicated on the idea that he was definitely trying to drive them out of the euro. There was absolutely no nuance there. As for his negotiating style, the only thing he did wrong was to open the discussion publicly. This was verboten in the Eurogroup. But he had seen where the other approach landed his former friend Stournaras. Varoufakis essentially created a space so that Europe could even countenance the Greek right-to-negotiate, and he did this with a lucid and consistent manner, and especially in the mass media, and therefore to the citizens of Europe and of the world. Prior to Varoufakis, the Greek right-to-negotiate was little understood, unsympathized, AND the reforms were demanded through email dictats. Varoufakis simply described the program as madness, and he did it often enough that he made plenty of allies to agree with him. I'm talking about the people on all the panels he'd been on, who had been convinced by his reaoning (not his negotiating) and therefore they wrote strong critiques in favor of Greece's positions in major news organs. Before a few months ago, these voices were non-existent. There was no polite road to an agreement. Varoufakis's job was other. I can see why he had to go in the end, but it has more to do with Syriza's workings. Varoufakis outlived his usefulness. We are no longer in a eurozone or bust mode. If party insiders were appalled at Varoufakis's IOU consideration, then these hothouse flowers are about to receive the surprise of a lifetime. Regardless, Tsakolotos and people like Lapavitsas have actually countenanced a Greek departure from the euro. I don't think Varoufakis has with the same level of intensity and responsibility.
by Upstate NY on Mon Jul 6th, 2015 at 02:15:07 PM EST
[ Parent ]
I agree, as long as there is a chance for a deal.

But once you are beyond the pale, and Varoufakis seems to have started beyond the pale, the one thing you can do is take pick up the limits of how you can behave and just run away with it, leaving a larger space to manouvere for your successor.

by fjallstrom on Mon Jul 6th, 2015 at 03:37:13 PM EST
[ Parent ]
you don't facilitate a negotiation by lecturing your interlocutors or calling them terrorists.
Methinks the "lecturing" part was how these finance ministers not understanding finance and proud of it perceived Varoufakis's attempt to actually talk economics. And calling them terrorists came at the end of the referendum campaign. I also think that what Schäuble did from early February was quite undiplomatic, too.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Mon Jul 6th, 2015 at 04:27:03 PM EST
[ Parent ]
I agree, but you are talking about an 18:1 line-up here with the 18 united in their self-righteousness and ignorance.  In negotiating terms, the minimum requirement for Greece is to achieve some dissension and waverers amongst the 18, so that a door opens to alternative thinking. So long as it remains 18:1, Greece gets effectively nothing.

Looked at from a conservative point of view, the remarkable thing has been the unity and purpose displayed by the 18.  The EU, so long the butt of all jokes that it can never agree on anything and that it takes ages to move anything forward is actually displaying remarkable cohesion, consistency, and unity of purpose.

We may argue that  this consistency is entirely wrong headed, but if your dream is built around an EU of balanced budgets, conservative stewardship of finances, and severe punishment of any deviants, then damning Greece to hell is a great opportunity to cement this dream in place.

Merkel is the only one with the stature to deliver even a slight modification of this dream, but asking her to do so is a big ask, particularly in the context of her favorite leadership style - slow, incremental, conservative, change.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Jul 7th, 2015 at 05:17:10 AM EST
[ Parent ]
The unity of the 18 has been because most of them lack any purpose, so they just fall in line for the sake of Europe or something. Plus, it's unclear what Syriza could offer its potential allies. At the end of the day, the other 18 are able to function within the economic insanity that is the Eurozone architecture. Greece, in addition, is the only country that has nothing to lose here - its economy has contracted by 25% and it has no market access. The window for a coalition of peripheral economies was when they were all under attack, or when they were under "programs". But the governments of the other countries first insisted "we're not Greece" and then "owned" the "painful" adjustment programs.

Even looking at Podemos, it's one thing to operate from lack of access to the markets than to promise you will throw bond market access to the wind. Which is why Podemos will eventually not talk seriously about debt restructuring even if it makes it to power.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Tue Jul 7th, 2015 at 05:30:55 AM EST
[ Parent ]
I would dissent a bit from your analysis.

Actually, getting a decision done now, would mean change the 18-consensus on the last "saving greece plan" from 2010.

The situation would require a change in an existing text. What you describe is actually that EU does not manage to change the text, aka, the firmness with which the eurogroup stand against Greece may well reflect a failure to produce a new, updated consensus in time to respond to the changes in greece situation.

by Xavier in Paris on Tue Jul 7th, 2015 at 06:03:49 AM EST
[ Parent ]
Yanis Varoufakis: why the brash Greek finance minister had to go

By June, when it became apparent that Varoufakis would take things to the brink, senior Greek government officials in Athens were also finding it hard to contain their consternation.

Many were enraged by tactics they saw as deliberately confrontational and a danger to the country's relationship with Europe.

Varoufakis's showy lifestyle and shameless narcissism also jarred. But his apparent endorsement of a parallel currency and IOUs appears to have been the straw that broke the camel's back. His ability to represent Greece abroad was over.



Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Jul 6th, 2015 at 11:15:26 AM EST
From the same article:
The resounding rejection of further belt-tightening in a referendum that pitted Greece against all its eurozone partners was a high-stakes gamble associated squarely with the 54-year-old's penchant for game theory and buccaneering style. The morning after, he had to go.

do you really belive that this makes sense?

by rz on Mon Jul 6th, 2015 at 11:20:03 AM EST
[ Parent ]
I'm not a big fan of understanding politics in terms of personalities - I focus more on interests and processes - but if you wanted to construct a narrative which blamed Varoufakis, he gave the colour writers some rope to work with...

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Jul 6th, 2015 at 11:50:57 AM EST
[ Parent ]
... will his sacrifice be enough to placate creditors? Varoufakis leaves an economy in meltdown, banks closed, capital controls imposed and shortages growing by the hour.

If his removal is not enough, the mess that has also been the price of his brinkmanship may well end up being his lasting legacy - a legacy that historians will not forget.



A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Jul 6th, 2015 at 11:22:51 AM EST
[ Parent ]
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Jul 6th, 2015 at 11:55:29 AM EST
[ Parent ]
Bullshit it may be, but I've seen it often enough in the past week and especially today that you can be sure this will be the narrative that will endure.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Jul 6th, 2015 at 12:14:25 PM EST
[ Parent ]
But what happens if Greece goes down the Euriou route, the banks reopen, "normality" slowly returns, austerity is gradually unwound, and the economy starts to grow again:  Panic stations amongst the  VSP's - Greece is threatening the TINA narrative.  

At first there will be complete denial.  Then anger. Perhaps attempts at sanctions/sabotage. And of course claims recovery was only possible because Greece welched on its obligations and was at the expense of others.  Never mind that Greece might well be able to repay more of its debt more quickly than under any other scenario.

Greece will be a pariah in conservative mythology for a generation no doubt, but its great sin will not be any default.  It will be that it didn't toe the neo-lib line.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Jul 6th, 2015 at 03:02:53 PM EST
[ Parent ]
This is such trite prose- fit to coach vapid reasoning. She certainly can't be Irish.
by de Gondi (publiobestia aaaatttthotmaildaughtusual) on Mon Jul 6th, 2015 at 01:29:25 PM EST
[ Parent ]
She writes for the Guardian, apparently.  I've never heard of her before. I posted the extract because it stated that Varoufakis' enthusiasm for the IOU idea is what brought about his dismissal.  I'd like to see that substantiated.  She strikes me as more of a colour writer than and economist, so she must have been fed that line from somewhere.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Jul 6th, 2015 at 02:51:45 PM EST
[ Parent ]
Helena Smith is The Guardian's correspondent in Greece, and her sympathies for the Yes camp were pretty obvious. And The Guardian is supposed to be left-wing.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Mon Jul 6th, 2015 at 04:31:18 PM EST
[ Parent ]
This revealing comment was by Helena Smith, too.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Mon Jul 6th, 2015 at 04:33:13 PM EST
[ Parent ]
For a country which makes great play of not having joined the Euro, it has produced some pretty passionate pro and and Euro establishment writers... the British chattering classes seem as engaged in the Euro crisis as any Eurozone country.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Jul 6th, 2015 at 04:52:59 PM EST
[ Parent ]
I emphasize she's not sitting in an office in London but is in Athens. Foreign correspondents' syndrome, possibly. (I'm not sure any more if it was her or a fellow Athens correspondent who described Greece's scaremongering oligarch press as vibrant and diverse, in a blog post diffusing hope that the media may yet swing it for the Yes side.)

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Mon Jul 6th, 2015 at 04:59:03 PM EST
[ Parent ]
She is ethnically Greek
by Upstate NY on Mon Jul 6th, 2015 at 06:09:13 PM EST
[ Parent ]
Greek suffering will continue. Greece is one Molotov Cocktail away from becoming Egypt ... doesn't matter who throws it ... and the European elites are waiting in the wings. Martial law, anyone?

They tried to assimilate me. They failed.
by THE Twank (yatta blah blah @ blah.com) on Mon Jul 6th, 2015 at 05:56:26 PM EST
Will the ECB Continue Its "Sherman's March to the Sea" with the Greek Economy? -- NSFW Capitalism
it's all too easy to forget that "the creditors" are not Merkel, Hollande, Lagarde and Draghi. The biggest group of "creditors" are taxpayers of the 18 other countries of the Eurozone. The ugly design of the Eurozone means that the sort of relief that Greece wants most, a reduction in the face amount of its debt (as opposed to the sort of reduction they've gotten, which is in economic value, via reductions in interest rates and extensions of maturities) puts the interest of those voters directly at odds with those in Greece. Our understanding is that a reduction in principal amount, under the perverse budgetary and accounting rules of the Eurozone, would result in those losses showing up as losses for budget purposes, now. They would need to be funded by increased taxes. Thus a reduction in austerity for Greece, via a debt writeoff, simply transfers austerity from Greece to other countries.
Great... Trickle down creditor risks.
by das monde on Mon Jul 6th, 2015 at 08:45:27 PM EST
This is a la-la-land reading ignoring the possibility of a default.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Tue Jul 7th, 2015 at 03:26:43 AM EST
[ Parent ]
Default is increasingly likely. In fact, given the damage done to the Greek economy already by recent EU decisions, it would be follish to not default on them.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Jul 7th, 2015 at 05:34:14 AM EST
[ Parent ]
The thing is, default is increasingly in everyone's interest.  For Greece, as you say.  For everyone else, they can blame it all on Greece.  Whereas if (say) an Irish politician agrees to take on another Billion of debt to bail out the Greeks at a time when single parent allowances are being cut in Ireland, it becomes his problem.  He then has ownership of it - especially if Greece, subsequently, needs even more help.

The cost to Ireland of Greece defaulting now may be similar, but no Irish politician/party will be held responsible.  ("We did our best, put in good money, but those irresponsible Greeks, leftists etc. just wanted more and more, we're better off without them, cut our losses etc., the integrity of our Euro has been preserved from those who didn't deserve it in the first place.....")

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Jul 7th, 2015 at 06:12:25 AM EST
[ Parent ]
Its also turning a problem of irresponsible banking into a problem for national electorates, and hence a problem for national political leaderships.  When the EU agreed, as part of the 2010 bail-out, to turn bad banking loans into national sovereign debts they put European taxpayers on the hook for losses rightfully incurred by the Banking elite.

John Bruton argues that bailing out the banks then was "a public good" as we all need a stable banking system.  By that logic, bailing out Greece is an even greater public good, as we all  We need a stable EU political, economic, and monetary system.  But somehow, bankers getting away with it is no problem for conservative leaders, pensioners should never get away with it...

Basically bankers seem to have a call on our political system by their ability to cause chaos (the ATMs will stop working!) whereas what happens in Greece is a long way away. It is illogical to expect National leaders to work against the interests of their own electorates - why should Irish taxpayers, already hugely over borrowed, take on more debt to let "corrupt Greeks" of the hook at a time when basic allowances for single mothers are being cut.  That is basically the line a popular phone-in radio programme here took.

The only long term solution is to ensure that banks are much more tightly regulated, bankers face imprisonment for breaking the rules, insolvent banks are resolved with shareholders/bondholders taking the hit, and all bonuses which incentivize irresponsible lending are banned.  Ultimately, I would argue, the payment systems should be nationalized (or Europeanized) so that the public at large can never be held to ransom.

There will always be an asymmetry in banking risk reward ratios, bankers will always be rewarded for generating fat profits, whilst losses will always tend to be borne by someone else. And why should private banks be allowed to make money from interest they charge on money they create ex nihilo? That should always be a privilege extended only to the state...

But as they say, "when you're up to your neck in crocodiles, you forget that the original objective was to drain the swamp".   "We are where we are" etc. The bank bail-outs released the crocodiles, and now those unable to escape the swamp will pay the price.  And it won't be the bankers...

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Jul 7th, 2015 at 05:58:34 AM EST
[ Parent ]
why should Irish taxpayers, already hugely over borrowed, take on more debt to let "corrupt Greeks"

Does this sentiment have any connection to reality?

by Colman (colman at eurotrib.com) on Tue Jul 7th, 2015 at 06:03:52 AM EST
[ Parent ]
Is "corrupt Greeks" intended as a pleonasm?

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Jul 7th, 2015 at 06:07:13 AM EST
[ Parent ]
Basically the Joe Duffy show yesterday was a litany of that sentiment by a variety of callers - including some married to Greeks or living in Greece - who claimed that corruption is a way of life there - either not paying taxes, or having to bribe corrupt officials for them to do their jobs. It doesn't matter what the reality is.  That is becoming the public perception, and therefore the political reality...

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Jul 7th, 2015 at 06:23:27 AM EST
[ Parent ]
I was asking if it had any connection to objective, rather than political reality. The Joe Duffy show has no connection to any reality: Twitter without the considered opinions.
by Colman (colman at eurotrib.com) on Tue Jul 7th, 2015 at 06:34:55 AM EST
[ Parent ]
I'm sure you're well capable of answering our own question...

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Jul 7th, 2015 at 06:54:24 AM EST
[ Parent ]
No, actually, I'm wondering about the idea that debt write-offs or whatever for Greece are impositions on Irish taxpayers.
by Colman (colman at eurotrib.com) on Tue Jul 7th, 2015 at 07:00:59 AM EST
[ Parent ]
Yes because we end up borrowing the money on sovereign debt markets and end up paying interest on that. Writing off debt costs us real money plus the interest on that which would have to be funded from taxation.

However if Greece doesn't get a restructuring, the question  becomes whether or not the interest rate we pay is greater than the interest rate Greece pays us on the loan.  In the past we were paying the IMF something like 5-6% interest on their loans and everyone who could raise money cheaper than that was making money on our bailout.

That is why the Government was so keen to get permission to pay those loans off early and replace them with cheaper market sourced loans.

Given that many countries can now market source loans for c. 0%, offering Greece 0% loans would be zero cost to them always discounting the risk of default. That is why I suggested in the diary that a solution could be found which included no actual write-off, but term extensions and c.0 % interest rates.

That way, no losses are crystallized, and the budetary impact on creditor states would be minimal.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Jul 7th, 2015 at 07:31:46 AM EST
[ Parent ]
Speaking of public goods, the ECB is evidently willing to use the public good of a functioning payment clearing system as a weapon.

Martin Sandbu: ECB, enemy of the euro? (6 July, 2015)

Recall that the closure of Greece's banks was caused by the ECB's decision to do the opposite of what Walter Bagehot taught, which was that to stem a bank run, the central bank should lend against collateral that, but for the crisis, is solid. In Greece, fearful people have wanted cash, but the banks have little cash left. The normal course of action would be for the banks to get cash from the central bank, pledging their investments as security for the loan. But after Athens declared a referendum, the ECB said no further such loans should (for now) be given.

...

This is unjustifiable. The EU Treaty lays out explicitly what the ECB has to do, in collaboration with the national central banks (look at Article 127). The primary task is, of course, price stability. This is hardly relevant here: Greece's economy is so small even flushing its banks with liquidity will have no effect on the eurozone price level - and if anything, crushing the banking system and forcing Grexit will be more destabilising. But while Frankfurt's central bankers rarely mention them, the ECB has a number of other explicit responsibilities, so long as they don't come into conflict with stable prices. Two are particularly relevant - one specific, one general.

The specific task is to "promote the smooth operation of payment systems". Ask the pensioners in line at Greek banks, or the importers finding their letters of credit turned down, how smoothly the payment system is working.



A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Jul 7th, 2015 at 06:06:15 AM EST
[ Parent ]
So what remedy is there for Greece if the ECB, as you say, is basically acting illegally?  Take them to the European Court, and perhaps get a favorable ruling in a couple of years time when Greece is long gone out of the Euro? And what sanction would the European Court impose on the ECB  - a mild telling off?

What happens if a Greek pensioner dies or commits suicide because he can't get medical treatment because he can't get money out of his account at an atm.  Can his family take the ECB to court?

Some provisions of EU law seem to me to be basically meaningless, because they are unenforceable. for all practical purposes. The ECB is a political institution enshrined to make permanent German economic dogma.  It's "apolitical" charter is  there to remove it from all democratic accountability.

And who decided it would have no responsibility for promoting full employment, unlike the US Fed?


Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Jul 7th, 2015 at 07:09:44 AM EST
[ Parent ]
Injunctions in the ECJ? If it has jurisdiction?
by Colman (colman at eurotrib.com) on Tue Jul 7th, 2015 at 07:11:04 AM EST
[ Parent ]
Ambrose Evans-Pritchard: Greece threatens top court action to block Grexit (Telegraph, 29 June 2015)
Greece has threatened to seek a court injunction against the EU institutions, both to block the country's expulsion from the euro and to halt asphyxiation of the banking system.

...

Greek officials said they are seriously considering suing the European Central Bank itself for freezing emergency liquidity for the Greek banks at €89bn. It turned down a request from Athens for a €6bn increase to keep pace with deposit flight.

This effectively pulls the plug on the Greek banking system. Syriza claims that this is a prima facie breach of the ECB's legal duty to maintain financial stability. "How can they justify setting off a run on the Greek banking system?" said one official.

Also: Greece creditors will gain nothing from toppling Europe-lover Yanis Varoufakis (6 July 2015)
But then he was starting to harbour 'dangerous' thoughts. When I asked him before the vote whether he was prepared to contemplate seizing direct control of the Greek banking system, a restoration of sovereign monetary instruments, Grexit, and a return to the drachma -- if the ECB maintains its liquidity blockade, forcing the country to its knees - he thought for a while and finally answered yes.

"I am sick of these bigots," he said.

His fear was that Greece did not have the technical competence to carry out an orderly exit from EMU, and truth be told, Syriza has already raided every possible source of funds within the reach of the Greek state - bar a secret stash still at the central bank, controlled by Syriza's political foes - and therefore has no emergency reserves to prevent the crisis spinning out of control in the first traumatic weeks.

...

The hardline wing of the Syriza movement has been pushing for a temporary take-over of the Bank of Greece under emergency powers in order to issue liquidity - accompanied by a lawsuit at the European Court of Justice to throw the whole EU ruling system off balance - but Mr Varoufakis recoiled, deeming it too incendiary even for him. At heart, he is an admirer of Mario Draghi.



A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Jul 7th, 2015 at 07:29:22 AM EST
[ Parent ]
Migeru:
accompanied by a lawsuit at the European Court of Justice to throw the whole EU ruling system off balance - but Mr Varoufakis recoiled, deeming it too incendiary even for him. At heart, he is an admirer of Mario Draghi.

Yes, an injunction is a possibility, - one which becomes more likely if you kick out a moderate like Vatoufakis who is basically a Europhile.  Wouldn't it be a delicious irony if Greece ends up taking that injunction and succeeds - and it turns out Varoufakis was too moderate to countenance that option?  "Come back Varoufakis, we really love you, the Eurogroup cry in unison...

Is The ECJ really that independent, or has it too been corrupted like SCOTUS?

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Jul 7th, 2015 at 07:43:31 AM EST
[ Parent ]
Yes. The actions of the ECB are incredible. I had not believed this possible.
by rz on Tue Jul 7th, 2015 at 07:24:27 AM EST
[ Parent ]
I would have been more surprised if they after years of threatening to break anyone who steps out of line would suddenly say "ok" and throw their arms up in the air.

ECB under Trichet started the eurocrisis and established ECBs power to - together with the eurogroup - dictate policy to national parliaments. ECB under Draghi scaled back on the crisis for the crisis countries (except Greece) but has not given up the power, it is kept in case it is needed. In effect if countries step out of line thay might suffer a return to crisis, compliments of the ECB. But as long as they move in the correct neoliberal direction they may be spared (except Greece).

by fjallstrom on Tue Jul 7th, 2015 at 08:08:54 AM EST
[ Parent ]
Maybe so. I just had expected something different from Draghi.
by rz on Tue Jul 7th, 2015 at 08:29:53 AM EST
[ Parent ]
Draghi presides, he does not rule.

And he's an orthodox economist and career central banker.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Tue Jul 7th, 2015 at 08:32:47 AM EST
[ Parent ]
He is chair of Governing Council of the European Central Bank - Wikipedia, the free encyclopedia

The Governing Council consists of:

That gives him a lot of influence, but he can't over-ride a majority of the Governing Council

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Jul 7th, 2015 at 08:46:00 AM EST
[ Parent ]
During the early days of the crisis the ECB decided to get very actively involved in politics. The outcome was uniformly a really bad performance of the relevant countries.

I had expected that somehow the recognition of this effect would stop the ECB from playing the enforcer of neo-liberal dogma again.

by rz on Tue Jul 7th, 2015 at 08:58:34 AM EST
[ Parent ]
Draghi has been much better than Trichet.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Jul 7th, 2015 at 09:11:13 AM EST
[ Parent ]
Especially considering he is appointed by the Council, which has been in lock-step on Greece.  He somehow managed to get QE though against the bitter opposition of the Bundesbank.  And it is QE which is currently creating the conditions where a solution to the Greek/Eurozone crisis is still possible.  Without QE the markets could well be in melt-down right now.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Jul 7th, 2015 at 09:25:05 AM EST
[ Parent ]
Draghi was then vice chairman and managing director of Goldman Sachs International and a member of the firm-wide management committee (2002-2005).
[In June 2012] Mario Draghi personally blocked Bloomberg's FOIA into the circumstances surrounding Goldman's structuring, and hiding, of Greek debt that allowed not only Goldman to receive a substantial fee on the transaction, but permitted Greece to enter the Eurozone
by das monde on Tue Jul 7th, 2015 at 11:17:07 AM EST
[ Parent ]
Or at least the Draghi era has. Are we really talking about the chairman or about a shifting majority? And has this majority perhaps broken down about Greece - after it did hold for Italy and Spain?
by IM on Sun Jul 12th, 2015 at 04:17:44 PM EST
[ Parent ]
What is the legality of your debt when your Central Bank tanks your economy?
by Upstate NY on Tue Jul 7th, 2015 at 10:44:20 AM EST
[ Parent ]
Your debt is to your creditors, which in this case is mainly to other "Sovereign" EU states. Effectively the ECB is now acting as liquidator on their behalf, except it is destroying Greece's assets, not liquidating them.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Jul 7th, 2015 at 11:16:30 AM EST
[ Parent ]
The bonds bought up by the ECB and the sovereigns were largely under Athenian law. So I'm sure that Greece has thought a little about the legal nature of this bailout.
by Upstate NY on Tue Jul 7th, 2015 at 11:32:44 AM EST
[ Parent ]
From the same article:
 As much as the Eurocrats have become unaccountable and causally malevolent in how they operate, Greece is too weak a vehicle to take up a successful, frontal revolt.

I fear that this is true.

by rz on Tue Jul 7th, 2015 at 03:45:21 AM EST
[ Parent ]
Meanwhile, the Guardian has its hands on a letter sent by the Greek president to Donald Tusk, European Council president, outlining the agreement between party leaders in Athens on Monday and insisting a No vote in Sunday's referendum was not a mandate for leaving the euro
Greek debt crisis | The Irish Times
The common goal, in this context, is the pursuit of a solution that will ensure:
- Covering, sufficiently, the financial needs of the country
- Credible reforms, based on a fair distribution of burdens and the promotion of growth, with as few recessionary consequences as possible
- A strong, front-loaded developmental program, primarily oriented to confronting unemployment and encouraging entrepreneurship
- A commitment to beginning a substantial discussion on confronting the problem of the viability of Greek public debt
The Political Leaders also underlined that the restoration of liquidity in the Greek banking system, in coordination with the ECB, constitutes an immediate priority.

Reads a bit like the solution I proposed in the diary

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Jul 7th, 2015 at 11:45:25 AM EST
by das monde on Wed Jul 8th, 2015 at 10:05:24 PM EST
I wouldn't mind seeing a more recent update on this, as Ireland has been putting in quite a lot of wind capacity over the past few years

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jul 9th, 2015 at 09:38:57 AM EST
[ Parent ]
Surely Cyprus must be putting in some solar capacity in recent years?

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jul 9th, 2015 at 09:39:54 AM EST
[ Parent ]
Merkel is said to be a non-explicit, rather reactive leader and is now caught in an impasse regarding the Euro. Don't count on transformative leadership. The time for that was a few years ago. Now it's time for the dominoes to fall. Even if a workable compromise is achieved for Greece, we will discuss the inadequacies of the currency union again five to ten years down the road.

Crossposted from the Open Thread:

There's No Plan B for Europe's Future - Lenz Jacobsen - Zeit (English)

[Zielonka] is furious about the "complete blindness of the European elite," about their "faith in integration" and about Europe's "paralysis." ... Zielonka says: "The EU is no longer serving European unity. It is damaging it."

That is an outrageous sentiment. And it is a position that is hardly mentioned in the European public debate -- a discourse that is characterized by nervous waiting for the current crisis to end and desperate hope that things will turn out okay. Yet what Zielonka has to say makes a lot of sense.

The Greece crisis isn't being solved by the EU, he argues. Indeed, it was worsened and made virtually insoluble by the European currency union. ...

Isn't it high time to begin thinking about what to do with Europe if it can't get its act together on its own? ... "The history of all political powers ultimately comes to an end," says Zielonka. Another one of those outrageous sentences. ...

"Talking about disintegration is frowned upon." Still, he insists he isn't "trying to say: We should do less and integrate less. We are merely pointing out that there is a flip side to the coin, that disintegration is already taking place and that we should start trying to understand it if we want to exert influence on it." Zielonka agrees. "Those who say that we should perhaps do things differently, and that we need a Plan B or Plan C, are branded as euro-skeptics and spurned. But that's absurd!" ...

Those who publicly break with the EU faith tend to rely on retrogressive, nationalist sentiments. ... "It is utter nonsense," says Zielonka. "The fact that we need to work together to be strong politically and economically has nothing to do with the EU. The retreat to nationalism only serves to weaken us." ...

He advocates for a European "polyphony" -- for many forms of cooperation existing in parallel, all of them cultivated from the bottom up rather than from the top down. ...

That may not sound like a rosy future -- it's a vague concept and certainly not an equal alternative to the dream of a united, crisis-hardened EU. At the moment, however, that idea is nothing more. It is just a dream.



Schengen is toast!
by epochepoque on Thu Jul 9th, 2015 at 06:13:45 PM EST


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