Greece and the EU

Adam L. Silverman

As we wait to see the outcome of today's referendum in Greece in regards to how its government should proceed in debt negotiations and responses with the EU, I wanted to point to two of the best pieces I've read on how things got to this point. The first is David Attewell's Putting the Greek Referendum in Context. Attewell clearly and concisely goes through how things have gotten to this point. The second piece is a much longer piece by Steve Randy Waldman at Interfluidity (h/t John Cole at Balloon Juice). Waldman takes a much deeper dive into how things got this way, as well as engaging in the important discussion about whether economics, especially macroeconomics, is supposed to be about efficiently and effectively allocating resources or about morality.

In many ways the instability of a loose federation or confederation within a monetary union framework, which is what the EU really is despite its bureaucratic nature, is clearly showing here. Each member state is supposed to be fully sovereign, yet no member state that is on the Euro controls its own monetary supply. And the supposedly independent European Central Bank has made it clear it will withhold liquidity/cash at the bidding of its economically most powerful members and the financial sector. This would be the equivalent of, during an economic downturn in the US, the US Federal Reserve refusing to make dollars available to the states that make up the US. Imagine if that had happened, even selectively, to force structural budgetary and economic changes at the state and local level during the Great Recession of 2008? That would have been a crisis of both federalism and the Constitution! What the EU member states are now learning, if they're paying attention, is that they are not actually sovereign. They don't control their own money supply, the ECB is not impartial, and it does the bidding of both the most powerful of the European economies and of the European financial sector. The takeaway here is that the EU states on the Euro are not fully sovereign, do not control their own economic, let alone political, systems, and are to do the bidding of those who have the monetary control.

Comments

[Toivos]

The big no vote in Greece has just sent a message to the financial elite that runs the ECB that national sovereignty is still a factor inside the EU. We will see in coming weeks if they understand that message.

I have no way of predicting what is going to happen. By Tuesday Greece will run out of money. Literally, simple cash by which daily economic activity is transacted. Those notes that grease the skids for sending food to stores that people require to survive. The ECB can, if they so decide, simply stop the flow of cash. Maybe there are enough sociopaths inside the ECB that will want to punish the Greeks for this expression of sovereignty? Today they have the power to literally starve them. Maybe more passionate heads will prevail and the ECB will realize that their austerity programs are not working? Who knows? We will know soon.

[Vaclav Linek]

Thank you Dr. Silverman for the links.
Here is a recent interview of Varoufakis where
he states his view of the evolution of the crisis
and where he describes a 3-point plan for resolving it:

https://www.youtube.com/watch?v=qNItYoJhgmk

[William R. Cumming]

Thanks ADAM and again IMO the EU, NATO, and Israel are the Achilles Heels of the USA and MENA the Achilles Heel(s) of the EU, NATO, and Israel.

The Ship of Our State may well be sunk this decade and perhaps this Weekend.

[charly]

Not true. Greece could just print Emergency Euro's and they will be accepted in Greece.

PS. Local government in my country did this during WWII when they couldn't get real bank notes from the central bank.

[mbrenner]

*The drama played out in Greece this week is of historic importance. What is at stakes goes well beyond the future of the Eurozone. It is the very essence of the great postwar civilizational compact that brought unprecedented prosperity and political stability to Europe. For it is the repeal of the understandings, principles and sense of comity associated with that project that is the clear target of the financial forces that control the continent’s economic affairs. The current Greek government headed by Prime Minister Alexis Tsipras has dared to reject an ultimatum whereby his country would be relegated to a permanent subservient condition of debt servitude or thrown to the wolves of the untamed financial markets. The game is an unsavory one whereby the Troika of the IMF, the European Central Bank and the European Union extract anything of value and transfer it to the banks and hedge fund speculators who made spectacularly reckless loans to previous, compromised government leaders. The resistance to that fate by a government that has received a mandate from the electorate is deemed illegitimate. Mr. Tsipras and Finance Minister Yanis Varoufakis are pilloried by the powers that be as ungrateful and feckless.

Professor Varoufakis in particular has been singled out for denunciation by his counterparts and by an obedient press, in libelous ways. I happen to know Varoufakis personally. He is a man of integrity and intellectual honesty who, in a lunch conversation a few weeks before taking office, told me that he was dedicated to seeking terms of resolution that at once spared Greeks further economic punishment and placed the country on a sound monetary footing. He was optimistic that a Syriza government could persuade the Troika that their plan was mutually beneficial. Varoufakis also is a superb monetary economist whose credentials outshine those who have bewitched European governmental elites with their Hoover era nostrums. Instead he has been vilified by Mario Draghi (ECB) from Goldman Sachs which played the primary role in cooking the financial books as advisers to the corrupt former government, Jean Claude Juncker (President of EU Commission)who as Prime Minister of Luxembourg was the impresario of a global tax avoidance scheme whose beneficiaries included Greek oligarchs, Christine Lagarde (IMF) who made her career at the Chicago based international law firm of Baker & McKenzie, and the clueless Angela Merkel from the former East Germany whose understanding of European postwar transformations seems nil.

[GulfCoastPirate]

Kudos to the Greeks for voting 'NO'

[Valissa]

Some excerpts below from an article that takes a philosophical approach to the Greek crisis and German attitudes about it. The classic Monty Python sketch of a soccer match between Greek and German philosophers is included and delightful, but the article itself is very thoughtful.

Would love to hear from any of you German commenters your opinion of this article and it's philosophical contentions. Personally I think the author should have, based on the title and the sketch, included more about the Greek philosophers and philosophy.

I always been partial to Heraclitus myself, and offer this quote for the Greek crisis...

You cannot step twice into the same river. (var. 1)
No man ever steps in the same river twice, for it's not the same river and he's not the same man. (var. 2)

A hilarious Monty Python sketch explains why Greece is in a huge crisis http://www.washingtonpost.com/blogs/wonkblog/wp/2015/07/04/a-hilarious-monty-python-sketch-explains-why-greece-is-in-a-huge-crisis/
The basic question for all these thinkers is whether the patterns we see in the world around us really reflect patterns that exist in nature or are simply attempts by our minds to structure what we see. For many German philosophers, a key effort was to understand the principles governing societies.

This is a particular issue for economists, who seek patterns in the mass of statistics coming out of stock markets and labor surveys. It's not always enough, though, to look at how markets and prices behave and describe the mathematical patterns they seem to follow. In practice, there always seem to be exceptions to the rules, sometimes catastrophic ones, which suggest that those maybe patterns have more to do with our minds than the natural world itself.

"Anglo-Saxon economists are guided by the utilitarian philosophy of John Stuart Mill or Jeremy Bentham, asking merely if a policy works," The Economist recently wrote. "Germans side with Immanuel Kant, believing that nothing works except through law, and are horrified when the [European Central Bank] strays from its narrow mandate."

[SAC Brat]

Will the US end up in the same position if the Obamatrade agreements go through? A loss of sovereignty?

[Adam L Silverman]

SAC Brat,

No, we are not entering into a monetary union or giving up control of our own currency. To be honest while I'm very concerned about some of the issues raised about TPP, specifically giving any president fast track authority to negotiate (remember the folks supporting it for this, where writing letters to Iran several months ago that the current President really doesn't negotiate for the US...) and the independent boards that would moderate disputes (these, I think, raise a concern for some aspects of sovereignty), the truth is that the whole TPP thing is really about the Straits of Malacca. What seems to be happening is we're trying to pre assemble, through this trade pact, a coalition to signal and if necessary push back against China in order to keep the Straits of Malacca open as a Sea Line of Commerce and Communication.

[Tyler]

Well let's get this party started.

The sooner the EU crashes and burns, the better off everyone will be. A bunch of technocrats ruling from Brussels suddenly out of a job. Glory be and let wonders never cease.

[Babak Makkinejad]

I agree with you: "Down with the Serfdom, long live Freedom"!

[Babak Makkinejad]

All:

Peasants have rebelled:

http://www.alamy.com/stock-photo-around-1500-german-peasant-revolt-had-peasants-shoe-with-a-shoestring-72542574.html

I suppose the northern Europeans, just like at the time of Luther and his supporters, will condemn the rebellion and try to extinguish it.

[Fred]

Valissa,

Here's another comedy take on the run up to the crisis.
https://www.youtube.com/watch?v=V4QpG5QXGB0

[Fred]

Adam,

"Imagine if that had happened, even selectively, to force structural budgetary and economic changes at the ... local level during the Great Recession of 2008?"

Welcome to Michigan! Where one of Barack Obama's chief fundraisers served as "Emergency Financial Manager" for the city of Detroit with powers to alter contracts at will. Been there, done that. Not to worry though, a couple of billionaire's got hundreds of millions in tax exemptions for special projects (hockey arena, land development, etc) while pensioners got a benefit cut, amongst other things. Wayne County is next. This is just practice, ah legal precedent, for potential future actions in states like Illinois and New Jersey.

[Farooq]

This was very informative. Thank you for sharing this.

[Babak Makkinejad]

Elefteria!

[Jack]

I never agree with GCP on most issues but in this instance I too say kudos to Syriza and Tsipras in having the political courage to bring participatory democracy to the forefront in Europe to answer the increasing autocracy of the EU elites. IMO, this democracy should be extended to the German people to decide if they should continue to fund the majority of losses on all the unpayable debt. Additionally they should also vote if their political leadership should be allowed to transfer private debt of the banks on to the public as happened with Greek private debt.

The Big question is how the EU elites respond to this Greek vote. The most immediate and urgent decision will have to be made by the ECB. Will they restart emergency lending to Greek banks and increase the Target2 liability if deposits continue to flee. If Greece is forced to exit the Euro then the ECB will have to be recapitalized as the Target2 liabilities become real losses. If the ECB does not provide emergency lending the Greek banks will fail rapidly and Greece will need another scrip. That will only further deepen the economic crisis as imports of food, medicine and oil will come to near halt as hard currency will have to be seriously rationed in the immediate term. Over the long term however clearing the balance sheet through a debt default will be the first step in recovery for Greece. They will still have to come to terms with government spending relative to taxes collected as only a foolish lender will take the risk of financing their government deficits. So any profligate government will be seduced into printing money.

On the political front it will be worth watching the fortunes of Pablo Iglesias, Beppe Grillo and Marine Le Pen. Le Pen's response to the Greek vote was to call for a negotiated dissolution of the euro.

How the Eurocrats handle this crisis will provide invaluable information on the long term survivability of the Euro as a continent-wide currency. I am also watching to see if the financial outcome of this Greek vote is the starting gun to a change in psychology on the sustainability of government backed credit growth as the central pillar to the global economy.

I hope at this pivotal moment Zanzibar will provide us his sage opinion. His post from 2011 is so prescient. https://zanzibr.wordpress.com/page/2/

[Larry Kart]

Interesting article from Business Insider (of all places):

Excerpt:

The vote is huge lesson for conservatives and anyone else who thinks this is about a dilettante government of left-wing idealists who think they can flout the law while staging some kind of Che Guevara-esque dream:
Wrong.
This is what capitalism is really about.
From the beginning, Merkel and the EU have operated from the position that because Greece took on debt, Greece now needs to pay it back. That position assumed — bizarrely, in hindsight — that debt only works one way: if you lend someone money, then they pay it back.
But that is NOT how free markets work.
Debt is not a guarantee of future payments in full. Rather, it is a risk that creditors take, in hopes of maybe being paid tomorrow.
The key word there is "risk."
If you're willing to take the risk, you'll get a premium — in the form of interest.
But the downside of that risk is that you lose your money. And Greece just called Germany's bluff.
The IMF loaned Greece 1.5 billion euros, due back in June, and Greece isn't paying it back. Greece has another 3.5 billion due to the ECB in July, and that looks really doubtful right now.
This is how capitalism works. The fact that it took a democratically elected government whose own offices are adorned with posters of Lenin, Engels and Guevara to teach this lesson to Germany is astonishing.

Read more: http://www.businessinsider.com/greece-referendum-result-and-the-meaning-of-debt-2015-7#ixzz3f4vUTj1d

[Farooq]

Dr. Silverman,

Thank your for this post and the two links. They were very helpful for me in understanding the situation.

[Ken Roberts]

The blog of Yanis Varoufakis may be a useful info.

http://yanisvaroufakis.eu/

See, for instance, his post of 18-June-2015 re Greece's proposals.

http://yanisvaroufakis.eu/2015/06/18/greeces-proposals-to-end-the-crisis-my-intervention-at-todays-eurogroup/

[confusedponderer]

I think it was a grave mistake that Germany and France bailed out their banks respectively. Banks have moral hazard, too. So I do think that debt restructuring is necessary.

I also think that Germany played this quite poorly, so did France, and so did the IMF. Point taken.

Also, I do not think that this is a referendum about Greece's stay in the EU or NATO. Greece has firmly stated its intent to remain in both organisations.

So let me just point out this:

Greece's public sector accounts, or accounted when Greece hit ground rock bottom, for about 40% of the GDP. The salaries, benefits and pensions were extravagant. That means, with or without the EU, they were in for austerity anyway, whether they like it or not. Given their lack of generated revenue, and collected tax, that was unsustainable from the onset.

For decades the Greeks were unwilling to adress that by policy choices they made. As long as they could, they did so with borrowed money. Now they can't and it's Germany's fault? Greece's endemic corruption (the 'fakelaki culture'), it's endemic tax dodging? France's fault? The faul t of the rapacious Ottoman emire whose self serving tax collectors the Greeks leanred to dodge perhaps? Another factor in Greece's misery is it's remarkable defence spending, by percentage of GDP, the second-biggest spender among the 27 NATO countries after the United States. NATO's fault?

People tend to forget over all that Troika, and EU bashing that Greece is a sovereign country.

Greeks themselves forget that, too, when they protest, understandably, against gvt layoffs and salary cuts (which are probably unfair, given that the Greeks outside public service are better able to cheat on their taxes and hide and understate their real income).

Interfluidity's cursory summary on Greek's general fucked-up-ness really skips the point. It is made clearer by Westphalian Post:

"It is the Greeks’ responsibility and theirs alone to manage their own budget and bear the consequences of their own actions. Some say that banks should not have lent irresponsibly and unsustainably but the banks not only depended on ECB and EU goodwill to operate in the single market, they all bought into the ‘German guarantee’. They were right to do so as indeed Germany and northern Europe did come to the rescue of the southern trouble-makers by making available loans at generous rates, at a time when the ‘PIGS’ were no longer able to finance themselves in the international lending markets. The price to pay was to enact budgetary reforms to ensure the problem would not repeat itself.

Both Greece and Portugal have been mentioned so far because this is where they parted ways: Portugal went on to enact austerity measures involving tax hikes and cuts in salaries – particularly painful cuts considering that the state apparatus in southern nations, invariably accounts, directly and indirectly, for about half of the GDP – but Greece dragged its feet. Austerity was implemented but not only were many of the intended targets not met, the debt had to undergo a ‘haircut’ and there was a public backlash which reflected, first in the threat of a Greek PM to hold a referendum on the deal with the IMF and European lenders, and now in the actual election of a government which promises to “end austerity”. The result is patently obvious: in the same EU finance ministers Council of February, where the Greeks tried to renegotiate the conditions of their loans, the Portuguese instead asked to be authorized to repay their loans from the IMF early, and thus save half a billion euros in the process."

Also people make too much of Germany and France having broken the stability pact, while demanding that Greece and the others adhere to it. They did so because they could afford to, unlike Greece.

"Deficit problems amounting from the introduction of the euro were not unknown to the EU and a number of policies had been attempted to address them, prior to the financial crisis. The ‘Stability and Growth Pact’ was one of these and envisaged 3% caps on annual budgetary deficits, with penalties to be paid by transgressors. It was dropped after Germany and France both broke the 3% cap. This too reveals much in the way of differences within the EU for the bigger the economy and the more central to the economic system, the less fragile it is to the moods of the markets. Germany and the US can actually afford to run high deficits or tax heavily because the size of their markets will always guarantee investment. Smaller economies like Greece need to value their reputation much more highly since the slightest hiccup can drive away FDI."

Before the Euro, tourists used to joke about Italian and Greek currency (I think I may have some 10.000 lira notes lying around somewhere), the ridiculously high numbered in prices and the endemic inflation.

With the introduction of the Euro they didn't change the policies, they only switched currency. Perhaps the Greeks are well advised to leave the Eurozone to continue their tradional inflationary policies of the past.

https://westphalianpost.wordpress.com/2015/04/17/brussels-achilles-heel/

Worth reading.

[Poul]

Hmm, as a Dane I'm not a fan of the Euro, but the EU is a useful organization for it's member states. The EU elites have just push too far with the idea of a closer union aka a federal government. The plan was probably to move towards a closer union with the unavoidable crisis a currency union would bring.

Unless the idea of being a European becomes a more powerful sense of nationality than that of being a Dane etc. the EU is better off sticking to those areas were all members benefit.

P.S.
No I'm not overstating the case of an unavoidable crisis - look at other currency unions like the Latin or Scandinavian currency union - they broke up because of economic imbalances over time put pressure on the union - just as with the Euro.

[Patrick Bahzad]

Thx Adam for kicking off a debate that is certainly going to be lively, but probably based on wrong assumptions, fantasies and misconceptions mostly.
The referendum in Greece is important, but it is not going to be the signal for a wider reshuffling of anything in the EU, let alone the "death" of the EU, which quite frankly is a ludicrous idea.

The two links to Attewell and Waldman are interesting as well, but IMO, some notions about the EU and the Euro Zone are clearly misunderstood here:
- "Each member state is supposed to be fully sovereign": not true. EU member States aren't fully sovereign at all, for reasons a constitutional expert could explain better than me. In layman's terms, some political areas have been federalized and aren't in the hands of the individual member States anymore. Other political decisions are taken by majority vote, meaning a country may be called to implement a decision it is not in favour of. That is what is called federalization. That this federation/confederation is imperfect is beyond doubt, but it's the only of its kind existing in the world and if looking at thing from a long term perspective, it's been quite a success story. I would like to remind everyone in this regard that the current fiscal and debt crisis in the EU is largely the result, not just of bureaucratic mismanagement in Greece, or a erroneous monetary policy by the ECB, but more so of the financial meltdown that took place in the US in 2007 and rocked the whole planet afterwards.
- "instability a loose federation or confederation within a monetary union framework, which is what the EU really is despite its bureaucratic nature, is clearly showing here". I beg to differ: if there was such an instability it would show in terms of exchange rates (euro vs other currencies), interest rates and global market trends. None of these indicators show there is any fundamental instability the likes of which you're describing. There is definitely an imbalance, because of the various degrees of integration in different areas (monetary, economic, fiscal, political).
"Each member state is supposed to be fully sovereign, yet no member state that is on the Euro controls its own monetary supply" : again false, as member states aren't fully sovereign, as you're stating yourself in that sentence. Controlling its own monetary supply is an indicator of sovereignty, but no State within the Euro area has that control, but none was forced to join the Eurozone. It is a sovereign decision to become am member, and it is by no means mandatory (the UK and Denmark are within the EU, but not the Euro zone. With certain rights, come certain obligations.
- "the supposedly independent European Central Bank has made it clear it will withhold liquidity/cash at the bidding of its economically most powerful members and the financial sector": wrong on two accounts. First of all, the ECB is independent, much to the dislike of several EU governments who would have liked to dictate their own terms to the ECB and wrong because the "emergency help funding" from the ECB has still been going on and is likely to continue. The ECB is responsible for defending the monetary interests of all the countries that are part of it, or just Greece. When the situation is 18 against 1, you can't blame the ECB to be closer to the line defended by the 18 countries that represent 98,5 % of the EU's GDP. As for withholding liquidity, again the ECB isn't, it's the IMF that is probably going to refuse any other help to Greece, as well as the markets.

[confusedponderer]

Patrick Bahzad,
re the aspects 'not fully sovereign' and federalisation, you're of course correct.

But there is after hat still plenty of sovereign domain for the Greek to govern themselves as they please. The Greek parliament still makes it's budget bills every year. A lot of Greek's problem's are a result of their conscious policy choices which reflect Greek preferences.

Contrast with Portugal.

http://uk.reuters.com/article/2015/03/20/uk-portugal-imf-repayment-idUKKBN0MF2CE20150320
http://www.wsj.com/articles/portugal-to-repay-imf-bailout-loans-early-1421840065
http://www.reuters.com/article/2015/02/28/us-portugal-imf-idUSKBN0LW0GO20150228

[Patrick Bahzad]

CP,

I fully agree with you. My comments are not directed at exonerating Greece of its share of responsibility in what has been going on, just to put the record straight from a purely factual basis, because from a legal and constitutional point of view, the situation is pretty straight forward, even though it may be difficult to understand as there are different rules for different areas.
Anyway, my take on the latest Greek drama, is that it will be over soon. The Greek have done their referendum, they think they're in a better position now, but they're not and at the end of the day, it's not the ECB and the rest of Europe or the eurozone that is in danger here, it's just Greece itself.
They will soon find out, that they may obtain a few concessions from their international creditors, but that they will still have to undergo an severe restructuring and rethinking of their own. After all, assuming they write off their debt and don't pay any of it, their public expenditure (budget) is still in chronic deficit, and they don't produce much that is of value as export products. Where are they going to get the money they need at the end of this month ? The only possible answer is through a new help package that will be tied to stringent terms and conditions, although maybe a bit less drastic than first anticipated.
If they don't play ball, they know they're out of the euro, because the euro zone has put in place mechanisms to cordon off Greece financially in order to avoid a contagion through greek "paper euros" that woudn't be worth the paper they're printed on.
This is just the latest in the ongoing poker game being played in Brussels. The Greek government just got a winning hand, but they don't have enough chips on the table to change the outcome. Besides, they're pretty much to blame too for the mess they're in.