Euro Crisis, Not really the End of Days
Jul. 6th, 2015 06:29 am![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksThere was an interesting post on Facebook a few days ago "liked" by Nicholas Whyte, in which the poster followed the general German/Europhile line on Greece. What was interesting about it was that it repeated the dire warnings of apocalypse if the Greeks voted no. It also seemed to believe that the Greeks would not do this, because the imagined consequences of them so doing were so horrific.
But, they did.
In fact, if Greece had voted "yes", the offer which they were voting yes to wwasn't even on the table. It had expired. I suspect that if someone in Germany had banged some heads and said "look, if you vote yes, that offer is back in play, we guarantee it", then the vote would have been a lot closer. It's an example of the headless chicken bureacracy-bound nature of Brussels, Berlin, Paris and New York (can't we set up a working party sub-cmmittee on it? Er, no, there isn't time, you fuckheads.) that they couldn't even manage that.
The difficult situation that the troika of the ECB, the eurozone financial ministers and the IMF now finds itself in is that, in any negotiations with Greece, the Greek leadership can say that they have a mandate from the Greek people which they have to follow. The Eurozone leadership cannot say that they have a mandate from the European people that they in turn have to follow.
That doesn't mean that Tsipras has "won". Indeed, the short-term prognosis for Greece is fairly horrific. Tsipras in the past few days has been as deluded as Merkel was when she said "where there's a will, there's a way". Well, there isn't a way, even if there is a will. Just because teh Greeks backed Tsipras does not mean the troika will say "oh, ok, we need you so much we will lend you more euros". They won't.
The situation now exposes the fundamental hole in the theory of the euro. Unlike the currency union of the USA (a parallel that has been used in the past), there is no printer of money of last resort when it comes to the euro. The ECB is prevented by one set of rules from doing what another set of rules asks it to do.
Greece's leadership (backed by a popular plebiscite) will say that the ECB, or the EFSB under the leadership of the eurozone finance ministers, should give Greece more euros to keep the economy functioning. Because, make no mistake, Greece is now in a position where the economy has effectively halted due to lack of currency. The European leadership are looking at a set of rules which, when put together by economic illiterates, fails to tell people what to do when a country within the eurozone runs out of euros. It can't print its own. So, what happens? This isn't a kickable can of accountancy. This is literally a case of banks having no cash. Not just insolvent, but cashless.
The Greek banks have been insolvent for years. Remember, Greece has already defaulted (in 2012). They just pretended at the time that it wasn't a default. But try telling that to the Cypriot banks that went broke as a result, nearly bringing down the Cypriot economic system with them.
More recently, the ECB just pretended that the Greek banks were not insolvent because it was the line of least resistance. Indeed, the entire Greek crisis has been one of politicians taking the line of least resistance in the vague hope that the problem will go away.
Now, I have to emphasize once again (because so many people think I am saying one thing when I am not), this is nothing to do with the rights and wrongs of the debt. I am fully aware that the Greeks lied through their teeth to get into the euro, and that public sector workers and pensions have been far too high for a decade. Any Greek public sector employee or pensioner who says that they didn't get any of this money they are said to have got need only look at the standard of living in Bulgaria, a neighbouring country with a similar level of absolute GDP per person, to see that everyone in Greece has for the past 10 years been living at a level commensurate with western European production, but without the production to match.
When I say that this is "besides the point", these "debt moralists" say that, au contraire, it is the entire point, that there is no other point, that any "forgiveness" of this debt will have practical knock-on effects. But, what they are really saying is, borrowing what you know you can't pay back is wrong, morally wrong, and you must be made to pay it back.
Sadly, as is evidenced throughout history, money borrowed at interest quite often is not paid back and cannot be paid back. The moral niceties have to be set aside; the rights and wrongs of the case on either side have to be ignored, and you have to work out how to solve this in a civilised manner, rather than in the manner used in India more than 1,00 years ago, when debt was passed from generation to generation and a class of what were effectively serf land-farmers came into being. In Greece today there is no hope of this money being paid back. Do the debt moralists think it "right" to create a modern version of this generation-to-generation indebtedness? Why not bonded servitude? Why not slavery? For, if a person has not the cash to repay, should they not be forced instead to give up their freedom? Slavery as a result of indebtedness does, after all, have a noble (Greek) history.
It is this which I have tried to argue most forcefully. I think that the Greeks were mendacious in getting into the euro; I think that they were avaricious and stupid to borrow the money without any real idea of how that money was going to be paid back. I think that the commercial banks in Germany and elsewhere were almost criminally stupid to lend the money (which they lent because their other commercial clients needed customers for their washing machines and cars) and, most of all, I think that the federalists in Brussels who foresaw the impossibility of a monetary union without a fiscal union, but deliberately went ahead because they thought the result of the inevitable crisis would be a fiscal union, should be brought to trial for crimes against humanity.
But, in the grand scheme of things, none of that really matters at the moment. The "blame game" is both pointless and fruitless. What now faces Europe's leaders, and what Merkel and Hollande will have to discuss today, is what you can do about a country that is running out of the currency it needs for the economy to function on any level at all. We are, to be blunt, weeks if not days away from a humanitarian crisis.
This is in its own way a fascinating test of modern monetary theory. Will Greece try to create an ersatz euro? That would appear to be the logical step in this world of denying reality. The Greek Central Bank prints its own fake euros to lend to its own insolvent banks. That has a certain symetry to it. The banks are bust so lend them currency that you aren't allowed to print, which you pretend has a value that it doesn't have.
Reality will quickly get in the way and the ersatz euro will probably fall to an exchange rate of 1:4 against the real euro. The ersatz euro might have "euro" printed on it, but if it walks like a drachma and talks like a drachma, that is what it really is – no matter how much the Greek Central Bank will deny it.
I am afraid to admit that I am watching this from an economic viewpoint with grim fascination. It's hard to take a detached academic viewpoint when the actions of a few could lead to the complete collapse of a wannabe western economy. But my suspicion is that, because the short-term problem is going to be "just" a lack of fungible currency, within a few weeks we will see an alternative fungible currency emerge. This is because fungibility of fiat currency is a necessity in a developed economy. We aren't going to return to a bullion economy and we aren't going to return to barter. Someone, somewhere, is going to create paper that someone else will trust. The Greek central bank is the obvious favourite candidate.
That would throw the ball back into the troika's court, so to speak, in that they would then have to take the decision to eject Greece from the eurozone. That, clearly, is something Merkel, Lagarde, Draghi, Djisselbloem and Schauble do not want to do. They might move the goalposts again (how, we do not as yet know).
But, they did.
In fact, if Greece had voted "yes", the offer which they were voting yes to wwasn't even on the table. It had expired. I suspect that if someone in Germany had banged some heads and said "look, if you vote yes, that offer is back in play, we guarantee it", then the vote would have been a lot closer. It's an example of the headless chicken bureacracy-bound nature of Brussels, Berlin, Paris and New York (can't we set up a working party sub-cmmittee on it? Er, no, there isn't time, you fuckheads.) that they couldn't even manage that.
The difficult situation that the troika of the ECB, the eurozone financial ministers and the IMF now finds itself in is that, in any negotiations with Greece, the Greek leadership can say that they have a mandate from the Greek people which they have to follow. The Eurozone leadership cannot say that they have a mandate from the European people that they in turn have to follow.
That doesn't mean that Tsipras has "won". Indeed, the short-term prognosis for Greece is fairly horrific. Tsipras in the past few days has been as deluded as Merkel was when she said "where there's a will, there's a way". Well, there isn't a way, even if there is a will. Just because teh Greeks backed Tsipras does not mean the troika will say "oh, ok, we need you so much we will lend you more euros". They won't.
The situation now exposes the fundamental hole in the theory of the euro. Unlike the currency union of the USA (a parallel that has been used in the past), there is no printer of money of last resort when it comes to the euro. The ECB is prevented by one set of rules from doing what another set of rules asks it to do.
Greece's leadership (backed by a popular plebiscite) will say that the ECB, or the EFSB under the leadership of the eurozone finance ministers, should give Greece more euros to keep the economy functioning. Because, make no mistake, Greece is now in a position where the economy has effectively halted due to lack of currency. The European leadership are looking at a set of rules which, when put together by economic illiterates, fails to tell people what to do when a country within the eurozone runs out of euros. It can't print its own. So, what happens? This isn't a kickable can of accountancy. This is literally a case of banks having no cash. Not just insolvent, but cashless.
The Greek banks have been insolvent for years. Remember, Greece has already defaulted (in 2012). They just pretended at the time that it wasn't a default. But try telling that to the Cypriot banks that went broke as a result, nearly bringing down the Cypriot economic system with them.
More recently, the ECB just pretended that the Greek banks were not insolvent because it was the line of least resistance. Indeed, the entire Greek crisis has been one of politicians taking the line of least resistance in the vague hope that the problem will go away.
Now, I have to emphasize once again (because so many people think I am saying one thing when I am not), this is nothing to do with the rights and wrongs of the debt. I am fully aware that the Greeks lied through their teeth to get into the euro, and that public sector workers and pensions have been far too high for a decade. Any Greek public sector employee or pensioner who says that they didn't get any of this money they are said to have got need only look at the standard of living in Bulgaria, a neighbouring country with a similar level of absolute GDP per person, to see that everyone in Greece has for the past 10 years been living at a level commensurate with western European production, but without the production to match.
When I say that this is "besides the point", these "debt moralists" say that, au contraire, it is the entire point, that there is no other point, that any "forgiveness" of this debt will have practical knock-on effects. But, what they are really saying is, borrowing what you know you can't pay back is wrong, morally wrong, and you must be made to pay it back.
Sadly, as is evidenced throughout history, money borrowed at interest quite often is not paid back and cannot be paid back. The moral niceties have to be set aside; the rights and wrongs of the case on either side have to be ignored, and you have to work out how to solve this in a civilised manner, rather than in the manner used in India more than 1,00 years ago, when debt was passed from generation to generation and a class of what were effectively serf land-farmers came into being. In Greece today there is no hope of this money being paid back. Do the debt moralists think it "right" to create a modern version of this generation-to-generation indebtedness? Why not bonded servitude? Why not slavery? For, if a person has not the cash to repay, should they not be forced instead to give up their freedom? Slavery as a result of indebtedness does, after all, have a noble (Greek) history.
It is this which I have tried to argue most forcefully. I think that the Greeks were mendacious in getting into the euro; I think that they were avaricious and stupid to borrow the money without any real idea of how that money was going to be paid back. I think that the commercial banks in Germany and elsewhere were almost criminally stupid to lend the money (which they lent because their other commercial clients needed customers for their washing machines and cars) and, most of all, I think that the federalists in Brussels who foresaw the impossibility of a monetary union without a fiscal union, but deliberately went ahead because they thought the result of the inevitable crisis would be a fiscal union, should be brought to trial for crimes against humanity.
But, in the grand scheme of things, none of that really matters at the moment. The "blame game" is both pointless and fruitless. What now faces Europe's leaders, and what Merkel and Hollande will have to discuss today, is what you can do about a country that is running out of the currency it needs for the economy to function on any level at all. We are, to be blunt, weeks if not days away from a humanitarian crisis.
This is in its own way a fascinating test of modern monetary theory. Will Greece try to create an ersatz euro? That would appear to be the logical step in this world of denying reality. The Greek Central Bank prints its own fake euros to lend to its own insolvent banks. That has a certain symetry to it. The banks are bust so lend them currency that you aren't allowed to print, which you pretend has a value that it doesn't have.
Reality will quickly get in the way and the ersatz euro will probably fall to an exchange rate of 1:4 against the real euro. The ersatz euro might have "euro" printed on it, but if it walks like a drachma and talks like a drachma, that is what it really is – no matter how much the Greek Central Bank will deny it.
I am afraid to admit that I am watching this from an economic viewpoint with grim fascination. It's hard to take a detached academic viewpoint when the actions of a few could lead to the complete collapse of a wannabe western economy. But my suspicion is that, because the short-term problem is going to be "just" a lack of fungible currency, within a few weeks we will see an alternative fungible currency emerge. This is because fungibility of fiat currency is a necessity in a developed economy. We aren't going to return to a bullion economy and we aren't going to return to barter. Someone, somewhere, is going to create paper that someone else will trust. The Greek central bank is the obvious favourite candidate.
That would throw the ball back into the troika's court, so to speak, in that they would then have to take the decision to eject Greece from the eurozone. That, clearly, is something Merkel, Lagarde, Draghi, Djisselbloem and Schauble do not want to do. They might move the goalposts again (how, we do not as yet know).
