Friday, July 08, 2011


"The Greek parliament has voted, but the crisis goes on. The European Union’s current policy has been driven by the political imperatives of preserving the euro and avoiding another banking crisis – but it will not yield an enduring solution. The EU’s future depends on enabling its poorest member countries to regain their competitiveness – and this requires a very different approach.

Everyone knows that lending more money to someone who is already heavily indebted, and has few realisable assets and woefully inadequate income or earning power, creates problems. Putting the repayment date off for 30 years simply ensures that no one in authority today will be around when the time comes.

Moreover, it is plain that a large part of the new lending to Greece, which obviously cannot possibly be repaid by Greece, is in substance going to repay Greece’s existing creditors. New official lending is public (taxpayers’) money, and it is going to bail out Greece’s creditors; in particular banks with exposure not yet written down. There is certainly a need to prevent another crisis. Hence the motive for the proposed “rescue”: to prevent banks, including the European Central Bank, being hit by losses large enough to be embarrassing.

So the process of putting off the evil day is likely to continue. Anyone still holding or buying Greek government debt is relying on this; and there are indeed some people buying because the discount on Greek bonds is now so large that the price has almost arrived at a market clearing level and may be thought worth a speculative bet for those who believe the policy of postponing default will continue.

This policy is firmly entrenched, thanks to eurozone leaders’ focus on preserving the single currency and avoiding further turmoil in the banking system. But unfortunately, it will not be sufficient.

Economic distress in Europe’s periphery is real and will continue. The worst manifestation of this is unemployment, particularly among young people, inevitably bringing with it misery and the danger of unrest. This is the human cost of bad policy governing the management of the euro, combined with bad lending. This seems to have been forgotten or pushed to one side.

Greece cannot earn its way out of this mess. Its adoption of the euro made it uncompetitive and, so long as the euro remains its currency, this state of affairs will go on....

Regaining competitiveness is bound (as it always does) to involve a temporary reduction of labour costs and living standards and, in practice, the only way this can be done with relative harmony is through devaluation. We ourselves in the UK have been reminded of this very recently. As our own currency has depreciated over the recent past, we have regained competitiveness.

Accordingly, unattractive, expensive and messy though this is, dismantling the euro is the least woeful course of action. Otherwise social as well as economic trouble lies ahead and the economic future of the EU itself will be threatened".

Sir Martin Jacomb, "Greece has no future within the Eurozone." The Financial Times. 5 July 2011, in

"Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back"

John Maynard Keynes, The General Theory of Employment, Interest and Money. (1936), Book, III, Chapter X.

The Grecian debt charivari or debacle continues apace with no real end in sight. The recent resolution of the latest installment of the crisis, has of course not resulted in any real solutions or even half-solutions. Merely a postponement of the ultimate question facing both Greece and the leaders of the Eurozone and the European Central Bank of either a real restructuring of the debt, with write-offs of seventy to eighty percent of the existing debt, or falling which, Greece declaring default and leaving the Eurozone. Either decision will be a difficult one to take, as the consequences of each are hard to contemplate. And rightly so, as there are justified dangers of either event becoming one of 'Lehman-like' proportions as the aftershocks of either decision are reverberated throughout the Eurozone. As the commentator, Philip Whyte, of the Centre for European Reform argued recently:

"It is unsurprising, then that the unpleasant choice facing Eurozone leaders has not gone away. If some of the peripherals are indeed insolvent, then relief in one form or another – via bail out or default – is inevitable. A taboo of sorts was lifted when the possibility of restructuring (or 'reprofiling') peripheral country debt was discussed by finance ministers at a 'secret' meeting on May 6th. But the question remains as politically divisive as it is explosive. It divides the German government internally. And the European Central Bank (ECB) is so implacably opposed to the very idea that its president, Jean-Claude Trichet, walked out of the meeting at which it was discussed. What explains the ECB's hostility to the prospect of debt restructuring?

Partly, it reflects an odd theological attachment to the idea of creditor sanctity: come what may, debtors should pay. But it also reflects a legitimate fear of the consequences. There are 'known knowns': a restructuring of Greek sovereign debt, for example, would inflict losses on banks inside and outside Greece (at a time when many are still thinly capitalised), as well as on the ECB (which built up sizeable exposures to peripheral debt in 2010). And there are 'known unknowns': the ECB is not confident that a sovereign debt restructuring could be achieved without provoking 'another Lehman' – that is, a catastrophic loss of confidence in financial markets resulting in a pan-European banking crisis and contagion to countries such as Spain and Italy"

While the above referenced fear is a legitimate one, currently the policy in place is one that can only be with politeness called: 'papering over the cracks', AKA a 'faut de mieux' policy. Something that Mr. Micawber would no doubt be pleased with, but hardly anyone else should be. The fact is, as countless commentators have argued, the premise of the recent austerity measures voted on by the Greek Parliament with its privatization programme, is completely unreal and unworkable. With Greece's economy going into a prolonged reverse, cutting government spending will merely add fuel to the fiscal and economic fire. When added to the fact that no one seriously believes that sales of state assets will net anywhere near the twenty to forty billion Euros figures, that are being banded about. The upshot being that as Philip Whyte cogently notes:

"In any case, countries across the eurozone's indebted periphery will not return to solvency if their economies continue to contract. In the meantime, the three countries that have been shut out of the government bond markets – Greece, Ireland and Portugal – look set to become wards of European and multilateral institutions: they will owe a growing share of their outstanding liabilities to bodies such as the IMF, the ECB, the European Financial Stability Facility and its successor.

All this could poison European politics without resolving the economics. Taxpayers in the creditor countries will grow increasingly angry with their own politicians as the size of their contingent liabilities to the indebted periphery increases. Meanwhile, citizens in the periphery could revolt at endless, and potentially quixotic, austerity programmes – particularly if these come to be seen as policies imposed by foreigners to rescue private investors abroad. With national politics becoming ever more toxic, the very scenario that the ECB wishes to avoid (contagion and a messy default) might become impossible to avoid. If such an event came to pass, moreover, taxpayers in the creditor countries would bear more of the losses than private investors"

While in some circumstances a policy of 'muddling through', might conceivably make some sense, this is not one of those times to put it mildly. What needs to be done, is a hard restructuring of the private debt owed by Greece and other Eurozone peripheral countries. The fact that some French and German banks will be hard hit, and will have to tabulate on their books these losses, while regrettable can hardly be said to a 'Lehman moment'. The truth of the matter is that the leaders of the Eurozone and Monsieur Trichet in particular need to dispense with their obsession with 'creditor sanctity'. And the sooner the better. The fact is that Greece and most likely the other peripherals (Ireland, Portugal and perhaps Spain), will either need to do a hard restructuring or default and leave the Eurozone. And this decision cannot be postponed for another few years down the line. It needs to be made sooner rather than later. Any postponement will only make the situation worse and not better for all concerned. Unfortunately, Monsieur Trichet et. al., in their unjustified dislike of the first option, will inevitably result in making the second option the only one possible for the countries involved.

1. Philip Whyte, "Eurozone Debt Crisis: To restructure or not?" The Centre for European Reform. (June / July 2011), in

2. Whyte, op. cit.


Post a Comment

<< Home