Thursday, July 16, 2015

Whither Europe?

The lull did not last long. Whatever Merkel and Hollande thought they had accomplished with their Potemkin bailout has now been exposed for the sham it is by none other than Mario Draghi. Draghi announced that the ECB will increase its Emergency Liquidity Assistance (ELA) to Greek banks to €900 million a week, but he also said that Greece "indisputably" needs debt relief, thus reinforcing the position of the IMF (or at any rate its research staff as opposed, thus far, to its policy arm).

L’homme fort de l’institution de Francfort a également clairement pris position dans le vaste débat sur la dette grecque. Selon lui, il est « indiscutable » qu’un allégement de la dette de la Grèce est nécessaire — dette dont le poids représente quelque 180 % de son PIB. « La question sera quelle est la meilleure forme d’allégement », a-t-il ajouté lors d’une conférence de presse à Francfort.
The question is now squarely on the table. The Eurozone as presently constituted does not work. It either needs to cease and desist or face the challenge of establishing central--and hopefully democratic--political control in place of the unworkable combination of deregulated markets, semi-sovereign member states, and ad hoc emergency arrangements. One of the staunchest supporters of the European project, Jürgen Habermas, has conceded that left-wing critics such as Wolfgang Streeck have a point: "Europe is stuck in a political trap," he says. But he disagrees with Streeck that "a return to nation-states can solve the problem."

I agree. For Habermas,
Such tendencies [toward de-democratization and growing social inequality] can only be countered, if at all, by a change in political direction, brought about by democratic majorities in a more strongly integrated ‘core Europe’. The currency union must gain the capacity to act at the supra-national level. In view of the chaotic political process triggered by the crisis in Greece, we can no longer afford to ignore the limits of the present method of intergovernmental compromise.
Indeed. But Habermas simply skips over the formidable, perhaps insurmountable, political obstacles to achieving this "ever closer union." Doubts about the wisdom of continuing with the European project are on the rise everywhere. The problem of the Greek debt is urgent, but the EU moves glacially when it moves at all. Still, denial of the Merkel-Hollande variety is becoming daily more untenable.


bernard said...

I'd seen the Habermas interview as well and agreed with what he said. However, supposing we did have an effective supra-national democratic representation, I doubt we would have had a different result given the political orientation of European people right now. We'd still have a vast conservative majority which is the actual problem.

Mitch Guthman said...

Europe already has a supra-national superstructure and it has been remarkably effective in imposing its will upon its supposed member states. In the absence of ongoing and substantial transfers of wealth, the economies of most of the euro zone countries will eventually be wreaked if the ECB manages the European economy exclusively for the benefit of Germany.

The other problem, as we've seen, is that whoever controls the ECB has effective control over every the survival of the member states and can dictate all of their domestic policies. For example, the ECB refused to support Greek banks because Greece elected a leftist government and because they wouldn't pass a law forcing shops to open on Sundays. How does Mario Draghi justify tying support for Greek banks to the enactment of laws requiring Greece to change its Sunday opening laws to support for Greek banks? It's as if the US Federal Reserve Bank would refuse to supply currency to American banks unless ObamaCare is repealed.

The euro is simply incompatible with a European Union that is composed of self-governing peoples. In fact, the dominant role of the ECB in setting domestic economic and social policies of all kinds means that the EU is a Potemkin democracy.

FrédéricLN said...

"De guerre lasse…"

But where and why did € governments consider that they had to exert supranational and supra democratic power over Greece?

When African states who use the Franc CFA (i.e. the €, at the rate of 1/655.957) meet bankruptcy, it is about them and the lenders, with some institutional supervision of the process — Club de Paris and Club de Londres, IMF and WB. The lenders who bought the junk bonds have to undersign a reduction of the debt. And things go on. Nobody even talks about any exit of the €.

€ governments put themselves in a political trap by *non-recognizing the boundaries of their power*. Rejecting subsidiarity. Pretending to be able to run a country against people, against the elected government, and against common sense.

Did the US government ever pretend to behave such a way against California? As far as I know, California had to manage her bankruptcy by her own, and succeeded — much better that Greece.

Imho, the issue goes above democracy vs. technocracy; above the European project or nation-states. It is about the aim and scope of politics.

Mitch Guthman said...


I agree that Varoufakis’s explanation of why Syriza didn't print and pre-position immense quantities of new Drachmas makes absolutely no sense—especially as regards the final round of negotiations. One of the things that makes the decision to join the euro irreversible is that printing and pre-positioning a replacement currency in total secrecy is pretty much impossible; but even the slightest hint of such activity would lead to "the mother of all financial crises." There would be instant capital flight, massive banks runs requiring banks to be closed and stay closed until the new currency could be distributed. Which would almost instantly turn any economy into a smoldering ruin like Greece.

But Greece was already Greece. Every liquid asset fled the country long ago. The banks were already closed. There were already serious and growing shortages of currency, food and medicne. So, what would be the harm if news leaks out?

By contrast, there might well be a significant advantage to Greece if it looked like the country was gearing up for default and Grexit. Defaulting on that large a debt would blow a hole in the German economy that would instantly consign Merkel’s political career to the dustbin of history. And the mere possibility that the Greek economy might begin to recover after a couple of years,
would have turned Merkel, Schäuble, and Draghi’s bowels liquid with fear. Instead, the Greeks unilaterally renounced their most potent weapon and just threw themselves upon the mercy of people who actually seemed to be savoring the Greeks suffering as you or I might enjoy a delicious meal. Indeed, if it’s true that the Syriza government had already decided that Greece would never default and leave the euro, it was daylight madness even to begin a campaign that could never possibly have succeeded and whose most probably outcome was the total obliteration of Greece as a sovereign country.

I think the thing that’s confound so many observers who pride themselves on their logic and rationality (such as me) has been the willingness of the Greeks to quite literally pay any price and bear any burden to stay in the euro.

As to how California recovered: We never went bankrupt. We are a very rich state whose economy and society had been dragged down because a quirk in our constitution gave Republicans a veto over everything which they had used for many years to destroy as much of our economy and infrastructure as possible. A few years ago, we changed the law and got rid of the Republicans. Things got better without Republicans. Indeed, everything is better without Republicans.

We made some temporary cuts and we raised taxes on the rich. Mainly, we began to function like a normal state and so as the US economy recovered, so did California. You will notice that other US states that cling to the Republican’s primitive superstitions and ancestor-worship of Ronald Reagan have not faired nearly so well.

Anonymous said...

Adding to Mitch's excellent commentary: not only did California never go bankrupt, it cannot go bankrupt. The Bankruptcy Code allows for municipalities to declare bankruptcy with the permission of the state (which some California jurisdictions have done in the last twenty or so years -- Orange County, Vallejo, Stockton, perhaps one or two others). But reflecting, I suppose, the fact that the United States is made up of all of its states, and so for a state to go bankrupt would mean the United States has gone bankrupt, states cannot go bankrupt. (Note: states can and have defaulted, but that is different from bankruptcy; even so, California in modern times, and for its entire history as far as I know, has never defaulted on bond issues, although it has resorted to temporary issuance of script to certain other creditors). But the EU, as the current sad episode demonstrates, has not reached the same level of unification of its states with the overall entity as the US, and that's why the euro has not and never can work under the current structure. And as Germany has shown, there is no desire to go for that extra level of integration which might cost German citizens money, the same way that citizens of CA, NY, CT, MA, etc.sacrifice money to subsidize citizens of MS, AL, AK, KY, etc.

FrédéricLN said...

Thank you Mitch for the excellent commentary indeed. My reference to California was at best provocative but basically irrelevant.

My point was nevertheless that the € states pretended to prevent a Greek default much more than, as far as I know (please correct!), the United States would prevent a default from one of them, or from jurisdictions within the US. Why? What for? I still can't get more reasons than: promethean illusion, fear of the unknown (while debt and deficit are known situations), institutional panic (lack of popular support + experience of a bankruptcy would have seriously undermined the EU "project"), short-term private interests (i.e. the French banks, which were heavily engaged in Greece before 2010 and have basically been "bailed out" from that risk). And, moreover, the inability to take meaningful decision, in absence of the working democracy and even a legal decent legal framework — for example, the "€ zone" does not exist as a legal body! And the controversy at the Karlsruhe Court suggest that the 2011-2014 bailout plans could be considered illegal at national level.

The comparison with Madoff would be therefore more relevant that the one with California ;-)

FrédéricLN said...

BTW — issuing IoUs did not require to "print and pre-position immense quantities of new Drachmas"; it is rather about "issuing scripts to certain creditors".

From my opinion, such a decision would have been more reassuring about the economic future of Greece, and therefore better regarding the cash requirements of the private sector, than the present plan which I consider as a "château de cartes".

Maybe there is a secret protocol, a relevant next step I did not get, or something like that? But we are waiting for such a relevant next step since 2011 at least (or 2008, or before), and Europe never had a secret plan, at least since the last 30 years — because it has not enough "moral personality" for that.

If the Greek crisis tells something, imho, it is about what democracies (the Greek one, the German one…) can and cannot do as far as money is concerned.

Alexandra Marshall said...

For everyone who is now finding themselves wanting to abandon the Bad Ship Euro, this article is really worth a read. I almost can't believe where my heart and head are going, but after recent events, where else could it go? I expect the cause below is lost, but if we need to root for something, it's looking like Europe can't be it anymore.