Europe vs. Greece: the End of the Euro?

Source: Chappatte, Eurofree 3

Greece was supposed to pay the IMF this week and it has deferred the payment to the end of the month — but how will it meet the € billions due if the negotiations fail?

What are Europeans leaders thinking of?

It is perfectly obvious that Greece can’t pay. This is a debt that cannot ever be recovered under present circumstances, with the Greek economy in the doldrums and the Greek people refusing further austerity measures. Rightly so.

Austerity does not work in times of recession. Never has.

Anyone who’s studied Econ 101 knows this. Elementary, my dear Ms. Merkel. When an economy is hit by recession, you have to stimulate demand and employment. If you hit both demand (with taxes) and cut back on employment — which is what has been done in Greece for five years, non-stop — all you get is more recession. And no money in the government’s coffers.

So how can Greece pay back its debtors?

The European Commission has reportedly tabled a proposal to break the logjam, offering the use of the Euro financing facility, the ESFS, created in 2010 as a “temporary crisis resolution mechanism”. And recourse to the ESFS is offered in return for pension and labor market reforms in Greece.

Problem solved?

No, it appears that the other two members of the Troika have not approved the EC proposal and perhaps not even read it.

So nothing happens.

Mario Draghi, the head of the European Central Bank, suddenly started talking about “social fairness”, suggesting that it should be applied to Greece.

Social fairness, sounds good… Problem solved?

No, the IMF won’t hear it. Ms. Lagarde has no interest in social fairness, she wants her money back.

And you know what? If they all keep going this way, none of them will ever get their money back.

Eurozone finance ministers go from one meeting to the next, week after week, expressing increasing annoyance at the flamboyant Greek finance minister, Yanis Varoufakis — no doubt because he is telling them the truth.

He’s an economist, he knows. All economists know this: some debts cannot be paid back, no matter how much belt-tightening you engage in. Precisely because that tightened belt makes you weaker by the day and prevents you from ever making enough money to pay back your debts.

In such cases, the solution is simple: forgive the debt.

Strike it out.

Start from scratch, give people in debt breathing space so they can climb out of the hole.

The Eurozone can afford it, Greece’s economy is small, some two percent of total Eurozone GNP.

Europe and the Euro are worth saving — yes or no?

Has any European leader any sense that Europe must be built on European values — cooperation, helping each other out, making life better for ALL Europeans. Greeks included. The party now in power had nothing to do with the creation of the debt, they didn’t lie to the rest of Europe, the mess was done by their predecessors.

Isn’t that worth remembering? There are Greeks worth saving, aren’t there?

But it seems that European politicians do not know this, that they have never heard of the values of cooperation or the need to build a Europe worth living in . They have forgotten all about Europe and European ideals.

All they want is their money back and teach a lesson to the Greeks.

But in so doing, they’ll only manage to kill Europe.

Especially certain politicians like the German Chancellor. Ms. Merkel is a fine political animal, attuned to her electorate, but she has no knowledge and even less understanding of economics. She’s never attended Eco 101, she’s a physics teacher (or some such thing — but it was a long time ago, now she’s a politician and nothing else). Strangely enough, her main economic advisers, Mr. Jens Weidmann, President of the Bundesbank, and Mr. Wolfgang Schaeuble, her Finance Minister know as little as she does.

In the case of Mr. Schaeuble, his lack of knowledge is easy to explain; he studied law at the Universities of Freiburg and Hamburg, obtaining from the latter a doctorate in law in 1971 with a dissertation called “The public accountant’s professional legal situation within accountancy firms”. Surely a subject that couldn’t be further away from public finances. His early career didn’t enrich his knowledge of economics: he worked in a tax office in Freiburg and subsequently, from 1978 to 1984, he practiced law in the district court of Offenburg. The rest of his life was spent in purely political activities (meaning blah-blah-blah), reaching as high as the Christian Democratic Union (CDU) chairmanship in 1998.

So Mr. Schaeuble was a Big Politician? Nope, he resigned 15 months later in the wake of the illegal donation scandal that rocked the party. Then he was picked up by Ms Merkel (never afraid of any scandal) and here he is, at the ripe age of 72, serving as her finance minister (and busy destroying Europe).

Mr. Weidmann’s obtuseness regarding economic matters is more surprising, since he did obtain a doctoral degree in economics from the University of Bonn in 1997 — but he got his training from a monetary theorist, Manfred J. M. Neumann, a relatively obscure economist who, at present, has left the university and is in the Bundesbank alongside his pupil, in the vest of Research Professor at the Bundesbank Research Centre.

It’s a small world — and a small world of people who blindly follow the teachings of Milton Friedman and are true believers in theWashington Consensus — economic theories that were popular 20 years ago and are now thoroughly discredited, so much so that even the IMF (once a major proponent)has had to abandon them after a series of disasters (not least in Asia, but that’s another story).

And of course, if theAmerican Federal Reserve, under Ben Bernanke’s leadership, has successfully helped steer the United States out of the 2008 Great Recession, pumping money into the economy, it’s because Milton Friedman’s monetarist theories have been long abandoned. But quantitative easing on the scale embarked by the Federal Reserve is an unthinkable course of action for strict monetarists like Schaeuble, Wiedmann and Neumann who do not understand the counter-cyclical use of the public sector.

Yet that counter-cyclical role of government in the economy is not hard to understand: when demand in the private sector collapses (as it did in the 2008 recession), you spend money in the down cycle to preserve overall demand; and you (the government and central bank) tighten the belt in the up cycle. That’s the moment you want to balance the budget and trim deficits. Not before. And certainly never during a down cycle.

But Schaeuble, Wiedmann and Neumann don’t understand this.

In fact, the whole of Germany does not understand this: Germans have even worked it into their Constitution that government budgets should be kept in balance every year.

And Germany wants the rest of Europe to do the same! Germany wants the death of Europe…Doesn’t Germany realize that it is doing well now because of a series of factors that have nothing to do with austerity? This is not the place to go into them, but it should be noted that the introduction of the Euro in 1999–2000 worked to Germany’s advantage, boosting its exports. Add to that a pliant labor market, and Germany’s economic success story is fully explained. All this could change now that German labor is finally waking up to the fact that it’s been exploited by employers and it’s beginning to engage in strikes and asking for wage hikes…

But Germany prefers to focus on austerity, they are still suffering from memories of the Weimar Republic’s super inflation. That was back in the 1920s, ninety years have passed, the Great Depression came and went as Keynes taught the world how to deal with it — but the Germans keep their eyes closed and continue in the childish conviction that a State’s budget is the same as a housewife’s or a small business’; that it should be balanced at the end of every year, regardless of the length of the spending cycle for government programs, especially in infrastructure building that can last several years, even decades.

Small wonder that Germany is now facing a serious problem of under-investment in essential infrastructure!

Back to Greece. The Germans (and the rest of Europe along with the IMF) bailed Greece out expecting the Greek economy to contract by 4 or 5 percent before rebounding — instead, it contracted by over 25% and never rebounded.

On the contrary.

There’s a full blown humanitarian crisis on-going in Greece: Greek unemployment stood at 25.7% in March 2015 and Greeks under 26 suffer from an astounding 58.3% rate of unemployment (see Eurostat data here and here). That’s three out of five young people without a job! And there have been reports (for example, the UK Guardian here) that some 500,000 children suffer hunger; that poor people with chronic diseases like diabetes or heart problems can no longer get the medication they need from the national health system and they can’t afford to buy it on the open market because of the high cost; that museums are understaffed and archeological digs stopped for lack of funding; that schooling and higher education are both curtailed. Many rely on handouts and soup kitchen. The Church of Greece distributes daily 250,000 food rations.

In March this year, it was reported that the EU pledged €2 billion ($2.7 bn) to “ease” the crisis. Better than nothing but far too little to make a real difference. Consider the debts Greece has to keep paying: this coming June, €6.74 billion; in July, €5.95 bn ; in August, €4.38 bn etc. I stop, you get the idea.

Source: BBC article

What are European leaders thinking of? Don’t they care that they have caused an unprecedented humanitarian crisis, something unseen in Europe since World War II except for the 1990s war in the Balkans?

Where is their moral fiber? Their sense of cooperation with European brothers and sisters who are suffering?

What kind of Europe is this?

I suspect that behind the hardening of European leaders vis àvis Greece is the idea that we can now do without Greece in the Eurozone because we’ve set up firewalls. The domino theory — that a Grexit would be followed by Spain, Portugal, Ireland or Italy — is no longer seen as realistic.

I believe that idea is dead wrong.


Consider the scenario of a Greek exit: Greece would have to abandon the Euro and build up a new currency system from scratch. A time-consuming, high-risk endeavor that would require a total overhaul of the banking system. For citizens, it would mean the loss of savings, for local businesses, the impossibility to get loans, for foreign investors, the freezing of their assets.

In short: an economic apocalypse.

Would the rest of Europe get hurt besides Greece? Yes, though perhaps not so much — at least at first. One thing is certain, a Greek default would mean a straight loss for all creditors, starting with the European Central Bank that has a €110bn exposure to Greek banks and has spent around €20bn on buying up Greek government bonds. It could of course print Euros to cover the loss, but Germany (with Weidmann on the ECB board) is not likely to allow that.

Would the Euro survive?

Good question. Because “dropping Greece” is something that signals to the world that the Euro is a currency that cannot be trusted.

If Greece gets treated by Brussels in this cavalier way, the same could happen to Portugal or Spain or anyone in the Union. And it could even happen to a bigger Euro member: why not Italy whose debt is much bigger?

But the damage doesn’t stop there.

It doesn’t stop in Europe. The Euro would sink, making imports (especially oil) extremely expensive for all Europeans, including Germans.

Exports (because of the low Euro) might fly for a while, but not for long as many European firms would find that their increased sales abroad do not cover the cost of the necessary inputs they must import to produce their exports. Imbalances would arise. This could be the beginning of a new recession, and as it would happen at a moment of great fragility in the Euro zone that is barely beginning to recover, it could quickly lead to a full-blown depression.

With vast and unpredictable political repercussions.

If Europe sinks into depression, the US and China might not be far behind.

Economic recovery in the whole world could grind to a halt.

But for Mr. Schaueble who is an accountant, a currency problem is just a matter of taking out your pen and balancing the accounts, right? He seems totally unaware of the risks. Irresponsible. Really, the man should be sent home.

One clap, two clap, three clap, forty?

By clapping more or less, you can signal to us which stories really stand out.