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Tuesday, July 28, 2015

What’s sauce for the goose… Plan Z vs. Plan B (Sketches in European Solidarity V)

There’s a ruckus about the latest disclosure of a contingency Plan B during the Greek debt showdown by the Greek Finance Ministry under its flamboyant minister Yanis Varoufakis to introduce a parallel currency in the event that the ECB shut down Greek banks (which of course the latter did but the former did not). While there is some room for debate about whether the Ministry’s hacking into its own online tax system (who knew backward Greece had an online tax system!), which seems to have been under the control of the troika rather than the ministry itself, seems somewhat stealthy, Paul Krugman defends the existence of such a contingency plan, tongue-in-cheek, as “shocking, shocking!”


Who knew that the Greek online tax system was under the control of the troika and not the Greek finance ministry? Film still from Casablanca: Major Strasser (Conrad Veidt) dictating terms to Capt. Renault (Claude Rains). Shocking, shocking!

Quite apart from the fact that this contingency planning had already been initiated by the predecessor Samaras government and revealed by Varoufakis on July 14 in an interview with Phillip Adams, it has long been known that the troika, for its part, had made highly secret contingency plans for Grexit and the introduction of a parallel currency during the 2012 round of the Greek crisis, known as Plan Z.

Here’s an excerpt from Peter Spiegel’s 2014 account in the FT:

Unbeknown to almost the entire Greek political establishment, however, a small group of EU and International Monetary Fund officials had been working clandestinely for months preparing for a collapse of Greece’s banks. Their secret blueprint, known as “Plan Z”, was a detailed script of how to reconstruct Greece’s economic and financial infrastructure if it were to leave the euro.

The plan was drawn up by about two dozen officials in small teams at the European Commission in Brussels, the European Central Bank in Frankfurt and the IMF in Washington. Officials who worked on the previously undisclosed plan insisted it was not a road map to force Greece out of the euro – quite the opposite. “Grexit”, they feared, would wreak havoc in European financial markets, causing bank runs in other teetering eurozone economies and raising questions of which country would be forced out next.

But by early 2012, many of those same officials believed it was irresponsible not to prepare for a Greek exit. “We always said: it’s our aim to keep them inside,” said one participant. “Is the probability zero that they leave? No. If you are on the board of a company and you only have a 10 per cent probability for such an event, you prepare yourself.”

Sounds familiar?

Here at Meltdown Economics we say,

“What’s sauce for the goose is sauce for the gander!”

Sauce for the gander

File under: Eurozone Barnyard Metaphors (see Game of Chicken, Game of Turkey, Cow on the Ice)

Sunday, July 19, 2015

‘O Freunde, nicht diese Töne’ or ‘Die Schonzeit ist vorbei’: World public opinion at a dangerous crossroads

The official European Union Anthem is the final choral movement of Beethoven’s Ninth Symphony, based on Schiller’s poem ‘An die Freude’ (‘Ode to Joy’, although the original version apparently had ‘freedom’ instead of ‘joy,’ which Schiller later deleted as too hot a political potato for his day).

Beethoven starts the movement with these words of his own:

O Freunde, nicht diese Töne!
Sondern laßt uns angenehmere anstimmen,
und freudenvollere.
Oh friends, not these sounds!
Let us instead strike up more pleasing
and more joyful ones!

After the Eurozone’s marathon reenactment of Buñuel’s film The Exterminating Angel, the Brussels Crucifixion of Greek PM Alexis Tsipras, and the Guns of Navarone, political discourse around the world has taken a sharp turn in the direction of recrimination, vituperation, polarization, slander and hysteria. On the one hand we have the Twitter hasttag #Thisisacoup denouncing the third Greek bailout terms, on the other we have a touchy nationalistic pushback in establishment German circles, media, and public opinion, as reported for instance in Jacob Soll’s recent NYT op-ed (also see previous post). And European Council president Donald Tusk “had been unsettled by the bitter recriminations that have characterised the contentious six-month Greek negotiations, particularly the anti-EU and anti-German sentiment that he believes has become part of mainstream political discourse,” reports the Financial Times.

On July 12, Paul Krugman in his NYT blog came out strongly in support of the #Thisisacoup camp:

This goes beyond harsh into pure vindictiveness, complete destruction of national sovereignty, and no hope of relief…

Who will ever trust Germany’s good intentions after this? …

The European project — a project I have always praised and supported — has just been dealt a terrible, perhaps fatal blow. And whatever you think of Syriza, or Greece, it wasn’t the Greeks who did it.

Official German circles and their lackeys (I hate to use such a loaded word from communist propaganda days, but it really seems appropriate) did not waste any time in riposting with a character assassination, by Nikolaus Piper in the Süddeutsche Zeitung on July 13. Under the section link “Paul Krugman--Economist foaming at the mouth,” Piper describes Krugman as joining the hashtag campaign of “Germany haters” (Germany being only one of his many pet targets, but currently his favorite), a “hyper-Keynesian” who thinks that new debt, low interest rates and government spending are always the answer to all problems, and that austerity is always false. He insinuates that Krugman’s Nobel Prize for his work in trade theory (actually trade and economic geography) is a questionable qualification for him to pontificate about fiscal (actually macroeconomic) policy while he blithely ignores facts, but Piper fails to mention Krugman’s work on exchange rates and currency crises and his publications on macro policy in a liquidity trap (e.g., Japan in the 90s) and, indeed, bailouts vs. write-downs. He ends with a recital of obscure Baltic politicians and playwrights with even lesser economic qualifications who have also felt an urgent need to defame Krugman. In other words, this is a complete hatchet job based on willful ignorance of the background of someone eminently qualified to comment on the Greek debt crisis (whether you agree with him or not), certainly light-years more qualified than Piper himself (who we are told on his SZ profile has written an award-winning children’s book on economics, among other things). The only invectives missing are “Keynesian running dog” and, of course, “spearhead of the world Jewish conspiracy against Germany,” but then, the Süddeutsche Zeitung is an honorable newspaper and has a reputation to uphold as a liberal paper of record that even republishes excerpts from the New York Times once a week. Strangely enough, the very same Nikolaus Piper conducted a rather favorable interview with Krugman in 2010, praising (if somewhat tongue-in-cheek) the very hang to polemic he now so roundly denounces in him. Is he not only a lackey of the German finance ministry but also suffering from unrequited love?

Piper 15 Krugman porträt SZ screenshot highlighted

Is the hitherto respectable Süddeutsche Zeitung in danger of becoming the new Der Stürmer?

Now, anyone who follows Krugman’s blog and columns knows that he is

That Piper might be part of an orchestrated campaign here (presumably by the German finance ministry, but of course I’m just speculating), comes out in Friday’s interview with German Finance Minister Wolfgang Schäuble in Der Spiegel:

SPIEGEL: The American economist Paul Krugman has a clear position on that. The new aid program for Greece, he wrote in a recent column [actually in his blog, GS] in the New York Times, is "pure vindictiveness" and a "complete destruction of national sovereignty." Do you share his view?

Schäuble: Krugman is a prominent economist who won a Nobel Prize for his trade theory. But he has no idea about the architecture and foundation of the European currency union. In contrast to the United States, there is no central government in Europe and all 19 members of the euro zone must come to an agreement. It appears Mr. Krugman is unaware of that.

Schäuble thus repeats Piper’s mischaracterization of  Krugman’s Nobel award and the insinuation that he is not qualified to judge these issues. Whether Piper is reading from Schäuble’s playbook, or vice versa, is hard to say, but this cannot be a coincidence. Would Schäuble’s perusing Krugman’s seminal 1988 paper “Financing vs. Forgiving a Debt Overhang” (Journal of Development Economics 29: 253-268) change his opinion about Krugman’s qualifications to comment on the Greek debt crisis in any way (on the unlikely assumption that Dr. Schäuble could even make heads or tails of it)?

And that Krugman might be oblivious of the cumbersome governance structure of the Eurozone also seems highly unlikely, besides being largely irrelevant. After all, who in the world today isn’t painfully aware of this deficiency after being subjugated to this excruciating five-year reenactment of The Exterminating Angel?

But we needn't take the word of a benighted American to judge whether there isn’t some justification in the #Thisisacoup accusations. Paul De Grauwe, former member of the Belgian Parliament, emeritus professor at the Catholic University of Leuven, currently professor at the London School of Economics, and one of the world’s leading experts on currency zones, is someone no-one could accuse of being unacquainted with the Eurozone’s architecture (or being a foaming-at-the-mouth “hyper-Keynesian,” for that matter). Yet in his blog on June 17, two weeks before the Guns of Navarone were fired or #Thisisacoup took off, he wrote:

All this teaches us two lessons. First, the objectives of the creditor nations, including the ECB, that today add tough conditions for their liquidity support is not to make Greece solvent but to punish it for misbehavior. … But it is precisely the desire to punish Greece by imposing additional austerity that makes it so difficult for Greece to start growing again and to extricate itself from the bad equilibrium.

A second lesson concerns the credibility of the future use of OMT. It clearly appears from the Greek experience that the willingness of the ECB to use the OMT program is very circumscribed. It is circumscribed by the ECB’s desire to solve a moral hazard problem … Behind the gloves of OMT is hidden a big stick. It is doubtful that future governments that experience payment difficulties will accept to be beaten up first before they can enjoy the OMT liquidity support. [my emphases]

Thus De Grauwe only lends further support to Krugman’s “this goes beyond harsh into pure vindictiveness, complete destruction of national sovereignty, and no hope of relief” critique, well before one could even speak of a “coup.”

Why is the German finance minister so sensitive to these criticisms that he seems almost overeager to resurrect the role of the “ugly German” (in the words of one German opposition parliamentarian)? The Oxford macroeconomist Simon Wren-Lewis has a plausible answer (and it’s not that Dr. Schäuble is a covert Nazi or auditioning for the role of Dr. Strangelove):

What is driving Germany’s desperate need to rid itself of the Greek problem?

One possible answer is that Germany finds the truth about Greece too upsetting, too challenging. This is because since 2010 Greece has done most of what the Troika asked of it. In particular, changes in its government’s underlying primary budget balance (i.e. the degree of austerity enacted) have been greater, by a long distance, than any other European economy. For many outside Germany what has happened to Greece as a result is hardly surprising: austerity is contractionary, and austerity on steroids is ruinous. Yet Germany is a country where the ideas of Keynes, and therefore mainstream macroeconomics in the rest of the world, are considered profoundly wrong and are described as ‘Anglo-Saxon economics’. Greece then becomes a kind of experiment to see which is right: the German view, or ‘Anglo-Saxon economics’.

The results of the experiment are not to Germany’s liking. Just as ‘Anglo-Saxon economics’ would have predicted, the results for Greece under the Troika have been a disaster. After dutifully taking the medicine for years, and seeing the collapse of their economy, finally the Greek people could take no more. Confronting this reality has been too much for Germany. So instead it has created its fantasy, a fantasy that allows it to cast its failed experiment to one side, blaming the character of the patient.

Wren-Lewis fails to mention that the Merkel government is also being very much driven, like the Sorcerer’s Apprentice, by the public opinion it whipped up in the past about “those lazy Greeks,” and by the rise of Germany’s own anti-Euro and xenophobic movements like Alternative für Deutschland and Pegida.

Paul Krugman, as the most visible, vocal and dangerous (what with his flashy Nobel Prize) exponent of this ‘Anglo-Saxon economics’ (read ‘hyper-Keynesianism’), is the obvious policy-wonk Prügelknabe (read ‘whipping boy’) for so many reasons I cannot even begin to enumerate them here. One is perfectly within one’s rights to disagree with him, but then one should marshal legitimate arguments rather than revert to a sorry tradition of character assassination and defamation.

PS: You might be wondering what ‘Die Schonzeit ist vorbei’ is doing in the title of this post. I hesitated to use this very loaded German expression in this context, but will go out on a limb anyway. ‘Die Schonzeit ist vorbei’ (literal translation: ‘the no-hunting-season is over’, or more figuratively, ‘the hunting season has now been reopened’) is an expression attributed to the Frankfurt theater manager Günther Rühle to justify the 1986 staging of film and drama enfant terrible Rainer Werner Fassbinder’s play “Der Müll, die Stadt und der Tod” (although German courts later ruled that it would be inadmissible to attribute it to him, but then, we know how consistently German courts have ruled on touchy historical issues). The Jewish community in Frankfurt claimed that the play revived classical anti-Semitic stereotypes such had been used in the notorious Nazi propaganda film Jüd Süß, and that this transgression overruled the constitutional freedom of artistic expression.

While the campaign against Krugman does seem to have aspects of ‘reopening the hunting season,’ the perpetrators have been very careful to avoid any overt anti-Semitism (it is of course no secret that Krugman is Jewish). However, anyone intimately familiar with German sensitivities cannot help but recognize that Piper’s article is skating dangerously close to this kind of historical stereotyping, particularly by using the term “Hasskampagne gegen Deutschland” (“hate campaign against Germany”). I won’t even speculate on who is responsible for the Stürmer-like “Volkswirt mit Schaum vor dem Mund” (“economist foaming at the mouth”), which was carefully placed outside the body of Piper’s article (and thus cannot be directly attributed to him) but in a prominent position on the webpage, and appears as the article’s actual title—which it is not—in Google searches.

Wednesday, July 15, 2015

O tempora o mores! Whether as creditors or debtors, German economists always seem to be angry!

The professor of financial accountability Jacob Soll is just back from a conference in Munich on Greek sovereign debt, and he shares his thoughts on “Germany’s Destructive Anger” with us today in the New York Times.

What are Germans angry about? According to Soll:

But when the German economists spoke at the final session, a completely different tone took over the room. Within the economic theories and numbers came a moral message: The Germans were honest dupes and the Greeks corrupt, unreliable and incompetent. Both parties were reduced to caricatures of themselves. We’ve heard this story throughout the negotiations, but in that room, it was clear how much resentment shapes the views of German economists.

Now flash back to 1919, when economist, founder of the German Workers' Party-DAP (predecessor of the German National Socialist Party) and theoretical mentor to the still-unknown Adolf Hitler Gottfried Feder published his pamphlet Das Manifest zur Brechung der Zinsknechtschaft des Geldes (Manifesto on the Breaking of Debt Enslavement):


Economists sure knew how to make attractive book covers in 1919. Take notice for your next book on the Greek debt crisis, Hans-Werner Sinn!

Feder attributed all the evils of the modern world to the machinations of financial capital (particularly, of course, Jewish financial capital) and the existence of interest on debt. He inspired the Nazi distinction between productive capital (schaffendes Kapital) and parasitic capital (raffendes Kapital, i.e., banking, stock market speculation), and wanted to do away with the latter by replacing traditional money with “Feder-Giro” money (not to be confused with his contemporary Silvio Gesell’s “Freigeld”).

While he was a big influence on Hitler and Goebbels during the 1920s, when the Nazis actually came to power in 1933 after the Machtergreifung, they reappointed former Reichsbank president Hjalmar Schacht (who had resigned in 1929 because he found the American Young Plan to service Germany’s debt unsustainable—sound familiar?) to the central bank presidency and as minister of economics, sidelining Feder completely. And of course the banks were not abolished (only the Jewish bankers).

Schacht writes about Feder in his memoir Magie des Geldes (The Magic of Money), Düsseldorf/Vienna, 1966, p. 66 (my translation):

The National Socialist propaganda under the direction of Gottfried Feder virulently attacked our entire private capitalistic banking and monetary system. Its slogans were nationalization of banks, breaking of debt slavery, and the introduction of “Feder-Giro” money with the intention of completely destroying our system of money and banking. In order to deflect this nonsense, as Reichsbank president I appointed  a committee of inquiry to draw up proposals for tighter supervision and regulation of banks [...] During several consultations with Hitler I managed to get him to break with the absurd and dangerous banking and monetary ideas of his party comrade.

Evidently, what one thinks about “Zinsknechtschaft” and the unsustainability of debt very much depends on whether one is a creditor or a debtor. Keynes, of course, thought that both should share in the costs of debt restructuring, in the interests of advancing the common good rather than descending into a negative-sum game of vengeance and counterproductive austerity. During the Bretton Woods negotiations he wanted to penalize equally countries that ran current-account deficits and surpluses. The Americans (at least until the Marshall Plan), who in 1944 were the world’s creditors and the world’s trade surplus champions, would have none of this. Evidently the Germans, who today in their part of the world are in a similar position, seem to share this view. They are in no rush to give up their 10%-of-GDP export surpluses for any corrupt, unreliable and incompetent Greeks.

Soll concludes his German anger article with this recommendation to them:

When the panel split up, German attendees circled me to explain how the Greeks were robbing the Germans. They did not want to be victims anymore. While I certainly accepted their economic points and, indeed, the point that European Union member countries owe Germany so much money that more defaults could sink Germany, it was hard, in Munich at least, to see the Germans as true victims.

Here lies a major cultural disconnect, and also a risk for the Germans. For it seems that their sense of victimization has made them lose their cool, both in negotiations and in their economic assessments. If the Germans are going to lead Europe, they can’t do it as victims.

My recommendation to German economists if they want to get their anger under control (for, as we’ve seen, they seem to have major problems in both roles):

Neither a borrower nor a lender be!

(Hamlet Act 1, scene 3)

And my admonition to Greek Rosencrantz and Guildenstern economists:

The rich ruleth over the poor, and the borrower is slave to the lender.

(Proverbs 22:7)

Bank of Greece after Direct Hit by the Guns of Navarone

Would the last person to leave please turn out the lights? (Photo: Reuters/FT)

Tuesday, July 14, 2015

A Specter is Haunting Europe: The Spectral Theory of Money, and Why Puerto Rico is not Greece

Barry Eichengreen has a stimulating recent essay at Spiegel Online (English version) on the differences and similarities between the debt crisis in the US Territory of Puerto Rico and the Eurozone Territory (sorry—sovereign state) of Greece.

So Puerto Rico is, in a literal sense, Greece in another guise. But can you imagine the United States putting all other domestic and foreign policies on hold while it attempts to resolve the crisis? The idea is ludicrous. But that is precisely what Europe has done.

Point well taken. Puerto Rico’s problems (like Detroit’s not too long ago) will be resolved in bankruptcy courts. Greece’s, in contrast, have led to a five-month marathon reenactment of Luis Buñuel’s 1961 surrealist film The Exterminating Angel. That there are fundamental governance differences between the Eurozone and the United States is something I examined some time ago.

But there is another, more fundamental, difference between the Greek and the Puerto Rican cases that has become glaringly apparent since the European Central Bank (ECB) unleashed the Guns of Navarone on Greece, that Eichengreen doesn’t address. Can you imagine the Federal Reserve Board cutting off its financial backstop (discount window) to all Puerto Rican banks because their local government was insolvent on its municipal bonds, thus imposing bank holidays and capital controls on the islands? For that is what the ECB, the Eurozone’s equivalent of the Federal Reserve, has done in Greece.

Why is it inconceivable for the Federal Reserve Board to do so but already tough love (though not uncontroversial) between the ECB and Greece? To obtain central banking liquidity, Greek banks have to put up collateral (rediscounting). But what does their collateral consist of? In the US it would be US Treasury Securities, bonds issued by the Federal Government. The Fed has never accepted state or municipal bonds as collateral (although it traditionally, i.e., before the 1930s, and perhaps even today, accepted best commercial paper as collateral, whatever that is), and that’s why banks do not hold them as capital reserves. The corresponding instrument in the Eurozone would be Eurozone central sovereign debt, but, alas, no such thing exists (except for a small amount of European Investment Bank paper). What does exist? National bonds of the 19 constituent member states of the Eurozone, i.e., in American terms, municipal and state bonds, something the Fed would never dream of discounting. Since the EZ banks largely hold bonds of their own country (increasingly so since the 2008 crisis), this has created the famous bank-sovereign debt doom loop. As long as the ECB is unwilling to act as lender of last resort using any of the 19 national sovereign debt instruments equally, we will get the famous “fragility of the Eurozone” centrifugal self-destruction feedback loop described by Paul De Grauwe in 2011. But in doing so, the ECB opens itself up to the objection of the German Bundesbank’s President Jens Weidmann that the ECB would be thereby engaging in illicit monetary financing of governments (to the point where the Bundesbank sued the ECB before the German and European Constitutional Courts). It was probably the threat of more of this Bundesbank blackmail that induced the ECB to deploy the Guns of Navarone against Greece.

This hamstrung construction of the Euro derives from a fundamental misconception of what a currency is. A currency is not merely circulating notes and coins (and central bank deposits)—what economists call the monetary base—issued by a central authority and deemed legal tender. In a system of fractional reserve banking, it must be a whole gamut of debt instruments of a wide spectrum of maturities and (fixed-income) returns guaranteed by this selfsame issuer. Notes and coins, what I call money of order 0, constitute the most liquid component and are also a form of sovereign debt. But banks normally want to keep their reserves in something interest bearing, rather than in cash, which means that they must also be supplied with “risk-free” instruments of maturities of all orders (1, 3, 6, 12 month T-bills, 2-10 year T-notes, 30 year T-bonds, and in the past perpetual bonds like British consols). It is the obligation of the central bank to do this in a way that is non-inflationary and serves the other macroeconomic goals of policy-making (e.g., full employment), by influencing the yield curve with open-market operations, discount rate adjustments, reserve and capital requirements, etc. I call this the Spectral Theory of Money.

From this point of view the national debt is not an evil to be eliminated, but a necessary service the central bank provides to operate a modern economy. Not a subterfuge the profligate government foists on society to finance evil wars and a wasteful welfare state (although it can and historically has indeed done both), but a necessary supply of a range of lubricants to keep a monetary economy running smoothly. And if we examine the history of the longest continuously running modern currency system in the world, the Bank of England, this is exactly what we find. In 1694 a group of merchants bought up the poorly managed debts of the English king and obtained the privilege of issuing pound notes and coins, and bonds and later consols, as the Bank of England (then still a quasi private enterprise). And while the national debt of England subsequently only ballooned while the country gorged on a successful but expensive program of imperial expansion, its financing costs fell radically. Something the French kings, who failed to establish a viable central bank and state finance after the South Sea/Mississippi Bubbles, could only regard with envy.

If Eurobonds had existed, and all Eurozone banks were capitalized by statute with them, this problem could never have arisen, and the Guns of Navarone could never have been fired. Alexander Hamilton, the first American Secretary of the Treasury, understood this clearly in 1791 when he bought up the outstanding debts of the thirteen revolutionary states, and consolidated them into a single national debt serviced by national tariffs and taxes.

Until such time as the Eurozone catches up with Hamilton and begins issuing Eurobonds, and exclusively capitalizing its banks with them, it will never be a viable currency zone, as the Greek debt crisis has amply demonstrated. At best it will degenerate into a German protectorate cowering under the Guns of Navarone.

Monday, July 13, 2015

Donald Tusk shines in Buñuel film reenactment, says Financial Times!

“Sorry, but there is no way you are leaving this room,” the former Polish prime minister said.

Council of Europe President Donald Tusk speaking to Angela Merkel and Alexis Tsipras at 6 am this morning in Brussels (according to the inside account in today’s Financial Times).

Tusk  Bunuel Exterminating Angel 2

Donald Tusk performing in the Brussels all-night marathon reenactment of Luis Buñuel’s masterpiece The Exterminating Angel (left), and film still from the 1961 original (right).

The Financial Times report continues:

It was extremely hard, violent even,” said one participant…

In the end, some bleary-eyed diplomats emerged unsure who had prevailed in the marathon session. But they seemed agreed as to who had suffered most.

“They crucified Tsipras in there,” a senior eurozone official who had attended the summit remarked. “Crucified.”

This undoubtedly would have been a field day for Buñuel’s camera had he lived to witness it!

L-age d-or crucifixion scene

Film still from Buñuel’s 1930 surrealist masterpiece L'Age d'Or. How would the master have filmed this morning’s Brussels Crucifixion?

Sketches in European Solidarity IV: Wolfgang Schäuble’s Sympathetic Magic Understanding of European Solidarity


Is German Finance Minister Wolfgang Schäuble’s economic philosophy basically a form of sympathetic magic? (Picture credit: Keystone)

In my last post I cited extensively from Timothy Geithner’s memoir Stress Test to document that German Finance Minister Wolfgang Schäuble has always led the Grexit, “amputate the festering Greek leg” camp in the German government since at least 2012. And that the new Greek government may have been unwittingly playing into his hands the whole last five months. In any event it is disingenuous or seriously naive to wake up suddenly to this possibility only last Saturday, as Yanis Varoufakis did in The Guardian, a charge he is planning to repeat in coming Thursday’s Die Zeit.

In retrospect it is clear that a fiscally and statistically troubled Greece should never have been admitted to the Euro (and also that the Euro should never have been launched in the form it was). So there is some sense behind contemplating Grexit, even if it represents a rather impressive failure of due diligence and supervision on the part of the European Commission, but correcting an error may not mandate the same policies as not making it in the first place. But what I find almost more shocking about Schäuble is something else—his sense of what constitutes European solidarity and effective policy, for it reveals a level of economic illiteracy truly shocking in such a powerful finance minister.

In his memoir Geithner also recounts another conversation he had with Schäuble in 2010:

The most powerful country in Europe, Germany, was deeply committed to a strategy of austerity, and skeptical of forceful financial rescues. I had met Schäuble, a survivor of an assassination attempt that left him in a wheelchair, for the first time in Iqaluit, and I had found him compelling—direct, smart, strong. On substance, though, we were often far apart. He had a clear view: Greece had binged, so it needed to go on a strict diet. Other nations with unsustainable deficits had to do the same, even though it would cause pain for their citizens, even though many [in fact, all except Greece] had been fiscally responsible before the crisis. Schäuble said Germany would slash its own budget in solidarity with the rest of the continent, to show that it wouldn’t ask for sacrifices it wouldn’t make itself [my emphasis]. I thought that would just make the problem worse; in the near term, the German government and German citizens needed to do more spending and less saving.

“You know, you sound a bit like Herbert Hoover in the 1930s,” I said. “You need to be thinking about growth.” [Kindle edition position 6681]

That slashing the German budget could be an act of solidarity with the financially strapped rest of Europe is a vision of such abject economic ignorance that it leaves one breathless. Anthropologists call this style of reasoning “sympathetic magic.” Like voodoo, “sympathetic magic is based on the metaphysical belief that like affects like.” The Skeptic's Dictionary continues:

Anthropologists consider magical thinking a precursor to scientific thinking. It is indicative of a concern with control over nature through understanding cause and effect. Nevertheless, the methods of magic, however empirical, are not scientific. Such thinking may seem charming when done by our ancestors living thousands of years ago, but today such thinking may indicate a profound ignorance or indifference towards science and a testable understanding of the world.

Recall that in 2010 Germany was running a current-account surplus of over 5% of GDP. Its public investment rate was at an historical low. The share of labor in national product was historically low and falling. It was benefitting from unprecedentedly low interest rates as a safe haven in the crisis. Its substantial excess savings were (and still are!) flowing into its foreign trade surplus.

This does even qualify as an example of Keynes’ famous dictum

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.

There is no academic scribbler behind such stupidity, it is just stupidity pure and simple. Hoover (actually his Treasury Secretary Mellon, although we have only Hoover’s word for it in his memoirs) may have advocated “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate... it will purge the rottenness out of the system,” but at least he might have been distilling this policy from the academic scribbler Friedrich Hayek (though this is unlikely, and Mellon actually pressed for lower interest rates). What excuse does Schäuble have? A schwäbische Hausfrau's common sense and an inability to understand the paradox of thrift?

Sunday, July 12, 2015

So what’s on the Eurotelly tonight? 1. Austerity for Our Time, 2. Rosencrantz and Guildenstern are Dead, 3. The Guns of Navarone

The Euro has many faults that have rightly given it the nicknames ‘machine from hell’ and ‘burning building with no exits.’ But one of its most pernicious is that, conceived as an irrevocable currency union, no legal pathway was foreseen for evicting one member if all the other members wanted it out but it still refused to leave, or even for it to leave of its own volition. And a debtor that had fallen on hard times could not pursue any kind of adjustment coupled with compensatory expansionary policies, since its hands would be tied without access to exchange and monetary policy, and a lender of last resort. Like in the old Gold Standard days (read 1930s), it would be nailed to a cross of Euro.

This seems to be the current situation with respect to Greece, and as I shall argue, it didn’t arise only after the Syriza anti-austerity coalition came into power in January. It seems that Greece was on a path to Grexit long before, and that Tsipras  and Varoufakis had only become its unwitting agents (dupes?), much like Rosencrantz and Guildenstern* in Shakespeare’s Hamlet. This would make the negotiations a political farce, ‘full of sound and fury, signifying nothing’ (Shakespeare’s Macbeth this time), staged simply to intimidate the various Eurozone national electorates into accepting a foregone conclusion. But a foregone conclusion that has taken five years to play out, and has had every resemblance to a Konkursverschleppung (criminal concealment of insolvency) at the expense of the Greek people and Eurozone taxpayers, as Wolfgang Münchau pointed out back in 2013 and again this week.

Yet no sooner had I written the above paragraphs Thursday morning then a new deal seems to be in the offing, with Greece, astonishingly, capitulating to possibly stricter austerity requirements than it had just rejected in the referendum last Sunday, now sweetened with a vague new promise of debt relief (a promise, one should note, that was made before, in November 2012, but never fulfilled – see below for more).

So what gives? I think the only possible explanation is that both sides panicked in the overtime period when they got exactly what they seemed to want: the present Greek government by so resounding winning its own referendum, and the creditors, by forcing Greece into an economic meltdown, and inexorable ‘voluntary’ Grexit. Paradoxically, by unintentionally calling each other’s bluffs, they created a situation neither could ultimately live with. And just winning the blame game (game of turkey), at least in the eyes of their own constituencies, would not be sufficient compensation. Thus we seem to be repeating the pattern of 2012, when German Chancellor Angela Merkel pulled back from the brink of ‘amputating the festering Greek leg’ (as recommended by her finance minister Wolfgang Schäuble) and agreed to the second Greek bailout (for the spicy inside details, see Peter Spiegel’s blow-by-blow account in the Financial Times). But will this solution—Austerity 3.0+Debt Relief–prove any more durable than the last one?

First, a brief sketch of the two diametrically opposed brinkmanship scenarios, and the real powers of enforcement behind either—the ECB’s ‘Guns of Navarone’, on the program tonight.

Scenario 1: Abject Greek capitulation, ‘Austerity for our time’


Will a new Brussels Agreement be likely to last any longer than Chamberlain’s 1938 Munich Agreement? (Picture credit: Wikimedia Commons)

This seemed to be where we were headed when I wrote my June 24 post: Tsipras returns in triumph to Athens bearing a Brussels Agreement, declaring “austerity/prosperity (take your pick) for our time”. In reality he has capitulated across the board to the creditors’ demands, but tries to sell it as a Greek victory. But the creditors did not even do him this favor, instead, upping their demands the nearer they reached an agreement, forcing him to call the Sunday referendum to save face in a hopeless situation (at least by his own account), and implying that the creditors were never negotiating in good faith in the first place (something I suspected as long ago as April 1). Today, despite winning his snap referendum (or precisely because of it?), he is back in Brussels abjectly capitulating to those same demand, with some vague promise of talks about debt relief in the future. But it is not even certain at this hour that the Eurogroup, and especially German FM Schäuble, will even approve this last appeal, despite support from France, the IMF, and the former Polish PM and President of the European Council Donald Tusk.

The trouble with the dangled promise of debt relief is that such a promise has been made before, in fact in November 2012, a little-known fact:

Commitment, though, is a two-way street and Greece would be within its rights to accuse its eurozone partners of failing to live up to their commitments to Athens. On November 27 2012, the Eurogroup agreed to provide further debt relief to Greece once it achieved a primary surplus.

The relevant extract from the common statement on that day reads: “States will consider further measures and assistance, including inter alia lower co-financing in structural funds and/or further interest rate reduction of the Greek Loan Facility, if necessary, for achieving a further credible and sustainable reduction of Greek debt-to-GDP ratio, when Greece reaches an annual primary surplus, as envisaged in the current MoU, conditional on full implementation of all conditions contained in the programme.”

Despite this commitment and even though Greece achieved a primary surplus in 2013, a year ahead of schedule, no measures on further debt relief were offered. The previous government was told at the end of 2013 to wait until the primary surplus was rubber stamped by Eurostat in March. Then, it was told to wait until after the European Parliament elections in May. Then, it was told to wait until after the completion of the troika review that began last September. Greece’s lenders attempted to cover their reluctance with the fig leaf of claims that Greek debt was on a sustainable path.

Ex-Prime Minister Antonis Samaras must be vexed at hearing his former counterparts talk about “commitments” because one of the main reasons he finds himself out of office today is that the Eurogroup did not live up to one of the key pledges it made to him. [Yiannis Mouzakis & Nick Malkoutzis at, 20 Feb 2015]

For those inclined to doubt the veracity of a Greek blog post, I refer you to two Reuters reports about the promise and its limbo status. If the Troika and the German government were so dismayed by the Syriza electoral victory in 2015, then why did they do so little to help Samaras stay in power? Because Angela Merkel (who of course is available for business 24/7) found him ridiculous after he boasted to her that he was even available to his aides on weekends (as reported in last week’s Der Spiegel)?

Scenario 2: Grexit–Amputate the festering leg (the ‘Rosencrantz and Guildenstern are Dead’* scenario)

T&V cravate L-Echo 2 R&G HangedMen

Will Varoufakis and Tsipras (left) share the fates of Greek PM Samaras (center) and Rosencrantz and Guildenstern (far right), despite refusing to wear ties? (Picture credits. Left: Cartoon from Belgian L’Echo explaining why the new Greek ministers do not wear ties ‘because’ their predecessor Samaras had been hung by his tie by German Chancellor Merkel; Right: Scene from stage production of Tom Stoppard’s spoof Rosencrantz & Guildenstern are Dead)

If the creditors were not negotiating in good faith, what did they want? Grexit/Graccident, but with the blame placed squarely on the recalcitrant, obstreperous, and immature Greeks `For this purpose the self-styled Marxists Tsipras and Varoufakis were made to order and more suitable than their malleable center-right predecessor Samaras. Let them pursue their revolutionary romantic quixotic tilting at austerity windmills until they fall off the fiscal cliff and have to face the music of financial collapse. This reality check would kill two birds with one stone: make a devastated Greece a deterrent to other populist parties contemplating upsetting the austerity order (think of Spain, Italy, Ireland, France), while getting the Greek people to turn on Syriza for maneuvering them into this disaster. And it would solve the legal conundrum of the Eurozone—how to expel a country by making it go ‘voluntarily’ under suitable but deniable duress, without leaving too much egg on the face of the creditors.

That this scenario might always have been German Finance Minister Wolfgang Schäuble’s intention (at least since 2012’s Greek crisis) finally seems to have dawned on recently resigned Greek Finance Minister Yanis Varoufakis (aka Rosencrantz or Guildenstern?), as he admits today in an otherwise highly intelligent op-ed in The Guardian and on his blog. As evidence he cites Nils Pratley’s May 11 Guardian piece which has Schäuble mouthing Arnold Schwarzenegger’s immortal line “Go ahead Greece, make my day” in the caption.

But that Schäuble led the “amputate the festering Greek leg” camp in the German government during the 2012 iteration of the Greek debt crisis has been well known since Peter Spiegel’s May 2014 How the Euro Was Saved pieces in the Financial Times, as well as former US Treasury Secretary Timothy Geithner’s 2014 memoir Stress Test, i.e., for almost a year before Rosencrantz and Guildenstern (sorry—Tsipras and Varoufakis) came to power. In case anyone had forgotten, Andrew Ross Sorkin reminded us of this again on June 29 in the New York Times. Geithner recalls in his memoir:

A few days later [i.e., late July 2012], I flew to meet Wolfgang Schäuble for lunch during his vacation at a resort in Sylt, a North Sea island known as Germany’s Martha’s Vineyard. Schäuble was engaging, but I left Sylt feeling more worried than ever. He told me there were many in Europe who still thought kicking the Greeks out of the eurozone was a plausible — even desirable — strategy. The idea was that with Greece out, Germany would be more likely to provide the financial support the eurozone needed because the German people would no longer perceive aid to Europe as a bailout for the Greeks. At the same time, a Grexit would be traumatic enough that it would help scare the rest of Europe into giving up more sovereignty to a stronger banking and fiscal union. The argument was that letting Greece burn would make it easier to build a stronger Europe with a more credible firewall.

I found the argument terrifying. Letting Greece go could create a spectacular crisis of confidence, regardless of what Europeans committed to do afterward. It wasn’t clear why a German electorate that hated the Greek bailouts would feel much better about rescuing Spain or Portugal or anyone else. And the flight from Europe, once it got momentum, might be impossible to reverse.

[Stress Test, Kindle edition position 7238—can you believe Kindle for PC does not show you page numbers?]

* Rosencrantz and Guildenstern, sycophantic childhood friends of Hamlet, are sent by Danish King Claudius to accompany Hamlet on a ship to England. They bear a sealed letter to the King of England requesting Hamlet’s execution (unbeknownst to themselves). Distrusting them, Hamlet secretly substitutes a letter of his own calling instead for their execution, and escapes back to Denmark. Clueless, they deliver this letter to the King of England and, we are later told, are indeed duly executed. Substitute ‘anti-austerity campaign’ for King Claudius, Wolfgang Schäuble for Hamlet, and the troika for the King of England, and you have a nice little contemporary parable (with of course Tsipras and Varoufakis interchangeably as Rosencrantz and Guildenstern). Tom Stoppard spins the Hamlet tale further in his spoof Rosencrantz & Guildenstern are Dead, which is often compared with Beckett’s Waiting for Godot. And Waiting for Godot, in turn, has also been invoked as a relevant literary metaphor for Germany’s role in the Euro crisis.

3. The Guns of Navarone

The Guns of Navarone

Film still from the 1961 Hollywood epic The Guns of Navarone. This fictional account of a successful British commando raid on German superguns hidden deep within a made-up Greek island controlling the Aegean sea-lanes is based on the 1943 Battle of Leros, which was in reality the last hapless debacle of the British and their new-found Italian allies against a still triumphant Wehrmacht. It took Hollywood to snatch victory from the jaws of defeat. Today the superguns are being wielded by an Italian at the helm of the ECB in Frankfurt.

Whichever way the Greek scenario goes this weekend, one lesson has been unequivocally learned: the ECB has the superguns (access to ELA funding, QE–aka “Querency Easing”, OMT “whatever it takes”), and it is prepared to use them, for good or evil. Whether the ECB is an independent central bank of unelected official or not, it is ultimately calling the shots because only it has its finger on the triggers of the financial weapons of mass destruction. And woe betide anyone in the Eurozone who dances out of line, as the present Greek government has discovered to its dismay.

Charles Wyplosz has a very trenchant 29 June piece on why the ECB’s decision, against the assessment of the IMF, not to write down Greece’s debt in 2010 and instead become one of the country’s creditors, compromised its position and has now led to this pass. He writes:

No other central bank in the world tells its government what reforms it should conduct, nor how sharp should fiscal consolidating be. As a member of the Troika, the ECB was instructing Greece to carry out deeply redistributive policies, for which only elected politicians have a democratic mandate. In the end, it must accept the blame for poorly designed policies that have provoked a deep depression and its political consequences.

The decision to freeze ELA is taking this politicization process to a new height. In effect, the ECB is pushing Greece out of the Eurozone. Politicians may debate about the wisdom of making Greece leave. As non-elected officials, the people who sit on the Governing Board of the Eurosystem have no such mandate. A charitable interpretation is that they felt that many governments would harshly criticize keeping the flow of liquidity to Greek banks open after the Greek government in effect closed the negotiations by calling a referendum. This is true, but central bank independence is designed to prevent this kind of pressure.

So, dear audience, I hope you are satisfied with the diverse range of programming of the very highest cultural quality being brought to you tonight on your Eurotelly. Rest assured that your television taxes are being well spent!

Saturday, July 11, 2015

Greek Debt Negotiations: Just a Eurozone Reenactment of Buñuel’s Surrealistic Masterpiece “The Exterminating Angel”?

Still-from-The-Exterminating Angel Guardian-006

Have the five grueling months of Greek debt negotiations been simply a reenactment of Luis Buñuel’s 1962 surrealistic film The Exterminating Angel, where the guests at the above dinner party, for some inexplicable reason, cannot leave the music room? (Film still credit: The Guardian)

British politician and onetime foreign secretary William Hague once called the Euro a “burning building with no exits.” And for five months, representatives of Greece and its creditors (we are now permitted to call them the troika again) have been locked in various rooms purportedly playing various games (chicken, turkey, rock-paper-scissors—which may have more accurately reflected what they had had to eat than what they were actually playing) while Greece slowly burned.

The Wikipedia begins to make a stab at summarizing the plot of the convoluted film as follows:

During a formal dinner party at the lavish mansion of Señor Edmundo Nobile and his wife, Lucia, the servants unaccountably leave their posts until only the major-domo is left. After dinner the guests adjourn to the music room, where one of the women, Blanca, plays a piano sonata. Later, when they might normally be expected to return home, the guests unaccountably remove their jackets, loosen their gowns, and settle down for the night on couches, chairs and the floor.

By morning it is apparent that, for some inexplicable reason, they are psychologically, but not physically, trapped in the music room. Unable to leave, the guests consume what little water and food is left from the previous night's party. Days pass, and their plight intensifies; they become quarrelsome, hostile, and hysterical …

While Greek PM Tsipras appeared to definitively leave the room by calling his snap referendum on 27 June, after overwhelmingly winning it on 5 July with a “No” vote to the creditors’ proposal (which was off the table anyway at this point) he has now returned to the room to abjectly capitulate to even harsher conditions after the ECB forced Greece to close its banks, impose capital controls, and plunge the country into economic chaos. (Evans-Pritchard claims that Tsipras was actually expecting and hoping to lose the referendum, thus allowing him to resign in dignity after having fought and lost the good fight. Alas, he had no such luck.) The creditors had threatened that a “No” vote would be a vote for exiting the Euro (Grexit), but now that this has happened, they have backpedaled (Juncker’s “small vs. large egos”) and are now in no apparent rush to throw Greece out.

No one seems able to leave the room. The Eurozone actors’ behaviors have become so inconsistent and absurd they make Buñuel’s figures seem paragons of reason and bourgeois propriety, something he had set out to parody.

The film’s ending (again drawing on the Wikipedia summary) opens up another range of fanciful Eurozone analogies, which I leave to the reader’s imagination to construct:

Eventually, Raúl suggests that Nobile is responsible for their predicament and that he must be sacrificed. Only Dr. Conde and the noble Colonel Alvaro oppose the angry mob claiming Nobile's blood. As Nobile offers to take his own life, a young foreign guest, Leticia (nicknamed "La Valkiria") sees that they are all in the same positions as when their plight began. Obeying her instructions, the group starts reconstructing their conversation and movements from the night of the party and discover that they are then free to leave the room. Outside the manor, the guests are greeted by the local police and the servants, who had left the house on the night of the party and who had similarly found themselves unable to enter it.

To give thanks for their salvation, the guests attend a Te Deum at the cathedral. When the service is over, the churchgoers along with the clergy are also trapped. It is not entirely clear though, whether those that were trapped in the house before are now trapped again. They seem to have disappeared. The situation in the church is followed by a riot on the streets and the military step in to brutally clamp down on the rioters. The last scene shows a pack of sheep entering the church in a row, accompanied by the sound of gunshots.

Thursday, July 2, 2015

gobble, gobble, gobble hoch zwei: Eurozone barnyard brawl attains level 2 of game of turkey


Berlin has delivered a blistering attack on Greece’s beleaguered radical prime minister, Alexis Tsipras, accusing him of lying to his own people and seeking scapegoats for the country’s misery everywhere but in his own ranks…

Tsipras referred to leaders of other eurozone nations as “extremist conservative forces” and blamed them for the capital controls that have forced the banks to shut down and ration cash.

[Guardian 1 July 2015 19.39 BST]

In case you forgot the definition of the game of turkey, please go back to April Fool’s Day post.