Europe's Turkey

Let’s see if we can put this in a nutshell. In the late 90s, Greece, with a little help from their German friends, fudged their books to get the drachma operating within the rules and regulations of the ERM and threw their lot in to join the Euro. They continued fudging their books right up to a few years back. The Great Recession struck and someone asked for a little something from the reserves, only to be told…oops….ain’t none. A big stack of debts, yes. Cash reserves? Not so much. Not to worry. They kept on spending the welfare, dodging their taxes and dreaming the European dream.

And Greece and the EU fudged the books again, breaking all sorts of rules and regulations, splashing the cash to try and keep Greece’s head above water. Alas, the floatation aid stopped Greece from ever reaching dry land. And here we are today. The Greeks have debts they can never pay off. The Germans have credit notes they can’t forgive. Forgiveness is for wars. The truth is, the Greeks should never have been in the Eurozone. Trying to keep them in it was simply throwing good money after bad. It turned out that a half-baked single currency shared by a multitude of independent and competing economies wasn’t such a good idea. Who knew? I guess all the other countries who have ever tried to share a currency and seen it fail.

So here we are. Pick an option. It’s lose, lose all round. There can be no winners. The only question is, does Europe seek an idealogical solution based on faux European unity and give the Greek’s their financial haircut? Or do they seek a common sense solution and let Greece go? Time will tell. Either option is expensive. Either way, pro-Euro supporters like myself are watching, weeping, and losing faith. It’s become an uncontrollable monster. The Eurozone area needs to federalise. The European Union needs complete reform, or risk losing supporters like myself to the sceptic side.

Are there any possible winners at all? Well, possibly. If Greece becomes Europe’s turkey and is sent to the slaughter house, could Turkey become Europe’s next hot entry? Whether this would be a good thing for the Turks or a bad thing is debatable. But they have previously expressed a desire to join in the fun. The only thing stopping them? The Greeks, with their Cypriotic grudge*. Who might not be around to say ‘oxi’ for that much longer…

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  • Of course, the Greek part of Cyprus will remain to be convinced…

20 Comments

  • As much as Germany might want Greece out of the EMU, there’s no way they can kick them out. The EMU was meant to be irrevocable, i.e., once you’re in, you’re in forever. There’s no legal mechanism for kicking out EMU members. And even if the EU wanted to create a way to expel members, it’d still have to be approved by each European parliament, thereby giving Greece a veto over its own expulsion. This is something the press has conveniently forgotten.

    As for the present, it appears that a deal has been struck, but there are still obstacles. Though it’s widely expected to approve this rape of a deal, the Greek parliament could theoretically reject it. More likely is that the IMF objects. The IMF does not lend to countries with unsustainable debts. It has bent that rule recently to lend to Greece, but is now making noises to the effect that it doesn’t want to be party to the current deal. So if the IMF doesn’t want to play ball, then the deal is effectively off.

    And the deal itself is ridiculous. The Germans, despite five years of evidence to the contrary, somehow believe that austerity and improving confidence is the key to solving this problem. (As an aside, Wolfgang Schaueble sounds like an American politician, circa 1931, saying that confidence is the issue, fiscal rectitude will solve the problem, and recovery is right around the corner.) Yet the Greeks have been as austere as possible. They’ve laid off 25% of government workers over the past six years. They’ve managed a MASSIVE fiscal adjustment of turning a deficit of 15% of GDP into a modest surplus (~1.0 – 1.5% of GDP) in the same time period, despite seeing a 25% DECLINE in their GDP. Sure, they’ve got some way to go in terms of making changes to pensions, state assets, tax collection, etc. But they’ve basically done things that would be regarded as IMPOSSIBLE by the UK or the USA, never mind France, Italy, or any number of other fiscally precarious European countries. Yet the austerity is shrinking their economy so fast that the debt to GDP keeps climbing, not so much through additional debt, but through a collapsing GDP.

    More austerity will collapse GDP even further, and make any repayment even more impossible. To truly solve the Greek problem will require either cutting the debt in half, creating a 20 year grace period with no repayments of either principle or interest, or something else which will let the economy recover. It’s Econ 101 that what the Germans are insisting on will NOT WORK.

    If you want the details, find Paul Krugman’s NYTimes columns on Greece, and he explains it all.

    So, the Greek problem is NOT fixed, and will only be fixed when there’s debt forgiveness or one of the solutions above. However, assuming the IMF doesn’t object, and the Greek parliament too rolls over, then the can has been kicked for another year, maybe more.

    Meanwhile, the Germans should be ashamed of themselves. They’ve now dramatically undermined European unity by threatening the Greeks with expulsion. And they’ve needlessly created a ton of suffering around the continent by their insistence on an austerity that isn’t working. What’s gone on in the past six years is nothing short of scandalous, and the Germans deserve 90% of the blame.

    • I can’t pick any point I’d disagree on. Nor should I…finance is your speciality, not mine! But I’m an interested observer, nonetheless.

      I’d only say though, following on from paragraph 1, that nothing is forever. Especially in politics. I think it’s clear that the Germans want Greece out. I agree that they should leave, but not based on the German premise. I base it more on…with friends like these, who needs enemies? If the Germans are determined that Greece go, then eventually that’ll happen. That determination may end up being somewhat weakened by other members of the EU, and the fact that they are bringing themselves into disrepute. Ironically, that disrepute is more amongst the political class, rather than the average Joe in the street.

      I know Norm is of the opinion that federalisation of the EU is the way to go, and is maybe the inevitable outcome. I can’t disagree with his logic. But I am more pessimistic about the reality of that happening. There is so much history on the continent that draws people in. Tourists, archaeologists, students, US and Aussie infantry brigades….

      You’d like to think we’ve moved beyond that. I think we are not. One hopes that the first half of the 20th century was as bad as it’ll ever get. But even if that’s the case, there is still too much negative sentiment existent amongst the many peoples of this continent. The EU has been a good force, bonding us together economically. But I still think that a certain amount of distance can be a good thing too.

      • Hola Gary,

        The EU now seems to be creating tensions between European countries rather than bringing them together, so it now seems to be working opposite to its intended purpose. Greece isn’t the only country which wants to reject austerity. Podemos in Spain is another leftist party that’s gaining rapidly in the polls, and it too wants to cast off austerity.

        Since my last comment, I’ve been reading through the EU memorandum on the Greek deal. Basically, the Greeks have dragged their feet on the economic reforms, and the Germans have lost patience. And Greece is famous for a business-choking combination of corruption and red tape. So the Eurosummit Statement (http://www.consilium.europa.eu/en/press/press-releases/2015/07/12-euro-summit-statement-greece/), which summarizes the “deal,” actually sets out preconditions for a deal, which involve Greece passing a bunch of legislation to make it easier to do business in Greece. After they pass all that legislation, then a deal will be discussed.

        This was somewhat surprising to me, that the “deal” wasn’t a deal, merely a precursor. Given the ebullience of the financial markets post the Eurosummit Statement, I’m surprised it wasn’t a deal. So there’s still lots of work ahead.

        Bottom line, to get their economy growing again, Greece needs some fiscal stimulus, not austerity. Whether that happens remains to be seen, but I’m not optimistic.

        This is a very complex topic which is hard to argue out in a comments section. Saludos. KG.

        • That the Greeks have been dragging their feet and the rise of other anti-austerity parties are very much linked, I think, in the German mind. Rightly or wrongly, understandably or frustratingly, the Greeks have been very uncooperative for the last however-many-months-since-Tsipras-got-the-job. Those other parts of Europe also in a financial pickle hold the promise of more of the same. The Greeks need their ‘haircut’. I think we all agree on that. But will this mean a trip to the barbers for everyone? Can the total sum of Euro write-offs be afforded if the worst case scenario came to pass?

          I remember the chat we had on austerity during our walk around the Monument to the Revolution in my dying days in DF. We didn’t disagree on the subject, and still don’t. Tightening the belt a little and reducing waste, inefficiency and unnecessary expenditure is one thing. Hacking back vital services and the infrastructure of growth is another thing altogether. We’ve been fortunate, so far, in the UK in that the Tories weren’t able to implement the cuts that they wanted to, and that the private sector managed to pick up most of the slack. Eventually. But they have full hold of the reins now, so we’ll have to see what the future holds.

          This is a very complex topic which is hard to argue out in a comments section.

          You’re not kidding. Frankly, you could put a full stop after the word ‘out’.

        • I always like an article which deals with the basic maths of an issue. Having said that this is a complex topic that’s hard to argue out, some parts of it are plain common sense,

  • Thanks for this interesting informative discussion about this topic!
    Now I know a lot more about this situation which is good.

    • By the way, I think it’s a little odd that countries didn’t have to submit to an audit before being allowed to join the EMU. I rather doubt that French and Italian books are particularly clean either. Certainly an audit should have caught the problems with Greece.

      I remember the 2000 Olympics and thinking to myself, “How does a country like Greece afford such an extravaganza?” That should have been a big tip off to everyone that perhaps fiscal matters in Greece weren’t what they appeared to be.

      Also, I appreciate your detailed responses, but you have yet to address the fact that the Greek problem started out as a problem for private banks and now is a problem for tax payers due to the various governments having quietly bailed out their banks with nothing given to the taxpayers in return. Don’t you think the banks should perhaps be forced to pay for some of this?

      • Sorry for the late reply.

        The banks, the bank, the banks. How do I even start to address the issues with the banks? I think I share the same frustrations and anger with the banking system, and their political accomplices, that almost everyone else does. Whether in a purely moral sense, and/or legal sense too, most us the world regard the banks actions as criminal.

        What could have been done? Let all the banks fold? Privatise them and keep them private? Or just fine them sufficiently over a prolonger period of time to ensure we keep them….well, in a Greek like position.

        I will say that whilst I feel a good deal of anger that private losses were effectively socialised, I am not sure it really matters in the end. It’s going to be Joe Bloggs paying for those losses one way or the other. And whatever action had been taken back then, would it really have changed the world for a noticeably better today? I don’t know. But I’m sure you’re right. One way or another, those responsible should have been held to greater account. But then, I suspect, you’d have to include a fair number of politicians.

        If Greece is going to escape from this mess, it’s hard to know who they should turn to for help. Perhaps they should ask El Chapo….

      • So anyway, everything has been delayed for another date in the near future. It seems to me that the Germans want the Greeks out, lead them to the door, opened it, but couldn’t quite bring themselves to push them when it came to it.

        It has to be said though, that this is your domain, an I’m more likely to learn from you than vice versa. How do you see the next episode playing out? Will they keep punting this can down the road forever?

  • The little-noticed fact is this. The Germans were perfectly happy to essentially extend debt forgiveness to their banks by engineering the purchase, with public money, of all of those Greek bonds AT PAR that now can’t be repaid. And having now done the bidding of Deutsche Bank and all those other idiotic German banks which previously bought all of the toxic mortgage paper from America that no one else would touch, they have the nerve to talk about “moral hazard” as some reason to not endorse a reasonable haircut to the Greek debt. And all of this from the country that leveled Europe twice in my grandparents’ lifetime, gassed to death six million Jews, and then were essentially forgiven by the Western powers, had their debts cut IN HALF, and then were bailed out by American tax payers to rebuild their industry. Friggin’ ingrates!

    Oh, and let’s not forget the integration of Eastern Germany. The Östmark was converted to Deutschemarks at a level that basically resulted in a big give-away to Eastern Germany, then billions of Deutschemarks were poured into the East to revitalize it. And by the way, Angela Merkel grew up in East Germany under the Soviets, and she herself benefited from all this.

    By the way, if Germany weren’t part of the Euro, it’s own currency would be so expensive that their export industries would be nearly dead. Just ask the Swiss about that one.

    And if you listen to Schaubel, he sounds like Herbert Hoover, blathering on about “confidence” and the need for “fiscal prudence.” It’s exactly that thinking that kept America in the Great Depression in the early 30’s.

    When it comes to the Greeks, it’s BEYOND outrageous how the Germans are behaving. And they’re doing nothing to help the overall European economy either.

    And the Germans will come to rue the day when they stopped saying the Euro was irreversible. That one is going to come back and bite them BIG TIME.

    • Indeed! To be fair though, Europe in the 1950’s and the Europe of today are difficult to compare. And Germany was bailed out largely on the principle of Cold War political necessity. I don’t think it’s something that will be forgotten. But it’s difficult to make a case for bailing out Greece based on history that is becoming more distant by the day. The two world wars were fought during my grandparents lifetime too….both of whom are now long dead.

      It’s also important to note that while the Germans are the ones who have most to lose, and are the ones calling the shots by and large, they are also speaking on behalf of poorer European nations who are also contributing.

      As with any debt, there are two parties involved who share equal (imho) responsibility for the outcome. Whether Greece stays in the Euro or not, their creditors will lose an awful lot of money that they have lent. Perhaps more so if they leave the Eurozone. At that point, I guess, Greece can write the debt off entirely. Albeit that there will be an alternative price paid for that course of action.

      I’ll leave you with one final thought of how we deal with the situation here in England….

      https://youtu.be/yfl6Lu3xQW0

      • A couple of thoughts:

        First, creditors, not debtors “write off” debt. The decision is no more Greece’s than Argentina’s. The creditors need to make the decision and then stop collection efforts.

        Two, the debt is simply unpayable at current face value. I base that on the trajectory of the Greek economy (down, and accelerating), and the need for further internal devaluation, e.g., lower wages and prices. That process will only make the debt more unpayable.

        Three, economic research shows that the Greek economy will not resume growth until a substantial portion of the debt has been written off. You can go back and look at five years of projections for the trajectory of the Greek economy, and they have all been massively wrong, and wrong by wildly overestimating future Greek growth. This overestimation is likely to be the case until the debt is reduced in nominal and real terms.

        Four: Yes, Europe is a very different place than in the 1950’s, but Greece ran up a lot of debt for local consumption. They did not create a big obligation by destroying Europe and then being expected to initially foot the bill. Which is worse?

        Five: the fiction that this isn’t a public bailout of German, French, and Italian banks needs to end. The voters in those places need to blame their leadership for letting the banks off the hook for their poor lending practices. More than anyone, the bankers are the real culprits here, yet they’ve cleverly vanished from the scene of the crime.

        Six: Yes, borrowers have a responsibility to repay their debts. But at the end of the day, if the lenders make bad loans, it is ultimately their responsiblity to take the losses. You can’t squeeze blood from a stone, which is what Europe is in the process of trying to do to Greece. It’s no more going to work this time than it did the last several times. The proposed “solution” is not a solution; it is merely a postponement.

        I’m not arguing for debt relief because I think debtors should get away with murder. I’m arguing it because it’s the only thing that will put Greece back on a sustainable path to growth and social stability.

        Seven: if Greece is either kicked out or allowed to exit the Euro, they will turn to Russia or China, and that would be a geopolitical disaster for The West. And that would cost us far more than 90 billion euros over time.

        I realize that German and many of the Northern European countries have turned this into a morality play, but it’s not. It’s just business and economics. And it needs a rational, solutions-oriented resolution, not the application of penance that will endure for generations in Greece.

        • Kim, you’re starting to sound like a Greek economist. You tell me that you have a couple of thoughts, and then list seven…the numbers don’t add up!! But on a serious note…

          1. I worded it wrongly. But if the Greeks refuse to pay up, the debtors are rather left whistling in the wind.I can well understand the German point of view and see some validity to their arguments. That doesn’t mean I agree with them. In fact, I am of the opinion that given the bumbling handling of this whole crisis, the Greeks would be better off taking back the drachma and returning their destiny to their own hands. With caveats etc of course.
          2. Completely agree. One would have to be a little mad not to.
          3. Ditto 2
          4. The worse one is obvious. But I don’t agree that this are relevant. I did find it amusing when the Greeks released a statement declaring Germany owed then $x billions of dollars a few months ago, based on WW2 reparations. And quite frankly, on this basis, the Germans could equally blame the UK, US and France for WW2, given our contribution to the decades long destruction of the German economy after the first world war which allowed the Nazi party in to power. And they’d have a point. WW2 happened, and Germany caused it. Israel exists. The British and Spanish practised ethnic cleansing and genocide across three quarters of the planet in building empires. The US still has a hang up with that confederate flag. We can learn from history but we can’t turn back the clock. Shit happens.
          5. I agree, at least in part. Although that doesn’t account for the Greek’s falsifying of their public finances for so many years, And for their own inability to balance their books. And for joining the Euro in the first place out of misplaced ideology. Etc. There is a substantial amount of guilt in the political corridors of Athens too.
          6. I agree, entirely. I am simply more inclined to believe that the Greeks might be better off outside the Eurozone in order to achieve what is needed to return them to prosperity. I’ll put forward just one piece of evidence to support my position: the current situation.
          7. I’ve read pieces here and there which postulate that a Greek exit from the Eurozone will be followed by a Greek exit from the EU. I haven’t read a good explanation as to why one should necessarily follow the other. It’s perfectly acceptable to exist within the EU whilst maintaining one’s own currency.

          8. Whichever way we go, the Eurozone will be forced to write off Greek debts. At present, within the Eurozone, the debt crisis looks likely to turn into a humanitarian crisis. It should never have come to this.
          9. I think Russia and China have bigger issues to deal with at the moment that trying to buy out Greece, and I’m not convinced that their exiting the Eurozone will see them turn a 21st century shade of red. But I don’t write off the possibility either. I guess that argument is as good as any for bringing up the Marshall Plan as a comparative situation. Although it’s worth noting that we Brits took the lionshare of that cash, even though there was never much of a risk we would go commie.
          10. And finally. 8. I’d like to go on holiday to Greece. I’ve moved it closer to the top of my list.
        • 5 is the green eyed monster in our current sideshow. These are bankers who want 20% down to buy a house but will loan money to a country that was fudging its deficit by as much as a factor of 4. The whole gang has been guilty of cooking their deficit numbers

          My guess how this will play out. The national banks will accept a total write-off, the private banks will collect 60-70% if they act within the next quarter, it will drop 2-5% each quarter thereafter.

          A haircut it will be but it will be a bargain if policy is set regarding non performing sovereign debt within the EU.

          I doubt very much that Greece is going to be drummed out of the EU; stand in the corner for a few years? Yes.

  • Well said Gary, well said, and the part about Turkey at the end was a factor that I had not contemplated.

    I’ve never been bankrupt, taken welfare or been on public assistance but I’m sure glad those social safety valves are part of my world because one never knows… My guess is that this Greek drama will end with the creditors getting no more than 10 cents on their euro and Greece will stay in the Euro monetary union. After all the wailing and tearing of cloth, the creditors will find a way to let a Euro nation go bankrupt. We will have footprints in the sand for the next nation that cannot service its debt. A good thing and something that should have been in place from the start . You and I have talked in the past about European Federalism, it would serve Europe well, it would be a godsend to the USA having a world power the size of Europe to join us in policing the miscreant polities of our world. The fragmented nature of the current EU is dangerous to world peace. A formalized method of national bankruptcy is required in the EU. Seeing the Greeks off because they gamed the system is short sighted, a spanking for all the fools involved? Yes in spades.

    A well written post today Gary. I’ve read 20,000 words on this subject in the last five years, you nailed it today.

    • Just 10 cents per Euro? That’s more than the ‘haircut’ the Greek have been looking for. That’s more the grade one shave a marine gets on the first day in the job!

      Isn’t that the issue though, regards bankruptcy. Any rational man, business or country in Greece’s shoes would file. But Greece can’t do that inside the Euro. The only sane option is not even an option at all.

      Now, these footprints in the sand you talk of. That’s perhaps the biggest issue. Because Portugal, Spain, Ireland and even Italy are staggering around the beach in a most uncertain manner. And they all have radical political parties that, if Tsipras is seen to be successful, will undoubtedly see a rise in their stock at their upcoming elections.

      Looking at the bigger picture, the Germans likely see the debt question differently. It’s not whether they are prepared to pay for Greece’s losses, but are they prepared to pay for half of Europe’s losses? I’m far from convinced that they are going to oblige. And if they aren’t, then there’s a fat lady in Greece having a final sing song. If I were a betting man, I’d put a very, very small wager on Greece exiting the Eurozone. I don’t want any winnings paid in Drachmas though!

      As for federalism. I think you and I agree on what is needed. Alas, I don’t think it is likely to happen. Even as we speak, anti-Europe parties are on the rise, and even where they don’t win, they have an influence on those who do. This isn’t a short term trend, and I’ve no doubt that much of the sentiment is a knee jerk reaction to tough financial times. But these tough times won’t be over any time soon…

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