Why the Euro deal on Greece is still likely to fail


4:01 pm - July 22nd 2011

by Richard Murphy    


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The EU thinks it’s saved the Euro, again. It hasn’t.

This is a deal, summarised here, that to coin the current vernacular, kicks the euro down the road until the autumn, but which has no hope of delivering a real solution.

Why not?
Because, clause 1, no one knows if the Greek people will, as yet, put up with the austerity that is demanded of them. But what we can say with certainty is that the austerity demanded will not deliver growth, whatever this document claims.

Because, clause 2, the IMF may not agree that the deal.

Because, clause 4, Germany may not in the end cough up enough cash to reflate the Greek economy, and even if it does, Portugal, Ireland, Spain and Italy need the same deal, and aren’t going to get it. The awareness that a Keynesian solution is needed is hinted at in this clause, and then firmly run away from.

Because, clause 5, when it comes down to it the private financial sector will prevaricate, arbitrage, delay and generally obstruct any deal, seeking better advantage for themselves over all others who might participate, and that will mean that this provision will fail to deliver.

Because, clause 6, Greece is not an exception and ignoring that fact means that clause 7 is farcical: anyone who believes that the Irish government is going to pay in full debt that is beyond any imagination that it can settle is naive in the extreme: those signing this deal were.

Because, clause 9, the Germans aren’t going to guarantee other euro states debts forever;

Because, clause 11, reducing deficits to 3% of GDP is going to result in mass poverty, the destruction of welfare, the ending of healthcare provision, misery in old age, massive destruction of the state in Europe, and in turn the destruction of GDP itself. A commitment to the economics of the madhouse destroys the credibility of this agreement: only a Keynesian solution can solve Europe’s crisis now, and this clause commits Europe to poverty.

And yet, I admit, all of those are just detail.

At its core this deal does not work for a number of much more fundamental reasons. The first is the euro itself cannot work: even with massive fiscal reallocation of wealth within the Eurozone the stress would remain too great: these economies are too disparate to have one currency.

Then there is the fact that, like it or not, Ireland, Portugal, and almost certainly Spain if not Italy, add debts that they cannot support and therefore, like it or not, European banks holding those debts are at serious threat of insolvency. This deal does nothing to address that issue.

Just as this deal does nothing to really stimulate growth: it recognises that without growth Greece cannot repay its debts and yet the rest of Europe it demands cuts in government spending that can only result in a move towards stagnation or recession across Europe as a whole for decades to come.

In other words, this is a fundamentally flawed deal, and the flaw can be simply identified: it is that this deal puts the stability of money above the importance of real economic activity that generates wealth for the people of Europe. This is about bankers, yet again, and not about putting food on the table. This is about preserving wealth and not about creating prosperity. This is about maintaining division, but not about delivering hope.

Only when we take on the banks; only when we realise that real wealth is based upon the full employment of well-paid people and only when we realise that it is the duty of governments to deliver hope can we go forward. This deal doesn’t do that, which is why the next version will be negotiated soon.


A longer version of the article is here

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About the author
Richard is an occasional contributor. He is a chartered accountant and founder of the Tax Justice Network. He blogs at Tax Research UK
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Story Filed Under: Blog ,Economy ,Europe ,Foreign affairs

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Reader comments


A Keynesian solution? You mean the Greeks need even *more* government debt?!

Yes, the whole thing will have to be revisited, but at least the burden on Greece, Ireland and Portugal is reduced. And the various players have shown they intend to defend the Euro and Eurozone.

I just posted this:

http://zelo-street.blogspot.com/2011/07/athenian-haircut-its-official.html

although I can’t manage the OP’s level of pessimism.

A Keynesian solution? You mean the Greeks need even *more* government debt?!

For all I agee the deal is doomed, Richard does tend to miss the key point that Keynesian solutions require running a surplus in good times – and whilst Germany might be able to fund one, good luck persuading the voters (or the courts) that they have any obligation to do so.

There was a stupid article in the Telegraph today suggesting Germany is acquiring a new empire – but this time at least, the Germans don’t seem to want one (wisely).

Otherwise, Mr Murphy needs to explain where the money comes from…

” Germany may not in the end cough up enough cash to reflate the Greek economy, and even if it does, Portugal, Ireland, Spain and Italy need the same deal, and aren’t going to get it. ”

” the Germans aren’t going to guarantee other euro states debts forever; ”

“…reducing deficits to 3% of GDP is going to result in mass poverty, the destruction of welfare, the ending of healthcare provision, misery in old age, massive destruction of the state in Europe, and in turn the destruction of GDP itself. ”

” The first is the euro itself cannot work: even with massive fiscal reallocation of wealth within the Eurozone the stress would remain too great: these economies are too disparate to have one currency. ”

” Then there is the fact that, like it or not, Ireland, Portugal, and almost certainly Spain if not Italy, add debts that they cannot support…”

You can say all those correct things and then come to the conclusion that the banks are to blame is simply astonishing. Yeah, and Legal & General are to blame for the UK budget deficit because they hold a lot of gilts. If you consider the current euro system as unworkable, why is it so difficult to blame, you know the people who set it up?

You admit that some of these countries are accumulating debts that they can’t afford. Yet, you blame the banks and not the governments who are racking up the debts.

They all have primary deficits i.e. a deficit even discounting debt interest payments. If they never paid a cent back on their accumulated debts, the respective governments would still need financing. Is it the tooth fairy that you expect who will finance them if you wipe out the bondholders? They can’t afford the states that they have built as is clear when you are outraged that they should keep deficits under 3%. If they could afford their states they would not need a deficit would they?

The financial markets rallied yesterday because at least the authorities are doing something. The EFSF buying in the secondary bond market is new and almost certain to be extended, so the bond market would like that development. A new big buyer in the market likely to be mug buyer who overpays is Xmas come early for bond traders. However, I share the OP scepticism that this will be a lasting solution.

@ 4 / Richard W:

1) “They can’t afford the states that they have built as is clear when you are outraged that they should keep deficits under 3%. If they could afford their states they would not need a deficit would they?”

They can easily afford their states, although they may need to collect more in tax from big business. What they cannot afford to do is to stop investing in the education of their people, their transport and energy infrastructure, healthcare and housing. These are necessities, where as under-priced imports of German luxury goods are not.

2) “You can say all those correct things and then come to the conclusion that the banks are to blame is simply astonishing.”

Banks (with the collusion of politicians) are to blame for inflating asset bubbles through cheap credit. They profited hugely during the good times and they kept the money. When the bubble burst, tax receipts plummeted and we were left with deficits. Much of the bad debt was also transferred into sovereign debt and the bankers walked off unscathed – £14 billion bonuses in the City this year. The Greek story is no different: the euro just puts them in a tighter bind.

Chris,

If it is so easy for them just to raise tax to fund their governments, they would not have required any funding from private capital markets and no need to be bailed out by European and international institutions. They are not turning to others for funding because they can’t be bothered to raise tax. Tell me one nation who has defaulted and managed to balance the budget through only raising taxes? All the supposedly simple solutions for Greece rely on someone else giving them finance. However, the advocates of the simple solutions can’t say who the someone will be.

From your previous posting Chris you do not believe these peripheral nations can exit their problems while they are still members of the monetary union. So why not just blame the people who set it up? Why all the obfuscation of blaming the players involved in the consequence of the monetary union, rather than the root cause? The asset bubbles would not have been inflated in Spain and Ireland if they had not been members, so everything else to that fundamental issue is ancillary.

7. Charlieman

@5. Chris Whitrow: “Banks (with the collusion of politicians) are to blame for inflating asset bubbles through cheap credit. They profited hugely during the good times and they kept the money. When the bubble burst, tax receipts plummeted and we were left with deficits. Much of the bad debt was also transferred into sovereign debt and the bankers walked off unscathed – £14 billion bonuses in the City this year.”

I don’t follow your argument entirely.

1. Exempting those on the financial margins, consumers are responsible for their own debt. Mr Micawber and all that. Consumers played their part by borrowing money that they could not realistically afford. It is insufficient to argue that the money should never have been loaned; the borrower should have been aware.

2. At the same time, sustainable, cheap credit is a great thing. It allows consumers to achieve things in their lives. It is an engine for upward economic mobility. Genuinely sustainable credit is an ideal for banking reform.

3. Share holders of banks received dividends during the boom years. How much into pension funds? And the tax man?

4. Employees of banks received large bonuses, during and post boom years. This argument boils down to whether “top bankers” make a difference to performance of the business. And as to how bonuses should be delivered (stage payments, deferred payments, deferred share allocations etc).

5. Some banks almost went bust until UK government guaranteed them in return for bank shares. The consequences were that, with one exception, bank customers did not run off to the branch to withdraw their savings. Thanks to government intervention, the UK economy just plodded on.

6. UK citizens will get the money loaned to banks back. Just wait until the banks start making profits, a matter of waiting. Alternatively, the Exchequer can give away shares to citizens who can wait or cash in.

7. Richard W has argued elsewhere that enough of the complaints against News Corp amounted to criminal conspiracy. And many of us would perceive that a lot of interbank loans in the last ten years were, at least, deceptive.

8. Iceland should stump up the money held in Icelandic bank accounts by non-Icelandic residents.

8. Luis Enrique

For once the author is plumb in the mainstream: since this crisis errupted, commentators have been saying bailouts won’t work. In fact that consensus is so strong, I’m starting to wonder whether it isn’t under estimating the probability of success, by which I mean muddling through with no disorderly default and no major banking crisis, and the Euro surviving. Nobody is expecting this to be the final word. What was done for Greece will probably be done for others, and maybe done to Greece again. But although these countries are still carrying too much debt, its easy to forget that they may never have to repay it, if the ECB keeps lending them new money and rolling it all over until inflation and maybe growth has worked things down to more managable size. (at least, I think the ECB can keep refinancing them – perhaps somebody with more direct knowledge like Richard W can say – is that ultimately the path out of this?).

Meanwhile, the author continues his apparent quest to see if there’s anything he can write to convince his fans that he doesn’t know what he’s talking about. My guess is there isn’t: he will continued to be regarded as an “expert” by The Guardian and others. Because none of his fans really care about “details”, they just like the smell of his bullshit.

But how about this: The OP tells us this deal is “all about bankers” but yet “does nothing” to address the solvency of banks holding Greek and others’ debt. Come again? That’s like saying: it is A and not A.

A bank has 100 of liabilities, split 90 creditors and 10 equity, and 100 assets (lets assume all Greek bonds). If its assets lose 10% of value, the bank is insolvent. How exactly is lending more money to the Greeks, so they can repay outstanding bonds, or maybe the ECB buying those outstanding bonds itself from the banks, or swapping them for debt backed by Germany and France, or the IMF forcing austerity on countries with the intention of them thus being able repay bondholders, or anything that can be described as a bailout – how the blue blazes is that “doing nothing” about the solvency of banks holding Greek debt? Maybe he wrote “nothing” when he meant to write “everything”.

Now what they’ve actualy done is negotiate “voluntary” 20% reductions in the value of (some?) debt, no doubt judged so that the banks can just about survive the hit. In which case that’s a compromise between doing something for the bankers, and doing something for Greece, with the solvency of banks very much in mind. Again, not doing nothing about it.

Incidently, the only other ways that I can think of addressing the solvency of banks is either to recapitalize them or somehow engineer and increase in their profits. Anybody here like the sound of them? You can always recapitalize with taxpayer’s money, but if you want private investment you rather need to convince people the next thing that’s going to happen isn’t default so that all those investors lose money.

9. Leon Wolfson

And you’re talking it down…well, WHICH financial interests do you have in it, at this point, given the damage it’ll do here?

Clause 5 – If they do, gut them like a fish. In fact, it’s an ideal stalking horse.

I too find this idea that a keynesian solution is required very odd. Even if it was the required solution, who is going to fund it given that everyone knows Greece cannot repay its debt?

It would be nice if Mr murphy responded.

11. Luis Enrique

here’s a very interesting short post on why Keynesianism is much hard to achieve when it is the tax payers of one country being asked to stimulate the economy of another country:

http://www.economist.com/blogs/democracyinamerica/2011/07/euro-rescue

Thanks Luis.


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  1. Liberal Conspiracy

    Why the Euro deal on Greece is still likely to fail http://bit.ly/pnZMu4

  2. The Old Politics

    Why the Euro deal on Greece is still likely to fail http://bit.ly/pnZMu4

  3. sarahkhayes

    Why the Euro deal on Greece is still likely to fail http://bit.ly/pnZMu4





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