Trojan Horse Rescue in Greece

Jun 21, 2011Marshall Auerback

EU elites are casting Greece into the modern day equivalent of a debtors' jail with their 'rescue package'.

In spite of all of the predictions to the contrary by the European Central Bank (ECB), the IMF and a host of "theoclassical" economists (who continue to disparage the utility of discretionary fiscal policy), the Greek economy continues to contract. Things will get worse, even if the new Greek government survives its vote of no-confidence, and takes the latest poisoned chalice from the ECB.

In truth, this latest "rescue package" is nothing more than a fiscal Trojan horse, which will do nothing but further undermine the sovereignty of Greece, much as Odysseus's wooden horse ultimately destroyed Troy. Why? Because the austerity conditionality attached to the latest bailout undermines spending and is almost certain to increase the very deficits that Greece is seeking to reduce. These are new conditions imposed on a monetary union which, at is core, is fundamentally illiberal and anti-democratic.

In an ideal world, all euro zone governments would exit from the euro and restore their respective national currency sovereignty, float that currency and then take political responsibility for the subsequent fiscal actions. That is what I thought democracy was about and it is certainly the optimal way of organizing a genuine liberal democracy.

By contrast, the European Monetary Union (EMU) has a huge democratic deficit at the heart. It is technocracy pushed to a politically unsustainable limit. What the ECB, EU or IMF is proposing is not in fact a genuine "United States of Europe" liberal democracy, but an unelected bureaucracy to rule without accountability to the people and impose whatever regime the elites deem suitable at any point in time. This would be anti-democratic, which is doubly ironic considering that Greece is going through the charade of signing a national suicide pact in order to sustain the unsustainable).

The most recent labor force data released by Statistics Greece revealed an unemployment rate of 16.2% generally. But among 15-24 year-olds, the unemployment rate is now 42.5%, rising from 29.8% in 2010. For 25-34 year-olds, the unemployment rate is 22.6%. Female unemployment was estimated to be 19.5%. This is the stuff of which revolutions are made.

There is no relief in sight as the EU elites continue to grind the nation into the modern day equivalent of a debtors' jail. They fail to understand that if you savagely cut government spending while private spending is going backwards and the external sector is not picking up the tab, then the economy will tank. Under those conditions, policies that aim to cut the budget deficit will ultimately fail.

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So why persist with this ruinous course of action? Well, let's be honest about what's really happening here. We can first throw out the silly notion that this ‘rescue package' has anything at all to do with the welfare of the Greek people: it's a bank bondholder's bailout, plain and simply. As Bill Black recently noted in New Economic Perspectives,

The EU is not lending money to Ireland, Greece, and Portugal to help those nations' citizens.  The EU is lending those nations money because if they don't those nations and their citizens and corporations will be unable to repay their debts to banks in the core.  That will make public the fact that the core banks are actually insolvent.  When the Germans and French realize that their banks are insolvent the result will be "severe banking crises and a return to recession in the core of the eurozone."  The core, not simply the periphery, will be in crisis. The ECB and the EU's leadership would be happy to throw the periphery under the bus, but the EU core's largest banks are chained to the periphery by their imprudent loans.

To reiterate: this is not a "Greek problem" or a problem of the so-called Mediterranean "profligates".  Jurgen Stark of the ECB tells us that restructuring, whether soft (reprofiling) or hard (default), would be a disaster for the Greek banking system. But the Greek banking system has much less total exposure than the Eurozone, including the ECB itself. The ECB could easily assume the debts, secure genuine pricing transparency, and then impose haircuts on the bond holders. If the resultant price discovery renders these universal banks insolvent, then nationalize them as the Swedes and Norwegians did in the early 1990s, and simply tell the holders of credit default swaps (CDSs) on Greek debt to take a hike. After all, there is no risk of ‘default' once the entity holding this euro-denominated debt is the very entity responsible to credit any bank account it likes to any sum in euros. The ECB, the EU and the national governments of Europe (indeed, virtually the entire world) should simply underwrite all commercial risk banking exposures which deal with real economic activity and by law exclude all other claims from any safety net. That includes remaining "speculative" financial activity in things like CDS contracts which I have long argued should be specifically banned as a financial sector activity.

Of course, that's not happening. Yet again, as was the case with AIG, the CDS tail is wagging the economic dog. And the irony is that this grotesque hardship imposed on regular citizens at the expense of bondholders is all carried out under the cries of "free markets".

The ECB itself notes that:

Legally, both the ECB and the central banks of the euro area countries have the right to issue euro banknotes. In practice, only the national central banks physically issue and withdraw euro banknotes (as well as coins). The ECB does not have a cash office and is not involved in any cash operations. As for euro coins, the legal issuers are the euro area countries ...

The ECB is responsible for overseeing the activities of the national central banks (NCBs) and for initiating further harmonisation of cash services within the euro area, while the NCBs are responsible for the functioning of their national cash-distribution systems. The NCBs put banknotes and coins into circulation via the banking system and, to a lesser extent, via the retail trade. The ECB cannot perform these operations as it does not have its own technical departments (distribution units, banknote processing units, vaults, etc.).

Even though monetary operations are for the ECB are conducted at the level of the national central banks, the "ECB has the exclusive right to authorise the issuance of banknotes within the euro area".

This means, as Professor Bill Mitchell has noted, "it can never run out of euros and always approve the electronic entry of any amount of euros into any account (government or private) that it likes."  Unlike the US government, which still nominally has the status of a functioning democracy, the ECB has the anomalous combined status of central bank/fiscal authority without the political mandate from the people for either role. But it could ensure no member state government becomes insolvent and it could provide the euros at any time to ensure people had a viable job offer. And it's hard to believe that this could be at all inflationary, given prevailing high levels of unemployment and high unused capacity. All the ECB has to do is commit to maintaining aggregate demand and wealth stocks at their previous level and protecting private citizens from the consequences of a major debt default.

As Mitchell notes, "the crisis is a voluntary human folly imposed on the majority by the elites". There is a reason why Europe's technocratic elites and bankers evade their fair share of the cost of the economic crisis that they largely created  while expecting the bottom 90% to pay for the fallout.

Throughout history, sovereign debt defaults tend to be precipitated by decisions of the body politic of the debtor nation who refuse indentured servitude to their creditors. Debt default tends to come from within. Over the past week there has arisen growing opposition in Greece to another round of austerity that will be a condition of any new needed round of bailout financing. This has swung some members of the Greek parliament against more austerity tied to further bailout financing.

Yes, Greece could well "solve" its problems today and the markets might well rally if and when the government wins its no-confidence vote. But everyone now knows a Greek bailout will simply be a case of "kicking the can down the road". The odds of default and future contagion are sky high because the underlying monetary union contains a dangerous design flaw that strips member nations of their power to safely expand their deficits in times of economic crises and continues to place the resultant burden of adjustment on everybody but bank bondholders. This is being exacerbated by a financial sector run amok. As my friend Chris Whalen has noted, "the refusal of the political class to imposes losses on large bank creditors since the collapse of Lehman Brothers and Washington Mutual in 2008 illustrates the extent to which the financialization of the western industrial economies has turned into a gradual coup d'etat by the banks and the global speculators who dominate their client base."

Until the EU, ECB, and IMF grasp this particular, we remain at risk of a major new economic and political crisis.

Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.

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