Tuesday, June 21, 2011

Greece becomes an EU crisis

The European Union, aka, the "European project," is failing. The process that led to and developed the EU was and is fundamentally a political project. Its main purpose was to prevent new European wars and to secure democracy. It was a result of the extremely brutal lessons of the two world wars last century.

But European leaders, not least the current ruling parties in Germany and France, the two countries that have always been the drivers for European unity, came to regard Europe (the EU) primarily as an economic union. And now the greedheads are driving EU policy on the sovereign debt crisis, with Greece being the most intense problem of the moment.

The greedhead trinity that is driving EU policy toward Greece right now is known as the Troika: the EU Commission; the European Central Bank (ECB); and the International Monetary Fund (IMF). The Troika is trying to do to Greece what the IMF and the World Bank did and tried to do to various Third World countries: use debt problems and attacks from the capital markets as opportunities to turn the country into a neoliberal dystopia. In Greece's case, that means forcing - and I do mean forcing - Greece to impoverish large numbers of its people and sell off huge amounts of state property. Claudi Pérez y Andreu Missé in a news article, La crisis del euro: Barroso advierte de que "no hay plan B" para Grecia El País 21.06.2011, say that the sell-off demands amount to "un programa de privatizaciones que prácticamente solo deja en manos del Estado las islas y el Partenón" (a program of privatization that will leave practically nothing in the hands of the state except the islands and the Parthenon."

The Troika is trying to turn Greece's economy into something like that of Chile under Pinochet, where the junta's conservative American advisers known as "the Chicago Boys" engineered a radical, neoliberal, anti-labor "free market" policy that damaged the living standards of most Chileans. One aspect of the neoliberal vision that later came to be called the "Washington Consensus" that the junta did not embrace was privitization of the copper mines. The nationalization of the copper mines was one of the main US grievances against the pre-junta democratic government of Salvador Allende. But the junta kept them as state property and did very well with the revenue they provided.

The Troika doesn't want Greece to have anything like that left.

But the fact that there are profit calculations behind the Troika's policies don't mean that they are smart policies, either for the EU and probably not for the creditors themselves. There has been somewhat conflicting and therefore confusing reports on the major Greek bailout package currently under negotiation, 100-120 billion euros or so. A big sticking point had been that Germany had wanted mandatory "participation" by the banks to whom Greece owes its money, of which German banks are a major portion. France had insisted the participation be voluntary. And Angela Merkel agreed with Nicolai Sarkozy a few days ago on the voluntary formula.

The reporting has also been conflicting about what "participation" would actually mean. Some accounts make it sound like the banks would be taking losses on the principal. But in accounts like this one from Carsten Volkery Schuldenkrise: Euro-Retter gehen volles Risiko Spiegel Online 20.06.2011, it's pretty clear that what is currently on the table for that voluntary private creditors' participation is debt restructuring, meaning substituting new debt securities for the current ones at somewhat more favorable rates for Greece without actually writing down any of the principal.

Part of the confusion may be coming from the rating agencies. Volkery reported that Fitch has only just changed its previous position that for credit-rating purposes, it would treat a restructuring as tantamount to a default.

But all of this is based on pre-Great Depression, Herbert Hoover (or maybe Calvin Coolidge) economics. Greece is not going to be able to pay back the principal. The German banks are going to have to take writedowns, i.e., losses. Paul Krugman writes in Kicking the Eurocan 06/19/2011:

The reaction of European leaders and institutions to the Greek crisis is a sight to behold. Essentially, it boils down to the fact that default would be very inconvenient, both as a practical matter and in terms of prestige. Therefore default must not be considered a possibility, even though it has long been obvious that non-default is not an option. ...

For Europe including Greece, the costs of delay are the real costs to the Greek economy: delaying a realistic resolution of the debt problem means extending the period of high unemployment and depressed output. Add up the cumulating Greek output gap, and there’s one estimate of the true cost of delay.

For Europe ex-Greece, the costs of delay are whatever that delay does to reduce the amount that Greece will eventually pay its creditor. I think there’s a good case to be made that at this point demands for even more austerity are counterproductive, even in terms of creditors’ interests: the Greek economy is suffering long-term damage, the Greek political scene is being radicalized, and the chances of Greece just telling its creditors to take a hike while it devalues the new drachma are rising.

In any case, what you have to ask now is what Europe is waiting for. Why will six months more of credit lines and suffering make the situation any better?
The political damage to European unity and to the chances for building a more democratic basis for the EU are also high.

Pérez Missé quotes EU Commission President José Manuel Durão Barroso of Portugal sounding like a mobster offering the proverbial deal they can't refuse. Or like an American President making impossible demands of a country we're about to invade. Massive resistance in Greece? Severe economic consequences from further austerity measures? Riots in the streets? Barroso says "there's no alternative."

If this is what EU "solidarity" looks like, Greeks would be better off getting out of the eurozone and maybe the EU itself sooner rather than later. If European democracy in practices means a Troika impoverishing member countries and overriding their fundamental economic needs and political concerns in order to cater to the wishes of German and French giant banks, the EU has become a vehicle that's more of a threat to democracy that a protector of it. Certainly in Greece and in other member states like Spain, Portugal and Ireland that have come under attack from bond speculators.

It's worth keeping in mind in seeing the news this week about the Greek crisis that the Troika is hyping the urgency of the matter in order to pressure the Greek government and political parties to go along with impoverishing their people and hammering their own economy for the profit of German banks. Still, even allowing for that, this is a real crisis. And it won't be ended in the next week or so. In the case of Greece, the Troika has been bleeding the patient. The result is that the patient is getting worse. So the Troika demands more bleeding. It's a destructive cycle.

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