Germany's risk is as big as her stake in the project

Germany runs the risk of being burdened with 100% of the blame for the failure of the euro project, primarily because it's the strongest and most ambitious of the pack. Since it is the major (and most prominent) recipient of profit from the euro, it is easily deemed -by public opinion- responsible for all the problems that EU is facing. In part it is to blame, because it has based its recent economic success on the erosion of income for Germans. It accepted that a growing percentage of its own citizens will live under poverty and even more under the threat of becoming impoverished. This would not be a problem for the rest of Europe if it were not for a common currency that inevitably diffuses the policy of the strongest member.

Although the Maastrich Treaty advocated convergence, harmony in development and social standard guarantees for all, the common currency's reality is one of massive unemployment or working-poverty. The Economic and Monetary Union's design and implementation is evidently a failure for at least half the citizens it affects. It was conceived as a maximalistic idea that might work under ideal circumstances, but it was executed as a book-keepers compromise. The euro project was limited to a no strategy-no authority operation, enforcing the letter of the rules in order to violate the spirit of the rules. This is no more Germany's fault than it is of the rest of the founding members, but it could become Berlin's major problem.

Once started, the Euro project can not be repaired or withdrawn without serious cost. It will soon be imperative to either transform the Eurozone in an economic area that would not alienate its less privileged citizens or to accept that Europe can't continue with a "one size fits all" single currency. There are various solutions available but the problem is always the same.

Union depends on trust. Trust in Eurozone is already running thin. If totally lost by the further impoverishment of the periphery and the lower/middle classes in the core-countries, the rift will be inevitable and could mean the disorderly demise of the EMU project. By virtue of her importance relative to the European Union, Germany will then be the target for much more blame than its share in the original mistake. It is in Berlin's interest to either support a positive metamorphosis of this Union or to accept that its days are numbered and commit to an orderly break-up. Or a mixture of these and possibly other solutions as well, for the various member states. If nothing is done Germany risks being stuck with both the blame and economic losses equivalent to her huge stake in this project.

Athens as part of the solution or as not part of the problem?*

Greece has unwillingly invested 180% of its current GDP in the Euro project. It can't afford to walk away with only the damage of the failed EMU.

Before forming an opinion on whither it's better for Greece and the Eurozone to part ways, one should examine the facts, starting from the basics. Greece should not have entered the Eurozone in the first place. It should not have applied for membership (let alone by using the Goldman Sachs swap trick) and the Eurozone should not have accepted. Both sides were aware of the fact that the Greek economy was only nominally converging with the EU median level, but chose to ignore reality, for purely political reasons.

The Greek has always been a “deficit economy”, like the rest of the periphery. The exchange rate of the Greek Drachma was revealing: In 1978 it took 20 Drachmas to buy one German Mark, in 1988 it stood at 70 Drachmas and in 1998 at 170 per one Mark. Trade and current account imbalances where counterbalanced by the exchange rates. This sort of “security valve” was eliminated with the establishment of the euro, when states forfeited monetary sovereignty but no authority has undertaken the relevant responsibility.

The Eurozone has evidently failed to achieve the aims of the Economic and Monetary Union it was intended to serve (as defined in the Maastrich Treaty): “... harmonious and balanced development of economic activities, sustainable and non-inflationary growth respecting the environment, a high degree of convergence of economic performance, a high level of employment and of social protection, the raising of the standard of living and quality of life, and economic and social cohesion and solidarity among Member States.” The Euro was supposed to be just a medium towards these aims, not the goal. Thirteen years after joining the Euro, the non-core countries like Greece, Italy, Spain, Portugal etc. are undeniably further apart from the core countries than they were before. This can't be explained by the “lazy, cheating Greeks who live beyond their means” stereotype.

The problem with the euro is that it is not a real common currency, but an inflexible fixed exchange rate regime, since it lacks a common economic, fiscal and social policy that would absorb the differences of the various economic realities. The Eurozone is missing what the Federal Republic of Germany uses in order to balance the different realities of (for example) Bayern and Bremen. This must be addressed, either with or without Greece in the club, in order to avoid more divergence, division and conflict down the road.

Letting aside the inherent failings of the Greek reality, it would be unwise to ignore what is now at stake for Athens. Greece has been forced to undergo a “salvation program” that saved mostly the French and German banks, destroyed the Greek economy, impoverished the society and ballooned its national debt. But seen from a different point of view, Greece has invested a good part of the 180% of its current GDP (namely its national debt) in the “Euro project”. If it were to let go now, and seek a solution to its problems alone, with a new national currency, it would essentially be forfeiting its investment and keeping only the damage inflicted from the failure of the EMU.

The Greek government might or might not succeed in securing a deal that would solve the problem of its country and perhaps start the process that the Eurozone needs to become a viable union. If it succeeds, the average Greeks will still face a long period of economic hardship, but with the prospect of a better future, in a better environment. If not, Greece has no other viable option but to cut it's losses and go back to surviving as the poor, small country it was for two centuries at the south eastern border of Europe. If it can't be a part of the solution, it can at least stop being a part of the problem.

* First published in German translation by Hubertus Volmer, at  http://www.n-tv.de/wirtschaft/Teil-der-Loesung-nicht-Teil-des-Problems-article15347436.html

Greece in the "omnipotent government" trap*

The so called negotiations between the Greek government and the rest are in the “dead zone”. What now hangs in the balance is either an agreement for the prolongation of the limbo situation, in order for further talks to take place in search of a real solution to the “Greek problem”, or a rupture.

The Greek government has made it clear that it is not willing to continue on the therapy that was enforced, since it has been proven to have made things worse, without solving the problem. The other side insists that what has not worked so far has to be continued and concluded before any other option is examined.

At this point it might be useful to look back to the problem that Greece faces, not on the fiscal or even structural level. The fiscal problems are of course connected to the structural inefficiencies. But even the admittedly severe structural failings are not the original source of trouble. It goes even deeper than that, into the actual institutional framework of the Greek state.

For 40 years following the fall of the US-backed military dictatorship, Greek politics has been based on the autocratic rule of all-potent prime ministers and their partisan system of clientelism that dominated all aspects of life. Governments have been able to not comply with laws but to change the rules at will, through the absolute hold on the Legislative. In the absence of a system for real control of the executive, laws were even ignored and the constitutional impunity of ministers has made corruption to be perceived as something normal. Situations not unique, since all countries in Europe and beyond have their share of corruption, tax evasion and underground economy, but maximized in Greece for the last 40 years.

All sorts of privileges have been granted or denied to various groups, by laws that have produced a highly dysfunctional economy and an inefficient, chaotic public administration. Insufficient political goods were provided: The Justice system has a backlog of hundreds of thousand cases that will never be judged in a sensible time frame. A private Health and Education market had flourished, since the public system was underfunded and/or mismanaged. Infrastructure was so unequally distributed (in order to maximize profits for contractors and bribes for decision makers) that nearly 70% of Greeks needed to move to the big cities, in order to secure a minimum of decent living standards.

With such a poor record on the public goods offered, it is no wonder that mismanagement, widespread tax evasion and massive underground business have derailed the Greek economy. It was to be expected that such a system would have no resilience, once a major crisis (like in the post-Lehman period) hit Greece. Sadly, the only solution that was ever offered after Greece went practically bankrupt in 2010 was to impose a program of austerity that crippled the national economy (25% drop of GDP), impoverished 40% of citizens and piled more debt on the already high mountain of public obligations.

Suppose that a compromise is achieved between Athens, the institutions and the partner member-countries of the EU/EZ, and a complete collapse is averted. Suppose that a solution is found for the public debt (by now even the IMF and the ECB admit it is not sustainable) and that there is agreement even on the course for the Greek GDP to start growing again. Without radical institutional reform that would ensure that rulers rule, legislators legislate and judges judge, it will only be a matter of time before another collapse, when Greece will be faced with the next crisis.

*First appeared in German translation by Hubertus Volmer at 

http://www.n-tv.de/politik/politik_kommentare/Griechenland-in-der-autokratischen-Falle-article15332956.html

Neoliberalism is...

Neoliberalism is a cure for the illusion of civilized mankind

Neoliberalism is the privatization of democracy and TTIP is its prophet

Neoliberalism is socio-economic warmongering

Neoliberalism is war between money and people

Neoliberalism rewards idle capital

Neoliberal Social-Democrats. Contradiction in terms.

Neoliberalism: Where goods, services, workforce or consumers become irrelevant and profit is extracted through the leverage of public debt

Neoliberalism puts a price to human life according to per capita GDP

Neoliberalism advocates the privatization of law and justice through TTIP

Neoliberalism treats elections as an opinion poll

Neoliberalism advocates solidarity with the banking system

Neoliberalism, or how to degrade a Society into an Economy

Neoliberal rationality: Summer clothing provokes winter snow!

Neoliberalism: Where workforce is a liability and debt is an asset!

Neoliberalism: Hybrid derived from the combination of bad ideas and bad practices catalyzed by bad principles

Neoliberalism: Self-flagellation aimed at impoverishing the potential clients of goods & services so they can't keep the economy running

Neoliberalism, or how to make Europeans remember the Cold War era as "the good old days"

Neoliberalism advocates competing in a race to the bottom

Berlin is single-handedly rewriting the Argonaut Conference

Three months and 70 years ago, the future balance of power in Europe was decided by then soon-to-be winners of WWII. In the Livadia* Palace, near Yalta in Crimea, the leaders of the outgoing British empire, the upcoming empire of the USA as well as the totalitarian “Soviet Socialist” successor to the Russian empire, finalized their plan to end nazi Germany's aggression -aimed at establishing its Third Reich- and negotiated their spheres of domination.

Britain's Prime Minister Winston Churchill, President Franklin D. Roosevelt of the USA, and USSR Premier Joseph Stalin, decided that Germany was to be dismembered, demilitarized, denazified and rehabilitated “so as to never again pose a threat to peace in Europe”, divided between the four occupying forces (defeated and afterwards liberated France was to be given a mandate, comprised by US and British concessions).

With a dividing line established in the middle of occupied Germany, all countries in the west and south would be “guided” by the allies, while those neighboring north-east to the USSR in “reasonable” distance would be handed-over to Moscow's rule. With the exception of Greece, which for geo-politico-strategic reasons, although situated in the extremity of the Balkan peninsula (conceded to Soviet influence) was to be the west's enclave in the region.

The political essence of that agreement between the contingent allies was to define the future of the “modern world” of that time. On one side would be the free-market capitalist proponents of the industrial western world and on the other side the self-proclaimed communists who advocated an egalitarian society via an inefficient centrally planed economy, in transition from the absolutist regimes of czarist Russia and the remnants of the Austro-Hungarian empire in the center-eastern part of Europe.

The “sphere of interest” division was transformed -through the iron curtain- into a nearly total separation between the two models, lasting decades until the fall of the Berlin Wall, in 1989. But separation was not total, in the sense that both regimes tried to emulate selected elements of one-another. The so-called Soviet block had unsuccessfully tried to create it's own type of “people's capitalism”, but only achieved in giving a bad name to anything Socialist and the mere idea of social justice. On the other hand, the Western world had successfully created it's own, so far unprecedented, social security system, which ensured that capitalism would enjoy decades of relative peace between the haves and have-nots.

At the time of its collapse, 45 years after the Yalta “Argonaut Conference”, the undemocratic totalitarian Soviet block was unveiled as what it was: A system with basic political goods -as education and health care- offered to all citizens, bar the dissidents, but with very little in terms of justice, infrastructure, organized markets or civic administration able to compete with the other half of Europe.

Meanwhile, West Germany protected and supported by the USA, had once more emerged as a major player in the global economy. It was only natural that the Federal Republic would absorb the former People's Republic and -after a relatively short period of integration- would seek to utilize its capacity in full. Aspiring to dominate on its neighbors, this time not through war, but via its economic might, it played a major role in the transition of former Soviet satellites towards the “new world order” of deregulated global markets for goods, services and financial products. That's where the euro comes into play.

The common European currency was initially devised to be only one of the cornerstone elements towards a hybrid-federal union of states. Separated from the broad strategy, the euro only fueled the inherent imbalances between the various sets of countries. The current account deficit states, not any more controlling a national currency that would smooth out problems through devaluation, entered a vicious circle of internal inflation and external debt. The monetary union -in a sense- degenerated into a rogue transfer union, where the eternal weaklings of Europe transferred their competitiveness to the strongest states, in return for cheap funds, directed mostly not in capital formation but in consumption. That Greece was the first country to collapse in this system, is due to a combination of many mistakes, inefficiencies and breaches of rules, both on the national and the European level.

At this point, Germany had achieved the status of first among unequal partners, able to dictate its political/economic dogma as the only way forward for Europe. Based on the current economic situation and its own interests, Berlin advocates a new redistribution of spheres of interest in Europe, mostly under its own direction. In this new balance of power, Germany is now seen to methodically promote a three tier segregation of European states, in a revision of the Yalta Conference compromise, decided in her absence, 70 years ago.

In the first tier would be the core-members of the EU, the strongest states of central Europe (let's for argument's sake call them the “3.000 euro per month citizen-states”) like Germany and France, which would be the ones to determine (regardless of their citizens' choices) the policies and means available to the other two: The “1.000 euro per month” states of the “immediate outer circle”, comprised by the relatively advanced countries of the former Western World, such as Italy, Spain, Finland, etc. and the “500 euro per month” outer periphery of former eastern block countries (e.g. the Baltic states, Slovakia, Hungary, Romania, Bulgaria etc.), with the addition of some “usual rogues”, such as Greece or even Portugal.

This is -in my view- the true issue at stake in the current conflict between Greece and the Quintet (formerly known as the Institutions and previously as the Troica). And the outcome of this conflict is certainly not something regarding only the Greeks.

At this point Athens is offered the choice between either slow death in the hands of it's "partner/creditors" or quick death down the Grexit cliff. Is there a third way out or is chancellor Merkel to confirm Otto von Bismarck's observation that “it was always a failing of the Germans to want to attain all or nothing and, in their headstrong way, to rely on one particular course” in the pursue of their ambitions?

____________________________

*Palace in the Livadiya estate, granted by Empress Catherine II of Russia to Lambros Katsonis (1752–1804), a Greek revolutionary and Imperial Russian Army officer, and named thus after Livadeia, Greece, the town he was born in, then part of the Ottoman Empire. It is now a suburb 3 kms west of Yalta.