thenextwave

Dicing with death in the Eurozone

Posted in economics, finance, politics by thenextwavefutures on 14 February, 2015

varoufakis-merkelI hadn’t meant to come back to Syriza and the Eurozone so quickly, but The Real News Network has a fascinating interview with the German economist Heiner Flassbeck, conducted after the election, where he makes three valuable points. Here’s some extracts and some notes.

1. The Troika is more interested in imposing conditionality than talking about debt.

FLASSBECK: [T]he most important thing is not debt as such, but it is the reforms, the so-called reforms, the so-called structural reforms, where the countries have the conditionality to do something. And whether the debt is now repaid in the next ten years and next 20 years or so is not important. And that is not what it’s all about. What you have to discuss is the conditionality, and this is not covered by Varoufakis’ proposal. …

JAY: So … this is things like lowering the amount of pensions that are paid, the minimum wages.

FLASSBECK: Everything, all the things, the long list of 100 points, including the privatization of the port in Piraeus or things like that, crazy things that have nothing to do with the Greek performance–or not much, at least. Only under a neoliberal ideology it has much to do with the Greek performance. So these things are very important. And there, is far as I understand, the German finance minister said very clearly, no, no way to change that.

So – if this analysis is right – the two sides are much further apart even than the recent coverage suggests. Greece is talking apples, the Troika is talking oranges. But it’s also a sign of the way in which the election of Syriza has changed the game, and the shape of the Overton window. This is one reason why both sides are negotiating in public, as Peter Doyle pointed out in the FT’s Alphaville blog. When you can’t even agree on what the discourse is, the usual channels and the usual forums break down.

2. Since the European debt problem is still being fuelled by German trade surpluses, it’s not going to go away soon.

FLASSBECK: [T]he German surplus of the current account for this year and the official forecast of the German government is, again, 20-30 billion higher than last year. It’s more than 200 billion–a surplus of more than 200 billion, which clearly means, logically means that the German economy, the German politicians are building their whole model of the German economy on more indebtedness of other countries of the rest of the world, including Europe. So they need new debt from the rest of the world of 200 million for this year to get a small growth of 1.5 percent, which is ridiculous….

JAY: Let me just break this down and make sure I’m understanding it … They’re sitting on all this surplus, and what they need to do with it is loan it to somebody. So they need some debtors to pick up this $200 billion.

FLASSBECK: They need debtors. Germany needs debtors more than anybody in the world, because the whole economy is built on this surplus, on this idea that the rest of the world would be debtors and Germany’s always a creditor, which is a foolish idea … Every reasonable economist knows it’s a foolish idea. It’s mercantilism.

Two points about this. The first is that it goes to the heart of the Eurozone’s low-growth problem – it won’t grow until Germany starts buying more. The second is that this isn’t a problem stemming from the financial crisis. It’s a problem stemming from the way in which Germany is choosing to manage its  economy. And generally, mercantilism went out of fashion in the 18th century.

3. The only way for Greece to resolve [1] and [2] is to build a coalition.

FLASSBECK: [I]t’s a violation of the rule inside the Monetary Union that you should not have macro economic imbalances that go beyond a certain point. The Germans insisted that it should be 6 percent of GDP, but now the German surplus is even going far beyond that. It would be 8 percent of GDP this year. So I would, if I were Mr. Tsipras, I would take this point. I would say, you see, the Germans are violating everything, and the most important thing under the sun, namely, the current account balance–and at the same time, they’re accusing us of violating other parts of the treaties of the European treaty. So who is the biggest violator, and who’s going to play along the rules or against the rules?

JAY: And this is the logic with which you try to build your coalition.

FLASSBECK: I would build my coalition exactly along these lines, and then it would be very difficult for the Germans to argue and to say, no, we don’t care about that; our violations do not count; only yours count. If you then have a strong political coalition, including Italy and France, they could easily, in my view, easily get a majority in Europe against the Germans. … That’s where you have to go.

Of course this makes political sense, but it also requires time; and political time and the time of financial markets run at different speeds. Indeed, you can go one step further here and suggest that the ECB’s intervention last week might have been designed to accelerate the speed of a Greek financial crisis and reduce the time and the opportunities to build such a coalition.

But all of this is a complex and dangerous game.

Whirling dervishes

In his excellent Alphaville post, Peter Doyle reminds us that everyone has the same aims for the euro:

The issue is not that the ECB and Syriza have fundamentally different aims for the euro: both want it; both want it to secure stable sustainable growth area wide; and, to that end, both agree that policy in it has to be designed and coordinated at area level because everyone working “by and for themselves” above pre-set floors and subject to “no-bailouts” has all-too-clearly-and-all-too-utterly failed.

But the eurozone has been so badly designed that the only way to keep it in the air is for everyone to keep threatening to crash it.

It is like a mid-air jumbo jet, flown by a large one-member-one-veto committee, with one wing on backwards. So orthodox procedures (all engines on forward thrust) spell ruin … In that context, the current pas-de-deux is not a matter of “whether the Greeks or the ECB blink first.” It is a case of whether the fallout from the perpetual dance of death can be contained.

And sitting in the middle of the whirling dervishes, of course, is Angela Merkel. As Peter Doyle argues, she could decide that the markets seem relaxed about a Greek exit, and let them go, to discover that the markets have just been quiet because they’ve been momentarily doped with a-trillion-or-so of quantitively-eased Euros. Or she could decide that’s too much of a risk, and over-rule her hawkish finance minister Wolfgang Schaüble – fresh from his defeat on the quantitative easing – to have him cause political mayhem internally.

Merkel always prefers the less risky option. But in this context, it is not clear what that is for her. Thus is her dance with the markets.

Someone said dismissively of Yanis Varoufakis this week (sadly I can’t find the link) that he resembled a man holding a gun to his head and demanding a ransom threatening to shoot (a bit like the new sheriff in Blazing Saddles). In such a volatile situation, acting crazy may be the sanest thing to do.


The image at the top of the post is by Greek designer and illustrator Stefanos Papadatos, and is used with thanks. You can read more about it here, or look at his portfolio here.

The interview was with The Real News Network. You can view it here.

One Response

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  1. Page not found | thenextwave said, on 19 February, 2015 at 1:16 am

    […] Dicing with death in the Eurozone […]


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