It is late Sunday afternoon as I write this in Colombo, Sri Lanka and about 4.5 hours to the west the Greeks are getting ready to vote in their national election. It has been hailed as a make or break-type of affair but from what I know from inside-type conversations with some of the players and from general reading it has the hallmark of a fizzer, even if Syriza wins the ballot. Essentially, none of the main players seem to be willing to actually solve the problem. The entrenched interests have helped create the problem and are impoverishing the Greek people (themselves excepted). So they are part of the problem. Syriza talks bit about freeing Greece from the Troika-yoke but has a set of proposals that are mutually inconsistent. They might help around the edge and redistribute income a bit but what is needed is a massive boost in national income and that can only come from a massive increase in spending. The non-government sector is not going to do provide the source of that spending boost to get things moving again. So, ladies and gentleman you know what the answer is – there is only one other sector left in town to do it. And, you also know what is stopping them – membership of the Eurozone and the requirement to obey fiscal rules that restrict necessary spending to stagnation-enduring levels. That is why Syriza’s strategy is mutually inconsistent. Even a debt jubilee – the current favourite of the progressives, which warms their hearts so they can convince themselves that they are different from the neo-liberals will not solve the problem. Repeat: a massive fiscal boost is required, which means deficits above 10 per cent of GDP for many years forward. Repeat: that can only be accomplished within the current political reality if Greece leaves the Eurozone. It should have done that in 2008. It should never have joined. It should do it next week.
I last wrote specifically about Greece’s situation in these blogs – Greece – two alternative views and Germany should be careful what it ‘allows’.
In the three or four weeks that have passed since I wrote those blogs nothing has been revealed by Syriza leaders to alter my view, unfortunately.
Around the world, the debt jubilee idea seems to have become the focus of progressive arguments. Last week, a ‘group of economists’ (forty of them) in Australia gained headlines when they released an signed letter – Let Greece Breathe – condemning the Troika’s bailout program in Greece.
I know most of the forty economists who are all working in the heterodox school of thought (variously and, in some cases, loosely). I wasn’t invited to sign the letter but if I had been I would have declined. Why?
The letter makes good points. For example the economists state that imposing fiscal austerity is bad for weak economies and “the particularly severe effects that flow on to the poorest households”. I have no objection to that.
But the letter seems to want to soft-peddle on key issues.
It says, for example, on the Troika to ensure there is:
– there is a cancellation of a large part of the debt, and
– there are new terms of payment that support the rebuilding of a sustainable economy.
– this settlement commences a new EU wide policy framework favouring pro-growth rather than deflationary policies
First, since when is it the Troika’s role or right to determine whether debts incurred by non-Troika institutions and individuals, presumably in good faith, be cancelled – arbitrarily and unilaterally?
I certainly do not think the Troika has that right. It has already assumed it can trample on the rights of workers in Greece and other nations and impoverish them. The Troika has no rights in my view and Greece should stop dealing with it as a body.
The Troika is not the overseer of the – Treaty of Lisbon – which amended the two core treaties of the EU, the Treaty on European Union and the Treaty establishing the European Community.
You won’t find any role for the Troika. None of the institutions in the Troika are democratically elected nor are accountable to any citizenry.
Second, I do not support the cancelling of the debt. I support a redenomination of it in a new currency, which is the sole right of the democratic country who issues that currency under monopoly conditions.
Lex Monetae or ‘The Law of the Money’ is a well-established legal principle, backed up by a swathe of case law across many jurisdictions, and is internationally accepted.
It states, broadly, that the government of the day determines what the legal currency is for transactions and contractual obligations within its national borders. There is thus no question that a nation currently using the euro could abandon it, introduce its own currency, and require all taxes to be paid and all contracts to be denominated in that currency.
Lex Monetae also has been taken to mean that if, say, an Italian had borrowed US dollars from a London bank operating under English law, the definition of the ‘currency’ for the purposes of resolving this contract is governed by US law.
Finally, the principle also means that if a government changes its currency and re-denominates at some given parity, all contracts must be honoured at the re-denominated rate.
Lenders know that Lex Monetae is well-established principle and could be invoked during the course of a debt contract. In that sense, the risk associated with a redenomination (principally exchange rate changes) should be factored in to the decision.
The idea that the Troika would just cancel out debts that it neither incurred or were responsible for would not be factored into any reasonable decision-making environment.
The only exception I would make to the debt cancellation would be the credit the Troika itself arranged. The exception is that the Troika forced the Greek government to issue liabilities under English law in order to gain further bailout assistance, thus anticipating the application of Lex Monetae, in the case of an exit.
Notwithstanding that act of bastardry, the discussion suggests that all public debt should be re-denominated into the local currency at the going parity on day one.
Third, what does “this settlement commences a new EU wide policy framework favouring pro-growth rather than deflationary policies” mean?
Are they calling for a wholesale change to the Treaty of Lisbon? It is hard to see any a pro-growth environment being sustained with the current terms of the Treaty. So why not be explicit about that? Why the ‘soft-shoe’?
Why not just explicitly state – the European Commission should abandon fiscal rules specified under the Stability and Growth Pact (SGP) and its antecedents – the Fiscal Compact, the Two- and Six-Packs.
There cannot be a pro-growth framework while these fiscal rules are enforced in any way. The GFC proved that the impact of the cyclical effects on the fiscal balances (that is, the loss of tax revenue etc due to the loss of output and employment) were sufficient to breach the 3 per cent limits.
Those ‘breaches’ led to the fiscal austerity being imposed.
Further, most Eurozone nations will not be able to run the necessary magnitudes for their fiscal deficits (to favour ‘pro-growth’) under the current terms that restrict the ECB – the monopoly-issuer of the euro – from funding such deficits.
Countries such as Greece already ran foul of the private bond markets who are required to fund the deficits under current rules.
So why not call for the rules to be changed to allow the ECB to properly act as a currency-issuer? The reason is obvious. Germany would never allow it and it, basically rules the Eurozone.
The latest announcement of quantitative easing while unconstrained from the prior conditionality that accompanied the – Security Markets Program – which began in May 2010.
That program saw the ECB demonstrate categorically that by purchasing specific government bonds in the secondary markets (to get around Treaty rules) it could eliminate the private bond markets from the picture and control bond yields to whatever rate it chose.
It was a salutary lesson about the power of the currency-issuer. The problem with the program is that the ECB insisted that the fiscal austerity be imposed and followed as a condition for it buying a beleaguered nation’s debt in the secondary markets.
So they controlled yields and dealt the private bond markets out of the equation but wrecked the economies in question at the same time.
Please read my blogs – this settlement commences a new EU wide policy framework favouring pro-growth rather than deflationary policies and – The ECB is a major reason the Euro crisis is deepening – for more discussion on this point.
The German ‘tolerance’ of Draghi’s QE announcement this week is limited I suspect. They know that as long as the fiscal deficits are prevented from rising and austerity is maintained that QE will not do much to stimulate growth.
But if QE was combined with large-scale expansion of fiscal deficits in several countries targetted at public sector job creation and infrastructure development then the German ‘tolerance’ (currently given through gritted teeth) would quickly vanish and there would be a political crisis.
The Germans would win as France and Italy haven’t the stomach to assert their own national sovereignty.
Why do progressives think that weak statements about “pro-growth” frameworks will help carve out a solution for Greece and other nations suffering the inanity and destructiveness of the Troika-imposed austerity?
Nothing short of a wholesale abandonment of the Treaty is required, preferably with national currency sovereignty re-established and a new political unity developed to tackle the big issues such as rule of law, climate change, migration etc all of which transcend sovereign currency boundaries.
The letter does call for the Greek government to:
… abandon the austerity program that is crushing economic activity and adopt a more expansive fiscal policy setting, targeting immediate relief from poverty and stimulating further domestic demand …
With what aim? Why not call for an unconditional commitment to restore full employment and pay equity in Greece?
That commitment then sets the reality because it tells us how much “more expansive fiscal policy” has to be. It tells us how much “further domestic demand” needs to be stimulated.
Calibrating those increases in the fiscal deficits would, of course, shock the conservatives and the mainstream (ignorant) financial media would go crazy. Syriza’s political aspirations would obviously be undermined.
Which then brings me to the next point. Is the letter by these Australian economists merely supporting Syriza rather than presenting a solidarity with the Greek people? The implication of the question is that the two should not be taken as necessarily being consistent.
Why would I say that?
It is clear that Syriza is holding itself out as the champion of the people. It is making certain statements about boosting incomes and reversing pension cuts and the like.
The campaign advertising that is posted up all around Greece repeats the campaign slogan – “Η ΕΛΠΙΔΑ ΕΡΧΕΤΑΙ ΣΕ” (Hope is on the Way).
I have no doubt this political messaging is a genuine attempt to engender optimism. I agree with that a major shift in Greek politics is required and that Syriza appears to be achieving that a shift. But is it the shift that is required?
I doubt it – and I am sorry to say that as I have friends in the Syriza movement.
First, don’t get the idea that Syriza is a radical party. Its public statements and the proposal it has taken the Greek people is not radical at all and would see it operate within the mainstream (neo-liberal) rules that are set and enforced by Brussels.
Syriza is not proposing a restoration of currency sovereignty. Rather it is proposing that Brussels goes soft on Greece for a while and writes down a proportion of the outstanding public liabilities as part of a negotiated easing of the repayment conditions.
That is not radical. It ensures that Greece remains within the Eurozone, the dynamics of which are dominated by Germany, which has an economy that is incomparable with the Greek economy and makes it an ‘impossible’ partner to be with in a common currency union.
They talk about “going to the markets” (private bond markets) to fund government spending. That is about as mainstream as it gets. But think about it for a second. The Troika’s bailout funds are currently being offered at rates lower than Greece would get in the open private bond markets. So how is it acting in the interests of the people to expose it to higher funding costs?
What happens when the private bond markets turn against the government again (as they did in 2010)? Then what?
Syriza talks about restoring the creditworthiness of public debt? What? Who are they representing – the private bond dealers and their assessments? The IMF? The people?
Syriza used to advocate the nationalisation of banks in Greece as a recognition of the centrality of banking for financial stability. At the 1st Congress of the Coalition of the Radical Left (that is, Syriza) in 2013, several “programmatic goals” were agreed, which would define the parties’ policy platform.
Goal 13.7 stated:
We will set the banking system under public ownership and control, through the radical conversion of its functioning and the aims it is serving today, through the upgrade of the workers and the customers’ role. We will found special purpose public banks focusing on agricultural credit, small and medium-sized businesses, and public housing.
One of the issues with the bailout packages is that the Greek government has been subsidising the private banks (and the huge salaries of the CEOs and the shareholder interests, etc) and is a major shareholder in the four largest banks – an action to avoid financial collapse.
The government has pumped billions into the private banks but the same financial elites continue to run them.
And now? The so-called radicals have abandoned the commitment to nationalise the banks. Why? Who are they proposing to serve?
More telling, is that Syriza plans to ‘stimulate’ the Greek economy within an effectively neutral fiscal position. There have been various statements made by so-called spokespersons of the Party about the need to maintain fiscal discipline while altering the composition of public spending in favour of helping the disadvantaged.
Former contender for the Communist Party leadership and likely Greek Finance Minister if Syriza takes power – Yiannis Dragasakis – has stated several times that a Syriza government would adopt a balanced fiscal position.
The Greek press article (September 16, 2014) – Finance Ministry challenges SYRIZA’s economic pledges – reported on a recent “Vima FM” interview (this is a radio station in Athens) that Dragasakis gave. He apparently:
… insisted that the leftists would run a balanced budget. “We are not going to return to deficits,” he said.
Well, one couldn’t be more categorical than that?
As I explained in this blog – Greece – two alternative views – Greece will not achieve growth with balanced fiscal positions.
How does the Party plan to fill the massive output gap that Greece has? Output gaps can only be closed by increasing output. That requires increased spending.
Greece has lost 25 per cent of its real GDP since 2008. While potential output has also surely declined (as firms have scrapped productive capital) in the face of a massive decline in the investment ratio, it remains there is a huge unused capacity in the country. The mass unemployment is testament to that.
While there might be good reasons for redistributing the existing fiscal outlays across the competing interests, the overwhelming fact is that the Greek public deficit has to rise substantially – by multiples of the current Stability and Growth Pact fiscal limits of 3 per cent.
Running a fiscally-neutral policy to help people will only partially stimulate overall spending in the nation. The reality is that Greece needs a public stimulus that is way beyond anything that is allowed under the current rules.
A balanced budget position doesn’t resolve that issue.
But the Greeks can fix that in a single decision – leave the Eurozone and restore currency sovereignty.
The statements by Dragasakis preclude that alternative.
The only reasonable conclusion is that Syriza’s stated policy aims are not mutually consistent. They cannot achieve the (motherhood) aspirations of higher growth and increased incomes and equity while allowing Brussels to dominate the magnitude of their fiscal deficits.
They cannot achieve their aims with a fixed exchange rate (effectively no independent exchange rate) with Germany as a partner in the monetary union.
Their policy pledges resonate with the suffering population. But the reality is that the population is not being educated by progressive forces about the self-inflicted damage that retaining the euro as their currency is causing.
Letters by economists that avoid that issue do not help.
Political parties that make it a root-and-branch commitment to remain in the Eurozone do not help.
So Syriza is either not going to be part of a sustainable solution for Greece or they are playing an elaborate political scam, designed to garner support under false pretenses with a secret plan to run large deficits and get kicked out of the Eurozone.
I do not like either option.
I think the progressive side of politics should reverse the trend to anti-democratic governance. A new dialogue is required which is transparent in motive and application so that people can appreciate in advance what they are voting for.
The downtrodden Greek people – who live in region that was the foundation of democracy – deserve nothing less.
I don’t see Syriza as the solution as they shift to the centre (which is really the right). I would love to be proved wrong!
That is enough for today!
(c) Copyright 2015 Bill Mitchell. All Rights Reserved.