Stiglitz and Krugman on Troika’s Attack On Greek Democracy

By Joseph Stiglitz

The rising crescendo of bickering and acrimony within Europe might seem to outsiders to be the inevitable result of the bitter endgame playing out between Greece and its creditors. In fact, European leaders are finally beginning to reveal the true nature of the ongoing debt dispute, and the answer is not pleasant: it is about power and democracy much more than money and economics. Of course, the economics behind the program that the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund) foisted on Greece five years ago has been abysmal, resulting in a 25% decline in the country’s GDP. I can think of no depression, ever, that has been so deliberate and had such catastrophic consequences: Greece’s rate of youth unemployment, for example, now exceeds 60%.

Read rest here.

By Paul Krugman

It has been obvious for some time that the creation of the euro was a terrible mistake. Europe never had the preconditions for a successful single currency — above all, the kind of fiscal and banking union that, for example, ensures that when a housing bubble in Florida bursts, Washington automatically protects seniors against any threat to their medical care or their bank deposits. Leaving a currency union is, however, a much harder and more frightening decision than never entering in the first place, and until now even the Continent’s most troubled economies have repeatedly stepped back from the brink. Again and again, governments have submitted to creditors’ demands for harsh austerity, while the European Central Bank has managed to contain market panic.

Read rest here.

Greece Has Made Tough Choices. Now It's the IMF's Turn

By James K. Galbraith

The International Monetary Fund's chief economist, Olivier Blanchard, recently asked a simple and important question: "How much of an adjustment has to be made by Greece, how much has to be made by its official creditors?" But that raises two more questions: How much of an adjustment has Greece already made? And have its creditors given anything at all?

In May 2010, the Greek government agreed to a fiscal adjustment equal to 16 percent of GDP from 2010 to 2013. As a result, Greece moved from a primary budget deficit (which excludes interest payments on debt) of more than 10 percent of GDP to a primary balance last year -- by far the largest such reversal in post-crisis Europe.

Read rest here.

More on currency crises and the euro crisis

I wrote a while ago about currency crises (see here). There I suggested that classical-Keynesian or post-Keynesian views on currency crises invert the causality between fiscal and balance of payments problems in a currency crisis. Currency crises are not caused by excessive fiscal spending financed by monetary emissions, which would lead to inflation, and eventually after a run on the currency and depletion of reserves to a devaluation, but on current account problems.

There two key problems with the conventional view. On the one hand, the very monetarist notion that increases in money supply have direct impact on prices, and no effect on quantities. That would be an extreme natural rate hypothesis. But also that these models presume that fiscal deficits and debt denominated in domestic currency are the problem in currency crises, when the relevant debt is the foreign one, related to the current account deficit, and denominated in foreign currency. In other words, whereas default in the former is not possible, in the latter it clearly is. The mismatch between government receipts in domestic currency and foreign debt obligations in foreign currency is the key problem in currency crises.

Fiscal deficits might play a role in a currency crisis, but it is ultimately an indirect one. If the fiscal deficit, by leading to an increase in the level of activity (not prices) leads to a current account deficit, then it does exacerbate the external constraint of the economy, and might contribute to the eventual depreciation. Note that this suggests that the variations of the level of income are more relevant for the adjustment of the balance of payments, than changes in the exchange rate, something noted for the case of peripheral economies, in particular Argentina during the Gold Standard, by A. G. Ford (for a discussion of that go here).

In a classical-Keynesian view the fiscal crisis might be a result of the currency crisis, and not vice versa (as I discussed for Brazil here). If the crisis leads to a recession, then fiscal revenues collapse, and spending increases, particularly unemployment insurance expenditures, welfare spending, and transfers, exacerbating the fiscal problems. Further, the central bank might hike the domestic interest rate, to preclude capital flight and further devaluation and that would have an additional effect on interest payments on domestic debt, also worsening the fiscal stance.

This currency crisis story might have some relation to the current debate between Marc Lavoie and Sergio Cesaratto on whether the European crisis should be seen as a a monetary sovereignty problem (Marc) or balance of payments crisis (Sergio). Both would agree that the crisis is not the result of fiscal problems, as described above. Even in Greece, that had higher fiscal deficits than others, the relevance of those deficits, and the enforcing of brutal austerity afterwards, has been associated to the current account. Note that in common currency areas, like the United States, federal fiscal transfers (and not just inter-state transfers) would allow for imbalances to continue without leading to contraction of output to reduce the regional balance of payments constraints, as noted by Nate Cline and David Fields here.

Alternatively, in the absence of fiscal transfers from a federal European government, if the European Central Bank (ECB) had the ability to buy euro denominated bonds of peripheral countries and keep their borrowing costs low, fiscal policy could be used by member countries, without risk of default. That's what Marc Lavoie has argued, that at the heart of the problem there is a monetary sovereignty problem. Basically the ECB could transform what is effectively a foreign currency problem, since peripheral countries have a constraint in euros, into an essentially domestic problem with no risk of default. On the other hand, it is also true that the manifestation of the euro crisis is in the form of a regular balance of payments problem, as noted by Sergio Cesaratto. In a sense, both are correct. The imbalances in the current account, which Sergio puts at the center, become relevant because in the absence of fiscal transfers, and of a monetary authority providing a zero risk asset for governments to borrow in times of crisis, as emphasized by Marc, the adjustment is done by variations of the level of income.

The difference might lie not so much in the diagnostic, which is basically the same (they also agree on Keynesian fashion that the current account adjustment is done by variations in quantities not prices), but on the policy alternatives. Sergio's emphasis seems to suggest that exit is the best alternative. Marc's views would indicate that reforming the institutions would be better (mind you, they might think differently, I'm suggesting what the different emphasis might imply). It is unclear to me that depreciation and exit from the euro would solve the problems of peripheral countries (on the role of depreciation on solving the external problem in Greece, that is, Greexit, go here). On the other hand, the reform of the European institutional framework has proceeded at pace that seems too slow for the magnitude of the problems faced in the peripheral countries. There is no good alternative.

PS: The Troika's solution is austerity, since the the crisis is seen as a fiscal problem, as in conventional currency crises models. And the ECB should in that framework remain concerned only with inflation.

The Gold Standard and the Depression

I have been teaching on this topic this week. One of the accepted views on the Depression is that countries that depreciated earlier recovered faster from the crisis. The classic paper by Eichengreen and Sachs sort of established the result.* The notion is the traditional one. Depreciation leads to lower prices in foreign currency, increased competitiveness and higher exports. Graph below shows the correlation between depreciation (since the exchange rate is measured as the foreign price of domestic currency, lower rate means depreciation).

The indexes show the difference between the exchange rate and export volumes in 1929 (100) and 1935. So in 1935 France had not left the Gold Standard and the exchange rate remained at 100, while the exports were close to 50% of their 1929 level. There seems to be a clear negative relation between the exchange rate depreciation and export performance. However, note that in the United Kingdom a depreciation of about 40% implied exports at around 75% or so of the 1929 level. Only Norway and Finland seem to have higher exports in 1935 than in 1929. This was not an external demand led recovery.

This suggests that if depreciation had a role it was more likely related to the space that breaking with the Gold Standard rules provided for domestic authorities to pursue expansionary policies at home. Note that in this context, the depreciation, as much as higher tariffs and other trade related policies, are less relevant for their role in stimulating external demand, than by their role in protecting domestic production.

In the US the group of economists that were in favor of the depreciation of the dollar (see the letter by Harvard economists J. Raymond Walsh, Lauchlin Currie, John B. Crane, John M. Cassels, Robert Keen Lamb and Alan R. Sweezy in support of FDR's depreciation policy in 1934; and yes that includes Currie, later advisor to Eccles, and Paul's brother Alan, a Keynesian, not a Marxist), were also in favor of domestic fiscal expansion, which was at the end of the day Keynes point too. You can see Keynes arguing why the abandonment of the Gold Standard would be a good thing here, at the beginning of John Kenneth Galbraith's documentary.

This is still an important point, since there are significant lessons, at least it seems to me, for the European periphery story, in particular Greece. Depreciation alone cannot do the job. But a combination of import substituting policies, to reduce external constraint problems, with expansionary demand policies might work.

* There are also issues related to the role of the Gold Standard in causing the Depression, since the crisis was international, and many authors think that this suggests that it must have international causes. Hence, the Monetarist contraction story, or the Keynesian consumption collapse story (including the more radical version in which income distribution plays a role) would be incomplete. In this view, the relatively high rate of interest, related to the not credible inter-war Gold Standard, would be the cause of the depression. This view, as I noted before, seems closer to Keynes' Treatise on Money than his GT.

Heinrich Bortis on Europe's Need For Classical-Keynesian Political Economy

By Heinrich Bortis

Based on theoretical reasoning this article suggests that a radically new conception of Europe is required to get out of the present economic and political crisis situation. Neo-liberal Europe must give way to a social-liberal Europe...Europe needs a new type of economic theory, classical-Keynesian political economy to wit, to shape institutions and socio-economic policies

Mind you, it's not just Europe that needs CKPE...

Read rest here (N.B. the article starts on page 4).

New Book: "The Euro, The Dollar and the Global Financial Crisis" By Miguel Otero-Iglesias

Editorial Reviews:

Many scholars have contributed to ongoing debates about the competition between the dollar and the euro for global monetary dominance. Few have added as much value as Miguel Otero-Iglesias with his systematic and original survey of the views of financial elites in major emerging market economies. Where conventional interpretations emphasize material "reality," Otero-Iglesias's ideational analysis clearly demonstrates how important it is to consider as well how "reality" is perceived and framed by key actors. The euro may be structurally weak, limiting its "hard" power. But at the cognitive level of "soft" power, Otero-Iglesias suggests, Europe's money poses a significant challenge to America's greenback. This is an argument to be taken seriously.

Benjamin J. Cohen, Louis G. Lancaster Professor of International Political Economy University of California, Santa Barbara, USA.

This is a book I’ve been waiting for: a detailed analysis of what financial elites in the large reserve-holding countries are thinking about the future of the international monetary system. Drawing on extensive research, Miguel Otero-Iglesias argues persuasively that the views of authorities in China, Brazil, and the Gulf states matter enormously for the future of the global roles of dollar and the euro. An engaging and innovative book that makes a major contribution to our understanding of the world’s money."

Eric Helleiner, Faculty of Arts Chair in International Political Economy and Professor in the Department of Political Science of the University of Waterloo

In this original, well written and carefully researched book, Otero-Iglesias suspends motion in this fast moving story of currency rivalry to give the reader a view into the deeper logic of global monetary change. The author has synthesized skilfully across a wide spectrum of perspectives, from various systemically important emerging countries, and for which he has accessed key financial elites, and policy shapers, in China and Brazil, as well as the Gulf States. This book is truly a must read for scholars of the politics of the international monetary system, especially those with an eye to systemic change.

Gregory T. Chin, Associate Professor, York University, Canada and Co-Editor, Review of International Political Economy'

About the Author:
Miguel Otero-Iglesias is Senior Analyst on the European Economy and the Emerging Markets at the Elcano Royal Institute in Spain and Research Fellow in International Political Economy at the EU-Asia Institute at ESSCA School of Management in France.

For more info go here.

***My RIPE paper with Matias Vernengo, "Hegemonic Currencies During The Crisis, The Dollar Versus The Euro In a Cartalist Perspective" (see here), is cited.

Riccardo Bellofiore on why Italy’s stagnation could be future for Euro Zone

From The Guardian

This summer Italy fell into a triple-dip recession. After the 2008/09 collapse, the economy stagnated, heading back into recession during 2011 and never really recovering. The philosophy of Giulio Tremonti, who was the economic minister at the time, was to wait and see, until speculation killed Berlusconi’s government. Prime ministers Mario Monti and Enrico Letta followed Brussels’ self-defeating diktat for fiscal rigour, but even with moderate deficits the public debt/GDP ratio soared. The situation remained under control only thanks to the zero rate of interest and rhetoric by the European central bank president, Mario Draghi. Then came along Matteo Renzi, and Italian economic policy was all talk, talk, talk. While turning the screw of authoritarian parliamentary and electoral reforms, future lower taxes and liberalisations are promised to compensate for public cuts and to attract foreign investments. The €80 monthly tax break to lower-paid workers did not raise household consumption, and was instead spent on tariffs and local taxes. Yet in the past few weeks the outlook has changed, with 2014 second-quarter data showing France flat and Germany experiencing negative growth. Greece, Spain and Portugal registered rosier figures only because they were recovering from severe austerity. The eurozone cannot but be driven by the three biggest economies alone. This is a continental crisis within an anaemic global economy. However, an old Gramscian truth about Italy must be remembered: the “backwardness” of its capitalism is paradigmatic. Europe’s exit from the crisis needs the same policies that Italy needs, and without them Italy’s stagnation is the future for the entire continent.

Read rest here.

Bill Lucarelli on The Euro: A currency in search of a state

 

New paper concerning Euro by Bill Lucarelli

From the abstract:

To understand the structural dynamics of the current eurozone crisis, it is necessary to examine the longstanding internal contradictions that the system has inherited from its inception under the Maastricht Treaty and the neoliberal strategy which has governed its evolution from the first experiments in economic and monetary union in the 1970s. A brief narrative of the evolution of the European Monetary Union yields some insights into its peculiar institutional design. More specifically, the article examines the dangerously self-reinforcing logic between speculative bond markets and cascading, deflationary policies of austerity imposed on those countries encountering severe debt crises. This examination reveals the fragile foundations upon which the eurozone was constructed [...] The stark contrast between US monetary and exchange rate policies and the straightjacket imposed in the eurozone by the ECB during the financial crisis that began in 2008 could not be more revealing. As David Fields and Matias Vernengo (2012) [see here] contend,

By buying great quantities of Treasuries, the Fed not only keeps stable bond prices and low interest rates, but also provides assurances that Treasury bonds remain a secure asset. That allows the US Treasury to maintain high fiscal deficits on a sustainable basis. That is the exact opposite of what the ECB has done for the countries in the periphery of Europe. Countries in the currency union lose control of monetary policy and cannot depreciate the exchange rate. But a common currency setting also brings to an end the possibility for a single nation to run fiscal deficits since the sources of funding are either removed or subjected to supra-national control.

Read rest here (subscription required).

Neoliberal Authoritarian Greece: A Nation for Sale & Death of Democracy

According to Henry A. Giroux (2005/6), 'neoliberal authoritarianism' is the process by which upper capitalist class interests reinvent the past, present, & future in the image of a crude exercise of power that unleashes unimaginable human suffering, in order to maximize wealth and influence in social, political & economic affairs at whatever social costs. From Truthout:

When the European Union (EU) and the International Monetary Fund (IMF) came to Greece's rescue in May 2010 with a 110 billion euro bailout loan in order to avoid the default of a euro-zone member state (a second bailout loan worth 130 billion euros was activated in March 2012), the intentions of the rescue plan were mult-ifold. First, the EU-IMF duo (with the IMF in the role of junior partner) wanted to protect the interests of the foreign banks and the financial institutions that had loaned Greece billions of euros. Greece's gross foreign debt amounted to over 410 billion euros by the end of 2009, so a default would have led to substantial losses for foreign banks and bondholders, but also to the collapse of the Greek banking system itself as the European Central Bank (ECB) would be obliged in such an event to refuse to fund Greek banks.

Read rest here.

Giroux, Henry A. 2005. “The Terror of Neoliberalism: Rethinking the Significance of Cultural Politics.” College Literature 32(1):1-19.

Giroux, Henry A., and Susan Searls Giroux. 2006. “Challenging Neoliberalism’s New World Order: The Promise of Critical Pedagogy.” Cultural Studies ↔ Critical Methodologies 6(1):21–32.

Bank of England on Endogenous Money

This paper by McLeay, Radia and Thomas from the Bank of England has been making the rounds in heterodox circles. In particular because it admits that the conventional story about money creation is simply wrong. For them:

"rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks."

Yes, finally the monetary version of Say's law is seen as incorrect. And for a change they do cite heterodox authors contributions. In a footnote they say:

"There is a long literature that does recognise the ‘endogenous’ nature of money creation in practice. See, for example, Moore (1988), Howells (1995) and Palley (1996)."

Interestingly they do get the reflux principle of the old Banking School (of Thomas Tooke and others). They say:

"There are two main possibilities for what could happen to newly created deposits. First, as suggested by Tobin, the money may quickly be destroyed if the households or companies receiving the money after the loan is spent wish to use it to repay their own outstanding bank loans. This is sometimes referred to as the ‘reflux theory’."

In this context, they refer to the contributions of Nicholas Kaldor, one of the fiercest critics of Monetarism and exogenous money views. Finally, they also note that the central bank determines essentially the rate of interest, and that there is no money multiplier per se. In their words:

"While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality. Rather than controlling the quantity of reserves, central banks today typically implement monetary policy by setting the price of reserves — that is, interest rates."

Mind you, it is weird that they think it is useful for teaching, and also it's not just 'today', but since their inception that central banks controlled the rate of interest. When they did try to control money supply in the late 1970s, central banks were unable to do so, and Goodhart's law that suggests that as soon as the central bank tries to control a particular quantitative target the very measure becomes unreliable.

Note, however, that endogenous money, while relevant and part of the usual set of ideas used by heterodox economists can be perfectly accommodated in a mainstream neoclassical framework, like the New Keynesian three equation model or the old Wicksellian model. And that is the way in which this paper by the Bank of England should be interpreted. Still nice that they do cite Kaldor and Moore, the quintessential endogenous money authors, and Howells and Palley of the younger post-Keynesian school.

PS: On a different note, this paper by the European Central Bank (ECB) cites my work with Esteban Pérez on the European crisis as one of the few that suggests that capital flows (after the convergence of interest rates) that allowed for spending in peripheral countries in part explains the current account imbalances in the region.

Weisbrot on why the European authorities are still punishing Greece

Mark Weisbrot

Alexis Tsipras has a tough job. He is leader of the Syriza Party of Greece, a left party that has risen meteorically in the past three years: from 4.6 percent of the vote in 2009 to 27 percent last June. It is now the most popular party in the country and Tsipras could be the next Prime Minister. Unlike most of the eurozone's leaders, he knows what is wrong with Greece and the eurozone, and so does his party: austerity. "We have become the guinea pig for barbaric, violent neoliberal policies," he said at a forum at Columbia University Law School last week, in which I participated. Tsipras notes that Greece's fiscal problems could be resolved if the rich paid their taxes. The IMF's latest numbers [PDF] concur on this: according to the Fund, "annual uncollected net tax revenue [is] at 86 percent of collections in Greece, against an OECD average of 12 percent."

Read rest here.

Mark Weisbrot on Economic and Social Policy and the Problems of the Eurozone and European Integration

By Mark Weisbrot

It was not because of the power of financial markets or because the Germans didn't want to "help" the Greeks that Europe suffered through about three years of recurring crises, in which the continued existence of the euro was thrown into question, until August 2012. It was because the European authorities were using these acute crises and did not want to resolve them until they had extracted certain "reforms" from the weaker European economies (and possibly even some of the stronger ones, if we consider the European Fiscal Compact and what the French government has been doing recently). We know this because as soon as the European Central Bank (ECB) wanted to do so, it put an end to these crises in a matter of weeks, in July-August 2012, by effectively establishing a ceiling on the interest rates of Italian and Spanish bonds - something it could have done at any time in the prior three years.

Read the rest here.

Yanis Varoufakis on why Reinhart and Rogoff are wrong about the Eurozone’s debt

By Yanis Varoufakis

"Carmen Reinhart and Kenneth Rogoff recently published a notable IMF working paper (13/266) entitled ‘Financial and Sovereign Debt Crises: Some lessons learned and those forgotten’ (December 2013). Their overarching claim is that the advanced economies are wrong to pretend that the present levels of debt can be sustained by means of fiscal austerity and without debt restructuring, sustained inflation or a combination of the two. This is a sensible argument, well grounded on empirical and historical evidence, that governments would be wise to internalise.

However, while the general thrust of the Reinhart and Rogoff paper is indeed reasonable and in principle useful, their discussion of Eurozone debt crisis is founded on a factual error that, since 2010, has been underpinning erroneous policy responses to the Euro Crisis."

Read the rest here.

Mark Weisbrot: Why the European Economy Has Done So Much Worse Than That of the United States

 

By Mark Weisbrot,

If we compare the economic recovery of the United States since the Great Recession with that of Europe – or more specifically the eurozone countries – the differences are striking, and instructive. The U.S. recession technically lasted about a year and a half – from December 2007 to June 2009. (Of course, for America’s 20.3 million unemployed and underemployed, and millions of others, the recession never ended – but more on that below.) The eurozone had a similar-length recession from about January 2008 to April 2009; but then it fell into a longer recession in the third quarter of 2011 that lasted for about another two years; it may be exiting that recession currently.

Read the rest here.

European Amnesia: Lithuania Considers Euro Adoption

 

Well, it is quite apparent that the euro crisis had done little to transform the sociology of knowledge concerning inherent problems related to common currencies; Lithuania is on track towards adopting the Euro. Read here. A related post on the issue can be seen here.

PS: Euroization is similar (wrt consequences for countries in the periphery) to the process of dollarization - see here.

Lessons Unlearned: Latvia Adopts Euro

Latvia officially adopted the euro to start off the new year. The prime minister has noted that although this is not necessarily a guarantee towards economic prosperity, it's an opportunity...I deem it a death sentence - For more on the sinking ship that is the euro, see here.

Does anybody really want to solve this mess? On the European Crisis

Pablo G. Bortz* (Guest Blogger)

It has been more than five years since Ireland had to rescue its failing banks. Almost four since the beginning of the crisis in Greece. Something similar for the explosion of the housing bubble in Spain. France is submerged in a persistent recession, like Italy. A 0.1% “growth” in a quarter is celebrated as an irrefutable proof of the “success” of the austerity programs. In the most realistic scenario, the Eurozone face a long decade of stagnation, high unemployment and rising social tensions. Many of the solutions are disregarded, never considered, such as a fiscal union or Eurobonds. Others are sabotaged, such as the banking union. Debt restructures are postponed for years, even though their necessity is plain to see. Somebody may ask, why hasn’t the Eurozone crisis been solved by now? At this stage, it is hard to avoid the conclusion that the crisis has not been solved because there is no intention to solve it. But who does not have that intention?

Some countries performed better than others, so one cannot safely state that no country succeeded in this period. However, there are sectors that did succeed. In this piece I want to focus on one of such sectors, with a huge influence in the decision-making spheres of European politics, which faced high risks at the beginning and throughout this stormy period, but which has seen events develop in its favor and now is starting to push towards the split up of the Eurozone. I will not present new information, but I do intend to briefly offer an interpretation of why they have done better than most and why are they in the position they are. I am talking about the big German banks. I also hope to make clear convincingly what economic benefits the German government has obtained by playing along with the interests of the banks, except in very specific situations, about which more will be said later.

The basic underpinning of this post is illustrated by graphs 1 and 2. Both show the exposure of German banks to selected countries of the periphery, based on data from the BIS (Table 9d of the Consolidated Banking Statistics). The black curve in graph 2 corresponding to Cyprus is measured in the right-hand-side axis.

The crisis of 2008 hit German banks severely, not only because they had bought significant volumes of asset-based securities in the US, but also because they had financed housing (and commercial property) bubbles in the periphery. Considering that their exposure to Ireland amounted to 137% of the Irish GDP, it is no surprise that the burst of the Irish housing bubble, among other measures, forced the German government to rescue Hypo Real Estate. But that was not the only public help they got: it is well known by now that the ECB forced the Irish government to make good the guarantees extended on the debt of its major banks. In any case, the financial crisis forced a certain retreat of German banks from periphery countries, though the same holds for the US. Around the second quarter of 2009 the situation had stabilized and they were willing to lend once again to these countries. 

The Eurozone crisis was triggered in the last quarter of 2009 and early 2010, with the change in government in Greece and the recognition of its falsified statistics and bigger-than-expected fiscal deficits. At that moment, it became evident that Greek debt was not sustainable, that the government would not be able to face its commitments on its own, and that help was needed, either as a loan, as a debt restructure, or as both. Heck, even Keynes explicitly said that in situations like these a rescue was unavoidable, and he wrote that seventy years ago!

Eventually, loans were granted in exchange for the conditions already known by everybody. A debt restructure was implemented in October of 2011, and a second one followed suit some months later. However, that word “eventually” took a long time to materialize: those measures were implemented years after the burst of the crisis. In the meantime, as the graphs show, German banks substantially reduced their holdings of Greek debt (particularly avoiding the second Greek default), selling their holdings to the ECB, now a major creditor of Greece and other European countries with one of the worst implemented buying programs ever, and the European Financial Stability Facility/European Stability Mechanism (ESM) (check page 17-18). In Spain they also pulled out, before the required bank capitalization was implemented through loans from the ESM. In Cyprus they also pulled out, when it was clear that the Cypriot banks would need another bailout due to the impact of the first Greek default. The Cypriot bailout took place almost a year and a half after the first Greek PSI. That was the main benefit that German banks (and French banks too) got from the way the crisis was “managed”: time. Time to pull out, to heal wounds, to offload their holdings into the hands of the public sector, both at the national and the continental level.

Probably the first indication that the worst had already passed was the fact that Deutsche Bank did not participate in the Long Term Repurchase Operation 2 in February 2012. By the second quarter of 2012, that is, a quarter before Draghi announced the Outright Monetary Transaction (OMT) Program, the claims of German banks vis-a-vis Spanish and Italian debtors hit the floor, and the downward trend regarding Irish borrowers decelerated. They also got time regarding the implementation of the banking union and its different components. Whatever problems the German banks may have, their exposure to the European countries in difficulties is not a major one, perhaps not even a problem at all. And they do not need to lend to these troublesome economies: they have a booming housing market at home to feed.

The time German banks enjoyed to reduce their exposure to periphery debt was obtained by the German government (in particular the German Ministry of Finance), the Bundesbank and the ECB (especially during Trichet’s term). Blaming the “reckless spending spree” of Greek, Spanish, Irish and Italian governments, they refused to acknowledge any possibility of debt restructuring. The EFSF was instrumented when Greece was already bankrupted, and the increase on interest rates (as investors flee the countries) was used as a threat in order to force governments to implement austerity policies. We all know this. We all know the reluctance of the ECB to act as a lender of last resort, and then when they finally decided they had to buy some debt, they did it badly. Compare that performance with the announcement of OMT: without actually buying any bonds, the ECB has succeeded in lowering interest rates.

The Greek default is also illustrative. First it was plainly rejected; later they figured out that Greek public debt in the possession of the private sector had to be written down by 21%, later on they extended to 50%, and eventually it was around 70% NPV. Those changes took months.

The Bundesbank has been the main opponent to any measure that can reasonably help (in some measure or the other) struggling governments. In fairness, they didn’t even want those countries in the Eurozone to begin with. They opposed OMT, the buying of public debt, either because it was (in their interpretation) explicitly prohibited by the Treaty of Maastricht, or against its “spirit”. They reject the idea that ESM can lend directly to banks (instead of lending to governments); they are rejecting (or seeking to restrict) the supervision of German banks by the ECB, and rejecting any possibility of a redemption fund at the European level in case some money is needed in banks liquidation processes without burdening national governments. They have rejected granting a banking license to ESM. This position aims at securing the advantage of German banks vis-a-vis their competitors in the Eurozone, who are crippled not only by the poor state of their borrowers’ finances but also, in the periphery, by the interaction with the public sector’s finance, either as debtors, or as possible rescuers.

The government, in turn, takes more or less the same line as the Bundesbank. After all, because of this crisis the interest rate it pays is at a record low, allowing some savings of around 10 billion euros. Small and medium-size German companies, at the heart of the German economic success and an important source of votes for the CDU, are paying interest rates almost 2% lower than equivalent and equally competitive Italian SMEs, for instance. Germany is becoming the major destination for young and skilled migrants that want to escape the grim and hopeless situation in their own countries. German officials are explicitly encouraging this movement, which is worsening even further the long-term prospects of the economies affected. In some sense, it is actually quite hard to escape the conclusion that Germany is “stealing population” from the periphery.

But there were a couple of circumstances in which the views of the Bundesbank and the German government diverged. Strangely enough, in those episodes it seems that the Ministry of Finance agreed more with the Bundesbank than with the Chancellor. One such episode is the aforementioned dispute, described in the article from Der Spiegel, concerning the inclusion or not of Italy in the euro. The other major event was the vote in the Governing Council of the ECB regarding the implementation of OMT.

That proposal won with a result of 23 positive votes and 1 negative vote. And there are two German officials. Joerg Asmussen, a member of the Executive Board, voted in favor of OMT, while Jens Weidmann, the president of the Bundesbank, voted against it. This highlights, in my view, that when the time comes Angela Merkel is willing (much more than Schauble) to do the bare minimum effort in order to save the Eurozone.

The Bundesbank is not willing to do so. It is not willing, because major German banks do not need the Eurozone any more. Not only they dislike the measures that are on the table to regulate them, linked to the banking union (even though the German government is fighting tooth and nail to defend them); not only because they have to focus on healing their wounds from other messes (like their derivatives exposure and lawsuits in the US) and strengthening their capital ratios: but also because if, for instance, Greece leaves, there might be new opportunities for purchasing assets at an even lower price and realizing huge capital gains. Heads I win, tails you lose.

I will not discuss the benefits for periphery countries of leaving the Eurozone, as the big German banks (and the Bundesbank) want them to do. In my view, these benefits exist and are sound and solid. But even if they agree on this, the periphery should not expect any support from German banks. They will not oppose further austerity packages, but they will oppose any favorable measure. The measures that would solve the Eurozone crisis while keeping everybody on board are relatively easier to implement, from a strictly economic point of view, than the whole set of measures required for periphery states to leave in an orderly fashion and succeed as independent states. However, the political willingness in Brussels (and Berlin and Frankfurt) to cure the crisis is non-existent, and the views range from desire to keep starving the ill countries, to complete disregard for their fate.

*Ph.D. Candidate, Delft University of Technology. I am very grateful for the comments and suggestions of Frances Coppola, Jan Kregel and Matías Vernengo, though the views and possible mistakes of this article should be attributed only to myself.