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.

ILO's Global Wage Report: Nothing to be happy about

The GWR 2014/15 has been published and is available here. I'm sure I'll post more on it later. Here just one of the several things to take into account. Wages in advanced economies fell in 2008 and 2011, and have grown very little since the beginning of the crisis in 2008. Basically stagnated. Disaggregating by country you get the figures below.

The declines are in Japan, Italy, UK, Portugal, Ireland, Spain and Greece. Japan in eternal deflation, and the European periphery under Troika's adjustment programs. In Greece a collapse of about 24% since 2009. This is not only result of the austerity policies, but also of specific policies to reduce wages, like a 22% cut in the minimum wage for unskilled workers aged 25 and over and a 32% cut for those under 25, the weakening of collective bargaining, and the massive cuts in public wages and employment. Internal devaluation. But the recovery of the current account balance, I'd bet, is related to collapse of imports, not expanding exports (more on that later).

Troika Kleptocracy

From the Guardian (see here):

"The imposition of a levy on savers in Cypriot banks marks a new turn in the European crisis. Savings of over €100,000 will be subject to a 10% tax, and those under €100,000 one of 6.7%, although it's reported these levels may change. The raid has been instructed by the "Troika" – the European commission, the IMF and the European Central Bank – as part of a characteristic "take it or leave it" ultimatum to the Cypriot government. The parliament in Nicosia is being pressed to ratify the deal with the threat that without it there will be no bailout funds and the ECB will withdraw all liquidity support to the stricken banks.

The Troika and its supporters have justified the levy by arguing that the state could not support the debt burden of a bank bailout. But this simply means the debt burden has been transferred from the banks, where it properly belongs, to households, who had no part in their lending decisions.

 ...
But it is foolish of the Troika to assume that its confiscation of Cypriot savings will have no international implications. Savers all across Europe will look on in horror, and are bound to wonder whether it could happen in their own countries. It is entirely possible they will respond by shifting their savings into state or postal savings banks at the very least, even if outright bank runs are avoided. If this happens on sufficient scale, it could further undermine the fragile banking system in a number of countries.

To prevent Troika raids, deposits need to be put into protective custody to preserve both savings and the domestic banking sector. For anti-austerity governments, these funds could then be used to support state-led investment and reverse the European depression."

Read the full piece here.

The Sinister Irreversibility of the Euro

Giancarlo Bergamini and Sergio Cesaratto (Guest Bloggers)

Draghi's decision to provide unlimited support to short term bonds of those countries who submit their public finances to European control has been greeted with widespread acclaim in Italy.

Albeit necessary to cut the spreads, which had attained unbearable levels, the European Central Bank (ECB) initiative is by no means decisive and under the current terms risks being counterproductive. For starters, it is politically indigestible for Spain and Italy, who hope in fact to scrape through without subscribing to any austere “precautionary program” imposed by Europe and policed by the IMF. In other words, they hope that the expectations triggered by the ECB's announcement can do the trick of lowering the spread on their sovereign bonds, even if nothing concrete follows without conditionality constraints. In reality, if nothing happens the spreads are likely to increase, possibly because the markets expect that the bailout will be requested too late. Let's not get carried away by market euphoria. On occasion of the previous ECB interventions, the Strategic Management Plan (SMP) of 2010-2011 and the two Long Term Refinancing Operations (LTROs), we had the same immediate reactions, only to be wound up after a few weeks. And this time we haven't even had ECB intervention to speak of, just the threat of it and subject to an abstruse mechanism (request for aid by country concerned, signing of a Memorandum of Understanding (MOU), participation of European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) in the bond actions, and at last ECB purchase in the secondary market). It seems highly impractical, save that in the process the applicant country may lose access to the markets.

How much the ECB intends to shrink the spreads is left unknown, however, the presumable inadequacy of its “Outright Monetary Transactions” and the hardening of the austerity clauses attached thereto will make it more and more difficult for the applicant countries to comply with the prescribed terms. If the countries do not comply with the objectives agreed upon, the ECB may withdraw its support, thus sanctioning a possible breakup of the Euro.

A true mess indeed, which renders Draghi's move the umpteenth kicking of the can down the road. Yet, it confirms what heterodox economists (including those subscribing to “Modern Money Theory”) have always asserted: Interest rates are determined by central banks, not by the markets. Hence, the deduction that the bulk of the fire of the past two years has been set by the ECB itself, subservient to the European elite's diktat that welfare state and trade unions be wiped out by means of a fiscal crisis– first in the periphery, but as a lesson to German unions as well.

The fact is, monetary unions are set up with the primary goal of constraining member countries (and their working classes) into a devastating deflationary competition. This teaching derives from Keynes, but few left-wing economists are culturally capable of drawing its dire consequences. Indeed, the ECB has acted in conformity with its mandate. Out of the three sources of the Eurozone crisis, the Euro itself, the two-year-long weakness of ECB's actions, and austerity policies, Draghi's move softens the second, but at the price of exacerbating the third, and without doing anything to deal with the first.

Draghi's move should be read as a response to the fear that the fire could bring down the very reason of the ECB's existence, namely the Euro, and that peripheral countries' citizens call an end to this exasperating agony. The patient is, thus, kept barely alive, so that augmented doses of the other treatment, austerity, effectively annihilate any remaining willingness to react. Therefore, the implications of Draghi's message on the irreversibility of the Euro are pretty sinister, rather than progressive as some commentators seem to infer.

Are there alternative routes? The unconditional intervention of the ECB, while affirming its role as lender-of-last-resort, makes sense as far as it allows the peripheral economies to execute a growth strategy aimed at restoring their competitiveness, with a view to dealing with the huge intra-European trade imbalances. To this end, stabilisation (not reduction) of the debt-to-GDP ratio should be sought. This objective would hopefully reassure the markets, while leaving room for more expansive fiscal policies. However, this would still not be enough.

A rapid increase in the European public budget should also be pursued, with a strong redistributive bias from core to periphery, whereas the role of national budgets should correspondingly decrease (as in the USA, in short). This vision of a Federal Europe is tantamount to a transfer union subdivided between those who subsidize and those that are subsidized, which would prove unacceptable to both, and not because of “national and nationalistic idiosyncrasies” that one commentator regards as obstacles.

Above all, the hard truth is that Europe is headed in another direction, in keeping with the true purpose of the Euro.

(A former version of this article appare in Il manifesto September 8 2012)