Martin Wolf Misses the Real Reason the Eurozone’s Unhappy Marriage Has Not Broken Up Yet

The normally astute and blunt Martin Wolf is either having an uncharacteristic bout of circumspection or is managing to miss an important, arguably determining reason why the Eurozone persists in inflicting destructive austerity on much of its population.

As his current column shows, Wolf is under no illusion as to the success of the Eurozone experiment and reminds readers it could still fail:

The currency union is supposed to be an irrevocable monetary marriage. Even if it is a bad marriage, the union may still survive longer than many thought because the costs of divorce are so high. But a bad romance is still fragile, however large the costs of breaking up. The eurozone is a bad marriage. Can it become a good one?…

If all members of the eurozone would rejoin happily today, they would be extreme masochists. It is debatable whether even Germany is really better off inside: yes, it has become a champion exporter and runs large external surpluses, but real wages and incomes have been repressed. Meanwhile, the political fabric frays in crisis-hit countries. Anger at home and friction abroad plague both creditors and debtors.

What, then, needs to happen to turn this bad marriage into a good one? The answer has two elements: manage a return to economic health as quickly as possible, and introduce reforms that make a repeat of the disaster improbable. The two are related: the more plausible longer-term health becomes, the quicker should be today’s recovery.

Wolf then proceeds to tell us that the Eurozone continues to be a resolute practitioner of austerity policies. Readers may recall that there was a huge kerfluffle in the economics-related media when the IMF admitted it was all wrong, that the fiscal multipliers in the Eurozone had turned out to be larger than one. In econ-speak that means you can’t starve your way back to health. Cutting fiscal deficits results in an even greater economic contraction, resulting in even worse debt to GDP ratios. But the rest of the European officialdom seems to be in shoot-the-messenger mode. Per Wolf:

In a recent letter to ministers, Olli Rehn, the European Commission’s vice-president in charge of economics and monetary affairs, condemned the International Monetary Fund’s recent doubts on fiscal multipliers as not “helpful”. This, I take it, is an indication of heightened sensitivities. Instead of listening to the advice of a wise marriage counsellor, the authorities have rejected it outright.

Wolf says the way out is more debt writedowns and restructurings, internal rebalancing, and financing national deficits as the rebalancing is in process. At this remove, I don’t see how this happens. Germany still wants to have its cake and eat it too. It does not want to give up running surpluses with the rest of the Eurozone and keep financing its trade partners. The fact that it insists on irreconcilable objectives is putting the periphery into a depression which will eventually infect Germany.

Wolf argues that the reason the Eurozone has not broken up despite pursuing such destructive policies is that a breakup would be worse. The question might be for whom. Greece has been the test case. Even though a Greek departure would not have significant economic ramifications for the rest of the Eurozone, the fear is that it would lead to contagion, since if Greece left, it would demonstrate to other periphery countries that it could be done too.

And one has to wonder why Greece has not left. By all accounts, the country is falling apart. Many medicines are in inadequate supply, sheets in hospitals are being re-used, and barter is becoming common as the economy is breaking down. Things are now so desperate that infrastructure is being damaged as desperate citizens try to pilfer metals. From Greek Reporter:

The thieves are accused of stealing industrial cable, power-line transformers and other metal objects – triggering blackouts and massive train delays. The profile of the metal thief is also changing, authorities say, from gypsies and immigrants living on the margins of society to mainstream Greeks who have fallen on hard times. A group of men were caught trying to take apart an entire bridge and droves of immigrants can be seen pushing shopping carts around Greek neighborhoods looking in recycling bins…

Athens’ nine-year-old light rail system has been a prime magnet for metal robbers, with at least five major disruptions reported in the past six months due to cable theft that forced passengers to hop on and off trains as diesel replacements were needed. The trend has had lethal consequences: In early January, the body of a 35-year-old man was found near Athens beside the tracks of a suburban rail system that services the capital΄s airport. He had been electrocuted while cutting live cables, police said.

It is hard to imagine how an exit could make matters any worse. Greece would get the Eurozone boot off its neck, be able to deficit spend to get its idle resources back to work, and depreciate its currency to make its goods more attractive on world markets.

So why are the periphery countries suffering this level of unproductive pain? Because the countries aren’t making the decisions. It’s powerful local politicians who are selling out their countries, working in cahoots with Eurozone technocrats. And I can assure you none of them are sharing in the suffering of periphery country workers.

This is the plague of our modern social order: detached and corrupt leaders, whether intellectually, monetarily, or both. The old code of noblesse oblige, which at least required the elites to have some concern about what happened to the lower orders, is a dead letter. It’s curious that someone as incisive as Wolf is unwilling to factor the behavior of the ruling classes into his assessment. Perhaps, as Michael Thomas said of Punch Sulzberger, he is dining with people he should be dining on.

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  1. jake chase

    Exactly right! The system works perfectly for those in position to loot the proceeds of endless borrowing. The populations are systematically enslaved by debt and then starved in order to service it.

    An avalanche of bank money results in continuous recapitalizations of assets, creating bubbles and crashes, so even those managing to accumulate savings deploy them at their peril. Those refusing to engage with the asset markets are denuded by ZIRP. The crashes are caused by the banks, but no banker is permitted to suffer.

    Bankers and executives and politicians are the primary beneficiaries, but bureaucrats and academic and media charlatans are the true enablers.

    Yesterday, on CNBC, we were treated to two hours of Ken Langone, the poster boy for today’s real economy, which can best be described as the nonstop peddling of Worthless

    Does anyone even remember what real hardware stores were like? You went in with a problem and emerged with a solution and generally spent less than $20. Today with $20, you stagger through the isles of a 50,000 square foot Home Depot and emerge with a screwdriver that bends when you apply torque and six screws that are stripped by any effort to use them.

    1. EconCCX

      An avalanche of bank money results in continuous recapitalizations of assets, creating bubbles and crashes, so even those managing to accumulate savings deploy them at their peril. @jake chase

      But…bank money nets to zero, if MMT is to be believed. One private party’s asset, another’s liability. Balance. Notwithstanding that the asset is the circulating medium of exchange, while the liability is corporate debt upon a ledger.

      Bar tabs don’t fuel bubbles and crashes; how can deposit accounts? Any shortfalls can be met by yet more sovereign debt or coin. Delivering unto the financial sector additional claims to real-world goods, services and assets. The shot, for now: privatization of tollbooth public goods via “monetary sovereignty.” Adding to the net financial wealth of the “non-government,” just as MMT promises.

      Seriously Jake, excellent observations. Yves and Lambert, sorry to near-troll, but MMT’s absurdities have overwhelmed my decorum this day.

      1. jake chase

        Bank money doesn’t net to zero when the Fed buys worthless loans and GE commercial paper and who knows what next.

        MMT isn’t a program, just an accounting identity. Those who advocate government spending unlimited by government borrowing ignore the capture of government by plutocratic interests.

        Elites we will always have with us. You cannot mitigate any social problem without noblesse oblige.

      2. steelhead23

        Odd little diatribe there Econ. The post is about why suffering peripheral nations continue to remain wedded to the Eurozone. Once Greece, with one of the oldest national identities on the planet, decides to assert its sovereignty, then we could perhaps argue about whether the citizenry or bankers should run the country and what monetary policies they might best pursue. Yet, somehow, you determined that it was really about MMT and stepped on the throttle. Indeed, you are a troll.

        1. EconCCX

          The post is about why suffering peripheral nations continue to remain wedded to the Eurozone. @steelhead23

          Indeed, but I was responding to Jake, in strong agreement. Didn’t think that “denuded by ZIRP,” for example, was a reference to Greece.

          We Soddy proponents are well outgunned here. Soddy, mind, was the fellow who proposed 100% Reserve banking, i.e. true monetary sovereignty. MMT, by contrast, has the plutocratic effect of delivering reserves to finance for leveraging. It’s a right-wing project, couched to appeal to the left. The Obama of money theories.

          Sarcasm’s almost never my style, but Jake’s words struck spark. MMT proponents can handle it.

          1. different clue

            Were Soddy’s observations so reality-based and so well worked out and explained that they could be understood and used at least rudimentarily by small or smallish groups of people involved in growing their own survival lifeboat fortress mini-economies in the teeth of the larger Mainstream Managed economy? Does the question at least deserve to be asked?

          2. EconCCX

            Were Soddy’s observations so reality-based and so well worked out and explained that they could be understood and used at least rudimentarily by small or smallish groups of people involved in growing their own survival @different clue

            No. Soddy accurately described the horror of fractional reserve banking, and its ultimate outcome: societies enslaved by debt to finance, from nominal governments on down. I obviously stand with him on diagnosis. His solution, of a single, national, 100% reserve-based currency regulated to inflation, would be unworkable in small groups, and would abridge growth in large. That’s why it’s promoted at CASSE, for example:

            Daly: Nationalize Money, Not Banks

            An approach that does work in small enclaves is that of service-backed, competitive currencies. Click my link for a theoretical intro.

            Unfortunately, I won’t be able to engage on the board today. Thanks for a great question.

          3. Calgacus

            MMT, by contrast, has the plutocratic effect of delivering reserves to finance for leveraging. “Delivering reserves” does not provide additional leveraging ability to plutocratic finance. In fact, theory and practice indicate that it delivers somewhat less leverage than banks holding bonds. Banks do not lend reserves.

            An avalanche of bank money results in continuous recapitalizations of assets, creating bubbles and crashes, so even those managing to accumulate savings deploy them at their peril. Those refusing to engage with the asset markets are denuded by ZIRP.

            This belief is just another mainstream piece of crap that has no empirical or logical basis. You can have bubbles with our without ZIRP.

            ZIRP doesn’t cause asset bubbles or avalanches of bank money. Japan has had 20+ years of ZIRP – AFTER its bubble burst. Where is their avalanche? Where is their bubble?

    2. Veri

      It seems that neo-Liberal capitalism, of infinite growth, has hit a wall. A capital (money) wall that is finite.

      For instance, Germany. It is a net exporter and it finances other nations. To buy German goods. Talk about trying to have your cake and eat it to.

      Currently, Western Capitalism is about the same-old same old. A paper system that benefits a few at the expense of the many. A system that its practitioners have invested heavily in, education-wise. They know the rules and others don’t. After all, they helped create the rules.

      The High-Priests of Western Capitalism.

      And what nation has the IMF or World Bank ever helped? As opposed to how many nations have actually been economically harmed through their machinations. It was only when Europe tanked that the IMF dared mention their High-Priest techno-speak of “greater than one” – when their very system was threatened.

      There comes a point in Capitalism when people have just about what the want and what the need. And then, they stop buying. Capitalism simply does not know what to do about this.

      1. different clue

        Well, some thingmaking operators withIN capitalism have tried to solve the problem with planned self-destruction whereby things bought break down fast, and are designed to be unfixable, so that replacements must be bought over and over again.
        And some things are rightfully one-time consumeable and quite properly need replacing once used. Food. Toilet paper. etc.

        1. Gaylord

          There’s also medical care and pharmaceuticals which are ongoing and ripe for exploitative marketing, especially when stress takes its toll.

  2. Hilary Barnes

    The people at France’s SciencePo-OFCE French Economic Obsevatory and German and Danish think tanks have put together at a scheme that offers a rational, gradualist way out of the Euro zone’s debt problem, reducing budget deficit by a half percentage point of GDP a year over 16 years (What’s the hurry?, which would allow the afflicted economies to grow while getting deficits under control instead of suffocating them by panic austerity. At OFCE they also argue that France should exploit the many loopholes in the Groath and Stability Pact to justify such a gradualist approach. Realistic? More so than the present policies, that’s for sure.

    1. diptherio

      I see…you’re suggesting one leech per year for sixteen years, instead of sixteen leeches all at once, like we’re doing now.

      You’re correct in that your proposal would be less damaging than the current policy, but shouldn’t the point be to do no harm. I mean, the Hypocratic oath isn’t “First, do less harm than the last guy,” is it?

  3. Ned Ludd

    The old code of noblesse oblige existed because the elites were afraid of the people. Today, however, people in countries like Greece and Spain acquiesce to the corrupt social order instead of disrupting it. The people of Europe and the U.S. can be reduced to serfdom and the most they will do is gather for the occasional mega-rally before switching their vote from Austerity Party A to Austerity Party B.

    Many of the most recent rebellions against neoliberalism and capitalism were led by indigenous groups in South America, which have their own culture that exists outside of the influence of mass media. In Europe and the U.S., the influence of the mass media is pervasive, and even the most esoteric parts of culture are manipulated by the powerful. One illustrative example: the CIA “fostered and promoted American Abstract Expressionist painting around the world for more than 20 years” in order to advance the “cultural power of the US”.

    Controlling the culture is an important way for the elites to keep threatening ideas out of the mainstream.

    1. William C

      I do not disagree with the basic idea that the elite in countries like Greece will continue, as they long have, to feather their own nest at the expense of the others. I just question whether leaving the eurozone would change that. I remember last year a TV reporter going round Athens asking people ‘do you not want to restore your monetary sovereignty and return control of fiscal affairs to your national authorities?’ to which he got an almost unanimous ‘No!’. When he followed up with the ‘Why?’ question he was told ‘because we do not trust our national authorities!’

      My uncle used to say there are some problems that have no solution. Perhaps that applies here.

      1. €ugenia

        Direct democracy might solve this problem. Then it would be collective mind, what makes these decisions, not few elite groups…

    2. diptherio

      The “nobility” used to be afraid of the populace because the populace understood exactly what the score was, i.e. who was being exploited by who. Today we suffer under the delusion of a false social mobility and so conflate the interests of the “elite” with our own interests (or at least enough of us do that the “elites” need not worry about mass insurrection).

      No serf ever thought that he might someday become lord of the manor, if only he played his cards right, worked hard and kissed the appropriate asses. Nowadays, we have whole industries committed to convincing the “serfs” that they can, in fact, become lords of their own manors and that if they don’t become lords and ladies it’s their own damn fault for not being ambitious enough to succeed in our modern, divinely-inspired feudal system.

      Class distinctions have been muddied by false narratives of limitless upward mobility, but the 99%-1% language has started to move class back into the forefront of our social consciousness.

  4. Jose Guilherme

    “It is hard to imagine how an exit could make matters any worse”

    It would raise the foreign debt (denominated in euros) to GDP (now in drachmas) ratio by a factor of two or even three.

    So an exit would only make sense if accompanied by a partial or even total default on the country’s euro-denominated debt.

    But yes, the option to exit and default should be considered. Greece has already suffered a troika-imposed decline of GDP in the order of 20%. By comparison, the peak to trough fall in GDP in 1930s Germany was “only” 17%. So the Greek predicament is already worse than the Great Depression. And as the country is still undergoing austerity, the final decline of GDP may reach 25% or even 30% – who knows? It’ time to stop the madness by opting out of it.

    1. Yves Smith Post author

      Greece has a lot of tanks. Are they proposing to send Nato in to collect?

      Or cutting it off from Swift? Greece can’t get foreign exchange now, effectively. So again, I don’t see how matters could be worse.

      1. johnnygl

        yes and they tend to buy them from the Germans. They also still can’t /won’t collect taxes. But don’t worry, they’re cutting the minimum wage so they can compete!!!

        1. Synopticist

          This is it.
          If the Greek state was actually capable of collecting the taxes due to it, then things might be different.
          But it’s not. Doctors and lawyers and well connected bar owners don’t pay tax in Greece, let alone the very wealthy, or corporations. The state itself is too weak to function effectivelly. It’s too corrupt, too much of platform for patronage networks.

        2. Claudius

          Just to put this Greek tax collection meme into some context; according to the Greek Finance Ministry, some 900,000 people owe the state an estimated 42 billion euros in outstanding taxes. Though, it’s 5 percent of tax dodgers that owe 85 percent of the outstanding amount. That’s just 14,700 individuals, companies or organizations owe 37 billion euros.

          As for individual working stiffs: about half of Greece’s working population is employed in jobs where their income is taxed at source, thereby ensuring they cannot avoid paying their dues.

          In short, it’s the small number of rich elite who own 85 percent of the problem, passing the tax bailout buck to the 95 percent of the general population. It’ll be the present and future generations of working and middle class Greeks who’ll be paying increases in VAT (sales tax), income tax, utility prices while taking cuts in social services, hospital services, defense and education to make-up for this tax shortfall dis-owned by Greece’s ruling rich and elite.

  5. Paul W

    Well said Yves! Your final two paragraphs highlight the problem all decent people face in the 21st century.

    1. Can't Help It

      I second that. Very well written. Perhaps it’s time I join the plutocracy. If you can’t beat them, then join them.

  6. Lafayette


    The answer has two elements: manage a return to economic health as quickly as possible, and introduce reforms that make a repeat of the disaster improbable.

    But the purpose of this “exercise” as administered by Mother Merkle is just that, “introduce reforms that make a repeat disaster improbable”.

    Let’s not forget how Europe’s politicians got into this mess. (And I insist on the word “politicians”.) At the signing of the Maastrict Treaty creating the EuroZone, Germany had insisted on very strict controls of deficits. The rest of Europe was amazed. “There they go again, the Krauts!”

    One of the criteria that Maastricht applies was that deficits needed to be held within 3% of GDP, which appears in the treaty. That was 1992 (see here) …

    FastForward to 2009, 17 years later. Did the Commission in Brussels ever once seek to reign in spending of a recalcitrant EuroZone member? Never.

    EU politicians, by then with Euro-perfusions stuck up their budget backsides, continued to pile up debt … whilst blithely disregarding the 3% rule. Politicians are like that, you know … austerity never got anyone reelected.

    Did the EuroZone go into economic freefall as EuroBond premiums (over the German bond) etch up to 10% levels? Yup – this time, the EU slipped into the Deep, Deep Doodoo.

    Politicians had always expected that the good-times would roll on forever allowing tax-revenues (mostly VAT) to pay off the debt. Then, lo and behold, the SubPrime Mess reduced American Demand massively as the Great Recession was imported from the US into the EU.

    European consumers started retracting consumption in a substantial fashion. Ooooppps! It wasn’t supposed, ever, to happen this way!

    So Mother Merkel is insisting now that the boys “learn their lesson” once and for all. The stakes of diminishing the Euro as bankers rubbish EuroBonds (if EU countries cannot pay their interest) is far too risky to ALL EU countries – Germany included.

    Somebody had to reign in EU spending and there was not one male politicians in all of the EuroZone that had the balls to do just that. (Cameron of the UK is not in the EuroZone.)

    So, Angela found herself a pair of you-know-whats.


    I don’t like austerity. You don’t like austerity. Angela doesn’t like austerity. Nobody likes it.

    But when austerity is the only viable alternative to cure what has become endemic profligate government spending that has been employed to make politicians look good and get reelected … then that medicine must be taken.


    France will not get down to 3% this year. Neither will Italy or Spain, which means that is 3 out of the BigFive (GB, F, I, G and S) in Europe will not meet their debt targets.

    So, she is sticking to her guns – which is exactly what the German people want (and she’s got a difficult reelection coming up in September).

    1. Gaelle

      “France will not get down to 3% this year….”
      Tell us … What is so great/relevant/magical about the “3%”.. I would love to see the minutes/participants list to the meeting when that 3% was originally decided..and the real motives beneath the ‘better regulation’ speak
      AS Eurostat reports could tell you, the only endemic profligate spending of the last two decades in he EU has been the sharp drop in corporate tax
      Finally, how can anyone commenting on this blog(and presumably reading it) still be asserting that ‘Austerity works’ ?
      Or are you one of those Yves was referring to in her post?

      1. Cui Jin Fu

        My understanding is that the 3% figure is a rough approximation of the average long-term growth rate these economies can expect. Consistently running deficits above your economic growth rate will inevitably lead to ruin, but deficit spending below that rate can be done indefinitely since debt will grow more slowly than your GDP.

        There have been lots of people lately asserting that “austerity clearly doesn’t work”. The question is, what do you mean by “work”? I believe that critics of austerity are committing a logical error…assuming that there is a painless solution to our problems.

        Unfortunately, we’ve been living beyond our means for far too long, and now all the choices to rebalance the system are bad. The question is which is “least bad”. Austerity is coming in one form or another. We can choose to accept it slowly on our own terms, or kick the can into the future and accept a much more chaotic and damaging debt collapse.

        1. Gaelle

          Thanks for the effort (which seemed more genuine than the soup of the original commenter- I am entirely in agreement with Sidelarge on that one).. but if 3% was a “ROUGH” approximation …why should it have a “STRICT” application?

        2. hunkerdown

          Who’s been living, and beyond whose means?* (These are two separate questions, and as it happens the answers are different.)

          Speaking for the royal “we”, that is, myself only, I don’t think we’re assuming that there’s a painless solution to our problems. We merely think the pain has been distributed unequally and disproportionately on those who don’t know better by those who ought, and that it should be distributed according to who can withstand it best and who is most consciously culpable for the mess.

          * That’s actually a great exercise for those of you in the audience: whenever a political statement is made, for each noun, ask “whose?” or “to whose benefit?” according to recent past performance. Things look quite a bit darker that way.

          1. Gaylord

            Like the phrase often used by Republicans: “tax- and spend- liberals” — the important questions are “tax whom?” and “spend on what?”

      2. sidelarge

        “Or are you one of those Yves was referring to in her post?”

        He is, is all you need to know. All the rhetoric, sophomoric parables, and no arguments. Basically an inflated one-liner, armed with meaningless moral rhetoric. Total waste of time to pay any attention to his ilk.

    2. Finnish Flash

      When Finland joined EU -94 – our politicians said, that we are not voting about euro now, it will be voted later… Well, when euro came, citizens didnt have a change to say nope. Politicians said, that it was already decided, when we voted to join EU in 1994. Sweden had referendum and they didnt join eurozone. (euro came -99)

      Stability and growth pack is a joke and so are those Maastricht criteria, please dont even mention those, because most of EU-countries have broken those deals. Those were just something, what they made up in a couple of hours to make EU look trustworthy. Those werent never meant to mean anything, just shiny shells.

      PS. that Olli Rehn dude is finnish and he was only once elected in our parliament. Other times, when he tried to get in finnish parliament or european parliament he failed to get in, so i dont really know how he can be one of the most powerful dudes in Communist European Union, when he didnt get enough votes, even to get into EU parliament – just wondering…

    3. Synopticist

      “Cameron of the UK is not in the EuroZone….”
      Cameron of the UK is leading Britian into a triple dip recession. We have an economy thats 6% smaller than it was in 2007.

      And if you think the Germans don’t like austerity, then you don’t understand anything about Germans. For them, economics is a branch of moral philosophy.

      And for everyone else, i’m sorry for feeding the troll.

  7. Eric Patton

    And one has to wonder why Greece has not left.

    Because the Greek ruling class doesn’t want it to.

    1. Synopticist

      It’s not just the ruling class.
      Most (at least I think it’s still most) Greeks don’t want to leave the Euro. This is because then the ruling class, who have hidden their tax free, corruptly aquired wealth abroad, would then bring their Euros back and buy the whole country at half price.

      A friend of a friend is an estate agent (realtor) in up-market Putney, London. Her office sold around 12 houses to 5 seperate rich Greeks clients in an 18 month period between 2010 nand 2012.
      (NATURALLY, one of her colleagues is a rich Greek woman, related to the first client. The other 4 clients were friend of the first. They mostly avoided paying Stamp duty on the house purchases. Don’t for a fraction of a second imagine they report a penny of their rental income. Thats how Greece works.)

      1. Synopticist

        An old mate of my dad lives on a Greek island, he has a friend who owns a chi-chi hotel there.

        This guy hasn’t paid any tax for a quarter century.
        No local taxes. No corporation, no business tax. No tax on profits. No turnover tax, no sales taxes, no Value added tax, no city tax, no special alchohol or food taxes. He pays no income tax. His staff pay no income tax, nor payroll, nor national insurance tax. NO tax.
        At all.
        Since 1987.

        However, he makes damn sure he gets every benefit and pension his familly are entitled to. Which includes the pension from the no-show public sector job he got, for doing favours for the patronage network based around the local political bigwig.

        At least that’s the story he told me. I dunno if it’s 100% true.

  8. tom

    There´s a element here, that nobody seems to understand. That is the difference between official talk and its real meaning. Take all the deficit discussion. German and EU officials might talk and talk and talk about austerity. In reality they do that not because they expect adherence. They want to keep the dams from breaking. Take France and the 3%. That will never be achieved and everybody knows it. It´s more like a negotiating tactic. One side insists on the deficit level and the other side goes beyond it. The expectation in Germany and the EU is that France would have an even worse deficit than the 5% expected without the 3% ceiling.
    Or take Ireland.Maybe it has escaped attention but Ireland has just effectively gt rid of the Anglo-Irish bank debt. Despite all claims to the contrary it got monetized with help of the ECB and will only be paid back many years hence. This year Ireland already saves 3 billion. That is the nature of Europe. An eternal muddle through where official pronouncements are more negotiating tactic than policy.
    Or take Tsipras of the new left party Syriza in Greece. He is lionized here but nobody seems to have noticed that a few weeks ago he met finance minister Schäuble in Belin. Nor that he has promised to keep Greece in the Euro. Albeit after a renegotiation of EU debt. No doubt Berlin will be happy to work with him if they are convinced he gets a grip on the tax system and corruption. They will even cut him some slack that todays government doesn´t get. That is all according to Germany´s semi official Frankfurter Allgemeine Zeitung. For a more cynical take see the world socialist website:
    As I said it is all a big gigantic muddle and if there is no external cataclysm they will continue muddling through for quite a while.
    Finally a word abut Germany and the trade surplus. It has been demonstrated again and again that wages aren´t the most determining factor in industrial production prices. Especially the left should know better. The reason Germany and the other Northern European countries run surpluses is purely cultural. And not as in they work more (they work less).

    1. steve from virginia

      “So why are the periphery countries suffering this level of unproductive pain? Because the countries aren’t making the decisions.”

      In poll after poll, election after election, the Greeks and the rest including Portuguese, Catalans, Spanish and Irish, etc. endorse the euro and express desire to keep it. Only the pandering Berlusconi and Beppo Grillo say ‘Jettison the euro’.

      Why the euro? Is it tradition, desire for a sense of togetherness, the nice pinkish color of the bills?

      The Europeans know what side their bread is buttered on. If the euro fails any replacement currency is more failed from the get-go. Any replacement drachma, franc, punt, peseta will be sharply depreciated at once … that countries banks will be totally insolvent. They know that these currencies will not trade on foreign exchange markets and will not be acceptable for the petroleum trade.

      The euro is holding the Continent’s cars hostage: no euro no ‘petrol’. Greece would do better dollarizing its economy like Ecuador.

      BTW: Greece could start ending some of its misery by having its Treasury issue ‘Greenback’ euros … to retire some of its massive debts and to put citizens to work … it needs to also ban all automobiles, thereby ending its dependency on imported petroleum. The Greeks would figure out how to live without the metal boxes and discover that life is better without them. Right now the boxes are bankrupting Greece … not the euro.

      1. Yves Smith Post author

        There was a poll in Greece that showed a majority wanting out. More than a year ago, probably 18-24 months ago. That led the pols and the PR machinery to go into overdrive telling them how awful it would be to leave and the poll results changed.

        Propaganda works. If the public were given the straight scoop, the poll results almost certainly would be different.

  9. JGordon

    Another word for Greece devaluing its currency is called “currency war”. So it’s readily apparent why Germany would want to keep Greece as it’s currency partner–at once keeping the value of the German Euro artificially low and the value of the currency of its potential competitor, Greece, artificially high.

    Devaluation or “expanding the credit supply” is not about growing an economy organically; it’s all about stealing growth from the neighbors. Although considering the disaster Japanese exports have proven to be lately, maybe neither of those theories are worth a crap anymore.

  10. JayTe

    What’s striking is how through the guise of what is called “modern economics” that the meaning of numerous terms have shifted to the point that as their value as indicators of problems or remedies has been lost. Whether it is the “modern” definition of inflation as a general increase in prices rather than the classic definition of an increase in the money supply (we all know how scary that would be!) or austerity coming to have a “modern” definition of cutting government spending and increases in taxes in order to transfer those funds in conjunction with qe to cover the losses of government bondholders (or more precisely banks) rather than the classic definition of a cut in government spending in order to reduce citizens taxes so that they are left with more money to spend, note how these changes of definition have left the majority of people confused irrespective of those who say austerity does or doesn’t work.

    It doesn’t take a rocket scientist to realise that the economy will not grow until individuals have more funds to pay off their debts, spend, save or invest as well as the recognition that the debts are beyond any entities (be it the banks or governments) to pay off and that the losses need to be recognised. Until these things happen, the western economies will meander along and the citizens will continue to suffer.

  11. JohnB

    Is there any realistic possibility of an actual recovery program taking place within the EU, within the next 5 years?

    I’m not an expert on the situation in the EU, but I just don’t see how anything can be done about the German fillibustering, and neither can I see any possibility for a change in attitude there either, which might lead to an ending of austerity.

    It seems to me that the only real solution available to troubled nations at the moment, is a reintroduction of local currencies, to get back control over monetary policy, followed by a redenomination or just total default of debts.

    Am I wrong, or is this (doubtlessly very painful) solution, seemingly the only way out of the crisis for periphery countries, and likely to be less painful than continuing within the current austerity limbo?

  12. sidelarge

    Yanis Varoufakis, much of whose opinion you probably share, is dead against leaving the Euro, though. His arguments center around the fact that unlike Argentina, Greece simply has no currency to quickly reinstate. It would be a technical nightmare with serious negative ramifications, according to him. His best-case scenario is defaulting inside the Euro. But as you say or imply, there is no sign of that ever happening.

    So, I’m still pretty torn between the two ideas.

    1. financial matters

      He seems to be basically in favor of the steps of European unification since WWII and wouldn’t want to see the positive aspects wasted.

      He has full appreciation for the fact that the US helped build up Germany and Japan after WWII largely as a buffer against Russia. The US recycled its global surplus to help build the industrial base of these countries.

      When the US developed its twin deficits of the Vietnam War and Johnson’s social programs it swithced to being a deficit country and went off the gold standard in the early 70s.

      France had strong banking and Germany had a strong currency. Joining the euro gave France a chance to extend its banking and as you mention gave Germany the advantage of the peripheral countries not being able to devaule their currencies to compete.

      The technocrats are holding the euro together to save the German and French banks from their recent reckless behavior similar to what the Fed is doing to US banks.

      The Greek, Spanish, Irish and Italian public shouldn’t be bailing out these creditors but the creditors should accept their losses. Then a more equitable realistic monetary strategy such as Germany investing its surplus to help build the industry of these peripheral countries should be established.

    2. Susan the other

      The only way to control “corrupt and detached” politicians and elites is to make all politics local again. Only computers can do that. Seems even further detached, but, if computers were used purposefully to keep track of important data and rules were followed to address those realities, local economic realities could once again be addressed. It is smoke and mirrors that solutions like this are not even considered.

      And the use of the word “austerity” is really annoying. It is code for “stop total collapse” even while nobody knows WTF. The objective of austerity is not for local economies to “get back on their feet” It is rather to keep national stock markets from crashing. The best way the elites know to do that is to feed money into the system via the banks like the Fed has done. It is a twist of logic that “austerity” is really being used to prevent deflation. No?

      In the EU, I thought this was the shell game: (I’m probably seeing things that aren’t there, but…) Germany’s surplus keeps the EU stock markets from crashing. Only Germany does this. Even tho’ the EZ economy isn’t functioning. Strange. So because Germany is a good credit risk, China buys German bonds and sells them immediately to the ECB. This gives Germany the money it needs to keep the system going. Germany donates lots of money to the ECB (or maybe buys its own bonds back?) so the ECB can give enough money to the periphery to send in their interest payments to Deutsche Bank, et. al. And this buys time for the big banksters to write down their bad assets gradually without anybody defaulting and bringing the Euro down, causing a crash in the stock markets, etc.

      It is probably insane because there will be no solution found to fix the system they are keeping on life support. Those stock markets can’t stay high if the real world is in poverty. Get rid of the corrupt elites and pols. Replace them with a bank of computers. Change the socialism for the rich politics of today into functional finance for the future.

      1. Dan Kervick

        I don’t think that’s going to happen Susan. People would all like to find some self-sufficient local enclaves where the world will leave them alone to have a happy little community. But I don’t think that is a viable solution. The world is too small; it’s too crowded; it is governed by powerful and organized elites that are going to keep on coming and keep on coming, and are going to run our lives wherever we are. They are building a new authoritarian, neo-feudal system. Somehow we need to get organized globally and wrest control from them. We’re getting into victory-or-slavery territory now.

  13. Ignacio

    As a member of the eurozone with full rigths to unemployment, all that I can say is that Oli Rehn is a F%cking bas/ard.

    1. Synopticist

      He’s a dickhead. He criticised the f*cking IMF for not being hardcore neo-liberal enough.

      Because, you know, if you say austerity isn’t working, then it won’t work. Whereas, if you praise it enough, it will. Because confidence fairy.

    2. Finnish Flash

      His only mission is to introduce eurobonds. We will see if his wet dream will come true and he will create Roman Empire once again or will it fall apart before it. I cant wait next huge crises and to see what happens. For all participants it would be better to stop this sick social experiment, which have cause only suffering for most of the people in EU, but I dont think they will listen to us, because show must go on and brussels must get laid.

      Roma exploitation: end of the dream

  14. The Dork of Cork.

    The role of austerity is to destroy the physical economy so that private money can lend again.

    I am sorry Yves but you are not agressive enough

    Wolf is a creature of the temple – its as simple as that.

    The treasuries of countries needs to be taken over by Greenbacker.
    But It will not happen.

    Private money will destroy Rome before that ever happens.

    Maybe it needs to be destroyed.

    These elites cannot function when the chain of command is destroyed.
    Banks need Government to give them the power of fiat.

  15. Hugh

    The eurozone has 6 core problems:

    1) Lack of a democratic fiscal and debt union
    2) A weak and ineffective central bank
    3) An insolvent and highly predatory banking sector
    4) Eurozone internal mercantilist trading patterns
    5) Completely corrupt political classes
    6) A ruling class of the kleptocratic rich

    What Yves is describing here is the unholy alliance between Greece’s corrupt political classes and its rich. Like the German and core kleptocrats, they continue to profit off the misery of Greece’s 99% through dismantling Greece’s social safety net, depressing wages, and selling off the country’s assets at firesale prices.

    Greece is the extreme case but we see much the same pattern throughout the Eurozone and that includes the core.

    There seems to be a lot of confusion about how a return to the drachma would work. But it would essentially be this. The government of Greece would print up a bunch of drachmas. It would close the nation’s banks say on a Friday so that the transfer of and changeover to drachmas could be accomplished with the minimum disruption.

    The key component would be to set the initial value of this new drachma to 1:1 against the euro, and make all of its existing debt payable in drachmas. It would then let the drachma float on international markets. If say the drachma fell to a fifth the value of the euro, this would mean that 80% of Greece’s debt would be erased. There would be no default. On top of this, Greece now a monetary sovereign, if it chose, could simply create the drachmas to pay off the remaining 20%.

    The question is whether this would be worthwhile to do for private debt as well. Here the choices would be converting private euro denominated debt to drachmas with the same effective discount or simply letting the loans default and recapitalizing any bankrupt banks along the way.

    Greece would also have choices about whether to allow dual euro-drachma use in the private economy or a drachma only one. It would have to get serious about tax collection though. Demanding payment of taxes in drachma would be essential to creating value in the drachma. But curiously this would not have to apply to everyone. It might be useful to demand that tax obligations of the uber-wealthy be paid in euros (or dollars). This would give the government access to foreign currency which would be useful.

    The best time for such a switch would be in late spring or early summer when agricultural crops and gardens begin to produce because even in a best case scenario this would be far from painless. Greece would have a hard few months before the new drachma and relations with the international community stabilized. But Greece is already in a fairly bad state and a period of worse with the prospect of significant improvement is a whole lot better than bad getting worse with no end in sight.

    And there are geopolitical considerations as well. Greece is a southeastern anchor for both the EU and NATO. The US might find it worthwhile to keep Greece from going down the tubes. One way of doing this would be a dollar swaps program like the Fed has used with many other central banks.

    The important and likely fatal caveat to all this is that Greece would have to change over not just its currency but its political system to accomplish this. The current odds are that Greece will sink into substate status, explode, or have a quasi or not so quasi military coup rather than a more orderly cleaning house and starting over.

    1. tiebie66

      Assuming for a moment that things could proceed as you describe, even that the political system can be reformed, then what? It has been pointed out numerous times here that Greeks work more hours than Germans, but not that their productivity is much lower. After a devaluation, on what grounds would one assume that their productivity would/should increase? I don’t see that happening, instead, more likely that periodic devaluations of the drachma would occur. That implies a declining relative productivity. A chart of the historical exchange rate should be useful. Some values that I found ( show that the drachma declined from ~ 50/$ (1981) to 160/$ (1989) while the DM rose from 1.9/$ to 1.7/$ over the same period. It didn’t work before, why would it now? Or is sinking slowly really more preferable than sinking fast?

      The other frustration that I have, and relating more directly to Yves’ post, is that corruption merely clouds the issue. I agree that corruption is a big part of the problem. But it could be argued that corruption is a big part of the problem in the medical system too: an unethically acting surgeon could stealthily remove a kidney, for example, but focusing on that brings us no closer to an understanding of kidney function. Likewise, we are no closer to understanding the economic system, and that perhaps makes it especially rife for exploitation. MMT/Keen seem the most genuine in their search for economic meaning, but there are so many variables, and no good comprehensive grasp of their static and dynamic relationships, that everybody is forever pulling on some thread or another to no avail. Adding corruption to the mix makes me yearn for a bunker, yet we cannot ignore it. If you or someone knows how to deal with this type of confound, I’d like to hear. Both you and Yves have strong views on corruption, is the basic view that most economic systems are ok, and that one can muddle through, provided that the ‘parasite/kleptocrat’ load is kept to manageable proportions?

  16. someone

    Of course it could get worse in Greece. Just take a look at Romania, Bulgaria, Hungary or Albania, Ukraine. The Greeks had two times the chance to vote the Euro out last year. They didn’t do it. They might have had some reasons for it…
    Even Tsirpas isn’t supporting this move.

    1. rotter

      More FEAR MONGERING. From the same people who predicted the total nuclear meltdown of Venezuela. Greece should be looking to that model, and the Bank of the South, not Europe and the European central bank. They would probably be heading in that direction if not for the corrupt political class installed there. “On wonders why they havent left already” indeed.

  17. financial matters

    Tax evasion is a very prevalent and corrosive global problem. Hopefully the musical chairs of this crisis will prod us to address this issue better.

    ‘Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens’ 2011 Nicholas Shaxson

    ‘Hot Money and the Politics of Debt, 3rd edition’ 2004 R.T. Naylor (with a forward by Michael Hudson)


    and then the whole issue of how wages and profits are taxed at a higher level than various types of rentier income which is well discussed by Michael Hudson

  18. Abe, NYC

    The picture of Greece looks quite familiar: just like Russia and other countries of the former Soviet Union in 1990s. People scavenging for scrap metal, cable theft, hospitals falling apart, shortage of medicins, government hated by the population – you name it.

    The cure for Russia was its default of 1998. The rouble plunged 80% to the dollar as I recall, asset prices collapsed in dollar terms. Imports fell through the floor, and import substitution industries sprang up almost overnight. Even though the crisis was seen at the time as another plunder of citizens, it set the stage for a massive 10-year economic expansion (to be sure, helped along by high oil prices).

  19. MarcoPolo

    En un lugar de La Mancha. No. La Mancha, no. Castilla la vieja, cuyo parte, mucho mas productivo que lo de Cervantes. I know this place. What is incomprehensible to economists, over-educated sycophants who still see the problem as one of cash flow and prescribe austerity, or anti-austerity, or whatever. Or political; given whatever solutions might be ascertained from that body of literature. Not even understood by the TV reporters who transcribe the stories; here it is in good castillian. This is what European integration has done to Spain.

    I wish I could help you understand.

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