Ilargi: Mario Draghi’s Slippery Downward Slope

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Yves here. While Ilargi has every reason to sound alarms about Mario Draghi meddling in politics, Ilargi s a bit late to take notice. The ECB, for instance, forced the Irish government to assume the losses of Irish bank even though Ireland had no deposit guarantee and similarly strong-armed the resistant Cyprus government into a “bail-in,” as in haircutting deposits to pay for banking system losses (Draghi also tried to block the ouster of the Cyprus central bank governor, a political appointee).

The reality is that the idea of central bank independence is pure propaganda, at least in the US and EU. Or more accurately, “independence” means freedom of central bankers from meaningful accountability to democratic institutions, while they can meddle, as long as they are not too obvious about it.

What has happened over time, as central bankers become more and more visible, the public has become desensitized when they start playing an overtly political role. In the US, it dates to the beginning of the Clinton era. As former Fed economist Richard Alford wrote in 2008:

Compare the behavior of the Chairmen of the 1950s and Volcker to that of Greenspan. Chairman Eccles and McCabe both lost their Chairmanships because they wouldn’t compromise Fed independence. They stood their ground even after being summoned to the White House. Martin, appointed by Truman, was in later life referred to by Truman as “the traitor” presumably for taking the punch bowl away. The public image of Volcker is that of a man who twice a year endured public Congressional assaults, resisted political pressure, and enabled the Fed to stay the course.

Greenspan, on the other hand, jumped at the chance to meet Clinton, traveling to Little Rock before the inauguration. Bob Woodward in his book “Maestro” quotes Clinton telling Gore after the pre-inauguration meeting: “We can do business.” Woodward also quotes Secretary of the Treasury Bentsen telling Clinton that they had effectively reached a “gentleman’s agreement” with Greenspan. The agreement evidently involved Greenspan’s support for budget deficit reduction financed in part by tax increases. It is not clear what Greenspan received.

Even if the deal with Clinton contributed to a good policy mix, Greenspan should never have entered into that agreement/deal/understanding or another agreement/deal/understanding. The very act of negotiating and injecting the Fed into a discussion of budget decisions compromised Fed independence. Why shouldn’t Bush have expected the same? Why shouldn’t every succeeding President expect the Fed Chairman to be a “business” partner? Refusal to deal on the part of the Fed can no longer be attributed to principle and precedent. Refusal “ to do business” will now be viewed as a rejection, partisan or otherwise. The Fed is no longer able to stand apart from political battles. Greenspan severely compromised the Fed standing as an agency insulated from the short-sighted and partisan politics of Washington DC.

Greenspan risked the NASDAQ bubble during the Clinton years (part of the quo for the quid?) and more recently implicitly accepted the risk of a housing bubble as he touted ARMs as the Bush Administration and Congress promoted the ownership society.

Greenspan also pumped for the privatization of Social Security, another pet Bush initiative. Bernanke regularly opined on fiscal policy, when that is none of the Fed’s business. Ilargi also cites economist Paul De Grauwe, who argues that it would have been better if central bankers had spoken up more before the crisis to oppose deregulation. Um, Greenspan was a vocal advocate of deregulation and his counterparts would have been likely to have sung from the same hymnal.

Former central banker Willem Buiter argued during repeatedly during and after the crisis that the Fed was playing a quasi-fiscal role that was inconsistent with the Constitution. For instance:

The Fed does not have a full indemnity from the US Treasury even for its outright purchases of private securities. It has no guarantee or indemnity for private credit risk assumed as a result of its repo operations and collateralised lending.

For the Fed’s potential $1 trillion exposure to private credit risk through the Term Asset-Backed Securities Loan Facility, for instance, the Treasury only guarantees $100 billion. They call it 10 times leverage. I call it the Fed being potentially in the hole for $900 billion. Similar credit risk exposures have been assumed by the Fed in the commercial paper market, in its purchases of Fannie and Freddie mortgages, in the rescue of AIG, and in a host of other quasi-fiscal rescue operations mounted by the Fed and by the Fed, the Federal Deposit Insurance Corporation, and the US Treasury jointly.

I consider this use of the Federal Reserve as an active (quasi-)fiscal player to be extremely dangerous and highly undesirable from the point of view of the health of the democratic system of government in the US.

There are two reasons for this. First, it undermines the independence of the Fed and turns it into an off-budget and off-balance sheet special purpose vehicle of the US Treasury. Second, it undermines the accountability of the Executive branch of the US Federal government for the use of public resources – taxpayers’ money.

Ilargi also takes Wolfgang Schauble, the German Finance Minister, to task for a mild suggestion that it might be helpful if Greece had a referendum. What Ilargi omits is that the Greek government had repeatedly made public statements about having a referendum. In context, they seemed to see it as a threat, as in they believed it would give them more authority in standing up to the Troika. It was also presumably meant to spook Mr. Market, since as former IMF staffer Peter Doyle pointed out, Greece’s strategy was in part to get investors in other periphery countries nervous, since that would increase Greece’s leverage. Thus the Schauble remark was to show the Germans weren’t worried about a referendum, and was close to taunting the Greek government by indicating they thought it would be “helpful”

Now if you want to get upset about meddling, the place to start is the effort to get Yanis Varoufakis replaced as Finance Minister. It’s one thing to try to persuade Tsipras through private channels that Varoufakis’ approach to the negotiations was doing more harm than good. It’s another to wage a public war against him. In fact, the strategy of personalizing the dispute appears to have backfired. Tsipras apears to have made changes to his team that were more cosmetic than substantive (mind you, I think calling for Varoufakis’ ouster was completely out of line, and that overreach appears to have led to Tsipras discounting that the creditors had legitimate, substantive objections to how the Greek side was conducting the talks). And While Varoufakis is no longer the lead negotiator, the approach to negotiations that he put in place seems to be operative.

By Raúl Ilargi Meijer, editor-in-chief of The Automatic Earth. Originally published at Automatic Earth

Mario Draghi made another huge faux pas Thursday, but it looks like the entire world press has become immune to them, because it happens all the time, because they don’t realize what it means, and because they have a message if not a mission to sell. But still, none of these things makes it alright. Nor does Draghi’s denying it was a faux pas to begin with.

And while that’s very worrisome, ‘the public’ appear to be as numbed and dumbed down to this as the media themselves are -largely due to ’cause and effect’, no doubt-. We saw an account of a North Korean defector yesterday lamenting that her country doesn’t have a functioning press, and we thought: get in line.

It’s one thing for the Bank of England to research the effects of a Brexit. It’s even inevitable that a central bank should do this, but both the process and the outcome would always have to remain under wraps. Why it was ‘accidentally’ emailed to the Guardian is hard to gauge, but it’s not a big news event that such a study takes place. The contents may yet turn out to be, but that doesn’t look all that likely.

The reason the study should remain secret is, of course, that a Brexit is a political decision, and a country’s central bank can not be party to such decisions.

It’s therefore quite another thing for ECB head Mario Draghi to speak in public about reforms inside the eurozone. Draghi can perhaps vent his opinion behind closed doors, for instance in talks with politicians in European nations, but any and all eurozone reforms remain exclusively political decisions, even if they are economic reforms, and therefore Draghi must stay away from the topic, certainly in public. Far away.

There has to be a very clear line between central banks and governments. The latter should never be able to influence the former, because it would risk making economic policy serve only short term interests (until the next election). Likewise the former should stay out of the latter’s decisions, because that would tend to make political processes skewed disproportionally towards finance and the economy, at the potential cost of other interests in a society.

This may sound idealistic and out of sync with the present day reality, but if it does, that does not bode well. It’s dangerous to play fast and loose with the founding principles of individual countries, and perhaps even more with those of unions of sovereign nations.

Obviously, in the same vein it’s fully out of line for German FinMin Schäuble to express his opinion on whether or not Greece should hold a referendum on euro membership, or any referendum for that matter. Ye olde Wolfgang is tasked with Germany’s financial politics, not Greece’s, and being a minister for one of 28 EU members doesn’t give him the liberty to express such opinions. Because all EU nations are sovereign nations, and no foreign politicians have any say in other nations’ domestic politics.

It really is that simple, no matter how much of this brinkmanship has already passed under the bridge. Even Angela Merkel, though she’s Germany’s political leader, must refrain from comments on internal Greek political affairs. She must also, if members of her cabinet make comments like Schäuble’s, tell them to never do that again, or else. It’s simply the way the EU was constructed. There is no grey area there.

The way the eurozone is treating Greece has already shown that it’s highly improbable the union can and will last forever. Too many -sovereign- boundaries have been crossed. Draghi’s and Schäuble’s comments will speed up the process of disintegration. They will achieve the exact opposite of what they try to accomplish. The European Union will show itself to be a union of fairweather friends. In Greece, this is already being revealed.

The eurozone, or European monetary union, has now had as many years of economic turmoil as it’s had years of prosperity. And it’ll be all downhill from here on in, precisely because certain people think they can afford to meddle in the affairs of sovereign nations. The euro was launched on January 2002, and was in trouble as soon as the US was, even if this was not acknowledged right away. Since 2008, Europe has swung from crisis to crisis, and there’s no end in sight.

At the central bankers’ undoubtedly ultra luxurious love fest in Sintra, Portugal, where all protagonists largely agree with one another, Draghi on Friday held a speech. And right from the start, he started pushing reforms, and showing why he really shouldn’t. Because what he suggests is not politically -or economically- neutral, it’s driven by ideology.

He can’t claim that it’s all just economics. When you talk about opening markets, facilitating reallocation etc., you’re expressing a political opinion about how a society can and should be structured, not merely an economy.

Structural Reforms, Inflation And Monetary Policy (Mario Draghi)

Our strong focus on structural reforms is not because they have been ignored in recent years. On the contrary, a great deal has been achieved and we have praised progress where it has taken place, including here in Portugal. Rather, if we talk often about structural reforms it is because we know that our ability to bring about a lasting return of stability and prosperity does not rely only on cyclical policies – including monetary policy – but also on structural policies. The two are heavily interdependent.

So what I would like to do today in opening our annual discussions in Sintra is, first, to explain what we mean by structural reforms and why the central bank has a pressing and legitimate interest in their implementation. And second, to underline why being in the early phases of a cyclical recovery is not a reason to postpone structural reforms; it is in fact an opportunity to accelerate them.

Structural reforms are, in my view, best defined as policies that permanently and positively alter the supply-side of the economy. This means that they have two key effects. First, they lift the path of potential output, either by raising the inputs to production – the supply and quality of labour and the amount of capital per worker – or by ensuring that those inputs are used more efficiently, i.e. by raising total factor productivity (TFP).

And second, they make economies more resilient to economic shocks by facilitating price and wage flexibility and the swift reallocation of resources within and across sectors. These two effects are complementary. An economy that rebounds faster after a shock is an economy that grows more over time, as it suffers from lower hysteresis effects. And the same structural reforms will often increase both short-term flexibility and long-term growth.

And earlier in the -long- speech he said: “Our strong focus on structural reforms is not because they have been ignored in recent years. On the contrary, a great deal has been achieved and we have praised progress where it has taken place, including here in Portugal.

So Draghi states that reforms have already been successful. Wherever things seem to go right, he will claim that’s due to ‘his’ reforms. Wherever they don’t, that’s due to not enough reforms. His is a goalseeked view of the world.

He claims that the structural reforms he advocates will lead to more resilience and growth. But since these reforms are for the most part a simple rehash of longer running centralization efforts, we need only look at the latter’s effects on society to gauge the potential consequences of what Draghi suggests. And what we then find is that the entire package has led to growth almost exclusively for large corporations and financial institutions. And even that growth is now elusive.

Neither reforms nor stimulus have done much, if anything, to alleviate the misery in Greece or Spain or Italy, and Portugal is not doing much better, as the rise of the Socialist Party makes clear. The reforms that Draghi touts for Lisbon consist mainly of cuts to wages and pensions. How that is progress, or how it has made the Portuguese economy ‘more resilient’, is anybody’s guess.

Resilience cannot mean that a system makes it easier to force you to leave your home to find work, but that is exactly what Draghi advocates. Instead, resilience must mean that it is easier for you to find properly rewarded work right where you are, preferably producing your own society’s basic necessities. That is what would make your society more capable of withstanding economic shocks.

Still, it’s the direct opposite of what Draghi has in mind. Draghi states that [structural reforms] “.. make economies more resilient to economic shocks by facilitating price and wage flexibility and the swift reallocation of resources within and across sectors.”

That obviously and simply means that, if it pleases the economic elites who own a society’s assets, your wages can more easily be lowered, prices for basic necessities can be raised, and you yourself can be ‘swiftly reallocated’ far from where you live, and into industries you may not want to work in that don’t do anything to lift your society.

Whether such kinds of changes to your society’s framework are desirable is manifestly a political theme, and an ideological one. They may make it easier for corporations to raise their bottom line, but they come at a substantial cost for everyone else.

Draghi tries to push a neoliberal agenda even further, and that’s a decidedly political agenda, not an economic one.

There was a panel discussion on Saturday in which Draghi defended his forays into politics, and he was called on them:

Draghi and Fischer Reject Claim Central Banks Are Too Politicised

The ECB president on Saturday said his calls were appropriate in a monetary union where growth prospects had been badly damaged by governments’ resistance to economic reforms. Mr Draghi said it was the central bank’s responsibility to comment if governments’ inaction on structural reforms was creating divergence in growth and unemployment within the eurozone, which undermined the existence of the currency area. “In a monetary union you can’t afford to have large and increasing structural divergences,” the ECB president said. “They tend to become explosive.”

He even claims it’s his responsibility to make political remarks….

Mr Draghi’s defence of the central bank came after Paul De Grauwe, an academic at the London School of Economics, challenged his calls for structural reforms earlier in the week. Mr De Grauwe said central banks’ push for governments to take steps that removed people’s job protection would expose monetary policy makers to criticism over their independence to set interest rates.

The ECB president [..] said central banks had been wrong to keep quiet on the deregulation of the financial sector. “We all wish central bankers had spoken out more when regulation was dismantled before the crisis,” Mr Draghi said. A lack of structural reform was having much more of an impact on poor European growth than in the US, he added.

De Grauwe is half right in his criticism, but only half. It’s not just about the independence to set interest rates, it’s about independence, period. A central bank cannot promote a political ideology disguised as economic measures. It’s bad enough if political parties do this, or corporations, but for central banks it’s an absolute no-go area.

Pressure towards a closer economic and monetary union in Europe is doomed to fail because it cannot be done without a closer political union at the same time. They’re all the same thing. They’re all about giving up sovereignty, about giving away the power to decide about your own country, society, economy, your own life. And Greeks don’t want the same things as Germans, nor do Italians want to become Dutch.

Because of Greece, many EU nations are now increasingly waking up to what a ‘close monetary union’ would mean, namely that Germany would be increasingly calling the shots all over Europe. No matter how many technocrats Brussels manages to sneak into member countries, there’s no way all of them would agree, and it would have to be a unanimous decision.

Draghi’s remarks therefore precipitate the disintegration of Europe, and it would be good if more people would recognize and acknowledge that. Europe are a bunch of fairweather friends, and if everyone is not very careful, they’re not going to part ways in a peaceful manner. The danger that this would lead to the exact opposite of what the EU was meant to achieve, is clear and present.

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    1. Steve H.

      From links, the Atlantic article:

      “If he simply steals one cup of coffee for himself, his power affordance shrinks slightly. If, on the other hand, he steals the pot and pours cups for himself and the other person, his power affordance spikes sharply. People want this man as their leader.”

      Or, as E. Nelson Bridwell wrote:

      “What do you mean . . . WE?

  1. Ned Ludd

    There is a typo in the first sentence: “eery” should be “every”.

    Also, the end of the post is missing </em>, so all of the comments are showing up emphasized.

  2. Michael Hudson

    Claims that a central bank should be “independent” are meant precisely to enable it to INTERFERE. What is meant is that central banks should be independent from democratically elected officials, so that they can be run from lobbyists supplied from the financial sector.
    Central banks for the last century have been oligarchic, not democratic. It doesn’t have to be this way, however.

      1. JTMcPhee

        Very different political economy, smaller population, more face-to-face, the basterds have not seriously taken a crack at cracking it yet.

  3. jgordon

    I have been reading anthropologist David Graeber’s work lately and in it he clearly shows that money and markets only come into existence when there is a need for large-scale organized violence (governments paying armies). From its very inception the DNA of money and markets is violence. That is the original sin of money.

    Consequently the many perversions that arise from a society whose operating system is money and markets is no surprise. Coercion by elites and tribute to elites is the only reason our economic system exists all, and Mario is playing a perfectly legitimate role within this system by effecting violence and demands for tribute against those who resist him. In fact, Mario’s proclivities as the central bank head could be considered the natural and necessary outcome of our system. As long as we have a centralized monetary system enforced by state violence characters like Mario will pop up all over the place like weeds in a garden. I don’t think there’s any moral or ethical problem in seeking to undermine and subvert such a system.

  4. /L

    When the “debate” that CB must be independent was in Sweden it was openly touted that it should act as a check on democracy because democratically elected politicians couldn’t be trusted. So unelected money “experts” should be able to overrule for the “best” of us all. (sic!)
    Whats the difference of this and Iran’s Guardian Council of mullahs? Equally unscientific.

  5. susan the other

    There is collusion afoot. Here in the US our Congress has steadfastly refused to implement any fiscal programs; Obama himself has equivocated all over the place on fiscal programs. So yes, central banks are defacto governments in times of abdication, and they have an agenda written by private banking and big corporations, and they think austerity solves all problems if we have a mobile workforce that can zoom off to the next job. Not. The mobile workforce is the idiot point. Only a military does that. And to that point, it is easy to see how we got here: the US Military, the MIC and NATO. They have this mobilization mind set, naturally. They mobilize. But dig down and we find that the products we produce as advanced technological societies are all military based.

    1. Otter

      “But dig down and we find that the products we produce as advanced technological societies are all military based.”

      + + + + +

  6. WanderingMind

    The reality is that the idea of central bank independence is pure propaganda, at least in the US and EU. Or more accurately, “independence” means freedom of central bankers from meaningful accountability to democratic institutions, while they can meddle, as long as they are not too obvious about it.

    The myth of central bank independence is most clear during wartime. The job of the Fed almost immediately after it was founded in 1913 was to support treasury operations during the first world war. It repeated that performance during the second world war and for a few years afterward, by directly intervening in the market for treasury securities, its job being to make sure that the interest rate on issues of Treasury securities was set at the level Treasury dictated. That was the opposite of the vision of its original mission, which was to discount private credit offered by member banks to business.

    More generally, looking at the long history of central banks in the Anglo-American world, the connection between government’s desire/ability to wage war and the operation of the banking system are intimately connected. During normal times, banks are at the service of the commercial classes and at times (like now) vice versa. Government use of resources becomes the great evil, especially if there is some type of democratic basis for decision-making about how to use those resources. All that goes out the window, however, if there is a desire to organize the resources of the country to fight a war, based on a threat, real or imagined, from outside (WW1, WW2, the Cold War, the War on Terror) or inside (the Slave Power, the War on Drugs(!)).

    War provisioning is the one area where there is a consistent, long-term political constituency supporting government intervention into the economy. Otherwise, the central bank is and always has been at the service of the owners of capital.

    1. Yves Smith Post author

      Perry Merhling had a good presentation on INET on this issue, how the role of central banks in providing war finance is at odds with their role as “bankers’ bank”.

      1. jgordon

        Or, extrapolating a bit from David Graeber, war financing must be the primary goal of any central bank. If there is a dichotomy there, it’s a facade.

        And, if you consider the role of the Fed and its dollar currency, this makes perfect sense. The Fed has become, or has always been, a potent (financial, monetary, and policy) weapon of war for the US government–even outside its role financing the military budget.

        It may be that it’s fundamentally impossible to extricate any government-run monetary system from the government-run military-industrial complex. Not just in the US, but wherever there is an official state-sponsored monetary system. And participating in such a system is consequently an act of violence. Let’s hope not too many people of conscious think too deeply about this stuff.

      2. Irene Rogers

        Yves, Mehrling certainly has a point, and yet, I suspect that this conflict of roles of central banks will continue as it has for the last three centuries. Rationalization of British government finance during the Nine Years’ War (1688-1697) and the War of the Spanish Succession (1707-13) was a central purpose in the founding of the Bank of England in 1694.

        Economic historian P.G.M. DIckson explained this at length in his book, “The Financial Revolution in England, 1694-1720.”

        It may be all well and good — and theoretically best — to say central banks should stay out of war finance, but in fact they have been doing war finance pretty much since they came to be. It’s hard for me to see why they might be expected to stop now.

  7. Oregoncharles

    ” Draghi’s and Schäuble’s comments will speed up the process of disintegration. They will achieve the exact opposite of what they try to accomplish. The European Union will show itself to be a union of fairweather friends. In Greece, this is already being revealed.”

    In a nutshell, this is why I think a Grexit is all but inevitable. It also makes a Brexit very likely. The other reason is Yves’ own repeated point that the two sides aren’t really “negotiating”; they’re at loggerheads. There are only two solutions to that dilemma: surrender or flight. An attempt at surrender would produce a revolution in Greece. They already have very little to lose. The INTENTIONS of the parties have very little to do with the outcome; that comes from the structure.

    It’s POSSIBLE that a default within the Euro would succeed in forcing a shakeup – the political processes for that are already started, and it might buy time. That’s why Yves favors it; but I think it’s just as likely to force an exit. Worth a try, I suppose.

    It’s sad that Europe’s attempt at a history-making permanent peace has turned out so badly (thought there is in fact little threat of war outside the Ukraine).

    1. Yves Smith Post author

      We do not see a revolution happening in Greece. If a 25% fall in GDP and a near collapse of the hospital system didn’t produce it, nothing will. The Greeks voted in Syriza as a bourgeois party that would negotiate its way out of austerity. That didn’t happen. Even with Syriza failing at the task it was elected to achieve, we still see support for Syriza at roughly the level it was at when it was elected and the public still against leaving the Euro.

      Greeks know they will be even worse off if they leave the Eurzone than if they suffer under austerity. It’s a terrible choice, but would you prefer to have both legs cut off (leaving the Eurozone) or having only one hand cut off (austerity). The Greeks are not being irrational here. Plus as alex morfeis says repeatedly in comments, the issue is not Greece being unable to feed itself in the even of a Grexit. It’s that the country can’t manage itself. He’s gone on at length on the lack of basic administrative competence in Greek society.

      Italy could leave the Eurozone and come out ahead. France could too. Greece, no way. And Greece leaving and suffering even more, visibly, would (at least for the next 10 years, till the centripetal forces became unmanageable) serve the Eurocrats perfectly. They could point to how horribly things turned out in Greece to scare voters into thinking twice about voting for anti-Eurozone parties.

      1. Alan

        Yves, In making such assertions for a whole country and its people (“the issue is not Greece being unable to feed itself in the even of a Grexit. It’s that the country can’t manage itself”), it would be better to rely on something a little more solid than an expat’s anecdotal evidence or opinion. I few days ago I tried to explain this, but it seems my efforts were in vain:

        “On a related point, the way many Greek expats treat their (old) country and fellow Greeks would make a great psychoanalytic treatise. My take is that the problems Greece has and the constant negative creditor propaganda make them feel too uncomfortable in the countries they live and thus their reflexive attitude is to side with all the negative criticism big time, only to occasionally break down to nostalgia and heavy sentimentalism for a while, and then back to hatred, and so on.
        It’s really weird.”

        Secondly, Greece was actually doing pretty well before joining the EZ. For decades, the worse that could happen was a devaluation, and by the time Greece joined the EZ it had the 25th strongest economy in the world. That’s not too bad considering that there are something like 200+ countries in the UN. Even if it were the 50th, it would still be doing pretty ok, all things considered, unless you would like to suggest that the other 150+ countries behind Greece on this planet can’t manage themselves too. Are you interested in making sauch a case?
        But don’t take my word for it, here is Michael Pettis explaining this pretty convincingly:

        “As for the claim that devaluation won’t help Greece because it has nothing to sell, this is nonsense. The belief arises among people, including many economists, who think that trade imbalances are driven by bilateral trade rather than by capital flows. It can be by the former, but it can also be by the latter, and in Europe today it is clearly the latter. If Greece has no way of generating foreign inflows on the current account, it is a little strange that it managed to avoid a balance of payments crisis for so many decades and then suddenly decided to have one at exactly the same time as Spain, Italy, Portugal, France, and everyone else. Of course I have no doubt that I will immediately be inundated with demands that I specify exactly what it is that Greece can sell, and when I say I have no idea, they will say I have proven myself wrong.

        Actually it only proves two things. First, it proves that I am not enough of an export in the Greek economy to know too much about what Greeks make besides olive oil, wine, tourism, fashion, and fruit — all perfectly exportable things, I would have thought, and I assume that if wages are low enough, someone somewhere can come up with an idea or two of things Greeks can produce. Second, economies are very complex things, and it doesn’t require that you predict precisely how an economy absorbs an exogenous shock to predict that macroeconomic impact of the shock. Of course if you begin with the assumption that Greeks are unutterably lazy and incapable of working at anything, then of course I will be proven wrong, but aside from being the grandson of Greek immigrants, whose American business made them quite rich within one generation, and one of whose children (my father) became a world famous geologist and engineer, making me skeptical about the claim that Greeks are incapable of producing anything, I still have to wonder why these horribly lazy and incompetent people waited to have their crisis at the same time everyone else did if their crisis was not caused by macroeconomic distortions in the European economy but rather by their infinite laziness and incapacity for producing things that can be sold.

        Devalue the Greek currency and the Greeks will export more, import less (which they will then produce at home) and welcome more German tourists to their islands. I am pretty sure of that. This doesn’t mean that there are not many reasons not to leave the euro, and it will certainly not solve most of their problems, but the idea that devaluation cannot possibly affect domestic production is very questionable, and can only be justified, it seems to me, by some pretty powerful stereotypes about laziness, incompetence and stupidity.”

        [My emphasis]

        A little caution would be warranted here I think, to put it lightly.

        1. Calgacus

          Yes, Alan – I and others saw and welcomed your comments then, and I wish I had had time to write the long positive reply they deserved. Thank you for that link to Pettis, who is one of the substantial contingent of economists – maybe not even such a minority – the ones who are imho thinking carefully, who do not leap to unsound conclusions. And who do not think that exiting the Eurozone will cause a catastrophe – but the reverse. Wishful thinking, magical thinking, heroic assumptions are what leads to Grexit pessimism, while the hard-nosed bean-counters are the optimists or romantics! As Mark Weisbrot says (with the appropriate qualifications)- the most likely outcome of Grexit is a robust recovery.

          Pettis even ignores the primary beneficial effect of leaving the Eurozone – domestic production for domestic demand and use, as well as the fact that Greece is well situated to benefit from its own currency through revived trade, better than Argentina was say.
          Greek exports of goods are nothing to write home about, but it has not one but two world-class fx earning, trade-in-services sectors – tourism and shipping. This quite small nation has 15% of the world’s commercial shipping- and the EU is supposed to be able to isolate it?! The problem was never that Greece has little to sell to the outside world, but rather that it imported too much. This is something which returning to your own currency & making the simple decision to have full employment handily and painlessly solves. As the leading victim of austerity ideology, it has the most to lose by remaining in the Austerizone and everything to gain, after a few short transitional months.
          Basically, Greece is like someone with a good job – but an even bigger gambling problem. The Grexit solution is to keep working but go to tedious Gambler’s Anonymous meetings. The stay-in-the-EZ or austerity “solution” (proposed by the casino owners, surprise, surprise) is to keep going to the casino, and quit your job.
          Syriza’s strategy – if, if it doesn’t back down at the moment of truth is perfectly rational and moral. Greece does owe a debt to the EU. But if the EU/EZ actively prevents it from repaying the debt – by not engaging in the fiscal equalisation (NOT transfers – they just aren’t transfers the way that word is used anywhere else) – necessary for a single currency zone. In particular the EU/EZ/ECB/IMF criminally foists mass disemployment on Greece, acting ultra vires to the founding treaties of the EU. So Greece has every legal and moral right to say – pay ya later, since you EU/EZ loons are effectively refusing Greek offers of repayment now.

          Cannier observers see that the real threat to the Eurocrats – Eurotyrants is that the natural outcome of a successful Greek exit will strengthen the centripetal or progressive forces and weaken the bankster stranglehold on a continent – and even the world.

          1. Alan

            Thank you Calgacus, I agree wholeheartedly. It is actually hard for me to come to terms with that because I used to be one of the European Unity romanticists, but as a friend likes to say, too many people on this continent thought they were moving towards a common destiny and promising future only to wake up in a nightmare. That the Eurocrats – or the casino owners as you so aptly put it – would attribute this to the failings of the People is no surprise, and I’m glad that the People show them the finger with more and more “political earthquakes”.

            On your last point (“the real threat to the Eurocrats – Eurotyrants is that the natural outcome of a successful Greek exit will strengthen the centripetal or progressive forces and weaken the bankster stranglehold on a continent – and even the world”), Krugman had this to say just yesterday:

            “[…] But the bigger question is what happens a year or two after Grexit, where the real risk to the euro is not that Greece will fail but that it will succeed. Suppose that a greatly devalued new drachma brings a flood of British beer-drinkers to the Ionian Sea, and Greece starts to recover. This would greatly encourage challengers to austerity and internal devaluation elsewhere.

            Think about it. Just the other day the Very Serious Europeans were hailing Spain as a great success story, a vindication of the whole program. Evidently the Spanish people don’t agree. And if the anti-establishment forces have a recovering Greece to point to, the discrediting of the establishment will accelerate.

            One conclusion, I guess, is that Germany should try to sabotage Greece post-exit. But I hope that will be considered unacceptable.

            So think about it, IFKATs: are you really sure you want to start going down this road?”

            I still have no idea what will happen. But I do hope that Syriza won’t back down.

            (Btw, I wish I could edit my comments, typos and writing things like “the worse that could happen” make me mad.)

            1. susan the other

              I think the repudiation of debt might be starting. It has been unthinkable for many years and that is how austerity succeeded. But recently Ukraine refused to pay Russia and Israel refused to pay Iran – both oil debts and both refusals rationalized and justified by some international rule that lets you off the hook if you consider the creditor to be at war with you. Your enemy. The obvious comes to mine: let’s all go to war. But that’s too nutty. So then let’s just all rationalize our discontent as if it were war. Much better. And once this ball starts rolling, maybe it will be possible to once again use the verboten phrase “odious debt” as well.

      2. WanderingMind

        I keep thinking about Yves’ hypothetical in which Greece defaults, but does not leave the Eurozone, in conjunction with her comments about the risks of miscalculation.

        If I understand the dynamics of that situation correctly, Greece will fail to make payments to its creditors, but will not apply for withdrawal from the Eurozone. Since there is no (legal) mechanism for forcing a Eurozone member out, it will be up to the Troika to decide how to react to such a default. The ECB, most importantly, would have to make a decision about whether it will continue to provide liquidity support to the Greek central bank.

        What I am not sure of is whether individual Greek banks have the ability to deal directly with the ECB, or whether all of the support goes through the Greek central bank. If the latter, then the failure to support the Greek central bank is the failure to support all of the Greek banks, which I assume would lead to a bank run, one that is worse than the one that is already happening. And even if individual Greek banks can apply for direct support from the ECB, if this is not done on a uniform basis, there could still be a bank run.

        The ECB and the other members of the Troika might hold firm in the face of that scenario, but I think that is where the miscalculation might come into play.

        The ECB may not be prepared if the rest of the periphery countries also engage in their own bank runs in reaction to events in Greece. The citizens of Spain, for example, seem to be taking a turn to the left, although it does not seem likely that Podemos will win an outright majority this year at the national level. Nonetheless, a change in attitude amongst the Spanish, Portuguese and even Irish governments might give rise to more bank runs in those countries, with citizens wishing to take pre-emptive measures so as not to end up like their Greek counterparts.

        So, is a cascading banking crisis kicked off by the ECB refusing to continue liquidity support for Greek banks following a default likely, or is such a bank run not likely?

    2. Mr. G

      The pragmatists within Syriza have triumphed. Lafanzis and his Lenin like views are of no threat any longer. Potomi will support tsipras. There is no political shakeup required. Tsiprias is free to make a deal and the opinion polls provide evidence in support of compromise, even giving in. There will be no big explosions…just a simple admission that a deal was reached and that they are moving on to debt restructuring/writedown.

      I do agree that Europe has a dysfunctional way of addressing its core problems. There is more fear of loss than risk taking for progress. Draghi’s comments hint at this too. He may be a central banker, but he’s also a European leader and has every reason to stand up and shout,when the house is in danger of catching fire.

  8. Synoia

    More true that we’d like:

    And if everyone is not very careful, they’re not going to part ways in a peaceful manner.

    There has never been peace in Europe with a united Germany.

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