Wednesday, November 06, 2013

The euro crisis rolls on

"European officials think that because the ECB has calmed financial markets and some countries are showing slight growth the crisis is over," writes Paul Krugman in Europe’s Inflation Problem 11/04/2013:

Greece prepares for general strike with visit of troika stoking anger on the streets Euronews 11/06/2013:

In fact, the stabilization achieved by the ECB by its President Mario Draghi's "whatever it takes" policy came with a poison pill. Yanis Varoufakis in From Contagion to Incoherence: Towards a Model of the Unfolding Eurozone Crisis Contributions to Political Economy 32/2013. He describes the ECB 2012 stabilization measures to discourse speculative attacks against eurozone country bonds, known more technically as the LTRO (Long-Term Re-Financing Operation)–OMT (Outright Monetary Transactions) measures against the background of the Fiscal Pact that German Chancellor Angela "Frau Fritz" Merkel insisted upon in 2011. I tend to call the later the Fiscal Suicide Pact, since it effectively requires those countries in the Pact to implement Herbert Hoover/Heinrich Brüning austerity measures in a recession or depression. That summer:

... the surplus countries, with Germany (but also Finland) in the leading role" ... were pushing mightily in favour of the so-called Fiscal Pact; a legally binding commitment by member states to achieve a structural deficit of no more than 0.5% of GDP in perpetuity. Never before in economic history has logical incoherence been given a constitutional expression that reality is bound to wreck. [my emphasis]
And he argues that "the folly in the Eurozone's Fiscal Pact ... goes beyond a mere procyclical austerity drive (that is, almost inconceivably placed on the European Union’s statutes)" because:

For the Fiscal Pact's aims to be feasible, without ... a Eurozone-wide über-mercantilist push, investment must rise significantly above savings in both deficit and surplus countries. However, the chances of this happening are non-existent, while the Eurozone is caught up in the web of wholesale recession and of a credit system at an advanced stage of disintegration. As a result, the austerity drive pushes growth rates into negative territory, annihilates imports into the deficit countries, maintains a steady stream of liquefied asset capital that flows from the deficit to the surplus nations and, in a predictably self-defeating manner, fails to squeeze fiscal deficits sustainably.
The current criticism that Germany is receiving from the US Treasury, the IMF and Paul Krugman over its trade surplus can only be met by an aggressive counter-cyclical, Keynesian anti-depression policy for the periphery eurozone countries Cyprus, Greece, Ireland, Italy, Portugal and Spain: the very kind of policy to which Merkel is dogmatically opposed.

With the LTRO, Draghi "made it clear that no bank would be allowed to fail." His announcement of the OMT in mid-2012 has created the impression among many in US business press that the crisis has been more-or-less stabilized, if not eliminated. Varoufakis describes the OMT this way:

Indeed, by July 2012 the situation [for Spain and Italy] had turned so critical that the President of the ECB chose to speak openly about the Eurozone's collapse (to which he referred with the euphemism of ‘convertibility risk’) and, at once, to warn that he would do ‘whatever it takes’ to stop it. The ‘whatever it takes’ part arrived later, in September 2012, in the form of the OMT (or ‘outright monetary transactions’) programme.

The OMT constituted a simple threat, by the ECB, that (if need be) the central bank would purchase as much short-term Italian and Spanish debt from the Italian and Spanish banks as it was necessary to inflict losses on the short sellers of Italian and Spanish bonds.
But here the kicker:

So, if the OMT programme makes it possible for Spain to pretend that it retains full access to the money markets, why can Ireland not manoeuver itself, with the ECB’s assistance, into a Spain-like situation: i.e. out of its EFSF programme while remaining a ward of the troika and, thus, under the same dark cloud of unrelenting austerity?

Which brings me to the Faustian bargain underpinning the ECB’s LTRO–ECB programmes: to get Germany’s government on side, especially regarding the OMT programme, Mr Draghi had to commit all the coercive powers of the ECB to imposing ruthlessly the Fiscal Pact upon the deficit member states. Which means that the Eurozone remains on a path to disintegration since ... the illogicality is maintained at the level of its real macro-economy. ... Which means that putting all of the ECB’s energies into pushing the deficit nations in that direction will only accelerate the recession, bring investment into deeply negative territory and lead proud countries like Italy and Spain to a condition of Greece-like un-governability.
In his conclusion, he puts it this way:

As the contagion gathered pace, at some point, the ECB was left with no alternative to intervening in a bid to prevent the European Monetary Union’s disintegration. But to be allowed to step in (with its LTRO and OMT programs), the ECB first had to enter into a Faustian Bargain with the surplus countries: in exchange of being unshackled from the prohibition from acting as a lender of last resort, the ECB had to commit to using its coercive powers in order to impose a third, new, principle: that of the greatest austerity upon the weakest member states. In so doing, these ECB-based ‘solutions’ exacerbated the Eurozone’s underlying macroeconomic conundrum while, on the surface, bringing temporary stability to the inter-bank and bond markets.
As he characterized it earlier in the article, there continues to be an "interplay between contagion and Europe’s institutional responses," including the supposedly successful, stabilizing LTRO–OMT measures.

In another post, Krugman illustrates the pro-cyclical (i.e., making the depression worse) nature of European fiscal policy under Frau Fritz' austerity hammer with the not-quite-so-bad bipartisan Herbert Hoover approach in the US (North Atlantic Fiscal Policy 11/06/2013):

The US did substantial stimulus in 2009-10 (although not, I’d argue, nearly as much as these numbers suggest), but then began withdrawing it rapidly despite still being in a liquidity trap. At this point fiscal policy is only modestly more expansionary than it was before the crisis, which is a big policy mistake.

But Europe is far worse. It, too, is in a liquidity trap, with the extra problems of severe adjustment needed in the periphery, made worse by a weak economy and excessively low inflation. Yet aggregate fiscal policy is clearly tighter than it was before the crisis.
Now Greece is headed once again for the chopping block. (Renee Maltezou reports in Anti-austerity strike brings Greece to a halt during troika visit Reuters 11/06/2013):

Labour unions fear Greece will have to impose further wage and pension cuts to meet its bailout targets in the coming years, union officials said. Greece and its lenders are at odds over the size of a projected budget hole next year, which has spurred speculation of a new round of unpopular cuts.

The unions are also protesting against planned public sector job cuts and privatisations. ...

Greece is in its sixth year of a recession, and repeated rounds of austerity have squeezed households and sent unemployment to record highs of over 27 percent.
The country needs additional bailout funds to keep up with its current crushing interest payments. But Frau Fritz will insist they come with yet more austerity measures. The Reuters report notes, "Anger against German-led austerity remains high and [conservative] Prime Minister Antonis Samaras's coalition government has rejected further across-the-board wage and pension cuts or tax increases to fill any budget gaps."

Varoufakis doesn't buy that talk. In his blog post The Greek government has a moral duty to use its veto in the next EU Summit: Q&A with Zdenka Pankovic 10/31/2013, he reminds us of recent history:

I fear that 'news' of their unity behind a tough line have been grossly exaggerated. The reality is far less heroic. After beating their chest for a little while they will buckle under the moment the troika [IMF, ECB, EU, all dancing to Merkel's austerity tune] raises its proverbial voice. The time to have put their foot down was at least 18 months ago. At the time they were signing the so-called 2nd Bailout. Once they gave in then, they are on a roll of making great pronouncements that "enough is enough" before imploring [G]reek citizens to accept "a little bit more" of mindless, self-defeating austerity.
As he puts it there, "Europe is in denial of the systemic crisis it finds itself in."

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