When the "adults in the room" are destructive

"Keep in mind that the ruling class can be self-destructively mad; not just pretending!" (Daniel Ellsberg to Yanis Varoufakis, 2015)

Economist and one-time Greek Finance Minister Yanis Varoufakis has written an account of his experience in 2015 trying desperately but ultimately unsuccessfully to get a debt deal for Greece that wouldn't condemn the country to indefinite economic depression, Adults in the Room: My Battle with the European and American Deep Establishment. It was published in the US Tuesday.

The Ellsberg quote comes in Varoufakis' description of the later stages of negotiations with the EU leaders, of whom Germany's Angela Merkel was easily the most significant.

[Prime Minister] Alexis [Tsipras] looked at me serenely and asked, 'What are the chances that they [the EU institutions and the IMF] will come back to us with something decent, Yani?'

At that critical juncture in our country's history I was obliged to answer with the greatest possible precision. I told him that the probability they would do so was mo per cent if they acted rationally. But, I warned, as Dan Ellsberg, the great American economist and Pentagon strategist turned pacifist whistle-blower, had emailed me a few weeks before, 'Keep in mind that the ruling class can be self-destructively mad; not just pretending!'

'Powerful European leaders have a track record of being bad at serving their interests, of falling prey to irrational urges,' I said. And given that irrationality breeds unpredictability, I estimated that a more sensible probability - that Chancellor Merkel would opt for the mutually assured damage of Grexit rather than a mutually advantageous deal - was around fifty-fifty.' [my emphasis in bold]

Adults in the Room is not only a good read, giving a chronological account of his short but highly eventful tenure as Greek Finance Minister under the Syriza government elected in 2015. Their mandate was to get Greece out from under the ruinous austerity program imposed on them by the "troika" of the IMF, the ECB and the European Commission. In the end, they failed, with Alexis Tsipras' government eventually backing down from risking leaving the euro currency.

Greece is still struggling with the same problems 2 1/2 years later, the austerity program keeping the country in what is in effect a permanent depression. The human cost has been staggering. The pro-EU, anti-austerity group of which Varoufakis is now a part, DiEM25, has recently proposed a New Deal for Greece, which advocates the kind of solutions that he wanted to put into place in 2015. It's opening sentences (bolding in original):

The seven-year economic crisis has kept Greece locked in a state of quadruple insolvency: with a bankrupt state, bankrupt banks, bankrupt businesses, and bankrupt households. Everyone owes to everyone and no one can pay.

Under these circumstances, there can be only one overarching goal: to restructure all public and private debt; a move which requires the restoration of democratic sovereignty.

Those themes run throughout Adults in the Room. Varoufakis does a great job of explaining the interactions between economic policy and the power dynamics within the EU. He cautions against shoeboxing the power rivalries within the EU in opposition between nations. He prefers to see the central conflict in basic left-populist terms as between the oligarchies of the EU nations and the people of the whole EU. At the same time, his account leaves little doubt that the chief enforcer for those EU elites is named Angela Merkel.

Greece did wind up with too much public debt to service, which became a legitimate debt crisis after the 2008 Great Recession began. A major portion of those bonds were held by French and German banks, already hit hard in other ways by the financial crisis, so German officials were particularly opposed to having the debt written down, which would be the normal procedure in such a case. Because the German government would then be faced with recapitalizing the banks, and Merkel didn't want to be seen doing that. The "solution" was a remarkable approach to excessive debt. The troika arranged additional loans to Greece so that they could service the old debt and avoid any French or German bank insolvencies. And forcing Greece to accept radical austerity measures as part of the deal.

Economists and financial journalists - among them Paul Krugman, Joe Stiglitz, Barry Eichengreen, Wolfgang Münchau, Martin Wolf, Varoufakis himself and his successor as Finance Minister Euclid Tsakalotos - predicted in real time that this was a disastrous program that would not solve the debt problem and would hammer the already distressed Greek economy. And events validated their predictions in a gruesomely spectacular way. As the austerity measures made the Greek GDP shrink, the expanded debt forced on them by the troika made the debt a bigger and bigger ratio to the GDP, which meant their debt position deteriorated further, requiring more "bailouts."

I put bailout in quotation marks, because the additional loans forced on Greece were not bailouts. They were additional debt. But politically, Merkel and her Grand Coalition government (CDU/CSU and SPD) decided to present the program as a generous bailout by Germany to Greece. And encouraged nationalist resentment against it. So it became distressingly common for Germans and Austrians to gripe about "lazy" and "corrupt" and "irresponsible" Greeks. This nationalist attitude toward Greece soared during the 2015 negotiations over yet another debt solution that had become urgent.

Varoufakis calls Merkel's strategy "extend-and-pretend," his version of the American "kicking the can down the road." One of the most notable aspects of Varoufakis' account is that the conservative German Finance Minister Wolfgang Schäuble repeatedly admitted to his Greek counterpart that he knew the program on which the EU was insisting would not actually solve the problem it claimed to be solving.

And this is where the Ellsberg quote comes in. Varoufakis also specializes in game theory. And his understanding of the basic negotiating options for Greece meant that if the EU had offered debt relief and a decent recovery program for Greece, then Syriza could accept it and the deal would be done. But if Germany and their allies in the EU insisted on continuing the unrealistic extend-and-pretend austerity program - which is what actually happened - then Greece would have to be prepared to be pushed out of the eurozone in order to be able to force Germany to agree to a solution that kept them within the eurozone without ruinous austerity.

This remains the basic dilemma for the EU and the eurozone. The German political scientist Claus Offe describes it in Europe Entrapped (2016) in terms that are broadly consistent with Varoufakis' description and which obviously draws heavily on the lessons of Greece's doomed 2015 attempt to break out of the debt-and-austerity trap. The German version is titled Europa in der Falle, which the English title also renders well. For the eurozone, no one knows exactly the consequence of a member nation leaving. But it would be a big risk. Because of the very likely possibilities is that the currency zone would quickly disintegrate with one nation after another leaving. The currency breakups after the fall of the Soviet Union and of Yugoslavia don't give anyone looking at this problem warm and fuzzy feelings.

Leaving the eurozone is also presumed to mean that the leaving nation would also have to leave the EU itself, which would create further economic problems. Brexit is providing a real world test of that process, but without the even more consequential implications of having to leave the euro currency zone, since Britain was never a member of it.

Varoufakis and Tsipras assumed on taking office that Germany was likely to insist on their hard line until the very end, which is what occurred. If Greece refused to agree to an unfavorable deal, Germany would then be forced to push Greece out of the eurozone. Schäuble, on Varoufakis' evidence, wanted that to be the outcome. He was willing to take the risk. That's the context in which the Ellsberg quote comes into play. The Greek negotiating strategy was predicated on the idea that Merkel's government would only agree to a realistic program that provided debt restructuring if they thought that Greece was serious about leaving the eurozone rather than accept a continuing of the troika program.

In the end, it was Tsipras who backed down from the risk of Greece leaving the euro. And in a humiliating way. Greece got a terrible deal and the same dilemma persists, unsolved, with 2 1/2 more years of serious economoic damage to the country. And it gives us a good idea of what to look for in future such confrontations. And in the ongoing Brexit negotiations.

One key point that Varoufakis stressed during the process was that Merkel's determination to coerce Greece into capitulation was primarily aimed at deterring other EU countries from going the same route, France in particular. She seems to seriously believe in her austerity policies, because she is especially determined to force them on the eurozone countries.

And Adults in the Room gives a vivid picture of what the much-discussed "democratic deficit" in the EU and especially the eurozone looks like. It's not a pretty picture. In an article (Why we must save the EU Guardian 04/05/2016), Varoufakis relates an emblematic moment in the "democratic deficit":

After I had recited our government’s plea for a substantial renegotiation of the so-called “Greek economic programme”, which had the troika’s fingerprints all over it, Dr Schäuble astounded me with a reply that should send shivers up the spine of every democrat: “Elections cannot be allowed to change an economic programme of a member state!” he said categorically.

During a break from that 10-hour Eurogroup meeting, in which I had struggled to reclaim some economic sovereignty on behalf of my battered parliament and our suffering people, another finance minister attempted to soothe me by saying: “Yanis, you must understand that no country can be sovereign today. Especially not a small and bankrupt one like yours.”

This line of argument is probably the most pernicious fallacy to have afflicted public debate in our modern liberal democracies. Indeed, I would go as far as to suggest that it may be the greatest threat to liberal democracy itself. Its true meaning is that sovereignty is passé unless you are the United States, China or, maybe, Putin’s Russia. In which case you might as well append your country to a transnational alliance of states where your parliament is reduced to a rubber stamp, and all authority is vested in the larger states. [my emphasis]

Negotiating over negotiating Brexit

Anything can happen with Brexit. But it sounds unlikely to me that it's going to be a smooth process.

European Parliament President Martin Schulz is from the German SPD. But he's a shameless Angiebot, not that this makes him any different than most other SPD leaders, a related but different story. He demanded that Britain make their Article 50 application by this Tuesday! Probably not going to happen. In theory, the SPD (Angie's junior coalition partner) is pressing for a rapid British exit while Angie and her CDU/CSU are being more cautious.

But there's no way Schulz made that kind of statement without Merkel's approval. If Merkel is going to preserve her current EU, she has to punish the defiant, like she punished Greece. I'm convinced that Merkel sees the EU as a neoliberal version of the Warsaw Pact; that's a big reason I call her East Germany's Last Revenge on the West. Since Britain is not a part of the euro, she has more flexibility to make concessions to Britain and did make some prior to the Brexit vote. But punishment and intimidation is how she rolls in these things, with the full support of the SPD.

I'm very sure Angie doesn't give a flying flip that a majority of British voters elected to leave. At his first meeting with Yanis Varoufakis as Finance Minister of Greece when the Syriza government took power in 2015 with a clear electoral mandate to end the Herbert Hoover austerity programs, Angie's Finance Minister and fellow CDU leader Wolfgang Schäuble told Varoufakis, “Elections cannot be allowed to change an economic programme of a member state!” (Why we must save the EU Guardian 04/05/2016)

Angie's close ally and Defense Minister Ursula von der Leyen is saying, "No one will have to chance to play for time. The economy will demand quick clarity. Investors will hold back until they know what's going on now: in or out." ("Es wird niemand die Chance haben, auf Zeit zu spielen. Die Wirtschaft wird schnelle Klarheit einfordern. Investoren werden sich zurückhalten, bis sie wissen, was jetzt gilt: drinnen oder draußen."; Schulz fordert Austrittsantrag der Briten bis Dienstag Spiegel Online 25.06.2016)

The negotiating over negotiating is already well underway (Jon Henley et al, European leaders rule out informal Brexit talks before article 50 is triggered Guardian 06/27/2016):

On the eve of a crunch summit in Brussels, the German chancellor, Angela Merkel, said she, president François Hollande of France and Italy’s prime minister, Matteo Renzi, had agreed at their meeting in Berlin that “there will be no formal or informal talks about Britain’s exit” until the UK has triggered article 50, the untested procedure that governs a member state leaving.

Hollande urged Britain to “not waste time” in launching the leaving process. “Being responsible means not wasting time in engaging with the question of Britain’s departure and setting this new impulse we want to lend the new European Union,” he said, adding that “nothing is worse than uncertainty – and Britain has already had painful experience of this”.

France and Italy, not surprisingly, are on board with Merkel's approach. The German SPD, which still passes for a center-left party and serves as Merkel's junior coalition partner, is playing its part by publicly insisting on a hard line with Britain:

The president of the European parliament, Martin Schulz, warned this weekend that a period of limbo would “lead to even more insecurity” and said the Brussels summit was the right time to begin formal exit proceedings.

There was pressure, too, from within Merkel’s own government: the head of her Social Democrat coalition partners, Sigmar Gabriel, called for “decisive action instead of indecision”.

Huffing and puffing and bluffing over Greece

The publicity/propaganda battle over Greece is pretty confounding to follow. Because some of it is substantial, some of it is bluff and the negotiating strategies of Greece and Germany - and the choir of conservative and social-democratic parties in the eurozone loyally supporting Angela Merkel austerity economics - are generating their own spins on matters.

Ioanna Zikakou gives an English summary of a couple of recent pieces from the German "quality" press in German Press: ‘Greece Might Have to Leave the Eurozone’ Greek Reporter 04/17/2015.

There will be no solution for Greece’s fiscal problem in the near future, said German Finance Minister Wolfgang Schaeuble, according to Süddeutsche Zeitung. However, as the newspaper reported, that is the only way for Greece to avoid bankruptcy, therefore the decision has pretty much been made. “It appears that Greece might have to leave the Eurozone,” the article concluded.

Meanwhile, Frankfurter Allgemeine Zeitung is predicting that Greece will have to take on another bailout program, in an article entitled: “Ad calendas Graecas – The crisis will last.” The newspaper referred to the various scenarios regarding the developments in the Greek debt crisis.

“It is likely that the conflict between Greece and its European partners will continue until autumn and it may result in an election,” noted the article. “Even if a solution for the liquidity problems faced by Greece is found, the debate regarding the country’s future is still pending. The fact that Athens will need a new support program in mid-2015 is almost certain.”

The two articles referenced are not linked. One appears to be by Claus Hulverscheidt, Schäuble fürchtet sich nicht vor Euro-Austritt Griechenlands Süddeutsche Zeitung 15.04.2015. I was unable to locate the Frankfurter Allgemeine Zeitung piece online under the title given. But it appears to be this article by Werner Mussler, which shows up in a Yahoo! search under the "Ad calendas Graecas" title, but online is entitled Und jeden Tag grüßt die Krise 17.04.2015, which contains the quote the Greek Reporter renders in English.

Schäuble is even more reactionary than Angie when it comes to austerity economics. Paul Krugman took him to task in the New York Times this week (That Old-Time Economics 04/17/2015):

The point is that it’s wrong to claim, as many do, that policy failed because economic theory didn’t provide the guidance policy makers needed. In reality, theory provided excellent guidance, if only policy makers had been willing to listen. Unfortunately, they weren’t.

And they still aren’t. If you want to feel really depressed about Europe’s future, read the Op-Ed article by Wolfgang Schäuble, the German finance minister, that was published Wednesday by The Times. It’s a flat-out rejection of everything we know about macroeconomics, of all the insights that European experience these past five years confirms. In Mr. Schäuble’s world, austerity leads to confidence, confidence creates growth, and, if it’s not working for your country, it’s because you’re not doing it right.

The article to which Krugman refers is Wolfgang Schäuble on German Priorities and Eurozone Myths 04/15/2015. Here's a sample:

My diagnosis of the crisis in Europe is that it was first and foremost a crisis of confidence, rooted in structural shortcomings.

He's invoking what Krugman has famously labeled the Confidence Fairy. Its actual function in any financial discussion pretty much means: you should do what business and financial lobbies want you to do. And a big part of what they want done is to fix those "structure shortcomings" through neoliberal reforms: privatizing government services, slash wages and pensions, get rid of unions, cut back public services of every sort while they are being privatized.

One thing Greece's standoff with Germany this year has illustrated is that two common features of the neoliberal "reform" litany, fighting corruption and ending tax avoidance, are just window dressing for people like Merkel and Schäuble and the One Percenters' Confidence Fairy they serve. When Greece proposed they would get aggressive on those two fronts in particular, Merkel and her EU toadies rejected it. Austerity and antilabor policies and privatization are the only "reforms" they care about.

Investors started to realize that the member countries of the eurozone were not as economically competitive or financially reliable as the uniform bond yields of the pre-crisis years had suggested. These investors began to treat the bonds of certain countries with much more caution, causing interest rates for those bonds to rise. The cure is targeted reforms to rebuild trust — in member states’ finances, in their economies and in the architecture of the European Union. Simply spending more public money would not have done the trick — nor can it now.

Merkel and Schäuble's confidence (fairy) game has produced measurable and impressive results. Though not impressive in a good way. Krugman:

America has yet to achieve a full recovery from the effects of the 2008 financial crisis. Still, it seems fair to say that we’ve made up much, though by no means all, of the lost ground.

But you can’t say the same about the eurozone, where real G.D.P. per capita is still lower than it was in 2007, and 10 percent or more below where it was supposed to be by now. This is worse than Europe’s track record during the 1930s.

The huffing and puffing and bluffing around Greece is likely to continue until July-August. I don't think Merkel wants to have Greece leave the eurozone. But her negotiating style in the euro crisis, especially in the summer of 2012, has been to let things slide to the point of a crack-up and then do just enough to stop imminent disaster. If she miscalculates, events could spin out of her control rapidly. And a whole army of Confidence Fairies won't be able to fix things for her.

Yet another really bad Munich analogy over Urkraine/Crimea

The Munich Analogy wore out it's usefulness decades ago.

But it keeps rolling along, one of those "zombie" kind of ideas that Paul Krugman talks about.

This time it's German Finance Minister Wolfgang Schäuble comparing Russia's recent actions in Ukraine/Crimea to Hitler taking a big hunk of Czechslovakia in 1938. (Ukraine-Krise
Schäuble vergleicht Putins Politik mit der Hitlers Süddeutsche Zeitung 31.03.2014)

I think it's pretty questionable whether German politicians, especially Cabinet Ministers, should be using Hitler analogies at all to cast themselves as the anti-"Hitler" good guys.

But this is Wolfgang Schäuble, Angela Merkel's Finance Minister since 2009. He is one of the main faces associated with Merkel's brutal austerity policies that are laying waste to the economies of Greece, Ireland, Italy, Portugal, Spain and now even France.

Those policies have included ousting the elected heads of state of Greece and Italy and replacing them temporarily with "technocrats" who would execute the austerity policies according to Merkel's and Schäuble's orders.

Greek cartoonist Yannis Ioannou recently depicted Schäuble along with Merkel taking tribute from the current government leaders of Greece in this 03/27/2014 cartoon. Schäuble is the one in the spiked wheelchair; Schäuble is disabled and actually uses a wheelchair, which certainly hasn't deterred him from playing the economic tyrant in the eurozone.

Wolfgang Schäuble is one guy who definitely should not be using Hitler analogies!

Tags: angela merkel, austerity economics, eu, euro, european union, france, greece, wolfgang schäuble

German Finance Minister Wolfgang Schäuble on further crushing Greece and Spain

German Finance Minister Wolfgang Schäuble may not be one of the biggest personal fans of his Chancellor and CDU party chief Angela "Frau Fritz" Merkel. But his down with her brutal, nationalistic austerity politics for their EU subjects partners to squeeze maximum benefit for Germany's One Percent at expense of the rest of the eurozone and of German workers.

The inspired Greek political cartoonist Yannis Iaonnou depicts Schäuble, who is disabled and always uses a wheelchair, as a man riding around in a tank. In this cartoon of 09/03/2012, Iaonnou shows him slicing up a hapless Greek leader (PASOK Party leader and Deputy Prime Minister Evangelos Venizelos) visiting Berlin:

Schäuble wants to do the same to Spain. And more of it Greece. Spiegel Online reports in Schäuble nennt Hilfsprogramm für Spanien unnötig 21.09.2012 that the Herr Finance Minister says Spain don't need no more aid, they just need to impoverish their people more demonstrate their credibility to financial markets by - what else? - austerity, austerity, austerity.

Actually, Spain is probably going to be asking for further aid and the EU will wind up granting it. Greece will also need additional aid if it is to stay in the eurozone, which German officials insist they must. But Schäuble rejected that concept as well. Some of this is obviously positioning in ongoing negotiations. But the starting point of Angie's government is to squeeze the "periphery" countries of the eurozone like Greece and Spain as hard as possible, even though it's wrecking their economies, causing widespread and largely completely unnecessary misery and increasing the actual risks to Germany of an eventual end to the euro.

Part of the irony of all this is that Frau Fritz' "ordoliberlism" is an ideology that sees itself as serving the needs of Big Capital by rolling the system in the victim countries back toward the 19th century, toward capitalism "red in tooth and claw" in the phrase of a famous 19th-century economist. But the "financial markets" which Angie and Schäuble invoke as something very like a deity to justify their vicious policies have for three years been punishing eurozone countries that have followed the austerity menu. Whether that represents cynicism or blind dogma on their part is perhaps a matter for discussion. That it represents astonishing irresponsibility is less doubtful.

In fact, Keynes biographer Robert Skidelsky talks about what a bad idea the austerity mania among European and American political elites really is in Return to capitalism 'red in tooth and claw' spells economic madness/Project Syndicate Guardian 06/21/2012:

Particularly in the United States and Britain since the 1980s, we have witnessed a return to the capitalism "red in tooth and claw" depicted by Karl Marx. The rich and very rich have become very much richer, while everyone else's incomes have stagnated. So most people are not, in fact, four or five times better off than they were in 1930. It is not surprising that they are working longer than Keynes thought they would.

That last reference is a concept of Keynes' that accurately recognized that the technological advances capitalism was producing actually created the possibility to minimize labor and increases leisure time, and therefor to lessen misery and poverty.

Even in the US, where the Obama Administration hasn't (yet) followed the drastic austerity policies being practiced in the eurozone and in Britain, we've all but lost site of the real possibilities implied by that concept of Keynes, which he described in the essay Economic Possibilities for our Grandchildren (1930). In the midst of the Great Depression - which didn't last as long in Britain as the current one has - Keynes wrote:

We are suffering just now from a bad attack of economic pessimism. It is common to hear people say that the epoch of enormous economic progress which characterised the nineteenth century is over; that the rapid improvement in the standard of life is now going to slow down --at any rate in Great Britain; that a decline in prosperity is more likely than an improvement in the decade which lies ahead of us.

But suicidal austerity policies didn't create the subsequent improvements then and they won't now. (See also my post Keynes on solving the "economic problem" 07/18/2012.)

Tags: angela merkel, austerity economics, eu, euro, european union, greece, keynes, wolfgang schäuble