Monday, July 13, 2015

Europe's Regime Change

Events of recent days have been chilling. We've witnessed a shocking exercise in the power of non-democratically-elected officials who meet behind closed doors (without even any formal minutes taken) to bring a debtor nation to the brink of humanitarian disaster while dictating the terms of an economy's dismantling. It's like buying a new car, falling impossibly behind on payments, then having an army of thugs show up to ransack your house at four in the morning; and meanwhile they steal your clothes on the way out.

This is how business is done now?

Somehow, the new Germany feels an awful lot like the old Germany.

FT's Wolfgang Munchau notes that Greece's creditors have "destroyed the Eurozone as we know it and demolished the idea of a monetary union as a step towards a democratic political union." Munchau goes so far as to say:
In doing so, they reverted to the nationalist European power struggles of the 19th and early 20th century. They demoted the Eurozone into a toxic fixed exchange-rate system, with a shared single currency, run in the interests of Germany, held together by the threat of absolute destitution for those who challenge the prevailing order.
But it was not just the brutality that stood out, nor even the total capitulation of Greece. The material shift is that Germany has formally proposed an exit mechanism. On Saturday, Wolfgang Schäuble, finance minister, insisted on a time-limited exit — a “timeout” as he called it . . . A member state pushed for the expulsion of another.
Hans-Werner Sinn, architect of "temporary exit."
The (still entirely theoretical) notion of temporary exit was first broached in Germany by euroskeptic Hans-Werner Sinn, who talked about it (and warned of the consequences of bailout economics) in a powerful, prescient 2012 interview with Der Spiegel. The idea actually makes a certain amount of sense. The only way to achieve a currency devaluation (and accompanying renormalization of a struggling import economy) is for a country to leave the euro and go back to a non-pegged currency. But then, in the event of success, why would such a nation choose to re-join the Eurozone later? (And in case of failure, would it be allowed back in?)

We may yet see regime change in Greece, but meanwhile the real regime change is in northern Europe, where (let there be no mistake) Germany now rules all matters money-related, with an iron fist. And it does so via a non-democratically-elected body that, for all the talk of "rules," operates beyond the law and favors certain members over others.

In Greece's case, the Schäuble/Sinn doctrine of temporary exit is a disingenuous ruse. As UC Berkeley's Barry Eichengreen points out:
Given Greece’s collapsing economy and growing humanitarian crisis, the government will have no choice, absent an agreement, but to print money to fund basic social services. It is inconceivable that a country in such deep distress could meet the conditions for euro [re-]adoption – inflation within 2% of the Eurozone average and a stable exchange rate for two years – between now and the end of the decade. If Grexit occurs, it will not be a holiday; it will be a retirement.
The Germans know full well there is no such thing as "temporary Grexit." They also know there is no way Greece can survive the punitive provisions of the agreement they've now agreed to enact (even supposing the Greek parliament would sign off on such a ludicrous package). The ultimatum Alexis Tsipras has taken home with him requires primary budget surpluses (net of interest payments) rising to 3.5% of GDP by 2018, which can only worsen Greece’s depression. (The spending cuts that would enable this come straight out of GDP.) As Greece's depression deepens, deficit targets will be missed, triggering additional spending cuts and accelerating the economy’s implosion.

As Eichengreen says: "Eventually, the agreement will trigger Grexit, either because the creditors withdraw their support after fiscal targets are missed, or because the Greek people rebel. Triggering that exit is transparently Germany’s intent."

Therefore, one can only hope that Tsipras is already hard at work on a Plan C, which would involve somehow wresting control of Greece's banks from the Troika before massive bail-ins occur, printing a new currency, repudiating ECB debt, and charting a new course for Greece. (It may, of course, be too late for any of this; the Tsipras government could be toast before the week is up.)

Meanwhile, the lesson for "periphery nations" (including Great Britain and France, in the larger sense) is clear: Don't expect help from your peers if you enter the Eurozone. If you get in trouble, your peers will break your goddam legs  take your furniture, your clothing, your food, and your dignity, and kick you to the curb, calling you names the whole while.


UPDATE 14 July 2015 1850 hours UTC (GMT)

The Greek parliament is hours away from rejecting voting on the suicide package Tsipras brought home with him. It's unlikely to pass, of course. More likely is that a new coalition government will have to form, or elections will need to be held; but is there time or money for that? ATMs will run out of cash soon. The cash economy (barely working, now) will falter. Will basic necessities run out? Will a miracle happen? I pray Greeks will continue to amaze us with their incredible ability to endure the unendurable. I fear what could happen otherwise. I fear (dare I say it?) that Germany will soon have blood on its hands. Again. Already.

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