Wednesday 19 October 2011

The Day before the next Greek Austerity Vote

The centre of Athens was blocked today as hundreds of thousands of protesters assembled in different areas to protest the next instalment of Greece’s austerity package: a vote to implement certain measures of the medium-term fiscal adjustment programme.

This law, which includes streamlining and reducing salaries in the public sector, reducing pensions, reducing tax exemptions and eliminating collective bargaining agreements, will almost certainly tip Greece into outright depression if it is passed. Opposition against the law is widespread and manifest, both within Parliament and on the street.

The severity of the cuts has been documented by international media. The Financial Times ran an article on October 17th which stated that

Research by the Financial Times shows that the planned tax increases and spending cuts for 2011 are equivalent to 14 per cent of average Greek take-home income – or EUR 5,600 ($ 7,707) for every household.

The impact is double that brought about by austerity measures in the other two Eurozone countries subject to international bail-out programmes, Portugal and Ireland, and nearly three times that of Spain.

One immediate result of this vote will be a drastic decline in consumer disposable income. Without consumer spending, the Greek private sector will not recover: the recession will be prolonged into a depression. And in a depression, no amount of grand ideas for tax collection or privatisation will work. Given that the Troika is directly responsible for these policy recommendations, it should also be made directly responsible for their consequences.

As if this were not sufficiently damaging, a number of regrettable actions are taking place which threaten not just the Greek vote, but the financial security of Europe as a whole.

Stronger Supervision
The first such action is the threat of stronger supervision. Kathimerini’s English edition reported today on a plan apparently being discussed to give the European monitoring mission in Greece “executive powers” to implement reform. As Kathimerini and Reuters report:  

Support for stronger supervision partly reflects dissatisfaction in countries such as Germany, the Netherlands, Austria and Finland with Greece and its failure to bring its finances more rapidly into check.

Emphasizing the need for far tighter oversight of Greece's economy, one eurozone source who supports the idea of giving the Commission's task force more executive power said: «It's that or not getting the money."

The source added that there was a need to "take over some of the sovereign functions of the state" to "get the machine running."

"It is assistance imposed from outside. It's where outsiders take over some elements of the operation," he said of the proposal, which could involve deploying several hundred technical experts on the ground to administer Greece.

"The idea is living in some capitals. There is no alternative."

Such “executive power” would be a disaster. It would intensify popular resistance against austerity and reform, and would ultimately lead to disaster as Greeks from all walks of life—whether civil servants or shopkeepers—resist was appears to be a foreign occupation.

There are, in fact, alternatives. The best one is to monitor the conditionality of funding, which is exactly what is taking place now. If Greece has not made the requisite progress, then the funding should be cut. This is the theory. In practise, it should also be mentioned that many of the policy prescriptions made by the Troika to date are totally irrelevant to the actual economic situation on the ground, and appear to have been drafted without any regard for a simple return-on-investment prioritisation.

Continuing European Disagreement
The second major problem is that of the continuing fundamental disagreement between the major Eurozone partners on the implementation of the July 21st agreement, and on the operation of the European Financial Stability Fund (EFSF).

Last weekend, the G20 gave a clear mandate to the Eurozone to solve its problems, and fast. There have been any number of additional warnings to this effect over the past two months. Unfortunately, the Germany government responded as follows:

German Finance Minister Wolfgang Schaeuble said on Monday that even though European governments would adopt a five-point platform to address the crisis, a definitive solution would not be reached at the Oct. 23 European Union summit.

This is exactly the wrong approach to take. While it is undoubtedly true in “factual” terms, what is important now is to restore confidence in the European financial system by achieving a workable plan, not hedging things into the future. This has been a continuing problem with Minister Schauble, to the extent where it is difficult to see why the lesson has not already been learned.

This apparently lackadaisical approach led President Sarkozy to respond today in the Financial Times with a rather pointed comment towards the Eurozone’s largest economy:

In share contrast to signals from Angela Merkel, Germany’s chancellor, playing down the chances of a breakthrough, President Nicolas Sarkozy said that “an unprecedented financial crisis will lead us to take important, very important decisions in the coming days."

Raising the sense of urgency, the French president added: “Allowing the destruction of the euro is to take the risk of the destruction of Europe. Those who destroy Europe and the euro will bear responsibility for resurgence of conflict and division of our continent.”

This is very well stated indeed.

A Deteriorating Financial Situation
These debates are occurring against the backdrop of a worsening financial situation. Spain’s sovereign debt was downgraded yesterday by Moody’s. British and Italian banks have been downgraded, as was Italy 2 weeks ago. It is painfully apparent that the risks to the European financial system are growing.

These risks stem not merely from the threat of a sovereign Greek default, but from a range of factors, including the need to roll over Spanish, Italian and Turkish debt in 2012; rising non-performing loans and toxic debt on the books of several banks; outrageous leverage and derivative positions in other banks; and a collapse of the commercial real estate sector.

As has been stated before, the Eurozone needs to get ahead of the policy curve immediately: there is no more time for delay. Concocting nebulous plans about sending a European “monitoring mission” with “executive power” to Greece; re-opening the private sector involvement; refusing to reinforce the EFSF’s lending capability; continually raising the prospect of a Greek default: none of these actions support the stated objectives of the bail-out, let alone of common sense. 

Combined with a poorly-crafted recovery programme and a worsening international environment, the net effect is to exacerbate an already impossibly-difficult situation.

Tomorrow, the Greek Parliament votes on yet another regressive austerity bill, at the “requirement” of its Troika partners. While it does so, it receives nearly no international support, even though the ultimate purpose of this austerity bill is to repay loans at face value, with full interest, made by European banks, and to a lesser extent by European governments, who have bailed out their own banks. 

With an economic depression arriving in Greece no matter which way the vote turns, and with policy error compounding policy error, it is difficult to see how this situation could turn worse. And yet there are strong chances it might.

At least in the short term, I expect the emergency meeting called by Nicola Sarkozy in Berlin tonight to bear fruit, providing guidance to the October 23rd meeting. I also expect a “half-good” plan to emerge from this meeting, and a short-lived relief rally early next week.

However, the chances are manifest that, given the previous poor track record, the meeting will not be conclusive, or the recommendations not helpful. In this case, trust and confidence in the Euro project will decline still further, touching off another financial panic.

© Philip Ammerman, 2011

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