European politicians hammered from both sides

February 16th, 2010

Share |

As observers of what’s happening around the world, we find the spectacle of what’s happening in Europe as juicy as soap opera plots. With so many internal contradictions within the cast of characters, we can be sure the outcome will be unpredictable and explosive (literally). Even if the Greeks get bailed out tomorrow, you can be sure that there will be another episode in the drama that will throw a surprise twist to the story.

We will look at the first character in the cast- Germany. At the heart of the European Union is Germany. Without Germany’s economic strength under-girding the union, the euro-zone economy would only be a pointless rump. Under-girding the German economic strength is the Teutonic spirit of discipline and efficiency. The brutal efficiency of the Germans allowed their exports to increase steadily both as a share of total European consumption and as a share of European exports to the wider world. Reflecting the Teutonic discipline of the German people, most of them are against the idea of bailouts. As Most Germans want Greece thrown out of euro reported,

A poll for popular newspaper Bild am Sonntag found that 53pc of Germans wanted Greece to be expelled from the euro if necessary in the coming months. Two-thirds were adamantly against German money being put towards a bail-out of the troubled country, the paper also found.

Thus, any German politician contemplating a bailout on Greece will have to keep one eye on the public opinion. This is something that will be looming on the back of Angela Merkel’s mind during the negotiations for a bailout package.

German politics is only one impediment to bailouts. There are also legal impediments to bailouts. Article 104 of the Maastricht Treaty (and Article 21 of the Statute establishing the European Central Bank) actually forbids one explicitly. Thus, for legal reasons, a bailout cannot be called a “bailout.”

Yet, despite the reluctance of the German people to save Greece, the German banking system (and by extension, the European banking system) is reportedly to be exposed to Greece. This is another dilemma faced by the German government.

Contrast the Teutonic spirit of the Germans with the profligate and undisciplined ways of the Greeks. The Greek government’s budget crisis did not arise out of the blue. It was several years in the making. As European Central Bank Chief Economist J?rgen Stark said in an interview (see European Central Bank Chief Economist: ‘Everyone Is a Sinner at the Moment’),

An economy doesn’t lose its competitiveness overnight. Greece covered it up for a long time with an extremely generous spending policy. For example, consumer spending was stimulated with pay increases in the government sector. We here at the ECB were vocally critical of this development several years ago.

Today, we even heard from a foreign news report that the Greek government, with the aid of Wall Street, used Wall Street’s dodgy tactics of using currency derivatives to disguise loans. Not only that, there were accusations of the Greek government using doctored statistics to cover up their dismal economic performance. The rot was reportedly extended to the grass-roots level- Greek citizens as a whole, tend to under-declare their tax liabilities. We have no comment on how true these allegations were, but all these are indicative of the rot in the system.

Thus, from the German perspective, any rescues will have strings attached. In fact, the strings will be very stringent. The highly disciplined German people will undoubtedly not tolerate anything less. In practice, this may mean German control of the ECB and Greek fiscal policies. Whatever the outcome of the conditions imposed on a bailout, it has to be as unpalatable as possible so as to send a signal to the other profligate PIIGS countries (see Currency crisis: first countries in the line of fire- PIIGS) not to expect any moral hazard.

If only it is that simple.

The Greek people, on the other hand, are already protesting against any austerity measures to rein in their government’s budget deficits. As this BBC news article reported,

Thousands of Greeks have rallied against deficit-cutting measures during a national public sector strike.

The unions regard the austerity programme as a declaration of war against the working and middle classes, the BBC’s Malcolm Brabant reports from the capital.

He says their resolve is strengthened by their belief that this crisis has been engineered by external forces, such as international speculators and European central bankers.

“It’s a war against workers and we will answer with war, with constant struggles until this policy is overturned,” said Christos Katsiotis, a union member affiliated to the Communist Party, at the Athens rally.

We can imagine that should there be any German-style discipline imposed on them, the entire nation will descend into flames. This is something that will be looming in the back of Greek Prime Minister George Papandreou as he enters the negotiation table. Judging from the mood of the Greek people, they are ripe for the rise of a demagogue blaming their country’s woes on international ‘speculators’ and European central bankers. So, even if the Greek government accept the stringent conditions attached to a bailout, the Greek people will not. The question is, will the Greek government collapse as a result? Investors buying into the ‘good’ news of a Greek bailout may well be confronted with such a Black Swan event within a relatively short space of time.

So, would the path of least resistance be an excommunication of Greece from the euro?

Again, there are complications. Firstly, there is no clear-cut legal mechanism to ‘expel’ a nation. Next, the question will be what to do with the debt owed by the Greek government? Also, should that happen, what will the other PIIGS nations (that are next in the line of fire) think?

There are many twists and turn in this drama. That’s why, up till now, the only progress so far are announcements of solidarity and intention.

An economy doesn’t lose its competitiveness overnight. Greece covered it up for a long time with an extremely generous spending policy. For example, consumer spending was stimulated with pay increases in the government sector. We here at the ECB were vocally critical of this development several years ago.

Tags: , , ,