The EU thinks it's saved the Euro, again.
It hasn't.
This is a deal, summarised here, that to coin the current vernacular, kicks the euro down the road until the autumn, but which has no hope of delivering a real solution.
Why not?
Because, clause 1, no one knows if the Greek people will, as yet, put up with the austerity that is demanded of them. But what we can say with certainty is that the austerity demanded will not deliver growth, whatever this document claims.
Because, clause 2, no one has worked out whether the EFSF can pay for this deal.
Because, clause 2, the IMF may not agree that the deal.
Because, clause 4, Germany may not in the end cough up enough cash to reflate the Greek economy, and even if it does, Portugal, Ireland, Spain and Italy need the same deal, and aren't going to get it. The awareness that a Keynesian solution is needed is hinted at in this clause, and then firmly run away from.
Because, clause 5, when it comes down to it the private financial sector will prevaricate, arbitrage, delay and generally obstruct any deal, seeking better advantage for themselves over all others who might participate, and that will mean that this provision will fail to deliver.
Because, clause 6, Greece is not an exception and ignoring that fact means that clause 7 is farcical: anyone who believes that the Irish government is going to pay in full debt that is beyond any imagination that it can settle is naive in the extreme: those signing this deal were.
Because, clause 8, this requires fiscal union and a fundamental reform the way in which the European Central Bank works, and getting agreement on that after the heat of the moment is very unlikely;
Because, clause 9, the Germans aren't going to guarantee other euro states debts forever;
Because, clause 10, the Irish will try to renege, for all their worth, making a deal on tax;
Because, clause 11, reducing deficits to 3% of GDP is going to result in mass poverty, the destruction of welfare, the ending of healthcare provision, misery in old age, massive destruction of the state in Europe, and in turn the destruction of GDP itself. A commitment to the economics of the madhouse destroys the credibility of this agreement: only a Keynesian solution can solve Europe's crisis now, and this clause commits Europe to poverty. Clause 12 does not change that. The democratically elected governments in Europe will reject this package: their electorates will demand that they do so.
Because, clause 13, creating an economic police to impose the straitjacket will not make it work;
Because, clause 14, reaffirming neoliberal economic policies is equivalent to signing a Euro suicide note;
Because clause 15, you can't tell banks how to rate their loan books - unfortunately;
Because, clause 16, by the time we get to October all these weaknesses will be apparent.
And yet, I admit, all of those are just detail.
At its core this deal does not work for a number of much more fundamental reasons. The first is the euro itself cannot work: even with massive fiscal reallocation of wealth within the Eurozone the stress would remain too great: these economies are too disparate to have one currency.
Then there is the fact that, like it or not, , Ireland, Portugal, and almost certainly Spain if not Italy, add debts that they cannot support and therefore, like it or not, European banks holding those debts are at serious threat of insolvency. This deal does nothing to address that issue.
Just as this deal does nothing to really stimulate growth: it recognises that without growth Greece cannot repay its debts and yet the rest of Europe it demands cuts in government spending that can only result in a move towards stagnation or recession across Europe as a whole for decades to come.
In other words, this is a fundamentally flawed deal, and the flaw can be simply identified: it is that this deal puts the stability of money above the importance of real economic activity that generates wealth for the people of Europe. This is about bankers, yet again, and not about putting food on the table. This is about preserving wealth and not about creating prosperity. This is about maintaining division, but not about delivering hope.
And because it fails to address any of those issues, this deal will fail.
Only when we take on the banks; only when we realise that real wealth is based upon the full employment of well-paid people and only when we realise that it is the duty of governments to deliver hope can we go forward. This deal doesn't do that, which is why the next version will be negotiated soon.
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Richard – I agree with most of your points against the deal. However, where does the Greek government get the cash to creat full employment and growth? Where does your preferred Keynsian stimulus come from?
Well, from tax would help in their case…
But actually literally from borrowing from themselves: they need to be able to print the money to provide the liquidity the real economy needs to function
That’s unrealistic and you know it. They can’t print money, they can’t try QE and they can’t devaule. So what should they be doing?
Doesn’t the second point require them to leave the Euro. Any replacement currency would immediately devalue against the Euro and other currencies which would be inflationary. Turning on the printing presses would be dangerous.
Which means they have to get out of the EU, does it not?
BB
Yes, sorry not to state the obvious and inevitable fact
There is no way that Greece can recover whilst it is in the Euro: it cannot price itself into work that way
It can with its own currency
As for its own currency, that is bound to be devalued, of course, that is inevitable, but note that part of the EU process is a Marshall plan for Greece: that is the price the countries of Europe will have to pay for their failed euro experiment: only by transferring sufficient assets to re-establish these economies are many sure that they can fully participate in the marketplace, which is ultimately necessary for the well-being of Europe as a whole.
I can’t help thinking that clause 11,with its guaranteed demolition of great swathes of society, is the heart of this document. If you wanted to destroy quality of life for all except the very wealthy, this is the way you’d go about it. The rest of it is just padding I think.
I know I’m at risk of repeating myself on this general subject 🙂 I don’t believe we’ll find a solution until more people accept the unending malevolence of government, that this is purpose-built to undermine and disable all but the very rich.
BB
I think most clear thinking people will agree with you, Bill and as Richard said above in different words, the only real answer is to throw off the shackles of usury. Assuming we cannot achieve this, it may be possible, for those who cling to need for the Euro, to split it into two tiers, so that the member countries with weaker economies, could opt for the lower, in effect, devalued currency. The exchange rate could be reviewed from time to time.
This would only delay the ultimate collapse that usury inevitably brings, but it would create more thinking time and perhaps avoid dragging economies down to the level of poverty.
Just reposting my previous comment, to reinforce the notion that it’s actually the Euro itself that is the problem.
Richard, I think we must also recognize that the Guardian sees various weaknesses in the so-called Rescue Package. For a different view of this Package, your readers might also like to look at Bill Mitchell’s take on this …..
see http://bilbo.economicoutlook.net/blog/?p=15363
“Which brings us to our first possible solution for the current woes. Break up the euro. This is simple and would be a good economic solution in the medium to longer term. However, it would also be an entire nightmare in the short term and, yes, you’ve guessed it, would be illegal. For, as we know, the whole point about the European Union itself is “ever closer union” and so everything has been set up to make it easy enough to join the euro, but you’re not actually allowed to leave once in”
?
http://www.theregister.co.uk/2011/07/22/saving_the_euro/
I totally agree, the idea of one currency across many countries with all their differences is a utopian dream of an idealist.
My personal views on the ridiculousness of the idea of a single currency (euro) aside, the situation with Greece is very scary, and looking at the evidence how do they move forward towards growth, a fact we are all now too aware of is that paying tax seems to be an optional cost in Greece, with that endemic attitude towards tax coupled with no doubt in the not too distant future widespread revolt once the austerity measure kick in, then what?
Every country that has joined the euro has seen prices/costs increase, substantially, it happened in Spain, Cyprus and not doubts the rest ………. Why are they so intent on having a single currency, the old system of having your own currency at least allows for QE.
So Greece can now default, but looking at the sheer size of the debt I wonder how the average German feels about where their tax money is going?
Then we have even bigger debt problems with the size of that of Spain, Portugal ……..
It’s a mess!
Austerity is another word for national asset stripping …. this is neoliberal capitalism digging its own grave.
I am afraid it’s making us dig our own graves, or we are letting them make us, more accurately.
I suppose the greatest stability is death.
No more people to gum up the models
As someone with less than fond memories of the Sterling Area it looks like deja vue all over again.
[…] A longer version of the article is here […]
The EU was formed (originally) with the view to prevent economic hegemony that led to the “European Civil War: 1890-1990” – as the LSE puts it. A perfectly fine and, I believe, deliverable ideal.
Unfortunately, the Euro was not implemented with a proper central banking approach, which exposes the whole currency to private sector banking, i.e. the peripheral economies are charged higher interest rates than the central economies (a side note to this is that economic theory would suggest the lending banks are in the central economies, exacerbating the whole problem of a ‘rich’ centre and a ‘poor’ periphery). This effectively undermines the principle ideal of the EU by making the central economies richer, and the peripheral economies poorer (you can actually see this play out in the UK with the likes of the Bombardier/Siemens scenario).
Yesterday’s solution is what we call a symtomatic fix – exactly as you say – one which puts off the inevitable, and in fact makes the situation worse.
A potential solution would involve a central bank taking on all the private sector debt for Europe, and offering high interest rates to the European centre, and low interest rates to the peripheral economy. This would in fact barr economies from taking on private sector debt directly.
Likewise, there would also be higher taxes in the centre, and lower taxes in the periphery (which would mean the public sectors of the peripheral economies would need some sort of fiscal imputus to retain equality for the weak and the vulnerable).
That said, I also completely agree that a Keynesian spell in Greece is required, although this is the point where the idea of a Federal Europe will be tested, as in reality this means Germany funding Greece….
Perhaps we could pursuade the ‘tax havens’ to deploy their excess funds accordingly?
It’s a crazy idea, but I believe global taxation should and could achieve global public good.
This whole process could be short-circuited simply by asking those certain international bankers, who claim to be philanthropists, to hand bank funds from their enormous reserves. Perhaps it might even make them feel good!
“This effectively undermines the principle ideal of the EU by making the central economies richer, and the peripheral economies poorer ”
Some might suggest that has always been the whole point of Europe, the transfer of wealth from the poor to the rich. I feel I’m seeing this principle in action everywhere lately.
BB
To my simple mind,the whole European dream of trying to integrate economically all 27 states with such diverse economies was doomed to failure. From the outset I think the original 6 and then 10 members might have stood a fighting chance,both politically and economically,of complete integration. But then to continue to expand the EU to such an extent, before adopting a sound federal constitution,and then a common tax system and currency was the utmost folly.For example,it made Germany adopt a currency less valued than the “hard” DM-much to the advantage surely,of their export trade,and their economy-but sadly not to the PIGS nations and others, who have to compete-some of the results of which we now see-big time. A truly United Europe could just have applied “Federal Aid” -and not adopt the current “fudge” on the PIGS woes agreed yesterday. The caveat might be that even a United Europe could still eventually have found itself in the same position as the U.S. does now. I just hope the European Dream does not turn into a ghastly nightmare-but it surely won`t be much fun.
You are right. Europe remains too diverse to have a single currency.
In the U.S, its not just that there is political union. There is a common language, similar standards all over the union.A relatively poor state like Alabama, for example, can really take advantage of its lower cost structure and attract investment and someone who invests in Alabama will not find a totally different system, as would happen if someone from the UK invested in Greece or Italy.
Allowing Greece into the union and the euro was a mistake, probably done for political purposes. They are just not transparent enough, and until that is not fixed they will always be a problem. Maybe they should be politely invited to leave…..
I think we are letting them create more problems for us than we already have, its about time we wakeup to the reality that EU hasnt done anything significatnt for the poor.
Most people will argue that the poor of Spain today, for example, are better off than twenty years ago….their houses are full of electronic gadgets, they have cars, their country has better hospitals….twenty years ago, there were very few dentists.
Before joining the European community, in the mid 80s, the Spanish unemployment rate was still 20%, and average salaries were lower.
The problem today for Spain and the others is that the world has become an extremely competitive place….. and those countries that did not prepare for this reality when they had the chance find themselves in a very difficult situation.
Richard:
I agree with virually all your points and you’ve probably seen my EUObs piece of 22 July (http://bit.ly/no8S4F0). But I disagree with:
“At its core this deal does not work for a number of much more fundamental reasons. The first is the euro itself cannot work: even with massive fiscal reallocation of wealth within the Eurozone the stress would remain too great: these economies are too disparate to have one currency.”
Assuming you mean this as an economic, not a political, statement, this argument is a variant of one-size-fits-all. Common currency areas prevent exchange-rate speculation (although the EA as structured has replaced this by bond-market speculation.) States of quite disparate productivity levels can be brought together if a common fiscal policy is supplemented by a common wages policy (NOT a common wage) which limits wage growth to labour productivity growth AND uses fiscal instruments to accelerate productivity growth in the poorest regions via investment. Migration is a complementary factor.
This solution is in principle quite feasible—look at the USA where migration and govt investment incentives (mainly under the New Deal) did much to reduce productvity differentials between regions. Such a solution is necessary in the Euro Area to resolve underlying trade imbalances for a start. Yes, there are (perhaps unsurmountable) political onstacles not the least of which is the right-wing short-sightedness of the EA political class, but the economics is in principle doable.
The final destination of the Eurozone is the most important question. Will Hutton puts it well:
http://www.guardian.co.uk/commentisfree/2011/jul/24/euro-greece-bailout-british-eurosceptics
The route to a workable solution for the Eurozone can be reached via numerous small steps (and misteps). We shouldn’t necessarily expect to reach a stable, coherent solution in one jump. It may take the resolution of successive crises to cement the economic structures with the approval of the populations.
Although the EU/Eurozone is not currently working well, it represents our best long-term opportunity of confronting the systemic problems Richard Murphy / Nick Shaxson regularly highlight. Powerful interests will always find ways to split the opposition if it is organised as a collection of nation states.