Greece versus the Eurozone

Some of the latest news can be read here:

Ben Chu, “Fears of a Greek exit from the euro rise as olive branch to creditors gets short shrift,” Independent, 19 February 2015.

Rose Troup Buchanan, “Greek bailout: Germany shatters hopes of deal after rejecting proposal for six-month loan extension,” Independent, 19 February, 2015.

Lamiat Sabin, “George Osborne warns of ‘full-blown crisis’ as Greece standoff with eurozone continues,” Independent, 20 February, 2015.

Bill Mitchell, “Friday lay day – Cave in or Trojan Horse?,” Billy Blog, February 20, 2015.

I recommend Bill Mitchell’s analysis in particular, who argues that even though Greece’s latest letter was a prima facie “cave in” the German Ministry of Finance still rejected it, apparently because they think it is a sly “Trojan horse.”

In essence, the Germans rejected Greece’s demand for a six-month loan extension. It remains to be seen what the formal EU reaction will be, as a meeting of the 19 Eurozone finance ministers is to be held today.

Without some kind of deal by 28 February, Greece’s government and its banking system could be thrown into chaos, and some think that this could be the trigger for a Greek withdrawal from the Eurozone. Already there are signs of an emerging general bank run on Greek banks.

Of course, the future is uncertain, and maybe things will be worked out. Behind the scenes, it sounds like some kind of deal will be hammered out by next week. But what kind of deal? Will it just be an end to extreme austerity and some type of mild stimulus for Greece? That will not be enough to repair the damage in Greece. It will just mean a mild recovery but mass unemployment for years on end. What is needed in Greece is a radical stimulus with large-scale public investment and social spending, all supported by the EU and with measures to prevent any balance of payments crisis (and, frankly, that is also needed throughout virtually the whole EU). The chances of the EU agreeing to this are so low as to be laughable.

And the fact is that even some mild sop to Greece won’t be enough to stem the rise of Euroskeptic, anti-Eurozone and even anti-EU parties across Europe. If Greece ends up (1) agreeing to accept austerity (with perhaps some cosmetic concessions by the EU) or (2) wins some concessions with a mildly expansionary policy, just imagine how this will look to European parties like the Spanish left-wing Podemos party. In case (1), they will conclude that no government that promises to remain within the EU can expect any real end to austerity unless they threaten to leave the EU and really mean it. Unless you are really prepared to accept the short-term pain of leaving and also seriously threaten to default on loans, expect no mercy. In case (2), is that good enough? Will parties like Podemos fold and accept nothing but mildly expansionary policy?

Some on the left think that the current developments in Greece might be the beginning of a movement to reform the EU and turn it into a “United States of Europe” with a central fiscal policy and Keynesian stimulus throughout the union. I fear this is an unrealistic and utopian fantasy.

More likely, the current Eurozone needs to collapse before something like a “United States of Europe” can be constructed.

Update
James Galbraith is interviewed in the video below on Greek television on Varoufakis’ negotiations with the EU.



The European Central Bank (ECB) is reportedly making contingency plans for a Greek withdrawal from the Eurozone, which, they think, will be manageable. But the real question is: how probable does the ECB think an exit will be?

You can also get live updates on the Eurozone finance ministers’ meeting scheduled for today here.