Friday, February 20, 2015

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.

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.


  1. Centralizing the Fiscal and Monetary policy, thereby creating a United States of Europe is what the primary aim is, believe me (trying not to sound conspiracy minded). Which is what Nigel Farage and the like are all against. It is an effective concession of sovereignty to an undemocratic bunch of bureaucrats, thereby giving them even more power de facto. I am wholly against the idea of a strong fiscal union because of political reasons. It also vastly ignores the impacts of cultural differences with regards to tax policy (a surprising factor that is constantly overlooked).

    Yet, it is definitely a strong possibility, and I can only hope that the Eurosceptics actually end up doing something.

    1. "Centralizing the Fiscal and Monetary policy, thereby creating a United States of Europe is what the primary aim is, believe me (trying not to sound conspiracy minded). "

      The aim of whom? Syriza? Podemos?

    2. Frankly, fiscal union is not the aim of current EU leadership.

      They want monetary union with highly ignorant and dangerous fiscal conservatism (derived from standard neoclassical economic theory), with their delusions of "expansionary austerity" and labour market deregulation as a way to get economic growth.

    3. The aim of people like Juncker, Schulz and the people pulling their strings.

      I understand that an expansionary fiscal policy is desperately required, but how does labour market deregulation affect growth?

    4. For reasons explained by Keynes in Chapter 19 of the General Theory:

      The aggregate level of employment is not driven by the wage rate. Cutting wages has disastrous knock-on effects such as gutting demand and causing pessimistic expectations -- contrary to the neoclassical model of labour markets and the economy.

      The Eurozone -- contrary to people who think it is the new "communism" or "socialism" -- is run by using a deeply flawed version of economics called "neoclassical economics" with fiscal conservatism and an obsession with cutting wages.

      Neoclassical theory was refuted by Keynes back in the 1930s.

  2. I think that the current developments in Greece might be the beginning of a movement to end the politics of austerity. A collapse of the Eurozone would be devastating for the people of all European Countries Germany as well. Schauble and Dijsselbloem have only their finger in a dyke behind which a sea of austerity weary people.

  3. The attitude of Germany to Greece throughout this debacle has shown that a United States of Europe is completely impossible.

    Compare that to the response of the UK to Scotland's threat to leave the UK last September.

    The UK is still, just, a single country with a shared sense of responsibility between its people. London may moan about the provinces, but they have not yet starved them to death completely as Germany has with Greece - despite Greece injecting spending into Germany throughout the 'good years'.

  4. But why is nobody talking about the only possible solution that can be done under surplus enforecement agreement. One solution that is considering saving banks and saving budgets and saving private debtors all at the same time. It is debt forgivness, but a debt forgivness that is not asked from international lenders but inside lenders and is hiden from budget accounting.
    a) overindebted banks
    b) overindebted private subjects
    c) deleverage(defaults) is destroying funds for government debts from interior

    Personal and corporate bankrupcy in USA uses the fact that banks create money by issuing credits and destroy money by credits being payed off. Bankrupcies allows banks to erase liability side without receiving payments (destroying record of debt without destroying money). Banks loose projected income which they lost already, they only have to accept it trough books. And owners get to keep properties. It benefits banks.

    How to achieve mass bankrupcy through the system without going to bankrupcy court? Specifically that there is no such institution in Greece and Greece can not print euro? But Greece could print something very close to money that would not be the subject to Troika review. Especially if it is very short duration money.

    Solution: Print euro denominated value of certificates that is accepted only by banks in lieu of credit payments and with duration of 45-60 days, to every Greek every month in amount of €100. This can be used to distinguish debts of greeks and corporations instead of real euros. Real euros will stay with people instead of being destroyed by banks. Those that do not have debts in banks could open line of credit payable by these certificates and then pay off utility and tax bills with euros from credits.
    In short, banks would destroy certificates instead of euros and people and corporations will have more left. this is in fact and effective increase of incomes which will improve agregat demand. This will lower defaults of old debts, reduce foreclosures, and increase euros in economy without printing them. It will stop delevraging process that is decimating banks and government debts. Credits that bank issue are the source fund for government debt. Stoping credit defaults will stop needs to recapitalize banks by government money and produce additional funds for greek government debt.

    The danger is that this will increase demand for imports and that is another set of problems, much easier to handle.

  5. Jure: Instead of handing out a "basic income" of sorts to Greek citizens, perhaps a related tax anticipation note (TAN) approach would be more effective in exiting austerity without exiting the euro. See here: