Reliable sources tell me that the troika has drawn a surprising
line on the sand: Either the Greek government agrees to force
upon the private sector trades unions an immediate reduction
in minimum wages with immediate effect (plus the dismantling
of all awards regarding dismissal compensation and limitations),
or the next instalment (or tranche) of EU-IMF-ECB loans to Greece
will be withheld. Noting that even Mrs Thatcher took years before
she could impose her iron will on the trades unions, it is clear that
the troika is asking the Greek government to commit to a change
that it may be both unwilling and unable to effect. If this is true,
two questions arise:
QUESTION 1: Why do the representatives of the Greek state’s creditors
gamble the progress of their loan agreement with the government of
the day on an immediate diminution of wages and awards that concern
the private sector? While the IMF has had a long held fixation with lower
wages (and has never left an opportunity to dismantle collective bargaining
agreements unexploited), it is curious that the troika seems prepared to risk
derailing an already hugely expensive Greek bail-out for the sake of such an
ideological project. Granted that that the troika may think of the present
moment as its golden opportunity to beat a demoralised Greek government
into total submission (especially given that no Greek state bonds will mature
until well into December), a question remains about the troika’s choice of
target: Why aim at the already pitifully low private sector wages when there
are so many larger fish to fry elsewhere within the Greek state (e.g. public
procurements, pharmaceutical bills, fee-free Universities etc.)?
QUESTION 2: The second question concerns the troika’s very thinking:
Can they really believe that a wage reduction for the lowest paid European
workers (who are vying for this ‘honour’ with their Portuguese counterparts)
will, in the midst of a rampant recession, help boost private sector economic
activity? Do they seriously think that entrepreneurs will seize upon such a wage
reduction to invest in the Greek economy handsomely enough to generate a
modicum of growth? As I am loathe to impute inanity on other parties, I shall
assume that they cannot possibly believe this. I shall, therefore, give the troika
the benefit of the doubt and presume that they, too, understand that a further
reduction in private sector minimum wages will (at a time of falling public sector
wages and employment) lead to a further, reduction in aggregate demand which
will, undoubtedly, maintain (if not accelerate) the current rate at which Greek
national income shrinks and, naturally, generate lower future taxes, thus giving
the remorseless wheel of recession another twirl.
If my assumptions above are correct, what on earth is the troika doing? Here
is a scenario that I think captures nicely, in all its horror that is, much of what
is going on at the moment. Three are the main protagonists in my scenario:
(1) European bankers (mainly French and German), (2) the German government,
and (3) the NYF member-states, where NYF stands for ‘not yet fallen’
(which includes mainly Italy but also Spain and perhaps Belgium). Having established
who the players are, it is important to define their objectives and constraints.
BANKERS: The bankers know well that their banks are bankrupt. They have
known it for some time but have been hoping that the European Central
Bank, together with their national governments (made up of politicians who
truly value their cosy relation with the bankers), would keep their banks afloat
and themselves in control of their banks. Unlike most businessmen/women who
labour under the fear of bankruptcy, bankers face a different nightmare
(since bankruptcy in fact increases their command of the surpluses produced
by others, courtesy of the politicians’ infinite generosity with the taxpayers’
and the ECB’s money): Forced recapitalisation, is their worst-case scenario
– of the sort that the American government introduced in conjunction with TARP
(the trouble assets relief program). They fear a Euro-Tarp (of the type that we
proposed in our Modest Proposal a year ago – see Policy 2) for the simple reason
that recapitalisation of ‘their’ banks means that the bankers will lose the part
of equity which has hitherto delivered to them control over the banks.
NYF member-states: Waiting on the sidelines, unable to utter a world
(in case loose talk brings them greater disasters than their current situation),
they are holding their breath hoping against hope for some decision from
Berlin that might get them off the hook. With the bond markets treating
them like the new pariahs, Italy, Spain and Belgium find themselves in a
tight corner. They are damned if their do not adopt swinging cuts (since
‘inaction’ will be perceived as fresh evidence that their spreads will rise)
and they are damned if they do (since austerity will further erode their
nations’ anaemic growth; a development which will also push up interest
rates). Deep down, their remaining hope revolves around some scheme
that will see their sovereign debt come down in size, if not via a haircut
then at least by means of a reduction of the interest payments due in the
coming decade.
GERMAN GOVERNMENT: Berlin’s main concern is how to manage this
crisis by means of minimal European integration. It disdains the idea
of any type of continental consolidation which threatens the Principle
of Perfectly Separable Debts (PPSDs, as I call it). After a long eighteen
months during which Germany’s political elite struggled to remain in
denial of the systemic nature of this Crisis, Mrs Merkel now seems
resigned to the idea that the banking sector of Northern Europe (including
of course Germany’s) is in tatters and in urgent need to capital infusions.
German politicians seem to have grasped the importance of the fact that
the liabilities of the eurozone’s banks is more than 300% the eurozone’s
aggregate GDP (Nb. the relevant ratio in the United States, in 2008, was
‘only’ 200%).
After a lot of huffing and puffing, Mrs Merkel and Mr Schaeuble have
accepted the inevitable: About one trillion notional euros must be set aside
for the banks. While they have not swallowed, as yet, that this must be done
at the central EU level (as opposed to a government by government level),
they are getting there, kicking and screaming of course. Two are sticking
points for Germany: It does not want to refloat the banks (for the second
time in three years) and have to pay Greece the money that Greece owes
to the banks. In short, a Greek default is a political prerequisite for what is
becoming a serial bailout of the Franco-German banks. The second sticking
point is Italy and, more generally, the NFY member-states: Germany fears
that if the NFY member-states see that Greece is allowed to diminish its
debt mountain through a default that still allows it to remain within the
eurozone, they may get ideas that a similar solution may be in the offing
for them.
THE EMERGING STRATEGY: Germany knows that the banks will resist
recapitalisation as long as Greece is being kept afloat by the troika.
To gain leverage over the recalcitrant bankers, Berlin must push them
over the edge with a Greek default....
;)
