Wednesday, 12 October 2011

The Wicked Game

How Greece is being beaten into pulp to force Europe’s banks to accept capital while keeping Italy et al in awe.

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....

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