Thursday, February 23, 2017

Edward Harrison — The negotiations over Greece aren’t about Greece

Earlier today, I was listening to an interview with IMF head Christine Lagarde dance around the issue of the unsustainability of Greece’s debt load. And she said something very telling. She said that debt haircuts were not on the table but that maturity extensions and interest rate reductions were, but only AFTER Greece implemented reforms demanded by the Troika.
What’s important to realize when Lagarde says this is that although she’s talking about Greece, the negotiations with Greece are not really about Greece itself per se. They are about the maintaining or imposing an economic paradigm for every country in the EU that Greece was not meeting – and this is a paradigm that the IMF supports as much as the ECB and the EU. Greece is just being used as an abject lessons for other larger EU economies.
Think of it this way: 25 years ago, the EU signed on to the idea of a single currency in Maastricht. The question marks at the time were Belgium and Italy – Italy because of its constant currency devaluations and Belgium because of high government debt loads. The EU figured out how to deal with Belgium and Italy by creating the stability and growth pact which said that all member states had to keep their deficits under 3% and get their debt under 60%, or at least moving in that direction. Underneath these simple rules lies a whole economic ideology though. And that orthodoxy says long-term growth and a stable currency are best maintained by liberalized free markets and fiscal discipline.…
"Liberalized free markets and fiscal discipline" is neoliberalism in a nutshell.

"Liberalized free markets" means minimized government "intrusion" in the form of regulation and oversight, along with privatization of state assets ("asset stripping").

"Fiscal discipline" means government finance based on "sound money" that limits a government's fiscal space in economic policy and thereby constrains its fiscal policy. This is tantamount to operating as if on a gold standard.

Credit Writedowns
The negotiations over Greece aren’t about Greece
Edward Harrison

16 comments:

Andrew Anderson said...

"Fiscal discipline" means government finance based on "sound money" that limits a government's fiscal space in economic policy and thereby constrains its fiscal policy. [bold added]

How can the monetary sovereign even have much fiscal space when its citizens are not even allowed to use fiat except for unsafe, inconvenient physical fiat (coins and bills)? Leaving most purchasing power creation to a government-privileged usury cartel with exclusive access to fiat accounts at the central bank?

Andrew Anderson said...

Of course, Greece is not monetarily sovereign but even if it were, the demand for its fiat would be artificially low, given government privileges for depository institutions.

Matt Franko said...

Why doesn't somebody in the Greece govt just explain the NIA to them and suggest some form of capital controls wrt the external sector? Then make other domestic policy changes to increase cumulative expenditures within the fiscal interval to avoid the "it's always an unspent income story..." issue...

Instead of coming up with all of these conspiracy theories....

Joe said...

What conspiracies are you referring to Matt?

Ralph Musgrave said...

The idea that neoliberalism is being imposed on EZ periphery countries is not correct in the sense that if those countries didn't get into debt, there would be no creditor to impose neoliberalism on them, thus they'd have far more lee-way to implement a non-neoliberal set up within their own borders.

But Greeks paid themselves silly wage increases for their first decade in the EZ, while Germans stuck to the official EZ inflation rate. Greek balance of payments went haywire as a result, so they're now in debt. And when your in debt, your creditor does tend to engage in "he who pays the piper calls the tune".

Noah Way said...

The real cause of the Greek crisis is incorporation into the EU.

The only solution to the Greek crisis is exiting the EU.

Matt Franko said...

Edward is positing that there is some ulterior motive at work by the EU and Tom implies they are rather intending to 'asset strip' Greece instead of simply enforcing treaty obligations...

Bob said...

EU policy does not include asset stripping?

Postkey said...

“According to the Paris Peace Treaties (Paris 1947) Germany owes Greece War Reparations estimated (with the interests) about one (1) trillion euros.”

http://greeceandworld.blogspot.co.uk/2011/03/german-war-reparation-to-greece.html

Postkey said...

'Anybody who thinks the loan package forced on Greece in 2010 (with the collusion of the Greek elites) was fair treatment should read the protests by every member of the IMF Board from the emerging market nations. With slight variations, all said Greece needed debt relief from the outset, not fresh loans that stored greater problems. All said the bail-out was intended to save foreign banks and the euro itself at a time when there were no EMU defences against contagion, not to save Greece.
"The scale of the fiscal reduction without any monetary policy offset is unprecedented," said Arvind Virmani, India's former representative to the International Monetary Fund, according to leaked minutes. "It is a mammoth burden that the economy could hardly bear. Even if, arguably, the programme is successfully implemented, it could trigger a deflationary spiral of falling prices, falling employment and falling fiscal revenues that could eventually undermine the programme itself." This is exactly what happened. '
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/11421500/ECB-risks-crippling-political-damage-if-Greece-forced-to-default.html

Postkey said...

“Mr. Mario Draghi.

You were the chairman of the Financial Stability Board for some years. In this respect, and especially since we have never heard you say otherwise, you were in full agreements with recent and current bank regulations.

These regulations allowed any European banks to leverage much more when lending to the Government of Greece, or to other sovereigns, than when doing any other type of lending in Europe. For instance, Basel II restricted banks to leverage their equity not more than 12 to 1 when lending to any unrated small business or entrepreneur in Europe, while allowing a leverage of more than 60 to 1 when lending to our government.

And so bankers became too interested in tempting our government with credit; and sadly our government-officials/politicians were unable to resist the sirens and got too much into debt; and those Greek who, with their activities are to generate the fiscal income needed to pay for our government’s expenses, they have had their fair access to bank credit severely curtailed.”

And so I hold that you, Mario Draghi, are directly co-responsible for Greece’s current tragic predicaments.
http://subprimeregulations.blogspot.co.uk/

Postkey said...

1h 23’50” in.
From 2004, under the watch of the E.C.B., there was over 20% credit creation {per annum} in Portugal, Greece, Spain and Ireland.
Property prices rocketed.
“The E.C.B. Could have prevented these bubbles. Just has it could have ending the ensuing banking and economic crises. But it refused to do so until major political concessions had been made, such as the transfer of fiscal and budgetary powers . . . ”
https://www.youtube.com/watch?v=p5Ac7ap_MAY

Andrew Anderson said...

there was over 20% credit creation {per annum} in Portugal, Greece, Spain and Ireland. PostKey

Government privileges* for depository institutions means their liabilities toward the non-bank private sector are largely a sham**. So with sham liabilities toward the non-bank private sector, is it any wonder that banks are so troublesome?

So how about we insist on honest accounting wrt depository institutions?

*e.g. Their exclusive access (in the private sector) to accounts at the central bank means ONLY depository institutions may use fiat except for inconvenient, unsafe physical fiat, a.k.a. "cash".
** If physical fiat is ever abolished, then those liabilities toward the non-bank private sector shall be ENTIRELY a sham, i.e. try cashing a check when cash no longer exists!

Matt Franko said...

Post, Thanks for helping to make my point....

Tom Hickey said...

Edward is positing that there is some ulterior motive at work by the EU and Tom implies they are rather intending to 'asset strip' Greece instead of simply enforcing treaty obligations...

Simplistic.

Noah Way said...

Hey, have we got a deal for you! Let us be your central bank your economy. Money will be cheap and plentiful and you'll be able to buy that BMW you always wanted.

Hey have we got a deal for you! Can't afford a house? We'll give you a zero interest ballon note for the full purchase price plus enough cash to cover a downpayment! No income verification required.

Hey have we got a deal for you! Can't borrow because you've reached the limit of your collateral? Try this new thing called a credit card. It allows you to buy whatever you want with only a promise to pay later.

Anybody see a pattern here?