Does Paddy Power consult with Willem Buiter, the coiner of the obnoxious term ‘Grexit’, or other high profile financial commentators when calculating the odds of when Greece will leave the Euro? If so, I’d say the odds are shortening every day, but one of the most frustrating things about reading Buiter’s latest comment today is that it ignores the fact that it is the policy of ‘reforms’ themselves that is generating a crisis that may result in Greece being forced out of the Euro. If as he says Greece get a small relaxation on it terms, but over all has to remain within the austerity program there is no way that they will be able to stay in the Euro. The programme itself is bringing about a situation it was designed to avoid. But of course, rhetorically it was supposed to be about resolving the crisis in the Greek economy. In reality it was about saving banks and the bailouts are merely the way to achieve this politically. What we are seeing is the failure of European politics to hide the nature of the power relations within Europe.
It’s quite obvious now that both Spain and Italy will enter bailout programmes under the Troika with all the conditionality that that implies, even though in Spain as in Ireland sever austerity has already seriously eroded the economy, which in turn has further weakened the banking sector nursing losses from the bursting of the property bubble. It is the conditionality, with the fixation on fiscal contraction, demanding further reduction in wages, deregulation and privatisation that is the motor behind the present crisis. As that other widely cited commentator Anatole Kaletsky argues, of the suggested solutions for the Eurozone crisis most regularly called for, fiscal and political union, a banking union, sovereign debt mutualisation, have all been vetoed by Germany. He says that EU countries should work to have Germany removed from the Euro area, rather than the end of the Euro being brought about through the unpeeling of the onion, as Buiter outlines will happen if “procrastination and policy paralysis prevail”. But this mess is not due to procrastination or indecision. Rather it is the attempt to work out how to maintain a badly designed currency union on a reasonably stable basis so that it protects the interests of those who wanted it so badly in the first place. This ‘working out’ can be witnessed by the Reuters report today that Germany ‘has agreed economic growth measures for Europe‘. But this is nothing more than a deal with the SPD to get their support for the Fiscal Compact which must be passed in the German Parliament on the 29th of June for it come into effect by the 1st of July. ‘Growth’ measures are the usual supply side prescriptions that are part of the conditionality of the Troika programs in Greece, Ireland, Portugal, and soon Spain, with Italy close behind.
Below is Willem Buiter’s piece from the Financial Times in full.
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Following the re-run of the Greek parliamentary elections, we have a New Democracy-led coalition government. This removes the risk of an early ‘Grexit’ as it is likely the minimum demands for relaxation of fiscal austerity by the new government will not exceed the maximum fiscal austerity concessions Germany and other core euro area member states are willing to make.
Some relaxation on the timing of austerity, some limited early disbursement of funds to pay for essential public goods and services, and some token pro-growth gestures courtesy of the European Investment Bank and EU structural and cohesion funds will most likely keep Greece in the euro for the time being.
However, we consider it highly unlikely that Greece will comply sufficiently with even ‘lite’ fiscal austerity conditionality, let alone with structural reform conditionality, including privatisation targets, which are unlikely to be relaxed. Political opposition to both austerity and reform now are stronger in Greece than ever before. So is resistance to bailouts in the core. The troika – the European Commission, European Central Bank and the International Monetary Fund – may forgive a Greek failure in the September progress assessment, but is unlikely to tolerate another failure to comply on all fronts by the December assessment.
Grexit may well be triggered by a troika review declaring Greece wilfully non-compliant with the conditionality of its programme, stopping the disbursements to the Greek sovereign. Greece defaults and the eurosystem and the Greek ELA (emergency liquidity assistance provided by the Greek central bank) stop funding the Greek banks. At that point Greece exits the euro area, following the imposition of capital controls, foreign exchange controls, restrictions on deposit withdrawals and a temporary suspension of the Schengen agreement.
It is highly unlikely the core eurozone would be willing to take on significant exposures to Spain and Italy unless it can be established unambiguously that a wilfully and persistently non-compliant programme beneficiary will be denied further funding.
Therefore Grexit would become even more probable should Spain and Italy require a broader troika programme and external help, respectively, which appears likely. The greatest fear of the core nations is not the collapse of the euro area but the creation of an open-ended, uncapped transfer union without a surrender of national sovereignty to the supra-national European level.
Grexit is likely to create extreme deprivation in Greece, and lead to social and political instability. We are likely to see evidence of this even before it takes place. The damage can be limited by ensuring that Greece stays an EU member even after it exits the euro. This is the most likely outcome.
The direct impact of a Greek exit on the rest of the eurozone, the EU and the rest of the world through trade and financial linkages are minor. The only risk is through exit fear contagion. This will lead to a sudden funding stop for all sectors in any economy perceived as being at material risk of exit after Greece. The European Central Bank, supported by the troika, has the resources and may have the will to keep at-risk sovereigns and banking sectors funded until the markets are convinced no country that is adequately compliant with programme conditionality and which does not want to leave the euro will be allowed to be forced out by a sudden stop on market funding.
There is now a material risk, if procrastination and policy paralysis prevail, that the end game for the euro could be an onion-like unpeeling and unravelling. Survival to fight another crisis will require at least the following: an enhanced sovereign liquidity facility, banking union and sovereign debt and bank debt restructuring, with only limited sovereign debt mutualisation.
The end game for the euro area, if the political will to keep it alive is strong enough, is likely to be a 16-member area, with banking union and the minimal fiscal Europe necessary to operate a monetary union when there is no full fiscal union.
Minimal fiscal Europe will consist of a larger European Stability Mechanism, the permanent liquidity fund, and a sovereign debt restructuring mechanism (SDRM). The ESM will be given eligible counterparty status for repurchase agreements with the eurosystem, subject to joint and several guarantees by the euro area member states. There will be some ex-post mutualisation of sovereign debt. Sovereign debt restructuring through the SDRM will recur.
Banking union aims to sever the poisonous umbilical cord between sovereigns and the banks in their jurisdictions. A roadmap to banking union will likely be announced at the EU summit on June 28-29. It better be a credible path. In any case, implementation is the hard part, and time is of the essence.
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