If Greece defaults, the euro will collapse within the week. This is what a few economists said yesterday on French TV:
http://www.france24.com/...
http://www.france24.com/...
A long segment, but they lay it out. Capital flight from collapsed Greek banks cause panic in smaller banks in Portugal, Ireland, maybe Spain and Belgium. Capital flight takes root there, and soon Europe has an avalanche it can't forestall. The euro collapses. In the FrenchTV segment, the German economist calls it blackmail. The other 3 economists call it reality.
In these segments, you see the discussions in play among Europeans, and you sadly witness the ideological blinders that some adopt which inevitably lead us to ruin.
But there's a solution:
http://yanisvaroufakis.eu/...
Is there an alternative? Absolutely! Consider the following three-step policy that attacks all manifestations of the crisis head on:
1. Use the funds raised by the European Financial Stability Mechanism (EFSF) to recapitalise the eurozone's (almost insolvent) banks in exchange for shares in these banks. Once the banks are cleansed, they will no longer need to rely on massive liquidity injections from the ECB (and can even be asked to take a selective haircut on bonds from the periphery). The EFSF then sells the shares and recoups its funds, thus costing the German taxpayer nothing (much like the TARP scheme in the USA).
2. A conversion loan is organised by the ECB for the part of the debts of member-states which does not exceed the EU's Maastricht limits (60% of GDP). In brief, the ECB takes on its books forthwith a tranche of the sovereign debt (of all member states that request it) equal in face value up to (the Maastricht-compliant) 60% of GDP and finances this by issuing eurobonds that are its own liability. Naturally, the member-states continue to service their debts (to the ECB now) but at the lower rates (and with the longer maturity) secured by the eurobond issue.
3. Empower the European Investment Bank (EIB) to fund a large scale investment program by which permanently to counter the forces of recession in peripheries that keep dragging the rest of the currency union (including parts of German society) toward stagnation. How can this happen? By allowing for the 50% of project funding (which now the bankrupt member-states must raise!) to come from the ECB's net eurobond issues.
This is a radical solution which completely diverges from neoliberal economic orthodoxy. The problem with the eurozone is that the ECB does not allow governments to print money. They instead rely on commercial banks for funding, and since there is no allowance for transfers between countries, what happens eventually is that the weaker countries suffer without investment and stimulus. In a recession, that's a recipe for disaster. But the neoliberals still don't get it, they still think there is moral hazard in centralizing bank operations.
This is my rejoinder:
The Greek debt at the outset was 250 billion. The total proposed package for 3 years for the Greek bailout is 195 billion. Now, consider: if that money had been given to Greece as Euro bonds to be paid back through the ECB, where would be? Greece's debt would have been reduced significantly--but a Euro bond would amount to a transfer of sorts, even at very low interest rates. So the Europeans blew it by insisting on huge austerity measures coupled with high-interest loans to Greece, and now the budget deficit has become exponentially large. They threw money down a black hole.
Angela Merkel's visit to the USA last week and her tete-a-tete with President Obama yielded a curious press conference afterward in which both leaders spoke of the imminent threat coming from a potential Greek default. I'm not going to rehash the Greek debt issue or Greek austerity measures in specific here, but instead I'd like to focus on a response to the coming default that presents alternatives to debts and deficits other than those espoused by our global leaders. In the early days of the 2008 crisis, we might recall Dr. Stieglitz suggesting that the best move for our economy would be the nationalization of banks. We didn't follow his suggestion. The world added trillions to public debt by taking on private bank losses. If you listen closely to European leaders right now, many of whom are backing off their idle threats, bluster, brinksmanship and even ethnic slurs, they are very afraid. The villain is again Credit Default Swaps. No one knows what's out there, and everyone fears Greece is Lehman squared. The numbers of Greece's potential default roughly coincide with the sub-prime market losses in the USA ($200 billion) but the default exposure for Lehman was in the tens of trillions. So, do nations have the capability to once again nationalize this private debt should CDS come into play again after a Greek default? Given our worries over budget deficits, the answer is NO. So, naturally, what comes next?
I've been following the very erudite writing of both Michael Hudson and Varoufakis lately, and they have a solution--one that hews close to Stieglitz but veers totally away from the ideologically bound neoliberal approach (which has been an utter disaster).
Here is Hudson:
http://michael-hudson.com/...
Promoting the financial sector at the economy’s expense
The resulting debt leveraging is not a solvable problem. It is a quandary from which economies can escape only by focusing on production and consumption rather than merely subsidizing the financial system to enable players to make money from money by inflating asset prices on free electronic keyboard credit. Austerity causes unemployment, which lowers wages and prevents labor from sharing in the surplus. It enables companies to force their employees to work overtime and harder in order to get or keep a job, but does not really raise productivity and living standards in the way envisioned a century ago. Increasing housing prices on credit – requiring larger debts for access to home ownership – is not real prosperity.
To contrast the “real” economy from the financial sector requires distinctions to be drawn between productive and unproductive credit and investment. One needs the concept of economic rent as an institutional and political return to privilege without a corresponding cost of production. Classical political economy was all about distinguishing earned from unearned income, cost-value from market price. But pro-financial lobbyists deny that any income or rentier wealth is unearned or parasitic. The national income and product accounts (NIPA) do not draw any such distinction. This blind spot is not accidental. It is the essence of post-classical economics.
Hudson diagnosis the structural games at play, while Varoufakis suggests solutions.
Here is Varoufakis:
http://www.nytimes.com/...
The "Modest Proposal" asks European politicians and economic policy advisors to abandon their economic ideologies and recognize the supreme fundamental breakdown OF THOSE ideologies. Which is, the principles behind fiscal discipline and moral hazard have already been breached when banks with huge losses were made whole by national governments, AND that Europe is already operating by effectively entering into continent wide macro-economic policies that already imply a fiscal transfer union. The author, Yanis Varoufakis, essentially wants to shake European politicians out of their coma to realize that they are holding fast to an ideology which has already been totally corrupted.
We've seen this movie before, we've seen Greenspan and the like realize that the market's invisible hand is really nothing but greed, and yet still today the neoliberals persist in their delusions. I suppose this is part and parcel of a discussion alongside bobswern's excellent diary on Geithner. Those of you asking for solutions or alternatives to Geithner, please consider this mathematician's radical proposal.
Under the proposal, Greece would transfer as much as 133 billion euros — or 40 percent of its government debt, equal to about $195 billion — to the European Central Bank, which would then pay off the obligation by issuing its own euro bond.
It would be a “restructuring without a haircut,” in the view of the plan’s proponents, who enthusiastically described it to Mr. Papandreou in a series of secret meetings this year. The result, ideally, would be to ease the weight of the Greek debt on the economy, clearing the way for renewed growth while keeping the bankers and credit-rating agencies on board.
In many ways, the plan was a dreamy alternative to the grim calculus of Europe’s demands for more austerity from Greece in return for more loans. And Mr. Papandreou went so far as to ask a political ally and the plan’s two proponents, a British and a Greek economist, to lobby Europeans in its favor.
Varoufakis actually goes beyond the NYT article and explains the proposal in depth on his own website:
http://yanisvaroufakis.eu/...
I think he's on the right track. What we're not hearing from our economists, politicians, or anyone in financial discourse is a frank discussion about how currency works.
In essence, a country's currency begins by fiat. The country literally creates something out of nothing. Credit comes first in every case. There is no hard material source that tethers it. The only question is one of enforcement or encouragement (i.e. will everyone or mostly everyone use this currency?). So, a nation operates in the same way by establishing the monetary instrument on credit, a promise to be paid back in the future. This is what stimulus is all about, and currency is already a form of stimulus, only in the case of a nation--the people are the bank. We are our own bank, we establish credit and we pay ourselves back. This is how Social Security works as well, as long as people keep contributing to it.
This is precisely the alternative to the call for austerity measures. Why not lend to ourselves directly? Why doesn't Greece do it by issuing scrips? What Varoufakis is proposing is a form of pan-European stimulus, a New Deal.
In the USA, we're under the impression that each individual owns property and we have our own money, our own salary, which is a result of the hard work we put in. We've totally untethered ourselves from the larger context, a currency system and economy that keeps property value stable and allows us to reinvest in ourselves and create more wealth. In America, we seem to believe however that money is a material object that we possess and that the government then takes from us.
It doesn't work that way. The government (in other words, WE THE PEOPLE) create currency by fiat. The creation of currency comes first. The remittance to government occurs AFTER that fact. Varoufakis is simply reminding his European cohort of this.