Greece: breaking illusions

A recent poll conducted by the University of Macedonia found that 56% of those Greeks asked believed the Greek bailout extension had been a success compared with 24% who said it represented a failure. A Metron Analysis poll showed that more than two in three Greeks were satisfied with the way the government was negotiating with EU partners, while 76% were positive about the government’s overall performance so far. It also put support for Syriza on 47.6% compared to New Democracy with 20.7%.

That’s an indication that, with the four-month extension of the bailout programme with the Eurogroup, the Syriza government has won time with the Greek people hoping for an end to austerity, as well as with the Eurogroup leaders wanting more austerity in return for the remaining bailout funds.

But this ‘window of opportunity’ is small and probably smaller than four months. The immediate issue is finding funds to cover the upcoming €1.5bn repayment due to the IMF this month and the rollover of short-term government debt. The ECB has ruled out an expansion of T-bill issuance to cover this debt redemption and probably will not raise the Emergency Lending Assistance limit to Greek banks so they cannot use ECB credit to cover Greek government debt bills. And yet tax arrears and non-payment have built up so that the government has lost between €1-2bn in revenues since the beginning of the year.

The Eurogroup has said that no outstanding bailout funds will be disbursed to Greece unless they show ‘visible evidence’ that they are trying to keep to the fiscal and other conditions of the existing bailout agreement. This will all come to a head on 9 March when the ECB meets on Greece again and the Eurogroup considers what the Greek government has done. Greek finance minister Varoufakis says he will present six ‘reforms’, costed, for approval by the Eurogroup.

In the meantime, it looks as though the Syriza government will proceed with various measures to ameliorate the ‘humanitarian crisis’. Tsipras said that the government would introduce measures including the provision of free electricity to 300,000 households living under the poverty threshold and the introduction of a new payment plan for overdue taxes and social security contributions. The scheme is set to allow applicants to pay in up to 100 instalments and will mean that anyone owing up to 50,000 euros cannot be arrested over their debts. And the government will protect primary residences with a taxable value of up to 300,000 euros from foreclosures and reopen the public broadcaster ERT, shut down in June 2013. None of this will affect the budget targets, Tsipras claimed, although how that is the case remains to be seen.

Maybe it won’t if the government can find extra revenues from undeclared funds that should be taxed. The finance ministry is now planning an amnesty on undeclared capital abroad, aiming to tax it – but not necessarily to repatriate it – according to Alternate Finance Minister Dimitris Mardas. The government reckons that up to €120bn is being held abroad by rich Greeks and oligarchs, often hidden in real estate in the UK or Swiss bank accounts. The government says it can obtain up to 10-15% of this. In addition, special tax minister Nikoloudis reckoned he had 3,500 audits amounting to €7 billion in back taxes, €2.5 billion of which he hopes will be collected by summer. If this money can be collected, then the government can square the circle of paying its debts and keeping within the Troika fiscal targets and help out the poor – at least for a while.

But only for a while because Greek public debt is ‘unsustainable’ and will never be reduced to a manageable level by Troika-style spending cuts and tax measures. However, as the interest rate on the debt is relatively low (4% of GDP annually) and the repayment schedule on the loans owed to the Eurogroup has been put back to the early 2020s, if the government can get through this year’s redemptions, then it may find another small fiscal ‘breathing space’. And if the Greek economy can grow over the next year, tax revenues will improve.

It’s just possible that an economic recovery in the rest of the Eurozone might also provide a boost to the Greek economy too. But it is only possibility. The Greek economy is still suffocating from the stagnation in Europe and the Troika’s inexorable austerity measures. Indeed, Greek real GDP rose only 0.7% in 2014 while prices fell 2.8%, so nominal GDP contracted.

Greece’s manufacturing PMI, the main measure of current business activity, was down at 48.4 in February, implying that the economy is still contracting. Greek investment and profitability remains at all-time lows.

Actually what is more important for the Eurogroup and big capital in Europe is that the neo-liberal ‘structural reforms’ of deregulating the labour market and other capital markets and the privatisation and ‘foreignisation’ of the best bits of Greek industry must go through. For them, that is the policy for restoring the profitability of the Greek capital (at labour’s expense).

These ‘structural reforms’ have been pursued with gusto by the conservative governments of Ireland, Spain and Portugal that have been under Troika programmes. Now the last thing they want is for Syriza to succeed in turning things round without imposing austerity and without restoring the profitability of the capitalist sector. So these governments have been the strongest supporters of a ‘tough line’ with Greeks. The French and Italian social democrat governments also continue to introduce measures to weaken the rights of employment and worsen the conditions at work.

But what happens at the end of June? Already there is talk of shackling the Greeks into a new bailout programme. In return for new loans (and a mixture of old ones) of up to €50bn over three years, the Greeks would be committed to yet more Troika monitoring and neoliberal measures to save Greek capital. This is the aim of the Eurogroup and its conservative governments.

Tsipras has made it clear that the Greeks will not enter a new package after June. If the government also says that it will honour all its debts to the IMF and the EU (even though it wants a new debt schedule), then either financial markets must be willing to buy Greek government debt and bank debt at reasonable rates of interest; and/or the government must find extra tax revenues to meet its debt commitments.

Perhaps the Greek government can avoid default and stay in the euro as the debt servicing schedule in 2016 is much lower. After all, the Greeks could meet the ‘ordinary’ budget targets under the EU Fiscal Compact. But can it get that far, and even if it does, how can it, at the same time, meet the needs of its people in raising wages, pensions, reversing privatisations, and restoring a decent health and education and other public services, and get the economy growing? To do that, Syriza needs a Plan B, as I proposed in a recent post (https://thenextrecession.wordpress.com/2015/02/20/troika-grexit-or-plan-b/).

Others see the issue as depending solely on whether Greece leaves the euro or not. Professor of Economics at the London School of Oriental and African Studies (SOAS), Costas Lapavitsas (see my post,https://thenextrecession.wordpress.com/2013/11/12/the-informal-empire-finance-and-the-mono-cause-of-the-anglo-saxons/) is now a Syriza MP and a leader of the Left Platform within Syriza. In a recent article in the British Guardian newspaper (http://www.theguardian.com/commentisfree/2015/mar/02/austerity-greece-euro-currency-syriza), Lapavitsas reiterated his view that “to beat austerity, Greece must break free from the euro”. Lapavitsas reckons that “we are deluded to think that we can achieve real change within the common currency. Syriza should be radical”.

Lapavitsas correctly gauges the deal reached by Tsipras and Varafoukis for the four month extension as a heavy price to pay “to remain alive”. But is it correct to argue that breaking with the Troika and reversing austerity must start with advocating leaving the euro, as Lapavitsas says? Tactically, it does not seem right to me. The alternative to the Troika should not be posed as ‘leaving the euro’, but rather ‘breaking with capitalism’.

Plan B must be to reject a new programme with the Troika after June. Instead, Syriza must introduce measures that can get the Greek economy growing sufficiently to enable wages and pensions to be restored, labour agreements honoured, increase employment and revive investment. That will mean taking over the Greek banks, introducing capital controls, and bringing into public ownership and control strategic industries and companies with a plan for investment. Such an investment plan should be pan-European, with an appeal to the labour movement through Europe to campaign for this.

But won’t Greece be thrown out of the euro anyway if it adopts these policies? Well, maybe, even probably. But there is nothing in the EU treaties that stops a member state from adopting these measures. Public ownership of the banks and ‘commanding heights’ might break EU competition rules, but that would not be enough grounds for Greece’s expulsion. After all, Germany runs state-owned banks in every region. And if Greece is managing to run ‘balanced budgets’, it won’t be breaking the EU fiscal compact either. There is just the question of its huge public sector debt that is supposed to be paid back (but not for decades).

The issue for the labour movement is not the “illusions” that the left has in the “absurdity of the common currency” (as Lapavitsas calls it), but the illusion that capitalism can be made to deliver people’s needs (something that Varoufakis has encouraged – see my post, https://thenextrecession.wordpress.com/2015/02/10/yanis-varoufakis-more-erratic-than-marxist/). It is breaking with capitalism that matters, not breaking with the euro. The latter may flow from the former BUT the former does not flow from the latter.

Breaking with the euro will not provide “a chance of properly lifting austerity across the continent”. Default and devaluation and the establishment of a new drachma will not mean prosperity for Greece if Greece’s weak and corrupt capitalist sector continues to dominate the economy.

Take Iceland. This is a very tiny economy with only 325,000 people, the size of smallish city in Europe or the US. It is often presented by Keynesian economists and others as showing a way out of the crisis compared to staying in a common currency. The argument is that Iceland defaulted on its debts and devalued its currency and so recovered its economy (on a capitalist basis), while Greece remains trapped.

I have written on the experience of Iceland in several posts and this story of default and devaluation is just not true (see my post, https://thenextrecession.wordpress.com/2013/03/27/profitability-the-euro-crisis-and-icelandic-myths/) ). Iceland did not renege on the huge debts that its corrupt banks ran up with foreign institutions (mainly the UK and the Netherlands). It eventually renegotiated them and is now paying them back like Greece.

And devaluation did not mean that Icelanders escaped from a huge loss in living standards. They have done little better than the Greeks on that score – although of course, Icelanders started from a much higher standard of living than the Greeks. In euro terms, Icelandic employee real incomes fell 50% and are still 25% below pre-crisis levels.

The same myth is peddled by Keynesians and others that having its own currency saved Argentina in its crisis of the early 2000s. See my post, https://thenextrecession.wordpress.com/2014/02/03/argentina-paul-krugman-and-the-great-recession/, and my joint paper with G Carchedi (The long roots of the present crisis) for a refutation of that. Argentine capitalism is back in crisis now.

Greek capitalism’s demise is not because it joined the euro. It had already failed when profitability collapsed, as a heap of excellent papers by Greek Marxist economists show (for a summary of these, see the paper by Stavros Mavroudeas out only this February and essential reading, 2015_001-libre).

And as Steve Keen has pointed out, “While Greece certainly had its own specific problems—especially with its current account—in general, its apparent boom before the crisis and the crisis itself had much the same cause as in the rest of the OECD: a private debt bubble that burst in 2008. Private debt grew rapidly before the crisis—on average by more than 10% of GDP per year.” (https://elgarblog.wordpress.com/2015/03/03/elgar-debates-lessons-from-greece-being-anti-austerity-is-not-enough/#more-4521).  Here is Keen’s graph showing that public sector debt only mushroomed after the crisis began.

The ultimate cause of the Greek crisis was falling and low profitability and the proximate cause was the huge increase in fictitious capital to compensate that eventually imploded in the Great Recession.

Greek capitalism is in no position to turn things round with its own currency. Greek capital will be saddled with huge euro debts following devaluation and it won’t be able to export enough to stop the economy dropping even further into an abyss and taking its people with it. Grexit also means not just leaving the euro but also the EU and without any reciprocal trade arrangements that Switzerland has, for example.  Currently, Greece contributes €1.7bn a year to the EU budget and gets back €7.2bn a year in various funds, a net 3% of GDP a year.

The issue for Syriza and the Greek labour movement in June is not whether to break with the euro as such, but whether to break with capitalist policies and implement socialist measures to reverse austerity and launch a pan-European campaign for change. Greece cannot succeed on its own in overcoming the rule of the law of value.

Economics prize: who wants one? – it’ll cost you

Can you believe it: the first Nobel prize in economics was sold at auction last week? Like the science, peace and literature prizes, the economics prize is awarded for making an important advance in human understanding or harmony. But when you look at the list of economics winners, you may wonder whether there has been any winning economist who deserves that accolade (Milton Friedman, Gary Becker, Robert Lucas, Eugene Fama). Some of them have actually set economics back, not forward. Maybe it is not accident that the economics prize is not funded or chosen by Norway’s Nobel Foundation but by the Swedish Riksbank, the central bank.

But then if you look at some of the winners of Peace prize, things are not much better (Henry Kissinger, Menachim Begin, Mother Teresa, FW de Klerk, Shimon Peres, Barack Obama (after less than one year), and the European Union (?)).

Anyway, last week, the first Nobel Prize in economics to go for auction sold for $390,848. That’s more than for prizes in physics, but far from the million-plus payouts for prizes for medicine or peace.

It was the prize awarded Simon Kuznets in 1971 that sold. Kuznets is known as the author of the gross domestic product measurement that now serves as the key benchmark for the size and growth of economies worldwide. He’s also famous for the Kuznets Curve, which suggests that as a country’s level of economic development increases, inequality initially rises but then falls. This latter conclusion has been disputed by Thomas Piketty and others in their recent works (see my post, https://thenextrecession.wordpress.com/2011/10/21/1-versus-99/).

The price for the Kuznets prize was nowhere near that of Francis Crick and James Watson‘s Nobels, which sold in 2013 and 2014 for millions each. Their discovery of the double-helix structure of DNA puts them among the most famous scientists of the century.

Why the difference in price for these prizes at auction: the intrinsic value of the medal?; supply and demand?; inflation?.  I leave that for any of these eminent economists to tell us:

Bipolar capitalism

In a recent article (http://www.bloombergview.com/articles/2015-02-11/what-we-know-about-recessions-might-be-wrong), Noah Smith pointed out that “Modern macroeconomists think that recessions and booms are random fluctuations around a trend. These fluctuations tend to die out — a deep recession leads to a fast recovery, and a big expansion tends to evaporate quickly. Eventually, the trend re-establishes itself after maybe five years. No matter what happens — whether the central bank lowers interest rates, or the government spends billions on infrastructure — the bad times will be over soon enough, and the good old steady growth trend will reappear.”

“But what if it’s wrong?” says Smith, “What if recessions deal permanent injuries to an economy”. Smith pointed out that right-wing economists have criticised the idea that after every recession comes a boom. Greg Mankiw (see my post, https://thenextrecession.wordpress.com/2013/06/19/defending-the-indefensible/), back in 2009, reckoned that the Great Recession would herald a lost decade of output as major economies failed to get back to the trend growth rate before the crisis.

Ironically, as Smith says, liberal Keynesian economist, Paul Krugman, was among the optimists. He was wrong and Mankiw was right. Of course, Keynesians do have an answer to why economies don’t bounce back after a deep recession. I have described their arguments in various papers and posts (https://thenextrecession.wordpress.com/2013/11/20/a-keynesian-or-marxist-depression/).

Smith brings to our attention one such Keynesian answer from Roger Farmer, Professor of Economics in Los Angeles. I have referred to his work before (https://thenextrecession.wordpress.com/2010/06/02/the-keynesian-answer-support-the-speculators/). Farmer reckons that economies are driven by “animal spirits” i.e. bursts of enthusiasm and depressions by capitalists to invest or not. Apparently, all can be explained by the view that capitalists are really suffering from you could call a ‘bipolar syndrome’. As Smith puts it: “A burst of pessimism can knock the economy from a good equilibrium into a bad one and it can then stay there until a burst of optimism comes along to knock it back.” So, reckons Farmer, governments must step in to provide some stability to this fragile capitalist mentality.

Farmer’s policy prescription is for governments and central banks buy up the stock market so that capitalists will be so pleased with this that they will start investing. Well, stock markets round the major economies are at record highs, thanks to cheap money injected by central banks – and yet the world economy remains in sluggish mode and some parts, like Japan and southern Europe are in ‘permanent recession’ or depression.

Another right-wing economist has complained that the Keynesians are far too optimistic about capitalist economies recovering with a judicious bit of central bank quantitative easing and government spending. John Taylor is also a West Coast professor and makes the point that the US economic recovery has never been so weak, even worse than the recovery after the deep double dip recession of the early 1980s (see graph below) – and the US economy is doing the best out the major advanced capitalist economies (https://thenextrecession.wordpress.com/2012/09/03/bernanke-in-a-hole/.)

As Taylor sarcastically described the US ‘recovery’: “At the time of the first anniversary of current recovery in 2010, it showed clear signs of weakness compared to the recovery from the recessions in the early. By the recovery’s second anniversary in 2011, it was weak for long enough that I called it a recovery in name only, so weak as to be nonexistent. By the recovery’s third anniversary in 2012, it was now the worst recovery from a deep recession in American history. By the recovery’s fourth anniversary in 2013, few disputed any more that it was unusually weak and disappointing. By the recovery’s fifth anniversary, we were so far away from the recession that linking the terrible performance to the recession became increasing far-fetched. With the recovery now approaching its sixth anniversary, there is more optimism that we are finally coming out the excruciating slow growth.”

The latest US GDP figures revised just yesterday for the fourth quarter of 2014 show that average growth since 2009 has been just 2.2% a year compared with 4.4% in the corresponding quarters of the 1980s recovery. And as of January 2015, the employment-to-population ratio is still lower than at the start of the recovery.

Both Mankiw and Taylor make these arguments because they want to score points against the Obama administration and the Keynesian economists who reckon that the government must intervene to help the ‘bipolar’ capitalist sector. Their argument is that ‘intervention’ just makes things worse. Better to let capitalism cleanse itself of dead capital, keep corporate taxes low and maintain ‘normal’ interest rates. But this ‘liquidationist’ approach does not work either.

In a new paper, David Papell and Ruxandra Prodan, Professor of Economics and Clinical Assistant Professor of Economics, respectively, at the University of Houston, find that deep recessions after a financial crash can take up to nine years before growth returns to trend. But this time it is different – it’s even worse (http://econbrowser.com/archives/2015/02/guest-contribution-long-term-effects-of-the-great-recession).

Looking at the latest projections of the US Congressional Budget Office (CBO), they reckon that US real GDP will never return to its pre-Great Recession growth path. “The projected decrease in potential GDP is unprecedented, as almost all postwar U.S. recessions, postwar European recessions, slumps associated with European financial crises, and even the Great Depression of the 1930s, were characterized by an eventual return to potential GDP.” US real GDP will permanently be 7.2% below the pre-Great Recession growth path because trend real GDP continued to rise during the recession. They call this a “purely permanent recession”.

But as readers of this blog will know, I characterise this as a Long Depression, a rare event in capitalism. The CBO reckons that the US trend growth rate will slow to just 1.7% and will never be above 2% a year for the foreseeable future! Why is capitalism locked into a depression? Well, mainstream economics has debated this, swinging between two causes for this ‘secular stagnation’: permanently lower productivity growth and innovation (Robert Gordon) or too high rate of interest or too low ‘animal spirits’ (Larry Summers) – see my post (https://thenextrecession.wordpress.com/2015/01/09/assa-part-two-permanent-stagnation/).

In another paper just out, three economists find that long-run US real GDP growth has been declining for some time and the main reason is a slowdown in the growth of the productivity of labour (http://www.voxeu.org/article/tracking-gdp-when-long-run-growth-uncertain). Capitalists are failing to boost productivity growth enough through new technology.

And two more economists show that worker productivity in the major economies has been persistently weak since the onset of the global crisis (http://www.voxeu.org/article/labour-productivity-and-global-crisis-historical-perspective). “We find that persistently weak productivity is not normally a feature of financial crises in advanced economies – this time has been different. Looking sector by sector, the biggest falls in most countries have been in manufacturing. The UK stands out in having also seen a dramatic fall in service sector productivity growth, now one of the slowest in our sample of countries.”

It seems that capitalism is now in a permanent bipolar disorder – a long depression.

Greece: the next four months

What will happen to Greece’s public finances and economy over the next four months while the Syriza-led government negotiates fiscal and economic conditions with the Eurogroup in return for Troika bailout funds under the existing programme that has now been extended until end-June?

Under the provisional agreement with the Eurogroup, the Greek government will not receive any of the outstanding funds of €7.2bn still available (€1.9bn from ECB profits on its Greek government bond holdings made in 2014 and promised to the previous Greek government; €1.8bn from the Eurogroup’s EFSF and €3.5bn from the IMF) until the Eurogroup is happy with its fiscal plans.

And that could take until end-April. As German finance minister Schaueble made clear: Greece was not getting softer conditions, only more time. “Only when we see they have fulfilled this will any money be paid. Not a single euro will be paid out before that,” he said.

But between this weekend and the end of April, the Greek government is supposed to make repayments on maturing short-term government bills and loans back to the IMF. Greece has to pay back IMF loans of just under €2bn by April and it also has to redeem short-term debt of €4.4bn and €2.4bn in March and April respectively.

Where is the money to come from if the Troika won’t cough up on what it promised until agreement on ‘conditionalities’ with the Greek government? Well, before the election of Syriza, the government was running an annualised surplus before paying interest on its debt of about €1.9bn. And it had built up some cash reserves of about €2bn. So all is well, then?

Well, no. Since the election, taxpayers have stopped paying tax, particularly the most well-off and private companies. Tax receipts have collapsed and were 20% short of target. The government actually ran a deficit in January. The primary surplus achieved in 2014 has already been halved. The available money is disappearing to pay for the upcoming debt redemptions.

Now the €6.8bn of government short-term bills could be paid off by issuing new bills that would be bought by the Greek banks (they are already making good profits on these). However, the ECB is saying that the Greek government is already at its limit of €15bn in T-bill issuance outstanding – this is a limit set by the ECB, by the way. The ECB does not want the Greek government to finance its spending by using the Greek banks, in case the government defaults later.

So it’s getting tight to manage to fund public finances over the next two months, unless the IMF waives its debt repayment to help – unlikely! As Finance Minister Yanis Varoufakis put it: “We will definitely have problems in making debt payments to the IMF now and to the ECB in July,” he told Alpha Radio.

So even before we get to a deal with the Eurogroup on what level of austerity measures the new Greek government is supposed to apply to meet fiscal targets, the possibility of default arises.

The four-month extension on the existing Troika programme has been cast by Prime Minister Tsipras and Varoufakis as the best that could be expected to avoid the ECB cutting off funds to the Greek banks and leading to a run on the banks and financial collapse. Tsipras and Varoufakis have argued with their Syriza MPs and followers that they have really got a good deal, in the sense that they can negotiate with the Eurogroup over the terms and measures that will be applied over the next four months. In other words, they have ‘wriggle room’ or ‘fiscal space’.

But as we can see from the latest revenue and spending figures for the government, even if the Eurogroup agrees to a lower primary surplus target than the 3% of GDP they wanted in the old programme, there may not be any surplus to spend at all if tax revenues are not collected.

Yes, the government aims to focus on getting tax arrears, getting taxes out of the oligarchs; and improving tax collection in general. The government claims it can get up to €7bn with its measures. But it will need it (and must convince the Troika too) because it also wants to stop further pension cuts planned under the existing programme (although it has backed down on increasing pensions and the minimum wage or in increasing public sector employment – or at least the wage bill).

Syriza has apparently agreed not to increase income or corporate taxes and yet this is precisely where the most progressive form of taxation could apply. Instead, Varoufakis appears willing to comply with the IMF’s longstanding demand that concessionary VAT rates charged on Aegean Islands should be raised to the standard level. VAT is the most regressive of all taxes.

As for privatisation, what is not commonly realised is that privatisation revenues were supposed to be used to pay down the debt bill and not used to bolster revenues and the primary surplus. The Syriza leadership has agreed to allow existing privatisations through. So Cosco, the Chinese state shipping company, and Maersk of Denmark, the frontrunners among bidders shortlisted for a two-thirds stake in Piraeus Port Authority, will take over. And a consortium led by Frankfurt airport is the preferred bidder for a 40-year(!) concession to run Greece’s regional airports.

Inviting in foreign investment to improve important state assets should not be shunned, in my opinion. After all, that is what the Chinese government does all the time. But they maintain a majority ownership and control the projects. Greece could do the same. Instead, foreign companies will get key sectors of the Greek economy over the next four months. At least, Panagiotis Lafazanis, the energy minister, will apparently stop the sale of the electricity grid and part of the state power utility.

Negotiations on the details of the four-month extension will be tortuous and it is an opportunity for the Syriza government to campaign openly within Europe against austerity measures that the Eurogroup wants to impose and also it gives Syriza time to mobilise the Greek people for the battle ahead.

As PM Tsipras said (wrongly), “we won (actually lost) the first battle and but the war continues”. Austerity must be reversed. Since 2009, successive Greek governments under the direction of the Troika have carried out huge public spending cuts worth 30% of GDP.  The public sector wage bill has been reduced by 29%, and now the government has agreed not to increase it. Social benefits have been cut 27% and again the government has agreed not raise this bill.

But Greek public finances at present do not allow for any fiscal space at all, even if the Eurogroup agrees to a lower fiscal target. Tax revenues must come in to meet upcoming debt repayments AND allow for dealing with the humanitarian crisis, boosting employment and wages. Can it be done?

And then what happens after four months? The Greek government and its people must reject any further Troika programme and its conditions (assuming it is offered). They must strike out on their own to control the economy.

That means taking over the banks and the major companies, introducing a plan of investment and growth that mobilises people to support and implement. If that brings the government into a final conflict with other Eurozone governments and the ECB and they threaten to cut off funds and throw Greece out of the Eurozone, so be it.

But there are four months available for the government to campaign within Greece and around Europe for the alternative to the neoliberal economic model and its policies. (see my post, https://thenextrecession.wordpress.com/2015/02/20/troika-grexit-or-plan-b/)

See my facebook site https://www.facebook.com/pages/Michael-Roberts-blog/925340197491022

Greece: ‘third world’ aid and debt

One of the cruel ironies of the last minute deal between the Eurogroup and the Greek government for a four month extension to the existing ‘aid’ programme monitored by the Troika is that in any sane meaning it is not aid at all.

In return for staying in the Troika programme for another four months to end-June and keeping to the still to be agreed conditions on fiscal targets, government spending and privatisations, the Eurogroup, the ECB and the IMF will disburse the outstanding tranches of loans under the existing programme. The FT might call this “aid” but it is nothing of the kind. It is not even bailout money for Greek banks. The €11bn funding for that has been returned by the Greeks to the Troika who are keeping it for ‘security’.

Between the beginning of March and the end of June, the financing institution of the Eurogroup, the EFSF, will release €1.8bn, while the ECB will return profits that it has made on maturing Greek government bonds that it purchased in 2014 worth €1.9bn and the IMF will disburse another €3.6bn in funds under its programme of ‘aid’ that lasts until April 2016. That’s €7.2bn.

But most of that will be immediately recycled back to the Troika as repayments of debt and interest for previous loans and government bonds that are maturing. In the upcoming four months, the IMF must be paid back €5.3bn while the Greeks must also roll over short-term T-bills bought by the Greek banks worth about €11bn. So the Troika ‘aid’ will just disappear and the Greek people will see none of it to help with government spending.

And what happens after the end of June? Any new programme with the Troika (if that is what Syriza decides to do) will involve yet more repayments, including €6.7bn to be paid back to the ECB on maturing government bonds in July alone, and with more to the IMF. It is never ending.

This is just like ‘Third World’ aid that used to be distributed by the World Bank and other international agencies back in the 1980s and 1990s. Most of this ‘aid’ ended up in corrupt dictators’ pockets or in repaying previous debt. The people never saw it. And the debt levels stayed where they were, as they do for Greece now.

Back then, eventually the international agencies agreed what was called a Brady debt swap that wrote off a portion of the debt that could never be repaid. No such plan is available to Greece, although Syriza asked for it in their negotiations with the Eurogroup.

The debt to the Troika remains fully on the books and, as a share of Greek GDP, is set to rise. Sure, the cost of servicing this debt is relatively low with repayments on the EU part of the loans put off until the next decade and interest on these loans at very low rates. But the debt liability is there forever – like the proverbial albatross on the back.

Troika, Grexit or Plan B?

In this tortuous saga between the leaders of the Eurozone and the new Greek government over repaying its public sector debt and continuing with a Troika-imposed austerity programme, we must remember that the cause of all this mess is the failure of capitalism in Europe and Greece.

Yes, the Syriza government has retreated massively from its original position to cancel or renegotiate the ‘odious’ debt burden and it has given way on some (many?) of the immediate measures it wanted to take on reversing austerity and improving the hugely reduced living standards of Greek households.  But that was inevitable if the government wants to sustain Greek capitalism inside or outside the Eurozone.  Greek capital is the weakest in the spectrum of European capital, where Germany and France are strongest.  They call the tune.

So the real villain of the piece is Capital in the persona of Franco-German capital and their supporters in the governments of the other ‘distressed’ EMU states of Spain, Portugal and Ireland, as well as ‘northern Europe’.

There are many commentators, including those on the Keynesian left, who complain that the Germans are being unreasonable and stupid.  Giving the Greeks some leeway on public spending and reducing the burden of debt would help restore the Greek economy and keep the European project going in the face of increased scepticism from the electorate of Europe and a stagnating and deflating Euro economy.  You see, austerity does not work, so goes the argument (http://mainlymacro.blogspot.co.uk/2015/02/greece-and-educating-economists.html).

But the Germans are not ‘irrational’ from the point of view of Capital.  The Austerians reckon that European capitalism will not recover unless the capitalist sector is restored to high profitability and the burden of debt is reduced.  That means neoliberal ‘structural’ reforms involving primarily decimating the power of labour through anti-trade union laws, increased sacking rights, reducing unemployment benefits and pensions and more privatisations.  Alongside this, there must be cuts in public spending and debt to allow cuts in corporate taxation to raise profitability.  Get labour costs down and boost profitability – that’s the way out of this depression (https://thenextrecession.wordpress.com/2012/04/14/the-austerity-debatehttps://thenextrecession.wordpress.com/2012/09/30/can-austerity-work/).

That is a rational strategy for Capital.  The Keynesians, on the other hand, reckon that cutting wages and fiscal austerity just slashes ‘effective demand’, so that more austerity breeds even less growth.  In the depth of depression, this argument has some validity, especially in Greece.  But the essence of recovery on a capitalist basis must be a return to profitability and raising wages or spending more on welfare does the opposite (https://thenextrecession.wordpress.com/2015/02/08/the-causes-of-recovery-austerity-qe-and-the-spending-multiplier/).

So the German intransigence flows from an ideological belief that fiscal austerity and wage-cutting programmes are essential.  As the Germans are not committed in any way to proper fiscal union in Europe (see my post, https://thenextrecession.wordpress.com/2015/02/12/red-lines-and-fiscal-union/), they do not want to make any (or the most minimal) concessions to Syriza.  Moreover, they are backed in this by the venal, corrupt and harsh neoliberal governments still in office in Spain, Portugal and Ireland who have imposed Troika programmes on their people and who would be badly undermined if there are better terms for a leftist government in Greece.  The feeble pro-capitalist social democratic governments of Italy and France, both trying to impose ‘structural reforms’ on labour, also go along with this.

Unfortunately, propaganda in Germany and the rise of Eurosceptic forces have led the German electorate to believe that the Greeks are lazy, are all on benefits, get huge pensions and are corrupt.  Apparently, 66% of Germans asked do not want the Greeks to get any concessions.  Of course, this characterisation of the Greek working class is nonsense.

Greeks work more hours in a year than any other country in Europe – and more than even the Americans or Brits!  And surprisingly, it is the Germans who are the ‘laziest’, if measured by hours worked.

Although Greek economy-wide productivity started from a low base when the country joined the Eurozone in 1999, growth in labour productivity since then has been faster than in the strong capitalist economies of Germany or France, Greece up 25% compared to just 10% in Germany.

The reason Germany has been so competitive has not been because the growth in its productivity of labour was so good, but because wages have risen the least, just 22% since 1999 compared to nearly double in Ireland and up two-thirds in Greece (see my post, https://thenextrecession.wordpress.com/2013/09/22/german-capitalism-a-success-story/).

So while Greeks saw their living standards improve under the euro until the crisis came, they did this by working the longest hours and by being exploited more than any other workforce in Europe.  The biggest gainers from joining the euro were the Greek capitalists.  The fruits of increased economic growth and trade went to them disproportionately.  The wage share in Greek national income fell nearly 4% pts, a fall only surpassed by Spain and more even than American workers suffered relatively.

In my view, Syriza was correct to say that it wanted to stay in the euro and campaign for removing the debt burden and reversing austerity.  To start from the view that Greece must leave the euro and then look at ‘reversing austerity’ puts the cart before the horse and also runs in the face of the aspirations of Greeks to be ‘part of Europe’.

But what is wrong with Syriza’s position (in my view) is to see the issue of debt and ‘fiscal space’ as the main (sole?) issues and have the illusion that the Eurogroup leaders will see it is in their interest to save European capitalism from a serious blow if Greece is thrown out of the euro.  As we now know, Greek finance minister, Yanis Varoufakis, says he aims to save capitalism from the stupid policies of neoliberalism, get some time to recover and then look at socialist measures some way down the road when capitalism is on a better footing (see my heavily criticised post,
https://thenextrecession.wordpress.com/2015/02/10/yanis-varoufakis-more-erratic-than-marxist/).

What’s wrong with both the Syriza leadership position and that of the left within Syriza is that they have put the debt burden and the euro on the front burner rather than replacing failed Greek capitalism at home as the top priority.  Whether Greece is in or out the euro will not restore growth and living standards if the capitalist sector continues to dominate in Greece.  Greece’ s public sector debt can never be repaid and should be written off as odious.  But the cost of servicing it has fallen to low levels already, so writing it off will not alone kick-start the economy.

The Greek government and its people must seize control of the commanding heights of the economy.  That means public ownership and democratic control of the banks and the major strategic companies; the launch of a public investment programme for jobs and growth and an appeal to solidarity within Europe for the Greek alternative against the neo-liberal governments in the Eurogroup.  That would probably lead to Greece being ousted from the EU, given the current balance of political forces.  But at least the Greek people and the rest of Europe would see why the Euro leaders are doing it and also have a clear alternative plan B to implement (https://thenextrecession.wordpress.com/2011/09/11/an-alternative-programme-for-europe/).

The danger now is that Syriza will agree to a compromise with the EU leaders that ‘saves’ Greek and Euro capitalism at the expense of little or no improvement in the conditions for the bulk of Greek people. All that does is postpone the crunch between reversing austerity and the interests of Capital, without a Plan B in the interests of Labour.

Doing God’s work again

Back April 2010, I wrote a post about Lloyd Blankfein, the chief executive officer of Goldman Sachs, the world’s most powerful investment bank (and also voted the most hated institution in the US in a recent poll – http://www.bloomberg.com/news/articles/2015-02-05/america-s-most-loved-and-most-hated-companies).

Blankfein had been interviewed by the UK’s Sunday Times. It went something like this: “So it’s business as usual then, regardless of whether it makes most people howl at the moon with rage? Goldman Sachs, this pillar of the free market, breeder of super-citizens, object of envy and awe, will go on raking it in, getting richer than God? An impish grin spread across Blankfein’s face. Call him a fat cat. Call him wicked. Call him what you will. He is, he says, just a banker “doing God’s work”. (https://thenextrecession.wordpress.com/2010/04/19/doing-gods-work/).

God’s work. Well, as we now know, Stephen Green, former chairman of that other notorious money launderette for the rich, HSBC bank, (see my post https://thenextrecession.wordpress.com/2014/08/27/getting-off-scot-free/), has also been doing God’s work. Reverend Green, an ordained vicar, published Good Value in 2009, an extended essay on how to promote corporate responsibility and high ethical standards in the age of globalisation!

The good Reverend was in charge of HSBC’s private banking division based in Switzerland, before he became chief executive and chairman of the whole bank. And it is this Swiss division that was engaged in hiding the ill-gotten gains of thousands of rich people in many countries who did not want to pay tax for income made out of people in their home bases. And HSBC went further in arranging ways and tricks to enable these rich people to recycle their cash back to the UK and other countries without tax payments.

All this was going on when the previous Labour government in the UK was in office. At the time, UK prime ministers Blair and Brown and City minister Ed Balls (now the finance spokesman for the Labour party) adopted what was ‘light touch regulation’ of banking activities. After all, the banks and the City of London were vital to Britain’s prosperity apparently.  As Peter Mandelson, then Labour’s business secretary, put it at the height of the neo-liberal boom back in 1998: ‘greed’ was a force for good and he was “intensely relaxed about people getting filthy rich as long they paid their taxes”.

The trouble with that argument is that the rich did not pay their taxes anyway, thanks to help from God and Stephen Green. Of course, Rev Green’s defence, provided by his supporters (Green won’t say anything), is that HSBC’s federated corporate structure prevented group management getting to grips with tricky local details, such as spotting those customers who were running multi billion-dollar drug cartels and arms deals (see my previous post https://thenextrecession.wordpress.com/2013/02/01/the-never-ending-banking-story/). But as Margaret Hodge, chair of the UK parliament’s public accounts committee, put it: “Stephen Green was either asleep at the wheel or involved in dodgy tax practices”.

It’s a sickly irony that the bank started off in Scotland in 1865 based on “Scottish banking principles” and was run thereafter with a strong ‘flavour’ of Scottish Presbyterianism. The corporate logo was a stylised adaption of the cross of Saint Andrew. Religious moral principles were supposed to rule in the original Midland Bank.  The takeover of Midland by the Asian Hong Bank to form HSBC soon led to taking over the Swiss banking division and the beginning, like everywhere else, of ‘universal banking’ and a move to investment and trading in financial markets as the main objective of the bank, rather than basic deposits and loans for customers. And, of course, money laundering and tax avoidance schemes for rich customers, including Mexican drug lords.

The rich tax avoiders themselves have been trying to justify their greed. Lord Fink, the former Conservative treasurer, attacked by UK labour leader, Ed Miliband, argued that everybody wants to avoid tax so there is nothing wrong with what he did in Switzerland. Fink said: “The expression tax avoidance is so wide that everyone does tax avoidance at some level.” It was done so that “my children were under 18 and I wanted them to have something to help them make their way in the wider world.”

Don’t we all?  What could be more reasonable? But the point is that tax avoidance, let alone criminal tax evasion, is not the same as, say, buying a bond that the government has decided can be tax free or not paying capital gains tax on your only home if you sell it.  Tax avoidance means schemes invented by accountants for rich people to avoid tax where government intend you to pay. And the Swiss bank accounts reveal we are talking about billions of ‘avoided tax’, all helped by HSBC and other banks.

‘Light touch regulation’ and the neoliberal aim of reducing tax for the rich and ‘creative’ has been the norm in all the major capitalist economies, with corporate tax being cut back sharply to boost company profits and huge exemptions on tax allowed for the very rich to swan round the world avoiding their share of burden of providing public services, infrastructure and communications paid for in taxes by the rest of us.

In the UK, there is the ludicrous ‘non-dom’ concession that allows the very rich to claim that they live elsewhere, pay a nominal tax to the UK government and then live in the UK, buy properties and pay no more for public services. The government says this concession (dropped in many other countries) is allowed because encourages wealthy foreign investors to spend time in Britain.

Exactly – but do we need these people? Amazingly, there is a rule that if you become a non-dom, you can hand on this status to your children! An inherited tax concession! The tax authorities recognise descent from the father so that rich children get this tax advantage even if they have been born, educated or lived most of their lives in the UK. Often they hold British passports.

Under the Blair and Brown Labour governments and of course under the current UK government, non-dom number shave exploded from 67,600 to 137,000 between 1997 and 2007.  So many non-doms living in Britain were among those placing funds in Switzerland that in 2010, the pursuit of back tax from the HSBC leaks only brought in £135m for HMRC in London, much less than for other countries. One great advantage for Britain’s non-doms is that, when ticking the box on their tax form, they are not required to disclose the existence of any Swiss accounts, though any income brought into Britain does become liable to domestic tax.

We now know that the Labour government and the coalition government knew all about the activities of HSBC and its tax avoider customers but did nothing about it. It turned a blind eye. Why? First, because the rich and powerful are always to be supported by governments that believe they are necessary to make capitalism work. And second, because, in the case of Britain and the US, big banks like Goldman Sachs or HSBC are seen as necessary wealth creators through financial markets that are so important in decaying modern capitalist economies.  Despite recent attacks on tax avoiders by Labour leader Ed Miliband, his finance spokesman, Ed Balls, seems less combative: at a recent meeting with City financiers he was reported as saying ‘You might hear anti-City sentiment from Ed Miliband but you’ll never hear it from me.”

But the financial sector is not a wealth creator: at best, it is a wealth distributor or facilitator, and at worst and increasingly so, it is a parasite on the productive sectors of the capitalist economy.  Is the financial sector useful and productive? Even mainstream economics doubts it.

Andy Haldane, now chief economist at the Bank of England, has shown that banking is not productive and even positively damaging to the ‘real economy’ (see my post, https://thenextrecession.wordpress.com/2013/10/31/the-value-of-banking-according-to-mark-carney-and-alan-greenspan/).  And a new paper by the Bank for International Settlements (BIS) finds that, as the financial sector grew its share of GDP in the major economies, overall economic growth slowed. The BIS reckons there was a causal connection (http://www.bis.org/publ/work490.pdf).

First, the high salaries commanded in the financial sector made it harder for genuinely innovative firms to hire researchers and invest in new technologies. Second, the growth of the financial sector has been concentrated in mortgage lending rather than in loans for investment in new technology. Credit has gone into a property boom not in boosting investment.

The BIS found that manufacturing sectors that are either R&D-intensive or dependent on external finance suffer disproportionate reductions in productivity growth when finance booms. By draining resources from the real economy, financial sector growth becomes a drag on real growth.
For roughly 40 years, the financial sector stayed roughly the same size relative to the rest of the economy. Then a phase shift occurred, starting in the late 1980s and it has since commanded a share twice as large.

The growth rate in productivity was systematically faster when the finance sector was relatively smaller and then when the finance sector got bigger, productivity growth got smaller.  The BIS found that a sector with high R&D intensity located in a country whose financial system is growing rapidly grows between 1.9 and 2.9% a year slower than a sector with low R&D intensity located in a country whose financial system is growing slowly. Financial booms are not, in general, growth-enhancing.

All this confirms the obvious to anybody that does not have a vested interest in maintaining the status quo. The major banks in all the major countries should be in public ownership. They should then engage in providing credit to households and small businesses and looking after people’s deposits, not in financial speculation that triggers credit crises and/or in tax avoidance, evasion and money laundering for the rich. The big banks dispose of £6tn in funds. This is equivalent to the amount that more than 60 million British people produce in four years. Yet they earmark just £200bn of this to investment in industry in the UK, a measly 3% of the total.

And bank executives would be stopped from earning grotesque salaries, bonuses and pensions that create huge inequalities of income and wealth and suck up human capital into unproductive activity. There could be democratic control of these banks, exercised by government and bank workers, and banks could be incorporated into a national plan for investment and growth.

That would be proper work, if not by God.

See ‘Take over the banks’ pamphlet by the UK Fire Brigades’ Union.

s-time-to-take-over-the-BanksLR.pdf

Red lines and fiscal union

It looks as though the negotiations between the Greek Syriza government and the Eurozone leaders will go right to the wire.  It won’t be clear whether there will be a deal or not until Monday 16 February, when the Eurogroup of finance ministers meet again.

Amid the flurry of comments, opinions and rumours, it seems that we can discern some red lines of no retreat for both sides.  For the Greeks, PM Tsipras has made it clear that there can be no continuance of the Troika programme and no further austerity measures.  There must be some ‘fiscal space’ for the Greek government to spend on the ‘humanitarian crisis’.  For the Eurozone leaders, led by the Germans, the red line is that there will be no more money or better terms unless Greece stays in a Troika or EU programme that can be monitored by the creditors i.e. EU governments, the IMF and the ECB.  This looks like an impasse, but we shall see.

While we wait to see if there is a deal, let’s consider the wider picture.  This crisis shows that the whole euro project is a botched form of currency and fiscal union, one that has taken this form because of the ambitions of German and French imperialism on the world stage.

What the period of Greek membership of the Eurozone has shown is that Greek capitalism has failed.  Indeed, so has capitalism in all the smaller Eurozone nations.  Nothing demonstrates more the need for a pan-European economy to use all the resources of the continent, both material and human. The smaller and weaker capitalist economies have been driven into a long winter of depression by the global slump.  The euro crisis is not really one of sovereign debt or a fiscal crisis.  Its origin lies in the failure of capitalism, the huge banking and private credit crisis and the inability of undemocratic pan-European capitalist institutions like the European Commission, the ECB, the Council of Ministers and the pathetic European parliament to deal with it.

The ambition of France and Germany to compete with the US and Asia on the world stage through monetary union was fundamentally flawed.  The original dream of a united capitalist Europe, of free markets in production, labour and finance, ever utopian, has turned into a mess.  Now the single currency union is under threat.  It always was ambitious.

The American investment bank, JP Morgan, recently looked at whether the ‘right conditions’ under capitalism existed for setting up a currency union in Europe.  They measured the difference between countries using data from the World Economic Forum’s Global Competitiveness Report, which ranks countries using over 100 variables, from labour markets to government institutions to property rights. The bank found that there’s an incredible amount of variation among the euro zone’s member nations. The biggest differences come in pay and productivity, the efficiency of the legal systems in settling disputes, anti-monopoly policies, government spending and the quality of scientific research.

Indeed, the euro zone countries are more different from each other than countries in just about any hypothetical currency union you could care to propose. A currency union for Central America would make more sense. A currency union in East Asia would make more sense. A currency union that involved reconstituting the old USSR or Ottoman Empire would make more sense.  In sum, “a currency union of all countries on Earth that happen to reside on the fifth parallel north of the Equator would make more sense.”  

But the currency union went ahead because of the political ambitions of France and Germany to have a Europe led by them, even after British capitalism refused to join.  Of course, the aim was to bring about a ‘convergence’ between the weaker and stronger economies.  That dismally failed in the boom years of 2002-7.  The Great Recession just exposed and widened the inequalities.

Can the existing currency union survive?  Well yes, if economic growth returns big time and/or if German capitalism grasps the nettle and is prepared to pay to help the ailing smaller capitalist economies through fiscal transfers.  It is no good the Germans saying they will do so if the likes of Greece, Portugal, Ireland, Spain etc “stick to fiscal targets”.  They cannot.  So Germany will have to decide on more transfers without more austerity. Yet the red lines being imposed by the Germans are precisely to avoid recognising the need to transfer funds to the weaker capitalist economies like Greece.

The reason the Germans are baulking at this is that a proper fiscal union would not be cheap.  The Cologne-based IW economic research institute reckoned that West Germans paid about $1.9 trillion over 20 years, partly via a “solidarity surcharge” on their income taxes, to help integrate and upgrade Eastern Germany. That was roughly two-thirds of West Germany’s GDP then. The subsidies helped cover East Germany’s budget shortfalls and poured money into its pension and social security systems. At the same time, nearly 2 million East Germans — a full one-eighth of the population — moved west to seek work.   That is the sort of transfer of funds and jobs that will have to take place to support the currency union.  Currency unions cannot stay still – Europe’s has been around for only 15 years. Either they break up or they move onto full fiscal union where  the revenues of the state are pooled.

Take Federal Germany itself.  There is a mechanism of fiscal transfer between the federal states of Germany, the so-called “Länderfinanzausgleich”. The German constitution states that the objective of this fiscal transfer mechanism is the convergence of the financial power across its federal states. The current system consists of vertical payments between the German state (“Bund”) and the federal states (“Länder”) as well as horizontal payments from federal state to federal state. The eligibility for transfer payment receipts is determined by an index (“Finanzkraftmesszahl”) which indicates the relative financial power of the federal states. Bavaria, Baden-Württemberg and Hesse are currently the only net contributors, while Berlin is the biggest net recipient of these fiscal transfers.

In Germany, fiscal transfers from the South to the North-East have certainly helped these federal states to converge in terms of their financial power and standard of living since the German unification in 1990. Nevertheless, after 25 years of fiscal transfer payments, the economic situation in these states remains highly unequal. For instance, the German unemployment rate varies significantly across federal states.

Of course, the rich Lander of Bavaria and Hesse are complaining that they are taking too much of the burden in Germanys’ fiscal union for ‘profligate’ Lander like Berlin and Saxony in East Germany.  But that is the point in a nation state: as Gordon Brown, former UK Labour PM, put it during the Scottish independence referendum last September, a nation state with fiscal union means “from each according to means; to each according to needs” – shades of communism!

Take the example of the UK.  This is a government of four nations and many regions.  Taxes are raised by a central state (although there has been some devolution to Scotland, Wales and Northern Ireland) and raising debt is mostly made by the central state (there are some local government bonds or loans).  Wales is a poorer part of the UK.  It runs a ‘trade deficit’ with the rich south-east of England.  Its inhabitants contribute way less in tax revenue than they receive in government handouts.   So Wales has twin deficits on its government and capitalist sectors, just as Greece has with the rest of the Eurozone.

Tax revenue per is 26% lower in Wales (at £5,400) and 23% lower in Northern Ireland (£5,700) than in UK as a whole (£7,300). Wales and Northern Ireland have less income and wealth than the rest of the UK and correspondingly raise less revenue per person from all the main taxes.  While the public finance deficit in England was approximately £2,000 per head, it was £6,000 in Wales: a difference of £4,000: a combination of higher public spending of £1,383 and lower tax generation of £2,400.  It’s because of higher public spending on tax credits, income support and on housing benefits in Wales with its lower wages, higher unemployment and greater social.  Fiscal transfers within a fiscal union ameliorates (but does not eliminate) these disparities.

Tax revenue in Scotland (£7,100 per person in 2012–13) looks much more like that in the UK as a whole (£7,300).  But public spending per person has been higher in Scotland than the rest of the UK and roughly 20% greater than in England.   So Scottish ‘budget deficits’ are higher than in England.  Devolution of spending and revenues to Scotland is gradually eroding the UK fiscal union.

Sometimes there are grumbles from the rich south in the UK that they have to pay for the unemployed Welsh but that argument does not have much traction.  After all, the extreme logic of that is to say that the very rich inhabitants of Kensington in the posh part of London should not have their tax revenues redistributed to the poor inhabitants of Wales or the north of England.  That would mean Kensington would have to break with the fiscal and currency union that is Britain, put up border controls and find their own government, armed forces and central bank.  Of course, their riches would soon disappear because they are based on the labour of all the people in Britain and even more from abroad.  It is a point that many nationalist elements in Germany and northern Europe forget.  If the Eurozone breaks up into its constituent parts, the ongoing (not just immediate) losses to GDP for northern Europe would be considerable.

The example of the US also shows the advantages of a federal state over the commonwealth of states that existed to begin with.  It took a civil war of bloody proportions to establish a unified state that wiped out the idea of secession for good.  Now the US federal government raises taxes and debt and provides funds to the states (even though they raise their own taxes).  A full financial union came later than fiscal union in the US, when the Federal Reserve Bank  was set up by the large private banks after a series of banking collapses.  Now dollars are redistributed through the federal reserve system to cover ‘deficits’ on trade and capital between states.  As a result, while the average national tax revenue per head is about $8,000, rich states like Delaware, New York, New Jersey, Massachusetts, Minnesota and Connecticut pay 25-50% more per head while poor states like Alabama, Missisippi, West Virginia, Kentucky or Michigan, or ‘empty’ states like Montana pay 25-50% less than the average.

I argued back in the middle of the Euro crisis in 2012 (https://thenextrecession.wordpress.com/2012/05/10/eurozone-debtmonetary-union-and-argentina/) that in the absence of German capitalism bailing out the south with huge fiscal transfers, the only way that the peripheral countries could restore growth and avoid the break-up of the EMU is by defaulting on the debt they have accumulated – in effect a forced fiscal transfer.  And so it seems for Greece.

Growth has not been restored by the neoliberal solutions demanded by the Euro leaders and the Troika.  The OECD keeps claiming that ‘structural reforms’ will deliver a rise in the level of GDP per capita for the indebted member states (see the recent OECD report for the G20 meeting, http://www.oecd.org/g20/topics/framework-strong-sustainable-balanced-growth/ambitious-reforms-can-create-a-growth-path-that-is-both-strong-and-inclusive.htm).  But what are these wonderful growth-enhancing structural reforms?  For Portugal, the Troika decided that they were a reduction of four public holidays a year, three days less minimum annual paid holidays, a 50% reduction in overtime rates and the end of collective bargaining agreements.  Then there would be more working time management, the removal of restrictions on the power to fire workers, the lowering of severance payments on losing your job and the forced arbitration of labour disputes.  In other words, workers must work longer and harder for less money and with less rights and a higher risk of being sacked.  Southern Europe must become a cheap labour centre for investment by the north.  That’s the Troika’s reforms.

Then there is deregulation of markets.  Utilities are to be opened up to competition.  That means companies competing to sell electricity or broadband to customers who must continually change their suppliers to save a few euros.  Pharmacies are to have their margins cut, so small chemists are to earn less but there is no reduction in the price of drugs from big pharma, the real monopolies.  And the professions are to be deregulated, so lawyers cannot make such fat fees but anybody can become a teacher or taxi driver or drive a large truck with minimal or no training.   Finally, there is privatisation of the remaining state entities sold cheaply to private asset companies in order to pay down debt and enlarge the profit potential of the capitalist sector.  It’s more or less the same proposals for Greece, Spain, Italy and Ireland.

The real aim of these neo-liberal solutions that the EU leaders and the OECD (now apparently an agreeable institution to deal with by the Syriza government) is not to restore growth as such, but to raise the rate of exploitation of the workforce.  This would boost profitability and so the private sector will then invest to create jobs and more GDP, assuming, of course, that capitalism does not have another slump before then.

Such policies have not worked so far.  And in the case of the weaker capitalist economies of the Eurozone they have been disastrous.  Ireland and Estonia have been offered up as examples of successful neoliberal policies, but as I have explained on many occasions, the reality is that growth and exports in Ireland and Estonia have only come about through huge deleveraging of private sector debt (at public expense), massive emigration and substantial social funding by the EU (some fiscal transfer there).

For Greece, mass emigration is taking place but debt deleveraging has not yet.  Yes, real incomes have been slashed and unit labour costs in Greece are now nearly on a par with Germany (see my post).  But will this be enough to get the Greek economy going now that it is ‘competitive’ in price?  Hourly wages have come down substantially in Greece and are in fact the lowest in the euro area with the exception of Latvia and Lithuania.

But despite a significant wage adjustment, exports have not picked up as they did in other countries.

Nominal change in exports is given as % of 2014 GDP. Nominal change in wages calculated as nominal % change between Q4 2007 and Q1 2014

What this tells you is that Greece’s capitalist sector is so weak and inefficient that even with a modest pick-up of profitability and huge drop in labour costs, it cannot compete in world markets. But it has had an ‘internal devaluation’ of labour and product costs, so if it exits the Eurozone now, a further currency devaluation may well not improve things at all, even on the export front, or at least only for a few years, as it did in Argentina.  But that would be at the expense of forced deleveraging as the Greek capitalist sector defaulted on its euro debt and went bust.

Weak Greek export performance is due to the rottenness of the oligarchies in the major industries in Greece, the failure of the Greek banks to provide credit to small businesses with any innovative products and the failure to invest in new technology by the major firms.  Greece’s biggest goods export is refined oil products. If Greece ever wants to develop a stronger manufacturing capacity to compete in world markets, it needs the support of funding from the rest of the Eurozone – lower debt, fiscal transfers and investment funding for shipping (6% of GDP), agriculture, alternative energy (sun and sea) and tourism (6% of GDP) and other services that Greece can offer.  And that means public investment. And it means cooperation and support from the rest of Europe.

Fiscal union must be part of that cooperation.  But it is unachievable in a capitalist European Union, where the national interests of the richer member states are put before a union of ‘equals’.  The German view of fiscal union involves a binding agreement between all members to run national budgetary policy so that no inter-country fiscal flows would ever be necessary! This is impossible to achieve, even if the Eurozone was growing at a reasonable pace, which it is not.

The idea that a central eurozone budget would gradually grow in size (from its tiny 1% of Euro GDP), towards a full federal fiscal union is a pipedream in a Eurozone with big strong states, a huge bureaucracy an ‘independent’ central bank and a feeble European parliament – in other words, no democratic commitment to a federal Europe. Instead, we have a botched, in-between solution, with no democracy, where there flows of resources from the strong national economies to the weak, only though Euro institutions and tied to draconian fiscal targets.  The red lines set by the Euro leaders in the negotiations with the Greeks demonstrate that.

Fiscal union, indeed a proper democratic federation of Europe, would only be possible through the ending of the capitalist mode of production and its replacement by one based on common ownership and resources transferred from ‘each according to means and to each according to need’.

PS. Don’t forget my Facebook site at https://www.facebook.com/pages/Michael-Roberts-blog/925340197491022

Yanis Varoufakis: more erratic than Marxist

While the ‘enfant terrible’ of the financial media, Greece’s new finance minister Yanis Varoufakis, enters key negotiations with other Eurozone finance ministers on a deal over Greek debt and economic recovery, I have been reading up on Varoufakis’ economics and philosophical ideas.

As a trained economist who has held many academic posts in various universities around the world, YV considers himself a Marxist, but an ‘erratic’ one. As he put it in a post on his blog back in 2013 (http://yanisvaroufakis.eu/2013/12/10/confessions-of-an-erratic-marxist-in-the-midst-of-a-repugnant-european-crisis/#_edn2), “while an unapologetic Marxist, I think it is important to resist him passionately in a variety of ways. To be, in other words, erratic in one’s Marxism.”

In his confessional post, VF explains that, although he considered himself a Marxist, he avoided studying Marxist economics at university because he wanted to understand and take on the basic premises of mainstream bourgeois economics. “When I chose my doctoral thesis, back in 1982, I chose a highly mathematical topic and a theme within which Marx’s thought was irrelevant, by design.” He is apparently an expert on the role of game theory in markets and the economic behaviour of ‘market agents’, being employed at one time by a gaming company for his expertise.

But he recognised that bourgeois economic theory bore little relation to reality. “When called upon to comment on the world we live in, as opposed to the dominant ideology regarding the workings of our world, I had no alternative but to fall back on the Marxist tradition”.

And what were key merits of the Marxist tradition in the eyes of YV? First, it was Marx’s insight that the world was full of contradiction: wealth and poverty; growth and collapse; democracy and the rule of the elite. “This dialectical perspective, where everything is pregnant with its opposite, and the eager eye with which Marx discerned the potential for change in the seemingly most constant and unchanging of social structures, helped me grasp the great contradictions of the capitalist era. It dissolved the paradox of an age that generated the most remarkable wealth and, in the same breath, the most conspicuous poverty.”

It was Marx’s dialectical thinking that enabled him to make his most important discovery about the capitalist mode of production, namely the “binary opposition deeply within human labour. Between labour’s two quite different ‘natures’: (i) labour as a value-creating (“fire breathing”) activity that can never be specified or quantified in advance (and therefore impossible to commodify), and (ii) labour as a quantity (e.g. numbers of hours worked) that is for sale and comes at a price.”

Thus Marx’s “brilliant insight into the essence of capitalist crises was precisely this: the greater capitalism’s success in turning labour into a commodity, the less the value of each unit of output it generates, the lower the profit rate and, ultimately, the nearer the next nasty recession of the economy as a system.”

Thus VF correctly captures the key law of contradiction under capitalism: the accumulation of capital through the exploitation of labour has a tendency to lower profitability and engender regular and recurrent crises in production.  So as YV puts it: “Capital can never win in its struggle to turn labour into an infinitely elastic, mechanised input, without destroying itself. That is what neither the neoliberals nor the Keynesians will ever grasp! “If the whole class of the wage-labourer were to be annihilated by machinery”, wrote Marx “how terrible that would be for capital, which, without wage-labour, ceases to be capital!”

For YV, Marx exposes the ‘false consciousness’ of bourgeois economics that reckons “wealth is privately produced and then appropriated by a quasi-illegitimate state” when the opposite is the reality “wealth is collectively produced and then privately appropriated through social relations of production and property rights”.   Moreover, YV also recognises that Marx does argue that what is wrong with capitalism is not inequality (that has existed in all class societies) but that it is wracked with continual crises that are “irrational, as it habitually condemns whole generations to deprivation and unemployment”.

All this would seem to make YV a Marxist by most definitions. But YV goes onto to say that he is really an “erratic” one because, in his view, Marx was wrong in two key areas.

First, he was far too dogmatic and closed in his views. As a result, he bred Marxists after him who adopted authoritarian policies and actions. Marx “failed to give sufficient thought, and kept a judicious silence, over the impact of his own theorising on the world that he was theorising about… He just did not consider the possibility that the creation of a workers’ state would force capitalism to become more civilised while the workers’ state would be infected with the virus of totalitarianism as the hostility of the rest of the (capitalist) world towards it grew and grew.”

Thus YV agrees with the superficial view of the populist right-wing papers and conservative thinkers that there is a straight line from Marx to Stalin and Pol Pot. There is no space here to deal with this ludicrous calumny of Marx and Marxism. I leave the reader to consider how justified YV’s argument is.

That’s because, according to YV, Marx’s other big error is even worse than breeding authoritarian and totalitarian regimes calling themselves Marxist. “It was his assumption that truth about capitalism could be discovered in the mathematics of his models (the so-called ‘schemas of reproduction’). This was the worst disservice Marx could have delivered to his own theoretical system.”

According to YV, Marx was determined in his determinism (my phrase).  Marx wanted to find economic models and laws that ‘proved’ capitalism would collapse or be subject to crises, when no such proofs can exist. By “toying around with simplistic algebraic models, in which labour units were, naturally, fully quantified, hoping against hope to evince from these equations some additional insights about capitalism.” As a result, we epigones of Marxist economics have “wasted long careers indulging a similar type of scholastic mechanism…Fully immersed in irrelevant debates on the transformation problem” and thus being ignored by mainstream economics.

YV’s argument smacks of empiricism and opposition to theory. Actually, the ‘scholastic’ debates over the ‘transformation problem’ by Marxists in the 1980s and 1990s eventually culminated in an important advance in Marxist economic theory that successfully defended Marx’s law of profitability against the attempts of mainstream neoclassical and neo-Ricardian economics to rubbish it (see Andrew Kliman’s seminal book, Reclaiming Marx’s Capital, http://akliman.squarespace.com/reclaiming/). That is what theoretical debate is about: to advance our understanding in a rigorous way.

Yet YV goes on “It was this determination to “have the ‘complete’, ‘closed’ story, or model, the ‘final word’, is something I cannot forgive Marx for. It proved, after all, responsible for a great deal of error and, more significantly, of authoritarianism. Errors and authoritarianism that are largely responsible for the Left’s current impotence as a force of good and as a check on the abuses of reason and liberty that the neoliberal crew are overseeing today.”  Thus Marx was a closed mind thinker, a determinist who had no room for error and doubt and thus wasted the time of later Marxists in pointless debates and he was so harsh on those who criticised this determinist view that he bred authoritarian attitudes in his followers.

Serious crimes, indeed, if they were true. But YV is talking nonsense. YV criticises Marx’s Volume 2 of Capital for trying to find a mathematical formula to show that capitalist accumulation can grow smoothly, when the real world is indeterminate, full of chance and change. But like many others, YV fails to recognise that Marx’s reproduction schema in Volume 2 are not meant to depict the reality of capitalism with all its warts. They are a model of ‘capital in general’, where capitalism is reduced to the basic forces of value creation and reproduction, excluding competition between capitals, credit, money, the equalisation of the rate of profit between capitals and the differences engendered between values and prices of production, let alone daily market prices.

Marx’s schemes of reproduction in Volume 2 were not a ‘closed model’ of capitalism. What they show is that capitalist accumulation will not stumble because of the ‘lack of effective demand’. Accumulation can take place with demand for capital goods and consumer goods. It is possible for a balance. But in reality that never happens except by accident. It is as indeterminate as YV wants.  Marx recognised and argued that the capitalist mode of production was a dynamic and uncertain system, but he delved below the level of uncertainty and appearances to the essence of capital in general and then added back each stage of reality to the level of many capitals (Volume 3) and then to market prices.

As Henryk Grossman explains in his essay on value and prices of production, at the level of many capitals, it is prices of production that move to establish an average rate of profit not values (see here Intro to Grossman Value-price trans and crisis 141101). And this is where the crux of crises rests – in the movement of the average rate of profit (Volume 3), not in the value reproduction schemes (Volume 2). This is a key mistake of Luxemburg and Bauer’s understanding of Marx’s reproduction schemas – and it seems YV as well.

Having convinced himself that Marx had a serious whiff of authoritarian determinism, he contrasts this with his delight in John Maynard Keynes’ eclectic indeterminancy. Yes, Keynes was on the side of the bourgeois and yes he was a snob etc, and he supported the ideas of that arch conservative thinker of classical economic, Rev Thomas Malthus, but “Keynes embraced Malthus’ scepticism regarding (a) the wisdom of seeking a theory of value which is consistent with capitalism’s complexity and dynamics, and (b) Ricardo’s conviction, which Marx later inherited, that persistent depression is incompatible with capitalism.”

You see, YV says, the trouble with Marx’s theory of crises is that it too generous to capitalism. Once sufficient capital values are destroyed and profitability is restored, capitalism can recover into a new cycle of accumulation and growth. But Keynes (and Malthus apparently) saw that this was wrong because capitalism can get locked into Great and Long Depressions that it cannot get out of. “Marx told the story of redemptive recessions occurring due to the twin nature of labour and giving rise to periods of growth that are pregnant with the next downturn which, in turn, begets the next recovery, and so on. However, there was nothing redemptive about the Great Depression. The 1930s slump was just that: a slump that behaved very much like a static equilibrium – a state of the economy that seemed perfectly capable of perpetuating itself, with the anticipated recovery stubbornly refusing to appear over the horizon even after the rate of profit recovered in response to the collapse of wages and interest rates.”

So “Keynes’ gem of a ‘discovery’ about capitalism was twofold: (A) It was an inherently indeterminate system, featuring what economists might refer to today as an infinity of multiple equilibria, some of which were consistent with permanent mass unemployment, and (B) it could fall into one of these terrible equilibria at the drop of a hat, unpredictably, without rhyme or reason, just because a significant portion of capitalists feared that it may do so.”

YV’s view that Marx’s theory of crises under capitalism cannot encompass long and lasting depressions and only explains regular and ‘normal’ recessions is again poppycock. Indeed, this blog has spent loads of words and time on arguing that Marx’s theory of crises provides the best explanation of the Great Depression and the current Long Depression, unlike Keynesian answers (see my posts, https://thenextrecession.wordpress.com/2013/02/10/why-is-there-a-long-depression/). And my upcoming book, due out in June, deals exactly with this issue.

YV exalts Keynes’ notion of ‘animal spirits’, i.e. that what drives capitalist accumulation is not the movement of profitability but the psychological and emotional ‘confidence’ of individual capitalists. According to YV, this is a “deeply radical idea” because it captures “the radical indeterminacy buried inside capitalism’s very DNA.”, a concept that Marx had abandoned “so as to establish his theorems as mathematical, indisputable proofs.” Again I have not the space to deal with the fallacies of Keynesian uncertainty and animal spirits as an explanation of capitalist crises (see my essay on Keynesianism here, APPENDIX TWO).

But most erratic is YV’s views about the current global economic crisis and in particular, the crisis in the Eurozone. He dramatically points out that “Europe’s present crisis is not merely a threat for workers, for the dispossessed, for the bankers, for particular groups, social classes or, indeed, nations. No, Europe’s current posture poses a threat to civilisation as we know it.”  Yikes, the end of civilisation: this suggests the need for radical socialist policies before it is too late.

But no. You see, the long depression being experienced in Europe (which I agree is a correct interpretation) “puts radicals in a terrible dilemma.” You see, it is not an environment for radical socialist policies after all. Instead “it is the Left’s historical duty, at this particular juncture, to stabilise capitalism; to save European capitalism from itself and from the inane handlers of the Eurozone’s inevitable crisis”.

Thus, YV says, his interventions in the public debate on Greece and Europe (e.g. the Modest Proposal for Resolving the Euro Crisis (see http://yanisvaroufakis.eu/euro-crisis/modest-proposal/), that he, Stuart Holland and James Galbraith (see my post, https://thenextrecession.wordpress.com/2014/10/28/from-establishment-to-anti-establishment/) co-authored and have been campaigning in favour of “does not have a whiff of Marxism in it.” Modest indeed!

YV says he would rather promote socialist policies as an answer to the Euro crisis but that would be unrealistic. Radical policies did not achieve anything against the forces of neoliberalism and Thatcherism in the 1980s: “What good did we achieve in Britain in the early 1980s by promoting an agenda of socialist change that British society scorned while falling headlong into Mrs Thatcher’s neoliberal trap? Precisely none.”  Apparently, it was a waste of time advocating socialist policies (assuming we did) in the 1980s because the people of Britain just swallowed Thatcherism hook, line and sinker (just a point, Thatcher never gained more than 40% of the vote in any election and most voters voted against her in all elections).  So when will socialist policies be worth advocating, according to YV – after we have saved capitalism? I don’t follow the logic.

This erratic Marxist, now negotiating with the neo-liberal Euro leaders aims “to save European capitalism from itself” so as to “minimise the unnecessary human toll from this crisis; the countless lives whose prospects will be further crushed without any benefit whatsoever for the future generations of Europeans.”  Apparently socialism cannot do this.  YV says “we are just not ready to plug the chasm that a collapsing European capitalism will open up with a functioning socialist system”.

Instead, according to YV, “a Marxist analysis of both European capitalism and of the Left’s current condition compels us to work towards a broad coalition, even with right-wingers, the purpose of which ought to be the resolution of the Eurozone crisis and the stabilisation of the European Union… Ironically, those of us who loathe the Eurozone have a moral obligation to save it!”  Thus YV has campaigned for his Modest Proposal for Europe with “the likes of Bloomberg and New York Times journalists, of Tory members of Parliament, of financiers who are concerned with Europe’s parlous state.”

An erratic Marxist indeed!

Greece and the Euro face-off

Much quicker than I expected, the new Greek government and the Euro leaders are coming to a major face-off. The Syriza government have made it clear that it will not agree to another Troika-style fiscal austerity and neo-liberal ‘structural reform’ programme in return for loans to pay back debt coming due (money to be paid to the IMF and hedge funds). Instead it wants debt relief, or ‘haircut’, or at least a new debt regime that reduces the burden of debt servicing to the minimum so that there is enough room for the government to spend to help the poor, the unemployed and bankrupt small businesses rather than Europe’s banks and oligarchs.

So far, the ECB and the Euro leaders are talking tough and saying that they will concede little or nothing to Syriza. On the contrary, the talk is of cutting off any further funding of Greek banks through the Eurosystem just as Greek banks see their customer deposits disappear abroad as rich Greeks and corporation spirit their money out of the country. The ECB has already blocked normal credit facilities to Greek banks. And now Greek bank deposits are starting to fall at an accelerating pace.

On Wednesday, the Euro finance ministers meet to decide what if anything they can offer the Greeks to help and the Euro leaders themselves will meet to discuss any final package.

The chances of the Greeks being forced out of the Eurozone has risen significantly because the most that the Euro leaders will offer will be an extension of the maturity of the existing EU loans to Greece (now totalling €217bn), so that repayments are spread out over a longer period and a reduction in the interest charged on those loans. But even these concessions are only likely to be offered if Greece agrees to more ‘structural reforms’ i.e. deregulating labour markets, privatising state companies and opening up markets to overseas capital.

Syriza is pledged to block these, although it will pursue (with more vigour) the tax obligations of the rich and oligarchs who avoided tax with the connivance of the previous Conservative government.

If Syriza accepts this limited offer from the Euro leaders, it will provide some ‘fiscal space’, because the cost of the EU loans has been reduced and interest payments on these loans have been postponed until 2022. So servicing costs will fall to below 2% of GDP this year. And if the maturity of these loans is extended even more, then the public debt to GDP burden, now standing at 175% of GDP, will fall by 20% points, because it will reduce interest payments by 0.5% of GDP a year, money that can be spent by the government elsewhere.

But of course, such concessions are way short of what the Greeks need to turn poverty, unemployment and investment around even if the Euro leaders offer to spend extra funds on infrastructure projects in Greece. And the concessions will still be conditional on Greece agreeing to a new Troika-type programme by any other name.

The Greeks want the Euro leaders to agree to a ‘bridging loan’ for a few months while they negotiate an agreement. But if the Euro leaders refuse that and there is no agreement this week, then the ECB governing council may well decide to cut off credit to Greek banks. The Greek banks are bust. Up to 40% of loans the banks have issued to households and companies in Greece have gone sour, or are ‘non-performing’, as bankers call it. Greek banks do not have enough capital and reserves to cover these loans if they have to be ‘written off’ and the ECB, responsible for bank governance in the Eurozone, may well insist on this soon.

And with deposits disappearing, Greek banks are now relying totally for their operations on Emergency Lending Assistance (ELA) from the National Bank of Greece (NBG). This is credit from the central bank to keep the banks going, subject to monitoring and restriction by the ECB.

The NGB finds this money by printing it and therefore in effect is receiving credit from the rest of the Eurozone under what are called Target 2 operations. Greek Target 2 liabilities, what the NBG owes to the rest of Eurosystem, have now risen to €60bn from a low of €35bn last autumn. During the height of the Euro/Greek crisis back in 2012, ELA reached €112bn. But it won’t be long before that level is reached again.

That is why the ECB governing council, if it knows that no agreement has been reached between the Greeks and the Euro leaders on the debt issue, may well decide that it cannot allow the NBG to go on printing money to bail out Greek banks.

If there is a two-thirds vote on restricting or stopping the NBG providing ELA, and the NBG sticks to the ECB instruction, then the game is up. Greek banks will run out of money and go bust, defaulting on their debts and there will be a run on the banks. Greece will have been kicked out of the Eurosystem of banking and, in effect, out of the Eurozone.

That will quickly lead to Greek government introducing capital controls to stop money leaving the country and then refusing to repay its debts, not immediately but between March and June when payments become due. The cost of default will be huge. The Greek government owes €273bn to the IMF, the ECB and the EU governments. Target 2 liabilities may well rise to over €160bn. And the Greek banks and corporations owe in euros nearly another €100bn to foreigners.

If the Greeks are thrown out of the euro and they will have to opt for a new currency. They would only be able to use the euro as Greek currency if they are prepared to accept a massive credit squeeze and deeper economic slump. If they opt to introduce a new currency, it will probably be worth only 50% of the euro. Greek banks, corporations and government will have to default by at least that amount. That means losses of about €200bn that governments, banks and corporations in the rest of Europe will have absorb, or about 2% of Eurozone GDP. Estimates put the loss to Germany alone of a Greek default at about €75bn.

That can be absorbed, at least on paper, without a meltdown in Europe of banks or government bonds, especially now that the Eurozone has got special stability fund to handle any bank or government crises.

The question is whether Angela Merkel and the German government would prefer to take the hit from default rather than concede Greek demands for debt relief and fiscal spending without any Troika-type conditions. The Germans do not want to show that their fiscal probity can be breached by a ‘profligate’ Greece led by a ‘rabidly leftist’ government. And they do not want the likes of Portugal, Spain or Italy to get similar ideas (the conservative Spanish government is backing the Germans on this. So they may opt for Grexit if the Greeks do not back down.

On the other hand, Grexit could lead to the unravelling of the whole Euro project if it confirms to an increasingly sceptical electorate that the Euro project is not a union of equals but really a Franco-German imperialist project (which it broadly is, of course). The precedent would be set that member states could leave or be thrown out and Euroscepticism would get renewed strength.

That’s the choice for the Germans, while Syriza must choose whether to accept new fiscal and structural conditions and monitoring for any debt relief. The face-off begins Wednesday.

ADDENDUM

The Greek government has just spelt out a new compromise deal for discussion with the EU on Wednesday.  The government’s proposal is in four parts, according to a Finance Ministry source. The first foresees that 30 percent of the Troika memorandum be scrapped and replaced with 10 new reforms which Greek officials are to agree with the Organization for Economic Cooperation and Development. The second sub-proposal entails Greece’s primary surplus target of 3 percent of GDP for this year being reduced to 1.49 percent. Thirdly, authorities want to reduce Greek debt through a swap plan. And finally, Greece’s “humanitarian crisis” is to be eased using measures set out in the government’s policy program which was unveiled by Prime Minister Alexis Tsipras on Sunday night.  According to Finance Minister Yanis Varoufakis, the government did not want “to tear up the (Troika) memorandum nor to enforce it faithfully.”!

As regards financing, ministry sources said Greece wants to secure the 1.9 billion euros in profits from the Greek bonds held by the Eurosystem and will seek to issue T-bills, some 8 billion euros above the 15-billion-euro limit which Greece has exceeded. Authorities are also keen to raise the threshold for emergency liquidity assistance from the European Central Bank. A further portion of a pending 7.2-billion-euro loan tranche could also be drawn if required, the sources said, essentially reversing the previous insistence by the government that it does not want the money. Another proposal foresees some 11 billion euros in leftover funding from the recapitalization of Greek banks being used to help Greek lenders deal with nonperforming loans.

This is a big step down from the Syriza government as they search for some ‘fiscal space’ to meet some of the promises they made to the electorate.  Two questions: will the EU leaders buy it and will the Greek electorate swallow it?