Europe passes the last exit. A great crisis lies ahead.

Summary:  Today Europe’s leaders have the last opportunity to avoid a great crisis.  Will they continue to demand increasing austerity of the Greek people, pushing them further on a path devoid of hope and leading to poverty and political collapse?  Or will they realize the folly of their actions?  Updates will be posted in section 5.

“Dans ce pays-ci, il est bon de tuer de temps en temps un adiral pour encourager les autres.” (In Europe it is good to destroy, from time to time, a nation to encourage the others to pay their debts)
— From Voltaire’s novel Candide, slightly paraphrased to better fit today’s news


  1. The last exit before disaster
  2. “Can a return to the drachma save Greece as unemployment soars?”
  3. “Restructuring Greece Within the Euro is Illusory”
  4. Letter from Archbishop of Greece Ieronymos to the Prime Minister of Greece
  5. Updates:  other useful articles about this phase of the Euro-crisis
  6. For more information: posts explaning what’s happening and likely consequences

(1)  The last exit before disaster

The German people drew the wrong conclusion from their post-WWI experience.  They see the damage from the Weimar hyperinflation of 1921-1924 (probably an inevitable result of the WWI settlement) but suffer amnesia about the Weimar deflation which brough Hitler to power (see A lesson from the Weimar Republic about balancing the budget).   Their obsession today with inflation is like sounding a fire alarm while the ship sinks.  As a result they repeat in different form Weimar’s mistakes of 1929-32, imposing a crippling austerity on the PIIGS while striving to balance their own budget — almost certain to result in recession and deflation (for description of this process see Debt – the core problem of this financial crisis, which also explains how we got in this mess).

The PIIGS nations grow weaker, the eurozone economy slows, and europe’s centrist political parties lose support to extremists.  Greece leads this parade, but the other PIIGS — and France — follow in its path.  We can only guess at how this plays out, but it probably ends badly.

Today’s meeting of Europe’s Finance Minsters might be the last chance to change course.  Like all previous opportunities, they will almost certain drive by this last exit.  They are ill-equipped to do otherwise, much like 13th century priests treating the Plague on the basis of Scriptural precepts.

  • Myopically focused on protecting politically powerful banks rather than their people,
  • seeing Europe as a morality play rather than the product of the cold laws of economics,
  • believing in a mixture of pseudoeconomic economic myths (eg, confidence fairies, invisible bond vigilantes and the curative power of austerity), and
  • unwilling to recognize their own role in creating this crisis.

The series of posts last Fall forecast a resolution —  a crisis-driven policy change — in the near future.  Three months later nothing has happened.  Europe leaders continue to improvise with sh0rt-term measures, while Europe — especially the PIIGS — grows weaker.  Each passing month reduces their ability to take decisive action to avoid a crash.  The devotion of Europe’s leaders — both in the North and South — to the unification project exceeds my expectations, but no longer appears rational.  Perhaps they do not see the cost in broken lives.  Perhaps they do see, but do not care.  Perhaps they value the shining dream of a future Europe more than blasted lives of today’s proles (sollateral damage).

Next are several articles reporting about Greece, the front lines of Europe.  Watch their society crack under the stress.

(2) Can a return to the drachma save Greece as unemployment soars?“, Ambrose Evans-Pritchard (Business Editor), The Telegraph, 19 February 2012 — “Greece’s unemployment bomb has detonated. After a deceptive calm, the surge in job losses since last summer is shocking even for those who never believed that combined fiscal and monetary contraction could possibly lead to any result other than ruin.” Excerpt:

A variant of this lies in store for Portugal as its “internal devaluation” starts in earnest. The young Schumpeterians in charge of the Portuguese economy insist otherwise — cocksure that shock therapy will triumph without the cushion of debt relief and devaluation — but events have a habit of  demolishing dreams.

In November alone 126,000 Greeks lost their jobs in a country of 11 million, equivalent to three and a half million Americans in a single month. The unemployment rate jumped from 18.2pc to 20.9pc.  This has not yet fed through into social breakdown. Greeks receive unemployment support for an average of thirty weeks, with a ceiling of €454 a month, according to Professor Manos Matsaganis from Athens University.   Those with civil service tenure are placed on labour reserve for two years at half their basic pay, or a third of their actual pay.  Once these cushions are exhausted, Greeks are on their own. The monthly ratchet effect will then become painfully evident.

… Dimitra Noussi, who runs two homeless shelters and a soup kitchen for the City of Athens, said the crunch comes once people have been unemployed for five or six months and cannot pay the rent. Most fall back on the kinship network   but there comes a point when critical mass overwhelms even this cultural backstop.

… One can see why the high priests of the EU Project wish to prevent elections   taking place in April. The political centre is disintegrating, with the once triumphant PASOK party down to 9pc in the polls and New Democracy at 18pc — each party reduced to a pro-Memorandum rump after the mass expulsion of   dissidents, and each stunned almost senseless.

The latest best-seller is the Greek translation of Heinrich Winkler’s “Weimar   1918-1933: History of the First German Democracy”, narrating how an   indebted Germany pursued the same deflation policies under the Gold Standard as Greece is now pursuing under EMU — with the same results. The book culminates in the Reichstag elections of July 1932 when the Nazis and Communists between them won half the seats, and Weimar died. Such parallels are always inexact. The radical parties of Syriza and the Democratic Left are not authoritarian. Yet their ascendancy surely threatens to shatter the existing order. “If we achieve a Left-dominated government, we will politely tell the Troika to leave the country, and we may need to discuss an orderly return to the Drachma,” said Syriza MP   Theodoros Dritsas, choosing his words carefully.

The news that Iceland has regained its investment grade rating — with unemployment down to 6pc — comes as a timely reminder that countries can indeed go it alone and live to tell the tale. Though of course, Iceland’s debts are in sovereign krona, not Mr Schäuble’s euro, and Iceland exports a lot of aluminium.

Mr Papademos warns that default and EMU-exit would lead to “uncontrollable economic chaos”. But is that not already the case? No Greek bank has   been able to issue a letter of credit accepted anywhere in the world since November. Large Greek companies are having to relocate their headquarters to Bulgaria in order to conduct basic trade.

The “drachma risk” has already killed investment. Greece is suffering the anticipated consequences of EMU exit without the benefits, so it might as well lance the boil, impose capital controls, and create a new   banking system (as Iceland did). Such catharsis might start to unlock €60bn of cash savings in gold, dollars, German euro notes (letter`X’, Greece`Y’), and such-like, sitting in the proverbial mattress. Foreign investors might start to nibble again, once the Greek exchange rate reflects reality at around seven Chinese yuan.

(3) Restructuring Greece Within the Euro is Illusory“, Der Spiegel, 20 February 2012 — Opening:

Europe’s finance ministers plan to approve a second bailout for Greece on Monday but Hans-Werner Sinn, the head of Ifo, a top German economic think tank, warns that the money will only help international banks — not the Greeks. He argues that Greece can only solve its crisis if it quits the euro.

SPIEGEL: The finance ministers of the euro zone want to approve a new bailout for Greece this Monday. Can the additional €130 billion ($172 billion) save Greece?

Sinn:No, and the politicians know it can’t. They want to gain time until the next election. I think we’re wasting time by doing this. … Because Greece’s external debt is rising with every year that passes until it leaves the currency union. We’re getting ever further away from solving the problem. The basic problem is that Greece isn’t competitive. The cheap loans that the euro brought the country artificially raised prices and wages — and the country has to come back down from this high level.

SPIEGEL: So the euro countries shouldn’t approve the aid?

Sinn: They should give them the money to ease their exit from the currency union. The Greek government could use the money to nationalize the country’s banks and prevent the state from collapsing. The state and the banks must continue to function through all the turmoil that an exit will entail.

SPIEGEL: This turmoil would hit the population hard.

Sinn: Yes, undeniably. But the turmoil would only be temporary, it would last one to two years perhaps. This time would have to be bridged with the financial aid from the international community. But the drachma will immediately depreciate and the situation will stabilize very quickly. After a short thunderstorm, the sun will shine again.

SPIEGEL: How would a euro exit help Greece in concrete terms?

Sinn: It would become competitive again. Because Greek products would rapidly become cheaper, demand would be redirected from imports towards domestically produced goods. The Greeks would no longer buy their tomatoes and olive oil from Holland or Italy but from their own farmers. And tourists for whom Greece has been too expensive in recent years would return. In addition, new capital would flow into the country. The rich Greeks who deposited so many billions, possibly hundreds of billions of euros, in Switzerland would see the falling property prices and wages and would have an incentive to start investing in their own country again.

SPIEGEL: Does the exit from the euro zone entail Greece going bankrupt?

Sinn: No, quite the reverse. The bankruptcy forces the exit. The Greeks will immediately leave if they don’t get any more international aid because the bankruptcy couldn’t be managed within the euro system. The state would be insolvent and the banking system too. The entire payments system would fall apart. The chaos can only be avoided if Greece leaves and the currency depreciates immediately.

SPIEGEL: Does that mean Greece should be forced to leave?

Sinn: No, no one should force anyone. But at the same time Greece doesn’t have the right to receive permanent assistance from the other euro countries, and Greece’s creditors aren’t entitled to have the debt repaid by the international community. Everyone has to earn their standard of living themselves, and those who choose to earn money from risk must bear that risk.

SPIEGEL: If Greece were to exit the euro zone, would the tough austerity measures still be necessary?

Sinn: In this case, savings really only refer to a reduction in debt growth. The economist only refers to savings if debt is actually repaid. Greece is nowhere near doing that. But it’s true that Greece has gotten used to the flow of cheap credit from abroad, and that it’s politically impossible to cut wages to the extent needed to make the country competitive.

SPIEGEL:Why are the euro-zone countries so adamant that Greece must remain in the currency?

Sinn:This isn’t really about the country. The Greeks are being held hostage by the banks and financial institutions on Wall Street, in London and Paris who want to make sure that money keeps on flowing from government bailout packages — not to Greece, but into their coffers.

SPIEGEL: What about the contagion that a bankruptcy or a Greek exit would involve? Financial markets may speculate that other countries will suffer a similar fate as Greece.

Sinn: There may be contagion effects. But I think this argument is being instrumentalized by people who are worried about losing money. People keep on saying “the world will end if you Germans stop paying.” In truth only the asset portfolios of some investors will suffer.

(4)  Letter from Archbishop of Athens and All Greece Ieronymos to the Prime Minister of Greece

Homelessness and even hunger – phenomena seen during the [Second World] war – have reached nightmare levels … A sense of patience among Greeks is running out, giving way to a sense of anger, and the danger of a social explosion can no longer be ignored.

… We must all understand the feeling of insecurity, desperation and depression in every Greek home. This, unfortunately, is continuing to causes suicide among those who can no longer stand the drama in their family and the suffering of their children. … We are being asked to take even larger doses of a medicine that has proven to be deadly and to undertake commitments that do not solve the problem, but only temporarily postpone the foretold death of our economy … And what is likely to follow are more painful, more unjust measures in the same hopeless and unsuccessful course of our recent past.

The full text in Greek is on the website of the Archdiocese of Athens.

(5)  Updates:  other useful articles about this phase of the Euro-crisis

(a)  Paul Krugman’s analysis today at the New York Times — Excerpt:

What’s happening is that nobody is prepared to take the plunge into either of the paths that might eventually lead out of this: sustained aid (not loans) to Greece, or departure from the euro, leading eventually to higher competitiveness and faster growth. Both options would be politically catastrophic, which means that they can’t be taken until there is literally no alternative.

(b)  Felix Salmon today at Reuters — Excerpt:

The effect of all this fiscal tightening? Magic growth! A huge amount of heavy lifting, in terms of making the numbers work, is done by the debt sustainability analysis, and specifically the assumptions it makes. Greece is five years into a gruesome recession with the worst effects of austerity yet to hit. But somehow the Eurozone expects that Greece will bounce back to zero real GDP growth in 2013, and positive real GDP growth from 2014 onwards. …  this whole plan is also contingent on a bunch of things which are outside the Troika’s control, including a successful bond exchange.

… the plan assumes that Greece’s politicians will stick to what they’ve agreed, and start selling off huge chunks of their country’s patrimony while at the same time imposing enormous budget cuts. Needless to say, there is no indication that Greece’s politicians are willing or able to do this, nor that Greece’s population will put up with such a thing. It could easily all fall apart within months; the chances of it gliding to success and a 120% debt-to-GDP ratio in 2020 have got to be de minimis.

Europe’s politicians know this, of course. But at the very least they’re buying time: this deal might well delay catastrophic capital flight from Greece, and give the Europeans more time to work out how to shore up Portugal if and when that happens. Will they make good use of the time that they’re buying? I hope so. Because once the Greek domino falls, it’s going to take a huge amount of money, statesmanship, and luck to prevent further dominoes from toppling.

(c) It’s All Greek to Me!“, Satyajit Das, Naked Capitalism, 21 February 2012 — Excerpt:

The Greek Prime Minister spoke of a choice between “austerity” and “disorder”. He got both, as the Greek Parliament based the European Union (“EU”) agreed to severe budget cuts and outside rioters protested the plan. … With Greece increasingly doomed, the real significance of the negotiations is that they provide a template for future European sovereign restructurings. No one buys the oft-stated European leaders’ position that Greece’s position is unique or exceptional. Portugal is first in the line of fire, with the Irish, Spanish and Italians watching anxiously. … Greece has consistently failed to meet economic forecasts. Despite measures by the Greek government, debt continues to increase. According to the EU statistics office, Greece’s debt reached 159.1% of GDP in the third quarter of 2011, up from 138.8% a year earlier and 154.7% in the previous quarter.

Greece may get through the March 2012 maturity but the arbitrary 120% debt to GDP ratio, the best case under the plan, is unsustainable, even in the unlikely case that it is met. The Greek economy, which has been in recession for years, shrank by 7% in later part of 2011. Budget revenues for January 2012 fell 7% from the same time last year, a fall of Euro 1 billion. This compares to a budget target for an 8.9% annual increase. Value-added tax receipts decreased by 18.7% in the same period compared to January 2011.  Greece’s financial position will deteriorate and it will miss key milestones – debt levels, budget deficits, growth, asset sales and structural reforms. The projected reductions in debt are based on optimistic assumption of growth which are unrealistic given the severity of the income cuts and shrinkage in government spending.

With elections due in April 2012, government support for the austerity plan cannot be assumed, in face of a serious recession and increasing social unrest.

A similar pattern is already evident in Portugal, Spain and Italy with debt, budget and growth targets, largely unrealistic, being missed. Popular resistance to reforms and austerity is also predictably rising. Prime Minister Maria Monti has made it clear that Italy cannot take more austerity, which has barely started to be implemented.

… There is no longer any pretence of “assisting” Greece. It is about ensuring that German and French banks minimise their losses. It is probable that no funds will be released to Greece but rather placed in a special account from where it will be used to meet the country’s debt obligations.

(d)  Other articles of interest:

(6)  For more information:  posts explaning what’s happening and likely consequences

Explanations of what’s happening and likely consequences:

  1. Government policy errors as a cause of the Great Depression, 1 November 2008
  2. Fetters of the mind blind us so that we cannot see a solution to this crisis, 1 April 2009
  3. A lesson from the Weimar Republic about balancing the budget, 10 February 2010
  4. All about deflation, the quiet killer of modern economies, 19 July 2010
  5. The simple explanation of why night falls over Europe, 9 December 2011
  6. Explaining the gold standard, the Euro, Default, Deflation, and Hyperinflation, 12 December 2012

Other posts about the crisis in Europe:

  1. The post-WWII geopolitical regime is dying. Chapter One , 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
  2. Can the European Monetary Union survive the next recession?, 11 July 2008
  3. The periphery of Europe – a flashpoint to the global economy, 8 February 2010
  4. A great speech by the PM of Greece. How soon until an American President says similar words?, 3 March 2010
  5. Governments cannot go bankrupt, 2 April 2010
  6. The EU does Kabuki for Greece. Is it the next domino to fall?, 14 April 2010
  7. About the Euro crisis: the experts are wrong; the German people are right., 7 May 2010
  8. Former Central Bank Head Karl Otto Pöhl says bailout plan is all about ‘rescuing banks and rich Greeks’, 20 May 2010
  9. The Fate of Europe, nearing the point of decision, 13 September 2011
  10. Europe drifts towards the brink of a cataclysm, 26 September 2011
  11. Delusions about easy fixes for Europe, dreaming during the calm before the storm, 30 September 2011
  12. Every day the new world emerges, yet we see it not.  Like today, as Europe begs China for loans, 15 September 2011
  13. Is Europe primed for chaos, as it was in July 1914?, 7 October 2011
  14. We see the outlines of the next cure for Europe.  Will it work?, 14 October 2011
  15. Today Europe’s leaders took another step towards the edge of the cliff, 27 October 2011
  16. Where to from here, Europe?  Some experts share their views., 8 November 2011
  17. Status report on Europe’s slow re-birth (first, the current system must die), 10 November 2011
  18. Europe begins its endgame.  Watch and learn, for Europe’s problems are the world’s., 11 November 2011
  19. Looking ahead to see the new shape of Europe, 22 November 2011
  20. Hot news! The Wehrmacht failed to take Greece. Now Germany tries again, with a different method., 28 January 2012

11 thoughts on “Europe passes the last exit. A great crisis lies ahead.”

  1. “Mr Papademos warns that default and EMU-exit would lead to “uncontrollable economic chaos”. But is that not already the case? No Greek bank has been able to issue a letter of credit accepted anywhere in the world since November. Large Greek companies are having to relocate their headquarters to Bulgaria in order to conduct basic trade.”

    Nigel Farage dubbed this guy “Unelected puppet Papademos” — because, well, he’s unelected and he is a puppet of the banks. His government is there to pay bondholders, no matter what, and that will continue until the day they fly him out of there via military helicopter. The great crisis is now, with so much homelessness and despair in Greece. And the default will be a great crisis for the financial system, but for Greece, it will be the beginning of the healing process, as discussed in the comments above regarding Iceland. But will the it come? Who knows. I think these guys will try everything to keep those bonds being paid. They already replaced a democratically elected leader — I’m sure they have other ideas. Maybe they’ll appoint a new leader to Germany, to ensure that the Germans continue to bail out Greece. That could be the start of something interesting, I’m sure.

    On the timing, my understanding is that the bonds are due sometime late in March. I think the current deal will get Greece past the March 20th date, so that the great implosion will be put off for a few more months at least.

  2. There was a speaker from the University of Maryland on British 5-live radio 2days ago ,I didnt catch his name . He was very passionate . Said the German currency was undervalued and the Greek overvalued when the Euro was set up. Suggested if the Germans are serious about the Euro project they should give Greece their BMW factories . If any Germans are reading this , how come you havent aready lost your BMW factories to Hungary ?

  3. Listen FM – I’m fed up with tweeting your excellent posts. Why don’t you get a bot to tweet them yourself? That’s what @NYTimesKrugman does – perfectly honourable!

    1. This technology is beyond me, but there is a Fabius Maximus twitter feed. WordPress automatically sends new posts to it, with links. Sometimes, like today, the titles do not always communicate to it correctly.

      Am I missing something?

  4. Eurozone’s shocking prescription for Greece“, Telegraph, 21 February 2012 — Excerpt:

    “As part of the deal, the Greek government has committed to enshrine into its legal framework a provision to give priority to debt service payments above all other public expenditure, including its inclusion in the Greek Constitution as soon as possible.”

    I think this is the key, and will be the pattern for other defaulting states. That the EU will install unelected leaders, as in with Greece and Italy, and then these guys will push through constitutional changes that give special rights to the bondholders, mainly large banks and financial institutions. Greece, by agreeing to these bailouts, will lose the legal right to default, and that what remains will be a stump of a government, basically there to suck the money out of people and send it off to the banks. You can vote for whoever you like, but the banks get theirs first.

    “One can see why the high priests of the EU Project wish to prevent elections taking place in April. The political centre is disintegrating, with the once triumphant PASOK party down to 9pc in the polls and New Democracy at 18pc – each party reduced to a pro-Memorandum rump after the mass expulsion of dissidents, and each stunned almost senseless.”

    If ever there was a time for radical political change, this was it. I think there’s a brief moment here, prior to the point when the legal shackles lock permanently and forever. After that it’s either eternal indenture or revolution/military coup.

  5. ”crippling austerity on the PIIGS”

    Another stupid, bigoted, illiterate american. They can’t all be that way???

    1. FM: ”crippling austerity on the PIIGS”
      Trev: “They can’t all be that way???”

      “Crippling austerity” refers to the policies imposed on the PIIGS nations. It says nothing about the PIIGS.

      “Another stupid, bigoted, illiterate american.”

      Your comment makes no sense to me. However, it must have been fun to write.

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