Summary: This week Europe’s leaders faced a choice somewhat similar and perhaps equally momentous as America’s leaders faced in 1787. But this week they chose a path that looks punitive and short-sighted, pursuing European unification but likely to generate discord and eventually fragmentation. Seldom does one act determine the future, but they might find it difficult to undo what’s been done this week. The only certain result is much suffering and humiliation for the Greek people. We can only guess at how this will work for Europe as a whole.
- The new bailout: the EU imposes Carthaginian deal on Greece
- For Whom the Bailout tolls
- Why are the EU member nations doing this?
- Lord Keynes explains the hidden truth behind this news
- For more information: posts explaining what’s happening and likely consequences
(1) The latest bailout: the EU imposes Carthaginian deal on Greece
Greece passed their last easy exit. Signing the latest bailout agreement (not yet done) leaves them no way to leave this highway to ruin, except by smashing through the guard rails and off the causeway. Only fools commit a nation to a course of action without providing an emergency out — but Greece’s leaders have do exactly that. We don’t yet know the exact terms of the deal, as it gains the necessary legislative approvals. But these seem likely forecasts:
- Exchanging their existing bonds — issued mostly under Greek law — for bonds issued under creditor-friendly UK law both diminishes their sovereignty and makes the eventual default far more difficult.
- Exchanging bonds issued to private investors for loans from quasi-governmental agencies makes the eventual default far more difficult.
- Pledging their gold reserves eliminates a vital resource needed to buy imports during the default and devaluation process.
- Little, perhaps none, of the new money goes to the Greek people. Rather it goes to banks and other Greek creditors.
- After this bailout, Greek sovereign debt will be almost twice GDP, with little hope for significant growth during the next few years.
- The EU demands severe restructuring of the Greek government, difficult in good times but perhaps impossible during the coming downturn.
- In exchange for bailing our EU banks, the EU imposes crippling austerity on Greece. A long severe recession seems the best possible outcome.
- This occasion, like the dozen or so previous major summits, provides an opportunity for politicians to falsely claim “
peace prosperity in our time” — but few economists concur.
- The coming months will further weaken Greece, so that the eventual necessary default and devaluation occur under conditions far worse than today’s.
Extreme outcomes seem likely, which might include depression (GDP already 17% below peak) and collapse of Greece’s political regime (probably not in the April elections, but in 2013 or 2014). Contagion to the rest of Europe is a high risk, especially to Portugal, Spain, and Italy.
(2) For Whom the Bailout tolls (willl be updated)
Summary: The news media usually report accurately, more or less. Often they prefer to act as stenographers for governments and corporations. Sometimes the logical thread linking events — the narrative — is obscure, hidden in the noise. Today we look at three examples of hidden history.
The world is not always as we’re told it is. Here are three of today’s major stories, where the true narrative remains hidden — and we attempt to guess at the truth.
- The recovery in America
- The war against Iran
- Germany fighting to preserve the eurozone
(1) The recovery in America
- Public debt outstanding as of 31 December 2010: $ 9,390,476,088,043
- Public debt outstanding as of 31 December 2012: $10,447,662,851,807
- Cost of the recovery: $1,057 billion.
- The increase in GDP bought by that fiscal stimulus: $561.2 billion
That does not mean the stimulus was wasted. Imagine the recession that a balanced budget would have produced. It does mean that cheering about a recovery is delusional; describing this as a “sustainable recovery” is doubly so.
Note: the public debt does not include treasury bonds bought by the social security trust funds, which are loans from the US government to the US government.
For more about this see About the January jobs report – mildly good news, but bought at great cost.
(2) The war against Iran
We can only guess at the plans of government leaders. That’s understandable operational secrecy, not a conspiracy. So what plan drives the intense propaganda drive demonizing Iran? If Israel plans to attack, they’ve forfeited any hope of surprise. Logic and history are our only guides.
Summary: Germany used it power over the European Monetary Union to institute a monetary policy that disproportionately benefited itself, to the disadvantage of the periphery nations. Germany prospered, they lost competitiveness. Now Germany acts to continue the game, attempting to force the losers to stay in the game. Now it’s Greece’s turn to go under the hammer. Will they comply or resist?
- The Financial Times breaks the story
- Update: The Greek government responds
- Update: Replies to Greece by the EU and the German goverment
- For more information about the European crisis
(1) The Financial Times breaks the story
“Call for EU to control Greek budget“, Financial Times, 27 January 2012 — Opening:
The German government wants Greece to cede sovereignty over tax and spending decisions to a eurozone “budget commissioner” to secure a second €130bn bail-out, according to a copy of the proposal obtained by the Financial Times.
In what would amount to an extraordinary extension of European Union control over a member state, the new commissioner would have the power to veto budget decisions taken by the Greek government if they were not in line with targets set by international lenders. The new administrator, appointed by other eurozone finance ministers, would take responsibility for overseeing “all major blocks of expenditure” by the Greek government.
Here is the “proposal” obtained by the FT. Only fools would accept this insulting and contemptuous offer.