The real European tragedy

When a government has given up control over money and credit, it has made itself vulnerable to capital markets whims and supra-national dominance.

What we are witnessing in these months is nothing less than a European tragedy. If Greece in one month time humiliated must leave the monetary union, the hollowness of the often expressed toast speeches vaunted European solidarity is unmasked. This realization will lie like a dead weight across European cooperation for decades to come. Mutual trust will have suffered irreparable damage; for when it really mattered, it turned out that even the richest countries were self-sufficient, as the bill for the failure of the Community project should have been shared. Here, we aim not only to Germany. The Danish government was also quick to insist that her contribution had to be reduced by one billion Dkr. as a condition for accepting the EU budget for the coming years.

What we are experiencing in the interval since the Greek election, is the calm before the storm. The new Greek government, which was elected in spite of 'well-intentioned' warnings from the EU-Commission chairman Jean-Claude Juncker, has ruled out further social cuts, cuts in minimum wage, let alone privatizations. In stead, the Greek Government asked for support to establish an effective tax administration, which the former government has neglected, ensuring that even the wealthy pay taxes their share, and a help to get registered the Greek property abroad and most importantly: to relaunch economic growth. One should not forget that the Greek GDP fell by 25 per cent. as a consequence of the Troika’s (ie the European Commission, the European Central Bank and the International Monetary fund) requirements. Yet the response from Brussels was a clear rejection of any softening of the existing loan terms.

When it dawned on Brussels that the negotiation process with Athens was short-circuited, and given the conditions for further loans was unchanged the Greek fate was sealed and inevitable. But, Bruxelles (and Athens) needed time to organize and signed a four months 'caese-fire' in what period both parties can prepare a so-called 'Grexit' in – hopefully – a fairly orderly way. Brussels simply needed time to prepare the Greek withdrawal from the monetary union, without creating a precedent case, which would undermine the politics of the very conservative governments of Portugal, Spain and of course Germany. Therefore these governments stubbornly have made all kind of obstacles to the idea of an agreed Greek debt write-down. If Berlin/Bruxelles do not turn around on the commanded requirements for more loans a compromise is blocked, and either we will experience a Grexit or Greece in practice ruled by a foreign administration, the latter entire unacceptable for the Syriza government and is tantamount with a call for a referendum. 

Reality has demonstrated that there is not much support in Brussels when the call for solidarity cost any money. But the present situation has a specific irony, because virtually all of the EU-loans that Greece has 'got' since 2010, has been used to release German French and others banks' from their non-performing loans to Greek businesses, banks and the government.  Hence, the huge loans from EU and IMF, which the Greek government had to underwrite in 2012, have in fact never been paid to Athens, they were passed directly to Frankfurt and Paris, as support for their banks by overtaking the bad loans which they have advanced to the former Greek governments in the 'good years'.

It is this paradox that the new Greek government had to renegotiate loans which the previous conservative government has signed to prevent a default of private German banks. Further, one should not forget, that back in 2011 Brussels put a huge pressure on the then PASOK government lead by Prime Minister Andreas Papadreou. He was forced to cancel a referendum on the debt issue and to accept a technocrat government.

 Anyhow, the new Greek minister of finance had expected a certain acceptance of his view points; but he was debunked. Its opponentIt is a conservative coalition lead by Jean Claude Juncker and Angela Merkel, which dictates the conditions which the left wing government in Greece has to accept. This dictate they make, of course, to support the dethroned colleges in Athens and to search, short sightedly, support from their national electorates (the tax-payers).  Although the Greek people appreciate the euro  they have to realize that being a member of the European Monetary union means abandoning its own currency system and the right to print money, which effectively has destroyed its sovereignty. When a government has given up control over money and credit, it has made itself vulnerable to capital markets whims and supra-national dominance. The government can no longer finance its most needed expenditures, because tax revenues fail. Today, the Greek government bonds by international rating agencies are classified like so-called 'junk bonds', where the rate is above 10 per cent. p.a., if the bonds can be sold at all. Without its own money any government is at the mercy of either the Brussels diktats or the caprice of the global financial markets.

When solidarity in the EU has failed so blatantly, the new Greek Government has no choice. It must re-establish its own currency system. And it would surprise us if there is not already ordered the printing of new bank notes, so-called euro-drachma. (Here it should be remembered that as a consequence of the dissolution of the Latin currency union in early 20th century francs were nationalized into a French, Belgian and Swiss franc). The new Greek banknotes should be put into circulation at short notice; for when the break is inevitable, the government has to act quickly. In fact, there is no time to vast, because in these weeks a significant capital flight from Greece is taking place. Billions of euros are withdrawn from banks in Athens and transfer to Northern European (and Swiss) banks.

Where does this capital come from? The answer is simple but untenable: From the private Greek banks, Which - as long cease-fire lasts - can borrow in the European Central Bank. It will be interesting to see, to what extent these loans have to be repaid, if the entire Greek banking system goes bust and has to be reorganized. When the collapse of negotiations between Bruxelles and the Greek government has become a reality, the Greek banks wil be forced to close down for at least one week, while their books are controled and reconstructed. Hence international capital control has to be imposed for quite a while. Here, the Greek administration could draw on the experience of other countries, particular Cyprus and perhaps Iceland, where just capital controls have prevented the subsequent stampede.

The value of the new euro-drachma will naturally fall considerably. This is considered by many ‘observers’ as a problem, which it also is for companies and individuals, who have borrowed money abroad, and for ordinary employees who must pay higher prices for a number of imported consumer goods. But these problems could be handled, especially if those parties who have gained by owning foreign assets were taxed and these money redistributed. In fact, Iceland is an example to copy, where a socialdemocratic government ensured that the distributional consequences of the currency devaluation did not increase the number of poor families. Something similar will Syriza government could do when it has regained control of the financing of public spending and the banks. 

On the other hand, the devaluation of the euro-drachma will also cause a number of benefits for the Greek economy. The mere fact that most agricultural prices are set in euros, will here give a considerable boost in income. The tourism industry will once more be attractive for the northern European sun bathers; but more importantly it will give Greek industry and entrepreneurs an opportunity again to be able to compete in the single European market. 

A prerequisite for the success of a re-nationalization of the Greek currency is a rapid creation of a substantial surplus on the balance of payment. If this happens, the Greek government does not have to borrow new money on the international capital markets. There remains only the question, at what speed and at what interest rate the old loan should be settled. Here we are talking about the loans that the private northern European banks initially had authorized and subsequently were converted into EU loans by the technocrat government headed by Papademos without much political discussion.

 Allow us to conclude with the sincere wish that Brussels / Berlin will come to their senses and begin real negotiations with the Greek government and thereby show just a little solidarity with the growing number of Greek people who utterly undeserving go to bed hungry every night. If so the scope of the European tragedy would, at least not grow much further.

Bruno Amoroso, Jesper Jespersen

Bruno Amoroso,Professor emeritus of Rotskilde University (Denmark). Co-editor of Insight.Jesper Jespersen is professor of economics at Roskilde University.( The most recent book is:"Jesper Jespersen & Bruno Amoroso,"Un’Europa possibile. Dalla crisi alla cooperazione". Copenhagen and Rome: Political Revy & CastelVecchi, 2014