Europe's Populist Left

[Sheilbh]

It's normally what the IMF do. Default, devaluation, austerity. Greece did that without the default or the devaluation. And of course the bailout money flowed straight back out of the country (only 10% has actually gone to the Greeks). As the IMF minutes noted in May 2010, this 'may be seen not as a rescue of Greece, which will have to undergo a wrenching adjustment, but as a bailout of Greece's private debt holders' - it may be seen like that because that's what it was.

In 2010 the IMF wanted some form of default - the Europeans didn't because it was their banks that had been lending to the Greeks. Since then the IMf have wanted less austerity and different structural reforms. But the Europeans want to get out the paddles and teach those lazy bastards a lesson.

[Martinus]

Would it be too bad an example to set to put Greece through some kind of debt-forgiveness program like you'd do for an African country?

I think the main concern with that is that the rest of PIGS would want it too.

[Sheilbh]

Tsipras says Greece will soon reach a deal with the EU creditors and will pay back their IMF and ECB assistance. The Greek Finance Ministry have appointed Lazards as advisers on public debt and fiscal management (they were previously appointed to deal with the Greek private sector haircut).

"My obligation to respect the clear mandate of the Greek people with respect to ending the policies of austerity and returning to a growth agenda, in no way entails that we will not fulfill our loan obligations to the ECB or the IMF," Tsipras said.
...
"We need time to breathe and create our own medium-term recovery program, which amongst other things will incorporate the targets of primary balanced budgets and radical reforms to address the issues of tax evasion, corruption and clientelistic policies," Tsipras said. "I am absolutely confident that we will soon manage to reach a mutually beneficial agreement, both for Greece and for Europe as a whole."

One of the ECB council members said that they won't extend further lending to Greek banks if a deal isn't reached by the end of February (a consequence of Varoufakis' statement yesterday), but that decision would take a 2/3rds majority, so ultimately it's Draghi's and he, and the IMF, are quiet.

Edit: Another ECB VP popped up to confirm that not extending ELA to Greece's banks is a decision for the governing council which wouldn't predict. As I say I think it's very, very unlikely that the ECB will effectively try and force a newly elected government out of the Euro when there's only been a few weeks for negotiations. My guess is things would have to degenerate massively in the next month for that to happen. If it ever does.

Meanwhile ECB Vice-President Peter Praet has given another interview to a German paper trying to explain Mono-ism away:

The ECB is buying government bonds to boost inflation and thereby economic growth. Are low petrol prices bad?
That is a natural argument. When petrol prices are falling, people are happy. However, monetary policy does not focus on individual prices, but rather on the overall price level. On average, prices in the euro area fell by 0.6% in January, and inflation rates will remain negative in the coming months. In Germany, prices fell by 0.5%, year on year, in January. We need to make sure that the euro are does not slip into a self-reinforcing downward spiral of falling prices and wages.

The Bundesbank does not see that as a problem.
If inflation in the euro area were to rise to 4%, everybody would expect the ECB to do something about it. Consequently, the ECB also has to step in when inflation falls to nearly zero. Price stability is threatened from above and below. We have a mandate under European law to maintain price stability. For very good reasons, the Governing Council of the ECB defined price stability many years ago as inflation close to, but below, 2% over the medium term – and it did so with the support of Germany and the Bundesbank.

Why has the ECB set its inflation target at 2%? Stable prices should mean 0% inflation.
With an inflation target of 0%, there would be no buffer. If an economic shock occurs in such cases, you have deflation straight away.

Is that so dangerous? The prices of computers have been falling for years. Surely that is good.
Cheaper computers are a good thing. Deflation means that prices in the economy as a whole are falling steadily. In such a situation, workers' wages are too high in comparison with the overall price level, and collective wage agreements cannot simply be changed. Therefore, production becomes too expensive and businesses stop investing because they assume that demand is falling. It is a vicious circle that leads to sharply declining economic activity and rising unemployment – the Great Depression in the United States in the 1930s has taught us that.

Can the risk of deflation be regarded as real at present?
We are not expecting deflation, but there are risks that need to be addressed. Prevention is better than cure. That is why we had to take action before the damage is done, because the inflation expectations of consumers and businesses are falling. That is dangerous. Also, a period of low inflation that is too prolonged entails significant risks.

People buy what they need, and whatever they can afford. Inflation expectations do not play any role in that.
Oh yes, they do. People are guided by expectations, even though they may not always be aware of it. People have an idea of what their future holds, of what they want, what they will spend and what they earn. They make rough estimates of what they can afford. If these expectations are not fulfilled, they experience a shock. And there was a risk of that occurring in the euro area, because deflation means less growth and lower income.

The ECB is doing all this solely for the benefit of crisis countries, i.e. Italy and co.
No, we work for the euro area as a whole. We have attempted to achieve our goals through low key interest rates, through purchases of covered bonds and through favourable loans to banks. All that has helped, but not to the extent desired, nor did it achieve what was required. That is the reason why we will now start purchasing government bonds. We have to use all instruments of monetary policy to ensure price stability across the euro area.

What makes you so sure?
I do not know what historians will write about the ECB at some time in the future, but every single measure we have taken was taken with due consideration of the risks involved, including the risk entailed if we had not done anything. What is also clear, however, is that the governments must now implement structural reforms.

Why does the ECB not put euro area governments under greater pressure?
This is not our role. If we were to make deals with governments on the basis of the principle that the ECB will do this, if you do that, we would lose our independence through such political give-and-take. And we would lose our credibility.

Couldn't you have put off the purchases of government bonds a little longer?
Some members of the Governing Council are of the opinion that such a measure should only be taken when deflation is a given. Nonetheless, almost all experts believe that it is far more difficult to combat deflation when in the midst of such developments. In that case, the central bank would have to spend many times as much and would still not be sure that deflation will be overcome successfully. That is the risk we wanted to rule out.

[mongers]

Thanks for that, Shelf, interesting link. 

[Neil]

Why didn't they hand Greece to Stalin?

Several reasons.  The British had been seeing themselves as the protectors of the Greeks since the early 19th century, and it was seen as desirable to keep the Soviets out of the Med.

[Sheilbh]

According to Greek TV at the end of that press conference Dijsselbloem whispered 'you just killed the Troika' into Varoufakis' ear and he replied 'wow'

Apparently the Greek press are also impressed that the Independent Greeks leader - and new Defence Minister - hasn't had a bigoted outburst in his first five days in office

And something to warm the cockles of Yi's heart:

New Finance Minister Says Greece Is Insolvent

The new Finance Minister of Greece has been making waves. In a meeting with Eurogroup chairman Jeroen Dijsselbloem on January 30th he appeared to say that Greece would no longer cooperate with the Troika – the combination of the IMF , European Commission and the ECB that has been running Greece's bailout programme. Dijsselbloem's face was an absolute picture, as FT Alphaville gleefully reported.

Except, of course, that Varoufakis was speaking in Greek, so this isn't what he actually said. And Dijsselbloem, who was listening via a translation service, did not hear what he actually said. Nor did the world's journalists, who by and large also don't speak Greek. Varoufakis (who is bilingual) later said that he perhaps should have made his remarks in English.

Nonetheless, his apparent refusal to deal with the Troika made headline news. The BBC's headline claimed he said "No debt talks with EU-IMF Troika". The FT put up an inflammatory headline saying that Varoufakis was refusing to work with the Troika. But the FT's report explains it differently:

Mr Varoufakis....said Greece "is working from the standpoint of the best possible co-operation with its institutional partners and the International Monetary Fund but not with a [bailout] program that we think is anti-European."

Eh? How is this "refusing to cooperate"? The reporters continue (my emphasis):

He also blasted the deeply unpopular bailout monitors from the European Commission, IMF and ECB, also known as "the troika", saying: "We are not going to co-operate with a rottenly constructed committee."

Ah. The problem is what is meant by "the Troika". In an interview with Emily Maitlis on the BBC's Newsnight program later on January 30th, Varoufakis explained (in English) that the Troika has two levels: the institutions themselves, and the "bailout monitors" they have sent to Athens to ensure compliance with program demands. It is these monitors who have been rejected.

So Varoufakis is not refusing to cooperate with the European institutions and the IMF. On the contrary, he says he wants a "rational discussion" with them. He is repudiating the bailout program that they have constructed.

But why is he repudiating the bailout program? Varoufakis gave Maitlis an everyday example to explain his reasoning (my emphasis):

Suppose a friend of yours were to come to you and say that he or she had difficulty paying the mortgage because of a reduction in their income – they lost their job or something like that. They have a great idea on how to solve this problem: they would get a credit card and draw money from it in order to meet the mortgage payments for the next few months. Would you advise them that they should continue to take these tranches of loans from the credit card in order to deal with what is essentially an insolvency problem?

The new finance minister has admitted that Greece is bankrupt.

Astonishingly, Maitlis completely ignored this. How any decent journalist could let such an opportunity pass is beyond me. It is the heart of the matter.

Everyone knows Greece is insolvent, of course, but no-one has ever stated it officially. The Troika's position is that Greece's problem is a temporary liquidity shortfall: lending it more money so it can meet current debt service obligations is justified because structural reforms will lead to renewed growth and increased income, enabling it to meet its obligations (including those for the new loans) in the future. But Varoufakis disagrees with this interpretation. His view is that while things remain as they are, Greece will never recover. The bailout program locks it into a debt deflationary spiral which simultaneously reduces its income and increases its debt burden. Continuing to accept more loans in order to meet debt service obligations only makes matters worse. What is needed is debt restructuring coupled with measures to restore growth.

It is certainly difficult to see that the bailout program has been successful. Five years on, and despite a private sector debt restructuring, the Greek economy remains deeply depressed. But of course Greece has resisted the structural reforms imposed by the Troika. Some think that if Greece had implemented them more enthusiastically, it might now be in better shape.

Varoufakis made it clear in the Newsnight interview that he is by no means opposed to structural reforms:

We do not want to reverse structural reforms. We want to deepen and extend them.

But he is deeply critical of the reforms imposed under the bailout terms, which he says do not address the "malignancies" of the Greek economy. He complains that the privatization program is a fire sale: the proceeds do not go into new investments or tax cuts, but simply go to meet debt service. Selling the family silver simply staves off default for a little longer. It does not restore Greece's income. And nor would decades of cost-cutting and tax raising to put Greece's debt/GDP ratio on a sustainable path. The large primary surpluses forecast by the Troika would squeeze all demand out of the economy. They are almost certainly impossible to achieve, and even if they were achievable, it is questionable whether they would restore the public finances anyway. The prospect of severe austerity for years to come is a serious disincentive to hard work and enterprise, which is what is really needed in Greece. If all your output disappears down the black hole of debt service, why bother?

Varoufakis wants an end to the policies that entrench debt deflation. "The crisis of the last five years has been detrimental to the whole continent", he says. "We want to end this".

He is calling for a New Deal, not only for Greece but for the rest of Europe. Many would echo his sentiment.

Saw this chart which highlight's what seems to be Syriza's approach:

They'll pay back private sector creditors, the IMF and the ECB - that debt is high but sustainable especially if they do as they promise and run a balanced budget/small primary surplus in perpetuity.

But they want some form of renegotiation from the ESM/EFSF (of which they're one of the top half of contributors ) and EU loans. Personally I like the idea of converting those loans into bonds conditional on a certain level of nominal GDP growth.

[The Larch]

According to our papers, the harder resistance against the Greek plans amongst EU governments comes mostly from Ireland, Spain and Portugal, in some kind of "If we had to suck it you have to suck it as well" argument.

[Iormlund]

O follamos todos, o la puta al río.

[Iormlund]

In related news, I will cease paying taxes in Spain as of this midnight.

As the saying goes, if you can't beat 'em, join 'em. Mutti.

[Legbiter]

As the saying goes, if you can't beat 'em, join 'em. Mutti.

[Sheilbh]

Very striking how many positive stories/spins on Greece these past few days have come from Rome. Maybe Renzi sees an opportunity/ally.

[celedhring]

Spain doesn't want Tsipras to get his way, since that could mean a Podemos government by the end of the year.

[The Larch]

And also because 26 thousand million euros from the different bailouts were ponied up by the Spanish government.

[Zanza]

In related news, I will cease paying taxes in Spain as of this midnight.

As the saying goes, if you can't beat 'em, join 'em. Mutti.

Welcome! Where will you go?

[Ideologue]

And also because 26 thousand million euros from the different bailouts were ponied up by the Spanish government.

That's like five hundred Eurobucks for every unemployed person.  What a theft.