Category: European Union

Quote of the Day

No Comments

The luck has come due to the ability of the Conservative party to fill the void in our lives left until the new season of Game of Thrones starts by providing an ongoing referendum-induced saga involving regal intrigue (Queen Elizabeth II, rumoured Brexiter), ambition (Chancellor George Osbourne), betrayal (former welfare minister Iain Duncan Smith) bizarre-o religious weirdness (Stephen “Pray Away the Gay” Crabb, his replacement), tits (Home Secretary Theresa May) and bestiality (London Mayor Boris Johnson). They’ve given us everything but the dragons. That said, there’s still a few months to go yet so we don’t want to be premature.

—“Clive” at Naked Capitalism

The post is titled, “Brexit: This is What We Call a Muppet Show,” and it is quite amusing.

Anarchy in the UK

No Comments

Your musical accompaniment

David Cameron has set June for a referendum on Britain leaving the European Union:

The UK will vote on whether to remain in the EU on Thursday 23 June, Prime Minister David Cameron has said.

The prime minister made his historic announcement in Downing Street after briefing the cabinet.

He said he would be campaigning to remain in a reformed EU – and described the vote as one of the biggest decisions “in our lifetimes”.

Ministers immediately divided up into the leave and remain camps as the campaigns got under way in earnest.

Fasten your seat-belts. It’s going to be a bumpy ride.

Spain is Going Pear Shaped

No Comments

In response to the election result the representatives of the center-left Socialist Party met with the Mariano Rajoy of the right-wing Peoples Party, but only to tell him to piss off:

The arduous task of assembling a new government for Spain got off to a bad start on Wednesday after the leader of the Socialist party flatly ruled out any deal with the Popular party of prime minister Mariano Rajoy.

Pedro Sánchez, the leader of the Socialists, held a brief meeting with Mr Rajoy in the prime ministerial compound outside Madrid — but apparently only to reiterate his opposition to any accord.

“We will vote against the Popular party and against Mariano Rajoy as prime minister. Voters have asked for change,” he told a news conference after the meeting.

The meeting was the first encounter between two party leaders since the inconclusive general election last Sunday. Spanish voters delivered a deeply fragmented parliament in which the two mainstream parties — the centre-right PP and the centre-left Socialists (PSOE) — will have a much-reduced presence.

The PP will be the strongest bloc in parliament once again, but it remains 53 seats shy of an absolute majority in the 350-seat chamber. The Socialists will be a distant second, followed by the upstart anti-austerity Podemos movement.

A second new entrant is the centrist Ciudadanos party, whose 40 deputies will make a useful addition to any alliance but are not enough to hand a majority to the PP on their own.

Much like in Greece, and Portugal, the two mainstream parties have been following a consensus that is opposed what appears to be a majority of the electorate, which has the electorate moving far right and far left.

Unfortunately, the response of Brussels to this trend is to become even more opaque and undemocratic.

It is a recipe for disaster.

Stupid IP Tricks

No Comments

European tax authorities going after Starbucks for “Recipe” payments in order to artificially lower its tax payments in Europe:

If there are two edicts I try to follow whenever I’m writing, they are, first, write what is true and, second, avoid cliche at all costs. I bring that up only as a preface before saying the following: the UK is walking down an Orwellian path. It’s nearly the cliche of cliches to say something like this, and yet it happens that the cliche is true. While there is most certainly a real thing known as a threat from Islamic terrorism, there is also such a thing as overreaction. What started as the British government’s attempt to ban extremist thought from social media and television (under the notion that some thoughts are too dangerous to enjoy the freedom that other thoughts deserve) then devolved into the conscripting of teachers that were to be on the lookout for children that might become radicalized. To assist them with this, the government helpfully provided spy-software to use against students. Spy-software which itself was found to be exploitable in the most laughably easy of ways. This employed two of the most horrifying aspects of Orwell’s Oceania: the concept of thought-crime and the employ of citizens to fearfully surveil one another.

 And now it seems the UK is going even further, adopting Oceania’s reputation for the swallowing up of citizens should they be found suspect of thought-crime by those watchful citizens. Specifically, the Family Division of the Judiciary has put out a memo declaring exactly how it will remove children from the homes of anyone it suspects might radicalize those children. Here’s a snippet.

 Recent months have seen increasing numbers of children cases coming before the Family Division and the Family Court where there are allegations or suspicions: that children, with their parents or on their own, are planning or attempting or being groomed with a view to travel to parts of Syria controlled by the so-called Islamic State; that children have been or are at risk of being radicalised; or that children have been or at are at risk of being involved in terrorist activities either in this country or abroad.

 Only a local authority can start care proceedings (see section 31(1) of the Children Act 1989 – the police powers are set out in section 46). However, any person with a proper interest in the welfare of a child can start proceedings under the inherent jurisdiction or apply to make a child a ward of court.2 Usually, in cases falling within the description in paragraph 1 above, it will be the local authority which starts proceedings under the inherent jurisdiction or applies to make a child a ward of court, and the court would not expect the police (who have other priorities and responsibilities) to do so. There is, however, no reason why in a case where it seems to the police to be necessary to do so, the police should not start such proceedings for the purposes, for example, of making a child a ward of court, obtaining an injunction to prevent the child travelling abroad, obtaining a passport order, or obtaining a Tipstaff location or collection order. Given the complexities of these cases, I have decided that, for the time being at least, all cases falling within the description in paragraph 1 above are to be heard by High Court Judges of the Family Division.

In other words, the High Court Judges within the Family Division are now tasked with determining whether children will be made wards of the state based solely on suspicions of possible radicalization. Children torn from mothers and fathers in Muslim homes will be subject to the whims and inherently flawed watch of the larger citizenry. A citizenry, mind you, that has had its vigilance unduly ramped up by the government’s past actions and requests. It’s hard to imagine a better recipe for the unfair targeting of Muslim families than this. Unfortunately for all concerned, this same memo imagined just such a recipe, making things even worse.

………

 Tax avoidance [Note: Tax avoidance uses legal, though frequently unethical, techniques to lower the tax burden. Tax evasion is a crime.] is a sore point in the United States, where the largest companies, including Apple, Amazon and many others, routinely try to minimize their bills. In Europe, the cases have hit a raw nerve in countries where citizens have been squeezed by years of austerity, and stoked friction among member states that are jockeying with one another for jobs and investment.

 ………

 After asking Dutch tax authorities and Starbucks to provide details of their tax deals last year, the commission determined the company’s tax setup with the Netherlands had no realistic economic justification. The case zeroed in on Alki, the British-based entity at the center of Starbucks’ efforts to reduce its Dutch and European tax bills.

 In 2001, Starbucks installed its European corporate headquarters and a massive new coffee roasting plant in Amsterdam after conferring with Dutch tax authorities. The setup proved beneficial: Starbucks created several Dutch partnerships that were not subject to the country’s corporate tax, including one named Emerald City, a nickname for Seattle.

 Emerald City owned Alki, which was set up in London to house Starbucks’ intellectual property. The intellectual property included logos and the recipe for roasting coffee beans, which Starbucks subsidiaries pay Alki a royalty to license. Because of its structure, Alki was not subject to corporate tax in the Netherlands or Britain.

 ………

 The recipe was basically the temperature for roasting beans, and appeared to be more like instructions than intellectual property. Yet counting it as such allowed Starbucks’ roasting unit to reallocate most of its profit to Alki in the form of royalties, the commission said, nearly wiping out the Dutch tax bill. No other Starbucks companies or roasters paid royalties for the same information, the commission said.

Crap like this happens, because we as a society have made a conscious decision to encourage rent of this sort behavior.

IP protections are there to incentivize creativity, and when we extend those incentives far beyond what is necessary for this, we create a cesspool of corruption and self-dealing.

It also one of the things that contributes to a less equal society, because the unearned proceeds create resources to lobby for even more rentier behavior.

Elections is Weird

No Comments

Somehow, after completely failing to deliver on its promises, and folding like a bunch of overcooked broccoli, Syriza still managed to emerge from the latest Greek elections the conclusive winner:

Alexis Tsipras will be sworn in as Greece’s prime minister later on Monday and his new government formally announced on Tuesday, Greek media said, after the leftist Syriza leader romped to an unexpectedly convincing election victory.

The result on Sunday was a personal triumph for the 41-year-old, who gambled on the snap poll last month to see off a revolt by party radicals over his U-turn on accepting more tough austerity measures in exchange for Greece’s third international bailout.

The premier-elect will now make renegotiating the terms of Greece’s debt mountain a top priority. He will attempt to build a broad consensus among the parties he defeated so as to strengthen his hand in talks with the country’s eurozone creditors, a senior Syriza source told Reuters.

………

Following a campaign that for weeks looked too close to call, Syriza won 35.5% of the vote – a fraction less than its previous total – against 28.1% for the centre-right opposition, New Democracy, giving the leftist party 145 seats in the 300-seat parliament.

………

Tsipras said he would renew his coalition with the small nationalist Independent Greeks party to give him the 151-seat majority he needs in parliament. The new government’s programme will be dictated by the punishing terms of Greece’s latest €86bn rescue package, which demands a radical overhaul of the country’s ailing economy and far-reaching changes to tax, welfare and pension systems. The cash-for-reforms deal is subject to quarterly reviews, with the first due next month.

I am thoroughly flummoxed by these results.

My guess as to the meaning of all this is that, “The whippings will continue until morale improves.”

Merkel Got What She Wanted

No Comments
Greek Prime Minister Alexis Tsipras has resigned and called snap elections:

Greece’s Prime Minister Alexis Tsipras has announced he is resigning and has called an early election.

 Mr Tsipras, who was only elected in January, said he had a moral duty to go to the polls now a third bailout had been secured with European creditors.

 The election date is yet to be set but earlier reports suggested 20 September.

 Mr Tsipras will lead his leftist Syriza party into the polls, but he has faced a rebellion by some members angry at the bailout’s austerity measures.

 He had to agree to painful state sector cuts, including far-reaching pension reforms, in exchange for the bailout – and keeping Greece in the eurozone.

A portion of Syriza has responded by splitting off into a new party:

Hardline rebels have confirmed an irreparable split in Greece’s ruling Syriza movement and broken away to form a new anti-austerity party as the country heads towards its fifth general election in six years.

The long-awaited move by up to 29 dissident Syriza MPs on Friday followed the resignation of the prime minister, Alexis Tsipras, who stepped down on Thursday to pave the way for a snap poll widely forecast to strengthen his hold on power.

The new Popular Unity party, headed by the former energy minister Panagiotis Lafazanis, said it would fight the promises of further austerity and far-reaching reform that Tsipras made to Greece’s international lenders to secure a new €86bn (£62bn) bailout package.

Lafazanis told a press conference the party would offer a realistic alternative to the deal. He said: “A new power is coming to the fore. We aim for government … and we will not fall victim to blackmail. We want to become a great movement that will sweep the bailouts aside.”

The veteran former Communist party member listed Popular Unity’s key objectives as cancelling Greece’s three bailouts, writing down its mountain of debt and leaving the eurozone “if necessary” to help the country recover.

This is significant, because we will now have a non-fascist party in the election that saying that there are worse things than leaving the Euro zone.

I don’t think that the Greek populace is willing to leave the Euro ……… yet, but Euro skeptic parties appear to be on the upswing.

When there is no politically alternative to a poorly conceived, and insanely managed common currency, those feelings have to go somewhere.

Now that Merkel, who said that Tsipras resigning was, “Part of the solution, not of the problem,” it’s clear that the replacement of social democratic parties with the, “We don’t suck quite as much,” policies of Tony Blair and their ilk has left a large political vacuum.

I just hope that Fascist parties don’t fill this vacuum, but I fear that they will.

It’s a Good Start

No Comments

This is kind down in the weeds finance, but the fact that the EU is requiring a central facility for clearing all derivatives:

The European Commission adopted new rules Thursday mandating central clearing of certain over-the-counter interest rate derivatives contracts. Phased in over three years, the mandate, which can begin in April of next year at the earliest, covers interest rate swaps with certain features denominated in euros, pounds sterling, Japanese yen or U.S. dollars.

Central clearing of derivatives was first agreed to by world leaders at the G-20 Pittsburgh Summit in 2009. It began in the US in 2013, followed by a requirement in 2014 that certain swaps begin trading on swaps execution facilities (SEFs).

The lack of coordination in the way derivatives markets reforms have been implemented in different jurisdictions has long led to complaints about cross-border fragmentation. As far back as January 2014, when the US has implemented central clearing but before US mandates for trading on SEFs had kicked in, the International Swaps and Derivatives Association (ISDA) had already published a research note titled “Cross-Border Fragmentation of Global OTC Derivatives: An Empirical Analysis.”

In September of last year, Commodity Futures Trading Commission (CFTC) Commissioner J. Christopher Giancarlo sounded alarms that uncoordinated cross-border regulations in the swaps market had the potential to degenerate into a regulatory “trade war” that could further fragment cross-border swaps trading.

“Rather than controlling systemic risk, the fragmentation of global swaps markets into regional ones is increasing risk by Balkanizing pools of trading liquidity and market pricing,” he said at the time.

This is important for a number of reasons:

  • It means that we are closer to get meaningful data as to the volume of what Warren Buffet called, “Financial weapons of mass destruction.”
  • It will allow for irregular trades to be flagged more easily, because they will stand out in comparison to the rest of the market.
  • It will allow for effective taxation of these instruments.

It is some rare good news in the financial regulation front.

Today’s Must Read

No Comments

Joschka Fischer, the former Foreign Minister for Germany has an OP/ED titled, “The Return of the Ugly German,” and it has to be read.

I will give you 2 paragraphs, and tell you to go read:

Germany has been the big winner of European unification, both economically and politically. Just compare Germany’s history in the first and second halves of the twentieth century. Bismarck’s unification of Germany in the nineteenth century occurred at the high-water mark of European nationalism. Militarism became intimately associated with German power. Indeed, Germany’s public philosophy, unlike that of France, Great Britain, or the United States, never incorporated a civilizing ideal to justify the use of military power.

 The foundation of the second, unified German nation-state in 1989 was based on Germany’s irrevocable Western orientation and Europeanization. And the Europeanization of Germany’s politics filled – and still fills – the civilization gap embodied in German statehood. To allow this pillar to erode – or, worse, to tear it down – is a folly of the highest order. That is why, in the EU that emerged on the morning of July 13, Germany and Europe both stand to lose.

H/t Naked Capitalism.

What a Surprise: Poles are Worrying about a New German Conquest

No Comments

In response to the largely German driven takeover of Greece, Polish support for joining the Euro has fallen off a cliff:

Once, it was an exclusive club that nearly all of Europe aspired to join. Now, in the wake of Greece’s latest financial crisis and the hard-line response from many of the Continent’s powers, becoming a partner in the European common currency seems less and less appealing to many of the countries lined up for their chance.

From Poland to the Czech Republic to Hungary and points farther south and east, joining the euro is increasingly seen as rife with risks and costs — including a substantial surrender of sovereignty — that outweigh the benefits. And while many of the countries that have not yet adopted the single currency had doubts before the Greek crisis flared, the heavy penalties incurred by Athens to stay in the eurozone have made the trade-offs even clearer and the political leanings against membership more pronounced.

The qualms about partnership in the currency raise further questions about the ability of the European Union to maintain momentum toward its long-held and oft-stated goal of ever-closer union. More than any other policy, the single currency was intended to bind the members economically and politically while reducing the chances of conflict, and the decline in enthusiasm for the union has tracked a more general reassessment of European integration.

The doubts are now playing out primarily in the countries that most recently joined the European Union, primarily in Central and Eastern Europe. Lithuania became the 19th and newest adopter of the euro in January.

………

With such political attitudes hardening, the prospect of Poland’s or any other country’s adopting the euro anytime soon appears quite remote, said Sebastian Plociennik, an analyst for the Polish Institute of International Affairs who focuses on European integration and economic issues.

This is not a surprise.

The EU was all about preventing another horrific war in Europe, particularly another attempt by Germany to conquer Europe.

So now, other nations which bound by treaty to join the Euro at an indeterminate time are thinking that the proper time is, “When hell freezes over.”

This has set back EU integration, and Euro adoption by decades.

Why the Germans Shouldn’t Run the EU

No Comments

It turns out that the economy of North Korea grew faster than the EU’s economy last year:

North Korea’s economy expanded by 1.0% to $29.85 billion (£19 billion) in 2014, according to Reuters citing analysis from South Korea’s central bank.

That’s just better than the 0.9% growth recorded in the Eurozone last year.

The Bank of Korea (BoK) report that “the increase in economic activity was attributed mainly to growth in services and building while farming, mining and manufacturing saw slower growth.”

Growth in services, making up around 31.3% of total economic output, accelerated to 1.3%, up from 0.3% in 2013, with retail sales, food, and accommodation, logistics and communications all expanding from a year earlier.

………

North Korea does not release official economic data, hence the reliance on the BoK analysis to estimate economic output.

EU growth is pathetic.

What’s more the EU’s hegemon and chief predatory exporter, Germany, experienced a GDP growth roughly double that of the EU as a whole.

German policies with regard to the EU, and particularly with regard to the Euro zone, are about benefiting the nation at the expense of its neighbors.

German domination was a bad idea in 1935, and it’s a bad idea in 2015.

Someone at the IMF Gets It, but It Ain’t Lagarde

No Comments

In response to the mindlessly punitive deal for the Greek bailout, IMF staff have released a report that calls for massive debt write-downs, and an anonymous source at the IMF implied that such a write-down is a requirement for IMF participation:

The International Monetary Fund threatened to withdraw support for Greece’s bailout on Tuesday unless European leaders agree to substantial debt relief, an immediate challenge to the region’s plan to rescue the country.

 The aggressive stance sets up a standoff with Germany and other eurozone creditors, which have been reluctant to provide additional debt relief. The I.M.F role is considered crucial for any bailout, not only to provide funding but also to supervise Greece’s compliance with the terms.

 A new rescue program for Greece “would have to meet our criteria,” a senior I.M.F. official told reporters on Tuesday, speaking on the condition of anonymity. “One of those criteria is debt sustainability.”

 Debt relief has been a contentious issue in the negotiations over the Greek bailout.

 Athens has pushed aggressively for creditors to write down the country’s debt, which now exceeds €300 billion. Without it, Prime Minister Alexis Tsipras has argued the debt will remain a heavy weight on Greece’s troubled economy.

 But Germany and other countries, including the Netherlands and Finland, are loath to grant Greece easier terms, which are a tough sell to their own voters. German Chancellor Angela Merkel has ruled out a “classic haircut” on Greece’s debt.

 The I.M.F. is now firmly siding with Greece on the issue. In a report released publicly on Tuesday, the fund proposed that creditors let Athens write off part of its huge eurozone debt or at least make no payments for 30 years.

 ………

 In going public, the I.M.F. is making a tactical move, adding pressure to the negotiations over the bailout deal. But its aggressive position also complicates efforts to complete a deal, with Greece’s Parliament scheduled to vote on Wednesday whether to accept the creditors’ conditions.

One thing that we can be sure of, however, is that whoever leaked the need for debt relief was not the Managing Director of the International Monetary Fund Christine Lagarde, because she has walked back this assessment:

In general, when discussing large complicated institutions distinctions must be made between parts of this institution. The mainstream press is particularly bad at that kind of nuance because these organizations are already complicated: making further distinctions between IMF managing directors, IMF staff and the IMF executive board gets needlessly obscurant in their view. However, these distinctions are important. The report that was leaked two weeks ago and the latest update to that report was written by IMF staff and specifically “neither discussed with nor approved by the IMF’s Executive Board”. Additionally, Christine Lagarde or her title “managing director” appear no where in this document. Thus to say that the “IMF” is saying anything in this report is deeply misleading.

The reporting of this latest update was even more muddled because it was combined with an anonymous statement from a “senior IMF official” by the Financial Times. The Financial Times lede reads as follows:

The International Monetary Fund has warned that it might not be able to participate in Greece’s bailout if the programme does not include substantial debt relief, setting itself on a collision course with the country’s eurozone creditors.

This (and the rest of the document) suggests to me that it is the Managing Director (ie Christine Lagarde) who goes to the board and ask for authorization. Is the anonymous official claiming to speak on behalf of Christine Lagarde? If so why is she not making this statement publicly? In my mind this anonymous official’s statements only make sense in three situations:

  1. Christine Lagarde is both unwilling to sign on to a deal the Eurogroup would currently agree to and unwilling to overtly and strongly pressure them to create a “better” deal they could sign. Thus she is aiming for a Grexit and no deal.
  2. Christine Lagarde is willing to sign on to whatever deal the Eurogroup would currently agree to but wants to covertly pressure them to offer more debt restructuring. In other words it’s a point of contention but not a dealbreaker.
  3. Many on the IMF staff don’t want Lagarde to sign whatever deal the Eurogroup is currently considering and specifically want much more debt restructuring. They have and are willing to leak things to the media to attempt to create this outcome whether by embarrassing their own Managing Director or putting indirect pressure on the Eurogroup.

To me option three seems like the most plausible. The same FT reporters (Peter Spiegel in Brussels and Shawn Donnan in Washington) reported over three weeks ago that a “senior [IMF] official” says many staff at the IMF “would rather cut off their little finger” than continue being involved in Greek bailouts. The use of similar descriptions (“senior official” and “IMF senior officials”) implies that the same sources at the IMF that said this over three weeks ago have been leaking the Debt Sustainability analysis and interpreted them for the press. This suggests a revolt among the rank and file of the IMF that doesn’t extend to the people who will ultimately make the decision. Remember that the definition of a “senior official” is necessarily vague to preserve anonymity and could easily be someone who can’t directly influence the decision made and certainly doesn’t speak for Lagarde. Thus, in this scenario this statement makes sense as a calculated lie by IMF staff to influence events. This also may suggest that my intuition earlier this week was wrong: it may not be the Obama administration crafting a narrative with the leaked reports and selective interpretations of official statements, but simply off the record comments from these same IMF staff sources (or at least, a complicated combination of both these sources).

What we are seeing here is a conflict between people who understand the underlying economics, and the “Very Serious People”, like Lagarde, or her predecessor Dominique Strauss-Kahn, who was in charge when the original deal with Greece was signed,  who are somehow operating out of a sense of European Union exceptionalism.

I would note that when DSK approved the original deal, he actually violated some basic IMF rules about requiring a creditor haircut, because, unlike dealing with, for example, Thailand, they know the creditors, and go to cocktail parties with them.

Tribalism is truly corrosive to good governance.

How the Germans Have Yet Again F%$#ed Up a Signature Foreign Policy Initiative

No Comments

First, the hash tag: #ThisIsACoup , which is trending on Twitter.

Rather unsurprising, given that now that Greece has capitulated to the insane and sadistic demands of the Troika, but there is still no deal because the so-called hawks still want another pound of flesh:

Greece’s final attempt to avoid being kicked out of the euro by securing a new three-year bailout worth up to €80bn ran into a wall of resistance from the eurozone’s fiscal hawks on Saturday.

Finland rejected any more funding for the country and Germany called for Greece to be turfed out of the currency bloc for at least five years.

All of this means that not only will Greece have to leave the Euro, but it means that there will be poverty, epidemics, and starvation that has not been seen on the European continent since the end of World War II.

It also means that Greece will be exiting the Euro Zone, because all of its banks will be shuttered in the next few days.

This could have turned out better, but it now appears that the current Greek government has made no plans at all for the eventuality of leaving the Euro:

Here are just a few of their concerns – focused in particular on the idea, put forward by the German Finance Minister Wolfgang Schaeuble, that there perhaps could and should be a temporary exit of Greece from the euro.

So the first rather chilling thing I’ve learned, from well-placed bankers, is there have been no conversations between the Bank of Greece, the government or regulators and Greece’s commercial banks about the technicalities of leaving the euro and adopting a new currency.

(emphasis mine)

The “hawks”, in particular the Germans, and most particularly Wolfgang Schäuble, are eager to make an example of Greece, thinking that this will cow the other members of the Euro Zone will see what happens to the Greek people and fall into Germany’s hegemonic line.

I think that this is a gross miscalcculation.

Any nation in the Euro zone that is seeing what is being done to Greece has to be drawing contingency plans for a rapid flight from the monetary union.

The lesson of this disaster is that a plan be that can be implemented in a few days must be ready to go, and I expect  that plans are being drawn up in Italy, Spain, Portugal, and Ireland.

If any of these countries has their ducks in a row, then in the event of a Euro exit, it means that this action will in fairly short order be followed by economic growth.

Once this happens, it is likely that the others will follow, seeing that an exit can be managed gracefully.

If either Italy or Spain leaves, the Euro would soar, because the effects of Germany’s predatory export state on the currency would be less diluted, which would likely make countries like France, the Netherlands, and Belgium (particularly with the possibility of an ethnic split between Flemish and Walloon) look for the exit as their exports become prohibitively expensive.

Assuming the gradual dissolution of the Euro, or as I like to think of it, the New Reichsmark, Germany sees its currency become much stronger, and its export driven economy looks a less successful.

I expect this to happen for two reasons:

First, because I do not see how the Euro can survive in the face of the German insistence on economics as a morality play.

Second, it is clear that the creation of the Euro, and its management over the past decade have been a major foreign policy initiative by the Germans, and all of the “bold” German foreign policy initiatives since reunification (there were none prior to reunification) have been a disaster, with Germany’s premature recognition of Slovenia, hastening the brakup of Yugoslavia, which prevented a negotiated separation, and guaranteed a bloody civil war being only the first of such disasters.

The Euro was structured by the Germans for the benefit of Germany, and the rest of the people of Europe are reaping a bitter harvest as a result.

Greece Just Caved

No Comments

As Paul Krugman notes, Argentina’s dropping the dollar peg, equivalent to a Grexit,and did not cause widespread economic devastation, it was the flailing around and uncertainty before making the break

Greece has presented a new proposal to the Troika, and it appears to be a complete capitulation to delusional German economics:

Only a day after grim predictions of financial and social collapse in Greece, a scramble appeared underway to work out the details of a new bailout package to bring the country back from the brink of falling out of the euro.

As details of the new offer emerged, it appeared that Prime Minister Alexis Tsipras was capitulating to demands on harsh austerity terms that he urged his countrymen to reject in the referendum last Sunday, like tax increases and various measures to cut the costs of pensions.

But Mr. Tsipras sought a three-year bailout loan totaling 53.5 billion euros (about $59 billion) and asked creditors to commit to discussing restructuring the nation’s massive debt. The amount was more than it would have been without a nationwide banking shutdown that has pummeled the economy. If granted, it would come on top of 240 billion euros in bailout loans Greece has received since 2010. Mr. Tsipras seemed to have gained ground on debt relief, his one bedrock demand. Germany’s finance minister, Wolfgang Schäuble, finally gave a little on that Thursday, admitting that “debt sustainability is not feasible without a haircut,” or write-down of debt, even if he then appeared to backtrack.

Greece’s debt has been unsustainable, and when /the previous government doing what was demanded of it by the Troika, it caused the economy to implode, driving debt higher, both on an absolute basis, and on a debt to GDP basis.

This is a f%$#ing disaster, not just for Greece, but for the Euro Zone.

It’s clear that Greece is going to leave the Euro under these terms, and when the Greek new Drachma era shows the kind of explosive growth that Argentina did post dollar peg, there will be a clamor among the southern tier of the Euro Zone to reestablish their own currency.

Yes, It Is Hypocrisy on a Historical Scale

No Comments

Thomas Piketty, economist and author of last year’s must read book, Capital in the Twenty-First Century, a treatise on the economic forces leading to inequality gave an interview in the newsweekly Die Zeit, in which he (correctly) observes that Germany has a greater history of shirking on its debt than any other nation on the face of the earth:

DIE ZEIT: Should we Germans be happy that even the French government is aligned with the German dogma of austerity?

Thomas Piketty: Absolutely not. This is neither a reason for France, nor Germany, and especially not for Europe, to be happy. I am much more afraid that the conservatives, especially in Germany, are about to destroy Europe and the European idea, all because of their shocking ignorance of history.

ZEIT: But we Germans have already reckoned with our own history.

Piketty: But not when it comes to repaying debts! Germany’s past, in this respect, should be of great significance to today’s Germans. Look at the history of national debt: Great Britain, Germany, and France were all once in the situation of today’s Greece, and in fact had been far more indebted. The first lesson that we can take from the history of government debt is that we are not facing a brand new problem. There have been many ways to repay debts, and not just one, which is what Berlin and Paris would have the Greeks believe.

ZEIT: But shouldn’t they repay their debts?

Piketty: My book recounts the history of income and wealth, including that of nations. What struck me while I was writing is that Germany is really the single best example of a country that, throughout its history, has never repaid its external debt. Neither after the First nor the Second World War. However, it has frequently made other nations pay up, such as after the Franco-Prussian War of 1870, when it demanded massive reparations from France and indeed received them. The French state suffered for decades under this debt. The history of public debt is full of irony. It rarely follows our ideas of order and justice.

………

ZEIT: Are you trying to depict states that don’t pay back their debts as winners?

Piketty: Germany is just such a state. But wait: history shows us two ways for an indebted state to leave delinquency. One was demonstrated by the British Empire in the 19th century after its expensive wars with Napoleon. It is the slow method that is now being recommended to Greece. The Empire repaid its debts through strict budgetary discipline. This worked, but it took an extremely long time. For over 100 years, the British gave up two to three percent of their economy to repay its debts, which was more than they spent on schools and education. That didn’t have to happen, and it shouldn’t happen today. The second method is much faster. Germany proved it in the 20th century. Essentially, it consists of three components: inflation, a special tax on private wealth, and debt relief.

ZEIT: So you’re telling us that the German Wirtschaftswunder [“economic miracle”] was based on the same kind of debt relief that we deny Greece today?

Piketty: Exactly. After the war ended in 1945, Germany’s debt amounted to over 200% of its GDP. Ten years later, little of that remained: public debt was less than 20% of GDP. Around the same time, France managed a similarly artful turnaround. We never would have managed this unbelievably fast reduction in debt through the fiscal discipline that we today recommend to Greece. Instead, both of our states employed the second method with the three components that I mentioned, including debt relief. Think about the London Debt Agreement of 1953, where 60% of German foreign debt was cancelled and its internal debts were restructured.

As I’ve noted before, the Germans think themselves special, and as bad as American exceptionalism has been, the consequences of German chauvanism over the past 150 years has been uniquely horrific.

It does not help that pretty much everyone in German politics but the Die Linke (The Left) are n***er baiting the Greeks in a way that would impress Bull Connor.

I am inclined to believe that we are seeing the collapse of the Euro Zone, and possibly the EU.

H/t Gavin Schalliol, who did the original translation, and then was forced to pull it over IP concerns.

When the Eurocrats Ask,”How Do You Think the People of Manhattan Would Like Bailing out Texas?” Note That We Did 30 Years Ago

No Comments

As Paul Krugman pithily observes that, “Bailing out Texas,” is a pretty good description of the Savings and Loan crisis of the 1980s:

Ahem. As it happens, the people of Manhattan did bail out Texas, big time. I wrote about it here. The savings and loan crisis, which was very costly to taxpayers, was mainly a Texas affair:

The cleanup from that crisis cost taxpayers about $125 billion (pdf), back when that was real money. As best I can tell, around 60 percent of the losses were in Texas (pdf). So that’s around $75 billion in aid — not loans, outright transfer.

So yeah, we did that.

If True, Then the Germans Are up to Their Old Tricks, but One Must Consider the Source

No Comments

Somehow or Other, this got deleted from my blog, and so I am reposting:

Andrew Ross Sorkin (of all people) teases an interesting tidbit out of Timothy Geithners self-serving and factually challenged memoir, Stress Test: Reflections on Financial Crises, specifically that in discussions with German FM Wolfgang Schäuble, Angela Merkel’s go to guy on finance had as his goal maximizing pain for the Greeks with the hope that they would be compelled to leave the Euro:

In July 2012, Timothy F. Geithner, the United States Treasury secretary at the time, traveled to Sylt, an island off Germany in the North Sea.

 Mr. Geithner was there for a meeting with Wolfgang Schäuble, Germany’s finance minister, who would spend his summers at his vacation home on the tiny island.

 The topic was Greece.

 In the home’s library, the two men spoke about Greece’s prospects and begun discussing ways for the European Union to keep the country in the eurozone.

 To Mr. Geithner’s dismay, however, Mr. Schäuble took the conversation in a different direction.

 “He told me there were many in Europe who still thought kicking the Greeks out of the eurozone was a plausible — even desirable — strategy,” Mr. Geithner later recounted in his memoir, “Stress Test: Reflections on Financial Crises.” “The idea was that with Greece out, Germany would be more likely to provide the financial support the eurozone needed because the German people would no longer perceive aid to Europe as a bailout for the Greeks,” he says in the memoir.

 “At the same time, a Grexit would be traumatic enough that it would help scare the rest of Europe into giving up more sovereignty to a stronger banking and fiscal union,” Mr. Geithner wrote. “The argument was that letting Greece burn would make it easier to build a stronger Europe with a more credible firewall.”

 Fast-forward three years. What Mr. Schäuble articulated that summer afternoon to Mr. Geithner is finally taking shape.

 ………

 A crucial decision made over the weekend had largely gone unremarked upon but is telling. The European Central Bank decided to halt an expansion of its emergency lending facility to Greek banks. That facility could have allowed the banks to continue operating without as much panic and helped avoid some of the capital controls by providing additional liquidity.

 ………

 By closing the cash spigot, the E.C.B. managed to instill additional fear and panic into the day-to-day lives of the Greek people, ahead of the vote on the referendum.

 That panic could cut two ways. The Greeks could look at the lines around the banks as a warning of what’s about to come, which would undoubtedly be worse in the short term, and vote in favor of the latest bailout agreement.

 Of course, they could also view the lines as further evidence of their subjugation to the eurozone and the continued austerity they would experience under the bailout, pushing them to vote against it.

 The E.C.B.’s decision also has another important purpose outside of Greece: It might be a warning to countries like Spain and Italy, should they ever consider following Greece out of the eurozone — if that comes to pass.

 It may seem counterintuitive, but rather than make a Greece exit easy and seamless to avoid dislocations in financial markets, the E.C.B. has the perverse incentive to make it messy and difficult to deter others.

 None of this is to suggest that the E.C.B. is the source of Greece’s problems. They were largely self-inflicted. Regardless of whether you think that the creation of the euro was a terrible mistake, Europe has severely mishandled the situation in Greece.

 “The economics behind the program that the ‘troika’ (the European Commission, the European Central Bank, and the International Monetary Fund) foisted on Greece five years ago has been abysmal, resulting in a 25 percent decline in the country’s G.D.P.,” Joseph Stiglitz, an economist and professor at Columbia University, wrote on Monday. “I can think of no depression, ever, that has been so deliberate.”

 In his book, Mr. Geithner reflected on his conversations with European leaders about the measures they sought to take. “The desire to impose losses on reckless borrowers and lenders is completely understandable, but it is terribly counterproductive in a financial crisis,” Mr. Geithner said.

 At one point, he told Mr. Schäuble: “You know you sound a bit like Herbert Hoover in the 1930s. You need to be thinking about growth.”

(emphasis mine)
If this report is true, and note that I do not consider Geithner’s memoir to be much more than an exercise in self-hagiography, then much of the pain of the that Greece has experienced over the past 6 years has largely been an exercise in sadism for its own sake by the Germans.

If there is a flaw at the heart of the European Union, it is Germany hegemony, which allows them to enforce their chauvinism on the other members.

Óχι!*

No Comments

Not only did the no vote win the referendum vote on further austerity for Greece, it absolutely crushed:

Greek voters gave their government a desperately needed victory Sunday in its showdown with European creditors as the country decisively rejected a bailout proposal that officials here had scorned as “blackmail.”

 With nearly all of the votes counted, “no” had won a landslide 61 percent — a bigger figure than nearly anyone had predicted. The result sent thousands of government supporters streaming into central Athens’s Syntagma Square to wave blue-and-white Greek flags, dance to traditional folk songs, and revel in their collective defiance of dire European warnings.

 But even as they celebrated, an angry reaction from European officials suggested that Greece’s profound economic struggles may be only beginning. With Greek banks on the verge of in­solvency, analysts immediately raised the odds that Greece will be ejected from the euro zone. Government opponents despaired that the country may have taken a dark turn.

 ………

 Several top European officials suggested that there would be no new leeway for Greece, and that in fact the vote had made a deal less likely.

 Germany’s deputy chancellor, Sigmar Gabriel, said Greece had “destroyed the last bridges across which Europe and Greece could have moved toward a compromise.”

 “Tsipras and his government are leading the Greek people onto a path of bitter sacrifice and hopelessness,” he told the Berlin daily Der Tagesspiegel.

 Julia Klöckner, deputy chairwoman of Germany’s ruling party, tweeted: “The E.U. is not a make-a-wish club in which a single member sets the rules and the others pay the bill.”

Nice words from the Krauts, but it is also a bald faced and pernicious lie, as the latest IMF report has revealed that the Troika has been negotiating in bad faith:

On July 2, the IMF released its analysis of whether Greek debt was sustainable or not. The report said that Greek debt was not sustainable and deep debt relief along with substantial new financing were needed to stabilize Greece. In reaching this new assessment, the IMF stated it had learned many lessons. Among them: Greeks would not take adequate structural reforms to spur growth, they would not sell enough of their assets to repay their debt, and they were unable to undertake sufficient fiscal austerity. That left no choice but to grant Greece greater debt relief and to provide new financing to tide Greece over till it could stand on its own feet. The relief, the IMF, says must be provided by European creditors while the IMF is repaid in whole.

The IMF’s report is important because it reveals that the creditors negotiated with Greece in bad faith. For months, a haze was allowed to settle over the question of Greek debt sustainability. The timing of the report’s release—on the eve of a historic Greek referendum, well after the technical negotiations have broken down—suggests that there was no intention to allow a sober analysis of the Greek debt burden. Paul Taylor of Reuters tells us that the European authorities worked hard to suppress it and Landon Thomas of the New York Times reports that, until a few days ago, the IMF had played along.

As a result, the entire burden of adjustment was to fall on the Greeks before any debt reduction could even be contemplated. This conclusion was based on indefensible economic logic and the absence of the IMF’s debt sustainability analysis intentionally biased the negotiations.

As an international organization responsible for global financial stability, it is the IMF’s role to explain clearly and honestly the economic parameters of a bailout negotiation. The Greeks, many said, benefited from low interest rates and repayments stretched out over many years. Therefore, no debt relief was needed. But, of course, as the IMF now makes clear, if a country has to repay about 4 percent of its income each year over the next 40 years and that country has poor growth prospects precisely because repaying that debt will lower growth, then debt is not sustainable. If this report had been made public earlier, the tone of the public debate and the media’s boorish stereotyping of Greeks and its government would have been balanced by greater clarity on the Greek position.

………

The creditors’ serial errors are well documented, including by the staff of the IMF. Continuing deliberately to suppress past errors is an act of bad faith but continuing to repeat those errors in making future projections of the Greek debt burden is a willful abuse of the trust that the international community has placed in an organization set up to serve the best interests of all nations. If the IMF’s latest numbers are properly reconstructed, the Greek debt burden is much greater than portrayed—and the policy measures proposed to reduce that burden will make matters worse.

………

Here is how this principle applies today to Greece. Recall that prices in Greece have been falling for about two years now. Since debt repayment obligations do not change when businesses sell at lower prices or when wages fall, businesses and households struggle to repay their debt in that deflationary environment. Investment and consumption are held back, the government receives less revenue, making its debt repayment harder. If fiscal austerity is imposed in such a deflationary setting, prices and wages are forced down faster, making debt repayment even harder. This is Fisher’s debt-deflation cycle. Greece is in a debt-deflation cycle. It is the medical equivalent of a trauma patient: the blood flow does not stop on its own and, in such a condition, austerity is like asking the patient to run around the block to demonstrate good faith.

The IMF’s latest numbers bear out this diagnosis. In November 2012, the IMF tentatively concluded that Greek debt was borderline sustainable if it would undertake austerity to reduce its debt burden and structural reforms to spur growth. The primary surplus (the budget surplus without interest payments) was to rise from -1½ percent in 2012 to 4½ by 2016—an extraordinary additional austerity on top of the extraordinary austerity that had already been undertaken since 2010. The Greek government actually delivered on the austerity through 2014, bringing the primary budget in balance, as per the proposed timeline.

But look what happened along the way—and this is the debt deflation cycle. In 2012, prices were expected to be broadly stable over the coming years. Instead, prices fell by over 5 percent just in 2013 and 2014. True, it is important for Greek wages and prices to eventually fall. But because of the Irving Fisher theorem, when prices fall, the debt burden increases. To reduce the debt burden, Fisher says, not only must austerity stop, but the economy must be “reflated.” He emphasizes that it was President Franklin D. Roosevelt’s policy of reflation that ultimately stopped the Great Depression. In an analogy similar to the trauma patient, Fisher says that when tipped beyond a point, the boat continues to tilt further until it has capsized. In a deflationary economy, the bankruptcies and distress can go on in a vicious spiral for years.

………

We may not like the conclusion, but it is quite simple. Greece has not grown and prices have fallen because that was to be expected when persistent austerity is laid on top of an unsustainable debt. The debt-deflation spiral always outpaces the returns from structural reforms. As certainly as these things can be predicted, on the path set out by the creditors, the stakes will continue to be escalated: the debt-to-GDP ratio will continue to rise, the calls for more austerity will grow, and, as the pattern repeats, more debt relief will needed.

The IMF report is very specific, it says that Greece needs billions in debt forgiveness or the debt will remain unsustainable: (See also here)

The International Monetary Fund, a big Greek creditor, conceded a point on Thursday that the Athens government has long been making: Without some reduction in the country’s staggering debt load, Greece has little hope of a sustained economic recovery.

 It was a significant acknowledgment, and an indication that if or when bailout negotiations resume, Greece might win some relief from its debt of 300 billion euros, or about $330 billion. It just might not be relief granted to the leftist government of Prime Minister Alexis Tsipras.

It should be noted that the EU bureaucracy aggressively tried to suppress this report:

Euro zone countries tried in vain to stop the IMF publishing a gloomy analysis of Greece’s debt burden which the leftist government says vindicates its call to voters to reject bailout terms, sources familiar with the situation said on Friday.

 The document released in Washington on Thursday said Greece’s public finances will not be sustainable without substantial debt relief, possibly including write-offs by European partners of loans guaranteed by taxpayers.

 It also said Greece will need at least 50 billion euros in additional aid over the next three years to keep itself afloat.

 Publication of the draft Debt Sustainability Analysis laid bare a dispute between Brussels and the Washington-based global lender that has been simmering behind closed doors for months.

This may be the reason for the lopsided vote: Any Greek voter who understood these dynamics could help but conclude that the Troika have no interest in Greece beyond making an example of the country.

My guess is that Germany, with the acquiescence of the EU bureaucracy, will attempt to expel Greece from the Euro Zone, since the alternative is to rip the mask off their attempt at regime change, but Greece could tie this up in legal proceedings for months, if not years:

“The Greek government will make use of all our legal rights,” proclaimed the finance minister, Yanis Varoufakis, according to The Daily Telegraph.

We are taking advice and will certainly consider an injunction at the European Court of Justice. The EU treaties make no provision for euro exit and we refuse to accept it. Our membership is not negotiable.

But, can a hypothetical Grexit decision adopted by the EU institutions be legally challenged?

………

So, what decision would Greece be challenging? It would be a decision adopted by the EU institutions and the Eurogroup finance ministers to force a Greek exit of the eurozone due to its default on fulfilling the obligations attached to its participation in the monetary union (criteria laid down in Article 140.1 of the Treaty of the Function of the European Union) and the conditions attached to Greece’s bailout program.

Greece would then still be an EU member state but it will have to revert to the drachma or adopt a new currency. Nevertheless, as mentioned, there is no explicit legal basis for such a decision. One can argue that the failure to fulfil the eurozone commitments would amount to a serious violation of the founding treaties, and that it is possible to adopt the decision based on the principles embodied in the treaties. But the fact is that the treaties would need to be amended in order to provide for this.

I would note that throughout all of this, someone is spreading a rumor that the Greek government is working on a program of depositor bail-ins, where depositor accounts would be raided to pay off the EU lenders, as happened in Cyprus.  (My money is that these rumors are coming from Brussels)

One hopes that the confluence of all these events will result in something other than the moral and economic bankruptcy that we have seen from the EU, IMF, and Germany, but I doubt it.

*Greek for no.

The Stupidest Analysis of the Greek Crisis so Far………

No Comments

Over at the Washington Post Max Ehrenfreund proceeds to think himself into a circle to such a degree that that his head is actually fully up his ass:

Suppose senior government officials in Greece had concluded that the euro was a failed experiment, that the rest of the continent would never extend reasonable terms to their country and would instead doom it to perpetual recession, and that the only way to save Greece from disaster — and Europe, too — was to begin the process of unwinding the common currency.

 They’d have encountered a major obstacle to leaving the euro: Greeks really like it. To get rid of it, the country’s leaders would have had just one option: sabotage negotiations with the creditors, blame them for being unreasonable, and then eventually tell voters that Greece has no choice but to go back to the drachma.

Seriously?

Greece has none of the infrastructure to even print Drachmas, because the Greeks were literally forced to smash their printing presses when they joined the Euro:

With speculation swirling that Greece might be forced out of the euro and have to print its own money after a weekend referendum, its finance minister on Thursday said the country no longer had the presses to make drachmas.

“We don’t have the capacity,” Yanis Varoufakis told Australian public radio network ABC.

In 2000, the year before Greece joined the eurozone, “one of the things we had to do was get rid of all our printing presses” as part of the bloc’s assertion that “this monetary union is irreversible,” he said.

“We smashed the printing presses — we have no printing presses,” Varoufakis said.

This is widely known, and it was a policy that was across the Euro Zone.

While it might be possible to get some currency printed up by a 3rd party (North Korea comes to mind) but they appear not to have taken any of the requisite steps to reintroducing the currency.

I am sick to death of this “too clever by half” contrarian bullsh%$.

It’s a cheap trick to make stupid pundits appear smart.