Victory for Schaeuble at the Eurogroup means no relief for Greece

June 17, 2017


 
The Eurogroup meeting of eurozone Finance Minister was held last week and the main item on the agenda was the approval of another round of bailout payments to Greece which were conditional on various Troika demands being met. The meeting was considered a success in that a package was agreed but the real winner was, once again, German Finance Minister Wolfgang Schaeuble who got what he wanted. At the crucial meeting Schaeuble ensured that he did not succumb to the International Monetary Fund’s demands for a clear agreement on significant debt relief, while keeping the Fund on board in the Greek programme for the time being.

Background

It’s important to remember that the decision to bailout Greece in the first bailout program in 2010 was intended to save German and French banks from taking possibly fatal losses. Banks from Germany and France had poured cheap credit into reckless loans to Greece during the credit bubble prior to the financial crash and by 2010 Greece was essentially bankrupt. Under normal circumstances Greece would have been forced to default on its large portfolio of outstanding bonds and the banks who had bought those bonds would have made massive losses. But those were not normal times.

If Greece had defaulted the banks would have been so damaged by those potential losses that they would had to have been bailed out by their respective governments. Germany had already spent tens of billions of euros bailing out its banks once already and a second bank bailout would have provoked a massive domestic political crisis in Germany, and would have deeply damaged both the CDU and SPD who were governing in a coalition.

Secondly the financial crisis had also unleashed a general crisis in the eurozone and as confidence in the single currency system faltered, and faced with a European Central Bank that was refusing to act as lender of last resort, financial markets were forcing up yields on the bonds of various heavily indebted eurozone countries, something that threatened to make those debts unsustainable and which might have forced more governments to default. Italy in particular was teetering on the edge. Further defaults would probably have led to a collapse of the eurozone. In these circumstances a Greek default was viewed as potentially catastrophically dangerous.

And so in one of the most shameful and cynical acts in the history of democratic Europe it was decided to stop Greece from going bankrupt, to stop it defaulting on (and thus writing off) its debts, to remove and replace its government, and force Greece to accept massive new loans thus ensuring that the country would be condemned to perpetual debt deflation and its own great depression. Less than 5% of bailout funds have been spent inside Greece, the rest has gone to the banks (see this article). By funnelling the funds for the bank bailout via Greece the EU, under primarily German leadership on the issue, ensured that all the ignominy was focussed on the Greeks and not the banks, and, as a handy side effect of packaging the deal as a European rescue package, the bail out of German and French banks could be funded by all the nations of the EU rather than by just their host nations.

As everybody knows, and certainly all economists should know, you cannot save a bankrupt by forcing them to take on more debt. The bailout program was designed to save the banks not Greece. The entire exercise was sold to contributing nations by pretending that the bailout loans to Greece could be repaid by forcing it to generate a large budget surplus every year for decades into the future. And this would be done by effectively taking over direct control of key parts of the Greek state apparatus, ruthlessly cutting Greek government spending including massive reductions in critical social welfare programs, and selling off state assets at massively discounted prices. Greece was essentially forced to become a debt colony of the EU for decades to come.

At the same time, the IMF, who had been roped into this project as the third leg of the Troika (the others two legs being the EU and the ECB) was brought aboard to give the whole cynical exercise a veneer of technical respectability so that it could be sold to the various nationals government and parliaments, in particular to the German Bundestag. Everybody knew that the IMF’s own regulations prevented it from participation in non-sustainable bailouts, so if the IMF was aboard then it would convince doubtful politicians that they would be repaid the funds they had contributed to the Greek bailout. The problem was that as anybody with a cursory knowledge or experience of state defaults would know, the Greek debt burden was, and remains, unsustainable. It will never be repaid. The idea that over the next few decades it will be possible to extract hundreds of billions of euros in debt repayments from Greece and that the country could, while that was occurring, recover from its great depression was plainly ludicrous. But it was not normal times at the IMF either. It was led at the time by the odious Dominique Strauss-Kahn who had ambitions to be the Socialist Party’s candidate in the 2012 French presidential election and he didn’t want to go into that election as the man who had refused IMF participation in the Greek bailout, thereby causing Greece to exit the euro and perhaps wrecking the entire single currency. So the IMF bent it’s own rules to participate in the Greek program and has been trying to recover its position ever since Dominique Strauss-Kahn was forced to resign as its Director following his arrest in New York for sexually assaulting a hotel worker.

Schaeuble defeats the IMF – again

Prior to last week’s Eurogroup meeting the IMF’s public position had been that if Greece agreed on the policy reforms the IMF wanted (mainly cuts to pensions and tax increases), it would then put pressure on the eurozone lenders to agree to the kind of debt restructuring that would allow the Washington-based organisation to participate in the Greek programme. The Greek government appeared to take it for granted that since Schaeuble needed the IMF on board to live up to his pledge to German MPs, the adoption of 2 percent of GDP in tax increases and pension cuts demanded by the IMF would also secure the much-desired clarity on debt sustainability.

The German finance minister, though, used a tactic he has used many times before in relation to the Greek crisis, using the IMF demands for further reforms as the battering ram that forced Tsipras into submission and then banking on the Washington-based organisation not wanting to stand in the way of an urgently needed funding package (without which Greece might default in July) and the Fund’s reluctance to cause a political fuss in Germany ahead of the September elections. As a result, the IMF decided to make do with a slightly more detailed pledge on debt restructuring and an “in principle” approval of the Greek programme, enough for the show to go on. So having swallowed the new round of IMF proposed spending cuts and tax increases Greece still got no firm commitments on debt restructuring.

Given these gains for Schaeuble, what was left for Greece? Yet another bailout tranche of 8.5 billion euros has averted a funding crisis in July but after 7 years of bailouts, Greece continues to teeter constantly on the edge of defaulting and the Greek Great Depression continues with millions jobless and living in poverty. Greece also knows after Thursday’s meeting that it will have to produce primary budget surpluses of 3.5 percent of GDP between 2018 and 2022, while the budget surpluses from 2023 to 2060 would have to be “equal to or above but close to” 2 percent of GDP. Although it means lower targets than some of the lenders might have initially wanted it also requires Greece to set aside around 100 percent of its GDP in primary surpluses between now and 2060.

What Greece did not get, though, is the clarity and extent of debt relief that the IMF wanted to declare Greek debt sustainable, or the very important green light from the European Central Bank for Greek bonds to be included in its QE programme which would mean Greece could starting selling bonds again and begin to ween itself off of EU and IMF funding.

Schaeuble’s game plan for the Greek program consists of the following elements:

Avoid any suggestion of debt restructuring until after the German election

Insist that the existing program must be followed – thus legitimising the past program

Avoid any scrutiny of the wisdom of the original Greek bailout or the fact that it was actually a back door bail out of German banks

Punish Greece and thus ensure that all countries in the eurozone either restructure (no matter the pain or social costs involved) or face possible expulsion from the euro. Remember that Schaeuble offered the Greeks an exit from the euro in 2015 but made it clear that if that was declined there would be no mercy.

Schaeuble’s primary target remains France.

Josef June 17, 2017

Tony thanks for this, I wouldn’t disagree, nor could I, seeing as I understand maybe 75% of what you write… but not entirely sure your final statement “Schaeuble’s primary target remains France.” is connected to the rest of your piece.

Most of your piece summarizes a sort of quadrangular relationship EU Finance>>IMF>>Germany>>Greece and all points in between, but France seems only mentioned near the start : “the decision to bailout Greece in the first bailout program in 2010 was intended to save German and French banks from taking possibly fatal losses. Banks from Germany and France had poured cheap credit into reckless loans to Greece during the credit bubble prior to the financial crash ” , then it’s mentioned in the middle where Strauss Kahn & his ambitions are mentioned.

I suppose one question is whether Schauble is speaking as agent of the German banks only, or of the European Banking sector (including France). For instance, are French banks’ involvement (relative liabilities) in Greek loans higher in relation to the French economy (or to their own capital, or both) than such relative liabilities of the German banks? So they are the weaker party. Is Schauble playing a short term gain for Merkel’s election bid this year, or a long game to force Macron (and France) to behave in a certain way? All this of course ignoring the Greeks with no medicines &c.

So, as any number of history books will tell us, going back to c1800, the Franco German relationship is one of the most important ones in Europe. Anyway thanks for the pieces past and future.

Tony June 18, 2017

The view of Schauble and the block he leads is that all members of the eurozone must comply with a set of rules about levels of public spending, deficits etc. Schauble was unhappy that so many ‘marginal’ countries were allowed into the euro in the first place. His view of France is that it massively offends against good practice in fiscal and debt management and must urgently reform itself. This means getting rid of the social and employment protection prevalent in France along with other ‘restrictive practices’ and heavily shrinking the French public sector, trade deficit and budget deficit. Schauble wants to take the Troika to Paris. Macron’s platform is basically to agree to deliver Schauble’s agenda for France (whether he can deliver is another matter) in return for major integration steps (a single finance minister for the Europe, fiscal integration, shifting big chunks of social spending up to the EU level, etc). I don’t think Germany, Merkel or Schauble would ever agree to this because all such schemes will inevitably involves creating permanent and large (very large) flows of money from Germany to other member states (including France).

Greece is just a dry run for this much larger and more ambitious German led program of restructuring across the EU.

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