Economics

It´s the emotions, stupid! or the politics of emotions

James Carville will be remembered as the strategist during Bill Clinton’s 1992 presidential campaign that gave us what has become the political mantra: “It´s the economy, stupid!” as a reminder of what to focus on. But a generation later, as we enter a new political phase, facts (e.g. the unemployment rate, GDP growth, exports, contribution of immigration, etc.) are no longer so important. Furthermore, expertise, evidence, independent analysis, etc. do not seem to carry as much weight as subjective feelings or emotions. This is the politics of emotions and perhaps it is time for “It´s the emotions, stupid!” to enter the political lexicon.

Post-factual politics / politics of emotions

The Brexit Referendum was the first serious and persistent post-factual political campaign in Britain. This was not necessarily something new but rather a culmination of a process which has been evolving for some time. It was already at an advanced stage of development during the Scottish referendum in 2015, where the emphasis of the campaign was very much on tapping one particular emotion: fear. The campaign was unrelenting in its focus on the negative implications of Scotland leaving the UK.

The fear-based campaign, mainly by those seeking to retain the status quo, did not go entirely according to plan. Despite the British government milking the fear factor for all it was worth, it was not sufficient to persuade the Scottish electorate to remain in the Union. The polls were fairly consistent in showing that despite the unrelenting emphasis on the negative, the majority of adults in Scotland were still tending towards voting in favour of seceding from the UK. It was only in the last few days of the campaign that a shift towards remaining part of the UK occurred, coinciding with the British government changing tack and unashamedly bribing the voters with all manner of concessions. Even so, it just about managed to gain a majority for the Union to remain intact. The highest recorded turnout (85%) in the UK resulted in a narrow vote (55.3%) against Scottish independence.

The recent EU referendum Remain campaign, led by Mr David Cameron and his then heir apparent, Mr David Osborne, clearly failed to learn the lessons of that narrow, last-minute turnaround in the campaign. The key strategy devised by the Remain campaign leading to the ballot on the 23 June 2016 was more of the same, otherwise known as “Project Fear”. All the possible negatives, especially the economic ones, of voting to leave the EU were magnified and pushed for all they were worth by the Remain campaign. Vast amounts of data analysis and facts were deployed with the tradition emphasis on “it´s the economy, stupid!” These arguments were reinforced up by various statesmen, such as Barack Obama, as well as reputable institutions such as the OECD, World Bank, IMF, economists, etc.

George Osborne, the then Chancellor of the Exchequer (Minister of Finance) was tasked with carrying out the economic analysing and publicising the Treasury´s assessment of the implications of Brexit. The basic conclusion was that Brexit would tip the economy into recession, 500,000+ people would lose their jobs and wages would decline, as would house prices. In 15 years, the economy would be 6.2% smaller, resulting in a loss of £4,300 for every household. The expectation was that this would put the fear of god in people and deliver a government victory.

It was plausible, it was fact-based and it preyed on people´s worst economic fears. No effort was made at all to make a case for remaining in the EU; I cannot remember a single discussion or comment or a positive nature that was ever pushed by the Remain campaign. The result is well-known: 52% voted to leave, 48% voted to remain. It was undoubtedly the single most momentous political result of recent times and will affect Britain and the rest of the EU for the foreseeable future.

The lessons of the Scottish Referendum, combined with the post-factual approaches deployed by Donald Trump across the Big Pond, were clearly analysed much more carefully by the Leave Campaign than by the Remainers. They too decided to focus on people´s fears but from a very different angle. It was not based on sophisticated econometric models that almost no one understands to magic a 6.2% reduction in GDP and thus a loss of £4,300 in the next 15 years. The Brexiters’ approach was very simple – it was exaggerated, it was not fact-based and it pandered directly to people´s fears and concerns today. If Remain’s focus was characterised as “Project Fear”, the Brexiters´ approach can be summed up as “Project Lies”. It was underpinned by a determination to dismiss and discredit all government and/or independent analyses, facts and expertise as being somehow biased because they had to be benefiting from EU funds.

The Brexiters concentrated primarily but not exclusively on the fears of the non-working, working and lower middle classes in the UK. Fears of immigrants (from the EU, though they account for less than 50% of all immigration), fears of job losses (though the UK has almost full employment – 4.9%) and stagnating wages (though almost all studies suggest otherwise), fear of losing control over our lives (i.e. the EU / European Parliament / European Commission making laws and regulations instead of the UK Parliament), all combined with a hefty dose of resentment towards the elites (taking more than their fair share of the economic pie). This was all combined with arguments about the NHS (an exaggerated £350m-a-week currently going to the EU which would be ploughed into the NHS instead – not a penny has been redirected so far), the housing crisis (blamed on EU immigrants and wealthy foreigners, though Britain has failed to build adequate housing for many decades), etc.

Emotions / fears / concerns galore

History has shown over and again, that strong emotions / fears / concerns can be exploited by those who offer change in the form of simple but evocative messages; Donald Trump has demonstrated the power of simplistic but populist messages, using Twitter, regardless of grammar or facts. The reason why these emotion-laden messages are so powerful is that they are not at all abstract (such as the Treasury / OECD / IMF / World Bank models) but embedded in people´s biases and/or experiences.

There is plenty of evidence that for decades the non-working, working and lower middle classes in many Western countries have been lost economic ground, while the elites have prospered from the ongoing forces of globalisation, greatly accentuated recently by the austerity drives (see below). Inequality has grown, wages have stagnated, tax policies have favoured the better off, while those dependent on key elements of the welfare state, including the middle classes (child benefit, tax credit, etc.), have systematically lost out as the impact of austerity has spread out. This has not been helped by the privately educated/ elites controlling successive governments, yet failing to recognise or deal with the problems faced by normal individuals and their families.

Referendums may work quite well for specific issues, such as whether to allow abortion or same sex-marriage but they are not at all geared to answering complex issues, such as whether to remain in the EU in the form or a simple “yes / no” answer. So when the opportunity arose to give the government / elites a bloody nose, it was obviously just too good an opportunity to pass-up, despite (or partly because of) the messages being put out by Project Fear.

Having gone through with the referendum, the new Conservative government cannot simply backtrack from the outcome of the vote. Doing so would fatally undermine democracy in Britain and unleash potentially far worse than what we are currently witnessing in the form of the current wave of populism. This populism seeks to take advantage of the fact that many people are no longer interested in facts and figures or weighing-up the pros and cons of different arguments. They are much more minded to follow their instincts or biases, as vented by people such as Donald Trump, Nigel Farage, Marie le Pen and quite a few others in Italy, Poland, Hungary, etc.

Raw emotions as politics (according to Home Office figures, 1,000 Syrian refugees were resettled under the Vulnerable Persons Relocation scheme in 2015. 1+ million refugees were accepted by Germany)

This strain of post-factual politics of emotions is not predicated on the traditional political dividing lines of left (Socialism/Social Democracy) or right (Conservatism/Republicanism) – it is cross-cutting in nature. The trigger issues are broad and generic yet connected with emotional impulses strong enough to transcend traditional party lines and similar allegiances. This was evident in the Brexit campaign, it was seen in the US Presidential election and strains of it are evident in France and other European countries. It is here to stay.

The emotive themes of the post-factual politics of fear are fairly common, regardless of which country is in question. This includes fear of powerful elites (e.g. Brussels/Washington D.C.), foreigners (EU / Mexicans, refugees, etc.), globalisation (trade deals, China, etc.), terrorism (Al Qaida, IS, etc.), cultural change (Islam, immigrants, refugees, etc.), etc.

No amount of logic, analysis or expertise can counteract the emotional triggers that many people have to such themes. A clear example of this was the deliberate dismissal of “experts” during the Brexit debates. Michael Gove made the situation crystal clear whenever confronted with facts/figures/experts that did not align with the case he was making for Brexit with the following: “People in this country have had enough of experts.” Truth be told, that particular soundbite had the ring of truth about it. People would much rather trust their own experiences / emotions / prejudices than listen to what experts have to say, unless those views conform with their world view and preferably in easily digestible messages (not exactly something that experts excel at).

The main themes include the following:

  • Control of own borders
  • European Union
  • Patriotism/Nationalism
  • Immigration
  • Refugees/asylum
  • Muslim culture
  • Terrorism
  • Trade / Globalisation
  • Elitism / 1%
  • Lower real incomes.

Other themes could have been added to the list, such as same-sex marriage, transgender, abortion, global warming, etc. which are all highly emotive, but the list illustrates the general issues. In the case of Donald Trump, a whole new set of additional issues could have been added such as racism, xenophobia, bigotry, misogyny, narcissism, etc. One can only hope that Trump´s particular strain of post-factual populism is not the future of politics, though I fear it already is.

Variations on a theme

Almost all the themes are negative in nature; they instill anxieties and fears in people. The only exception is nationalism / patriotism which, generally leads to positive feelings such as pride in one´s country. History is replete with examples of how easily both positive and negative feelings can be manipulated, misused and abused. Patriotism is particularly strong in the US, with its melting pot but less so in Britain, with its former empire. The Germans, the culprits of two World Wars, are rather more interested in forging a European identity, though this is has been slowly changing in recent times.

There are clearly variations. The European Union (EU) does not figure large in people´s perceptions in the USA but is something that the UK has been in two minds about since the formation of the EEC in 1958: there has always been an ambivalent relationship involved. The opposite applies to Germany: it has traditionally had an unquestioning stance to the EU where traditionally the French have made the strategic decisions (Marie le Pen would call for a referendum to pull France out of both the EU and the Euro) and the Germans have paid for them. This started changing during Gerhard Schröder´s Chancellorship and accelerated with the Euro crisis, and the advent of the Alternative für Deutschland (AfD), which initially wanted out of the Euro but under new leadership has evolved into an anti-immigrant/refugee/Islam party and could eventually become anti-EU.

The perception in Germany was initially that it was paying for the economic and other economic mistakes of other EU countries, especially the Mediterranean ones. This evolved into concern over the dangers to the Euro risks for Germany itself, followed by a blistering critique of the European Central Bank´s policy of near zero interest rates and quantitative easing. The country is also experiencing angst about its capacity to absorb over 1 million mostly Muslim young men that the other EU countries (with the exception of Austria and Sweden) were completely unwilling to share. More recently, this has transmuted into concern about terrorism and attacks on German soil.

A clear trend is evident: the politics of emotions is tapping into fears and concerns about immigration generally and refugees and asylum seekers specifically. The key immigrants in the USA are the Mexicans, something that the US has a long history of, not all of it proud, such as the forcible deportation of 500,000 – 2 million people during 1929 to 1936. Trump milked this theme to the maximum extent possible with his talk of building a “big beautiful wall”, of making Mexico pay for it and of getting rid of illegal immigrants from day one of his Presidency. None of this was based on fact but it hardly dented his popularity among large segments of the population, including many of Hispanic descent.

The referendum debate on immigration in the UK has verged on the xenophobic and racist, despite the fact that EU immigration involves mostly white European migrants. Immigration was and remains the most vivid expression of people´s concerns. In this respect, Germany is different to other nations by virtue of its role in the past in respect to groups such as Jews, Roma, disabled, etc. For this reason, there is no indication at present of Germany reacting badly to EU migration (but see discussion below about recent influx of refugees), though it is happening on an unprecedented scale which dwarfs the immigration in countries such as the UK (1,13 million in 2015). This may change in time, though the ageing population structure of the country is a countervailing factor.

The ire of the Germans, particularly evident during 2015, was focused on the implications of Germany absorbing it 1.1 million asylum seekers and refugees and the still relatively large numbers expected in future (the forecast is 300,000 in 2016). It all started well, with Germans going out of their way to be welcoming but quickly deteriorated as the cultural and economic strains became apparent. To be fair, the wave of intense concern, particularly notable during the New Year period, has waned as the sheer numbers being received by the country have abated in 2016. A blip was still evident during the summer due to various terrorist and other incidents.

In the UK, known for its open racism during the 1950s to 1970s (recall private landlord adverts: No Blacks, No Dogs, No Irish), recent anger towards EU migration started initially with a focus on the Poles and then extend to the Romanians (especially Roma) and pretty much all EU immigrants have implicitly been targeted during and since the referendum in June 2016. Who knows if and when this feeling may be extended to all other migrants, regardless of origin or the length of time they have lived and worked in the UK. The populists of the post-factual era are sure to milk this particular negative sentiment, especially during the drawn-out period of Brexit negotiations that will last at least until 2019. This is all the more likely because the British government still has no plan for Brexit and the other EU nations are highly unlikely to offer Britain a good Brexit deal. The risk of other countries following suit is just too great for this to happen.

Pressing the sore spot

The next two themes are particularly emotive, namely fear of terrorism and the influence on Muslim culture on Western societies. This is a particularly rich vein for post-factual politics, since this is probably where the most intense fears reside. I have shown that people´s perception of the size of the Muslim population is totally out of proportion compared with the reality.  The following illustrates the data for the three countries in question:

Country        Muslim Population % of Population % 2030
Germany 4.1 million 5% 7.1%
UK 2.8 million 4.6% 8.2%
USA 2,6 million 0.8% 1.7%

 

These data refer to 2010 as I could not find more recent comparable information for the three countries. Since 2015, there would have been an increase of approximately 1.1 million Muslims in Germany alone (i.e. 6.3% of the population) and this will continue, albeit at a lower rare. Overall, the Muslim share of EU´s total population was 5% in 2010 and is expected to increase to 8% by 2030. The fact that the Muslim population remains relatively small seems to cut little ice with many people, especially the older age groups. There is intense concern about the possible loss of cultural identity, combined with strong doubts about the willingness of the Muslim communities to integrate. This is and will continue to be a powerful emotion to tap into; many are intent on exploiting it.

Fear of terrorist attacks is at least as powerful, if not more so. The reality is that the chances of dying in a terrorist attack while on a plane is 1 in 25 million and the overall average chances of dying in any kind of terrorist attack worldwide is 1 in 9.3 million. There were at least 155 Americans killed by police officers in the United States in 2011, which means that people are about 10 times more likely to be killed by a law enforcement officer than by a terrorist. Worldwide, people are 517 times more likely to be murdered, 500 times more likely to die in a car accident, 41 times more likely to die in natural disasters and 1.8 million times by more likely to die of heart disease that being killed in a terrorist attack. However, none of this matters because negative emotions Trump facts (pun intended) – every time.

But I am falling again into the trap of talking about data / statistics / evidence in the post-factual political age.

The combination of fear of cultural change as a result of the perceived “Islamification” of Europe and the clear association with terrorism is such a potent mix in people´s minds and there is little antidote to it, other than public education. Unfortunately, not only is this imperfect, it also takes a hell of a long time to permeate minds and influence public perceptions, time which the proponents of post-factual politics will put to use in the pursuit of a simplistic but emotionally charged agenda.

The last set of themes listed above concern an amalgam of globalisation/trade deals/deteriorating incomes/elitism. In this particular case, I can relate to the panoply of emotional pulls what populists in the post-factual era are latching on to.

There is increasing evidence produced by academics such as Thomas Pikkety, who argues that the rate of capital return in developed countries is persistently greater than the rate of economic growth and that this not only causes wealth inequality, but that inequality will also increase in the future unless redistribution occurs through a progressive global tax on wealth.

This is intensifying the “them and us” divide and connects with a range of themes relating to the stresses and strains caused by international trade and globalisation, combined with growing social polarisation / inequality. This is the discourse of the 1% / elites taking a disproportionate bite off the economic pie compared with the non-working/working population (globally speaking, anyone with an income of EUR 30,000 p.a. belongs to the 1%). The lower and middle-income groups have also experienced the brunt of the effects of austerity, combined with the increasing job insecurity, resulting in deteriorating real incomes and state benefits. This led to a pronounced backlash against the elites, including the political and financial professions. These trends more than compensate for the countervailing influence of the remarkably low levels of unemployment (4.9% in USA/UK and 6.1% in Germany, September 2016) which pertain today.

What of the future?

So what does the post-factual, feeling based politics mean for Britain, Germany, Europe and indeed the rest of the world?

It means that are all in for a roller coaster political ride for the foreseeable future.

And it also means that the democracies discussed in this post are in deep trouble, unless the global economy not only starts growing strongly soon, but the resulting economic benefits are much more equally distributed in the future.

But the chances of both happening any time soon are about as high as the likelihood of being caught in a terrorist attack.

 


Britain’s Productivity Puzzle and Brexit

Britain has a huge challenge. In the fractious lead-up to the Brexit referendum on the 23rd of June 2016, almost everything imaginable is being use for or against the European Union (EU), but on this occasion I am not referring to the EU challenge. I am alluding to the title of this post, namely the productivity of the UK, as this has direct implications for economic growth, wages and ultimately living standards. Given its importance, it should be the No 1 issue in the debate about the future of the UK, except that it is barely touched upon. This is a mistake.

The Theory

Productivity refers to how efficiently inputs (i.e. capital and labour) are used to produce outputs (i.e. goods and services), the best measure of productivity being output per hour. In theory productivity matters a good deal: Britain’s capacity to raise its standards of living over time depends almost entirely on its ability to increase its output per worker.

Productivity is also crucial in determining the long-term growth rates of the economy; stronger productivity growth leads directly to faster GDP growth. If this happens, tax revenues increase and budget deficits decrease. Governments have more to spend on public services such as health, housing, school places, GP / hospital capacity, infrastructure, etc. all of which are at the centre of the Brexit discussion. Naturally, the reverse also holds true: with lower productivity. And if Britain’s productivity is lower than its competitors, such as other EU nations, its relative standard of living decreases over time.

Productivity matters a great deal. The Nobel Prize winning economist Paul Krugman is reported to have said that: “Productivity isn’t everything, but it’s nearly everything”. What is the situation in Britain?

Productivity Puzzle

British labour productivity has traditionally grown at around 2% per year since the 1970s. That is not at all bad but the point is that since the global recession began in 2007, Britain´s productivity stagnated and continues to do so almost a decade later. Official reports stress that: “… such a prolonged period of essentially flat productivity is unprecedented in the post-war era”. The Chart below illustrates the trend.

Chart UK Productivity and GDP

Although economic growth has resumed quite strongly since 2013, this is mainly the result of an increase in the total number of hours worked in the UK, rather than rising productivity. What this means is that Britons are working harder to produce the same amount of goods and services than was the case prior to 2007, and much harder than if productivity growth had continued at its 2% annual trend rate. The feeble productivity level leads directly to the stagnation in UK wages and living standards. This is already having significant effects in terms of the on-going package of austerity in Britain, which is being felt across the whole country and is, if anything intensifying. People´s economic pain is much more a consequence of low productivity than of the costs of the EU or the freedom of movement of people (EU immigration).

If Britain’s productivity does not bounce up to the 2% trend, the implications for the economy, public finances and future living standards will be even more severe than is already the case.

International comparisons illustrate just why this is the No. 1 challenge.

Chart International Productivity Comparison

Based on real GDP per hour worked in 2014, the UK was ranked sixth among the Group of Seven (G7) countries, with Germany top and Japan bottom (the Chart below illustrates the issue). UK productivity was 18 percentage points below the average of the other G7 countries, the widest productivity gap since at least 1991. To illustrate the point further, it was 10 percentage points lower than Italy (which is hard for Britons to swallow), 30 percentage points lower than Italy and 36 percentage points lower than Germany. On the basis of output per worker, UK productivity was 19 percentage points below the average for the rest of the G7 in 2014.

The resumed economic growth and low unemployment rate combined with stagnant productivity has led people to talk of the UK’s “productivity puzzle”, as Britain loses ground to its major competitors.

Pumping-up Productivity: Brexit implications

Unlike Eurozone economies, Britain has its own currency and is fully in charge of its monetary policy. Blaming the EU and European immigrants for all its ills is far too easy and convenient. Instead, Britons should take a good, hard look at their own economy and what is required in order to increase productivity not just back to 2%, but ideally above this threshold.

What kinds of solutions are available to Britain in order for it to rise to the productivity challenge? The good news is that there is broad agreement about the main policy options. The bad news is that none of them are quick fixes and most of them will almost certainly not be improved by leaving the EU. The possible solutions include the following:

  • Raise the skills and qualifications of the labour force: the education system has to produce a better educated labour force and employers need to invest more in skills via training, apprenticeships, etc. These are known to increase labour productivity, however, the evidence is that this is not happening sufficiently. This may be part of the reason why Britain has been attracting ready-made, educated and trained migrants from the EU and non-EU countries (academia, R&D, industry, health service, financial sector, etc.). It is doubtful that the UK can immediately raise skills and qualifications to substitute what comes through the EU (the EU labour force is more highly educated in terms of average levels of human capital), thus productivity levels are unlikely to be enhanced by Brexit in the short to medium term. It takes time, investment and planning to systematically build-up the human capital base.
  • Increase investment in technology: the adoption of new technology is a key factor in improving productivity, as illustrated by the advent of computers and the internet in the recent past. A strong focus on generation of innovative products, services and processes would translate into high productivity levels. However, exiting the EU may either slow down this process or increase the investment cost. This is not just because of the potential loss of international collaborative innovation and R&D networks across European countries, which the EU funds. Brexit would also result in uncertainty about trade in the short-term and almost certainly less favourable trade agreements with the remaining EU trade block of 27 countries. This is likely to translate into increased import and export costs for Britain, including of equipment and technology. By opting out of the EU and its 50+ trade agreements, less favourable trade agreements will eventually be negotiated with 120+ countries. If investment in technology becomes more costly, firms may delay or avoid it, so it is unclear if the UK’s productivity levels will be enhanced by Brexit.
  • Increase substitution of capital for labour: if labour becomes cheaper and more freely available, firms may have fewer incentives to invest and may choose to use labour intensive methods, rather than capital-intensive ones. This would result in lower levels of productivity, though jobs and incomes would be maintained, at least for a certain period of time. A surge in productivity would require a reverse in the trend of underinvestment in plant and machinery, as well as physical infrastructure. If Brexit means much less availability and/or more expensive skilled capital, this could spur greater levels of substitution of capital for labour, thus stimulating productivity. At the same time, this might have implications for employment.
  • Improve the morale of workers: during recessions or periods of industrial unrest and low worker morale, productivity tends to fall. By contrast, if workers are motivated and happy, productivity is likely to be higher. The morale of employees can be affected by numerous variables, including but not only wages, bonuses and other monetary incentives. It is also affected by issues such as state of industrial relations, sense of having a stake in the company and enjoyment of the job. These are specific to each nation and enterprise. But to the extent that morale is affected by other factors such as nature of the labour contracts, hours worked, leave of various sorts, etc. Brexit is unlikely to affect morale positively, since many of those factors are influenced by EU rules and regulations (see below) affecting all 28 countries.
  • Minimise rules and regulations: regulations should not impose excessive costs on enterprises and a balance has to be struck between say being able to get rid of poor or disruptive employees and having lax labour market regulations which exploit employees and results in high turnover and demotivation. EU regulations affect health and safety standards, discrimination at work, hours worked, paternity/maternity periods, minimum breaks, minimum paid holiday periods, etc. Brexit might well be good for British employers if regulations are scrapped and labour market flexibility is increased, but would almost certainly come at the expense of employees. Many other regulations are the solely the purview of the British government. Britain has already spawned zero hour contracts which maximise employer flexibility over almost a million employees. It widely acknowledged that Britain already has one of the most deregulated business environments around – some have argued that there is excessive deregulation, for example in the financial sector. Further deregulation would be possible upon Brexit, but it is questionable whether this would necessarily be desirable. It might undermine labour gains, for example, if rules and regulations concerning discrimination, maximum work hours, health and safety, etc. are undermined. These would reduce job security, employer costs and possibly spur productivity, but much would come at the expense of employees.
  • Maximise capacity utilisation: during economic booms, firms tend to squeeze more output out of existing capacity by encouraging people to work overtime, thus increasing labour productivity. In recessions, they may hold on to workers, rather than releasing them even if they are working below capacity, resulting in labour productivity falls. There is some evidence of “labour hoarding” (firms cutting output but keeping labour in reserve for the recovery), which is part of the reason for the productivity puzzle previously discussed. It seems unlikely that leaving the EU will increase capacity utilisation. Britain´s trade balance is already poor, it exports 44% of its goods and services to the EU and Brexit would mean negotiating new, less favourable terms with the other 27 countries of the EU and 120+ countries that the EU has trade agreements with. Rather than maximising capacity utilisation, it is likely that the reverse will happen upon Brexit (less favourable trade agreements, more risk, higher costs, etc.), with negative implications for employment, wages and tax revenue.

The above does not represent a complete list of possible solutions to the British productivity puzzle. Other factors could be considered, such as seeking to rebalance the economy away from services (about 75% of GDP) towards manufacturing (about 10% of GDP).

In 2015, the Government published its productivity plan (Fixing the foundations: Creating a more prosperous nation), covering issues such as improve transport and digital infrastructure, increase investment, enhance workforce skills, build more houses, move people off welfare and into work, encourage exports, rebalance economy away from London, etc. The 15 point plan is illustrated in the Chart below.

Chart 15 Point Productivity Plan

The productivity plan seems worthwhile implementing but none of it is a quick fix to Britain´s fundamental problem and, on balance, Brexit would not unleash an immediate gain in productivity.

To conclude, the cause of austerity, low productivity and stagnating wages in the UK are first and foremost to do with the UK, not the EU or Europe more generally. The number one priority for the country is to raise the productivity levels, regardless of whether Britain remains in the EU or not. If this happens, the wages, the public expenditure and the standards of living take care of themselves. But it is hard to see just how the UK’s productivity puzzle could be eased by Brexit.

© Ricardo Pinto, 2016, AngloDeutsch™ Blog, www.AngloDeutsch.EU


In Praise of Freedom of Movement of People in the European Union

MoveMapper™ helps you move to another country quickly and painlessly

MoveMapper Android App

In these days of mass movements of people connected with the refugee crisis, it is rare to find recognition of the European Union’s (EU) freedom of movement of people, let alone any commendations. Rather, the media and politicians tend to focus on the stresses and strains connected with migration and freedom of movement within the EU in general and the volume of refugees heading to Europe specifically. In this article, I argue against the grain of current discourse, fully acknowledging populists’ ability to set the tone of public opinion. I make the argument that the single most important achievement of the EU is the principle of freedom of movement of people across 28 countries. This fundamental right is under attack from many quarters. This article and the MoveMapper™ app presented below, represent my effort to counteract this trend. Freedom of movement of people has the capacity to improve people’s lives, while also raising standards of living for all. We should not allow it to be undermined by short-sighted, populist agendas.

The Nation State: freedom of movement lost

Before there were dukedoms, fiefdoms, principalities and eventually nation-states, human being roamed the earth and settled where they chose to. Freedom of movement of people existed in its purest sense: we could go anywhere we liked and the world was our oyster. After the establishment the nation state we became Germans, Britons and so on. Fences, borders, visas and other obstacles restricted the ability to live and work severely and the arena of life was telescoped into national boundaries except for a lucky few, such as diplomats, the military and the well-to-do.

The EU: freedom of movement regained

At the heart of the European Union (EU) is the establishment of a common market. This in turn required overcoming a number of restrictions and led directly to the establishment of the four fundamental freedoms at the core of the EU:

  • The free movement of goods: this right allows free flow of products between EU countries free of import/export duties/charges and common customs tariffs for non-EU countries;
  • The free movement of services (and of establishment): this ensures unrestricted rights to create firms/self-employment in any country and freedom to provide cross-border services;
  • The free movement of capital: this allows capital flows (finance, property, etc.) within the EU countries;
  • The free movement of people: this allows the relocation of citizens between EU 28 countries to pursue their activities, including the abolition of discrimination based on nationality.

The EU is dedicated to realising these four freedoms, subject to exceptions where a Member State can prove that they jeopardize a public good (e.g. public health) and are safeguarded by EU Treaty. Of the four freedoms, the most important to the 500+ million people living in the EU, is the freedom of movement of people throughout 28 countries (actually 32 in the European Economic Area countries, which includes Switzerland, Iceland, Liechtenstein and Norway).

Up-Close: Movement of People

For me, this is the most fundamental freedom and greatest achievement of the EU. It guarantees every EU/EEA citizen the right to move freely, visit, live, work and retire in any member state without restriction. It applies to all EU/EEA citizens, regardless of nationality and does away with discrimination in the common market. Furthermore, it ensures that certain rights can also be extended to the family members of the worker, including benefits, pensions, etc.

None of us believes that we should be disadvantaged in the labour market because of our religion, skin colour or other factors. This freedom means that discrimination on the basis of nationality, residence and/or language is not permitted, while also securing equal treatment in employment conditions, remuneration, dismissal and the receipt of social benefits.

If you believe in transparency and fair treatment, there is absolutely nothing that anyone should fear from the freedom of movement of people. On the contrary, this is an achievement that Europeans should be proud of.

The pros and cons: movement of the people

At the most basic level, the freedom of movement of people means that you and I have access to 32 EEA countries, as well as Switzerland, at the drop of a hat. Not only that, we have automatically the same rights (and responsibilities) as the citizens of those countries. What does this mean in practice?

  • You can visit all 31 countries when you like and as often as you like without cost, delay, restriction, etc.;
  • You can study / au pair, etc. in any of these countries using the same procedures and incurring the same costs as the national citizens of that country;
  • You can work in all countries without constraints or fear of discrimination due to nationality, residence, language, etc.;
  • You do not need a visa or a qualifying period before you can start working or your family can join you;
  • You can do not need to fear being treated differently in the form of the contract, holidays, wages, pension, benefits, etc. just because your nationality is different;
  • You can retire wherever you choose and transfer your pension without fear of being penalised or restricted by virtue of choosing to live in another EU/EEA country.

These fundamental rights are just the tip of the iceberg. Yet this degree of freedom to take greater control of your own destiny would have been considered to be a utopian dream not so long ago in Europe. It used to take hours to cross borders and the long, costly and uncertain bureaucratic nightmares involved in moving countries, getting a job, buying a property, establishing a company, etc. made it a remote dream, except for a small minority. No longer; this particular freedom have been hard won and it is worth fighting tooth and nail to retain.

The above are not the only benefits of the freedom of movement of people. It can play an important role in other respects, contributing to individual, national and EU well-being:

  • Ageing Population and pensions: the ageing population structure in the EU is a major challenge: of the 28 countries of the EU, only Ireland, France and the UK are remotely close to being able to replace their population. Politicians may seek to increase the female participation rate in the labour market and raise the pensionable age, however, the serious demographic challenge cannot be overcome without significant positive net migration for a sustained period of time, even beyond the levels currently being experienced due to the refugee crisis;
  • Reducing unemployment: some cities and regions of EU countries experience much higher levels of unemployment than others (e.g. London vs Liverpool). In the same vein, some countries experience higher levels of unemployment than others (e.g. Greece and Portugal vs Germany and the UK). If economies are growing and labour is attracted to more dynamic cities, regions or countries, this is advantageous to all concerned, not least the unemployed, their dependants, the employers, as well as the tax man;
  • Economic contribution: if economic growth is restricted due to lack of employees or absence of certain types of skill, a labour market of 500+ million makes it possible for economies to continue growing without overheating and resulting in recession. This applies not only to the top, professional jobs. Low paid, dirty, dangerous, dull, flexible and insecure work is the very type that many nationals of the wealthier EU countries are very content to leave to others.

There are few things in life that only entail benefits and no costs; freedom of movement of people is no different. The main potential disadvantages include the following:

  • Cheap Labour Depressing Wages: it is possible that inflows of people willing to take even lower pay than the going rate for certain jobs depresses the wage levels. However, the case either way (depressing or increasing wages) is hotly disputed by economists. Most studies find that there is almost no effect either way but many people remain fearful of this issue, especially the less educated/skilled;
  • Already High Unemployment Levels: it is possible that migrants will flow to areas with already high levels of unemployment. However, migratory flows have an internal logic – migrants want to find work, not to move from being unemployed in one location to being unemployed in yet another. As a rule, they seek out high employment areas because they want to work, they want to save and they want a shot at a better life for themselves;
  • Welfare Tourism: it is possible that a proportion of migrants will seek to improve their lives by migrating to a country offering higher social benefits in than in their own nation. However, research suggests that a tiny proportion of EU migrants fall into this category (less than 1% of all beneficiaries in six EU countries and 1%-5% in five others). Despite the great song and dance about this issue by the populists, no government has come up with any data corroborating the overblown claims of cross-border welfare tourism;
  • Brain drain: freedom of movement of people can lead to skilled people leaving countries that paid for their education and training to be benefit of the receiving country. This is certainly an issue for the emitting country. But there is also the prospect that many choose return to their country of origin, bringing with them higher levels of human capital, know-how, investment capital and an entrepreneurial mind-set that can contribute to national development.

While recognising the pros and cons involved, on balance, most conclude that the freedom of movement of people is a great boon for the individuals concerned, as well as for the emitting and receiving countries. Migration across localities, cities, regions and countries has the capacity to unleash economic development and raise living standards, while also delivering greater satisfaction and happiness at the individual level. It is not a one-way street, but it is worth defending.

The Reality: movement indirectly hampered

The reality however is that governments, to varying degrees, are sensitive to the issue of freedom of movement of people. While recognising the great potential and actual advantages of migration, politicians are extremely mindful of emotive public opinion. They are fully aware of the demographic ticking-bomb that is the ageing European society. But short-termism is inherent their profession (4-5 year election cycles) and populism (winning the next local / regional / national / European region election) is the name of their game. They and the media feed upon people´s concerns and fears, regardless of whether these are well-founded or not. Fear, not hope, is their basic working material.

The consequence is that none of the EU and EEA governments (the European Commission included) make it easy for people to get access to the information that they need to have a sound basis for deciding whether to move to another country or not. A lot of information is available, but it is fragmented, outdated, uncoordinated, etc. Moving to another country may be something that we consider but we usually do not get far. It takes weeks of research effort to connect up the fragmented dots and build a clear picture of what is involved in moving from one country to another with the EU. We typically lack the time, skills, energy and patience to do this.

Relatively few people make use of the single most precious gift of the EU to its 508 million citizens: only 11 million EU citizens have taken advantage of the right to live, study, work or retire in another EU country (or 2.2% of all people in 28 countries). It is clear that some countries are more attractive than others, but the low level of general migration within the EU is not something to fear and deny.

Moving people: MoveMapper™ app

Through the EU’s freedom of movement of people, we have almost utopian rights to live our lives how and where we want. If we choose to, we can change our minds and go back home and pick-up where we left off. I am a serial migrant. I have lived in several EU countries and worked in almost 40 countries worldwide. I have benefited enormously as a human being and as a professional. I do not fear migration or migrants. On the contrary, I embrace other cultures, languages, traditions, history, art, ideas, cuisine, and yes, also our differences and our sameness as human beings, whatever our skin colour, language or beliefs.

The beauty of the freedom of movement of people has inspired me to develop the MoveMapper™ app, which is designed to bring to together key information in deciding whether to work / study / au pair / retire, etc. in another EU country, starting with Britain and Germany.

The MoveMapper™ app covers the formalities of moving to another country, how to get accommodation, how to find employment, how to deal with financial issues, how to integrate your family, how to gain education / language skills and other issues. By pulling the relevant information together, the app provides you with the capacity to enrich your life.

I do not claim that this is a perfect app, that it has all the possible information or indeed that it is 100% up-to-date. The situation is constantly evolving and maintaining information is not easy.

But I believe that it will provide you with sufficient information with which to enable you to decide whether and how to take advantage of the EU’s greatest gift to its citizens. The rest is up to you.

The MoveMapper™ app offers information for two countries to start with: Britain and Germany, the countries closest to my heart and which form the focus of my blog: the AngloDeutsch Blog.

The free version can be tested for free. The premium version costs Euro 0,99 + VAT per country.

When the MoveMapper™ app generates sufficient interest and revenue, I plan to add other countries and update and improve the information available, as well as the app experience.

Test MoveMapper™. Rate it. Share it by forwarding it to people who might be interested.

Do not fear the freedom of movement of people within the EU; instead, recognise it for the incredible opportunity that it offers to those that choose to make use of it. This amounts to real power, real freedom to shape our lives and those of our families.

© Ricardo Pinto, 2016, AngloDeutsch™ Blog, www.AngloDeutsch.EU


Elitism in Britain: unequal opportunities = unequal outcomes

© Ricardo Pinto, 2015, AngloDeutsch™ Blog, www.AngloDeutsch.EU

In my previous post, I showed that, on the basis of their educational background (i.e. whether they attended an independent school and one of the top two universities), the UK cabinet is very much part of the Establishment or the elite of the country. In stark contrast to the German cabinet, there is an extreme concentration of people with such a background: a staggering 42.8% of the British cabinet, are doubly privileged, David Cameron and George Osborne included.

If that was not amazing enough, I would like to report some of the results of an official analysis by the Social Mobility and Child Poverty Commission called Elitist Britain (2014).

Secondary Education and Higher Education are the foundation for elitism

Whereas 89% of pupils attend comprehensive schools, 4% go to grammar schools and a further 7% to independent schools, the latter being independent in terms of finances as well as governance. The terms independent and private school are used synonymous in the UK and basically involve significant tuition charges which only the affluent can afford.

Whereas 62% of the UK adults do not attend university, 1 in 9 attend the so-called Russel Group Universities (the leading 24 higher education institutions in the UK, including Oxford and Cambridge or Oxbridge) but only 1 in 100 attend Oxbridge or 1% of the adult population, which is a classic definition of the elite.

Britain’s elite: formed on the playing fields of independent schools

To get a feel for the influence of the independent schools, consider the following statistics: 71% of senior judges, 62% of senior armed forces officers, 55% of Permanent Secretaries, 53% of senior diplomats, 50% of members of the House of Lords, 45% of public body chairs, 44% of the Sunday Times Rich List, 43% of newspaper columnists, 36% of the Cabinet, 35% of the national rugby team, 33% of MPs, 33% of the England cricket team, 26% of BBC executives and 22% of the Shadow Cabinet attended independent schools compared with 7% of the public as a whole. This means complete domination of the most powerful and influential positions in UK society by those that attend independent schools.

Britain’s elite: finished in Oxbridge

If that provides food for thought, than the influence of the top two universities in the UK is absolutely gobsmacking: 75% of senior judges, 59% of the Cabinet, 57% of Permanent Secretaries, 50% of diplomats, 47% of newspaper columnists, 44% of public body chairs, 38% of members of the House of Lords, 33% of BBC executives, 33% of the Shadow Cabinet, 24% of MPs and 12% of the Sunday Times Rich List attended Oxbridge, compared to less than 1% of the public as a whole. The influence of Oxford and Cambridge in respect to the top positions in Britain is extremely disproportionate, to put it mildly.

Oxford, R Pinto 2015

Oxford Trinity College, © R. Pinto, 2015

 

Sectors of entrenched elitism

The preceding analysis demonstrates the extent to which privilege is entrenched in Britain and this advantage tends to cumulate over time, since is generally passed-on from generation to generation. Since Britons generally take pride in living in a meritocratic society, it is worth delving a bit deeper into some sectors to illustrate what this form of elitism means in practice:

  • Parliament: the advantages are even more entrenched than suggested at first sight by the fact that 36% of the cabinet went to independent schools and 59% went to Oxbridge. Out of the 365 Members of Parliament (MPs) 33% went to independent schools (52% of Conservatives, 41% of Liberal Democrats and 10% of Labour) and 24% went to Oxbridge (32% of Conserves, 28% of Liberal Democrats and 17% of Labour). It should be noted that the MP data refer to 2014 and thus the previous Parliament, though there is no reason to assume this has changed dramatically in the current parliamentary intake. The situation is even more extreme in the case of the House of Lords or the Upper House. Half of the Lords attended independent schools (50%), which is seven times more than the UK population as a whole and over a third (38%) of the Lords attended Oxbridge.
  • Civil Service: over half (55%) of Whitehall permanent secretaries (the most senior civil servant charged with running government a department or ministry on a day-to-day basis) attended an independent school, as did 45% of Public body chairs and 34% of Public body CEOs. Public bodies are created to provide public services such as British Rail (BR) and the British Broadcasting Corporation (BBC). Unsurprisingly, more than half of the same Whitehall permanent secretaries are Oxbridge educated (57%), as are 44% of the Public body chairs and 26% of Public body CEOs.
  • Law: 71% of judges attended an independent school and a further 23% of judges attended a grammar school, which take 4% of the pupils. Thus independent/grammar schools account for a staggering 94% of all judges in Britain. Not only that, but one in seven judges (14%) went to just five independent schools: Eton, Westminster, Radley, Charterhouse and St Paul’s Boys. 75% of judges went to Oxbridge. Our judiciary is a highly self-selective group, it seems.
  • Order: the concentration in the army is almost as extreme as for judges and civil servants. Senior armed forces officers were also largely educated in independent schools (62%) and fewer than 1 in 10 (7%) went to comprehensives. But the equivalent in the police services are less concentrated; a mere 22% attended independent schools and 6% went to Oxbridge.
  • Business: Excluding those educated abroad, 41% of British-educated FTSE350 CEOs and six out of 10 of those in the Sunday Times Rich List (60%) were educated privately. Almost half of FTSE350 CEOs (43%) and over a quarter of those on the Sunday Times Rich List attended Russell Group universities (28%), of which 18% and 12% respectively attended Oxbridge.
  • Media: in terms of the other key set of people setting the agenda for the rest of the population, 54% of the Top 100 media professionals (newspaper editors, columnists and broadcasters) are drawn from independent schools and 45% attended Oxbridge. More than two in five newspaper columnists (43%) in the British press attended an independent school; and 47% graduated from Oxbridge. The situation is even more extreme if we add the independent and grammar school categories together (or 11% of the public): 89% of the Top 100 media professionals are from such schools. Looking specifically at the tabloids (a newspaper having pages half the size of those of a standard newspaper, typically popular in style and dominated by headlines, photographs and sensational stories such as The Sun, The Mirror, etc.) 38% of the columnists attended independent schools and 25% attended Oxbridge (and 49% went to a Russell Group institution). 45% of the broadsheet columnists (a newspaper with a large format regarded as more serious and less sensationalist than tabloids such as The Telegraph, The Independent and The Guardian) went to independent schools and 57% to Oxbridge. The 1% seems to have cornered the media market too.

Self-selection and group think to the fore

As I was writing this piece, I was reflecting on my long-held belief that British society is meritocratic – where the people holding power are selected on the basis of their ability. I still believe this to be the case. I do not doubt that the elite comprising the 7% or 1% is extremely well-educated or that they hold their powerful, prestigious and well-remunerated positions on the basis of their ability. But they are greatly aided by attending the top schools and facilities that money can buy and abetted by a self-selecting and entrenched Oxbridge network of their ilk. To suggest that there is equality of opportunity in Britain, but not necessarily equality of outcome is not only misleading, it is also plain wrong.

This situation may be broadly meritocratic but it is hardly the same as being fair, right or healthy for a democracy; only a small subset of the population has the resources, contacts and know-how to buy the entry ticket to an independent school (7%) which the gateway to securing a pass to one of the top two universities in the country (1%), which in turn results in access to the most influential, powerful and lucrative professions in Britain. The opportunities and the outcomes are systematically cornered, generation after generation, by the same elites.

The very fact that the report Elitist Britain (2014) was released at all demonstrates that the British Establishment is not too concerned about such information being released. Given how little it has been reported or impacted on policy-making (since they also control most of the levers), I guess they are right.

In any case, this fascinating report makes two further points worth noting. The first is that a lack of diversity in the people who are running the country is a problem in and of itself since certain professions should be representative of the public for reasons of legitimacy. This includes politicians, the media and judiciary.

Secondly, a narrow elite implies serious limits on adult social mobility and the sheer scale of the dominance of certain backgrounds raises questions about the degree to which the composition of the elite really reflects merit, as opposed to know-how combined with know-who.

These are serious concerns but the point that really caught my attention concerns the risk of “group think”:

“Where institutions rely on too narrow a range of people from too narrow a range of backgrounds with too narrow a range of experiences they risk behaving in ways and focussing on issues that are of salience only to a minority but not the majority in society. Our research shows it is entirely possible for politicians to rely on advisors to advise, civil servants to devise policy solutions and journalists to report on their actions having all studied the same courses at the same universities, having read the same books, heard the same lectures and even being taught by the same tutors.

The penny drops. I finally understand the reason why so many British politicians and journalists are so consistently and systematically (with some exceptions) pro-leaving “Europe” by which they mean the European Union (EU). Their entrenched group think has blinded them to the benefits of being part of the EU and they systematically underestimate the disadvantages of going it alone, thereby risking the country becoming an increasingly isolated Little Britain.

 

 

 


#ThisIsaCoup´s Germany Bashing is “Over the Top”

Quite a few people have taken to twitter under hashtag #ThisIsACoup to air their view that Greece has been bullied and coerced into an unjust and undemocratic agreement by the other Eurozone members, with the finger being pointing directly at Germany.

#ThisIsNOTaCoup

At least part of the reason for the popularity of hashtag #ThisIsACoup is that prominent commentators such as Paul Krugman, the Nobel-winning economist, have helped to legitimise it and propel the hashtag #ThisIsACoup to the global audience. Krugman wrote in his New York Times blog“The trending hashtag #ThisIsACoup is exactly right.” This was part of his campaign to encourage Greece to exit the Euro.

 I have shown that hashtag #ThisIsACoup is exactly wrong and on two counts. Firstly, “this is a coup” literally implies a great compliment to the Eurozone countries (a coup), which Krugman and the rest presumably did not mean. What they actually meant is hashtag #ThisIsACoupD’état. But here too they have got it completely wrong because the bailout agreement on offer has none of the defining characteristics of a coup d’état either.

I am not arguing that the Euro summit agreement is all fine and well. It most certainly is not and makes unrealistic demands of Greece given the almost non-existing willingness or capacity to reform. I am simply saying that referring to it as a coup d’état (or indeed comparing the agreement terms to the Versailles Treaty, which some commentators have taken to doing) is emotional claptrap directed at one country rather than the 19 that signed the agreement, Greece included.

 #ButItCertainlyISGermanyBashing

In this post I would like address the content being posted on hashtag #ThisIsACoup. This particular bandwagon is not only ill-informed but it is deteriorating into a full-on Germany bashing movement.

Have a look at a selection of photos on offer to get the general gist of what is going on.

Germany Bashing 1

This is a sub-set of the kinds of images being posted. Some of them are funny but the vast majority are simply misleading or spiteful. The tweets are laced with references to Nazism, Fourth Reich and other stuffpointing towards Germany´s true intentions, namely of subjugating Europe through the back door.

Which planet have these people been living on since 1945?

Germans are entitled to feel offended by what is going on. Make no mistake: this is not restricted to the Twittersphere. A reading of comments posted in many national newspaper articles relating to the Eurozone crisis reveals a rising level of enmity towards Germany and its supposedly true intentions towards Europe via the mechanism of the Euro.

As a Briton living and working in Germany, with a German family, friends, family and colleagues, I find this sort of thing, often under the guise of “humour”, unacceptable.

This is unfair. It is wrong. This is  Germany bashing.

If it has not yet been understood those in question, please reflect on the unequivocal fact that that vast majority of Germans would never have opted for the Euro if they had been given a choice and would gladly return to their beloved Deutschmark tomorrow if they could. The Greek tragicomedy is only adding fuel to this particular fire. But I guess whatever I say will never not cut much ice with some people.

Debt relief has already happened and will continue to happen

Now, having got that off my chest, I would like to turn to the rest of Paul Krugman´s quotation, since it appears to legitimise much of what is going on in hashtag #ThisIsACoup namely: “This goes beyond harsh into pure vindictiveness, complete destruction of national sovereignty, and no hope of relief.”

I would like to start with the end bit: no hope of relief. It must be noted that Krugman wrote this before the finalisation of the bailout negotiations, so he was not aware of the fact that, for the first time publicly, “hope of relief” has been finessed into the agreement (“… including financing needs, debt sustainability and possible bridge financing.”). We all know there is no such thing as money for nothing; and so do the Greeks. Incidentally, Krugman also fails to acknowledge that there has already been very significant debt reduction in the first two bailouts for Greece. There will almost certainly be further debt reductions in the third bailout.

As for the final part of the quotation, “This goes beyond harsh into pure vindictiveness,” I suggest that the Nobel laureate actually looks are the terms of the bailout to justify his view. I do not see it, thought I do agree that many of the things in the Euro summit agreement will never be realised, just as they were barely realised in the first two bailouts and/or were reversed once Syriza assumed power.

Germany Bashing 2National sovereignty is a 19-way street

The “complete destruction of national sovereignty” part is a red herring. In a representative democracy, the Greeks elect their government and their government makes decisions in relation to spending, taxation, etc. Parliament does not have to agree to anything it does not wish to do. In the meantime, the Greek Parliament has voted to accept the draft agreement. Two general elections and multiple Parliamentary votes later, the Greek government continues to ratify bailout conditionality. The debate about national sovereignty cannot be about Greece and Greece only. In the Eurozone there are another 18 nations whose taxes are increased and/or expenditure is potentially curtailed as a result of bailout after bailout to help Greece get its own house in order. There is a duty and responsibility towards the sovereignty of 19 nations, not only one.

If a country runs out of money through its own actions and inactions and needs to get it from another 18 countries with no end in sight, then then that country can expect reforms. But remember, these are the things which everyone agrees (including the Greeks themselves) it has systematically avoided doing for decades. Ask other states that have gone broke (but do not have the benefit of a Eurozone sugar daddy) whether they have had to implement painful reforms or not and for how long they have had to do it for in order to get back to normalcy.

Greece is under tremendous pressure to accept the bailout and some of the conditionality is questionable, such as connected with the privatisation fund. This reflects the lack of progress made in the other two bailouts as well as the breakdown in trust as a result of the negotiation tactics deployed in the last six months, rather than pure vindictiveness. At the end of the day, Tsipras and the Greek government must decide what, on balance makes most sense for their country. If the conditionality is vindictive and humiliating, there is an obvious option for them. If the future is truly brighter outside the Euro then it is the duty and responsibility of the Greek Parliament to go in the direction advocated by Krugman and others. But this is something which they have steadfastly refused to do so far to many economists´ dismay and disbelief.

As an aside, Paul Krugman is reported to have said that in pushing for a Greek exit he may have “overestimated the competence of the Greek government” and that it didn’t even occur to him that Greece would make a stand against the rest of the Eurozone countries without having made a plan for an exit from the euro if things went wrong. Perhaps he will also come to agree that the latest bailout agreement may be better than the alternative after all.

He who pays the piper calls the tune

At the end of the day, the country which makes by far the biggest contribution to the bailouts and thus potentially incurs by far the greatest loss associated with the Greek bailouts is entitled to not just a vote but to a significant say in the matter. Failure to do so would be irresponsible in relation to its own tax payers and a failure in democracy vis-a-vis its own electorate.

Every country must look after its own national interests. Consider Britain steadfastly refusing to contribute a penny to the Euro bailouts but offering to show solidarity towards Greece in the form of “humanitarian and medical aid,” should the country choose to exit the Euro and default. Britain is doing what it considers acceptable to its own electorate, as are all 19 Eurozone countries. What about Greece? Its approach is the epitome of following its own national interests. Why not Germany?

Get real: Greece´s sovereignty is not the only one in question; 19 countries are affected by the crisis. As the biggest contributor, Germany is entitled to a significant voice in the decision making-process (just as Italy, France, etc. and the Troika/Institutions are – but Britain is not). Some may not like it, but that is the reality.

Grow up: WWII ended 70 years ago; there comes a point when it is just plain silly to keep rolling out the tired old war clichés.

Stop the “over the top” (pun intended) Germany bashing.

 


To Grexit, or not to Grexit, that is the question

© Ricardo Pinto, 2015, AngloDeutsch™ Blog, www.AngloDeutsch.EU

And so, amazingly and beyond most Europeans’ wildest imagination, it has come to the single most important Referendum since the beginning of the Eurozone, indeed since the very beginning of the European Union (EU) “project”. The Greek nation is voting in a historic referendum that will shape its future, as well as that of the 18 other nations of the Eurozone and the 28 nations on the EU.

As a Briton, I belong to one of the 9 countries that are not part to the Eurozone, but I live and am based in Germany, so I am contributing to the various bailouts. My views of the historic vote the Greeks are casting are shaped by both sets of experiences, which is valuable, since Greece may soon be one of the 9, following a probable default, probable exit from the Euro and possible exist from the EU, the so-called Grexit.

Let me start by saying that I fully understand the Greek’s anger and frustration with the current situation. Unemployment of around 25%, youth unemployment of 60%, wage reductions, pension reductions, poverty reaching unprecedented levels, pensioners desperate to get some money and all the rest of it. Whatever you may think about Germany and the Germans, you will surely be aware of the suffering of the German civilian population after two world wars, hyperinflation, devaluation, two periods of devastation in the last century. The Britons have also gone through traumas. So have the Irish, Portuguese, Spaniards and Cypriots to varying degrees at the same time as the Greeks. No one wants to see this whole sorry situation drag on endlessly.

I am tired of and increasingly frustrated with all the accusations, bickering, tantrums and all the rest that all our politicians have been guilty of since January 2015, reaching a crescendo in the last two weeks. At a historical turning point in European history, it is sad and worrying to see just how divided Europe is. This does not bode well for Greece, the other 18 countries in the Euro or the 28 nations of the EU, not mention the large number of countries that aspire to join the EU in the future. Only one country will be quietly satisfied observing that is going on: Russia.

There have been all sorts of claims and arguments from politicians and economists, many of them totally contradictory. I am just an interested observer who is contributing through my taxes to the bailouts, who may be affected by a possible Euro collapse and who will be affected by the future shape of Europe resulting from today’s referendum. I would like to highlight some issues that Greeks may or may not be considering in casting their vote, but which are probably impossible to pay adequate attention to. given the chaotic and febrile situation, as well as the compressed timescale for this critical referendum:

  1. Europe is not to blame for Greece’s woes. This is first and foremost Greece’s own responsibility.
  2. The EU is not to blame for the Greeks’ troubles. Greek governments have consistently promised more than they could deliver and its citizens have knowingly voted them in one after the other, including the current Syriza. If what politicians are offering sounds too good to be true, it probably is and in other countries, the electorate generally acts accordingly.
  3. The Euro is not the reason why Greece needs bailouts. Greek government, Greek businesses and Greeks individually have lived beyond their means for decades and then used the historically low interest rates generated by (fraudulently) joining the Eurozone to over-borrow even more than previously. But we know full well that what is borrowed must eventually be repaid – and so do they.
  4. Greece has systematically lost competitiveness through its own actions and inactions. Generation upon generation of politician has borrowed too much, created too many public sector jobs, feathered the nests of their supporters through unaffordable perks such as early retirement, failed to collect the taxes due from certain segments of society, refused to implement needed reforms and again and again paid itself too much. In the 10 years until the crisis, the Greeks awarded themselves a 100% increase in wages, not to mention anything about early retirement or other perks. The loss of Greek competitiveness is not due to the EU, the Euro, the banks, the capitalists, the oligarchs, the politicians etc. They have collectively failed to maintain or improve their own competitiveness. The last 5 years have reinforced an entrenched the pattern and austerity has made the pre-existing situtation a lot worse, which is the main criticism which is justifiable. But the last five years were not the cause.
  5. The German, French and other banks are not to blame for the Greeks´ ills. These and other banks saw the opportunity to expand their business in this and other similar countries (as have Greek banks in the whole of the Balkans region) and lent according to the regulatory principles of the Greek Central Bank, according to the contracts that the Greek government, businesses and individuals signed. All three took the money that was lent and did not concern themselves unduly about its origin, though this has become an issue when it comes to payback. The banks naturally want to be repaid the huge sums involved otherwise they go bust, meaning losses for all the individuals that save with them, businesses that bank with them, shareholders that invest in them and others. They are no different from the Greek banks operating in Greece, the Balkans and elsewhere. If the banks (including Greek ones) had not been rescued or propped up, the consequences for the Greeks and for us in the Eurozone and non-Eurozone countries would have been disastrous. The Eurozone has acted correctly in avoiding this scenario. All the talk of paying French and German banks but failing to mention all the others, including Greek banks is hypocrisy. This has happened in all countries where it had to happen, including Britain, Ireland and the United States. If push comes to shove and governments have to make a similar choice again, the same pattern will be repeated because the alternative is worse.
  6. Greece has been the whipping boy for the Eurozone, but not the only one. The fact is that the Eurozone could easily have suffered “contagion” if Greece had defaulted at the time of the first and second bailouts. Furthermore the vast majority (around 90%) of the bailout has gone to the banks rather than the people of Greece. However, this was neither premeditated nor designed to impoverish, punish or humiliate the Greek people. I have already discussed the likely consequences of allowing a Lehman-style ”letting go” of the commercial banking sector. The failsafe mechanisms were simply not in place at the time (who knows if they really are this time around). The Eurozone was doing whatever was necessary to stop a doomsday scenario in Greece and potentially the other weak countries, as well as the whole of the Eurozone area. They succeeded, but at an even greater cost to Greece. But Greece chose to remain in the EU and the Euro. It did not have to.
  7. The Eurozone is not responsible for past, present or future Greek prosperity. There is no transfer union in the EU and it is not possible to have permanent bail outs of one nation by any other nation. Therefore Greece does not have an automatic right to be bailed out by anyone and certainly not on an on-going basis. Solidarity stretches only so far and cuts both ways. The Greeks should reflect on the fact that many of the nations bailing them out are notably poorer than them. If Greece is being bailing out, it is not to create a long-term dependency culture, but to help it to help itself and to be economically sustainable as soon as possible. Greece is entirely responsible for its present and future prosperity, not others.
  8. Greece has chosen so far to remain in the EU and Euro and must live with the consequences. Greece has held two national elections at which its electorate has categorically insisted upon remaining in the EU and the Eurozone. There is a price to be paid for this decision on their part and that price is called “internal devaluation”. The way that the Greek nation can regain competitiveness and eventually stand on its own two feet, is to reduce wages and other costs to levels which are compatible with their economic performance. The other option is to leave the Euro, but this is exactly what Greeks have insisted upon avoiding so far. The decision today enables the country to choose its own path for the third time. If they choose the same path as the rest of the Eurozone countries, then they have to abide by the implications. Please, let us not have any more accusation of blackmail, terrorism, humiliation of the Greek nation and all the rest of it.
  9. No one is taking sovereignty away from the Greeks. The Eurozone does not owe Greece anything and certainly not on a permanent basis (which is actually illegal in the EU and rightly so). So far Greece has chosen to remain in the Euro and swallow the bitter pill of internal devaluation that goes with the bailouts. The bailouts involve clear conditionality and the other Eurozone governments will only provide further tranches of funds if they accept the conditions/reforms connected with the bailouts. No one can or should get money for nothing. The conditionality is designed to enable Greece to get back on its own two feet as soon as possible, including priority reforms which previous Greek governments have systematically failed to implement over decades. Most people are totally unwilling to pay for a free Greek (Irish, Spanish, Portuguese, Maltese) lunch and certainly not for ever. And the same applies to these countries in reverse. Greece has a duty and responsibility, to itself as well as the Eurozone countries, to reform and regain its competitiveness as soon as possible. The conditionality is not for the benefit of the other countries, except in the sense that they and their electorates / taxpayers wish fervently not have to have to continue to bail out other countries.
  10. No one has twisted Greece’s arm and forced it to take the bailouts and accept the associated conditionality. Greece asked for the bailouts arising directly from its own actions over decades. Its politicians signed-up to the money and the conditionality. If it takes the cash but fails to deliver on the conditionality, shit happens. But as the popular saying goes: “Fool me once, shame on you; fool me twice, shame on me.” EU voters in other countries will not allow further bailouts that fail to deliver the promises of reform for ever. Our politicians know this and they are not suicidal. They have a responsibility towards the Greek citizen by virtue of Greece being part of the Eurozone. However, they have a much greater responsibility towards their own electorates and to fulfil their own mandates. This will always trump Greece in a democratic environment comprising 28 nation states, and rightly so.
  11. The last general election resulted in a Syriza majority despite the electorate knowing full well that its programme was both contradictory and unaffordable without continuing bailouts from the Eurozone countries, debt relief and a cancellation of numerous conditions attached with the present bailout agreement. The nightmarish last five months have been the direct consequence of the mandate that the Greek people have given Syriza to end austerity. This is pie in the sky. This will not happen for a decade, regardless of whether Syriza is able to extract all the concessions it wants and certainly regardless of whether Greece remains part of Euro/EU or not. The mandate to end austerity in Greece is pure political opportunism on the part of Syriza: it amounts to a populist policy that cannot be delivered. Messrs Tsipras and Varoufakis know this full well and so does the Greek electorate.
  12. Mr Tsipras and Mr Varoufakis cannot deliver the mandate they have asked for. They have assumed that the risk arising from Greek default is so high that the Eurozone countries would agree to whatever they demanded and have acted accordingly. They have deliberately and consistently gambled over the last five months with the future of Greece, as well as that of the rest of the Eurozone (and beyond – Britain, take note). I resent this stratagem on the part of the Greek government and I feel indignant about it both on the part of the ordinary Greeks and other Eurozone citizens. Game theory is all very well when it comes to econometric modelling, but not when the future wellbeing of 19 countries is at stake. Newsflash for Mr Varoufakis: we are not a mathematical model comprising 10 million Greek voters and a further 325 million rest-of-Eurozone variables to be number crunched until your previously desired statistical outcome is eventually delivered. The sad reality is that all that the Fine Your Radicals have manage to achieve so far, other than plunging Greece into unneeded and unwanted chaos, it to manage to rename the hated “Troika” to the equally detested “Institutions.” Game theory at its best? We are real people, not some gigantic theoretical experiment. The Greeks are facing enormous stress which goes well beyond any spurious mandate that Syriza believes it has managed to extract from a deeply traumatised nation.
  13. Greece has broken the EU way of doing things and the current state of the country is the result. The only way that it is possible for 19 counties to make decisions on such issues as the future of Greece and the Euro (and possibly the EU) is through compromise. Neither Mr Varoufakis nor Mr Tsipras have proved to be willing or able to play the game according to the established rules. The game theory assumption is that when push comes to shove, the Eurozone countries will back down and agree to more or less whatever Greece wishes. Newsflash for Mr Varoufakis: this hardball strategy, which plays fast and loose with the lives of 350 million people, not just that of the Greeks, has failed. The resulting fall-out is a complete and utter lack of trust on a scale never previously witnessed in Europe (not even during Margaret Thatcher’s period as British Prime Minister) since the end of the Cold War period. It does not serve Greece’s interests. It does not serve Eurozone interests. It does not serve EU interests. And it does not serve global interests.
  14. The current chaos in Greece only serves Russian interests. The geographers out there would agree that Greece is undoubted located at a pivotal geo-political position in Europe. The USA, EU and Greece know this, and so does Russia. Mr Tsipras´ attentive and persistent courting of Russia has been deliberate and has not failed to grab our attention. Europe is at a turning point and Russia, despite the ongoing economic weaknesses due primarily to low petrochemical prices, is resurgent. This is game theory with serious global implications which go potentially beyond mere economics and finance. The obvious and explicit threat is that Greece will turn its back on Europe and fall straight into the arms of mother Russian. Good luck with that. Greece is part of the European Union and Greeks feel European. There is nothing in the mandate that the Greek that citizens have given to Syriza to justify this approach and it can only entrench feelings against Syriza in the first instance and the Greek nation thereafter.
  15. Austerity cannot and will not be stopped tomorrow or any time soon. What the Greek or any other politicians imply, say or promise count for nothing as far as austerity is concerned. Not much will change, regardless of whether Greece votes Oxi (yes) or Nai (no). The choice is between “shock therapy” by defaulting and leaving the Euro or “muddling through” with EU bailouts. Neither option is quick nor palatable, though the shock therapy route does offer the promise of regaining competitiveness faster than the “muddle through” option, since Greece would then be totally in charge of its own currency and its own monetary policy, instead of the Euro straitjacket. However, there is no guarantee that its politicians will be able to agree, implement or maintain the long-term reforms necessary to achieve greater and faster economic dynamism than the current path. Presumably this lack of confidence in their own politicians is the reason why the Greeks are bending over backwards to remain in the Euro and the EU, rather than to entrust their own leaders with their future. The chaotic last 6 months are not a good omen: who can blame them?
  16. A flip-flopping government has run out of credibility, friends and trust. The negotiating position of Greece fluctuated over time but unilaterally pulling out of negotiations at a critical time, calling a snap referendum, the decision by Messrs Tsipras and Varoufakis to solicit a “no” vote, not to mention the increasingly bellicose language used, means that there is no longer any trust in the current Greek government. How Messrs Tsipras and Varoufakis can imagine that Greece’s negotiating position will be strengthened by a “no” vote is beyond me but this must obviously be the conclusion that their game theorising has led them to. The main counterparts in the whole process, not least IMF, EC and the principal contributor to the bailouts, Germany, have stated that they will not be able to work with Mr Varoufakis while remaining a vague about whether the same applies to Syriza.
  17. The EU cannot achieve regime change, only the Greek people can. The Institutions/Troika can say whatever they like (and they are, presumably because of their exasperation) but only the Greek people can decide on their own future and which party will lead them. The rest of Europe will have to like or lump it: that is the nature of democracy. But what exactly are the Greeks deciding on in this referendum? Do the people understand the convoluted question? Do they have enough time to consider the options properly? Even if the answer is “yes” twice over, is there an EU bailout on offer to vote on? The answer is “no”. The only thing that the voters are deciding on is whether they want to be part of the Euro or not. Already, with funds running low, there are chaotic and heart-rending scenes that are nothing to be proud of, either in Greece, the Eurozone or the rest of the EU. If this goes on, whatever the announcements by the Syriza government that they have stock-piled food and medicines (when did they do this and why did they do so, unless they did not expect their negotiations to succeed?), we shall all be diminished and the Greek people will indeed be desperate. Who knows what kind of chaos will break out? Has this really been factored in by Syriza? I very much doubt it. I suspect that they are just winging it.
  18. Neither option will be palatable to Greek people: it is a case of damned if you do and damned if you don’t. A yes vote could mean easier negotiations with Syriza since they will then have another mandate (but they already have the mandate of remaining in the Eurozone) to negotiate the terms of the bailouts. This will be awkward but not impossible to roll up the sleeves and find a workable compromise this time around. We expect no less from our politicians. But a resignation by Syriza is the more likely outcome based on their intransigent approach in the last five months. There would be another general election, with the possibility of an even more radical government coming to power and the crisis being drawn-out even longer. Or it could mean a “traditional” government that will agree debt relief, combined with an acceptable bailout programme and conditionality. Either way, the Greeks cannot expect higher minimum wages, pensions, etc. than exist in the various countries that are contributing to keeping their economy afloat but do not enjoy the same level of benefits. This is not feasible and will not be agreed to. Living within their means has to be the way forward, even with the significant debt relief combined with serious investment for growth and development that I sincerely hope will be hammered out next time round.
  19. The present is bleak, but the future could be worse. No European, indeed no human being, can look upon the scenes in Greece with aloofness. My parents are pensioners and I would not wish this sort of thing upon them or any other person. However, should the Greeks choose the “no” path, followed by default and introduction of a new Drachma, they will have delivered themselves into an unpredictable roller-coaster ride which will test the nation well beyond the limits of anything they have endured so far. There is plenty of not-so-distant experience of “shock therapy” in most of Central and Eastern Europe, including Russia. Whatever the alluring promises on the part of duplicitous politicians or contradictory prize-winning economists, the bloody reality will result in economic and human carnage in the short-term. This will, hopefully, quickly be followed by much more rapid recovery and prosperity than possible under the current “muddling through” option within the Euro. But don’t bet on it: economic theory and reality are usually out of sync, as the last five years should have once gain proved.
  20. A last word on the matter. Good luck to the Greeks today. I would not like to be in their shoes and I can only hope that they will make the right decision for Greece, as well as for the rest of us.

 

 


The Return of the Greek Drachma … err Drama!

© Ricardo Pinto, 2015, AngloDeutsch™ Blog, www.AngloDeutsch.EU

Greece is widely considered to be the cradle of democracy. The theatre of ancient Greece is also considered to be the fountainhead of the Western dramatic tradition, and it shows. The earliest Greek dramas emerged during the 6th Century BC and the term “drama” is derived from the Greek word for action (to do or to act). Indeed, the three main dramatic genres, namely tragedy, comedy and satire (tragicomedy or burlesque), emerged from Athens.

It is just as well that drama is a Greek invention because in the last five months, a mixture of “comedy” and “satyr” is exactly what the Syriza-led government has been serving-up on the European Union (EU) stage. For the final act, it is quite possible that “tragedy” will complete the fascinating yet frightening performance that is unfolding before our eyes. The end product of the Greek drama could well be a return to the Greek drachma.

Greek Drama: paving the way for the drachma?

Dramatic structure refers to the framework of a dramatic work such as a play or a film.  According to Gustav Freytag, dramas can divided into five parts or acts (also called Freytag’s pyramid), as illustrated below.

Freytag's Pyramid and the Greek Drama

I would like to take the liberty of applying Freytag’s pyramid to modern-day Greece, as far as the Eurozone crisis and its future in the EU are concerned. Bear with me.

Act 1. Exposition

This introduces important background information to the audience such as the setting before the main plot in the form of flashbacks, characters’ thoughts, background details, etc.

The first Act of the latest instalment of the Greek drama started during the General Election of January 2015. The Syriza party, indeed almost all Greek parties, told more or less the same narrative and provided the same broad analysis of the background to the plight of Greece and the Greeks. The plot can be summarised as follows: the Greek troubles are the result of the Euro and EU, the Troika (ECB, IMF and EC) has imposed unbearable burdens on the Greek people, resulting in a collapse of GDP, reduction in income and pensions (internal devaluation), very high levels of unemployment, etc. This has all been done in the name of austerity, which has principally served to rescue German and French banks, as well as the Eurozone as a whole but Greece itself. The Greek people have suffered enough. Austerity must end and Greece must regain its self-respect.

Interestingly, the above exposition concentrated almost entirely on the period post-2009, when Greece was rescued from bankruptcy by the EU. The first Act makes clear that the protagonist (Greece) has been treated very badly by the main antagonist in the drama, the Troika / EU / Eurozone / Banks but that enough is enough. The protagonist´s exposition somehow leaves out the decades of corruption, mismanagement, clientelism and sheer incompetence of generation upon generation of Greek leaders that necessitated a rescue by the rest of the Eurozone in 2009 in the first place. But such is the nature of dramatic plots. It is not convenient to set out the background in painful detail, including the fact that Greece had the chance to exit the EU but chose instead to remain and be part of the euro while taking the painful internal devaluation that it implied and which countries in a similar position have also gone through. The previous government signed-up to the bailout conditionality but clearly the mood has changed after five years of painful austerity.

A key aspect of the exposition was the election manifesto. As I have previously discussed, the Syriza programme did prioritise an end to austerity, however, any reading of its pledges would lead to the conclusion that it was both contradictory and unrealistic.

It called for Greece to remain in the EU and Eurozone yet basically roll back the commitments made by the previous government as part of the conditionality for the bailouts, while at the same time calling for an end to privatisation, restoration of lost state jobs, raising of minimum incomes and pensions, free health provision and much else beside. That is all very well during a general election, except for two minor issues: Greece is broke and the only way this can be done is if others pay for it in the short, medium and possibly long-term, yet permanent bailouts are forbidden by various EU treaties for a very good reason.

The EU rescue packages were designed to stop Greece from becoming bankrupt as a result of its own decisions made over a period of decades and did indeed manage to keep them in the Eurozone and the EU, something which the Greek people have always insisted upon. They were designed primarily to buy Greece time to regain competitiveness through reforms agreed to by the previous government. Five years later, this is all interpreted as no more or less than national humiliation, bullying and dictatorship on the part of the EU, with Germany and the Troika singled out for special attention. This was a cracking opening Act in the play.

Act 2. Rising Action

The rising action is a series of events that begin immediately after the exposition (introduction) and builds up to the climax. The entire plot depends on these events to set-up the climax and the satisfactory resolution of the story.

A series of events took place immediately after the election, which set the course for the current Greek drama.

As I have previously discussed, instead of picking a mainstream coalition partner, Syriza chose the Independent Greeks Party which was committed to revoke the agreements between Greece, EU and the Troika, prosecute those who negotiated them, repudiate part of Greece’s debt and require German war reparations for the invasion and occupation of Greece during WWII. Syriza selected this party over other moderate alternative partners. This was widely interpreted and an immediate slap in the face for Germany, by far the most important contributor to past, present and future EU bailouts. Not a good start to negotiations, but great drama.

Syriza then took it as read that being elected actually gave it a mandate to end  austerity in Greece. Under a scenario where Greece would leave the Eurozone and possibly the EU, this would have been correct. Just because they were elected on the basis of a contradictory and unrealistic manifesto, does not give a country the right to implement it unless it assumes responsibility for the costs associated with such a manifesto. Clearly, all the other Eurozone countries would need to pay for a Greek programme that they had absolutely no control over. But if they are to agree a further bail out, they naturally have to approve the basis or conditionality associated with further funds, since they have their own electorates to consider. Instead, Syriza chose to act as if the other countries owed it to Greece to agree their programme by virtue of their electoral mandate.

Furthermore, Syriza and the Independent Greeks Party made a series of important appointments based on political dues to take-on the Troika, rather than selecting experienced and diplomatic negotiators, steeped in the EU way of doing things.

A critical decision was the appointment of the unelected Yanis Varoufakis as the Finance Minister. A bike riding, fiery blogger with a penchant for game theory who describes himself as a “libertarian Marxist” was not necessarily an inspired choice for dealing with 27 other EU Finance Ministers. While he may be a highly regarded economist, he has almost no political experience, except for a period during 2004 – 2006, when he served as an economic adviser to George Papandreou.

Alexis Tsipras, the other main character in the play, can hardly be considered a mature politicians himself, having first been elected to the Greek Parliament in 2009. But initially both Alexis Tsipras and Yanis Varoufakis were widely fêted by the European media for being a contrast to the previous government – young, handsome, tieless, bike riding (Varoufakis), living in a modest neighbourhood (Tsipras), etc. The media throughout Europe loved this and the message that the Greeks were going to take on the austerity camp in the EU. But it was not only the media and the population of various countries that appreciated the rising action in the Greek drama. Many political parties, such as Podemos and other populist movements, saw the Syriza as a white knight in shining armour riding to slay the austerity dragon and reclaim its democracy from the clutches of the dreaded Troika.

Indeed, many economists and politicians in the EU were actually in tune with the message that after five tortuous years, the emphasis had to change. Instead of unrelenting austerity, collapsing GDP, falling incomes and standards, increasing poverty, deflationary pressures, the emphasis simply had to shift to investment, growth and employment. This had to be combined with flexibility in the bailout programme’s target of a surplus of 4.5% of GDP, so that it could be redeployed to achieve Syriza’s programme objectives.

Therefore, a series of events and individuals came together in the second part of the play that created the basis for the next Act in the political drama.

Act 3. Climax

The climax is the turning point. If the story is a comedy, things will have gone badly for the protagonist up to this point; now, the plot will begin to unfold in his or her favour. If a tragedy, things will go from good to bad or bad to worse for the protagonist, often revealing their weaknesses.

However, although the media, general public, economists and politicians were generally well disposed to the Syriza agenda for easing austerity and focusing on growth, the next  set of events gradually but systematically turned against the Greek government, leading to a crescendo of criticism and recrimination.

The talk of war reparations, right at the beginning of the term of government did not go down too well in Germany. Yet Tsipras and Nikos Paraskevopoulos (Justice Minister) kept banging this particular drum to the tune of € 341 billion in compensation (about the same as the overall Greek debts), knowing full well that this would goad German public opinion at a critical time in Greece’s negotiations. This was naïve to say the least and resulted in a general feeling on the part of the Germans of being blackmailed.  Just to add a bit fuel to the fire, Panos Kammenos (Defence Minister, Independent Greeks) seemed to consider it appropriate to threaten to send Islamist fundamentalists to Germany from among tens of thousands of migrants currently in Greece in revenge for the austerity measures he felt had been imposed on Greece by the Germans. That turned up the heat nicely, not least because other people had been under the impression that the Greeks had chosen to remain in the EU and Euro, sign-up to be bailout and take the bitter medicine of internal devaluation.

The choice of Varoufakis to negotiate the EU bailout was a little unfortunate. Varoufakis may well be a brilliant economist and he may well know more about the ins and outs of the financial crisis than all the other 27 EU Ministers of Finance put together. However, lecturing to them from the off was never going to be a winning strategy. From the beginning there was a fundamental personality and ideology clash between himself and Wolfgang Schäuble, the powerful, experienced and prickly German Minister of Finance, who wasted no time in making it clear to the Greek negotiators that their programme was unrealistic, their promises to their electorate had been misleading and that there would still be conditionality in negotiating EU bailouts.

The basic assumption which characterised the Greek position from day one was that they had the Eurozone countries by the balls and that they simply had to squeeze long and hard enough for their demands would be acceded to. In other words, the basis of negotiations, perhaps informed by game theory,  was that the Eurozone countries feared a Greek default and the contagion that would follow, and that this had the potential to deal a mortal blow to the Euro and the EU project.

But the EU finance ministers did not seem to be cowed by this threat, which I consider to be the worlds´s biggest game of chicken. Greece’s most natural allies in the anti-austerity movement, namely Italy and France, were quickly put off by the strident tones and lack of willingness to compromise. The Spaniards, Portuguese, Irish and Cypriots who were also following the internal devaluation route proved to be even more resistant to backing the Greek cause, no doubt fearful of similar populist movements in their own countries. And the northern group of EU countries, especially Germany, Finland, Slovakia, etc. and others were anxious of the consequences of capitulating to Greece’s insistent demands. As I previously wrote, moral hazard is the main reason why Syriza could not and will not force an EU capitulation. If the Greeks could manage to drive a coach and horses through the bailout terms and conditions, would others be tempted to follow their lead and would this be sustainable for the rest of the Eurozone?

The demand for 50% debt relief was denied, though everyone recognises that the current level of state indebtedness (180% of GDP and rising) is not sustainable and will need to be tackled at some point in the future, during calmer global economic times. There certainly was recognition of the need to allow Greece to use more of its primary budget surplus over the next few years. But Greece’s steely determination to avoid as conditionality to the extent possible in the future Eurozone rescue package, whilst simultaneously dismantling the few reforms implemented so far, such as rolling back privatisation, reemployment of former public employees and raising wages and pensions which it can ill afford, only served to harden opinion against Greece. The consequence after five months of intense negotiations and diplomacy is that remarkably little agreement exists on the overall package of reforms necessary to secure the latest tranche of the EU bailout worth Euro 7.2 billion.

It is tempting to conclude that the single most notable Greek achievement appears to have been the rebranding of the “Troika” into the “Institutions”.  This would be unfair, but everyone has noted the Greek government’s populist tendencies. Progress has been made on the reform programme, but there appear to be insurmountable sticking points, such as the primary surplus targets, VAT reform, privatization targets, minimum wage levels and pension reforms. These are all issues which impinge directly upon the country’s fiscal base and thus its debt sustainability, which is why both sides are sticking grimly to their guns.

Within a few months, the almost complete inability to make progress on these sticking points has raised tensions to critical levels. The resulting lack of confidence and trust means that several high-profile individuals no longer negotiate directly. Varoufakis has been removed from the Greek negotiating team for his abrasiveness and style. Schäuble has been side-lined because of his prickly relationship with Varoufakis and his conclusion that the way forward is a “velvet Grexit”.  Jean-Claude Juncker, the President of the European Commission and one of the key remaining Greek allies, has expressed his anger and frustration at Tsipras’ misrepresentation of the EU proposals. Many others have vented their frustration with the main protagonists of the Greek drama. The IMF has packed its bags and gone back to Washington saying it was pointless to stay while the two sides remain so far apart. Sigmar Gabriel, Germany’s vice-chancellor recently said that Europe and Germany will not let themselves be blackmailed or let the exaggerated electoral pledges of a partly communist government be paid for by German workers.

These almost unprecedented accusations and counter-accusations serve to harden positions and will make it ever more difficult to achieve compromise in the coming days. Instead of seeking common ground, the Greek Prime Minister reacted by accusing the IMF of “criminal responsibility” for the situation and that its creditors were seeking to “pillage”, “humiliate” and “asphyxiate” his country. For good measure, he added that if Greece fails, it will be the beginning of the end of the Eurozone.

As if that was not enough, others are raising the stakes. Germany’s EU Commissioner, Guenther Oettinger argues that Greece could face a “state of emergency” on 01 July 2015 and Josef Kollar, the vice chairman of Slovakia’s Finance Committee, accused the Greek prime minister of “swindling the whole world” and that “Politics should … be based on economic reality. And in reality, the drachma would be a rescue for Greece.”

The climax was reached in the third Act: there are open rifts and recriminations, the likelihood of Grexit is openly talked about, emergency measures and being discussed and a return to the Greek drachma is widely speculated upon.

Act 4. Falling action

During the falling action phase, the conflict between the protagonist and the antagonist unravels, with the protagonist winning or losing against the antagonist. The falling action may contain a moment of final suspense, in which the final outcome of the conflict is in doubt.

During mid-late June 2015, we enter the 4th and penultimate Act of the Greek drama. Nothing less than the future of Greece in the Eurozone is at stake. Unless Greece honours the € 1.5 billion repayment due to the IMF on 30 June, it is likely to default. Yannis Stournaras, the Governor of the Bank of Greece, has pitched-in to confirm that his country does not have enough funds to pay the IMF and sketch a less than reassuring scenario of the likely consequences of default.

The only solution is to resolve the critical sticking points in the little time that is left. In the past, I would have bet my bottom dollar in the EU’s ability to manage this. Today, following all the posturing and bickering, I am doubtful that the remaining issues can be resolved and a possible EU rescue package can be approved by the Eurozone governments in time for the IMF payment on 30 June 2015.  At the same time, the game theorists among the Fine Young Radicals remain convinced that the EU will shrink from pressing the euro Armageddon button and Greece will win take the prize.

Freytag’s pyramid predicts that the falling action may contain a moment of final suspense, in which the final outcome of the conflict is in doubt. There is only one politician with the stature to change the entrenched dynamics, and I certainly do not refer to either Mr Cameron or Mr Hollande, whose lack of leadership and vision is palpable. A last-minute intervention by Mrs Angela Merkel is the only hope for a compromise that satisfies all parties sufficiently to get a deal done but, as usual, she is keeping her cards close to her chest until there is no alternative but to act. But perhaps the situation is already past the point of acting.

At the moment, it is far from clear whether the protagonist or the antagonist will win the day. But in a way, it does not really matter because we have already entered uncharted territory where there will only be losers in this Greek tragedy.

Act 5. Dénouement

The comedy ends with a dénouement in which the protagonist is better off than at the story’s outset. The tragedy ends with a catastrophe, in which the protagonist is worse off than before.

And so we enter the final Act, but it is not clear whether this drama is a comedy, a tragedy or a mixture of the two.

It is still possible for the conflict to be resolved, reducing the tension and stress in Greece and Europe. If this happens, Tsipras, Varoufakis and the rest will be fêted for their high stakes brinkmanship and other countries will undoubtedly try to replicate the methodology deployed by the Greek government. But will this end happily for the Greeks and for Europe? I very much doubt it. There may be a rolling back from the reforms that the Troika/Institutions have been seeking so as to raise Greece´s own competitiveness, but this will only make it harder and take longer for Greece to regain economic traction compared with its neighbours. There may be further debt relief, but even if the level of indebtedness is scaled back to the supposedly sustainable level of 120% of GDP, the Greek economy would still need to perform well consistently for a stretch of time so as to avoid its debts mounting-up rapidly. There may also be implementation of many of the measures that the Syriza has been insisting upon and which are the source of the stalemate, but these will come at the expense of the Eurozone countries for the foreseeable future, many of which are significantly poorer than Greece and resent having to subsidise the Greeks’ minimum wages, pensions, etc. The seeds of doubt about the merits of continuing Eurozone membership have already been sown and will start germinating. If other countries such as Spain and Portugal follow the Greek model (moral hazard), several of the net EU contributors, not least Germany, may conclude that the limits of the EU and Eurozone have not only been reached but surpassed. As for the Greeks themselves, they may be in greater control of their own destiny but the reforms that have been so elusive in the past will still need to be implemented, which is not a given. Whatever happens, the Greek citizens will realise that austerity will not, in fact, have been stopped. Furthermore, unless the economy starts performing much more strongly, the latest tranche of the EU bailout will not last long. But after the extreme stress and friction of negotiating this agreement, there may not be much enthusiasm for another full bailout. The game theorists must realise that this is a consequence of their winner-takes-all and at-all-costs strategy. Grexit will remain a possibility. Or perhaps the Syriza government will begin to collect tax revenues vigorously, introduce effective reforms exceeding all expectations and pull the country back from the brink. The past is not necessarily a predictor of the future, but I doubt this will happen without strong and timely global growth to lift all boats, including the Greek one.

But it is possible, indeed likely, based on the latest statements emanating from all sides, that this Greek tragedy will end in catastrophe – yet another word of Greece origin. If Greece does not make the IMF repayment due on 01 July 2015, it is quite possible that a political rabbit will be pulled out of the bag and default will be averted. Angela Merkel is apparently fond of the saying: where there is a will, there is a way. But based on the current situation, sooner rather than later, the country will run out of money. At that point, all hell will break loose, despite all the warm and comforting reassurances from politicians that firewalls are in place to avoid contagion that would wreak havoc across Europe and possibly other parts of the world.

As I wrote in a separate blog post: Eastern Europe went through variants of shock therapy in the 1990s and the Russians, Poles and all the others will confirm that very little was predicted by economic theory, that recovery took much longer than anticipated and that they have absolutely no desire to ever experience such wanton destruction again. I would not wish this upon Greece or any other nation. I would much rather another round of muddling through in the classical European way instead of the destructive, unpredictable catharsis that is being floated. But I also know that many would disagree and not just in Greece.”

Having reflected on the last five months since the election of the Greek government, I am tending to the conclusion that the Greek drama may well end in a dénouement / catastrophe / catharsis resulting from the Fine Young Radicals’ refusal to compromise. They will take the hit, re-establish the drachma or something similar and do their best to move forward. Greece will then be fully in charge of its monetary policy, its currency, its dignity and everything else that its people, in an act of mass amnesia, believe Germany and the other Eurozone countries have taken away from them in the last five years. Of course, they cannot then expect further EU bailouts, will have to live within their own financial means and will rely on their own politicians to navigate the process of regaining international competitiveness.

Hold on! For a second I almost forgot that this is precisely the scenario that the Greek citizens have been bending over backwards and executing double somersaults to avoid. For otherwise they would surely have voted to exit the Euro/Eurozone/EU in one of their previous two general elections, rather than willingly go through the latest acts of this excruciating Greek drama.

Perhaps it really is true that we cannot have it both ways… even in the EU.


Europe is a litmus test: Britain and a possible EU Referendum

As expected, a key battleground of the British General Election due on 07 May 2015 concerns whether Britain should remain in or out of European Union (EU). The position of the main political parties is now clear namely that Labour, the LibDems and the SNP are all fighting the election on the basis that they wish to remain in the EU, whereas the Conservatives are fighting on the basis that if re-elected, they wish to hold a referendum in 2017 on whether to stay in or leave the EU. The Ukip party´s position is to leave the EU as soon as possible, preferably before 2017.  The manifesto positions are summarised here.

I have written about this the possible Referendum in 2017 before (British Voters and EUroscepticsm: much ado about nothing?), namely that it does not actually rank highly in the the average British voter´s list of priorities.  When the Ipsos MORI poll of January 2015 asked British voters about their top concerns, four issues predominated: healthcare (almost half of voters), economy (one-third) followed by asylum and immigration (one-quarter) and education/schools (one-fifth). Europe/EU as an issue is on par with unemployment, which at present is very low in the UK. Indeed, less than 10% of potential voters consider it to be of importance in their list of priorities. The same post also examined the full list of British voter priorities and concluded that they had very little to do with the EU, since they the vast majority of them, with the exception of EU immigration are largely or entirely the responsibility of the British government. In other words, voting for the Conservatives in order to have a referendum resulting in leaving the EU would change precious little in relation to the state of the NHS, the economy, the education system, the housing system and much else besides. The responsibly for these rests squarely with the British government, not with the EU.

There is, in my view, little or no point to quote research and studies regarding the economic and other consequences of leaving the EU. The fact is that both sides of the debate use the assumptions that best suit the conclusions that they they wish to arrive at. Ultimately, each voter will have to weigh up the pros and cons of staying and leaving the EU. The British voter had to do so in 1975 and chose to join the EU. I shall trust them to arrive at an appropriate conclusion in 2017, should the Conservatives regain power after the General Election.

I would note, however, that the Ukip has been simplifying the pros and cons of leaving the EU and, as I have previously discussed, have made strenuous efforts to conflate the issue of migration, use of the NHS, etc. with the EU which also underplaying the consequences of leaving the EU as soon as possible. By contrast the Conservatives have understood perfectly the consequences of leaving the EU but have simply pandered to their Eurosceptical wing while at the same time seeking to stop the hemorrhage of support in their traditional voters which have, until recent months, been increasingly warming to the dubious charms of the Ukip party.

The Labour party, unlike the LibDems and the SNP, initially gave the impression of sitting on the fence on this issue but have ultimately decided to stay in the EU, while reforming the EU budget and ensuring EU migration does not lead to workers’ wages being undercut.

On 07 April 2015, a leading British political figure waded into the debate and, for a change, it was not to denounce the EU, EU immigration, benefit scroungers and all the rest of the anti-EU rhetoric that has become common place in recent British politics. The person in question has this to say about the possible EU referendum, should the Conservatives be returned to power following the General Election:

“For me Europe is an important litmus test. I believe passionately that leaving Europe would leave Britain diminished in the world, do significant damage to our economy and, less obviously but just as important to our future, would go against the very qualities that mark us out still as a great global nation. It would be a momentous decision….

A decision to exit Europe would say a lot about us [United Kingdom] and none of it good: that an adventurous country has become a timid one; that one with global ambitions has opted to be a parochial bystander; that a country known for its openness to the world shuts the open door nearest to it; that a nation which has built its history on confidence towards others defines itself by resentment to others; that, with all the challenges of the world crowding in upon us, demanding strong and clear leadership, instead of saying ‘here’s where the world should go’, we say ‘count us out’. “

At last, a notable politician has the courage to stand up and be counted in relation to the importance of the EU to the UK and vice versa. The speech by this politician has been prominently reported but alas has also been widely dismissed for the simple reason that it was said by none other than Mr Tony Blair (Europe – a very good reason to vote Labour, 07 April 2015).

This is a terrible pity. Tony Blair has gone from being the darling of the left and the person that brought about Cool Britannia to achieving political pariah status in the years since he resigned in favour of Gordon Brown. The main reason for this is that he was he was blown off course by 9/11 and committed British troops to Afghanistan in 2001 and Iraq in 2003. Of course, many seem to find his ability to amass a personal fortune since leaving public office galling, though it is entirely his right to do so and simply mirrors what other ex-Prime Ministers have done.

Personally, I believe that because of the so-called special relationship with the USA, almost any other British Prime Minister would have made the very same decisions that he did at the time and that, just like Margaret Thatcher before him, not only has he defined British politics since 1997 but his legacy continues to do so today.

I admire his capacity to communicate and I respect his political courage for making this speech on the UK and Europe.

 Ricardo Pinto, AngloDeutsch™ Blog, www.AngloDeutsch.EU


Moral Hazard and the Future of the Eurozone

The blame game

I greatly sympathise with the argument that Greece and its citizens have been through the meat grinder, otherwise known as austerity, in the last six years. But this is categorically not because of the EU, the euro, the Troika or Germany. It is down to Greece and the Greeks. Ask the Britons about their own version of austerity, which is nowhere near its end stage with a further GBP 50 bln of cuts in public expenditure scheduled in the next five years. Britain is in the EU but not in the euro, however, there are similarities in the causes that have led to the austerity that both countries are facing for the foreseeable future. The difference is that Britain retains control over its currency and interest rates and is able to manipulate both, while still needing to undergo a painful process of austerity. Despite the most serious economic and social stresses and strains since WWII, the political parties are consistent about the journey in the next five-year term of office.

Contradictions galore

The Greeks chose to join the EU and the euro. In their last two general elections, they have chosen to remain in both. They must either live with the consequences or leave one or both. If Greece chooses to stay in the euro, the only option is to submit to the process of internal devaluation so as to regain competitiveness. Greece can choose to leave the euro but it knows full well that it will still have to submit to a different and rather more unpredictable form of pain that would follow as surely as night follows day. What Greece cannot do is to continue to want to have it both ways, namely to blame everyone else, row back completely from its obligations and totally unshackle itself from any conditionality connected with on-going eurozone support.

I have already written two other posts about the future of the eurozone, centred on Greece and the current phase of uncertainty about the future of Europe:

  • The first focuses on Syriza and its commitments, which are contradictory and impossible to achieve given Greece’s current financial circumstances. It has also chosen a completely unsuitable coalition partner, when it had various more reasonable options. This is a serious miscalculation by its Fine Young Radical leadership.
  • The second focuses on the demands of the Greek leadership, which amounts to the world’s biggest game of chicken. The Greeks are assuming that the rest of the eurozone will blink first and simply cave-in to its demands so as to keep Greece in the euro, avoid contagion in the eurozone and possibly save the EU project as a whole. The new Greece wants to have its euro cake and eat it at the same time, but at the expense of all the other eurozone countries that have been standing by it through various rescue schemes. This approach is inconsistent with the principle that rescue packages must be time-limited, clearly earmarked and subject to conditionality otherwise, they become permanent transfers, which are illegal under both EU and national constitutional law.

Moral hazard and financial crises

This post focuses on the third reason why the Greek will, in the end, be unable to bounce the other eurozone countries into agreeing to its demands, leading ultimately to an abandonment of its major electoral platform. That reason is “moral hazard”, a pervasive and inevitable feature of the financial system and of the economy. Moral hazard arises when a contract or financial arrangement creates incentives for the party(ies) involved to behave against the interest of others.

Many of these moral hazards involve increased risk-taking: if I can take risks that you have to bear, then I may as well take them; but if I have to bear the consequences of my own risky actions, I will act more responsibly. Thus, inadequate control of moral hazards often leads to socially excessive risk-taking—and excessive risk-taking is certainly a recurring theme in the current financial crisis.

Turning back to the latest eurozone crisis, it is not so hard to see where the moral hazard arises from the Greek stance.

Greece, as well as the other countries bailed out by the eurozone countries, namely Spain, Portugal, Ireland and Cyprus, have benefited tremendously from being members of the EU in the first instance, as well as the ultra-low interest rates and other advantages of being part of the euro. All experienced sustained growth which delivered much higher levels of income and prosperity. The cause of the problems they commonly face was almost entirely self-imposed: they borrowed too much, paid themselves too much, relied on the construction sector too much and deregulated too much, all of which fuelled their economic growth until the bubble burst.  They can blame the banks and the fatcat banksters, they can blame the government, they can blame the establishment and clientelist elites, they can blame the EU, they can blame the euro, they can blame the troika, they can blame the Germans and they can blame the immigrants… and they certainly do. But facts are facts. Citizens borrowed too much, spent too much, focused too little on productivity, competitiveness and innovation, and kept voting-in politicians for more of the same. They did this for generations prior to even joining the EU and the advent of the euro, then accelerated the process until the music inevitably stopped.

To blame the EU and the eurozone countries for their plight, as Greece is currently, amounts to wilful collective amnesia. The Greeks want to stay in the EU and euro. They have taken on obligations connected with the various euro rescue packages which they now wish to roll back. There is no doubt that there has been and continues to be massive suffering and not just in Greece. I am all for finding solutions that generate economic development that allows Greece and others to turn the corner as soon as possible. I am all for productive, long-term investment. Greece desperately needs this, as does the rest of Europe.

There is no such thing as a free lunch

But I am not for debt forgiveness combined with rolling back all the commitments that the new Greek leadership insists upon. The reason is that it would amount to a permanent transfer union from all other eurozone countries to Greece, something which is not only forbidden but also increases moral hazard. If the other eurozone countries are expected to assume the resulting risk, then it cannot work. If I were Greek, I would be thrilled to reduce my own burdens while at the same time increasing my pension, my wages, my social benefits and all the rest of it, knowing that someone else will foot the bill. I would certainly agree with the thinking: “Let the strong eurozone countries carry the burden. They can afford it. I have suffered enough.”

This is at the one and same time totally logical and yet totally unconscionable, but it is precisely what would happen. Once the Greeks are granted their 50% debt relief and released from the conditionality of the eurozone rescue packages why should the country reform itself as the new Greek leadership promises? More importantly, why should the rot stop there? It is quite clear that the Podemos movement in Spain is carefully watching developments and others also look on with great interest. Once the principle of debt relief and release from conditionality is established, what is likely to happen at the next general election in those countries? If other anti-austerity parties are elected, would they not reasonably expect similar treatment from the eurozone countries?

It might be possible to absorb the resulting losses and implied on-going costs in the case of Greece, but the euro game would be up soon after. No one could afford it. This applies to Germany as much as to any other eurozone country that has been backstopping the various eurozone rescue packages.

I am resident of Germany and a taxpayer there and I can assure you that I do not fancy this scenario at all. You can take it for granted that my neighbours, no matter how Europhile they may be, care for it even less. While they may go on holiday to other countries of the EU, they have not lived and worked elsewhere and therefore do not have the friendships and family networks that I do and even I am dubious about this future. Germans are financially conservative not by nature but as a direct result of horrific experiences with financial and other catastrophes within living memory. Its ageing population structure simply reinforces this tendency. If moral hazard takes hold in the eurozone, it is not beyond the realms of possibility that Germany might experience a rapid and pronounced disenchantment with the EU and the euro. Were this to occur, it would be an unmitigated disaster for Europe.

I believe the new Greek government will fail with most of its contradictory anti-austerity drive. Its programme is completely unrealistic (except for their insistence that austerity must be counteracted with a pro-growth, productive investment programme), EU and national constitutional law forbid a transfer union and the obvious moral hazard connected with all other eurozone countries mean that this simply cannot be accepted.

The current Greek position would directly increase moral hazard in the EU to an unprecedented degree. If other countries were to follow suit, moral hazard will reach hitherto unimaginable levels. If I take a risk, I should bear the consequences. But if I take a risk at someone else’s expense, then it becomes moral hazard and I would consider this new EU and eurozone, where I would have to pay on an on-going basis for other countries’ decisions, to be little short of an economic nightmare. I would be in hock to third parties for the rest of my life, as would my children and my grandchildren.

I would remind the Greek Fine Young Radical leadership, as well as all the economists out there pushing for the eurozone to give-in to the Greek’s apparently reasonable anti-austerity, pro-growth demands, of a universal truth: there is no such thing as a free lunch. Someone will have to pay for it and I have no intention to be paying lunch for complete strangers from elsewhere in the EU for the foreseeable future.

Ricardo Pinto, AngloDeutsch™ Blog, www.AngloDeutsch.EU


Transfer Union and the Biggest “Game of Chicken”

The Greek David vs. the EU Goliath?

A cursory glance of much of recent media reporting and one could easily conclude that the EU is bullying Greece as a means of advancing its agenda of propping up the euro at the expense of the Greek economy and on the back of the Greek people. Our instinctive reaction is to support the plucky underdog in its monumental fight against the Eurocrat Goliath, especially if the undertone is that the bailout has only succeeded in helping the fat cat foreign banks, who have been making hay with the EU rescue funds while the Greek citizens starve. This could not be further from the truth, as I have previously written.

The recent media reporting has consistently demonstrated that the Syriza rhetoric which went down so well with the Greek electorate is failing to gain traction with the other eurozone countries that have been keeping the Greek economy afloat for the last few years. Instead of Mr Alexis Tsipras and Mr Yanis Varoufakis, Greece’s Fine Young Radicals getting their way with their contradictory demands, they are discovering that their European partners are not for turning, despite the high stakes game of poker being played.

Game of Chicken: who blinks first, loses

This is the world’s most dangerous game of chicken and everyone can see a potential crash looming ahead. Neither the EU nor the Greeks are giving way. The Greeks want to tear down the agreed programme of reform and the as they see it unreasonable conditions imposed on them by the hated “troika” (EC, IMF and ECB) and take back their sovereignty while at the same time staying in the EU and the eurozone and demanding a long list of concessions while being clearly not in position to pay for them either today or any time soon.

The obvious implication of the Greek stance is that the eurozone has foisted austerity upon the Greeks, that it is not working and that the eurozone owes the Greek people for the suffering that has been imposed on them against their will. There should be a significant debt write down, an immediate end to austerity and presumably continuing transfers from eurozone countries for the privilege of Greece not pressing the reset button by leaving the euro and defaulting on their debts. Such eurozone transfers would be expected by Greece not only now, but potentially for the foreseeable future until its economy has recovered fully and it is able to pay back its debts. Many cheer the Greek stance and their pluck in the face of the pro-austerity forces of the establishment, such as the Troika.

Interestingly though, none of the eurozone countries seem to be buying into this fairy tale despite the potentially catastrophic chain of events that could flow from such a game of chicken if contagion were to take hold in other similarly stricken eurozone countries. The lack of eurozone cave-in appears to have taken the Greek young radical leadership by surprise. Moreover, the public pronouncements being made, and not only by the Germans, appear to be hardening over time. Time is running out for Greece. The world‘s biggest game of chicken is unfolding before our very eyes with potentially disastrous consequences for Greece and eurozone. Many must wonder why the eurozone countries don’t simply press the financial reset button? Why must the poor Greeks continue to suffer, whereas through a magical stroke of the EU pen, they could simply forgive the Greek debt and move on?

The Germans always pay…

When it comes to the EU, the three most significant countries have always played a consistent game. The French are the visionaries that drive the ever closer union agenda, including in the establishment of the euro. The Germans are the ones that sign the blank cheques and effectively traded off their beloved DM for reunification. The Brits are the pragmatists that have only ever been interested in trade and finance, but been sceptical about almost everything else connected with the EU and would not touch the euro with the proverbial barge pole. In this story, the simple fact is that the much vilified Germans would almost certainly have signed on the dotted line and rescued the Greeks (and probably others) were it not for two seemingly innocuous words which few people ever mention in relation to the game of chicken currently being played, namely the “transfer union”.

… except if they simply cannot: transfer union

Firstly, let us be clear about the definition. A “transfer union” is basically characterised by permanent, direct and horizontal transfers between eurozone countries.  Quite simply, this is forbidden under EU and national law. The taxpayer in German and other EU countries has always been concerned that s/he might end-up assuming liability for the debts and deficits generated by other Member States. Consequently, the Maastricht Treaty and its successor treaties provided safeguards not least Article 125 of the Treaty on the Functioning of the European Union (TFEU), which contains the so-called “no bail-out” clause.  It requires that EU institutions (including the European Central Bank) must not assume liability for the debts of central, regional or local governments of the member states of the eurozone, nor must one member state assume liability for the debts of another. A recent amendment to Article 136 TFEU authorises eurozone members to set up the European Stability Mechanism on an inter-governmental basis, but this does not invalidate the no bail-out clause which forbids debt burden-sharing amongst eurozone members.

These legal restrictions are reinforced by others in the national constitutions of certain member states such as that of Germany. The German Federal Constitutional Court based in Karlsruhe has been particularly vociferous in blocking anything which affects Germany’s ability to act as a fully self-governing sovereign state.

Had it not been for the constraints blocking transfer union on the basis defined above, I believe that most German politicians would have already done whatever it takes to rescue Greece and the euro. They would have written a blank cheque in 2009, they would have done so today and they would have continued to do so for the foreseeable future until their own financial system was corroded. Never underestimate the importance of war guilt in German policy-making. The instinctive reaction of German politicians, certainly until the advent of Chancellor Gerhard Schroeder, was to pay first and think last about the consequences for the German taxpayer. Fortunately for the German citizen (or more to the point, unfortunately for the Greek citizen), the problem of the transfer union is a major stumbling block which inhibits the normal course of EU politics and results in the biggest game of chicken ever.

To be sure, some vertical transfers do take place between member states and the EU and back to member states. Article 3 III of the EU Treaty refers to economic, social and territorial cohesion and solidarity between the member states as one of the aims of the Union. Measures that are financed must correspond with the aims of the Union and have been agreed by the member states in the framework of the European Treaties and secondary legislation. The competitiveness and cohesion budget focuses on three elements: i) economic convergence of the least developed regions and member states ii) regional competitiveness and employment and iii) cross-border cooperation and the integration of regions and SMEs.

But the situation becomes much trickier in the case of the euro rescue package which now comprises three elements: i) the European Financial Stabilisation Mechanism (EFSM) run by the Commission, ii) the European Financial Stability Facility (EFSF) financed by the member states and iii) IMF aid. There have been numerous attempts to block the rescue packages on the legal grounds previously mentioned. All have failed because the rescue packages have been considered to be time-limited, with clearly earmarked loans and subject to strict conditionality. Funds are not paid out until economic policy conditions connected to the framework of the structural adjustment programme, are complied with. This is the basis of the euro rescue packages, otherwise they could not have been offered. This is the basis that Greece accepted the offered rescue packages.

New Greece or eating the euro cake and having it too

Prior to the advent of Syriza, it could be questioned if the loans would ever be repaid by Greece or if the conditions attached were being met in the manner anticipated. But with the new, explicit Greek demands, the position changes radically . As I have previously discussed, Syriza goes against all uneasy compromises which have been hammered out under the previous euro rescue packages. In essence it insists on the following:

  • Stay in the EU and the Euro.
  • Negotiate the level of the debt burden (175% of the GDP or €318 billion) immediately
  • Reboot the economy and create 300,000 jobs
  • Immediate end to austerity:
    • Tax reductions (abolish taxes & social contributions for 7 years & income tax of 30%)
    • Raise the minimum wage from €586 to €751
    • Re-introduce 13th month payment for the lowest retirement pensions
    • Distribute electricity or housing coupons and free access to public transport for the poorest 300,000 households
  • Introduce free healthcare for all.
  • Stop privatisation on its tracks.

This is the new Greece wanting to have its euro cake and eat it at the same time, but at the expense of all the other eurozone countries that have been helping it through various rescue funds. These demands, which its Fine Young Radical leadership is pursuing with vigour, would effectively overturn the current rationale of the rescue packages totalling €240bn and contravene the principle of no transfer union since it would lead to permanent, direct and horizontal transfers between eurozone countries. By requiring an immediate renegotiation of the debt burden by half (bearing in mind that many eurozone countries are significantly poorer than Greece on a per capita basis yet would have to bear the costs of debt reduction), it would represent a clear and unambiguous bailout by the other eurozone countries. By stopping privatisation and reintroducing a raft of measures which the country simply cannot afford to pay for, it would effectively amount to permanent, direct and horizontal transfers between the other eurozone countries and Greece, since the country cannot afford them now and is unlikely to afford them for decades. In other words, the current Greek negotiating position would represent a direct contravention of the EU treaties and, if successful, would trigger challenges at the EU level, as well as in the German Federal Constitutional Court, something which the German government rightly fears. And this is even before we discuss how the average tax payer and voter in eurozone countries will feel about contributing to increasing the minimum wage or pension in Greece to levels which they themselves do not enjoy in their countries.

In this game of chicken, Greece’s leadership has been betting that when push comes to shove, the rest of the eurozone will blink first and simply cave-in to its demands so as to keep Greece in the euro, avoid contagion in the eurozone and possibly save the EU as a whole.

But Greece’s Fine Young Radicals have underestimated the legal importance of the EU treaty and national constitutional barriers to the establishment of a transfer union. A European financial equalisation, with permanent, direct and horizontal transfers, is simply not possible, otherwise Germany and other leading eurozone national would probably have long ago given-in to the mounting economic and political pressures.

The limits to the EU and the euro

The day when the Greek citizen or any other EU citizen votes to increase its wages, pensions, social expenditure, etc. yet simply expects the taxpayers of other EU countries, be it the Germans or any other nationality, to foot the resulting bill on an ongoing basis is the day that the EU and euro will be dead and buried as far as I am concerned. This massive game of chicken potentially affecting the lives of the Greeks, the eurozone countries and other including Britons (though they may feel immune to it because of their own currency)  may go on for a while, but it will not last long. There will probably only be losers in this game started by Greece’s Fine Young Radicals. They will lose if things go wrong by accident or design, but nowhere as badly as the Greek people themselves who, in their desperation, have voted them in.

Ricardo Pinto, AngloDeutsch™ Blog, www.AngloDeutsch.EU