Tag Archive: Moral hazard

#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.


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.


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.


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.

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