Monday, June 1, 2015

For Whom The Bell Tolls?

The Prime Minister of Greece, Alexis Tsipras, wrote a comment for Le Monde newspaper, Europe at crossroads:
On 25th of last January, the Greek people made a courageous decision. They dared to challenge the one-way street of the Memorandum’s tough austerity, and to seek a new agreement. A new agreement that will keep the country in the Euro, with a viable economic program, without the mistakes of the past.

The Greek people paid a high price for these mistakes; over the past five years the unemployment rate climbed to 28% (60% for young people), average income decreased by 40%, while according to Eurostat’s data, Greece became the EU country with the highest index of social inequality.

And the worst result: Despite badly damaging the social fabric, this Program failed to invigorate the competitiveness of the Greek economy. Public debt soared from 124% to 180% of GDP, and despite the heavy sacrifices of the people, the Greek economy remains trapped in continuous uncertainty caused by unattainable fiscal balance targets that further the vicious cycle of austerity and recession.

The new Greek government’s main goal during these last four months has been to put an end to this vicious cycle, an end to this uncertainty.

Doing so requires a mutually beneficial agreement that will set realistic goals regarding surpluses, while also reinstating an agenda of growth and investment. A final solution to the Greek problem is now more mature and more necessary than ever.

Such an agreement will also spell the end of the European economic crisis that began 7 years ago, by putting an end to the cycle of uncertainty in the Eurozone.

Today, Europe has the opportunity to make decisions that will trigger a rapid recovery of the Greek and European economy by ending Grexit scenarios, scenarios that prevent the long-term stabilization of the European economy and may, at any given time, weaken the confidence of both citizens and investors in our common currency.

Many, however, claim that the Greek side is not cooperating to reach an agreement because it comes to the negotiations intransigent and without proposals.

Is this really the case?

Because these times are critical, perhaps historic–not only for the future of Greece but also for the future of Europe–I would like to take this opportunity to present the truth, and to responsibly inform the world’s public opinion about the real intentions and positions of Greece.

The Greek government, on the basis of the Eurogroup’s decision on February 20th, has submitted a broad package of reform proposals, with the intent to reach an agreement that will combine respect for the mandate of the Greek people with respect for the rules and decisions governing the Eurozone.

One of the key aspects of our proposals is the commitment to lower – and hence make feasible – primary surpluses for 2015 and 2016, and to allow for higher primary surpluses for the following years, as we expect a proportional increase in the growth rates of the Greek economy.

Another equally fundamental aspect of our proposals is the commitment to increase public revenues through a redistribution of the burden from lower and middle classes to the higher ones that have effectively avoided paying their fair share to help tackle the crisis, since they were for all accounts protected by both the political elite and the Troika who turned “a blind eye”.

From the very start, our government has clearly demonstrated its intention and determination to address these matters by legislating a specific bill to deal with fraud caused by triangular transactions, and by intensifying customs and tax controls to reduce smuggling and tax evasion.

While, for the first time in years, we charged media owners for their outstanding debts owed to the Greek public sector.

These actions are changing things in Greece, as evidenced the speeding up of work in the courts to administer justice in cases of substantial tax evasion. In other words, the oligarchs who were used to being protected by the political system now have many reasons to lose sleep.

In addition to these overarching goals that define our proposals, we have also offered highly detailed and specific plans during the course of our discussions with the institutions that have bridged the distance between our respective positions that separated us a few months ago.

Specifically, the Greek side has accepted to implement a series of institutional reforms, such as strengthening the independence of the General Secretariat for Public Revenues and of the Hellenic Statistical Authority (ELSTAT), interventions to accelerate the administration of justice, as well as interventions in the product markets to eliminate distortions and privileges.

Also, despite our clear opposition to the privatization model promoted by the institutions that neither creates growth perspectives nor transfers funds to the real economy and the unsustainable debt, we accepted to move forward, with some minor modifications, on privatizations to prove our intention of taking steps towards approaching the other side.

We also agreed to implement a major VAT reform by simplifying the system and reinforcing the redistributive dimension of the tax in order to achieve an increase in both collection and revenues.

We have submitted specific proposals concerning measures that will result in a further increase in revenues. These include a special contribution tax on very high profits, a tax on e-betting, the intensification of checks of bank account holders with large sums – tax evaders, measures for the collection of public sector arrears, a special luxury tax, and a tendering process for broadcasting and other licenses, which the Troika coincidentally forgot about for the past five years.

These measures will increase revenues, and will do so without having recessionary effects since they do not further reduce active demand or place more burdens on the low and middle social strata.

Furthermore, we agreed to implement a major reform of the social security system that entails integrating pension funds and repealing provisions that wrongly allow for early retirement, which increases the real retirement age.

These reforms will be put into place despite the fact that the losses endured by the pension funds, which have created the medium-term problem of their sustainability, are mainly due to political choices of both the previous Greek governments and especially the Troika, who share the responsibility for these losses: the pension funds’ reserves have been reduced by 25 billion through the PSI and from very high unemployment, which is almost exclusively due to the extreme austerity program that has been implemented in Greece since 2010.

Finally–and despite our commitment to the workforce to immediately restore European legitimacy to the labor market that has been fully dismantled during the last five years under the pretext of competitiveness–we have accepted to implement labor reforms after our consultation with the ILO, which has already expressed a positive opinion about the Greek government’s proposals.

Given the above, it is only reasonable to wonder why there is such insistence by Institutional officials that Greece is not submitting proposals.

What end is served by this prolonged liquidity moratorium towards the Greek economy? Especially in light of the fact that Greece has shown that it wants to meet its external obligations, having paid more than 17 billion in interest and amortizations (about 10% of its GDP) since August 2014 without any external funding.

And finally, what is the purpose of the coordinated leaks that claim that we are not close to an agreement that will put an end to the European and global economic and political uncertainty fueled by the Greek issue?

The informal response that some are making is that we are not close to an agreement because the Greek side insists on its positions to restore collective bargaining and refuses to implement a further reduction of pensions.

Here, too, I must make some clarifications:

Regarding the issue of collective bargaining, the position of the Greek side is that it is impossible for the legislation protecting employees in Greece to not meet European standards or, even worse, to flagrantly violate European labor legislation. What we are asking for is nothing more than what is common practice in all Eurozone countries. This is the reason why I recently made a joint declaration on the issue with President Juncker.

Concerning the issue on pensions, the position of the Greek government is completely substantiated and reasonable. In Greece, pensions have cumulatively declined from 20% to 48% during the Memorandum years; currently 44.5% of pensioners receive a pension under the fixed threshold of relative poverty while approximately 23.1% of pensioners, according to data from Eurostat, live in danger of poverty and social exclusion.

It is therefore obvious that these numbers, which are the result of Memorandum policy, cannot be tolerated–not simply in Greece but in any civilized country.

So, let’s be clear:

The lack of an agreement so far is not due to the supposed intransigent, uncompromising and incomprehensible Greek stance.

It is due to the insistence of certain institutional actors on submitting absurd proposals and displaying a total indifference to the recent democratic choice of the Greek people, despite the public admission of the three Institutions that necessary flexibility will be provided in order to respect the popular verdict.

What is driving this insistence?

An initial thought would be that this insistence is due to the desire of some to not admit their mistakes and instead, to reaffirm their choices by ignoring their failures.

Moreover, we must not forget the public admission made a few years ago by the IMF that they erred in calculating the depth of the recession that would be caused by the Memorandum.

I consider this, however, to be a shallow approach. I simply cannot believe that the future of Europe depends on the stubbornness or the insistence of some individuals.

My conclusion, therefore, is that the issue of Greece does not only concern Greece; rather, it is the very epicenter of conflict between two diametrically opposing strategies concerning the future of European unification.

The first strategy aims to deepen European unification in the context of equality and solidarity between its people and citizens.

The proponents of this strategy begin with the assumption that it is not possible to demand that the new Greek government follows the course of the previous one – which, we must not forget, failed miserably. This assumption is the starting point, because otherwise, elections would need to be abolished in those countries that are in a Program. Namely, we would have to accept that the institutions should appoint the Ministers and Prime Ministers, and that citizens should be deprived of the right to vote until the completion of the Program.

In other words, this means the complete abolition of democracy in Europe, the end of every pretext of democracy, and the beginning of disintegration and of an unacceptable division of United Europe.

This means the beginning of the creation of a technocratic monstrosity that will lead to a Europe entirely alien to its founding principles.

The second strategy seeks precisely this: The split and the division of the Eurozone, and consequently of the EU.

The first step to accomplishing this is to create a two-speed Eurozone where the “core” will set tough rules regarding austerity and adaptation and will appoint a “super” Finance Minister of the EZ with unlimited power, and with the ability to even reject budgets of sovereign states that are not aligned with the doctrines of extreme neoliberalism.

For those countries that refuse to bow to the new authority, the solution will be simple: Harsh punishment. Mandatory austerity. And even worse, more restrictions on the movement of capital, disciplinary sanctions, fines and even a parallel currency.

Judging from the present circumstances, it appears that this new European power is being constructed, with Greece being the first victim. To some, this represents a golden opportunity to make an example out of Greece for other countries that might be thinking of not following this new line of discipline.

What is not being taken into account is the high amount of risk and the enormous dangers involved in this second strategy. This strategy not only risks the beginning of the end for the European unification project by shifting the Eurozone from a monetary union to an exchange rate zone, but it also triggers economic and political uncertainty, which is likely to entirely transform the economic and political balances throughout the West.

Europe, therefore, is at a crossroads. Following the serious concessions made by the Greek government, the decision is now not in the hands of the institutions, which in any case – with the exception of the European Commission- are not elected and are not accountable to the people, but rather in the hands of Europe’s leaders.

Which strategy will prevail? The one that calls for a Europe of solidarity, equality and democracy, or the one that calls for rupture and division?

If some, however, think or want to believe that this decision concerns only Greece, they are making a grave mistake. I would suggest that they re-read Hemingway’s masterpiece, “For Whom the Bell Tolls”.
The irony is that Alexis Tsipras never read Hemingway's masterpiece, nor did he write the comment above. It was written by Greek finance minister Yanis Varoufakis who has read Hemingway (and Marx) and is acutely aware that Europe is at crossroads, which is why he's pleading for a new deal for Greece.

Unfortunately, the Greek disconnect is alive and well. Tsipras and Varoufakis are drawing their red lines on "austerity measures", sticking tightly to their stalling strategy which some think is a winning one.

Hans-Werner Sinn, Professor of Economics and Public Finance at the University of Munich and President of the Ifo Institute for Economic Research, wrote a comment for Project Syndicate, Varoufakis’s Great Game:
Game theorists know that a Plan A is never enough. One must also develop and put forward a credible Plan B – the implied threat that drives forward negotiations on Plan A. Greece’s finance minister, Yanis Varoufakis, knows this very well. As the Greek government’s anointed “heavy,” he is working Plan B (a potential exit from the eurozone), while Prime Minister Alexis Tsipras makes himself available for Plan A (an extension on Greece’s loan agreement, and a renegotiation of the terms of its bailout). In a sense, they are playing the classic game of “good cop/bad cop” – and, so far, to great effect.

Plan B comprises two key elements. First, there is simple provocation, aimed at riling up Greek citizens and thus escalating tensions between the country and its creditors. Greece’s citizens must believe that they are escaping grave injustice if they are to continue to trust their government during the difficult period that would follow an exit from the eurozone.

Second, the Greek government is driving up the costs of Plan B for the other side, by allowing capital flight by its citizens. If it so chose, the government could contain this trend with a more conciliatory approach, or stop it outright with the introduction of capital controls. But doing so would weaken its negotiating position, and that is not an option.

Capital flight does not mean that capital is moving abroad in net terms, but rather that private capital is being turned into public capital. Basically, Greek citizens take out loans from local banks, funded largely by the Greek central bank, which acquires funds through the European Central Bank’s emergency liquidity assistance (ELA) scheme. They then transfer the money to other countries to purchase foreign assets (or redeem their debts), draining liquidity from their country’s banks.

Other eurozone central banks are thus forced to create new money to fulfill the payment orders for the Greek citizens, effectively giving the Greek central bank an overdraft credit, as measured by the so-called TARGET liabilities. In January and February, Greece’s TARGET debts increased by almost €1 billion ($1.1 billion) per day, owing to capital flight by Greek citizens and foreign investors. At the end of April, those debts amounted to €99 billion.

A Greek exit would not damage the accounts that its citizens have set up in other eurozone countries – let alone cause Greeks to lose the assets they have purchased with those accounts. But it would leave those countries’ central banks stuck with Greek citizens’ euro-denominated TARGET claims vis-à-vis Greece’s central bank, which would have assets denominated only in a restored drachma. Given the new currency’s inevitable devaluation, together with the fact that the Greek government does not have to backstop its central bank’s debt, a default depriving the other central banks of their claims would be all but certain.

A similar situation arises when Greek citizens withdraw cash from their accounts and hoard it in suitcases or take it abroad. If Greece abandoned the euro, a substantial share of these funds – which totaled €43 billion at the end of April – would flow into the rest of the eurozone, both to purchase goods and assets and to pay off debts, resulting in a net loss for the monetary union’s remaining members.

All of this strengthens the Greek government’s negotiating position considerably. Small wonder, then, that Varoufakis and Tsipras are playing for time, refusing to submit a list of meaningful reform proposals.

The ECB bears considerable responsibility for this situation. By failing to produce the two-thirds majority in the ECB Council needed to limit the Greek central bank’s self-serving strategy, it has allowed the creation of more than €80 billion in emergency liquidity, which exceeds the Greek central bank’s €41 billion in recoverable assets. With Greece’s banks guaranteed the needed funds, the government has been spared from having to introduce capital controls.

Rumor has it that the ECB is poised to adjust its approach – and soon. It knows that its argument that the ELA loans are collateralized is wearing thin, given that, in many cases, the collateral has a rating below BBB-, thus falling short of investment grade.

If the ECB finally acknowledges that this will not do, and removes Greece’s liquidity safety net, the Greek government would be forced to start negotiating seriously, because waiting would no longer do it any good. But, with the stock of money sent abroad and held in cash having already ballooned to 79% of GDP, its position would remain very strong.

In other words, thanks largely to the ECB, the Greek government would be able to secure a far more favorable outcome – including increased financial assistance and reduced reform requirements – than it could have gained at any point in the past. A large share of the acquired resources measured by the TARGET balances and the cash that has been printed would turn into an endowment gift for an independent future.

Many people in Europe seem to believe that Varoufakis, an experienced game theorist but a political neophyte, does not know how to play the cards that Greece has been dealt. They should think again – before Greece walks away with the pot.
No doubt, if the ECB removes Greece’s liquidity safety net, the Greek government would be forced to start negotiating seriously, but with the stock of money sent abroad and held in cash having already ballooned to 79% of GDP, its position would remain very strong.

From this vantage point, the stalling strategy Tsipras and Varoufakis have implemented is pure genius. I discussed it in my comment on whether Germany will push Greece over the edge, citing a  brilliant comment from Frances Coppola where she stated the following:
Is it possible that this is not an antagonistic move at all, from Greece's point of view? Could it be that far from kicking Greece, the ECB's real target is Germany? For some time now, it has been evident that Draghi is no fan of Germany's "Austerity Forever" stance. Pressuring Germany into negotiating might be his intention. But if so, it is a highly risky strategy. Pulling the waiver is likely to increase capital flight from Greece and raise Greek bond yields still further, putting further pressure on Greece's fragile finances. How exactly would this help Greece?

Alessandro Del Prete helpfully sent me this piece by Jacques Sapir which explains how weakening Greece's position could actually strengthen its hand (my emphasis):
In this strategic game, it is clear that Greece has deliberately chosen the strategy qualified by Thomas Schelling, one of the founders of game theory, but also of nuclear dissuasion, as « coercive deficiency »[5]. In fact, this term of « coercive deficiency » was imagined by L. Wilmerding in 1943 in order to describe a situation where agencies enter into expenses without prior financing, knowing that morally the government will not be able to refuse funding them [6]. Schelling’s contribution consists in showing that this situation can be generalized and that a situation of weakness can reveal itself to be an instrument of coercion upon others. He also showed how it can be rational for an actor knowing himself to be in a position of weakness from the start, to increase his weakness in order to use it in negotiation. Reversing Jack London, one can speak in this instance of a “strength of the weak.” [7]. It is in this context that we must understand the renunciation by the Greek government of the last slice of aid promised by the so-called « Troïka, » amounting to 7 billion euros. Of course, having rejected the legitimacy of said “Troïka, » it could not logically accept to take advantage of it. But, in a more subtle way, this gesture is putting Greece voluntarily at the edge of the abyss and demonstrates all at once its resolve to go the bitter end (like Cortez burning his ships before moving up to Mexico) and to increase the pressure on Germany. We are here in a full blown exercise of « coercive deficiency ».
This explains Varoufakis's "Do ahead" (he probably meant "Go ahead"). He stands at the edge of the cliff, and the ECB says "Do what we want or we will push you over". His response: "Go on then, push".

It must be remembered that this game is being played on a global stage. The US President, Barack Obama, has openly sided with the Greeks, warning that "You cannot keep on squeezing countries that are in the midst of a depression. At some point there has to be a growth strategy in order for them to pay off their debts and eliminate some of their deficits". And the UK's George Osborne, while calling for the Greek finance minister to "act responsibly", also criticised the Eurozone for its lack of a coherent plan for jobs and growth. Calling for the two sides to strike a deal, he warned that the standoff between Greece and the Eurozone is the "greatest risk facing the global economy". This seems like hyperbole to me, given the continuing crisis in Ukraine and military game-playing in the South China Sea, not to mention the Islamic insanity in the Middle East. But it all helps the Greek cause.

Varoufakis is gambling that the Eurozone, and more particularly Germany, will not dare to push him off the cliff because of the consequences for international political relations. If Germany was seen to force Greece out of the Euro by refusing to negotiate, it would become an international pariah. There are already voices reminding Germany of its own debt forgiveness in 1953, and anti-austerity movements in many other Eurozone countries would only be encouraged by Germany and/or the ECB looking like bullies. Forcing Greece out of the Euro could result in the disorderly unravelling of the whole thing.

I may be completely wrong, but this looks far more plausible to me than a simple explanation that fails to take account of the signals given by both Varoufakis and Draghi. In which case, Schäuble should beware. His position is nowhere near as strong as he thinks. He is dangerously close to the cliff edge himself. If Germany pushes Greece over the edge, Greece may well take Germany down with it.    
The truth is that Germany is in a very tough spot too and far from being an enemy, the ECB has aided and abated Varoufakis’s Great Game, pretty much ensuring checkmate by Greece, not for Greece.

But the reality isn't as simple as this. In fact, this strategy comes at a great cost for Greece, one that will push the country back decades as long-term unemployment and debt soar to unprecedented levels. The truth is this is a lose-lose game for Greece and the eurozone.

Why? Because no matter what Tsipras and Varoufakis claim, Greece desperately needs major reforms in its hopelessly corrupt and antiquated economy which is dominated by powerful public sector unions, special interest groups and a handful of wealthy families (I will refrain from using the term "oligarchs" which Tsipras ---umm, Varoufakis -- uses above because only a Marxist fool would use such a stupid term in 2015!!).

Nonetheless, I agree with Syriza's leaders that the time has come to nab big Greek tax evaders. Tax evasion, not soccer, is Greece's national sport. Go to Mykonos and Santorini in the summer and check out how many receipts are being cut at bars and restaurants (I always demand them when visiting Greece), and you will get a mere glimpse of tax evasion in Greece. Greek tax authorities should take lessons from Revenue Quebec which put the squeeze on restaurants and bars using cutting edge technology.

But I've been hearing about clamping down on tax evaders in Greece for the last 40 years and I can guarantee nothing will happen. They'll catch one or two big fish and feed the corrupt Greek media with a story and then they'll go right back to their merry ways.

The Greek economy is unlike anything you can possibly imagine. I provided some examples of how screwed up it is after my trip last year to the epicenter of the euro crisis, but it's much, much worse. In fact, I touched upon it in my comment on the Greek disconnect:
You can read the anti-austerity comments from Krugman, Stiglitz and other well-known economists but go back to read the comments from a friend of mine living in Greece which I referred to last week when I went over Europe's pension crisis. He shared the following with me:
"...there are 2.5 million private sector workers supporting 1.5 million public sector workers in Greece. How is this sustainable? I got into a fight with a professor of geology who was complaining to me her salary went down from 2,300 euros a month to 1,300 euros a month and she still has to work 12 hours a week. I told her she's lucky she still has a job and told her to go see my butcher who works close to 60 hours a week and only earns 750 euros a month to feed his family of four. And it drives me crazy when I hear Greeks talk about the good old drachma days when they were collecting 25% interest at a bank but the inflation rate was sky high and you took out loans at 40% interest, if you were lucky."
He added:
"The country is in desperate need of reforms but Greeks are incapable of governing themselves and cutting public sector expenses. Did you know that by law you're not able to foreclose on a primary residence in Greece? Did you know that if you own a private business you cannot fire more than 2% of your workforce at a time? The Greek government owes private businesses billions of euros in arrears and isn't paying them so many businesses close up shop, at which point people lose their job. But god forbid we cut expenses at Greece's over-bloated public sector, all hell will break loose. Still, this is what Greece needs, someone to come in here and make the needed cuts and I think that is what is going to happen once Syriza balks and signs a new agreement on specific reforms."
On Grexit, he doesn't think it's going to happen. Instead, he thinks Syriza will eventually cave and the ECB will take over the IMF loans to Greece (about 30 billion euros) and then Germany and other creditors will put the screws on Greek leaders to reform their economy once and for all.

I certainly hope he's right but when I look at the way this Greek government is handling crucial negotiations, I'm worried that they really don't know what they're doing. All this uncertainty is casting a dark cloud over Greece and making a terrible situation far worse than it needs to be.
The major roadblock in Greece remains the structural imbalance between the Greek private sector and its grossly over-bloated public sector. Varoufakis and Tsipras don't want to reform this imbalance. In fact, they want to perpetuate it as long as possible so they can do what successive Greek governments have done through the decades, buy votes with borrowed money to bolster their popularity and stay in power for as long as possible.

This is why I'm adamantly in favor of the big fat Greek squeeze even if I know Syriza's leaders will never implement much needed reforms to the Greek economy. They prefer playing games but this strategy can easily backfire on them as unemployment mounts in Greece and Greeks who voted for them to protest mindless austerity see how hopelessly inept they are at governing the country.

Having said this, there is some truth in what Syriza/ Varoufakis wrote in Le Monde. If Germany pushes Greece over the edge, it will be the beginning of the end of the eurozone as we know it and it will send the wrong message to Spain, Italy, Portugal and even France, namely, that the eurozone is fine as long as Germany benefits and dictates fiscal and monetary policy.

And make no mistake, Germany has been and continues to be the chief beneficiary of the eurozone and eurozone crisis. Its leaders know full well that even if Greece implements all the reforms they're asking for, it won't make an iota of a difference unless there is real political and economic ties between northern countries and peripheral economies.

As far as I'm concerned, all this political posturing changes nothing. The euro deflation crisis has not been addressed and Grexit will only make matters a lot worse. This is why I simply don't buy the global reflation story and think that bond gurus claiming the end is near and hedge fund billionaires calling bonds the "bigger short" are out to lunch. Global deflation will eventually hit America and when it does, it will decimate many delusional U.S. pensions clinging to their pension rate-of -return fantasy.

I hope I'm wrong but I see the writing on the wall and it ain't pretty. All those big bets on alternative investments won't pan out and they won't be able to emit enough pension obligation bonds to deal with their widening pension deficits.

For Whom the Bell Tolls? I'd say we're coming close to the precipice and we are literally a few policy blunders away from pushing not just Greece but the entire world over the edge. So enjoy the liquidity rally while it lasts -- and it can last a longer than the skeptics claim --  because when the music stops, all hell will break loose.

Finally, take the time to read this excellent comment on Greece, Argentina, and the Middle-Income Trap by Andrés Velasco, a former presidential candidate and finance minister of Chile, and Professor of Professional Practice in International Development at Columbia University's School of International and Public Affairs. It is superb and explains why high-income status eludes both these countries.

Below, professor Nicholas Economides of the Stern School Business was interviewed on Greek television following up on his Greek article in Kathimerini on why the Greek government needs to accept a deal or chaos will ensue. He's right but Greeks still believe in the fairy tales Syriza's leaders are feeding them.

I also embedded a BBC report on how migrants from war ravaged Syria are fleeing that country and settling in the island of Kos. How many more can Kos take? I'm afraid not many and if the eurozone doesn't get its act together, this humanitarian crisis will be an economic and security threat in the not too distant future.

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