Posts Tagged ‘Greece’

THE Australian dollar is higher amid upbeat sentiment on global markets after the European Central Bank boosted its cash lifeline to Greece.

At 0630 AEST on Friday, the local currency was trading at 74.03 US cents, up from 73.81 cents on Thursday.

 

The ECB will tip an additional 900 million euros into the financial assistance that has kept Greek banks afloat, a move that comes after Athens passed a tough reform package demanded by creditors.

CURRENCY SNAPSHOT AT 0630 AEST ON FRIDAY

One Australian dollar buys:

* 74.03 US cents, from 73.81 cents on Thursday

* 91.88 Japanese yen, from 91.39 yen

* 68.05 euro cents, from 67.52 euro cents

(*Currency closes taken at 1700 AEST previous local session)

Source: IRESS

Germany demanded unconditional surrender from Greece and got what it wanted.

 

The result is that severe punishment in the form of austerity will continue, along with the humiliation of the Greek people. Democracy in the eurozone has been severely strained.

 

While the six-month battle between Greece’s anti-austerity Syriza government and its German and other creditors resulted in a deal this weekend that prevents a Grexit for now, this much is clear: there will be no end to Europe’s economic malaise, of which Greece is only the most extreme case.

 

Rather, the gradual dismantling of the euro – a project of integration that began in 1999 and brought 19 countries together under a single currency – will continue as long as its biggest member refuses to ease up on the austerity and other policies that are suffocating Europe’s economy.

 

The Greeks themselves, of course, cannot be pardoned from their fair share of blame for their predicament, as I’ve noted many times.

 

But Germany as Europe’s powerhouse is the one running the show. And based on my experience and research, it bears a large share of the blame both for creating many of the conditions that led us here and by showing little to no flexibility in resurrecting Greece’s economy.

 

Another dose of austerity

 

The sad truth is that Germany’s finance minister – who has pushed austerity on all its neighbors including Greece at any cost, despite the often abysmal results – remains firmly in charge of economic policy and is determined to impose more of the same folly.

 

The eurozone remains stuck in a process of competitive internal devaluations – in which members suppress wages to boost their competitiveness – that suffocate domestic demand. This leaves the currency block extraordinarily vulnerable.

 

Continuing to freeload on external demand through euro depreciation, thereby also undermining the global recovery, excessive thrift (via austerity) rather than investment leaves the land of the euro destined for socioeconomic stagnation.

 

And if it can be believed, another especially high dosage of that austerity has been reserved for Greece, even though it is already suffering a humanitarian crisis.

 

What happened to political integration

 

Matters are even worse politically. The idea of European integration as a means to secure peace and prosperity was founded on solidarity, tolerance and compromise – a supposed union of equal partners, ending Europe’s long history of conflict and domination.

 

The euro in particular was meant to end Germany’s monetary hegemony over the continent that characterized the previous currency arrangement: the European Monetary System.

 

The plan backfired badly. By undermining everyone else’s competitiveness through persistent wage repression, Germany has maneuvered itself into a hegemonic creditor position that has secured the country even more leverage over the economic policies of its “partners.”

 

In other words, low labor costs at home have made it easier for German manufacturers to undercut its competitors’ prices, leading to a massive trade surplus relative to most countries in the euro. The corresponding deficits have left Germany’s euro partners in their vulnerable debtor positions.

 

Greece merely provides the most clear-cut case: offered the choice between Grexit and the de facto replacement of its sovereignty with external control over financial and other policies, Greece, for the time being at least, is opting for the status of a vassal state.

 

Greece’s blame, Germany’s forgiveness

 

Greece is neither flawless nor blameless. Compared with its peers, it suffers from more than its fair share of corruption. It fudged its numbers and broke the euro’s fiscal rules by a wider margin and for more years than Germany itself.

 

But if Germany at least in part believes that Greece must be punished for its sins, it should look to its past and the magnanimity with which it was dealt after World War II: with the Marshall Plan and London Debt Agreement, which resulted in the forgiveness of 60% of German foreign debt, according to Thomas Piketty.

 

Why is Greece’s case so much different, and by what kind of moral, political or economic standards can the deal be justified?

 

France, a counterweight no more

 

France has often been a counterweight to Germany in these matters, and at times, including this past weekend, tried to fight in Greece’s corner. But in the face of German rigidity, it was able to achieve only a deal that provided the Greeks with a draconian choice: Grexit or vassal.

 

For not even France, pressured to restore its competitiveness vis-à-vis Germany and embrace austerity more fully, is more than a junior partner these days.

 

This outcome is clearly unsustainable. A plan such as the one I suggested earlier this year that would create a European treasury – in a move toward a closer union – could help solve the economic and fiscal problems that plague Europe and spur much-needed investment. Unfortunately, Germany stays on this destructive course.

 

As a German, I am simply dismayed by the unrelenting conduct of my government, which reached a new climax this weekend when it dug its heels in further than ever before.

 

But there is no way around it: this weekend has pushed European integration firmly into reverse, and the pessimist in me has to admit that at some point “Germexit,” a German exit from the euro, would probably be the least terrible outcome for Europe.

Europe has offered Greece a new $96 billion bailout after its government agreed to enact deep economic reforms under close supervision by its creditors.

The rescue — Greece’s third since 2010 – should secure its place in the euro, for now. The country’s potential exit from the currency union would have shaken Europe to its core.

 

Greece agreed to significant economic reforms: Pension cuts and higher taxes, as well as the sale of some government assets. The key to the deal: Proof that Greece will follow through.

“Eurozone leaders have agreed in principle that they are ready to start negotiations on a [new bailout],” said Donald Tusk, who chaired an emergency summit of all 19 nations that use the euro.

 

Greece’s Parliament must approve these measures by Wednesday. In addition, Europe will assign monitors to ensure that Greece will also have to give up control of the proceeds from government sales, with the bulk being earmarked for debt payments.

Greece had been pushing for some of its massive debt load to be canceled. Europe rejected that, but said it would consider easing the terms with longer grace periods.

Still, the deal is just a proposal, and it does not mark an immediate end to the crisis. It could face resistance in Greece’s Parliament.

And Greece desperately needs the European Central Bank to restart money flows to re-open up its shuttered banks. The ECB however said Monday that it was not ready to do so yet.

The leaders hammered out the agreement at the marathon overnight meeting in Brussels, after weeks of frantic diplomacy sparked by Greece walking away from a previous bailout program.

That decision left it without the cash to make a payment to the International Monetary Fund, triggered the closure of its banks, and sent the economy into free fall.

Fast running out of money, Greece faced an awful choice: Accept the conditions demanded by the only people willing to lend it money, or leave the euro.

Speculation about the currency should now fade, but it’s not clear how soon the money the country desperately needs will flow, and when its banks will reopen.

Related: Read the full deal document

Finance officials will reconvene later Monday to talk about how to support Greece while the details of the bailout are being negotiated. That process could take weeks.

 

The conditions are particularly tough for two main reasons.

First, the economy has deteriorated sharply in recent weeks, damaging Greece’s already fragile finances still further.

Second, there was a complete breakdown in trust between Greek Prime Minister Alexis Tsipras and other European leaders. That was largely because of a series of U-turns he performed, and his decision to call a referendum to reject reforms he then signed up to days later.

That made for hard talking this weekend. The summit ran for 17 hours, and that was after finance officials had spent 14 hours preparing the ground.

Under pressure from skeptical voters, some European leaders wanted ironclad guarantees that they wouldn’t be throwing good money after bad. Europe and the IMF have already lent Greece about 233 billion euros since 2010.

Monday’s deal requires Greece to give access to bailout monitors on the ground in Athens — including officials from the IMF, a point Tsipras resisted to the last.

He was elected on promises to reverse austerity and end intrusive monitoring, and the agreement will raise questions about whether he can continue in his post.

Related: Inside Greece’s health care crisis

But without a new bailout, Tsipras knew Greece’s descent into economic chaos would accelerate, bringing the country ever close to exit from the euro.

Greece’s banks have been shut for two weeks, and cash withdrawals are capped. The vital tourism industry is suffering. People are spending less, some public services have stopped charging, and the healthcare system is running out of imported medicines.

Greece needs to pay pensions and wages this week, and make a big debt repayment to the European Central Bank next week. Without an injection of funds fast, it would have to issue IOUs, a first step to printing its own currency.

Finance officials from the 19 countries that use the euro have begun discussing Greece’s request for about $80 billion in new loans it needs to avoid bankruptcy and keep the currency.

 

European leaders gave Greek Prime Minister Alexis Tsipras an ultimatum earlier this week: Convince us you’re serious about putting Greek finances in order, or you’re out of the eurozone.

Officials arriving for a weekend of crisis talks in Brussels said the Greek proposals were a positive step, but it was still far from certain whether formal negotiations on a new rescue package could begin.

Greece has not yet said how much money it wants in its third bailout since 2010.

Austria’s finance minister Hans Joerg Schelling told reporters the loans would total about 72 billion euros ($80 billion), including a contribution from the International Monetary Fund, over three years.

Greece has already received about 233 billion euros from Europe and the IMF in the past five years.

Related: Inside Greece’s health care crisis

The package of reforms Greece is proposing includes spending cuts, tax hikes, and plans to phase out tax discounts on some islands, among many other things. Greece is also proposing changes to public pensions, such as raising the retirement age, and steps to improve tax collection.

They’re very similar to ideas put forward by the country’s creditors in late June before Tsipras walked out of talks, triggering the collapse of the last bailout and forcing the closure of Greece’s banks.

But on their own they don’t go far enough. Germany’s finance minister, Wolfgang Schaeuble, said Saturday’s crunch talks would be “extraordinarily difficult.”

 

Here are several obstacles to a deal:

Greece will need to accept even tougher reforms and fiscal targets to take account of the rapid deterioration in its finances and economic outlook caused by the closure of its banks and the introduction of capital controls. Belief in the Greek government’s commitment to reforms, and its ability to implement them, has been shattered by the series of U-turns seen in the past couple of weeks. Opinion in some other countries that use the euro, including Germany, is running very high against another rescue for Greece. Taxpayers don’t want to put more public money at risk. A new bailout would need to be ratified by parliament in Germany, and a handful of other countries. Greece wants creditors to restructure its debt. Europe could give it even more time to pay back loans, and cut already very low rates of interest, but that may not be enough. Some eurozone countries insist they can’t go further and cancel Greek debt outright. That in turn could kill a deal. Some eurozone countries say they’ll only back a third bailout if the IMF takes part. The IMF has made clear that it will only participate if the Europeans agree to restructure Greece’s debt.

So the pressure is on. If talks fail this weekend, all 28 heads of government in the European Union are on standby to fly to Brussels for an emergency summit late Sunday.

That meeting would discuss how to cope with the unpredictable fallout of a Greek exit from the euro

Backed by Greek voters and opposition leaders, Prime Minister Alex Tsipras meets Tuesday with other eurozone leaders to see it they can resurrect debt relief negotiations.

Following Sunday’s referendum in which 61% of voters rejected stringent bailout terms set by Greece’s international creditors, Tsipras hoped to go to the meeting in Brussels with a strenghtened hand. On

Banks have been closed for a week, with strict limits on daily ATM withdrawals, and are expected to stay shut at least through mid-week.

Monday, Greek party leaders rallied around his call for new talks.  However, the lenders gave no immediate indication they were ready to compromise on new loans to keep Greece afloat.

German Chancellor Angela Merkel, who on Monday talked with Tsipras and met with French President Francois Hollande in Paris, stressed that Greece needs to take “responsibility” for reforming its economy. Hollande said Europe needs to show “solidarity” with Greece. The two leaders run the eurozone’s largest economies.

Both leaders also said they respect the referendum results, and the door remains open to negotiations to find a way to keep Greece in the 19-country eurozone.

As the outlook for the talks remain unclear, the European Central Bank decided Monday to leave the level of emergency credit to Greek banks unchanged to prevent their collapse. But it raised its collateral requirements.

In one concession to the creditors, Tsipras replaced his outspoken finance minister, Yanis Varoufakis, who had alienated eurozone leaders by assailing the onerous terms they demanded for new loans.”I shall wear the creditors’ loathing with pride,” Varoufakis said in a defiant but characteristically colorful announcement about his resignation on his blog.

He said he was resigning because Tsipras believed his departure might help pave the way for Greece to “achieve a deal.”

The Greek government later named lower-keyed economist Euclid Tsakalotos, 55, as the new finance minister. He was the prime minister’s lead bailout negotiator in talks that halted last month before Tsipras called the referendum.

IMF chief Christine Lagarde said Monday that the fund is “ready to assist Greece if requested to do so. “We are monitoring the situation closely,” she said, without offering further details.

In a statement Monday, European Commission Vice President Valdis Dombrovskis said: “The ‘no’ result unfortunately widens the gap between Greece and other eurozone countries. There is no easy way out of this crisis. Too much time and too many opportunities have been lost.”

He said the commission is ready to work with Greece but cannot negotiate a new program without a mandate from eurozone finance ministers.

Major stock benchmarks in Asia, Europe and on Wall Street all moved lower Monday.

Economic policy is not a morality tale. The Greek tragedy is that the Europeans have treated the Greek crisis as a question of national character. In their outrage at the Greeks – in the context of broader view of austerity as the way out of the European crisis – they have not only weakened their collective economies, but also jeopardised the fate of the European experiment itself.

The risk is that the larger goal of the European project – to create a sense of shared identity – may be undermined by an incidental economic means to that end, in the creation of a euro – a mechanism of economic discipline.

The reasons for this tragedy go deep into European history. Coming out of World War II, European leaders decided nationalist excesses should never again be permitted to divide their people. They therefore sought to create a supranational union, one that would unite the continent in a common vision. In 1950, French Foreign Minister Robert Schuman proposed the establishment of the original European Coal and Steel Community – the grandfather to the modern EU – as a way to “make war not only unthinkable but materially impossible”.

Ironically, given what the Euro has become, Schuman’s vision was never based on any commitments to “hard money” or free trade. Quite the opposite. The tragedies of the 1930s were widely attributed to a classical gold standard that had enforced austerity on the European people. As the European economies collapsed in the early 1930s, states were forced to cut spending and raise taxes – contributing to an ever-worsening slump.

In contrast, the point of the European Coal and Steel Community was to raise the prices of its members’ commodity and manufacturing exports. The ECSC would do this by enabling its initial six countries – most importantly, including France and Germany – to collude and fix coal and steel prices. In this sense, the early European ideal was not about free trade or convertible currencies – it was about enhancing the collective welfare as a means to political union.

Over the decades to follow, the economic dog nevertheless came to wag the collective welfare tail. As the German economy grew more important, German influences in European economic institutions would increase – leading to a shift toward more free market, hard money views. There were deep cultural reasons for this: German memories of the 1920s were of hyperinflation, while the German successes of the 1930s in using fiscal stimulus were repressed from collective memory, for obvious reasons.

The result would see European economic institutions – most notably the European Central Bank – evolve and place financial rectitude and monetary stability ahead of growth. This has been the case even when intellectual arguments for austerity – primarily as a means to limit inflation – make little sense, as the high unemployment of recent years has broken any link between fiscal deficits and inflation.

Large deficits absent full employment are not a problem – they are the solution, enabling revived growth. Greek austerity only makes Greek repayment more difficult, whatever one’s view of their pension system.

Over the past five years, the EU has taken what should have been a practical matter of economic policy – to run deficits during a recession – and turned it into a morality tale.

Internal Greek politics have nothing to do with the macroeconomic needs of the European Union – which would benefit from debt forgiveness across the continent to enable rising demand. On top of this economic malpractice, one can superimpose political error, as austerity politics have revived political extremism and nationalist sentiment across the continent. This is the very essence of a tragedy – as the postwar European dream may be undermined by incidental mechanisms established to bring it into being.