European politicians have been fighting ever since. Germany's Merkel and France's Sarkozy had an argument loud enough to be heard in the EU concert hall. The Belgian finance minister left early and refused to attend the press conference. Merkel and Sarkozy jointly turned on Italy's Berlusconi, demanding that he implement fiscal reforms he has so far failed to deliver. And Sarkozy slapped down the UK's Cameron when he complained about the lack of any credible resolution plan for the Eurocrisis.
Entertaining though the politicians' antics are, they arise from a terrible truth. The bailout plan they came up with on July 21st was totally and completely inadequate. Everyone knew this, of course. But the politicians didn't want to admit it. Because actually they haven't the faintest idea what to do.
This crisis reminds me of the "bird within a bird within a bird" roasts that pretentious restaurants like to offer. On the face of it, it is a sovereign debt crisis in the poorer countries of the Eurozone, now extending to richer but highly indebted nations such as Italy. The
But cut through the sovereign debt crisis and you find a bird of a different feather. Regular readers of my blog will know that almost everything I write has banking in it somewhere, and this post is no exception. If Greek debt had been entirely held by its own banks, it could have defaulted long ago - nationalised its banks, wiped its debts, started again. But its debt was held by giant foreign banks, systemically interconnected, crucial to their countries' economies and seriously short of capital and liquidity. The countries to whom those banks "belong" have waged a systematic campaign of disinformation to prevent the world realising that the Greek (and Portuguese, and Spanish, and Italian) sovereign debt crisis is also (and has always been) a BANKING crisis and the main suspects are French and German banks.
Every cent that has gone to "bail out" Greece has been paid straight to banks. Greece has not been "bailed out" at all. Far from it - it has been asset-stripped and its people impoverished to enable it to make some contribution to meeting its creditors' demands. Furthermore, those creditors have demanded severe fiscal austerity as the price of this "bailout". I say "those creditors" because the principal agents of those demands are the French and German governments whose banks are at risk - plus the IMF, representing more distant financial interests. The Greek economy is now in deep recession. But the creditors are demanding even harsher austerity measures, despite the appalling consequences for the people of Greece .
Demanding severe austerity from a country in recession looks like madness, not only for the country itself but also for its creditors, since it makes it even less likely that it will be able to pay its debts. But there is a reason why the creditor nations have insisted on this apparently idiotic course of action. To them, there is no other choice.
Here's why. Were Greece a currency-issuing sovereign state, it could say "up yours" to its external creditors, default on its debts, nationalise its banks, devalue its currency and impose capital controls. The ensuing economic adjustment would be painful, but at least Greece would be controlling its own future. But it can't do this - because it is a member of the Euro. In effect it has adopted a foreign currency as its national currency. Yes, the Bank of Greece is one of the central banks that supports the European Central Bank (ECB), which is responsible for determining Eurozone monetary policy. But historically the ECB has pursued monetary policies that suit the larger, richer nations, particularly Germany, and are disastrous for the smaller, poorer nations. It is still doing so now: it raised interest rates despite mounting evidence of impending recession throughout the distressed debtor countries, thus making their problems worse. This would be fine if there was a commitment within the Eurozone that stronger countries would support weaker ones with fiscal transfers. But there is no such commitment - in fact it is specifically ruled out in the treaty directives. Nor have the convergence criteria defined in the European Stability and Growth pact ever been adhered to: the 60% debt limit was exceeded for several years by - France and Germany. Convergence criteria that are so widely flouted are pointless, and for creditor countries to blame Greece and others for failing to adhere to them is rank hypocrisy.
When a nation has no control of its currency, it has no control of monetary policy. The only means it has of solving economic problems are fiscal ones. If it is over-indebted, it must increase tax income and/or cut public spending. That means tax rises, sales of state-owned assets, wage cuts, benefit cuts, pension cuts, public sector job cuts. This is the "austerity" that is demanded of Greece and others. The reason why Eurozone creditor nations have demanded such austerity is that they see no other way that preserves the Euro. The only other alternative is for Greece to leave the Euro - and the fear is that other debt distressed nations would then follow.
But fiscal austerity in recession-hit countries doesn't work, does it? Greece's problems have got worse, not better. Its deficit is increasing, not decreasing. There is no prospect of it returning to economic health for at least a decade, if ever, if current policies continue. And this is the cold hard truth that Eurozone leaders are now facing. The policies they have pursued have turned a small sovereign default into a potential continent-wide debt crisis and banking collapse. And they have no other policies to offer.
So the politicians argue among themselves about exactly how much of a loss the private sector should "voluntarily" accept on Greek debt. Germany, whose taxpayers stand to take the biggest hit if Greece defaults, wants a 60% haircut. France, whose taxpayers will have to bail out its under-capitalised banks,
It's all so much hot air. Every country is fighting for its own survival now. The figleaf of European union has finally fallen off and the fundamental misconception of the Euro project is evident for all the world to see. THERE IS NO UNITY. The only possible future for the Euro lay in fiscal and political union - the creation of a "United States of Europe". But there can be no political union while politicians pursue the interests of their own countries at the expense of the rest. And without political union there can be no fiscal union - given what has happened with monetary policy, is any Eurozone country really going to give up its tax raising powers to Brussels?
The Euro is doomed. Exactly how it will break up remains to be seen - perhaps Greece and other debtor nations will leave or be expelled, perhaps Germany will reinstate Deutschmarks, perhaps it will split along North-South lines (the so-called "2-speed Euro"). But break up it will, and really the sooner this happens the better for all concerned. Trying to preserve it at all costs has already wrecked Greece's economy and threatens to ruin the rest as well. I'm not pretending that a Euro breakup will be easy. It won't - it will be exceedingly painful and very, very messy. But I don't see how it can be avoided.
Greece's economic decline has gone too far now for an orderly default with maybe a 60% haircut to be sufficient. What is required is comprehensive debt forgiveness and economic aid, not more loans. It would be difficult enough for this to be achieved even within a more accommodating Eurozone. But in the present political climate I don't see how a sufficient aid package can be put together. The political will simply doesn't seem to be there. Eurozone politicians will no doubt kick around some numbers and come up with yet more ever-so-clever ways of leveraging fictional money to bail out banks and pay creditors without doing anything to relieve the debt burden or restore Greece's economy. It won't achieve anything and it won't fool anyone.
Greece is dying before our eyes and its only hope now is default, exit from the Euro and international economic aid. Others are queuing up to take its place as Eurozone basket case. Portugal, Spain, Italy.....even France is now on the hook for a possible credit rating downgrade because of the weakness of its banks. And Germany, that powerhouse economy, will soon feel the effects of the economic demise of the countries it has come to rely on as its main export market.
The Eurozone is heading into the mother of all recessions, and it will be entirely of its own making. But the consequences of its folly will be felt throughout the world.