The cold hard truth

On Friday 21st October 2011, a group of economists working for the so-called Troika produced a devastating report. This report was leaked to the press, notably the FT, which promptly produced an article analysing it, and the BBC. Paul Mason, BBC Newsnight's economics editor, gave a 10-point analysis of the report on Twitter which I reproduce here. And the Telegraph released the full text of the report the following day.

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 German official story goes that these countries have borrowed far more than they can afford so must take the pain of massive reductions in their bloated public sectors in order to reduce their debt and return to competitiveness.  This story, and its accompanying denigration of people in the debtor countries as "lazy" and "profligate" despite considerable evidence to the contrary, is now so widely believed that it is difficult to counter it. It has become an article of faith.

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, can't afford won't accept anything more than 40%. Both of them are furious with (and terrified of) Italy, which owes far too much even for Germany to bail out. And the ever-so-virtuous UK is just seriously irritating. Why should Eurozone politicians care about the impact on them? They didn't join the Euro, after all, and they've scotched every bright idea that the Eurozone whizzkids have come up with for extracting more money from their bloated financial sector to help with the Euro blues.

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.


  1. How long do we have before the world ends?

  2. I agree with all the the above, just want to add one point that (I think) is being underestimated: the crisis in Greece is not only economic and financial but has moved on to the political and social levels as well. We are headed for a period of prolonged and sustained social and political instability. Meanwhile, our government is eroding basic freedom and civil liberties by the day (e.g. by seeking to push through legislation banning internet anonymity, suppressing dissent in all its forms, arresting people without due process, turning a blind eye - not to say encouraging - police brutality, etc.)The consequences of this social and political breakdown go well beyond impoverishment of the Greek population. Europe, the EU and other Eurozone states must become aware of this authoritarian trend now. One European country drifting towards authoritarianism is a disaster not only for the country itself (Greece) but for Europe as a whole.

  3. Great post - I would like to add to @irategreek's comment that I believe the "totalitarian agenda" is Europe-wide, if not pan-Western - look at recent protests turned riots in London, and what is currently happening to peaceful #occupy protesters world-wide. The activist/author Naomi Wolf talks about a fascist shift in her book "The end of America" (also check her lecture on YouTube!)that would have sounded like a conspiracy theory 15 years ago - and doesn't really anymore. British MP Nigel Farange constantly talks about the EU dictatorship (and we have seen EU flags burn here in Greece). Perhaps loss of sovereignty was always in the agenda for the "periphery"(?). @regulargrrrl

  4. At long last a euro-sceptical (literally) article on a liberal/progressive blog (where I came across your analysis) which, while short (the extended version goes further), goes to the heart of the matter, and does thiw with well-balanced liberal points, and not with the usual eurosceptics’ rant. See the difference?
    Right from the start, it has been about saving eurocracy’s honour and at the same time bankers’ money. Those are intertwined in… bonds. All the rest is baloney or rubbish.

    I remember having faced some angry backlash among lib dem ranks when I wrote at the beginning of what was then the early Greek crisis that it was high time for the Europhiles to admit that the dream (if any) was over. That was in March 2010 (read:, as well as a collection of articles and viewpoints about the euro crisis on

    Margaret Thatcher was much criticised for her TINA (there is no alternative) approach and mindset. That is exactly the way eurocrats, european elites -and these include more than 80 per cent of MEPs- and europhiles have behaved since the outburst.
    That is exactly what Paul Krugman (not exactly a right-winger, is he?) wrote two days ago in the New York Times:
    “For as one rescue plan after another falls flat, Europe’s Very Serious People — who are, if such a thing is possible, even more pompous and self-regarding than their American counterparts — just keep looking more and more ridiculous.”
    And later:
    “the European elite, in its arrogance, locked the Continent into a monetary system that recreated the rigidities of the gold standard, and — like the gold standard in the 1930s — has turned into a deadly trap.”

    I agree with 90 per cent of what you write, but strongly disagree with the conclusion: “The only possible future for the Euro lay in fiscal and political union – the creation of a “United States of Europe”.
    This is a chimera, based on the assumption that European nations (and regions) could merge and become a sort of state. This will NEVER happen. Charlemagne, Charles V, Napoleon, Hitler tried before the more peaceful way of the EC founders. All have failed.
    So I might agree with Nick Clegg ontoday’s Guardian website ( that Britain should not leave the Union (even though I have some doubts here too) yet disagree that it should lead. Except the Franco-German bond (pun intended) now impersonated by “Merkozy”), there is no such thing as EU leadership. Or is there too much? Ask 25 member states.

  5. Mike,

    I wouldn't say that statement was my conclusion, exactly. I was merely observing that such a union is really the only way a single currency could survive. I am personally convinced that the "United States of Europe" dream has vanishingly small chance of becoming reality. My conclusion is therefore that the Euro, like the ERM that preceded it, is doomed.

  6. Apocalypic but convincing stuff. Speaking as one who hoped for the Euro's success but was never quite convinced by the various monetary fudges around it, I agree that true federation is - has always been - the only way the currency could survive.

    Contrast with Polly Toynbee in today's Guardian - 'being in Europe is our destiny.'


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