Wednesday, 29 July 2015

Lessons from the Greece Debacle

Guest Post Ronald Janssen: There is no point in denying reality. By crushing a rebellious Greek government and disciplining its voters, the ‘Masters of Austerity’ have won a great victory. Implications extend far beyond Greece itself. What is now being inflicted upon Greece rams home the message that the dismal results of austerity policy are preferable compared to the disaster the ‘institutions’ will unleash if a government dares to step outside the orthodox framework.  

Here are two lessons from the Greek debacle the Left in Europe needs to reflect upon seriously.

The ECB as a powerful political decision maker - again

Previous episodes of the euro crisis have already underlined the power the ECB holds over member states.  One only needs to recall the (not so) secret letters written by the ECB telling the prime ministers of Italy and Spain what detailed reforms they had to undertake in return for the bank’s support for their sovereign debt on the markets. Reforms that included, amongst other things, a cut or a freeze in public sector pay and the restoration of managerial prerogative in setting wages.

In this case, the source of the ECB’s power comes from the fact that sovereign debt is issued in a currency euro area that member states have no control over. Debt gets issued in Madrid, Rome or Paris but it is a supranational central bank in Frankfurt that is managing the currency in which the debt is expressed.

This makes economies highly vulnerable to financial market attacks. If markets start dumping their holdings of sovereign bonds and if there is no central bank standing ready to act as a buyer of last resort, then interest rates shoot up and the economy collapses. Governments then find themselves with their backs against the wall. They see no other choice but to give in and undertake the reforms the ECB wants to see implemented, thus hoping to sway the ECB into shielding their economy from the markets by making a ‘wall of money’ available.

Getting to grips with the power the ECB derives from this peculiar characteristic of the monetary union is already a daunting challenge.  The latest Greek crisis, however, points to yet another important channel the ECB can use if it wants to prevail over reluctant governments.

Indeed, as the euro is the currency used by Greece and its banking sector, the ECB is able to shut down the entire payments system of a member state by limiting the amount of euros it supplies.  This is exactly what happened at the end of June when the ECB, in reaction to the decision to hold the famous referendum, decided to cut off the provision of new additional liquidity to the banks of Greece. From that moment on, banks could no longer obtain the euros they needed to refund depositors that were taking their savings out. Greece was thus forced to close its banks and impose capital controls with, amongst others, a €60 limit on daily cash withdrawals.

The damage to the economy by closing the banks cannot be underestimated. It is not just the fact that cross borders payments became seriously restricted, thereby severely disrupting import flows, hence also exports.  Domestic payments got disrupted as well. Considering that cash was the only real money to be trusted, business started to refuse payments operated through bank accounts (‘plastic money’). Many companies, facing cash constrained customers and no longer having access to their working capital, reacted by shutting down production and telling their workers to go home.

In others words, Greece had suddenly become an economy without a currency and one telling anecdote is that the northern part of Greece started to use the Bulgarian lev as the currency to do business with. People also crossed the border to buy things in Bulgaria as products became scarce in Greece.

The ECB, by triggering the implosion of the economy’s payments system, put enormous pressure on Greece. And it did so to influence the outcome of the referendum, - to literally scare people into submission.

“The Troika is dead, long live the Euro Group”!

Starting in 2014 and on the eve of the European elections, the European Parliament’s inquiry into the dealings of the troika in distressed euro area countries pointed to the lack of democratic accountability.  In particular, one of the findings that emerged is that technocrats from the IMF, the ECB and the Commission were basically given a free hand to write out harsh and unrealistic policy measures while European finance ministers and the Euro group simply rubber-stamped the programme afterwards.

However, this is not what happened in the latest Greek crisis. At the insistence of the government and also thanks to the somewhat a-typical behaviour of its then finance minister, the new lending programme for Greece did become politicised. Discussions were no longer restricted to lower level representatives and to closed corridors. Proposals and counterproposals were instead brought out in the open and for everyone to read.

In the end, on that dramatic night some are calling the ‘night of shame’, it was the Euro group of finance ministers itself that was forced to take an open stance. And the stance it took was shocking. In complete disregard for basic economics, not to mention the social dimension and a minimal respect for democracy, the Euro group imposed a policy programme that boils down to turning Greece into a creditor’s protectorate.

In contrast to what the European Parliament’s inquiry indicated, it appears that the troika does have an implicit political mandate as it is de facto backed up by a Euro group that shares the same line of thinking.

As testified by one privileged insider, what also comes out of the experience with the Euro group over the past few months is that a rational discussion is extremely difficult, if not impossible. Despite the already disastrous track record of austerity in general (think about the double dip recession it triggered), well thought-out arguments and alternative proposals were simply ignored. As the former finance minister Yanis Varoufakis says: “You might as well have sung the Swedish national anthem – you’d have got the same reply”.

The latter is unfortunately also the experience of trade unions in discussing economic policy issues with officials from the ECB, the Commission and finance ministers. Whatever the arguments put on the table, whatever evidence to the contrary is provided, whatever economic reality is showing up, the reply from these officials is always the same: Stick to austerity and implement reforms, reforms, reforms….

Two questions
All of the above raises two essential questions.

One is how to get to grips with the European Central Bank, a bank that is at the same time the most independent central bank in the entire world. How to stop the ECB from abusing its mandate on monetary policy to impose political choices on our economies, choices that shift the balance of power in society and destroy democratically chosen institutions such as collective bargaining and social rights and are drawing on economic textbooks dating long back to the age of simplistic neo-classical economics?

The other question is how to challenge the Euro group’s role and prevent it from becoming even more powerful. As demonstrated by recent events, it is the Euro group with the support of the ECB that is basically taking all the important decisions. Moreover, according to the five presidents’ report on completing monetary union, the intention is to achieve a ‘major enhancement of the executive role of the Euro group’ by ‘reinforcing its presidency and the means at its disposal.’ Given the role the Euro group has now openly displayed in the Greek crisis, given the fact that it is a body with no legal existence nor transparency, without even minutes of its meetings, this intention to strengthen the Euro group even further is deeply worrying.

Ronald Janssen is an economic adviser working in the Trade Union Movement in Brussels. He was part of an expert panel at the TASC/FEPS conference in June 2015.