European democracy dies in its cradle

Yet another night in the European soap opera. If I had to name the episode I would have called it “the death of European democracy”, but I’m not particularly imaginative so maybe someone else can think of a better one. The news is moving very fast at the moment with lots of conflicting stories, so I thought I would take the time for a bit of re-cap to explain exactly what has occurred over the last week.

Last Wednesday, the EU summit finalised a new bailout package for Greece containing debt write-downs and new payments. I talked about some of the issues with this package in this post.  After the announcement of the package the equity markets rose sharply, my assumption at the time was that no one had actually bothered to read the details. Those details were summed up nicely in the xtranormal video from yesterday:

“Where did they get all that money?”
“They haven’t got it”

The next day Italy held a debt auction which went very poorly signalling that rescue package hadn’t done enough and the markets became unnerved in the realisation that something was already wrong. Then on Tuesday the Greek PM, George Papandreou, announced that he was going to give the Greek people a say in their future with a referendum on whether to accept the terms of the latest packages because he could not get consensus from the Greek parliament. The markets took this very poorly and fell sharply, while other European leaders started announcing all sorts of warnings to Greece. On Thursday the IMF and EU started applying the blowtorch to Greece in an attempt to get Papandreou to back down:

A Greek referendum on its latest bailout package will hinder the next installment of aid funds from the International Monetary Fund and the European Union, Dutch Finance Minister Jan Kees de Jager said.

“This hinders the planning of the IMF and the euro zone. It creates a problem for the whole sixth tranche,” De Jager told parliament in The Hague late last night. “I can imagine that it will be very difficult for the IMF if there is uncertainty about the sustainability.”

Later in the day the Greek PM held yet another crisis meeting with the Angela Merkel and Nicolas Sarkozy while Papandreou turned up the heat by announcing that the referendum was not just about the bailout package but about staying in the Euro. What support Papandreou had in the Greek parliament began to crumble, down to 151 out of 300 seats. On the eve of the G20 the Greek finance minister, Evangelos Venizelos, released a statement that appeared to be an attack on the position of the PM stating that Greece needs the bailout and the decision can’t be left up to a referendum.

The Greek PM then summoned his ministers, and looked to be about to resign, until it appeared that under the weight of pressure or some form of deal the Greek opposition finally rolled-over in support of the bailout package and the referendum was called off. There is now some confusion over exactly what the terms of the deal made were or whether they were tied to Papandreou resigning. Either way, the Greek PM still has to survive a no-confidence vote tomorrow. If he does not survive then Greece will fall back onto a temporary government to accept the new package and its terms, but there will need to be an election shortly after. At least the Greek people will get to vote on something.

Greece, however, is not the only soap opera as Reuters reports:

Pressure mounted on Italy’s besieged premier Silvio Berlusconi to quit on Thursday, as six former parliamentary loyalists called for a new government and the squabbling cabinet failed to agree an urgent economic reform program.

The rebel deputies, three of whom have already left Berlusconi’s crumbling coalition, wrote to the premier saying Italy needed a “new political phase and a new government.”

“We are asking you to take an initiative which is appropriate to the situation,” the deputies wrote, according to the letter published in the daily Corriere della Sera.

Earlier this week Berlusconi called an emergency cabinet meeting in order to push through further austerity measure he had announced after his squabble with Merkel and Sarkozy. He wanted this done quickly so that he was able to arrive at the G20 appearing as if he was actively doing something. These measures that were supposed to be voted on were a watered-down version of Berlusconi’s initial promises, but what actually occurred was a complete break-down of parliament when Berlusconi and his economics minister, Giulio Tremonti, yet again started attacking each other over the proposals.

The changes were eventually adopted by the parliament, but not in the form that Berlusconi wanted. The entire episode demonstrated that Berlusconi’s grip on power is also slipping and it is unlikely that he is going to be able to survive for much longer before a new confidence vote occurs, which he is likely to lose.

It really isn’t any wonder the ECB cut rates last night. With this sort of disfunction occurring in the national parliaments of the two countries that have the potential to bring down Europe what choice did they have ? Europe continues to worsen, and once again no one is dealing with the actual problem.


  1. This instability and confusion has all the hallmarks of the kind of panic that precedes a major economic event. Anyone with more than a few connected neurons is taking cover.

    • “Anyone with more than a few connected neurons is taking cover”

      thats right R2M, anyone that hasnt covered their hopelessly wrong shorts yet needs their head read.

  2. I’ve read some commentary on this, might have even been by you, can’t remember, which said that if CDS events aren’t triggered by this bailout, the logical result would be increased yields.

    …which did seem logical to me.

  3. I’m terribly sadenned. That the Greek people have no say in whether they want to suffer through 10 years of austerity, before a likely collapse anyway is disturbing. I hope they get rightly mad.

    In any case, this bailout package is flawed and this latest crisis will make people think again regarding its feasibility. Nothing stops Greece holding another referendum when they are clearly in a primary surplus next year.

    Sad day though… as a comment elsewhere wrote. A referendum has already taken place. 2-0. Merkel and Sarkozy win.

    • You mean the voting, non-tax paying, early retiring, extremely inefficient & non-productive, shadow economy loving, rioting people of greece ?

      Which option do you expect them to accept via a democratic process, given that they seem quite determined to carry on their current standard of (debt producing) living, as evidenced by the riots.

      You don’t get to a debt to gdp ratio of 140% by accident.

      • This is the fault of bankers and poor government policy. If the Australian government made it easy to avoid taxes and started handing out government jobs to anyone regardless of demand, would it really be the people’s fault for having a bloated public sector and poor tax collection?

        If international lenders were then happy to lend us more money to cover the low tax revenues would it be the people’s fault that debt was being accumulated?

        Greece does have a systemic problem but it’s due to governments and lenders. You cannot punish the people for simply reacting as any rational agent would. Just as you cannot really be angry at Wall Street for taking advantage of the ease with which to lobby the US government, take crazy risks due to moral hazard, and avoid paying their taxes.

      • Come on Phroneo,
        that bloated public sector has nothing to do with the people? They all had to jump on the gravy train on pain of death?
        They have to retire early? And they simply must abide by and indeed encourage unsustainable pension plans?
        Oh and did they vote for all this pork?

      • apparently it means that our level of our debt is our (read the debt holders) fault, instead it is the fault of our governments and banks whom have borrowed on our behalf so that we could spend our way to happiness and health

      • No so much ‘their fault’, as in a deriliction of duty.

        The rest of your response is inane, bordering on petulance.

        Bankers are entitled to say no to a loan appliaction, in fact it is their responsibility to assess credit worthiness.

        If borrowers were meant to self-assess, then we wouldn’t require bankers, borrowers would leave IOU’s on a vault floor.

        If the rules however incentivise banker remuneration in direct proportion to the volume of loans at hand, as well as a tacit guarantee that taxpayer largese will underwrite any failure, then bankers will never assess a borrowers credit worthiness.

        After all, it’s not their money.

        So no, spending our way to happiness and health is not our fault, its a feature of our inherant desires. A banker is PAID to say no to these limitless desires, and if they don’t say no, they deserve to lose everything.

      • You mean the voting, non-tax paying, early retiring, extremely inefficient & non-productive, shadow economy loving, rioting people of greece ?
        You don’t get to a debt to gdp ratio of 140% by accident.
        You mean the bond holders were unaware of the above facts BEFORE they lent money to Greece????
        Then these bond holders are imbeciles who deserve to lose their money.

      • CM Burns, you idiot. This crisis is no different to the US’ subprime mortgage mess. Idiot lenders handing out money with not a care in the world and then ignoring warning signs for extended periods of time.

        And yes, I will call you an idiot because you talk like one.

  4. My own interpretation of what has happened in Greece is that GPap called the opposition’s bluff. The opposition, being part of the elite, didn’t want to exit the Euro since it wasn’t in their financial interest. They wanted an election so they could seize power, but GPap went one better, so now there will be a government of national unity.

    I’m no expert, so I’m transplanting what I’d see happening in Australia or the UK in a similar circumstance.

  5. “no one is dealing with the actual problem”

    so what was that agreement they all came to last week all about then?

      • The 50% debt write off applies to a small portion of Greece’s debt. The increase in borrowing costs for other nations since the plan announcement (and before this referendum talk) alone would have offset any decrease in debt in the medium term. Add the leveraging into the equation and you have a clear problem.

      • Not quite so simple. The write-off requires recap. Recap coming from EFSF which is borrowing from China.

      • If China is willing to lend them money.

        I somehow don’t think they’re that stupid.

        Say what you want about communism, at least the people in charge have ability. Also most of them would’ve had a western education.

      • The bond is responding but the ECB is damping that response. I’d love to see Italian bonds right now if the ECB wasn’t intervening with its QE.

  6. I now believe that “sovereign debt” is the world’s biggest bubble. International investors are crazy to have lent so much money that will NEVER be paid back. NZ under Rogernomics was an aberration. Default is actually what we should all EXPECT democracies to do.
    Voters in our age will simply not tolerate “austerity”. The Greeks are just the most glaring case.
    All this money lent to governments, even US Treasury bonds, is now a case of yet another layer of “paper money” in the world economy.
    The banking and finance sector is one thing. Governments are no better, and in fact are probably the most responsible for the coming “fall off the cliff” of the world economy.

    • If there’s one thing you can credit Howard & Costello with, it’s paying off the majority of Australian federal government debt – so I don’t see how that assumption that democracies will default necessarily applies.

      In any case, the reason we’re in the current mess is that banks binged with regulators asleep, and then governments bailed to prevent contagion. The Greeks are in their position because they lied about the state of government finances and when the cheap debt merry-go-round finished they couldn’t cover it up any more. Don’t tar with such a broad brush.

  7. The Irish accepted austerity to pay off banker’s in other countries but the Greeks, not so much. Irish seem to accept poverty, Greeks not so much. Let the banks and all other bondholders take it on the chin for all their mismanagement and thievery.

    Default will impose its own austerity as credit will dry up or be repriced at prohibitive levels. But the Greeks will still rule themselves rather then Merkozy.

    • Yeah, that’s cause they lived through something called the great potatoe famine. And famines before that.

      They are hardy people… Unlike them lazy, wine swilling, olive eating Greeks.

  8. The Irish are not out of trouble, Rodzone. They are still running a handsome budget deficit and if they do not soon start to create an external (trade) surplus, they will once again find themselves exposed to metastasis in public finances and the need to impose further (self-defeating) austerity.

    The problem here is really one of failed imagination and failed leadership. It seems no-one can imagine a dis-integrated
    monetary/currency system; or, if they can comprehend this idea, they have no idea how to achieve it. Truly, political leaders have become servants to the fear of change.

    The result is economic decay on a continental scale. Because this is at once unnecessary and yet (strangely) also becoming unavoidable, it is also utterly tragic.

  9. The stricken Euro economies and Australia have a great deal in common. We have all been running trade and/or current account deficits for many years. And we have all accumulated very large debts as a result. In the Euro economies the debts have accumulated in or been transferred to the public sector, and in Australia they have accumulated in the household sector.

    And yet, Australia does not face economic collapse. On the contrary, we are able to adjust continually to changing internal and external environmental factors. The essential reason is we issue our own currency, and it is permitted to float freely. We have a system designed to allow adaptation and mitigate shocks. The Europeans do not.

    As I keep on saying, for their own sakes, they have to change their system.

    • I said this in 1999 to a mate (and neither of us are experts, just backpackers at the time) – “How the hell is this Euro thing going to work exactly?” Ladies and gentlemen, we finally have our answer – it won’t.