Greece brought a latte to a gunfight

The weekend’s European news could not be more extraordinary. A superb opinion piece by Yanis Varafoukas in The Guardian brought everything to a head:

In 2010, the Greek state became insolvent. Two options consistent with continuing membership of the eurozone presented themselves: the sensible one, that any decent banker would recommend – restructuring the debt and reforming the economy; and the toxic option – extending new loans to a bankrupt entity while pretending that it remains solvent.

Official Europe chose the second option, putting the bailing out of French and German banks exposed to Greek public debt above Greece’s socioeconomic viability.

…Our government was elected on a mandate to end this doom loop; to demand debt restructuring and an end to crippling austerity. Negotiations have reached their much publicised impasse for a simple reason: our creditors continue to rule out any tangible debt restructuring while insisting that our unpayable debt be repaid “parametrically” by the weakest of Greeks, their children and their grandchildren.

…Greeks, rightly, shiver at the thought of amputation from monetary union…To exit, we would have to create a new currency from scratch. In occupied Iraq, the introduction of new paper money took almost a year, 20 or so Boeing 747s, the mobilisation of the US military’s might, three printing firms and hundreds of trucks. In the absence of such support, Grexit would be the equivalent of announcing a large devaluation more than 18 months in advance: a recipe for liquidating all Greek capital stock and transferring it abroad by any means available.

…After the crisis of 2008/9, Europe didn’t know how to respond. Should it prepare the ground for at least one expulsion (that is, Grexit) to strengthen discipline? Or move to a federation? So far it has done neither, its existentialist angst forever rising. Schäuble is convinced that as things stand, he needs a Grexit to clear the air, one way or another.

What do I mean by that? Based on months of negotiation, my conviction is that the German finance minister wants Greece to be pushed out of the single currency to put the fear of God into the French and have them accept his model of a disciplinarian eurozone.

This is a truly bizarre confession. Yanis can see with razor sharp clarity the economics and politics at play. But at the same time he sees them as somehow new, as if Schäuble and German position has “suddenly” altered in some way in recent days. This is plain wrong, as MB’s own Delusional Economics pointed out five months ago when Yanis was first elected, he displayed an impressive grasp of economics and political naivete in equal measure.

Germany has not changed its position recently, if at all throughout the four year crisis. For Germany the euro is a simple national interest weapon. It allows it to dominate Europe and global trade by artificially suppressing its real exchange rate. For it to sustain that position it cannot allow peripheral nations to successfully drop out of the currency. They’d flood out and the more that left the higher the euro would rise as the German weighting in the currency increased. Anyone staying must adhere to German rules and anyone leaving must be destroyed to deter others from doing do. The euro and Europe are irrelevant to German real politik. They are in it for the Germans.

Yanis appears to have assumed that he could grasp the European light on the hill and persuade with elegant reason all of Europe to embrace enlightened super-national consciousness. He’s been genteelly sipping lattes at a gunfight and by doing so has played right into realist German hands by destroying his country’s economy as an example to all other European ‘dead beats’.

There is nothing new here. Yanis has simply been outplayed. When it was elected, Syriza either had to sign up to new terms of austerity or immediately leave the euro. It’s stylish five month congress with Europe has ruined its economy to no purpose of its own given it will either now buckle under to even deeper austerity or will still be forced out of the euro, taking its economy from wrecked to destroyed. By misreading power politics from the outset, Syriza has allowed Greece to be turned into an open-necked sacrificial goat gutted to keep the rest of Europe bowed to German will. That Yanis can see it now changes nothing for the forgotten Greek national interest.

By Saturday the German game of cat mouse reached laughable proportions, from Reuters:

Germany’s Finance Ministry believes Greece’s latest reform proposals do not go far enough and has suggested two alternative courses for Athens including a “timeout” from the euro zone, the Frankfurter Allgemeine Sonntagszeitung (FAS) reported.

“These proposals miss out important central reform areas to modernise the country and to bring economic growth and sustainable development over the long term,” the FAS quoted the ministry as writing in a position paper.

Instead, the ministry set out two alternative courses for Greece. Under the first, Athens would improve its proposals quickly and transfer assets worth 50 billion euros ($56 billion) to a fund in order to pay down its debt.

Under the second scenario, Greece would take a “timeout” from the euro zone of at least five years and restructure its debt, while remaining a member of the European Union.

Schäuble must be choking with laughter behind closed doors; playing the good guy with a sympathetic Greek “timeout”. Using what currency? The proposal also included the generous offer of “growth-enhancing, humanitarian and technical assistance”. Food stamps for German exports, no doubt.

Finally, when the Eurogroup did meet it was a mess with Finland leading a Teutonic rebellion against even the bailout, let alone any notion of debt forgiveness. By Sunday talks resumed and what surely began as Schäuble sniggering suddenly became reality as the terms of the Greek bailout that were counter-offered by Eurogroup suddenly became significantly more harsh that either the offer of two weeks ago or the Greek’s bizarre referendum-betraying counter proposal. The list included the politically impossible demand that Greece transfer $50 billion euros of state assets to a Luxembourg company so that the Eurogroup can sell ’em when it pleases.

The offer was surely only made tongue in cheek as it came with what appears to be the real idea, that Greece take a five year holiday from Eurozone membership. Greece must enact key reforms this week before any talks on any new financial rescue and the Greek parliament will need to approve legislation by July 15. Once done, funds can be released to avert Greek bankruptcy. An absurd timetable for ludicrous demands.

So Greece will now walk, obviously. Except for this from the BBC:

So the first rather chilling thing I’ve learned, from well-placed bankers, is there have been no conversations between the Bank of Greece, the government or regulators and Greece’s commercial banks about the technicalities of leaving the euro and adopting a new currency.

This is astonishing – and some would say pretty close to criminal – given that on Wednesday night the president of the European Union, former Polish prime minister Donald Tusk, was explicit that this weekend’s negotiations were all about whether Greece would stay in the eurozone.

Greece has not even been negotiating with an armed latte.

And so, by burning its political capital with Brussels over five months of polished debate, convincing the Greek people of the righteousness of their cause of staying in the Euro but paying no German price for doing so, and then flipping to outright panic as their banking system collapsed, Greece has destroyed itself so that Germany can rule the zone.

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. fitzroyMEMBER

    Maybe its time to speak to the Russians and the Chinese. Maybe the sale of a few islands. The European “partners” would have to be happy with that.

    • Listen to this extraordinary interview – Varoufakis first since resignation
      http://www.abc.net.au/radio/programitem/pgJE6gZygG?play=true
      Bizarre is apt. Varoufakis says he and Tsipras thought they would lose the referendum! He goes into Tsipras jubilant and Tsipras says he has lost his nerve and will fold to the Germans. Varoufakis resigns.
      Varoufakis concedes that the Greeks really have no capacity to leave the eurozone
      Bizarre indeed

  2. GunnamattaMEMBER

    Yeah thats basically it.

    The thing that needs to be remembered is that any nation leaving the Eurozone needs to be driven back to an economic stone age. The Cypriot bank deposit raid showed that. The last thing the Eurozone wants is a nation to do something like Iceland did and repudiate debt and then enjoy something of an economic bounce (in Iceland’s case inside the Eurozone by joining it). Anyone leaving from here needs to be an example, no cheap tourism driven rebound, no manufacturing or even trade int the EU driven rebound, no EU citizens buying local real estate driven rebound.

    The delay on another bail out does not surprise me one iota. Everyone needs to remind themselves that part of making an example involves making the process torturous. Then on top of that people would do well to consider that the EU elite (that is the EU bureaucratic elite, and the Eurozone corporate elite – no matter what nation they are from) is essentially one and the same with the Davos uber set, and these people really do think the punterariat of any nation are their plaything. They wouldnt hesitate a second to trash a nation to make a point.

    The only way last weekends vote (was it only a week ago?) would have made any sense would have been for Tsipras to come out on the evening repudiate debt and state that he would print Euros until he was blue in the face if they didnt get debt relief straight away, and make the process as messy as possible unless there was agreement then and there. Now that the matter of something EU driven has been put to the public of a nation and voted down, that too must be made an example of. I dont think it will be pretty.

  3. Think you could say Greek state became insolvent for the umpteenth time since its inception around 1830, with a good deal of unfluence from the Ottomans (in later years Turkish middle class elites would be busy ‘mugging’ their own state and economy, while cementing their own positions or class, at the expense of most the population)….

    While ome explain the stand off as a civil war amongst the left in Greece, I would assume many of the players in Greek politics will still live comfortable lives either way, while most of the population have to deal with economic dystopia, either way.

    It’s not a simple binary issue and the referendum was not only rushed, it’s not so democratic if 500K eligible voters, i.e. mobile youth and working age population, are excluded because they are living elsewhere, mostly in the EU….. the result could have been very different if this group were included http://www.euractiv.com/sections/euro-finance/half-million-greeks-unable-vote-referendum-315990

    Even Turkey changed their similar law (present conservative leaders assuming more votes) requiring travel back home to vote, but nowadays those elsewhere can vote too, and no doubt challenged the political status quo recently.

    • A lot of the population couldn’t get to the province/island/village they are enrolled in so that they could vote. One of the main reasons was because of $, the Greek electoral commission isn’t as ‘functioning’ as the AEC.

  4. What will the next farcical headline from frau Merkel be? “Greece to sit in the naughty corner” ?

    The germans don’t seem to get it, but my general feeling is ‘how dare they’.
    The country that got a post-war debt haircut in the order of 50% now struts around about how virtuous they are and refuses to budge on the most obvious of requirements, a debt restructure.

  5. Been saying it –

    http://www.ozy.com/pov/to-russia-with-love-greece-may-still-have-a-plan-b/61797

    Already meeting with them

    http://www.business-standard.com/article/reuters/russia-says-to-support-greece-recovery-by-deepening-energy-cooperation-115071200532_1.html

    Payment systems will avoid European controls – and US sanctions

    http://thediplomat.com/2015/06/china-new-system-a-step-forward-on-rmb-internationalization/

    http://sputniknews.com/asia/20150702/1024131486.html

    Asian investment infrastructure bank, Silk Road Initiative.

    Real elephant in the room is still the worlds largest gas reserves and 4th largest oil reserves – Iran.

  6. A lot of people are claiming that it was all so obvious that Germany were going to shaft Greece unless Greece agreed to be shafted. It was never obvious that the Germans would push for and other countries would be prepared to permit Grexit. It was much more rational for the Eurozone (if not Germany) to address some of the basic reforms required before driving Greece out.

    That the rest were prepared to toe the German line is a cause for concern, however even if some of the countries don’t get it yet and still think it is all about Greece, more and more of their people will start to realise that the unpleasant tone to German statements during this affair have a familiar ring to them.

    What happens next in Europe will largely depend on what the USA does. If it decides to leave Europe to Germany management, Europe is likely to find nationalistic themes arising more broadly as the Germans go from ‘strength to strength’.

    If German national interest is all that now matters, it will not take long before the fear of German dominance becomes a real political issue.

    Which is pretty much the last thing Europe needs.

    Having regard to the approach taken by the Germany it may not be long before other countries start thinking that being in a monetary straight jacket with Germany is unsustainable.

  7. Transfer assets to where I wonder? Frankfurt would be my guess and Germany would have a defacto northern German province. Cheap holidays and a subservient populace – teutonic bliss!
    Option one is likely given the Greek people are hell bent in staying in the EMU. And where is the ECB in this mess?

    For those who like conspiracy theory see http://newwrh.com/WRHARTICLES/reich.html

    Federer is losing so I have to vacate the blog space.
    How much humiliation does this pack of criminals want to shower on Greece. Do the weaker states already in recession themselves think that these bastards won’t turn on them when it suits their purpose?

    I’ll cop a hiding on this one, but I’m going to say it anyway. Hitler used blitzkrieg tactics to subject Europe in his grand plan. These fucking new age Huns are slowly strangling Greece and showing the rest of Europe that the fourth Reich is on the way. France should be resisting and telling Schauble, Merkel and the ECB to get reasonable. Hollande is weak and the US are too stupid to realise that NATO could become the new Wehrmacht. The United Nations is pissing about like the old League of Nations did when they had a real crisis to deal with and that turned out really well. The UK should be doing more political lobbying to prevent this from proceeding.

    Russia and China (and Iran) must be apoplectic with glee watching Europe and the US make a complete mess of European political, monetary and social cohesion. This is going to be terrible for Greece, but potentially a disaster in the making for Europe and the world.

    • St JacquesMEMBER

      Ireland grew at 4.4 per cent in the last year and Spain did 2 per cent and seems to be accelerating, even Portugal is picking up. The real danger of contagion is Greece’s northern neighbours in eastern Europe, where a lot of business and banking is run out from Greece. The other danger is for Germany – anti austerity and even anti European sentiments are growing in the battered countries, and even if their economies are picking up, most people are not feeling it yet and the mood could sour quickly. Ireland, Italy and Spain are much better placed than Greece economically to go it alone if push came to shove and the Germans are causing a lot of ill feeling by their apparent unwillingness to compromise in a mess all are responsible for.

    • That was interesting.

      The one positive thing to come out of this debacle is that it has forced the rapidly developing malignant character of the EU and Eurozone out in the open.

      One hopes that the centre left in European politics starts to get it through their generally thick heads that ‘ever closer union’ in practice will prove, without urgent action, to be the very thing they hoped it would protect Europe from.

      • I note that Yanis appears to be stirring the pot between France and Germany in that piece, with the comment about using Greece as an example to keep them in line. Will be interesting to see if the French react to it in any way.

      • It is a pot that does not need a lot of stirring. A lot of people are already waking up the implications of what is going on.

        And only because the current Greek government have put up a fight.

    • fitzroyMEMBER

      Total lack of goodwill by troika was not anticipated. Harsh to call it naive.. Great article. Thanks for the link. Now for a few military bases in the Mediterranean.

    • The problem is that until they have an alternative monetary system in place there can be no Grexit. Grexit is an actial state of affairs not a statement.

      If the Euro Nasties have really been preparing for Grexit they will been putting in place the means to facilitate it. I would not be surprised if we find out there are printing presses primed and ready to roll with some type of new currency that can be shipped to Greece within days..

      Keep in mind that all European currency is actually marked to indicate the European central bank that authorised it.

      https://www.ecb.europa.eu/euro/banknotes/design/html/index.en.html

      Doing a print run with some additional design elements that marks notes as specifically Greek-Euros, a different currency, would not be difficult – inserting the words Drachma is not rocket science.

      All central banks developed emergency note printing capacity to deal with bank runs after the GFC. If Greece needs a new currency it will happen and will happen quickly. If Greek Banks can manage foreign accounts now they can readily create a bunch of new foreign currency accounts for a new foreign currency called the “Drachma”. Create a matching new account for every customers existing account is not complicated.

      The US may tolerate Grexit but it will not tolerate Greece being driven out of Europe and out of the US sphere of influence. If the Euro Nasties lay on the hate too thick the US will waggle its finger.

      • pfh007
        I was thinking along similar lines, but the scenario I had in mind was that people in the EU will end up looking carefully at their change in the shops. A nice new 50 euro note with the word “drachmas” in very small print somewhere. What an industry that’s going to be…

      • Rob,

        If the Germans ‘helpfully’ have their presses ready to roll out some temporary Drachma for the Greeks to use until they can organise their own notes, it will probably have some special watermark ‘….from Deutschland with love….’.

        And if The Greeks get really desperate they could ring Australia. Our polymer note producer was once extremely keen to win new business.

      • PFH, from recent reading, I believe the Greeks already have their own functioning presses set up to issue Euros, so I think they could issue Drachmas. But that isn’t the main issue they face, it’s all the reprogramming and changes required to allow electronic transactions that is the biggest hurdle. As Yanis said even under ideal circumstances it could take months to achieve. Although I think his comparison to Iraq, a freaking war zone, was over the top.

        If they have to exit, ideally it would be with cooperation and support from the EU, but that doesn’t look likely.

      • i don’t think greeks want to exit, germans do so they’ll help them with the printing and electronic accounts as long as greeks put something down as guarantee that they’ll not default on all the debt. I think that all negotiations are about that bit, not whether greece will stay in euro.

        If somehow greeks reassure germans that they’ll not default on all the debt, germans will help them transition otherwise it will be painful for greeks but also for rest of euro. Maybe greeks are already printing money (there are so many countries capable to do that for afee 🙂 ) so they need to buy some time before system is setup.

      • Ronin8317MEMBER

        It is possible to create a pure digital currency at first, but keep using the Euro for everyday transaction. Everything to do with government will be done with the new currency (VAT, income taxes, pension, etc), and the system can be put in place in weeks, and the printing of the phyisal notes can come later. The problem is that the Greek government don’t have a plan for it, they simply assume that ‘somehow’ they’ll get the money from the EU because they’re European.

  8. A frape. Greece brought a frape to a gunfight. Nice headline nonetheless.

    Following the news and the #thisisacoup #tsiprasleaveeusummit tags trending 1 & 2 worldwide, perceptions of europe, and of germany in particular are being changed forever.

    What is currently happening (and might lead to an actual coup in Greece) is a total smashing of the political, social and economic structure of a sovereign state and the jackboot-to-the-neck suffocation of an ancient and proud culture.

    And the Brand re-Nazification of Germany.

    Whatever happens from here-on. Europe, the project, is terminal.

  9. Look at the Greek population pyramid.

    That tells nearly the entire story. There is no way they can stay in the euro or feed their pensioners. They have to leave and devalue. Period.

    If they do that, maybe, just maybe in 3-5 years, some of their youth will return.

    • Ronin8317MEMBER

      The Greek government never contemplated a new currency, so nothing has been prepared. When they’re kicked out of Euro, they will have no currency at all!!. Imagine all the banks being closed forever, the government stop payment for everything, and the army staging a coup since they’re not being paid. That is back to the economic stone ages of bartering.

  10. greek revolution !
    time for the people to stand up and stop the bankers leading them down the rabbit hole

  11. But it’s not a gunfight. A gunfight is still an option and the old fashioned way to loot a country.
    This is a financial conquest or a FIRE-fight.
    For Greece individually the best option is not to fight but to Grexit and disarm their opponent and cleanse their own economy.
    But this leaves Europe still in the hands of its banks picking countries off one at a time and looting them. All of Europe remembers what happens when you leave that kind of aggressive invader alone and try to just cover yourself.
    Having already ceeded control over their currency and central bank Greece can’t bring their own FIRE to this fight and Syriza would consider them part of the problem in any case.
    So what else can you fight with? Where the goal is to change perceptions, discredit the Flog and reform Europe you’re pretty much down to Latte’s or Lawyers. Problem is while it’s possible to put out a FIRE with a Latte when all of europe is already burning you need a bigger Latte than the Greeks can manage on their own. By fighting back Syriza has provided their own example but they have lost the short term battle and have to withdraw or surrender. Not planning more for the likely defeat was a mistake. But they really underestimated the determination of their opponent as well as the extent of their control over the governments of Europe.
    If Michael Hudson is right it looks like the next round will be fought with Lawyers but Greece needs to deal now with losing this fight first.

  12. I did read an older article last night suggesting the rest of Europe should force the Germans to exit instead of being used to artificially suppress the value of Germany’s exports.

  13. I disagree with the premise that Yanis and Co were not aware of German plan all along. I think this is a deliberate plan to show the rest of Europe and the public at large that the Germans cannot be appeased – a kind of reverse Chamberlain “Peace in our times”. Press and social media coverage (including #thisisacoup) confirms this.

    I forsee that the Greeks bend for now, but will get out of this agreement and the Euro 6 months down the track when their banking system is a bit more stable and they are in a position to print Drachmas.