Germany and the ECB Play with Fire

By JOHN BUELL

Crises are seldom discussed and critiqued solely in abstract terms. Policy proposals and ideologies often become personified and doctrines are identified with their protagonists. Yanis Varoufakis, former Greek Finance Minister, became a lightening rod in the dispute over the proposed bailout of Greece. Crises seem to become embodied in persons, all the way from their clothing to style of argument.

What has been the goal of Germany’s grim, singularly minded Finance Minister? If repayment of the debts Greece owes to German and French banks is the objective, Wolfgang Schauble is pursuing a foolish course. New rounds of enforced austerity will increase the ratio of debt to GDP, and increase the possibility of default.

Schauble is smart enough to know this. He is more likely interested in driving an ideological agenda, making an example of Greece. Nations that overspend their budgets will be punished, and those that reject the terms of their bailouts will be doubly disciplined. Thus the Greek referendum rejecting the initial bailout terms was followed by even harsher terms imposed on Greece.

That Schauble’s disciplinary agenda contains a double dose of hypocrisy seems hardly to have dawned on him. Germany’s near miraculous rebound from World War II and levels of debt that were clearly unsustainable depended not merely on the Marshall Plan but also on substantial debt forgiveness, the recognition that as Jeffrey Sachs puts it, there are situations in which the interests of creditors and debtors are best served by some level of forgiveness.

Nor need one rely on history to make this case. Greece’s situation was a consequence not merely of the corruption and malfeasance of its government but also of French and German banks. Relying on the permanence of the Eurozone, on supposedly foolproof mathematical models, and seeking outsized returns in a low interest era, these banks extended massive loans to the Greek government.

In their loans, in the leveraging, and in their reactions to crisis, German and French banks have followed the dubious example of Wall Street. As commentator Paul Tyson puts it: “In 2007-8 American corporate bankers were using special financial instruments which enabled them to generate huge private profits out of speculative hutzpah and mathematical magic. These creative activities with mortgages were not, apparently, illegal, but they did place the entire global financial system in peril of collapse. So when the US government threw trillions of tax-payer dollars down the throats of five giant private finance corporations, this was seen as a necessary action that could not be avoided. … The Wall Street game was being played in the way all the big powers expected it to be played, so no-one with financial power felt that there had been any in-principle wrong doing going on. The game is, global financial power exists for the advancement of global financial power, and nation-states are there to make sure that nothing goes wrong for the risk takers. Everyone played their part and the wheels didn’t fall off, so all is well. …What we learn from this is that for big financial players and big governments, power is its own justification. This is called financial realism … Here, that which is legal, necessary and right is, in the final analysis, whatever the financial institutions with the most power tell you is legal, necessary and right. … [A]nyone who doesn’t play the game that they control, by their rules, will be punished severely.”

Whether these rules work in the interest of the great financial institutions is a question that deserves more scrutiny than it has received. I have already noted the problem with the assumption that even harsher doses of austerity will allow Greece to pay down its debt. To this I would add the contention that those eager to expel Greece from the Eurozone are playing with fire. Financial and political leaders now argue that the Eurozone is better prepared to cope with a Greek exit for several related reasons. It has inaugurated a banking union and has established stabilization funds and mechanisms. Yet as Lorenzo Bini Smaghi , a former member of the ECB board writing in the Financial Times points out, these fund mechanisms, like the Greek case, come loaded with conditionality terms. The Eurozone is in effect doubling down on its commitment to austerity.

Nor has the risk of contagion been finally overcome. As Smaghi puts it: “Many observers and commentators seem to think that the effects would be similar to a currency devaluation and debt default. This is an oversimplification, which probably underestimates the overall effects … Contagion is very hard to predict, as it reflects the interaction between a myriad of market participants reacting to an event without precedent, An exit is a change in regime, which can entail large discontinuities, if not market disruption.”

Perhaps the greatest chutzpah on the part of the troika and its defenders lies in the blindness to the political ramifications of a Grexit and the ways those political ramifications may reflect back on the economic structure and even their own power. Even power for its own sake can become self-defeating. Smaghi comments: “[A] Greek exit and default would cause an increase in public net debt and deficits in the other eurozone partners, which would trigger populist anti-European reactions, not only in northern Europe. The concerns of those who advocated against bailing out Greece a few years ago would be confirmed, making it more difficult to approve new financing programmes. In such circumstances even the major investment banks may find it impossible to dip into the public treasury.”

I do not conclude that these feedback mechanisms and their negative consequences will necessarily be triggered. Such an assertion would represent a left version of the Troika’s chutzpah. Yet I find the Troika and its apologists’ unwillingness to ponder seriously such possibilities shocking.

Because Varoufakis challenged conventional wisdom, he became the lightening rod for this controversy. He was termed ruthless and arrogant. Yet the arrogance may lie with his Eurozone antagonists. Perhaps the established elites have the most to fear from an excess of pride.

John Buell lives in Southwest Harbor, Maine and writes on labor and environmental issues. His books include Politics, Religion, and Culture in an Anxious Age (Palgrave MacMillan, 2011). Email Jbuell@acadia.net.

From The Progressive Populist, November 1, 2015

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