Weekend Economists Ask: "What Were They Thinking?" March 16-18, 2012

[Demeter]

48. Bill Black: (Re) Occupy Greece

http://www.benzinga.com/news/12/03/2394587/reoccupy-greece

Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Cross posted from New Economic Perspectives.

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While the Occupy Wall Street (OWS) movement set its sights on occupying a financial center, Germany has accomplished the vastly more impressive feat of occupying an entire nation – Greece. Germany has experience at occupying Greece having done so during World War II. The art of occupying another nation is to recruit a local puppet to do the dirty work required to repress the citizens. Germany used several puppets, most notoriously the murderous Ioannis Rallis, to (nominally) rule Greece and terrify the Greek people during World War II. (After Germany’s defeat, Rallis was executed for his treason.)...This time around, Germany has been far more successful in recruiting and using a puppet to (nominally) rule Greece and terrify the Greek people before the German occupation. It was able to put its puppet, Lucas Papademos in place and have him “request” that Germany reoccupy Greece. Papademos is not elected. He is in power because his elected predecessor, George Papandreou, announced that Greece would hold a plebiscite on whether to agree to the terms of a deal on Greece’s sovereign debt that would have the effect of surrendering Greece’s remaining sovereignty and consigning the Greek people to an even deeper depression. The inevitable German reaction to the plebiscite was: Democracy in Greece – inconceivable! Germany threatened to destroy Greece’s economy if there were a plebiscite. Germany’s extortion led to the collapse of Papanderou’s elected government and Papademos’ appointment as Greece’s de facto prime minister...Papademos is a banker and shares the theoclassical economic views that caused the global crisis and then led the ECB and many European leaders to adopt austerity strictures that have hurled the Eurozone back into recession. He has been wrong about the most important economic issues of his time. His economic dogmas, track record of failure, and disdain for democracy and the Greek people made him the perfect puppet to the Germans. For reasons that pass all understanding he is called a “technocrat. His record of economic policy failure demonstrates that “faux shaman” would be a more accurate label.

Germany and Papademos have ended Greece’s political sovereignty, but Greece gave up its economic sovereignty long ago when it adopted the euro. Two aspects of national economic sovereignty were inherently lost with nations that gave up their own currency and adopted the euro. A member nation could no longer have a monetary policy and it could no longer revalue its currency. The designers of the euro required a measure sharply curtailing the member nations’ remaining economic sovereignty. The demand that the euro nations surrender the last vestige of their economic sovereignty was deliberate. The euro’s designers viewed national economic sovereignty as the gravest threat to the euro’s success. Their great fear was that inflation could lead to a weak euro, so they adopted the “Stability and Growth” Pact to sharply limit the member states’ ability to control their fiscal policies. The Pact forbade member nations from running material budgetary deficits even during a severe recession or depression... The European Central Bank (ECB) was created with a single mandate – preventing even benign inflation. It was directed not to try to counter even severe recessions, mass unemployment, and extreme poverty. It was not even designed to function as a lender of last resort. But the equally important aspect of the ECB was not written into its charter – but understood by everyone. The ECB would be subservient to Germany’s economic views (with an ever diminishing French fig leaf). Germany’s economic view was that hyper-inflation always lurked around the corner and the ECB must act like a eternally vigilant raptor. The nations of the periphery had no realistic hope of influencing ECB policies. There were three key implications for nations that adopted the euro and surrendered economic sovereignty by giving up their sovereign currency. First, the member nations gave up their only reliable means of recovering from a serious recession or depression. Second, the member nations rendered themselves defenseless to devastating attacks by the bond markets if they fell into economic crisis. Third, the nations of the periphery placed their political sovereignty at grave peril should they fall into economic crisis.

The proven tool kit for recovering from a serious recession includes three policies. The policies are not mutually exclusive. They are typically used in conjunction. A nation that retains its economic sovereignty can speed its recovery from a severe recession by adopting a stimulative fiscal policy, a stimulative monetary policy, and by devaluing its currency. A nation that adopts the euro cannot use any of these methods. The Stability and Growth Pact allows nations to run only a tiny budgetary deficit that is grossly inadequate to replace the lost private sector demand...A nation that has a sovereign currency whose value floats and whose debts are denominated in its own currency makes an exceptionally poor target for currency attacks. It always has the capacity to repay debts denominated in its own currency, so it makes an even worse target for attacks by the credit markets. A nation that uses the euro is not an issuer of a sovereign currency. It uses another entity’s currency. Its sovereign debts, therefore, are inherently denominated in another currency – typically the euro. When a nation falls into recession or a debt crisis the debt markets produce a vicious cycle. As the sovereign debt increases the rating agencies cut the ratings, which raises the interest rate on the sovereign debt, which increases the debt costs, which leads to further rating downgrades. Note that when the credit rating agencies downgraded the United States the credit markets proceeded to loan vast sums to the U.S. at even lower interest rates. The credit markets rightly view the U.S., in no small part because it has a sovereign currency, as a “safe haven.”

The dynamics of sovereign currencies drive the deficit hawks to distraction. They eagerly await the day, and invent fictional debt ratio “tipping points”, when the credit markets will adopt their Austrian economic views and refuse to lend to the United States. Even Japan’s financial leaders, still able to borrow vast amounts at virtually zero interest rates despite long having one of the highest debt ratios in the world, are so Austrian in their economics that they are unable to understand their monetary system. Modern Monetary Theory (MMT) scholars have repeatedly demonstrated analytical and predictive success in explaining the inexplicable (from the dominant theoclassical economics perspective)...The result of the destruction of economic sovereignty is that a nation that adopts the euro and sinks into a severe recession can be forced into an unrecoverable spin. The euro system had no means to deal with such a death spiral that would lead to default and forced withdrawal from the euro. The default of one member nation on its euro debt would cause the debt costs of other euro members trapped in recessions to spike and could lead to a series of defaults and withdrawals from the euro. The only established institution to assist way out lay outside the euro system, the International Monetary Fund (IMF). The IMF provides loans to nations and demands austerity, privatization, and deregulation in return. Austerity makes recessions worse and deregulation is one of the causes of financial crises, so IMF loans often prove destructive to the recipient nations. The IMF was unwilling to take on the loss exposure of becoming a dominant lender to the periphery. This forced the European Union (EU) and ECB to create a fund that worked in conjunction with the IMF to lend to euro members that went into crisis. The EU lent to periphery nations under austerity, privatization, and deregulatory terms that were even more destructive than those imposed by the IMF. Theoclassical economic dogma has forced the Eurozone back into recession and much of the periphery into depression. This is one of the most destructive and spectacular “own goals” in history...The ECB’s theoclassical dogma leaves only one means of escaping a severe recession or depression – ending the European safety net and slashing working class wages such that every member state in economic difficulty becomes a major net exporter of goods and services. This is why we call the dogma the “New Mercantilism.” Adam Smith, of course, was motivated to write largely by his desire to expose the folly of mercantilism. Economics is the only “science” I am aware of that has deteriorated dramatically in its predictive ability over the course of 150 years. The ECB’s dogma is premised on a fallacy of basic logic (and is economically illiterate and vicious). One nation’s export is another nation’s import so we cannot all be net exporters. The success of one nation (Germany) in becoming a net exporter in part through substantial reductions in working class wages does not prove that the periphery can emulate its “success” by slashing working class wages. Indeed, the more Germany becomes a net exporter the harder it is for the periphery nations to become net exporters.

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