Habermas Declares the European Union Politically Bankrupt

Thanks to a tip from my father, here is a transcript of an interview conducted by Philip Oltermann with Jürgen Habermas which appeared in The Guardian this past Thursday, "Jürgen Habermas’s verdict on the EU/Greece debt deal – full transcript." Habermas' take is pretty much non-controversial at this point. The European Union is politically bankrupt. And this bankruptcy is consistent with the "technocratic hollowing out of democracy [that] is the result of a neoliberal pattern of market-deregulation policies."

Guardian: What is your verdict on the deal reached on Monday?

Habermas: The Greek debt deal announced on Monday morning is damaging both in its result and the way in which it was reached. First, the outcome of the talks is ill-advised. Even if one were to consider the strangulating terms of the deal the right course of action, one cannot expect these reforms to be enacted by a government which by its own admission does not believe in the terms of the agreement.

Secondly, the outcome does not make sense in economic terms because of the toxic mixture of necessary structural reforms of state and economy with further neoliberal impositions that will completely discourage an exhausted Greek population and kill any impetus to growth.

Thirdly, the outcome means that a helpless European Council is effectively declaring itself politically bankrupt: the de facto relegation of a member state to the status of a protectorate openly contradicts the democratic principles of the European Union. Finally, the outcome is disgraceful because forcing the Greek government to agree to an economically questionable, predominantly symbolic privatisation fund cannot be understood as anything other than an act of punishment against a left-wing government. It’s hard to see how more damage could be done.

The European Council is effectively declaring itself politically bankrupt
And yet the German government did just this when finance minister Schaeuble threatened Greek exit from the euro, thus unashamedly revealing itself as Europe’s chief disciplinarian. The German government thereby made for the first time a manifest claim for German hegemony in Europe – this, at any rate, is how things are perceived in the rest of Europe, and this perception defines the reality that counts. I fear that the German government, including its social democratic faction, have gambled away in one night all the political capital that a better Germany had accumulated in half a century – and by “better” I mean a Germany characterised by greater political sensitivity and a post-national mentality.

Guardian: When Greek prime minister Alexis Tsipras called a referendum last month, many other European politicians accused him of betrayal. German chancellor Angela Merkel, in turn, has been accused of blackmailing Greece. Which side do you see as carrying more blame for the deterioration of the situation?

Habermas: I am uncertain about the real intentions of Alexis Tsipras, but we have to acknowledge a simple fact: in order to allow Greece to get back on its feet, the debts which the IMF has deemed “highly unsustainable” need to be restructured. Despite this, both Brussels and Berlin have persistently refused the Greek prime minister the opportunity to negotiate a restructuring of Greece’s debts since the very beginning. In order to overcome this wall of resistance among the creditors, prime minister Tsipras finally tried to strengthen his position by means of a referendum – and he got more domestic support than expected. This renewed legitimation forced the other side either to look for a compromise or to exploit Greece’s emergency situation and act, even more than before, as the disciplinarian. We know the outcome.

Guardian: Is the current crisis in Europe a financial problem, political problem or a moral problem?

Habermas: The current crisis can be explained both through economic causes and political failure. The sovereign debt crisis that emerged from the banking crisis had its roots in the sub-optimal conditions of a heterogeneously composed currency union. Without a common financial and economic policy, the national economies of pseudo-sovereign member states will continue to drift apart in terms of productivity. No political community can sustain such tension in the long run. At the same time, by focusing on avoidance of open conflict, the EU’s institutions are preventing necessary political initiatives for expanding the currency union into a political union. Only the government leaders assembled in the European Council are in the position to act, but precisely they are the ones who are unable to act in the interest of a joint European community because they think mainly of their national electorate. We are stuck in a political trap.

Guardian: Wolfgang Streeck has in the past warned that the Habermasian ideal of Europe is the root of the current crisis, not its remedy: Europe, he has warned, would not save democracy but abolish it. Many on the European left feel that current developments confirm Streeck’s criticism of the European project. What is your response to their concerns?

Habermas: His prediction of an imminent demise of capitalism aside, I broadly agree with Wolfgang Streeck’s analysis. Over the course of the crisis, the European executive has accrued more and more authority. Key decisions are being taken by the council, the commission and ECB – in other words, the very institutions that are either insufficiently legitimated to take such decisions or lack any democratic basis. Streeck and I also share the view that this technocratic hollowing out of democracy is the result of a neoliberal pattern of market-deregulation policies. The balance between politics and the market has come out of sync, at the cost of the welfare state. Where we differ is in terms of the consequences to be drawn from this predicament. I do not see how a return to nation states that have to be run like big corporations in a global market can counter the tendency towards de-democratisation and growing social inequality – something that we also see in Great Britain, by the way. Such tendencies can only be countered, if at all, by a change in political direction, brought about by democratic majorities in a more strongly integrated “core Europe”. The currency union must gain the capacity to act at the supra-national level. In view of the chaotic political process triggered by the crisis in Greece we can no longer afford to ignore the limits of the present method of intergovernmental compromise.

Syriza Crippled, Tsipras Proven a Bootlicker, Neoliberal Austerity Triumphant

My only question is how does Tsipras move his bootlicking surrender through the Greek Parliament.

But first a rundown of Tsipras' capitulation. From the lede story by James Kanter and Andrew Higgins in The New York Times this morning, "European Leaders Reach Agreement to Resolve Greek Debt Crisis":

The total commitment of money has not been disclosed. But a document by the eurozone leaders noted that experts had estimated that Greece might need from 82 billion to 86 billion euros more — $91 billion to $96 billion — to shore up its economy, rebuild its banks and meet its debt obligations over the next three years. The document said Greece and its creditors should seek to “reduce that financing envelope,” if possible.

As part of Greece’s commitments, Ms. Merkel said, a fund will be created to use the proceeds from selling off assets owned by the Greek government to help pay down the country’s debt. That fund would be “to the tune of” €50 billion, she said.

Greece will also be required to seek assistance from the International Monetary Fund and to agree to let the organization continue to monitor the country’s adherence to its bailout commitments. The Greek government had resisted a continued role for the I.M.F., seeing the fund’s involvement as unwanted meddling.

The Greek Parliament will also be required to approve the terms of the agreement “without delay,” according to the document released on Monday morning. One of the sticking points in the negotiations over the weekend had been a demand that the Parliament sign off on any deal by Wednesday, but that requirement appears to have been relaxed.

Yves Smith in a post this morning, "Tentative Deal Strips Greece of Sovereignty, Makes Debt Relief Dependent on Compliance," on Naked Capitalism where she quotes extensively from a Financial Times story provides a more detailed reckoning of Tsipras' failure:

Mr Tsipras has promised to pass tough new reform laws, including on tax and pensions, by Wednesday and prepare further rapid reforms, such as labour market liberalisation, opening up closed professions, deregulating Sunday trading and reinforcing the financial sector. In a particularly humbling move, the government has to reverse some of the extra spending measures it introduced earlier this year, when it trumpeted its ambitions to end five years of EU-imposed austerity.

The major terms include:

Increasing and simplify VAT

Cutting pensions. More on that shortly. The terms here look to be vastly worse than the cuts Greece fought a few weeks ago

“Requesting” continued IMF “support” (monitoring as well as financing)

“Introducing quasi-automatic spending cuts in case of deviations from ambitious primary surplus targets after seeking advice from the Fiscal Council and subject to prior approval of the Institutions”

Sequestering €50 billion of assets, nominally supervised by Greece but under strict oversight of the creditors. Half will go to recapitalizing the banking system

Implementing labor market “reforms” along the lines sought by the creditors

Not only is there no debt relief, there is no prospect of any debt relief unless Greece meets targets. And forget about principal reduction. From the letter:

…the Eurogroup stands ready to consider, if necessary, possible additional measures (possible longer grace and payment periods) aiming at ensuring that gross financing needs remain at a sustainable level. These measures will be conditional upon full implementation of the measures to be agreed in a possible new programme and will be considered after the first positive completion of a review. 

The Euro Summit stresses that nominal haircuts on the debt cannot be undertaken.

This is not just failure. To sign off on this agreement is an act of collaboration with a hostile power.

All Syriza's red lines have been crossed, not to mention the 11th-hour addition of the €50 billion privatization to be administered by the creditors.

On top of it all, the ECB will not release additional funds to Greek banks until Parliament approves all the measures contained in the agreement.

By signing this agreement Tsipras validates the European hardliner mantra about Syriza -- that the party was a collection of jejune poseurs more style than substance who had no business being in government and were just wasting everyone's time. This certainly appears to be the case.

The Wednesday in the run up to the "Oxi" referendum Tsipras forwarded a proposal that basically accepted bulk of the troika's austerity demands. The proposal was declined by Merkel in favor of letting the referendum play out. At the time I thought that was foolish of Merkel et al. because what better outcome for the Syriza-hostile troika than to have Tsipras administer the very policies he was elected to overturn. What better way to make the point to a recalcitrant public that "There Is No Alternative" to neoliberal austerity than by having the only anti-austerity party in power in Europe accept and oversee austerity?

The answer to the question of what is better is Syriza implementing even more austere fiscal policies after the public voted overwhelming against austerity. Merkel knew what she was doing. I assumed Tsipras meant what he said when rallied Greeks to vote No.

Syriza is now crippled. It will split, but Tsipras should be able to push the agreement, at least most of it, through Parliament with the help of To Potami, New Democracy and other parties in the opposition.

I don't see how Syriza can survive. Its rise to electoral power was based on a promise that it would not accept further austerity. Now that it has done so it has no rationale.

Nothing more than a youthful Pasok, Syriza will be remembered for its bluffing, its open collars and untucked shirts. What a disappointment. Syriza's spectacular failure will be a blow to the legitimacy of all non-centrist parties -- to Podemos in particular.

Greek Capitulation Not Good Enough for Schäuble & Co. Grexit Unavoidable

Yves Smith for all the arrows she has absorbed for her pessimism about the bargaining positions of both Greece and her creditors has for the must part been reliably on the money. This morning she writes that "A Grexit Looks Almost Inescapable":

Despite my generally dour outlook, I never thought we’d arrive at the insane juncture we are at now, that of a Grexit being all but baked in. This would be a catastrophic outcome, most of all for the Greek 99%. If a Grexit comes to pass, it should deservedly blacken the names of everyone involved, most of all Merkel, whose incrementalism meant that all of the unresolved contradictions of the Eurozone produced intensifying pressure on its fault lines, and Greece proved to be the breaking point. But as we’ll see soon, her finance minister Wolfgang Schauble would also get a particularly large badge of dishonor. 

You don’t need to know much to know that the odds of Greece escaping a Grezit are becoming vanishingly small as time progresses, and there is perilously little time left. And mind you, this sorry trajectory is occurring even after the Greek government prostrated itself and offered to meet even more stringent conditions than its voters overwhelmingly rejected in a referendum less than a week ago.

The big development is that last night's meeting of eurozone finance ministers adjourned minus any resolution. As James Kanter reports in "Meeting on Greece Debt Breaks Up With No Deal" the hardliners -- Germany, Finland, Slovakia, et al. -- don't believe that Greece will implement its latest austerity proposal:

Despite Greece’s capitulation on those terms, many countries came into this weekend’s final round of negotiations skeptical of the Tsipras government’s commitment to seeing through the changes and putting his country on firmer financial footing — and weary of the constant brinkmanship that has characterized the months of negotiations over Greece’s latest crisis.

Instead of working through the night to hammer out a statement on requirements for Greece, as had been expected, the meeting was suddenly called off shortly before midnight, and ministers left without even holding a formal news conference.

“The issue of credibility and trust was discussed, and also of course the financial issues involved,” Jeroen Dijsselbloem of the Netherlands, the head of the so-called Eurogroup of ministers, told reporters. “It is still very difficult. but work is still in progress,” he said, adding that discussions would continue later Sunday morning.

From the start, it was clear that Mr. Tsipras’s gambit had not entirely won over Germany and other countries that have been skeptical about giving a new round of loans to Greece after years in which successive governments in Athens have struggled to carry out changes that creditors have demanded as a condition of the bailouts.

“We will have exceptionally difficult negotiations,” Wolfgang Schäuble, the hard-nosed German finance minister, said on Saturday before the meeting. “We won’t be able to rely on promises.”

His prediction proved accurate, as he and fellow ministers wrangled with little apparent progress, seeking more assurances from Greece that it was committed to changing its ways, and weighing the desires of France and Italy for a deal against the more skeptical stance of Germany and the possibility of outright opposition from Finland.

What Schäuble did do in the 11th hour was forward a proposal demanding that Greece essentially be placed in receivership and banned from the euro for five years. According to The Guardian's Ian Traynor in "Greece nears euro exit as bailout talks break up without agreement," who Yves Smith quotes at length in an update to her post,

With Greece on the edge of financial and social implosion, eurozone finance ministers met to decide on the country’s fate and on what to do about its debt crisis, after experts from the troika of creditors said that new fiscal rigour proposals from Athens were good enough to form “the basis for negotiations”.

But the German finance minister, Wolfgang Schäuble, dismissed that view, supported by a number of northern and eastern European states. “These proposals cannot build the basis for a completely new, three-year [bailout] programme, as requested by Greece,” said a German finance ministry paper. It called for Greece to be expelled from the eurozone for a minimum of five years and demanded that the Greek government transfer €50bn of state assets to an outside agency for sell-off.

Timo Soini, the nationalist True Finns leader, meanwhile, threatened to bring down the government in Helsinki if Alex Stubb, the finance minister, agreed to a new bailout for Greece. Stubb apparently came to the crunch meeting on a new bailout without a mandate to agree one.

“The hawks are very vocal,” said an EU diplomat. “It’s very tough.” Berlin also demanded stronger and more intrusive powers for outside monitors to police the economic and fiscal reforms that Alexis Tsipras, the leftist Greek prime minister, would need to commit to to secure the new bailout.

Saturday night’s talks were not to agree on a third bailout, but were negotiations on whether to launch more talks on Greece’s third rescue package in five years. The ministers faced formidable problems, said Schäuble, who argued debt relief for Greece, broadly seen as essential, was banned by the EU treaties: “Athens’s proposals are far from sufficient. The funding gaps are way beyond anything we’ve seen so far,” he said.

The hard line was echoed by Peter Kazimir, finance minister of Slovakia, who said that new austerity measures tabled by Athens were already past their sell-by date.

The eurozone has been united for five months in the negotiations with Tsipras, but with the stakes rising greatly in the last 10 days, major divisions have surfaced, with the French working tirelessly to save Greece and the hardliners now pushing Greece’s expulsion for the first time openly.

The European commission and the European Central Bank issued dire warnings that a failure to grant Greece new rescue funds of up to €78bn would put the country on a trajectory of complete banking and financial collapse.

The widening gulf between eurozone hawks and doves paves the way for an acrimonious summit on Sunday, with France and Italy lining up against Germany and the northern and eastern Europeans. Matteo Renzi, the Italian prime minister, is expected to tell chancellor Angela Merkel that enough is enough and that Greece should not have to put up with any more humiliation.

Merkel is under intense pressure from the Americans not to “lose” Greece and is worried about her own legacy. But Greece fatigue is becoming endemic in Germany, and she faces growing unrest in her party ranks where Schäuble’s hard line is popular. She was said to have endorsed Schäuble’s tough position.

Whether the U.S. can work its will once again on a reluctant Merkel, as it did in the case of Russian sanctions and the whole smorgasbord of riots, a coup and the downing of the MH17 passenger jet, seems a long shot to me.

The Obama administration has not been particularly assertive about securing an amicable resolution to the Greek debt crisis. Getting the IMF to release its report saying Greece's debt load was unsustainable and that debt relief must be considered was helpful to Syriza in the run up to last Sunday's referendum, but it was far from the kind of full-court press trotted out to get the EU to embrace sanctions on Russia.

The U.S. is allowed to run roughshod over Europe when it comes to NATO force projection. But when the question is Germany's economic hegemony over the continent, Uncle Sam apparently has to wear velvet slippers.

Schäuble's 11th-hour proposal, one that Traynor says Merkel has signed off on, at least clarifies the root of Germany's incessant demands for austerity. It is not about a belief that austerity will lead to growth; that has been debunked long ago. It is about taking possession of Greece lock, stock, and barrel. Likely in the private moments of hardliners among the Finns, Germans and Slovaks are thoughts about Greek women. Why not put the young fertile ones on the auction block too?

Huge Win for Greece, Varoufakis Sacked, Troika Unlikely to be Placated

Greek Prime Minister Alexis Tsipras' first move following the landslide anti-austerity "Oxi" vote in yesterday's referendum was to toss his finance minister and chief troika critic, Yanis Varoufakis, on the pyre. Varoufakis announced his resignation today with the blog post, "Minister No More":

Soon after the announcement of the referendum results, I was made aware of a certain preference by some Eurogroup participants, and assorted ‘partners’, for my… ‘absence’ from its meetings; an idea that the Prime Minister judged to be potentially helpful to him in reaching an agreement. For this reason I am leaving the Ministry of Finance today. 

I consider it my duty to help Alexis Tsipras exploit, as he sees fit, the capital that the Greek people granted us through yesterday’s referendum. 

And I shall wear the creditors’ loathing with pride. 

We of the Left know how to act collectively with no care for the privileges of office. I shall support fully Prime Minister Tsipras, the new Minister of Finance, and our government. 

The superhuman effort to honour the brave people of Greece, and the famous OXI (NO) that they granted to democrats the world over, is just beginning.

There is no indication at this point that the eurozone power brokers are feeling any change of heart after a super-majority of Greeks rejected their last proposal. Jack Ewing reports from the European Central Bank headquarters in Frankfurt that there is a wait-and-see attitude on Greece's access to emergency liquidity assistance (ELA):

The no vote by Greeks on Sunday makes it even more difficult for the European Central Bank to continue propping up Greece’s commercial banks, whose solvency is closely linked to that of the country’s government. 

But the central bank has so far avoided taking action that could force Greece out of the eurozone, a possible outcome if the banks fail. Without a banking system serving as a conduit for euros and a platform for transactions, Greece might have little choice but to begin printing its own currency.

“Pressure has increased further for the E.C.B. to revoke Greek banks’ access to central bank liquidity,” said Mujtaba Rahman, the Europe director for the Eurasia Group, a political risk consulting firm. “Still, the E.C.B. is very likely to keep its liquidity lifeline open for the time being.”

While the central bank probably will not cut off credit to the Greek banks on Monday, it is also unlikely to increase the amount available to them from its current level of 89 billion euros, or about $99 billion. The 25 members of the Governing Council will not want to increase the central bank’s exposure to Greece until there is tangible progress toward an accord with eurozone creditors and with the International Monetary Fund.

Without an increase in credit, Greek banks are in imminent danger of running out of cash to dispense to depositors. They are unlikely to open tomorrow, despite promises to the contrary by Athens.

“The Greek no puts the European Central Bank in a most difficult position,” Holger Schmieding, chief economist at Berenberg, a German bank, said in a note to clients. “We look for the E.C.B. to tread very cautiously, though, perhaps even seeing to it that small amounts of euro cash could still be withdrawn from Greek cash machines for a while until the political outlook becomes clearer.”

In other words, the historic "Oxi" vote by the Greek people means nothing to ECB apparatchiks. This attitude is also prevalent in Brussels where James Kanter quotes European Commission VP Valdis Dombrovskis saying "Oxi" will make things worse for Greece:

“The commission is ready to continue its work with Greece,” Mr. Dombrovskis told a daily news conference in Brussels. “But to be clear, the commission cannot negotiate a new program without a mandate from the Eurogroup.” 

Mr. Dombrovskis was referring to the name of the group of finance ministers from countries that use the euro.

The hurdles to a formal resumption of talks, including any official decision by the Eurogroup to begin negotiations on Greece’s third international bailout in five years, were high, Mr. Dombrovskis warned.

“The ‘no’ result unfortunately widens the gap between Greece and other eurozone countries,” he said. 

“There is no easy way out of this crisis,” he added. “Too much time and too many opportunities have been lost.”

Once again, to the eurozone power elite the "Oxi" vote means nothing; in fact, worse than nothing. The democratic referendum, we are told, has raised the costs of the any new bailout deal by tens of billions of euros.

What the "Oxi" vote reveals is the weakness of the "big lie." Greek voters saw clearly what was happening: Banks were shut because the European Central Bank capped ELA when Tsipras called the referendum. The ECB did this in an attempt to shock Greeks and stampede them in the direction of a Yes vote. It failed stupendously. Now, as Krugman outlines in his column, "Ending Greece’s Bleeding," for the ECB to increase ELA would be to acknowledge that the cap on lending was a political intervention meant to topple Greece's Syriza-led government:

The most immediate question involves Greek banks. In advance of the referendum, the European Central Bank cut off their access to additional funds, helping to precipitate panic and force the government to impose a bank holiday and capital controls. The central bank now faces an awkward choice: if it resumes normal financing it will as much as admit that the previous freeze was political, but if it doesn’t it will effectively force Greece into introducing a new currency. 

Specifically, if the money doesn’t start flowing from Frankfurt (the headquarters of the central bank), Greece will have no choice but to start paying wages and pensions with i.o.u.s, which will de facto be a parallel currency — and which might soon turn into the new drachma.

But the big lie must be protected. That is all neoliberalism is at this point. Krugman is not sanguine about the possibility of a new debt deal emerging quickly; and without this, Krugman sees no better alternative for Greece than abandoning the euro:

In the failed negotiations that led up to Sunday’s referendum, the central sticking point was Greece’s demand for permanent debt relief, to remove the cloud hanging over its economy. The troika — the institutions representing creditor interests — refused, even though we now know that one member of the troika, the International Monetary Fund, had concluded independently that Greece’s debt cannot be paid. But will they reconsider now that the attempt to drive the governing leftist coalition from office has failed?

I have no idea — and in any case there is now a strong argument that Greek exit from the euro is the best of bad options.

Of course, Greece no longer has its own currency, and many analysts used to claim that adopting the euro was an irreversible move — after all, any hint of euro exit would set off devastating bank runs and a financial crisis. But at this point that financial crisis has already happened, so that the biggest costs of euro exit have been paid. Why, then, not go for the benefits? 

Would Greek exit from the euro work as well as Iceland’s highly successful devaluation in 2008-09, or Argentina’s abandonment of its one-peso-one-dollar policy in 2001-02? Maybe not — but consider the alternatives. Unless Greece receives really major debt relief, and possibly even then, leaving the euro offers the only plausible escape route from its endless economic nightmare.

And let’s be clear: if Greece ends up leaving the euro, it won’t mean that the Greeks are bad Europeans. Greece’s debt problem reflected irresponsible lending as well as irresponsible borrowing, and in any case the Greeks have paid for their government’s sins many times over. If they can’t make a go of Europe’s common currency, it’s because that common currency offers no respite for countries in trouble. The important thing now is to do whatever it takes to end the bleeding.

Basically we are back to where we were when negotiations first started between Greece and the troika. Absent significant debt write-offs there appears to be no rational alternative to a Grexit.

But a Grexit doesn't appear to be Tsipras' goal; axing Varoufakis is proof of that (though the finance minister didn't seem too broken up about it; at the end of the day, a scholar prefers the quiet of the cloister). Why the troika doesn't grab at the offer Tsipras made last Wednesday after Greece failed to make its repayment to the IMF and be done with the crisis can only be explained by a perception in Brussels, Berlin, and other European capitals (not to mention Washington D.C.) that protecting the big lie of neoliberalism -- at all costs -- is paramount, and this demands that a leftist party like Syriza must go.

Greece Has Already Won

Well, after half a year of negotiations, a time when the positions of the parties seemed to change not at all, we suddenly have quite a bit of movement.

On Friday, Greek prime minister Alexis Tsipras called for a public vote on the troika-creditor-institutions' take-it-or-leave it offer, an offer that included pension cuts that Syriza came to power explicitly rejecting.

Yesterday the troika-creditor-institutions rejected a one-week extension on loans coming due in order to allow the Greek government to conduct the referendum on July 5.

This morning the European Central Bank (ECB) announced that it will freeze Emergency Liquidity Assistance (ELA) to the Greek banking system. Given that lines have formed at ATMs since Tsipras' announcement of a referendum on Friday, for the ECB to freeze ELA puts the ball back in Syriza's court. Tsipras will now or very shortly have to impose a bank holiday and then capital controls.

Greek finance minister Yanis Varoufakis posts this morning on his blog a summation of the breakdown in talks in Brussels, "As it happened – Yanis Varoufakis’ intervention during the 27th June 2015 Eurogroup Meeting," which he prefaces as follows:

The Eurogroup Meeting of 27th June 2015 will not go down as a proud moment in Europe’s history. Ministers turned down the Greek government’s request that the Greek people should be granted a single week during which to deliver a Yes or No answer to the institutions’ proposals – proposals crucial for Greece’s future in the Eurozone. The very idea that a government would consult its people on a problematic proposal put to it by the institutions was treated with incomprehension and often with disdain bordering on contempt. I was even asked: “How do you expect common people to understand such complex issues?”. Indeed, democracy did not have a good day in yesterday’s Eurogroup meeting! But nor did European institutions. After our request was rejected, the Eurogroup President broke with the convention of unanimity (issuing a statement without my consent) and even took the dubious decision to convene a follow up meeting without the Greek minister, ostensibly to discuss the “next steps”. 

Can democracy and a monetary union coexist? Or must one give way? This is the pivotal question that the Eurogroup has decided to answer by placing democracy in the too-hard basket. So far, one hopes.

Varoufakis makes several substantive points. He basically outlines why it is the Greek government wants to hold a referendum: because the troika-creditors-institutions' take-it-or-leave-it offer is an "austerian" proposal that covers a mere five months and therefore guarantees no stability; the Syriza-led government commanded a 40% plurality of the vote last January; hence, the public needs to be consulted. Here is where Varoufakis' statement gets very interesting:

On the question that will be put to the Greek people, much has been said about what it should be. Many of you tell us, advise us, instruct us even, that we should make it a Yes or No question on the euro. Let me be clear on this. First, the question was formulated by the Cabinet and has just been passed through Parliament – and it is “Do you accept the institutions’ proposal as it was presented to us on 25th June in the Eurogroup?” This is the only pertinent question. If we had accepted that proposal two days ago, we would have had a deal. The Greek government is now asking the electorate to answer the question you put it to me Jeroen – especially when you said, and I quote, “you can consider this, if you wish, a take or leave it proposal”. Well, this is how we took it and we are now honouring the institutions and the Greek people by asking the latter to deliver a clear answer on the institutions’ proposal.

To those who say that, effectively, this is a referendum on the euro, my answer is: You may very well say this but I shall not comment. This is your judgement, your opinion, your interpretation. Not ours! There is a logic to your view but only if there is an implicit threat that a No from the Greek people to the institutions’ proposal will be followed up by moves to eject Greece, illegally, out of the euro. Such a threat would not be consistent with basic principles of European democratic governance and European Law.

To those who instruct us to phrase the referendum question as a euro-drachma dilemma, my answer is crystal clear: European Treaties make provisions for an exit from the EU. They do not make any provisions for an exit from the Eurozone. With good reason, of course, as the indivisibility of our Monetary Union is part of its raison d’ etre. To ask us to phrase the referendum question as a choice involving exit from the Eurozone is to ask us to violate EU Treaties and EU Law. I suggest to anyone who wants us, or anyone else, to hold a referendum on EMU membership to recommend a change in the Treaties.

These debt negotiations have always been primarily political and much less about the technicalities of repayment. The IMF itself, the institution that Tsipras has singled out for making unreasonable demands of sacrifice by the Greek people, has acknowledged that austerity has damaged the Greek economy. But neoliberal orthodoxy foresees a low-growth future where the only guaranteed profits to be had are in the further cannibalization of the public sector. Syriza's people first mantra is an existential threat to the neoliberal hive mind.

Since negotiations began this past winter the goal of the parties has been to make the other side throw the first punch and appear as the aggressor. So, given this framing, I think Greece has already won. The troika-creditors-institutions refuse to allow an extra week for a public vote. They have ended negotiations. What are they afraid of?

Clearly the fear is of democracy. As Varoufakis notes above, Syriza would pose the question as a Yes or No on the eurogroup's proposal of June 25th, not on whether to stay in the eurozone. The short run up to the vote next Sunday would not allow for the necessary fearmongering and manipulation to sway the electorate, as the neoliberal orthodoxy was able to do last September in the Scottish referendum on independence. The troika-creditors-institutions saw this and denied the public vote, and have now frozen ELA to force Syriza to implement capital controls, as was done in Cyprus. The hope in the eurogroup is that Syriza will then lose popular support, forcing Tsipras back to the negotiating table humbled.

The troika-creditors-institutions wants Syriza broken and discredited; absent that, they want Greece out of the eurozone. Capital controls are not the end of the world. Cyprus survived. Greece will too.

Greek Debt Negotiations to Muddle Along, But Things Actually Looking Up for Syriza

It is Monday morning which must mean that there is a meeting in Brussels between eurozone finance ministers and Yanis Varoufakis' Greek negotiating team. Tomorrow is the deadline for repayment of 750 million euros to the IMF. Last week Varoufakis said Greece would make the repayment. The ever-skeptical Yves Smith of Naked Capitalism is not so sure. As she argues in her post today, "Greece Finally Threatens Default as Deal with Creditors Remains Remote,"

The ruling Greek coalition appears to have finally woken up to the fact that it it cornered. As we indicated, the longer the creditors keep Greece in the sweatbox, the more its popularity is destined to decline. 

While the latest polls still show Syriza as the most popular party, its support is now at 36%, a round trip from a huge surge after the government took office to back to where it stood when it was voted into office. Approval ratings of the government’s strategy have dropped precipitously from the very high levels reached shortly after the new government took office. As e pointed out early on, the best strategy for the creditors was simply to remain non-negotiable. Either Syriza would capitulate to their demands, or the government would lose support, paving the way for the return of a more complaint coalition. Syriza appears to realize that following the inertial path of trying to extend its negotiating runway does not work in its favor. Even if Greece were to pull a rabbit out of the hat and make the €750 million IMF payment, it has a total of €1.5 billion coming due to the IMF in June, which it almost certainly can’t satisfy if it fails to unlock the bailout funds.

Yves Smith seems to think that Syriza can either make the IMF payment tomorrow and risk having to issue scrip to pensioners and government workers at the end of the month, or it can stiff the IMF, a course of action that would not immediately precipitate default and Grexit. As Smith explains:

The situation is more fluid than it appears. The odds are high that blame game political calculations will win over sound policy. We’re already seeing jockeying starting to take place. Notice Schauble’s “justifiable conditions” caveat. He’s made clear repeatedly that he’d just as soon see Greece leave the Eurozone, but no one, particularly Merkel, wants to be seen to have pushed Greece out. Thus if Greece plays its cards so it can be depicted to have brought the default (and if it comes to that, an exit), that works to the advantage of the hardliners who see Greece as disposable and believe a default/possible exit can be made painful enough for the Greek people so as to make any other country that might contemplate leaving the Eurozone to see that alternative as too costly.

Despite the continued impasse, and virtual certainty of a default on Tuesday [!], the creditors have quite a lot of choices and options. For instance, despite the IMF’s tough talk about not giving Greece any grace period on a default, an IMF default is not as fine a trigger event at a private sector bond default. As the Financial Times explains:

But that hard line masks a little wiggle room created by the IMF’s own procedures. Under the official timeline plan, it is not until a month after a missed payment that the managing director formally notifies the board and not until three months afterwards that a formal statement to the outside world is expected to be made.

In other words, even if Greece defaults on the loan repayment to the IMF, things can continue to muddle along as they have. The June repayments are larger than this month's. But if missed payments can play out over months before a default is officially declared, there is no reason why this can't repeat itself next month.

In the Business section of today's "newspaper of record" is a slightly more sanguine treatment of the Brussels negotiations. Peter Eavis, Jack Ewing and Landon Thomas, "I.M.F. and Central Bank Loom Large Over Greece’s Debt Talks," see a chink in the troika's armor, and it is not the wiggle room on IMF repayments; it is the risk aversion of the European Central Bank:

It would of course also be a high-stakes gamble for Greece to do anything that could undermine relations with the central bank, which is shoring up Greece’s banking system. It has lent Greek banks more than €110 billion, cash the lenders need to operate but would have trouble raising on international money markets. 

The support to the banks is not the debt that the officials in the Greek government would consider for default. Instead, the idea would be to not repay Greek government bonds held by the central bank. Greece is scheduled to repay nearly €7 billion on those this summer. 

If the Greek banks could not repay their central bank loans, the losses would be passed on to other eurozone countries. An outcry would come from Germany and other countries already fed up with what they regard as Greece’s misbehavior. The central bank’s credibility — probably a central bank’s most important asset — could be damaged. 

Still, the central bank’s deep caution about financial stability would most likely limit how hard it pressed Greece. As the guardian of the single currency, the central bank may not want to do anything that could set off a chain of catastrophic events in Greece’s banking sector that could lead the country to quit the euro. 

“The E.C.B. does not want to be responsible for precipitating a crisis,” said Mujtaba Rahman, practice head for the European Union at Eurasia Group, a political consultancy. “They are very, very concerned about having blood on their hands.”

I know at the end of April when last I wrote about this I said climax was near. Then it looked impossibile that Varoufakis could scrape together the 750 million euros due the IMF on May 12. At the time there was the brouhaha over Varoufakis' obstreperousness; things seemed to be at an unbridgeable impasse and something was going to fracture. But then Tsipras organized a deft cosmetic reshuffling of the bargaining team, with Varoufakis nominally sent to the sidelines, and that seemed to cool things down. Also, I had no idea just how wide the nonpayment wiggle room to the IMF is. Things can continue to go on as they have for months.

Syriza will get some rhetorical help from the Scottish National Party blasting away at austerity. And there is evidence that the U.S. is extremely jealous of Russian pipeline overtures to Greece. So all in all I am more hopeful of some sort of resolution that favors Greece than I have been in months.

Neoliberalism Triumphant

The post-mortem on Greece's clash with eurozone finance ministers, the International Monetary Fund and the European Central Bank over terms of its bailout is either a wash (Jim Yardley, "In Greek Crisis, Rare Moment of Consensus") or a loss for Greece (Yves Smith, "ECB and IMF to Greece: No Escaping the Austerity Hairshirt."

Both agree that the can has been kicked down the road and now the Syriza-led government of prime minister Alexis Tsipras has very little room to maneuver, caught as it is between promises to restore pension benefits, collective bargaining rights and undo privatization while it has just signed on the dotted line to implement the troika's structural adjustment which is predicated on cutting pension benefits, rolling back labor laws and fast-tracking privatization.

The collapse of the eurozone, as I had hoped for, does not seem to be in the offing. Neoliberalism remains the dominant paradigm. Despite the planetary crisis of climate change and the spread of war, a forty-year-old paradigm (a decade older than the social-democratic consensus that governed the West following World War Two) shows no sign of giving way to something different. There is no significant rival ideology in the West to neoliberalism. Syriza, a throwback to what would be considered a standard social democratic party of the 1950s and 1960s, had its momentum killed in Brussels.

The only counter to neoliberalism is the epiphenomenon of Wahhabism. One begets the other, a yin and yang thing.

But there is always the problem of overreach. The U.S. overreached in Ukraine. And it can't seem to admit defeat. Next up is Iran, the conclusion of negotiations on its nuclear program and Netanyahu's coronation in Congress.

"Syriza is the Only Game in Town"

From time to time we among the news-consuming public are treated to a focusing of the lens that reveals a basic conflict, a sort of good guys versus bad guys, the outcome of which might change before our eyes the world we live in. Cyprus vs. the troika at the beginning of 2013 is an example. It looked for a moment there as if the eurozone might come tumbling down, of which I was in favor because it seemed to me that rather than providing an alternate model of the dominant race-to-the-bottom neoliberalism of the United States, the European Union was copying it, hollowing out the rich social democracies of its member nations.

After Cyprus there was Syria in the summer of 2013. A false flag chemical attack in a Damascus suburb was meant to launch a saturation bombing campaign led by the U.S., the idea being to drive out the ruling Baathists and carve up Syria, re-crafting Sykes-Picot. The Russians intervened with some deft diplomacy, the result of which was that the U.S. would call off its air power campaign in exchange for al-Assad giving up all of Syria's chemical weaponry. This so incensed the Saudis that Islamic State was given the "Go" signal. By the next summer we had a version of the Sykes-Picot reboot that the Gulf sheikhdoms were hankering after all along.

Also last summer there was Cold War 2.0. It looked for a while like the rebels of the Donetsk People's Republic and Luhansk People's Republic were going to smash so thoroughly the Ukrainian military that the junta in Kiev might collapse. Then there was the Minsk ceasefire in September. Now that fiction has evaporated and we are back to where we were last summer with "boilers" in the Donbass and the junta military getting its clocked clean.

Right now the good guys vs. bad guys narrative moment of clarity has to do with Greece's new Syriza-led government. Since its convincing election victory ten days ago, Syriza's leader Alexis Tsipras has stepped back from the international limelight and finance minister Yanis Varoufakis has stepped forward.

Varoufakis has been seemingly everywhere of late, parrying with BBC talking heads and eurogroup chief Jeroen Dijsselbloem, flying to Paris to meet with France's finance minister, all in an attempt to break the stranglehold that German-dictated austerity has on the continent.

Yves Smith of Naked Capitalism has been following these perambulations and, despite the outpouring of joy from the Western left that greeted Syriza's election, she has been bearish on Syriza's chances of achieving its aims, i.e., restoring social spending and collective bargaining rights, halting privatization, negotiating a debt jubilee with Greece's creditors.

Smith's post this morning, "Greek Finance Minister Varoufakis Retreats on Debt Writedowns, Public Spending Promises," is a good example:

We’ve said that Greece had a weak negotiating position in trying to get a better deal from its creditors. That is playing out before our eyes. Greek Finance Minister Yanis Varoufakis has stepped down some of his early proposals even before formal talks have begun. This is a sad but predictable situation, since the Germans and the other members of the northern bloc are not at all willing to cut Greece much if any slack, since that would lead bigger, more powerful countries to try to slip the yoke of austerity.

The tragic thing about this situation is that Varoufakis is simply describing economic reality and has a number of sound ideas for how to make conditions better for Greece, which in the end will also lead to better results for its lenders. Yet he has run into a massive, if predictable wall, with his willingness to make unvarnished descriptions of the obvious, abject failure of Eurozone economic policies regularly depicted as “confrontational”. One reason Varoufakis may be going this route is to use his newfound high profile to send a message to voters and anti-austerlity politicians throughout Europe, since as we have stressed, the more popular anti-austerity and anti-Eurozone parties become, the more even the Germans will have to fear.

The Germans have a short-sighted view of the stakes. With the ECB holding a sword of Damocles over the Greek banking system, in terms of its ability to cut off access to emergency liquidity facilities, and Syriza and Varoufakis personally having rejected a Grexit, they can dictate terms. In their eyes, the only reason to cut Greece any slack is that, as Varoufakis keeps stressing, Syriza is the sole party that is not loyal to Greek’s oligarchs. If they want corruption tamped down and the tax system cleaned up, Syriza is the only game in town.

Today in a Financial Times interview, Varoufakis walked back his negotiating ask for debt cancellation, instead proposing a series of “debt swaps” that would achieve more or less the same result. He was more obvious that might have been ideal in stating that he regarded this as a fix to placate Germany. From the Financial Times, which broke the story:

Greece’s radical new government revealed proposals on Monday for ending the confrontation with its creditors by swapping outstanding debt for new growth-linked bonds, running a permanent budget surplus and targeting wealthy tax-evaders…

Attempting to sound an emollient note, Mr Varoufakis told the Financial Times the government would no longer call for a headline write-off of Greece’s €315bn foreign debt. Rather it would request a “menu of debt swaps” to ease the burden, including two types of new bonds.

The first type, indexed to nominal economic growth, would replace European rescue loans, and the second, which he termed “perpetual bonds”, would replace European Central Bank-owned Greek bonds.

He said his proposal for a debt swap would be a form of “smart debt engineering” that would avoid the need to use a term such as a debt “haircut”, politically unacceptable in Germany and other creditor countries because it sounds to taxpayers like an outright loss.

But there is still deep scepticism in many European capitals, in particular Berlin, about the new government’s brinkmanship and its calls for an end to austerity policies.

“What I’ll say to our partners is that we are putting together a combination of a primary budget surplus and a reform agenda,” Mr Varoufakis, a leftwing academic economist and prolific blogger, said. “I’ll say, ‘Help us to reform our country and give us some fiscal space to do this, otherwise we shall continue to suffocate and become a deformed rather than a reformed Greece’.”

In a more sophisticated undercutting of Varoufakis than the disgraceful BBC interview of last week, a Financial Times video embedded in the article features a commentator discussing Varoufakis’ progress thus far. The segment depicts Varoufakis as being confrontational and as not having gotten on well with the UK chancellor of the exchequer, and also focuses on the flight of financial assets from Greece and its falling stock market. Does it not occur to anyone that a substantial portion of the money exodus is that of those very oligarchs that Syriza has threatened? The rest of the EU says they want the country cleaned up, yet they attack Syriza for the predictable results of their seriousness.

But while it may seem trivial for them to get their way with Greece, this victory is likely to be Pyrrhic. The more it becomes obvious that the northern countries will keep inflicting pain on Greece out of a desire to keep a bad status quo intact, the more the other victims in better bargaining positions (by virtue of having larger economies and even more fractious voters) are likely to escalate. Indeed, Varoufakis, by challenging the Troika on so many fronts, is conveying a powerful message that subservience is neither necessary nor desirable. No wonder the technocrats are out to discredit him personally.

Ambrose Evans-Pritchard argues that Greece holds the trump cards. Here I disagree. With de facto control over Greece’s banking system, the ECB can bring Greece to heel. We’ll see if the ECB imposes any conditions on its approval of the Greece’s request to use ELA funds on Wednesday. If they are anything other than cosmetic, that means the ECB is supporting the northern countries and is determined to box Syriza in. But I do agree that in a longer time frame, Germany is losing. The problem is it may not lose quickly enough for Greece to get the relief it desperately needs. 

Interestingly, right after Syriza won the election all the talk was that the troika would extend the bailout program set to expire on February 28. Nothing of the sort materialized, and last week Varoufakis staked out the position that Greece would not accept the bailout funds because doing so would lock the country into conditions the new government rejects.

Now, following the post-election bank runs, Smith sees a lot of importance in what position the European Central Bank will take Wednesday regarding Greece's request for Emergency Liquidity Assistance. According to Smith, the game for the Syriza can be up pretty much by tomorrow if the ECB demands onerous conditions to access ELA money.

My sense is that Syriza is shrewder and tougher than Smith is willing to credit. At this point "There Is No Aletrnative" to a party like Syriza, other than, given time, one more to the left or the far right. Varoufakis, it seems to me, is waiting for the troika to overplay its hand. And so far this seems to be transpiring, which is having the effect of radicalizing the public. The point is that the general populous has to be moved from its false consciousness to one that is more real, more radical. That is happening. But as Smith asks, Will Syriza have enough time?

Cyprus Synopsis

The Cyprus bailout crisis is retold this morning by Liz Alderman in a story, "Cypriots Feel Betrayed by the European Union," that focuses on an average Joe, Charalambos Alexandrou, who owns a roofing business, and his wife, Aliki Perganti, who works for a ceramics company. The contours of a standard narrative are taking shape. Cyprus joins the EU in 2004; the eurozone, in 2008. In doing so, it moves away from agriculture and manufacturing and refashions itself along the lines of Switzerland and Luxembourg as a strategic money hub uniquely situated to serve Europe, Asia and the Middle East. And the money flows in, creating a real estate boom. Then in 2010 the chickens come home to roost. Risky loans begin to default. The coup de grace is the haircut on Greek government bonds the Cypriot banks are forced to take as part of the troika engineered bailout of Greece. When it was Cyprus' turn to go hat in hand to the troika Germany made sure, because of an intelligence assessment that Cypriot banks were flush with ill-gotten Russian wealth, that any bailout would have to include a bail-in, a.k.a., inflicting pain and suffering on depositors. As Alderman says,

And with losses of up to 60 percent being imposed on deposit accounts above 100,000 euros at the Bank of Cyprus, [Charalambos Alexandrou] said, even many of his friends — not just Russian oligarchs — were losing big portions of savings they so diligently tucked away during the good years.

An unsigned editorial in today's Opinion section of the New York Times, "Cyprus Is Not an Exception," points out that in the eurozone it's not just Cyprus that has a banking sector that is at a large multiple of GDP; both Malta and Luxembourg have banking sectors that are larger than Cyprus':

Luxembourg and Malta, which have established themselves as tax havens serving big global corporations and the superrich, have banking systems that are even larger. Luxembourg’s bank assets are a staggering 22 times its gross domestic product, and Maltese bank assets clock in at eight times the size of its economy. 

Leaders of both countries have insisted that they should not be compared with Cyprus and that they expected European leaders to stand behind their governments and banks come what may. Speaking of his banking system, the finance minister of Luxembourg, Luc Frieden, said: “We want to expand it further, not to downsize it.” 

Banks in Luxembourg and Malta, many owned by big European and American financial firms, are healthier than those in Cyprus, according to the International Monetary Fund. But the I.M.F. raised concerns about the ability of the countries to properly monitor their banks or support them in a crisis. In other words, the euro zone and the I.M.F. would have to step in to bail them out if they ran into trouble. 

In any case, the euro zone needs urgently to finish work on a banking union that would allow the European Central Bank to supervise large banks instead of leaving that task to national policy makers who may be too protective of their banks. Europe should also have a common process to restructure troubled banks, which should reduce the risk of Cyprus-like debacles. A banking union would also give savers more confidence that their insured deposits are truly guaranteed, an assurance that was deeply shaken by what happened in Cyprus. 

Thankfully, the crowds were not as big and chaotic as people had feared when banks in Cyprus reopened last week after for two weeks — but only after the country imposed tough capital controls to prevent depositors from fleeing. Europeans may not be as lucky next time.

There seems to be a lot of clucking satisfaction from those who championed the view that Cyprus was a little one-off that so far there is no evidence of a run on banks. I say it's early yet. People are still in shock. Events are still unfolding in Italy. Give it some time.

Troika Tough Love

The news out of Cyprus this morning is not encouraging. Proposals -- such as issuing new bonds based on the confiscation of state-run pension funds or using Church of Cyprus property as collateral to issue new bonds or selling offshore gas exploration rights to Gazprom -- cobbled together to satisfy troika (ECB, IMF and the European Commission) demands to raise 5.8 billions euros seemed to have fallen flat. The ECB, from a story this morning by Liz Alderman, proclaimed that if by Monday there is no deal it will cut off funding. According to a naked capitalism post this morning, "ECB to Push Cyprus over the Brink,"

This is tantamount to cutting off its central bank and pushing it out of Eurozone if it does not capitulate. 

During the day yesterday, Eurozone officials made it clear that they would not accept some other ideas that Cyprus had developed to try to shield depositors, such as accessing pensions fund assets, restructuring the two largest banks, and selling its gas rights to Russia. This was deemed unacceptable in that it would increase debt levels. The fallacy, of course, is that the Trokia is unduly obsessed with the numerator of this equation (the borrowings) and not the denominator (the impact on the economy). Cyprus.com estimates the impact of trashing the banking system to be a minimum 20% contraction of GDP in two years. And mind you, this is after Cyprus was a good Eurozone citizen and sent €3 billion to help the Greek government.

The ECB has given Cyprus virtually no runway. It’s a deal by end of Monday or off with their heads. Given the difficulty of cobbling anything else together, this would seem to force Cyprus into only being able to structure yet another variant of the “rape depositors” plan. They seem either to rely on a reaction like the US had to the TARP, to having Congress capitulate after the markets swooner, or perhaps they sincerely believe that even a worse case scenario, of dumping Cyprus out of the Eurozone, is acceptable because it will tell all those lazy Latins that they’d better not even think of crossing the Troika. (It’s inconceivable that a forced Cyprus exit would not lead to deposit flight from Portugal and Spain, which will pressure the Eurozone tremendously. They’ve really drunk their own “Cyprus is a special case” PR if so.)

According to Alderman people are already queuing up in front of ATMs this morning in Nicosia:

Meanwhile, the mood turned sour on the streets of Nicosia, the Cypriot capital, where people flocked to cash machines Thursday morning to withdraw as much money as possible after the government declared that banks would remain closed until next Tuesday to give officials time to renegotiate the bailout deal.

The tough love approach that the troika is taking with Cyprus only makes sense as homeopathic quakery. Take a tiny member of the eurozone and implement a bank levy. When the patient, the eurozone, survives the patient will be healthier. Then move on to the next country and repeat the cure. The gamble here is that bank runs can be contained.