By Ambrose Evans-Pritchard 13 July 2015
A new deal for Athens is the worst of all worlds and solves nothing
Like the Neapolitan Bourbons – benign by comparison – the leaders of the Eurozone have learned nothing, and forgotten nothing.
The cruel capitulation forced upon Greece after 31 hours on the diplomatic rack offers no conceivable way out the country’s perpetual crisis. The terms are harsher by a full order of magnitude than those rejected by Greek voters in a landslide referendum a week ago, and therefore can never command democratic assent.
They must be carried through by a Greek parliament still dominated by MPs from Left and Right who loathe every line of the summit statement, the infamous SN 4070/15, and have only agreed – if they have agreed – with a knife to their throats.
EMU inspectors can veto legislation. The emasculation of the Greek parliament has been slipped into the text. All that is missing is a unit of EMU gendarmes.
Such terms are unenforceable. The creditors have sought to nail down the new memorandum by transferring €50bn of Greek assets to “an independent fund that will monetise the assets through privatisations and other means”. It will be used in part to pay off debts.
This fund will be under EU "supervision". The cosmetic niceties of sovereignty will be preserved by letting the Greek authorities manage its day to day affairs. Nobody is fooled.
'Crucified' Tsipras capitulated to draconian measures after 17 hours of late night talks
In other words, they are seizing Greece’s few remaining jewels at source. This is not really different from the International Committee for Greek Debt Management in 1898 imposed on Greece after the country went bankrupt following a disastrous Balkan war.
A six-power league of bondholders, led by British bankers, impounded customs duties in the Port of Piraeus, and seized revenues from stamp duty, tobacco, salt, kerosene, all the way down to playing cards. But at least there was no humbug about solidarity and helping Greece on that occasion.
“It is the Versailles Treaty for the present age,” said Mr Varoufakis this morning, talking to me from from his island home in Aegina.
Under the new terms, Greece must tighten fiscal policy by roughly 2pc of GDP by next year, pushing the country further into a debt-deflation spiral and into the next downwards leg of its six-year depression.
This will cause the government to miss the budget targets yet again – probably by a large margin – in an exact repeat of the self-defeating policy that caused Greek debt dynamics to spin out of control in the last two Troika loan packages.
As the International Monetary Fund acknowledged in its famous mea culpa, if you misjudge the fiscal multiplier and force austerity beyond the therapeutic dose, you make matters worse. The debt to GDP ratio rises despite the cuts.
EMU leaders have an answer to this. Like Canute’s courtiers, they will simply command the waves to retreat. The text states that on top of pension cuts and tax increases there should be “quasi-automatic spending cuts in case of deviations from ambitious primary surplus targets”,.
In other words, they will be forced to implement pro-cyclical contractionary policies. The fiscal slippage that acted as a slight cushion over the last five years will be not be tolerated this time.
"This goes beyond harsh to pure vindictiveness," says Nobel economist Paul Krugman of the EMU demands
And let us not forget that these primary surpluses never made any sense in the first place. They were not drawn up on the basis of macro-economic analysis. They were written into prior agreements because that is what would be needed – ceteris paribus – to pretend that debt is sustainable, and therefore that the IMF could sign off on the accords. What a charade.
Nobel economist Paul Krugman says the EMU demands are “madness” on every level. “What we’ve learned these past couple of weeks is that being a member of the Eurozone means that the creditors can destroy your economy if you step out of line. This has no bearing at all on the underlying economics of austerity,” he said.
“This goes beyond harsh into pure vindictiveness, complete destruction of national sovereignty, and no hope of relief. It is, presumably, meant to be an offer Greece can’t accept; but even so, it’s a grotesque betrayal of everything the European project was supposed to stand for,” he said.
Yes, Syriza has blinked, though there are many chapters in this sorry saga yet to come.
The Greek banks are on the verge of collapse. There is not enough cash left to cover ATM withdrawals of €60bn each day through this week, or to cover weekly payments of €120 to pensioners and the unemployed – that is the to say, the tiny fraction of the jobless who receive anything at all.
Capital controls have led to an economic stand-still. Almost nothing is coming into the country. Firms are running down their last stocks of raw materials and vital imports. Hundreds of factories, mills, and processing plants have already cut shifts and are preparing to shut down operations as soon as this week.
Late tourist bookings have crashed by 30pc. Syriza faced a serious risk that the country would run out of imported food stocks by end of this month, with calamitous consequences at the peak of the tourist season. So yes, faced with the full horror of what is happening, they recoiled.
You don't need to be an oracle to see that there is more trouble ahead for Greece
There is no doubt that Syriza sold the Greek people a false prospectus with its incompatible promises both to tear up the Troika Memorandum and to keep Greece in the euro. They have learned a horrible lesson.
Yet that is only half the story. We have also watched the EMU creditor powers bring a country to knees by cutting off the emergency liquidity (ELA) to the banking system.
Let there be no doubt, it was the decision by the European Central Bank to freeze ELA at €89bn two weeks ago that precipitated the final crisis and broke Syriza’s will to resist. The lines of authority on this episode are blurred. Personally, I do not blame the ECB’s Mario Draghi for this abuse of power. It was in essence a political decision by the Euro group.
But however you dress it up, the fact remains that the ECB is by its acts dictating a political settlement, and serving as the enforcement arm of the creditors rather than upholding EU treaty law.
It took a stand that further destabilised the financial system of an EMU member state that was already in grave trouble, and arguably did so in breach of its primary treaty duty to uphold financial stability. It is a watershed moment.
What we have all seen with great clarity is that the EMU creditor powers can subjugate an unruly state – provided it is small - by shutting down its banking system. We have seen too that a small country has no defences whatsoever. This is monetary power run amok.
To make matters worse Greek premier Alexis Tsipras cannot make a plausible case to his own people that he has secured debt relief, the one prize that could have saved him. Germany blocked even this.
It did so despite massive pressure from the Obama White House and the IMF, and even though France, Italy, and the leaders of the EU Commission and Council accept that a haircut of some sort is necessary.
The IMF says debt relief must be at least 30pc of GDP. Even this is too low. Given the damage done by six years of economic implosion, a lost decade of investment, chronic hysteresis, youth unemployment of 50pc or higher, a brain drain of the educated, and a ruined banking system, it would still be inadequate even if the entire debt was written off. That is what this EMU experiment has done to the country.
Yet all the Greeks get is vague talk of a “possible” extension of maturities, at some point in the future, once they have jumped through umpteen hoops and passed their exams. This is what they were promised in 2012. It never happened.
“If the specifics of debt relief are not written clearly into the overall package, this is not worth anything,” said Mr Varoufakis.
The summit document asserts with self-serving dishonesty that Greece’s debt has come off the rails due to the failure of Greek governments to stick to the Memorandum over the last year. Had this not occurred, the debt would still be sustainable.
This is a lie. Public debt ballooned to 180pc late last year – long before Syriza was elected – and even though the New Democracy government had complied with most Troika demands.
The truth is that Greece was already bankrupt in 2010. EMU creditors refused to allow a normal debt restructuring to take place because it would have led to instant contagion to Portugal, Spain, and Italy at a time when the Eurozone had no lender-of-last resort or defences.
The crushed Syriza leader must sell a settlement that leaves Greece in a permanent debt trap
Leaked documents from the IMF leave no doubt that the rescue was intended to save the euro and European banks, not Greece. More debt was shovelled onto the Greek taxpayers in order to buy time, both in 2010 and again in 2012, storing up the crisis that Europe faces today.
In an odd way, the only European politician who was really offering Greece a way out of the impasse was Wolfgang Schauble, the German finance minister, even if his offer was made in a graceless fashion, almost in the form of diktat.
His plan for a five-year velvet withdrawal from EMU – a euphemism, since he really meant Grexit – with Paris Club debt relief, humanitarian help, and a package of growth measures, might allow Greece to regain competitiveness under the drachma in an orderly way.
Such a formula would imply intervention by the ECB to stabilise the drachma, preventing an overshoot and dangerous downward spiral. It would certainly have been better than the atrocious document that Mr Tsipras must now take back to Athens.
The crushed Syriza leader must sell a settlement that leaves Greece in a permanent debt trap, under neo-colonial control, and so economically fragile that it is almost guaranteed to crash into a fresh crisis in the next global downturn or European recession.
At that point, everybody will blame the Greeks again, unfairly, and we will go through yet another round of bitter negotiations, until something finally breaks this grim cycle of failure and recrimination.
The deal will leave Greece so economically fragile that it is almost guaranteed to crash into a fresh crisis in the next global downturn
For the Eurozone this “deal” is the worst of all worlds. They have solved nothing. Germany and its allies have for the first time attempted to eject a country from the euro, and by doing so have violated the sanctity of monetary union.
Rather than go forward in times of deep crisis to fiscal and political union to hold the euro together – as the architects of EMU always anticipated - they have instead gone backwards.
They have at a single stroke converted the Eurozone into a hard-peg currency bloc, a renewed Exchange Rate Mechanism that is inherently unstable, at the whim and mercy of populist politicians playing to the gallery at home. The markets are already starting to call it ERM3.
I will return to the behaviour of Germany and the diplomatic disaster that has unfolded over coming days. For now let me just quote the verdict of historian Simon Schama.
“If Tsipras was wearing the crown of King Pyrrhus this time last week, Merkel is wearing it now. Her ultimatum the beginning of the end of the EU,” he said. Exactly.