The Euro Is Not Unassailable, Even With The ECB’s Bond Buying

By Marshall Auerback

There appears to be an emerging consensus that the euro will survive, especially now that Mario Draghi has apparently grasped the nettle and persuaded his colleagues that the ECB is prepared to initiate unlimited purchases of national government bonds in order to underwrite their solvency.  Of course, as usual
with the ECB, there’s a sting in the tail, the sting being additional “conditionality” (for which one can read more fiscal austerity) as a quid pro quo.  It’s like dealing with Hannibal Lecter.

Greece is the implied fate of anybody who dares to flout the rules.   Maybe the country isn’t washed down with a Chianti and some fava beans, but it’s getting pretty close.  And whilst nobody wants to appear to be the triggerman who finally kills off Greek membership in the currency union, the country is increasingly being placed in an untenable position, which will almost certainly set it up for future failure.

The problem is that the currency union is only as strong as its weakest link. Lopping off the weakest part of the Eurozone is not akin to removing a cancerous lesion from an otherwise healthy body, but more like the puncturing of an important blood vessel, which could well destroy the patient. True, Greece has been historically ridden with corruption and tax evasion (a recent report from the organisation, “Global Financial Integrity” – suggests that the Greek economy lost US$261 billion to crime, corruption, and tax evasion from 2003-2011).

But the country has more recent made strenuous efforts to cut its deficit is by cutting public sector wages and pensions, a step that has exacerbated the size of its public deficits by decreasing incomes and employment. Were Greece to leave the Eurozone, it is almost certain that speculators would move to pick off another member country—Portugal, Italy, or Spain— all of which could face the same metaphoric fate as Hannibal Lecter’s victims. And so it goes.

Of course, the idea at this stage isn’t to rescue Greece. It is to provide an abject lesson to any other country which in the future considers flouting the country’s perverse rules. According to a recent report in the Guardian, the eurozone creditors are now saying the Greek government must tighten the universal neoliberal screws even further by imposing a six day work week and perhaps reducing wages as well, as a condition for the Greeks getting another “bailout.” Of course, unemployment and underemployment in Greece are rising rapidly, so it is hard to see how extending the work week for the already employed can be the kind of “tough love” that will create an increase in the total number of jobs or improve the economy. In the creditor’s eyes, however, that is unimportant; the real problem is Greece’s dysfunctional culture of work and profligacy.

So the neoliberal policy solution for turning around the Greek economy is to improve the culture of work is to introduce a kind of debt peonage by taking the Greeks back to the 19th Century. Arbeit macht frei? And what happens when the six-day workweek and wage reductions do not work, as they inevitably won’t? What comes next? Charles Dickens knew the answer — improve the culture of work by relaxing child labour laws to reduce wages further and/or privatize the Aegean islands, Delphi, and the Acropolis. No problem.

Greece, to be sure, has its share of self-inflicted economic problems, but austerity economics is pushing Greece into a death spiral. Europe is cutting its nose to spite its face as it convert one Eurozone economy after another into a barter state. One already sees that with Spain as well. As the Toronto Globe and Mail’s Eric Reguly has noted, Madrid is being mauled by a double-dip recession, imminent bank bailout, yawning budget deficit and soaring jobless rate:

“But things are even worse than they appear because Spain’s capital flight has quietly gone from bad to dire. Fortunes are fleeing the country as the economy deteriorates and as investors and bank customers worry that Spanish banks will not survive the onslaught. They also fear that the country’ use of the euro is not guaranteed. If you believe the peseta is about to make an inglorious return, you do not want your precious euros sitting in Spanish deposit accounts.”

That’s our old friend, the bank run, which still remains unaddressed. The ECB’s proposed bond buying program may ultimately address the solvency issue because it remains the only currency-issuing institution that can act like the federal governments in Canada and the US. But its means of enforcement is perverse:  it is as if the US threatened Mississippi with expulsion if the state didn’t learn to “leave within its means”, to employ one of the German Chancellor’s favourite “Merkelisms”.

As Bill Mitchell has noted, the likes of Jens Weidmann might be threatening to resign as the BuBa head if the ECB continues to run its Securities Market Program (buying trouble government’s debt on the secondary markets) but he cannot deny the reality that the SMP and other ECB fiscal-type interventions has been the only reason why the euro hasn’t vaporised just yet. One wonders, however, what kind of salvation this presents for those countries which endure the ongoing rigors of austerity.

The problem is that the renewed bond buying will be tied to the conditionality of yet more fiscal austerity, and Greece is being held up as the poster boy of what happens when you don’t comply with the conditions laid out by the ECB, or the Troika. In addressing the solvency issue, the ECB’s conditionality ironically will make the very “problem” of fiscal profligacy and higher government deficits much worse, as demand gets crushed by yet more austerity. In effect, one is left with the Scylla of a quick death via exit from the euro zone, or death via slow strangulation of aggregate demand via the fiscal austerity conditionality laid out by Mario Draghi today. Pick your poison.

10 responses to “The Euro Is Not Unassailable, Even With The ECB’s Bond Buying

  1. Jose Guilherme

    “The problem is that the renewed bond buying will be tied to the conditionality of yet more fiscal austerity”.

    Exactly. The Draghi solution seems to be to have the ECB buying periphery bonds and as a quid pro quo the Central bank will from now on get to dictate the fiscal policies of the “south”.

    The big question then is whether and how long the PIIGS will be willing and able to withstand the punishment of austerity in order to stay within the euro.

    Great analysis by Marshall Auerback.

  2. Pingback: The euro zone can still blow up even after unlimited purchases | Credit Writedowns

  3. It’s all about wage suppression, the capitalists’ dream.

    • @ Tom Hickey
      It’s all about wage labour suppression, the capitalists’ WET dream.

      There, fixed it. No Charge

  4. Pingback: The Euro Is Not Unassailable, Even With The ECB’s Bond Buying « Abnormal Capitalist

  5. I doubt Germany will ever let Greece leave the Euro. Despite the immediate pain of a default, a post Euro Greece would almost certainly return to growth within a few months, setting an example for other countries by revealing the Big Lie at the center of austerian economics. The people of Portugal, Italy and Spain would then be forced to passively watch an expanding Greek economy while they contemplate a decade or more of recession under Troika diktat. It’s not a sustainable situation, and it’s one that Germany and the IMF will do anything to avoid. So we can look forward to endless fudges, compromises, last minute rescue programs and ECB interventions. Anything but a clean break for Greece.

  6. Great article. Problem is we all know the script, step by step they’re led down the path to debt peonage and slavery, but we can’t seem to stop it as it seems to have a momentum all its own. Flailing away trying to find answers –

  7. Typo: “It is to provide an abject lesson to any other country which in the future considers flouting the country’s perverse rules.”

    Should be “object lesson.”

  8. For an example of a free Greece, see Iceland. This is the way out, in different flavors for each country for all of the PIIGS, and some others, too.

  9. Erick Borling

    Jim, “abject lesson” is the right word choice. Austin, if Greece decided as a soverign nation to depart the Eurozone then Germany cannot stop it. In today’s news we hear of Greeks warring among themselves because they are unaware of their true enemy; ignorance about how their currency system works and the way out of their Misery. Greece needs to exit the Euro now. Nothing but good will come of it. …and the deficit scolds of the world will be made the town-idiot.