We were all awaiting whether or not the Greeks are going to get the 2-year extension on their debt obligations or not. The announcement has just come through: the Greeks are not just getting an extension but are to get another 50 billion Euro bailout, of which 40 billion is in reduced debt and 11 billion comes straight from the ECB.
There are a lot of face-saving tricks in the latest bailout. The Germans did not want to openly tell their public that the Greeks will not pay back their debts, so insisted that they don’t take a nominal hit. The solution was to drop the interest rate on the loans, effectively meaning the Greeks pay back less. Same outcome, different label. There is apparently sufficient financial illiteracy amongst the Germans to make this deception politically expedient.
Another trick concerns the budgetary transfer from the ECB of 11 billion. From the ECB, I hear you ask, were they not expressly forbidden from giving any country money? Yes, the ECB is legally not allowed to give direct budget support, but they found a loophole for that one too. The ECB is simply ‘giving back’ the profits it previously made on its Greek bonds. In reality, the ECB has basicallybought up the bonds at a discount from private banks and is giving it directly to the not-so-grateful Greeks.
The Greek finance minister was already celebrating and claiming credit for getting more money for fewer reforms weeks ago, but the Germans took a few extra weeks in getting round to the position of the IMF that the Greeks were never going to pay back and that one hence had to simply write off many of the loans. With stories coming out weekly in the German press now as to just how corrupt the Greek politicians really are, the confidence in yet another set of promised reforms is scant. My position has been for a while now that sending good money to the Greeks is merely prolonging the agony and empowering the very people who should not be in power, so I hoped for the sake of Greece and everyone else that the Northern Europeans would say ‘enough is enough’. Unfortunately the odds were always in favour of muddling through. No-one wanted to be the baddie.
As to the whole financial crisis, the general change in recent months has been as expected: the ECB is gradually given more leeway to print money; nearly everyone now agrees the Greeks are not going to pay back, and other countries (Italy and Spain) will only pay back if you basically allow them not to pay back a 100% (such as via cheaper roll-over loans). More interesting and important than the pantomime played out in Brussels is whether things are actually moving on the ground. On that score several interesting phenomena are underway:
- Italy seems to be making a serious go of the issue of tax compliance. I have in the past criticised Mario Monti for not reforming the labour market and the economy, and it is clear now to virtually everybody that he has not and will not do much on this front, but he has made tax compliance a big thing. The numbers on compliance are yet to come in, but it is safe to say that all the symbolism and activity is good: tax cheats are now officially branded as ‘parasites’. There are campaigns underway to shame the tax dodgers. High profile businessmen and politicians are regularly brought to trial over the issue and public opinion seems to go in the right direction. It is, I would say, a hopeful sign of gradual ‘Germanification’ of Italy. Whether Italy can pay back its debts without further bailouts is dubious, but it is now looking more likely that only a reasonable amount of money printing will be enough to prevent a break-down. Long-term growth needs reforms and those are not yet forthcoming, but perhaps the next government will have more opportunity than Mario Monti who missed his opportunity in the early weeks.
- Greece is not yet making much of tax compliance, or indeed any other reform. As The Economist quoted an anonymous member of the troika visiting a meeting of rich Greeks ‘If I could get everyone here to pay their tax I would not have to be here’. And the saga of Greek non-tax compliance is truly staggering. Not only is there the well-publicized story of how a succession of Greek finance ministers conveniently ‘forgot’ to follow up on a list of 2000 high-profile tax dodgers that was given to them by Christine Lagarde in 2010 (yes, she heads the IMF now), but in December 2011 two high profile tax inspectors resigned because of political interference with their investigations. The list of tax dodgers includes current Greek MPs[LU1] , but astoundingly, being on those lists appears not to be an issue for political careers. The population does not expect anything else. This should make it clear, if there was any real doubt, that there simply is no group in Greece at the moment willing and able to clean out the parasitical elite running it. The few Greeks trying to hold their politicians to account and come up with reforms (such as this bunch of Greek economists) simply get no traction there. The reforms Europe asks of them are either not voted in, voted in and not implemented, voted in and implemented but not prosecuted, or deemed unconstitutional. The current saga of some Greek parties playing posturing with the troika over labour reforms just fits into all of this: it is just for internal show.
- Spain is in internal turmoil. As I have written before, civil society there has now really woken up to the political networks that are the real problem there. There are many demonstrations and very active debates (see for example this El Pais article) and this is also how you should see the internal debates around independence of existing regions: partially the result of being disenchanted with the national politicians, but also partially the opportunistic reaction of local politicians to divert attention away from their own behaviour. I find it very hard to predict how that one is going to turn out, but I would be surprised if everything remains the same in Spain. I do expect some ‘Germanification’ to become visible there, and not just in the labour and other reforms that are now finally on the table.
- Portugal seems to have gone furthest in actual reforms, but with little to show for it yet. Unemployment is lower than in Spain, but GDP growth remains negative. Still, increasing export figures are a sign that Portugal will probably weather the storm better than Spain.
- The saga with European bank regulation now seems to be coming to a head. The ones who were shouting for the ECB to sort out all the banks now have effectively been shown to be talking idiots, but the ECB now has indeed spawned a new entity that will in future years, possibly, start to regulate banks. It will take quite a few years for that regulation to get underway as there are lots of things to sort out, such as which banks actually fall under the new institution and what the actual powers of the new regulator will be. A true bank regulator may hence not be far off as an institution.
- The ESM and ESF funds will be more limited than was hoped. Contrary to the press reports that said the German constitutional court approved of these institutions, the actual decision had an important sting in the tail, which is that these institutions cannot operate like banks. This is crucial because it means the ESF cannot borrow against the funds in it, making it much less powerful and effective. It might mean that the ESF will become the de facto political watchdog for further help from the ECB. Kind of like an embryonic ministry of finance at the European level.
So, I would say that slowly my 2011 prediction is coming true that we are getting more money printing for Southern Europe in return for vague promises of better future behaviour, backed up by new semi-toothless European institutions. Southern Europe is Germanising with the conspicuous exception of Greece for which I can see little hope in the present arrangements.