tag:theconversation.com,2011:/fr/topics/grexit-15041/articlesGrexit – The Conversation2018-12-05T12:41:05Ztag:theconversation.com,2011:article/1078542018-12-05T12:41:05Z2018-12-05T12:41:05ZWhat moves markets more, Twitter or traditional news?<figure><img src="https://images.theconversation.com/files/248138/original/file-20181130-194935-e0e6gh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Tweet power. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/chiang-maithailand-february-272017-female-holding-588413579?src=g7Kt2cS0mn2U4iCfD8Pk1Q-1-80">nopporn</a></span></figcaption></figure><p>Can a single tweet make a country’s currency depreciate by 16%? Apparently it did on August 10, when Donald Trump <a href="https://twitter.com/realDonaldTrump/status/1027899286586109955">tweeted</a> that US tariffs on Turkish steel and aluminium would rise sharply. Amid 36,100 retweets, and <a href="https://www.france24.com/en/20180810-turkey-curency-lira-plunge-erdogan-trump-twitter-tariffs">calls by</a> Turkish President Recep Tayyip Erdoğan for his people to dump foreign assets, the Turkish lira <a href="https://www.bloomberg.com/quote/TRY:CUR">plunged</a>. </p>
<p>It’s not just the president of the United States that has such Twitter power. Around the same time, Elon Musk’s <a href="https://techcrunch.com/2018/08/07/elon-musk-tesla-private-tweet/">infamous tweet</a> about taking Tesla private raised shares in the motor company by 11% – later earning him a US$20m (£16m) <a href="https://www.dw.com/en/elon-musk-to-resign-as-tesla-chairman-pay-20-million-fine-over-fraud-charges/a-45692172">fine</a> from the US Securities Exchange Commission for misleading investors. And these are only two of <a href="https://www.ogilvy.com/feed/11-tweets-that-turned-the-stock-market-upside-down/">numerous examples</a> of such market shifts. There is a <a href="https://academic.oup.com/rfs/advance-article-abstract/doi/10.1093/rfs/hhy083/5061375?redirectedFrom=fulltext">growing</a> body of academic literature <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1468-036X.2013.12007.x">documenting</a> these occurrences. </p>
<p>This shouldn’t come as a surprise. Twitter has long been essential for economic commentators, policymakers and their faithful followers. While the network’s overall user numbers have been <a href="https://www.statista.com/statistics/282087/number-of-monthly-active-twitter-users/">fairly static</a> in the low 300 millions, certain leading Twitter accounts are becoming increasingly influential. To give one example, the 2008 Nobel Economics laureate, Paul Krugman, had around 1m followers in early 2013, but <a href="https://twitter.com/paulkrugman">now has</a> around 4.5m. Meanwhile <a href="https://twitter.com/realDonaldTrump">Trump now has</a> 55.8m followers, and <a href="https://twitter.com/BarackObama">Barack Obama</a> 103m. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/248140/original/file-20181130-194922-fr9ov.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/248140/original/file-20181130-194922-fr9ov.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/248140/original/file-20181130-194922-fr9ov.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=614&fit=crop&dpr=1 600w, https://images.theconversation.com/files/248140/original/file-20181130-194922-fr9ov.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=614&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/248140/original/file-20181130-194922-fr9ov.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=614&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/248140/original/file-20181130-194922-fr9ov.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=771&fit=crop&dpr=1 754w, https://images.theconversation.com/files/248140/original/file-20181130-194922-fr9ov.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=771&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/248140/original/file-20181130-194922-fr9ov.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=771&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Economist Paul Krugman.</span>
<span class="attribution"><span class="source">Wikimedia</span></span>
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</figure>
<p>But how do tweets compare to traditional news outlets when it comes to moving markets? We have just published a <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3291978">new paper</a> that attempts to provide an answer. We focused on announcements relating to the Greek debt crisis between 2012 and 2016, looking at their effect on the sovereign bond market. We chose to focus on the Greek crisis because it was of global interest; went on for a reasonable duration; and could be easily tracked because the word “Grexit” tended to appear in each announcement regardless of the language in which it was written. </p>
<h2>Our research</h2>
<p>As you can imagine, this was a big undertaking. We collected every mention of “Grexit” on Twitter in our sample and assigned to each day a value equal to the total number of the mentions on that day. This amounted to 1.3m mentions coming from 195 countries in 14 different languages. We then repeated this exercise with the traditional news media, collecting more than 62,000 mentions of “Grexit” from 3,700 different newspapers, magazines, broadcasters and wire services from 83 countries in 18 languages. </p>
<p>Making allowances for the fact that we had many more tweets than traditional news stories, we then looked at how these two types of news stories affected the gap (or spread) between Greek bond yields and German bond yields – traditionally German bonds are always used for comparison as the least risky sovereign bonds on the market. To work out the effect of these stories, we had to filter out the effect on bond yields of things like economic data or the latest pronouncements from financial institutions about Greek debt default risks or contagion or whatever.</p>
<p>We also had to exclude situations where information that originated on Twitter was influencing the traditional media and vice versa – for example, a tweet being followed up by newspapers, or a TV interview being retweeted. In either case, we ascribed the market influence to the original source of the story. (Incidentally, we found that Twitter was influencing the traditional media much more than the other way around.)</p>
<p>Working on the basis that original tweets and traditional news stories <a href="https://academic.oup.com/oep/article-abstract/67/2/406/2362293?redirectedFrom=fulltext">essentially produce</a> activity for 20 days, we were able to come up with averages for the effect of each story. We found that for every 1% increase in the volume of Grexit tweets on a given day, the Greek-German spread widened by 0.67% over the next 20 days; whereas a 1% increase in Grexit mentions in traditional media widened the spread by 0.58% over the same period. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/248139/original/file-20181130-194953-1au7yt9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/248139/original/file-20181130-194953-1au7yt9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/248139/original/file-20181130-194953-1au7yt9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/248139/original/file-20181130-194953-1au7yt9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/248139/original/file-20181130-194953-1au7yt9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/248139/original/file-20181130-194953-1au7yt9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=425&fit=crop&dpr=1 754w, https://images.theconversation.com/files/248139/original/file-20181130-194953-1au7yt9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=425&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/248139/original/file-20181130-194953-1au7yt9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=425&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Greek fallout.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/greece-high-resolution-crisis-concept-190868051?src=U_nQ4huwA4InjXbKiqhJAQ-1-31">xstock</a></span>
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<p>Because the Greek crisis was taking place in parallel with debt crises across the eurozone periphery, we also looked at to what extent tweets and traditional news stories about Grexit affected spreads between German bond yields and those of Portugal, Spain, Italy and Ireland. The one major effect was on Portuguese-German spreads, where the same 1% increase in tweet volumes moved the spread by 0.39% over 20 days. Interestingly, there was no comparable effect from stories that originated in the traditional news. </p>
<h2>Next steps</h2>
<p>Though we only looked at the effect of one longstanding news story on one part of the market, it is, to our knowledge, the first time anyone has tried to compare to what extent traditional and social media move markets. Given that our research period ended in 2016, it may well be that the disproportionate power of Twitter has since increased. </p>
<p>We also need to bear in mind that Greece is a relatively small country – much smaller, say, than Italy, which is currently on a <a href="https://www.bbc.co.uk/news/world-europe-46343033">collision course</a> with the EU over its budget. Given the ability of tweets about Grexit to raise fears of contagion to Portugal, it might be that tweets about the Italy/EU spat could produce bigger shockwaves. </p>
<p>Either way, an important question is whether Twitter’s market power is a problem. When you consider how instantaneously social media information is spread, Twitter is contributing to the efficient functioning of financial markets. On the other hand, there is the potential for misinformation: much <a href="https://ideas.repec.org/p/swn/wpaper/2018-30.html">has been written</a>, for example, about automated “bot” accounts pumping out messages that can affect markets. </p>
<p>At present, however, <a href="https://theconversation.com/good-luck-banning-fake-news-heres-why-its-unlikely-to-happen-89940">social media regulation</a> is light to non-existent. Some countries, <a href="https://theconversation.com/regulate-social-media-its-a-bit-more-complicated-than-that-103797">including the UK</a>, are looking at introducing tighter rules around what can be said on platforms such as Twitter. It is not made easier by differing views around the world – sentiment towards government intervention <a href="http://www.digitalnewsreport.org/">is stronger</a> in Europe than in the US, for example. In the absence of coordinated government action, intervention at national level might not be very effective. As people realise just how powerful Twitter has become in relation to traditional news media, it will be interesting to see how this debate develops.</p><img src="https://counter.theconversation.com/content/107854/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>New research into the Greek crisis from 2012-16 compared how tweets and traditional news affected bond yields among countries in the eurozone peripheries.Costas Milas, Professor of Finance, University of LiverpoolTheodore Panagiotidis, Associate Professor in Economics, University of MacedoniaTheologos Dergiades, Lecturer in Economics, University of MacedoniaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/974282018-05-30T10:31:06Z2018-05-30T10:31:06ZItaly and the euro: Sergio Mattarella has opened a window of opportunity to save the single currency<p>Crisis looms large over the eurozone yet again. And this time it’s swirling around Italy. If <a href="https://www.palgrave.com/gb/book/9783319622224">Cyprus was a tropical storm</a> for the euro in 2013 and <a href="https://theconversation.com/how-greeces-liquidity-problem-could-cause-an-unplanned-grexit-41691">Greece a hurricane in 2015</a> what will Italy turn out to be in 2018? </p>
<p>Italy’s public debt is <a href="https://www.bloomberg.com/news/articles/2017-11-09/italian-debt-load-up-this-year-above-130-in-2018-eu-says">132% of GDP</a>. This is the second highest in the euro area (Greece is still out in front with 180.8%). In absolute terms, however, Italy’s public debt at €2.3 trillion dwarfs Greece’s €320 billion. Meanwhile, the eurozone’s third largest economy contains a rising tide of populist, anti-EU sentiment.</p>
<p>It is therefore not surprising that Italy is now the biggest ever threat for the euro. As Greece showed, a sovereign debt crisis can quickly transform itself <a href="https://theconversation.com/euro-nightmare-unfolds-queues-at-banks-in-greece-as-capital-controls-follow-ecb-funding-cap-43984">into a banking crisis</a>, as depositors flock to take their money out.</p>
<p>Part of the problem is that the Five Star Movement and the League – the big winners in the March election who were <a href="https://theconversation.com/italys-new-government-why-a-political-novice-is-a-strategic-choice-for-prime-minister-97196">set to form a coalition government</a> – made electoral pledges so wild that to call them populist is to put it mildly. Among these was taking Italy out of the eurozone and cancelling €341 billion Italian debt held by the European Central Bank (ECB).</p>
<p>Although their <a href="https://www.ft.com/content/e0cd0f22-5a7c-11e8-bdb7-f6677d2e1ce8">draft programme</a> for government had removed all direct references to a eurozone exit, it included enough anti-euro rhetoric and such drastic reforms to the eurozone’s architecture and economic policies that it sent shivers across the continent. What’s more, the coalition’s spending commitments are around €100 billion or 6% of Italy’s GDP, potentially making a bad public debt situation worse and conflicting with EU budgetary rules. </p>
<p>The two parties also want to “radically revise” the EU’s banking rules that protect public finances from failing banks and seek to compensate retail investors for any losses already incurred. Such a prospect could prove destabilising not just for Italy but also for Spain, Cyprus and Slovenia – where creditors <a href="https://voxeu.org/article/bank-bail-ins-lessons-cypriot-crisis">were “bailed-in”</a> (the opposite of a bail out). It would, in effect, undo all the progress towards a banking union in the eurozone and mean returning to the days when taxpayers footed the bill for bank failures. </p>
<p>The two parties even appeared to have had <a href="https://www.bloomberg.com/news/articles/2018-05-29/league-five-star-had-euro-exit-plan-italy-s-democrats-say">a Plan B</a> in case Europe didn’t accept their demands. They were prepared for a “secret” exit from the euro over a weekend, accompanied by the cancellation of all Italian debt held by the ECB. No referendum was planned as this would cause financial havoc. </p>
<p>If Italy were to leave the euro, the ECB would have to write down its holdings of Italian public debt and all central banks across the eurozone would make massive losses. The respective governments – funded by the taxpayers – would have to foot the bill. That would be bad enough, even before considering whether the euro could survive an Italian exit and all the knock-on effects that would ensue. </p>
<p>The icing on the cake, which has led to the country’s latest political impasse, was the nomination of Paolo Sanova, a well-known eurosceptic, as finance minister. This explosive proposition was <a href="http://www.bbc.co.uk/news/world-europe-44277888">rejected by Sergio Mattarella</a>, Italy’s president, who has vetoed the coalition’s proposed government, wisely claiming it would have destabilised the country. He has installed Carlo Cottarelli, a former IMF official, as interim prime minister, instead. </p>
<h2>A poisoned chalice</h2>
<p>Had Italy’s president gone along with the Five Star Movement-League proposal, the crisis would have escalated very quickly. Markets and bank depositors were unlikely to wait until the “secret” weekend when Italy exits the euro. A bank run would have ensued almost immediately and that could have caused a new and unprecedented challenge for the ECB. </p>
<p>In the cases of Greece and Cyprus, the ECB supported their respective banking systems while political negotiations were ongoing and had a reasonable prospect of agreement. Even so, such support was never automatic. When negotiations stalled, it was frozen or restricted, resulting in extended bank holidays and capital controls. </p>
<p>In Italy’s case, the decision whether to provide such support would be much more of a poisoned chalice. Throwing good money after bad to support banks in a country whose government is threatening to abandon the euro could be seen as financially and legally reckless, if not politically suicidal. </p>
<p>Providing a lifeline to a government that is so hostile to the euro would have caused a furore in Germany where the ECB is already seen as too soft on the periphery, in general, and Italy in particular. Yet not supporting banks in Italy would lead to an immediate shut down of the banking system and an even bigger economic and political crisis, which could prove to be the final blow to the euro.</p>
<h2>Window of hope</h2>
<p>Unsurprisingly, Mattarella’s decision was welcomed with relief in both France and Germany, although Chancellor Angela Merkel was <a href="https://www.reuters.com/article/us-italy-politics-germany/merkel-tells-italy-euro-zone-rules-must-frame-economic-discussions-idUSKCN1IT1FG">quick to stress</a> that she would be willing to work with any coalition government that respected eurozone roles. </p>
<p>But the interim technocratic government is only a very short-term fix that may not even last until the end of summer, if it fails to get a vote of confidence in parliament. As the president’s actions are already inflaming anti-EU sentiment in Italy, a new election could well deliver an even more populist outcome. Financial markets are certainly becoming spooked and that can force an even earlier election.</p>
<p>Some commentators, including former Greek finance minister <a href="https://www.theguardian.com/commentisfree/2018/may/28/italy-eurosceptic-far-right-technocrat-matarella-racist-populist">Yanis Varoufakis</a>, are suggesting that the only way for the euro to withstand an Italian tsunami is for Berlin to show more flexibility. But if Berlin were to give in to the demands of one populist government, that could signal the beginning of the end for the euro, as it would be a gift to populist parties in other member states. In turn, that’s likely to lead to a rise of the far right in Germany – surely the beginning of the end of Europe as a project for peace.</p>
<p>I’m not saying the eurozone is perfect or that Italy should not receive any form of help. Far from it. But the interim government provides a small window of opportunity to fast track eurozone reforms. These need to be based on sound economic logic and pragmatic politics, rather than populist notions that are often poorly disguised ways to shift the burden of one country’s past excesses to others. </p>
<p>Time is limited, but there are already several sensible proposals around, including the one for a <a href="https://www.imf.org/en/Publications/Staff-Discussion-Notes/Issues/2018/03/22/A-Central-Fiscal-Stabilization-Capacity-for-the-Euro-Area-45741">rainy day fund by the IMF</a>, a proposal for a new debt instrument by the European Commission and <a href="https://www.ft.com/content/10069151-0736-3072-b185-c4c635e59174">reform ideas</a> from top French and German economists. </p>
<p>This is the only way forward if the European project is to survive the new threat from Italy. Although the German government <a href="https://global.handelsblatt.com/finance/imf-lagarde-rainy-day-fund-euro-zone-904034">isn’t thrilled</a> by these proposals, it may now be the last opportunity to save the eurozone. Unless its benefits are seen to be more widely shared, the euro’s days are numbered.</p><img src="https://counter.theconversation.com/content/97428/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Panicos O Demetriades does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>If you thought the risk of Grexit was bad, you’ve got a shock coming in the shape of Italy.Panicos O Demetriades, Professor of Financial Economics, University of LeicesterLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/950162018-05-08T11:15:48Z2018-05-08T11:15:48ZGermany’s deep-rooted obsession with saving – a brief history<figure><img src="https://images.theconversation.com/files/218101/original/file-20180508-34009-dcwt4w.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com">shutterstock.com</a></span></figcaption></figure><p>A small exhibition <a href="https://www.dhm.de/en/ausstellungen/saving.html">recently opened</a> in the German Historical Museum in Berlin all about Germany’s love of saving money. It might have had a mundane sounding title, “Saving – History of a German Virtue”, but it provides an interesting insight into what is a deep-rooted national obsession. </p>
<p>As well as an opportunity for self-reflection for visiting Germans, the exhibition also provides a window into the historical roots of German morality when it comes to being financially prudent and the country’s attitude towards European policies and its partners. </p>
<p>Saving has a long history in German society. The first savings bank opened in 1778 in Hamburg. By 1836, there were more than 300 of these savings banks operating in the then German Confederation, allowing Germans to save their hard earned income for some interest. </p>
<p>There is <a href="https://www.dhm.de/fileadmin/medien/relaunch/ausstellunngen/Sparen/SH_DHM_Sparen_Flyer_4cSC_A6_180312_web.pdf">plenty of evidence</a> in the exhibition that the concept of saving was established as a virtue from this period, through the Weimar Republic, which followed World War I, then in the Nazi era and after World War II on both sides of the Berlin Wall. Saving became an essential part of the country’s tax planning, welfare provision and social policies.</p>
<p>The legacy of this virtue has made Germans the top savers in the world. Households consistently saved more than 8% of their disposable income over the last two of decades, <a href="https://data.oecd.org/chart/5am1">according to OECD data</a>. The last time UK households came close to the German savings rate was in 1995. Two decades later, in 2015, German savers keep an equivalent of 9.96% of their disposable income in the country’s 400 savings banks, while the British were merely at 0.16%. </p>
<p>Looking at total savings of households, companies and the government (gross domestic savings) in these two countries, the gap is equally large. In 2015, German’s gross domestic savings were at 27.2% while in the UK figure shows merely 15.3%</p>
<iframe src="https://data.worldbank.org/share/widget?end=2016&indicators=NY.GDS.TOTL.ZS&locations=DE-GB&start=1990" width="100%" height="400" frameborder="0" scrolling="no"></iframe>
<p>Germans not only save more than their UK counterparts, but the deep rooted national habit has more implications than those numbers would reveal.</p>
<p>Understanding the German obsession with savings is important when one wants to understand German attitudes towards domestic and European policies. For example, since 2012 the main European Central Bank interest rate has been below 1%, and in March 2016 <a href="https://www.ecb.europa.eu/stats/policy_and_exchange_rates/key_ecb_interest_rates/html/index.en.html">was reduced to 0%</a>. The reason for these low interest rates, along with large programmes of quantitative easing, was to stabilise the European banking sector <a href="https://theconversation.com/explainer-what-is-the-ecb-bazooka-and-will-it-spur-a-eurozone-recovery-56302">and to encourage lending, spending and economic recovery</a>. </p>
<p><iframe id="ny5Lr" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/ny5Lr/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>The move was widely praised by various governments. But in Germany, it was criticised by the country’s saving public who feared the low interest rates would destroy their wealth <a href="https://www.ecb.europa.eu/press/key/date/2017/html/ecb.sp171009_1.en.html">and ruin their retirement plans</a>. As the conservative German newspaper, <a href="http://www.faz.net/aktuell/finanzen/finanzmarkt/zinsen-was-die-ezb-wirklich-fuer-die-sparer-tut-15482224.html">FAZ, put it</a>: “there is something ritualistic about cursing the Italian president of the ECB for keeping interest rates low, depriving savers of their well-deserved interest.”</p>
<h2>At the state level</h2>
<p>The virtue of saving in Germany is not limited to households or companies, but to state finances too. A good state does not live beyond its means and saves money where it can. The state, seen as the virtuous and prudent <a href="https://www.economist.com/news/europe/21595503-views-economics-euro-and-much-else-draw-cultural-archetype-hail-swabian">Swabian housewife</a>, is at the centre of the German pro-austerity narrative, which has not only affected domestic but <a href="https://mainlymacro.blogspot.co.uk/2016/09/explaining-macroeconomics-to-swabian.html">most of all European policies</a>. </p>
<p>In the aftermath of the European sovereign debt crisis the implementation of austerity policies in the southern periphery, specifically Greece, was justified with the necessity to reduce spending and increase savings. It is no surprise that Germany was one of the leading advocates of these fiscal policies. To the German psyche, austerity was the necessary antidote to a country that had lived recklessly beyond its means up until 2008. </p>
<p>To <a href="https://www.ft.com/content/97b826e2-d7ab-11e0-a06b-00144feabdc0">quote</a> former Germany’s finance minister at the time, Wolfgang Schäuble: </p>
<blockquote>
<p>It is an undisputable fact that excessive state spending has led to unsustainable levels of debt and deficits that now threaten our economic welfare … Governments in and beyond the eurozone need not just to commit to fiscal consolidation and improved competitiveness – they need to start delivering on these now.</p>
</blockquote>
<p>Schäuble was seen as a stickler for rules. So much so that he became <a href="http://www.bbc.co.uk/news/world-europe-33511387">a hate figure in Greece</a> for emphasising austerity policies. </p>
<p>But, with the history and importance of saving in Germany in mind, it is unlikely that Olaf Scholz, Schäuble’s successor as finance minister, or the country he represents, will change its mind on this any time soon. </p>
<hr>
<p><em>Correction: the interest rate graph in this article was updated on May 10 2018 to correct an inaccuracy in the interpolation.</em></p><img src="https://counter.theconversation.com/content/95016/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Imko Meyenburg does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The importance of saving is so deep rooted in Germany that an exhibition recently opened to commemorate it.Imko Meyenburg, Lecturer in Economics and International Business, Anglia Ruskin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/618852016-07-12T02:23:09Z2016-07-12T02:23:09ZFrom Grexit to Brexit, why EU’s mess of rules designed to prevent crisis is causing it<figure><img src="https://images.theconversation.com/files/130110/original/image-20160711-9307-g3ao17.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The EU is fraying thanks to its puzzle of fiscal governance policies.</span> <span class="attribution"><span class="source">EU UK flag via www.shutterstock.com</span></span></figcaption></figure><p>The European Union, still nursing wounds from its crisis over the euro and “Grexit,” is facing a much more severe threat that strikes at the very heart of the EU’s legitimacy. And the problem concerns the very measures put in place to resolve the earlier crisis, which nearly led to a Greece exit from the eurozone. </p>
<p>That threat concerns the EU’s legitimacy and is putting the bloc under tremendous pressure. It took on new urgency last month when <a href="http://www.theguardian.com/politics/eu-referendum">the U.K. voted to exit the union</a>, adding to the rising chorus across the continent demanding similar in or out referendums. </p>
<p>Those in favor of “Brexit” made <a href="http://www.euractiv.com/section/uk-europe/news/brexit-campaign-begins-boris-johnson-compares-eu-to-prison/">a big part of their campaign</a> how “unelected” bureaucrats in Brussels infringed on their sovereignty, with many celebrating the victory as the U.K.’s “<a href="http://www.theguardian.com/politics/2016/jun/24/britain-votes-for-brexit-eu-referendum-david-cameron">independence day</a>.” </p>
<p>The pressure could intensify in the coming months and years as European economies continue to stagnate and <a href="http://www.bbc.com/news/world-europe-36615879">nationalist politicians</a> in France, the Netherlands and elsewhere grow in popularity and call for their own “Frexits” and “Nexits.” They tend to repeat Brexit campaigners’ claims that the EU has become overly intrusive and is ineffective. </p>
<p>When it comes to fiscal governance, they actually have a point. Fiscal governance is one of the most problematic areas for both the operation and legitimacy of the EU. Particularly troublesome are post-euro-crisis efforts to avoid another one by imposing tight limits on member state budgets and policies – and the haphazard way the EU enforces them. That include this week’s <a href="http://www.channelnewsasia.com/news/business/eurozone-slams-spain/2949410.html">decision</a> to declare Spain and Portugal in breach of fiscal rules after ignoring violations for so long, exposing them to <a href="http://www.ft.com/cms/s/0/568ad062-42cb-11e6-b22f-79eb4891c97d.html">unprecedented fines</a>.</p>
<p>While the focus of our research is on <a href="http://joh.sagepub.com/content/46/2/262.short">how the EU’s policies affect health care</a>, <a href="http://journals.cambridge.org/action/displayAbstract?fromPage=online&aid=10224436&fileId=S0017257X16000026">we’ve also explored the broader impacts</a> of the EU’s fiscal governance mechanisms. We’ve found that there is little reason to think fiscal governance will help spur growth or avoid future crises. In fact, it’s more likely to continue to sow division and lead to more problems in the coming years.</p>
<h2>Foundations of fiscal discipline</h2>
<p>The EU’s efforts to forestall eurozone economic crisis started all the way back in 1992, when the <a href="http://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1412156972092&uri=URISERV:xy0026">Maastricht Treaty</a> laid the foundations for economic and monetary union. </p>
<p>Back then, all <a href="http://ec.europa.eu/economy_finance/explained/economic_and_monetary_union/the_rules_of_emu/index_en.htm">EU members agreed</a> to maintain “sound public finances” (i.e., low deficits and debt). They tried to establish measures to enforce this five years later with the <a href="http://ec.europa.eu/economy_finance/economic_governance/sgp/index_en.htm">Stability and Growth Pact</a>, which imposed fines when certain deficit, debt and other levels were breached. </p>
<p>The euro’s financial crisis, however, revealed that that pact wasn’t enough, since some countries such as Spain had <a href="http://www.tradingeconomics.com/spain/government-debt-to-gdp">healthy public finances</a>, well within EU requirements, <a href="http://personal.lse.ac.uk/hopkin/Chapter%208%20-%20The%20Troubled%20South%20-%20Hopkin%20Finalissimo.pdf">but imbalanced economies</a>. To remedy the problem, in 2011 the EU <a href="http://ec.europa.eu/economy_finance/economic_governance/macroeconomic_imbalance_procedure/index_en.htm">created a new procedure</a> to identify and punish imbalances. </p>
<p>The problem with procedures designed to take effect after there are problems, of course, is that the whole point is to prevent them in the first place. Measures designed primarily to punish are often doomed to failure. It is always easy for politicians to take the risk of (potential) punishment later in return for lower taxes or economic growth today (risking high deficits and problems in the future).</p>
<p><a href="https://books.google.co.uk/books?id=npEXme7MFCwC&dq=harold+james&source=gbs_navlinks_s">Over</a> <a href="https://books.google.co.uk/books?id=s7XmCwAAQBAJ&lpg=PR4&dq=kenneth%20dyson&pg=PR4#v=onepage&q&f=false">the</a> <a href="https://books.google.co.uk/books?id=Y0E2ty5lpLYC&lpg=PP1&dq=dermot%20hodson&pg=PP1#v=onepage&q&f=false">years</a>, EU leaders did create processes to <a href="http://eur-lex.europa.eu/summary/glossary/broad_ec_pol_guidelines.html">monitor</a> and <a href="http://eur-lex.europa.eu/summary/glossary/open_method_coordination.html">intervene</a> in member state policies of all sorts in order to keep them from choosing bad policies. But none of them was quite as intrusive as the <a href="http://ec.europa.eu/europe2020/making-it-happen/index_en.htm">European Semester</a>, also set up in 2011 as an annual review of macroeconomic conditions and fiscal policy. </p>
<p>And by now, you get the drift: rules and regulations on top of more rules and regulations, with a variety of enforcers, political and otherwise. </p>
<p>This mechanism resembles nothing as much as a “<a href="https://www.rubegoldberg.com/about/">Rube Goldberg machine</a>,” referring to the cartoonist famous for inventing hilariously complicated ways to achieve simple goals, such as a dozen improbable steps required to comb hair or cut a loaf of bread. </p>
<p>EU fiscal governance, with its multiple, redundant, interlocking mechanisms all aimed at controlling government budgets, is at best a very complex way to achieve the simple goals of the Stability and Growth Pact. But it is more likely that it will fail to foster stability, promote growth or prevent another financial crisis. </p>
<p>Here are four reasons why.</p>
<h2>Just look back in time</h2>
<p>First, a brief look back at history shows what happened when earlier mechanisms to this were breached. </p>
<p>The record of EU fiscal policies constraining member states since 1992 is very poor. The most dramatic incident was in <a href="http://www.lse.ac.uk/europeanInstitute/Research/SchelkleGovernance.pdf">1995</a> when both France and Germany breached the Stability and Growth Pact and persuaded the other member states to rewrite it with more flexibility. </p>
<p>Less noted but equally interesting was Ireland’s decision to <a href="http://www.eucenter.wisc.edu/OMC/Papers/EconPolCoord/hodsonMaherJEPP2004.pdf">ignore</a> a 2000 sanction. There were no real consequences for Ireland, a far less powerful state than Germany or France. </p>
<p>And it already appears that the new fiscal governance system is being undermined. The Dutch finance minister in June <a href="http://www.ft.com/cms/s/0/24575aee-320d-11e6-ad39-3fee5ffe5b5b.html">complained</a> that the European Council was showing favoritism to big countries when it let Spain, Portugal (not actually a big country) and France have more time to bring their budgets into compliance with the rules. Complex rules are no match for political agreement, it seems. </p>
<p>After the Brexit vote and Spanish elections, and with French elections next year, will member state resistance start to matter less?</p>
<h2>U.S. states and balanced budgets</h2>
<p>Second, the EU was not the first to set up fiscal mechanisms intended to restrain democratic politicians from making unsound policy decisions.</p>
<p><a href="http://www.ncsl.org/research/fiscal-policy/state-balanced-budget-requirements.aspx">Every U.S. state but one</a> (Vermont) has similar rules. Their constitutions have balanced budget amendments that forbid deficit spending. Yet neither courts nor politicians like to enforce them. Courts are reluctant to delve into the details of budgets and often unsure how to enforce their rulings, while politicians often want to run deficits (if nothing else, to keep from cutting services during recessions). The result is budgetary trickery as politicians look for ways to invest without being constrained by balanced budget rules. </p>
<p>Do judges wish to risk their credibility and legitimacy, and spend their time, determining whether an elected government has written a legitimate budget? </p>
<p>Courts in the United States, over almost two centuries of balanced budget rules, <a href="http://eprints.lse.ac.uk/59396/">have not. It is bond markets</a>, rather than judges, that have been policing state deficits. It is unclear that European courts would act differently.</p>
<h2>Economic winds</h2>
<p>Third, the rules assume that bad finances and macroeconomic imbalances are the results of bad policies. </p>
<p>Rather, <a href="http://link.springer.com/article/10.1057/cep.2014.1">research shows</a> that variation in deficits is driven by the economy more than policies. Plainly put, deficits grow when there is less tax revenue and more unemployed people. The mechanisms are “automatic stabilizers” such as unemployment insurance that stabilize economies in downturns through government expenditure.</p>
<p>This is a simple point but one that undermines the whole fiscal governance apparatus. If economic cycles, and the attendant revenue and expenditure changes, drive deficits, then enforcement of fiscal rules just means kicking countries when they are down.</p>
<h2>Inexplicable decisions</h2>
<p>Fourth, the experience so far shows just how political and occasionally inexplicable the decisions can be. </p>
<p>For example, in 2015 <a href="http://ec.europa.eu/europe2020/pdf/csr2015/csr2015_council_france_en.pdf">the French were advised</a> that their limitations on medical school enrollment were a threat to the country’s fiscal future. </p>
<p>Most health economists have <a href="http://link.springer.com/chapter/10.1007/978-1-349-63660-0_10">long agreed</a> that training more doctors raises, rather than lowers, health costs. The potential demand for health care is enormous. More doctors can therefore create work for themselves even if it increases health care costs. </p>
<h2>Limping through crisis</h2>
<p>How, then, has it been that the EU managed to end the rout of its government bond markets and limp along since the debt crisis? </p>
<p>The answer is simple: the European Central Bank’s monetary policy decisions, which <a href="http://voxeu.org/article/how-did-ecb-save-eurozone-without-spending-single-euro">saved the eurozone</a>. The ECB made it clear that speculators would be betting against not a weak member state such as Spain but against the power of a central bank. <a href="http://onlinelibrary.wiley.com/doi/10.1111/jcms.12044/abstract;jsessionid=F0BD22F864D1902324BFB854915D53B6.f01t02?userIsAuthenticated=false&deniedAccessCustomisedMessage=">Markets grew calm</a> only after ECB head Mario Draghi promised the bank would do <a href="https://www.ecb.europa.eu/press/key/date/2012/html/sp120726.en.html">“whatever it takes”</a> to defend the euro. The flapping bits of Rube Goldberg machinery (fiscal governance mechanisms) contributed little or nothing to the result. </p>
<p>It will be hard to rethink this system, entrenched as it is in EU law and an intergovernmental treaty, but the crisis over Brexit might make doing so worthwhile. An intrusive, dysfunctional system of rules that are impractical, intrusive and political hardly helps the EU get through this period of turbulence. </p>
<p>If this is what EU membership means, it is easy to see why some voters want no more of it.</p><img src="https://counter.theconversation.com/content/61885/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The European Union faces a crisis of legitimacy, and its rules on fiscal governance are at the heart of it.Scott L. Greer, Associate Professor, Global Health Management and Policy, University of MichiganHolly Jarman, Research Assistant Professor, University of MichiganLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/597542016-05-24T08:57:58Z2016-05-24T08:57:58ZA false morality tale blocks the resolution of the Greek debt crisis<p>Optimists hope that Greece will soon be able to put its crisis behind it following the latest meeting of eurozone finance ministers. The optimism is not unfounded. Key lenders like the <a href="http://www.imf.org/external/pubs/ft/scr/2016/cr16130.pdf">IMF</a> and the <a href="http://www.theguardian.com/world/2016/may/08/greece-has-basically-achieved-reform-goals-says-jean-claude-juncker">European Commission</a> have stopped <a href="http://www.ft.com/intl/cms/s/0/c5a7e9fe-201a-11e6-aa98-db1e01fabc0c.html?siteedition=intl#ft-article-comments">pretending</a> that Greek debt is sustainable. More importantly, the obvious is at last recognised – that Greece cannot exit its debt crisis until the very problem of its debt is addressed. </p>
<p>Yet <a href="https://mainlymacro.blogspot.co.uk/2015/07/the-ideologues-of-eurozone.html">economic</a> <a href="https://ineteconomics.org/ideas-papers/blog/joseph-stiglitz-deep-seatedly-wrong-economic-thinking-is-killing-greece">sense</a> has been largely irrelevant in the unfolding of the Greek drama. Following a <a href="http://ser.oxfordjournals.org/content/11/3/601.full.pdf+html">typical pattern</a> in the <a href="http://www.mhpbooks.com/books/debt/">history of debt crises</a>, it is a tale that has been predominantly framed and managed in terms of morality. </p>
<p>For example, Wolfgang Schäuble, Germany’s finance minister, <a href="http://www.wsj.com/articles/germanys-schauble-sees-no-need-for-immediate-decision-on-greece-payments-1457438844">insists</a> that he cannot support Greece’s claim for relief because he lacks “a proper argument for the German lawmaker and the German public”. The truth is that there are overwhelming economic arguments for debt relief, including the fact that the current plan is <a href="http://www.theguardian.com/business/ng-interactive/2015/apr/29/the-austerity-delusion">self-defeating</a>. The requirement that Greece generates <a href="https://www.project-syndicate.org/commentary/greece-referendum-troika-eurozone-by-joseph-e--stiglitz-2015-06?barrier=true">massive budget surpluses</a> will only accelerate the <a href="http://www.politico.com/agenda/story/2015/07/greece-death-spiral-ahead-000152">death spiral</a> of the Greek economy, inevitably deteriorating its debt-servicing capacity.</p>
<p>But it is vain to fight with economic reason, when the problem is, <a href="http://www.theguardian.com/commentisfree/2015/jul/16/jurgen-habermas-eu-greece-debt-deal">among</a> <a href="http://www.iwh-halle.de/d/publik/iwhonline/io_2015-07.pdf">other</a> <a href="https://www.rt.com/news/310223-Strauss-Kahn-Greek-deal/">things</a>, profoundly governed by moral sentiments. An important issue when it comes to resolving the crisis is whether the Greek population – which has been <a href="https://pogiblog.atlatszo.hu/2015/06/27/corrupt-lazy-greeks-debunking-ethnic-stereotyping-substituting-economics/">systematically</a> <a href="http://ser.oxfordjournals.org/content/11/3/601.full.pdf+html">morally downgraded</a> – deserves debt relief. </p>
<p>The underlying moral struggle and associated <a href="http://www.ft.com/intl/cms/s/0/c5a7e9fe-201a-11e6-aa98-db1e01fabc0c.html?siteedition=intl#ft-article-comments">political impasse</a> was recently captured <a href="http://www.nytimes.com/2016/05/14/opinion/time-to-end-the-greek-debt-tragedy.html?_r=0">in a New York Times editorial</a>: </p>
<blockquote>
<p>The problem is Germany, Greece’s main national creditor: German federal elections will take place next year, and many German citizens feel that their hard work and thrift should not be squandered on rescuing the Greeks from the pain of their fiscal sins. </p>
</blockquote>
<p>According to the <a href="https://theconversation.com/why-weve-been-discussing-the-greek-bail-out-in-the-wrong-way-39884">dominant narrative</a> that has shaped public imagination, Greeks have been repeatedly rescued in order to maintain a profligate lifestyle. Against this backdrop, it is understandable that the prospect of debt relief is resisted on moral grounds. </p>
<p>But the underpinning story is flawed. </p>
<h2>False logic</h2>
<p>The root cause of Greece’s fiscal problem was public expenditure on a bloated and dysfunctional public sector, structurally designed to service <a href="http://eprints.lse.ac.uk/33826/">political clientelism</a> – not the Greek citizen. Greek cronyism was in turn heavily fed by profit-seeking institutions. They <a href="http://www.ft.com/intl/cms/s/0/8db1ae58-23b9-11e5-9c4e-a775d2b173ca.html#axzz498p15b5s">recklessly bought debt</a> from the eurozone periphery that was back then <a href="http://www.nytimes.com/2011/07/22/business/global/europes-new-bank-rules-still-favor-government-debt.html">treated as risk-free</a>. </p>
<p>But investors had underestimated how the waves triggered by the 2008 global financial crisis would affect the <a href="http://www.tandfonline.com/doi/abs/10.1080/09644008.2012.739614?journalCode=fgrp20">poorly designed</a> European monetary union. It was an accident waiting to happen and was first felt in Greece in 2010 when it became increasingly evident that Greek bonds could not be paid in full. </p>
<p>Shockingly enough, the solution was neither to have investors shoulder the consequences of their bad bets, nor to drastically fight the budgetary cause of the Greek deficit. <a href="http://www.independent.co.uk/news/business/comment/greece-crisis-imf-was-pushed-around-by-angela-merkel-and-nicholas-sarkozy-and-now-it-is-being-10356247.html">Defying even the IMF rulebook</a>, Europe’s political elites decided to keep both a dysfunctional state and an unsustainable sovereign debt in place. This was possible by financing Greek clientelism; but more importantly (and <a href="https://global.handelsblatt.com/edition/423/ressort/politics/article/study-finds-greek-bailouts-saved-banks-not-people">disproportionately</a>), by bailing out private investors – <a href="https://www.foreignaffairs.com/articles/greece/2015-07-07/pain-athens">especially</a> <a href="http://www.newyorker.com/news/john-cassidy/greeces-debt-burden-the-truth-finally-emerges">French and German banks</a>. </p>
<p>Of course, what was essentially a reimbursement of imprudent buyers of public debt has been deceptively depicted as a lofty act of European solidarity towards the Greek population. Greeks supposedly received money that could be fully repaid in due course. Likewise, Greek politicians equally misleadingly portrayed bailouts as “success stories” <a href="http://www.theguardian.com/world/2011/jul/17/greece-not-bankrupt-papandreou">helping Greece</a> from <a href="https://theconversation.com/why-weve-been-discussing-the-greek-bail-out-in-the-wrong-way-39884">going bankrupt</a>. </p>
<p>By not dealing with the essence of the debt crisis, the 2012 and 2015 bailouts were unavoidable in order to refinance an unpayable debt and recapitalise Greek banks (that were since suffering the side-effects of disastrous crisis management). And while the early bailout of debt was described as a bailout of Greeks, the subsequent <a href="https://rwer.wordpress.com/2015/07/15/stop-the-frenzy-please-its-just-about-rolling-over-the-debt/">rolling over</a> of the debt is even more <a href="http://www.ft.com/intl/cms/s/0/395ae5a0-142c-11e5-9bc5-00144feabdc0.html#axzz498p15b5s">misleadingly</a> portrayed as an endless influx of <a href="http://blogs.ft.com/brusselsblog/2015/06/25/leaked-greece-bailout-plan-sent-to-eurogroup/">desperately-needed</a> <a href="https://www.yahoo.com/news/eurozone-ministers-approve-first-tranche-greek-bailout-funds-181037147.html?ref=gs">injections of cash</a>. </p>
<p>Moreover, the conditions imposed on Greece in return for <a href="http://www.theguardian.com/world/2015/jun/29/where-did-the-greek-bailout-money-go">supposedly</a> <a href="http://www.cnbc.com/2015/06/16/cramer-greece-on-a-death-spiral-of-total-insanity.html">generous help</a> had <a href="https://theconversation.com/greek-parliament-passes-debt-agreement-but-european-democracy-is-on-its-knees-44624">little to do with economics</a>. Greece undoubtedly stands in needs of structural reforms (necessary for the modernisation of the Greek state – <a href="http://www.wsj.com/articles/real-greek-drama-is-about-reforms-not-debt-relief-1463000335">not</a> the resolution of the debt crisis). But <a href="http://prospect.org/article/what-reform-strange-case-greece-and-europe">the “reforms” demanded from Greece</a> are mostly a mix of <a href="http://www.wsj.com/articles/SB10001424127887324235104578239563893526152">destructive austerity</a> and <a href="http://www8.gsb.columbia.edu/chazen/globalinsights/node/300">punitive policies</a>. They might be best understood as moral reforms of the sort commanded by a <a href="http://www.d.umn.edu/cla/faculty/jhamlin/1095/The%20Protestant%20Ethic%20and%20the%20Spirit%20of%20Capitalism.pdf">Calvinist ethic</a>. </p>
<p><a href="http://www.huffingtonpost.gr/christos-papadimitriou/story_b_7627596.html">Predictably</a> <a href="http://www.ft.com/intl/cms/s/0/9a030cee-24f5-11e2-86fb-00144feabdc0.html#axzz498p15b5s">enough</a>, not allowing Greece to sustainably restructure its debts on the one hand, while imposing unreasonable “bailout conditions” on the other, marked the <a href="http://www.nytimes.com/interactive/2015/07/09/business/international/is-greece-worse-off-than-the-us-during-the-great-depression.html">greatest economic collapse in modern times</a>. All the while Greece is <a href="http://www.wsj.com/articles/real-greek-drama-is-about-reforms-not-debt-relief-1463000335">again blamed</a> for failing to recover. </p>
<h2>Reshaping our moral imagination</h2>
<p>In moving beyond a false morality tale, it is high time we start appreciating that recovery is not possible precisely because of the bailout programmes – not in spite of them. In so doing, we must restructure the way the crisis is framed, since the very words we use nurture an irresistible inclination to blame Greece for not achieving what successive “rescue aids” and “reforms” actually render impossible. </p>
<p>The associated fallacy that Greece is paying for its own fiscal sins must also be put to bed. This was mostly true until 2010. But if punitive economics could be somehow justifiable in the offset of the crisis, they have since become root causes of the current state of the Greek economy. German leadership cannot for much longer afford to claim a higher moral ground and put the blame squarely on Greece – let alone pretend to be the saviour of an ungrateful and defiant population. </p>
<p>I do not even go so far as to contend that Greece deserves debt relief on moral grounds. What I more moderately maintain is that the debt problem is unlikely to be resolved soon due to a moral imagination that has been misguided by the toxic belief that Greece has repeatedly received generous help, and is still suffering for its original fiscal sins. As an antidote, we need to disarm the vindictive morality tale that has been deceptively constructed and allow economic sense to take center stage.</p><img src="https://counter.theconversation.com/content/59754/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stratos Ramoglou does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Economic sense has been largely irrelevant in the unfolding Greek drama. Instead, morality has been at its heart.Stratos Ramoglou, Associate professor, University of SouthamptonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/454392016-01-10T19:14:33Z2016-01-10T19:14:33ZSeeing eurozone events through the lens of the global financial crisis<p>Some 75 years in the making, the eurozone as it currently exists has generally succeeded in its aims of establishing shared institutions, political constraints and economic benefits: a single currency, open borders, free trade agreements - and until 2008 - flourishing growth. </p>
<p>But cracks that began showing throughout 2015 this year show no sign of closing.</p>
<p>Since the growth in the number of refugees fleeing the conflict in the Middle East, primarily Syria, through Turkey to Greece and beyond, the Schengen agreement on travel sans papiers within large parts of the European union has come under pressure. Successive countries have blocked the flow of refugees, with <a href="http://www.independent.co.uk/news/world/europe/the-end-of-schengen-restrictions-by-denmark-and-sweden-are-threatening-europes-passport-free-zone-a6796696.html">restrictions on the Denmark Swedish border</a> the latest development. At the same time, anti-immigrant parties — in Hungary, France, and Poland — have made inroads electorally. </p>
<p>For the past seven years, I have been keeping a record of events associated with the global financial crisis, as they have occurred, and have also delved into the antecedents of the crisis. Over the past few years, events in Europe have attracted my attention, as the aftermath of the events in the US has played out in the eurozone and beyond. </p>
<p>I am continuing to update the analysis and timeline I have constructed, <a href="http://www.agsm.edu.au/bobm/papers/marksfinal.pdf">Learning Lessons? The Global Financial Crisis in Retrospect</a> as more events occur, or past events come to light. </p>
<p>The “European project” is looking shaky, despite Angela Merkel’s popularity in Germany, and the French success at shepherding the 2015 climate change agreement. </p>
<p>British Prime Minister David Cameron has recently agreed to allow his cabinet ministers <a href="https://theconversation.com/free-vote-on-eu-referendum-could-see-cameron-keep-the-peace-within-his-party-52828">to campaign on European Union membership</a>, with the referendum anticipated to happen this year. </p>
<p>Where the building blocks of Europe have served primarily political purposes, until the last few months the institutions have been very successful. </p>
<p>But the political actions have not always been informed by appropriate economics analysis, a case perhaps of political optimism overwhelming economic caution. And focus on recent political events has overshadowed the continuing creaking in the common currency itself. </p>
<p>In fact, when the common currency was proposed, several prominent economists argued that currency union would not work successfully without certain institutions: a bank of last resort (a central bank), a means of “harmonising” fiscal policy across eurozone countries. After all, within a currency union, individual nations’ macroeconomic policy is constrained: no country can devalue, say, or unilaterally affect monetary policy (although individual countries’ policies do affect current bond rates and hence their borrowing costs). </p>
<p>Even as the US Federal Reserve signals the end of the financial crisis, at least in the United States, by slightly raising the benchmark interest rate from almost zero, the first raise in over nine years, the eurozone continues to give concern. </p>
<p>Not only has the flood of refugees put pressure on the European institutions and agreements, but “Grexit” — the exit of Greece from the eurozone — and even “Brexit” — the exit of the UK from the EU — are still possible, perhaps even more so after the events of the past few months. </p>
<p>With the release of the movie, “The Big Short,” based on Michael Lewis’ book of the same name, it is perhaps time to be reminded that the global financial crisis was triggered by the US sub-prime lending scandals, which in turn occurred because the lessons of the Great Depression of the 1930s had been forgotten. </p>
<p>Laws which had prevented its recurrence for 70 years were diluted or abandoned, under the pressure of people and institutions who stood to gain, and also of some academic economists who believed in the virtues of unfettered markets. </p>
<p>And the economic and political stability of Europe matters to Australians, not merely because of the Enlightenment and the values we inherit from Britain and the Continent, not merely because of the ancestral links so many of us have with Europe, not merely because Europe is a nice place to visit, not merely because we buy European cars, cheese, wine, and movies, but because our wealth and jobs and security are tied, directly and indirectly, with the success of the European project.</p><img src="https://counter.theconversation.com/content/45439/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Robert Marks does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Troubles in the eurozone can be viewed as a continuing fallout to the 2008 global crisis.Robert Marks, Professor emeritus, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/492672015-10-28T05:31:16Z2015-10-28T05:31:16ZCan the EU keep the peace in Europe? Not a chance<p>The European Union <a href="http://europa.eu/about-eu/basic-information/eu-nobel/index_en.htm">won the Nobel Peace Prize in 2012</a> because of its “six decade-long contribution to peace and human rights in Europe”. In 2015, as the UK gears up towards its referendum on EU membership, we hear very often that the EU played a key role in building peace after World War II. For all its faults, <a href="http://www.bbc.co.uk/news/world-europe-19924216">the argument goes</a>, the European Union is the best peace project Europe has.</p>
<p>There are three reasons why this is wrong. The first is that European integration contributed very little to the building of peace in post-war Europe. The second is that the EU’s record in keeping the peace on its external borders is poor. The third is that the Euro has aggravated conflicts between the members of the Eurozone: between north and south, creditor and debtor, exporter and importer.</p>
<p>It may seem crazy to suggest that the EU is not a peace project. This is, after all, its founding narrative. But history suggests otherwise for two reasons.</p>
<p>One is that in the late 1940s and 1950s there were many more powerful forces leading to peace in Europe. The shift from warfare to welfare states, made possible by the class compromise put in place after World War II, was crucial. European cooperation was really just an extension of that deeper change in European societies. The <a href="http://www.politics.co.uk/reference/common-agricultural-policy">Common Agricultural Policy (CAP)</a> was intended to extend welfare provision to farmers. </p>
<p>Central to post-war peace in Europe was also the Cold War and the support given to Western Europe by the United States. Most important of all was the post-war boom. After the war, people wanted a better life and it was to their own governments that they turned.</p>
<p>Another reason is that the EU of today has little to do with European cooperation in the 1950s. Today’s EU has more recent roots. The <a href="http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:xy0022">Coal and Steel Community</a> was a cartel intended to make European steel production more competitive and give the French access to West German coal. This initiative was quickly overcome by the economic success that raised demand for coal and steel. By 1957, it was quietly folded into the <a href="http://www.civitas.org.uk/eufacts/FSTREAT/TR1.php">Treaty of Rome</a>.</p>
<p>The aim of the Treaty of Rome was to soften the effects of economic success. Growing economies push up wages and prices, which makes imports cheaper and leads to repeated balance of payments problems. Look at Britain’s <a href="http://www.ehs.org.uk/dotAsset/727f5198-c788-4481-b4b6-cea1af25155b.pdf">Stop-Go economic experience of the 1950s and 1960s</a>. A common external tariff, which raised the prices of imports, was Western Europe’s answer to this problem.</p>
<p>Today’s EU has its roots in economic crisis, not in economic success. Its history takes us back to the 1970s and the end of the post-war consensus. Governments sought many ways to exit this crisis and eventually settled on European market integration (the <a href="http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:xy0027">Single European Act</a>) plus fiscal consolidation through more robust external rules (the <a href="http://europa.eu/eu-law/decision-making/treaties/pdf/treaty_on_european_union/treaty_on_european_union_en.pdf">Maastricht Treaty</a>). This takes us to the EU and the euro of today.</p>
<h2>Groundhog Europe</h2>
<p>The European Union has not been very successful at promoting peace beyond its own borders. The EU does have a foreign policy but it is stuck in a time loop.</p>
<p>If one goes back 20 years to 1995, the kinds of questions being raised about Europe’s role in promoting peace related to whether it would speak with one voice. This was the time of the <a href="http://news.bbc.co.uk/1/hi/world/europe/4997380.stm">Yugoslav war</a> when European divisions meant that the United States got heavily involved in the Balkans. People wondered if the EU would finally become not just an economic giant but a political one, too. People described 1995 as a <a href="http://1995blog.com/2014/07/02/why-1995/">crossroads and a watershed moment.</a></p>
<p>Fast forward to 2005 and the <a href="http://www.lse.ac.uk/publicEvents/pdf/20050218GarethEvans.pdf">very same clichés are being used</a>. Two years after the US invasion of Iraq had divided Europe, people asked when it would speak with one voice. The EU was again at a crossroads. This was two years after the EU’s first Security Strategy, intended to give Europe a sense of direction in foreign policy.</p>
<p>Today, we hear much the same thing and Europeans are <a href="http://eeas.europa.eu/top_stories/2015/150627_eu_global_strategy_en.htm">once again drafting a new security strategy</a>. The <a href="https://theconversation.com/uk/topics/ukraine">war in Ukraine</a> led commentators to lament the divisions between EU member states. The rise of Islamic State in the Middle East has made people wonder if the EU will ever become a regional power or whether it will always have a “lowest common denominator” foreign policy.</p>
<p>As in the film Groundhog Day, where Bill Murray is stuck in a time loop, the European Union is forced to relive its foreign policy frustrations time and time again. Groundhog Day has a Hollywood-style happy ending; the EU may not be so lucky.</p>
<h2>The euro versus democracy</h2>
<p>The euro was meant to lead to convergence in Europe. It was expected that a single currency would lead to harmonisation of national business cycles. Instead, the <a href="https://www.ecb.europa.eu/press/key/date/2012/html/sp120615_1.en.html">buzzword amongst economists is heterogeneity</a>.</p>
<p>The euro has created new divisions but it has also cemented older ones. It has exaggerated the differences between productive and unproductive national economies. It has heightened intra-Eurozone competition. New <a href="https://theconversation.com/uk/topics/grexit">divisions between debtors and creditors have broken out</a>. There is no single European economy, just very different national economies. More than ever before, the economic map of Europe looks like it did in the 19th century when advanced northern societies complained about the “backwardness” of southern and eastern Europe.</p>
<p>A solution to this is to build a political union with fiscal powers. Transfers from rich to poor parts of Europe would iron out today’s enormous gaps. There is no political appetite for this anywhere, neither among elites nor among domestic publics. As a result, the survival of the Eurozone seems set against national democracy. Few accept this at present but the euro and national democracy may be incompatible.</p>
<p>We are right to ask if Europe can keep the peace. The answer is “no”. Peace in Europe owes much to other factors and the EU has done little to build peace beyond its borders. Peace within Europe has become fragile as the euro unleashes competitive pressures that pit national economies against one another.</p>
<hr>
<p>This is an edited version of a talk by the author at the <a href="http://www.festivalofideas.cam.ac.uk/events">Cambridge Festival of Ideas</a>. A full audio recording <a href="http://www.festivalofideas.cam.ac.uk/photo-gallery/audio-recordings">can be listened to here</a>.</p><img src="https://counter.theconversation.com/content/49267/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Chris Bickerton does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The European Union was billed as the most important post-WWII peace project. It has failed.Chris Bickerton, Lecturer in politics at POLIS, University of CambridgeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/456842015-08-26T09:51:09Z2015-08-26T09:51:09Z‘Hamilton’: the Broadway hip-hop musical every European leader should see<figure><img src="https://images.theconversation.com/files/92952/original/image-20150825-15920-1rgsvp2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Hamilton is shown whispering into Ben Franklin’s ear in Howard Chandler Christy’s depiction of the signing of the Constitution.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/uscapitol/6263666566/in/photolist-23sHQ9-axuVR9-4R48Yd-eUBrK5-7pNvhq-ise3F7-wQWG59-oyZ3wQ-ia9QAN-5AM4Te-5AM4PK">US Capitol/flickr</a></span></figcaption></figure><p>What do the new Broadway hip-hop musical <a href="http://www.hamiltonbroadway.com">“Hamilton”</a> and Europe’s debt crisis have in common? A great deal, actually.</p>
<p>“Hamilton,” which opened on August 6, celebrates the life and public career of one of our nation’s greatest statesmen, Alexander Hamilton, our first secretary of the treasury under President George Washington and the lead author of the most important and influential commentary on the Constitution, The Federalist. </p>
<p>European leaders such as German Chancellor Angela Merkel and Greek Prime Minster Alexis Tsipras, who <a href="http://www.nytimes.com/2015/07/30/world/europe/how-germany-prevailed-in-the-greek-bailout.html">squared off</a> recently over the latter’s desperate need for another bailout, should book front-row seats, because “Hamilton” has important lessons for them about debt and government. </p>
<h2>Hamilton’s stroke of genius</h2>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/92954/original/image-20150825-15875-1rhnxun.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/92954/original/image-20150825-15875-1rhnxun.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=880&fit=crop&dpr=1 600w, https://images.theconversation.com/files/92954/original/image-20150825-15875-1rhnxun.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=880&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/92954/original/image-20150825-15875-1rhnxun.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=880&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/92954/original/image-20150825-15875-1rhnxun.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1106&fit=crop&dpr=1 754w, https://images.theconversation.com/files/92954/original/image-20150825-15875-1rhnxun.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1106&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/92954/original/image-20150825-15875-1rhnxun.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1106&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Hamilton used the Roman pen-name Publius on his essays in The Federalist.</span>
<span class="attribution"><span class="source">US Treasury Department</span></span>
</figcaption>
</figure>
<p>Hamilton was instrumental in transforming the United States into a true nation, in particular by his policies and actions as treasury secretary, and the musical conveys the scope and drama of his achievement. </p>
<p>One of Hamilton’s most brilliant and successful policies was to have the federal government <a href="http://founders.archives.gov/?q=Ancestor%3AARHN-01-06-02-0076-0002&s=1511311111&r=1">assume</a> the Revolutionary War debts of the states, which it did in 1790. </p>
<p>Hamilton recognized that the United States would be better able than individual states to make regular payments on those debts and ultimately to retire them. Further, he recognized that the government could use the debt as a means to stimulate economic growth, bolster the strength of the new nation’s currency and shore up its honor in the community of nations – by showing that the US would meet its obligations.</p>
<p>One key insight also drove Hamilton’s policy. He saw that consolidating state debts into a single national pool would require a single national policy. No longer would the United States be plagued by divergent or conflicting state policies. Hamilton ensured that his plan would promote national unity. </p>
<p>To this day, scholars of American constitutional and legal history like us, who try hard to maintain their objectivity in interpreting the past, find it difficult not to admire Hamilton’s constitutional, legal, economic and political creativity. And rarely have Hamilton and his policies seemed more relevant than today, particularly for Europe as it struggles to prevent Greece’s debt crisis from ripping apart the eurozone and potentially the European Union. </p>
<h2>A clash of nations</h2>
<p>In this crisis, we see individual European nations clashing with one another.</p>
<p>Germany and its supporters have insisted on imposing strict austerity measures on Greece in exchange for a third bailout needed to prevent the collapse of the Greek economy – even at the price of stripping Greece of its sovereign power to determine the structure and workings of its economy and society. </p>
<p>Some even charge Merkel with seeking to turn Greece into a colonial satellite by means of Germany’s economic clout, as it did with its <a href="http://www.amazon.com/Inside-Hitlers-Greece-Experience-Occupation/dp/0300089236/ref=sr_1_1?ie=UTF8&qid=1440440396&sr=8-1&keywords=mazower+greece">military might</a> during World War II. </p>
<p>Nor have Greece’s political leaders played innocent roles. By holding a referendum on the EU’s proposed bailout for Greece, Tsipras and his government sought to blackmail Merkel into abandoning her demands for austerity by <a href="http://www.theguardian.com/world/2015/mar/22/german-anger-towards-greece-mounts-over-bailout-as-tsipras-meets-merkel">asking</a> for reparations for the Nazis’ occupation of Greece and implying current leaders are bent on ignoring Greek democracy and the democratically expressed wishes of the Greek people.</p>
<p>Tsipras refused to follow the consensus-building rules by which the EU has governed itself. In our view, his embrace of populist, hardball politics has done serious harm to the mechanisms of European governance, risking destroying them. </p>
<h2>Preventing destructive political conflicts</h2>
<p>In the 1790s, by contrast, the federal government’s assumption of state debts under Hamilton’s guidance prevented similar destructive political conflicts in the early United States. </p>
<p>When Hamilton proposed his plan to bolster the nation’s public credit, he did so within the context of a constitutional system in which there was a general government, at least arguably supreme in certain spheres of activity over the states. In addition, it was within the context of a union that many Americans saw as necessary to their new independence and ability to create a nation and maintain their liberties. </p>
<p>Vigorous, contentious debates within Congress and the public could thus unfold without threatening to burst the Union or the Constitution – even though some states, which had already paid their Revolutionary War debts, resented that the federal government would relieve other states of their burdens.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/92947/original/image-20150825-15883-1h06xvz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/92947/original/image-20150825-15883-1h06xvz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/92947/original/image-20150825-15883-1h06xvz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=428&fit=crop&dpr=1 600w, https://images.theconversation.com/files/92947/original/image-20150825-15883-1h06xvz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=428&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/92947/original/image-20150825-15883-1h06xvz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=428&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/92947/original/image-20150825-15883-1h06xvz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=538&fit=crop&dpr=1 754w, https://images.theconversation.com/files/92947/original/image-20150825-15883-1h06xvz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=538&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/92947/original/image-20150825-15883-1h06xvz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=538&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">America’s founding fathers weren’t immune to destructive political conflicts. Hamilton and his contemporaries, however, successfully turned politics into a peaceful war of words and ideas. In this anti-Republican cartoon, Jefferson is the one standing on a table.</span>
<span class="attribution"><span class="source">Federalist cartoon via www.shutterstock.com</span></span>
</figcaption>
</figure>
<h2>Lessons for Europe</h2>
<p>Did Hamilton and other founding fathers of the United States behave better than Europeans today? </p>
<p>To be sure, political leaders at all times and in all places will do what they must to please supporters and constituents who place their selfish fears and interests ahead of the need to maintain rational government. By contrast with most of his contemporaries, Hamilton’s defiant candor, which sometimes amounted to tactlessness, often made him and his policies more enemies than friends.</p>
<p>Even so, Hamilton understood, as did most politicians of his time, that the way to avoid irrational politics was to create governmental structures for a federal republic that channeled decision-making in productive directions. </p>
<p>In helping to create the first system of national politics, Hamilton and other founding fathers devised a system that forced voters who wanted to make effective and constructive political choices to unite behind centrist candidates and to make binary choices between partisan alternatives. </p>
<p>A case in point is the election of 1800, when voters rejected many of Hamilton’s domestic and foreign policies, elected his archrival Thomas Jefferson to the presidency and gave the Jeffersonian Republicans control of Congress. This result testifies further to the wisdom of the system that Hamilton helped create in Philadelphia in 1787. That system often showed its ability to contain and damp down heated disagreement over major policy issues. </p>
<p>Indeed, one aspect of the 1800 election that showed the Constitution’s strength and resiliency was the peaceful transfer of power from the Federalists to the Republicans, when President John Adams stepped down from office after losing, making way for Jefferson to become the third president. Behind the scenes, Hamilton urged his fellow Federalists not to block Jefferson’s election, though he admitted his dislike of Jefferson and his political views.</p>
<h2>An end to blackmail and conquest</h2>
<p>The Greek debt crisis is only the latest problem demonstrating the need to create European political structures that can prevent games of blackmail and conquest and give citizens the political power to attain the economy and society they desire. </p>
<p>Europeans themselves are aware of the need for such strengthening and reform. As the European Commission’s 2015 report “Completing Europe’s Economic and Monetary Union” (EMU) <a href="http://ec.europa.eu/priorities/economic-monetary-union/docs/5-presidents-report_en.pdf">notes</a>:</p>
<blockquote>
<p>A complete EMU is not an end in itself. It is a means to create a better and fairer life for all citizens, to prepare the Union for future global challenges and to enable each of its members to prosper.</p>
</blockquote>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/92949/original/image-20150825-15891-rwi3sm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/92949/original/image-20150825-15891-rwi3sm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=988&fit=crop&dpr=1 600w, https://images.theconversation.com/files/92949/original/image-20150825-15891-rwi3sm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=988&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/92949/original/image-20150825-15891-rwi3sm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=988&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/92949/original/image-20150825-15891-rwi3sm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1242&fit=crop&dpr=1 754w, https://images.theconversation.com/files/92949/original/image-20150825-15891-rwi3sm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1242&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/92949/original/image-20150825-15891-rwi3sm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1242&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Jean Omer Marie Gabriel Monnet, considered the EU’s founding father, saw the American model as the right one for Europe.</span>
<span class="attribution"><span class="source">Monnet statue via www.shutterstock.com</span></span>
</figcaption>
</figure>
<p>Hamilton’s career, and the American founding experience in general, offer insight as to how those structures might be built. </p>
<p>Statesmen such as the late Jean Monnet – considered the <a href="https://www.foreignaffairs.com/reviews/review-essay/1977-04-01/what-jean-monnet-wrought">founding father</a> of the European Union – and modern scholars such as British political philosopher Larry Siedentop have often <a href="http://www.amazon.com/Democracy-Europe-Larry-Siedentop/dp/0231123779/ref=sr_1_4?ie=UTF8&qid=1440440601&sr=8-4&keywords=siedentop">invoked</a> the American example as a model for a United States of Europe, or of a European Union beyond what we see today. </p>
<p>While recognizing that ethnicity, religion and national heritage may serve as barriers to such a union, these scholars and statesmen have argued for a rational recognition among Europeans of their many shared interests. That step would help to replace self-interested and bitter squabbling among nation-states with a rational means of controlling nationalist resentments, emotions and suspicions. </p>
<p>In the US founding era (comprising the years from the 1760s through the 1830s), even though the early states had few sensible reasons to remain separate and many good reasons to coalesce, suspicions, jealousies and resentments comparable to those plaguing Europe today reigned. </p>
<p>These suspicions and resentments, and Americans’ fears of a too-powerful general government, were so strong that, during the framing of the US Constitution in 1787, the delegates to the Federal Convention specifically crossed out the words “nation” or “national” from the working draft. Even so, they created a government strong enough to protect national interests while checked and balanced enough to safeguard democratic governance and individual rights.</p>
<h2>Lessons for US</h2>
<p>Not only Europeans could learn a thing or two about rational political decision-making from the new musical “Hamilton.” Americans, also plagued today by a vicious, bitter, either/or form of political conflict, could benefit from the lessons of Hamilton and the other founding fathers.</p>
<p>Those who see “Hamilton” will gain a renewed appreciation for the need to preserve rationality in American politics. The musical’s presentation of complex and difficult policy disputes between Hamilton and Jefferson as well-staged, well-written rap battles shows how words and arguments matter. The show’s author, Lin-Manuel Miranda, recognizes the power of words not only in his use of hip-hop and rap forms but in his close attention to getting the substance of his rap lyrics right. </p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/92955/original/image-20150825-15912-1812951.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/92955/original/image-20150825-15912-1812951.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=972&fit=crop&dpr=1 600w, https://images.theconversation.com/files/92955/original/image-20150825-15912-1812951.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=972&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/92955/original/image-20150825-15912-1812951.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=972&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/92955/original/image-20150825-15912-1812951.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1221&fit=crop&dpr=1 754w, https://images.theconversation.com/files/92955/original/image-20150825-15912-1812951.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1221&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/92955/original/image-20150825-15912-1812951.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1221&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The title page of THE FEDERALIST, written by Hamilton, James Madison and John Jay to support and explain the Constitution.</span>
<span class="attribution"><span class="source">Federal Hall National Memorial</span></span>
</figcaption>
</figure>
<p>The play is pervaded by one great insight: the power of language and reason. That power not only enables Miranda’s Hamilton to transcend his humble roots and vault into political leadership of the Revolution and of the creation of an American constitutional republic, it also enables all the founding fathers who appear in the show – Hamilton, Washington, Jefferson, Madison and Burr – to order the American political world with words. </p>
<p>“Hamilton” reminds us once again of the power of reason and of words in the political realm, and of the need for reason to anchor that political world and to direct its course.</p>
<p>Perhaps “Hamilton” might persuade Americans who see it, whether conservative or progressive, of the foolishness of hardball politics and of the need to nurture institutions that promote compromise and to accept it as a legitimate means of getting political things done. </p>
<p>It may convince people that their leaders cannot satisfy every interest demanding satisfaction, and it also may emphasize the need to show respect to their opponents as well as to the values by which those opponents live.</p><img src="https://counter.theconversation.com/content/45684/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Alexander Hamilton and the policies he pursued as America’s first treasury secretary set the US on a course of national unity. That’s just what Europe needs today.William E. Nelson, Weinfeld Professor of Law, New York UniversityR B Bernstein, Lecturer in Political Science, City College of New YorkLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/448902015-07-20T18:01:39Z2015-07-20T18:01:39ZFrom Greece to Iran: the importance of credibility<figure><img src="https://images.theconversation.com/files/89045/original/image-20150720-12543-59ux7r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A billboard in Tehran.</span> <span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Iran_2007_074_Tehran_Grand_Ayatollah_Sayyed_Ali_Hosseini_Khamenei_(1732472092).jpg">David Holt</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>Lord Palmerston, Britain’s 19th-century prime minister, was reputedly the first person <a href="http://thinkexist.com/quotation/nations-have-no-permanent-friends-or-allies-they/771609.html">to have coined the phrase</a> that</p>
<blockquote>
<p>Nations have no permanent friends or allies, they only have permanent interests. </p>
</blockquote>
<p>Many statesman have staked their careers on that claim, none more famously than Ronald Reagan when <a href="https://answers.yahoo.com/question/index?qid=20061230230553AAjxN4c">he quoted</a> an old Russian proverb in referring to his negotiations with then Soviet President Mikhail Gorbachev about an arms control treaty,</p>
<blockquote>
<p>Trust, but verify. </p>
</blockquote>
<p>The gist of both is that sometimes countries have to take a chance and make deals with people that they don’t trust because the possible benefits outweigh the obvious costs. </p>
<p>They have to put aside the historical track record – the facts – in order to try to create a new relationship beneficial to everyone. In effect, you need to stick to your interests and ignore everything else.</p>
<p>After many years of friction and negotiation, there is something deeply symbolic in the fact that a deal between Greece and the other members of the EU, and between Iran and the permanent members of UN’s Security Council plus Germany, was concluded in the same week.</p>
<p>In both cases, the critics can understandably point to the track record of failure and deceit. In both cases, the advocates can suggest that the terms of the final agreements take into account that distrust in building safeguards for implementation – the “verify” component. </p>
<p>But in the end, progress – in one case toward mutual prosperity and in the other toward nuclear stability – involves a substantial leap of faith where none appears justified. </p>
<p>So looking at both agreements, why did all sides reach an agreement? </p>
<p>And whose reputation has suffered in their aftermath?</p>
<h2>Greece: whose reputation is really on the line?</h2>
<p>Of the two, the outcome of the negotiations between Greece and its eurozone partners was perhaps more predictable – Greek defiance followed by capitulation. </p>
<p>The Greeks have stressed that they feel “humiliated.” But whose reputation has really suffered as a result of these events?</p>
<p>When the euro was created in 1999, strict laws were created about budgetary expenditures that all partners had to follow. Members of the eurozone have to respect the <a href="https://en.wikipedia.org/wiki/Stability_and_Growth_Pact">Stability and Growth Pact</a>, which sets agreed limits on <a href="https://en.wikipedia.org/wiki/Government_budget">deficits</a> and <a href="https://en.wikipedia.org/wiki/National_debt">national debt</a>. Each member country has to stay within the limits on government deficits (3% of GDP) and debt (60% of GDP). Eurozone member states face fines if they exceed these amounts. If a country broke the rules in three consecutive years, the <a href="http://www.civitas.org.uk/eufacts/FSINST/IN1.php">European Commission</a> could impose a hefty fine of up to 0.5% of its GDP.</p>
<p>Greece became a member in 2001 and inherited these rules. But it was an unspoken secret that Greece was unprepared to meet these requirements. Like other members, it routinely ignored them. </p>
<p>Indeed, <a href="http://ec.europa.eu/geninfo/query/resultaction.jsp?query_source=ECFIN&QueryText=Greece+2005&swlang=en&x=0&y=0">proceedings</a> were initiated against Greece as early as 2005 but were abandoned, largely for political reasons. If countries like France could flout the rules, then why not Greece, a country with a small economy that was far less important to the health of Europe’s economy? By 2006, even <a href="http://www.civitas.org.uk/eufacts/FSECON/EC10.php">Germany’s debt</a> exceeded the 60% limit.</p>
<p>The pact’s guidelines were reformed in 2011 to allow for greater flexibility. Nonetheless, everyone trundled along, pretending that Greece’s behavior was acceptable when it clearly wasn’t. </p>
<p>Yet German and French banks had spend years pouring tens of billions of euros into Greece in search of profit, ignoring the <a href="http://www.theguardian.com/world/datablog/2015/jun/19/the-greek-debt-what-creditors-may-stand-to-lose">growing mountain</a> of Greek debt. </p>
<p>Their investment behavior was reckless, similar to American banks before the Great Recession. But, like their American counterparts, they anticipated that they wouldn’t have to pay the bills if things didn’t work out. They would snare the benefits but avoid the costs – what economists call <a href="http://economictimes.indiatimes.com/definition/moral-hazard">“moral hazard.”</a> </p>
<p>The French and German bankers were right. In 2012 they faced oblivion under a mountain of Greek debt. By this year, all but a small fraction of the debt had been moved from their balance sheets to those of their national governments and to international creditors. The <a href="http://www.bbc.co.uk/news/world-europe-33399718">exposure of these banks</a> has now been significantly reduced. </p>
<p>Greece may feel <a href="http://www.bbc.co.uk/news/world-europe-33527917">humiliated</a>. Its reputation may have suffered to the point that many suspect that the <a href="http://www.nytimes.com/2015/07/13/world/europe/greece-debt-plan.html">final agreement</a> can’t even – or simply won’t – be implemented by any Greek government. </p>
<p>But the agreement <a href="http://www.nytimes.com/2015/07/18/world/europe/germany-risks-reputation-with-harsh-tone-on-greek-debt-crisis.html">masks a challenge</a> to the credibility of the French, the Germans and everyone else that ignored their own rules in search of profit – and then chastised the Greeks for their financial folly. </p>
<p>And ultimately, as was the case in the US in the first Obama administration, it is the <a href="http://www.nytimes.com/2015/07/18/world/europe/germany-risks-reputation-with-harsh-tone-on-greek-debt-crisis.html">taxpaying citizens</a> of these countries who will foot the bill. </p>
<h2>Which Iran negotiated the deal?</h2>
<p>The deal with Iran is even more complex, in large part because it is hard for the Western powers to know who is in charge – and credible. </p>
<p>The representatives of supposedly moderate President Hassan Rouhani <a href="http://www.wsj.com/articles/back-home-irans-leader-tries-to-sell-nuclear-deal-1437081590">declared victory</a> last week because the agreement allows Iran to escape from the crushing weight of UN and American sanctions and provided the opportunity for greater future collaboration with the West on a number of issues. </p>
<p>But, on July 18, Iran’s Supreme Leader Ayatollah Ali Khamenei <a href="http://www.nytimes.com/aponline/2015/07/18/world/middleeast/ap-ml-iran-nuclear.html?_r=0">undermined</a> any spirit of detente by declaring Iran’s avowed opposition to the US and calling once again for the total destruction of Israel, which he described in his speech as a “terrorist, baby-killer government.” </p>
<p>While his speech may have been designed to appease hard-liners at home, the effect abroad will be to undermine President Obama’s efforts to convince the US Congress that it should verify the agreement and to reinforce Israeli Prime Minister <a href="http://www.nytimes.com/aponline/2015/07/19/world/middleeast/ap-ml-israel-iran.html">Benjamin Netanyahu’s claim </a>that it is a “historic mistake.” </p>
<p>Both Iran’s credibility as a member of the “community of nations” and the agreement’s credibility in portending a new collaboration with the West, was, I would argue, swiftly and brutally destroyed.</p>
<p>President Obama’s credibility also suffered a major setback, unless he can convince his Republican opponents that Iran can be boxed in by the terms of the agreement, despite its reinforced reputation as an ambitious and unrelenting threat to the US and its regional allies.</p>
<h2>Verify – but trust?</h2>
<p>So, as a new week starts, the question remains: will either the July 13 Greece agreement or July 14 Iran deal achieve its promise for, respectively, prosperity and greater policy coordination in Europe and nuclear stability in the Middle East? </p>
<p>One thing is clear: when it comes to statecraft, “trust” is just as important as “verify” when it comes to negotiating truly momentous agreements. </p>
<p>In its absence, the prospects for peace and prosperity look grim.</p><img src="https://counter.theconversation.com/content/44890/count.gif" alt="The Conversation" width="1" height="1" />
Lord Palmerston, Britain’s 19th-century prime minister, was reputedly the first person to have coined the phrase that Nations have no permanent friends or allies, they only have permanent interests. Many…Simon Reich, Professor in The Division of Global Affairs and The Department of Political Science, Rutgers University - NewarkLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/447442015-07-20T10:27:40Z2015-07-20T10:27:40ZReading between the lines of Greece’s bailout: debt relief is inevitable – just not yet<figure><img src="https://images.theconversation.com/files/88944/original/image-20150720-2328-1qz1x3k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">How to explain Greece's bailout puzzle? </span> <span class="attribution"><span class="source">Greece puzzle via www.shutterstock.com</span></span></figcaption></figure><p>At first glance, the latest developments in the Greek bailout saga seem a little puzzling, particularly those concerning debt relief. </p>
<p>The current <a href="http://www.consilium.europa.eu/en/press/press-releases/2015/07/12-euro-summit-statement-greece/">proposal</a> from Greece’s eurozone creditors does not offer debt relief. To the contrary, it <a href="http://www.bbc.com/news/business-33505555">emphasizes</a> that debt relief is not involved: “nominal haircuts on the debt cannot be undertaken.” </p>
<p>Yet the day after Greece agreed to the proposal, the International Monetary Fund <a href="http://www.imf.org/external/pubs/ft/scr/2015/cr15186.pdf">released</a> a report showing that Greece cannot possibly pay back its current debt. This position is hardly surprising in itself -– the IMF has been saying as much for months. But the timing was mystifying because the IMF had initially endorsed the proposal. In fact the eurozone countries would <a href="http://blogs.wsj.com/moneybeat/2015/07/13/heres-what-the-greek-deal-entails/">not have agreed</a> to the proposal otherwise. </p>
<p>Truth be told, no one seems to think the latest bailout (alone) will work, the official word notwithstanding. Whether it’s the <a href="http://www.wsj.com/articles/germanys-schauble-dismisses-greek-haircut-option-1437032027">German finance minister</a>, the <a href="http://www.telegraph.co.uk/finance/economics/11743163/Greece-news-live-Brussels-prepares-to-release-emergency-loan-to-get-Greece-through-July.html">Greek prime minister</a> who agreed to the deal, the <a href="http://www.bloomberg.com/news/articles/2015-07-17/greek-bailout-needs-debt-reduction-imf-s-lagarde-says">head of the IMF</a> or the pundits, there’s a “Greek” chorus in the background wailing that this bailout will just bring another crisis.</p>
<p>In other words, it’s a puzzle any way you look at it. If debt relief will ultimately be essential, why not just provide it now? Why insist on fiscal and structural reforms that will increase Greece’s economic pain? </p>
<p>Could it be that eurozone leaders are simply setting the stage, however quietly, for significant debt forgiveness in the not-too-distant future? </p>
<p>Here’s why that idea may not be so far-fetched – and why there probably isn’t any better time than now, with Greece’s banks in crisis, to pursue reforms as a step toward debt relief. We just need to read between the lines.</p>
<h2>Why debt relief must wait</h2>
<p>First of all, proposing debt relief today would be politically dangerous for leaders in the eurozone creditor countries. Their voters <a href="http://www.washingtonpost.com/blogs/monkey-cage/wp/2015/07/12/other-europeans-say-they-cant-trust-greece-the-problem-goes-both-ways/">do not trust</a> Greece, given the country’s many unfulfilled promises of reform, and many view debt forgiveness as unfair. </p>
<p>It’s difficult for pensioners in Latvia, who <a href="http://ec.europa.eu/economy_finance/publications/publication14992_en.pdf">retire</a> on average at 63, to see why it’s fair for them to sacrifice to help pensioners in Greece, who retire on average at 60 – and <a href="http://greece.greekreporter.com/2014/12/04/75-of-greek-pensioners-enjoy-early-retirement/">sometimes</a> at 50. It’s difficult for voters in Finland, who <a href="http://www.kpmg.com/global/en/issuesandinsights/articlespublications/vat-gst-essentials/pages/finland.aspx">pay</a> a value-added tax (VAT) of 24%, to see why it’s fair for them to be taxed to support voters on Greek islands, many of whom <a href="http://www.ekathimerini.com/199529/article/ekathimerini/business/four-tier-vat-status-for-islands">pay</a> a VAT of only 13%. </p>
<p>So Europe’s leaders face a catch-22. Greece cannot recover without debt relief, but Europe’s voters will not approve such forgiveness. To complicate matters further, the Greeks think they merit relief since they have already implemented some reforms and their economy is suffering.</p>
<p>Economic activity <a href="http://money.cnn.com/2015/01/22/news/economy/greece-elections-austerity-syriza/">is down</a> by almost 30% since 2008. Prices are falling 2% per year. The banks are still closed, limiting Greeks to withdrawals of just €60 a day. Overall unemployment is 26%, and unemployment among the young is 50%. Homeless shelters are overwhelmed. Proper medical care is out of reach for many people.</p>
<p>Naturally the Greeks think they’ve suffered enough.</p>
<h2>Why insist on reform amidst the ruins</h2>
<p>Given the terrible economic pain in Greece, why do its eurozone creditors insist on fiscal and structural reforms that will make things even worse? Reform is critical financially, economically and politically.</p>
<p>Greece already owes more than it can pay, yet Greece’s government keeps borrowing more because it still runs a substantial <a href="http://www.tradingeconomics.com/greece/government-budget">budget deficit</a> every year.</p>
<p>The <a href="http://www.theguardian.com/business/2015/jul/13/greece-bailout-agreement-key-points-grexit">bailout plan</a> requires fiscal reforms that will dramatically reduce the need for borrowing: Greece must bring its pension system to financial sustainability via “comprehensive reform,” streamline VAT and broaden the tax base and introduce “quasi-automatic spending cuts” that kick in if the government can’t hit its targets. </p>
<p>Sustainable economic growth also requires structural reform. Existing Greek laws and regulations severely impede business activity and strangle job creation, all of which reduce tax revenues and make it hard for Greece to balance its budget. The deal aims to enhance competition, introduce greater labor-market flexibility and privatize certain industries. </p>
<p>History shows that these reforms will make a big difference to Greece’s economy. Similar reforms brought Germany to economic dominance within Europe and enabled China to explode onto the world economic scene. And the reforms are likely to pass: most Greeks strongly <a href="http://greece.greekreporter.com/2015/06/16/poll-7-in-10-greeks-want-the-euro-at-any-cost/">support</a> their country’s membership in the eurozone and are willing to pay a steep price to keep it. </p>
<p>But the political benefits of reform are just as critical as their financial and economic benefits. By implementing the reforms, Greece could alleviate voter distrust among its creditor countries and reduce the perceived unfairness in debt relief. Thus the deal could ultimately make it politically feasible for leaders in these countries to propose significant forgiveness. </p>
<p>The adjustments associated with reform will be very painful, and the Greek economy is already in bad shape. Indeed, it was to avoid such pain, or at least spread it out, that Greek voters so often opted to slow or stop reform in the past. Unfortunately, slowing reform over the past year led the country into greater debt, precipitating the current crisis, so the rest of Europe will no longer support that option. </p>
<p>And the one option still available to Greece -– spurning its creditors altogether –- would be even worse than reform because it would intensify the banking crisis. </p>
<h2>Banking crisis boosts Europe’s leverage</h2>
<p>It is the banking crisis – which began after Prime Minister Alexis Tsipras surprised everyone in late June with his call for a referendum, prompting the European Central Bank to cap how much Greek lenders could borrow – that gives creditors the most leverage over Greece. </p>
<p>To review: the <a href="http://www.abc.net.au/news/2015-07-18/greek-banks-to-reopen-monday-but-capital-controls-remain/6631014">bank closures</a> in Greece have sent the economy reeling, firms are closing at an accelerated rate, and Greek banks are at risk of insolvency. The banks have just reopened, but they’re still desperate for cash.</p>
<p>If the banks are not recapitalized soon, they’ll sharply curtail lending, and economic activity will fall precipitously. Greece would be forced out of the eurozone and would have to adopt a new, devalued currency. Greeks would find euro-denominated debts to foreigners more difficult to repay, and many would default. The defaults would delay the return to growth because foreign lenders would be even more reluctant to extend credit in the future. </p>
<p>Key to the new political calculus is Greece’s inability to recapitalize its own banks. Because it is so deeply in debt, the Greek government has no financial resources to spare. It is already behind in paying regular expenses. And the Greek central bank gave up the power to recapitalize the banks by printing new money when Greece joined the euro. </p>
<p>To recapitalize its banks and avoid economic implosion, Greece needs an immediate infusion of foreign funds. This gives Europe unprecedented leverage to help Greece help itself. By making current aid depend on immediate reform, Europe changes the calculus for Greek lawmakers when voting on reform proposals: it increases the payoff to voting Yes, because it helps Greek voters avoid a deeper banking crisis, and it reduces the costs to voting Yes, because the eurozone itself will take some of the political heat. </p>
<p>What’s in it for the eurozone? Its leaders would prefer to avoid the uncertainties and precedents of a Grexit. And in the long run a stronger Greek economy will import more of their products, supporting economic growth throughout the region. And, of course, a stronger Greek economy will need less debt relief; who can complain about that?</p>
<h2>What’s with the IMF?</h2>
<p>Another puzzle: why would the IMF acquiesce to the current agreement if it believes debt relief is critical? Keep in mind that the IMF wants to maximize its chances of being paid back. Those chances rise whenever Greece implements reforms, because they strengthen the economy. </p>
<p>The IMF could also benefit indirectly from reforms because they might alleviate the political opposition to debt relief. Forgiveness from other institutions frees up resources in Greece that can be used to pay back the IMF. </p>
<p>In short, another incentive for not insisting on immediate debt relief could be that waiting is required to make reform happen, and reform is politically necessary for actual debt relief to occur down the road.</p>
<h2>Clues that debt relief lies ahead</h2>
<p>If the Eurozone creditor governments do have in mind a long-run plan that includes significant debt relief, they clearly cannot openly discuss it today. </p>
<p>Nonetheless, their close cousins in the European Commission called this week for just that: an eventual “<a href="http://www.reuters.com/article/2015/07/15/eurozone-greece-eu-assessment-idUSB5N0ZA05420150715">reprofiling</a>” of Greece’s debt conditional on “a far-reaching and credible reform program.” Reprofiling amounts to implicit debt forgiveness through the lengthening of maturities, deferring of interest and similar adjustments. </p>
<p>The <a href="http://www.consilium.europa.eu/en/press/press-releases/2015/07/12-euro-summit-statement-greece/">eurozone plan</a> itself hints at this possibility. The first sentence highlights the importance of rebuilding trust. Specific reform proposals target the perception of unfairness, stressing that Greece should match policy standards elsewhere in Europe. For example, “labor market policies should be aligned with international and European best practices.” </p>
<p>And tucked in at the end is a brief but explicit hint of possible future forgiveness: </p>
<blockquote>
<p>Against this background, in the context of a possible future [European Stability Mechanisms] programme … 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. </p>
</blockquote>
<p>Of course, this vague gesture toward forgiveness is immediately linked to the necessity of reform: “These measures will be conditional upon full implementation of the measures to be agreed in a possible new programme.” </p>
<p>So Greeks and others who think the Germans are being a little harsh with their demands for austerity without debt relief should take heart. Good things may ultimately come to those who wait – and endure.</p><img src="https://counter.theconversation.com/content/44744/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Carol Osler does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>No one seems to really believe the latest bailout plan will work without debt relief. But the only way to get Greece to adopt essential reforms is to pretend it isn’t in the cards.Carol Osler, Professor of Business, Brandeis UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/443572015-07-19T20:12:36Z2015-07-19T20:12:36ZGreece’s best chance of escaping economic misery was a ‘Grexit’<p>Greece has a bad reputation. In default on its debts for half of the modern era. A dysfunctional economy, with a leaky tax system and retirement for the young. The reputation is somewhat deserved. In my view however, the blame for the ongoing fiasco that is Greece lies squarely with the European Union and IMF, and the pain for Greeks will not end unless they give up on those institutions and properly default, as well as repairing their economy.</p>
<h2>The world’s first default was in… Greece</h2>
<p>In the 5th Century BC the Greek city states borrowed from the Greek Treasury, then located on the island of Delos. The first sovereign default in history occurred in 454 BC when some of those city states started to skip payments. </p>
<p>In the modern era Greece has the record for the longest period in default of its loans. In 1824 Greece began borrowing to finance the costs of independence from the Turks, and subsequently to finance civil war. A debt of initially half a million pounds, and added to by further borrowings from England, France and Russia accrued to more than ten million pounds by 1878. </p>
<p>During the period between 1824 and 1878 the Greeks were permanently in default on these borrowings. However, in this period I would argue that the blame for the default was at least as much with the lenders, for funding Greek misadventures and expecting payment in full in return – a theme to which I’ll return.</p>
<p>In more recent years the problems in Greece began well before the financial crisis. In 1992 the Maastricht Treaty established the European Union. The Treaty laid out the roadmap for monetary union and the Euro, but also required countries to have a public debt to GDP ratio below 60% of GDP, deficits below 3% of GDP and inflation below 1.5%. </p>
<p>If countries did not meet these targets they would not be admitted to the Euro. The rules are a very sensible way of ensuring that countries that have problems with public debt do not get into difficulties financing those debts in the absence of independent monetary policy. The problem is that in Europe rules relating to economic management are routinely violated. And so the Greeks were admitted to the Eurozone in 2001 even when their deficits and debts were well in excess of the Maastricht requirements. </p>
<h2>Sins revealed</h2>
<p>The decision to admit Greece was based on the belief that Greek public debt and deficits were falling. As it turns out the current CEO of Goldman Sachs, Lloyd Blankfein, helped the Greek government hide some of its public debt through a complicated debt swap, and so the belief that public debt was falling was very misguided.</p>
<p>The Athens Olympics saw further problems with rising Greek debts, and by the time the global financial crisis hit, Greek deficits and debts were well and truly out of control. When the PASOK government took office in October 2009, it revised upwards its estimates of the budget deficit that year to 12% of GDP. It turned out that the actual deficit was 15.4% of GDP and its total public debt was revised upwards to €300 billion, or 130% of GDP.</p>
<h2>What Greece needed and what Greece got</h2>
<p>It was clear at this point that the Greek situation was unsustainable. Greece needed economic restructuring and a write-down of their debt in order to move forward. This is not what they got. </p>
<p>The problem was that €134 billion of the Greek debt was owed to banks in Europe, and in particular German and French banks. The first Greek bailout in 2010 was not a bailout of Greece, but a bailout of French and German Banks, engineered by the ‘Troika’ – the IMF, EU and European Central Bank. This bailout saw the Troika gradually buy Greek debt from mostly French and German banks. Four years after this bailout European banks outside of Greece had sold their Greek government bonds, with these bonds now being held by EU governments, the ECB and IMF. </p>
<p>Germany’s exposure to Greek bonds increased, but the exposure shifted from the banks to the German government. Total French exposure to Greece fell over this period, with increases in the French government’s bond holdings being more than offset by €50 billion of sales of Greek debt by French banks. All of these deals shift the exposure of European banks, but do nothing for Greece. With the leadership of the EU and ECB dominated by French and Germans, and a French IMF Managing Director it is not surprising that the first Greek bailout was really a bailout of French and German Banks, and did very little in terms of putting the Greek economy and finances onto a more stable footing. </p>
<p>Philippe Legrain, in his book European Spring has described the Eurozone as a glorified debtors prison, and the monstrous undemocratic creditors racket – sentiments that I entirely agree with.</p>
<p>One year after this first bailout it was clear that the first bailout was not working, and negotiations for a second bailout began. What Greece got out of these first two bailouts was very little in the way of realistic debt relief, very little from the Greek side in terms of proper economic reform, and austerity programs that would only further destroy the Greek economy and demoralise the population.</p>
<h2>Sensible austerity can work</h2>
<p>Sensible austerity in conjunction with a credible economic reform program and debt restructuring can work. This is not at all what Greece got. A private debt swap was supposed to reduce Greece’s public debt ratio to 120.5% by 2020. The estimates of this debt level relied on completely unrealistic forecasts of Greek economic growth. Given the austerity which accompanied these first two bailouts, Greek debt today stands at a not surprising 180% of GDP.</p>
<p>So why did the Greek population vote a resounding no to the most recent EU bailout offer? The choice before the Greeks was 20 more years of austerity and economic misery, or exit from the Eurozone and the chaos that that would create – bank failures, high inflation, and economic chaos. Their banks would fail. They would have to revert to their own currency, and Greece has previously had a history of inflation problems – in 1944 they issued a 100 billion drachma note! But it comes down to the fact that countries can pick themselves up from that kind of chaos. South East Asian countries faced some similar issues and problems after the Asian crisis, but bank and economic restructuring saw those countries survive and thrive within 5 to 10 years. </p>
<p>Having seen what an exit might look like in the past two weeks, with the banks closed and economic activity at a standstill, the government decided to opt for continuation in the Eurozone, austerity and economic misery. </p>
<p>I think this is the wrong decision. If Greeks exited the Eurozone they would face several years of economic chaos. But they would be masters of their own destiny. The current EU offer will further destroy the Greek economy, and will lead to another bailout in three years time.</p>
<h2>Bring in Paul Keating</h2>
<p>Greece needs two things. They need a Paul Keating to run their economy. Greece does need tough economic reforms to labour markets, taxation, competition policy and competitiveness and more. Their leaders have avoided reform, but they are not the only European country to do so. </p>
<p>They also need Rafael Correa to manage their debt. The Ecuadoran President has continually told international creditors to “get stuffed” and piled haircut onto haircut on Ecuador’s public debt. It is time for Greece to tell the troika to do the same. Sovereigns should be sovereign, and should manage in the best interests of the citizens of their country, not in the interests of foreign banks or institutions. And lenders should be wary for precisely this reason.</p><img src="https://counter.theconversation.com/content/44357/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Crosby does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>If Greece exited the Eurozone it would face several years of economic chaos. But it would be the master of its own destiny. The current EU offer will further destroy the Greek economy.Mark Crosby, Associate Professor of Economics, Melbourne Business SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/447452015-07-15T18:27:16Z2015-07-15T18:27:16ZGreece’s ‘aGreekment’ isn’t Versailles: why the bailout won’t lead to sudden rise of Golden Dawn<figure><img src="https://images.theconversation.com/files/88524/original/image-20150715-26319-1xb0mxy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Grecians have made it clear how they feel about Golden Dawn: get out. </span> <span class="attribution"><span class="source">Greece protest via www.shutterstock.com</span></span></figcaption></figure><p>It is not uncommon that a compromise is made that leaves practically everyone disappointed, but the aGreekment, as the recent agreement between the EU and the Greek government has been so coyly dubbed, takes it to a whole new level. </p>
<p>An avalanche of (<a href="http://www.theguardian.com/business/2015/jul/13/greek-supporters-social-media-backlash-germany">orchestrated</a>) tweets tells us that #ThisIsACoup and <a href="http://www.euractiv.com/sections/euro-finance/12-july-agreement-puts-greece-slippery-slope-towards-right-wing-extremism">pundits</a> warn that “the 12 July agreement puts Greece on a slippery slope towards right-wing extremism.” </p>
<p>The hero of continuous resistance, former Greek Minister of Finance <a href="http://www.abc.net.au/radionational/programs/latenightlive/greek-bailout-deal-a-new-versailles-treaty-yanis-varoufakis/6616532">Yanis Varoufakis</a>, also weighed in on this, comparing the aGreekment with the Treaty of Versailles – putting contemporary Greece on par with Weimar Germany – and proclaimed with his usual level of certainty that the neo-Nazi party Golden Dawn will be strengthened by more austerity.</p>
<p>I am not going to focus on the irony that the <a href="https://www.opendemocracy.net/cas-mudde/european-elites-politics-of-fear">European Union elite</a> has used the same cynical and misguided fear-mongering tactic again and again against both the far right and the far left, including Varoufakis’s Syriza Party itself. </p>
<p>I am also not going to dwell on the fact that Weimar Germany was literally destroyed by a (real) war, while contemporary Greece has seen no armed conflict since its own civil war, more than 50 years ago. </p>
<p>Nor will I develop further the meaningless comparison of the aGreekment, which is essentially a loan of billions of euros to Greece in exchange for binding reforms, to the <a href="http://www.ushmm.org/wlc/en/article.php?ModuleId=10005425">Versailles Treaty</a>, which meant a payment of billions by Germany in the form of reparations.</p>
<p>I am even going to ignore the fact that the whole leadership of Golden Dawn is currently in jail or <a href="http://www.thenation.com/article/rejoice-caution-golden-dawn-under-arrest/">under house arrest</a> and the party can hardly organize in a normal fashion.</p>
<p>Instead, let’s just look at the empirical facts. Is Golden Dawn really on the rise? </p>
<p>There is little doubt that Golden Dawn did profit from the crisis, <a href="http://www.nytimes.com/2012/10/01/world/europe/amid-greeces-worries-the-rise-of-right-wing-extremists.html?_r=0">growing</a> from an irrelevant party of less than 1% before 2010 to a moderately successful party with roughly 7% in 2012. </p>
<p>Perhaps high, but hardly a threat to Greek democracy. While no polls have been held since Monday morning following the bailout, a <a href="http://www.electograph.com/2015/07/greece-july-2015-metron-analysis-poll.html">Metron Analysis</a> poll taken between the Greferendum and the aGreekment shows remarkable stability in Greek party preferences since the January 2015 elections. </p>
<p>Only one shift was outside of the margins of error of plus or minus 3.1%: New Democracy (one of Greece’s two major parties) lost almost 9%, which is undoubtedly in part a temporary response to the fresh news of the <a href="http://greece.greekreporter.com/2015/07/05/antonis-samaras-resigns-from-nd-party-leadership-after-no-win-in-greek-refrendum/">resignation</a> of party leader Antonis Samaras after the No vote in the Greferendum. Golden Dawn was down 2%, from 6.3% in January elections to 4.3%. Again, this is within the margin of error, but at the very least shows that there is absolutely no evidence for a rise.</p>
<p>If Varoufakis and others <a href="http://alphahistory.com/weimarrepublic/why-the-weimar-republic-failed/">really want</a> to learn lessons from Weimar Germany, they should remember that the rise of the Nazi Party was at least as much caused by the material economic effects of the Versailles Treaty and the Great Depression as by the psychological consequences of the framing of the two. </p>
<p>As <a href="http://www.huffingtonpost.com/cas-mudde/weimar-greece-and-the-future-of-europe_b_6876944.html">Weimar Germany</a> was largely a democracy without democrats, contemporary Greece is largely a liberal democracy without liberal democrats. Just like in Greece today, anti-Semitism was <a href="http://www.haaretz.com/jewish-world/jewish-world-features/1.591841">rampant</a> in Weimar Germany. However, while anti-Semitic conspiracies were highly popular in other countries in the 1930s too, including Austria and France, Weimar Germany had an even more toxic conspiracy theory.</p>
<p>The “<a href="http://www.bl.uk/world-war-one/articles/the-legacy-of-world-war-one-propaganda">Dolchstoβlegende</a>” (Stab-in-the-Back Myth) emerged already at the end of the First World War and was spoon-fed to ordinary Germans by a broad range of elites. The accusation was that the capitulation of Germany and the consequent Treaty of Versailles were the result of a stab in the back by a “fifth column” and a “traitorous elite” who did the bidding of hostile international forces. </p>
<p>Sound familiar?</p><img src="https://counter.theconversation.com/content/44745/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Cas Mudde has received funding from the Alexander von Humboldt Foundation, British Academy, Dutch Scientific Organization (NWO), Flemish Scientific Organization (FWO), Israeli Institute, and Volkswagen Foundation. He is affiliated with the Center for Right-Wing Studies at the University of California, Berkeley, and consults/ed for the Canadian Security Intelligence Service (CSIS), Institute for Jewish Policy Research (JPR), and European Policy Center (EPC).
</span></em></p>Some, including Greece’s ex-Finance Minister Varoufakis, have warned that the bailout’s austerity will strengthen extremist parties like Golden Dawn. They’re wrong.Cas Mudde, Associate Professor in the School of Public and International Affairs, University of GeorgiaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/446402015-07-14T13:45:11Z2015-07-14T13:45:11ZGreece bailout includes a €50 billion asset fund. Here’s how to avoid wasting it<figure><img src="https://images.theconversation.com/files/88270/original/image-20150713-11795-13kdgri.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Will Greece's asset fund turn into an investing piggy bank or another lost opportunity?</span> <span class="attribution"><span class="source">Piggie bank via www.shutterstock.com</span></span></figcaption></figure><p>Yesterday’s agreement between the Greek government and its creditors includes a condition that requires Greece to sell €50 billion worth of public assets and <a href="http://www.marketwatch.com/story/heres-what-greece-agreed-to-do-to-secure-bailout-funds-2015-07-13">establish</a> a fund to oversee the proceeds. </p>
<p>Half will be used to recapitalize banks, while €12.5 billion will be used to repay part of Greece’s debt and €12.5 billion will be invested internally to generate growth. </p>
<p>While the privatization of inefficiently managed government assets could well serve the interests of the Greek people, it could well go very wrong. </p>
<p>Here’s how and what Greece could do to prevent that from happening.</p>
<h2>Setting the right incentives</h2>
<p>The fund is already off to a bad start by setting a target sales number (the €50 billion). Doing so from the outset can distort incentives. </p>
<p>By that I mean the easiest way to hit that target is to sell assets at whatever price you can get, thus well below their true worth, resulting in a lot of bad deals. Greece could easily end up selling €60 billion to €80 billion of quality assets just to hit the €50 billion target.</p>
<p>I wrote a <a href="http://www.hbs.edu/faculty/Pages/item.aspx?num=49049">Harvard case</a> a while ago of a hotel company that had a target of selling €300 million of hotels per year. But they never specified how many hotels they would sell. Not surprisingly, they ended up selling way too many hotels for way too low a price. They reached their sales target, but at the cost of selling far more of their assets than they needed to. </p>
<p>My point is the following: Greece should carefully design a performance measurement system that makes sure that assets are sold at the maximum price that could be obtained in the marketplace. That should help get around the pitfalls of setting a target up front.</p>
<h2>Timing of sales and use of proceeds</h2>
<p>The Greek economy is in <a href="http://money.cnn.com/2015/07/02/news/economy/greece-crisis-prime-minister-economy/">ruins</a> and the government has a liquidity problem – that is, it’s short on ready cash. These are exactly the wrong conditions in which to sell assets. Fire sales result in deep discounts. </p>
<p>Moreover, they lead to the sale of the easiest-to-sell assets. The easiest assets to sell are the ones that have the most potential buyers. The reason that there are many buyers is that their economics are attractive; these are high-quality assets. </p>
<p>It is very important that the proceeds from disposing of these high-quality assets are invested in the economy rather being used to repay loans that were made to recapitalize banks or previous loans. These loans have below-market interest rates and very long maturities (perhaps even 60 years), so their repayment can wait. Indeed the present value of Greece’s debt is just a <a href="http://www.nytimes.com/2015/02/21/business/dealbook/greek-debt-is-vastly-overstated-an-investor-tells-the-world.html?_r=0">small fraction</a> of its nominal value. </p>
<p>Investing the proceeds in the economy could create the conditions for economic growth, raising the prices of the rest of the government assets that are still in the portfolio.</p>
<p>Lesson: no need to rush the asset sales, and just make sure to use proceeds for something productive. That means there should be an effort to renegotiate so that more of the fund goes toward investment.</p>
<h2>Governance and transparency</h2>
<p>The privatization fund should follow world-class standards in terms of governance and transparency in the bidding process. </p>
<p>The members of the fund’s board of directors should be carefully chosen to protect the interests of the Greek people. Directors should be chosen on the basis of merit and be experts in matters of accounting, finance and valuation so they can effectively oversee the sales of assets. </p>
<p>Greece can follow best-practice governance processes such as those <a href="http://www.imf.org/external/pubs/ft/survey/so/2008/pol070908a.htm">adopted</a> by the Norwegian pension fund that manages the wealth of the Norwegian people from the extraction of oil.</p>
<h2>Choosing the right partners</h2>
<p>Buyers have reputations – good or bad – and the directors should take them into account, along with bid price, when choosing to whom they will sell an asset. </p>
<p>Companies, investment funds or sovereign investment partners who have developed a reputation for responsible business practices and the creation of value for all stakeholders can create more value for the Greek people. Businesses that promote the development of skills, safe working conditions, protection of the natural environment, and product safety and quality will create competitive advantages for the country over time.</p>
<h2>The right framework</h2>
<p>The Greek government uses cash accounting, and therefore does not prepare a balance sheet and does not take inventory of its assets and liabilities. </p>
<p>“You manage what you measure,” and it is obvious in the case of Greece that not measuring assets and liabilities using internationally accepted accounting standards leads to mismanagement of both assets and liabilities.</p>
<p>We need a fresh start and the right framework under which to start creating value for the Greek people. This framework is to <em>measure</em>, <em>analyze</em>, <em>create</em> and <em>communicate</em> value. </p>
<p>Measure the value of the assets and liabilities and the net worth so the measures can be analyzed. Analyze performance over time and relative to other countries in the eurozone so the analysis can be used as an input on what needs to change to create value. Create value by adopting policies that will increase the value of the the assets. Communicate the value creation story to build trust and confidence in the economy and attract investments.</p>
<p>Following some of these guidelines will help ensure that the Greek people get the most out of this fund, and that in turn could bring their economy and livelihoods back to life more quickly.</p><img src="https://counter.theconversation.com/content/44640/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>George Serafeim does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Greece must sell €50 billion worth of government assets as part of its latest bailout. It could very well go wrong.George Serafeim, Jakurski Family Associate Professor of Business Administration, Harvard UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/446362015-07-14T02:36:07Z2015-07-14T02:36:07ZGreece’s total surrender to German demands shows failure of euro integration<figure><img src="https://images.theconversation.com/files/88291/original/image-20150714-11801-r9sxtc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Unfortunately, the eurozone doesn't exactly fit together like a puzzle.</span> <span class="attribution"><span class="source">Euro puzzle via www.shutterstock.com</span></span></figcaption></figure><p>Germany demanded <a href="http://www.bloomberg.com/news/articles/2015-07-13/eu-demands-tsipras-capitulation-as-bailout-costs-spiral-ic1mkgo3">unconditional surrender</a> from Greece and got what it wanted. </p>
<p>The result is that severe punishment in the form of austerity will continue, along with the humiliation of the Greek people. Democracy in the eurozone has been severely strained. </p>
<p>While the six-month battle between Greece’s anti-austerity Syriza government and its German and other creditors resulted in a deal this weekend that prevents a Grexit for now, this much is clear: there will be no end to Europe’s <a href="http://www.bruegel.org/publications/publication-detail/publication/776-europes-growth-problem-and-what-to-do-about-it/">economic malaise</a>, of which Greece is only the most extreme case. </p>
<p>Rather, the <a href="http://www.bloomberg.com/news/articles/2015-07-13/greek-deal-makes-europe-more-german-but-at-what-cost-">gradual dismantling</a> of the euro – a project of integration that began in 1999 and brought 19 countries together under a single currency – will continue as long as its biggest member refuses to ease up on the austerity and other policies that are <a href="http://www.boeckler.de/pdf/p_imk_study_42_2015.pdf">suffocating</a> Europe’s economy.</p>
<p>The Greeks themselves, of course, cannot be pardoned from their fair share of blame for their predicament, as I’ve noted many times. </p>
<p>But Germany as Europe’s powerhouse is the one running the show. And based on my experience and research, it bears a large share of the blame both for creating many of the <a href="http://www.boeckler.de/pdf/p_imk_study_42_2015.pdf">conditions</a> that led us here and by showing little to no flexibility in resurrecting Greece’s economy.</p>
<h2>Another dose of austerity</h2>
<p>The sad truth is that Germany’s finance minister – who has pushed austerity on all its neighbors including Greece at any cost, despite the often abysmal results – remains firmly in charge of economic policy and is determined to impose more of the same folly. </p>
<p>The eurozone remains stuck in a process of <a href="http://www.cer.org.uk/insights/eurozones-ruinous-embrace-competitive-devaluation">competitive internal devaluations</a> – in which members suppress wages to boost their competitiveness – that suffocate domestic demand. This leaves the currency block extraordinarily vulnerable. </p>
<p>Continuing to freeload on external demand through euro depreciation, thereby also undermining the global recovery, excessive thrift (via austerity) rather than <a href="https://theconversation.com/germany-may-be-the-biggest-loser-if-it-doesnt-start-spending-32726">investment</a> leaves the land of the euro destined for socioeconomic stagnation. </p>
<p>And if it can be believed, another especially <a href="http://www.project-syndicate.org/commentary/greece-debt-agreement-risks-by-barry-eichengreen-2015-07">high dosage</a> of that austerity has been reserved for Greece, even though it is already suffering a <a href="https://theconversation.com/time-to-end-europes-disgrace-of-holding-greek-people-hostage-42939">humanitarian crisis</a>. </p>
<h2>What happened to political integration</h2>
<p>Matters are even worse politically. The idea of European integration as a means to secure peace and prosperity was founded on solidarity, tolerance and compromise – a supposed union of equal partners, ending Europe’s long history of conflict and domination. </p>
<p>The euro in particular was meant to end Germany’s <a href="http://www.spiegel.de/international/germany/german-power-in-the-age-of-the-euro-crisis-a-1024714.html">monetary hegemony</a> over the continent that characterized the previous currency arrangement: the European Monetary System. </p>
<p>The plan backfired badly. By undermining everyone else’s competitiveness through persistent <a href="http://www.ft.com/cms/s/0/4f7656de-3a25-11e0-a441-00144feabdc0.html#axzz3foC4Gzmn">wage repression</a>, Germany has maneuvered itself into a hegemonic creditor position that has secured the country even more leverage over the economic policies of its “partners.” </p>
<p>In other words, low labor costs at home have made it easier for German manufacturers to undercut its competitors’ prices, leading to a massive trade surplus relative to most countries in the euro. The corresponding deficits have left Germany’s euro partners in their vulnerable debtor positions.</p>
<p>Greece merely provides the most clear-cut case: offered the choice between Grexit and the de facto replacement of its sovereignty with external control over financial and other policies, Greece, for the time being at least, is opting for the status of a vassal state. </p>
<h2>Greece’s blame, Germany’s forgiveness</h2>
<p>Greece is neither flawless nor blameless. Compared with its peers, it suffers from more than its fair share of corruption. It fudged its numbers and broke the euro’s fiscal rules by a wider margin and for more years than Germany itself. </p>
<p>But if Germany at least in part believes that Greece must be punished for its sins, it should look to its past and the magnanimity with which it was dealt after World War II: with the Marshall Plan and London Debt Agreement, which <a href="http://qz.com/445373/thomas-pikettys-wise-words-on-german-hypocrisy-and-how-to-solve-the-greek-debt-crisis/">resulted</a> in the forgiveness of 60% of German foreign debt, according to Thomas Piketty. </p>
<p>Why is Greece’s case so much different, and by what kind of moral, political or economic standards can the deal be justified? </p>
<h2>France, a counterweight no more</h2>
<p>France has often been a counterweight to Germany in these matters, and at times, including this past weekend, tried to fight in Greece’s corner. But in the face of German rigidity, it was able to achieve only a deal that provided the Greeks with a draconian choice: Grexit or vassal. </p>
<p>For not even France, pressured to restore its competitiveness vis-à-vis Germany and embrace austerity more fully, is more than a junior partner these days. </p>
<p>This outcome is clearly unsustainable. A plan such as the one I <a href="https://theconversation.com/the-eurozone-needs-a-new-treasury-to-revive-it-33909">suggested</a> earlier this year that would create a European treasury – in a move toward a closer union – could help solve the economic and fiscal problems that plague Europe and spur much-needed investment. Unfortunately, Germany stays on this destructive course. </p>
<p>As a German, I am simply dismayed by the unrelenting conduct of my government, which reached a new climax this weekend when it dug its heels in further than ever before. </p>
<p>But there is no way around it: this weekend has pushed European integration firmly into reverse, and the pessimist in me has to admit that at some point “Germexit,” a German exit from the euro, would probably be the least terrible outcome for Europe.</p><img src="https://counter.theconversation.com/content/44636/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Joerg Bibow is affiliated with: Levy Economics Institute of Bard College and the Bretton Woods Committee.
</span></em></p>The last-minute bailout deal will keep Greece in the common currency, but at a cost of the dream that was the euro.Joerg Bibow, Professor of Economics, Skidmore CollegeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/443472015-07-09T17:51:04Z2015-07-09T17:51:04ZWhat now for Greece and the euro?<p>Last weekend’s <a href="http://www.bbc.com/news/world-europe-33403665">vote</a> in Greece against the terms of a bailout for its deeply troubled economy has launched a new flood of dire warnings about the future of Greece and the euro. </p>
<p>The conclusion, however, is likely to be much more mundane.</p>
<p>The European Union has faced many <a href="http://ec.europa.eu/education/events/2013/confjm/mccormik_en.pdf">crises </a> since the voyage of European integration began in the 1950s; my book, <a href="http://www.palgrave.com/page/detail/?sf1=id_product&st1=581141">Why Europe Matters,</a> has examined the benefits of this integration. </p>
<p>However, the problems of the eurozone – and of Greece in particular – have posed challenges like no other. The scenarios of catastrophe have ranged from worsening <a href="http://www.msnbc.com/msnbc/greeces-economic-crisis-has-lot-people-very-nervous">economic challenges</a> for Greece, to a <a href="http://www.slate.com/blogs/moneybox/2015/07/07/what_would_happen_if_greece_leaves_the_euro_the_best_and_worst_case_scenarios.html">Greek exit</a> from the eurozone, to the possible <a href="http://metro.co.uk/2015/06/19/poll-will-greece-exiting-the-euro-cause-the-collapse-of-the-eurozone-5254207/">collapse</a> of the EU itself. </p>
<p>But while these are the kinds of dramatic warnings that make for exciting headlines, the outcome of this crisis will likely to be less startling. Why? Because everyone has too much to lose from a sudden and badly organized “Grexit,” let alone from broader ongoing problems in the eurozone. </p>
<h2>The benefits of the eurozone</h2>
<p>The EU is, we should not forget, the wealthiest marketplace in the world. It has a bigger <a href="http://data.worldbank.org/region/EUU">gross domestic product</a> even than the United States; it is the biggest exporter and importer of services; it is the biggest source of – and target for – foreign direct investment, and it is the biggest source of foreign aid. Clearly, it is in everyone’s interests to make sure that the European experiment remains as healthy as possible. </p>
<p>To be sure, it is both worrying and galling that Greece should be the tail that is currently wagging the dog of the EU. This is a country of 11 million people that accounts for less than 3% of the <a href="http://ec.europa.eu/economy_finance/publications/publication862_en.pdf">economic production</a> of the EU, a market of more than half a billion people. We have to ask how the Europeans ever allowed themselves to get into this fix, particularly given the many very bright minds that were brought to bear on the design and launch of the euro in 1999.</p>
<p>Without question, numerous avoidable mistakes were made, not least among them the decision to allow Greece to join the euro in the first place. That should never have happened, quite simply because Greece did not meet the terms of membership of the eurozone, including limits on its budget deficit. And once it was in, it should not have been allowed to launch itself on a debt-driven spending spree that made its already bad fiscal situation even worse.</p>
<h2>Flaws in the original design of the euro</h2>
<p>But it did not help that the <a href="http://www.reuters.com/article/2014/12/15/us-ecb-nowotny-fiscal-idUSKBN0JT0TM20141215">design of the euro </a>was flawed, with too little authority given to the European Central Bank to keep an eye on budgets in its member states. This was, as much as anything, a politically driven mistake; there was enough doubt about adopting the euro without the governments and voters of the member states giving up control over fiscal as well as monetary policy.</p>
<p>In terms of the future, the most likely outcome is that after some brinkmanship that allows Greek political leaders to boast that they are not going to be pushed around by “Brussels” or the rest of the EU, a deal will be worked out. The flaws of the current Greek bailout will be addressed, a more sensible set of requirements will be imposed on Greece, and the headline writers of the world will have to set aside their more lurid adjectives. Greeks and their government will hopefully learn the wisdom of borrowing only within their means and paying their taxes.</p>
<p>A less likely outcome is that Greece will indeed leave the euro, but that the longer-term effects will not be as dire as most economists are predicting. Life for Greeks will briefly worsen, and their crash course in how to stop mismanaging their economy will intensify, but they will adapt. Meanwhile, the rest of the eurozone will make the policy and institutional adjustments needed to move on without the participation of this small and troublesome partner.</p>
<h2>Learning what works – and what doesn’t</h2>
<p>As for the bigger questions of how this will impact the euro and the European Union, the crisis will go down as the latest in the hard process of <a href="http://johnmccormick.eu/2014/05/three-of-the-most-persistent-myths-about-the-european-union/">learning what works</a> and what doesn’t as Europeans continue their efforts to build regional integration. </p>
<p><a href="http://www.britannica.com/biography/Jean-Monnet">Jean Monnet</a>, one of the founding fathers of what is now the EU, long ago warned that Europe would be built from crisis, and that it would be the sum of the solutions adopted. Not a cheerful dictum, to be sure, but realistic given the pioneering nature of European integration and the human nature of its designers and leaders. </p>
<p>At the end of the day, and whatever unfolds, the EU and the euro will weather the storm and emerge chastened but wiser. They are both, after all, too big to fail.</p><img src="https://counter.theconversation.com/content/44347/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John McCormick receives funding from the European Commission, via the Jean Monnet program.</span></em></p>The media predictions are dire, but the reality of the Greek monetary crisis may be less sensational.John McCormick, Professor in the Department of Political Science, IUPUILicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/443752015-07-08T20:09:57Z2015-07-08T20:09:57ZGreece, like Wahlberg in The Gambler, just needs a friend — and a new currency<figure><img src="https://images.theconversation.com/files/87606/original/image-20150707-1271-1gvfbqs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Greece's gross domestic product, shown here in 2010 constant dollars, has plunged since 2008. </span> <span class="attribution"><span class="source">RED St. Louis Federal Reserve Bank and Hellenic Statistical Authority </span></span></figcaption></figure><p>On Sunday, the citizens of Greece <a href="https://theconversation.com/after-the-no-vote-greece-faces-its-last-judgement-44247">voted</a> No on the country’s referendum to accept a package of money in exchange for further austerity measures. </p>
<p>Now what?</p>
<p>Every armchair economist from Iowa to the Aegean Sea has an answer and opinion, including, as it happens, me. </p>
<p>Although I’m an actual economist, I’m thinking about the events of Greece as they relate to the plot of a recent movie, The Gambler, starring Mark Wahlberg. It occurred to me that Greece is just like Wahlberg’s character Jim Bennett.</p>
<p>Examining the unfolding drama in Greece through the lens of this movie should help illustrate what’s really going on here, who the main players are and how it could be resolved. </p>
<h2>Premise of The Gambler</h2>
<p>The movie is about the gambling problems of an English professor and the issues surrounding borrowing and paying back loans (the movie also touches on ideas of talent, wasted talent and understanding one’s place in society, but for these purposes, I’ll just focus on the loans). </p>
<p>The professor had, at one point, received some attention (good reviews, a promotion and tenure) from his novel. So he has been productive and done some good work in the recent past. </p>
<p>But he has a problem: he likes to gamble. </p>
<p>And since the house always wins, he is in debt to the owner of the local underground gaming parlor, Mr Lee. Since Bennett is an English professor, we know he doesn’t have a huge income. In order to keep his gambling going, he continues to borrow from Lee. And, of course, he keeps losing. </p>
<p>Bennett tries to get caught up by borrowing from another fellow, Neville Baraka, and loses that money as well. Within the first 10 minutes of the movie, Bennett is indebted to Lee (US$240,000) and Baraka ($50,000, plus $10,000 in interest). Given that he has no income potential (he is an English professor, after all) and the bad guys want their money, he is in big trouble. </p>
<p>At one point, Bennett approaches Frank (John Goodman, playing one of the lovable scary tough while doughy roles that we expect from him) for a loan. When Frank analyzes the risk/reward, he comes to a simple conclusion (something everybody in the audience already knows): Bennett doesn’t really have the means to pay any of the money back. </p>
<p>In the end, Frank does loan Bennett some serious cash, knowing very well that he can’t pay it back unless he gets lucky gambling. Frank makes this move because, I believe, Frank sort of likes Bennett, relates to Bennett’s helplessness and, perhaps, is a risk-seeking individual. </p>
<h2>Greece the gambler</h2>
<p>Although Greece doesn’t exactly have a gambling problem, it does have a borrowing problem. Greece <a href="http://www.nytimes.com/interactive/2015/business/international/greece-debt-crisis-euro.html">owes</a> money to just about everyone. The table at right shows the principal amounts owed to different countries, groups, banks and other parties of interest, to the tune of €320 billion, or at current exchange rates about $355 billion.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/87805/original/image-20150708-31567-108nfho.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/87805/original/image-20150708-31567-108nfho.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/87805/original/image-20150708-31567-108nfho.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=541&fit=crop&dpr=1 600w, https://images.theconversation.com/files/87805/original/image-20150708-31567-108nfho.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=541&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/87805/original/image-20150708-31567-108nfho.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=541&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/87805/original/image-20150708-31567-108nfho.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=680&fit=crop&dpr=1 754w, https://images.theconversation.com/files/87805/original/image-20150708-31567-108nfho.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=680&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/87805/original/image-20150708-31567-108nfho.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=680&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The table shows Greece’s loan partners and how much of its debt they own.</span>
<span class="attribution"><span class="source">Open Europe; IMF; Greek Public Debt Management Office</span></span>
</figcaption>
</figure>
<p>Does Greece have a chance of paying off any of these loans? Not realistically and certainly not anytime soon. </p>
<p>The real gross domestic product (GDP) of Greece stands at around $240 billion. In other words, Greece’s debt is approximately 150% of its current GDP. By comparison, the real GDP of the United States is $16 trillion with a $19 trillion debt (119%). </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/87836/original/image-20150708-31590-kv5g9p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/87836/original/image-20150708-31590-kv5g9p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=467&fit=crop&dpr=1 600w, https://images.theconversation.com/files/87836/original/image-20150708-31590-kv5g9p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=467&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/87836/original/image-20150708-31590-kv5g9p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=467&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/87836/original/image-20150708-31590-kv5g9p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=587&fit=crop&dpr=1 754w, https://images.theconversation.com/files/87836/original/image-20150708-31590-kv5g9p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=587&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/87836/original/image-20150708-31590-kv5g9p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=587&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Greece’s gross domestic product, shown here in 2010 constant dollars, has plunged since 2008.</span>
<span class="attribution"><span class="source">FRED St. Louis Federal Reserve Bank and Hellenic Statistical Authority</span></span>
</figcaption>
</figure>
<p>Greek GDP has been falling the last several years, ever since the European Union and other creditors imposed <a href="http://www.nytimes.com/interactive/2015/business/international/greece-debt-crisis-euro.html">austerity</a> on Greece in exchange for €240 billion in bailouts. The Greek economy has been in a recession or even <a href="http://money.cnn.com/2015/07/06/news/economy/greece-economy-warn-torn-country-depression/">depression</a> since 2008, losing one-quarter of its GDP. That has significantly reduced its income.</p>
<p>What is the cause and effect here? It’s not exactly clear. But it is very possible that austerity has made it harder for Greece to pay back its loans by stifling output. </p>
<p>Another way to examine Greece’s helpless situation is by looking at the relationship between the revenue generated through taxes and tariffs and the spending behind government and social programs. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/87807/original/image-20150708-31569-1qbe73a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/87807/original/image-20150708-31569-1qbe73a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=469&fit=crop&dpr=1 600w, https://images.theconversation.com/files/87807/original/image-20150708-31569-1qbe73a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=469&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/87807/original/image-20150708-31569-1qbe73a.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=469&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/87807/original/image-20150708-31569-1qbe73a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=590&fit=crop&dpr=1 754w, https://images.theconversation.com/files/87807/original/image-20150708-31569-1qbe73a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=590&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/87807/original/image-20150708-31569-1qbe73a.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=590&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The deficit has come down significantly, but Greece still overspends.</span>
<span class="attribution"><span class="source">IMF</span></span>
</figcaption>
</figure>
<p>Greece has been spending more than it earns. The austerity measures that took hold several years ago have helped bring the expenditures more in line with revenues, but the expenditures are still greater than earnings.</p>
<h2>History lessons and next steps</h2>
<p>Greece is the first developed country to <a href="http://www.telegraph.co.uk/finance/economics/11709473/Greece-defaults-on-the-International-Monetary-Fund-after-launching-11th-hour-attempt-to-agree-new-rescue-deal.html">miss</a> an IMF payment. But other less developed countries have both missed IMF payments and/or defaulted on other loans. In other words, it’s not a completely uncommon occurrence; Mexico, Thailand and Argentina have all defaulted on loan payments. </p>
<p>Mexico, for example, <a href="http://www.economist.com/node/3524948">suffered</a> from a significant crisis in 1994, when decreases in investor confidence caused capital to flow out of the country. </p>
<p>After signing the North American Free Trade Agreement (NAFTA) the year before, Mexico began to be seen by investors as a budding opportunity for new markets. In order to keep investor confidence high, the government of Mexico used its own US dollar reserves to purchase Mexican currency and debt. </p>
<p>This was a shell game of sorts – one in which Mexico used its own resources to prop up the idea that Mexico was strong. Unfortunately, Mexico ran out of reserves and eventually had to devalue its own currency. The figure at right shows the model of how this was done. </p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/87808/original/image-20150708-31560-118wpyj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/87808/original/image-20150708-31560-118wpyj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=511&fit=crop&dpr=1 600w, https://images.theconversation.com/files/87808/original/image-20150708-31560-118wpyj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=511&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/87808/original/image-20150708-31560-118wpyj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=511&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/87808/original/image-20150708-31560-118wpyj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=642&fit=crop&dpr=1 754w, https://images.theconversation.com/files/87808/original/image-20150708-31560-118wpyj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=642&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/87808/original/image-20150708-31560-118wpyj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=642&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">This chart shows supply and demand of currency and exchange rates.</span>
<span class="attribution"><span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>Consider that the exchange rate for Mexican pesos was at $0.80. Mexico wanted investors to think it was a strong country and a great place for investing. Any time the demand for the peso started to soften, the Mexican government used its own reserves in dollars to purchase pesos or government debt or both. </p>
<p>That is, anytime the market started to move along line A, the government responded by pumping its own funds into the system to move along line B. Eventually, the government ran out of money and wasn’t able to keep the exchange rate. When this occurred, the peso fell dramatically in value, investors left the country and Mexico wasn’t able to sell its debt. </p>
<p>The solution is to have a strong trading partner and a newly devalued currency that allows other countries to take advantage of a strong trade position. When the Mexican currency fell in value, the US was there as a strong partner. President Clinton had just signed NAFTA and wasn’t interested in seeing Mexico fail. </p>
<p>In 1995, Clinton signed a resolution to provide $20 billion in loans to Mexico. This didn’t “fix” Mexico – the country went through a horrendous recession. But it did provide a foundation upon which Mexico could rebuild. Other countries became more certain that the exchange rate of Mexico was realistic, and it allowed countries to clearly evaluate the risk and rewards associated with investing in Mexico. </p>
<h2>A friend in need…</h2>
<p>This is what Greece needs – a strong trading partner and its own currency to devalue. Greece needs the John Goodman character Frank to come along and give it another chance, another loan, hoping that Greece gets lucky. </p>
<p>The US is not in position to be that trading partner – there just isn’t a strong need for the products that Greece produces. Perhaps Germany can step back in or France or Spain. But Greece needs a friend. </p>
<p>And Greece needs its own currency to devalue. If Greece had been on its own currency, we would have seen a significant devaluation this past week. And this would have allowed investors and other interested parties to truly identify the risk and reward of getting back on the wagon with Greece. </p>
<p>This partner will be hard to find! Consider the <a href="http://www.transparency.org/research/cpi/overview">Corruption Perception Index</a> of Greece, Italy, France and Germany:</p>
<p>The Corruption Perception Index for Greece is very low, which means there’s a lot of corruption. In order for a trading partner such as a Germany or a France to want to do business with Greece, Greece will have to change its ways. </p>
<p>Graft, insider payments and tax evasion will have to be removed and replaced with a consistent system of fiscal restraint and effective tax collection. </p>
<p>In The Gambler, Bennett borrows more money from Mr Lee and Frank and, with a little insider help, bets the lot on a fixed basketball game. </p>
<p>Bennett pays Baraka back with some of those winnings and then bets the rest on a single roll of roulette – he bets black and wins. He escapes with his life because he receives more loans, makes a deal with a ball player and gets lucky. </p>
<p>I don’t see Greece getting away this cleanly – there is no roulette wheel to spin. In a movie, everything is controlled by the writer, the director, the actors and the guiding principal of pleasing audiences and making a little profit to boot. </p>
<p>A happy ending for Greece is unlikely at this point, even with a friend and a new currency. While the plot may mirror The Gambler, the ending is more likely to be in the style of Titanic.</p><img src="https://counter.theconversation.com/content/44375/count.gif" alt="The Conversation" width="1" height="1" />
On Sunday, the citizens of Greece voted No on the country’s referendum to accept a package of money in exchange for further austerity measures. Now what? Every armchair economist from Iowa to the Aegean…Thomas More Smith, Assistant Professor in the Practice of Finance, Emory UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/443822015-07-08T05:24:01Z2015-07-08T05:24:01ZWant to know how Greeks see the future? Get in the ATM queue and ask them<p>If one was following Greek and international media, it might have seemed as though the difference between the numbers in the Yes and No camps in the Greek referendum was tiny. However, as most ethnographers of Greece would be able to tell you, especially the ones who have spent <a href="http://www.crisis-scape.net/">two years doing research in Athens during the crisis</a>, the No voters were in the overwhelming majority. And so it ultimately proved in the result. </p>
<p>One of the most grotesque moments in the festival of pro-Yes propaganda hosted by Greek TV channels came when a Mega Channel journalist attempted to interview a pensioner in Athens about his views on the debt crisis. The journalist had been expecting the elderly man to complain about the terrible queues at the banks. Instead, the man began to comment on how the crisis has caused thousands of suicides and that he supported the decision to let the people decide. Having failed to get the answer he was looking for, the journalist simply pushed the man out of the frame and quickly began <a href="https://www.youtube.com/watch?v=UjMBq59fRV0">talking over him</a>, while the camera panned away. </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/UjMBq59fRV0?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
</figure>
<p>Probably one of the best places to understand what is going on in Greece at the moment is in the queues forming at the ATMs of closed banks. People have to wait longer than usual to withdraw cash, and with a daily limit of €60, they are queuing more often, so while there, they just chat with each other spontaneously. Others join in the conversation until you have a small assembly. People address the “audience” loudly, agree and disagree, add comments on top of the main debate and splinter off into their own, smaller groups in the queue. Sometimes people stick around to talk even after they have withdrawn their <a href="https://euobserver.com/economic/129359">60 euros</a> from the ATM.</p>
<p>They talk about their fear but also about their anger. They are angry at the private TV channels and newspapers that spread fear ahead of the vote. They are angry at Greece’s creditors and resent the euro as a currency. In the queue, the conversations are often about the real value of the euro. People still loudly translate their 60-euro allowance into the old Greek currency. They talk about how much they could buy with 20,000 drachma and how little they can get with 60 euros.</p>
<p>They also remember the last time a significant percentage of people in Greece lost substantial amounts of their savings. That was in 1999 when the Athens Stock Market collapsed, just before Greece joined the euro. The government, led by technocrat Costas Simitis had liberated the financial markets as part of the eurozone integration process.</p>
<p>People were encouraged to invest their savings in the financial market via governmental (and TV) propaganda. Small stock market agencies sprung up in towns and villages to help them on their way. The TV sets in the traditional Greek coffee shops broadcast stock market sessions and pink newspapers appeared on the tables. A country with 10 million people was suddenly home to more than 1 million stock-market investors.</p>
<p>Then came <a href="http://tvxs.gr/news/%CE%B5%CE%BB%CE%BB%CE%AC%CE%B4%CE%B1/%CF%80%CE%B1%CF%81%CE%B1%CF%80%CE%BF%CE%BC%CF%80%CE%AE-%CF%83%CE%B5-%CE%B4%CE%AF%CE%BA%CE%B7-16-%CE%B1%CF%84%CF%8C%CE%BC%CF%89%CE%BD-%CE%B3%CE%B9%CE%B1-%CF%84%CE%B7%CE%BD-%CF%85%CF%80%CF%8C%CE%B8%CE%B5%CF%83%CE%B7-%CF%84%CE%BF%CF%85-%CF%87%CF%81%CE%B7%CE%BC%CE%B1%CF%84%CE%B9%CF%83%CF%84%CE%B7%CF%81%CE%AF%CE%BF%CF%85">the crash</a>. The market collapsed under the weight of several corporate manipulations and investors saw their savings vanish.</p>
<p>At the time, there was enough going on to distract people from the blow. The change of currency to the euro and the devaluation effect made the loss of trillions of drachmas look relatively less significant. People still recall how things that cost 100 Drachma or less quadrupled in value overnight and suddenly cost a euro.</p>
<p>This time around, there are no distractions. But although people fear losing their deposits while the banks remain closed – <a href="https://en.wikipedia.org/wiki/2012%E2%80%9313_Cypriot_financial_crisis">as happened in Cyprus</a> – the fact is, very few people have much of a deposit to lose.</p>
<p>Beyond what people are talking about as they queue for the ATM, social theory teaches us that large groups with little to lose are a traditional danger for capitalist projects.</p>
<p>The threat they pose was temporarily diffused by the referendum, as they had the chance to express their discontent, but the result makes it clear that they will not be placated for long. The resounding No vote has emerged from a population with no faith in the neoliberal economic system or the mainstream media that presents it to them. They voted no because people are ready to risk losing things in order to win a new political and social deal– especially when what they have to lose doesn’t amount to much.</p><img src="https://counter.theconversation.com/content/44382/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dimitris Dalakoglou received funding from an ESRC Future Reearch Leaders grant for the project 'Crisis-scapes: Transformations of Public Spaces in Athens'</span></em></p>Talk on the street is that nothing short of revolution will do after the referendum.Dimitris Dalakoglou, Professor of Social Anthropology, Vrije Universiteit AmsterdamLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/443242015-07-06T14:26:51Z2015-07-06T14:26:51ZLessons from Greece as controversial finance minister exits stage left<p>Greece’s economy is in ruins. It is hard to imagine how things could have gone worse. Banks closed, no liquidity, very high unemployment, businesses closing down or fleeing the country, and the brain drain is accelerating.</p>
<p>And now the Greek people have voted No in a referendum that some cast as being about whether they would remain in the eurozone – though many were <a href="https://theconversation.com/greece-votes-no-now-syriza-must-clarify-what-that-really-means-44289">unclear</a> about what exactly the vote meant. What it certainly means is that the Greek people are deeply wounded by the prolonged recession of the last six years. </p>
<p>As Greek Prime Minister Alexis Tsipras heads back to the negotiating table in hopes of securing a new deal to save his country, he will go without his controversial finance minister, Yanis Varoufakis, who <a href="http://www.theguardian.com/world/2015/jul/06/greek-finance-minister-yanis-varoufakis-resigns-despite-referendum-no-vote">resigned</a> a day after the vote. According to Varoufakis, Tsipras asked him to resign in order to help with the negotiations.</p>
<p>One reason we’re where we are today, so close to a “Grexit,” is that journalists – Greek and foreign – failed to carefully scrutinize Varoufakis’s strategy to win better terms from Germany – one that didn’t pan out. Let’s hope they look much more closely at his replacement.</p>
<h2>Path of destruction</h2>
<p>Tsipras, Varoufakis and their left wing Syriza party were elected to office back in January because of how much the Greek economy had suffered. Between 2009 and 2014, a tremendous amount of value was <a href="http://qz.com/248821/greeces-collapse-is-officially-worse-than-the-us-great-depression/">destroyed</a>, both because of the failure of Greek governments to implement reforms and because of the austerity measures imposed by creditors. The pace of value destruction only accelerated in the first six months of 2015. </p>
<p>Consider this: just in the first quarter of 2015, the Hellenic Financial Stability Fund (the fund established with loans from eurozone governments and the European Financial Stability Facility to finance Greek bank recapitalization) <a href="http://www.hfsf.gr/files/HFSF_Interim_January_March_2015_en.pdf">lost €5 billion</a>. </p>
<p>This loss and the postponement of cash payments from the Greek government to its suppliers isn’t being accounted for in its budget. Doing so would turn the 4% primary budget surplus that was reported for the first quarter into a 13% deficit. The primary surplus is the sum of spending and income, excluding interest payments.</p>
<h2>From expert to pariah</h2>
<p>When Varoufakis emerged on the public scene, he was quickly <a href="http://business.financialpost.com/news/economy/greeces-superstar-finance-minister-yanis-varoufakis-tests-eus-ways-of-winning-friends-and-influencing-them">baptized</a> by the media as an expert and world-class economist. </p>
<p>That created a figure of authority, a person that many Greeks deeply believed. In the last couple months, however, he has been under attack, accused of destroying the country’s finances. </p>
<p>The same people who now criticize him never questioned the basic premise of Varoufakis’ negotiating strategy: that Europe would blink first because of the risk of contagion. His assumption was that the threat of a Grexit would have devastating consequences to the eurozone. </p>
<p>Back in February, I <a href="https://www.linkedin.com/pulse/greece-threat-eurozone-george-serafeim?trk=mp-reader-card">said</a> the opposite: do not count on this because we are not in 2012 anymore. The eurozone built a concrete fence around the Greek economy so that if it blows up, the consequences for other countries would be minimized – though it still would send Greece back to pre-euro economic development levels. </p>
<p>Whether this will now prove to be true is irrelevant. What matters is that both European politicians and the markets believe it. All Greek threats during negotiations were dismissed.</p>
<h2>Lack of scrutiny</h2>
<p>Unfortunately, before Varoufakis was given the license to implement his strategy, he was never hard-pressed to present evidence of his hypothesis. </p>
<p>What data did he have that suggested that European financial institutions were exposed to the risk of a Grexit? Would big foreign multinational companies be forced to fire a large number of people as a result of the Greek market collapsing? Did the prices of government bonds of other countries move in the same direction as the prices of Greek government bonds in 2014 – in other words, is there evidence of a close connection between the fate of the Greek economy and that of other countries?</p>
<p>The role of a finance minister is incredibly important in a country’s economy. </p>
<p>Given the importance of attracting investments, the finance minister needs to inspire confidence and build trust. The only way to do this is through consistency, specificity and clarity in decision-making and public statements. </p>
<p>A finance minister needs to have a clear plan and to be able to support his or her rationale with evidence. </p>
<p>I do hope that Greek – and other – journalists will scrutinize the country’s future finance ministers to present evidence that justify the policies they choose. They have a very important role to play, if Greece is ever to recover.</p><img src="https://counter.theconversation.com/content/44324/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>George Serafeim is affiliated with Harvard Business School, KKS Advisors, the High Meadows Institute and the Global Initiative for Sustainability Ratings.</span></em></p>Greek Finance Minister Yanis Varoufakis, who led a failed strategy to change the terms of Greece’s bailout, resigned Monday.George Serafeim, Jakurski Family Associate Professor of Business Administration, Harvard UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/443162015-07-06T13:35:58Z2015-07-06T13:35:58ZWhy the No vote was a triumph of democracy over austerity<p>The resounding rejection of the unworkable polices demanded by Greece’s lenders in a <a href="https://theconversation.com/uk/topics/greece">national referendum</a> held on July 5 is truly momentous for Greece.</p>
<p>Beyond the economic issues at stake in this vote, the democratic processes on display offer new hope not only to the Greek people, but for other countries too. The result is a powerful message to the political establishment that has mismanaged Greece for the last four decades, bringing the country to the brink of catastrophe.</p>
<p>These people, who ruled using corrupt practices and nepotism, all united for the Yes vote in the build-up to the plebiscite. They included no fewer than four former prime ministers, all of whom bear a direct responsibility for Greece’s debt. These men have spoken with one voice in their attempt to absolve themselves of responsibility.</p>
<p>Among these discredited leaders are the socialist Kostas Simitis, who introduced Greece to the eurozone <a href="http://news.bbc.co.uk/1/hi/business/4012869.stm">on doctored data</a>, and another socialist, George Papandreou, an inept scion of a political dynasty who <a href="http://www.aljazeera.com/news/europe/2011/11/201111385358105842.html">negotiated the biggest bailout in history</a>. They also include the conservative Kostas Karamanlis, a beneficiary of nepotism under whose watch the debt spiralled from 98.9% to 129.7% of GDP <a href="http://www.ekathimerini.com/153537/article/ekathimerini/comment/costas-karamanliss-deafening-silence">in less than five years</a>, and the unelected technocrat Loukas Papademos, a former banker who “bailed in” tens of thousands of small depositors in Greece while letting off German and French banks holding Greek bonds.</p>
<p>The referendum result is equally bad news for the oligarch-owned media, which deployed scare tactics to promote its own agenda (including a desire to avoid paying taxes and competitive tendering for the airways that the Syriza government is likely to enforce). This plan clearly backfired, since 61.3% of voters weren’t buying what they were selling.</p>
<p>The resounding No vote has all but obliterated the power held by the handful of political families and oligarchs who <a href="https://www.foreignaffairs.com/articles/greece/misrule-few">have dominated Greek politics</a> for years. It is a vote of confidence in the Syriza-led government, which has no ties to this toxic nexus of corruption and dependency.</p>
<h2>Bringing democracy back to Brussels</h2>
<p>But the referendum also dealt a heavy blow to European technocrats. The lenders of the European Union, the European Central Bank and the International Monetary Fund, who imposed savage and unworkable austerity measures on the Greek society in the past five years in exchange for bailout funds that the country badly needed, were of course hoping for a Yes. </p>
<p><a href="http://coppolacomment.blogspot.gr/">Most economists agree</a> that an extension or a further intensification of the disastrous policies forced on Greece would have led to a further contraction of the Greek economy, which has already caused massive <a href="http://www.wsj.com/articles/SB10001424127887324299104578527202781667088">unemployment</a> (currently at 26% in the general population and more than 50% among young people).</p>
<p>The Greek government was first to reject the take-it-or-leave-it ultimatum from the lenders and now the electorate has followed. The No vote is therefore a triumph of democracy over diktats dreamed up by unelected officials. It is an opportunity to redefine Greece’s place in the European Union and its future identity for the years to come.</p>
<h2>A wider change</h2>
<p>While the battle between the Yes and No camps was largely fought between the “haves” and the growing number of the “have nots”, it also brought the demands of younger Greeks to the fore. They crave change that has not been on offer from mainstream parties. Beyond economic stability, many younger voters want citizenship for the children of immigrants and the legalisation of same-sex marriage, for example.</p>
<p>Since Greece’s problems did not begin with Syriza, the current government has the best chance in years of addressing the country’s intractable problems. There is hope that corruption can be stamped out and reforms introduced to improve governance and modernise Greek society.</p>
<p>The tremors will be felt beyond Greece’s borders. The promise of a better tomorrow that <a href="https://www.foreignaffairs.com/articles/greece/2015-01-29/austerity-vs-democracy-greece">never seems to arrive</a> on the condition of more impoverishment today is a familiar concept to many. If Greece is successful, it will offer an alternative to the misanthropy driving eurozone austerity policies. It will enable citizens to have a bigger say in the future of the European project.</p>
<p>This is potentially the most important contribution being made by the democratic processes taking place in Greece. The No vote should give pause to politicians and media all over the world. They should note that they <a href="http://www.zerohedge.com/news/2015-07-03/troika-turns-europe-warzone">couldn’t tell the Greeks</a> what to do and they can’t stop people holding unelected institutions to account.</p><img src="https://counter.theconversation.com/content/44316/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Marianna Fotaki does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The referendum is a victory against the political class that has driven Greece to the brink, and the eurocrats who refused to help.Marianna Fotaki, Network Fellow, Edmond J Safra Center for Ethics, Harvard University and Professor of Business Ethics, Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/443172015-07-06T10:14:49Z2015-07-06T10:14:49ZVictory for politics of defiance in Greece means the real crisis starts now<p>Now that the Greek referendum has produced a <a href="http://news.sky.com/story/1513901/greece-referendum-no-vote-what-does-it-mean">decisive No vote</a>, never mind what happened before. The real crisis starts now. </p>
<p>It has to be recognised that the Greek people faced a difficult choice. The referendum itself was a political gambit by the Syriza government to seek to split the eurozone governments and obtain a better deal. The politics of defiance has won. It was a major gamble, so will it pay off? </p>
<p>There will be some EU leaders, particularly in France and Italy, who will urge a return to the negotiating table. But the odds which the Greek government now faces are stiff. One political commentator wryly told me in recent days that Syriza has achieved what few others managed: to unite the eurozone governments against it, even those most critical of austerity policies. In my view there is now an 80% probability of Grexit. </p>
<h2>The Greek reality</h2>
<p>The IMF’s debt sustainability report, which <a href="https://www.imf.org/external/pubs/ft/scr/2015/cr15165.pdf">was published</a> on June 26 just days before the vote, shows how dire Greece’s fiscal predicament is. Just a year before, the fund projected the country’s debt/GDP ratio falling from 175% in 2013 to around 128% in 2020. But the poor growth performance and poorer primary fiscal balances have worsened the outlook such that the ratio is now expected to be over 150% by 2020. </p>
<p>Worse is still to come: the report does not yet reflect the negative impact of the current banking closure and capital controls, which will have severely affected economic activity, and numerous commentators have said that the IMF’s growth forecasts for the country are too optimistic.</p>
<p>Although one can partly blame Syriza’s intransigence for the latest economic setbacks, the result of the referendum should be a wake-up call to the eurozone economies that fiscal austerity alone cannot be a solution. Greece’s <a href="http://www.tradingeconomics.com/greece/gdp">GDP decline</a> of more than 27% between 2008 and the first quarter of 2015 is one of the worse peacetime economic declines in history. </p>
<h2>Entrenched warfare</h2>
<p>Following the No vote, the rhetoric on both sides will be turned up another notch, having already sharpened in recent weeks. Northern-European critics <a href="http://www.cesifo-group.de/cesifo/newsletter/0515/Original_Sinn_May_2015.html">point out</a> that none of the reforms to pensions or to the economy, such as privatisations, which were agreed in 2011 have been carried out. </p>
<p>There were <a href="https://www.imf.org/external/pubs/ft/scr/2015/cr15165.pdf">supposed to be</a> €23bn (£16bn) of proceeds from privatisation over the 2014–22 period, and further ones which the Greek government promised but which have since been taken off the table. The IMF now notes that there have been privatisations of €3bn in the past five years and forecasts proceeds of only €500m a year over the next few. </p>
<p>In contrast, critics of the <a href="http://www.bbc.co.uk/news/business-15149626">troika</a>’s approach <a href="http://www.project-syndicate.org/commentary/greece-referendum-troika-eurozone-by-joseph-e--stiglitz-2015-06">argue that</a> Greece’s economy has lagged behind because of a basic lack of domestic demand, and that aiming to run a 3%-4% primary surplus in the national finances is incompatible with any sort of economic recovery. </p>
<p>This polarised debate disguises that the better path probably lies in the middle: Greece does need to improve the supply side of its economy by investing in new technologies and making its existing sectors more competitive. But in the meantime, demand needs to be sustained and you need more than three to four years to radically restructure an economy. In simple terms Greece needs another bailout (probably about €50bn), this time with a major debt restructuring (about €80bn, maybe more) to ensure that a new medium-term economic plan can be adopted which has a chance of working.</p>
<p>That’s what the bargaining should be about, and following the referendum the Tspiras government has a strong mandate. But this will require flexibility so far unseen among the eurozone governments – many have already said publicly that a No would lead to a Greek exit from the euro. Negotiating a new bailout will also take time. </p>
<h2>The liquidity threat</h2>
<p>But in the short run the main binding constraint is the banking shutdown. It is rumoured that one Greek bank is almost running out of cash, <a href="http://www.telegraph.co.uk/finance/economics/11715198/greece-crisis-live-no-yes-referendum-polls.html">and that</a> the whole banking sector has no more than €500m-€1bn left to dispense: about three days’ worth of cash. Without political cover from the eurozone governments, the European Central Bank (ECB) cannot reverse its move on June 28 to cap the Emergency Liquidity Assistance programme, which led to the closure of Greece’s banks the following day. </p>
<p>Having already received €89bn in assistance to keep functioning, the banks can’t resume business unless the cap is removed. Without additional ECB support, there would quickly be serious dislocation in the economy as businesses and government cannot pay salaries, and key imports like food and medicines cannot be guaranteed. Many businesses would cease to operate. So if the eurozone does not restart negotiations then Grexit could follow, de facto if not de jure, as the banks run out of cash. </p>
<p>If the eurozone shuts out Greece from ECB assistance, the Greek government would then be forced to issue promissory notes or IOUs: in essence the precursor of a new Greek currency, to which the Greek Central Bank and the Greek banks would need to be parties. Indeed, outgoing finance minister Yanis Varoufakis <a href="http://www.telegraph.co.uk/finance/economics/11719688/Defiant-Greeks-reject-EU-demands-as-Syriza-readies-IOU-currency.html">has already indicated</a> that this is a possibility. In theory this exit from the euro could be reversed if an agreement were reached with the eurozone.</p>
<p>But a dual currency limbo cannot last long. Very quickly it would make sense to convert all bank accounts, prices and contracts to the new currency. Because it would take time to issue new drachma notes, euro notes would continue to circulate alongside IOUs. But people would seek to hide them in the knowledge that the new drachma would quickly devalue, probably by about 50%. It is also likely that the euro would eventually stop being legal tender and tight capital controls would operate, with a forcible conversion of euro notes to new drachma notes. </p>
<p>For the creditors, Grexit means Greece could walk away from its debt, which is mostly held by governments rather than European banks. This will have a negative fiscal impact on large eurozone countries like Germany, France, Italy and Spain. But European banks have built up capital reserves in the last five years and should be able to withstand the shock of the sovereign bonds of large eurozone countries that they hold on their balance sheets plunging in value as a result. </p>
<p>For the eurozone, the key will be to prevent a contagion through increasing debt costs to other weaker members such as Spain, Portugal, Ireland and Italy. The ECB will need to use whatever it takes to defend these countries, including its <a href="http://lexicon.ft.com/Term?term=outright-monetary-transactions-OMT">Outright Monetary Transactions programme</a>, under which it can buy their sovereign bonds.</p>
<p>For Greece, debt relief would follow an exit from the eurozone. But there are risks, not least that it would have violated its adherence to EU treaties by exiting the euro. So an exit from the EU, though seemingly implausible, cannot be excluded. </p>
<p>And in spite of having a currency with a much lower value following a Grexit, there might be little benefit to net exports for Greece. This is because the Greek economy <a href="http://www.ft.com/cms/s/1bf65f00-1f29-11e5-ab0f-6bb9974f25d0,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F1bf65f00-1f29-11e5-ab0f-6bb9974f25d0.html%2523axzz3f2HiHl5L%3Fsiteedition%3Duk&siteedition=uk&_i_referer=">is quite closed</a>, with net exports less responsive than might be expected to a devaluation. Greece would also need to maintain a fiscal surplus with no short-run external finance sources. So for Syriza this risks being a pyrrhic victory. For the eurozone and the EU, meanwhile, this is their biggest ever challenge.</p><img src="https://counter.theconversation.com/content/44317/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Anton Muscatelli does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Greek rejection of the bailout means it’s time to brace ourselves: Grexit is now an 80% probability.Anton Muscatelli, Principal and Vice Chancellor, University of GlasgowLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/442932015-07-06T08:41:52Z2015-07-06T08:41:52ZGreferendum offers symbolic victory for Syriza’s anti-austerity ‘Third Way’<p>Against the predictions of many opinion <a href="http://greece.greekreporter.com/2015/06/28/greece-referendum-polls-greeks-favor-agreement-yes/">polls</a>, the so-called Greferendum scored a surprisingly resounding victory for the Oxi — or No — campaign. </p>
<p>Some 60% of Greek voters <a href="http://www.nytimes.com/2015/07/06/world/europe/greek-referendum-debt-crisis-vote.html">chose</a> “no” on one of the most incomprehensible referendum questions in history. The vote has been heralded and mourned across Europe, with both sides agreeing that it is a “<a href="http://www.wsj.com/articles/greeks-vote-in-historic-referendum-1436095669">historic</a>” occasion in European (they mean European Union) history.</p>
<p>It is not.</p>
<p>How could it be? The Greferendum was <a href="http://www.theguardian.com/news/datablog/2015/jul/03/greek-referendum-voters-greece-creditors-proposals">designed</a> to be vague and inconsequential. It was on an extremely narrow <a href="http://www.huffingtonpost.com/cas-mudde/victims-of-illusions-the-_b_7679138.html">question</a>, that is whether Greeks supported a highly specific proposal from the country’s creditors. </p>
<p>Moreover, by the time the referendum was held, the proposal was already off the table. It is therefore completely ridiculous to <a href="http://www.huffingtonpost.com/2015/06/29/greece-referendum-national-front-_n_7691166.html">celebrate</a> it as a vote against the eurozone, let alone the EU, as many far right politicians have done, and highly optimistic to see this as a mandate to end austerity. </p>
<p>Not only was this not the <a href="http://www.huffingtonpost.com/2015/07/04/greece-referendum-question_n_7727924.html">question of the referendum</a>, it is not up to Greece to decide that for the whole eurozone and EU.</p>
<p>The referendum was always much more about the <a href="http://www.reuters.com/article/2015/06/30/vicenzino-greece-idUSL1N0ZG30F20150630">survival</a> of the Greek government — and, more specifically, its main party, the Coalition of the Radical Left (Syriza) — than about Greece or Europe. </p>
<p>It was, first and foremost, an elaborate and expensive <a href="http://www.bbc.co.uk/news/world-europe-15588380">vote of confidence</a> in the more moderate line within Syriza. In fact, Prime Minister Alexis Tsipras was remarkably candid about this in his victory speech, saying the result was not a mandate for a rupture with Europe but one for a strengthened negotiating position for Greece. I wonder how that message resonated among the many “anti-EU” and “international solidarity” supporters of Syriza across Europe.</p>
<h2>Back where we started</h2>
<p>Consequently, we are exactly where we started half a year ago, when Syriza won the Greek elections. </p>
<p>In essence, the referendum was about Syriza’s “Third Way,” that is an anti-austerity eurozone, which has been the basis of the party’s electoral success. </p>
<p>Tsipras <a href="http://www.theguardian.com/world/2015/jun/26/greece-calls-referendum-on-bailout-terms-offered-by-creditors">called</a> the referendum with the (unconvincing) argument that he didn’t have a mandate to accept the creditors’ proposals, because the two coalition parties gained only 41% of the vote in the 2015 elections – yet they have a clear majority in the mono-cameral Greek parliament. </p>
<p>If this really is his line of thinking, and we ignore the fact that only about 40% of the Greek electorate actually voted “no” in the referendum (60% of 65% turnout), the situation hasn’t changed much. After all, the Greferendum gave him only a mandate about this specific deal, which was off the table anyway. Any new deal, let alone a significantly changed one, would require another referendum. Somehow I think that will not happen.</p>
<h2>A symbolic victory</h2>
<p>From a broader European perspective the Greferendum was a symbolic victory. But unfortunately, such victories are exactly that, symbolic, and tend to not last long. We have seen symbolic victories against the “imperialist” and “undemocratic” EU before – think about the French and Dutch <a href="http://pa.oxfordjournals.org/content/59/1/98.full">referendums</a> against the European Convention in 2005, in which similar majorities said “no” to a much more fundamental question. </p>
<p>But after a couple of months of “crisis,” the EU responded as it has always done: with more EU. </p>
<p>The <a href="http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:12007L/TXT">Lisbon Treaty</a> was a European Convention Light, which was no longer put to a referendum in France and the Netherlands. The silly Irish <a href="http://news.bbc.co.uk/1/hi/world/europe/6901353.stm">tried</a> to reject it, in a 2008 referendum, only to be forced to vote again in 2009 – as they made “the right choice” the second time around, they didn’t get a third chance. </p>
<p>The Greferendum won’t be different. Within weeks there will be a “compromise” between the two camps, as both have too much at stake (such as hanging on to power). There will be neither an end to austerity nor a Grexit. </p>
<p>Instead, there will be something that strongly resembles the rejected proposal, a Lisbon Treaty of austerity, but that can be re-branded as a victory for Greek “dignity” by Syriza. The new policy will be austerity light, not much different than the policies in most other bailout countries (such as Ireland and Portugal). </p>
<p>In that way, Syriza’s “Third Way” will end up much the same as the “Third Way” of New Labour in the UK: neoliberal policies hidden under progressive rhetoric.</p><img src="https://counter.theconversation.com/content/44293/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Cas Mudde has received funding from the Alexander von Humboldt Foundation, British Academy, Dutch Scientific Organization (NWO), Flemish Scientific Organization (FWO), Israeli Institute, and Volkswagen Foundation. He is affiliated with the Center for Right-Wing Studies at the University of California, Berkeley, and consults/ed for the Canadian Security Intelligence Service (CSIS), Institute for Jewish Policy Research (JPR), and European Policy Center (EPC).</span></em></p>Heralded and mourned as historic, the so-called Greferendum was more about the survival of the Greek government and Syriza than anything else.Cas Mudde, Associate Professor in the School of Public and International Affairs, University of GeorgiaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/442892015-07-05T21:29:36Z2015-07-05T21:29:36ZGreece votes No – now Syriza must clarify what that really means<p>With the votes counted, <a href="http://www.bbc.co.uk/news/world-europe-33403665">more than 60%</a> of Greeks have said no to the bailout terms set by the country’s international creditors. Following this resounding rejection, prime minister Alexis Tsipras now has a clear mandate from the Greek people to renegotiate the terms and conditions of the agreement with the IMF and its EU partners. </p>
<p>The referendum presented Greek citizens with a dilemma. On one hand, voting Yes would mean conceding to further austerity and siding with precisely those political forces that are perceived responsible for Greece’s predicament. On the other, voting No would bring a new period of uncertainty for the country. </p>
<p>The precise wording of the referendum question contributed to this quandary. The government was very careful not to ask voters if they wanted to stay in the eurozone or not, which is – after all – what is at stake. Rather, Tsipras decided to ask a very specific question on a technical issue that he himself had rejected. </p>
<p>This was a political move. Given that public opinion is generally supportive of eurozone membership, it was much more likely that Greeks would vote to reject austerity than oppose eurozone membership. This essentially allowed the government to use this referendum as a popular vote of confidence for its negotiation policy with Greece’s creditors. </p>
<h2>Unanswered questions</h2>
<p>The economic consequences of this result could be devastating. Greece’s domestic economic situation will be weakened and further economic uncertainty will follow. It is not clear when banks will re-open and whether the country will be able to address its liquidity problems. Deputy finance minister Nadia Valavani has <a href="http://www.kathimerini.gr/822329/article/epikairothta/politikh/valavanh-oxi-analhyeis-metrhtwn-apo-tis-8yrides">already warned</a> that Greeks will not be permitted to withdraw cash from safety deposit boxes for the time being.</p>
<p>It is also unclear how the government will bring investment and growth to the country. Any foreign business is unlikely to invest in a country which could nationalise their assets at any moment. </p>
<p>And, crucially, we still don’t know how this result will affect Greece’s negotiating position with the EU partners and the IMF. It may well weaken rather than strengthen it, as many voters may have hoped.</p>
<p>The Greek government has lost credibility abroad. Its EU partners and the IMF no longer trust it and the view from abroad has been that this is nothing short of a vote on Greece’s eurozone membership. In fact some key players, such as European Parliament president Martin Schulz, have even argued that if Greece votes no, it should start looking at introducing a <a href="http://www.reuters.com/article/2015/07/05/us-eurozone-greece-schulz-idUSKCN0PF06O20150705">new currency</a>.</p>
<h2>The morning after</h2>
<p>As his country went to the polls, Tsipras said: “Today we celebrate democracy,” and proclaimed that the will of the people <a href="http://www.kathimerini.gr/822298/article/epikairothta/politikh/a-tsipras-kaneis-den-mporei-na-agnohsei-thn-voylhsh-toy-laoy">should not be ignored</a>.</p>
<p>But the referendum has had the opposite effect. It has further weakened Greek democracy and undermined Greece’s negotiation position with its creditors. What’s more, its has solidified divisions in Greek society. In a country with a history of civil war and dictatorship, this polarisation may lead to a further rise of the extremes. </p>
<p>The day after the referendum is a very important moment. The people have spoken and the government will need to finally clarify its vision for the future. It will need to explain if it is resolved to addressing Greece’s crisis within the eurozone by cooperating with its partners or if it wants to create a utopian socialist state in Europe. This result marks a new period of uncertainty, not only for Greece but for Europe – and potentially for the world economy as a whole.</p><img src="https://counter.theconversation.com/content/44289/count.gif" alt="The Conversation" width="1" height="1" />
Greece has voted resoundingly against the bailout terms set by the IMF in a historic referendum.Sofia Vasilopoulou, Lecturer, Department of Politics, University of YorkLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/442592015-07-05T08:59:21Z2015-07-05T08:59:21ZIf you think the eurozone will be safe from Grexit contagion, think again<figure><img src="https://images.theconversation.com/files/87352/original/image-20150703-20493-t2b4sa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Grexit puts everyone at risk</span> <span class="attribution"><a class="source" href="http://www.shutterstock.com/cat.mhtml?lang=en&language=en&ref_site=photo&search_source=search_form&version=llv1&anyorall=all&safesearch=1&use_local_boost=1&autocomplete_id=&search_tracking_id=078hje0CELX3fTEgCY0uDQ&searchterm=greek%20crisis&show_color_wheel=1&orient=&commercial_ok=&media_type=images&search_cat=&searchtermx=&photographer_name=&people_gender=&people_age=&people_ethnicity=&people_number=&color=&page=1&inline=292175045">Martin Capek</a></span></figcaption></figure><p>For Greece’s government, the July 5 referendum that <a href="http://news.sky.com/story/1513740/greece-no-campaigners-celebrate-victory">has just</a> rejected the EU’s bailout package was one step in a long negotiation process. Its ultimate objective is to get Greece’s creditors to agree a <a href="http://uk.businessinsider.com/greece-2-year-bailout-demands-and-loan-application-2015-6">bailout package</a> that provides partial relief from debt repayments, together with a substantial debt write-down. </p>
<p>For the creditors, on the other hand, it was a straightforward in/out referendum which will determine Greece’s continued membership in the eurozone and even perhaps the EU. If Greece voted Yes, these creditors were effectively demanding a <a href="http://www.nytimes.com/2015/06/30/world/europe/greek-premiers-referendum-call-tests-his-power-and-conviction.html?_r=0">change of government</a>.</p>
<p>Now those creditors have to be content with the <a href="http://money.cnn.com/2015/07/06/news/economy/greece-yanis-varoufakis-resigns/">resignation</a> of finance minister Yanis Varoufakis. The rest of the government remains.</p>
<p>Given the pivotal nature of the referendum, the brinkmanship on display was both striking and seemingly foolhardy – possibly borne of a disagreement about what will happen if an agreement can’t be reached. It further complicated what is already a high-stakes and seemingly endless negotiation, which now has to contend with a Greek No victory as well. </p>
<h2>Making sense of Greece</h2>
<p>After it <a href="will%20happen%20if%20negotiations%20break%20down,%20and%20therefore%20what%20the%20true%20worth%20of%20the%20%22outside%20option%22%20really%20is.">won the</a> last Greek general election in January, Syriza of course <a href="http://www.todayszaman.com/anasayfa_syriza-wins-greek-election-promises-austerity-is-over_370820.html">publicly committed</a> to reject any bailout package involving further austerity – though it has since <a href="http://www.bloomberg.com/news/articles/2015-07-02/defiant-varoufakis-says-he-ll-quit-if-greeks-endorse-austerity">shown willing</a> to compromise this ideal. </p>
<p>The Greek argument is that austerity is self-defeating, and without a substantial debt restructuring, the prospect of further harm to the country in both the short-run and the medium term outweighs any potential gains from continued eurozone membership. The <a href="http://www.theguardian.com/business/2015/jul/02/imf-greece-needs-extra-50bn-eurosanalysis">IMF’s intervention</a> on July 2 seemingly supports this view, proposing relief from debt repayments and a substantial debt write-down in return for a credible plan for economic reforms. Yet while Greek prime minister Alexis Tsipras <a href="http://www.theguardian.com/business/2015/jul/02/imf-greece-needs-extra-50bn-euros">welcomed</a> this intervention, not all the economic reforms the IMF has in mind might be palatable to Syriza. </p>
<p>The contrary view, of course, is that the current Syriza government in Greece is a recalcitrant debtor with no intention of either paying back its debts or implementing a reform package that stimulates private-sector economic activity. The Greek government has steered clear of conflating a No vote and a strategic default, though, clearly wording the referendum to avoid this interpretation. It seeks a decision from the Greek people on the latest bailout proposal and not euro membership. And the proposal <a href="http://g8fip1kplyr33r3krz5b97d1.wpengine.netdna-cdn.com/wp-content/uploads/2015/06/ilovepdf_merged-2.pdf">it tabled</a> to the <a href="http://www.esm.europa.eu">European Stability Mechanism</a> and <a href="http://www.consilium.europa.eu/en/council-eu/eurogroup/">Eurogroup</a> on June 29 for a new third bailout was an attempt to distance itself from the vitiated wrangling that has characterised the failed talks so far.</p>
<h2>Eurozone brinkmanship</h2>
<p>Less has been written about the brinkmanship on the part of the eurozone creditors. It signals a belief that the impact of Greece leaving the euro could be contained to its borders and not spread to other eurozone countries labouring under enormous debts. This betrays a false sense of control over the unintended consequences and deep long-term uncertainty that a Grexit would cause. </p>
<p>A different view is that a Grexit would push the eurozone project to the brink. The eurozone constitutes an irrevocable commitment to a monetary union, essentially a fixed-exchange-rate arrangement backed by a central bank and some form of banking union. As we learned from the <a href="https://history.state.gov/milestones/1969-1976/nixon-shock">collapse of</a> the Bretton-Woods system in the 1970s, fixed-exchange-rate regimes between structurally dissimilar economies eventually break down. A common central bank and a banking union might mitigate some of the risks, but without some arrangement to pool the fiscal policies of the different countries involved, it is prone to collapse once the irrevocable commitment to sustain the monetary union is in doubt. Allowing Greece to leave would put the eurozone in that category. </p>
<p>The market would consequently demand a risk premium in relation to the assets of other struggling countries in the zone. It would want to see a pan-European framework of laws in place to mitigate the risks of another country leaving, which doesn’t exist at present. The <a href="http://europa.eu/rapid/press-release_MEMO-13-1140_en.htm?locale=en">EU banking resolution framework</a> is still nascent and untested, and Grexit could expose flaws at a particularly turbulent time when its inevitable bank insolvencies would have to be handled in an orderly fashion. </p>
<p>Equally uncertain are the <a href="http://www.inhouselawyer.co.uk/index.php/contract/7202-choice-of-law-when-none-is-chosen-the-rome-i-regulation">rules governing</a> what happens to commercial contracts between Greek parties and those from elsewhere in the EU, and whether they would be redenominated from euros into new drachma (potentially causing catastrophic losses for non-Greeks if and when that drachma plummeted). This would make the outcomes from any litigation particularly uncertain, which would create further market uncertainty and instability. Indeed regardless of the outcome on Sunday, there is <a href="http://www.allenovery.com/archive/Documents/Legacy/65610.pdf">no evidence</a> that the uncertainty will be diminished in this respect. </p>
<p>Further adding to the uncertainty is the fact that the creditors have <a href="http://www.theguardian.com/business/2015/jul/01/greece-crisis-berlin-blasts-tsipras-scapegoats-germany">not yet said</a> whether the bailout negotiations would continue in the event of a Grexit; and the partisan role of the European Central Bank in <a href="http://www.theguardian.com/business/live/2015/jun/28/greek-crisis-ecb-emergency-liquidity-referendum-bailout-live">denying the</a> Greek banks the emergency liquidity to which they are entitled as members of the euro. </p>
<p>There was an unequivocal monetary-policy case for continuing the funding until after the referendum (it stopped on Sunday June 28), as well as renegotiating the austerity programme on which the bailouts depend. The European Central Bank <a href="https://www.ecb.europa.eu/press/pr/date/2015/html/pr150628.en.html">provided no</a> monetary rationale for its decision – yet the European Court of Justice <a href="http://curia.europa.eu/jcms/upload/docs/application/pdf/2015-01/cp150002en.pdf">has ruled</a> that the bank’s mandate requires it to ensure the channels for monetary policy remain unblocked. The bank’s evident sensitivity to political headwinds is a problem for the future stability of the eurozone. </p>
<p>The ways in which these scenarios do or don’t play out after the referendum are moot to some extent. Despite the No vote in Greece, a solution will be found in the short term. But to make a difference in the longer term, there will have to be further and deeper economic convergence funded by a 21st-century version of the <a href="http://marshallfoundation.org/marshall/the-marshall-plan/">Marshall Plan</a> for the eurozone’s “south”, together with a new phase of political integration. Since Europe’s citizens want to bring the continent closer together, there is no other option.</p><img src="https://counter.theconversation.com/content/44259/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sayantan receives funding from ESRC</span></em></p><p class="fine-print"><em><span>Dania Thomas does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>European leaders have consistently claimed that their anti-contagion measures would protect the rest of the eurozone from a Greek exit. This looks like pure propaganda.Sayantan Ghosal, Professor of Economics, University of GlasgowDania Thomas, Lecturer in Business Law, University of GlasgowLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/441042015-07-03T05:28:26Z2015-07-03T05:28:26ZGreece, honour and the ancient ties of wergeld<p>On the surface, it seems the <a href="https://theconversation.com/uk/topics/greece">Greek crisis</a> is all about money. The Greek government has defaulted on a €1.6bn loan repayment to the IMF and is seeking a new bailout programme. Meanwhile, the Greek people are to take part in a referendum that is being billed as a choice between the euro and the drachma.</p>
<p>In fact this crisis is not about money. Greece’s creditors are well aware that Greece cannot repay or even service its debt. They are happy to keep finding ways to refinance it, so long as Greece agrees to punitive austerity policies. They aim for punishment, not repayment. They care about honour and vengeance, not money. </p>
<p>Modern Europe is witnessing an enactment of an ancient law known as <a href="http://www.britannica.com/topic/wergild">wergeld</a>. Greece is expected to continue paying, not until its financial debt has been cleared, but rather until its creditors think it has suffered enough.</p>
<h2>The endless debt</h2>
<p>When a person or a firm faces bankruptcy, their debts can be written down to their ability to pay. A person’s total ability to pay can be estimated on the basis of expected lifetime earnings. Firms have indefinite lifespans, but at least their rate of repayment can be estimated on the basis of their expected profits.</p>
<p>Sovereign debt is completely different. A sovereign, <a href="http://oregonstate.edu/instruct/phl302/texts/hobbes/leviathan-d.html">as Hobbes said</a>, is immortal in the intention of them that make it. And in principle it can set its own level of income by choosing how much to tax its citizens and how much to spend on them. There must be a limit to what sovereigns can extract from their citizens, but who knows where it is? A sovereign’s ability to pay is an unknown rate of income multiplied over an infinite lifespan. This is why Greece can, in principle, stay in the condition of a debtor forever.</p>
<p>Nor is there any real limitation on the creditors’ side. It is true that some creditor or other must keep lending Greece money to service its debt. But once the European Central Bank got involved the amount of potentially available credit became infinite.</p>
<p>So far the austerity policies imposed on Greece by its creditors have made it less, not more, able to pay. From 2006 the debt-to-GDP ratio has risen from <a href="http://www.tradingeconomics.com/greece/government-debt-to-gdp">100% to nearly 180%</a>. But what does it matter? The sovereign debtor has an infinite lifespan in which to recover the loss.</p>
<p>There is 60% youth unemployment now, but three generations in the future people might be working again. Greeks may be dying early due to malnutrition and curable disease, but others are being born who can take over the work of repayment. The luxury of time is all the luxury the creditor needs.</p>
<h2>Paying wergeld</h2>
<p>The burning question isn’t whether Greece can be kept in this condition indefinitely; it is why anybody should want it to be. The creditors are never made whole, so what is the point? The answer is not to be found in economic reasoning.</p>
<p>Such reasoning tells us only that a creditor should get as much as possible while there is still time. But that is not what is going on here, where there is always still time and the creditors are making new loans faster than they recover old ones. Sovereign debt is an entirely different species of debt to that whose workings are governed by economic reasoning.</p>
<p>The Greek debt is instead what anthropologists know as <a href="http://www.britannica.com/topic/wergild">wergeld</a>. This is a type of debt found in a variety of societies in different periods. It is typically owed when the member of one tribe kills or injures the member of another.</p>
<p>Some theorists interpret wergeld as the price one pays for the wrong. Others, recognising that no amount of money can right a past wrong, see it as something else: a sacrificial act to show contrition and supplication. <a href="http://www.editionsladecouverte.fr/catalogue/index-La_dette_de_vie-9782707155399.html">Philippe Rospabé</a>, for instance, claims that wergeld is paid in order to suspend vengeance.</p>
<p>The debtors pay to show how sorry they are, to harm themselves through deprivation, and thus to assure those they have wronged that there is no need to take vengeance. The word “pay” itself comes from “payer” - to pacify.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/86868/original/image-20150630-5836-1jg8c3t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/86868/original/image-20150630-5836-1jg8c3t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/86868/original/image-20150630-5836-1jg8c3t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=406&fit=crop&dpr=1 600w, https://images.theconversation.com/files/86868/original/image-20150630-5836-1jg8c3t.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=406&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/86868/original/image-20150630-5836-1jg8c3t.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=406&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/86868/original/image-20150630-5836-1jg8c3t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=510&fit=crop&dpr=1 754w, https://images.theconversation.com/files/86868/original/image-20150630-5836-1jg8c3t.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=510&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/86868/original/image-20150630-5836-1jg8c3t.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=510&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">A pre-eurozone court. It was all so simple then.</span>
</figcaption>
</figure>
<p>So it is with Greece. The refrain of those who support the austerity measures is that the transgressions of past Greek governments should not be forgotten. This is very revealing. It explains why the creditors don’t care that they aren’t getting their money back – and why in fact they are lending ever more. For them it is not a matter of money. It is a matter of honour.</p>
<p>The Greeks lied about their financial situation, and for this they must be punished. They must harm themselves to satisfy those they have dishonoured.</p>
<p>We might see the upcoming referendum as a chance for the Greeks to decide whether their penance is done. But it isn’t up to them. Even leaving Europe will not take away the power of their creditors to exact vengeance. It is the creditors who must decide how many homeless pensioners and starving children it takes to restore honour to someone who was once told a lie. It is they who must draw the line between honour and cruelty.</p><img src="https://counter.theconversation.com/content/44104/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alexander Douglas does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It might seem like Greece and Europe are arguing about money, but it’s really all about vengeance.Alexander Douglas, Lecturer in History of Philosophy / Philosophy of Economics, Heythrop College, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/441932015-07-02T14:57:48Z2015-07-02T14:57:48ZHow Greece crisis sparked a new era of extremist politics<p>Societal crises breed extremism. As political theorist <a href="https://books.google.co.uk/books?id=ASarAQAAQBAJ&pg=PA195&lpg=PA195&dq=%22alleviate+political,+social,+or+economic+misery+in+a+manner+worthy+of+man%22&source=bl&ots=Uf06jmaDmG&sig=DqMrV279E2PG_afw1TDNQHfCbsg&hl=en&sa=X&ei=_y-VVZ2lMovsUt_KoEg&ved=0CC0Q6AEwBA#v=onepage&q=%22alleviate%20political%2C%20social%2C%20or%20economic%20misery%20in%20a%20manner%20worthy%20of%20man%22&f=false">Hannah Arendt</a> has claimed, extreme groups gain momentum by offering solutions when other alternatives appear unable to “alleviate political, social, or economic misery in a manner worthy of man”.</p>
<p>Both the far right and the far left can be understood as the product of external triggers, such as economic crises. Parties at both extremes of the political spectrum capitalise on the insecurities of downward social mobility. They <a href="http://www.amazon.co.uk/Political-Man-Social-Bases-Politics/dp/0801825229/ref=sr_1_1?ie=UTF8&qid=1435843738&sr=8-1&keywords=Political+Man:+The+Social+Bases+of+Politics">appeal</a> to the dispossessed, the socially isolated, the economically insecure, and authoritarian persons at every level of society.</p>
<p>The Greek crisis is a perfect example of this phenomenon. As the country spirals towards disaster, the extreme left and extreme right find themselves singing from the same hymn sheet. But while their eurosceptic nationalism is being celebrated by many in Greece, it also poses a threat.</p>
<h2>Rise of the extremes</h2>
<p>Radical left coalition Syriza made a significant electoral breakthrough in 2012, coming second in the election with 26.89% of the <a href="http://www.stanlib.com/EconomicFocus/Pages/GreeceelectionwonbyNewDemocracywith297ofvote.aspx">vote</a>. On the far right, the neo-Nazi Golden Dawn party moved from the fringes into the mainstream after winning 6.92% of the votes, giving it 18 seats in the Greek parliament.</p>
<p>This trend continued into the 2015 election, when Syriza and ANEL, a far-right party formed by defectors from New Democracy, formed a coalition government. Syriza had secured 36.34% of the vote and secured 149 parliamentary seats – just two seats short of what it needed to form a majority government.</p>
<p>Golden Dawn lost a little ground since 2012 but still managed to come third, with 6.28% of the vote. This despite the fact that the party did little campaigning and its leading members were in prison at the time of the election, facing <a href="http://www.bbc.co.uk/news/world-europe-31139658">charges of indictment</a>.</p>
<p>All three parties were elected on an anti-austerity platform that emphasised the independence, dignity and sovereignty of the Greek nation. The crisis altered the cleavages of Greek society from left versus right to centre versus extreme. These three parties are now converging in their support for the campaign to <a href="http://www.bloomberg.com/news/articles/2015-07-01/greece-s-tsipras-calls-for-no-vote-in-july-5-referendum">reject</a> the bailout deal being proposed by Greece’s international creditors in the referendum being held on July 5. Rejection in this vote may be interpreted as a call for Greece to leave the eurozone and even the EU.</p>
<h2>Strange bedfellows</h2>
<p>It may seem counter-intuitive that both the far left and the far right belong to the same camp and put forward similar ideas and solutions to the crisis but it actually makes sense.</p>
<p>Societal crises breed extremism when economic woes meet political turmoil – particularly when severe issues of governability limit the ability of the state to fulfil its social contract obligations.</p>
<p>This breach of the social contract is accompanied by declining levels of trust in state institutions, resulting in the collapse of the party system. This is what happened in Greece. The people lost faith in the ability of the state to mediate the effects of the crisis. They stopped trusting institutions, political parties and democracy more broadly. Citizens questioned the existing mechanisms of democratic representation, which gave anti-systemic parties space to offer an alternative vision.</p>
<p>This vision is <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1475-6765.2011.02050.x/abstract">premised</a> on national pride, defiance and an antagonism against the status quo – which explains the convergence of the extremes. The far right and left both take an anti-establishment stance and reject the European Union on the basis that it is an exploitative power seeking to undermine the unity, autonomy and identity of the Greek nation. </p>
<p>Paradoxically then, nationalism is the underlying feature that unites the far right and the far left in Greece, cross-cutting traditional alignments and mobilising support across the political spectrum.</p>
<p>Since the eruption of the crisis, left-right polarisation has been superseded by polarisation over the demands being placed on Greece by its creditors.</p>
<p>The extreme versus mainstream cleavage is based around the question of whether the Greek crisis can be resolved within the confines of the eurozone or whether the people should reject European membership in order to maintain their national pride.</p>
<h2>Decision time</h2>
<p>The impending referendum is yet another indicator of the state’s failure to manage the crisis and implement solutions based on democratic practices. The timing of the referendum, the ballot paper itself, and the question posed, all fail <a href="mailto:http://www.washingtonpost.com/world/europe/council-of-europe-conditions-of-greek-referendum-fall-short-of-international-standards/2015/07/01/2485b560-1fe9-11e5-a135-935065bc30d0_story.html">international standards</a>. The people are being pushed into answering a complicated question at very short notice, while the government has openly supported the No camp. </p>
<p>The most important effect of the referendum has been to further polarise an already deeply divided society. The tension between the Yes and No voters provides an opportunity for extremist parties and there is grave danger that Golden Dawn will be able to harness even further support.</p>
<p>History should act as a warning here. When societies have opted for extreme measures in response to crises, they have found themselves plunged into economic disaster, isolation, dictatorships and totalitarianism.</p>
<p>This is because for the dispossessed, the socially isolated and economically insecure who vote on the basis of anger and emotion, the extreme becomes acceptable and <a href="http://www.theguardian.com/commentisfree/2011/aug/29/hannah-arendt-adolf-eichmann-banality-of-evil">banal</a>.</p>
<p>But their choice is often the product of a lack of reflection, information and clarity about the severity of the implications. Expecting Greek voters to provide a simple answer to an extremely complex question, within a very short period of time and without a clear plan of what comes next, deepens societal polarisation and undermines the very democratic practices a referendum is purported to promote.</p><img src="https://counter.theconversation.com/content/44193/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The extreme right and extreme left have found themselves united against Europe.Daphne Halikiopoulou, Associate Professor in Comparative Politics, University of ReadingSofia Vasilopoulou, Lecturer, Department of Politics, University of YorkLicensed as Creative Commons – attribution, no derivatives.