A victorious second place for SYRIZA?

It’s not often that the losing party in an election can declare that “a new day is dawning.” Yet, SYRIZA leader Alexis Tsipras felt that his party’s phenomenal rise, which narrowly lacked the momentum to carry the leftists to first place in Sunday’s Greek elections, justified a feeling of optimism.

“The future does not belong to the terrorised but those who bring hope,” he told supporters at a small post-election rally in central Athens on Sunday night.

Tsipras is right to feel emboldened by his party’s upward trajectory from 4.6 percent in the 2009 election to almost 27 percent in yesterday’s vote but the immediate future belongs to those who pledge something much less ambitious than hope. Sunday’s result, which saw New Democracy’s conservatives gain 29.6 percent, provides a mandate for those who pledge plain old stability.

While the pro- and anti-bailout vote was split relatively evenly, Greece’s electoral system awards 50 extra seats to the leading party and makes governing without it virtually impossible. This gives New Democracy 129 MPs and the opportunity to form a coalition government made of parties that favour continuing with the EU-IMF bailout, albeit in a revised form. Fear of the political unknown and concern about being cut off from the security many Greeks feel euro membership provides tipped the balance in favour of the conservatives and against SYRIZA, which advocated rejecting the bailout terms and starting negotiations with the eurozone from scratch. That was too much of a leap for some Greeks, scared by the sight of their country crumbling around them, to take.

Nevertheless, it is clear that Greece is going through a dramatic political transition that is weakening the iron grip the country’s two main parties, New Democracy and centre-left PASOK, have had on power since 1974. The economic and social impact of the devastating crisis has acted as a political particle accelerator that is changing the face of Greek democracy. This change, though, is happening in stages and, at least for now, New Democracy and PASOK will continue to be the decision makers.

The conservatives will turn to PASOK to form a coalition. This will give them 162 MPs in the 300-seat Parliament but they are unlikely to leave it at that. SYRIZA’s rise has put pressure on these traditional forces to create a wider coalition, one whose roots spread into Greek society as widely as possible and which has an ample parliamentary buffer. The only viable candidate as a third coalition partner is Democratic Left, which gained 6.2 percent and 17 seats on Sunday. The moderate pro-euro leftist party opposes the austerity measures and has called for a gradual “disengagement” from the bailout. Given that PASOK and New Democracy both favour extending Greece’s fiscal adjustment period, due to end in 2014, by at least two years, the easing of austerity is something that all three parties can agree on.

Following the inconclusive May 6 elections, Democratic Left passed up the opportunity to join ND and PASOK in government. It had one eye on SYRIZA’s strengthened position and feared being tarnished as a traitor to leftist ideals. Yesterday’s elections removed the possibility of a left-wing government but it didn’t negate Greece’s desperate need to be governed. Democratic Left has to decide whether it will be part of an administration that has a better chance than at any stage since 2010 of convincing the country’s lenders that an austerity-centred programme in a recession-wracked economy is not going to produce results.

The best-case scenario for a New Democracy-PASOK-Democratic Left coalition would be to gain some concessions from the eurozone that would allow the government to do more than just chase its tail in an effort to find revenues and cut spending over the next few months as Greece heads for an economic contraction more than 5 percent of GDP this year. This could allow for more attention to be paid to structural reforms, particularly overhauling Greece’s inefficient public administration. A relaxation of asphyxiating austerity, relative economic stability and signs that the country was actually starting to put right some of the problems that brought it to the brink would start to win public opinion around.

Of course, this demands a level of cooperation between rival parties that Greek politics has rarely witnessed. It calls for levels of determination that Greek politicians have consistently failed to show. It will also require vision and planning, qualities that have been painfully absent from political life in Greece for many years. Without this, Greece will be left with uncomfortable political bedfellows applying failed policies handed down to them by the EU and IMF. This will be the road to ruin.

In this case, SYRIZA, with the freedom it will have as an opposition party and boosted by the swelling current of support that swept it to second place on Sunday, will be in a position to become a formidable force of resistance. In the fluctuating world of Greek politics, Sunday’s defeat may yet prove a victory for the leftists.

Nick Malkoutzis

A shorter version of this article appeared on The Guardian’s website.

27 responses to “A victorious second place for SYRIZA?

  1. The economic and business types have been talking about this kind of Syriza plan (B) for weeks now, probably generated by some good old kafenieo rumor even before that. They further stipulate Syriza is strengthened by the June Memorandum II cutbacks, and can generate as much protest as it needs to force elections in the fall, if so desired. Then the Comrade returns, winner take all, if he so desires. Assuming Greece gets a free pass for tranche 2 of this Memorandum, it all hangs on the third Troika review in the fall, when Greece will not have delivered much and the continued Euro flow is seriously questioned (again).

  2. First, both Syriza and Xrisi Avgi are Merkel’s creations and 100% Made in Germany.

    Second, if you think that Syriza would be allowed to free load while all other Greek political parties self-destroy in dealing with the beast of Berlin, you have another thing coming.

    Either Syriza would step up to its responsibilities to contribute or this fabricated and contrived movement will be taken apart never to be heard again. In 50 years from now, no one will remember Syriza.

  3. Estevao Veiga

    Dear Mr. Plassaras,
    You again playing the victim! Please, spare us!

    • Pardon?

      We will not live under a German Europe. Rather, Germany has to become European and fast.

      http://blogs.reuters.com/anatole-kaletsky/2012/06/20/can-the-rest-of-europe-stand-up-to-germany/

      • Estevao Veiga

        Greece can refuse the German money whenever it wants, nobody will oblige Greece to take it, nor be offended by the refuse, by the contrary, people will admire Greece for taking care of themselves.

      • Estevao:

        Greece will do whatever is consistent with its highest and best interest.

        That’s for us to know and for you to keep “your advices” to yourself.

      • estevao veiga

        As long as it is not with German taxpayer money, this is just fine for me🙂

      • None of the financial aid so far has cost German taxpayers a single penny.

        In fact, since you seem to be uninformed about it, why don’t you return to Greece about 80 billion euros of German profiteering made on the backs of innocent citizens of Greece?

        Not only Germany is stealing from the people of Greece but it also leveraging the crisis to obtain free money in financing its own debt. The recent issue of 10-yr Bundes was far below the inflation rate of 1.9% which means that basically investors are paying Germany to keep their money in addition to Germany getting money at effectively zero cost.

        So why don’t you return to us your illegal profits and we will call it even. Some nerve you’ve got with you German taxpayer nonsense fed to you by amateurs and designed for naive consumption.

      • estevao veiga

        This is an extraordinary leap of faith. To start with, the “renegotiation” of the private Greek debt has already cost around US$ 100 billion to the lenders, the majority of them being European banks who now can’t lent to their own economies because they have to reconstruct their balance, with the economics consequence that we know.
        To continue, since Greece refuse to make the structural reforms, including the closed professions, privatizations, reform of the public sector, improvement in tax collection, etc… The most probable consequence is that Greece will also default on the debt owed to the rest of the European Community. So I am sorry Dean, but there is a real cost to others of what is being done, or voted, in Heladas.
        Even my country, Brazil, is paying the consequences of the slow down caused by the erratic behavior of Greece.

      • Estevao Veiga

        Dear Dean,
        I do hold a degree in economics, and I am noticing that we may have a problem of semantics.
        On my understanding, a country who can’t pay it’s bills and don’t have credit in the market is broke. Now I have to ask you to tell me how you describe the same state of affair, because it seems that your definition is quite different.

    • Estevao:

      Since you are Brazilian, one more reason to be factual re: a European crisis. Of the $100 Bil. cost you claim, $85 Bil. (or 85%) of it came from Greek banks and the Greek pension system. It was the result of Merkel’s PSI nonsense so that Frau Ridiculous looked like she was punishing the banks for over- lending.(Imagine that: Merkel a champion of the people).

      The result of this tremendously amateurish and financially out-of-depth move was the complete destruction of the Greek banking system and thus the Greek economy.

      As I have said before, Germany has profited from the Greek crisis to the tune of 80 Bil. euros and rising.

      If you feel the effects in Brazil, it’s not from Greece. It’s the effect of Merkel’s amateurism and incompetence of curing a problem, which initially was curable at a fraction of the present cost which now Germany claims unable to shoulder, even though it was clear German malpractice which has escalated the total bill including Spain and soon Italy as well.

      99.9% of the worlds’ respected economists (close to or at Nobel prize level) are in unanimous agreement: Merkel has no clue what she is doing. The emperor has no clothes and people like you from Brazil are interested to hear unrelated stories of imaginary culpability.

      • Estevao Veiga

        Dear Dean,
        Ms. Merkel has the power that Greece gave to her by going bankrupt. Greece went bankrupt because successive governments mismanaged the economy and cheated on the statistics. Successive governments mismanaged the economy and cheated on the statistics because this is what the Greek people was requesting them to do.
        The diagnostic of Ms. Merkel is absolutely correct, if there is no cost to be paid by countries who mismanage their economy, the consequence will be a continuation of this policies until even Germany will not have the funds to save anybody, even themselves. In English there is an expression for this, it is called “never throw good money after bad money”.
        And Greece is the best example of mismanagement, having spent more than half of its existence since independence on default and still living in a politic of patron – client relationship at the beginning of the 21st century.
        As for your legendary 99.9% economist, it is simply not true, moral hazard is well studied in economic theory and anybody who has studied it and know the functioning of Greek politics will recognize that Greece is a perfect example of why sometimes you have to cut your losses, even when the consequences on the short term is pain for everybody.

      • Dear Estevao:

        Your thesis fails from the first sentence. The one who bankrupted Greece was Merkel with her PSI nonsense and her austerity phobias. It is indeed the contrived PSI that has resulted in the bankruptcy of Greece.

        In other words the German recipe is wrong and the German actions calamitous not only for Greece but for the rest of Europe.

        BTW, if you intend of trying to give me lessons here on financial matters do you mind revealing your background? Do you hold an MBA? or other degree in economics and finance? What’s your experience in these matters?

  4. Estevao Veiga

    Does Mr. Tsipras has a German passport? Where the voters of Syriza sent by bus from Germany? What low esteem you have of the Greek people if you think they are puppets who can’t think by themselves, don’t think they are responsible of their fate, don’t think they are responsible of their acts, and their votes.

  5. We should question how much political “stability” we can expect from Greece since it appears that Pasok and Democratic Left will not be putting senior leaders into ministerial posts. It is Democratic Left that has the most to lose having joined a pro-austerity government while campaigning as (and continue to insist it is) an anti-austerity party. If Democratic Left really can get the terms of the memorandum changed significantly, its gamble will have paid off. But there is every reason to doubt that, and it is most likely that it is Democratic Left that will have consigned itself to oblivion.

    The Troika will surely grant a couple of small concessions, such as extending some payment periods. But the ND/Pasok promises that they can accept the terms but re-negotiate the basis of the austerity program are unrealistic. Let us not forget what the eurozone finance ministers said before the election results were final: “The Eurogroup therefore looks forward to the swift formation of a new Greek government that will take ownership of the adjustment programme.” And Angela Merkel flatly said: ““There can be no loosening of the reform steps.”

    And those statements, far more than empty promises by ND and Pasok, are what is going to carry the day. As financial officials and political leaders have made clear, the decisions will be made elsewhere than Athens. http://wp.me/p2cpPS-21. ND won, yes, but likely more on the basis of fear of the unknown than on Greeks believing its promises.

  6. o.k. Estevao:

    Since you hold a degree in economics, I am sure you would understand this:

    Proposal for a European Fiscal Authority (EFA), a Debt Reduction Fund and European Treasury Bills

    Rationale

    In retrospect it is now clear that the member states entered the monetary union that was incomplete in its construction. The main source of trouble is that the member states surrendered their right to print money to the ECB without fully realizing what that entails- and neither did the European authorities. When the euro was introduced the regulators allowed banks to buy unlimited amounts of government bonds without setting aside any equity capital; and the central bank discounted all government bonds on equal terms. Commercial banks found it advantageous to accumulate the bonds of the weaker countries to earn a few extra basis points. That is what caused interest rates to converge. The large fall in the cost of credit helped fuel housing and consumption booms, which went unchecked. At the same time, Germany, struggling with the burdens of reunification, undertook structural reforms and became more competitive. This led to a wide divergence in economic performance.

    Then came the crash of 2008 which created conditions far removed from those prescribed by the Maastricht Treaty. Governments had to bail out their banks and some of them found themselves in the position of a third world country that had become heavily indebted in a currency that they did not control. Due to the divergence in economic performance Europe became divided into creditors and debtors countries.

    When financial markets discovered that supposedly riskless government bonds may actually be forced into default they raised risk premiums dramatically. This rendered commercial banks whose balance sheets were loaded with those bonds potentially insolvent. That gave rise to an adverse feedback loop between the solvency of the banks problems of the banks and the risk premium on sovereign debt.

    The Eurozone is now replicating how the global financial system dealt such crises in 1982 and again in 1997. Then the international authorities inflicted hardship on the periphery in order to protect the center; now Germany is unintentionally playing the same role. The details differ but the idea is the same: the creditors are shifting all the burden of adjustment onto the debtors and the “center” avoids its own responsibility for the imbalances. Interestingly, the terms “center” and “periphery” have crept into usage almost unnoticed. Yet in the euro crisis the responsibility of “the center” is even greater than it was in 1982 or 1997: they were the architects of a flawed currency system and failed to correct its defects. In the 1980’s Latin America suffered a lost decade; a similar fate now awaits Europe.

    At the onset of the crisis a breakup of the euro was inconceivable: the assets and liabilities denominated in a common currency were so intermingled that a breakup would have led to an uncontrollable meltdown. But as the crisis progressed the financial system has been progressively reordered along national lines. This trend has gathered momentum in recent months. The LTRO enabled Spanish and Italian banks to buy the bonds of their own countries and earn a large spread. Simultaneously banks are giving preference to shedding assets outside their national borders and risk managers are trying to match assets and liabilities within national borders rather than within the eurozone as a whole.

    If this continued for a few years a break-up of the euro would become possible without a meltdown but even then the creditor countries would be left with large claims against the debtor countries which would be difficult, if not impossible, to collect. In addition to all the rescue packages and ECB interventions the central banks have large claims against the central banks of the debtor countries within the Target2 clearing system. The Bundesbank had claims of €644 billion on April 30th and the amount is rapidly growing due to capital flight.

    The creditor countries led by Germany are always willing to do what is necessary to avoid a cataclysm. But that is not enough to resolve the crisis so it continues growing. Tensions in financial markets have risen to new highs. Most telling is that Britain, which retained control of its currency, enjoys the lowest yields on government bonds in its history while the risk premium on Spanish sovereign debt is at a new high despite Spain’s deficit and debt to GDP ratio being lower than those of the UK. The real economy of the Eurozone as a whole is declining while Germany is still booming. This means that the divergence between debtors and creditors is getting wider. The political and social dynamics are also working toward disintegration. Public opinion as expressed in recent election results is increasingly opposed to austerity and this trend is likely to grow until the policy is reversed.

    What is needed is a set of bold initiatives that are convincing enough to persuade both the public and the financial markets that the authorities have both the will and the resources to make the euro work. These initiatives have to conform with the existing Treaties yet they have to be bold enough to bring conditions back closer to those that were prescribed by Treaties. The Treaties could then be revised in a calmer atmosphere so that the current excesses will not recur.

    It is difficult but not impossible to construct a set of initiatives that will meet these tough requirements. They would have to simultaneously tackle the banking and the sovereign debt problems without neglecting to reduce divergences in competitiveness. There are various ways to provide it but they all need the active support of Germany as the largest creditor country.

    At the Rome meeting on Thursday June 22 the four heads of state agreed on steps towards a banking union and a modest stimulus package to complement the fiscal compact but Chancellor Merkel resisted all proposals to provide relief to Spain and Italy from the excessive risk premiums prevailing in the market. This threatens to turn the June summit into another fiasco which may well prove fatal because it will not provide a strong enough firewall to protect the rest of the eurozone against the possibility of a Greek exit. Even if a fatal accident can be avoided the divisions between creditor and debtor countries will be reinforced and the “periphery” countries will have no chance of regaining competitiveness because the playing field is tilted against them. This may serve Germany’s narrow self-interest but it will create a Europe that is very different from the open society that fired people’s imagination. That is not what Chancellor Merkel or the overwhelming majority of Germans stand for.

    Chancellor Merkel argues that it is against the rules to use the ECB to solve the fiscal problems of member countries and she’s right. President Draghi of the ECB has said much the same. There is a missing element in the current plans and this proposal is designed to provide it.

    The Proposal

    The June summit has to produce a Political Declaration which outlines not only the long-term vision of a political union but also practical steps towards a fiscal and a banking union. Since plans for a banking union are well advanced this proposal is confined to:

    • A European Fiscal Authority (EFA) which will serve as the embryo of the fiscal union and also provide fiscal backing for an embryonic banking union.

    • A Debt Reduction Fund (DRF) which will provide immediate relief to the periphery countries on refinancing their sovereign debt by issuing European Treasury Bills.

    These measures will require an Intergovernmental Agreement. With unanimity at the summit the process could be accelerated and, on the basis of the Political Declaration, some steps could already be taken in the meantime. This would bring immediate relief to the financial markets and reverse the political dynamics from conflict to cooperation.

    This is how it would work.

    European Fiscal Authority (EFA): To be established by inter-governmental treaty a.s.a.p.

    Membership: Finance Ministers of Eurozone countries

    Organization: Embryonic European Treasury

    Voting: According to shareholdings in ECB

    Majority

    • 80% when guarantees are involved that disproportionately affect creditor countries

    • 50% plus when members are affected proportionately

    Mission

    1. Implement Debt Reduction Fund – a modified form of the European Debt Redemption Pact that has been proposed by the German Council of Economic Advisors.

    2. Provide fiscal backing for banking union.

    3. Assume solvency risk on government bonds held by ECB.

    4. Provide financing for a growth policy to complement the fiscal compact.

    5. After a suitable transitional period allow for annual settlement of Target2 balances.

    Financial resources

    1. Control of ESM, EFSF

    2. One tenth of 1% additional VAT contribution from member states- approved by 80% majority. This will demonstrate the political will necessary to carry out the mission.

    3. Additional financial resources: to be mobilized as needed.

    The Debt Reduction Fund

    The EFA will conclude agreements with individual countries that will oblige them to abide by the fiscal compact and introduce specific structural reforms like labor market liberalization and pension reforms. In return the EFA would reduce that country’s stock of debt to 60% of GDP or such higher figure as the agreement specifies by acquiring bonds in 1) primary market 2) secondary market and 3) from the ECB and other official bodies.

    The EFA will finance its purchases by issuing European Treasury Bills and pass on the benefit of cheap financing to the country concerned. The bills will be assigned zero risk rating by the authorities and will be treated as the highest quality collateral for repo operations at the ECB. The banking system has an urgent need for risk-free liquid assets. Banks are currently holding more than €700 billion of surplus liquidity at the ECB earning only one quarter of 1% interest. This assures a large and ready market for the bills.

    Should a participating country subsequently fail to live up to its commitments the EFA may impose a fine or other form of penalty which would be proportionate to the violation so that it would not turn into a nuclear option that cannot be exercised. This would provide strong protection against moral hazard. For instance, it would make it practically impossible for a successor government in Italy to break any commitments undertaken by the Monti government. Having practically half the Italian debt financed by European treasury bills will have an effect similar to a reduction in the average maturity of its debt. That would make a successor government all the more responsive to any punishment imposed by the EFA.

    Only after the demand for European treasury bills has been exhausted will the EFA consider issuing longer-term bonds. After a transitional period long enough to insure that the Eurozone resumes growth, the participating countries concerned will enter into a debt reduction program which will be tailored not to jeopardize their growth. That will be the prelude to the establishment of a full fiscal union with the appropriate political arrangements which, in turn, will allow the replacement of the remaining 60% of sovereign debt by Eurobonds.

    A Euro Area Banking Union

    By taking control of the ESM and the EFSF, the EFA would be able to provide the necessary fiscal backing for a banking union. The EFA as a political authority acting in partnership with the ECB can do what the ECB as a monetary authority cannot do on its own.

    A banking union has to have three components

    1. A European source of funding for recapitalizing the banks

    This could be provided by the ESM acting under the control of the EFA. While the ESM has substantial resources that could be used for this purpose, allowing it to borrow from the ECB would substantially reinforce it. It would require a banking license for the ESM, best provided by a modification of the Intergovernmental Agreement. This is highly desirable but not critical for the plan to work.

    2. Eurozone-wide supervision and regulation of banks – this is best provided by the ECB acting together with the European Banking Authority.

    3. A Eurozone-wide deposit insurance scheme. This is the thorniest immediate problem. German depositors are reluctant to pay for the extra risk posed by Spanish banks in the current economic climate and German taxpayers are unwilling to make up the difference. But the EFA assuming the solvency risk on government bonds held by the ECB provides a makeshift solution. Specifically, the EFA could take over the Greek bonds held by the ECB coming due on August 20th and thereby avoid a Greek default. The ECB could then continue to provide unlimited liquidity to the Greek banks which have recently been recapitalized. This would not eliminate capital flight but it would remove the most immediate threat confronting the euro-area – a run on the banks of other periphery countries. A more lasting solution will have to await the formation of a full-fledged banking union. The EFA taking over the solvency risk on the bonds held by the ECB would establish the principle that the EFA is responsible for solvency risks and the ECB for providing liquidity.

    Growth Policy

    By laying the groundwork for a banking union and substantially reducing the financing costs of sovereign debt, the June summit will offer an escape route from the deflationary debt trap in which the European Union is currently caught. Nevertheless, it would be highly desirable to develop a growth policy to accompany the fiscal compact. This could form part of the Political Declaration but time is too short to go into details. The Political Declaration could point out that the EFA is providing the institutional framework for developing a growth policy.

    Annual Settlement for Target Balances

    Similarly, the Political Declaration could contain a paragraph announcing that after an appropriate transitional period Target2 balances would be annually settled. This would be a reward to Germany and other creditor countries for their willingness to provide the guarantees implied by the issuance of European treasury bills.

    Creditor countries should remember that they have made practically no transfer payments; they have only made loans which will result in losses if they are not repaid. The proposals outlined here to are comprehensive enough to reduce the likelihood that any losses will be incurred. The more complete the guarantees the less likely they are to be invoked.

    Sequencing

    Immediately – at June summit issue a Political Declaration and set in motion and Intergovernmental Agreement establishing the EFA with the appropriate powers to carry out its mission.

    Very short term – in anticipation of Intergovernmental Agreement

    • ECB starts accumulating Italian and Spanish bonds.

    • ESM takes over ECB’s holdings of Greek bonds insuring the ECB against default risk.

    • No implementation of austerity measures as long a country has negative GDP growth rate.

    • Finance Ministers start negotiating structural reforms that will qualify “periphery” countries to benefit from debt reduction scheme.

    Short term – hopefully before year-end

    • Ratify and implement new Intergovernmental Agreement.

    • Develop growth policy.

    Medium term – next 3 to 5 years

    • Creation of fiscal, banking, and political union.

    ************

    Germany’s reticence to agree threatens European stability

    Financial Times

    June 25, 2012

    At the meeting in Rome last Thursday the four heads of state agreed on steps towards a banking union and a modest stimulus package to complement the fiscal compact. But Chancellor Merkel resisted all proposals to provide relief to Spain and Italy from the excessive risk premiums prevailing in the market. This threatens to turn the June summit into a fiasco which may well prove fatal because it will leave the rest of the eurozone without a strong enough firewall to protect it against the possibility of a Greek exit.

    Even if a fatal accident can be avoided the division between creditor and debtor countries will be reinforced and the “periphery” countries will have no chance to regain competitiveness because the playing field is tilted against them. This may serve Germany’s narrow self-interest but it will create a very different Europe from the open society that fired people’s imagination. It will make Germany the center of an empire and put the “periphery” into a permanently subordinated position. That is not what Chancellor Merkel or the overwhelming majority of Germans stand for.

    Chancellor Merkel argued that it is against the rules to use the ECB to solve the fiscal problems of member countries – and she is right. President Draghi of the ECB has said much the same. There is a missing element in the current plans for the June summit: a European Fiscal Authority (EFA) which, in partnership with the ECB, can do what the ECB cannot do on its own. It could establish a Debt Reduction Fund – a modified form of the European Debt Redemption Pact that was proposed by Chancellor Merkel’s Council of Economic Advisors and is endorsed by the Social Democrats and Greens. In return for Italy and Spain undertaking specified structural reforms the Fund would acquire and hold a significant portion of their outstanding stock of debt.

    It would finance the purchases by issuing European Treasury Bills – a joint and several obligations of the member countries – and pass on the benefit of cheap financing to the countries concerned. The Bills will be assigned zero risk rating by the authorities and will be treated as the highest quality collateral for repo operations at the ECB. The banking system has an urgent need for risk-free liquid assets. Banks are currently holding more than €700 billion of surplus liquidity at the ECB earning only one quarter of 1% interest. This assures a large and ready market for the Bills at 1% or less.

    Should a participating country subsequently fail to live up to its commitments the EFA may impose a fine or other form of penalty which would be proportionate to the violation so that it would not turn into a nuclear option that cannot be exercised. This would provide strong protection against moral hazard. For instance, it would make it practically impossible for a successor government in Italy to break any commitments undertaken by the Monti government. Having practically half the Italian debt financed by European Treasury Bills will have an effect similar to a reduction in the average maturity of its debt. That would make a successor government all the more responsive to any punishment imposed by the EFA.

    After a suitable period the participating countries will enter into debt reduction programs which will be tailored not to jeopardize their growth.

    That will be the prelude the establishment of a full political union and the introduction of eurobonds. The issuance of European Treasury Bills would of course require the approval of the Bundestag but it would be in conformity with the requirement by the German Constitutional Court that any commitment approved by the Bundestag should be limited in time and size.

    It is not too late to turn into a Political Declaration which outlines not only the long-term goal of a political union but also a road map towards a fiscal and banking union. Guided by this Declaration the EFSF could immediately takeover the ECB holdings of Greek bonds, the ECB could start accumulating Spanish and Italian bonds and Italy and Spain could implement the structural reforms that will qualify them for the Debt Redemption Fund.

    This would have the same effect on markets as the finance ministers’ declaration in November 2009 which saved the financial system. It would also change the political dynamics.

    The main obstacle is in German politics which is mired in a “can’t do” mode. Chancellor Merkel insists that a political union should precede a full-fledged fiscal and banking union. That is both unrealistic and unreasonable. The three have to be developed together step-by-step. There can be no treaty or constitutional clause preventing the establishment of the EFA if the German electorate as represented by the Bundestag approves it – otherwise there could have been no ESM. If the rest of Europe is united behind this proposal and the Bundestag rejects it Germany must take full responsibility for the financial and political consequences.

    By: George Soros

  7. estevao veiga

    Dear Dean,
    What a difference between this last post and the ones about “the beast of Berlin!”.
    Lets me start from the beginning, I would agree 100% with this proposals in principle if there was not the problem of the free rider.

    This said, it is not true that “The main source of trouble is that the member states surrendered their right to print money to the ECB without fully realizing what that entails”. The Bundesbank understood perfectly well what this mean and insisted for the clause many many times before accepting to surrender the Deutsche Mark, this fight was done in a very public way so nobody can claim “that they weren’t aware of it”

    Second point:

    “The EFA will conclude agreements with individual countries that will oblige them to abide by the fiscal compact and introduce specific structural reforms like labor market liberalization and pension reforms”

    The problem is, this works for Portugal and Ireland as they had showed during the crisis where, with much less, they had abided with the terms of their agreements, but what you do with Greece?

    We are always back to the Greek problem, the free rider of the system who will promise and not deliver, renege agreements in the middle of a program, not feel bound by its word, play victim all the time, etc.. etc…

    Nothing work in this case, so, unless Greece leave the Euro, we can’t apply any of this measures because they will automatically apply to Greece and will automatically be abused by it. And I will be extremely curious to see any realistic solution to this conundrum.

    Apparently the solution will come when, after an umpteem time of Greece not delivering, Europe finally lose patience and pull out the plug, but we are now in the third year of this torture and they still hadn’t showed the spine to do it.

  8. Estevao Veiga

    Nobody can wish to throw out of it’s house a son or a daughter, but sometimes it is the only choice left. But it is a sad choice, and you aren’t proud or happy after, it will always feel as a failure.

  9. Dear Dean,

    I am delighted, and quite surprised, that you agree with me, since this is what George Soros says in the article that you attached:

    Quote

    Soros: Unlikely. Rescuing Greece would require an enormous kind of magnanimity and generosity. The situation there has simply become too poisoned. I think that by standing firm and not compromising on Greece, Angela Merkel would be in a better position to persuade the German public to be more generous toward other nations and distinguish between the good guys and bad guys in Europe.

    Unquote

  10. Yeap, Greece is out. God help Germany.

  11. I am truly sorry for you Dean, I can only imagine how hard it is to realize that your so beautiful country is in such a mess and I fear the economic consequences to your person of it. And what also saddens and despair me is the impression that it is a worthless sacrifice since nobody is learning from it, on the contrary, it only reinforce the self belief of a country who see itself as a victim of evil forces.

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