Yesterday, Nomura’s Richard Koo presented one of the better assessments of the situation in Greece, when he said that the “IMF is slowly beginning to understand the Greek economy“, which explains its strategic U-turn, one which now demands far greater debt cuts than what Europe, and Germany in particular, is willing to concede.
Koo further notes that “the reason is that Greece’s GDP has plunged because fiscal consolidation was carried out during a balance sheet recession, resulting in a destructive deflationary spiral that has devastated the lives of ordinary Greeks. While the nation may appear to be making progress when we view the data as a percentage of GDP, the raw data show an economy in collapse. This difference in perspectives widened the gap separatingEuropean creditors who thought everything is going well, and the Greek public who has been suffering serious declines in their standard of living. And this rift in perceptions was perhaps nowhere as evident as in the results of the national referendum on 5 July.”
The observation of the Greek economic devastation is absolutely accurate, and is no surprise to our readers: it has been our base case that not only Greece, but the rest of Europe’s peripheral countries would suffer an ongoing deterioration in living standards due to lack of an external rebalancing (thanks to the common currency) leaving internal devaluation (plunging wages, deflation, economic devastation) as the possibility to remain competitive in the Euro Area; however where our opinion differs from that of Koo is the “motives” behind the creditors’ unwillingness to honestly interpret the situation on the ground in Greece.
Yes, it is true that it is the same creditors who were the next beneficiaries of some 90% of incremental debt-funded proceeds entering Greece (only 11% of the €220+ billion in Greek bailouts ever reached the general population), and as a result they may have had the impression that ordinary Greeks are also enjoying the spoils of their bailout.
They were not, as the events of July 5 showed.
But while the former Fed economist will surely attribute this “oversight” to mere carelessness or at best, stupidity, even if an entire nation of 11 million people is suffering more than ever in history as a result of what is, at best, a failed experiment, there may be a more ulterior truth to events in Greece in the past 5 years especially considering Germany’s stern insistence on not writing off Greek debts despite what is now an accepted fact that without a major debt haircut Greece simply is unviable.
Meet Bernard Connolly.
Barnard is a British economist whose rise to prominence started when he worked for many years at the European Commission in Brussels, where he was head of the unit responsible for the European Monetary System and monetary policies. In other words, if any one was familiar with what the ascent of the Euro would lead to, it would be him.
We say “eventual” because he was terminated by the Commission in 1995. The catalyst may well have been his book “The Rotten Heart of Europe: The Dirty War for Europe’s Money, a negative treatment of the European Exchange Rate Mechanism” which Eurocrats did not take too very lightly.
However, Bernard is more notable not his books, or his employment in Brussels, but where he went next and what he did there.
After ending his relationship with Europe, Bernaned worked at Banque AIG, the Paris-based financial arm of the infamous AIG whose collapse together with that of Lehman, was the primary catalyst for the great financial crisis. Bernard however was not in the front office and did not trade CDS, but was the global strategist. Here is euro skepticism flourished and culminated in a report on May 30, 2008, months before the GSEs and Lehman failed, and AIG was bailed out.
The report was titled “Europe – Drive or Driven“, and it should have been a must read for all Greek (and Europeans) some 7 years ago as it not only lays out precisely why Greece is now on the verge of not only sovereign capitulation but total collapse, but presents what may be the true motives behind Europe’s perpetual crisis and why it almost appears as if the core European countries demand that the sick men of Europe, because Greece is just the first of many, remain and keep Europe in a state of perpetual turmoil.
And since this report is as relevant now as it was 7 years ago, we lay out some of its key highlights again.
From May 30, 2008
The Global Economic Crisis and the EMU Crisis
- The global crisis is the result of intertemporal misallocation (Greenspan; EMU).
- In effect, there has been a global Ponzi game.
- In Europe, this was intensified by the myth that “current accounts don’t matter in a monetary union”: EMU is the biggest credit bubble of them all.
- The treaty says that government should have the same credit status as private sector borrowers.
- Monetary union means greater economic instability.
- These two factors should mean a worsened credit standing in EMU, yet government bond spreads actually diminished in EMU and ratings agencies actually upgraded governments
When the bubble bursts…
- A collapsing credit bubble in the world means collapsing domestic demand in deficit countries (e.g. US, Britain, Balkans, Baltics – and several euro-area countries)
- In the US, and to some extent Britain, domestic demand is being supported by rate cuts and, in the US, by a fiscal stimulus
- In the affected euro-area countries, it isn’t
- In the absence of support for domestic demand, affected countries will be forced into an improvement in net exports via improved competitiveness
- In the US and Britain, this is happening through currency depreciation; in the euro area it isn’t.