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

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

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

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

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

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

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

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

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

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

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

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

About Marshall Auerback 37 Articles

Marshall Auerback has 28 years of experience in the investment management business, serving as a global portfolio strategist for RAB Capital Plc, a UK-based fund management group with $2 billion under management, since 2003. He is also co-manager of the RAB Gold Fund. He serves as an economic consultant to PIMCO, the world’s largest bond fund management group, and as a fellow of the Economists for Peace and Security.

From 1983-1987, he was an investment manager at GT Management (Asia) Limited in Hong Kong, where he focused on the markets of Hong Kong, the ASEAN countries (Singapore, Malaysia, the Philippines, Indonesia, and Thailand), New Zealand and Australia. From 1988-91, Mr. Auerback was based in Tokyo, where his Pacific Rim expertise was broadened to include the Japanese stock market. From 1992-95, Mr. Auerback worked in New York for the Tiedemann Investment Group, where he ran an emerging markets hedge fund. From 1996-99, he worked as an international economics strategist for Veneroso Associates, which provided macroeconomic strategy to a number of leading institutional investors. From 1999-2002, he managed the Prudent Global Fixed Income Fund for David W. Tice & Associates, an investment management firm, and assisted with the management of the Prudent Bear Fund.

Mr. Auerback graduated magna cum laude in English and philosophy from Queen’s University in 1981 and received a law degree from Corpus Christi College, Oxford University, in 1983.

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