Published on New Economic Perspectives, by Marshall Auerback, January 30, 2012.
… Peter Spiegel of the Financial Times published the German government’s proposal for Greece’s “improvement of compliance” with the terms of the bailout, and all of a sudden Greek PSI positively pales in comparison. According to Germany’s proposal, whatever the result of the PSI deal, Greece would need to “legally commit itself to giving absolute priority to future debt service” and “accept shifting budgetary sovereignty to the European level”. If the Greek government is not willing to do this, the troika would presumably turn off the taps of bailout money and Greece would default. With no access to market or official financing, Greece would be forced to exit the eurozone.
Now, polls appear to indicate that a bunch of the Greek middle classes might actually welcome EU control over their finances, as opposed to a bunch of corrupt Greek politicians, but overall, it’s almost certainly guaranteed to trigger a violent reaction. In any case, given that a deal with Athens is seemingly so close, why did Berlin choose this particular moment to make this demand, and place the entire deal potentially at risk?
I think we have to look beyond Greece for the answer to that question.
One suggestion by Megan Greene is that Berlin’s proposal is a by-product of the unintended consequences of the ECB’s three year long term refinancing operation (LTRO): “If eurozone banks have as much access to cheap, three-year ECB funding as their collateral allows, perhaps Germany and the troika have decided that eurozone banks can survive a Greek default.”
In the absence of the ECB hoovering up all of Greece’s debt via its Securities Market Programme (”Not gonna happen; wouldn’t be prudent,” as George Bush the Elder/Dana Carvey might have said), Greece is, as Greene argues, clearly insolvent and would likely have to leave the eurozone to eventually return to growth. The German proposal, argues Greene, may have accelerated the inevitable.
But there’s another, more sinister interpretation. The question which has been persistently asked since the debt renegotiations started with Greece is: what will stop Portugal, Ireland, or indeed Spain from demanding the same deal? And I continue to believe that Spain is the domino which is too big to fail. Its liabilities are too big to be covered by the existing firewall established by the EFSF and ESM. An expansion of the LTRO might address the solvency/banking crisis, but not the broader problem of deficient aggregate demand, high unemployment, and rising social turmoil.
So to repeat the question: how do you preclude Portugal, Ireland and, indeed, Spain from asking for the same deal as Greece, if the negotiations succeed?
Answer; you can’t. So the Germans throw a politically impossible demand in front of the Greeks, in effect saying, “No more money unless you effectively surrender your national sovereignty.” And that’s the implied warning ahead for the other periphery countries which look to secure the deal currently on the table for Greece.
In effect, the Germans (behind the auspices of the troika) are saying, “It’s fiscal austerity on our terms. You try to renegotiate like the Greeks and we take you over. The other alternative is that you leave.”.
Anschluss economics, plain and simple … (full text).