February 7th, 2015
in Op Ed
by Dirk Ehnts, Econoblog101
Former German finance minister Peer Steinbrück (Social Democrat) has given an interview to tageszeitung's Ulrike Herrmann. It was very revealing. Since the interview was published in German, let me translate a few phrases and put them into context. Comments are open, so if you think that I mistranslated or put the extracts out of context, voice your critique! The first snippet comes in response to Herrmann quoting Varoufakis, who said that the Greeks can't pay anyway.
P.S.: I have a clear understanding of what an unconditional debt cancellation will do to the debate in Germany. Populist parties would be enthusiastic about this help for their electoral campaigns.
So, let's be clear about this. Politically, the socialdemocrats can't let a debt cancellation happen because then populist parties would steal their (the socialdemocrats) votes. Steinbrück, when asked the first time if a (partial) debt cancellation for Greek would not be on the agenda, answered: "No, they already hat two cuts". He also complains that a cut in Greek debt would hit European tax payers.
The case for not accepting a Greek hair cut rests on two pillars (I can't find a third or a fourth):
- The ruling coalition government of Germany would lose votes;
- European tax payers lose money
The second reason is something which can be circumvented if the ECB buys sovereign bonds and then accepts the losses on those bonds by letting equity fall into negative territory. Whereas private banks with negative equity are closed down, this is not the case for central banks. They can always create new deposits for participating banks because they are running the accounting system. Marking up the deposits that a bank has at a central bank is not depending on the equity position of the ECB. (If you do not agree: what is the actual equity of the ECB and do you really think that other people look at that value?)
The Federal Reserve Bank, for instance, has bought up lots of treasury bonds. The effect is that the treasury pays interest to the Fed, which books this as a profit. Central bank profits usually are returned to the Treasury, hence the Fed will transfer the money back to the Treasury. Sovereign debt problem solved, interest rates under control. This is modern sovereign money. The ECB, by the way, can do the same and does so with quantitative easing (although for different reasons). This does not create inflation, because money is moved from the governments account to the central bank and back (it's not the same money, by the way). No goods are purchased, no services bought.
So, the only reason why the German government does not accept another debt cut for the Greek government is political, if Steinbrück is to be trusted. He is a member of parliament, so he's still part of the club. European politics 2010-14 was driven by campaigns of misinformation (the lazy Greeks, Club Med, etc.) and maybe 2015 we can have an open and honest debate about the mess Europe is still in. Of course, politicians will continue to maximize votes, but then it is the public which needs to be educated. It would help tremendously if the media would rethink their point of view. The recent interview by the BBC with Greek finance minister Varoufakis is a case in point. The anchor from the BBC seems to be an angry woman, angry about the Greeks and their behavior:
It is very nice to see Varoufakis counter the full court press that the BBC anchor plays. Informed sources already wrote in 2013 that 77% of the bail-out money went to the financial sector and not the general population. The Greek crisis is not about the Greeks living by spending our money. It is about the European banks lending money to the Greek government, which was not able to repay in 2009. Instead of finding a solution right then and there, politicians decided to kick the can down the road, while the Greek government bonds had two hair cuts and were moved to public institutions where now 90% of them seem to be. So, European politicians created the huge potential costs for taxpayers. Potential costs that did not exist in 2009.
Last but not least, remember that austerity was imposed on Greece through the troika, which helped to create a fall of GDP by some 25%. Of course the debt-to-GDP also went up because of the loss of output. So, to a significant extent austerity policies imposed by the troika are indeed the reason why now with the diminished output Greeks cannot repay their foreign debts.
The drama of Greek debt is a political drama. The troika was invented during the crisis. Austerity was never a threat before the crisis happened and was imposed because the European Commission wanted it, not because it had to. These were political decisions, and they were not based on macroeconomics textbooks. Expansionary austerity and the confidence fairy where stories invented on the go, without proper theoretical foundations (and not mentioned in macroeconomics textbooks). It is about time to stop T.B.T.F. (too big to fail) and T.I.N.A. (there is no alternative) and rethink the whole episode 2008-2014. Learning from mistakes is hard, but it must happen.