Dr. Draghi: Name Your Poison

by Marshall Auerback, New Economic Perspectives

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 (European Central Bank) 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 trigger man 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 troubled governments’ 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.

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More by Marshall Auerback

Analysis and Opinion articles about the Eurozone.


About the Author

Marshall Auerback, a Director of Institutional Partnerships at the Institute for New Economic Thinking has 30 years’ experience in the investment management business, also serving as a global portfolio strategist for Pinetree Capital, a Canadian-based fund management group. He also acts as an economic consultant to PIMCO, the world’s largest bond fund management group, a Research Associate for the Levy Institute at Bard College, and a Research Fellow for the Economists for Peace and Security.

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