Greece deal is a compromise and, once again, the banks have won
Whenever I see photos of Chancellor Merkel these days, Iâ€™m reminded of the lugubrious features of the creature in the Restaurant at the End of the World, as it recommended to guests which part of its own anatomy they should eat. The details of the â€śDeal to Save the Euroâ€ť are still mysterious and have been given a misleading spin in the official releases, but one or two points seem clear.
First, the package is a compromise â€“ a little bit of default (as required by a reality check) plus assistance to Greece which looks very generous but is still not enough to give it a realistic chance of paying its remaining debts. So the can has been kicked further down the same road yet again.
The second point is one I am as fed up of writing as you probably are of reading: once more, the Banks Have Won. On the one hand, the French President wanted some kind of blanket balance-sheet tax, supposedly to contribute to the cost of the bailout. This was a daft idea for all sorts of reasons, not least the fact that it would have penalised the banks which behaved responsibly along with the irresponsible, the sort of outcome we have seen only too often in the last three years.
Germany, or at least Angela Merkel, wanted a solution which involved some contribution from the private sector creditors (mostly the banks, of course), which she has in the end got. Now the first thing to be said is that the words â€śprivate sectorâ€ť ought to be in inverted commas, because we have seen time and again since 2007 how, one way or another, bank losses end up being borne by the taxpayers, so that any serious hit on the banks would have been deflected on to the public sector anyway.
And then, of course, the British banking sector is half state-owned in any case â€“ all of which begs the question: why all the fuss? Why were negotiations held up for weeks over the issue of how much the private sector should contribute?
In the end, how much are the so-called private sector lenders going to contribute to the rescue?
Officially, they have agreed to take â€śvoluntaryâ€ť losses of 37 billion euros over the next three years. To put that in perspective, the cost of bailing out the banks in Britain alone is officially estimated to have been about one trillion euros, or 25 times as much. Perhaps a more relevant comparison is with the amount European creditor banks pay out in bonuses which, while I cannot find a precise estimate, appears to be far greater than the 12 billion euros per year implied by the three-year figure in the agreement.
Moreover, there are reports in the press today that the true contribution is far less even than 37 billion Euros, because in the official communiquĂ© the loss to the private bondholders has been computed with respect to face value rather than current market value – in other words, relative to what they would have been worth if Greece had been regarded as having rock-solid creditworthiness.
The fig leaf of a private sector contribution is what the Chancellor felt she needed in order to sell the deal to her electorate. There is no hiding the fact that the weeks of negotiation and brinkmanship have simply been about how much Germany will pay and how the package will be wrapped up to conceal the reality that the outcome is their nightmare scenario: a transfer union, locking them into a situation where they either resign themselves to subsidising Southern Europe forever or they destroy the euro zone, either by pulling out or by staying in and joining the overspending party, thereby condemning the euro to death by inflation.
The contagion is now going to affect Germany itself (and, of course, France). How long before German debt is downgraded in recognition of the fiscal burden of supporting the rest of the euro zone?
All of this is consistent with the idea which seems to be accepted without question in bien pensant Europhile circles, outside Germany at least â€“ that fiscal integration is the right direction for Europe, the natural next stage in the evolution of the United States of Europe, and so forth.
However, comparison with exiting federal republics shows how improbable is the leap involved in this next stage. Take the USA, where the system works â€“ more or less â€“ because states know that the Federal Government will bail them out only with the greatest reluctance and on draconian terms that involve considerable loss of control over their own affairs. That, essentially, is why California is currently facing severe cuts in some of its most cherished institutions.
Or consider Germany, where vast amounts of money were paid by taxpayers in the West to support their kith-and-kin in the East â€“ but on the understanding that this was intended to set them on the road to self-sufficiency within a finite length of time.
How can anyone imagine that Germans (or Brits or Dutch or Finns or, least of all, French) will be content to subsidise people of a different nationality when they have so far only grudgingly supported those of their own?
It bears repeating: it is utter nonsense to claim that monetary union could never work without fiscal union. If the no-bailout clause in the Maastricht Treaty had been taken seriously from the outset, we need never have got into this mess. As it was, the no-bailout clause carried so little credibility that the Greek Government was able to borrow on virtually the same terms as Germany, from the time of its accession in 2002 until the market woke up and smelt the coffee a couple of years back. If the markets (read: banks) had been even half-awake, they would, probably guided by the credit rating agencies, have charged far more to lend to Greece from the outset, causing it either to limit its borrowing or face a solitary and far less contagious default.
For weeks now, the air has been thick with calls â€“ not least from the fundamentalist europhile wing of the British press – for Frau Merkel to â€śshow leadershipâ€ť. I have never been quite sure what leadership means in these situations. Now at long last I know. It apparently means a willingness to be generous with other peopleâ€™s money.
Image — German Chancellor Angela Merkel leaves after a statement to the media in Berlin, July 23, 2011. REUTERS/Tobias Schwarz