Greece’s Fatal Mistake, And Europe’s; Central Bankers Are Dancing In The Financial Dark
Joseph Sternberg, Editorial-Page Editor of The Wall Street Journal, Europe, had an Op-Ed in the Friday, Jan. 23, 2015 edition of the paper, “Greece’s Fatal Mistake, And Europe’s, that was both interesting, and sobering. He begins by noting that “Greek voters, foreigners worry, are on the verge of plunging the Eurozone into another crisis — if parliamentary elections on Sunday [go as expected], and put an anti-Euro candidate and party in power.” This concern, Mr. Sternberg argues, underestimates the real danger, and wrongly assumes that a divorce, or Eurozone crisis “could be averted if Greek voters change their mind at the last minute. The bigger problem on display in this campaign,” Mr. Sternberg warns, “is that another Eurozone crisis is coming anyway,” no matter how the Greek vote goes Sunday.
“That’s not to minimize the severity of the jam into which Greek voters could push the Eurozone,” he adds. “The [radical] left-wing, Syriza party has a lead in the polls, and an unrealistic policy agenda, to put it kindly. The [Syriza] party’s grand idea is that the rest of the Eurozone is sufficiently desperate to keep Greece in the fold that the country’s creditors will accept significant write-downs on their debt holdings. Syriza also seems to think it can conjure up billions of Euros necessary to reverse hated fiscal tightening.”
There are plenty of Greek citizens who have sufficient doubts and anxiety about the Syriza party’s stance on reversing some of the austerity measures imposed on it by the EU — in exchange for loans — as evidenced by poll numbers showing the party with only 33 percent of the voters. Other polls show that a majority of Greek citizens want to stay in the Euro. “Conventional wisdom holds that a win for the [Syriza] party should [at] best be viewed as a protest vote against the current government, rather than as an endorsement of the more radical elements of Syriza’s own agenda, something leader Alexis Tsipras would forget at his peril — if he’s the next prime minister. But, politicians perilously forget reality all the time,” Mr. Sternberg writes. “Hence,” he says, “the worry that Mr. Tsipras will overplay his hand in negotiations with creditors, and Greece will end up accidentally leaving the Euro without a viable plan for what to do next.”
Mr. Sternberg doesn’t have much good to say about Greece’s current political leadership, noting that Prime Minister Antonis Samaras, “trumpets the fact that Greece has posted a small primary budget surplus (excluding debt service), and the economy is returning — ever so tentatively to growth. So what?,” Mr. Sternberg asks. “This has mostly been accomplished mainly through deep; but, erratically distributed cuts to salaries and pensions, coupled with steep — and, haphazardly imposed new taxes. Supply-side reforms are almost completely absent,” he writes. “As a result, unlucky households are left earning less and stilly paying high prices to Greece’s politically powerful and somewhat unreformed sectors, such as power, and professional services.”
“Mr. Samaras is on much firmer ground with a campaign of fear, warning Greeks that a Syzira victory would precipitate a much-dreaded loss of the Euro,” Mr. Sternberg writes. “But, even under Mr. Samara’s allegedly steady hand — Greece has tripped into another moment of high drama.
“The problem no one yet has an answer for — is how successfully the old system has entrenched itself, as journalist Yannis Palaiologos describes in his illuminating study, “The Thirteenth Labor of Hercules,” Mr. Sternberg wrote. In this compelling paper, Mr. Palaiologos describes just how deeply entrenched decades of political favors, have resulted in “a web of powerful unions, a bloated bureaucracy full of political hires, and a protected professional class that repulses at all efforts at reform. They haven’t actually benefited from the general malaise since 2009; but, they’ve been shielded from its worst effects. They aim to keep it that way.”
This attitude and aversion to fiscal and structural economic reform, “is different in degree; but, not in kind, to what’s happening in many other parts of Europe,” Mr. Sternberg concludes. “The fatal mistake Athens made was to conduct its patronage politics via an unusually large state sector, leaving the system vulnerable to acute fiscal strain. The Germans, French, and Italians have developed very similar protected, special-interest constituencies in their own economies. They’ve just been subtle enough to coddle their patronage networks; not exclusively through handouts, but also via strict labor laws, and anticompetitive regulations that trigger a fiscal emergency only slowly by stifling revenue-generating growth.”
“The main danger of a Syzria victory on Sunday,” Mr. Sternberg contends, “is that the party might, deliberately, or accidentally, pull the plug on half a decade’s worth of efforts to reconcile the Eurozone’s need for growth, with its political inability to reform itself. If so, far into this rolling crisis, no one anywhere yet has a handle on how to do that, the Eurozone has far bigger problems than one parliamentary vote in a small Aegean state.”
This Currency War Cannot Go Well
And, now that the ECB has joined the quantitative easing binge, David Malpass, President of Encima Global LLC, and former Deputy Assistant Treasury Secretary in the Reagan Administration, wrote in the January 22, 2015 Wall Street Journal,” that “Central banks in the U.S., Japan, and Europe are trapped in a loop,” that may not end so well. “Central bankers,” he argues, “should be forcefully urging their governments to pursue practical, growth-oriented solutions that encourage private investment and hiring. Instead, they’ve allowed the focus to be on them, and their decisions to prolong quantitative easing — even though QE hasn’t worked.”
Alarmingly, he notes, “Central bank liabilities have grown by an extraordinary, $7T since the 2008 crisis, yet many parts of the world are in, or near recession, including Japan, Latin America, Eastern Europe, and most of the Eurozone. The ECB is now using QE to promote the devaluation of the Euro, as a way to make up for Europe’s anticompetitive tax and regulatory policies, much like the Bank of Japan has done with [devaluing] the yen — without causing growth.
Art Cashin, Director of UBS Floor Operations on the NYSE, and one of the grand, ‘old’ sages of Wall Street, said to CNBC yesterday that “the laid back, cerebral attitude [of Central bankers] is going to disappear. At some point,” he said, “somebody is going to get their currency to a place where it’s going to cause enough pain to somebody else; and then, it’s going to turn into a real war.” Mr. Cashin also warned that “the waves of deflation are going to strengthen, as currencies fall. These nations have been exporting deflation; but, it just hasn’t turned into a tsunami yet. When it gets close to that, then you’re going to see central banks around the world decide they better get a bit more cooperative. This currency war cannot go well…..they never have,” he warned.
If the Central banks begin to lose ‘control’ and credibility/confidence, the music stops and everyone goes broke, I guess. It is certainly and uneasy feeling that permeates financial hallways around the globe; and of course, contains some of the key ingredients or seeds that led to The Great Depression, and set the stage for the rise of Adolph Hitler and the Third Reich. No wonder gold is gaining some of its previous luster back. Whatever the election outcome in Greece Sunday, one gets the uneasy feeling that Europe will still be….tilting at windmills. V/R, RCP