Cyprus Cliffhanger

As announced in my last blog, I really wanted to write about a cockroach zombie roaming Germany and certain neighborhoods in Brussels. However, faced with an extraordinary Cyprus crisis cliffhanger, that will have to wait ‘til next time.

Due to the usual incompetence of EU officials combined with the incompetence and boneheadedness of leading German officials, we now have a situation in the eurozone which could lead to the collapse of the Cyprian banking system and the Cyprian economy if €5.8 bln in cash cannot be scraped together by Monday, March 25, the last day of ECB-liquidity help to the Cyprians. The euro crisis is back !

As no doubt you have all followed in the media, the catastrophy began to unfold when the gang of four (EU commissioner Olli Rehn, a representative of the IMF, ECB board memberAsmussen and German finance minister Schäuble) pretty much blackmailed the new president of Cyprus, Nikos Anastasiades, to finance a part of the EU bail-out with an obligatory tax of 9.9% on uninsured Cyprian bank deposits of €100.000 and above and a 6.75% tax on insured deposits below €100.000, effectively dismantling the EU deposit insurance guarantee. Otherwise, the ECB would stop its liquidity help to Cyprus' banks which would mean an immediate disorderly default. Mr. Anastasiades had no choice but to accept this poisonous deal.

While financial markets remained calm as the ECB reinsured investors that liquidity would be supplied to Cyprus' banks, the financial media, finance experts, and the Cyprian population went haywire when the news of the depositor bail-in became public. Some commentators called it “an unbelievably stupid decision”; a former ECB official from Cyprus even threatened that Cyprus would now sell gas exploitation licenses of  recently discovered natural gas fields to Russia instead of the EU. The best comment I read was only slightly more diplomatic, calling the deal “a huge blunder” and pointing out that, if the deal were to be approved by the Cyprian parliament, the EU would get the required €5.8 bln cash contribution to release €10 bln in EU-aid, yet it would still be too little, too late as depositors would withdraw all their deposits as soon as Cyprian banks reopened. The alternative (i.e. non-approval of the deal) would lead to the disorderly default of Cyprus' banks and possibly another massive bank crisis in other eurozone countries (see "Cyprus: the next blunder", March 18, 2013).

Today, 6 days later, we know that the Cyprian parliament rejected the deal and is desperately searching for another way to come up with the required €.5.8bln. The Russians have turned them down. The disorderly bank failures have not (yet) occurred as the ECB continues its liquidity provision until Monday, March 25. After that date, all bets are off. Interestingly, financial markets remained calm until the day the ECB made public the March 25 deadline. Since then, both equity and credit markets have reacted nervously. Depositors in other countries, however, apparently view the Cyprian situation as special and have not withdrawn their deposits. That is where we stand.

Now, it is easy to criticize the depositor bail-in deal without knowing all the facts, but difficult to come up with a better alternative in a strained situation. However, knowing our charm- and courtesy-challenged, boneheaded German machos, I am sure one could have easily handled the situation better and come up with a more democratic solution if one had treated the Cyprians with a little respect and negotiated with them as true partners, instead of assaulting them with a 'take-it or else'-type of proposition. My advice: next time in a critical situation, the EU should employ an all-women negotiating team !

The uproar in Cyprus has been gigantic, with swasticas and Merkel in nazi uniform displayed on many protest signs on the streets of Nicosia. With ongoing anti-austerity protests in Greece, Spain, Portugal and the 'vaffanculo' message from Italians, Germany now is easily the most hated country in the eurozone, its hard-won post-war reputation in shambles. Congratulation to the Merkel government ! We needed that like a hole in the head.

Olli Rehn, the EU commissioner already ridiculed and battered by Paul Krugman who labeled Rehn's policy decisions "cockroach ideas", has to serve as the scapegoat. Bloomberg reports that Rehn faced "a torrent of critiscm and a call to resign after helping broker a rescue package for Cyprus that fell apart." Nessa Childers, an Irish member of the EP, said in a telephone interview with Bloomberg: "Somebody somewhere has to be accountable and the buck stops with him"..."This was not only undemocratic, but incompetent. Was anyone thinking about the big picture?"

Right she is ! I think (and I'm not the only one), we need an entirely new, democratically elected leadership team for the eurozone. But first of all, the whole EU commission team responsible for the austerity policies plus the entire Merkel government should be fired. Let's do it at the ballot box this September !

Here is a good solution for the Cyprus crisis: take a page out of the book of Iceland.

Did Euro-Austerians blink ?

No, not really: just a little PR and a lot of self-justification, but the austerity course remains intact.

Let me explain...

On March 10, I reported about the EU's initial reaction to the Italian election results and the mounting trans-atlantic critique of the draconian fiscal austerity imposed in the eurozone to pay for EU taxpayer-financed (bank) bail-outs. Just a day later, the German mainstream press wrote about a draft EU summit declaration that proposes a "differentiated growth-friendly fiscal consolidation strategy" and "short-term government programs for more growth and employment". Even Olli Rehn is said to have indicated that selected governments will get more time to reach their fiscal deficit targets. As a nod to Italy, the draft summit statement even provides space for productive public investment spending.

Bloomberg reports that "German officials have backed the commission's approach, indicating that the Berlin leadership is sensitive to criticisms that budget cutting has gone too far." (Bloomberg, March 15)  Is this a reaction to the warnings of the market gods (see video here) or a face-saving mea culpa of the "cocooned elite in Brussels", preparing the ground for a gradual dismantling of the fiscal austerity strategy ?

Hélas, I don't think so. I think, it's just part of a successful PR strategy pioneered by chancellor Merkel which is working like a charm in Germany: publicly, take a compromising step toward your opponents, slab a catchy name on the new strategy, introduce a few miniscule policy changes but leave the core strategy as is and publish a scholarly article to justify it (see "Fiscal policy in Europe: Searching for the right balance") 

Paul Krugman's comment on this "self-justifying piece on fiscal austerity":  "how does that 'delicate balance' [mentioned by the Commission] feel in countries with 15, 20, 25 percent unemployment ?"

                                 source:  Paul Krugman, "Of cockroaches and commissioners"

The EU commission's arguments to justify a continuation of austerity in the eurozone sadly demonstrate that the expansionary austerity zombie still roams our beautiful continent.

In my next post, I will report about a new PR campaign for a particularly indestructible zombie:
the cockroach zombie Agenda 2010, re-loaded.  

The Euro-Austerian Empire strikes back

The reaction of EU austerians in response to the Italian election results was predictable: "Euro chiefs urge austerity", demanding (!) "that euro members press on with budget cuts to end the debt crisis" reports Bloomberg. Merkel is quoted: "Now in Europe, after the Italian election, it seems to be a case of either austerity and savings programs or growth, but that's a completely false premise" (she considers austerity measures combined with Agenda 2010-type labor market reforms as growth-enhancing). Of course, Merkel's minion Olli Rehn, EU economics commissioner, supports the view of the dominant economic power in Europe: "Given that average debt exceeds 90% of GDP in the EU, I don't think there's any room for manoeuvre to leave the path of budgetary consolidation" reports the UK Telegraph. It also comes as no surprise that Italy's president Giorgio Napolitano is exploring the creation of a second technocrat government with central bank governor Ignazio Visco to brake the political patt in Italy and calm markets in case Italy's parties are unable to form a stable government.

While Beppe Grillo dismissed these explorations as cattle market trading and vowed to "bring down the old system" in a civic revolution, the boneheaded austerity stance of EU commissioner Rehn provoked a hilarious trans-atlantic cockroach war between Paul Krugman (said to be one of Beppe Grillo's economic advisors) and three tweeters from Brussels. 

For economists, the battles between different economic ideologies may be fascinating and hilarious, especially when the tone of the debate slips into kindergarten-territory, but let's not forget that in the meantime people suffer. Many of the commentators from Europe are clearly in favor of Paul Krugman using "wild words" to draw attention to the desperate economic situation in Southern Europe and the incompetence of the "cocooned Brussels elite". Unfortunately, Paul Krugman's commentators are also correct in suggesting that all the empirical evidence and public uproar about the misery caused by austerity will not faze the EU power elite as a economic and humanitarian crisis may just be what they want: --> see my post on the role of crisis for the troika's economic shock therapy in Europe. "Only a crisis—actual or perceived—produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable." (Milton Friedman, “Capitalism and Freedom”) 

Meanwhile, however, the winds of change are picking up in Europe. Even mainstream German talkshows and newspapers have started to report about the true destinations of taxpayer-financed EU bailouts (namely French and German banks instead of the people in Greece, Ireland, or Portugal) and the lies being dished out by the Merkel government. Both the political left and the right in Germany have filed lawsuits in constitutional court to stop future taxpayer-financed bank bailouts while Europe-wide coordinated social movements are planning huge demonstrations in the spring. Seems all the trans-atlantic educational efforts of anti-austerians are beginning to have an effect.

Message from Italy to Europe's Austerians: VAFFANCULO !!!

The big surprise in last Sunday's national election in Italy is the strong showing of former comedian Beppe Grillo’s “Five Star Movement” (with well-attended V-Day celebrations where V stands for Vaffanculo) which garnered 25% of valid votes, clearly ahead of Mario Monti's austerity-friendly centrist coalition which barely passed the 10% threshold. 

Italy's centre-left alliance led by Pier Luigi Bersani obtained a thin majority of votes (29.5%), but a secure majority of seats in the Chamber of Deputies thanks to a constitutional majority bonus of seats. Silvio Berlusconi’s centre-right alliance followed close behind with 29.2% of valid votes. In the Senate, no political group or party won an outright majority. (see “The Italian General Election of February 2013”)

Some say, the election results spell chaos for Italy and disaster for the EU and the euro project, others complain that Italians have chosen two clowns to run the country, referring to Berlusconi and Beppe Grillo. Well, that may be true, but just as the fools in Shakespeare’s plays, Italy’s so-called clowns are no fools at all. Just as their Shakespearean counterparts, Italian 'fools' are fearless in speaking the thruth and in uncovering deceit and misdeeds of people of higher standing. They do not follow any ideology and reject all appearances and traditional moral codes to make a valid point: that Italy's politicians are corrupt and that the austerity measures imposed by unelected EU technocrats are undemocratic, inhumane and unacceptable !

To me, the message to Italy's political caste and Europe’s austerians is loud and clear: We will not stand any longer for the fiscal austerity imposed by you on our people while you are filling your own pockets. If this is your vision for the European Union, then Vaffanculo - get yourself f.... !

Europe’s Very Serious People would do well NOT to deride or ridicule the democratic choices of Italians but should instead take heed and reassess their policies. Or would Europe prefer the rebirth of a new Mussolini? As Paul Krugman pointed out days before the Italian election results, “disreputable politicians are on the rise all across Southern Europe. And the reason this is happening is that respectable Europeans won’t admit that the policies they have imposed on debtors are a disastrous failure. If that doesn’t change, the Italian election will just be a foretaste of the dangerous radicalization to come.” (see “Austerity, Italian Style” NYT Feb 24, 2013)

I hope, the Independent European Daily Express is right in concluding, “Observers see the defeat of the reformer Monti and the surpisingly good results for EU critics Berlusconi and Grillo as a clear signal directed at Brussels that the austerity drive is coming to an end.”