(In case you don't know, that stands for Portugal, Ireland, Greece, Spain. In the beginning it was PIIGS to include Italy but somehow Berlusconi's departure and Mario Draghi's selection to head the ECB were all that was needed to get Italy off this club).
It was interesting to watch how Merrill Lynch tricked the Irish government to guarantee private loans and destroyed the country's economy. Or how the diversified, modern and relatively debt-free Spanish economy was declared bankrupt on the basis of some of its banks being over-leveraged, a condition that existed throughout the Eurozone.
To top it all off, as the solution, they devised an utterly destructive austerity program and imposed it first on Greece and then the rest of the PIGS.
In all this, what especially got under my skin was the combination of laughable arguments, crude ideological choices and overtly racist innuendos that were served to explain the austerity programs.
Half a decade later, Greece has 25% unemployment (50% among young people), its economy contracted by 25% with its GDP back to where it was a decade ago. The average monthly salary is €600. And it owes more money to its creditors than it did at the start of the program with its debt being 175% of its GDP. Yet, Germany, the Netherlands and the so-called troika (ECB, IMF and the EU Commission) are arguing that Greece should continue to implement austerity measures.
This expectation for a different outcome from the same course of action may sound like the definition of insanity to you. But there is more to it than ideological obtuseness.
Allow me to give you a short recap as it is relevant to understand what is going on and why certain logical solutions are not readily available.
There were two main causes behind the crisis.
Cheap Money and Bankers' Greed
One was the greed of bankers (or banksters as I used to call them) who shoveled cheap money into these economies with the clear knowledge that they would be unable to pay them back. They knew it in Iceland, they knew it in Ireland and they knew it in Greece. In Iceland, Ireland, Spain and Portugal they lent the money to the banks.
And in Greece, they gave it to both the government and the banks. In fact, Goldman Sachs was nice enough to teach the Greek government how to hide those funds from European regulators (and true to form, they turned around and shorted that debt).
If your bank manager insists on giving you a large line of credit and fudges the application on your behalf to get it done, how is it your fault when you are unable to pay the money back?
In any event, the crisis had little to do with the periphery being profligate and living beyond their means.
In the case of the eurozone, the sudden stop to capital flows in 2009 indiscriminately hit all of the periphery countries, regardless of how well they had managed their finances. Spain and Ireland, for example, were more fiscally responsible during the boom years than France or Germany, yet that wasn't enough to inoculate them from the sudden end to the capital flow bonanza. So even if Greece and Portugal (which did run large budget deficits) had been paragons of fiscal prudence, it’s quite likely that they would still have been hit by the sudden stop to the capital flow bonanza. That’s why the best predictor of which countries were hit by this crisis was not budget deficits, but rather the size of the capital flows they were receiving.That huge inflow of capital to PIGS was driven by French and German banks that were in search for better returns. In that sense, the initial bailout had very little to do with Greece. It was necessary to save the German and French banks (like Deutsche Bank and Société Générale): collectively, Northern European banks were on the hook for almost a trillion dollars in PIGS countries.
When the euro zone crisis began in October 2009, it was German and French banks that were most exposed in the periphery. More than 40 per cent of the foreign claims on the periphery of Greece, Ireland, Portugal, Italy and Spain were French and German, and the proportion was much higher when considering only members of the euro zone itself. The German banks were particularly exposed in Spain, Italy and Ireland. (...)
Far from involving domestic sacrifices imposed to save the euro, Germany’s handling of the euro zone crisis thus far has been, first and foremost, an opportunity for Germany to ‘Europeanise’ the burdens of its banks.Now that we have this settled, do you remember how this was presented to the general public?
The corporate media was full of openly racist insinuations about those lazy and no-good Greeks living above their means at the expense of the oh-so-frugal-and-sensible German tax payers. German newspaper BILD's headline on 27.10.2010 was "Sell your islands you bankrupt Greeks"
Here are some other common charges found in the German media:
-The Greeks are lazy
-The Greeks are constantly on holiday
-We are paying luxury pensions to the Greeks
-The Greeks have been feathering their own nest well
-The Greeks have been living above their means
-The Greek state is over-inflated
-Greece is not capable of competing
-The Greeks are corrupt
If that sounds familiar to my North American readers, that is because a version of this discourse was used when the US real estate bubble burst. It was not the fault of the banksters who gave loans that exceeded the value of the property to literally anyone who asked. It was the fault of poor people, Latinos, Blacks, first time home owners, who got too greedy and bought a big property that they could not afford.
To this day, the average European thinks that the Greeks had it coming because they wanted something for nothing. And the average American (especially Fox News watchers) believe that the real estate crisis was the fault of some minorities who wanted to buy luxury homes they did not deserve.
But no one ever brings up the professional bankers who made those loans. And the reckless banking practices like these.
Even now, Deutsche Bank, the largest of the German commercial banks, remains in an extremely risky position. It is quite probably the most highly leveraged bank in Europe, as well as having the largest gross derivative exposure in the world, a staggering €55.6 trillion according to its 2012 accounts.Just as no one mentions banksters' role in all this, no one ever questions some curious German policy choices allegedly triggered by traumatic memories.
Destructive German Policy Preferences
The other cause of the crisis was the German insistence to have 1 percent inflation for its economy and the European Central Bank (ECB) enforcing this norm for the entire Eurozone.
As Krugman worked it out at the time, because of the 20 percent differential in prices and wages between the core and the periphery, for Germany to have a 1 percent inflation, PIGS would have to have a massive deflation.
If you were Germany and the numbers told you unequivocally that this level of inflation would be catastrophic for several European economies, why would you insist on it?A reasonable estimate would be that Spain and other peripherals need to reduce their price levels relative to Germany by around 20 percent. If Germany had 4 percent inflation, they could do that over 5 years with stable prices in the periphery — which would imply an overall eurozone inflation rate of something like 3 percent.
But if Germany is going to have only 1 percent inflation, we’re talking about massive deflation in the periphery, which is both hard (probably impossible) as a macroeconomic proposition, and would greatly magnify the debt burden. This is a recipe for failure, and collapse.
The corporate media told us why: apparently, the German collective consciousness was still traumatized by the hyperinflation that ravaged the Weimar Republic in late 1920s. Consequently, no German government could allow even the smallest inflation.
Yes they said that with a straight face. Even though most young Germans don't know the meaning of the term inflation let alone having a visceral reaction to it.
When people use this argument on me, I tell them that as the huge rise in anti-Semitic attacks in recent years indicates, German national memory seems to be rather selective. It is odd that the idea of a postage stamp costing one billion Reichsmark has such a strong hold on the German psyche but the more recent memory of gas chambers and six million victims is rapidly fading.
I don't mean to insult anyone, but if I were German, I would not want you to use this argument.
In any case, the reality is a little more prosaic and involves a lot of self-interest.
Germany insisted on low inflation not simply because it was good for their assets, which it was, but also because German economy benefited the most from the conditions this policy created in the periphery.
First of all, the crisis discourse that was generated around the PIGS countries ensured a steady capital flight from the periphery to the core and Germany was he biggest beneficiary of that.In fact, the EU cross border payment system called TARGET 2 became a conduit for capital flight towards Germany.
(See my short primer for TARGET 2)
This is also true of the new money created by the ECB. The more bailout money doled out or the more quantitative easing implemented, the more Germany benefited.
And since the Syriza government came to power, the capital outflow from Greece to Germany has reached a whole new level.
The Bundesbank’s latest report on what’s called “Target 2”— the eurozone’s cross-border payments system that records transactions between member countries — showed that 54 billion euros ($61.91 billion) were transferred to Germany last month, the largest amount since September 2011 and March 2012.Secondly, after Germany successfully "Europeanised" their debt and offered destructive bailout packages to PIGS, the German insistence on low inflation had the intended effect and, as Krugman predicted, it magnified the debt burden.
And despite formally leaving its bailout program, Portugal will still need decades to pay down the total of €738 billion ($1 trillion) in public and private debt the country has amassed.In other words, these countries found themselves under a massive debt burden which precluded any growth possibility and starved their private sector.
That, in turn provided Germany and other core countries with an amazing economic opportunity.
Two-tier Europe
You see, since 2009, German companies (the famed Mittelstand) have been investing in PIGS countries. Can you guess why?
That is in large part due to the economic and labour market reforms bailout countries have been forced to implement - making it easier to hire and fire and reducing wage costs - which less stricken countries such as France have been slower to embrace. (...)
Himmelskamp says he has seen a 30 to 40 percent increase in German acquisitions of Spanish firms since 2009, when the euro zone debt crisis first flared in Greece.When I posted "Can anyone tell me what is wrong with Spain?" I did not know why such a modern and healthy economy was declared bankrupt and why Spain with one of the lowest GDP/debt ratios in the Eurozone (63%) could not borrow to meet its obligations.
Now I know.
German firms have been buying up financially sound and technologically advanced competitors at fire sale prices.
German firms are buying up strong competitors, clients or suppliers at a time when those companies are struggling to stay afloat through years of recession in their home markets and as shaky banks restrict access to credit.
AZ Group, a German fittings maker, bought Italian competitor Fiber in 2012, when insolvency loomed under its previous owner.
German material producer SGL Carbon bought Portugal's fibre maker Fisipe last year.
And Happich, an interior outfitter of buses, acquired its rival Auto Carrocerias Riu last year.
While these firms rarely publish the amount they pay for acquisitions, Himmelskamp said the price tag was in the low double-digit million euros range.In case you assume that this consists of a few anecdotal transactions:
A study by DZ bank showed last year that one in four Mittelstand firms already present in euro zone crisis countries was willing to invest more there, in contrast with 14 percent of all Mittelstand firms.When you look at the rest of the PIGS the picture is the same. Almost 71 percent of Foreign Direct Investment (FDI) to Portugal is from Benelux, German, French and UK companies. And they get special labor concessions.
The leading case of successful foreign investment in Portugal is that of «Autoeuropa», a Volkswagen project in the Setúbal peninsula with an initial investment of 2 billion euros. Because it was so large, the State moderated the negotiations on salaries etc.In the case of Greece, the pillaging was done using the stricken banks.
Restructuring specialist Haris Stamoulis, the chief executive of Athens-based LEADfinance, says Greece has many good companies which are saddled with bank debts they cannot pay.And state-owned profitable assets were put in the market at fire sale prices.
Because Greek banks have been forced to write down such debts, Mr Stamoulis says, investors can gain control of companies through buying their debts from the banks.
Other investment opportunities are in the offing in the shape of Greece's vast array of state-owned assets - valued at up to €125bn (£109bn).
In the currently depressed economic conditions, Greece has been reluctant to put such trophy assets onto the market.
But with the European Commission, the IMF and the European Central Bank - collectively known as the troika - putting Greece under increasing pressure to sell state assets to help reduce its debts, new bargains are likely to appear.In short, the proposed solution (austerity measures in the periphery and low inflation for the Eurozone) to the crisis triggered by German banks turned out to be very beneficial for Germany.
The same solutions enabled German companies to eliminate their competitors and to buy them up fairly cheaply. It also allowed them to set up manufacturing in low labor cost countries that are within the EU. The new labor rules imposed by their government made hiring and firing a breeze and high unemployment guaranteed a very docile workforce.
To give you an idea, in Greece, the average labor cost was €14.70 in 2013, which was less than half of the German and about a third of Northern European labor cost. It is like having your own China next door.
How do I know this was not just a fortuitous outcome of things naturally evolving?
Well, one of the first conditions imposed on Greece was to reduce minimum wage to €550 from €750. If your economy is export-based, this would make your products cheaper and therefore more competitive. But if yours is a service sector economy like Greece's, all this would do is to lower domestic demand further and push your economy into an even more severe recession.
It makes zero economic sense unless your goal is different from what you stated. Tellingly, Germany opposes Syriza's plans to increase the minimum wage back to where it was, that is €750.
If you ask me, what the bailout packages and the accompanying austerity measures achieved was the enactment of an old idea known as "two-tier Europe."
The notion of a core group of European countries leading weaker peripheral member states and enjoying different privileges has been around for decades but it has always been resisted by the peripheral countries.
With the crisis, they've lost their veto power.
What Will Happen Next? Will Greece Exit?
The majority of financial columnists believe that Europe will find a way out of this impasse.
There are several good reasons for that.
The most obvious one is the fact that, everybody, including the combative German Finance Minister Wolfgang Schaeuble, knows that there is no way Greece can pay back its debt nor can it find a way to grow. The troika could keep the status quo going for a century and nothing would change.
If anything, it would get worse as the debt would keep growing. And sooner or later Greece would have to default.
Secondly, Europe is teetering on the edge of deflation and even Germany acknowledges that some stimulus is needed to get the European economies going. This is why Bundesbank approved ECB's one trillion euro Quantitative Easing program (while expressing skepticism on the side).
Thirdly, the first-tier Europeans are aware of other looming threats on the horizon. In Spain, Podemos made huge gains within a year of its creation and they are likely to win big in the upcoming Spanish elections. They made it clear that they will ask for re-negotiations. Portugal cannot be far behind.
In short, the wheels of the two-tier Europe might be coming off because of the greed and intransigence of the core countries. They cannot browbeat them all.
Indeed, PIGS may fly. And that would be the end of the Euro.
Having said that, I am not as confident as finance pundits on a possible solution.
For one thing, the austerity camp has a huge problem on their hands. How could they change the terms of the deal when they campaigned so hard and so long to impose those terms? How could they say, instead of austerity and balancing the books we need stimulus spending?
Renouncing austerity now is like admitting that they were wrong and applied the wrong medicine and nearly killed the patient. More importantly, they believe in the medicine. It is not an act, they are fully committed to it. Look at the Bundesbank President. Look at Britain.
To paraphrase Digby's dictum on conservatism, austerity cannot fail, it can only be failed.
Moreover, they sold the original crisis as "lazy Greeks living off of our savings" and they used a lot of show-and-tell anecdotes to achieve that. Consequently, this idea is very firmly embedded in the Northern European psyche: there is no way for German or Dutch or Finnish politicians to walk it back without being accused of catering to their lazy-swarthy-southern-neighbors.
It is like having to tell CNBC viewers that state-owned enterprises could be profitable or to Fox News watchers that Obamacare could be beneficial. The cognitive dissonance is simply too big.
His testy appearances on Greece comes after a report in the Frankfurter Allgemeine Zeitung late last week drew attention to a cartoon in the official newspaper of Tsipras' political party Syriza which depicted the German finance minister in a Wehrmacht uniform saying: "We insist on the soap from your fat. We’re willing to discuss the compost from your ashes.”The irony is that the German banks were much more vulnerable at the outset and if Greece exited then (as I and a few other better known luminaries suggested), they and the German economy would be in deep trouble.
By now, the core countries and especially Germany implemented the necessary protective measures and a Greekexit would only hurt Greece. Even before he became Minister of Finance, Varoufakis was aware of that and in 2012 he wrote an essay entitled "Weisbrot and Krugman are wrong: Greece cannot pull off an Argentina."
But since doing nothing is not an option either, I suspect they will try to come up with a solution to prevent the breakup of the Eurozone. It might be an anti-deflationary package with a small print that gives PIGS some breathing space. Or some other technical trick to ease up on budgetary controls. They will do so with an eye on Spanish elections. If Podemos wins, life will be tough for austerity politicians.
In any case, it will not be a simple straightforward arrangement. As true-believers, austerity proponents will resist every step and the periphery countries will have to push back very hard.
There is more than a decent chance that this will not end up well.
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