Archives‎ > ‎

Greek debt crisis: Failure of the Euro was predicted - it transferred National Sovereignty to a group of bankers, from Peter Myers

(1) Greek debt crisis: the failure of the euro wasn't just predictable,
it was predicted
(2) Maastricht and All That, by Wynne Godley (1992)
(3) Referendum allows Greek people to decide their own fate - Pepe Escobar
(4) Joseph Stiglitz: how I would vote in the Greek referendum

(1) Greek debt crisis: the failure of the euro wasn't just predictable,
it was predicted

By Matthew Dal Santo

Posted Tue at 8:09am

Though it became gospel around the globe, euro-enthusiasm was always
misguided. The crisis currently facing Greece shouldn't come as a
surprise, writes Matthew Dal Santo.

Has a Greek default begun? Or is this just the European Central Bank's
way of affording the country's feckless inhabitants a foretaste of what
it would be like?

It's too early to say. Either way, it's clear that what has failed here
is not the negotiations; it's the euro itself. Put to the test, its
entire foundation has been found wanting.

The worst of it is that all this - the acrimony between Brussels, Berlin
and Athens; the misery induced across Greece by depression-era levels of
unemployment - was not just entirely predictable but actually predicted.

Anyone who subscribes to the London Review of Books will have noticed
the reappearance over the weekend of the 1992 essay 'Maastricht and all
that' by Wynne Godley - a man who, according to his own biography,
started his working life as a 'professional oboe player' and ended it as
director of applied economics at Cambridge.

Godley's was not the profile of the usual eurosceptic. On the contrary,
he was a strong supporter of European integration.

What he objected to was its form. "It took a group of bankers," he wrote
in a trenchant criticism of the 1992 Maastricht Treaty that set out the
plan for establishing the euro, "to reach the conclusion that an
independent central bank was the only supra-national institution
necessary to run an integrated supra-national Europe."

This dismissal of the role of the state in the management of the economy
was a proposition which Godley as a Keynesian simply couldn't accept -
and one which, though it became from the late 1990s gospel around the
globe, displayed its deficiencies in spectacular fashion with the
collapse of Bear Stearns in 2007.

But if Godley's first big criticism of Maastricht was that it entailed a
vision of the nature of the economy that only an investment banker could
embrace, his second big criticism was the corollary fudge Maastricht
attempted to make about the euro's impact on national sovereignty. Just
because the euro didn't create a federal government to manage what was
now to all intents and purposes a federal currency didn't mean that
Europe's nation-states remained their own political and economic masters.

Typically, the euro-enthusiast tells the public a nauseatingly win-win
story. Nothing is being lost with European integration, just wonderful
new things created. For European countries, the EU doesn't mean an
undignified surrender of historically hard-won independence, but a giant
bring-and-share party where, magically, European integration doesn't
entail the loss of national sovereignty but simply the pooling of some
of its attributes: e.g., border controls, the ability to print money.
(If it helps, think of Brussels as home to a giant lazy Susan.)

As Godley saw, however, when it comes to currency union, the
bring-and-share model is an illusion. Once European governments have put
their drachmas and guilders, francs, lire and marks on the common table,
they then discover that they've handed over whole branches of economic
and political responsibilities too.

Despite supporting what he never ceased to call the "noble cause of
European integration", therefore, Godley wasn't to be fooled:

     It needs to be emphasised from the start that the establishment of
a single currency [...] would indeed bring to an end the sovereignty of
[...] component nations and their power to take independent action on
major issues.

And this is precisely what has happened. Faced with the slump in the
global economy produced by the default of US investment banks in 2008,
Greece could no longer devalue its currency. On the contrary, the euro
strengthened as the dollar sank.

That left Athens at the mercy of the European Central Bank in Frankfurt,
the sole institution created to manage the single currency. It might
agree to cover Greece's mounting debts or it might not. Either way, the
voice of more powerful members of the currency union - above all,
Germany - would count for more in its decision than that of Greece.

Starting from 2010, the seat of the Greek government was thus
effectively transferred from Athens to Brussels, Washington and Berlin.
Left in Greece itself was little more than the power to administer
national policies and implement sovereign decisions made abroad. In
Godley's words, a country in such a position "acquires the status of a
local authority or a colony".

For this reason, the referendum the Greek government has called for next
weekend wrongly is seen as simply irresponsible or bizarrely pointless.
Yes, the terms of the bailout the Greek people are being asked to ratify
or reject will have expired. Yes, the Greek government might already
have failed to make its June 30 repayments.

But in appearances at least, Greece is still at the negotiating table.
Rather than jumping, Greece has effectively waited to be pushed out of
the euro.

This not only allows the blame for the resulting economic repercussions
to land primarily on Angela Merkel and Christine Lagarde's shoulders. It
also expresses the fact that Athens sees itself not as reclaiming a
sovereign right to set monetary and fiscal policy surrendered with the
adoption of the euro, but as asserting rights it never ceased to possess.

Whatever the outcome, by calling the referendum and imposing currency
controls, Athens is showing that, politically and economically, it's
master in its own house.

So much was foreseen by Godley in 1992:

     It should be frankly recognized that if the depression really were
to take a turn for the worse - for instance, if the unemployment rate
went back up to the 20-25 per cent characteristic of the Thirties -
individual countries would sooner or later exercise their sovereign
rights to declare the entire movement towards integration a disaster and
resort to exchange controls and protection [...].

The only thing that could have prevented this was a federal European
government, possessing the legitimate political power to transfer
resources from those member states less scathed by an economic slump to
those suffering more.

But Maastricht declined to create such a body and left responsibility
for such counter-cyclical interventions to inter-governmental
negotiations - which is another way of saying that it left nobody with
responsibility for addressing such an eventuality that possessed the
means to do anything about it.

That was a cruel bargain, as Godley knew.

     If a country or region has not power to devalue, and if it is not
the beneficiary of a system of fiscal equalization, then there is
nothing to stop it suffering a process of cumulative and terminal
decline, leading, in the end, to emigration as the only alternative to
poverty or starvation.

Like the idea of depression-era unemployment, in 1992 those words
doubtless seemed dramatic. Today, they're a fair description of reality.

In the ultimate riposte to Maastricht, the message from Athens is not
that Greece failed the euro, but that Greek sovereignty - and,
implicitly, the sovereignty of all EU member-states - is simply
incompatible with the euro.

It won't thrill those sceptical about the whole European project to
learn that his solution to this crisis would have been more integration,
not less.

Matthew Dal Santo is a Danish Research Council post-doctoral fellow at
the Saxo Institute, University of Copenhagen. Follow him on Twitter at

(2) Maastricht and All That, by Wynne Godley (1992)

London Review of Books

Wynne Godley was a professional oboe player for some years in his
twenties; in his thirties he joined the Treasury, where he reached the
rank of Under-Secretary; in 1970 he became a fellow of King’s College,
Cambridge and, later, was appointed director of the Department of
Applied Economics. He died in May 2010.

Vol. 14 No. 19 · 8 October 1992

Maastricht and All That

Wynne Godley

A lot of people throughout Europe have suddenly realised that they know
hardly anything about the Maastricht Treaty while rightly sensing that
it could make a huge difference to their lives. Their legitimate anxiety
has provoked Jacques Delors to make a statement to the effect that the
views of ordinary people should in future be more sensitively consulted.
He might have thought of that before.

Although I support the move towards political integration in Europe, I
think that the Maastricht proposals as they stand are seriously
defective, and also that public discussion of them has been curiously
impoverished. With a Danish rejection, a near-miss in France, and the
very existence of the ERM in question after the depredations by currency
markets, it is a good moment to take stock.

The central idea of the Maastricht Treaty is that the EC countries
should move towards an economic and monetary union, with a single
currency managed by an independent central bank. But how is the rest of
economic policy to be run? As the treaty proposes no new institutions
other than a European bank, its sponsors must suppose that nothing more
is needed. But this could only be correct if modern economies were
self-adjusting systems that didn’t need any management at all.

I am driven to the conclusion that such a view – that economies are
self-righting organisms which never under any circumstances need
management at all – did indeed determine the way in which the Maastricht
Treaty was framed. It is a crude and extreme version of the view which
for some time now has constituted Europe’s conventional wisdom (though
not that of the US or Japan) that governments are unable, and therefore
should not try, to achieve any of the traditional goals of economic
policy, such as growth and full employment. All that can legitimately be
done, according to this view, is to control the money supply and balance
the budget. It took a group largely composed of bankers (the Delors
Committee) to reach the conclusion that an independent central bank was
the only supra-national institution necessary to run an integrated,
supra-national Europe.

But there is much more to it all. It needs to be emphasised at the start
that the establishment of a single currency in the EC would indeed bring
to an end the sovereignty of its component nations and their power to
take independent action on major issues. As Mr Tim Congdon has argued
very cogently, the power to issue its own money, to make drafts on its
own central bank, is the main thing which defines national independence.
If a country gives up or loses this power, it acquires the status of a
local authority or colony. Local authorities and regions obviously
cannot devalue. But they also lose the power to finance deficits through
money creation while other methods of raising finance are subject to
central regulation. Nor can they change interest rates. As local
authorities possess none of the instruments of macro-economic policy,
their political choice is confined to relatively minor matters of
emphasis – a bit more education here, a bit less infrastructure there. I
think that when Jacques Delors lays new emphasis on the principle of
‘subsidiarity’, he is really only telling us we will be allowed to make
decisions about a larger number of relatively unimportant matters than
we might previously have supposed. Perhaps he will let us have curly
cucumbers after all. Big deal!

Let me express a different view. I think that the central government of
any sovereign state ought to be striving all the time to determine the
optimum overall level of public provision, the correct overall burden of
taxation, the correct allocation of total expenditures between competing
requirements and the just distribution of the tax burden. It must also
determine the extent to which any gap between expenditure and taxation
is financed by making a draft on the central bank and how much it is
financed by borrowing and on what terms. The way in which governments
decide all these (and some other) issues, and the quality of leadership
which they can deploy, will, in interaction with the decisions of
individuals, corporations and foreigners, determine such things as
interest rates, the exchange rate, the inflation rate, the growth rate
and the unemployment rate. It will also profoundly influence the
distribution of income and wealth not only between individuals but
between whole regions, assisting, one hopes, those adversely affected by
structural change.

Almost nothing simple can be said about the use of these instruments,
with all their inter-dependencies, to promote the well-being of a nation
and protect it as well as may be from the shocks of various kinds to
which it will inevitably be subjected. It only has limited meaning, for
instance, to say that budgets should always be balanced when a balanced
budget with expenditure and taxation both running at 40 per cent of GDP
would have an entirely different (and much more expansionary) impact
than a balanced budget at 10 per cent. To imagine the complexity and
importance of a government’s macro-economic decisions, one has only to
ask what would be the appropriate response, in terms of fiscal, monetary
and exchange rate policy, for a country about to produce large
quantities of oil, of a fourfold increase in the price of oil. Would it
have been right to do nothing at all? And it should never be forgotten
that in periods of very great crisis, it may even be appropriate for a
central government to sin against the Holy Ghost of all central banks
and invoke the ‘inflation tax’ – deliberately appropriating resources by
reducing, through inflation, the real value of a nation’s paper wealth.
It was, after all, by means of the inflation tax that Keynes proposed
that we should pay for the war.

I recite all this to suggest, not that sovereignty should not be given
up in the noble cause of European integration, but that if all these
functions are renounced by individual governments they simply have to be
taken on by some other authority. The incredible lacuna in the
Maastricht programme is that, while it contains a blueprint for the
establishment and modus operandi of an independent central bank, there
is no blueprint whatever of the analogue, in Community terms, of a
central government. Yet there would simply have to be a system of
institutions which fulfils all those functions at a Community level
which are at present exercised by the central governments of individual
member countries.

The counterpart of giving up sovereignty should be that the component
nations are constituted into a federation to whom their sovereignty is
entrusted. And the federal system, or government, as it had better be
called, would have to exercise all those functions in relation to its
members and to the outside world which I have briefly outlined above.

Consider two important examples of what a federal government, in charge
of a federal budget, should be doing.

European countries are at present locked into a severe recession. As
things stand, particularly as the economies of the USA and Japan are
also faltering, it is very unclear when any significant recovery will
take place. The political implications of this are becoming frightening.
Yet the interdependence of the European economies is already so great
that no individual country, with the theoretical exception of Germany,
feels able to pursue expansionary policies on its own, because any
country that did try to expand on its own would soon encounter a
balance-of-payments constraint. The present situation is screaming aloud
for co-ordinated reflation, but there exist neither the institutions nor
an agreed framework of thought which will bring about this obviously
desirable result. It should be frankly recognised that if the depression
really were to take a serious turn for the worse – for instance, if the
unemployment rate went back permanently to the 20-25 per cent
characteristic of the Thirties – individual countries would sooner or
later exercise their sovereign right to declare the entire movement
towards integration a disaster and resort to exchange controls and
protection – a siege economy if you will. This would amount to a re-run
of the inter-war period.

If there were an economic and monetary union, in which the power to act
independently had actually been abolished, ‘co-ordinated’ reflation of
the kind which is so urgently needed now could only be undertaken by a
federal European government. Without such an institution, EMU would
prevent effective action by individual countries and put nothing in its

Another important role which any central government must perform is to
put a safety net under the livelihood of component regions which are in
distress for structural reasons – because of the decline of some
industry, say, or because of some economically-adverse demographic
change. At present this happens in the natural course of events, without
anyone really noticing, because common standards of public provision
(for instance, health, education, pensions and rates of unemployment
benefit) and a common (it is to be hoped, progressive) burden of
taxation are both generally instituted throughout individual realms. As
a consequence, if one region suffers an unusual degree of structural
decline, the fiscal system automatically generates net transfers in
favour of it. In extremis, a region which could produce nothing at all
would not starve because it would be in receipt of pensions,
unemployment benefit and the incomes of public servants.

What happens if a whole country – a potential ‘region’ in a fully
integrated community – suffers a structural setback? So long as it is a
sovereign state, it can devalue its currency. It can then trade
successfully at full employment provided its people accept the necessary
cut in their real incomes. With an economic and monetary union, this
recourse is obviously barred, and its prospect is grave indeed unless
federal budgeting arrangements are made which fulfil a redistributive
role. As was clearly recognised in the MacDougall Report which was
published in 1977, there has to be a quid pro quo for giving up the
devaluation option in the form of fiscal redistribution. Some writers
(such as Samuel Brittan and Sir Douglas Hague) have seriously suggested
that EMU, by abolishing the balance of payments problem in its present
form, would indeed abolish the problem, where it exists, of persistent
failure to compete successfully in world markets. But as Professor
Martin Feldstein pointed out in a major article in the Economist (13
June), this argument is very dangerously mistaken. If a country or
region has no power to devalue, and if it is not the beneficiary of a
system of fiscal equalisation, then there is nothing to stop it
suffering a process of cumulative and terminal decline leading, in the
end, to emigration as the only alternative to poverty or starvation. I
sympathise with the position of those (like Margaret Thatcher) who,
faced with the loss of sovereignty, wish to get off the EMU train
altogether. I also sympathise with those who seek integration under the
jurisdiction of some kind of federal constitution with a federal budget
very much larger than that of the Community budget. What I find totally
baffling is the position of those who are aiming for economic and
monetary union without the creation of new political institutions (apart
from a new central bank), and who raise their hands in horror at the
words ‘federal’ or ‘federalism’. This is the position currently adopted
by the Government and by most of those who take part in the public

(3) Referendum allows Greek people to decide their own fate - Pepe Escobar

Athenian Democracy vs. Neoliberal Gods

At least EU citizens now start to get the picture on who their enemy is:

  By Pepe Escobar - Jul 1, 2015


Prime Minister Alexis Tsipras allows the Greek people to decide their
own fate via a democratic referendum. That’s enough to send the troika –
the European Central Bank (ECB), the European Commission (EC), and the
International Monetary Fund (IMF) – into a paroxysm of rage. Here, in a
nutshell, is everything one needs to know about the EU “dream”.

Tsipras is, of course, right; he had to call a referendum because the
troika had delivered:

“an ultimatum towards Greek democracy and the Greek people.” Indeed, “an
ultimatum at odds with the founding principles and values of Europe.”

But why? Because the apparently so sophisticated politico-economic web
of European “institutions” – the EC, the Eurogroup, the ECB – had to
come up with a serious political decision; and due, essentially, to
their nasty mix of greed and incompetence, they were incapable of making it.

At least EU citizens now start to get the picture on who their enemy is:
the non-transparent “institutions” who supposedly represent them.The –
so far — 240 billion euro bailout of Greece (which featured Greece being
used to launder bailouts of French and German banks) has yielded a whole
national economy shrinking by over 25%; widespread unemployment; and
poverty soaring to unprecedented levels. And for the EU “institutions” –
plus the IMF – there was never any Plan B; it was the euro-austerity way
– a sort of economic Shock and Awe — or the (desperation) highway. The
pretext was to “save the euro”. What makes it even more absurd is that
Germany simply couldn’t care less if Greece defaults and a Grexit is

And even though the EU operates in practice as a clumsy, reactionary
behemoth, the puzzling spectacle remains of otherwise reputable
intellectuals, such as Jurgen Habermas, denouncing the Syriza party as
“nationalistic” and praising former Goldman Sachs golden boy, ECB
president Mario Draghi.

Waiting for Diogenes

The July 5 referendum goes way beyond Greeks responding whether they
accept or reject more humongous tax hikes and pension cuts (affecting
many that are already below the official poverty line); that’s the sine
qua non by the troika — qualified as “barbaric measures” by many a Greek
minister — to unblock yet another bailout.

A case can be made that a more pertinent referendum on July 5 would be
posing this question: “What is the red line for Greece to remain part of
the euro?”

Prime Minister Tsipras and Finance Minister Varoufakis turned upside
down insistent rumors that they would accept any humiliation to remain
in the eurozone. That only served to radicalize even more the German
politico-economic elite – from Iron Lady Merkel to Finance Minister
Schauble. Their not so hidden “secret” is that they want Greece out of
the euro now.

And that is leading quite a few Greeks — who still believed in the
benefits of a supposedly common financial house – to slowly start
accepting a Grexit. With their heads held high.

The ECB has not gone totally nuclear – yet, crashing the whole Greek
banking sector. But by de facto capping the Emergency Liquidity
Assistance (ELA) this past weekend, all hell will break loose if
millions of Greeks decide to withdraw all their savings early this week,
ahead of the referendum.

The Bank of Greece, “as a member of the Eurosystem”, as a communiqué
stressed, “will take all measures necessary to ensure financial
stability for Greek citizens in these difficult circumstances.” This
implies serious limits on bank withdrawals – thus allowing Greece to
survive until referendum day.

Still, no one knows what happens after July 5. Grexit remains a distinct
possibility. Projecting further, and taking a leaf from Wagner’s Ring,
it also seems clear that the euro “institutions” themselves have been
adding fuel to the fire that may eventually consume the eurozone – a
direct consequence of their zeal to immolate the Greeks just like

What Greece – the cradle of Western civilization — has already shown the
world should make their citizens proud; nothing like a shot of democracy
to make the Gods of Neoliberalism go berserk.

One may be tempted to invoke a post-modern Diogenes, the first homeless
philosopher, with a lantern, looking for an honest man (in Brussels?
Berlin? Frankfurt?) and never finding one. But instead of meeting the
greatest celebrity of the day – Alexander the Great — let’s imagine
another encounter as our post-mod Diogenes suns himself in an outdoor
court in Athens.

“I am Wolfgang Schauble, the Lord of German finance.”

“I am Diogenes the Cynic.”

“Is there any favor that I may bestow upon you?”

“Yes. Stand out of my light.”

(4) Joseph Stiglitz: how I would vote in the Greek referendum

Tuesday 30 June 2015 02.02 AEST Last modified on Tuesday 30 June 2015
23.29 AEST

The rising crescendo of bickering and acrimony within Europe might seem
to outsiders to be the inevitable result of the bitter endgame playing
out between Greece and its creditors. In fact, European leaders are
finally beginning to reveal the true nature of the ongoing debt dispute,
and the answer is not pleasant: it is about power and democracy much
more than money and economics.

Of course, the economics behind the programme that the “troika” (the
European Commission, the European Central Bank, and the International
Monetary Fund) foisted on Greece five years ago has been abysmal,
resulting in a 25% decline in the country’s GDP. I can think of no
depression, ever, that has been so deliberate and had such catastrophic
consequences: Greece’s rate of youth unemployment, for example, now
exceeds 60%.

It is startling that the troika has refused to accept responsibility for
any of this or admit how bad its forecasts and models have been. But
what is even more surprising is that Europe’s leaders have not even
learned. The troika is still demanding that Greece achieve a primary
budget surplus (excluding interest payments) of 3.5% of GDP by 2018.

Economists around the world have condemned that target as punitive,
because aiming for it will inevitably result in a deeper downturn.
Indeed, even if Greece’s debt is restructured beyond anything
imaginable, the country will remain in depression if voters there commit
to the troika’s target in the snap referendum to be held this weekend.

In terms of transforming a large primary deficit into a surplus, few
countries have accomplished anything like what the Greeks have achieved
in the last five years. And, though the cost in terms of human suffering
has been extremely high, the Greek government’s recent proposals went a
long way toward meeting its creditors’ demands.

We should be clear: almost none of the huge amount of money loaned to
Greece has actually gone there. It has gone to pay out private-sector
creditors – including German and French banks. Greece has gotten but a
pittance, but it has paid a high price to preserve these countries’
banking systems. The IMF and the other “official” creditors do not need
the money that is being demanded. Under a business-as-usual scenario,
the money received would most likely just be lent out again to Greece.

But, again, it’s not about the money. It’s about using “deadlines” to
force Greece to knuckle under, and to accept the unacceptable – not only
austerity measures, but other regressive and punitive policies.

But why would Europe do this? Why are European Union leaders resisting
the referendum and refusing even to extend by a few days the June 30
deadline for Greece’s next payment to the IMF? Isn’t Europe all about

In January, Greece’s citizens voted for a government committed to ending
austerity. If the government were simply fulfilling its campaign
promises, it would already have rejected the proposal. But it wanted to
give Greeks a chance to weigh in on this issue, so critical for their
country’s future wellbeing.

That concern for popular legitimacy is incompatible with the politics of
the eurozone, which was never a very democratic project. Most of its
members’ governments did not seek their people’s approval to turn over
their monetary sovereignty to the ECB. When Sweden’s did, Swedes said
no. They understood that unemployment would rise if the country’s
monetary policy were set by a central bank that focused single-mindedly
on inflation (and also that there would be insufficient attention to
financial stability). The economy would suffer, because the economic
model underlying the eurozone was predicated on power relationships that
disadvantaged workers.

Related: Greece debt crisis: Europe says referendum is euro vs drachma -

And, sure enough, what we are seeing now, 16 years after the eurozone
institutionalised those relationships, is the antithesis of democracy:
many European leaders want to see the end of prime minister Alexis
Tsipras’ leftist government. After all, it is extremely inconvenient to
have in Greece a government that is so opposed to the types of policies
that have done so much to increase inequality in so many advanced
countries, and that is so committed to curbing the unbridled power of
wealth. They seem to believe that they can eventually bring down the
Greek government by bullying it into accepting an agreement that
contravenes its mandate.

It is hard to advise Greeks how to vote on 5 July. Neither alternative –
approval or rejection of the troika’s terms – will be easy, and both
carry huge risks. A yes vote would mean depression almost without end.
Perhaps a depleted country – one that has sold off all of its assets,
and whose bright young people have emigrated – might finally get debt
forgiveness; perhaps, having shrivelled into a middle-income economy,
Greece might finally be able to get assistance from the World Bank. All
of this might happen in the next decade, or perhaps in the decade after

By contrast, a no vote would at least open the possibility that Greece,
with its strong democratic tradition, might grasp its destiny in its own
hands. Greeks might gain the opportunity to shape a future that, though
perhaps not as prosperous as the past, is far more hopeful than the
unconscionable torture of the present.

I know how I would vote.

Joseph E. Stiglitz, a Nobel laureate in economics, is University
Professor at Columbia University. His most recent book, co-authored with
Bruce Greenwald, is Creating a Learning Society: A New Approach to
Growth, Development, and Social Progress.

Peter Myers