Friday, March 19, 2010

Greece, The Euro, And The Battle Of Jutland

Greece, The Euro, And The Battle Of Jutland

By Ambrose Evans-Pritchard Economics Last Updated: March 18th, 2010 | 19 March 2010

German Chancellor Merkel, Greek Prime Minister Papandreou and French President Sarkozy discussing the Greek crisis last month

During the Battle of Jutland in 1916 or Skagerrakschlacht as it is known in Germany, the Imperial German Navy carried out a brilliantly executed "battleship about turn" after straying into a death trap beneath the guns of the Royal Navy's Grand Fleet. Admiral Scheer's High Fleet vanished into the mists within four minutes— his retreat covered by a torpedo attack and the "death ride" of four German battlecruisers that charged into Admiral Jellicoe's guns in an act of supreme sacrifice. The actions saved the Imperial High Fleet. It has gone down in German history as the Gefechtskehrtwendung.

I was unaware of this until it was brought to my attention by Commerzbank this morning in a note by their currency chief in Frankfurt, Ulrich Leuchtmann. He drew the parallel with the astonishing volte-face by German leaders yesterday in suggesting that Greece should go to the IMF for a rescue after all. "A Gefechtskehrtwendung is a 180-degree turn that saves you. I think this may save Germany from a bail-out that they don't like, that they can't sell to German voters, and that creates legal problems under the no-bail-out clause of Article 125 of the EU Treaties."

"We think the IMF is the ideal solution anyway, and would actually be good for the euro. It would establish discipline and avoid moral hazard. It is much easier for the IMF to enforce austerity conditions," he said. "The markets are still focused on the fact that we still don't seem any closer to an EU rescue for Greece, so they are treating this IMF story as negative," he said.

I agree entirely with Dr Leuchtmann. The EU top brass have of course been saying for weeks that it would be intolerable to let the camel's nose of Washington's IMF under the eurozone tent. Eurogroup chair Jean-Claude Juncker said it would shatter the credibility of monetary union. But is this all EU religious stuff: ideology and totemism.

Mr Juncker, the Commission's Jose Barroso, and their allies, have been trying to exploit the crisis to advance the EU Project, pushing the boat stealthily across the Rubicon towards fiscal federalism and a de facto debt union. They hoped that the Germans would not realize fully what was being done to them until too late. Chancellor Angela Merkel appears to have balked at this— understandably— seeing a 'standby' facility for Greece as the beginning of a slippery slope that would leave German taxpayers on the hook for €3 trillion of Club Med debts.

At least that is how I interpreted her comment yesterday that one should "perhaps call in the IMF". The plot thickened when her Christian Democrat finance spokesman in the Bundestag, Michael Meister, said: "We have to think who has the instruments to push Greece to restore access to capital markets: nobody apart from the IMF has these instruments". No doubt there will be further utterings today.

This morning, Greek premier George Papandreou openly threatened to go to the IMF in an address to the European Parliament. These are the quotes that have just been relayed to me the floor by our very sound Brussels Correspondent Bruno Waterfield. "We are not asking for money from the Germans, Italians or French. What we are saying is that we need strong political support for reforms and to make sure that we do not have to pay more than necessary."

"We need to borrow at rates that are normal, similar to the rates other states in the EU and eurozone can use. In fact we are under an IMF programme. However we do not have the facilities that the IMF could give— money if necessary. Greece, unlike Hungary does not have a free currency. We have the worst of the IMF and none of the advantages of the eurozone. This is where Europe must come in and provide what the IMF can offer. Or Greece will have to go to the IMF, we hope that will not be necessary."

So Hungary has a "free currency" and is therefore better off? I am shocked, shocked, that he could say such a thing. "I prefer a European solution as part of the eurozone. [This would] show the world that Europe can act together."

"We expect the EU to live up to the challenge facing it. We are a eurozone country. Within the eurozone, where we have one currency, we should have similar types of loans, not the same kind of loans, so we can be competitive. That is not only viable but a realistic demand. As I said, this instrument may never be used but the fact that it does exist is going to be a very important political and financial tool to support Greece in its needs for going out to the market."

Is this now a dispute about the price of any loan? Or are the Greeks so angry over the barrage of insults they have been receiving daily that they would almost relish a chance to give Brussels a black eye in revenge? The Eurogroup has suggested that any rescue would come at a punitive rate above EU borrowing costs, but did not specify. Perhaps it would be around 4.5% to 5% for long-term money.

Sources tell us that the IMF would lend at around 3.25%, using its SDR benchmark plus 100 basis points. So why suffer the daily abuse from Europe? Besides, as Mr Papandreou himself said, the IMF "would have asked us for nothing more," meaning it would not impose more severe austerity measures than the EU is already imposing. It would be lunacy to do so.

Greece is already having to squeeze fiscal policy by 10% of GDP in three years— and a lot more if Deutsche Bank is right in predicting economic contraction of 4% this year. If you think through the arithmetic, this could soon turn into a self-defeating downward spiral. It is quite possible that the IMF would impose more rational, ie, more lenient, terms. Though how on earth IMF strategists would deal with this crisis is beyond me.

They usually demand a devaluation of 30% or so to offset the pain of fiscal austerity and to allow the country to claw its way out of its hole through exports and import substitution. This is obviously Verboten in euroland. Latvia is going through a version of this IMF-pain-without-an-IMF-cure treatment, in its case to defend its euro-peg. The IMF expects the result to be a 30% contraction of GDP from peak to trough, just about a world record.

Not surprisingly, the Latvian ruling coalition disintegrated yesterday, unable to agree on how to implement this euphemistically named "internal devalulation". Latvia is being crucified for the sake of EU fixed-exchange ideology. I would be cross if I were Latvian.

Needless to say, it really doesn't make any difference in the long-term whether Greece gets a bail-out or who provides the money. The country is not facing a liquidity crisis, it is facing an insolvency crisis. Stephen Jen from BlueGold Capital says the EU authorities appear to misunderstand the fundamental nature of the problem. Greece needs a "Thatcherite" supply-side revolution (good luck with PASOK) to raise its game. This cannot be done when the country is caught in a vicious circle of deflationary wage cuts and fiscal retrenchment.

So Greece too must be crucified for ideology, until it too loses a government. What a way to run a railroad.

[ Normxxx Here:  Needless to say, Ambrose E-P is not a big fan of the EU. ]

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