Belmont Club

The Juncker Dictum

The Wall Street Journal has blog roundup summarizing predictions of what will happen if Greece left the Euro. The scenarios presented vary; all seem to agree it would involve a period of acute short term pain followed possibly by long-term benefit. The two worst worries are a cascading run on the banks in the “periphery” and the rise of left and right wing parties.

The risk of capital flight is key. “We are most worried about deposit risk for the periphery, and we see plenty that can be done to alleviate these risks–crucially if there is the political willingness. For instance, allowing banks to access the EFSF/ESM [the European Financial Stability Facility and European Stability Mechanism, the euro zone’s temporary and permanent rescue funds, respectively] directly. We have not thought that this was politically feasible but clearly there is a pain threshold that makes politicians take risks.” Alternatively, a euro-wide deposit insurance program would be a good idea, RBS says.

But  the predictions are contingent. There is if and there is maybe. The biggest if is whether politicians will do the right thing. Why would anyone think they will? The most likely outcome is for politicians to behave exactly as they have before.

Jack Ewing at the New York Times  gamely essays a primer explaining the crisis to its readers. He tries to explain why little Greece is causing so much trouble:

Q: What’s all this talk about ‘‘contagion’’? Why is the global economy threatened by a small country like Greece, or a few troubled Spanish banks?

A: If Greece leaves the euro, anyone who is owed money by the Greek government or private individuals there can probably forget about being paid in full. In fact, that has already happened to a lot of Greece’s creditors in the debt restructuring completed in March.

The next time, if it comes, a lot of the people getting hurt would be European taxpayers, because most of the government debt is owned by the European Central Bank or the European Union. The investment bank UBS estimates the total cost at 225 billion euros, or $286.5 billion.

Commercial banks that have extended loans to Greek clients would also suffer. And some could fail, destabilizing the European financial system, which is already vulnerable enough. Likewise, the failure of several banks in Spain or elsewhere could stick those banks’ creditors with losses, perhaps causing more failures, as the problems cascaded through the system.

The problem isn’t that a small part of the system is rotten. The difficulty is that the whole system is so ramshackle that a threat to the smallest part of the system threatens the whole shebang. The uncertainty over how far things may cascade through the system is exacerbated precisely by this fragility. Nobody knows exactly what to expect because all of the accounting and still less of its policy framework of this statue of clay can be taken at face value. The reason there are so many unknowns is because so much has been misrepresented or hidden. For example CNBC reports the existence “secret fund” to prop up Greece.

There has been no official announcement. No terms or conditions have been disclosed. But Greece’s banking system is being propped up by an estimated €100 billion or so of emergency liquidity provided by the country’s central bank — approved secretly by the European Central Bank in Frankfurt. If Greece were to leave the eurozone, the immediate cause might be an ECB decision to pull the plug.

How on earth can a hundred billion euro fund be kept secret? Simple. Don’t tell anyone about it. Jean-Claude Juncker President of the Euro Group, which exercises political control over the euro currency may be immortalized for the juxtaposition of two memorable phrases, neither of which was intended to be heard in conjunction with the other.

“I don’t envisage, not even for one second, Greece leaving. This is nonsense, this is propaganda.” – Jean-Claude Juncker, Chairman EuroGroup FinMin Committee.

“When it becomes serious, you have to lie.’’ – Jean-Claude Juncker, Same guy.

Which of these utterances is truth? Perhaps both of them. The thing about trading in falsehoods, myth, narratives and talking points is that they finally corrupt the institutions that rely on them.  The stage is reached nobody knows what it is true or false. It is perhaps instructive to remember that the Greek crisis began with a lie. In 2004 Greece admitted that it lied about its budget to get into the Euro. Then after bingeing on the Olympic Games the Greek government promised to go straight.

It lied. But so did everyone else.  Spiegel writes that “since its inception, the euro zone has been built on lies”. Even after the lies were serially exposed the politicians added even more to the tally to buy time. Spiegel writes:

Initially, it was supposed to cost €110 billion ($130 billion). That’s how expensive the first EU bailout package for Greece was. Soon, it was expanded via a comprehensive rescue fund that helped out Portugal and Ireland. Then came a second bailout package for Greece, followed by an even more comprehensive rescue fund for the rest.

In late September 2011, representatives in Germany’s parliament, the Bundestag, had not yet voted on this expanded package — which would put Germany alone on the hook for €211 billion — but it was already clear to them that even that wouldn’t be enough. But nobody could say that out loud, and especially not Finance Minister Wolfgang Schäuble, because they obviously didn’t want to endanger the government’s majority in parliament — and, thereby, its own ability to govern.

On top of that, the European Central Bank (ECB) is buying up sovereign bonds of debt-ridden euro-zone countries. At first, it was Greece, Portugal and Ireland. Then, beginning in the summer of 2011, it bought bonds from Italy and Spain. It now has a grand total of over €195 billion of bonds on its books. If things should go south, Germany will also ultimately be responsible for 27 percent of that figure, corresponding to Germany’s share of the ECB’s capital.

The argument is always that it’s all about winning time. Time that would allow the financial markets to settle down. Time that would let the debt-ridden PIIGS states (Portugal, Ireland, Italy, Greece and Spain) implement stringent cost-cutting measures. Time that would make it possible for the euro zone to reform its institutions and rules — and perhaps even let Greece default without having the entire euro immediately implode.

And now with the rejection of “austerity” those “stringent cost-cutting measures” are dead, replaced by the new narrative that the only way forward is Obama-like growth policies. Do they really believe it’s going to work? Or is it just another lie? The logical conclusion of Juncker’s dictum is that the bigger the hole, the bigger the lie.

We often think that politicians know when they are misleading the public and when they are not. But there’s one other possibility. They don’t know themselves what the truth is any more.  They are like a bunch of pirates who, after making the master mariner walk the plank realize they can’t read the “books of navvigashun” for the life of them. They are irretrievably lost and the only thing the pirate chieftains can do is pretend to pore over them.

The situation may be reaching the point where it has become counterproductive to listen to “the leaders” who have neither the knowledge nor skill to think or do anything definite.  Perhaps recovery — when it comes — will be the result of people just doing stuff. Creating new businesses, innovating or just adapting to changed circumstances without much reference to the Big Leaders who will continue to pretend to know everything when they know nothing. Maybe the end of Peak Government has already started. The “leaders” will pronounce more and more, and they will matter less and less.

It used to be said that generals with uniforms like doormen and countries with currencies in bombastic and fanciful colors were to be ignored. Perhaps the corollary to Juncker’s dictum is “the more they swore, the less I believed”.

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