John Grahl (Professor of European Integration at Middlesex University) spoke to Martin Thomas.
What is likely to come out of the 28 June EU summit?
There is not likely to be much movement. There may be some acceptance of moving towards a banking union. It would isolate the problem of instability and possible insolvency of banks from the financial problems of the member states. Whether Germany is prepared to move fast on that, I don’t know, but it seems to be what the European Commission and some of the member states will be pushing for.
Even if the summit decides for a banking union, the timescale for setting that up is much longer than the timescale of the crisis?
On the basis of an agreement in principle to go for a banking union, it might be necessary to increase the room for manoeuvre for the European Central Bank or at least the stability funds. If the eurozone can say it is going for a general regime of centralised recapitalisation of banks that are in trouble, it could start doing some of it now. Or a reasonably solid commitment to a banking-union agreement might change market sentiment. Suppose you had a two-year horizon, then even an insolvent bank that could secure funding for two years would be secure against speculation.
There may be other moves at the summit — something towards eurobonds and mutualisation of some of the government debt — but resistance to those seems stronger than to a banking union. Anything worthy of the name of fiscal union is beyond the horizon at present.
But the period of apparent success for the EU’s band-aid measures is becoming shorter and shorter...
Spain can’t manage with an obligation to offer 6% interest when its government borrows, though the time horizon of its debt also matters, and there isn’t an immediate emergency there. The talk was before the Greek election that the Greek government would need money quite soon, but presumably that money will now be found. But it’s true: the inadequacy of the measures is revealed at a more and more rapid rate.
It looks as if the leading EU governments still think that they can hold firm and get through without a crash.
How would a break happen? The most concrete thinking I’ve seen on that is from John Dizard in the Financial Times (18 June). He says that a member state could invoke Article 65, which appears to give scope for capital controls. Other states would be reluctant to see that, especially if it was one of the “good pupils” doing it. There might be an attempt to refinance such a government rather than see it introduce capital controls. I don’t know how that would be done, but Angela Merkel has changed her mind in the past.
The real imponderables are political, not financial. It’s a question of how much will there is to keep the show on the road. I suspect there is probably still a strong will in Germany to save the eurozone.
The FT has reported an estimate of the immediate, first-order costs of a break-up of the eurozone, which would be 10 to 13% of output for countries across the EU.
You could certainly rescue Greece, Ireland, Portugal, Spain, and Italy for a lot less than 10% of eurozone output. It struck me before the last Greek election that it would cost the EU states more money to crush the Greeks than to assist them. The losses on a comprehensive Greek default would be large, and you’d have to add the firewall that would have to be put in place hurriedly, using lots and lots of cash, to stop a snowballing collapse.
What’s your opinion of Syriza’s programme?
I very much hoped that Syriza would win on 17 June and that the Greeks would fight openly for an abrogation of the bailout terms. I can understand why Greeks voted otherwise, because they saw a danger of isolation.
Syriza was going to suspend some aspects of the bailout agreement. Some of the draconian cuts were going to be suspended or reversed. I don’t know whether they were going to try to keep servicing the debt.
The primary deficit of Greece [the shortfall of government income from government spending, excluding debt payments] does not look that terrifying. It’s maybe two or three per cent of GDP, and in an emergency any government can find 2% of GDP, especially if it has popular support. A special wealth tax would be the best way, but there are others.
The real danger would, perhaps, not be the government becoming unable to finance its current expenditure, but a banking collapse — that a Syriza government would face comprehensive banking failure because nobody would deposit with or lend money to the Greek banking system.
Of course, Syriza is an alliance of disparate forces. The people I know in Syriza mainly have a background from the Communist Party (Interior). But Syriza includes other forces, some of them, probably, more combative than Synaspismos.
One analyst has said that the European Central Bank would respond to a Syriza government by cutting Greece off from the Target 2 payment system, with the effect that euros inside Greece would become invalid for payments outside Greece.
Yes. That more or less coincides with what John Dizard has written in the Financial Times. You would have euros trapped in the Greek banking system, which could be used only for transactions within Greece with someone else who also has a Greek bank account.
It would be a sort of dual currency system; but you could have an objective, or a programme, for restoring the connection.
Cutting off Greece from the euro payments system would require a high-profile political decision by the European Central Bank, which is supposed to be independent of all politics. Given the will and the organisation, there would be large scope for a campaign to stop the cutting-off.
One of my worries about Syriza is that there wasn’t much solidarity forthcoming. Governments in a similar position were saying that they would never do what Syriza proposed. If the four or five countries involved in the sovereign debt crisis articulated some common positions, that would strengthen their position. But Syriza is still a force. I’ll bet that the new Greek government will be glad it’s there and constitutes the only alternative. The Greek government can say to the EU leaders: if we fall, this is what you face...
The theory was that the European Central Bank would keep in the background — regulate inflation, and that was all. Here it is already involved in high-profile political decisions, and potentially involved in more. Some mainstream writers have said that this shows that the model of an “independent” central bank has failed.
The European model of an “independent” central bank has failed; but it is a very extreme model. Everywhere else you have only operational independence. With the Bank of England, a simple piece of legislation, or an Order in Council even, could change its mandate overnight in an emergency. In the United States, the status of the central bank has not been changed in recent decades.
The notion that you can assign monetary policy to the single target of stabilising the price level is discredited. There have to be other objectives. And the model of “absolute” independence of a central bank which you have in Europe has also failed. It has allowed political leaders to evade their responsibilities for three years now.
What do you think is driving Angela Merkel’s policy?
In the background is a big change in the attitude of German corporations to economic and social development in their home country. As they became highly globalised, Germany ceased to be so important to them as a market and more important simply as a cost. The constant pressures from the largest corporations for cost containment condition the German political class.
That fact may help to explain the otherwise surprising compression of wage costs which took place in Germany in the first decade of this century.
I find it much more difficult to assess the political calculations. Some people invoke the relative failure of integration of the two Germanies. Jürgen Habermas has invoked the same sort of scandal as we’ve had here in Britain in relations between the media and the political class. Habermas argues that German political culture has become “Berlusconified”.
Yet if what emerges from the crisis is a very small eurozone — say, Germany, Austria, Finland, Netherlands, Slovenia, Slovakia — then they are looking at a 30 to 35% appreciation in their currency. For the corporations there would be a huge cost escalation, and strong contractionary forces would be released in the German economy.
Another aspect is historical. Think back to the break-up of the European Monetary System in 1992-3. The German government squeezed harder and longer against inflation which never reached 5% than Paul Volcker in the USA had against inflation which was verging on 20%, ten years previously.
They said to their partners in the European Monetary System that they would cut interest rates provided that the others devalued. That wrecked the chosen strategies of their partners, who were trying to use the Deutschmark link to bring down inflation. I found that episode hard to understand in terms of rational interests. The previous case is described in the autobiography of the former president of the Bundesbank, Otmar Emminger, D-Mark, Dollar, Währungskrisen. He tells the story, with pride, of a meeting between himself, [then German Chancellor] Helmut Schmidt, and [then Federal Reserve president] Paul Volcker in the autumn of 1979.
The dollar was dropping like a stone. Volcker was travelling back from an IMF. He stopped off in Germany and asked for support from the Bundesbank for the dollar. They turned him down flat. Emminger says that he insisted that Volcker had to get the money supply under control. He quotes with pride Volcker saying as he left: “You’re right. The decisive factor is the money stock”.
Emminger reports this as a triumph. But that was the Germans helping to precipitate the worst crisis there has been in the post-war economy [Volcker pushed interest rates high in an effort similar to the “monetarist” binge under Thatcher in Britain at the time, and real US GDP in 1983 Q1 was still lower than in 1980 Q1].