It took German Chancellor Angela Merkel two long years to visit President Obama. She eventually arrived at the White House this June. After considerable pomp and ceremony, the two leaders sat down at the Oval Office for two hours to discuss the most pressing world affairs. After the meeting, their press secretaries surprised people by saying the leaders of the West’s two most powerful nations had spent one hour and forty-five minutes on Greece (with the remaining fifteen minutes spent debating intervention in Libya).
Only once before has Greece managed such prominence in the minds of the Western elites. The month was December 1944; the occasion was the eruption of the Greek Civil War; and its significance was that it constituted the beginning of the Cold War, the Truman Doctrine, and all that flowed from it. Could the Greek debt crisis be for the post-2008 world what the Greek Civil War was to the postwar era? Perhaps. But if so, the reason will not be Greece’s debt — indeed it will not be anyone’s debt.
Before examining the true origins of the crisis, it would be helpful to examine a more recent official visitation. On September 18, 2011, US Treasury Secretary Tim Geithner dropped in on European finance ministers’ regular gathering to share some thoughts on how the bewildering euro crisis could be ended. Quite astonishingly, Geithner’s sensible advice was rejected unceremoniously — the Treasury Secretary received the diplomatic equivalent of his marching orders.
The Austrian finance minister, Maria Fikter, presumably summing up the predominant feeling among Europe’s powers, declared her puzzlement that “even though the Americans have significantly worse fundamental data than the Eurozone… they tell us what we should do and when we make a suggestion… they say no straight away.”
This statement reveals the deep ignorance in which European leaders are veiled. When they refer, for instance, to “fundamental data” comparatively worse in the United States, they are referring to the Eurozone’s lower debt-to-GDP ratio. They believe that Europe’s problem is a debt crisis which, courtesy of being less severe than the United States’s, is unlikely to be cured by the remedies purveyed by a visiting US secretary.
Tragically, the euro crisis is as much of a debt crisis as the pain caused by a malignant tumor is a pain crisis. It is my contention that Europe’s unraveling catastrophe is due to its leaders’ grand failure to grasp the essence of the crisis they are trying, unsuccessfully, to face down. And as if this were not troubling enough, theirs is a keenly motivated grand failure.
The Minotaur in the Room
With the sound of crashing markets and the roar of burgeoning uncertainty reverberating in our ears, it is time to take pause to ask a simple question: why is the global economy finding it so hard to regain its poise after the 2008 crash?
In my recent book, The Global Minotaur, I argue that in 2008 the world lost a Global Surplus Recycling Mechanism (GSRM) that was keeping it in the precarious equilibrium that US Federal Reserve Chairman Ben Bernanke had mistaken for some “Great Moderation,” and which had caused UK Prime Minister Gordon Brown to think, calamitously, that the era of boom-and-bust had ended.
Grasping how this GSRM worked and why it perished is a prerequisite for coming to terms with our current global predicament — which, in turn, is key to understanding why Greece has become so prominent in the headlines.
Sustainable growth in a capitalist economy is a rare blessing that is predicated on the successful recycling of surpluses. Every nation, every trading bloc, every continent, indeed the global economy itself, is made up of deficit and surplus regions.
California, Greater London, New South Wales, and Germany will always be in surplus vis-à-vis Arizona, the North of England, Tasmania, and Portugal, respectively. Given this chronic chasm, which market forces can never obliterate, the deficit regions are unable to maintain demand for the goods and services of the surplus producers. Thus, without surplus recycling, stagnation beckons for surplus and deficit regions alike.
Surplus recycling is commonplace at the national level. In the United States, for example, military procurement often comes with the precondition that new production facilities are built in depressed states; the Australian welfare state ensures that Western Australian and New South Welsh surpluses end up propping up demand for their goods and services in Tasmania. However, at the global level the issue of surplus recycling becomes more pressing and harder to institute.
The postwar era was remarkable in that two GSRMs saw to it that the world economy achieved unprecedented growth. The first GSRM lasted from the late 1940s to the early 1970s. The United States exited the war with enormous surpluses, which it quickly sought to recycle to the rest of the Western world in a multitude of ways (the Marshall Plan, wide-ranging support for Japanese industry, endless backing of the European integration project, and so on), effectively functioning as a GSRM itself.
Alas, this first postwar GSRM broke down, predictably, when US surpluses turned into deficits toward the end of the 1960s. The loss of that meticulously planned GSRM threw the world into the 1970s crises which did not subside until a new — most peculiar — GSRM was put in place, again courtesy of the United States.
This time the nation absorbed the surpluses of the rest of the world, running ever increasing trade and government deficits. Those deficits were, in turn, financed by capital flowing into Wall Street, as the rest of the world recycled its profits by investing them in the United States.
Ancient myth has it that pre-classical Athenians maintained, in the name of peace and prosperity, a steady flow of tributes to the Cretan Minotaur. From 1980 onwards, the “rest of the world” sent a tsunami of capital to Wall Street to finance what I call a “global Minotaur” — a GSRM that served to pull the world economy onto higher growth planes, giving the semblance of some “Great Moderation.”
The world witnessed the most intense and profligate financialization possible, built upon the Minotaur-induced mass capital flows into Wall Street. Wall Street, the City of London, and a host of international banks indulged in printing voluminous quantities of private, toxic money. When these paper pyramids combusted and burned down, the global Minotaur was mortally wounded — and the US deficits’ capacity to recycle the world’s surpluses disappeared.
Since then, the best paid plans of Central Banks, G20 nations, or the IMF have failed to restore the rude energy of the wounded beast. Without a functioning GSRM, the crisis that started in 2008 will continue to migrate across continents and sectors, regularly threatening us with imminent collapse.
The Euro as the Minotaur’s Simulacrum
The euro was put together under the assumption that the global Minotaur would remain in rude health ad infinitum. Less allegorically, Germany came to believe that the Eurozone could operate like a Greater Germany built upon the twin postwar pillars of German prosperity: a hard currency (the Deutschmark cum euro) and aggressive trade surpluses to be absorbed voraciously by the United States, which in turn would finance its trade deficits courtesy of the capital that flowed from the rest of the world (including from Germany) to Wall Street.
While the Eurozone was formed under those assumptions, the euro’s formation engendered deepening stagnation in Europe’s deficit countries, including France. It also enabled Germany and the surplus Eurozone nations to achieve exceptional surpluses that quickly found their way to Wall Street. They became the financial means by which German corporations internationalized their activities in the United States, China, and Eastern Europe.
Thus Germany and the other surplus countries became the global Minotaur’s European opposite: its simulacrum. As the Minotaur was creating demand for the rest of the world, the simulacrum was draining the rest of Europe of it. It maintained Germany’s global dynamism by exporting stagnation into its own European backyard. So when the crisis hit, the European periphery was ripe for the fall.
First as History then as Farce: Europe’s Bank Bailouts
When the GFC shook the world in 2008, Wall Street and the City of London collapsed. Washington and London immediately sought to recapitalize the banks. By means ill and fair they dipped into taxpayers’ pockets and cranked up the central banks’ printing presses to ensure that the banks did not become black holes, as Japan’s had in the 1990s. In Europe, nothing of the sort happened.
Despite European gloating that the crash of 2008 was an Anglo-Celtic crisis, and that the continent’s own banks had not been taken over by financialization’s equivalent of a gold fever, the truth soon came out. German banks were caught with an average leverage ratio of €52 borrowed to every €1 of own funds; a ratio worse even than that raked up by Wall Street or London’s City. Even the most conservative and stolid state banks, the Landesbanken, proved bottomless pits for the German taxpayer.
Similarly, France’s banks were forced to admit to having at least €33 invested in US-sourced toxic derivatives. To this sad sum, we must add the European banks’ exposure to the indebted Eurozone states Greece, Ireland, Portugal, Spain, Italy, and Belgium (€849 .); to Eastern Europe (more than €150); to Latin America (more than €300); and around €70 of bad Icelandic debts.
Between 2008 and 2009, the European Central Banks and the member-states socialized the banks’ losses and turned them into public debt. And yet, unlike their US or British counterparts, they failed to plug enough capital into Europe’s banks to stop them from being insolvent after the loss of their assets’ values. Instead they kept them on a drip feed (connected to the ECB) that kept the ATMs working without dealing with the root problem of Europe’s public sector: its fundamental insolvency.
Interestingly, bankers did not mind. If their banks had been recapitalized by the European taxpayer, the bankers’ own control would have been diluted. Instead they found other ways of profiting while their banks were… bankrupt.
In early 2009, hedge funds and banks alike had an epiphany: why not use some of the public money they were given and bet that the strain on public finances (caused by the recession on the one hand, which depressed the governments’ tax take, and the huge increase in public debt on the other, for which they were themselves responsible) would sooner or later cause one or more of the Eurozone’s states to default?
The more they thought, the gladder they became. The fact that euro membership prevented the most heavily indebted countries (Greece et al.) from devaluing their currencies — thus feeling more the brunt of the combination of debt and recession — focused the bankers’ sights upon these countries. They started betting, small amounts initially, that the weakest link in that chain, Greece, would default.
At the same time, they hedged their bets (that is, they also bet that the default would not come because Europe would not dare let one of its member-states declare bankruptcy). In addition, the bankers used the bonds (the IOUs) of countries like Greece as collateral to borrow from each other to place more of these bets. In short, every euro of Greek debt spawned countless euros of French and German bank bets and even more debts that one European bank owed to another.
Essentially, the European variant of the bank bailout gave the financial sector the opportunity to mint private money all over again. Once more, just like the private money created by Wall Street before 2008, it was unsustainable and bound to turn into thin ash. The onward march of the new private money was to lead, with mathematical precision, to another meltdown. This time it was the public (also known as sovereign) debt crisis whose first stirrings occurred at the beginning of 2010 in Athens, Greece.
The Trouble with Greece
Greece was bearing a large public debt-to-GDP ratio well before the crash. Nevertheless, while its GDP was growing healthily (between 4 percent and 5 percent for more than a decade), it was finding it spectacularly easy to borrow cheaply from international funds replete with the private money printed by the global financial sector.
Once the pyramids of private money had turned into ashes and the global recession annulled Greek growth, it was only a matter of time before a run on Greek bonds would occur. It started in late 2009 and gathered cruel pace in 2010.
Once a run on the bonds of a Eurozone member-state begins, with no possibility of shock-absorbing devaluation, the country in question becomes insolvent; unable to refinance its public debt. And when its Eurozone partners offer it a lifeline in the form of expensive new loans on condition of GDP-crippling austerity, a wholesale depression is added to the state’s insolvency.
At that point it is game over for the poor country in question. Moreover, the domino effect begins as one failed member-state leans upon the next marginal state, which then stumbles on the next, and so on.
At some point, this sequential tumbling will force Europe’s elites to let the ugly truth come to light about its banking sector’s sorry state. Since there is only so much good money that can be thrown after bad to keep buying time, and given that there is a limit to how much depression the peoples of the indebted Eurozone can bear, the moment will come when the most indebted state — Greece, in other words — will have to be allowed to declare bankruptcy.
However, given the mountains of derivative debts and bets that have been built upon the comparatively small Greek debts by bankers in Europe and elsewhere, a Greek default on its debts will cause these mountain ranges to subside, giving rise to a new 2008 — hence Chancellor Merkel and President Obama’s long chat about little, otherwise insignificant, Greece.
Technically speaking, fixing the euro crisis is a relatively simple matter. If this is correct — and given that a Greek state bankruptcy will be Europe’s Lehman moment — why is Germany resisting all rational approaches to resolving the crisis? The answer is, unfortunately, straightforward: to save the euro we need to implement policies that will make it economically impossible for Germany to exit the Eurozone.
Even though Germany does not wish to exit presently, it knows that its “option to exit” (which as the main surplus country of the common currency area it possesses uniquely) guarantees it the exorbitant privilege of enormous hegemonic power within the zone. Thus Merkel does not feel she has the authority, or legitimacy, to renounce Germany’s immense powers, fearing also that such a move would bring her government crashing down. And so the dithering continues.
While the world is laboring without the Global Surplus Recycling that it was used to under the global Minotaur, when one hears that Germany is planning for a Greek exit from the Eurozone, even for a Greek default, one ought immediately to suspect that Germany is planning a controlled disintegration of the Eurozone.
One ought also to fear that such a move will only manage to achieve an uncontrolled disintegration whose end result will be massive recession in the European north, a gargantuan stagflation in the European periphery, and the descent of the global economy into a postmodern 1930s. Europe has managed twice in the last hundred years to drag the rest of the world down with it. It is about to do it again, with Greece as a convenient scapegoat.