Sketches in European Solidarity I

 

     

What goes around comes around in Western culture.

From the darkest depths of their collective subconscious, Europeans in their moments of crisis are waking up to the fact that they actually have much more in common than they had been aware of.

Thus, after his dressing down last weekend in Riga by the Eurogroup finance ministers as “a time-waster, a gambler and an amateur,” Greek Finance Minister Yanis Varoufakis tweeted back an honor-salvaging quote from American New Deal President Roosevelt:

He may not have realized that this quote actually places him firmly in the cultural camp of his prickly German counterparts, for it is only a variant of the 1513 battle motto of German Landsknecht commander Georg von Frundsberg at the Battle of La Motta:

Viel Feind', viel Ehr' ("Much foe, much honor"),

a philosophy that also stood German Kaiser Wilhelm II and German Führer Adolf Hitler in good stead in their respective (if somewhat flawed) battles for European ‘solidarity.’ Notice that the original German also has the advantage of being much more succinct and alliterative.

The Writing on the Wall: Grexit, Graccident, Grone. Is that Greek to You?

The writing on the wall may now be in Greek (“Grexit, Graccident, Grone”), but its meaning may not have changed much from Daniel 5:25–28: מנא, מנא, תקל, ופרסין
Mene, Mene, Teqel, Upharsin

Only now have commentators and the markets woken up to the fact that a Greek default and possible exit from the Euro might really be impending. They seem to have been lulled into complacency by the conviction that the Eurozone powers that be (EC, ECB, IMF, the EZ creditor countries, revolving submissive EZ debtor governments) have always been able to pull a rabbit out of the hat at the last minute since Greece initiated the sovereign debt crisis in 2010. Yet the writing on the wall has been visible for all to see since the end of the Samaras government in Greece and its replacement by the Syriza anti-austerity coalition, that is, since February.

Thus in yesterday’s Financial Times Wolfgang Münchau proposes that Greek default necessary but Grexit is not. Münchau ruminates

[I] wonder whether one or more people on both sides of these discussions may simply be miscalculating. We may be on the verge of one of those sleepwalking moments in European history.

“Sleepwalking” will be an expression familiar to the readers of this blog.

And today’s New York Times brings us Paul Krugman’s Greece on the Brink, a remarkably conciliatory piece for Paul implying that the negotiations between the Eurogroup and Greece have really been conducted in good faith on both sides. And if only men and women of good will would sit down together over retsina, it could all be worked out to the satisfaction of both parties.

While I cannot claim to have special insight into the minds and especially the subconsciousnesses of the negotiators, I read the present situation much more direly. As I already pointed out on April 1 (no joke), I think we have long ago moved from a game of chicken (i.e., irresponsible brinksmanship) to a game of turkey (i.e., a post-mortem blame game). And that the negotiations have long since ceased to be in good faith.

So why have the parties been keeping up appearances nevertheless? Let me answer by going over the points raised in Paul’s NYT op-ed.

1. “Don’t you think they want us to fail?” Paul was asked by many Greeks during his recent trip there. Maybe the answer really is yes, and for the reason Paul also gives: as an example for other opposition parties like Podemos in Spain against bucking the austerity line. And don't underestimate how much pure pique may be driving someone like Wolfgang Schäuble, who undoubtedly resents having to deal with deja-vu 1968 leftist types like Tsipras and Varoufakis publicly flouting the Eurocratic rulebook. Maybe “they” really intend to hang Greece out to dry as a warning to other obstreperous populists. The “success” of the Eurozone in containing the Cyprus crisis by imposing currency controls (but who ever heard of a currency union with currency controls on one of its constituents?) and depositor haircuts may have emboldened some into thinking a much larger containment exercise can also be surgically performed on Greece. After Lehman Bros. one is entitled to have some doubts.

Can Greece avoid a symbolic economic hanging out to dry? (Picture: Krakow civilians publicly hung in 1942 to deter resistance. Wikimedia Commons)

2. Paul sees the main problems as mostly already solved:

By late 2014 Greece had managed to eke out a small “primary” budget surplus, with tax receipts exceeding spending, excluding interest payments. That’s all that creditors can reasonably demand, since you can’t keep squeezing blood from a stone. Meanwhile, all those wage cuts have made Greece competitive on world markets — or would make it competitive if some stability can be restored.

Despite the immense internal devaluation (wage cuts), Greek exports, unlike in Ireland, Portugal and Spain, have decidedly not increased, nor have export prices declined (see the recent paper by Daniel Gros). Contrary to what Paul claims, Greece’s international competitiveness has not been restored despite all the suffering. Thus Greece really is a special case and a mystery to even fanatical adherents of austerity and internal devaluation. At least Ireland, Portugal and Spain can claim to see some light at the end of the tunnel, especially after the ECB’s QE (“Querency Easing”) Program, which has very effectively devalued the Euro (its very thinly veiled intention). But unemployment remains so high that the incumbent governments of these states still need to fear being voted out of office.

And one can attempt to squeeze blood from stone: the creditors still insist that Greece raise its primary surplus to the previous government’s promise of 3.5% this year (original troika target 4.5%) and 5 4.5% next year. But without a restructuring of Greece’s nominal debt and export surpluses Greece remains the German government’s worst nightmare—a bailout bottomless pit.

3. One can really question whether the Greek government is also actually negotiating in good faith (I have no doubt that the creditors aren't) and not rather rolling in self-righteousness as the valiant but doomed Don Quixotes tilting against Euroausterity windmills (see my taxi driver post). Of course the "taxi driver" slander may just be the limited prejudicial stereotyping of Greeks by northern European Eurocrats whose only knowledge of the country derives from contentious taxi trips between the airport and Athens hotels (while the Greek Finance Ministry hastened to dismiss this report).

There is a pipe dream current in Brussels that Tsipras can still prove his statesmanship in a volte-face, expel the leftwing of his party, form a new government with centrists, and in an act of brutal realism accept the same bailout terms his predecessor Samaras agreed to but also could not implement, the bailout terms that got Samaras voted out of office in the first place and were the bugbear that got Tsipras where he is today. But it is hard to see how he could preserve his self-respect if he did so, let alone the respect of the Greek electorate.

Thus I think many people are clutching at straws when it comes to repressing the Greek nightmare. But I have been proven wrong before.

Let us only hope that Daniel’s reading of the writing on the wall does not turn out to be the epitaph of the Eurozone:

And this is the writing that was inscribed: mina, mina, shekel, half-mina. This is the interpretation of the matter: mina, God has numbered the days of your kingdom and brought it to an end; shekel, you have been weighed on the scales and found wanting; half-mina, your kingdom is divided and given to the Medes and Persians.

No one knows what a Grexit/Graccident would look like, but Gustave Doré’s vision seems as good as any.

 

Update April 21, 13:18: European Commission President Jean-Claude Juncker, in an interview today in Politico, “ruled out a Greek debt default or exit from the eurozone…[He] said his main reason for optimism rests less on any tangible progress than on the simple fact that the alternative is unimaginable.”

I assume that until recently he and his colleagues in Brussels would also have ruled out the possibility that a copilot employed by a leading European airline would deliberately crash his plane with 149 passengers onboard as “unimaginable.”

This Eurocratic faith in human reason is immensely reassuring and now puts to rest the budding suspicion that at least some Europeans in responsible positions might actually have acquired a taste for suicidal self-destruction or ‘Götterdämmerung’ (European privacy laws prohibit us from giving full names at this point).

Update April 22, 15:26: It looks like the ECB’s Mario Draghi has been delegated to give Greece the coup de grâce after all: “European Central Bank Squeezes Greek Banks, Tightening Access to Loans,” New York Times April 21. None of the elected officials seem to have the b***s to do it (with apologies to Angela Merkel), despite Draghi’s insistence that it was ultimately their call. It is not the first, and undoubtedly not the last time Draghi will have to do the heavy lifting in the Eurozone. And EC President Juncker, as we have seen above, is still out in “unimaginable” lala land. And you thought the 2013 Tea Party Shutdown in the US was the height of government self-destruction!

The Krugman Twin Paradox (with Apologies to Albert Einstein!)

I posted my PINE-UCM slides yesterday around noon (Central European Summer Time) based on a talk I gave the evening before to undergraduates that attempted to break a lance for the centrality of multiple coordination equilibria, nonlinear dynamics, network and complexity theory in economics and finance. This is something I have been thinking about for a long time (see my 2010 presentation at the INET Budapest ‘Alternative Macrodynamics’ conference, available as a pdf file here). And of course I don’t claim to be the first person to think along these lines.

Then I took a train to Berlin, arriving around midnight, and checked my ‘usual suspects’ websites before going to sleep. And low and behold Paul Krugman had, in the meantime, coincidentally written a blog diatribe precisely on the subject of multiple equilibria and nonlinearity, apparently triggered by recent articles by Frances Coppola and Wolfgang Münchau (only the second of which, in Monday’s Financial Times, I had already seen—and don’t forget the Umlaut in his name!).

Of course it’s facile for non-card-carrying economic kibitzers to poke fun at the academics. And while I avidly and appreciatively read Wolfgang’s comments in both the Financial Times and SpiegelOnline and subscribe to his main points about multiple equilibria and nonlinearity, he really does not give any compelling substantive arguments for his claims. Both Coppola and Münchau seem (at least to professional economists) to be indulging in just armchair hand waving, at taking cheap shots. But why Paul Krugman should be so personally piqued by this discussion is puzzling.

His argument seems to boil down to essentially two parts:

1. “Been there, done that!”

True! In spades! In fact, Paul Krugman received the Nobel Prize precisely for his work in new trade theory and new economic geography, which also uses multiple equilibria and nonlinearity as central tools (nice bifurcations there, Paul). Something that in his modesty he doesn’t even mention in his diatribe. As have many other well-known, reasonably mainstream economists, such as Diamond and Dybvig on bank runs, as he points out. In my lecture I go even further back in time to Nicholas Kaldor’s 1940 Keynesian trade cycle model, and return to the present for Paul de Grauwe’s recent work on the dynamics of the Euro crisis. No argument here.

2. “That kind of stuff is too easy and too much fun”

Whoa! Since when were “easy” and “fun” incompatible with good science and now are a mark of opprobrium? Maybe it was too easy to generate spurious chaos models in the 1980s when it became clear how trivial it was to do with simple one-dimensional nonlinear discrete-time dynamics (remember the logistic equation?). But after that fad subsided, no serious scientist had any doubts that nonlinearity was of critical importance in lots of different fields (and why should economics be an exception?). Multiple equilibria (and even more complex dynamical regimes like limit cycles, chaos, and self-organized criticality) were shown to be certainly possible and important in an increasing number of domains. And this can be hard work, both theoretically and empirically (not that this is an essential criterion), not just idle fun and games for playful graduate students. So what’s going on here to turn Krugman against his own roots and better judgment? Fear of being flakey?

This does look like something that can only be explained by his psychoanalyst (in the unlikely event that he has one). Paul goes on to describe his own intellectual development:

And in my case, at least, I ended up with the guiding principle that models with funny stuff should be invoked only when clearly necessary; you should always try for a more humdrum explanation.

Well, I have no problem with Occam’s Razor, nor does any other scientist I know. If Paul can make sense of the present crisis using a simple, one-equilibrium IS-LM model augmented with a nonlinearity at the zero lower bound of interest rates, more power to him (and his prediction that inflation would be tame there despite the monetary expansion of the central bank seems to have been entirely on the mark until now). But if everyone was always a priori allergic to “funny stuff,” we would never have gotten relativity theory, quantum mechanics, or even the heliocentric theory of the solar system. So what gives? Are we now confronted with a multiple personality Paul Krugman who rejects the excesses of his youth? Who after going into orbit in the academic, journalistic and political worlds returns to the earth and now is an intellectually different person from the scientifically progressive twin personality he left behind (in analogy to the famous Einstein twin paradox)?

     

Paste together your own Krugman Twin Paradox by inserting the two bottom pictures into the Einstein Twin Paradox template above (left: PK, exceptionally, on extreme right with an 1976 IMF delegation in Lisbon; right: PK in an interview with ABC television in 2014). Replace the word “relativity” with “macroeconomics.”

Coming up: Multiple equilibrium models—do they really make any difference at the zero lower bound, or are they just Hicksups?

It Takes Two to Tangle/Tango: Slides of My PINE-UCM Lecture

Economics students around the world have been venting frustration with the orthodox curriculum in the wake of the 2008 world economic crisis. As readers of this blog will be aware, I have considerable sympathy with their plight.
However, there has been a wealth of proposals for how to reform economics and finance in recent years, much of which has only muddied the waters and deepened the despair of both the general public and economics students alike.
At the invitation of the Pluralism in Economics group at University College Maastricht, I gave a lecture last evening that argued that understanding only two simple principles takes us a long way to understanding the complex social reality we live in.
These principles are

• It takes two to tangle (tango);
• What goes around comes around.

I’m making a revised version of my slides available for a general, non-technical audience: download here. Enjoy.
And don’t forget to attend Paul de Grauwe’s Joan Muysken Lecture on “Is the Eurocrisis over?” this coming Monday, April 20, in Maastricht!

I’ve been down so long it looks like up to me: Greece wants to know where its ‘goold’ is, and will send a taxi driver to find out

Prediction is very difficult, especially if it's about the future.

Nils Bohr

April 9 has come and grone, yet Greece managed to pay off its €458 million debt to the IMF by scrapping together the bottom-of-the-barrel cash balances of the electricity board, pensions and other government agencies, defying my recent conjecture.

Meanwhile, the groundhog day ritual between Greece and the Eurogroup of finance ministers pondering the release of the remaining €7.2 billion in overdue bailout funds continues. The Frankfurter Allgemeine Zeitung reports in its Saturday edition that (my translation)

The Greeks sent a new representative, the General Secretary of the Finance Ministry Nikos Theocharakis. He reportedly only asked again and again “like a taxi driver” about where they are hiding the money, and claimed that his country was on the verge of bankruptcy. The representatives of the creditors, however, did not share this view. They stated that Athens could still meet its international obligations even if it meant that salaries and pensions could not be fully paid. This would merely be a domestic Greek problem, the paper’s sources reported them as saying.

As anyone who has been to Athens will fondly recall, if anyone can extract billions of Euros from tight-fisted Eurozone finance ministers, it is Greek taxi drivers, who have been known to easily charge four times the regular price on the way in from the airport.

Of course I do not mean to insinuate that Greek Taxi champion Mr. Sachinidis (pictured above) would ever cheat his customers. However, his ability to extract more than five times the expected mileage from his top quality German car (the purchase of which was a major contributor to Greece’s present indebtedness, I should point out) would seem to highly recommend him to the Greek Finance Ministry as a suitable replacement for the hapless Mr. Theocharakis. If the Greeks feel that they now need to haggle like taxi drivers, at least they should send a real one!

While Greece has, to everyone’s surprise, managed to take the April 9 IMF hurdle, its troubles are only beginning, as the chart below makes clear:

Postedit April 17: I have now revised this chart by correcting some errors in the Bloomberg source using IMF data. Bloomberg left out the substantial repayments to the IMF on May 1 and 12, and used an incorrect SDR/€ conversion for the June 12 payment.

Grexit, Graccident, Grone…

Is the Eurozone sleepwalking its way to disaster, or is there method in this madness?

The Greek debt crisis was supposedly resolved, or better, postponed, for at least four months, on Feb. 20. Instead we now find ourselves this week back to square one, with the Greek government resubmitting vague and insincere “reform” plans while the “troika” (now renamed “the institutions”) still insists that the draconian austerity measures agreed with the previous Samaras government be implemented to the letter (or, as German Chancellor Merkel now allows, up to some cosmetic reshuffling that is fiscally neutral, i.e., equally contractionary). Meanwhile, the Greek government is playing the Russian card, something I facetiously recommended to it in my Feb. 15 post. This will undoubtedly endear it even more to its Western allies.

The Greek debt crisis has now been playing out for five years and things have only gone from bad to worse (with the Greek debt ratio rising from 110% to 170% and unemployment stuck at 25%). Almost all economists agree that nominal Greek debt is unsustainable (even if on a net present value calculation it may be considerably more modest), and that growth will not resume until it is convincingly restructured. No package of “structural reforms” (many of which will actually be inimical to growth, at least in the short term) is going to change this, however reasonable many of these measures may be (and at least the reasonable ones should have been implemented before Greece joined the Eurozone). Both Paul de Grauwe and Michael Pettis have recently argued that addressing such structural issues cannot in itself be a substitute for demand management and debt restructuring. A cynic might even claim that they are indeed just fig leaves for punishing internal devaluation and debt deflation.

So what is going on here? Is the Eurozone just trying to vindicate Einstein’s purported definition of stupidity as "doing the same thing over and over again and expecting different results"? Are the actors even negotiating in good faith?

While Martin Wolf in today’s Financial Times still thinks that a Graccident can be avoided, I now conjecture that both “the institutions” and “the Greek government” have already moved well beyond this point. Having previously played a game of chicken with each other (see here for a nice game-theoretic definition), they are now playing a game of turkey: both parties, having now realized that the worst-case scenario (Grexit) in which neither can back down because losing face is even more painful, is now inevitable, all they care about is shoving responsibility for the ensuing disaster onto their opponents. Germany cannot back down because loosening the “bailout” terms for Greece will only encourage populist parties in Spain (Podemos), Portugal and perhaps Ireland to agitate for the same. And the current Syriza government in Greece, in abjectly surrendering to “the institutions’” old terms as the latter still insist, would have no other honorable course than to return its mandate. But no one wants to be left holding the bag.

Already ECB President Draghi has made known that he does not want to be the odd man out responsible for Grexit by withholding refinancing from Greek banks (something he is already doing)—it has to be an elected official. But neither Merkel nor Juncker nor Dijsselbloem is willing to step up to the plate and force Greece out (thereby possibly initiating the process of Euro unraveling). It has to be a desperate Greek government itself that cuts the ties and starts printing new Drachma to keep paying salaries this month (not to mention the April 9 IMF loan repayment it can never meet without access to the last bailout tranche overdue since Feb. 28). However, if the Greek government unilaterally takes responsibility for cutting loose now, they logically should have campaigned for leaving the Euro, devaluing and defaulting from the beginning (Varoufakis’s infamous middle finger strategy) instead of promoting their illusionary platform of both staying in the Euro and ending austerity. They will be discredited with their electorate and have lost all legitimacy.

So who winds up taking responsibility and getting egg on their face is anyone’s guess. But my bet is that Greece, one way or another, will be out of the Euro by April 9: going going Grone. Kicking the bailout can down the road again with shambolic name games has simply become too ridiculous even for the well-practiced Eurozone.

Has the Greek debt crisis morphed from a game of chicken into a game of turkey?

Disagreeing to Disagree in the Greek Debt Crisis, or Redeeming Klotzky’s ‘Goold’ (Who Says History is Bunk, Part 5)

On the eve of the probably decisive meeting on whether Greece remains in the Eurozone (Grexit) some reflections seem in order on the nature of international debt negotiations. As always, some elements of complex dynamics and game theory prove useful, but most of all a study of historical analogies to the few similar historical moments of asymmetrical creditor-debtor brinkmanship again come to our aid (who says history is bunk?). The new Greek finance minister Yanis Varoufakis himself appealed to analogies with the plight of debtor Weimar Germany in the 1930s after his fruitless consultation with his German counterpart Wolfgang Schäuble, now in the enviable creditor’s seat. But I’d like to go even further back in time to the origins of the interwar debt and social crisis, the even more mistrustful negotiations in 1919 between the victorious Western allies and the new Weimar German government that had the sorry task of kitting together the shards of their country left behind by their Imperial German predecessors. We are lucky to have the testimony of an eminently astute first-hand participant/witness of these negotiations, no less than John Maynard Keynes.

The European Union was supposed to put an end to Europe’s twentieth century twin ills: territorial expansion and dysfunctional economic nationalism. They were to be replaced with an international system of the rule of law and mutually beneficial cooperation, eventually ending in some form of political and economic integration superseding the traditional boundaries of national sovereignty.

Instead we now find ourselves in a situation of deja-vu, with Russian revanchism now militarily and propagandistically dismembering the national sovereignty of a Ukraine whose national sovereignty Russia apparently never really accepted (despite the 1994 Budapest Memorandum), much like Nazi Germany’s attitude to interwar Czechoslovakia, while exploiting the disunity and weakness of the Western liberal democracies in a rerun of appeasement. And creditor and debtor nations, in the wake of a world economic crisis, are locked in an antagonistic cul-de-sac that has envisioned no other recourse than self-defeating debt-deflation resulting from austerity and the Euro/Gold Standard, much like the 1930s. All of this has been the subject of many blogs on this site over the years, and all of it seems to come to a head again every time I go to Goa on a working holiday.

With the election of the Syriza government in Greece the Eurozone, slumbering in an illusion of stability due to the willingness of the ECB to finally act as a lender-of-last-resort and implicitly mutualize Eurozone sovereign debt risk, and the stoical willingness of other peripheral countries to endure austerity and one-sided internal devaluation, has come to a critical juncture. A democratic electorate has signaled the end of its willingness to make sacrifices to the creditor countries and their banks that show little or no sign of restoring full employment and essential public services and have, predictably, made their debt load even less sustainable. Greece has always been the weakest link in the fragile structure of the Eurozone risk network, but the populist backlash has been brewing for some time in France, Italy and Spain as well. If the EZ finance ministers think they can face down Greece’s newfound obstreperousness, how will they act when they confront a Marine Le Pen as French president a few years hence?

German Finance Minister Wolfgang Schäuble (left) disagreeing to disagree with his gadfly Greek counterpart Finance Minister Yanis Varoufakis (right) Feb. 6 in Berlin. The gulf in sartorial styles is an indicative but imperfect proxy for the gulf separating creditor and debtor philosophies.

The only concession to Greece from the “troika” until now has been IMF Managing Director Christine Lagarde sporting a black leather jacket, demonstrating that at least some creditor representatives can beat Varoufakis at his own sartorial game. This strategic ploy evidently only provoked disgust from Eurogroup Finance Minister President Jeroen Dijsselbloem (far left) at the inconclusive meeting last Wednesday that did not even disagree to disagree. Dijsselbloem and Schäuble shared the Creditanstalt Mellon Memorial Prize in 2013 for the Expeditious Resolution of Banks. (Picture credit EPA)

The essence of the conflict between the new Greek government and the troika is not so much debt forgiveness or restructuring as the freedom to reduce the envisioned primary surplus from 4.5% to something like 1.5% and postpone impending repayments to the IMF and ECB. Already Greece’s debt service is only 1.5% of GDP due to extensions and lenient terms. What Greece suffers from is the miscalculation of its creditors in 2010 about the devastating effect of the imposed budget cuts and tax hikes (on the order of 20%) on the real economy and the social fabric: 25% unemployment (50% youth), termination of health insurance coverage, fire-sale privatizations… And the failure of exports to make up for the slack due to reduced public spending. Paul Krugman’s recent blog on Greece’s multiplier woes reiterates this point.

IMF projections of Greek unemployment from program implementation in 2010 (“SBA”) down to the 2013 program evaluation (“Latest”) show the extent to which the fiscal multiplier has been underestimated. (Source: IMF Country Report No. 13/156, June 2013)

The new Greek government’s bargaining position is weak. The ECB has placed limitations on its ability to issue short-term T-bonds. The final bailout tranche on Feb. 28 will not be paid without an agreement, threatening it with insolvency. Its banking system has been denied ECB rediscounting and will have to rely on Greek National Bank emergency liquidity funding, while deposits are evaporating in an incipient bank run. Time is not on its side.

Despite Varoufakis’s academic credentials in game theory, his negotiating strategy has been described by Anatole Kaletsky as ‘playing to lose’:

Varoufakis’s idea of strategy is to hold a gun to his own head, then demand a ransom for not pulling the trigger.

German and European Union policymakers are calling his bluff. As a result, the two sides have become stuck in a passive-aggressive standoff that has made serious negotiation impossible.

However, the bluff they are calling is the unraveling of the whole Eurozone should Greece exit (or be de facto expelled). While German officials have been privately mooting that firewalls are now in place, in contrast to the situation in 2010, to prevent contagion to the next weaker Eurozone members such as Portugal, who really wants to play with this potential Lehman-like fire? Thus the two parties are really locked in a game of chicken in which whoever can project the greater appearance of irrational commitment wins (paradoxically, this is where rational choice theory takes us). And Germany has an incentive to make an example of Greece to deter any other country from similarly attempting to renege on its bailout terms, even if the punishment would be punitive for everyone and Greece claims to be a unique case. Ferdinando Giugliano in the Financial Times argues that such a Carthaginian/Melian solution may be in the offing (making an analogy with the war between Athens and Melos during the Peloponnesian War):

The problem with this strategy, however, is that the other player may choose to build a reputation for toughness. This is what Athens opted for — it laid siege to the island and starved the inhabitants into submission.

However one analyzes this confrontation, it is clear that a European project that was intended to promote cooperation and mutual prosperity has degenerated into a negative sum game of brinkmanship resembling war and reparations more than peace and co-prosperity. The tragedy of the current Greek government is, as Kaletsky puts it, that

Whatever form the surrender takes, Greece will not be the only loser. Proponents of democracy and economic expansion have missed their best chance to outmaneuver Germany and end the self-destructive austerity that Germany has imposed on Europe.

 

Financial Negotiations Anno 1919

           

French Finance Minister Louis-Lucien Klotz (left) and his Premier Georges Clemenceau (right) resisted proposals to allow the defeated Germans to use their gold reserves to purchase desperately needed food imports at the 1919 conference in Spa. The French were counting on these reserves as reparations. (Picture credits Wikicommons)

John Maynard Keynes was a member of the British Treasury delegation to the Supreme Economic Council of the Allied Powers in negotiations with defeated Germany and the subsequent peace negotiations in Paris that set the stage for the turbulent interwar years. His revulsion at the dysfunctional and draconian terms of the Treaty of Versailles led him to publish The Economic Consequences of the Peace in 1919 after resigning from the British delegation. The questions attendant on transferring such large sums between debtor and creditor countries without undermining the world economy continued to influence his thought down to his work on the Bretton Woods Agreement to establish a different foundation for the post-WWII era in 1944.

While The Economic Consequences of the Peace first propelled Keynes into the public’s eye, his experiences in these negotiations found a more intimate record in his essay on the economic advisor of the German delegation with whom he soon established friendly personal ties and shared economic viewpoints, Dr. Carl Melchior, in the 1949 volume Two Memoirs, based on a talk he gave in 1921 before the Bloomsburg Memoir Club. The predicament of the defeated Germans was that after four years of naval blockade they were on the verge of starvation but faced as yet undetermined reparation demands. The new Weimar government had hardly established its legitimacy and confronted putsches from the left and the right. Its army had dissolved, its bargaining power was minimal, and its expectation of being bailed out by American loans was, as Keynes pointed out to them, illusionary since this would require a Congressional vote. Keynes then recounts the scene at the negotiations in Belgian Spa in which French objections vociferously advanced by Finance Minister Louis-Lucien Klotz against allowing Germany to use its gold reserves to purchase food imports came to a dramatic and somewhat ludicrous head:

But Klotz was not yet beaten. He still withheld the gold. The Germans should be allowed to pay in any other way, but not in gold. He had shown, he declared, a very conciliatory spirit and had made great sacrifices, but it was impossible for him to go further without compromising his country’s interests, which (puffing himself out and attempting an appearance of dignity) had been placed in his charge.

Never have I seen the equal of the onslaught with which that poor man was overwhelmed. Do you know Klotz by sight?—a short, plump, heavy-moustached Jew, well groomed, well kept, but with an unsteady, roving eye, and his shoulders a little bent in an instinctive deprecation. Lloyd George had always hated him and despised him; and now saw in a twinkling that he could kill him. Women and children were starving, he cried, and here was M. Klotz prating and prating of his ‘goold’. He lent forward and with a gesture of his hands indicated to everyone the image of a hideous Jew clutching a money bag. His eyes flashed and the words came out with a contempt so violent that he seemed almost to be spitting at him. The anti-Semitism, not far below the surface in such an assemblage as that one, was up in the heart of everyone. Everyone looked at Klotz with a momentary contempt and hatred; the poor man was bent over his seat visibly cowering. We hardly knew what Lloyd George was saying, but the words ‘goold’ and Klotz were repeated, and each time with exaggerated contempt. Then turning, he called on Clemenceau to put a stop to these obstructive tactics, otherwise, he cried, M. Klotz would rank with Lenin and Trotsky among those who had spread Bolshevism in Europe. The Prime Minister ceased. All round the room you could see each one grinning and whispering to his neighbour ‘Klotzky’.

Clemenceau did what he could to save the face of his minister, blustering for a few minutes how his country had been ruined and ravaged; what guarantees had France in return for this?—merely a few pieces of gold, a few securities, which it was now proposed to take from them. In a word, he was being asked to betray his country, and that he refused to do.

But it was really all over, Colonel House had supported the Prime Minister. So now did the Italians, The six Japs had sat, and still sat, silent, rigid and seemingly unapprehending, attendants at the drama of another planet. It was tea-time. Loucheur and I were told to go into the next room to prepare a formula, The gold was to be used after all.

“Melchior: A Defeated Enemy”, in Collected Writings of John Maynard Keynes, vol. X, pp. 422-3.

Klotz later denounced Keynes for vetoing a wartime loan to France to support the franc in a 1924 book, leading to an exchange of newspaper volleys culminating in Klotz’s characterization of Keynes’s

swollen vanity…hypertrophy of self which is akin to megalomania…It is Mr Keynes whom I accused and whom I continue to accuse. I said, and I repeat…that Mr Keynes committed towards France an acte atroce on 19 February 1919, when he assured the triumph of his monetary megalomania, which remains the true cause of the financial catastrophe which has fallen on the whole world.

Collected Writings of JMK, vol. XVI, pp. 413-4, quoted in Gilles Dostaler, 2007, Keynes and His Battles. p. 143.

Keynes for his part had been working since 1916 on a plan to cancel all inter-Allied debt “as being likely to promote the well-being of this country [GB] and the world.” Maintaining and aggravating the debt pyramid created by the war constituted a threat to the survival of capitalism (Dostaler, 143). Will the same be ultimately said of the debt pyramid created by the introduction of the Euro?

 

Lessons for Greece Today?

What are some lessons for contemporary Greece in its negotiations with the troika one can derive from the 1919 deliberations in Spa that would improve on its present losing strategy?

• Play the starvation card. It’s hard to deny international lending when women and children are starving in the streets (redundant cleaning women on 80% pay may not be enough).
• Slander you counterpart finance minister as a craven Jew obsessed with ‘goold’ (‘pound of flesh’). Better yet, get one of his allies to do it for you. This may be less effective today than in 1919, especially if he is a German Protestant in a wheelchair, but it may still be worth a try.
• Claim that denial of funding and stringent terms will open the gates to political extremism (Bolshevism and Freikorps then, neo-Nazis and populist xenophobes now).
• Point out that a Greece forced out of the Eurozone would be forced to seek funding from and align itself with Putin’s Russia. But this may be of greater concern to the US than the EU.

Clemenceau had been dissatisfied with his choice of Klotz as finance minister, reportedly complaining that he had placed in the Rue du Rivoli "the only Jew in Europe who understood nothing about money.” Klotz for his part never gave up trying to make Germany pay, down to his death in 1930 after falling into disgrace for passing bad checks.

Will German chancellor Merkel later lament that her finance minister Wolfgang Schäuble was the only schwäbische Hausfrau in Europe who understood nothing about international macroeconomics? Whose repeated insistence that “bailout agreements must always be honored” will go down in history with Klotz’s “goold?”

What will Chancellor Merkel be thinking when her finance minister Wolfgang Schäuble admits that he had no idea that his counterproductive austerity policies would lead to the breakup of the Eurozone and decades of stagnation and social unrest? (Picture credit DPA)