How monetary chaos has created the perfect recipe for European civil war

what is the monetary base

It has come to this. The first finance minister of a eurozone country who dared to draw up contingency plans for a possible euro exit is under investigation for treason.

Greek prosecutors are examining criminal charges against a five-man “working group” in the Athens finance ministry for the sin of designing a “Plan B”. a parallel system of euro liquidity and bank payments that could — in extremis — lead to a return of the drachma.

It is hard to see how a monetary union held together by judicial power, coercion, and fear like this can have any future.

The criminalization of Grexit debate shuts off the option on an orderly return to the drachma even though there is a high probability — some say a certainty — that the latest EMU loan package for Greece will prove unworkable and precipitate Grexit within a year. As a matter of practical statecraft, this is sheer madness.

The ECB did in fact the pull plug — arguably violating its Treaty duty to uphold financial stability — when the Syriza government threw down the gauntlet with an anti-austerity referendum.

Pablo Iglesias, the pony-tailed leader of Spain’s Podemos movement, has drawn his own conclusions after watching the Europe’s first radical-Left government elected in modern times brought to its knees by liquidity asphyxiation.

The lesson is that if Podemos is ever elected in Spain it must expect a trial of strength and make sure that it takes power in the fullest sense. You can interpret this how you will, but there is a hint of Leninist defiance, a warning that Podemos will launch pre-emptive strikes against the entrenched positions in the media, the judiciary, the security forces, and the commanding heights of the economy.

The deeper message is that no Leftist government can pursue sovereign policies within the constraints of EMU

The fate of Syriza in Greece has clearly tainted the radical-Left brand. The EMU creditor powers have shown that if you buck the system, your country will pay a price. It is hard to explain to Spanish voters — or indeed to anybody — how Mr Tsipras could accept a package of draconian demands rejected by the Greek people in a landslide vote just a week earlier.

Podemos has lost its lead in the polls, trailing the Socialists by a wide margin. But it would be premature to conclude that this is the end of the story. The deeper message is that no Leftist government can pursue sovereign policies within the constraints of EMU.

It is hard to see how a monetary union held together by judicial power, coercion, and fear like this can have any future

Prof James Galbraith from Texas University — who played a

key role in the Greek plans — said Syriza’s experiment over the last five months has demonstrated for all to see that it is impossible for a weak state on the EMU periphery to change anything by force of argument, even if the policies of debt-deflation and fiscal overkill imposed upon them have been calamitous. Speaking to the Left, Prof Galbraith said Spanish voters should not delude themselves that they would secure better terms merely because their country is bigger. The creditors have shown themselves to be inflexibly rigid, insisting on the exact terms of their Memorandum regardless of economic science.

There would be the same sudden-stop in capital flows from EMU banks, leading to the same liquidity rationing by the ECB, the same internal bank-run, ending in the same “death spiral.”

Personally, I doubt that radicals will sweep Spain (or Portugal) in elections later this year. The country is enjoying a cyclical upswing. The worry is what will happen in the next global downturn when the Spanish people discover that they are still trapped.

Italy is another matter. There is no such mini-boom. Output is still 11 per cent below its pre-Lehman peak. Stefano Fassina, the ex-deputy finance minister in the ruling Democratic party, is already proposing a “controlled disintegration of the eurozone” to break free from Germany’s neo-liberal mercentalism. “Syriza and the Greek people have the undeniable historical merit of having ripped away the veil of Europeanist rhetoric,” he said.

Beppe Grillo, the leader of Five Star Movement, has long been equivocal about Italy’s euro membership. Disgusted by events in Greece, he has issued a full-throttle “Plan B” for a return to the lira. The lesson for Italy — he argues — is that it must take the fight pre-emptively to the creditors and force an exit from the euro on Italian terms.

Donald Tusk, the EU president, concedes that a pre-revolutionary mood is taking hold across much of Europe, comparing it to the Left-Right alliances of the late 1930s. “It was always the same game before the biggest tragedies in our European history,” he said.

Yet he could not bring himself to admit that the root cause of the populist uprising is the deformed structure of monetary union that has led to six years of mass unemployment. Nor could he admit that the deal he himself brokered after “water-boarding” Alexis Tspiras in Brussels for seventeen hours perpetuates the same vicious-cycle.

So we now have a Europe where the political temperature is rising to boiling point: where the EMU elites refuse to shift course; and where foolish lawyers are concocting criminal charges against anybody daring to explore a way out of the trap.

This is a recipe for a European civil war.


Category: Bank

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