A Giant Game of Chicken in the Eurozone

As financial operatives and politicians play games to protect their interests, the future of ordinary Europeans is held hostage.

February 27, 2012 |

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The Europeans evidently thrive on instability and the ongoing threat of systemic risk. There is nothing else to explain the renewed hardline stance adopted by both Mario Draghi of the ECB and the German government on fiscal policy, just as the markets appeared to be calming down again.

In response to the question as to whether Greece was a “one-off”, or a deal which would presage similar claims on the part of the other Mediterranean debtor nations, there has been a growing prevailing belief that either the terms demanded of Greece would be so punitive (“pour decourager les autres”) or that, if Greece were to default, a sufficiently large firewall would be constructed by the Troika to ensure that the contagion wouldn’t extend to other countries. This is what Greek economist Yanis Varoufakis has called “cauterize and print”:

"Germany’s belated epiphany is that, without a major redesign of the euro architecture, a number (>1) of eurozone member states are irretrievably insolvent. As for the two strategic choices, the first is Berlin’s conclusion that German politics have no stomach for, or interest in, a structural redesign of the euro system.[2] The second choice involves a massive bet in attempting to save the eurozone by shrinking it forcefully while, at the same time, authorising the ECB to print trillions of euros to cauterise the stumps left when the states earmarked for the chop are severed."

Well, the 2nd leg of that strategy seems to be falling apart, even as Greece is slowly being severed from the euro zone (because let’s be honest: Greece has insincerely accepted yet more impossible conditions for implementing another unworkable fiscal adjustment plan, which suggests that both sides are simply playing for yet more time).

In the meantime, the UK’s Daily Telegraph has reported that Germany's ruling parties are to introduce a resolution in parliament blocking any further boost to the EU’s bail-out machinery, vastly complicating Greece’s rescue package and risking a major clash with the International Monetary Fund. According to Ambrose Evans-Pritchard:

“'European solidarity is not an end in itself and should not be a one-way street. Germany’s engagement has reached it limits,' said the text, drafted by Chancellor Angela Merkel’s Christian Democrats and Free Democrat (FDP) allies.

“'Germany itself faces strict austerity to comply with the national debt brake,”'said the declaration, which will go to the Bundestag next week. Lawmakers said there is no scope to boost the EU’s 'firewall' to €750bn, either by increasing the new European Stability Mechanism (ESM) or by running it together with the old bail-out fund (EFSF)."

In one sense, the sentiment behind the draft is right. European solidarity should not be a one-way street. But that’s exactly the nub of the issue: As with all of the “rescue plans” introduced thus far, the latest does not allow the Greek government to help its people cushion the blow from 5 years of depression, but simply provides a mechanism to bail out banks and bondholders. Invoking Aesop’s famous fable about the ants and the grasshoppers, Yanis Varoufakis describes the crux of the problem:

“The problem (for those seeking to understand a Crisis) with attractive allegories is that the latter can be as much of a help as a hindrance. In this post I wish to argue that Aesop’s timeless tale, however appropriate it may seem at first glance, contributes more to Europe’s current problems than to their solution. My reason is simple: The ants and the grasshoppers are to be found in both Greece and in Germany, in the Netherlands and in Portugal, in Austria as well as in neighbouring Italy. But when we assume that all the ants are in the north and all the grasshoppers in the south, the remedies we introduce are toxic.

Yes, it is true, the Crisis has placed a disproportionate share of the burden on the back of Europe’s ants. Only Europe’s ants are not exclusively German or Dutch or Austrian; and nor are the grasshoppers exclusively Greek, Iberian or Sicilian. Some ants are German and some are Greek. What unites Europe’s ants, north and south, east and west, is that they struggled to make ends meet during the good times and they are struggling even more now during the bad times. Meanwhile, the grasshoppers, both in the north and in the south of Europe, lived the good life before the Crisis and are doing fairly well now, keen as always to privatise the gains and distribute the pain (to the ants).”

That message evidently has not got through to either the Merkel government or the Bundesbank. The proposed draft of Merkel’s government is a political response to mounting German frustration at the current direction of European Union economic policy. There is, however, no corresponding appreciation that her coalition is fomenting this very anger through the ongoing perpetuation of a failed fiscal policy response which, as Varoufakis notes, continues to rewards lazy grasshoppers in both Germany and the south, whilst making all of Europe’s ants work harder and harder for less and less. It is perfectly understandable as to why ordinary German citizens, as well as those in other parts of the EU, should question why all of their hard work is not translating into a better life, when “their money” is actually going down a sinkhole to fund insolvent countries given no means of growing themselves out of debt trap dynamics.

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