Jun 042012
George Soros

George Soros

It’s not often that one thinks of George Soros going viral but his speech the other day on Europe and the EU has become the talk of more than just the business community. The full speech is on Soros’ website and runs through a broad range of concepts from the scientific method to social behavior. In it, Soros argues that the European Union was designed as:

  • a fantastical object – unreal but immensely attractive
  • a product of piecemeal social engineering
  • deliberately inadequate so as to require further steps
  • When those steps didn’t happen, the bottom began to fall out
Soros gives the European Union three months to work everything out or collapse as a failed experiment. Probably an accurate a deadline as any.
If you don’t want to work through Soros’ speech, Business Insider helpfully reprints the core section which is definitely worth reading:

I contend that the European Union itself is like a bubble. In the boom phase the EU was what the psychoanalyst David Tuckett calls a “fantastic object” – unreal but immensely attractive. The EU was the embodiment of an open society –an association of nations founded on the principles of democracy, human rights, and rule of law in which no nation or nationality would have a dominant position. 

The process of integration was spearheaded by a small group of far sighted statesmen who practiced what Karl Popper called piecemeal social engineering. They recognized that perfection is unattainable; so they set limited objectives and firm timelines and then mobilized the political will for a small step forward, knowing full well that when they achieved it, its inadequacy would become apparent and require a further step. The process fed on its own success, very much like a financial bubble. That is how the Coal and Steel Community was gradually transformed into the European Union, step by step.

Germany used to be in the forefront of the effort. When the Soviet empire started to disintegrate, Germany’s leaders realized that reunification was possible only in the context of a more united Europe and they were willing to make considerable sacrifices to achieve it.  When it came to bargaining they were willing to contribute a little more and take a little less than the others, thereby facilitating agreement.  At that time, German statesmen used to assert that Germany has no independent foreign policy, only a European one.

The process culminated with the Maastricht Treaty and the introduction of the euro. It was followed by a period of stagnation which, after the crash of 2008, turned into a process of disintegration. The first step was taken by Germany when, after the bankruptcy of Lehman BrothersAngela Merkel declared that the virtual guarantee extended to other financial institutions should come from each country acting separately, not by Europe acting jointly. It took financial markets more than a year to realize the implication of that declaration, showing that they are not perfect.

In effect, Europe got a financial union without a political union and as Soros goes on to argue, the founders thought that the that “. . . when the need arose the political will could be generated to take the necessary steps towards a political union.” Obviously, it hasn’t worked out that way.

This is not a pretty picture and the next few months will be decisive not only for the EU but for nations around the globe. Spain is teetering on the brink, Greece is headed toward elections that will lead them out of the EU and into financial default or continue within it and suffer greater economic deprivation (in other words, basically the same no matter which way they vote for the person on the street). European leaders are looking at proposals for greater monetary integration but the political will may not be there. And in effect, they are still focusing on the monetary side and not the political side.

As of this morning, the markets are plunging in Asia and it will be a turbulent week in the European and U.S. financial markets.

Buckle up and hold tight.

May 072012
Pedestrians are reflected in a poster advertising the Greek national elections, on the day of voting in Athens.  -Simon Dawson/Bloomberg

Pedestrians are reflected in a poster advertising the Greek national elections, on the day of voting in Athens. -Simon Dawson/Bloomberg

The election of Socialist Party leader François Hollande and serious loses in the coalition parties (New Democracy and Pasok) in the current Greek government are sending shockwaves throughout  Europe. Whatever challenges the Euro has faced up to this point, they pale in comparison to what the future holds.

The Telegraph has a good initial take on the events:

The economic doctrine of austerity, to cut the burden of state spending to free up the economy, has ruled supreme with the support all of Europe’s leaders, the European Union and financial markets.

But political leaders were on Sunday night conceding the consensus had been shattered beyond repair.

With Europe’s economies plunging further into recession and as unemployment in the eurozone breaks record levels, voters demands for a new approach had finally become to great to ignore.

The popular backlash to EU imposed austerity to the centrist New Democracy and Socialist parties in Greece threatens the existence of the euro itself. 

Greece is potentially ungovernable as a minority government must try and pass a new raft of austerity measures next month which are a condition of an EU-IMF bailout and Greek membership of the euro.

In France, while Hollande, the Socialist President-elect is a centrist, he is sitting on a powder keg of resentment at measures that his government will have to pass if it is not spark a meltdown of financial markets.

He has refused to ratify the treaty unless the eurozone and EU also sign up to a “growth pact”.

And as a footnote, despite Chancellor’s Merkel’s popularity in Germany, it appears that her coalition government suffered a lose in the state of Schleswig-Holstein.

France may muddle through - François Mitterrand came to power in 1981 and after a brief move to the left (inviting the Communist Party into his government) was forced by pressures from the international markets and domestic politics to move to the right. But Greece is in a fundamentally different situation with a negotiated $171 billion dollar agreement with the EU that ostensibly cannot be revoked by the new post-election government.

Problem is – the current coalition parties, New Democracy and Pasok, may have received no more than 34% of the total votes and Syriza, the Coalition of the Radical Left party – which is pushing for an end to the austerity measures – may get as much as 17%. Syriza is looking to form it’s own coalition based on an end to the austerity measures and if the current coalition collapses, the shockwaves will hit the global financial markets. As the Washington Post remarked:

The vote was a stunning repudiation of the two political parties that have ruled Greece since the end of dictatorship here nearly 40 years ago. The pro-business New Democracy Party and the Socialists have traded power for decades. Now, a cacophony of new, skeptical voices will crowd the halls of parliament — including a far-right party called Golden Dawn, whose supporters celebrated Sunday night with flaming torches and the Nazi salute.

Yes, you read that right – Nazi salutes. And Golden Dawn will enter Parliament for the first time.

Members of the Greek neo-Nazi Golden Dawn Party celebrate in Thessaloniki on Sunday.

Members of the Greek neo-Nazi Golden Dawn Party celebrate in Thessaloniki on Sunday.

A scary development, but in all honesty, while the press here – elsewhere – speaks of a “downturn” or a “recession” in Greece, Spain, Portugal, etc., the unemployment numbers and business statistics indicate that this is essentially an economic depression (in Greece, unemployment has reached 21 percent and GDP has declined by 20 percent in just two years). People are tired of sacrifice that seems to only call for more of the same, and the result will be a resurgence of radical parties on both the left and the right. With all the debate about bailout packages, deadlines and who should pay, the leaders at the center of the crisis have forgotten that people need hope. The austerity measures are clearly not providing it, which will lead people into the arms of those with much more radical solutions.

Greece has reached a breaking point. And the political decisions ahead may well reverberate throughout Europe.

Feb 142012

Call this week the morning after . . . or the postpartum moment of Greece’s delivery of their little Rosemary’s Baby budget deal with the European Union. Whatever. It’s always good to step back and see the broader picture.

Here’s a quick graph that illustrates the economic challenges facing not just Greece but the European Union and the Euro zone in general. Of course, it’s more complex some snippets of data (as a quick view of Syntagma Square will reveal), but this is useful information from the Economist. Click on the Economy tab and then the Unemployment Rate, or under the Debt tab and use the Public Debt link to see some very scary numbers:

Feb 112012
Demonstrations in Athens Greece - 2-11-12

Demonstrations in Athens Greece - 2-11-12

A second day of protests in Greece as Parliament edges closer to a vote on Sunday. The Cabinet approved the agreement negotiated with the EU on Saturday.

A few MP’s have resigned in protest but it appears the majority coalition still has the votes to approve the austerity package.

Three measures are up for a vote tomorrow according to Aljazerra:

. . . . recapitalise Greek banks, an authorisation for Papademos and the finance minister to sign the eurozone bailout, and a bond swap with private creditors designed to wipe out around $131.9bn from Greece’s $461bn debt. 

But we’ve been down this road before and even if approved, this is hardly the end of the story. Ultimately, the entire bailout package could be implemented only to come unraveled with possible elections in late spring.

Feb 102012

I remember living in Paris some two decades back and my friends (and everyone they knew) in France, Italy and Greece didn’t have much good to say about the European Union. There had been protests in the 80′s as once separate political entities lurched into something approximating  a political and economic union. No one loved what was happening except perhaps those at the top (the 1%) who would benefit most from the free flow of currency and harmonization of archaic national laws and practices. The common refrain I heard: the EU is no good; but it’s surely better than more of the past. And the past in 1989 was still close enough (as it always is in Europe) with bullet holes and plaques marking the liberation of Paris from German occupation and the endless cemeteries holding the two million French (4.3% of the population) who died in World War I only twenty years before. Europe was a political swampland and a killing field in desperate need of a solution.

Fast forward to the present and the grudging optimism of this-is-the-only-doorway-with-a-future attitude is gone. Germany will happily remain in (and control) the Euro zone as long as they don’t need to bail everyone out. France, Spain, Italy are increasingly confronting their own economic woes and trying to stabilize a present that is really a previous generation’s vision of the future. Continue reading »

Jan 132012

Except for the Mediterranean countries (who ironically are doing the worst economically) this is always a bleak time of the year in Europe. January brings snow in the north, gray skies and endless drizzle in the central areas, and a shortage of daylight that is enough to send anyone into the throes of an Existentialist depression. After a year of living in France, I thought the Paris spring fell woefully short of what its reputation promised; it was beautiful, joyful, romantic, largely because the winter had been so gray, so somber, so lacking in passion.

And now debt talks break down in Greece and Standard and Poor’s has added to the season’s woes, downgrading the credit ratings of nine countries and in particular, pulling France and Austria’s triple A rating. Only Germany was left standing intact. For now.

From Reuters:

Today’s rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone,” the U.S.-based ratings agency said in a statement.

In a potentially more ominous setback, negotiations on a debt swap by private creditors seen as crucial to avert a Greek default that would rock Europe and the world economy broke up without agreement in Athens, although officials said more talks are likely next week. . . .

S&P cut the ratings of Italy, Spain, Portugal and Cyprus by two notches and the standings of France, Austria, Malta, Slovakia and Slovenia by one notch each.

The move puts highly indebted Italy on the same BBB+ level as Kazakhstan and pushes Portugal into junk status.

The larger picture looks bleak and one has to wonder if the formation of the EU and the euro zone was an answer to a problem (the European economies of the 50′s and 60′s) that we no longer have. 2012 will a year in which they move closer together or go their separate ways. A real European spring, if you will.

Jan 102012

A sad story from BBC News – mothers abandoning their children in Greece due to the financial crisis. In the past children went to foster care mostly due to drug or alcohol abuse; now it is due to parents unable to find work. One mother’s account:

“Every night I cry alone at home, but what can I do? It hurt my heart, but I didn’t have a choice,” she says.

She spent her days looking for work, sometimes well into the evening and that often meant leaving eight-year-old Anastasia alone for hours at a time. The two of them lived on food handouts from the church. Maria lost 25kg.

In the end she decided to put Anastasia into foster care with a charity called SOS Children’s Villages.

“I can suffer through it but why should she have to?” she asks.

She now has a job in a cafe, but makes just 20 euros (£16) a day. She sees Anastasia about once a month, and hopes to take her back when her economic situation improves – but when that might be she has no idea.

Greece’s woefully inefficient economy and tax evasion practices that amount to a national pastime are indefensible. But at the moment, Greece would run a budget surplus if it were not for the interest payments on the debt. And the future? It depends entirely on interest rates which, in turn, depend on the perception of lenders.

With all the discussion in the media over the euro zone – see the articles this morning in the Wall Street Journal (paywall), or yesterday from Reuters - the International Monetary Fund (IMF), European Central Bank (ECB), austerity measures and private sector involvement (PSI), not covered is the impact on families and especially, the children. And with Greece possibly spending bailout money on military purchases, there’s more than enough blame to go around for this mess.

Sep 222011

A small Sicilian island with a difficult history – a maritime base from the Phoenicians on through the the Roman Empire, eventually abandoned due to piracy, not resettled until the 1700′s, tried to develop as a tourist destination in the 20th Century only to become a way station for refugees  - Lampedusa is now a major focal point of the immigration issue between Africa and Europe. Thousands have made their way here including some 26,000 Tunisians and 28,000 others (many from Libya), only to be turned back or held in cramped detention centers. The frustration boiled over yesterday with demonstrations by Tunisian refugees and counter-attacks by Italian riot police. Local residents have also lashed out and the Mayor, Bernardino De Rubeis, who keeps a baseball bat in his office was quoted as saying:

We’re at war, people have decided to take justice into their own hands.

The video of police beating demonstrators and forcing them over a 13 ft wall while some residents throw stones at them is not a pretty one, but beatings will do little to solve the problem. It might help if the country had a full-time Prime Minister who was interested in governing instead of bedding young women, but that’s another story (or, perhaps not). Ultimately, it’s Europe’s problem but conveniently left in the hands of the countries that serve as a border crossings into the EU.

Sep 192011
euro and Greek drachma

Euro and Greek Drachma

The Guardian headlines the current crisis in Greece as “The future of  Greece rests on a phone call.” Actually, it will take a lot more than a few conference calls to resolve a crisis of a country on a financial precipice. Moreover, the recent election in Berlin sent shock waves through the Merkel Center-Right government as it is the sixth straight regional coalition defeat in a row.

But this paragraph sums up the dire straights the country is in:

The authoritative Sunday Vima, citing an internal government email, said the country’s international creditors had not only demanded that 100,000 public sector workers be laid off by 2015 but also that the pensions of farmers, sailors and employees with the telecommunication organisation OTE be cut immediately. Around 50,000 state employees would have to be placed on reduced pay in a special labour reserve immediately. With the atmosphere becoming ever more explosive, such measures would almost certainly exacerbate social unrest.

With every new crisis, it would seem that a full default – and pullout from the single currency region – is the only option. In the end, it simply becomes a less painful option for Greece, though how the write-off of a massive amount of debt would impact the rest of the EU (especially Spain, Portugal and Italy) remains to be seen. The question is who among the many players forces the hand? The international creditors, German voters, or people on the streets in Athens? Maybe I’m being pessimistic, but it’s hard to see the current situation of limping from month to month continuing past the end of the year.

Jul 052011

“Regretfully, we are bankrupt” Prime Minister Charilaos Trikoupis, in an announcement to the Greek Parliament, 10 December 1893

Yes, it’s happened before, under equally complicated circumstances, but let’s focus on the present . . . Now that the austerity package worth some 28 billion has passed the Greek parliament, the news is still very bleak for Greece (raising the potential for a broader financial crisis in the euro zone). Here are some of the obstacles that could have this whole thing unravel:

Political cartoon of Trikoupis despairing, National History Museum, Athens

Credit: National History Museum, Athens

  • Greece has promised to sell off 50 billion in public assets in four years. It’s unclear if they can raise that amount and how much public opposition there will be to the sales. Jean-Claude Juncker, PM of Luxembourg, favorably compared the process to the privatization of East Germany’s economy over a four year period which saw the sale of 14,000 companies (and we should point out, the loss of 2.5 million jobs). Of course, as a Reuters article notes, there are vast differences between the two situations, but the German agency overseeing the process ended up with $170 billion in debt instead of returning $900 billion in anticipated profits.
  • Also from Reuters, Standard & Poor will “. . . treat a French bank plan for a rollover of privately-held debt as a default.” This will probably be resolved, but it shows that the resolution of the crisis involves more than just the EU, Greece and the people on the streets.
  • The strong opposition to the bailout in Germany may take a new turn as a constitutional court case gets underway. The plaintiffs are arguing that the bailout agreement violates German constitutional provisions regarding property and democracy. About the only argument the Merkel Government has is that “. . . the stability of the euro is of paramount significance”.  However, Presiding Judge Andreas Vosskuhle announced today that “Europe’s future and the right economic strategy to tackle the sovereign debt crisis isn’t debated in Karlsruhe . . . That’s the task of politicians, not of judges. But the Federal Constitutional Court must consider the limits that the constitution sets the political realm.”
  • Finally, the Greek unemployment rate is already over 16% and over 40% for those 18 – 24. With the number of unemployed expected to increase one can see where the aganaktismenoi, or “Indignants”, as the opposition movement is calling itself, has little investment in a future controlled by bankers in Brussels and elsewhere.

In other words, the vote last week “kicked the can down the road” but hardly resolved the challenges. Indeed, as Kevin Gallagher argues in the Guardian today, there is no agreed upon global mechanism for resolving a debt crisis like the one facing Greece. The EU is in reactive mode and it is unclear how it will proceed given the financial and constitutional issues that stand in the way. And of course, the latest data from the Athens News after last week’s protests reveals another cost hidden in the current situation – 8,000 hotel booking cancellations in Athens in a span of five days. Perhaps minor in the larger scheme of things (though surely not for the hotel owners and employees) but not if the crisis continues. Which it surely will.

Addendum: And the news this afternoon is that Portugal’s debt has been downgraded to junk status. Not a complete surprise, but the markets will now start looking for weakness in Spain and elsewhere.

Jun 162011

Anyone following the international news will know that the situation is very tense in Greece. Massive demonstrations yesterday (some of the most violent so far) with the government attempting to pass austerity measures amounting to 28 billion euros ($40.5billion) in cuts and privatization to gain access to additional EU and IMF assistance. And now the Prime Minister, George Papandreou, who may face a revolt in his own socialist Pasok party, has reshuffled the cabinet and agreed to hold elections next year. Markets (and the euro) plunged yesterday and it looks dire.

Demonstrators in Syntagma square and elsewhere in Greece are following on continuing protests in Spain (where protesters in Barcelona blocked access to the Parliament building), drawing upon many of the same symbols and organizing tactics (especially Facebook). I haven’t heard from my friends in Greece – and alert me if good videos surface.