ECB cannot have it both ways on problem of Greek debt

The Schaeuble Doctrine eschews cutting deals, but it ignores the lessons of history at its peril, writes Ray Kinsella

The preliminary skirmishes are over. The extent of the division between, on the one hand, the new Greek government seeking to renegotiate its impossible debt burden and, on the other hand, Germany and the ECB, is now evident. Greece is at the very sharp end of the eurozone’s ‘austerity’ doctrine — while Germany and the ECB are its foremost advocates.

The new Greek finance minister, Yanis Vardoulakis, met German counterpart Wolfgang Schaeuble and highlighted the scale of the problems confronting Greece’s broken-back economy — with unemployment at 25%, 50% youth unemployment and a haemorrhage of its most employable young people. He pointed out that “too much time, hopes, lives” had been wasted by Greece’s troika-imposed austerity programme. They need a write-down, not least to deliver on their commitment not to exit the eurozone.

Schaeuble rejects any writedown of the €320bn Greek debt — most of it owing to the IMF (which can do little) and the eurozone/ECB (which, were Germany supportive, could do a great deal). They might extend the maturity — broadly equivalent to staying in prison longer — but with extended recreation periods.

Schaeuble insists: “Stick to the reforms.” Vardoulakis insists that those same reforms are killing people and the economy. He says: “The eurozone made the biggest loan in history to the most insolvent of nations... with a list of reforms that was just a fig leaf.”

That, of course, is the whole narrative of the global banking crisis — creditors, driven by (in this instance) their own political agenda, screw up on risk and due diligence while the population of debtor countries, shafted by domestic political incompetence, are hung out to dry by a malignant ‘adjustment model’, spawned by the US neo-con ideology of the 1980s.

There was not even pretence of progress at the meeting of Schaeuble and Vardoulakis — not even an agreement to disagree.

The ECB, for its part, has begun to intensify the squeeze on Greece. It has attempted to justify its recent decision to discontinue accepting Greek government bonds as collateral for lending to commercial banks — thereby restricting access to funds and pushing up their cost — on the basis that Greece is not complying with the rules.

The rules, in this instance, relate to the conditionality attaching to the troika’s programme for Greece which has contributed to a debt GDP ratio of 175% and to the recent, democratically mandated, political catharsis there.

The ECB’s decision is overtly political. It is intended to put additional political, as well as funding pressures, on the Greek government as it seeks to resolve a crisis which, at heart, reflects the wider institutional deficiencies within the Eurozone itself.

It is also a disingenuous decision. The recent initiative by the ECB to engage in bond purchases in the form of its QE programme is, itself, highly problematic in terms of the ECB’S own rules. The decision was pushed through the board on the basis of a (non-binding) opinion relating to the earlier and somewhat different 2012 Outright Monetary Transactions (OMT) programme.

The reality is that these initiatives are equivalent to the monetary financing of member countries and are, therefore, contrary to the ECB’s own rules. It’s not today or yesterday that the ECB has arrogated this kind of flexibility to itself in interpreting its rules.

It may be the case that the ECB needs a broader, more flexible mandate. That, however, has yet to be agreed. In the meantime, the ECB cannot have it both ways. It cannot argue that Greece is not complying with the rules by refusing to push through an impossibly burdensome adjustment process — one which is, after all, at the very heart of the present crisis — while selectively interpreting its own rules and mandate.

It is making the already difficult position of the new Athens government even more daunting by leaning on its domestic banking system and, by extension, its economy.

The Schaeuble Doctrine eschews deals. It chooses to ignore the lesson of history, namely that putting countries under this kind of pressures ignites fires. A bit of humility never goes amiss in troubled times — especially when the doctrine of austerity (and the efforts of the ECB) has so signally failed to prevent deflation across the eurozone.

It also ignores the argument that, whatever the rights and wrongs, it is contrary to the spirit of a putative political union not to do the right thing by a peripheral economy, especially one that has contributed so much to our understanding of democracy.

The Greek government has a mandate from its own people — and wide support from across the austerity- impacted counties of the eurozone and economies now infected by deflation.

Had Germany, and the ECB, proactively dealt with the Debt Trap at the outset, there would now be no need to for the ECB to pump over €1trn into the financial system, in the form of a QE programme of dubious legality.

There has long been a compelling case for a eurozone debt conference. The alternatives look far too costly.