Monday, January 14, 2013
The Advent of Berlin (Part 2 of 2)
by Vasilis Viliardos
Mercantilism was ultimately rejected by the liberal and British Adam Smith, who also refused to wade into monetary policy – believing that products, people and institutions constitute the foundations, on which general well-being can be built on peacefully, and under conditions of freedom and democracy.However, many economists believed that mercantilism, in some cases, is not erroneous.
The most important among them was J.M. Keynes, who incorporated some elements of mercantilism in his theory – stating that the money supply, the foreign trade balance and prime interest rates are very important for an economy (believes that where later used to set the grounds for modern monetarism).
Adam Smith rejected the sole focus on production mercantilists thought to be the key – believing that consumption is the only way to develop an economy. In contrast, Keynes considered both the production and the consumption as being equally important for economic growth – recognizing also, that... at the then modern times, the pursuit to increase reserves in precious (noble) metals was a reasonable goal.
His ideas were based on the fact that, before the introduction of paper money (1973), an increase in gold reserves was the only way to increase money supply – with the help of which productive investments and consumption could be reinforced (today, an increase in money supply is achieved by simply «printing» more paper money – either by the central or commercial banks).
Now, because the U.S. in the early 1930’s withdrew their money from abroad, due to the great recession it faced at that time, while many countries-debtors were unable to pay off their obligations (over-indebted economies) (something similar is happening with Germany and the South today), Keynes realized the importance of the balance of trade deficit.
He also understood that, when all the over-indebted countries try to increase their exports, while minimizing at the same time their imports, to be able to pay off their debts, as well as to enhance their internal labor market (similar to what is happening today, at least to some extent), Germany would not be able to achieve a surplus balance, so that it could pay off its obligations (reparations of World War I).
So he tried to convince the lenders of Germany to scale down their demands (claims), to avoid the creation of explosive conditions in Europe – unfortunately without success, resulting in the rise of Nazism through the Weimar Republic and ultimately to the initiation of the Second World War (a fact that Germany does not seem to understand today, planning in creating indebted colonies, in which it wants to establish cheap labor industries that offer unbeatable costs compared to that of Asia – with an apparently Utopian goal, to first dominate the EU, and then the whole world).
So, in contrary to Adam Smith’s free market theory (laissez-faire), Keynes, because of the then global crisis, brought back to the forefront the mercantilistic idea of government intervention on the economy – which later led to the «new deal» policy in the US by President Roosevelt (massive employment boost by means of the state), a policy adopted by many other countries up until the 1970.
The similarities now between Keynesianism and the theories that «emulate» it, as well as the precedent mercantilism, led follows of them to be called «neo-mercantilists» – while other economic systems, that incorporate some mercantilistic attributes, such as the highly protective economic system of Japan (less that of Germany), are called neo-mercantilistic.
To conclude, it was during the period of mercantilism that most of today’s economic institutions were created – such as stock exchanges, modern banking systems and insurance organizations. In general terms, «mercantilists» were mainly either businessmen or government officials – in no case works.
From the very beginning of the crisis, everyone has been making references to the viability or not of Greece’s current debt levels – while at the same time any efforts to limit or/and pay it off gradually are hampered, although «inhuman» austerity programs and over-taxations are being enforced (economic genocide).
At the same time, propaganda, both within the country and abroad, literally thrives – targeting to manipulate the masses and in victimizing them, so that they will continue accepting without protests the looting of private and public property, the abolition of their basic rights, impoverishment etc.
As part of this propaganda, even lists of potential tax evaders (real or fictitious) are used, so that Greek and global media can seize the opportunity and accuse Greece’s citizens, as well as its politicians, as sole perpetrators of the country’s bankruptcy – even though it is neither the first nor the last country affected by corruption and/or that has faced difficulties in debt payoffs (with Germany of course being also among these countries). Especially when it happens under circumstances of a global financial crisis, with asymmetries both in Europe and worldwide, resulting in major geopolitical upheavals.
Regardless of the above, after the criminal PSI came into effect, Greece’s public debt was limited by 106 Billion Euros. As a result, the country’s total public debt was reduced to 262 Billion Euros from 368 Billion Euros in 2011 – to which, if we add the deficit of 2012, amounting approximately to 13 Billion Euros (as indicated in the government budget), the public debt in 2012 would normally be 275 Billion Euros (and not 343 Billion Euros as reported, with the arbitrary addition of aid to banks, funds etc. which paradoxically do not «pass» through the deficit).
Now, the solution available to Greece’s government, if it had the ability to negotiate properly, and if it truly wanted to make the country’s debt sustainable, without waiting for a divine miracle to happen (through the policy of subordination to the German chancellor), is to demand for the following:
(a) The time extension for the repayment of the 275 Billion Euros of public debt, with amortization installments equal in size to the country’s budget surpluses, so that its debt can actually be payed off – at least with respect to the loans of the EU, as well as those of the ECB and the IMF, which haven’t undergone any write-offs.
(b) An interest rate slightly above the ECB’s basic rate, since normally it should not be possible for European «partners» to speculate through loans to their peers. In the case of Greece and for about 175 Billion Euros of the agreed on loans from the EU, the IMF and the ECB (individuals cannot be forced into yet another loss), if the country was to be charged with 1% interest rate, rather than 5%, the budget savings would be around 7 Billion Euros – while it would be burdened with an annual interest charge of 1.75 Billion Euros to its European peers, the IMF and the ECB, as well as with 4.25 Billion Euros to individuals (a total of 6 Billion Euros, compared to 13 Billion Euros today – in which case Greece’s deficit levels would be within 3%).
(c) The write-off of that amount from the ECB, for which it has not paid via buying government bonds from the secondary market. This amount is to be around 20 Billion Euros, since it bought 50 Billion Euros in Greek bonds, reduced by 60% in value on average (30 Billion Euros). If that was to happen, both the interest and the amortization payments would be reduced accordingly.
(d) Recapitalization of banks by the ESM (as already planned for Spain, Ireland etc.), so as to avoid a further increase in Greece’s public debt – provided of course that the banks will have to pay back the amount within 5 years, in order to avoid their de-hellenization (a feasible plan, if public confidence is reinstated and the country’s citizens restore their deposits – of around 100 Billion Euros).
If the Greek government can negotiate properly all of the above (German repayment of past obligations remain a standard requirement), then Greece’s debt will become sustainable, limited to 255 Billion Euros or at 131% of GDP (if the GDP is to fall further to 195 Billion Euros). At the same time, however, budget deficits will almost reach zero, so that the debt can be serviceable – a state that will allow confidence to be restored, deposit repatriation, optimism, investments to take place, consumption increases etc.
As a result, the GDP will start growing again, gradually limiting the percentage of debt to GDP – while at same time government revenues will climb, slowly allowing Greece’s living standards to be restored.
If now Greece’s government fails to negotiate this solution, even though what it would be asking for is honest, feasible and reasonable, then it should have at least refused the «dose of shame» (the 2013 loan package now in effect) – choosing a direct halt of payments within the Euro-zone (nobody can actually expel Greece without its own will), since it is completely dishonest and unworthy for someone to borrow money, knowing in advance that there is no possibility for repayment.
The impact of such a decision would of course be the immediate need for Greece to survive on its own, relying solely on its own strength and without any borrowing – something that is highly possible, considering the limited primary deficits of the country. There will be of course significant difficulties, the banks perhaps may need to be nationalized, it is likely for certain public debt payments to be serviced with promissory notes (like in the case of California) and several other, but these will not be the end of the world for Greece – especially if public confidence in the state is restored and proper preparations are made.
Now Greece should avoid any further borrowing, accepting the risk of a possible default – a condition that is in any way not avoidable, if of course the country does not agree in becoming a German protectorate.
In any case, it is better for the country to suspend payments to creditors today (although it would have been preferable to have chosen to do so in 2010), no matter how distressful the consequences might be, rather than postponing it further – which would eventually drive it into bankruptcy, but like a «juiced out» lemon cup (that is, completely looted, impoverished and with degraded citizens).
What anyone should calmly consider, both the supporters of the Troika policies, as well as the critics of it, is whether Greece is currently in a better position compared to 2008 or compared to the year of the invasion of the IMF and Germany to the country. If correct steps had been made, no matter how painful, and even under the policy of austerity, citizens should have had voted «positively» – without any hesitation. Yet, as data reveal, no correct steps had been made (with the IMF and Germany both failing to succeed in their «plan», yet media only seems to be blaming Greece for the negative outcomes).
In this context, Greece’s public debt in 2008 was 262 Billion Euros or 113% of GDP – while its budget deficit did not exceed 5%, with public and private property being completely intact, standards of living under normal conditions, and with viable banks, pensions, wages etc.
Today, both the business environment or the competitiveness of the country’s economy, and the rule of law, were and are in the same situation – meaning that they haven’t in any way improved, despite the rapid decline in consumption and GDP, the dramatic increase in unemployment, poverty, crime levels etc. At the same time, the drop in the GDP by as much as 40 Billion Euros (mainly because of the austerity policy), has reduced government revenues by 10 Billion Euros, equal in value to the additional property taxes imposed (and with a projected income from state owned business privatizations calculated only at 13 Billion Euros).
So today, after a devastating recession, after the loss of Greece’s national independence, as well as after a 106 Billion Euros debt write-off which humiliated the country worldwide, destroying at the same time its banks and welfare funds, the public debt of Greece is placed (arbitrarily) at 345 Billion Euros or 175% of its GDP – and there seems to be no prospect for the future.
At the same time, scandalous frauds take place at a large scale, the Greek stock market has collapsed, the real estate market as well, the profitable state owned utilities are scheduled to be privatized at a minimum price, banks have gone bankrupt, small businesses are closing down one by one, young Greeks migrate, Greece has completely lost its dignity, as well as so much more, painful enough for someone not to be able to mention all this without feeling any grief.
Finally, I must remind that freedom needs virtue and boldness – as well as painful sacrifices, if a nation wishes to maintain its national independence, pride and dignity. And this must be understood by Greece, as much as by Spain, Portugal, Cyprus, Italy, Ireland, France and even England. Because the «European Dream», a dream of real unity, cannot hold true, if its nations are not willing to fight for their freedom, since the European Union should not be a union of submission, but a union of mutual prosperity.
Back to: The Advent of Berlin – Part 1 of 2