How Papandreou Could Have Avoided the Merkozy Diktat

The Greek crisis firmly invited itself to the the G-20 in Cannes. It revealed to its full extent the arrogance of the couple Merkel-Sarkozy. From Monday, October 31th to Friday, November 4th, the hubris of the Chancellor and of the President will have displayed themselves to their full extent. The cause? The project, now abandoned, of a referendum advanced by Prime Minister Papandreou. Yet his initial decision could seem sensible for someone who, while endorsing a profoundly reactionary politic, must yet face incessant attacks coming from the conservative forces in his country. This decision could even have had the claim of being democratic: given the vastness and harshness of the measures decided upon, nothing made more sense than to ask the opinion of the people.

But there was precisely the rub. In Europe such as we know it, there can be no way asking the people to intervene, except for applauding decisions taken. One is reminded of the stage directions in the opera Boris Godunov: "The people stand, remaining silent."

The fury of the Merkel-Sarkozy tandem was manifest and nothing was done to hide it. The chief of the executive of a sovereign nation was called up under humiliating conditions and given a dressing down, Greece was threatened with the worst of evils. At the end, pressures were added onto pressures to have the referendum called off, which was done on Friday Nov. 4th. Still, nobody gave credit to George Papandreou for having acted like a loyal partner, an exemplary "europeist" - that is, a partisan of the institutions of the European Union and of the eurozone.

Let's imagine that the Prime Minister had had in mind the interests of his own country instead of those of the eurozone, which after all should be considered normal for a head of government, and even the least one should expect. He could not have ignored the fact that there exists no legal procedure to expulse a country from the eurozone. This has been stated time and again by those in charge of the judicial departments of the Brussels Commission. Therefore, George Papandreou could very well have taken the decision to temporarily requisition the Central Bank of Greece (for a period of one year) and to have it emit an amount of 360 billion euros (the amount of the Greek public debt) worth of advances to the Public Treasury, at an interest rate of 0.5%.
With this money he could then have bought up the debt held by Greek and non-resident creditors. The burden of the interest payments on this debt - which represents as of now some 7.5% of the GDP - could so be brought down down to 0.75%, thus contributing to a substantial decrease of the budgetary deficit. Further advances could have been granted later on, in order do build a "kitty" for the Budget, to which the government could have had recourse to face up to the deficits which would have to be endured until 2015-2016. Freed in so doing from the burden of the accumulated debt, the government could have dedicated itself to the unescapable structural reforms, yet without having to try to return immediately and at all cost to a balanced budget, which would have permitted to soften the murderous austerity measures imposed today on the population.

Voices will be raised immediately, saying that such a measure would be inflationary. But, compared to the 9,200 billion euros of GDP of the eurozone (in 2010), this direct monetary creation of 360 billions would have weighed in at a mere 3.9%. This amount is so negligible that the inflationary effect would have been near zero.

It will be said too that such a measure is contrary in its spririt to the dispositions of the treaty of Maastricht on the economic and monetary union. It contravenes especially to the statutes ruling the network of central banks around the European Central Bank. This is doubtlessly true. But what could the other countries in the euro zone do?

  • decide to cancel the aid to Greece? But with such a currency creation, Greece would no longer be in need of it.
  • exclude Greece from the eurozone? This is legally impossible.
  • decree an embargo on Greek products? Besides the fact that its commerce with the eurozone represents only 35% of the total of its external exchanges, Greece could then attack the other states before the Court of Justice of Luxembourg, with a good chance of winning...

In fact, such measures would put the German government in front of the wall. If it were consequent with itself, and keen on respecting the decisions of the Constitutional Court at Karlsruhe, it would itself leave the eurozone. Then, freed of Germany (as well, probably, as of Austria and Finland), the eurozone could reorganize itself in a more rational manner.

Moreover, without the weight of Germany, the euro would depreciate by ca 20%, whereas the newly reintroduced mark would tend to appreciate by 15% to 20%. The difference in the exchange rate could reach 33% (if calculated from the new value of the recovered mark) or 50%, if calculated from the value of the maintained euro. This difference would be more than sufficient for the commercial excedents of Germany (which are realized up to 60% in the eurozone) to melt like snow in the sun, and we would return to the situation of 2000/2001. One would then discover that Germany entertains in fact a commercial deficit in its exchanges with the emerging countries.

Otherwise, if the economic price of an exit from the euro appeared to high to Germany to pay, it could take the decision to remain in the eurozone nevertheless, at the cost of a constitutional amendment. But then, it would find itself in agreement with Greece, and we can bet that other countries would soon imitate the example of Athens. More and more, we would arrive to an equivalent of the "quantitave softening" which the Federal Reserve of the United States has achieved. It would be effected not by the BCE, but by the central banks of each country.

The inflationist push would in reality be quite low. The total amount of emission has been estimated by the president of the European Commission, M. Barroso himself, to 2,200 billion euros, which is a little bit less than a quarter of the annual GDP of the zone. It is on a scale with the "quantitative softenings" put in place by the Federal Reserve of the US. Such an injection of liquidities into economies which are stagnant, if not even in recession, would not have the inflationist effects that it would otherwise have, if the totality of the capacities of production were at work.

The euro would depreciate in relation to the dollar, returning to an exchange rate of 1 euro for 1.15 or 1.20 dollars. This would bring a salvatory adduction of oxygen to the countries of Southern Europe but also to France, where all econometric studies, beginning with those of the national INSEE, show the destructive effects of the present surevaluation of the euro. There would then remain to be drawn the institutional lessons from these practices by modifying the statues of the European Central Bank.

George Papandreou did nothing of all this. He even took great care not to threaten with it in any way. He has so shown himwelf to be a worthy and loyal representative of a europeist party, the PASOK, a member of the Socialist International. In doing so, he let run away a good opportunity for his country, but he has also chosen the existing European institutions against the economies and the peoples of Europe. The infernal couple Merkel-Sarkozy should have thanked him for it! One might ask oneself, though, if in other countries, such an idea might not be making its way...

Jacques Sapir
translated by Anne-Marie de Grazia
November 7, 2011

Jacques Sapir (b. 1954); French economist, director of studies at Ecole des Hautes Etudes en Sciences Sociales (EHESS), Paris, head of CEMI-EHESS (Centre d'Etude des Modes d'Industrialisation). Expert on Russia and on military affairs.