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Should Greece present the ECB with an ultimatum, will the ECB and the Commission take it lying down?

No, they will probably refuse. That's why this recommendation would have been impossible half a year ago: Back then, it still looked like the costs to Greece of leaving the € were larger than the costs of playing ball with the deficit errorists. But unless things begin changing posthaste, leaving the € will be preferable to continuing to appease the deficit errorists.

Is there no punitive countermeasure they can resort to?

They have a variety of creative ways to screw Greece over. They can refuse to carry Greek bonds, thus leaving Greece at the mercy of the markets. But if Greece quits the €, Greece can tell the markets to go and commit unnatural acts with farm animals. They can refuse to release EU funds for Greece (which is a net recipient). They can sue Greece in the European courts (but that takes years and years). Greece will lose prestige, standing and political capital in Bruxelles (but political capital only matters if you have an actual policy to push in the first place...). And a variety of other innovative forms of mean-spiritedness.

But the point of the Greek situation is that, short of sending a naval task force or ejecting you from the EU altogether and putting up punitive tariffs, they can't do anything worse to you than they already are doing with this Austerity^TM crap. Having your back firmly pressed against the wall is enormously liberating in terms of policy options.

Now, it's important to note that leaving the € won't make the pain go away completely. Following a default, it will take a year or two before Greece is able to borrow at anything resembling reasonable rates in the international money markets. What leaving the € will do for Greece is restore Greek government control of the domestic money markets. That means that domestic Greek economic activity can be funded at reasonable interest rates, but hard currency will have to be rationed, presumably by explicit import quotas and capital controls, as well as activist ForEx policies to rapidly build foreign currency reserves.

The question you should be asking yourselves is whether the inability to import Siemens and Samsung for the next two years is better or worse than Austerity^TM.

Isn't this really an extortion by the ECB/EC?

"Extortion" is such a crude word. I believe that the internationally recognised term is "foreign policy."

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Feb 18th, 2011 at 09:28:14 AM EST
[ Parent ]

Followup diary to your The "Euro Crisis" - Both more and less than meets the eye? That was just three months ago, not six... The rot is accelerating...

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Carrie (migeru at eurotrib dot com) on Fri Feb 18th, 2011 at 10:27:18 AM EST
[ Parent ]

And is leaving the Euro a good idea even as a threat. Michael Hudson warned against it some weeks ago:

For a left government leaving the euro would be a major strategic error. The new currency would be devalued as that is, after all, the desired objective. But that would immediately open up a space, which the financial markets would immediately use to begin a speculative offensive. It would trigger a cycle of devaluation, inflation and austerity. On top of that, the debt, which until that point had been denominated in euros or in dollars would suddenly increase as a result of this devaluation. Every left government which decided to take measures in favour of the working class would certainly be put under enormous pressure by international capitalism. But from a tactical point of view it would be better in this test of strength to use membership in the euro zone as a source of conflict.

The road of excess leads to the palace of wisdom - William Blake

by talos (mihalis at gmail dot com) on Fri Feb 18th, 2011 at 04:42:09 AM EST
[ Parent ]

But that would immediately open up a space, which the financial markets would immediately use to begin a speculative offensive.

Then you cut their balls off, by identifying the aggressive market participants and cutting off their Greek credit lines. You can't short a currency without access to its domestic credit market. And the Greek government controls access to the Greek credit market.

The Commission will scream bloody murder, and the banksters will sue in the European courts. But by the time the case reaches the last judge, everybody will have forgotten about it.

It would trigger a cycle of devaluation,

A real risk.

inflation

Potentially. Beats austerity.

and austerity

Nothing short of a foreign naval task force in Aegean can force the Greek government to engage in austerity policies if they don't want to. They may have to live with a patch of inflation. But that still beats austerity.

On top of that, the debt, which until that point had been denominated in euros or in dollars would suddenly increase as a result of this devaluation.

Convert the debt at some more or less fictional official exchange rate when you do the currency swap. The bits you haven't defaulted on explicitly, that is. Nothing short of a naval task force in the Aegean can force Greek residents to repay debts that the Greek government is unwilling to enforce.

Every left government which decided to take measures in favour of the working class would certainly be put under enormous pressure by international capitalism.

So you cut the banksters' balls off. Capital controls, bank confiscations, confiscatory taxes on wealth, unilateral repatriation of Swiss and Cayman Islands bank accounts. And all the other little dirty tricks that aren't used in polite company, but which a country with nothing to lose can indulge in to its heart's content.

The point here is that Greece is being pillaged and burned. And not even necessarily in that order. You have options other countries don't, because all the bad things that will or might happen if you leave the € are still less bad than what the IMF is doing to you as we speak.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Feb 18th, 2011 at 09:42:40 AM EST
[ Parent ]

Re: Draft LTE (4.00 / 4)

Don't talk about "leaving the Euro" - talk about "instituting capital controls and issuing scrip as in the Wörgl experiment" until such time as the ECB starts doing its job.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Carrie (migeru at eurotrib dot com) on Fri Feb 18th, 2011 at 04:51:46 AM EST
[ Parent ]

That was six months ago.

If policy does not change, leaving the € altogether will be the superior alternative for Greece. They have nothing to gain by beating around the bush about this. Six months ago, it looked like the € might still, overall and in the long view, be a good idea for Greece. Back then, circumspection was indicated.

And six months ago, you could have made the case for the Greeks to be circumspect out of a sense of European solidarity. But enough is enough. If the creditor nations want to play every country for itself, then the debtor nations can only continue to take the high road for so long.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Feb 18th, 2011 at 09:48:42 AM EST
[ Parent ]

Re: Draft LTE (4.00 / 3)

A sad end for the European dream.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Carrie (migeru at eurotrib dot com) on Fri Feb 18th, 2011 at 10:21:22 AM EST
[ Parent ]

At least it stands to die not with a bang, but with a whimper. Considering that the number of fatalities from the last time Europe went "bang" are counted in nine figures, I think we should be grateful for small favours.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Feb 18th, 2011 at 12:19:01 PM EST
[ Parent ]

The problem is that the idea with the EU is to prevent further bangs. The end of the EU is not itself a bang. It is what comes after that might be, as it where, bang-inducing.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Fri Feb 18th, 2011 at 07:27:45 PM EST
[ Parent ]

ATinNM:

I think the Internet's ability to increase global frustration by informing people what is available, and what they do not have, is underrated.

you can definitely make that point, but how else can a head of steam big enough to change anything fundamental build up?

history shows the printing press and its effects on peoples' desire to overthrow oppression, the internet can do orders of magnitude more, it's barely begun.

maybe frustration is just the beginning of empowerment, certainly it beats apathy and ignorance, which have been the meat and potatoes of european public economic/political awareness since? WW2?

i had never connected the dots before, but the wave of rage and yearning in these latest uprisings in n. africa and the middle east may well be the thread that will unravel the plunderers' plans to keep milking us europeans all'americana, captured governments, finance 'riding bareback', institutionalised ponzi pyramids et al.

certainly any major interruption/price rise of the oil supply will accelerate the pace of change, hopefully educating many hitherto untroubled by serious crises, just how we are all in similar -if not identical- lifeboats.

frustration is the first twitch in the moribund, learned-helpless, shock-doctrined populace. even as we are introduced to the sting of the IMF lash here, we can relate better to what is happening in the arab world, whose corruption has much -if not all- connection to our greedy meddling and peddling too long.

we are fortunate indeed that the mass of the arab street is not directly blaming us for their plight, and hope this continues, it seems like only the rabid irani theocrats have a hate-on for the west, and that's not even their people, the other maghreb and ME countries want to join with our youth and have a life not that different than the youth here or anywhere else they can have a FB page and chat away...

the internet makes it all seem so tantalisingly just out of reach, it must be infuriating.

as we see...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Fri Feb 18th, 2011 at 03:19:26 PM EST
[ Parent ]

I see above however that some have said that moving to a new currency will improve the Greek import-export dynamic. Every country is different however, and Greece doesn't have much in the way of manufacturing. A new currency might improve the level of its valuations in the future, but two of Greece's biggest industries are tourism and shipping. In both, you have external euros coming into the country. one might argue that two of Greece's economic brightpoints are actually forms of export (inasmuch as Greek tourist goods are sold to tourists from other countries) and also a service industry (shipping) that deals almost exclusively with foreign clients. Presumably, there may be a way to keep the level of Greek tourist prices what they are, but I don't see how you can do it without artificial controls. Also note that though the Greek tourism industry can surely improve and become more efficient, the switch to the Euro (and the rise in tourism prices which is undeniable) did not decrease the numbers of tourists to Greece. In the last decade, tourism increased year over year until the crisis.

Finally, about reducing Greek debt to the level that it was prior to the crisis, it's important to remember that creditors fled Greece when it's level of debt to GDP was at 110%. It had been at 95-105% for at least a decade if not more. So, presumably, a reduction to that level would not improve things as far as credit goes because those levels are the levels which spooked the credit markets in the first place (after several hedge funds made huge short bets against the country).

Finally, it may be that Greek banks are repatriating Greek debt by having the ECB back them in their purchases of Greek bonds, thereby paying off outside creditors while the EU and Greek banks take on more EU debt. In other words, the longer these austerity measures continue, then we come to the point when the totality of the debt has moved from private hands to EU taxpayers and Greek banks.

by Upstate NY on Fri Feb 18th, 2011 at 11:29:58 AM EST
[ Parent ]

Finally, it may be that Greek banks are repatriating Greek debt by having the ECB back them in their purchases of Greek bonds, thereby paying off outside creditors while the EU and Greek banks take on more EU debt. In other words, the longer these austerity measures continue, then we come to the point when the totality of the debt has moved from private hands to EU taxpayers and Greek banks.

I could live with that. Then all you have to do is shaft the Greek banks and the ECB, which is if nothing else politically easier than shafting German pension funds.

But unless the ECB is moving massively in this market, it's mostly cosmetic anyway, because these buybacks will be matched by Greek interbank debt to the rest of the €-zone. So shafting the Greek banks will still shaft the creditor countries.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Feb 18th, 2011 at 12:24:57 PM EST
[ Parent ]

But unless the ECB is moving massively in this market, it's mostly cosmetic anyway

We know the ECB has bought under 80bn of Euro sovereign debt. That's no more than 1/3 of Greece's outstanding debt.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Carrie (migeru at eurotrib dot com) on Fri Feb 18th, 2011 at 01:49:40 PM EST
[ Parent ]

Somehow the IMF should be mentioned, too -- after all, the ECB is hiding behind international 'consensus' when pursuing this policy as part of the troika.

_{*Lunatic*, n.

One whose delusions are out of fashion.}

by DoDo on Fri Feb 18th, 2011 at 08:37:44 AM EST
[ Parent ]

The IMF is irrelevant to this discussion. Bringing in the IMF in the first place is yet another charge to be laid at the feet of the ECB, but this letter isn't about laying charges at the feet of the ECB. It's about power, not justice, at this point. And the IMF can't do anything to Greece that the ECB and Commission can't do worse.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Feb 18th, 2011 at 09:53:38 AM EST
[ Parent ]

!? in Greece, currently they are doing it with the IMF as nominally equal partner in a troika.

_{*Lunatic*, n.

One whose delusions are out of fashion.}

by DoDo on Fri Feb 18th, 2011 at 02:22:46 PM EST
[ Parent ]

The IMF was, reportedly, the sane partner in the negotiations. Plus, there is no reason whatsoever (other than ECB insanity) for the IMF to lend to a country in its own currency - the IMF is there to provide access to hard international currency.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Carrie (migeru at eurotrib dot com) on Fri Feb 18th, 2011 at 02:34:48 PM EST
[ Parent ]

That's what I think an LTE should indicate, after all, the public row involved Mr. Thomsen of the IMF, not Trichet or his minions.

_{*Lunatic*, n.

One whose delusions are out of fashion.}

by DoDo on Sat Feb 19th, 2011 at 04:37:04 AM EST
[ Parent ]

Re: Draft LTE (4.00 / 3)

Actually Mr. Servaas Deroose of the EC was equally blunt. It's just that Thomsen was the most vocal. It might be because they put him out front so that the IMF catches most of the grief in these press conferences.

The road of excess leads to the palace of wisdom - William Blake

by talos (mihalis at gmail dot com) on Sat Feb 19th, 2011 at 05:02:27 AM EST
[ Parent ]

From the link:

"The purported statements of the European Commission representative in Sunday newspapers are at the very least off target, and certainly inaccurate," Papaconstantinou said in a press statement midday Sunday.
The three international lenders--the IMF, EU and ECB commonly know as the "troika" in Greece--held a very controversial press conference Friday. It was their third review of the debt-laden Mediterranean state's progress on austerity, fiscal consolidation and economic restructuring reforms. And while they approved the fourth EUR15 billion aid tranche, they also ratcheted up expectations on reforms.
...Greek Prime Minister George Papandreou midday Saturday called the head of the IMF, Dominique Strauss-Kahn, and Olli Rehn, the European Commissioner for economic and monetary affairs, to complain about the tone of Friday's joint press conference of the international lenders of last resort. Papandreou also criticized the statements as "unacceptable." Other government ministers have talked about a breach of the country's sovereignty and underlined the cabinet only takes orders from the Greek people.

That's now even worse: both the IMF and the Commission catching the fire before the ECB.

_{*Lunatic*, n.

One whose delusions are out of fashion.}

by DoDo on Sat Feb 19th, 2011 at 06:28:31 AM EST
[ Parent ]

Re: (none / 0)

Well, he complained to the EC not the ECB. My omission. From the linked article:

Greek Prime Minister George Papandreou midday Saturday called the head of the IMF, Dominique Strauss-Kahn, and Olli Rehn, the European Commissioner for economic and monetary affairs, to complain about the tone of Friday's joint press conference of the international lenders of last resort

The road of excess leads to the palace of wisdom - William Blake

by talos (mihalis at gmail dot com) on Sat Feb 19th, 2011 at 06:28:52 AM EST
[ Parent ]

Re: (none / 0)

(Editorial note: I probably deleted and re-posted my comment with the extended quote before you got to post the above reply with the same quote.)

_{*Lunatic*, n.

One whose delusions are out of fashion.}

by DoDo on Sat Feb 19th, 2011 at 06:48:46 AM EST
[ Parent ]

Yes. Well the ECB representative was more constrained last Saturday in his statements, mainly because he was talking about the banking sector.

The road of excess leads to the palace of wisdom - William Blake

by talos (mihalis at gmail dot com) on Sat Feb 19th, 2011 at 06:30:41 AM EST
[ Parent ]

Strike "ECB" in the draft, replace with "troika."

In practise, it's going to be the ECB, but DoDo is right about the rhetorical points.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Feb 19th, 2011 at 06:32:47 AM EST
[ Parent ]

The IMF is there because the ECB wants the political air cover. The IMF has no stick that can hurt Greece remotely as bad as the stick the ECB has.

If you're willing to present ultimata to the ECB, you're past the point where that sort of political theatre matters very much.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Feb 18th, 2011 at 02:42:36 PM EST
[ Parent ]

You are attacking the ECB on the occasion of a public row between the government of Greece and IMF representatives. So what you say in the first paragraph would better be there so that readers of the LTE not reading ET will get the apparent shift of target.

_{*Lunatic*, n.

One whose delusions are out of fashion.}

by DoDo on Sat Feb 19th, 2011 at 04:29:27 AM EST
[ Parent ]

The Brussels Consensus and the ECB have done this all by themselves. The IMF and the Washington Consensus are the story of 15 years ago...

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Carrie (migeru at eurotrib dot com) on Fri Feb 18th, 2011 at 10:23:26 AM EST
[ Parent ]