Huffpost WorldPost
Michael Brenner Headshot

Gaming Europe's Financial Crisis

Posted: Updated:

The chronicle of Europe's financial crisis has two themes. For the cognoscenti, it is the technocratic cum political challenge of managing a globalized financial network of great complexity by overmatched public authorities in Bruxelles, Frankfurt, and Berlin. The other is a morality play wherein the fiscally virtuous are endangered by the profligate ways of slack Mediterraneans who evade the required discipline to correct their wayward conduct. This latter is favored by politicians and publics in the North who relish the sense of moral superiority provided by pointing fingers at their supposedly self-indulgent neighbors. The two attitudes converge in their shared distain for the allegedly lazy, inefficient workforces of Portugal, Spain, Italy and Greece -- spoiled by pandering politicians -- that are bringing the Euro to grief. To this group of truant Southerners are added the Irish and Icelanders as "honorary" members of the stigmatized fraternity.

Yet there is dimension at the very root of the crisis that is slighted -- when mentioned at all. It is the financial institutions whose reckless practices are the main cause of the banking failures, depressed economies and monetary imbalances. The pursued quick profits with the same buccaneering spirit and no-holds-barred methods as their American counterparts and models. Regulations were seen as suggestions as they brazenly turned their financial clout into political power.Their sway in all decision-making centers has skewed responses to the crises in directions that favor their interests while promoting failed strategies

The indictment of the 'poor' by the 'rich' as bearers of the plague has an uncanny resemblance to what passes for mainstream thinking in the United States. Well, it should -- for the analysis is framed by the same self-serving economic elites, grounded in the same "flat-earth" economic models, and backed by the same constellation of powerful intellectual and monetary interests as has controlled the response to the great financial collapse of 2008 in America. The European situation is further exacerbated by the hovering presence of historical memories among still nominally sovereign states whose Union is far from complete and certainly imperfect. Therefore, the stakes are higher and the implications from imposing draconian policies on vulnerable peoples are capable of producing mischief on a profoundly greater scale.

Let's begin by taking a look at the factual foundations of the case against the Southerners. The indictment is built on a foundation of mistruths and distortions. Here are some inconvenient numbers. Spain, Portugal, Italy, Ireland -- and, yes, Greece -- all had lower levels of state expenditure relative to GDP than Germany before the crisis. Spain, for example, was running budget surpluses until 2008. Its aggregate debt to GDP ratio is only slightly higher than Germany's. (Ireland too kept its budget in surplus.) Between 1999 and 2007, Spain and Portugal on average had substantially lower budget deficits than did Germany. Even Italy's debt to GDP ratio for the period was no greater than that of Great Britain -- now held up as a model of fiscal virtue and bite-the-bullet austerity policies. The latter has been spared the crisis thanks to its being outside the Euro-zone and, therefore, able both to control its own money supply and to allow Sterling's exchange rate to fall. The highest worker productivity in Europe is registered by "border state" and semi-Mediterranean France. Britain's workforce lags by 17 percent! Paid vacation days? Highest in Germany, exceeding those in Greece or Ireland and on a par with those in Portugal and Spain. David Cameron's Britain tops them all. For the moralists, perhaps what really counts is whether or not you feel guilty while on holiday. Angela Merkel, by the way, is the daughter of a Lutheran pastor.

Greece is the one country that legitimately can be judged as handling its finances irresponsibly, along with Cyprus. Again, Greece is the exception that disproves the blanket condemnation of the southern European countries. Perhaps its most egregious action was to cook the books so as to obscure the full budget deficit in the mid-late 2000s. This was done under the conservative government of Prime Minister Kostas Karamanlis who preceded the ill-starred "socialist" George Papandreou in office. The private financial firm that devised and promoted the scheme? Goldman Sachs. Goldman then proceeded to short Greek debt. GS' name pops up elsewhere in crisis-ridden Europe. Among its alumni are Lucas Papdemos (the Viceroy imposed by the Troika on Greece to discipline its unruly masses), Mario Draghi, and Mario Monti -- the Troika's Italian Viceroy.

The other clearly irresponsible conduct of successive Greek governments has been to turn a blind eye to massive tax evasion. Greatest damage to national finances has been done be the country's economic elite, the notorious 100 families, who aggressively have exploited tax havens and lax enforcement to spare themselves tax obligations with impunity. So complete is their control of the authorities that they have managed to defend themselves against any remedial action even when the French government made available to the Athens authorities detailed accounts of who was hiding moneys in secret Swiss accounts, information found by happenstance during a raid by tax agents The list includes an advisor to Greek prime minister Antonis Samaras, as well as a former minister and a member of Samaras' New Democracy political party. The list also contains the names of officials in the finance ministry. The CD containing the information was 'lost' in the Finance Ministry sometime in 2012. No one has requested a replacement.

The names of the culprits, were made public by the investigative journalist Kostas Vaxevanis. His reward? An indictment for violating privacy laws. Acquitted, he now has been recharged by the state prosecutor. All of this under the nose of the Troika who have observed omerta on the matter.

Despite this established pattern of denying the state critical revenues, neither the EU Commission, the European Central Bank nor the IMF made full disclosure and evidence of enforcement a condition for the provision of the critical financial aid package. While the bailout was merciless in imposing an austerity program that has produced enormous damage on the well-being of Greeks generally, while it has forced the transfer into private hands at discount prices of valuable public assets, it has been quite casual when it comes to measures that threaten the fortunes of Greece's ultra-rich. Principles of economic justice, of political accountability, of moralism are applied selectively.

A closer look at the genesis of Europe's financial and monetary crises reveals the capital role played by the banks and other big financial institutions. It was they who provided the bulk of the money that fueled the reckless real estate booms in Spain, Greece, Cyprus and Ireland. It was they who the spread a plethora of toxic financial instruments across the continent so as to maximize gains and to expose the entire EU to financial collapse were they not bailed out. It was they who lobbied hard, and successfully, against meaningful regulation at the European level that might rein in those practices. When the bubble burst, it was they and their political allies who mobilized their clout so as to ensure that bank debt was nationalized, i.e. that states would assume responsibility for the potential losses of stockholders and bond holders. Citizens who bore no responsibility for the financial meltdown were stuck with the bill in Ireland, Spain, Portugal, Greece and now Cyprus. Iceland, a non-EU country, also was so targeted. There, successive uprisings by an aroused public twice overturned agreements forced on them by London and The Hague by which Icelanders were to pay off German, British and Dutch investors in Icelandic banks whose owners had participated in the continent wide roulette. In effect, Reykjavik told the EU, the governments of creditors and the ECB to take a flying leap into an empty credit pool. Their economy is now doing well - better than the austerity saddled Mediterraneans and doldrums dwelling Britain.

It also should be noted that the bank induced real estate bubbles inevitably led to price inflation that gave a significant advantage to German manufacturing firms across the EU.

Cyprus is the logical termination point of where economic policy-making for the financial interests, by the financial interests, leads. The government of Cyprus bet the house on turning the country into a regulation free financial haven. European authorities gave the enterprise their blessing as an example of innovative engagement in the modern day, globalized world economy. After all, their strategy is little different in kind from that of successive British governments which have mortgaged the country's future prosperity on making London a world financial center where banking wheeler-dealers could count on "light touch regulation" to do just about anything -- and to be praised for it.

Waves of liquid capital flowed in -- much of it from Russia where ill-begotten fortunes had been made. Sunny Cyprus also became their playground, and the playground of other footloose wealthy. That produced an unsustainable real estate boom - as elsewhere. When the house of cards inevitably collapsed (in part because banks were persuaded to seek high returns but buying soon to be discounted Greek government securities), the troika of the EU/ECB/IMF laid down the usual conditions for a salvage operation. In Cyprus' case, they could not avoid demanding a 'haircut' for the banks' creditors. But they went a fateful step beyond the standard savage austerity measures in insisting on the seizing of a portion of all depositors' savings accounts. In law, those accounts were insured up to 100,000 -- as is the case across the EU. In practice, that law was declared null and void by some dubious legerdemain, i.e. the obligations could not be met because Cyprus was technically bankrupt and no one would lend them the money. That's when all hell broke loose and the great minds of the Troika realized that dispossession of the Cypriots' accounts would lead to a bank run throughout the EU's southern tier and Ireland.

Confiscation, it was decided, should be restricted to accounts above € 100,000 -- most of which belonged to non-EU citizens. Cypriots, though, will remain in a condition of debt-servitude to their financial masters for the foreseeable future.

The wages of sin -- in the minds of Europe's born again Puritanical elites who observe the caveat that financial elites have a special dispensation from the Heavenly Father who already have squeezed through the eye of the needle.