It all started in October 2009 when George Papandreou’s new Greek government revealed a black hole in their accounts that was vastly underestimated by the previous administration. Several years of tumult followed, bringing the eurozone project to the brink of failure. But 2013 proved to be a lucky year for the 17-nation group. Relatively few economic surprises and heightened attention on events elsewhere brought a welcome calm to European financial markets.
This year the eurozone emerged from six quarters of economic contraction and the weaker nations enjoyed a strong rally in asset prices. Stock markets in the so-called PIIGS (Portugal, Ireland, Italy, Greece, Spain) have all rallied more than double figures year-to-date, while demand for each nation’s sovereign bonds has risen strongly, resulting in a significant decline in their borrowing costs.
Structurally, notable progress has been made on the enormous budget deficits that plagued the region. Optimism has been augmented by the imminent exit of Ireland and Spain from their respective EU/IMF bailout programs, with both countries set to make the transition to self-financing without the safety net of an emergency EU credit line.
The catalyst for positive sentiment came from the European Central Bank in July last year when President Mario Draghi said the phrase: “the ECB is ready to do whatever it takes to preserve the euro.” Those words were soon supported by a conditional bond-purchase program called OMT ( Outright Monetary Transactions) – a facility that has yet to be used.
The ECB’s actions signaled to financial markets that the central bank would indeed be a “lender of last resort,” effectively acting as guarantor for assets if the eurozone did verge on collapse. With that reassurance, markets have instead focused on the probable unwinding of the Federal Reserve’s bond-buying program and the slowdown in emerging market economies.
Yet even though there is less likelihood of a eurozone breakup, eventually markets will demand to see evidence of a return to eurozone prosperity. Incongruously, that objective is being hindered by the nation currently driving growth. Germany, the region’s largest economy, is expected to grow by 1.7% in 2014, which should lead to a 1.1% eurozone increase. However, Germany is vastly imbalanced – it has a huge current account surplus of 6.3% of GDP, meaning that it exports far more than it imports from the rest of the world. (A current account surplus of more than 6% is deemed excessive by the European Commission, but this limit is not enforced).
The strong influence of Germany on eurozone policy directives has resulted in the weaker nations enduring strict austerity and relying on export-led growth. The austerity has somewhat succeeded in reducing labor costs, thus boosting the competitiveness of eurozone products in global markets. Subsequently, most periphery nations are now running current account surpluses, but instead of stable economic models, these imbalances highlight worrying vulnerabilities. An over-reliance on exports may work for a strong economy such as Germany, but it is impossible for the whole eurozone to rely on such a model; the region is simply too big. There cannot be enough continuous demand from the rest of the world to provide prosperous stability for all individual eurozone economies.
An absence of strong domestic demand makes eurozone growth extremely fragile. Additionally, austerity without stimulus leads to weak consumer spending and risks facilitating a deflationary environment. The eurozone is nearing this scenario. The ECB predicts eurozone inflation of 1.1% in 2014, significantly below its 2% target. The weak number is a symptom of high unemployment and stagnant household income growth, highlighting the fragility of the region’s recovery.
Deflation is harmful to an economy as expectations of falling prices make consumers less inclined to spend. Moreover, deflation is particularly damaging for the periphery economies since it is difficult to further enhance competitiveness by cutting depressed wages, while the value of debt burdens cannot organically erode.
The ECB reacted to deflation concerns in November by cutting its benchmark interest rate (at which banks have to pay when they borrow money from the ECB) from 0.5% to 0.25%. This cut has come too late. The move was opposed by the German, Austrian and Dutch central banks, illustrating the divide between the sturdy and struggling eurozone economies. Germany’s resistance to an easier monetary policy comes from a fear of hurting their exporters’ competitiveness and perhaps lingering ghosts from the nation’s struggle with hyperinflation in the 1920s.
Such was Germany’s influence over the ECB in 2011 that the benchmark rate was increased 0.5% over the year to 1.5%. Mario Draghi’s presidential appointment in late 2011 has resulted in a much-needed decline in rates, greater ECB commitment to eurozone stability and a decline in Bundesbank influence.
Now the ECB must do more than prevent a eurozone collapse. The region cannot export away its problems; real growth must be spurred from within. The delay in reducing its benchmark rate may now force the ECB into unconventional action. Among the options are quantitative easing (creating new money to lower bond yields and borrowing rates), negative deposit rates (effectively charging banks to keep excess cash at the ECB) and long-term refinancing operations with strict lending conditions (providing cheap funding to banks that agree to lend to companies).
Financial markets should maintain a favorable view of the eurozone into 2014 as exports help steady, if slow, growth. But the time will come when slow growth is not enough, forcing the ECB into a standoff with Germany over aggressive stimulative actions. It may have been avoided if smaller measures were made earlier.
Ronan Keenan is a contributor to Geopoliticalmonitor.com
Giant banks are the most powerful institutions in in the world — in many ways as powerful economically and politically as the biggest governments. Unfortunately, the banks frequently use their power in ways that damage the economy and hurt folks living around the world.
Two prominent research projects carried out in recent years paint a picture of a ruthless banking and financial sector powerful enough to dictate the nature of key parts of the world’s economy and challenge the strongest politicians.
Research carried out by three Swiss economists reveals the links and structure the giant financial institutions dominate and use to their advantage.
The researchers looked at 30 million “economic actors” around the globe. Their remarkable research found that a group of 147 transnational corporations (TNCs) controlled nearly 40 per cent of the economic value of all TNCs in the world. More shockingly, financial institutions make up 75 per cent of the organizations at the core of this powerful group: what the researchers call, a “super entity.”
Barclays Bank of the UK had the most connections of any organizations. JP Morgan Chase of the United States and UBS of Switzerland, were both in the top 10. (See graphic below.) The Swiss did their research in 2011, relying on a corporate database compiled in 2007, before the recession. If anything, banks have increased their power during the intervening years.
U.S. economist and political activist David Korten, a former professor at Harvard Business School and the author of When Corporations Rule the World has spent much of his life criticizing how giant corporations use the privileged position the Swiss described.
Korten accuses wealthy bankers and financial traders of “colonizing ever more of the planet’s living spaces, destroying livelihoods, displacing people, rendering democratic institutions impotent and feeding on life in an insatiable quest for money and profits as a be- and end-all.”
Korten says that “only wealth and power matter” to the big bankers and the investors who surround them. “Whatever they want, they get, including the right to operate freely outside the law, manipulate markets, bilk investors, strip-mine nations and people for profit and get bailed out at public expense if they overreach.”
(It’s no surprise that Korten’s views on the corporate world and finance seldom, if ever, appear in the business press.)
Just five years ago, greedy banks blew up the West’s economy, some of them even destroying themselves. Many more teetered on the verge of collapse, without enough funds in reserve to cover their own debts. But the high-flying traders and investors profiting from the money machine didn’t want to see it stop spinning.
Facing ruin, the big banks and wealthy investors pressured and threatened nearly every Western country into giving them trillions of dollars of public money to fend off failure.
Now, while distressed governments and struggling individuals are still recovering, the bankers and wealthy elites are once again using every opportunity to further expand their power and influence around the globe.
Europe’s fire-sale of public assets
Leading up to the recession, the big European banks had loaned far too much money to already-indebted governments. The banks were desperate to grab the trillions they were owed so they could pay their own debts. Threatening a chokehold on national finances, they more or less seized forced the governments of Ireland, Greece, Portugal and later Cyprus, to adopt austerity programs that have devastated the lives of millions of people.
In addition, several European governments were forced to privatize valuable public assets to raise money to help pay the banks. Nick Buxton of the Transnational Institute says the agreements some governments reached with creditor banks demanded that key national assets and public services be sold off.
European banks and well-heeled businesses have been picking these assets up at bargain basement prices. As the economy improves, they stand to make a fortune from their resale. This amounts to theft from the people of heavily indebted countries.
Asked which countries are seeing a lot of privatization, Buxton says: “Perhaps the largest is Italy, where they’re projecting up to €570 billion coming from sales, largely of huge amounts of heritage and state national assets being sold off, but also energy, transport and any kind of national companies, like telecommunication companies, airlines, bus companies and so on.”
At the height of the crisis, the people of Greece got a taste of the power of their bank’s wealthiest shareholders. Greek Prime Minister George Papandreou called a citizens’ referendum to decide whether the country would accept or reject an austere bailout plan. This was a chance for Greeks to make a democratic decision concerning one their most important choices since the Second World War.
Euro leaders were furious, and the next day the stock market took a hit. There would be no democracy in the cradle of its invention: the referendum was cancelled.
The “super-rich” get special services
Meanwhile, the banks were helping the super-rich launder their newly acquired wealth and relocate it in traditional tax havens (although some governments are now catching on).
The super-rich who owned recently recovered old-Masters paintings stolen by the Nazis during the Second World War, will likely get their paintings back. When the European economy recovers, will Europe’s citizens get their “heritage” back from the rich?
The behaviour of Europe’s banks shows their anti-democratic influence, helping elite owners and other giant corporations extend their control over everyday citizens. Millions of ordinary people are being hurt, their democracies knee-capped.
Most Southern European countries are experiencing massive increases in the need for food aid. Mental health problems are on the increase. There is chronic unemployment, and a feeling of worthlessness among youth. Social safety nets will not be restored for years to come.
Canada’s Big Five wield unchecked power
Canada’s giant banks have a lot of influence with government. As I wrote in part one of this series, the Harper government secretly helped the top five Canadian banks maintain their powerful position by facilitating their rescue with an infusion of $114 billion during the last recession.
A six-person equity investment firm in Toronto, Hamilton Capital Partners, took a risk by bluntly criticizing our top banks as being too powerful. In a 2012 report, Hamilton said that “over the past several decades, our financial system has become increasingly organized to the benefit of the five giant banks.”
The biggest weakness of the current system, the firm asserted, is that the banks are effectively protected against foreign acquisition. That has meant that “wide swaths of the wealth management and investment banking sectors have also become protected, creating what is now effectively a closed market.” This has enabled the biggest banks to achieve domestic market dominance against smaller domestic competitors. They argue steps must be taken to increase competition.
Curiously, Finance Minister Jim Flaherty, normally a fan of free market competition, has done the opposite. He has named six banks — adding the National to the traditional Big Five of the Bank of Montreal, Scotiabank, CIBC, Royal and TD, accounting for more than 90 per cent of total banking assets in Canada — as “systematically important.” The government will attempt to make all six immune to collapse during a crisis. Doubtless, their untouchable status will attract even more business along the way — making them even more dominant.
U.S. banks are bigger than ever
Meanwhile, U.S. banks have grown by 37 per cent over the past five years. They and their affiliates have increased their influence over government and broken out of their traditional realm to establish themselves as major owners in several industrial and development sectors.
U.S. political activist Miles Mogulescu writes that the U.S. has a dominant, perpetuating oligarchy at about eight powerful banks “which dominates the political system to protect its own wealth and power to the detriment of the national interest and democratic governance.”
Simon Johnson and James Kwak write on the website Futurecasts Journal that “the Wall Street banks are a group that gains political power because of its economic power, and then uses that political power for its own benefit. Runaway profits and bonuses in the financial sector were transmuted into political power through campaign contributions and the attraction of the revolving door.”
You could also say that U.S. banks don’t show much respect for the hand that feeds them.
A study on risk-taking by banks that received funds from the Troubled Asset Relief Program (TARP) revealed that, instead of becoming more cautious after being pulled from the brink, they increased their overall risk exposure — ie: they gambled harder — by about ten per cent. Bailed-out banks were supposed to pass the public’s money through to businesses, to help restart the U.S. economy; the study found they were no more willing lenders than banks that didn’t receive support.
Bankers and regulators: often the same
The continual flow of top-level executives moving back and forth between the U.S. federal government and the banks reinforces the latter’s influence.
President Obama’s chief of staff, Jack Lew, the second most powerful man in Washington, used to work for the banking conglomerate Citigroup. His predecessor worked for JP Morgan Chase. And his predecessor had also worked for a giant investment bank. That’s Washington.
Under Obama, no less than under George W. Bush, bank lobbyists help write the laws purportedly controlling the financial sector. A Treasury Department official who allowed a bank to falsify its financial reports was allowed to retire instead of being charged.
Banks’ political donations to Capitol Hill through the depths of the recession delivered dozens of key politicians to their pockets. Blogs and news sites have revealed the details of these payments again and again.
At the same time the banks were sucking up trillions of dollars in taxpayer aid from the U.S. government, they also managed to get away with violating the “foundational principle ofseparation of banking from commerce,” by buying up dozens of companies and other assets.
“Goldman Sachs, JP Morgan and Morgan Stanley are no longer just banks,” writes a widely read blogger who goes by the name of George Washington. “They have effectively become oil companies, port and airport operators, commodities dealers and electric utilities as well. This is causing unforeseen problems for the industrial sector of the economy.
“For example,” said the blog, “Coca Cola has filed a complaint with the London Metal Exchange that Goldman Sachs was hoarding aluminum. JP Morgan was being probed by regulators for manipulating power prices in California, where the bank was marketing electricity from power plants it controlled.”
The six largest U.S. banks now control assets totaling more than 60 per cent of the country’s Gross Domestic Product.
Minting their own money — literally
One of the reasons private banks are so powerful, and able to dictate to governments, is because governments have handed them the powerful role of what appears to be the creation of much of our money. However, under the fractional banking system, every time they “create” new money through a loan, they also have to enter a debit on their books. How much new money they can “create” is restricted by their investment-to-reserve percentage. The new money created is the interest on the loan.
When governments borrow from for-profit banks, instead of issuing bonds or printing money through their own national banks as most once did, they can end up in serious debt. Governments too often borrow more than they can afford and, under some conditions, interest rates can be very high. When this happens, as we have seen in Europe, the banks can dictate repayment conditions to a whole nation.
Private banks have additional powers we never think about. When they make loans they also get to decide who gets the money. That means they also determine what is produced, where it is produced and who produces it. These choices are all made on the basis of what is most profitable to the bank, rather than what is beneficial to the community.
As long as the giant banks have the power to create their own money, and use it to influence or coerce governments, they may be impossible to control: their sole reason for being and their loyalty are to making even more money. My next report will show how practically every one has been involved in unprincipled and possibly criminal activities to make billions of dollars.
What makes them do it?
With all their privileges and million-dollar-plus salaries, why do these men — they’re almost all men — behave so badly and do so much damage to the rest of us?
“I think they simply see themselves as being at the very top of the food chain,” says Dr. Ulrich Thielemann, who has taught philosophy and business ethics at the University of St. Gallen, Switzerland. “They feel like they’re able to trick others.
“That is the thinking of a caste of people who have been trained at business schools,” Thielemann adds. “It’s an economic theory that views the most rational action as [being] what is to your own advantage. Its aim is to maximize its own income and will; and, if it comes to that, walk over dead bodies to achieve this.”
Nick Fillmore is a Toronto blogger and sometimes investigative journalist. He worked in several capacities at the CBC over 25 years, and was a founder of the Canadian Association of Journalists. Please email Nick Fillmore or visit his blog.
This article originally appeared on The Tyee and is reprinted with permission.
Photo: flickr/Joe Schueller
Editor’s note: To honor the memory of Energy Tribune editor Michael J. Economides, we will be republishing some of his best articles this week. This piece was originally published on June 29, 2011.
Under enormous international pressure the Greek Parliament just passed an austerity package. The world can now breathe a temporary sigh of relief but it will not last too long. The problem will not go away.
It used to be that being a Greek had a cachet, a source of historical pride bordering on arrogance. “When our ancestors were building the Parthenon yours were living in caves.” The fact that Greeks are voted year after year as Europe’s best lovers did not hurt either.
But there is “something rotten” in Greece, that is putting an unsavory stop to all this even if my compatriots, as usual, want to blame foreigners who for some inexplicable reason hate, or are jealous of, the Greeks. The country is, in all but name, bankrupt and is certain to default no matter how many stop gap measures are taken. The only reason it has not happened yet is because of the fear of what misfortunes may befall other countries. There is also no precedent where a region, under a monetary union like the EU, can default. Would the United States let California go bankrupt? To some this is possible and tantalizing in itself and not far-fetched.
It would be hard and bitter but the possibility of letting the country fail may be the best thing that can happen. Phoenix is a mythical Greek bird that is re-born out of the ashes and it is becoming increasingly clear that its modern manifestation must be a new Greece itself. Fixing the unfixable is not the answer.
There is nothing implicit to the Greek nature with the current economic mess in the country. Greeks are damn good business people with a great love of education and upwards mobility, and they have done very well in their diaspora throughout the world. I am a Greek from Cyprus, akin to the analogy of a Hong Kong Chinese to the mainlanders. Cyprus, an independent Republic and a member of the European Union, in spite of the fact that 40 percent of the island is occupied by Turkey, has thrived and it is far off the malaise that has engulfed Greece. So it is possible.
The Greek problem started almost 200 years ago. At the time, what became eventually Greece and what it took 130 years to complete, was under the crumbling Ottoman Empire. I know that almost all Greeks and the vast majority of Europeans think of Turkey, itself a remnant of the Empire, as something alien to European ideals and values, exacerbated by the country’s Islamic religion. That may be the case but there is another truth. At its height, the Ottoman was one of the most tolerant, multi-ethnic empires in world history. The reason that the Greeks are still Orthodox Greeks and for that matter the Serbs and Croats, the Bulgarians and Albanians are still what they were (along with the modern problems that have arisen in their resurgent nationalisms) is because the Turks did not force them to become Turks, like other empires would have done.
Romantic notions of resurrected ancient glory of the enslaved Greece dominated European intelligentsia in the late eighteenth and early nineteenth centuries. Lord Byron died in Greece as part of that quest. American university Greek letter societies have their origins during that era, including a short-lived and in retrospect preposterous notion to make Greek the official language of the nascent United States, wanting to breach all ties with Britain.
A tiny patch of land was the first Greece in the late 1820s following the Greek war of independence. It took all the way until after World War II and a number of in-between wars for several regions and islands to be added to form what people know as Greece today. Ironically, this country is not the vision that Greeks would have had all the way into the 1920′s. Few people realize that even then the westernmost part of today’s Turkey was Ionia, Izmir was Smyrna, with a Greek majority. The Greek Grand Idea was to resurrect the Byzantine Empire with capital Constantinople, Istanbul, modern Turkey’s thriving city.
One would ask what would happen to the Turks? I am not sure that was something the Greeks and Europeans of the day thought much about, other than the Turks did not belong there. (Maybe Turkmenistan from where their ancestors set off 1000 years earlier?) The whole idea was another preposterous notion of a bygone era. After a catastrophic war the Grand Idea crushed to an end along with the birth of a new Turkey run by a major personality, Kemal Ataturk, and the expelling of one million Greeks, many of which became permanent public charges of Greece. The more educated and imaginative ones became the cores of the international Greek diaspora.
For 130 years, from 1820 to 1950, the attitude in Greece was one of entitlement. Europeans felt so, not unlike, the way they came to feel eventually towards Israel, garbed in post-World War II guilt. Greeks at the receiving end felt similarly, to the point that any time they sensed that Europeans would not espouse even the minute Greek predilection it would bring feelings of hostility and betrayal. How dare they not be on our side? We are the Gods’ truly chosen people.
Greece was the recipient of massive foreign aid for decades. During the Cold War, following a brutal civil war between communists, who had taken over the rest of the Balkans, and the nationalists, brought the United States at center stage, replacing the western European powers. Greece and Turkey became frontline countries in the region and recipients of massive US aid (with Greek complains directed at the American government thereafter).
Greece as a supported state lasted for another 40 years. The country, having entered the industrial revolution era way too late, never fully developed its economy, its business, its institutions. There were no echoes of, say, Italy even with its own peculiarities, let alone, The Netherlands or Norway. Foreign giveaways and tourism nourished the country. The population grew to depend on the state for everything.
Interestingly the society grew to actually frown upon private business and its inherent uncertainties, unless businessmen somehow found a way to be in bed with government. Even the shipping community, the world’s largest and most successful with press luminaries like Onassis did not excite common Greek citizens that much. Much of private business was mom and pop operation and if it could evade taxes that would make it all the more palatable.
On the other hand, a successful young man would do well in school, then go to a good department at the university, graduate at the top of his class only to be hired by the government with 14 salaries per year, many weeks of vacation and retire at age 57; much earlier if a married woman. Who would pay for all of this was never the issue.
Greece was the classic patronage state. Landlords formed many of the political families and political parties were fashioned along ideological lines but still tied with prominent persons. Governing was for the sake of governing. There was never really any effort to develop the country economically or industrially. Business was never encouraged. Greeks were supposed to be eternally admired by foreigners for their ancient contributions but the country was OK to be always poor. Greeks would not waste time to make the country prosperous. That would be too trivial and plebian.
Then came 1974. It was a fateful year for Cyprus and to a large extent also for Greece.
Cyprus, which had been a British colony since 1878, went through the process, like Crete, Macedonia and Rhodes before it, to unite with Greece. For the Greeks that was supposed to be the natural path. But this did not calculate the will of new Turkey nor the divide-and-rule attitude of Britain, something that has fomented again anti-Western complains by Greek nationalists ever since. After an insurrection by the Greek Cypriots against the British Administration in the 1950′s, the best the Greeks could muster in 1960 was the Republic of Cyprus, with a very heavy involvement of Turkey and a lopsided set of guarantees for the Turkish Cypriots.
In the meantime in Greece, at the height of the Cold War in a very contested region of the world, there was a constant sociopolitical struggle that is hard to explain to outsiders. First, there was the official pro-western position of the country, a member of NATO. This was supported by the royal family and much of the establishment that won the civil war. But Greek communists and, especially socialists, were on the opposite end of the spectrum. Certainly, the intellectuals in Greece were very heavily inclined towards the socialist left, not unlike American academic liberals. The father of the current Prime Minister George Papandreou, Andreas, himself a prime minister was a US citizen for years, a professor at the University of California, Berkeley who would have felt very much at home in the Obama Administration. Their adversaries, Greek nationalists, were not necessarily pro-western, feeling betrayed by the West in dealing with Turkey and in general not getting their due by being the real frontline country of western values.
In 1967, in a move that shocked Europe, a military junta took over in Greece, first presumably supported by the King, then disassociated, leading to the latter’s abdication. The junta run the country until 1974 when, after engineering a coup against the then President of Cyprus, Archbishop Makarios, Turkey invaded the island, causing an intractable problem ever since.
The junta, unable to counter Turkey, collapsed practically overnight and Greece declared itself squarely as part of Europe, ready to join, after the necessary process, the fledgling Union.
There were not very many second thoughts among most Europeans in the 1970s of whether Greece but also Spain, just getting rid of decades of the Franco dictatorship and Portugal, also at the end of military governments, should be part of the European Union. With little due diligence, looking the other way of the obvious structural differences with northern European countries, they were eventually allowed to accede to the group, a reward for their democratization. Their obvious shortcomings were papered over.
Greek problems are nothing new. Only their airing is new and only after a much ballyhooed monetary union brought the question of what happens when a country in default can no longer do what many had done before: print more money. But in some ways this creates an obvious way out. Let the country default and from the immolation Phoenix will emerge. That’s the only solution and it would serve as an example for the rest of the world to take measures to avoid its recurrence in other countries. The world may grow again to owe the Greeks another gratitude.
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