The Greek ‘settlement’: the lesser evil, but still a disaster
The Greek settlement, or perhaps better the eurozone’s Diktat, is outrageous. It reflects such an intrusive, dictatorial, dirigiste, centralising mindset on the part of those in the control room of the EU (not just of the eurozone) that it will force many to revisit their enthusiasm for Britain’s EU membership. If Europe’s leaders show as much contempt for the residual independence and national sovereignty of the Union’s member states as the debt-collectors have shown for Greece, Cameron begins to look justified in seeking a UK opt-out from the “ever closer union” of European Holy Writ. UKIP is already crowing, and no wonder. Eurozone leaders’ treatment of Greece is a priceless gift to those campaigning for Brexit (UK exit from the EU) at Britain’s in/out referendum in or before 2017. The creditors’ conditions for a bail-out and debt re-structuring constitute a gross interference in “matters which are essentially within the domestic jurisdiction of any state”, contrary to Article 2(7) of the United Nations Charter [1]. The monitoring and enforcement provisions are insulting, reducing Greece to little better than colonial status, and there’s no ethical, financial or political basis for the creditors’ careless assumption that repayment of debts (to themselves!) takes precedence over all considerations of humanity, the relief of human distress and deprivation, social and political cohesion, national pride, and respect for the clearly expressed wishes of the people of a democracy, not to mention the strong western strategic interest in maintaining Greece’s commitment and loyalty to Europe and the west.
In joining the EU or its predecessors, each member state voluntarily exchanged some elements of sovereignty for the benefits of collective action for the greater good. But it’s unlikely that any state would have agreed to join if the advertised price in terms of the sacrifice of political independence had been anything like as high as that now forced on the Greeks. In ordinary circumstances a borrower chooses whether to accept draconian terms offered by a lender or to seek better terms from a different lender, or in the last resort to do without the loan. No such options are available to the Greeks. No one else is going to lend if the Troika won’t. The Greeks’ sole alternative to the Troika’s mindlessly harsh terms is penury and social collapse.
It’s true that the Greeks and their elected governments over the last several decades are largely responsible for their own calamitous situation (although not for the global financial crisis which has aggravated it), and that some (but by no means all) of the domestic ‘reforms’ being imposed on them are necessary for economic recovery and thus in Greece’s own interests. It’s also undeniably true that Greece could probably have secured marginally better terms from the creditors if it had not been for the erratic, contradictory, antagonistic, amateurish and often insulting behaviour of the Syriza leadership in the negotiations, including the ill-conceived referendum to reject the terms of a settlement that were anyway no longer on offer. But allowing their (understandable) irritation at Tsipras’s behaviour to harden the terms of the eventual settlement is little short of wicked: this is the perverse justice of the nursery.
Paradoxically, there’s a broad consensus among respected economists that the austerity régime being imposed on the Greeks against their will is likely to hinder and delay Greece’s eventual recovery and return to prosperity, not promote them. When lack of aggregate demand in the economy is a factor in the recession, making the Greeks increase VAT is crazy. An attack on widespread tax evasion is one thing: reducing the pensions of people who are among those with the highest marginal propensity to spend is manifestly counter-productive, something that even voodoo Osborneconomics hasn’t attempted in Britain. Policies such as privatisation of national assets and progressive versus regressive tax regimes should be for the Greeks and their governments to decide, not foreign financiers and politicians.
So this is a rotten deal. The sole reason for agreeing to it and seeking to conform to its terms is that the only available alternative for Greece would be even worse. A great injustice is being done; the great European idea is badly damaged. In exam question form:
“The single currency project was intrinsically flawed from the start. Its survival now will entail a degree of integration of economic, political and fiscal policies under central eurozone control and discipline, with implications for non-eurozone countries as well as for the rest, that many EU countries, including some eurozone members, will find it impossible to accept. Moreover, in the new two-speed Europe the discrepancy between the two speeds may prove too great to accommodate. Discuss.”
President Hollande almost alone comes out of this well. Although Cameron, as head of a non-eurozone government, could never have played a central role, a more committed European could have discreetly given invaluable support to French efforts to tone down Mrs Merkel’s and her domestic political supporters’ harsh, rigid and doctrinaire zeal. The partial discrediting of the European enterprise is a disaster for Britain, and a still greater one for the eurozone members. But once again, thanks to weak and clumsy Tory European diplomacy, Britain stands helplessly on the sidelines, incapable of influencing events even when its own interests are indirectly involved. Our government’s sole current concern is apparently to avoid any British contribution towards the cost of the new Greek bail-out. How shaming is that?
Postscript (1800 hrs., 15 July 2015): For comments on new developments and replies to initial responses, please now see my comment below at https://barder.com/4482/comment-page-1#comment-208704.
[1] Update (16 July 2000): In two comments on this post (see below) Mr Vine has correctly pointed out that strictly speaking the wording of Art. 2(7) of the UN Charter, to which I refer in this post, prohibiting intervention in matters essentially within the jurisdiction of any state, applies to the UN itself and not explicitly to individual member states. In mitigation I would just plead that the greater must logically also embrace the lesser, and that individual states or groups of states must by implication also be barred from doing what the UN itself is prohibited from doing under its own Charter. Otherwise Art. 2(7) becomes virtually meaningless, since it could so easily be circumvented. Please see Mr Vine’s comment here and my apologetic response to it here.
Brian
Brilliant analysis. Just one small observation. The Eurozone nations agreed to the ERM and the 2010 treaty amendment altered tfeu art 139 accordingly. Do you see the un charter as overriding this?
“The creditors’ conditions for a bail-out and debt re-structuring constitute a gross interference in “matters which are essentially within the domestic jurisdiction of any state”, contrary to Article 2(7) of the United Nations Charter”
That can’t possibly be right. Greece have asked for the further loans, on which the egregious conditions to which you refer have been placed. Their best option was to default and go their own way. The Greek government chose not to do so, thinking that their lack of reserves precluded adopting a new currency without undesirable short-term dislocation to the economy.
The fact is that those who provide the money (the rest of the Eurozone, who also hold a democratic mandate from their electorate) are entitled to set out the conditions by which they hope to get some or all of it back. The fact also is that the Greek government should never have accepted those conditions, and gone their own way.
I say this as a supporter of the European Union and a mild skeptic of the Euro currency union.
I am grateful for these comments. My reply to the question posed by ObiterJ — whether I see the UN Charter as overriding the terms of the relevant EU and ERM treaties — is an unqualified Yes, on two grounds: first, I don’t believe that the terms of any EU treaty bind or could bind any member state to accept interference in its most sacrosanct internal politics and independence on the scale demanded by Greece’s creditors; and, secondly, even if they did, Article 103 of the UN Charter, to which all the states concerned are signatories, states explicitly that
A comment on the same post on another website claims that Article 2(7) of the Charter is meant to prevent the UN, not its individual members, interfering in “matters essentially within the domestic jurisdiction of any state”. This seems to me impossible to reconcile with the preamble to Article 2:
— one of which is Art. 2(7):
nb: When the Charter refers to the UN as a whole, it uses the term “the Organization”; when it refers to the individual UN members, it uses the term “the United Nations”, as here. So all UN member states have accepted an obligation to act in accordance with certain principles which include non-intervention in matters essentially within the domestic jurisdiction of any state (whether or not a member of the UN, incidentally). This is obviously not an enforceable obligation under international law, but it seems abundantly clear that the action of Greece’s creditors in imposing such harshly intrusive conditions on their urgently needed loans to Greece are in breach of that Charter principle.
The comment by Chris Vine disputes that reading of Art. 2(7) (saying that it “cannot be right”) but I’m not sure on what grounds. His comment recites some of the relevant facts, which are not in dispute, and states as fact his opinion that the Greeks should have taken a different course, namely to default on their existing debts, leave the eurozone, re-establish their own currency, “and go their own way”. The Greek government and a sizeable majority of the Greek people however take a different view, namely that the course advocated by Mr Vine would lead to inevitable economic collapse and ruin, including probably hyper-inflation and forced devaluation of the drachma, with the likely result of an eventual neo-fascist authoritarian regime and expulsion or voluntary exit from the EU itself, an outcome that would have perilous global consequences and pose a serious threat to western security. That is a perfectly tenable view and I am far from alone in holding that the Greeks are right to rule it out. Hence my assertion that in effect the Greeks have no real alternative to surrendering to the creditors’ terms, which is the only way for Greece to remain in the eurozone and avert total collapse.
The implied argument in Mr Vine’s comment seems to be that those who lend money are entitled both morally and legally to impose whatever terms they like, regardless of generally accepted norms and principles of international and human behaviour (one of which is defined in Art. 2(7) of the Charter, as I have suggested in my post). I see no possible basis for such an argument. Money-lenders must be bound by the same rules of decent behaviour as anyone else, and they must expect to be condemned if they fail to observe them, as Greece’s creditors have patently failed to do.
An old friend with strong Greek connections has made another point in a private communication to me: namely, that I have not given enough weight to the constraints on Chancellor Merkel’s freedom of action imposed by German public opinion and especially that of members of the Bundestag, many — perhaps most — of whom favour even more severe treatment of the Greeks than that currently proposed by Mrs Merkel and the other creditors. Mrs Merkel knows that any eventual settlement will have to be approved by the Bundestag and that a settlement regarded in Germany as excessively lenient (even if the rest of the world sees it as excessively severe) is liable to be rejected by the Bundestag. Another aspect of this is the resentment of other eurozone members which are poorer even than Greece, with lower pension rates and higher taxes, of any settlement that gives Greece more favourable treatment of its debts than those countries get for theirs. I fully accept that these are indeed real complicating factors. But they are not arguments for imposing unreasonably harsh terms on Greece in a settlement that is unlikely to succeed if it generates such deep resentment that there will eventually be organised opposition to it. One of the requirements of leadership is the ability and willingness of government leaders to persuade their own peoples and parliaments of the realities of complex problems, of the reasons for less than ideal solutions to them, and of the need to overcome objections to the best obtainable solution that are at least in part based on prejudice and envy. If national leaders will not lead, but only follow, international problems requiring flexibility and compromises for their solution will fester and spread, with potentially disastrous consequences for all of us.
Finally, the publication of the IMF’s sweeping condemnation of the proposed settlement as unrealistic and unworkable without large-scale cancellation or radical restructuring of Greece’s existing debt has injected a huge new element in the crisis which may affect the prospects for parliamentary approval of the proposed settlement in Athens and Berlin and perhaps elsewhere also. Apparently the eurozone leaders were aware of these powerful objections by the IMF when they approved the proposed settlement. The IMF has probably the best resources for economic analysis and forecasting of any institution in the world. In this case its strictures on the other creditors’ proposals and demands fully conform with ordinary common-sense. If Greece is to recover from its present predicament and become a prosperous and creditworthy partner of the rest of us in the EU, an obvious pre-condition must be substantial relief from the unmanageable burden of existing debt under which it labours. It’s tragic that the creditors, apart from the IMF, seem unwilling to recognise this. By holding out for every last cent, every cent paid on time, they risk losing the lot. Quos deus vult perdere, prius dementat.
Brian
Spot on, Brian. Perhaps you are a little hard on the Tories, since their inability to influence events is primarily due to G Brown having (thank God) kept us out of the euro mess, which was, from day 1, a disaster waiting to happen. But Cameron”s constant air of haplessness in European company is pathetic.
The other sad aspect of recent events is that, for those of our generation at least, it is difficult to escape the sneaking feeling that this is just how one would expect a German government to behave, and exactly what we fought two world wars to prevent….
Robin
Brian writes: Thank you for this, Robin. But “hard on the Tories”? Moi? Never!
However I’m truly sorry that events have prompted you to write in these understandable terms about the Germans, whose post-war behaviour seems to me to have been admirable, indeed almost impeccable, including the adroit exercise of her enormous power by Chancellor Merkel as the de facto leader of a generally liberal Europe. It seems sad that Mrs Merkel’s strong attachment to the single currency and to rigid fiscal rectitude, evidently shared by many German parliamentarians, along with resentment of special terms for Greece on the part of some EU states that are even poorer than Greece but have managed without constant bailouts and the accumulation of mountains of debt, should have led to such internal frictions within the EU and the eurozone and to such a regrettable outcome for Greece (so far). I feel strongly that this must not be allowed to damage Britain’s overall friendship with and support for our German partner.
“nb: When the Charter refers to the UN as a whole, it uses the term “the Organization”; when it refers to the individual UN members, it uses the term “the United Nations”, as here.”
I know you feel strongly about this, but your criticism of my position is unfair and in this respect I think you are simply wrong. The words “Nothing contained in the present Charter shall authorize the United Nations to intervene …” in Article 2(7) are in terms a limitation of the powers conferred on the United Nations by the charter. It has no effect on the powers of members which exist apart from the charter – for example from the treaties of the European Union or from the ordinary intercourse of states under public international law. When the charter intends to refer to the members for the purposes of imposing obligations on them, it refers to “the Members”. This appears throughout the charter.
I agree that just because the actions of lenders such as Wonga and other pay day lenders is lawful doesn’t mean that it is morally justifiable. In this case however, the Eurozone governments seem to have their electorates’ wishes and mandates in mind. The alternative course was probably to refuse any further loans at all. That may be the morally superior solution but you are presumably against that as well, given your predictions about the consequences. If I am right about that (and I may not be), then your argument reduces to one that, in current circumstances, the Eurozone governments are obliged to make fiscal transfers to Greece in consequence of their obligations under the UN charter. That is an extreme position which I do not think anyone else has put forward.
What we have here is, in my view, simply a clash of democratic mandates, brought about by the deficiencies of the Eurozone treaties.
Thank you for coming back at me in this further comment (https://barder.com/4482/comment-page-1#comment-208706). In my earlier response I had not intended to criticise what you had written, only to disagree with some of it, and if in doing so I was “unfair”, I apologise. In fact I owe you a second apology: I have looked more carefully through the Charter in the light of your further remarks, and regretfully conclude that you are correct in your argument that the ban on intervention in the internal affairs of any state applies to the UN as an institution and not to its individual members. So I was wrong. I can only plead in embarrassed self-defence that individual members of the UN are explicitly committed by the opening words of Art. 2 to act in accordance with seven Principles, of which 2(7) is the last, with exactly the same status as the other six; and that if the UN itself is barred from intervening in a state’s internal affairs as a principle to be observed by its individual members, it must follow logically that individual members may not intervene in other states’ internal affairs either. It would make a nonsense of 2(7) if the UN itself could not intervene in such matters while its members were licensed to do so, even by implication. But I recognise a whiff of the Jesuitical in that defence. More generally, I hope you will agree that 2(7) establishes a principle of non-intervention in states’ internal affairs which has been accepted as a valuable guide to international behaviour (not of course one that has been universally observed) even though, as you rightly say, strictly speaking the actual wording applies only to the UN itself.
However, in your re-phrasing of my case in your further comment, you say my argument boils down to the assertion that “the Eurozone governments are obliged to make fiscal transfers to Greece in consequence of their obligations under the UN charter.” I have never said, believed or even implied any such thing, as I think you will acknowledge if you re-read my post. My reference to the creditors’ breach of the principle of non-intervention set out in 2(7) is only one of numerous criticisms of the behaviour of the creditors, and that by no means the most important or cogent. Your summing up of my case against the creditors seems to me at least as ‘unfair’ as anything I have said about your original comment, so let’s put it down as a draw, and leave it at that.
I am adding an update to my post to take account of your correction, for which I repeat I am grateful.
Brian,
I agree that you made many points other than the one about Article 2(7) of the UN charter. However, it was your point about Article 2(7) to which I originally responded. I hope it was clear that my “If I am right about that (and I may not be), then your argument reduces to one that, in current circumstances, the Eurozone governments are obliged to make fiscal transfers to Greece in consequence of their obligations under the UN charter” was specifically and only about the obligations to Greece (if any) imposed on the Eurozone governments by Article 2(7) of the charter. If there was any possible alternative interpretation of my writing, then obviously I apologise.
I broadly agree with your other points anyway, while perhaps laying more emphasis on the sovereign rights of the other Eurozone governments. The current situation with respect to Greece is clearly highly regrettable. And I retain the view that default and exit from the Eurozone, with interim assistance to the Greek banking system and humanitarian assistance (which was offered at least under the “temporary exit” scenario) would have been the better option.
Too black and white, Brian. It’s not the creditors who ran up the debts. It was the Greeks, and they lied about them. The creditors, on the other hand, have already in practice written off a significant amount of debt by agreeing to lower interest rates and by conceding a less exacting time table. All involved need to play down this concession to their electorates. But a write-off it is, deserving some recognition. As for pensions and privatisations, Chris Vine has a point, hasn’t he? They have been subject not to a Diktat, but a negotiation. Greece did not exactly play a brilliant hand, while the UK, which might have tried to arbitrate (in Ken Clarke’s time), kept clear. Disappointing. The only comfort is, it could have been even worse. The discomfort – it probably will be.
Brian writes: Thank you. “Too black and white”? My post is a good deal more even-handed than your comment, if I may say so (and I may!). It’s true that the creditors have reduced some of the interest rates on existing debt and lengthened some of the repayment periods, but it’s also true — and not widely acknowledged in the current debates — that Greece has already met many of the creditors’ conditions for reform, however reluctantly. The creditors’ latest demands take no account of that. They are disproportionate, in many respects unreasonable and likely to be counter-productive (as even the IMF has publicly argued), unnecessarily intrusive, harsh and inhumane. It is intolerable that a developed European democracy and EU member state with a glorious history should be treated like a colony in order for the international banks and money-lenders to make fresh loans that are to be used to service and repay earlier loans to the same banks, a circular transaction in the interests of the banks, not a cent of it doing anything for the impoverished Greeks except to increase their debt burden. The more the creditors and their chums seek to justify this indefensible situation, the more they are generating popular hostility to the whole European project, with incalculable consequences for the UK in/out referendum and for the EU itself. There’s none so blind….
Three observations, if I may; but first full disclosure: I served five years in all in the British embassy in Athens, from 1993 to 1996 as ambassador. The historical roots of recent events were there of course, but much has changed and I do not feel I have any real qualification based on that experience to understand the latest developments.
First, I am surprised that the backlash against Germany has been relatively limited. Greece suffered appallingly under German occupation, and although the details are confusing I think Greeks can well argue that they never received anything like reasonable compensation, and that under the Marshall plan defeated Germany was treated much more generously than ruined Greece.
Private Eye points out that businesses being investigated and prosecuted by the Greek authorities for corruption include Siemens, Daimler-Benz, MAN and Rheinmetall, and that the former defence minister has been jailed for twenty years, convicted of accepting bribes from Ferrostaal (submarines), Rheinmetall (tanks), Daimler-Benz (military vehicles) and Krausss-Maffei Wegmann (tanks). In my time as ambassador Siemens were a byword in Athens for corruption.
Secondly, it would not surprise or dismay me if Russia were to make a serious bid to step in and help Greece. The relationship between Russia and Greece has deep roots. Failing some helping hand from outside, I fear the worst, some form of what is now called a “failed state”.
Thirdly, as a student of Middle East history I am struck by the parallel with Egypt’s bankruptcy in 1876. Britain and France established the Caisse de la Dette, on which the English Commissioner was Captain Evelyn Baring, nicknamed over-Baring, who as Lord Cromer effectively ruled Egypt until 1907.
Brian writes: I am grateful for these extremely interesting comments, Oliver. It’s hard to conceive of a better way to drive Greece into a generally anti-western stance, gladly embraced by Mr Putin, and making a gaping hole in NATO’s southern flank on the approach to the middle east, than to treat the country and its people as pariahs, effectively colonising them rather than treating them as partners in desperate need of intelligent support. Of course the creditors have a legitimate interest in getting their money back: the point is that they are behaving in a way calculated to ensure that they will lose it all, whereas radical re-structuring, including significant cancellations, on acceptable conditions, stands a sporting chance that they may get something back in the end. Better a modest haircut than losing one’s hair altogether! And the anti-German backlash, even if so far less sharp than you might have expected, is very sad to see, squandering years of goodwill so painfully built up over decades by more far-sighted German leaders. Your Egyptian parallel is very telling, too.
Dear Brian – thank you for your detailed reply to my question. A simple question but the answer is not so easy to pin down. I will look at this more closely. Thanks again.
I’d say it was the greater of two evils. In fact the other option isn’t evil at all. It’s difficult but the only sensible option for Greece. They’ve been sold a lemon on euro membership. They have been tricked into buying something which is seriously defective.
That’s a pretty good description of the the German dictated piece of financial engineering known as the Euro. It must rate as one of their worst ever engineering efforts. Even the much maligned East German Trabi is an engineering marvel by comparison.
Unlike the euro system, the Trabi has a starter motor to re-start the engine after it has stalled!
The Euro, and the GSP rules that go with it, is clearly not fit for purpose. The Greek electorate was more than justified in demanding it be fixed under warranty. However, the makers have just declined, and are even insisting that the problems are all of the customer’s own making. No-one else has reported any problems! Except the Spanish, the Irish…….
There has to come a time when the buyer has to consider a “lemon” is much more trouble than it is worth. The buyer needs to stop making any further payments and look elsewhere.
Just to follow on from my “the euro is a lemon” comment I might just add that I wasn’t always of that opinion. Like many others on the centre left, I was generally pro-EU, (I’ve even voted Lib Dem in previous elections), up until about 2010 or so when unemployment started to rise sharply in the eurozone.
Having then taken a closer look at the rules that govern the operation of the euro it then became apparant that they were much too rigid in terms of what was allowable by way of public debt and budget deficits. The UK is well outside those rules. That seems to be OK, at least for now, as we’ve had the good sense, or good luck, to stay out of the euro.
Essentially the rules have been written to accommodate Germany.
However, the nature of the peculiarity of the German economy seems to have been overlooked. Germany runs a huge trade surplus to the tune of €200 billion plus p.a. or over 7% of GDP. They always have a ready supply of euros coming into their economy. But not everyone can run trade surpluses! It’s arithmetically impossible.
The Bundesbank cannot just create these euros, to keep their exporters happy in the same way they could with the DM. They have to come from somewhere. The UK pays for German imports in pounds. The USA in dollars. Neither can pay in euros.
So these euros have to come from either the ECB, by fiat creation, a big no-no in the EU, or they come from the euro using countries. So is it any wonder Germany’s trading partners run out of euros and find they need to borrow heavily to fight recessionary forces in their economies?
So I would submit it’s the Germans, and the Dutch, and not the Greeks who are responsible for the present shambles in the EZ. It’s not going to be possible to convince them of that anytime soon though. I hope I’m wrong about that, but if I’m not then Britain needs to get out of the EU before it is sucked into the inevitable disaster to come there.
Thanks for conceding (in your reply to my post of 16 July) that Greece’s creditors have not been entirely unhelpful. I don’t feel able to quantify the extent of the write-off, but the FT, I seem to remember, valued the second adjustment programme at around 50% of the debt. Not to be sniffed at.
As for even-handedness, to quoque. Both sides failed to appreciate the havoc being caused by Greek mismanagement and misreporting until it was too late. The Syriza government still seem to be in denial about it.
David, by the same token I have certainly read that (contrary to the received wisdom) pre-Syriza Greek governments have complied extensively in the past with many of the creditors’ demands, even when this involved making changes such as to taxes and pensions that the Greeks regarded as deeply objectionable, unjust and intrusive. Anyway, I don’t think the creditors (apart from the IMF which I understand is the only creditor strongly advocating either a radical write-off or an equally radical restructuring of existing debt) are acting in their own best interests, through their own political and ethical obtuseness. If they are flexible over restructuring, they will get some of their money back. If not, they are liable to lose the lot. (Serve them right if they do, many of us would secretly mutter.)
Let’s call it a draw, Brian. As I see it, the Euro is not flexible enough for a highly productive, tax paying country like Germany and one which wants the deficit financing of the Thessaloniki programme. Conciliatory diplomacy of the kind which HMG seems to have abandoned (and for which your blog site is such an eloquent lament) might just bridge the gap. Without it an even more cataclysmic disaster is likely, quite probably involving France. In that sense, you are right to feel indignant with the creditors. I never said you weren’t.