Eurozone troubles.... all originate in a wish to get back to normal?

In the recent days I've read a book by J. Beyen called: 'het spel en de knikkers'. It's a Dutch autobiography describing the life and career of a banker, central banker, former President of the BIS, Executive Director at the IMF, Minister of Foreign Affairs and so on. Beyen was for example one of the important Dutch delegates at the Bretton Woods conference. And his book - in particular the episode on the golden standard - is fascinating.

Golden Standard as the solution or the problem?

Until the First World War, the golden standard had become the de facto monetary norm for governments/countries. It consisted of a set of fixed exchange rates, which meant that local economies sometimes had to suffer, as devaluation was impossible. On the other hand, it allowed for a lot of international trade and stability and was thus praised and adopted. Until the First World War changed a lot and the golden standard was abandoned.

In his book, Beyen describes the major sentiment of policy makers after the First World War. And he calls it the desire to go 'back to normal'. A central theme in this desire was the re-establishment of the Golden Standard. Beyen also describes that monetary thinking at that time wasn't as advanced as in 1968 (when he wrote the book) He sketches that the system of fixed exchange rates in itself burdened the European economies, but policy makers weren't able to see this at the time: obsessed with getting back to normal.

Current flaws in Euroland thinking: still seeking a back to normal?
The musings and discussions all around Europe these days, in particular the new plans on a banking union, fascinate me enormously. The singlemindedness with which politicians now move forward into more Europe, more joint policy, more deposit guarantee may be variations on a similar desire: back to normal. Back to the Europe from before the crisis, using the same policy tools and concepts that we used before the financial and sovereign crisis broke out.

As a result, we are now witnessing policy makers, fully caught up in their goal to save Europe by designing futher institutions and policies.  But, essentially, our politicians and civil servants fail to recognize that the European car doesn't respond any more to twists of the steering wheel. The only thing that has helped (only temporarily) is throwing money at the problem.

Are we missing something here?
While our monetary thinking may evolved quite a bit since the 1930s, our knowledge of policy and strategy making is not as widely and heavily discussed and modeled. In theory we could all be aware of mechanisms such as groupthink, tunnel vision, decision complexity, resource complexity etcetera. But in practice we fail to properly recognize and address the fundamental errors in policy making.

Having read the autobiography of Beyen, I tend to believe that we are now learning new lessons in the Eurozone. And the lessons are not so much related to monetary theories but to international policy making under stress. I therefore hereby propose the concept of policy illusion to be better recognized in the future. It is the understandable tendency of policy makers to continue doing what you were doing all the time, even when the world fundamentally required a different way of looking.

And so we can now see our policy makers making policy by looking so intensely at the rear-view mirror that they will miss the fork in the road ahead.

Eurocrisis: the frog may have been long boilt but we fail to notice...

Looking at todays market developments I am very much reminded by the complex discussions of 2007 and 2008. I think also these days, here in Europe we are failing to recognize that the political and decision process has gotten out of control. The bailout-frog is long boilt and dead, but we keep pretending it is alive and will be able to move. And heaven only knows wen reality will sink in.

Mind you, my personal opinion is that the Wednesday-package was not about bailing out Greece but about bailing out Europe. Given that clearly the EU governments don't have the support/cash to fund a bailout fund themselves, they had to provide the EFSF with sufficient flexibility to go shopping for funds in the market. Three cheers to Angela Merkel for finally understanding that...

And the European leaders of course also placed an emergency solution via the IMF in the background. In doing so the (emergency) plumbing is laid for a bailout of Europe. As a result, the financial markets could no longer determine whether the bazooka was sufficiently big. It's size is unknown, now that there is the possibility of some Chinese or Saudi Arabi or the IMF to step in. So, lot's of work to do, but the main problem was solved.

Thus, the essence of the EU-package was that it ensured that the EU itself would qualify for emergency packages, should push come to shove. And this appeared to work for a day or so. And while Draghi outlined to continue to take extra-ordinary measures, Italy got burnt in the market. So that did not bode too well.

And here we are now. Tuesday evening, first of november 2011. Berlusconi is meeting with his Cabinet to discuss measures. As is the Greek Prime Minister who presumably felt that the First November of 2011 was a good day to announce a referendum (1-11-11, it must mean something in Greek mythology). And of course, the Dutch Members of Parliament will also convene this evening. So there will be more discussions. And letters to parliament. And then our Prime Minister will say stuff. And then there will be the G20. And so on, and so on.

I understand that for those working in civil service, there is no giving up on Europe and procedure. They must continue to go the way that has been prescribed and try to make something out of this very desperate situation. But it is all quite similar to the myth/story of the boilt frog. If you put a frog in a glass of water it will jump out if it is heated quickly, but will not when the water is heated slowly. So in a situation of slow changes, the frog will boil to death.^* 

The whole EU-situation now reminds me very much of the complex discussions we had here in the Netherlands with the takeover of ABN AMRO by Barclays, followed by the bid of RBS/Fortis/Santander. This whole deal messed up incredibly and had all kinds of side effects (no attention paid to smaller banks with two of them failing subsequently: DSB Icesave). And the one major lesson that we could learn in the Netherlands was that it is essential to identify the moment in which a process has become too complex to handle.

And what I'm saying here: we may have passed that moment quite some months ago already. We are already witnessing the Lehman 2 moment in the markets, but European politicians are too busy to notice (as they are holding summits and meeting to prevent Lehman 2 from happening).


By the way: later scientists proved that the story was untrue and an urban myth. Maybe someday people will say the same of the Euro...

Interesting development... default Greece confirmed/rumoured (sort of) by Dutch Ministry of Finance..

This morning, Bert Bruggink, CFO Rabobank, was quoted in Financieele Dagblad, saying that -looking at the markets- it was not the question if but when Greece would default. And RTL Nieuws informed the public that the Ministry of Finance was now preparing for all possible (and unthinkable) options in the crisis. Which lead to clippings in the press: 'Dutch Ministry of Finance thinks that default of Greece is imminent.'

Tomorrow, Dutch parliament will discuss the EFSF in parliament. But PvdA (Labour) does not wish to support the extension of the fund if Finland still has its demand for collateral on the table. The 'Green-Left'-party states that with the extension, the EU should also decide on the Euro-commissioner for budget (the MarkRutte proposal). And the Socialist Party doesn't want the EFSF to take over bond-buying from the ECB as, the ECB has 'unlimited funds'.

Meanwhile, national radio bulletins send out the message that sources near to the Ministry of Finance outline that it is preparing for default (19.57). While formally the Ministry may not be calling for orderly default and denies it (20.20). Which means that the 'open' and transparant communication of Minister de Jager, once again creates more confusion than necessary. It's a bit like BNP formally denying the informal rumour about its financial health.

So, looking at this confusion, it does indeed look as if the default of Greece is imminent...

Still amazed at the 'tough' stance of Netherlands Jan Cees de Jager in Greek Crisis

As the readers of this blog know already, here in the Netherlands we have a minority government that has to lean on support of the PVV to survive. With the end result that we have a divided caretaker government that steers on a day-to-day basis, and is unable to steer on long-term policy goals or to achieve fundamental changes.

As a result we see the current government and in particular our Minister of Finance, Jan Cees de Jager, surfing the waves of public sentiment rather than those of solid government. De Jager time and again has to account for the public sentiment and does so in particular with respect to todays political and macro-economic European crisis. He continues to stress that private entities will have to pay along to save Greece. And he says: there will be no more money going to Greece, unless this condition is fulfilled.

Well, this tough policy stance, copied from the Germans, is not bringing us in Europe or the Netherlands anywhere. All it does is prolong the crisis, as we have seen last week in all the market turbulence about Italy and the stress tresting of banks. So perhaps de Jager will slowly retreat. But still we can imagine some more populist talk to enter the European policy arena. Because the populist PVV is still banging the drum that no more money should go to Greece.

It is interesting to analyze the position of de Jager, using some of the insights of former President of the central bank: Nout Wellink. Just two weeks ago, on the day of his departure from the central bank, a book was published with the title 'Wellink talking'. And in it Wellink outlines that at some point in time, bad collateral of banks may result in losses for the ECB and thus also hit the Dutch tax payer. It is telling and striking that only very few people in the Netherlands realize that our 'tough talk' with respect to the Greek situation is just for show. The real costs of this crisis may well end up at the Dutch tax payer via the back door of the ECB.

Although by now I should have gotten used to the 'pragmatic', visionless way in which our government operates, I still remain amazed at the Ostrich policy that our Ministry of Finance uses in dealing with the EU-crisis. If indeed at some point in time the central banks or bankers were to blame for a crisis, now is the time that we can fully blame politicians for not deciding, for bowing towards populists and for a complete lack of leadership.

Greece: let's help the Greek people in solving the democratic errors that caused the financial trouble!

In an earlier post, I outlined that both the EU-countries and Greece were sort of stuck with politicians that may have not done their job well. Populist politicians in the EU have widened the gap with Greece by portraying all the Greek as bandits. Meanwhile, within Greece there is a huge difference between have's and have-nots and between politicians and the people. So while the world may treat Greece as one people, we overlook the distinctions within the Greek people.

ZeroHedge featured an article that made this distinction more specific. The article outlines that Greece may essentially be a kleptocracy. In such a system, a financial and political Elite skims and concentrates the wealth of the nation via corruption and embezzlement while being protected by the winking complicity of their fellow plunderers who hold civil and financial authority.

At present all eyes are focused on Greece and the votes in parliament. While most eyes will focus on the financial part of the vote, I am thinking now about the ramifications for Greece as a democracy and its citizenry. Imagine yourself to be a Greek voter that has over time learnt to live with corruption and the fact that an elite holds the jobs and priviliges. In this role you are essentially illegally taxed by the elite, in order to get services from the state that it should provide you for free or at much lower costs. And now this elite has also frauded the European system so much, that it is obliged to introduce a formal tax upon you as well. This double-taxing appears to be quite unfair and incorrect. And what can you do about it?

The current workings of the Greek democracy will thus inevitably lead to further social unrest than we see already. The people will want to rise up against their political elite in a similar way that in the Middle-East countries we see the people rise against its dictators and their family-clans. And that's what we see in the streets now. It's the same process, but the Greek elite is less pronounced, leass easy to catch and less easy to portray as a single entity.

I am afraid that the EU people and politicians will be so much clouded by their economic mindset and reasoning, that they will misstake and portray the Greek people's resistance as inappropriate given the amount of fraud that has occurred so far in Greek government (the elite). This may lead EU leaders and politicians to explicitly or implicitly favour a violent suppression of completely justified Greek protests.

In my opinion, our attention in the EU should not just be focused on the financial issue. We should take a broader perspective and try to determine how we can help the Greek public get a government with less corruption and less implicit taxes, allowing them to pay the formal taxes that Greece needs to come out of the crisis.

The stakes are high. And not just financially. If we overlook this issue, then essentially we are supporting the dictatorship of the Greek political elite.

And is that something we want the European Union to be based on?


Click here for a Dutch translation of this blogposting.

Greece: we Europeans need to bypass politicians and support the Greek people

The Greek parliament is facing a tough call with respect to future measures to reaarange their financial household book. And at present we are seeing the economists do the calculating, the politicians do the talking/negotiating and the banks may mildly be supportive. Yet all the talk and public debate seems to be in terms of black and white, of division, rather than in terms of connection. That surprises me.

At pressing times like these, it may be time for the citizens themselves to speak out and connect to Greece and its people. The euro has a very positive cost-benefit ratio as it shielded Europe from uncanny complicated situation when the financial crisis hit in 2007. Without it we would have had highly fragmented local financial disasters all over Europe. Politicians are forgetting this too quickly and choosing for populistic lines of reasoning to satisfy what, in their view, is the peoples wish/opinion.

On both a political and human level, there is no other way than supporting the Greek. But we shouldn't let only the politicians and bankers do the work. It is now time for European labour unions, companies, families, sports clubs, stamp collectors and what have you, to reach out to the Greek counterparts that they have been in touch with over the last years.

The message to them could be one of human and moral support, outlining that both the Greek people and the European people are stuck with politicians that sometimes don't do their job right. In Greece they frauded a bit too much and in Europe they are just too populist and lack the leadership to stand up for the euro now. But if we look underneath it all, there is only one thing to do: support the Greek, sympathize with their situation and encourage/support them to make the best of it.