The Frankfurt ultimatum

Note kindly translated by Anne-Marie de Grazia

The European Central Bank has chosen its camp – who will be surprised? – it’s the camp of Germany. Through the measure it has just taken against Greece, it is sending a very clear sign to the new government: stay within the framework of the aid plan decided by the “Troïka.” But it has triggered a process which could end up achieving the opposite of what is being sought. Far from bringing the Greek government to give in, this measure might force it to take radical measures which, in time, could provoke a final break between Greece and its creditors and bring the country to leaving the Euro. Such is the logic of the game of “chicken” which we described in the preceding note. [1].

The measures of the ECB

The ECB has decided in the evening of Wednesday, February 4, to suspend the exception which it had conceded Greece, of temporarily  accepting Greek state bonds as collateral for loans to Greek banks. This exception came in return for Greece’s compliance with the aid plan elaborated by the Troïka, the consequences of which have been all-around disastrous, be it for the Greeks or for the state finances. In itself, this measure is by no means decisive. But there is little doubt that in the coming days it will prompt a bank panic, what economists call a “ bank run.” Greek banks will be desperate for liquidities. They will be able to ask for them from the ECB in the framework of a program of urgent help to bank liquidity called ELA. But this program is subjected to the rules of the Troïka and it has been renewed only until the 28th of February.

Concretely, this is tantamount to holding a gun at the head of a newly elected government in order to require it to give up measures approved by its electorate. One will appreciate the acute sense of democracy of the managers of the ECB and of European authorities in general.

The possible reactions of the Greek government

Faced with what can only be called an ultimatum, the Greek government can decide to capitulate. Doing this, it would scuttle itself politically. A public opinion poll conducted last Sunday shows that 70% of the Greeks, that is in reality far more than those who have voted for SYRIZA on January 25th, support the government and believe it to be capable of conducting a true policy of survival for the country.

The Greek government can therefore implement counter-measures. Some of these are technical (momentary closing of banks, limits to retrievals by private persons). But others are more political. In reality, when the ECB says that it is lending to Greek banks, it means that it is authorizing the Central Bank of Greece to do so. The organization of the ECB has not done away with the various Central Banks of the member countries of the Eurozone. It has put them into a network under the authority of the ECB, operating out of Frankfurt. The Greek government can therefore decide to requisition the Central Bank in order to constrain it to furnish the Greek banks in liquidities (in Euro). But in so doing, it will be violating the treaties constituting the Economic and Monetary Union, that is, the Eurozone. It could do it by calling on the threat which the ECB is bringing to bear upon Greece and calling the people as witness to this unheard of fact of a technical instance interfering with the political choices of a sovereign people.

The consequences.

Such a decision would of course be loaded with consequences. It would be the ECB’s turn to find itself with its back to the wall. Were it to accept the measure of requisition, it would be acknowledging its powerlessness and give ideas of independence to the other countries. And this in a general setting in which it has already acted on the increasing fragmenting of the Eurozone, as demonstrated by the measures announced by Mario Draghi on January 22, and which have been a little bit hastily assimilated to a « quantitative easing ».

As a matter of fact, German pressure, direct and indirect (by means of allied countries such as Finland and Austria) on the ECB is presently such that one can hardly conceive of the latter accepting a possible fait accompli coming from Athens. We must repeat that what is in the balance is the austerity policy of Mrs Merkel and especially its imposition on the whole of Europe, a necessary condition for making sure that no implementation of the logic of a Transfer Union to the detriment of Germany will be taking place. Germany cannot give in, or it will see its credibility vanish at once.

In the case of the Central Bank of Greece being requisitioned, which could occur on February 28th or March 1st, the European Central Bank could decide to no longer admit « Greek » euros in circulation. Such a measure has already been applied temporarily to Cyprus. It is tantamount to expulsing, or threatening to expulse, a country from the Eurozone.


An exit from the Euro?

In reality, Greece is today in a better situation than it was in 2010 to contemplate an exit from the Euro. At that time, the budget was critically unbalanced. At present, the budget is balanced at the level of the primary balance, which comes down to saying that if Greece had no debt at all (and therefore no interests to pay back) it would have no need at all to borrow again, and would even have an excess to its benefit. As for the trade balance, it is slightly in deficit. But, taking into account the price-resilience which can be calculated, if Greece devaluated by 30% to 35%, it would increase its exports significantly and would find itself in excess. Let’s moreover point out that a devaluation of the Greek currency would increase the fiscal receipts in local currency coming from the ship owners, because the latter are operating in dollars. As for direct investment in the country, one is not at pains imagining that, what with a balanced budget, a positive trade balance and a very serious competitive advantage over its competition, they would not be slow in coming. Of course, Greece would default on its debt in the case of an exit from the Euro. But, with no need to borrow any longer, it will not undergo much risk by cutting itself off from its creditors. In the contrary, it will be the latter who will be coming to resipiscence, as is shown by the history of the many countries which have gone through a default on their debt.

A devaluation of 30% to 35% would give back to the economy not only its competitiveness but would give the government room for maneuvre in the social domain, in the same time as the government would be gaining some through defaulting on the debt.

Greece must therefore resolutely contemplate the possibility of leaving the Eurozone. If such a solution should make itself necessary, it is not Greece, but the Eurozone itself who would suffer the consequences. It must tell the authorities of the ECB and of the European Union that, if needed, it will not hesitate to implement such a solution.

What is it all about?

It is necessary not to let oneself be abused by the technicity, real or imagined, of the various measures and counter-measures which have been or may be taken. Fundamentally, this measure taken by the ECB confronts us with the problem of the people’s sovereignty in a member country of the Eurozone, that is, with the problem of democracy.

We are today faced with an inexpiable conflict between technocratic legitimacy and democratic legitimacy.

In this regard, the outcome for Greece concerns us all.

Do we want to live free or are we ready to take on the yoke ?

[1] Sapir J., « Greece’s brinkmanship », note published on RussEurope, on 3 February 2015


Jacques Sapir

Ses travaux de chercheur se sont orientés dans trois dimensions, l’étude de l’économie russe et de la transition, l’analyse des crises financières et des recherches théoriques sur les institutions économiques et les interactions entre les comportements individuels. Il a poursuivi ses recherches à partir de 2000 sur les interactions entre les régimes de change, la structuration des systèmes financiers et les instabilités macroéconomiques. Depuis 2007 il s'est impliqué dans l’analyse de la crise financière actuelle, et en particulier dans la crise de la zone Euro.

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