EU & IMF: More European Kool-Aid

While it is not this week due to Monday turning into a non-deadline--might the endless game of delay in European and Euro-zone reform be encouraging the next Greek Debt and overall Euro-zone Crises? "Kick the can" has become normal operating procedure. Anyone who doubts that can just reference how many years (not just months or quarters) it has now been that European Central Bank President Mario Draghi has complained that the necessary ‘structural reform’ complement to ECB’s monetary stimulus has not been anywhere near as extensive as necessary to reinforce the ECB’s efforts.

And when it comes to lack of movement, there is also the still intractable position of the creditor nations in Europe toward Greece’s seemingly endless debt problem. During the past six years they’ve made downward revisions to overly optimistic anticipation of stronger Greek growth (more below.)

Next chapter

This is the "European Kool-Aid" that allows those creditors to believe they can avoid admitting that Greece cannot possibly return to real growth (or a normal society) without more significant debt forgiveness. All of our reasons for that that Greek weakness, and even the degree to which the International Monetary Fund (IMF) tends to agree that further significant debt forgiveness is necessary, were reviewed at length in last Friday’s European Kool-Aid: Greece (again?) post. We refer you back to that for the extended discussion. Yet there is now another chapter in that failure.

It is the classic kick the can (i.e. “kick the can down the road” in order to delay dealing with the problems until later) response of European Union (EU) and IMF negotiators to the self-imposed deadline to reach agreement by Monday of this week… or maybe not really a ‘deadline’ at all. As noted in last Friday’s post, there were some serious disagreements even on the IMF’s board regarding the degree of budget surplus Greece can achieve over the next several years.

IMF board split

The non-European members of the IMF were attempting to stand up to Europeans who were demanding a much higher surplus requirement. Needless to say, that once again entails further major benefits cuts and higher taxes in a Greek economy that has already been decimated by six years of cutbacks. That has shrunk the Greek economy to the point where even the same levels of debt are very realistically harder to service. This is a classical "devolutionary" spiral where the debt cannot ever be handled by the smaller economy. So what do you think happened in the EU-IMF disagreement? 

Yep, the ‘more stringent requirements’ European faction at the IMF managed to exert a goodly bit of influence on the ‘more debt forgiveness’ prone non-European wing. It has been decided that maybe Greece can indeed hit that higher budget surplus target.

In other words, it is more of the same parsimony and dispensing punishment to the Greeks. That is for their sin of taking advantage of the European banks mindless extended purchases of less than credible major Greek government bond offerings into 2009 (the original "European Kool-Aid," with more in last Friday’s post on that.)  

The truly specious nature of the EU-IMF "agreement" (at least tacitly so) into Monday’s previous ostensible ‘deadline’ is highlighted in an excellent Financial Times article on Monday. It fully articulated the degree to which this is merely short-term confrontation avoidance ("kick the can") rather than any actual conclusion that Greece is capable of hitting the more stringent budget surplus targets the European creditors once again blithely assert can be achieved. That is nothing more than an excuse to avoid the necessity of further debt reduction.

Not this week, but soon

This is a formula for actually triggering another "Greek Debt Crisis" as its next major debt repayment deadline arrives in July. While the IMF’s European directors have held sway for now, according to that Finacial Times article a senior IMF official has noted, “But differences remain on several important issues and we are clearly still well away from staff level agreement.”

In other words, IMF has agreed to take a further look while still leaving quite a bit of room to disagree with the EU: Agreeing to disagree, yet sending a team back to Athens for further study in spite of IMF skepticism. Yet this is being reported as some sort of resolution of EU-IMF-Greek government issues. In Trumpian terms it is ‘fake news.’

Greek government complicity

And most bizarre of all in many rational observers point of view is the Greek government’s complicity in imposing yet more crushing reforms in order to achieve the near term goal of hitting a 3.5% fiscal surplus. Yet this would need to be sustained over the long term, which almost no other country had ever achieved; and much less one with a damaged and weakened economy. This is the view of many independent observers.

History Doesn’t Lie

And getting back to the reality of previous EU and Euro-zone reliance on overly optimistic Greek growth projections as a means to avoid the ugly truth that Greece must either get more extensive debt relief or ultimately leave the Euro-zone, a picture is worth a thousand words. The graphic from a Monday, February 13th FT article on Greek yields is striking:

So the EU’s position on the likelihood of Greek growth being sufficient to achieve the necessary fiscal surplus target is not just misguided for this round of further bailout funding negotiations. It is the classic definition of the actions of a ‘crazy person’: doing the same thing over and over again while expecting a different result.

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