2017/02/22 Commentary: European Kool-Aid II
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Commentary: Wednesday, February 22, 2017
European Kool-Aid II
In the endless game that is the European and Euro-zone economic and fiscal reform effort, ‘kick the can’ has become the normal operating procedure. Anyone who doubts that can just reference how many years (not just months or quarters) it has now been that ECB President 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 continued debt problem. For years they’ve made downward revisions to overly optimistic anticipation of stronger Greek growth (more below.)
This is the ‘European Kool-Aid’ that assists those creditors in believing 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 Wednesday’s Commentary: Greece (again)? European Kool-Aid 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 the European Union (EU) and IMF negotiators in the face of a self-imposed deadline to reach agreement by Monday of this week… or maybe not really a ‘deadline’ at all. As noted in last Wednesday’s post, there were some serious disagreements even on the IMF’s board regarding the degree of the budget surplus Greece can achieve over the next several years. As discussed then, 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…
…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?
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