Monday, January 26, 2015

The Political Reality of Syriza and the Political Sustainability of Capitalism

The stubborn insistence of the Eurozone authorities on unending austerity in the face of an epic economic downturn blew up in Europe's face yesterday with the political triumph of Syriza, and its leader Alex Tsipras.

Syriza is a coalition of left and radical left parties that now controls the Greek Parliament.  They have promised Greek voters a negotiated write-down of Greece's massive sovereign debt and an end to austerity in Greece; others in the Eurozone say that is simply not possible. Greece thus now poses a major threat to stability in the Eurozone, a risk I raised in a blog post in December and in a series of posts over the past few years.

Here is how the WSJ.com characterizes Syriza's platform:
A Syriza victory marks an astonishing upset of Europe’s political order, which decades ago settled into an orthodox centrism while many in Syriza describe themselves as Marxists. It emboldens the challenges of other radical parties, from the right-wing National Front in France to the newly formed left-wing Podemos party in Spain, and it sets Greece on a collision course with Germany and its other eurozone rescuers.

And, this is how the Economist sees a potential path to the dreaded Grexit from the Eurozone:
A Grexit could happen if Syriza, the left-wing opposition party led by Alexis Tsipras, which is currently ahead in the polls, wins the election and confronts Greece’s creditors with demands they find incompatible with Greece staying in the monetary union. A political decision to expel Greece could be enforced by the European Central Bank cutting off Greek banks from its liquidity operations and payments system. 
The same Economist article also lays out an alternative scenario whereby a Grexit is avoided. The key point, however, is that in coming weeks Greece and Germany are going to be playing "chicken" with the Eurozone. Any miscalculation on either side could lead to Greek exiting the Eurozone.

Photograph of Barry EichengreenOf course, everyone knows that at the first sign of Grexit, all those holding Euros in Greece would face temptations to move their money to safer place lest they be forced to accept Drachmas (sure to lose value) in exchange for their Euros. Further, those holding Euros in Spain, Italy, Portugal and other troubled Euro nations would need to confront the reality that Eurozone membership is not inviolable, and they too would move their cash to safer climes. If enough cash moves fast enough then banks will fail throughout the Eurozone and that means a financial crisis is apt to result. Then loses would be distributed through the non-transparent and government subsidized derivatives markets to who knows which banks.

Renown international economist Barry Eichengreen believes the ensuing crisis would be "Lehman squared." It is very hard to disagree with Professor Eichengreen and his analysis is in accordance with mainstream economic thinking. The only good news is that Mario Draghi foamed the runway last Thursday through his massive $1 trillion quantitative easing program. Still that will likely not prove enough to stem a panic-induced contagion across the periphery of the Eurozone--at best it will simply mitigate the inevitable downturn a bit.

Greece currently faces billions in debt repayments this year. The next payments are due March 1, with more due in the summer. The Greek banking system is basically kept afloat right now only with ECB support. The government debt burden amounts to over 170 percent of GDP. Unemployment is 28 percent and GDP has plunged 26 percent since the onset of the crisis. Youth unemployment is over 50 percent. These numbers reflect a true humanitarian nightmare with little real economic hope for Greece, particularly its youth. While I am always suspicious of leftist solutions to anything (think North Korea or compare old West Germany to Old East Germany), one can hardly blame the Greeks for responding to severe economic pain in the same manner that US voters did in 1932.

They voted for uncertainty over certain economic pain. It could have been worse. Consider Germany in the 1930s, or Russia in the depths of the manifest misery of World War I.
Economist CC c      c
Capitalism must be defended politically by governing elites to assure its viability at the polls. This means that growth-retarding elites must be disempowered under the rule of of law from entrenching their own privileges at the expense of a true competitive meritocracy. Real economic growth must be permitted based upon the talents and innovations of a fully empowered population. Growth and opportunity must be broadly shared to assure maximum political viability. Crony capitalism whereby law and markets are rigged in favor of the few is ultimately politically doomed.

Unfortunately, with respect to Greece, it appears the aid rendered by the troika (ECB, IMF and Eurozone) ultimately aimed to buy time for Eurozone banks and gave little thought to the well-being of the people of Greece. Instead, they (particularly Germany) prescribed poison. Now, the Eurozone must deal with the political whirlwind of that ill-starred decision.

1 comment:

  1. As a trader, I have been looking for this kind of source of providing the trading knowledge for learners. I really appreciate your work.

    ReplyDelete