You don’t have to be a radical leftist to get that Athens needs debt relief. And a Syriza victory in this month’s elections might be the only way to get it. My column for Foreign Policy
I was interviewed by The Press Project on Syriza’s economic programme for Greece. I said:
While there is much in Syriza’s programme that I don’t agree with, Alex Tsipras is right that Greece needs debt relief in order to recover and that the country should not be bled dry to pay off its foreign creditors. Where are the other voices demanding debt justice? Greece needs them. It’s a tragedy that Greece’s corrupt elites have collaborated with eurozone policymakers at the expense of ordinary Greeks who continue to suffer unnecessarily great hardship. And when new elections are called, Greeks should not be blackmailed by EU leaders into voting for Samaras again. If Angela Merkel was wise, she would make a make a virtue of a necessity and call a debt conference to write down Greece’s debts, as Germany’s were in 1953. Failing that, Greeks need to stand up for themselves and elect a government willing to threaten default on the EU loans, which were not a gesture of solidarity but a bailout of the French and German banks and investors that recklessly lent to Greece, and which are in any case unpayable.
European Spring has been selected as among the Financial Times’ Best Books of 2014.
Martin Wolf wrote:
This is a splendid book on the European malaise. Legrain argues compellingly that policy makers’ response to that crisis was and remains a disaster. He warns that the eurozone is still far from healthy and that the German example, which members are supposed to follow, is a delusion. He notes, too, that the UK’s recovery is built on sand.
I took part in a panel discussion on Tonight with Vincent Browne on Ireland’s TV3 that went out on Thursday 27 November and was recorded in Charleville on Saturday 22 November. I argued that while the injustice of eurozone institutions blackmailing the Irish government to impose the bank debt owed to foreign creditors on Irish taxpayers was flagrant, it would be a mistake to leave the EU.
I was invited by the Ballyhea Says No group of citizens protesting against the €64 billion bank debt unjustly imposed on Irish taxpayers by eurozone policymakers, whose determination to right this wrong is admirable.
I was interviewed about the ECB and the threat of deflation in the eurozone on CNBC Europe’s Squawk Box Europe on 21 November 2014
I am quoted repeatedly in Ian Traynor’s excellent piece on European politics in last Sunday’s Observer.
Philippe Legrain, an economist and former adviser to then European Commission president José Manuel Barroso, described the tests as a “whitewash”.
“The ECB singles out less important banks in less important countries and gives the German banks a clear bill of health,” Mr Legrain said.
Others were less convinced by the outcome of the tests, however. Philippe Legrain, an economist and former EC adviser, said: “It’s ludicrous that there is only a capital shortfall of €9.5bn. The ECB singles out less important banks in less important countries and gives the German banks a clear bill of health.”
The “comprehensive” assessment of the health of eurozone banks – the ECB’s long-awaited asset-quality review (AQR) of eurozone banks and latest European Banking Authority (EBA) stress tests - concludes that eurozone banks had a capital shortfall of only €24.6 billion as of end-2013 and only €9.5 billion as of now. That is ludicrously overoptimistic. Independent assessments, for example by Professor Viral Acharya of the Stern School of Business at New York University and Sascha Steffen of the European School of Management and Technology, find much larger figures.
Throughout the crisis, the ECB has failed to act independently of eurozone banks, especially those in politically powerful countries such as Germany, while the EBA’s previous stress tests have all quickly been discredited. And given their capture by the banks they oversee, the pressure not to offend powerful governments and their desire not to spark market panic, this latest effort looks like another whitewash. Moreover, captured national supervisors, which tend to see local banks as national champions, were intimately involved in the process and doubtless had plenty of scope to hide problems, as indeed do banks themselves, which are always better informed than watchdogs. As I suggested it would, the assessment singles out less important banks in less politically powerful countries and lets German banks off the hook.
The premise for the banking union was that given that national supervisors had been less than honest about domestic banks’ problems, an independent and more rigorous eurozone supervisor was needed. But given that the AQR finds only small discrepancies with assessments by banks and national supervisors – the book value of banks’ €22 trillion in assets is adjusted by a mere €48 billion, while non-performing loans are increased by only 18% (€136 billion) to $879 billion – either the banks and national supervisors were already honest, which we know isn’t the case, or the ECB isn’t being honest either.
Even if you take the ECB at its word, the exercise is not comprehensive. The AQR covers only 57% of the risk-weighted assets of 130 banks that account for 81.6% of eurozone bank assets, ie, less than half (46.5%) of eurozone bank assets. Some of the exclusions are major and significant: Germany’s savings banks, the Sparkassen, which collectively have more than €1 trillion in assets, are not part of the exercise; the ECB also takes on good faith that many of the residential mortgage assets of German banks are properly valued – because why would they have an incentive to lie? Two of the politically powerful German banks that scraped through the assessment, bailed-out Commerzbank and HSH Nordbank (chaired by former German deputy finance minister and EBRD President Thomas Mirow), are among those benefiting from the ECB’s good faith in them.
Nor are the stress tests particularly stressful. They require banks to have at least an 8% Tier 1 capital ratio in the baseline scenario and only 5.5% in the adverse scenario. But as has been pointed out by Bank of England chief economist Andy Haldane and many others, risk-weighted asset ratios are easily manipulable and are a poor guide to a bank’s strength. A simple, unmanipulated leverage ratio of assets to debts should at the very least be used as a backstop. As the calculations by Acharya and Steffen show, they suggest much bigger problems in eurozone banks than the ECB/EBA claim.
The baseline scenario in the stress tests is based on the winter forecast of the European Commission, which has consistently been over-optimistic throughout the crisis. For example, when my book European Spring: Why Our Economies and Politics are in a Mess – and How to Put Them Right was published in April, the Commission claimed that the eurozone recovery was “strengthening”. It has since stalled. The adverse scenario is based on a eurozone recession and a return of bond-market stress, but fails to cover the possibility of deflation. Indeed, the adverse scenario is based on inflation scenarios that are actually optimistic: 1.0% in 2014 (it is currently 0.3%), 0.6% in 2015 and 0.3% in 2016. Given that deflation would wreak havoc with banks’ balance sheets, that is a farce.
This is just an initial assessment; given the huge volume of information provided by the ECB and EBA, I’ve only had time to look through some of it. But it is enough to suggest that this latest exercise by eurozone banking authorities is another whitewash.
Yannis Palaiologos invited me to speak at the launch of his excellent new book, The Thirteenth Labour of Hercules: Inside the Greek Crisis, at LSE. I spoke about how EU institutions have locked Greece in a debtor’s prison and imposed unnecessary misery in outrageous ways. My intervention starts around the 42nd minute and lasts 9 minutes.
I was interviewed on BBC World Service’s Newsday about how to make the World Trade Organisation more effective. Last week director-general Roberto Azevedo said the WTO was “prone to paralysis” following India’s refusal to lift its veto on the Bali deal agreed last December to streamline customs procedures, which was meant to be a confidence-building exercise to kickstart the long-stalled Doha Round of broader trade negotiations.