How about some 'market non-conforming democracy' Angela Merkel?

If the yes votes wins Sunday’s Greek referendum and Syriza falls, “too many will believe”, fretted the Guardian’s columnist in chief, Jonathan Freedland on Saturday, that Brussels and Berlin engineered the toppling of a democratically elected government.

I wonder where they could have picked up that delusionary belief?

It clearly can’t have come from the senior German conservative politician, described as “one of Europe’s most influential politicians” who told the Times newspaper  last week that Angela Merkel’s CDU would block any deal with the ‘communists’ Alexis Tsipras and Yanis Varoufakis, campaign vociferously for a ‘yes’ vote, and then install a ‘technical’ government in Syriza’s place.

Revelations from Martin Schulz, German social democrat (!) and President of the European Parliament, to the effect he wanted to Syriza to resign and be replaced with a “technocratic government so we can continue to negotiate” obviously had no effect.

But, perhaps, you know, “too many” have just been paying attention to the record of Eurozone institutions and core country governments like Germany’s since the beginning of the financial crisis. A record that betrays an unbending desire to topple recalcitrant governments and views the will of the people as a minor impediment to which no credence should be given.

Let’s have a brief refresh

Ireland, February 2011

On the eve on the Irish general election in February 2011, the European Commission helpfully intervened to point out that the result would have absolutely no effect on the country’s IMF-EU bail-out conditions, imposed after the financial sector imploded and its enormous bad debts were transferred to the state. It could not be renegotiated as it was “between the EU and the Republic of Ireland, it's not an agreement between an institution and a particular government,” the Commission said.

The Irish government, it emerged last month, was strong-armed by European Commission into agreeing the 2010 bail-out in the first place, and also to accepting that ‘senior bondholders’ such as large banks, should not share any losses. The ex-General Secretary of the Irish government’s Finance Department, told an inquiry into the causes of the financial crisis in June that the European Commission applied enormous pressure through “misinformation” and “anonymous media briefings” so that Ireland swiftly agreed to the €85 billion IMF-EU bail-out.

All this was quite in keeping with the views expressed in May 2011 by now European Commission President Jean-Claude Juncker, that fiscal policy was “too important” for voters to have any say over, and should be determined in “dark, secret debates”.

But, you can say that, technically speaking, Eurozone institutions were not toppling governments, just telling them what to do.

Hang on a minute …

Portugal, April 2011

After months of Portuguese Prime Minister Jose Socrates refusing to accept a bail-out, the European Central Bank (ECB) intervened for the sake of the banks (sorry Eurozone). In April 2011, Portuguese banks decided to stop buying government bonds if Lisbon did not seek a rescue. The head of the country’s banking association admitted that he had been given “clear instructions” from the ECB and Bank of Portugal to cut off the tap.

During the ensuing general election campaign, ECB and European Commission experts demanded that all parties sign an accord agreeing to the bail-out memorandum. Before the election, that is. “Let's not have a public dialogue every day,” said EU economy commissioner, Olli Rehn. Portugal has since been lauded by the London School of Economics for establishing consensus over implementing austerity. Well done.

Moving swiftly on …

Greece, November 2011

You could be forgiven for thinking the Eurozone’s current travails with Alexis Tsipras and co were the first time a Greek Prime Minister had thought of holding a referendum on bail-out conditions. But back in November 2011, Prime Minister Georges Papandreou (of the centre-left Pasok party, currently riding high at about 3% in the polls), announced a referendum on whether to remain in the euro and accept the then austerity measures being proposed. But before it could happen he was called in for a swift re-education session with Angela Merkel, then French President Nicolas Sarkozy, the ubiquitous Jean-Claude Juncker, then European Commission President Jose Manuel Barroso and the IMF’s Christine Lagarde. “We made Papandreou ... aware of the fact that his behavior is disloyal,” said Juncker.

But they didn’t stop there. In the words of the Financial Times journalist, Peter Spiegel: “Mr Barroso had called Mr Samaras, the Greek opposition leader, from his hotel before the meeting. He knew Mr Samaras was desperate to avoid the referendum. Mr Samaras told Mr Barroso he was now willing to sign on to a national unity government between his New Democracy party and Pasok – something he had assiduously avoided for months in the hopes he could secure the premiership on his own. Mr Barroso summoned his cabinet and other commission staff to his suite… to plot strategy. He decided he would not tell Mr Sarkozy or Ms Merkel of the conversation but according to people in the room, they began discussing names of possible technocrats to take over from Mr Papandreou in a national unity government. The first person to come to Mr Barroso’s lips was Lucas Papademos, the Greek economist who had left his post as vice-president of the ECB a year earlier. Within a week, Mr Papademos would have the job.”

Technocrats, engineered to take over from elected politicians, who’d have thought it?

Last but not least:

Italy, November 2011

Alright, this one involves Silvio Berlusconi, who you could say, deserved it, but the point still holds. If the EU could remove an obstructive right-wing politician, they would have no qualms about doing so in the case of a left-wing government - like Syriza.

According to a 2014 book by former US Treasury secretary, Timothy Geitner, he was approached by EU officials in November 2011 with a plan to overthrow Berlusconi. The idea was that the US would refuse to back IMF loans to Italy as long as Berlusconi remained in power. Geitner didn’t oblige but the plotting didn’t stop there.

According Lorenzo Bini-Smaghi, Italy’s former member on the European Central Banks’s executive board, the EU decided to remove Berlusconi and replace him with former European Commissioner, Mario Monti, because he started threatening in private meetings to ditch the euro and bring back Italy’s former currency, the Lira.

What did definitely happen was that the interest rate on Italian government bonds rocketed in the autumn of 2011 and Berlusconi resigned on 9 November. He was replaced by Monti, who announced an austerity programme and the interest rate miraculously plummeted.

Greece, 2015?

The difference now is that the current Greek government is not prepared to accept ‘dark, secret debates’ or hotel room coups and won’t go quietly into the night. With a ‘no’ vote in Sunday’s referendum, Angela Merkel’s guiding philosophy of ‘market conforming democracy’ is threatening to turn into, heaven forfend, market non-conforming democracy.

And they are really, really asking for it …

Vote Oxo cube

So this is a private debt crisis after all

 The return of the Greek crisis and its revelations

They want you to believe it’s all about public debt. Reckless spending by governments has caused a ballooning of debt, which can only be addressed, painful though it is, by years of austerity, and the drive to be more ‘competitive’. So the mainstream debate is confined to arguing whether national debt and deficits are being shrunk sufficiently. And if it turns out they aren’t, the logical conclusion is that austerity is not being applied with enough vigour. The condensed version of this argument is ‘this doesn’t work, so let’s have more of it’.

But the return of the Greek debt crisis has punctured a giant hole in this masochistic ideological construct. Because, contrary to the official narrative, Greece wasn’t bailed out at all; its creditors were.  Analysis reveals that around 89% of the bailout money has gone to creditors:

This is masked by the fact that, as a result of the 2012 restructure, Greek debt was transferred from the private sector to the EU/IMF/ECB Troika. So the debt crisis can now be presented as a generous bail-out by prudent, efficient Northern European countries to profligate, lazy Southern Europeans. This picture, eagerly lapped up by the mainstream media, such as the BBC, conspicuously omits the most important players.

So, in the interests of accuracy, they should be reinstated. Europe has followed the path trodden by the US, in that the private debt of highly leveraged (in plain language indebted), financial institutions has been transformed into the public debt of states. With the caveat that the indebtedness of European banks - and that includes the UK - is actually much higher. According to Mark Blyth, author of Austerity: The History of a Dangerous Idea, in 2008 the combined assets of the top six US banks came to 61% of US GDP. That’s about 10% of GDP per bank. When they fail you have a huge problem.

But in Europe, the situation was way more extreme. “In the same year,” he writes, “the top three French banks had a combined asset footprint of 316% of French GDP. “The top two German banks had assets equal to 114% of German GDP. In 2011, these figures were 245% and 117% respectively. Deutsche Bank alone had an asset footprint of over 80% of German GDP and runs an operational leverage of around 40 to 1. This means a mere 3% turn against its assets impairs its whole balance sheet and potentially imperils the German sovereign. One Dutch bank, ING, has an asset footprint that is 211% of its sovereign’s GDP … The top four UK banks have a combined asset footprint of 394% of UK GDP”.

If you’re seeking an example of profligacy and rash borrowing, here it is. And it’s not Greek coloured.

What happened, in a nutshell, was that these supposedly more conservative European banks borrowed like crazy to profit from the government debt of countries such as Greece, Spain and Portugal. Chronically overleveraged, when their investments in US mortgage-backed securities turned ugly in 2008, they swiftly became insolvent. In the words of Stephanie Kretz, private banking investment strategist with Swiss bank Lombard Odier, in 2012, “Germany, by lending money to the peripheral countries, is trying to prevent its fragile and leveraged banks from getting hit, effectively orchestrating a back-door recapitalisation of its own banking system.”

The result has been what I have described as a peculiarly one-eyed version of austerity. The penance of paying back debt is only applied to states, and states that have become indebted as a direct consequence of taking on private sector debt. Banks are not permitted to fail, or take responsibility for their bad debts. In contrast to the liquidationism of 1930s’ austerity, in which the insolvent firms were allowed to go to the wall, we have now the mirror opposite:  preservationism. None of the rottenness has been purged from the system, as early 1930s US Treasury secretary Andrew Mellon, advocated. Instead, it has become someone else’s problem. Namely, ours.

The official attitude towards state and private debt diverges wildly. The EU’s newly minted fiscal compact requires that the government’s deficit not exceed 3% of GDP.  Basel III, meanwhile, the rules governing banks’ capital reserve requirements, rewritten after the financial crisis because Basel II was retrospectively considered too lax, insists on a leverage ratio of 33:1. Lehman Brothers, whose collapse triggered the financial crisis, had a leverage ratio of 31:1. One law for public debt, quite another if it happens to be private.

It has fallen to faint and isolated voices to point out the real story of what happened; how the nationalisation of private debt led to huge problems for public finances. “A crisis of private finance, emerging in the financial system itself, was not ended but transformed into a burden for public finance,” says James Meadway, senior economist with the New Economics Foundation, “and through austerity, the immense cost of the transformation is now imposing itself on society.”

But the underlying problem is not solved by pointing out the evasiveness of the official account. However well-camouflaged, the crisis of private finance has clearly not been ended. The transformation of austerity, in this sense, hasn’t worked. It hasn’t erased private debts. “After the 2008 financial crisis and the longest and deepest global recession since World War II, it was widely expected that the world’s economies would deleverage,” says a February 2015 report by the consultants McKinsey. “It has not happened. Instead, debt continues to grow in nearly all countries, in both absolute terms and relative to GDP.” In Britain, total debt (of which government debt is a relatively small part) was 484% of GDP at the end of 2013, down from 507% in 2011, but still way above the 310% level it stood at in 2000.

The question is, does it matter? Austerity-mongers like George Osborne obsess endlessly about the evils of public debt, even as it continually rises, whilst managing not to mention private debt at all. If you reverse that attitude, do you not become an equally warped private sector austerian? However, there are sound reasons why private debt is a genuinely pressing issue. For a start it’s much larger than public debt. Secondly, many economists believe that beyond a certain level, which we’ve certainly exceeded, private debt makes a new financial crisis all but inevitable. Thirdly, it constrains economic growth and causes stagnating or declining real wages; problems that only exacerbate the original problem. Lastly, even without the assistance of austerity, private debt causes public debt to rise.

It is said that the overhang of private debt will cause a Japanese style ‘lost decade’, in which economic growth remains low, people are starved of economic opportunities and real wages fall. But, in truth, Japan, the most privately indebted country on earth, has suffered a ‘lost two decades’, and the Japanese government’s recent return to massive Quantitative Easing in an attempt to stimulate the economy indicates that, a quarter of a century on, the so-called lost decade is still not over.

One country, famously, did let its banks take responsibility for their bad debts and collapse. In 2008, Iceland decided to let its three biggest banks, with combined assets ten times the country’s GDP, fail. It is now thriving, advocates say. But the banks in question had almost exclusively “off border” debt, and Iceland’s domestic banking largely went on uninterrupted. In the monetary union of the Eurozone, bank debt is decidedly domestic, and much larger. Moreover, it is not just financial institutions who are indebted. Non-financial corporations, which pioneered the process of ‘disintermediation’ – lending between themselves and bypassing the banks, are also hugely indebted. Consumers may have paid down some of their debts in the aftermath of the financial crisis, but they are now rising again.

Recognising that austerity is, in the words of Mark Blyth, ‘the greatest bait and switch operation in modern history’, does not change the fact that we have an economy that exists on private debt. Writing down that debt will not be a painless process. Indeed it could cause a deep depression. But not dealing with the problem is far from painless either, and the pain that results seems to have no end in sight.