17 May 2012

Five types of Drachmail ‘tearing the eurozone apart’

An unexpectedly fiery assessment of the UK economy by the governor of the Bank of England. First the good news.. almost all unemployment data heading in the right direction, bar long term unemployment. Claimant count, the unemployment rate and youth unemployment all down.

However the Bank of England’s quarterly health check of the economy saw forecast growth this year downgraded to 0.8 per cent as the Jubilee “special factors” look set to prolong the recession (King blames the Queen?). As bad, inflation was predicted to stay higher for longer, continuing to eat into Britain’s living standards into next year. Sir Mervyn blamed this on budget measures and hikes in gas prices.

The real problem? That even that mixed assessment depends on a benign outcome to euro-turmoil. As described by Sir Mervyn King: “our nearest trading partner, the eurozone, is tearing itself apart, with no obvious solution”.

It was a non-scripted remark from the governor, but it is a good way to see what’s going wrong. I see five types of euro-related blackmail going on that will determine Greece’s fate in the eurozone. What might be called “Drachmail”.

1. From Greece’s radical left party Syriza: Drachmail is the conscious use of the threat of disorderly Greek exit from the eurozone, causing widespread contagion to Spain and Italy, as a bargaining chip in negotiations about Greece’s bailout package. It’s a little like being mugged by a heroin addict with a syringe. Aimed at: Frankfurt, Berlin at Brussels. Intended effect: Looser austerity.

2. From the Troika (EU, ECB, IMF, Merkel): Drachmail is the suggestion that if Greek voters continue to vote for anti-bailout deal parties such as Syriza, then they will return to the Drachma. Aimed at: Greek voters. Intended effect: different election result on June 17.

3. From Greece’s unpopular centrist parties, ND and Pasok: Drachmail again concerns the idea that voting Syriza will lead to the drachma. A cut to the bailout funds would lead to any new Greek government having to print IOUs or drachmas. Aimed at: Syriza supporters. Intended effect: More votes for ND and Pasok.

4. From Syriza to other leftwing parties such as the Communists KKE: Drachmail is also securing support from anti-bailout leftists to support Syriza, if they come top of the poll on June 17th, with 100 plus seats, Syriza believe there will be huge pressure on other parties to help Syriza form another government. Aimed at: leftwing Greek parties. Intended effect: radical left government in June.

5. From ECB to the rest of Europe: Drachmail is the need for Greek banks to attain solvency, in return for continued multi-billion euro liquidity funding, keeping Greek banks running, as bank deposits leave. Requires an EU capital injection, depositors not to panic. Aimed at: EU authorities, Greek depositors. Intended effect: Greek banking solvency.

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