Comments on the ESM-Treaty from a non-lawyer

Well, tomorrow is the day! At 10 a.m. tomorrow, the German Constitutional Court will present its opinion on the ESM-Treaty. My prediction? It will say: "Yes, but..."

In last Sunday's talk-show on ARD, the former ECB/Bundesbank executive Otmar Issing was asked whether he understood the ESM-Treaty. His answer: "No, but I hope the Constitutional Court will clarify what it means".

This prompted me to finally read the 60+ pages from start to finish.

I was reminded of my bank training program 40 years ago. In one class, we studied legal documentation such as promissory notes. Each promissory note began with the phrase: "For value received, the undersigned promises to pay...". I asked the question: "Why does it say 'for value received'"?

I was educated that if it didn't stipulate "for value received", the debtor could later refuse payment, arguing that he had never received any value in exchange for signing the promissory note.

From that, I learned that it was not only important to understand what the text of a treaty said but, equally important, why such text was put into the treaty in the first place. Typically, it is put in there to prevent certain things from happening or to make sure that certain things can be done without explicitly stating so.

With that in mind, let me list a few quotes from the ESM-Treaty where the political leadership should have, but did not, explain to the people why they were put into the treaty, what they are supposed to prevent and which things can be done without being explicitly stated. It would be helpful if the Constitutional Court's "but" would shed some light on this.

Here are the quotes:

"The ESM, its property, funding and assets, wherever located and by whomsoever held, shall enjoy immunity from every form of judicial process except to the extent that the ESM expressly waives its immunity for the purpose of any proceedings or by the terms of any contract, including the documentation of the funding instruments".

"The property, funding and assets of the ESM shall, wherever located and by whomsoever held, be immune from search, requisition, confiscation, expropriation or any other form of seizure, taking or foreclosure by executive, judicial, administrative or legislative action".

"The archives of the ESM and all documents belonging to the ESM or held by it, shall be inviolable".

"In the interest of the ESM, the Chairperson of the Board of Governors, Governors, alternate Governors, Directors, alternate Directors, as well as the Managing Director and other staff members shall be immune from legal proceedings with respect to acts performed by them in their official capacity and shall enjoy inviolability in respect of their official papers and documents".

Without any additional explanation, these clauses literally beg the questions of why they were put into the treaty, what they are supposed to prevent and which things can be done without being explicitly stated.

I have looked up the Statute of the ECB. There is no such language in that Statute (interestingly, there is a lot more language about the responsibilities of ECB-officials than there is in the ESM-Treaty about ESM-officials). Why would ESM-officials have been put in a senior position relative to ECB-officials?

Does anyone really believe that this language made it into the ESM-Treaty because it is standard language? Of course, not! It made it into the treaty because there were serious concerns that, if they were not there, substantial trouble could be caused later. What are they supposed to prevent? Very easy! They are, among others, intended to prevent personal responsibility of the executives involved. Does that encourage those executives to do things which are not explicitly stated in the treaty as being permitted? Of course, it does!

I am not suggesting that such wording is absolutely impermissible. I do suggest, however, that political leadership has immensely fallen short of its responsibility to explain the ESM-Treaty in more detail to the people.


Addendum per 12.09.2012
At least the German Constitutional Court stipulated that no relevant ESM-information can be withheld from the German Parliament. 

Perplexing unemployment in Greece

I recommend reading this article from the Ekathimerini but equally so do I recommend reading the comments to it!

Greece: the pain behind the beauty

A very moving article about current hardship cases in Greece was published by the BBC. The following statement comes from this article:

This is happening in a European Union country - a place of unparalleled cultural richness, of beauty, of history. How has it come to this?

To me, Greece has been a case of very uneven wealth/income distribution even before the EU/Euro. My wife's parents, retired tobacco farmers, had to get by with a pension of about 300 EUR (in Drachma equivalent at the time) while only half-an-hour's drive away in the city of Kavala the living standard could not be differentiated from the living standard in a Central European country and the residential areas, particularly along the beaches near Kavala, surpassed much of what I could see in Austria at the time.

The EU and the Euro have only seemingly narrowed that gap because of all the debt-financed growth. With that growth gone, we are back to an even greater gap than before the EU/Euro (it seems to me).

I keep reading in the Greek media how much more income the government would have if only the upper class of Greece would pay their fair share of taxes. Some of these estimates even suggest that Greece would not have a budget deficit in that case.

So the question asked in this article is valid: how could, in a member country of the EU, there be a situation where the upper class takes such brutal advantage of the others? The issue, to me, is not Greece in toto. Greece has undoubtedly as many hard-working/clean-living people as any other EU-country; possibly even more. Mind you that those are generally people who cannot even cheat on income taxes because they are taxed at the source.

What Greece seems to have more of relative to other EU-countries is an upper class which has no qualms whatsoever to take the rest of the country on a ride. How that can still happen in an EU-country is indeed a very good question!

Transition from Euro to Drachma

I continue to adhere to my position since the beginning of the crisis that it would be best for Greece to make every attempt to stay in the Eurozone. However, since a possible Grexit is more and more being talked about as though it was the most natural thing to happen soon, I want to dispel some myths about a Grexit.

The operational challenge is often cited as the major reason why a Grexit should be avoided at all cost. My point is that the operational challenge of a Grexit would be absolutely manageable. Instead, it is the economic risk for Greece’s future which should matter above all.

I only concern myself here with the operational challenge of a possible Grexit and I will address the key issues. We are at point A where Greece’s currency is the Euro and when we reach point B, Greece will have the Drachma as a perfectly well-functioning local currency. The critical period is the transition from point A to point B.

Contrary to general assumptions, Greece does NOT have to physically create the Drachma as a new currency immediately. That would be like putting the cart before the horse. Instead, Greece simply has to rename the Euro into Drachma within the national jurisdiction of Greece and create the “real” Euro as a new currency.

For the purpose of simplification, let’s call the “real” Euro the “Free-Euro” and the provisional new local currency (until the Drachma is fully in place) as the “Drachma-Euro”. Also, let’s assume that the Drachma-Euro would trade against the Free-Euro in a relation of 2:1. That is one Free-Euro buys two Drachma-Euros. 

Domestic sphere versus cross-border sphere 
This is the critical differentiation which needs to be made. The domestic sphere includes everything that takes place within the national jurisdiction of Greece. The cross-border sphere includes everything else. 

Domestic sphere 
A simple law would stipulate that, effective immediately, all non-cash items within Greece’s jurisdiction are renamed from Free-Euro (that is the Euro as in the common currency) into Drachma-Euro at a relationship of 1:1. Examples of non-cash items: assets/liabilities of banks, public institutions, corporations as well as their incomes/expenses, etc. to the extent that they are booked within the national jurisdiction of Greece. With one stroke of a pen, there would no longer be the Euro (Euro as in the common currency) in Greek bookkeeping accounts. No new accounts would have to be opened. Instead, existing accounts would simply be renamed.

As a result, all non-cash transactions could be handled as before except that they are now in Drachma-Euros which have a value of 2:1 against the Free-Euro. The Bank of Greece would have unlimited capacity to create Drachma-Euro liquidity.

The real challenge would be the cash items. The general view is that Greece would have to arrange, top secretly, that new Drachma cash is printed/coined/distributed. Far from it! One would simply say that all existing Euro-cash in circulation will, effective immediately, be considered as Drachma-Euros within the national jurisdiction of Greece. To evidence that, all existing Euro-cash would be stamped as “Drachma-Euro” when it comes into circulation. The stamping would be done by the recipients of Euro-cash. Mind you: the stamping would only serve to get people accustomed that their Euro-cash is no longer worth 1:1 against the Free-Euro. Even if a Euro-banknote is not stamped, it would still only be worth 2:1 against the Free-Euro within the national jurisdiction of Greece.

How about those who use Euros from abroad (i. e. tourists) in Greece? Will their Free-Euros only be worth Drachma-Euros? Not at all. Those people would do what they did before the arrival of ATMs: go to a bank and show evidence that they have “imported” their Euros from abroad and they could exchange those Free-Euros at 1:2 into stamped Drachma-Euros (see capital controls below).

The specific charme of this is that those who have hoarded Euro-cash under matrasses suddenly discover that, effective immediately, their Euro-cash is worth only 2:1 against the Free-Euro as long as it is used within Greece. If they want to get a real Euro’s worth out of it, they would have to use it outside of Greece (see capital controls below). That would put all Greeks on equal footing, i. e. those who have hoarded Euro-cash would not be better off than those who left it in their bank accounts.

What would happen at ATMs? Very simple. The customer would withdraw, say, 100 Euros from the ATM and he would know that those are now Drachma-Euros, i. e. worth only 2:1against the Free-Euros. The logistics of adapting ATMs to the Drachma could be handled during the time, say 6-12 months, until the new Drachma has been designed/printed/circulated.

No new Drachma-currency would have to be designed/printed in a hurry. It would suffice to over-print the regular Euros with a simple stamp “Drachma-Euro” on them. Again, the stamping would only serve to get people used to the fact that their Euro-banknotes are no longer worth the same as a Free-Euro. In reality, that would be the case from day 1. 

Capital controls 
Transfers out of the country must be approved by the Bank of Greece. No restrictions as regards commercial payments. Restrictions on everything else.

Transfers into the country must be controlled as to the the sources of funds. No special controls as regards commercial receipts. Very strong controls as regards everything else. Transfers from an anonymous offshore company can only be accepted by a bank if the beneficial owner of that offshore company is revealed. Loans from an offshore bank can only be approved if the Greek borrower authorizes his lending bank in, say, Switzerland to reveal all collateral they have behind the loan.

Strict controls on the export and import of cash.

A temporary deposit freeze will be necessary during the transition period. 

Implementation 
A long weekend may not be enough time to get all the necessary legislation passed. Thus, a bank holiday must be announced but under no circumstances should that last longer than one week. 

Cross-border sphere 
That is where the economic risk lies. If the economy is not to come to a standstill, Greece will have to have pre-arranged a liquidity supply for imports.

The foreign debt is almost a non-issue. If the 350 BEUR before the Grexit were not sustainable, they will now be worth 700 BEUR and will be so much less sustainable. That is simply a question of negotiations as to how much of that debt will have to be forgiven.

Three rankings - one conclusion

So far, I have always talked about the Doing Business Report of the World Bank/IFC and Transparency International's Corruption Perceptions Index. Now a third, similar report was published - the World Economic Forum's Global Competitiveness Report. Here are the links:

Global Competitiveness Report
Corruption Perception Index
Doing Business Report

I won't belabor the point that Greece ranks rock-bottom among EU-countries in all three reports. That does not surprise anyone.

I do, however, argue that if Greece could move itself into the upper part of those rankings, a lot of things in Greece would rapidly turn to the better, economically that is.

One can read every day in detail about Troika-measures and how cost-cutting is coming along. I find it interesting to note that one reads very little about measures which would improve Greece's rankings in the above three reports.

The greatest challenge for Greece is to employ its people. As a general rule, there is no new employment without new investment. And also as a general rule --- new investment money tends to flow when a location/region/country is a great place to do business, is gobally competitive and has a reasonably low level of corruption.

Two masons were asked by a passer-by what they were doing. One said: "I am putting one brick on top of the other". The other one said: "I am building a cathedral".

Why is eveyone so much in love with putting one budget brick on top of the other instead of focusing on building an economy?

Free to choose! - Milton Friedman

Free to Choose: A Personal Statement is a ten-part television series broadcast on US public television  in 1980. In it, Milton Friedman states, emphatically and often provocatively, that the free market works best for all members of a society. Each part begins with a 25-minute film followed by another 25 minutes of discussions with honorable members who both agree and disagree with Friedman.

It wouldn't be Milton Friedman if he didn't go to extremes in his argumentation. I do not belong to those who are passionate followers of his proposals. Most of all, I think his proposals are primarily academic because they would not have a chance of being tested/implemented in today's pluralist democracies.

However, I think it is very good if, from time to time, one gets a reminder, sort of like a periodic injection - a reminder that the principle of personal freedom is at the root of our Western societes. We may not be aware of it today but if it weren't so, we wouldn't look back at a couple of thousand years of evidence of what human beings have done to increase their freedom.

In the battle between individualism and collectivism, I would offer the following observation: There is no idealistic or material value anywhere in the world whose origins are not either in the brains or hands of individual human beings (for the football fans I add "also in the feet of human beings")! The individual is the atom of everything but, at the same time, no individual can get far on his own if there is not a society where individuals demonstrate solidarity. Limit the individual and you limit the quality of society.

Why do I present this in this blog? I do so because what we are seeing in today's Eurozone are exclusively actions by governments and other official bodies. Whether it is Greece or Germany, Spain or Austria - it is governments who think that they can steer economies through plans instead of through incentives.

It is unimaginable to me that Greece would be in the dire straits which it is in today if there hadn't been absolutely mad government decisions (and behavior!) over the last 3 decades. Today, it seems that many Greeks have become helpless as a result of that. Greeks who probably would have done quite will if not hindered by others now pay dearly for not having been allowed to do quite well.

Those who still think that all answers can and will come from the Greek government are urgently recommended to watch the below videos. One doesn't have to go through all of them. It suffices to watch the first and the last one.

Nr. 1: The power of the market
Nr. 2: The tyranny of control
Nr. 3: Anatomy of a crisis
Nr. 4: From cradle to grave
Nr. 5: Created equal
Nr. 6: What's wrong with our schools?
Nr. 7: Who protects the consumer?
Nr. 8: Who protects the worker?
Nr. 9: How to cure inflation?
Nr. 10: How to stay free

Alexis Tsipras ante portas?

Things in Greece have been incredibly quiet since June 17, the last election. The general view seems to be that this was only the lull before the storms, or even hurricanes, in September/October.

Will that be so?

One school of thought is that the government has already lost legitimacy because, in most instances, it did virtually the opposite of what the parties had promised during the election campaign. Instead of forcefully renegotiating the memorandum, they went overboard trying to comply with it. That, the thought continues, will lead to dissens among the coalition parties and certainly to a break-down of majorities in parliament. While this happens, Alexis Tsipras will return to the forefront of the action, mobilize the masses against the government and cause all sorts of foreseeable and unforeseeable disturbances. Perhaps even a forced resignation of the government.

I hasten to add that there could also be another school of thought. That thought would suggest that Greeks have gotten used to the benefit of having 2 or 3 months of reasonable quiet. While on one hand they have had enough of ever more austerity measures, on the other hand they have resigned themselves to the fact that there is no alterantive to it and that they might as well get it over with.

What if everybody expected chaos and chaos didn't happen?

Personally, I think there is fair chance for either scenario to happen. In case of doubt, I would opt for the latter. A revolutionary movement like that of Alexis Tsipras needs to be kept alive all the time. Once one takes a 2-month vacation from revolution, it can be hard to rekindle the spirits.

So, I will put this post on follow-up for October 31. By that time, we should have the answer!