Keywords

Club Med countries, Draco’s laws, ethics, Government Accountability Office, EU Accountability Office, Stability and Growth Pact, 3 percent limit, persisting budget deficits, scam Italian style

The Trickery Associated to the Birth of the Euro

A public debt which reaches for the stars is bad enough in itself as it destabilizes sovereigns, leads to banking industry excesses, and hurts the common citizen’s standard of living as well as his hopes for the future. Even worse, however, is the sight of a western society which loses its bearings as it transits through higher and higher levels of public debt.

Lofty sermons about democracy change nothing when democracy has been turned into cleptocracy (Chapter 15), the common citizen’s deposits are looted by the sovereign, government decisions are based on incomplete evidence, structural unemployment continues to increase, the quality of western culture deteriorates, and so does the future of western countries is in the hands of largely incompetent politicians. All the while:

Animal spirits dominate. Just prior to and after the unwarranted gift of euro 400 million of public funds to political parties, the opinion in Athens has been that the famous “troika” was informally informed about the intentions of democratic cleptocracy and shame, and it gave a tacit approval. If this is so, then the troika’s members should be rotated because they grow roots in Athens.

Evidently, this does not relieve the IMF, ECB, and EU from their part of responsibility of what has taken place under their watch, but it poses the question:

What is needed for the good of Greece, of the other “Club Med” countries, and of the EU as a whole is law-setting by a new Draco, the toughest and most straight-talking lawmaker of ancient Greece’s.¹ There is an urgent need to establish tough ethical laws and watch over their execution. The more this problem of giant public debt is pushed into the future the more the lure of democratic cleptocracy gains ground, the more the common citizen’s losses will mount, while those who think of themselves as “well connected” (which means with strong political support) will profit.

Democratic cleptocracy and other scams evidently raise the question: Is there an official and independent audit authority in this EU, like the GAO in the United States and La Cour des Comptes in France? Nothing has been heard of a powerful European auditor, yet there is plenty of dubious happenings to be sanctioned, particularly the aforementioned creeping democratic cleptocracy which came to the public eye with the:

An independent EU Accountability Office should have been most inquisitive in establishing what has happened to the billions of haircuts from PSI which have ruined the Greek, Cypriot, and French banks (among others), while it did not benefit Greece. It would have, as well, focusing its duty to find out personal responsibilities behind the ECB’s Cyprus ultimatum. Ultimatums to EU member states are outside the statutory rights of the ECB.

The Stability and Growth Pact admits an upper limit of 3 percent of GDP to annual budget deficits for Euroland’s member states (more on the hilarious history of this 3 percent later on). At 10.6 percent, Spain’s 2012 budget deficit was the largest in the European Union. On April 22, 2013 Eurostat, the EU’s statistics agency, reported that swollen by the cost of trying to salvage its banks Spain’s 2012 deficit widened from 9.4 percent in 2011 and was worse than Greece’s 2012 budget overrun.

Functions like that and sanctioning of overruns is classical work for an independent auditing office whose mark of distinction is the thoroughness with which its findings are researched, analyzed, and deployed. Without the analytical services of an accountability entity, the EU citizens are being gamed not in one but in many of the duties the huge, highly paid, and full-of-lobbyists Brussels bureaucracy is supposed to perform.

The same is true about the political meddling in European community affairs and the resulting misguided policies. Take membership to the euro as a case for auditing and you will find in it plenty of rights and wrongs in personal accountability. But no voice was ever raised by EU auditors to sanction the behavior surrounding the use of the euro which went against all logic—even if at the time this has happened “too big to jail” was not en vogue.

When in the 1990s the qualifications for euro membership were discussed, a critical question has been whether highly indebted countries like Belgium should be admitted. The technical opinion was negative, but the decision was political: Belgium’s public debt was high in respect to its GDP, still it joined the euro.

There was as well the case of Italy. Technically speaking, its euro candidacy was found wanting: Italy had a public debt of 120 percent² of GDP, double the upper limit of the Stability and Growth Pact. The governor of the Bank of Italy said that the country was not ready for the euro, particularly in the domain of fiscal discipline. Germany, too, thought Italy was not ready to join the euro, but the French (wanting a partner to weight against Germany in the “soft euro” side) insisted that if Italy is not admitted to the euro then France will not participate either³.

Feedback and control have been another issue of contention. The first opinion was one of automatic sanctions if the sovereign budget’s deficit is greater than 3 percent. However, according to Jacques Chirac, who succeeded François Mitterrand as president of France, “this was the work of German technocrats.” The French were against automatic sanctions. In one of its mistakes, Germany gave in when the Stability and Growth Pact was ratified, even if it stipulated that politicians should not decide whether or not there are sanctions.

Ottmar Issing, chief economist of the Bundesbank and (later on) of the ECB, objected, saying that a regime or jury where potential sinners hold judgment over actual sinners cannot function.⁴ The politicians, however, carried the day. The time plan for the euro was set, though everybody knew it started with:

The famous 3 percent limit in annual budgetary deficit of Euroland’s member states provides an evidence on how ill-studied, incomplete and superficial euro’s rules and regulations are. What is written in the following paragraphs is a mockery of the common currency, revealed postmortem. By all likelihood, few people know its existence.

Yet, this 3 percent limit to budgetary deficits by Euroland’s member states plays a vital almost daily role in negotiations between Brussels and individual Euroland governments. Even people expected to know about the 3 percent because it’s part of their business, are in the dark as demonstrated by a recent public case.

Karine Berger is the national secretary for the economy of the French Socialist Party. In an interview she gave on February 13, 2013 to the RTL television station, she was asked what’s the role of this 3 percent and her answer has been: “With a deficit of 3 percent the public debt starts shrinking.”⁵ It needs no explaining that this is patently false, and Berger’s decisions are made on wrong premises. Any deficit, even one as small as 1 per million, increases the public debt. It does not decrease it.

More colorful is how this 3 percent was invented. According to Guy Abeille, who worked for the French Ministry of Finance in the 1990s, and was present in the Franco-German negotiations which led to the common currency, this deficit limit of 3 percent has no real substance. When the more profligate French ministers objected to the trimming of the budget, a couple of their colleagues at a corner of the table guesstimated that 3 percent will be enough to calm them down without creating a negative reaction by Germany.⁶ That’s “scientific management” (of which the French are so proud) turned on its head.

Even if in terms of its foundations, the euro is a castle built on sand and, more than anything they did, the founding fathers were bent over to please the pico palino;⁷ it did not take long till it became clear that almost every country who rushed to join the Euroland bandwagon found it difficult to fulfill the entry criteria. In a 1997 Brussels finance minister meeting, Jean-Claude Junker, the president of Ecofin, was confronted by German and Dutch requests to exclude some countries from the euro, such as Spain and Portugal. But the political will was to include them, and Junker gave in.

To their credit, there is an absence of evidence that in trying hard to join the euro, Spain and Portugal used a scam Italian strategy. To cover their country’s huge annual budget deficit—which in 1991 was over 11 percent and in 1996 it stubbornly persisted at nearly 8 percent—Italy’s authorities cooked the books. With the help of investment bankers, they engaged in a series of tricks with derivative financial instruments. According to the Financial Times,⁸ the three men directly responsible for this frolic were:

The derivative instruments Italy used in 1996 to masquerade its accounts mandated up-front payments made by counterparties (typically go-go banks). This reversal in normal practices allowed it to reduce its publicly reported debt and deficit ratios, thereby meeting the criteria necessary to join the euro.

A big question is: Was the hoax a tightly kept secret which surfaced only in June 2013 with the news that Italy risks potential losses of billions of euros on derivatives contracts it restructured at the height of the Eurozone crisis? Plenty of red ink is being suggested by a confidential government report that sheds light on the tactics that enabled the debt-laden country to enter Euroland.⁹

Experts who examined what is revealed by the Treasury report are of the opinion the reason for the 2012 restructuring has been to permit the cash-strapped Italian Treasury to delay payments owed to foreign banks (which are not named). Allegedly, the transaction was done in a hurry and at disadvantageous terms for the Italian taxpayer.

As required by law, this report about the deceit was submitted in early 2013 to the Corte dei Conti, Italy’s state auditors. Concerned by the amount of red ink, the auditors requested the finance police to intervene. In April 2013, the Guardia di Finanza visited the Treasury’s debt management agency asking for more information, including details of the original derivatives contracts behind the euro entry hoax.

Absolute secrecy, however, is not a likely course of action in a Mediterranean country, where the going motto is “two men can keep a secret if one of them is dead.” Alternatively, there are those who believe that the racket which preceded the introduction of the euro has not been for 17 years a closely held secret. The roots are somewhere else.

The awkward questions for Draghi, head of the ECB and director general of the Treasury at the time of the racketeering derivatives deals, were raised back in 1998 when Helmut Kohl, the German chancellor, warned that Italy is “dressing up” its accounts and would not meet Maastricht treaty criteria to join euro. But as masters of deceit, the French and Italians had their way. The French wanted a partner as profligate as they are, and the Italians were desperate for membership to the euro club.¹⁰

On June 26, 2013, the way a report by RAI News had it, this second thesis has been supported by Italian Treasury officials. According to this source, to cover Italy’s annual budgetary deficit and qualify it for joining the euro, the country indeed used derivatives—but this was made known at the time to the EU executive, and Italy received its approval and its blessing. The antithesis between these two versions of what really happened in 1996 leaves two possibilities:

This second thesis is further supported by the fact that deceit by cooking the government’s books had found imitators within the EU. At twentieth century’s end, Draghi had quit the Italian Treasury to become a big gun at Goldman Sachs,¹¹ the investment bank. It’s precisely at that time that Greece needed his expertise to do not just one but two window dressings through a derivatives hoax.¹² In spite of huge budgetary deficits and an inordinate level of public debt, Greece was welcomed to the euro.

Let’s recapitulate. These two deceits which created a fata morgana of strong economies out of weak and shaky have contributed the big way to the euro’s downfall. The Greek derivatives masquerade came first to the public eye, but the Italian was the first machination and is by far the more important. Moreover, it involved a permission by the EU.

Not only Treasury officials in 2013 but also at an earlier time other people known to be trustworthy—like Giulio Tremonti, the former finance minister—have said the European Union was aware of the scam and gave approval to Italy’s use of derivatives to qualify for entry into Euroland.¹³ Greece followed suit 2 years later and took most of the blame because its irregularities in government accounts became public in 2009, 4 years ahead of Italy’s.

In terms of precedence, Greece learned from its neighbor and the fact some investment bankers were masters of cover-ups through derivatives made the Italian Way so much more appealing for another try. It even emboldened the officials’ viewpoint. In the spring of 1996, in the course of preliminary discussions by EU finance ministers meeting in Verona, Italy, Yannos Papantoniou, the then Greek finance minister said to Theo Waigel, his German counterpart, that on the euro bills have to be Greek characters. The German finance minister responded: “You are not in it.” The Greek replied: “You want to make a bet?”¹⁴ They made a bet, and we all know what has happened thereafter.

Greece miraculously met the 3 percent barrier and sent the entry application and the statistics to Eurostat in Luxembourg. However, Eurostat could not control these numbers. No database mining was possible, as the vital statistics were handwritten. When the European Commission suggested giving Eurostat the power to go to member countries and control the vital membership numbers, the big member states (Germany included) were against, saying that this is too big an interference in their sovereignty. Greece essentially delivered statistics which nobody could really know if they were right or wrong.

In April 2000, the head of the Hessische Landeszentralbank had enough and insisted during a press conference that Greece is not meeting the entry criteria and should be delayed by at least 1 year as it does not fulfill the Maastricht clauses. As a reaction to this statement, the Greek drachma and the Athens stock exchange went south. The Greek finance minister immediately called his German counterpart demanding that such public statements are not repeated. The German finance minister called the Bundesbank president and told him to shut up the critic.

The politicians had decided that Greece will be allowed to join the euro,¹⁵ but the Greek sovereign knew that it had to do some face-lifting. Even if the political will for euro entry had turned positive, the numbers remained dismal. Goldman Sachs was ready and willing to provide all its expertise to turn black into white and other feasts reserved to financial alchemy. Indeed, it made not one but two interventions to hide Greek debt:

In February 2001, the debt agency founded by the Greek government to manage the euro entry contacted Goldman Sachs and allegedly gave it the mission to hide euro 2.8 billion in debt. The American investment bank’s London office sent one of its best specialists: Antigone Loudiadis, whose strength was one of finding “creative solutions” to difficult financial problems.¹⁶

While forbidden by law, the beautification of national accounts was marching on: sell debts now, pay back later. But there were no miracles. The swap deal on which Goldman Sachs and the Greek government agreed did not cancel the debt; it only transferred it into the future.

In March 2003, Athens again required the services of Goldman Sachs in order to hide debt. This time it was an interest rate deal which did not go as smoothly as the first one. Postmortem, a fatal error was found in creative accounting. The interest rate of the deal was not fixed, and as market moved in the opposite direction than the one the wizards had guessed there was plenty of red ink. It does not matter. Client pays it all. Goldman Sachs made $500 million on this deal.¹⁷

The good news is that Greece was not alone in face-lifting its accounts. Indeed, it found itself in good company. In April 2003, the European Commission in Brussels felt obliged to open a deficit procedure against Germany and France. Chancellor Schröder, who had just implemented the Agenda 2010, insisted that he could not apply such rigid reform program if Brussels makes it financially even more difficult for Germany. There was a heavy controversy between the Bundeskanzleramt and the Commission. Finance Minister Eichel went to Brussels to get going an alliance against the self-established rules of the Stability and Growth Pact in order to prevent sanctions.

Many Germans felt offended by their socialist government’s curious initiative. The way Ottmar Issing saw it: Of all countries Germany, the country which had insisted on a pact, organized a political majority against the application of the sanctions.¹⁸ This was simply embarrassing; a deadly stroke against the Pact.

In common accord, Germany and France broke the Stability and Growth Pact. It was more than simple tricking. It was the abandonment of common principles in the fourth year of the currency union. The larger two economies of Euroland have taught a bitter lesson to the smaller ones: “The rules we made are for you. We do what we consider right for our economies, but you obey the rules.”

The rules said that Euroland’s smaller economies were not expected to use favorable exchange rate swaps or other gimmicks to their advantage. That was cooking the books and had to be sanctioned. In July 2004, in Luxembourg, Eurostat’s new boss controlled the Greek numbers and was puzzled by what he saw. Therefore, he sent some officials to the Greek Bureau of Statistics. The Eurostat inspectors obtained information which implied that part of the Greek military budget did not show in the national budget.

The statisticians who at the time were responsible for the numbers put the blame on the new government which changed the booking methods in 2004 by transferring huge sums to the past. This excuse became known among a wider group of statistical offices creating the impression that Greece tricked its way into the euro.

Frictions followed. Mid-April 2013 EU member states were clashing over plans to centralize the handling of failing banks, as Germany warned that Euroland is running out of road to adopt crisis-fighting measures under its current treaties. At an April 12–13, 2013 meeting in Dublin, Wolfgang Schaeuble, the German finance minister, told his EU counterparts that there is not enough of a basis in the EU’s current rulebook for:

This was not the opinion of other member states who had to profit from such a fund, like France and Denmark. Probably foreseeing a collapse of one or more of their banks both urged swift progress on putting in place a resolution system, amid concerns that Lisbon Treaty changes would open Pandora’s box—apart from causing delays. This argument indeed rested on curious logic: “If it is difficult to change the Treaty, then let’s bypass it, work outside it, and disregard the letter of the law.” This is not yesterday’s policy. It goes on for years, and it has left big chunks of present-day EU outside a legal framework, hanging on a fork.

As per established policy, the financing of the fund for EU-wide bank failures is another example of an initiative which has not been studied regarding to its implications. Who is going to provide the funds when everyone knows that the financial situation of the European banking industry, particularly of the big banks, is a bottomless pit? Don’t count on the EFSF and ESM, if such an idea crosses your mind; they are already overcommitted.

In terms of preparedness, not only matters concerning the banking union but as well for the majority of its projects the EU continues to behave as if it were selling watches out of the back of a van. Schaeuble had good grounds when he opposed the motion of a stillborn banking union, saying that: “A banking union only makes sense if we have mechanisms for the restructuring and resolution of banks. But if we want these European institutions, we need Treaty changes.”²¹ That’s precisely what scares the other 16 Euroland members so that the EU, its institutions, and its acts continue living in the twilight between legality and illegality.²²

The investing mood is confused with two very different futures of Europe either pulling itself together and keeping the euro going or “things fall apart and the euro comes apart,” said on April 9, 2013, at the Bloomberg Link Doha Conference, J. Christopher Flowers, chairman and chief executive officer of a private equity firm.²³ Investors are also confused because so many politicians are simply lying, and they find it difficult to make up their mind while, after listening to the lobbyists, some become turncoats.

“A truthful man,” Trotsky said, “has this advantage, that even with a bad memory he never contradicts himself. A disloyal, unscrupulous and dishonest man has always to remember what he said in the past, in order not to shame himself.”²⁴ Liars are cowards, and

“Cowards die many times before their deaths.”

William Shakespeare (1564–1616) in Julius Cesar