Next-generation system-wide liquidity stress testing (VOX)

The global financial crisis has shown that neglecting liquidity risk comes at a substantial price. This column presents a new framework to run system-wide, balance sheet data–based liquidity stress tests. The liquidity framework includes a module to simulate the impact of bank-run type scenarios, a module to assess risks arising from maturity transformation and rollover risks, and a framework to link liquidity and solvency risks.




Regional multilateralism: The next paradigm in global affairs (CNN)

Link: Global Public Square,

By Harris Mylonas and Emirhan Yorulmazlar – Special to CNN
The Cold War and the early post-Cold War periods were relatively easy to define and comprehend. The first was roughly the struggle between two superpowers forming a bipolar system where almost every state had to choose a side. What followed was a period described by Fukuyama as “The End of History” announcing the triumph of liberal ideas. The US was a global hegemon: selecting when to intervene, expanding NATO’s reach, and dominating international institutions. Following the 9/11 attacks unilateralism was exposed and thereafter multilateralism appeared – with its limitations. Today, “regional multilateralism” may be the next paradigm that can bring about peace, cooperation, and stability in global affairs.The rise and fall of U.S. hegemony during the 1990s has been documented. The Unipolar moment, a Foreign Affairs article by Charles Krauthammer, encapsulates the main point in the title. It was a moment. Once this “moment” was over, Fareed Zakaria and others have been imagining a “post-American world.”U.S. power and its global role remain at the core of the contemporary discussion. America still is – and probably will remain for a long time – the world’s undisputed leader in military, economic and technological power. However, the politics of austerity at home and pressing realities abroad necessitate a new U.S. foreign policy. The U.S. cannot go it alone.

Indeed, the U.S. has been refocusing its foreign policy and Obama has been using the term multilateralism repeatedly. Multilateralism is a prudent strategy for the U.S. and the international system at large, however it is incomplete. Multilateralism has reached its limits when it comes to Iran’s nuclear program, recognition of Palestine, the six party talks on North Korea, and Kosovo’s independence – to name just a few thorny issues.

In a world of diminished U.S. involvement and unsuccessful multilateralist endeavors, an alternative vision for global engagement is necessary. Instead we are faced with a reluctant China, an unprepared India, an European Union in the midst of a financial debacle and a host of regional powers that focus on their neighborhood rather than claiming a global role. Given these realities, regional multilateralism can serve as the way out from this dead end.

Regionally, the Middle East is as explosive as ever. The Western Balkans are doubtful about their future within the European Union and may again implode. The African continent has many ongoing conflicts and even more potential ones unresolved. In Latin America at least two alternative visions for the region are competing. The Far East is actively searching ways to live with the rise of China. These and other contemporary problems can be better solved at the regional rather than the bilateral or global levels.

This context highlights the importance of regional integration and multilateralism. Regional multilateralism is building on these very ideas. Bringing these two together is necessary in today’s world. The buds of regional integration are everywhere in the making but they have not yet been clearly connected with the principles of multilateralism.

The EU serves as an example of regional integration and others are following its steps. The African Union has also stepped up its peacekeeping efforts and moved toward further economic integration. However, the quest for regional multilateralism should not be confined by a conventional understanding of geography. For instance, Russia may be a force for stability both in the Far East and Central Asia, China may have a stake in the affairs of Latin America and Africa, and different parts of what we call the Middle East may integrate with parts of Central Asia or Europe. The very prospect of Turkey joining the EU may be a sign of such developments.

Cross-regional cooperation is key to regional multilateralism. The transatlantic dialogue model between the U.S. and Europe can and should be exported. For instance, in the Far East the U.S. and the EU both cooperate with ASEAN. China and Russia have extended their ties through the Shanghai Cooperation Organization. This however did not prevent Russia from establishing the Eurasian Union, in a way reclaiming its sphere of influence. The Middle East, on the other hand, is in dire need of broader – albeit imaginative – regional integration.

The inability of any one power to confront global challenges will lead responsible powers into the fold of regional multilateralism. The transition will be facilitated if it builds on existing regional integration structures. This way, every state will ultimately become a stakeholder in the international system.

For that to happen, regional leaders need to operate as focal points. They need to listen, persuade and inspire insiders, while coordinating with outsiders. This process is different from the traditional spheres of influence system. It is based not on Monroe Doctrine-type of arrangements and coercion but rather on reassuring security umbrellas and mutually beneficial trade blocs.

Within this new paradigm, emerging regional leaders – such as China, Russia, India, Japan, Brazil, Turkey, and South Africa – will play a more significant role within their regions while at the same time will take part in cross regional and global issues.

Editor’s Note: Harris Mylonas is Assistant Professor of Political Science and International Affairs at George Washington University and Academy Scholar at the Harvard Academy for International and Area Studies. Emirhan Yorulmazlar is Fellow at the Weatherhead Center for International Affairs, Harvard University.

Will Brussels ever become Washington? (E!Sharp)

Will Brussels ever become Washington?

By Roberto Foa

January 2012

I lived in Washington, DC for about two years, during the dying days of the Bush administration. A sense of decadence and decline hung heavy over the city, like the plumes of smoke that still pocked Baghdad skies, leaving their trails across the daily headlines. Yet as the primary season got underway there was an undeniable buzz about town, a slow-burning frenzy of activity amidst the undergrowth of think-tanks, dinner circles, and political action groups. I saw young, power-hungry Americans come to Washington to advise for political parties, work for senators and congressmen, write in journals, and feel like they were part of a grander project. That wasn’t my project; it was the American Project, and I was at best a detached observer. But it gave me an idea of what an imperial capital ought to look and feel like, as well as how a polity can renew itself.

Inevitably, I now ask myself whether Brussels could one day have the same energy and vitality. For there are no motorcades bombing down the rue de la loi, ferrying foreign dignitaries from Cairo and Kabul, ready to make their speech on the stage of world history, and no meetings of young Europeans to draft manifestos for their first 100 days in office. Whereas Washington DC is a city of rogues and ideologues, of hungrily ambitious hacks and starved campaign staffers, of people who sleep poorly at night and by day dream with eyes wide open; Brussels remains a city of tidy officialdom, where people work solidly at their offices by light and snooze deeply in bed at dusk.

Can it ever change? I would like to believe so, but it seems beyond my lifetime. The problem is simple enough: post-Lisbon Europe remains bereft of real politics. Without meaningful pan-European elections, without European political parties and electoral campaigns, without winners and losers, there is no place for action groups, think-tanks, magazines and fiery debates. Everything remains inside the bureaucracy; nothing outside the bureaucracy.

I have nothing against Brussels itself. I feel at home there; it is one of the few places where I feel as such. I feel at place among the young, bright, optimistic Europeans who come from around the continent and believe in the European project, and share the same dream as I do, of a continent united and a world that transcends nationalism. But the problem is that Europe is not our Europe, it is something clung on to by elites in London, Berlin and Paris, and what has been left to us is just this dream, and little else.

I’ve heard that said to me many times, now, from Brussels friends and colleagues. You can come here, and dream your European dream, but sooner or later that dream will betray you: Europe is on the way to itself, but just a little too slowly, and its pace will not keep step with your hopes and ambitions. When Americans go to Washington, they undoubtedly have their moments of frustration, pain, and disappointment, but eventually these are balanced by moments of redemption, even of glory; for all the difficult years spent suffering the malapropisms of George W. Bush, Democrats could feel the excitement of the 2008 campaign, and the euphoria of victory. Such highs and lows, however, are denied to the denizen of Brussels, whose long-timers express weariness, lassitude, cynicism, and resignation. Indeed the contrast between the energy of youth and the exhaustion of age is perhaps nowhere stronger than in Brussels. Certainly, one does not find it in Washington DC, where I can recall plenty of determination, energy, and ambition among fiery-eye neoconservative gentlemen and battleaxe liberal mothers alike, and a real faith among each that the great American project is on track and that every DC hack, lobbyist, tinker and scribbler had some small place within it.

Of course it could change. I have no doubt that a hundred-and-fifty years ago, Washington had all the excitement and great-power potential of Canberra or Wellington. It took a century for the sleepy, provincial swamp of the American civil war era to become the superpower capital of the Kennedy years. Perhaps Brussels will make it there too one day. But it is difficult to imagine without a fundamentally different Europe, a political Europe with meaningful elections, winners and losers. In the meantime, to paraphrase de Gaulle’s pithy put-down of Brazil, “l’Union européenne est le pays de l’avenir, et elle le restera”.


The eurozone crisis: end, middle or just the beginning? (E!Sharp)

The eurozone crisis: end, middle or just the beginning?

By Roberto Foa

December 2011

In the wake of failure to agree treaty-change at the December 9 summit, is the eurozone now on the verge of imminent ‘collapse’? Comparing the Anglo-Saxon and the continental newspapers over the past several weeks has revealed a massive discrepancy in coverage, both in tone, and diagnoses. With debt contagion approaching the eurozone core, Joseph Stiglitz publicly raised the spectre of the ‘end of the eurozone’, while Lawrence Summers stated that the European Union ‘risks catastrophe’. And yet, to judge from the calmer commentary found in the Frankfurter Allgemeine Zeitung or Le Figaro, there was always the luxury of time to first negotiate a new EU treaty – and perhaps still is.

This discrepancy, I think, reflect a deeper ideological difference. Neo-Keynesian economists such as Stiglitz or Summers see the eurozone crisis as a technical, macroeconomic difficulty, a problem of liquidity rather than solvency. They have therefore proposed large-scale, ‘technical’ solutions, such as a joint Eurobond – or a Euro-TARP, as suggested by US Treasury Secretary Geithner, during his intervention at the September eurozone summit. They are perplexed that the European Union cannot instantly implement what they feel is an obvious policy fix.

If continental, and in particular, German commentators have not thus far shared their sense of urgency, it is not because of complacency, but due to a different diagnosis. Those who currently advise the German government prefer to point to failings of institutions and incentives: decades of poor fiscal management in the Mediterranean countries, and irresponsible corporate governance in the eurozone banking sector. Correspondingly, they have favoured solutions that are partial, disciplinary, and gradual: IMF programmes in periphery, financial regulation in the core, and above all, a new EU treaty framework to ensure collective debts are matched by collective obligations.

Why this extreme divergence of perspectives? While it is easy to see nothing more than a technical discrepancy, a difference in economic schools of thought, I think there is a more profound disagreement at work, concerning views of agency and trust. US public intellectuals assume politicians and businessmen to be the responsible agents of their citizens or shareholders. Thus they have faith that the managers at Bank of America or Italy’s politicians would deleverage, if given access to easier terms of credit, rather than reward themselves and their supporters. That is why they favour immediate and unlimited liquidity, at home and abroad.

European commentators, by contrast – whether they are situated on the socialist left or the neoliberal right – tend to suspect that elites will place their own short-term interest above that of their constituents, unless compelled. It is no surprise, for example, that many Italian economists – including the new European Central Bank president Mario Draghi – are among the more enthusiastic proponents of the view that Italian governments function best when placed under the boots of their northern neighbours. That is why having a new treaty framework, with monitoring of national budgets, is so necessary before enlarged bond purchases can be taken on by the ECB.

Whether we believe institutions or policies are at fault, however, has implications not only for how we think about the resolving the eurozone crisis – but even whether we seek resolution at all. For example, commentators in London and New York highlight with alarm that, in the absence of urgent action, the eurozone’s banking sector is now on the verge of collapse. If we see this as a ‘technical’ problem of liquidity, then the solution proposed by Timothy Geithner at the September eurozone summit is not only reasonable, but necessary: the banks must be recapitalised, and urgently.

Yet seen as a problem of poor corporate governance and excessive risk, the provision of unconditional liquidity now will do little to address root causes. The current weakness of the eurozone banking sector reflects years of misaligned incentives, excessive staff remuneration, and leverage above tolerable risk thresholds. Dexia, which increased its CEO salary by 30 per cent after receiving a public bailout in 2008, was symptomatic of this rot.

Other eurozone banks are little better, having increased their leverage since the crisis of 2007-8, such that they are now far more exposed to risk than in the United States (see chart). French banks are the worst perpetrators, having increased from a ratio of 17 to 24 times assets to capital, and several may need to be nationalised. Yet if minor credit events now cause insolvency, the market is only delivering discipline where regulators have failed.

What applies to eurozone banks, applies equally well to eurozone sovereigns. We all know the argument, often restated by Keynesians, that the eurozone crisis is a currency crisis, and not simply a debt crisis: peripheral sovereigns were able to run up debts, in part, due to flows of easy capital from the surplus countries at the core.

Yet if the shoe and the foot do not fit, we have a choice about which we adjust. That is, one option is to re-tailor the shoe, by remoulding Europe into a fiscal union and cover deficits by fiscal transfers. The other is to reshape the foot, by making eurozone sovereigns more similar to one another. Realistically, we are going to need some combination of each. A sensible debate has to be about what proportion of either is feasible.

Critics of the austerity programmes in Greece, Portugal, and Spain miss the extent to which IMF and ECB support is not merely technical assistance, but a long-term institutional and administrative revolution, similar to that undertaken by post-socialist Europe after 1989. In short, the goal is to complete in the economic domain  what EU accession accomplished in the political sphere: harmonising the South with the North, not only in democratic politics and rule of law, but in building effective tax systems, open markets, and competitive industries.

Can this succeed completely? Of course it cannot. But it must succeed in part. Even if the Greek government is still running a 6.8 per cent deficit next year this will be a real deficit, audited by European and International Monetary Fund officials, and not the phony figures and off-balance sheet accounting of the past. Even if the fiscal reforms implemented by Athens have fallen short of a fair and comprehensive tax system, they lay the basis for further rounds of reform.

Those calling for immediate comprehensive action see the eurozone crisis as merely one of confidence: to restore faith in eurozone banks and sovereigns, and allow each to reduce its burden of debt as borrowing terms improve. Yet from a classical perspective, the crisis is a part of the solution. As long as it continues, incompetently-run banks will be forced to insolvency, and irresponsible sovereigns into international administration. The challenge is one of containment, until the adjustment has run its course. And whether it can be contained, is what we shall shortly see.


What Does Europe Want? (Bertelsmann Foundation)

What Does Europe Want?

The decisions facing Europe’s leaders and institutions in 2012 are nothing less than colossal. Attempts at the end of last year to cobble together a “comprehensive solution” culminated in the December 8-9, 2011 European Council summit started a process that will consume the continent for most of 2012. But questions remain as to the true nature of the crisis, how the EU can prevent a potential slide in the value of the euro and shore up Greece, and if a lumbering treaty-ratification process can get ahead of market’s expectations and fears. French and German leaders have stated repeatedly that a new treaty is a major step towards fiscal union. However, a sober analysis of the proposed measures in the treaty indicates that many of them came into existence by way of crisis-management policy in 2010 and early 2011.

This piece attempts to dissect the anatomy of the eurozone’s diffuse and often vexing decision-making process to determine:

What does Europe want?
The paper’s first section provides an analytical snapshot of the four main players in crisis decision-making: Germany,
the European Central Bank (ECB), France and the European Commission. These four actors are and will be essential for
the passage and implementation of policy instruments intended to pull Europe out of the crisis. This section is not a
comprehensive analysis of all actors – governmental or private – that can impact political outcomes in the EU. It is rather an attempt to capture players and policies that stand out in the debate on the eurozone’s short- and long-term future. The first part begins with an examination of Germany, the country at the heart of the eurozone, and the dynamics that drive the reluctant hegemon’s actions. It then looks at the ECB, the EU’s only credibly independent institution, which continues to be the only player with the latent power to bring immediate relief single-handedly. But the bank is plagued by treaty restrictions and internal ideological conflicts that impair its ability to act. The third part of this section delves into France’s role in bridging the gap between Europe’s two ideological factions while managing its own internal debate. A fourth and final part considers the Commission, which entered the crisis as a weakened institution but retains a role as the nucleus of some of the central questions about the future of fiscal and economic union. As such, the Commission has staked out stronger positions in the past two years.

The second section examines policy proposals that have emerged or are under consideration by eurozone leaders. These
options range from short-term instruments, such as re-capitalizing banks, to the longer-term re-wiring of the EU’s basic
economic governance. Other policies under review include the depth of European integration and the possible introduction of mutualized eurozone debt. Debates on all these issues could involve new agreements or treaty revisions.
This publication was assembled by the Bertelsmann Foundation North America based on interviews and research conducted in Europe and Washington, DC. This text was originally released on the eve of the December 2011 EU summit in Brussels and has since been updated to reflect the outcome of that gathering. Readers should note that events surrounding the eurozone crisis are changing rapidly.

This text is primarily meant as a primer for a US audience looking for better understanding and greater transparency of a
highly complex, fast-moving issue that has become the most important challenge on America’s foreign-policy agenda.

What Does Europe Want?
Annette Heuser
Executive Director

Meghan Kelly
Project Manager, Transatlantic Relations

Tyson Barker
Director, Transatlantic Relations

Christopher Wiley
Program Associate, Transatlantic Relations


What really went wrong in Greece? (CNN)

Link: Global Public Square,

 By Evan Liaras and Harris Mylonas – Special to CNN
After reading about the Greek debt crisis for over a year now, you might think you understand what it’s all about. You’re probably wrong. International media focus on how the Greek government and people spend their money. But an equally important problem is the inability of the Greek state to collect revenues.The story constantly aired by various news outlets is simple enough. Greece, we are told, free-rode on the security offered by the rest of Europe to attract money from foreign investors, and then spent it lavishly on its bloated public sector. In case you don’t get it, BBC’s website has a recurring instructional slide show titled “What went wrong in Greece?” Apparently, Greece’s adoption of the euro “made it easier for the country to borrow money…. Greece went on a big, debt-funded spending spree, including paying for high-profile projects such as the 2004 Athens Olympics.”This brief media lesson on Greek economics has proven very appealing to audiences abroad for two reasons. First, it rhymes with the stereotype of lazy Mediterranean people conning their hard-working North European partners and then shamelessly asking for a bailout. (Now that Italy may be heading the same way, there will be more of this coming.) It also resonates in the ears of the euro’s sworn opponents, above all in the UK.

Unfortunately, it is only half the story. Greek public debt as a percentage of GDP did not dramatically rise right after Greece joined the euro. Greek debt actually accumulated back in the 1980s and early 90s, years before Europe got its common currency. The size of the Greek public sector (as a percentage of GDP or share of the labor market) is around or even below average compared to the rest of Europe. Greece did try to spend its way out of the global recession in 2008-2009 and ran large deficits; but so did most other developed countries, including the UK and the U.S.

There are two sides of the public finance coin: expenditure and revenue. What is left out is that while Greek public spending and debt crept up, government revenue fell or remained constant in the years after Greece adopted the euro. Between 2001 and 2007 Greece’s average government revenues totaled 39.4% of GDP, whereas the EU average was 44.4%. Taxes are by far the largest component of government revenue. The issue is not unique to Greece. Declining tax revenues were observed in Ireland, Spain, and in the U.S. after the Bush tax cuts kicked in.

In Greece the culprit has been rampant tax evasion by corporations owing millions in taxes and self-employed professionals who can hide their earnings, unlike salaried employees and pensioners. Under international pressure to balance its budget, the outgoing Greek government axed salaries and pensions and slapped new taxes on the bulk of citizens who were not tax-delinquent. This only drove the country deeper into recession and insolvency, making it necessary for EU leaders to write off part of Greece’s debt in July and then again in October.

Whether the government is reluctant to tax the very wealthy (as in the U.S.) or lax in its duty to punish tax evasion (as in Greece), the results are similar. Revenues can’t keep up with expenditures and lenders become uneasy. Meanwhile, those who are taxed too leniently have an interest in shifting public attention towards cutting government spending. The bitter partisan quarrels in Washington and Athens lately have this much in common. Yet, this obvious point is conspicuously absent from reports on Greece in the English-speaking world.

There is no denying that Greece overspent on security for its Olympics – they were the first games after 9/11. There is also no denying that the Greek public sector is very inefficient. But this has to do with how the money is used. Deep cuts will not make an inefficient public sector better. Other reforms, however, just might. Finally, there is no denying that the euro deprived Greece of the flexibility to devaluate its currency. However, Greece’s revenue collection problem has been perennial and is unrelated to the euro. The first reforms Greece’s new government should focus on are the tax and judicial systems.

Casting the crisis ravaging Greece and closing in on Italy as a fundamental story of governments drunk on loans, doling out stacks of euros to their shortsighted citizens is a half-truth. It makes it easy to caricature on a national basis and to categorize Greeks, Italians, Germans or Americans as people who collectively live either within or beyond their means. It also masks the fact that there are differences within each country: Those who benefit the most from high-profile government contracts are the hardest ones to tax when the creditors come banging on your door.

Editor’s Note: Evan Liaras is the Davis Post-Doctoral Fellow in European Studies at the Institute of European, Russian, and Eurasian Studies at George Washington University. Harris Mylonas is Assistant Professor of Political Science and International Affairs at George Washington University and Academy Scholar at the Harvard Academy for International and Area Studies.

Greece’s legitimacy crisis (CNN)

Link: Global Public Square,

 By Thomas Meaney and Harris Mylonas – Special to CNN
In the past 48 hours, Greek Prime Minister George Papandreou has succeeded in one thing: Stirring up the anger of nearly everyone around him. The European Union, his own party PASOK, the opposition party New Democracy and the Greek electorate are all pitted against Papandreou. The Greeks have a word for this special brand of rage – they call it “thymos”. This refers to the simmering resentment that arises when one’s views are not recognized.

It’s little wonder Papandreou has had to back down from his initial call for a national referendum on the 50% haircut deal decided by the European Union heads of state on October 27.

First off, he failed to get the opposition to agree to the referendum. They called it blackmail, denounced Papandreou as an opportunist and asked for a grand coalition government or immediate elections. Main opposition leader Antonis Samaras’ consensus on Thursday was short-lived and with many conditions.

Meanwhile, the European leaders – French President Nicolas Sarkozy and German Chancellor Angela Merkel – called Papandreou’s bluff. ‘Go ahead and make our day,’ they told him. “Imagine what would happen if we called a referendum on the bailout in our countries?’ The International Monetary Fund, for its part, threatened to freeze all of its loans to Greece.

Finally, for Papandreou’s party PASOK the situation is even more dire. Instead of shoring up support from his own party members, the referendum only emboldened cries for his resignation — including from his own Ministers and PASOK Parliamentarians.

Papandreou has recalled his decision for a referendum because he failed in all fronts and it’s become clear that he can no longer be part of the solution.

There are three possible ways the crisis will play out.  First, Papandreou could refuse to resign and possibly win the no-confidence vote Friday. This is unlikely since his overall support has reached its all-time low. The second, more likely scenario is that Papandreou loses the vote tomorrow and the President of the Hellenic Republic, Karolos Papoulias, turns to the other political party leaders to determine if the existing Parliament could form a government. The final scenario, if these efforts fail to build a government, would be new elections, as called for by the Greek Constitution. But it is most likely that a one-party government will not emerge from these elections.

The only way out of these three scenarios is to form a Grand Coalition government. What is a Grand Coalition government? In multi-party parliamentary systems, sometimes one-party governments cannot form. In such instances, coalition governments are often formed including more than one party in order to secure a Parliamentary majority, manage to form a government and pass legislation.

Greece’s history with such governments in the late 1980s does not exactly inspire faith, and the global stakes were smaller then. A grand coalition would entail the cooperation of all the political parties that are in favor of a European future for Greece. They would be ready to support the austerity measures needed to balance the Greek budget and overcome the solvency problem, but most importantly they would be the the parties that can agree on the composition of such a government. This last feature of a Grand Coalition is particularly valuable at a time when consensus-building in the Greek parliament has become nearly impossible.

What remains left out of this discussion is the Greek people. They voted two years ago for a party running on an anti-austerity platform and this is not what they received. Perhaps the current political system is afraid to hear their message. “Thymos” may not be the best state of mind to make choices.

Regardless, the greek political leadership’s ownership of the austerity program and responsible governance are necessary steps toward resolving Greece’s legitimacy crisis, which would then allow them to confront the Greek people with the responsibility they must take in order to end the financial crisis.

Editor’s Note: Thomas Meaney is a doctoral candidate in history at Columbia University and an editor of The Utopian. Harris Mylonas is Assistant Professor of Political Science and International Affairs at George Washington University and an Academy Scholar at the Harvard Academy for International and Area Studies. The views expressed in this article are solely those of Thomas Meaney and Harris Mylonas.

Are Greece’s leaders being reckless or bold? (CNN)

Link: Global Public Square,

By Thomas Meaney and Harris Mylonas – Special to CNN

Call it reckless, call it bold, but the Greek Prime Minister, George Papandreou, has attempted to transform a referendum on the European Union bailout plan for Greece into a referendum about whether the Greeks want to stay in the Eurozone or not. The last time Greece had a popular referendum was in 1974 to decide if the people wanted to keep King Constantine, a descendent of the Royal family that European Powers foisted on the Greek people in the 1860s.

This time around, the Greek Prime Minister has shocked the rest of Europe — and even his own Vice President —with his plans to call for a popular vote on whether to accept the 50% haircut deal that EU heads of state agreed on last week to manage the country’s spiraling debt crisis. It’s the latest in a series of Hail Mary passes by Papandreou to keep his hold on power, but the proposed referendum is really only a distraction from the no-confidence vote he faces, which is scheduled in Greek Parliament this Friday. As hard as the Europeans leaders may have fought to prevent a Greek default, they failed to take into account the dire state of domestic Greek politics. But even at this moment the solution to the crisis must be a European one.


The gravest threat facing Papandreou right now is from the Greek people. His government party, PASOK, was elected two years ago on an anti-austerity platform, but has since been forced into the position of calling for more austerity than any Greek government in the postwar era. The demonstrations across the country last weekend that disrupted the parades commemorating the Greek resistance in World War II culminated with the forced departure of the President of the Republic, Karolos Papoulias, from the parade in Thessaloniki. The current political system has been facing a legitimacy crisis for a while now. The social contract, based on patronage, established between Greek politicians and the electorate following the fall of the Greek Junta in 1974 is under severe strain.

The second problem facing Papandreou is the dissent and distrust he is experiencing from his own party, which — for the moment — holds a bare majority of 152 seats out of 300 in the Greek Parliament. This past summer in a cabinet reshuffling, Papandreou tried to smooth out the problems in his party by appointing his main internal rival, Evangelos Venizelos, Vice President. But this accommodation reached its breaking point yesterday when Venizelos declared he had not been informed about the referendum by Papandreou, who nevertheless called on him to deliver the bad news to EU leaders. Meanwhile, the opposition parties claim that the government is blackmailing the Greek people and suggest that the only solution is to have early elections.

The crisis of legitimacy reached its peak yesterday when rumors about tensions between the government and the military leadership of the country became credible when the minister of Defense called for the replacement of all the heads of divisions of the armed forces. It would be a controversial decision in the best of times, but one that’s nearly impossible to carry out for a government facing unprecedented unpopularity.

The European Union leaders are dead against three outcomes: the collapse of the Greek parliament, the ouster of Papandreou on Friday, and the negative result of any kind of referendum on the bailout — all of which would ultimately spell the ejection of Greece from the Eurozone and spur financial chaos on the continent. The solution must come from Europe. The meeting at Cannes Thursday—where Papandreou has been invited by Merkel and Sarkozy— is his last chance to appease his European patrons.

The real question is not whether Greece will proceed or not with the referendum, but rather who controls Europe? Is it the Germans who seem to be the only ones who can undo the European Central Bank policy about printing money? The French and the Germans together who want to keep the Euro strong? Is it the speculators, banks and their interests? Or is the EU open to more democratic control whereby the voters can have a voice?

Whatever the outcome, Greece is now up against the wall thanks to Papandreou. The predicament has suddenly changed from a financial catastrophe and austerity measures to a question about political identity: Do Greeks belong in the European Union or not?

Editor’s Note: Thomas Meaney is a doctoral candidate in history at Columbia University and an editor of The Utopian. Harris Mylonas is Assistant Professor of Political Science and International Affairs at George Washington University and an Academy Scholar at the Harvard Academy for International and Area Studies.

The end of peaceful protest? (Kathimerini)

Link: Kathimerini

By Harris Mylonas

During the three days that the Greek Parliament was discussing and voting on the latest round of austerity measures, 138 police officers were injured, more than 500 protesters were hospitalized with breathing problems caused by the use of tear gas by the police, Syntagma metro station resembled a wartime hospital, tens of protesters were wounded, while 46 demonstrators were taken to police stations and 11 of them arrested on June 29 alone.


The police brutality was unprecedented according to Skai news and many witness accounts. Through Twitter, Facebook, email, and text messages, the Greek protesters spread the word of indiscriminate police beatings.


A peaceful protester injured by the police called a radio station to express his consternation at the attack he suffered at the hands of the police, “who are supposed to be there to protect citizens.” He further argued that he was there to “protest for Greece and its rights, so why was I attacked by another Greek?” Another citizen claimed that he was almost beaten by motorcycle police while walking around recording the events with a camera and that what saved him was an old expired press pass. At the same time, families were calling in reporting brute force without any provocation on their part. Many citizens, especially older ones, claim that they tried to talk to the police officers and dissuade them from using chemicals against simple protesters but to no avail.


Amnesty International had already condemned Greece for the use of force against protesters on June 15. June 29 was much worse.


There are several possible explanations for why Greek police used such force. One view is that it was hard for them to tell which were peaceful demonstrators and which were troublemakers. The police might have felt threatened by the mayhem. They may have determined that if they did not strike first, the protesters would attack them.


An alternative explanation is that the government wanted to break the “Indignant” movement using force. The vast majority of protesters saw the events as a strategy employed by the state to keep them from protesting. After all, most protesters were family types who were not going to remain there under such circumstances. And as expected, they fled the scene.


The ones left were younger, more determined and enraged and, again expectedly, engaged in street fights with the police. Thus, what was a peaceful demonstration that challenged the legitimacy of the government, if not the Parliament as a whole, turned into the “usual” fight between the “known unknowns” — as they are often referred to — and the police forces.


On top of this, some believe the government planted provocateurs among the peaceful protesters to justify the escalation. Regardless of whether this hypothesis is true or not, the mere perception is damaging to the reputation of the government and the police. Let’s hope that these events have not killed peaceful protest.


All this violence was happening while those inside the Parliament had just voted in favor of the new austerity measures. Many think that it was much more convenient for the government that people were discussing police brutality rather than the midterm plan that was being voted on. Regardless of motivation, that was indeed the case. The next day, June 30, when the government had to vote on the implementation law of the plan, there was hardly anyone in the ruins of Syntagma Square and the discussion within the Parliament had turned into a discussion about the quality of democracy and the right of people to demonstrate freely.


Public Order Minister Christos Papoutsis, who is ironically now called the citizens’ protection minister, made an analytical distinction between governmental and police responsibility.


The head of the main opposition New Democracy party, Antonis Samaras, suggested that the scenes raised questions about the existence of state-sponsored provocateurs. However, ND deputy Manolis Kefaloyiannis later rushed to congratulate the police officers and, together with Health Minister Andreas Loverdos, repeated the high number of police officers wounded during the street battles.


The leader of the right-wing nationalist Popular Orthodox Rally (LAOS) party, Giorgos Karatzaferis, suggested that special recognition should be given to the Evzones presidential guards because they remained in position before the Parliament during the fighting despite the fact that tears were running down their faces due to the chemicals used against the protesters.


Dora Bakoyannis, the head of the Democratic Alliance political grouping who was expelled from the main opposition ND party in 2010, commented only on the destruction of Hania MPs’ offices by a raging crowd.


The parties of the left were furious and suggested that the democratic foundations of the political system have cracked.


Of course, in the end the vote passed.


* Harris Mylonas is assistant professor of political science and international affairs at the Elliott School of International Affairs & Department of Political Science at George Washington University. He is also an Academy Scholar at the Harvard Academy for International and Area Studies.

Analysis of Greece’s cabinet reshuffle – CNN

Three weeks of peaceful street protests; a couple of Panhellenic Socialist Movement (PASOK) members of parliament resigning this week; a few more PASOK members of parliament challenging the leadership qualities of Greek Prime Minister George Papandreou; rampant unemployment; violent clashes with the police; and one of the worst financial crises in modern Greek history culminated today in…a cabinet reshuffle.

Prime Minister Papandreou is facing the most intense criticism since his election in October of 2009, both from his party and from Greek society. What on Wednesday night looked like a grand coalition government with the main opposition party, Nea Demokratia, was transformed on Thursday into an intra-party “reshuffling for elections”.

The new government was sworn in on June 17 and will be up for a confidence vote on June 21. The opposition parties are not impressed with the reshuffle. Most citizens reacted by saying “same old, same old”.

Not much is expected from this new government. Why is that? To begin with, Papandreou’s effort to regain the confidence of the Greek public began with the ambitious idea of a coalition government including many technocrats but ended up with a mild cabinet reshuffling satisfying the narrow interests of the ruling political party rather than effectively tackling the mounting problems.

For example, his efforts to recruit Lucas Papademos, an experienced economist that has served as vice president of the European Central Bank, as a Minister of Finance did not bear fruit. This is just one example of the failure of Papandreou to bring technocrats into the government. Instead, Evangelos Venizelos, a professor of constitutional law and until today defense minister, took up the burden.

Moreover, Theodoros Pangalos remained deputy prime minister despite the fact that he has been the target of most of the chants of the street protesters for the past three weeks. Most ministers were not changed and three important ministers were demoted but not fired—the Ministers of Finance, Interior, and Justice. However, there is a more positive way to read the news. Papandreou managed to build a team that agrees with him, to improve the internal cohesion of the party, and to share the burden with the rest of PASOK.

One step was to remove Katseli, who was probably a victim of her disagreements with the Troika (European Central Bank, IMF, European Commission), from the Ministry of Labor and Social Security. To appease the political base of PASOK and silence a wave of internal criticism that has been mounting within his party he removed from the government some of his close friends that had been intensely criticized and included some of his personal critics in the government. Last but not least, by promoting Venizelos—his party rival and contestant for the leadership of the party just a few years ago— to deputy Prime Minister. Adding a second deputy Prime Minister position for Venizelos, Papandreou significantly changed the dynamic within PASOK.

Party cohesion is a arguably a precondition for the government to pass the new bundle of austerity measures required to secure more loans from the EU/IMF. Despite these cooptation tactics, however, the new government has already found its critics from within the party. A few minutes after the new government was sworn in, PASOK MP Voudouris argued that the reshuffle was unsatisfactory. Regardless, as a result of this reshuffle, the whole political party is seen as an “accomplice” of Prime Minister Papandreou in this effort.

There are also important changes in the functioning of the government. The Prime Minister re-created a “Government Committee” — something that has been a demand of many party members — where the most important policies are normally decided. The irony is that it is both oversized, with ten Ministers participating, and lacks the key Ministers of Foreign Affairs and Defense.

These changes aim to enhance Papandreou’s ability to delegate responsibility and for the government to coordinate more efficiently. Another important fact is that Pangalos will not be part of the “Government Committee” — something that might appease some of his many critics.

Turning to the Ministry of Finance — the hot potato of this affair—most people believe that Venizelos may be better in the negotiations than the previous Minister of Finance, Papaconstantinou. Venizelos is an experienced politician and charismatic speaker. He has served as minister of culture, justice, transportation, and development. Nevertheless, he is not an economist and thus he will have to rely on the advice of others.

Finally, two promising new faces in the government are Stavros Lambrinidis, (BA from Amherst, JD from Yale), the new Minister of Foreign Affairs, and LSE Professor Elias Mossialos, the new government spokesman and Minister of State.

In the meantime, this Sunday the Eurogroup is meeting in Brussels to decide on the next installment from the EU/IMF bailout package. It seems that the developments in Greece have also alarmed Sarkozy and Merkel to the point that they rushed to declare that they will provide further assistance to Greece and that the private sector can also participate in this scheme on voluntary basis — a highly contested point so far.

Nevertheless, with few exceptions, the changes have not impressed the Greek people — who are still waiting for social justice, more just redistribution, and have grown impatient with political parties— and it is unlikely that they will restore the confidence of our foreign creditors.

If this new government fails to regain the confidence of the people then we will have early elections. And one thing is certain. From these elections a one party government will not emerge.