Sunday, 21 June 2015

The Greek Debacle

The situation in Greece is a disaster. Exit from the euro now looks almost certain. But despite profligate spending by past Greek governments, it is a combination of poor institutional design and the intransigence of northern European politicians that ultimately will drive the Greeks away.

Greek finance minister Yanis Varoufakis. Photo courtesy of the European Council.


Due largely to being in the wrong place at the wrong time I have ended up leading Central Banking’s coverage of the Greek crisis since Syriza took office. I can't claim to have the insight of a journalist based in Brussels or Athens, but through a lot of reading and talking to various European economists, I have begun to piece together an understanding of the fault lines that underlie the economic and moral crisis.

Since I began covering the crisis in January this year, I have been torn two ways by the debate. The first argument, favourite of northern Europeans and Germans in particular, is the Greek government simply spent too much. It used its newfound euro membership to splurge, and now it has got what was coming to it.

The second argument is that Greece would not be in the mess it is now if her creditors (Germany principal among them) had not handled the last crisis, in 2012, so ham-fistedly. A heavy burden of austerity crushed what little life there was left in the Greek economy.

Of course, the truth lies somewhere between these two explanations. But increasingly I feel it leans more towards the latter.

Unemployment now stands at 25%, and 50% among youths. It is not a stretch to say this is a humanitarian crisis, and that is the core of why I feel the recent refusal by creditors to make concessions to Greece has been not only devoid of economic sense but also morally bankrupt.

Northern intransigence

Negotiations have gone round and round in circles for the past three months or more, with many words and much ink expended and little to no progress made. The core of the disagreement comes from two areas: targets for Greek government spending, which Syriza says would inflict too deep a wound on the economy; and cuts to Greek pensions, which Syriza has point-blank refused, despite Greek pensions representing 16% of GDP – a huge burden.

From left: IMF chief Christine Lagarde, ECB president Mario
Draghi, and (I think) ECB board member Benoît Cœuré.
Photo courtesy of the European Council.
Somewhat remarkably, despite Greek debt once more hitting something in the region of 180% of GDP, the cost of servicing that debt is quite low, due to the generous interest rate on loans from the eurozone and IMF. Budget discipline by the Greeks is clearly necessary, but vicious budget cuts are not, and amid a humanitarian crisis they are totally unjustifiable.

There is no doubt the Greeks spent too much in the early 2000s after joining the euro, and arguably they never should have joined in the first place.

But a large chunk of the money the Greeks borrowed and spent came from their most hawkish creditor: Germany. If a bank lends money to a dodgy borrower, no one will have much sympathy when it gets its fingers burnt. But when Germany lends to Greece, German politicians are able to cast that as Greek profligacy, not German foolhardiness.

And it goes beyond foolhardiness, for imbalances of the sort that allowed Germans to lend vast and unsustainable sums to Greece are hardwired into the euro. For many years it has been clear that the euro is flawed, but if Greece leaves the euro, as now seems almost inevitable, those flaws will be thrown into stark relief. It is debateable whether the euro should, or indeed can, continue to exist.

Institutional design

Frances Coppola put it succinctly and presciently as always in a blog post in 2014, noting that the history of Europe is “long and blood-spattered”. There is no sense of being “in this together”, which is why the political convergence that is essential to make a single currency work is absent from the eurozone. There is no goodwill from the Germans, or even from other southern European countries, no desire to help Greece out. And the most galling thing is that Germans must shoulder a large portion of the blame for the crisis.
Mario Draghi. Photo courtesy of the
European Council.

Let’s return to the point about dodgy lenders and dodgy borrowers. Throughout history, people have only paid attention to the dodgy borrower: in this case, Greece. The EU was designed with dodgy borrowers in mind, with the Stability and Growth Pact (SGP) designed to force governments to keep their finances in order.

The SGP has many failings, but one thing it did not prohibit was large government surpluses. The Germans ran a deliberate and successful policy of wage and budgetary restraint for many years, essentially forcing its people to become savers rather than spenders to make their exports more competitive. Thrifty Germans sounds harmless enough, but the problem is this is just as unbalancing as profligate borrowing: the spare German cash found an eager home in Greece. In this way, German surpluses helped encourage Greece to borrow more and more. And forced competitiveness is a beggar-thy-neighbour policy – the Germans’ gain was the rest of Europe’s loss.

With political, and particularly fiscal, integration, this would not have been a problem. A central European treasury could tax and spend at will to correct the imbalances, forcing Greeks not to borrow too much and Germans not to spend too little. But Europe’s history of jealously guarded sovereignty means such fiscal integration has never been a practical proposition, and it means the euro will never be safe.

A similar story can be told of monetary policy. The one-size-fits-all policy (with that size tailored to your typical German, by the way) means monetary policy is never at the right level for Greece, even as her economy is throttled to death by tight monetary conditions.

The economic consequences of the peace

It was ever thus. 100 years ago it was Germany on the receiving end of brutal austerity, administered as a punishment for the First World War, much the same way that Greek austerity looks more like a punishment than a cure.

The great 20th century economist John Maynard Keynes walked away from the signing of the Treaty of Versailles before the conference finished, disgusted by the delight the victors took in imposing their will on the vanquished. The creditor countries demanded Germany and her European allies make good on their debts – never mind the human consequences.

Eurogroup president Jeroen Dijsselbloem, who
has led negotiations with Greece. Photo
courtesy of the European Council.
“It might be an exaggeration to say that it is impossible for the European Allies to pay the capital and interest due from them on these debts, but to make them do so would certainly be to impose a crushing burden,” Keynes wrote in The Economic Consequences of the Peace.The existence of the great war debts is a menace to financial stability everywhere.”

For these reasons, Greece is absolutely right to say no to her creditors. Acceptance would not only be an economic and moral disaster, it would be acquiescence in their misguided and small-minded brand of century-old thinking. I take a small amount of hope from Wolfgang Münchau, who wrote in the FT recently that Greece cannot lose – either she gets a reasonable package from her creditors or she leaves the eurozone, leaves crushing austerity and tight money behind, and rebalances her economy.

Exit from the eurozone would be extremely painful in the short term. Greece would likely have to impose capital controls, there would be great instability in financial markets worldwide, and her economy would likely take an even greater nosedive in the short term. But longer term, she could begin rebuilding.

The remains of the eurozone will have to think seriously about the future of their endeavour. It has inflicted ruin on millions of innocent people. It cannot go on in this way.


No comments:

Post a comment