Saturday, August 29, 2015

Europe Engineers Another Versailles, in Greece

One person's take on the Greek economic crisis and the fallout of the Euro.

What happened in Greece? The narratives are shockingly divergent. On the one hand, Germans view Greece as a spendthrift poor relation who borrowed up the gills and now wants sympathy and even more money to throw down the drain. Nein!

On the other hand, Greeks are suffering depression conditions even worse than our Great Depression, and surrendered utterly in their most recent deal with the Trioka, (aka Germany), who are behaving like the Nazis of yore in destroying Greek independence and sending them into incredible poverty. The deal dictates that the Greek government run substantial budget surpluses as far as the eye can see, despite presiding over an economy in free-fall. It is reminiscent of the Versailles treaty that likewise tried to wring blood from the stone of then-Germany for its culpability in World War I.

Who is at fault and what is to be done? Greece is obviously heavily at fault, both for borrowing when lenders of Euros were willing to lend, and for not running an economy that maintains a rough trade balance with the rest of the Europe and the world, necessitating that borrowing (and for running a government that can not even collect taxes competently). But who were the lenders? As in our own sub-prime crisis, are the lenders who gave money so irresponsibly to the most corrupt and dysfunctional government of Europe, in full knowledge of its poor trade position, not a little to blame? Or mostly?

That is the first issue, that debtors should not be always and entirely to blame when debts go bad. Just ask the Donald. He has no qualms about redemption through the magic of bankruptcy, and Greece likewise should have few compunctions, morally, about reneging on its debts. But then it shouldn't expect any more bailouts or lending, of course. That would be the deal.

Obviously, having just been through a confidence-shattering banking crisis, the Germans and others are not excited about leaving their banks holding the bag for their bad loans to Greece. So they are extracting all the blood they can. And their bargaining position is excellent, because Greece's trump card, its willingness to leave the Euro at the same time it defaults on its Euro debts, seems to be unplayable since 80% of the population favors, even after all this misery, staying in the Euro.

Leaving the Euro would have the beneficial aspects of 1) allowing Euro debts to be more easily reneged, since Greece would henceforth have its own currency and not rely on Euro institutions; 2) allowing currency devaluation that is desperately needed to bring Greece's trade imbalance under control by automatically making imports expensive and exports cheap; 3) allowing the government to get out of its troika-imposed austerity and run budget deficits as any normal & sovereign government in its position (with trade deficits and depression conditions) would do. It is worth noting that the Euro zone is not a democratic entity. There is no president of the Euro, or popularly elected legislature, etc. It is a bureaucratic monster with little accountability, specifically constructed along the lines of a central bank to be independent of political control, except for its masters, who are the leaders and technocrats of the European economic powers, aka Germany. Which leaves little say for countries like Greece.

In the Euro system, if it were run properly, Greece would have no more currency or budget flexibility than the State of Alabama has. Alabama doesn't print its own money, or budget with ongoing fiscal deficits, or benefit from natural adjustments of a floating currency in its trade. It resembles a household that uses money originating from outside and must balance its books. Sure, there may be debt in the form of long-term bonds, but there is no scope for the many uses of a truly soverign currency. At the same time, the welfare state of Greece would be willingly under-written by the Euro zone in toto, as would some attempts at fostering economic growth, instead of making Greece sell off its public assets and endure decades of austerity.

It is thus remarkable that the Greek people are so attached to the Euro, and to being part of the European political project in general. They see themselves, indeed, as the historical and cultural heart of Europe ... where it all began. I think there are some class aspects to this position as well. The upper crust in Greece are much more tied into the European system and benefit far more from inexpensive imports than the lower classes. They would naturally regard leaving the Euro as unthinkable, and lead the political system in that direction. Also, they have so far been able to game that system so well, with all the loans and corruption, that it might seem as though the party might not have to end, even at this late date.

In any case, in or out of the Euro, Greece has to start balancing its external trade. In the absence of currency devaluation, which provides the cleanest and most progressive way to accomplish this, that takes the form of paying people fewer euros, enduring lengthy recession, and hoping that everyone with any prospects doesn't flee to other countries before a new balance between internal average pay (lower than that of their dominant trading partner Germany) and tradable productivity is found.

The role of the government in all this is something of a side-show. It ran all kinds of deficits over the Euro period, and incurred many debts. But its future budget surplus and extra taxation can not do the heavy lifting of bringing the total trade balance back on course. And what if different regions of Europe have persistently different trade balances? Not every country can be better than average. What then? In the US, different states have clearly different trade balances, and while Federal spending makes up some of the difference and supplies a safety net, in the end some states become poorer than others and send their labor out to more productive ones. The rust belt rusted out, and Social Security and unemployment insurance was not enough to save it. Property values there may be a fraction of what they are on the coasts, but the prices of other goods are typically set nationally, making these regions suffer on a permanent basis. This is one price of currency union, that laggard regions that have trade deficits with productive regions have no means of trade/currency adjustment, and can become hollowed out ruins.

That fate awaits Greece and the other poor relations of the Euro zone, unless more robust and regular means of "adjustment" are found. So far, profligate lending filled that role, until the party ended. But the need for such transfers did not end, indeed is especially acute now, with unemployment at unimaginable levels in Greece and Spain. Greece's debt should in all decency be a dead letter in its entirety, for example. Germany can't keep selling its wares to the other Euro countries, not buy enough in return, and expect the system to sail on without someone coming knocking.

  • Stiglitz on Greece.
  • New Yorker on Greece.
  • Who caused the crazy? Too much religion, or too little?
  • The evolution of hate-words.
  • Coal, at least, is slowly dying in the US.
  • The Taliban is still about.
  • This week in the WSJ: Martin Feldstein warns of new depression due to Fed pumping of stock prices, turns around and advocates raising the interest rate.
  • The traffic is soul-crushing.

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