As Larry Elliott wrote recently in The Guardian, the longer the Eurozone crisis drags on, the more it resembles a mad hatter’s tale from Lewis Carroll.[1] In order to save Greece, for example, the conditions imposed by Germany and others are bleeding the patient to death. Or, we are told repeatedly that government profligacy lies at the core of the problem, but neither Spain nor Ireland had large public debt burdens. In the same vein, it is argued that the solution is for all Eurozone countries to become as competitive as Germany. In truth, it was the recycling of export surpluses to peripheral countries (together with an undervalued euro) which has enabled the German export boom to continue. The list of absurdities is a long one …
In truth, the centre-right politicians and technocrats who dominate the Eurozone have mainly themselves to blame for the extent and duration of the crisis. At every turn, they have preferred short-term sticking plasters to long term solutions. Like ostriches, they have convinced themselves that if they don’t look, the problem will eventually go away. Instead, the problem has got steadily worse—not only is Greece now likely to default and possibly leave the Eurozone, but so-called European austerity increases the chance of a new recession, this time almost certainly far deeper than that of 2008/09.
As I wrote in my June column this year, had Germany and the ECB moved quickly to aid Greece in early 2010, the crisis could have been contained.[2] But Ms Merkel and other Eurozone leaders sat on their hands. Later, as the crisis spread to other countries, there was much populist sloganeering about avoiding Europe becoming a ‘transfer union’ and ‘letting the banks share in the haircut’. A few sensible politicians, most prominently Mr Juncker, had been arguing for unified economic governance underpinned by a common European bond (or E-bond)—but it has taken 18 months for such notions to gain serious traction. Even now, Ms Merkel stands resolutely against an E-bond, preferring instead to back a hair-brained scheme which would result in the EFSF becoming an open-ended and uninsured insurer.[3] Indeed, the new Bundesbank president appears to believe that the ECB should shun any sovereign eurobond purchases.[4]
It may now be too late—-not just for Greece to avoid default and departure from the euro, but an unravelling of the common currency, the implied cost of recession for Europe and indeed, for the rest of the world. Greece’s exit from the Eurozone will almost certainly lead to contagion on a scale which the ECB cannot finance, the resulting euro-collapse administering a shock to the German economy equivalent to 20-25% of its GDP according to a UBS report.[5] The knock-on effect for the rest of the EU would be enormous, not to mention for the US financial system whose banks are estimated to hold half a trillion dollars in ‘Club-Med’ sovereign assets alone.
What Europe is doing instead is to hedge around the ‘bailout’ operations of the EFSF with even more stringent conditions about budget balance clauses and a stronger Stability and Growth Pact.[6] This is of course quite the contrary of what is needed, namely, a very large injection of demand to pull the Western economies out of stagnation.
Under current conditions, an expansionary package could be financed largely from a Financial Transactions Tax, though if not, by printing money and using it to invest in everything from modern greener infrastructure to clean energy generation.
But where is the political will for expansion? It will not come from Merkel, Sarkozy, Berlusconi and company. It might just come from France under the PS after next year, and Germany under an SPD-Green coalition in 2013. Can Europe—or indeed the world—wait that long for new political leadership?
_____________
1 See http://bit.ly/oCfaMA
2 See http://www.social-europe.eu/2011/06/greece-unecessary-crisis/
3 See Wolfgang Münchau in the FT: http://on.ft.com/qi7ZIw
4 See http://bit.ly/rtfM3F
5 See http://on.ft.com/qi5nEj
6 For a critique, see http://bit.ly/ooRbnp
3 See Wolfgang Münchau in the FT: http://on.ft.com/qi7ZIw
4 See http://bit.ly/rtfM3F
5 See http://on.ft.com/qi5nEj
6 For a critique, see http://bit.ly/ooRbnp
No related posts.
All Content
What nonsense! Too much of it to debunk it all, just some few examples:
"the conditions imposed by Germany and others are bleeding the patient to death."
Actually, the conditions are necessary to forve the Greek government into action. As everybody can see, without such pressure, it only drags its feet and delays unpopular reforms. However, the trika doesn't really care HOW the targets are met. The government has more than enough leeway, but it prefers to use the EU/IMF as scapegoats, to distract attention from its own failures.
"it is argued that the solution is for all Eurozone countries to become as competitive as Germany. In truth, it was the recycling of export surpluses to peripheral countries (together with an undervalued euro) which has enabled the German export boom to continue."
In truth, it was painful reforms in Germany (while some other governments were asleep at the wheel) which made the nation so competitive again just recently. And in truth, Germany had a NEGATIVE current account, more money leaving the nation than coming in, in every single quarter of the 90s! Why isn't this mentioned at all? Why do highly qualified experts like Irvin make it look as if Germany had been somehow "ripping off" other countries for decades? Such cheap talking points should have no place in a serious debate of the issues.
"Like ostriches, they have convinced themselves that if they don’t look, the problem will eventually go away."
I don't think ANYBODY who's read the news in the last years can really have failed to notice the extraordinary amount of time and efforts European governments have spend on the Greek crsis. It vastly exceeded the attention to any of the other suffering nations, Ireland, Portugal and Spain. To call this "ignorance" is simply ignorant in itself.
Bah, enough already. This embarassing piece of cheap populism and shallow fingerpointing doesn't deserve more attention. There's lost of other, more thoughtful stories to be found at SEJ.
@ Gray:
I suggest you check your statistics with Eurostat. An external current account suplus (which Germany ran) must be offset by a capital account outflow which is why (by definition) the Balance of Payments must balance.
George – I think it's wrong to compare Greece with the situation in Spain and Ireland. Both are suffering as a consequence of the banking crisis. Ireland went from a budget surplus to massive debts taken over from the banking system (which was effectively bankrupt). Spain is suffering primarily due to a collapse of the building industry in the south, as banks are no longer willing to fund property development – this has caused the deep recession and mass unemployment they are experiencing.
Greece on the other hand has had no banking crisis – instead its problems are due to decades of severe economic mis-management, and widespread corruption (the worst in the Eurozone, according to their own anti-corruption tzar) and tax-evasion by the Greek people. An OECD survey noted that between 2006 and 2010, the average Greek salary had grown by close to 30%, with tax receipts dropping at the same time.
The crisis in Greece was always going to happen, it was just a question of when.
The issue for ordinary Greeks is the scale of structural problems with their economy and society. They desperately need to rebuild both almost from scratch. Much of the anger towards Greece from the rest of Europe comes from the apparent lack of willingness of the Greek people to either take responsibility for causing the crisis, or take any meaningful action to resolve it (there have still been no privatisations of state-owned businesses, 2 years after the crisis broke). The European (including much of the Greek) press has reported that most Greeks prefer to go on tax strikes or riot, rather than take responsibility – I hope that this is simply a case of press bias, if not it's a national disgrace.
The key point for Greece is that regardless of whether they default or not, with a primary budget deficit of 6% in 2010, there is a lot more pain to come, as the economic chaos is likely to drag on for years. My view is that they should default, return to a massively devalued drachma and try to export their way out of trouble – but this will mean hyper-inflation and a dramatic fall in living standards (probably to Turkish/ex-Soviet Bloc levels) due to the massive rise in import costs and the inability of their government to raise finance on the international markets, for some years to come.
Sorry meant 30% increase for public-sector and state-owned enterprise workers….
@Sulla:
Good pont—yes, Greece's situation wa alwasy different from that of Ireland & Portugal as you say. But past corrupt Goverments (both the Karamanlis and Papandreou dynasties) does not mean that the 'Greek people' are all corrupt and revenge should be extracted.
It's not a question of exacting revenge, but rather making the necessary structural reforms to ensure that the same situation doesn't occur 5-10 years down the line. It's unfair to ask German, Dutch, Finnish taxpayers to give massive amounts of their hard-earned cash to Greece, without guarantees that Greek Society accepts the responsibility for the issue and will avoid it happening again.
In terms of responsibility, I agree that not all the Greek people are greedy, corrupt and fraudulent, but unfortunately the facts I've seen provided by the OECD and Greece's own anti-corruption tzar suggests that a large proportion are. The anti-corruption tzar I believe noted in 2010 that almost 20% of Greek workers had admitted to asking for bribes, the IMF I believe noted that the Greek black market was worth up to 30% of annual GDP in 2010. We also know that workers in state industries and the public sector received a 11.5% payrise over 2 years in 2004 (almost 4 times the 2004 inflation rate) following a collective agreement signed before the Olympics of that year.
There is something very rotten with Greek society generally and frankly I only have sympathy with those Greeks who actively strove to challenge the large payrises, black market practices and overly-generous pension arrangements – having been to Athens many times, I have yet to meet anyone who did.
Finally, the excuse that this was the responsibility of the government is a rather weak one in a democracy – if the Arab Spring has shown us anything its that real change can only happen when the people themselves decide to make it happen (as the Germans did with the structural changes to their economy in the late 1990s). I haven't seen anything in any of the Greek press suggesting that as a Nation they have admitted responsibility for causing the crisis and putting through the painful changes that are required to fix it. Instead there seems to be much talk about "national dignity" and criticism of Germany, but very, very little actual action or soul-searching. Maybe I'm just not reading the right newspaper websites or speaking to the right greeks, but I doubt it.
Professor Irvin loses all credibility when he lines up with all the other 'commentators' who expect Germany to bail out or subsidise other countries or accept responsibility for their debts. From an economic perspective, this is rubbish; but from a moral perspective it is unconscienable.
The fact is that Germany was virtually bludgeoned into adopting the Euro in the first place by Thatcher and a few of her duplicitous fellow-opponents of German reunification, because they thought that this would be a way of controlling a resurgent Germany or using its enterprise and the strength of its economy for their own purposes. (This is especially ironical in view of Britain's refusal to adopt the Euro). Everyone forgets that whatever bail-outs the abject and subservient German politicians provide to other countries (and they never have the courage to resist the pressure for very long), it is never their money they are using, but the money from the already greatly over-taxed German citizens.
Isn't enough that Germany already pays about a quarter of the EU budget, that it is already providing about half of the rescue package for Greece, that is the second largest paymaster of the UN, etc. etc.?
If Professor Irvin wants to make a serious contribution to this debate, he should begin by campaigning for the introduction of a financial transactions tax in Britain and for the stricter regulation of banks, hedge-funds, currency speculators, short-sellers, credit-rating agencies and the other assorted predators who are profiting from the current crisis. He should also be speaking out in favour of forcing the banks and hedge-funds to write off their debts to Greece without running to their governments for compensation, and he should be speaking out against the forced privatising of the public assets of the Greek people at fire-sale prices.
What the currect crisis needs is a comprehensive set of solutions to fix a fundamentally rotten system, not just the same old mantra : "Germany must pay more".