Thursday 16 July 2015

Our Future Beckons

Greece--the Bigger Picture

In the lead up to World War II, British Prime Minister, Neville Chamberlain proceeded to negotiate with Hitler because he believed him to be a man who would keep his word.  In a now infamous sentence he said he had looked into Hitler's eyes and saw integrity in his soul.  When Hitler subsequently broke solemn agreements, Chamberlain's offence was such that he resolved to war against Hitler with might and main.  When it dawns on you that the person across the table is lying, there is no point in continuing further negotiations.

And so it has come to this point in the small matter of Greece remaining in the European Union.  Clearly some of the European nations (Germany and Finland amongst them) believe that Greece as a nation, and its Prime Minister as its representative, are complicit in telling and living systemic lies.  Therefore, negotiations are not worth anything, and, like Chamberlain, all further attempts should be suspended immediately.

But the charade must needs go on.  The pretensions demands of a United Europe built to the glory of Man demand it.  The Greek Prime Minister returns to Athens to drum up support for all the concessions he must make in order to get an 80bn euro loan, just to keep Greece Inc. going and to keep Greeks in the lifestyle to which they have become accustomed.  One can imagine what is taking place behind the closed doors.  "Look, chaps, it doesn't matter what we agree or sign up to.  It's just words, scribbles on a paper.  We have fudged our way through before.  We can do it again.  Easily.  It's the Greek way."

Whether the bailout goes through is not yet a done deal.  But close.
  If it does, we expect another crisis in about two to three years.  Sooner or later the rest of Europe will run out of money financing Greek profligacy.  Probably later, since a hundred blows on the back of a fool make no impression.  In the meantime, the euro will become a weaker and weaker currency.  The markets will likely see the breakup of the euro to be inevitable and will price euro debt accordingly--that is, it will require higher and higher interest rates for the risk of holding European debt.

Behind all this there are broader and deeper macro-economic currents running.  There are lessons to be learned. Matthew Lynn draws the following conclusions:

1. Don't put politics before economics.
The greatest mistake made with the design of the euro was to make it a currency that was primarily political.  It was designed as an instrument for creating a single European state.[Matthew Lynn, Bust: Greece, the Euro, and the Sovereign Debt Crisis, (Hoboken, New Jersey: John Wiley and Sons, 2011),  p.257.]
 That meant the euro was "forced" to cover both strong and weak economies, in the vain hope that one day all those states and economies would be united into one country.  The economic risks and perils were waved away in the minds of many (France, most culpably) because they would only be temporary; eventual political union would remove the risks.

2. Let markets decide (they are more realistic and honest).
One point is important to keep in mind about the Greek crisis and the way that in time it will destroy the euro.  There was an alternative.  The euro could have been saved even as late as May 2010.  How?  By letting Greece go bust.

The treaties were, after all, completely clear.  The euro was not a transfer union and there was never any obligation  for the other members of the euro-zone to come to the rescue of the Greeks. . . . (A) default would have created a far stronger euro.  It would have been a sturdy anti-inflationary currency, a recreation of the old deutschmark. [Ibid, p. 258f]
3.  Be intensely suspicious of grand schemes that don't allow for error.
The euro was in many ways a utopian scheme. It was a grand project for creating a political union.  For most of its history, however, the European Union had built itself through modest, incremental steps. . . . Nothing was done in a rush.  Most importantly, there was always space to backtrack, . . . to reform any structure that did not appear to be working out.

The euro broke with that tradition and disastrously so.  It assumed that massive changes could be wrought in the main economies of Europe within a few short years. . . . In short the euro didn't leave any room for error. . . . Once it collided with the real world, of course, that meant it was doomed from the start.  It joins a long list of schemes undone by the arrogance and hubris of their designers. [Ibid, p. 259f.]
4. The demise of the euro and the sovereign debt crisis (aka the global financial crisis) marks the start of the great rebalancing of the global economy between West and East.

To put it succinctly, the East has continued to grow its economies by producing goods and services that out-compete in price and quality.   The West's response to the GFC and the euro crisis has been for governments and the private sector to borrow astronomical amounts to sustain a lifestyle to which peoples in the West have become accustomed.  Western governments have cheered this borrow-and-spend approach as the key to kick-starting their economies again.  All it has done is lock inefficiencies down, making them not just worse, but permanent.  Greece is the poster boy, advertising our likely future. 

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