Is the EU’s response to the Greek crisis about helping the country to put its spending and income back into balance and pay off its debts, or is it about halting a crisis of confidence in the eurozone?
Despite what the politicians imply, these are not the same thing.
Greek politicians and commentators admit the country has lived beyond its means, paying similar salaries to those available in Brussels or Paris while producing less than 3% of eurozone output.
Protestors are on the streets of Athens because they fear even more dramatic cuts to pay and services. Greece is grappling with uncomfortable truths: work harder or earn less.
Athens isn’t burning yet, but European policymakers are fiddling, preferring European mood music to answering difficult questions: Can northern and southern Europe afford a similar lifestyle?
The uncomfortable truth is that northern Europe can afford to borrow more to enhance its lifestyle for objective reasons such as wealth-creating industries as well as subjective ones like reputation for competence and the long history of its financial centres.
The euro project famously was intended to promote the convergence of debt levels between governments. Instead, governments fiddled the fiscal numbers while wages and house prices converged.
There are huge differences in wages and the price of property and other assets across the United States. In the eurozone, a decade of low interest rates encouraged prices to converge upwards.
As the Greek protests show, Europe’s voters now believe this apparent wealth is theirs by right.
SAVING THE EURO
By dropping $146 billion into the Greek government’s bank account, the EU is more likely to support the lifestyle of Europe’s bankers but is it enough to satisfy them?
Looking at the possible outcomes: Let’s assume the 110 billion euro currently on offer stabilizes Greek finances. It would still require banks to respect caveat emptor in the case of Italy or Spain and hold the risky bonds which they willingly bought, rather than seek taxpayer bailouts. It may still require eurozone governments to print the money to bail out Greece.
As the crisis rolls on, politicians seek to rebrand the crisis as further integration of the euro, around a central treasury which they should have created at the start of the euro project. Unfortunately, half the eurozone countries now have black holes rather than gold to contribute to the central treasury so, in effect, Germany would play treasurer to the eurozone. This is precisely what it seeks to avoid.
A Greek default could leave European banks with 30 cents for every euro they’re owed. The consensus in Europe’s press is to exclude the possibility of such losses. That assumes the hurricane doesn’t move on to Italy and Spain. The amount of money required to settle their debts would require massive printing of money, creating inflation, undermining one of the core premises of the euro, the German-inspired commitment to long term stable prices.
The wealthiest nations face a choice of quitting the euro, allowing poorer nations to devalue the single currency to reflect their wage prospects. Alternatively they create a two-speed eurozone, forcing austerity upon southern Europe, cutting wages and services and requiring them to pay reparations, over decades to repay the bailout.
Germany and the other eurozone leaders will demand somebody pays and the choice will be seen as laying waste to Greece or to Europe's banks.
FROM TRAGEDY TO TERROR
As Greece enters a long and painful austerity, the country’s vulnerability to political extremism and ability to resist will be tested. Terrorist groups such as November 17, small but fired by a hatred of capitalism and the United States, could find fertile support. These groups date back to protests against the autocracy of the Greek colonels and have never been convincingly uprooted.
At stake in this crisis is not just Greek membership of a currency union. David, Lord Hannay, the UK’s permanent representative at the European Economic Community until 1990, once told me in an interview to remember the EEC, now EU, is not primarily about trade or even currencies. It is an alliance intended to ensure that Europe’s leading nations never again go to war with on another.
The euro project raised the expectations of citizens in countries like Greece and Portugal that they’d rejoined the first world. Failing to hold the eurozone together risks splitting Europe and undermining its fundamental purpose.
In launching the single currency without fully understanding what they were doing, Europe’s politicians find themselves in the same camp as the Goldman Sachs trader ‘Fabulous Fab’ Tourre, who created and sold investment products based on sub-prime mortgages.
The hapless Fab admitted in emails that are now subject of multiple legal cases, that he was “...standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!"
The European economic community was an undoubted success. The single currency may have been a step too far.