Tuesday 14 July 2015

The economic consequences of the bail-out

I know the ferocious bail-out of Greece is not the Versailles Treaty. Nor are the debt-repayments reparations exactly The Economic Consequences of the Peace. but John Maynard Keynes knew a thing or two when he stormed home from Versailles in 1919 and wrote it.

There is something horrific when a great institution like the European Union becomes obsessive about one thing, so obsessive that it is prepared to put one corner of itself - one whole nation - into a state of semi slavery to achieve it.

This is what Keynes wrote in 1919 about the negotiators a century ago:

"The future life of Europe was not their concern; its means of livelihood was not their anxiety. Their preoccupations, good and bad alike, related to frontiers and nationalities, to the balance of power, to imperial aggrandizements, to the future enfeeblement of a strong and dangerous enemy, to revenge, and to the shifting by the victors of their unbearable financial burdens on to the shoulders of the defeated."

It is as if, in defence of a flawed continental currency - one designed so that it would suck up the available money and power into the centre - its first victims should be so punished. Because "the future life of Europe was not their concern". Apparently.

I must say, reading the outrageous terms visited upon the Greeks - apparently without any debt relief - I've been wondering whether I have been right about many things.  If the European Union can remove the rights of self-determination from a corner of Europe then, really, I want none of it.

If the peace of Europe becomes less important than the currency, or the debts, then it may well be best that we make our excuses and leave. Because I fear that what we saw today was a glimpse of a new European tyranny. From being the protector of the peace of Europe, the European Union is now threatening it.

It isn't that somehow they are squeezing the life out of Greece accidentally, it is that they are doing so deliberately - because Greece is less important than the currency.

What is even more frightening is that, if it hadn't been for the Lib Dems in 2010, the same kind of measures might have been visited on us. But at least we have a central bank. We can print our own currency if we need to, if national pride or desperation or ingenuity drives us to.

But our own austerity seemed such a temporary measure, a short-term pretence that the debt and the money is somehow real. Even Syriza, the great radicals, appear to have no alternative to offer their people but to sign on the dotted line of indentured servitude.

I don't feel very optimistic now, but there is an optimistic thought. That this is the beginning of the turning point, when we claw back a little of our futures from the financial world - because Greece will have to work out how, and we will follow where they eventually lead.

The worry is that they don't look as if they will lead us anywhere right now. And some of the places they might lead are extremely dark.

As Keynes concluded his book:

"If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp."

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Matthew Green said...

I don't think you are being altogether fair. Versailles was about retribution. Greece has been the beneficiary of quite substantial support. At least half its debt has been, in net present value terms, forgiven; its interest burden is less than Germany's proportionately; most of its repayment schedule is undemanding. The aim of the "austerity" programme is meant to put Greece's economy on a more sustainable path, so that it is shaped more like other economies at a similar stage in economic development. Looking at the history of Greece over the last couple of decades, it is hard to argue that it was being drained to support more developed economies. Once the more sustainable fundamentals have been achieved then so should growth - as it appeared to have been before Syriza took over. The fundamentals of physics cannot be overcome by government fiat, however much democratic legitimacy it has. Greece has become over dependent on outside finance, and yet has lost their trust. It really is hard to see how they would be better off with their own currency.
The question now is how to get investment into the Greek economy to start creating meaningful, productive jobs. But it is hard to see how Greece can proceed with that without sustainable internal finances - it would be like turning on the tap with the plug still out.
There is plenty to criticise the EU over, and the shape of the Euro system. You may well be right that more localised currencies are part of the future - but I think they work alongside other currencies that work on a bigger scale. It is very striking that fixed currency regimes are particularly popular with smaller countries - while their critics come from those with larger economies.

David Boyle said...

I very much agree about the mix of scale for future currencies. But I don't see how any reading of the terms could suggest this is an attempt to put Greece on a sustainable economic footing, though clearly some of it is - most of it seems to be extractive. I also think there is more than an element of retribution about it. The Germans have clearly come to hate the Greeks, and that really isn't healthy.

For me, leaving that aside, the real question is how you can rescue an economy using its own resources. That is clearly not the intention of the terms just agreed.

Matthew Green said...

Well maybe I need to take a closer look at the small print. But it sounded to me that it was extractive without any actual extraction going on - the cash flows going from Eurozone members into Greece rather than the other way round - until the principal debt needs to be repaid in 20 years time - and they agreed to look at putting that back too. The vindictive thing to have done would have been to step back and let the Greek banks collapse. A lot of Germans wanted to do just that.
Things like raising taxes and cutting pensions are meant to ensure tax and spending stay in balance - Greece's tax receipts are low. Too many public sector jobs likewise limit growth potential. Privatisation can be justified on the grounds of efficiency - though I wouldn't like to say if that was true in this case.
Having said which I don't care for a lot of the language and stereotyping that's being going on - and the whole business of people from outside trying to do things to the Greeks, rather than helping them to help themselves. And the Germans have a very weak moral case when it comes to the repayment of the historic principal. But that's what happens after trust has been exhausted.
I'm hoping that there is an element of theatre about the whole thing, and once the dust has settled some more constructive transfers can proceed. I may be being too optimistic.

Anonymous said...

"...it is that they are doing so deliberately - because Greece is less important than the currency."

It's not the currency that is important (not now, it perhaps was in 2010), but power relations between the states and to make an example to discourage the electorates of Spain etc from getting ideas.


"Rather than go forward in times of deep crisis to fiscal and political union to hold the euro together – as the architects of EMU always anticipated - they have instead gone backwards.

"They have at a single stroke converted the eurozone into a hard-peg currency bloc, a renewed Exchange Rate Mechanism that is inherently unstable, at the whim and mercy of populist politicians playing to the gallery at home. The markets are already starting to call it ERM3."

See also the transcript of Varoufakis' interview in the NS for the lack of interest Schauble and Dijsselbloem (in particular) had in the economics of the dispute.


Felix Dodds said...

david can i reproduce the blog in my blog ive already ahd an interestign guest blog by Jeb Brugmann http://earthsummit2012.blogspot.com/2015/07/a-gust-blog-from-jeb-brugmann-greek.html

Eliseo Weinstein said...

Wow this is a very in depth write up, I was not aware of all of these economic factors. I showed my wife this and she was also shocked. We have a family member who was recently in need of bail money. Thankfully god answered our prayers and he managed to get all the money together that was necessary. Thanks.

Eliseo Weinstein @ Jr's Bail Bond