A wearisome fudge that can only spawn further fudges
The failure by the Troika in 2010 to impose losses on Greece's creditors spelt doom for the eurozone
Published 12/07/2015 | 02:30
The emerging 'deal' for Greece, the alternative to the country's exit from Europe's ill-advised common currency, is shaping up to be another essay in extend-and-pretend. The last six months have been wasted by the new Greek government and the creditors - on making a bad situation worse in Greece - without any promise of a sustainable economic recovery. The closure of the banks and the consequent suspension of both internal and external payments in a sinking economy was a quite extraordinary failure of common sense.
Whether the Greek government or the eurozone leadership has made the greatest contribution to this disappointing outcome is an issue best left to their spinners and media wizards. The outcome is what counts, and it looks like there will be a deal which fails to address the debt overhang, fails to avoid further short-term deflation of the Greek economy, fails to fix the banks and fails to plot a plausible course to economic recovery.
There is no getting away from the ultimate source of this macro-policy nightmare. The response by the eurozone leadership and by the IMF - who should have known better - to the emergence of the Greek sovereign debt crisis in late 2009 and early 2010 has cast a long shadow. Instead of insisting that the private sector lenders to Greece had been foolish and should take losses, the eurozone abandoned its 'no bailout' policy and shifted the burden to the Greek treasury. The logical corollary of a no bailout policy for countries no longer able to borrow is that those who chose to lend them excessive amounts should face the consequences, quickly and without fuss. This approach should appeal to either socialists or capitalists: socialists object to the imposition of the costs of errors by private lenders on the public purse, capitalists to the distortions created by ex-post rescue of foolish investors. Capitalism is about enthusiasm in the pursuit of profits but it is also about prudence in the avoidance of losses. The decision to spare foolish lenders the losses they deserved in Greece in early 2010 was the biggest mistake in the mismanagement of the crisis in the eurozone and also an affront to both socialists and (old-fashioned) capitalists. The left-wing Greek government has been joined, in their opposition to another non-solution, by an impressive line-up of economic and financial experts around the world from all points of the political compass. The emerging 'deal' looks like another fudge and will spawn further fudges.
This is not to deny that Greece - even if the private holders of Greek debt had been given a haircut as deserved in 2010 - would have faced a sharp budget correction: state spending was way ahead of state revenue and a painful correction was inevitable. But the correction could be over by now and the economy in recovery if the eurozone had stuck with the 'no bailout' clause and insisted on losses for those who financed the irresponsible Greek budget bubble. Instead, the eurozone, with the unwise collaboration of the IMF, funded a bailout and prevented, for two years, the imposition of losses on the foolish financiers of the Greek excesses. When losses were finally imposed in the sovereign default of 2012 most of the foolish lenders had escaped, trapping the Greek public as involuntary guarantors of the lenders in creditor countries.
I will spare readers the twists and turns of the Greek saga in the years since 2010. It should be clear that a better resolution was possible and it was not pursued. It is hard to forgive when a five-year-old mistake is repeated in pursuit of political convenience. Politicians should never be blamed for committing new mistakes: it is the wearisome repetition of old ones that grinds people down.
In Greece, uniquely in the eurozone, the source of the economic collapse was the profligacy of politicians through excess borrowing, compounded by mendacious statistics stretching back to fiddling the figures to secure eurozone entry. But the persistence of the Greek crisis is rooted in the unresolved design flaws in the common currency project for which the citizens of Greece cannot be held responsible. A 'no-bailout' clause logically implies that foolish lenders, whether to improvident Greek governments or to reckless Irish or Spanish bankers, are on the hazard and will face swift retribution when their loans go sour. The debut of the Troika was in Greece in May 2010 and the failure to impose losses on private creditors on that occasion remains the Original Sin of eurozone mismanagement.
The continuing failure to rectify the founding flaws in the eurozone design has been painted these last few months in vivid Aegean blue. Blaming the Syriza government for brinkmanship and for poor diplomacy is entirely beside the point. Europe has burdened itself with a thoroughly dysfunctional, and annoyingly self-styled, 'monetary union' which does not do what it says on the tin. In a proper monetary union, regional banking systems do not get closed down arbitrarily by the supposed lender of last resort and economic policy does not get to be dictated by lawyers.
The decision by European elites to put the cart before the horse and instigate a half-baked currency union in advance of political union back in the 1990s was not an unrecognised mistake. Several EU member states politely declined to join and the flaws in the design were pointed out by economists in continental Europe as well as in the derided 'Anglo Saxon' world. There was little or no intelligent debate in most of the smaller European countries, whose elites appeared to regard euro membership as a kind of unearned promotion to the Premier League. In a proper monetary union there is no link between the solvency of the state and the security of bank deposits. The last six months in Greece has been a tutorial in eurozone design flaws.
The closure of banks, the suspension of the payments system and the introduction of capital controls, as a conscious and deliberate tool of financial management by the central bank of a supposed monetary union, is beyond satire. There is no monetary union without banking union, and that means that the legal domicile of banks has no effect on the perceived security of bank deposits.
That the eurozone has failed to build a proper monetary union is attested by the extraordinary events in Greece these last few weeks. Can you imagine the reaction if the US Federal Reserve decided, because the state of California is bust, which it is, to close the bank branches in California? Before the euro got off the ground, back in 1997, this was the prescient verdict of the late Milton Friedman, who knew a thing or two about monetary economics. There is really nothing to add.
'The drive for the Euro has been motivated by politics not economics. The aim has been to link Germany and France so closely to make a future European war impossible, and to set the stage for a federal United States of Europe. I believe that adoption of the euro would have the opposite effect. It would exacerbate political tensions by converting divergent shocks that could have been readily accommodated by exchange rate changes into divisive political issues. Political unity can pave the way for monetary unity. Monetary unity imposed under unfavourable conditions will prove a barrier to the achievement of political unity.'