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Greece crisis: Leftist politics have doomed country to collapse


Greek Prime Minister Alexis Tsipras, Italian Prime Minister Matteo Renzi and German Chancellor Angela Merkel share a joke before getting down to negotiations at the EU leaders' summit in Brussels

Greek Prime Minister Alexis Tsipras, Italian Prime Minister Matteo Renzi and German Chancellor Angela Merkel share a joke before getting down to negotiations at the EU leaders' summit in Brussels


Greek Prime Minister Alexis Tsipras, Italian Prime Minister Matteo Renzi and German Chancellor Angela Merkel share a joke before getting down to negotiations at the EU leaders' summit in Brussels

It was Adam Smith who put it best.

 “There is a great deal of ruin in a nation”, he wrote in reply to an over-excited young man who thought that Great Britain was facing devastation after a setback during the US war of independence.

Smith was right about the specifics as well as the general point, of course: America was thankfully soon to win its independence, and both Britain and the US went on to prosper and thrive.

More generally, Smith was spot on about something even more important: it is very hard for politicians and officials, however incompetent, to truly destroy a prosperous nation.

They can impoverish it, and slow its growth, and damage it in all sorts of ways, but inflicting genuine collapse is tough. Core market institutions - the rule of law, private property and widespread, specialised human capital - are remarkably resilient when they are established properly; our free market economies are self-organising, decentralised networks that can take multiple hits and bounce back.

Even countries that have been mismanaged for decades, such as France or Italy, remain prosperous, even though they are steadily falling behind in relative terms.

But while it is hard to break a relatively developed and prosperous country, it’s not impossible. Venezuela is a complete basket case, its economy so damaged by its mad Marxist administration that it suffers even from shortages of toilet paper.

Argentina has suffered catastrophic problems over the years, so much so that the “Argentine paradox” is now a case study in what not to do in university applied economic departments worldwide. In the years just prior to the First World War, Argentina almost caught up with the UK and US in terms of living standards and national income per person.

The country continued to do well until the 1930s, and even in the after-war years was still seen as sufficiently wealth as to be an alternative to Europe. But years of statist, socialist and protectionist policies eventually did ruin the country.

Tragically, Greece itself is now very close to the brink. It is set to default on its €1.6bn payment to the IMF on Tuesday and its referendum will determine whether or not it quits the euro, or if it is able to cling on for a while longer.

There are generally four steps to social and economic collapse. First, the middle class loses access to its money, either because the banks shut or go bust in a mass, uncontrolled manner. Second, food and supplies start to run out in supermarkets as foreign suppliers slash lines of credit or domestic companies are banned from sending cash abroad.

Third, the state starts printing money uncontrollably, and hyperinflation sets in. Fourth, the lights start to go out, with power cuts and a generalised failure of the infrastructure. This process has now started, and could easily spiral out of control.

Greece is very much at step one, though it could end up in stage two much more quickly than many realise. In the short term, the public will probably put up with the limits on how much cash they can withdraw.

One week isn’t that long; and the money is still theirs. But businesses, as well as individuals, are also being affected, and it is here that the constraints could bite most dramatically over the next few days.

A special committee has been set up to vet all significant corporate deals that involve spending cash abroad; but the bureaucracy involved in such a demented act of central planning is clearly extraordinary.

There is simply no chance that there will be enough time and manpower to process every transaction; and that means that it will soon become harder for Greek importers to purchase the goods and commodities that the public needs. At some stage, this will lead either to much higher prices or, if price controls are imposed, to crippling shortages.

If Greece votes yes on Sunday, the government will collapse and the EU will once again have succeeded in removing a government it doesn’t like. If Greece votes no, it will be out of the euro, at least in practice, this time next week. This will trigger stage three of the collapse: a new currency will be issued -- perhaps in the form of state IOUs -- and it will immediately start to depreciate against the euro.

When it becomes obvious that Greece no longer remains in the euro, the state will legislate to redenominate all euro assets and liabilities into the new drachma, which by now will be collapsing very quickly, while formally defaulting on what’s left of its euro-denominated debts. This will trigger another massive set of bankruptcies and ensure that, for a time at least, no foreign company will want to deal with a Greek company.

With nobody within or outside the country inclined to trust the government, the new drachma will plunge and the price level, measured in terms of the new currency, will start to shoot up.

At the same time, the banking system, which by then will no longer be propped up by the European Central Bank, will collapse, with all banks shutting indefinitely. By then, stage four will kick in: the public sector will down tools and key utilities will stop working, triggering all out social and economic chaos.

The rich can mitigate the effect of enforced bank holidays, capital controls and hyperinflation by holding assets or cash abroad; the very poor don’t have much to lose in the first place. It is always those in the middle -- and especially what Marxist intellectuals call the petit bourgeois, the aspiring, hard-working workers and savers -- who are hurt the hardest.

They will have worked hard to build a life for themselves, and will find it intolerable to see it all snatched away. These are grim days indeed for Greece.