Wednesday, November 2, 2011

Greece and Germany

Bundesrepublik Deutschland

The Eurozone looks like it's about to unravel. Greece announced that it's holding a referendum about the austerity/bailout package offered to it by the EU and the IMF, and it's pretty likely that such a referendum would reject it. It's quite likely that it won't even be needed, as the mere announcement has gotten stuff moving so quickly that by the time there is such a referendum, it'll be too late.

The EU leadership has completely failed to address the crisis. I'm really disappointed in it. There's a simple, basic refusal to face reality. The reality is this:


This has been entirely obvious for at least a year now. Instead of accepting this and dealing with it, the approach has been to go "BLAA BLAA BLAA I'M NOT LISTENING I'M NOT LISTENING" and pretend that it's a liquidity problem, and that "confidence" and "voluntary debt forgiveness" that just might, if we're lucky, get the Greek debt/GDP ratio to about 120% instead of 140% in another decade or so, will magically sort things out.

It doesn't really matter how Greece got there. That's the reality, and it needs to be dealth with. Dealing with insolvent debtors is pretty simple. They default, and then the creditors and the debtor come to some kind of arrangement about who recovers what of the debts, if anything. The rest are written off as losses, and then life goes on, with everybody the sorrier but, it is to be hoped, the wiser. It wouldn't be the first time, and certainly not the last.

Another complicating factor with Greece is that the Euro functions much as the gold standard did in the 1930's depression: it makes it impossible to devalue, which means the only way the economy can adjust is through a fall in wages, which only happens through massive and very persistent unemployment. Years of pain, in other words.

Germany has been the big problem here. It wants something that's mathematically impossible—to simultaneously maintain its massive trade surplus with Southern Europe, and to stop lending Southern Europe more money. A trade surplus means that goods go in, money comes out. If money comes out, money has to go in. If Southern Europe can't in turn export to someone else to get money to come in—which it can't as long as it has a currency that's massively overvalued for their economies—that money has to be borrowed. It doesn't matter how much Angela Merkel hectors Greece about "living up to its commitments." It can't do that. It's broke, and nobody's lending it any more money.

Oh, and, austerity doesn't produce growth. Never. Structural reforms might make an economy more competitive in the long run, and Greece absolutely needs to do something about its utterly rotten system of governance, but that won't help with the immediate crisis. That can only happen once the dust settles, and will be needed to stop this from happening again. But not now.

I was wrong about the Euro. I believed it could work as a way to get the diverse European economies to converge, and the difficulties inherent in such a diverse currency zone could be worked through by political action. That was clearly not the case. Turns out that Paul Krugman does understand economics better than me. Imagine that.

Right now the best solution for everybody is to bite the bullet and get this over with. Greece should leave the Euro and default, and the let the drachma drop as far it has to. If—as seems very likely—the crisis will spread to Italy next, Italy should do the same. As should any other countries to which it spreads. This could include France. If that happens, what's left doesn't have much to do with the Euro as it used to be, and the European Union itself would be in grave jeopardy.

That would be a shame. Europe used to be the most war-ridden continent in the past thousand years at least, and the EU has brought it a period of peace, stability, and prosperity that it has never experienced. I believe that the EU could be a huge stabilizing influence simply by virtue of existing and functioning; an empire with voluntary membership and no emperor. I would hate to go back to a system of jingoistic nation-states beggaring each other.

This crisis is a pretty good acid test of the whole European idea. If Europe can't manage to resolve this, it doesn't deserve to survive.

I'm pretty bummed about this. But bravo, Greece, about that referendum thing. It's about time someone faced up to the reality, and if Merkel and Sarkozy aren't able to do it, it's gotta be you.

So please, let's get this over with. Then we'll pick up the pieces.


  1. Had Greece defaulted from the beginning, I would have commended them. Instead they have taken more and more aid and dragged their feet in a way that in retrospect seems quite dishonest.

    ... and by the way. I fear that those pieces left for picking may literally have blood on them.

  2. They might.

    I wouldn't have commended Greece for defaulting in the beginning. This crisis would have been manageable had the German and French leaders been willing to face the facts. I don't blame Greece for giving the EU a chance to resolve the situation in an orderly manner. Now all the options left are much worse for everybody. And yes, some of them certainly involve blood.

  3. Leaving the Euro will help the Euro, not Greece. Greece can go back to the Dracma, and inflate it to Zimbabwe levels, but *nobody* will accept Dracmas as real money: wanna buy something? Euros. Wanna buy something in shops where the state is forcing the owners to accept Dracmas? nothing to sell, zilch, nada. The only saving for the Greek state would be in paying public employees in Dracmas, screwing them royally. If Greece leaves the Euro it will automagically turn into Zimbabwe. I bet Greece would rather have a say on the currency it is forced to use. France and Germany also cannot look at other EU nations budget, then just say 'Sorry, you're out'.

    And now, religious leader hat on, and pontification starts:

    The solution, which I have been advocating for years (not for Greece, but for Italy, but I see we need to expand the solution), is that you Skandi kids stop playing around and just invade souther Europe, *completely kill all of the local population off* and repopulate the land. You can always say you had the wrong mushrooms, went beserk but you will be more careful what you eat in the future.

    You chaps just invading like a colonist force will not work. Tried before. Does not work, you fools marry the locals and get bullied around by the mammas. Why do you think my mum's family are tall and have blue eyes despite being from Southern Italy? Norman heritage anyone? Ever been there, and seen how fcuk'd the place is? Been there, not going back.

    The problem with Greece and Italy (and to a lesser degree Spain and Portugal) is the people, not the economy. Let's grow up and face it. Changing years of ingrained bullshit based culture? feel free to try while I learn how to fly and walk on water. The solution, which nobody likes is to put the bastards out of their misery and get on with life, with millions fewer greeks and italians.

    BTW, I do hold and Italian passport and lived in the sorry ass place for the first 24 years of my life, so I know I am 100% right about Italy. I am surprised Greece is as bad, but hey, I am naive...

    I guarantee that my solution will solve the Euro problem and that you will like having a farm in Irpinia. All you Skandi have to do is to just man up and do it.

  4. Do you prefer to keep wallowing idly you your well run social democracy then?

  5. Honestly? I would prefer that everybody has at least as well run a social democracy as we do, and preferably better. Ours is among the best in the world, and it's still barely functional. We really ought to be able to do great deal better than that.

    There is a moral dimension to the story, at least when it comes to Greece and Italy. However, that's certainly not all of it. Spain and Ireland were models of fiscal probity during the good years. Given the tools they had, there's nothing they could've done to avoid the pickle they're in now. The European situation would be very similar even if Greece and Italy had behaved just as well. Greek and Italian misgovernment hurts Greeks and Italians most of all. I would really like it if they could fix their governments, but I—nor my compatriots—can't do it for them.

    As to wars of extermination... well, it did work out for the Mongols. For a few centuries. Look at them now, though.

    Besides which, we might lose. That would kinda suck.

  6. 1) you should know better, I *know* you read Popper! History does not allow prediction the same way physics does, so you might fare might better than you are stating

    2) You lose? against Italy and Greece? and I can walk on water right?

    my point being that, the problem of Italy and Greece will persist as long as the countries are blighted by the current populations, because the current populations have some seriously bullshit cultures (which, incidentally, have a 'I am not to blame for this/any shit' kind of clause).

    Since the problem is the people, either you get rid of the people or you fence them off and stop them fcuk'ing things up. Hoping that they will sort themselves out has beed tried before, with little success.

  7. Federico: Scandinavia (even extending it to Finland) has at best half of the population of Italy. So it would be a challenge to win. And even if they did exterminate them all, who guarantees that with sunny warm weather the wouldn't just fall back into the relaxed lifestyle?

    On a more serious note, none of your Zimbabwean predictions happened in Argentina, when it defaulted. There is no reason to think such a thing would happen in Greece. Greece defaulting is the lesser evil here. No way austerity will lead to economic prosperity. So what is it, a few decades of painful unemployment, or a few painful years of currency devaluation and then increased competitiveness?

  8. I'm not too optimistic about Greece's prospects even outside the Eurozone: it takes a certain amount skill and determination and a fairly functional governmental apparatus to pull an Argentina or an Iceland. But what they're trying to do now is as good as impossible, even for a country much better governed than they are.

    Finland went the "austerity and structural reforms" path in the 1990's, and boy did it suck. I'm pretty sure it would've sucked far less to default and devalue the bejeezus out of the mark, and handle the banks the same way Sweden did. We survived it, but I'm not sure a less cohesive country with more corruption and weaker governance could.

  9. Anonymous, one would hope that, relaxed or not, the good Fenno-Skandi (happy now?) would not get as bad as the populations they replace, because their starting point is for a substantially more accountable and less selfish culture.

    I also said that Greece would get to Zimbabwe style inflation should they get back to the Dracma, not should they default. I might be wrong, but the risk is there, and is not trivial, and I think quite a few people in Greece would rather not deal with the possibility. And devaluing the currency makes sense only in the view that Greece will eventually start producing something people want abroad in large quantity. Maybe the Greek themselves fear that olive oil and Kalamata olives are not such a strong place to start.

    Incidentally, I also believe its all a pile of crock inspired and orchestrated by the banksters. Greece is 4% of the EU economy. For instance California is in many way in worse financial troubles, though it does not seem to get peoples run around like wet hens like Greece does. Inquiring minds...