November 9, 2011
What is happening in Europe? Greek prime minister Georgios Papandreou was hauled over the coals for suggesting that the Greek people might want to be consulted on their own future. Let’s consider this. Why should a referendum threaten anyone? Indeed, why should democracy threaten anyone? Or maybe the other way to ask this question is: who is threatened by democracy?
Maybe those who are trying to foist something on the population that the population does not want are threatened by democracy. Let us think a bit about what is going on from a political standpoint.
When you strip everything back, what you see is that each recurring European ‘rescue’ package is nothing more than a bailout for private professional investors who are paid for previous risk-taking by the average taxpayer, who normally pays others to avoid too much risk. This is the issue and, if you ask the average citizen whether it is fair or right that he pays for the mistakes of others, he is likely to say no.
The other observation that we can make is that, all over the world, the ‘too big to fail’ notion has meant that the bill of more and more of the individual debts of certain people and institutions is being transferred to more and more people who had absolutely nothing to do with these debts in the first place. But what is happening is that the amounts are getting too big and, at every stage, the entity that the debts are passed on to becomes less credible. This happened here with the botched bank guarantee. The Irish banks undermined the Irish sovereign, so we got ejected from the bond market.
Then the idea was to shunt on the debt to another bigger lender of last resort, the EU and the IMF. But even the EU/IMF wasn’t big enough to bail out the Irish sovereign (or the Greeks or the Portuguese, for that matter), and the contagion continued.
When it was obvious that the Europeans hadn’t enough money, they went last week to the Chinese looking for loot. The reason they are looking for loot is that the focus is switching firmly to Italy
Now that Italy is the focus of the crisis, things are getting really hairy. If the eurozone is struggling to find enough cash to bail out Greece, how the hell can it bail out Italy?
The G20 was unable to come up with anything concrete last Friday, because everyone is beginning to realise that the problem of living for years on credit is that, when it comes to paying back, someone is going to get burned badly.
At every stage when the EU leadership has shunted the debt of someone on to someone else, it becomes less and less democratic, more institutionalised and more remote from the average person, who is getting fed up and fearful in equal measure. Here in Kilkenny, where I am writing from John’s Street at the www.kilkenomics.com festival, people are increasingly worried about where this is all going to end.
Ultimately, Papandreou, seeing this and realising that Greece faces an enormous choice, decided that it was time to ask for a mandate from the people about their future. This would seem to be what democracy is about. But in response, the rest of the EU leadership (including our own) went ballistic. Why should they be so afraid of the people, particularly when they have not come up with any other solution, bar shunting on the problem?
They are afraid because Papandreou also raised the idea of Greece’s continued membership of the eurozone. In normal circumstances, the eurozone leaders should be happy to be rid of Greece because, without Greece, the euro would be immeasurably stronger. But these are not normal circumstances. If Greece elects to leave, who else will want to leave?
Regular readers of this column will know that it has been arguing since 2007 that the endgame of this eurozone debt crisis will be some break-up of the currency and that the reason is very simple. Membership of the euro gives a massive subsidy to German producers and imposes a massive penalty on producers in the rest of Europe. In addition, the nature of the European economy means that, if the euro wants to stay in place, its main beneficiary will have to tolerate being defaulted on every few years, or at best decades.
If Germany had its own currency, the New Deutschmark would be like the Swiss Franc on steroids. It would appreciate dramatically and force German industry to contract. As things are, German industry has gained a huge market – the rest of Europe – at an exchange rate that makes its goods tolerably priced, so it’s “quids in” for the Germans.
The surplus Germany gets from all these exports finds its way back to German banks.
These banks need to lend this money to someone and, more crucially, German industry needs its banks to lend to the likes of us and the Spaniards and Italians etc, so that we can have the money to buy the German cars – because, if we don’t buy them, who will?
That’s the game, and every so often when the Germans come looking for their money back, it isn’t there. It has been spent.
Once this happens, the present policy is to impose austerity in order to increase the likelihood that the Germans will be paid back. But austerity doesn’t increase the likelihood that the money will be paid back, it decreases the likelihood.
This is the inconsistency at the heart of the euro, and the only way out of it is if we all become better at making things than the Germans are. In fact, the rest of us don’t have to become more German, we have to become better Germans than the Germans themselves, and this is not going to happen – nor should it.
So if nations are not going to change their behaviour and the Germans need to lend enormously to us to buy their goods, of course there are going to be defaults. The only alternative to this is a return to national currencies. National currencies allow us to devalue to compensate for the idea that we might not be as productive as the Germans because we value other things in life. After all, there is more to life than economics.
If this adjustment is not allowed to happen, the rest of Europe – in the euro – simply can’t keep up with Germany.
The best way to understand this dilemma is to consider that, when we had the punt linked to the deutschmark, we devalued six times in 13 years just to try to keep up competitively. Conversely, when we joined the euro and could no longer devalue, we lost 30 per cent competitiveness against Germany. It could not be clearer.
All Papandreou was doing was recognising this for Greece. Without the drachma, Greece can’t work. Europe with all this debt can’t work. You can’t shunt the debt of some people on to others indefinitely. The people will say no, and democracy threatens nobody. The sooner we all see this the better.