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By Detlev Schlichter, on 24 June 11
Fallacies and Misconceptions about the Greek Crisis
One frequently gets the impression from reading the mainstream media that Greece has a monetary policy problem and not a fiscal problem. This is incorrect. Yet many commentators seem to argue along the following lines: This crisis is due to the straitjacket of the single currency with its one-size-fits-all monetary policy, or at least aggravated by the constraints of this system. Greece would have more “policy options” in dealing with its troubles if it had control of its own national currency.
Then there is, connected to this, an underlying – and not very flattering – notion that the Greeks are somewhat unfit to live and work in a ‘hard money system’, which presumably the euro is. The Greeks, this seems to be the allegation, like borrowing and spending too much. I am paraphrasing here but this is certainly the underlying tone of the narrative. The Germans and Dutch and French can live without the constant aid of conveniently cheap national money – but the Greeks can’t.
This is nonsense, and dangerous nonsense at that. Let’s first look at what Greece’s alleged “options” would look like if the country suddenly had the drachma back. The idea in the mainstream media seems to be that they could have lower rates and an even easier monetary policy than they have today under the ECB, and that such a policy would be suitable to the country as a whole. We have to remember that the ECB is already running an ultra-expansionary monetary policy, that the ECB is already the single biggest owner of Greek government debt, and that the ECB is very generously funding all euro banks (including the Greek banks) under lending programs that allow a lot of toxic waste to be used as collateral. But, I guess, a newly independent drachma-central bank could print even more money, hand that money to the Greek banks and the Greek government to allow them to stagger on, and then have a go at – what’s that pernicious phrase, again? – “inflating the debt away”. Well, good luck – we will debunk this shortly.
But there is another, slightly more sophisticated sounding argument out there. According to this ingenious interpretation, the Greek government is insolvent not because it habitually spends more than it takes in but because the Greek economy is not growing fast enough. If only the Greeks were more competitive and could sell more stuff abroad, then their government could happily continue spending! So again, the problem is with the inappropriately “hard money” of the Eurozone when what is needed is “soft money” — a super-easy monetary framework, in which the currency can be debased and international competitiveness and government solvency be restored with cheap money and low rates.
Luckily, I have never needed the help of any of those debt advisory services for consumers who face personal bankruptcy, so I am not speaking from experience here. Yet, I very much doubt that the first advice these services give to individuals at risk of getting crushed under mountains of credit card debt, is that they should get better jobs so their income rises. Yet, this seems to be the standard advice from mainstream economists for governments. Governments are expected to manipulate the economy via their paper money monopolies in order to generate the economic growth they need in order to sustain their lavish spending. Economic reality has to be made to perform to the demands of state largesse.
Also, I wonder, if soft money is such a great idea, why should we confine it to Greece? Should we then not all ask our central banks to run an even easier policy to “stimulate” growth? Well, most central banks are already trying this without much success. Could it be that there is something fundamentally wrong with fighting a crisis that is the result of too much debt and cheap credit with yet more debt and even cheaper credit?
I am not quite sure what is scarier, the present crisis or the fact that such economic nonsense is widely considered accepted wisdom.
A soft drachma would be of no benefit
But back to Greece. First of all, it should be clear, that a reintroduction of national paper money in Greece and the subsequent debasement of this money would not prevent bankruptcy. It would accelerate it, as the original debt was contracted in euros, and any attempt to repay it in debased “new drachmas” would constitute a default. (Of course, the Eurocracy may try and label it “restructuring” or “re-profiling”, but the rest of us have to live in the real world.) And even if repayment in new and debased drachmas was finally agreed, it would still constitute a massive loss to euro-area lenders such as the reckless German and French banks that foolishly lent to Greek politicians with blissful abandon and that are really the designated beneficiaries of the bailouts. They might as well write-off the Greek euro debt now.
Reality is not optional. The Greek government is bust, which means it cannot and will not repay its debt in anything of material value. Introducing a soft drachma doesn’t change anything.
However, many commentators suggest that even after default and substantial write-downs at the banks and pension funds, Greece should still leave the euro. Why? First of all, there is no need for an exit. The euro is a form of paper money, and paper money is not debt. The euro, just like the dollar, pound and yen, is an irredeemable piece of paper. The governments that issue it promise to exchange these notes for – nothing! The creditworthiness of these states is immaterial. The Eurozone is a currency union, not a credit union or fiscal union. I explained this here.
But I suppose the argument for post-default exit is essentially the one I cited above, namely that a soft national currency is more in character with the Greek’s alleged tendency to financial extravagance. Even if we accepted the distasteful national stereotype behind this, this argument would still be nonsense.
Debasing the currency can never be in the interest of Greek society – or any other society for that matter. Of course, weakening the exchange value of the new drachma would be a temporary shot in the arm to the export industry. As Jamie Whyte explained so lucidly here, and using the UK to illustrate the point, a weak currency is a subsidy to exporters funded by a tax on importers. Debasing the currency never furthers overall prosperity. In terms of access to internationally traded goods and services, the Greek population would get instantly poorer.
Additionally, easy money is a subsidy to the banks and the borrowers, and a de-facto tax on savers, who – contrary to the caricature in the media- do in fact exist in Greece. The recommended soft money policy for Greece would mean that savers lose purchasing power via a combination of artificially low interest rates, international currency depreciation, and rising domestic inflation. But sadly, savers do not count for much in today’s macro-economic debates, which are all geared toward borrowers and dominated by Keynesian ideas of boosting the growth statistics and generating artificial “aggregate demand”. Such a policy bias has far-reaching and long-lasting consequences. Saving and the accumulation of real capital are the backbone of any economy and the only method we have for increasing productivity and thus generating lasting prosperity. It is the savers who put the capital into capitalism.
Continue reading at Paper Money Collapse
By Andy Duncan, on 12 May 11
In this latest Cobden Centre Radio programme, I interview Professor David Howden, a member of our Advisory Board, about his new book, Deep Freeze: Iceland’s Economic Collapse, co-authored with Professor Philipp Bagus.
Amongst other subjects, we fly south from Iceland down to Ireland, then compare how these two North Atlantic islands are coping with their respective economic crises, before Howden considers Portugal, Greece, and Spain, and how the fate of these nations may be tied to the immediate fate of the Euro, by weighing up the latest evidence from an Austrian perspective:
Subscribe to our podcast here:
By Prof Philipp Bagus, on 19 January 11
January 14th 2011 is the day on which the Greek government ultimately would have failed. Only extreme interventions by the ECB, breaking former promises, are holding the Greek government afloat. On January 14th, Fitch downgraded Greece from BBB- to BB, a rating considered junk status. Fitch was the last of the big three rating agencies after S&P and Moody’s that had rated Greece above junk.
The ratings are essential for governments because of the collateral rules of the European Central Bank (ECB). When governments spend more than they receive as tax revenue, they issue government bonds. These government bonds are bought by the banking system because banks can use government bonds as collateral for new loans from the ECB. This mechanism is explained in detail in my book The Tragedy of the Euro. The ECB does not accept just any kind of security or government bond as collateral for its valuable loans. The ECB wants some quality, and requires a minimum rating by one of the three rating agencies for these securities.
During the financial crisis the ECB had lowered the required minimum rating for its open market operations from A- to BBB- in order to help out banks because the rating of securities, especially mortgage backed securities, were falling. The reduction was supposed to be an exception and was to expire at the end of 2010.
The uncertainty of Greece’s rating triggered the sovereign debt crisis in 2010. Due to budgetary problems, Greece was in danger of losing the minimum A- rating. What would happen in 2011 when the minimum rating would be raised back to A- and Greece’s rating would not meet this requirement?
The market started to have doubts about Greece’s being able to repay its debts. And it was feared that the ECB would stop financing the Greek deficit indirectly. If the ECB would stop accepting Greek bonds as collateral for loans, no one would buy Greek bonds. The government would have to default on its obligations.
In January 2010 Jean-Claude Trichet, ECB president, still maintained a hard money rhetoric: “We will not change our collateral framework for the sake of any particular country. Our collateral framework applies to all countries concerned.”
Market participants interpreted this statement as a pledge that the ECB would not extend the exceptional reduction of the required minimum rating to BBB- just to save the Greek government. Along the same line, chief economist of the ECB, Jürgen Stark, stated in January that markets were wrong in believing that other member states would bail Greece out.
As Greek problems intensified in March 2010, Trichet, in contrast to his January statement, announced that emergency collateral rules would be extended through 2011. Greek bonds regained the potential to serve as collateral.
Yet, the Greek situation was worse than central bankers had expected. Markets started to believe that Greece would even fail to meet the BBB- rating in 2011, an expectation that finally became reality on January 14th with the downgrade by Fitch. They continued to sell Greek bonds.
In May 2010 at the height of the debt crisis, the independence of the ECB began evaporating when it announced it would drop all rating requirements for Greek government bonds. The ECB would accept Greek bonds as collateral no matter what. Only by this measure does the ECB continue to accept junk rated Greek bonds as collateral.
By contradicting its previous approach and becoming an executor of politics, the ECB lost its credibility. The ECB presented itself more and more as the inflationary machine—in service of high politics—that had been intended by French and other Latin politicians.
From the beginning, the Euro has been a political project. In order to save the project, the ECB disregarded its mandate of price stability and changed its collateral rules to accommodate the bailout of Greece. Far from being a copy of the Bundesbank that during its history repeatedly dismissed inflationary wishes of politicians, the ECB proved to be an instrument of politicians toward a centralization of power in Europe.
In 2011 we are at a decisive moment regarding the future of the European Union. Either the EU takes a leap forward toward a strong centralized European state, or we will move towards more freedom as competition is fostered. The ECB has shown on which side it stands.
By Gordon Kerr, on 19 November 10
Britain and the Eurozone hover on the Brink of Banking and Monetary Collapse. Our response? More Regulation.
The European Central Bank’s head, Jean Claude Trichet, appears to have realised what a mistake he made in single-handedly engineering the bailout of Greece only six months ago.
As I pointed out at the time this was simply a massive transfer of wealth from taxpayers to banks, funds and other investors in Greek Government bonds. Those smart and wealthy investors are now banking these profits very rapidly as we can observe by noting the rises in credit default swap prices.
Yesterday M. Trichet announced plans to raise Euro interest rates and decrease long term support for the banking system. It will be interesting to see if and by how much rates are raised since the Spanish banking system will probably collapse if Euro rates rise by even 1 per cent.
Why will this happen? It was a poorly reported consequence of the bailout two years ago that a significant consequence of forcing rates to zero is to inflate asset prices. Both effects are forced and hence, to use the popular term of the decade, unsustainable. The crash that we are about to experience will be far greater than that which would have occurred if the ordinary rules of capitalism had been allowed to operate in 2008. Sanity could have been restored to the banking system had governments stayed out of the mess. Liquidations would have led to changed business models and the appreciation by consumers of banking products that governments cannot protect them from losing money.
And what has the UK Government’s response been during this joyous week, which has already been widely reported as a good time to bury bad news?
In addition to pledging that we will donate several billion to the Irish cause, it has been announced that those who make their living by selling us mortgage products must take a course in mortgage loans.
This is yet another example of what Kevin Dowd has labelled “sham regulation”. The presence of an accreditation mark on an IFA’s business card is intended to imply that the consumer should trust his mortgage advice and sign up for the loan he recommends.
Let me recommend that sellers and buyers of these products take a very short education by reading and understanding the rest of this article. If enough of you lobby the FSA, these few words might even be adopted as the new FSA official mortgage education qualification.
When considering mortgage loan offers there are only two relevant criteria:
a) The length of the fixed interest period;
b) The all-in cost of the loan.
I would mention a third, but much less important point: break costs. Borrowers’ circumstances may deteriorate and the consumer should be aware of the costs of defaulting or switching lenders during the fixed period. Simply ask and compare.
Let us consider point a). Why do I focus on fixed rate loans, when historically in the UK and today in many countries like Spain floating rate loans were / are much more common? The answer is simple. The financial risk of a home purchase is usually considered to comprise only the risk of up or down variance in the house’s value after purchase. This assessment only applies to houses bought for cash. If a loan is required the consumer should quickly decide whether he wishes i) to take this amount of risk or ii) twice this risk.
Buying a house and borrowing on a floating rate basis amounts to taking roughly twice the house price risk because if rates rise not only do house prices usually fall but of course your payments rise as well. Therefore borrowers who wish to expose themselves to one times the risk of the house price variance should borrow on a fixed rate basis.
Point b) the all-in cost, can be calculated by entering all payments into either an Excel spreadsheet or even some calculators. All fees at inception and redemption should be included. Then press the “Net Present Value” button and compare the offers. (For the less financially savvy reader, NPV is simply a way of expressing a stream of payments over time as a cost today. For example, if the interest rate is 5% you would be indifferent as to a choice between paying £100 away today or £105 in one year’s time).
That is the end of the mortgage loan training course. Set out above is a universal guide. No other criteria matter – least of all the identity of the lender, unless you take a floating rate loan and expose yourself to being gamed by the bank. Many lenders brazenly jack up the rates they apply to loyal customers and offer “discounts” to new borrowers. These banks rely on lethargic consumers not to refinance quickly. This risk is almost impossible to assess in advance and is another reason to fix your rate for as long as possible.
It would be wonderful if the FSA’s official course were to comprise no more than the above few paragraphs, but sadly I fear the actual course will be replete with mumbo jumbo and simply constitute yet another barrier to entry into the financial services business. Mortgage industry hucksters will thus receive state support for their present modus operandi, namely the maintenance of the pretence that, like a Savile Row suit, you are a very special customer and need an expert, like me, to tailor a loan to your specific requirements.
By Toby Baxendale, on 19 August 10
Sean Corrigan has sent us one poem we missed by Thomas Moore that has much relevance today. Enjoy.
Toby Baxendale.
“The Ghost of Miltiades” is about Greek war bonds. As noted earlier, Greece had been fighting for independence from the Ottoman Turks since 1821. In 1824-5, the fledgling Greek government obtained two large, high-interest from English banks, which were then turned and floated as bonds on the London market. Andreas Luriottis was the Greek agent in London. The whole thing did not end well and the value of the Greek bonds collapsed accordingly — ending with the “Benthamite” trader wailing about his subsequent losses and trying to sell them back to the Greeks. “Jerry” is Jeremy Bentham, of course.
[Ah quoties dubius Scriptis exarsit amator! – ah, how often has a message inflamed a doubting lover - Ovid]
The Ghost of Miltiades came at night,
And he stood by the bed of the Benthamite,
And he said, in a voice, that thrill’d the frame,
“If ever the sound of Marathon’s name
Hath fir’d they blood or flush’d thy brow,
Lover of Liberty, rise thee now!”
The Benthamite, yawning, left his bed –
Away to the Stock Exchange he sped,
And he found the Scrip of Greece so high,
That it fir’d his blood, it flush’d his eye,
And oh, ’twas a sight to see,
For never was Greek more Greek than he!
And still as the premium higher went,
His ecstas rose – so much per cent.,
(As we see in a glass, that tells the weather,
The heat and the silver rise together,)
And Liberty sung from the patriot’s lip,
While a voice from pocket whisper’d “Scrip!”
The Ghost of Miltiades came again; –
He smil’d as the pale moon smiles through rain,
For his soul was glad at the patriot strain;
(And poor, dear ghost — how little he knew
The jobs and the tricks of the Philhellene crew!)
“Blessings and thanks!” was all he said,
Then, melting away, like a night-dream, fled!
The Benthamite hears — amaz’d that ghosts
Could be such fools — and away he posts,
A patriot still? Ah no, ah no –
Goddess of Freedom, thy scrip is low,
And, warm and fond as they lovers are,
Thou triest their passion, when under par.
The Benthamite’s ardour fast decays,
By turns he weeps, and swears, and prays,
And wishes the d–l had Crescent and Cross,
Ere he had been forc’d to sell at a loss.
They quote him the Stock of various nations,
But, spite of his classical associations,
Lord how he loathes the Greek quotations!
“Who’ll buy my Scrip! Who’ll buy my Scrip?”
Is now the theme of the patriot’s lip,
And he runs to tell how hard his lot is
To Messrs. Orlando and Luriottis,
And says, “Oh Greece, for Liberty’s sake,
Do buy my Scrip and I vow to break
Those dark, unholy bonds of thine –
If you’ll only consent to buy up mine!”
The Ghost of Miltiades came once more; –
His brow, like the night, was lowering o’er,
And he said, with a look that flash’d dismay,
“Of Liberty’s foes the worst are they
Who turn to a trade her cause divine,
And gamble for gold on Freedom’s shrine!”
Thus saying, the Ghost, as he took his flight,
Gave a Parthian kick to the Benthamite,
Which sent him, whimpering, off to Jerry –
And vanish’d away to the Stygian ferry!
— Thomas Moore, 1828
By Toby Baxendale, on 6 May 10
The latest Material Evidence from Sean Corrigan:
What seems to escape every one of these fatuous macromancers is that, for years now, Greece has been the very essence of Keynesian folly: that the heavy hand of the state, by distributing a corrupting largesse derived from the government-supported evil of fractional reserve banking and constituted of laughably mispriced, fiat-money lending, had so successfully ‘stimulated’ the country and artificially boosted the shibboleth of its GDP that it is now reduced to a state of penury so extreme — and is plagued with a false sense of entitlement so engrained — that all conceivable solutions to its woes now seem like bad ones.
 Material Evidence, 7 May 2010 Download the report here.
By Toby Baxendale, on 30 April 10
The brilliant economist Ewen Stewart of Arden Partners sadly shows we are going the way of Greece, not Ireland:
We call the UK the ‘tixylix society’ after the sugary-sweet medicine used to mask the symptoms of a chill in young children. The nation has become lethargic on easy credit asset inflation and delusory levels of public sector debt. The choice ahead is essentially political, although not party political. We can either choose the Irish option of austerity but maintain bond market support and a platform for longer-term growth, through regained competitiveness and a reversal of the trend to crowd out the private sector, or this tixylix society can continue to pretend that there is not a problem and we can spend beyond our means. The consequences of this latter option could well prove catastrophic.
 Read the full report.
By Gordon Kerr, on 18 February 10
Via The Telegraph:
Meanwhile Angela Merkel, the German Chancellor, criticised investment banks for the role they may have played in helping Greece to mask its fiscal problems: “It would be a disgrace if it turned out to be true that banks that already pushed us to the edge of the abyss were also party to falsifying Greek statistics.” Her comments were in reference to a derivatives deal arranged by Goldman Sachs in 2001 which allowed the Greek government to mask its budget deficit by deferring interest payments.
If questioned on the witness stand, wired to a polygraph, with the death penalty looming for any dishonest response most public officials who had employed “exotic” derivatives structures would admit that the main purpose of the transaction has been to deceive stakeholders in public entities. It is possible that some decision makers were merely genuinely incompetent, but that is hardly reassuring to taxpayers. It is worth noting that in every case we discuss on this site the accounting profession provides no defence barrier affording any protection for the taxpayer. I doubt whether accountants understand derivatives.
When the second phase of this crisis unfolds derivatives will be seen to have been employed for nefarious purposes on a grand and widespread scale.
In the UK I expect the quasi state housing association movement to experience problems when the huge volume of poorly understood debt instruments called “LOBOs” come up for refixing. The acronym stands for “Lender’s option, Borrrower’s option”. It is a 20 year loan instrument with early termination options, enabling the bank to play games with the yield curve. More detail later.
Needless to say any financial product with embedded derivatives purchased by the quasi public sector tends to lead to problems at some stage for the public sector. If LOBOs were such a good idea why don’t the private sector buy them?
By Liam Halligan, on 17 February 10
Could the endgame of this “Greek tragedy” be a eurozone break-up? The single currency’s supporters maintain such an outcome is mere mythology. Greece accounts for only 3pc of the 16 member states’ combined GDP, they say, and has lower debts than some of the banks bailed-out during “sub-prime”. A loan of €20bn (£17.5bn) would do the trick, we’re told. That’s less than the British government injected into either Lloyds or the Royal Bank of Scotland.
Such analysis sounds vaguely plausible. But its naïve and politically dishonest. Then again, the single currency was built on political dishonesty. That’s because, at the heart of the eurozone project there was always a fundamental contradiction – one the architects of monetary union never dared to address. Now its being highlighted for them, whether they like it or not.
While the European Central Bank controls eurozone interest rates and the money supply, the size of each country’s fiscal deficit results from the spending and taxation decisions of its own sovereign government. How can you enforce collective fiscal discipline in a currency union of individual sovereign states, each answerable to their own electorate? The truthful answer is you can’t – not unless you subjugate the autonomy of democratically-elected politicians and, by proxy, their voters.
Voters don’t like that. Neither, do politicians. Faced with a choice between seriously annoying their own voters and seriously annoying the ECB, the most ardently “pro-European” lawmakers, even those with years of Brussels trough-nuzzling under their belt, will always side with their own. That’s why the eurozone will ultimately break-up – whether Greece is bailed-out or not.
The eurocrats blame “speculators” for the single currency’s woes. That’s a bit like sailors blaming the sea. The eurozone is ultimately doomed because, in the end, economic logic wins and the will of each country’s electorate bursts through. This current Greek saga won’t end the eurozone – but future historians will identify it, perhaps, as the beginning of the end.
Many have said it’s hardly surprising that Greece – with its history of financial profligacy and capital flight – has emerged as the eurozone’s Achilles heel. A more germane observation is that, while fiscally wayward, Greece is also the birthplace of democracy. If the Greek population wants to get upset, throw out its elected politicians and reject austerity, it must be allowed to do so. I think they’d be mad, but it must be their choice.
If Berlin and Brussels try to impose their own view on Greece and the “cuts” come from outside, the situation will become incendiary. Protests will turn into fully-blown riots. Greece will endure very serious social unrest. Deep-seated rivalries and suspicions between countries will be re-ignited. And for what?
Greece is running a budget deficit of 12.7pc of GDP. The real number could be 15pc or more as Greek politicians have lied for years about the extent of their country’s liabilities. They’re not the first European leaders to do so and they won’t be the last. But Greece was, almost uniquely, assisted in its fiscal cover-up by Brussels – with the usual “convergence criteria” being bent to allow Greek euro entry.
As recently as September 2008, the euro seemed to be going well, despite the massive variation between member states. The five-year Greek credit default swap spread was less than 50 basis points. In other words, buying insurance against Greece reneging on its sovereign debt cost only slightly more than insuring German government bonds. Those, such as this columnist, who continued to warn that the eurozone was “dangerous and inherently unstable” were dismissed as cranks, xenophobes or worse.
Then sub-prime hit in earnest. Insuring against Greek default suddenly became a lot more expensive, the CDS spread rising six-fold in eight weeks. The same risk measure is now around 400 basis points, the cost of insuring against Greek default no less than 20 times higher than it was in January 2008. Default risks are growing in Portugal and Spain too, the eurozone’s fourth biggest economy.
The problem is that default dangers in Greece – where €20bn of debt falls due in April and May – are making creditors think twice about lending to other cash-strapped governments. Even if Greece avoids default, this latest crisis means governments everywhere will have to pay more for their finance, which in turn will push up borrowing costs for everyone – right across the eurozone and beyond, including in the UK. This is so-called “contagion”.
The Greek government has been desperately trying to convince the rest of the world – the Germans in particular – that it will keep its promise to reduce the deficit in its still-shrinking economy to 8.7pc of GDP next year and less than 3pc by 2012. Yet this would amount to the most severe fiscal contraction in the history of modern Europe. It simply won’t happen.
The reality is that Greece has two choices – both disastrous for the eurozone. One is to default, leave the euro and re-establish the drachma at a rate low enough to stimulate exports and growth. To write this is heresy. But with general strikes now in the offing, and the Greek public-sector unions resurgent, such a scenario is possible.
For years, the ECB has set rates low to suit France and Germany. This has made life difficult, causing dangerous debt bubbles, in smaller and more inflation-prone eurozone members. Were Greece to take the exit route, the governments of several other single currency members would come under intense pressure to do the same. The eurozone’s vital cohesion would be seriously undermined. Its ultimate break-up – or, at least shrinkage to a Franco-German rump – would only be a matter of time.
The other, more likely, option is that Greece accepts a German-led bail-out and “muddles through”. But even that would spark an eventual eurozone split. On extending assistance, Berlin and Brussels would talk tough and Greece would promise to behave. Anything less wouldn’t be tolerated by German voters. After the horrors of inter-war hyperinflation, Germany has spent more than 50 years building policy credibility. Backing a Greek bail-out would be a massive step – the first time in decades Germany has departed from its fiscal and monetary hard line.
Yet the German government will do it. Refusing to bail-out Greece would risk being labelled “bad Europeans” – something anathema to Germany’s post-war elite. Berlin also has a massive financial stake in the euro’s status as the world’s second most-used reserve currency.
Although Greece will be presented as a one-off, a “very exceptional” case, once that line has been crossed there is no going back. Other eurozone countries will want a bail-out. Why should Portuguese, Estonian or Spanish workers endure austerity and unemployment, while those in Greece were spared? Why them and not us? If big banks can compete for bail-outs, walking the line of “moral hazard”, political leaders will do so too. A Greek rescue by the Germans would spark repeated bail-outs.
In the end, voters in the big eurozone economies, faced with their own fiscal problems will say enough is enough. Europe’s monetary union will collapse, just like every other currency union in the history of man. The exception is America – yet the US, as the eurocrats hate to acknowledge, had been through a century and a half of political union before the Federal Reserve was founded in 1913.
That’s the key difference. America is a political union, with a system of explicit inter-regional fiscal transfers, and the eurozone isn’t. That’s why the single currency will ultimately split and be exposed as what it is – a triumph of European hubris and political vanity over unavoidable economic logic.
By Gordon Kerr, on 15 February 10
BJ’s excellent article today rightly draws comparison between the bailout of Greece and the bailout of Northern Rock.
He makes the excellent point that we should be grateful that the myth of monetary union without federalism is now starkly exposed.
His own shortcoming is that he does not quite understand the seriousness of the banking crisis and therefore his article ends at the crisis point with no solution apparent to the UK’s Greeklike problem, other than the implied debauching of the currency.
Without reform along the simple lines advocated by the Cobden Centre I fear that, even outside the Euro, the banking system may crash again.
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