Should the Greeks have a referendum on whether they want to stay in the euro? Are the upcoming elections such a referendum? Would it be better for the Greeks if they left the euro? – Are you, like me, sick and tired of hearing these questions and then the answers based on the same stale and superficial logic?
Most commentators assume that it was a mistake of ‘the Greeks’ to enter European Monetary Union and that they would do better outside of it. I suspect some undue generalization behind such verdicts. For who do these observers talk about when they say ‘the Greeks’? It seems evident, for example, that to the extent that the Greeks are savers they do not believe that exiting the euro and having again a depreciating local currency is in their interest. In fact, they expect to get hurt by such a move. These savers – the forgotten men and women of the crisis – are already holding their own referendum. They are shipping their savings to Germany, the Netherlands and Finland in an attempt to protect them from confiscation through devaluation and inflation. They want their savings to stay in the eurozone. Such ‘voting’ could be characterized as ‘Germanic’, although I would say it simply serves to show that the interests of those who save are very similar, regardless of which country’s passport they hold.
Savers play an important role in the market economy. Capitalism is based on capital, and capital is generated through saving and not money-printing, contrary to what many economists and central bankers want us to believe. Prosperous societies have always been built on hard money, which encourages saving and the expansion of the capital stock, and in turn increases the productivity of human labour. Greek savers are no different from American savers or German savers, and the role of money, saving and capital is no different in Greece from that in any other country. The laws of economics change as little from one place to another as the laws of physics. And sacrificing the interests of your savers for some short-term boost to growth will have the same adverse long-run effects in Greece as it has anywhere else.
It is often said that Germany can afford to live with a harder currency than her European ‘partners’ because she has a strong industrial base and a high personal savings rate. This confuses cause with effect. Germany has a strong industrial base and a high personal savings rate because she has had a relatively hard currency for so long. The absence (at least in relative terms) of inflation and currency depreciation has encouraged saving, capital accumulation and efficient, competitive corporate management. The de-industrialization of Britain, to take just one example, may have been the result of militant unionism in the 1950s to 1970s, and of the craze for nationalization of industry but the ongoing policy of currency debasement by the Bank of England certainly played its part, too.
We should therefore be very suspicious if we are told that it would be in the interest of ‘the Greeks’ if they adopted a weaker currency. It has never been in the interest of any country to adopt a weak currency.
Politics versus economics
The political urge to superimpose some unifying ‘national interest’ on all citizens runs counter to everything the decentralized spontaneous market order stands for. The whole point of a market economy is that it is based on private property and voluntary, contractual exchange. And voluntary, contractual exchange works so well because two parties frequently have different interests or tastes or preferences. If I sell you one of my old vinyl LPs for $2, it doesn’t mean we agree that this record is worth $2. We disagree. You value the LP more than $2, I value $2 more than the LP; otherwise we wouldn’t trade. By trading we have both improved our position. Extended human cooperation based on private property and free, non-aggressive and voluntary exchange improves the position of everybody participating in such a society. In the market economy, not everybody will be rich and not everybody will necessarily be happy. But for those who prefer a larger supply of things to a smaller supply of things, there is no better way to achieve this than by participating in a private-property economy.
The market economy is precisely so powerful because it is a highly efficient way of human cooperation that does not require ‘common interests’ or ‘single goals’. To the contrary, it thrives on differences and still achieves peaceful cooperation. That is precisely its strength, and that is also what sets it apart from politics. The diversity of human talents, interests and preferences that is simply a fact of life does not have to be suppressed and curtailed to fit into the dumb tribalism of politics, which is always about ‘the Greeks’ need this but ‘the Germans’ want that.
All we need for this cooperation on markets to work is the rule of law and hard money as a medium of exchange and store of value. Other than providing these two things, there is no legitimate role for politics in the economy (and by the way, it can be argued that even money and the rule of law are best provided outside the state but this is a different topic). In that sense, there is indeed a common interest that everybody shares, but not only all ‘Greeks’ but equally ‘the Japanese’ and ‘the Congolese’: That is a common interest in a framework that allows human cooperation on markets, and that framework is simply the protection of property rights (the rule of law) plus hard and apolitical money. The rest you can safely leave to the people – laissez faire!
Macroeconomics as politicized economics
Sadly, however, there is a branch of economics that has been all too happy to look at the world through the prism of politics, and this branch is modern macroeconomics with its focus on national account statistics. The macroeconomist, believing that the statistical aggregates he can measure and observe are also the driving forces of the economy, happily subscribes to the political fiction of the ‘national economy’. Such an economy is assumed to be congruous with areas of political jurisdiction, so the macroeconomist can talk to the politician about ‘the Greek economy’, which is, we are to believe, a clearly distinguishable economic entity and neatly ends where the neighbouring countries begin. And he can then ascertain what special needs this specific ‘national economy’ might have; what its unique requirements are; and what would be beneficial for everybody living within the borders of this ‘national economy’. With this dubious intellectual sleight of hand, the spontaneous interaction of all those people with all their different, divergent and often conflicting ideas, preferences and tastes who make up the essentially borderless, increasingly global market economy disappears and is, conveniently for the political mind, replaced with national objectives and clear goals. ‘The Greeks’ need a weaker currency. ‘The Greeks’ need lower interest rates. ‘The Greeks’ need higher inflation. — All of them? — Tribalism as the currency of politics is restored. And – bingo! – the economist has a role as policy adviser.
The mirage of manageable capitalism
If you want to get an idea of how the bureaucratic elite perceives the world, you only have to open the Financial Times. Take last week’s edition of May 23. There is the IMF bureaucracy telling the UK bureaucracy that ‘the Brits’ need lower interest rates and more government spending. Martin Wolf tells us that ‘the Greeks’ can be helped if ‘the Germans’ accept higher inflation. (Hint: Martin Wolf is almost always in favour of easy money and a bit more debt to ‘stimulate’ the economy). Then there is Professor Jeremy Siegel of the Wharton School of the University of Pennsylvania, who tells us that what everybody in the eurozone needs is a proper devaluation of the euro. It is, of course, no coincidence that all this advice from the IMF’s Lagarde to the Wharton School’s Siegel points in the same direction: toward lower interest rates, more money printing and currency devaluation. The debasement of money is the cure-all for economic problems, according to our policy elite.
Of course, the logic of Lagarde, Wolf and Siegel is roughly equivalent to suggesting that you and I would benefit in our little exchange of old records for dollars if the bureaucrats kept debasing the dollars or otherwise intervened to artificially prop up the prices of old vinyl records. Of course, their interventions may occasionally help one party to the trade at the cost of the other, but they cannot improve the mutual benefit that you and I derive from this commercial transaction and that is its true raison d’etre. Most important, however, is that the mere fact that they are intervening at all – and keep intervening – will raise our uncertainty about the value of dollars and the prices of records in the future. The whole idea that their currency manipulations will make our co-operation better or more beneficial is entirely preposterous.
Helping Greece through monetary debasement?
Of course, I am not denying that Greece as a political entity has some specific problems. This is how Professor Siegel in his article on euro devaluation describes the three key problems:
First, the flight of deposits out of fear of euro exit. Second, the unsustainable budget deficit. Third, high Greek labour costs that make Greece uncompetitive, in particular versus Germany.
I think the answers to these problems are straightforward in a market economy. You can only keep your savers if you are committed to hard money. For Greece that means, first and foremost, not leaving the euro. If the budget deficit is too big, which it certainly is, you have to rein in spending. As I have said repeatedly, Greece should not only have defaulted on some of its privately held debt but also on its loans from official lenders. Greece should then not have accepted additional official loans and should now drastically cut public spending. This is hard, for sure, but it is the only cure for a deficit and debt problem. You cannot cure debt with more debt. And if labour costs are too high, they have to be reduced. If wages are too high – and they have risen much faster than in other eurozone countries – wages have to be allowed to fall. For this to happen, the labour market needs to be liberalized.
Staying in the euro, cutting spending and implementing structural reforms in order to make the labour market flexible and operable – that sounds a lot like what the much reviled ‘austerity camp’ prescribes, and I have to admit that it has economic logic more on its side than the ‘stimulus camp’. These prescriptions also have the advantage that they directly address what is wrong rather than try to shift the pain to others, for example to taxpayers in other eurozone countries or to euro-savers throughout the eurozone.
But Professor Siegel does not recommend ‘austerity’. He recommends devaluation for the entire eurozone, one assumes via aggressive money printing from the ECB and foreign exchange intervention. His belief is that this will address the competitiveness problem in particular. But uncompetitive wages in Greece are a relative-price problem, and furthermore a local one, and not a general purchasing power problem. Many Greek wages are too high in relation to what consumers – whether in Greece or outside Greece – are willing to pay for Greek goods and services. By debasing the euro Siegel does not directly impact the relative prices that are out of whack but he would inevitably set off numerous secondary and largely unforeseeable relative price effects throughout the eurozone. The good professor is willing to debase the euro internationally and by doing so disrupt the entire eurozone price structure in order to maintain the illusion among parts of the Greek population that their wages are sustainable.
As do most inflationists and currency-debasers, Professor Siegel only considers the immediate inflationary impact of his policy, the direct impact on the statistical average of euro prices, which he believes to be minor. That may or may not be the case, but the aggressive easing from the ECB that would be required to properly debase the euro would have many other effects, in particular on relative prices and on capital allocation, and this throughout the eurozone. At a minimum it would discourage saving and disrupt the process of deleveraging and bank balance sheet repair. Professor Siegel expressed concern about capital flight from the eurozone periphery (his first point above) but happily risks it for the entire eurozone as his policy would affect savers throughout the single currency area. And what about the deficit problem? Does he really think aggressive easing would provide incentives for fiscal consolidation anywhere in the eurozone?
Currency debasement creates a fleeting illusion of competiveness but would leave the eurozone ultimately with more debt, less saving and less true capital formation, and thus a less well-functioning economy. Professor Siegel himself states the following:
“Historically, overpriced labour markets have been cured, albeit painfully, by currency devaluation – an option which is not open to euro-based economies.”
It was precisely the recognition that this historical option of the quick fix had too many painful side-effects and that it was not really a cure to begin with, that made a currency union so attractive, in particular for countries with a history of currency debasement. By taking the placebo of currency devaluation away from local politicians in places such as Italy and Greece, it was hoped that they would finally address the real structural issues in their economies and stop robbing their savers and thus impairing domestic capital formation. They have not done so during the first 10 years of European Monetary Union as the global credit boom was in full swing and simply allowed them to borrow more. The time for change has finally arrived.
But our most prominent policy advisers seem to have learnt nothing. After we severed the last link to gold, we have had forty years of relentless fiat money debasement and debt accumulation to cover up the rigidities of the modern welfare state. Today, around the world, central banks have reached near zero policy rates and are resorting to employing their own balance sheets to keep the overstretched credit edifice from collapsing. Yet, the chorus of ‘experts’ still thinks that what we need is another devaluation, another round of QE and another rate cut, if at all possible. Their ideology has brought about the present mess. It is time we stop listening to them.
In the meantime, the debasement of paper money continues.
This article was previously published at Paper Money Collapse.