Europe in denial
By Graham Reid & JR Max Wheel
1 February 2015
The Greek situation is singularly important for the European Union, let alone its single currency. Syriza’s message needed to be said loudly and directly to a leadership in near total denial. Insolvency not illiquidity is destroying their country, its people’s welfare and way of life. Much of the same can be said for the other deeply indebted Eurozone countries.
I am sure that Greece has not forgotten the London Debts Agreement of 1953, to which they were a co-signatory – in short, Give rather than Lend Money. That agreement was relieving Germany of its massive external debts. The repayable amount was reduced by 50% and repayment of the balance, stretched out over 30 years, limited to 3% of export earnings and only due while their trade was in surplus. This gave Germany’s creditors a powerful incentive to import German goods, assisting reconstruction. The final payment was actually made in October 2010 – some difference to the current stance being by Germany and others with Greece! As a matter of record, other co-signatories included Italy, Spain and France.
Currencies matter, rules matter but sometimes it is as important to break them as it is to enforce them. This is one such an occasion. The big countries are now closing ranks and Draghi might even threaten to cut off liquidity to the Greek banks. Events are moving very fast as the EZ looks to shore up the status quo, with or without Greece, but it still doesn’t alter the facts of life!
Is there anyone who still thinks that a common currency for 19 economically diverse countries can work without fiscal and financial union – a common treasury, taxation, benefits, pensions and regulatory framework with agreed disciplines and targets?
Financial journalists appear to becoming around to our long-held view that without a full union and mutualisation of debt, a functional Eurozone will remain an impossible dream.
We go along with debt forgiveness only as an immediate solution for Greece, but it does nothing for the built-in flaws of the whole Euro concept, doomed to repeat the same errors, lack of competitiveness, contrary cultures, differing economic requirements and in the Greek case a largely offshore economy!
The forgiveness and restructuring of Greek debt is required due to very particular factors. Who is next? Italy? Spain? Portugal? France? It is very doubtful that the ECB easing QE [in excess of 1 Trillion Euros] could cope in keeping patients alive, let alone thriving. Any solution is going to cost but let that cost be in building a stronger future, not paying for past mistakes.
BOE Governor Mark Carney said (Dublin Speech 28th January 2015):
“Cross border risk sharing through the financial system has slid backwards. Europe’s leaders do not currently foresee fiscal union as part of monetary union”.
“Leaders” in this context are politicians who have a very different agenda to that of the real world where strength of economies is paramount. These are the self-same people who have perpetuated the myth that the Euro will recover and be a pillar among world currencies. Why do they deny the reality? Is the truth consistently hidden from view too hard to bear – that it was and is a dire error?
Change is not only inevitable but urgent and vital before too much more money is wasted on this absurd currency construct. It appears that there is a mood, part truculent part reluctant, to do something and matched by a total lack of commitment to set out a course of action to set the process of change in motion.
There are a few ways out of this mess, all with costs and degrees of risk but is not some “risk” better than “certainty of loss and failure” if the problem is just kicked down the road yet again?
First there has to be a de facto admittance, by member countries Germany, France, Spain etc., that the Euro’s demands cannot be met: what is required is a radically changed European Union, even without a common currency but with less bureaucracy, expense and overweening power.
Second is to decide how to dismantle the Euro whilst minimising the potential for transitional currency arbitrage. This needs careful and closed-door planning. It could be assisted by the US, UK, Japan, IMF agreeing to support a plan of action and making it difficult for the vultures to operate.
The Greek bluff could be called – leave if you want but you still owe us and you break the principle, now anyone can in theory leave – at a major cost but not impossible. A more credible Grouping might be Germany, Austria, Finland, Belgium and Luxembourg with real fiscal union.
A further idea could be Germany agreeing to leave of its own accord. This would remove the obvious major internal value disparity but would probably lead to a major initial drop in the value of the Euro if recent Swiss experience is an example but it would destroy the European project and clobber its exports.
It would be pleasing if our “leaders!” came up with a constructive idea of their own in place of threats and punishments for the weakest. Not much chance of that as they all seem to concentrate on making an example of Greece to lay down a marker to others.
Whatever is decided those politicians who insist on its future should have the courage to tell us why and debate in public letting the people decide who is right.
They won’t as they appear to value their personal positions more than those they were elected to serve.
We all await an answer, not just Greece and trust that Lewis Carroll was not prophetic in his tale of the Walrus and the Carpenter and the little oysters:
O Oysters,’ said the Carpenter,
You’ve had a pleasant run!
Shall we be trotting home again?’
But answer came there none,
And this was scarcely odd,
Because they’d eaten every one.