Published by CapX
Writing for
CapX, Iain Martin writes that “the financial and
political elite has behaved appallingly towards the Greeks”, noting that “it
seems to be forgotten that Germany’s revival after the Second World War was
underpinned by massive American aid while victors such as the UK were crippled
for decades by the cost of defeating the Nazis”.
The historical comparison is tricky. After the second World War, newly
democratic Germany only enjoyed – conditional – debt relief after
it had burned bank depositors. Also, much of Germany’s post-War economic
miracle is thanks to measures like eliminating all price
controls at once, against the wishes of the US army. This was underpinned by hard
money policies which had started in 1948 with a 93% contraction in the money
supply, all driven by men such as “ordoliberal” Economy Minister Ludwig Erhard.
Perhaps Syriza, which often invokes Germany’s post-war debt situation, should read up on German economic history to get inspiration
on how to fire up an economy.
We
shouldn’t overlook how the massive
transfers made to prop up Greece after 2010 haven’t exactly led to positive
economic outcomes for reasons not completely unrelated to the clientelist Greek
state. These were transfers, not loans, given that a “loan” with an
artificially low interest rate partly counts as a “gift”. These transfers
really already started since Greece entered the Eurozone, in 2001, and perhaps
before. The prospect for the country to enter the Eurozone resulted in a
drastic reduction of its borrowing rate from almost 20% in 1995 to around
3% in 2005. The reason was two-fold: investors considered investing in Greece
less risky, given how its banking system would soon enjoy access to the ECB’s
cheap money. When the cash started flowing, a lot of it was passed on to the
Greek government. Greek politicians were
able to burden their citizens with more debt than would ever have been possible
outside of the Eurozone. The country would have defaulted long before. Also
private debt levels have almost tripled between 2000 and 2010.
It is
correct that the billions of euros in bailout funds - estimated at 240 billion
euro - have partly served to prop up exposed major European and US banks, which
may explain US President Obama’s sudden interest in Europe after the eurocrisis
broke out in 2010. This was a mistake
made by Germany, but also by all the other Eurozone states. In 2011,
private investors agreed to take a haircut of 50% worth 100 billion
euro on their claims towards Greece, but in order to convince these investors
to do that, they were allowed to dump of a lot of their remaining exposure to
taxpayers. With Open Europe, we've warned for this at the time, while we estimate that taxpayers now hold around 75% of claims
to Greece, up from 36% in 2012.
Bail-ins
and restructuring of the whole European banking system would have been the
desirable thing to do, but this would have risked driving up interest rates.
Europe’s cash-strapped welfare states would have been forced to impose draconic
spending cuts, disturbing an ageing population which is awaiting all the
promises made by their politicians for decades. How many voters in Europe would have gone for this, if presented the
option? We can blame politicians, but at the end of the day, they are
merely executing the electorate’s desires, which can be often summarized in a
very simple manner: kick the can down the road, send the bill to the
grandchildren.
The common currency itself is largely a means
of bailing out struggling member states. A country like Belgium increased the number of its civil servants with
15% between 2000 and 2010, but saw its borrowing rate drop nevertheless, just
like Italy and France. In Spain and Ireland, the easy money mainly went into
unsustainable private investment, causing a monstrous real estate boom and bust
which badly damaged their banking systems.
The
individual European states had witnessed their borrowing rates going up until
1995. This indicated that the game was soon going to be up. In 1995, the euro was announced, overriding German public opinion. The prospect of having access to a central
bank backed by Germany’s creditworthiness and presiding over a very large
economy drove borrowing rates down after 1995.
Would this
have happened without the euro? Certainly to an extent. The UK, outside of the
euro, also saw its borrowing rates drop over the same period, largely driven by
central bank activism. Given that investment happens at a
worldwide level, also the US Federal Reserve’s low interest policies were
influential, having contributed to the fall in borrowing costs for Italy and
Spain after 2012, given how the Fed’s balance sheet has ballooned since the Summer of 2012, unlike
the ECB’s.
The smaller a monetary union, the more quickly
investors will punish its central bank for having excessively increased the stock
of money in a bid to lower borrowing rates – primarily to allow governments to refinance more
cheaply. Lots of
other factors also play a role, of course, but access to the ECB’s “cheap money
canal” has been the necessary condition for countries like Greece, Ireland or
Spain to get in trouble so deeply.
The euro
hasn’t been a good thing for Greece. The country’s GDP is now lower than before the entered the Eurozone. Also for Germany, however, the euro wasn’t
a good thing, although it has been less damaging than for Greece. As one of
Germany’s most prominent economists, Hans-Werner Sinn, who built his economic
institute IFO into a world player, remarked: “When the euro was announced in 1995,
Germany’s gross domestic product per capita was the second-highest among the
current euro countries. [In 2013,] it is seventh. That’s not exactly the
performance of a “euro winner”.
Too often
the focus has been on Germany’s export success. But there are also importers,
consumers, savers, insurers and pensioners. They are all being hit badly by the
euro which is artificially weak for Germany. Sinn has estimated that therefore, the benefits of a
German “revaluation”, through the introduction of the D-Mark, would be three
times as big as the benefits certain parts of the German economy enjoy thanks
to the undervalued euro. Obviously German politicians and politically
well-connected major exporters are the benefactors of the ECB’s low interest
rates, given how it has driven down the German federal government’s borrowing
costs. Meanwhile, German pensioners who were assuming to enjoy at least 5%
annual returns on their life savings are biting the bullet. And German insurers
are facing deep trouble.
To sum up: Greek corruption and the leftwing populist
economic mindset of Greek voters certainly has helped to drive the country to
where it is today and German – and French - elites certainly could have allowed
Greece to default hard on reckless banks in 2010. Then banks could have been
bailed out directly, if one wanted to avoid deposit haircuts, which on its turn
would have destabilized a system whereby all deposits are not available all the
time. This story is much bigger than the recklessness of a Greek Finance
Minister or the short term - focus of a Northern European politician. This is
the result of the creation of a monetary union serving to paper over decades of
irresponsible welfare state spending.
Pieter Cleppe represents independent think
tank Open Europe in Brussels
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