Monday, 13 July 2015

Has the Eurozone been destroyed?

Wolfgang Munchau writes in the FT-
By forcing Alexis Tsipras into a humiliating defeat, Greece’s creditors have done a lot more than bring about regime change in Greece or endanger its relations with the eurozone. They have destroyed the eurozone as we know it and demolished the idea of a monetary union as a step towards a democratic political union.
In doing so they reverted to the nationalist European power struggles of the 19th and early 20th century. They demoted the eurozone into a toxic fixed exchange-rate system, with a shared single currency, run in the interests of Germany, held together by the threat of absolute destitution for those who challenge the prevailing order. The best thing that can be said of the weekend is the brutal honesty of those perpetrating this regime change.
We will soon be asking ourselves whether this new eurozone, in which the strong push around the weak, can be sustainable. Previously, the strongest argument against any forecasts of break-up has been the strong political commitment of all its members. If you ask Italians why they are in the eurozone, few have ever pointed to the economic benefits. They wanted to be part of the most ambitious project of European integration undertaken so far.
Is there any truth to this?
Why is Wolfie saying it then?
Sour grapes.
Just a month ago, he predicted that those wily Greeks would quit the Eurozone, repudiate their debts to official creditors, and enjoy a depreciation led export boom while Germany would be left with egg on its face and worthless scrip in its treasury for the lion's share of Greece's 160 billion euro default.

Nothing of the sort happened. Greek banks ran out of money and the economy collapsed. Syriza hadn't got a drachma contingency plan, indeed it hadn't even mooted a California type debt instrument stop-gap. Tsipras has returned to Athens with a worse deal than that to which he got his people to say 'oxi'.

Why did Wolfie get it so wrong?
He believed in fairy tales like
1) private businessmen will rush to lend to a country which stiffs powerful entities like the I.M.F and the European Central Bank. 
2) Greece can afford to leave because it is a relatively 'closed economy' with 3/4 of its GDP being domestic and a good proportion of the rest coming from Tourism which is elastic to devaluation. The problem here is that Tourism gains even more from not requiring fiddly currency conversion. Greece is small. It is riddled with rent-seeking. Small, corrupt, countries are hit hard by devaluation because the well connected can protect themselves from the Wealth effect at the expense of the productive base. That happens through inflation- Argentina anybody?- and crazy capital controls and export taxes and so on.
This is an extract from a joint statement issued by 30 of the leading Greek Economists-
'Modern, prosperous economies in Europe and the world are based on the market and on healthy competition, and they use part of their wealth to fund a strong welfare state. They also have an efficient public sector, which operates independently of the current government and thus limits partisan influences. Greece’s participation in the core of Europe fosters long-term convergence to European institutions. By contrast, a Greek exit from the euro would strengthen the tendency to clientelist structures and aggravate the timeless pathologies of the Greek economy. This inevitably leads to a closed and impoverished economy with high corruption levels.'

So what, you may say, if Wolfie got Greece wrong?
Isn't his wider point about the eurozone correct?
After all, Krugman says no one will trust Germany again- they just killed the European project.
Before discussing what that last phrase might mean, let us first ask what an agent could do today which causes no one to trust him in the future.
The answer is, trust is lost if an agent goes mad and starts babbling paranoid nonsense, or if he goes back on a promise, or if he does something which shows that his preferences are different from what might reasonably have been inferred, or- finally- if he refuses to do something mutually beneficial- an Aumann correlated equilibrium in a repeated game- because it turns out he is stupid or vicious or both stupid and vicious.
Germany hasn't gone back on a promise- otherwise Tsipras would have mentioned it, instead of dredging up the issue of reparations for Nazi crimes. Germany hasn't shown that it has different preferences from what could be reasonably inferred from the terms of the agreements it has signed because those agreements were also signed by other countries, including Greece, and no country prefers to write off other countries debts. Spain and Portugal and Ireland took a haircut on Greece- they didn't want to do it anymore than Germany did. True, since Germany pays a much bigger share it has more of a voice, but since that voice is saying the same thing as Spain and Portugal, what great question of treachery arises? France, it will be remembered, got shot of a lot of its Greek debt by pushing it onto the E.C.B thus forcing the Germans and the Spanish to eat a portion of their loss. Now, they weep crocodile tears for the Greeks but aren't proposing a unilateral bail-out of their own.
Why is Krugman, a Nobel Prize Winner, saying nobody will trust Germany after this? We trust Germany not to invade its neighbors because we know it is too weak. We trust Germans to continue making good cars and fridges and engineering products because their Capital Markets work differently, they have better Apprenticeship schemes and they keep a lid on Property Speculation. Did we also trust them to be big fat Sugar Mommies showering money on Greek gigolos with their shirt collars open? No. The generous, non-judgmental German is a stereotype which has never existed. 
Of course, Krugman, who is Jewish, isn't suggesting anything to the contrary. This leaves only one alternative. Krugman believes there was a better co-operative equilibrium such that monetary union would be followed by fiscal harmonization within a truly democratic framework such that the people of Greece wouldn't feel they were being ass-raped at this moment.
The problem here is that the Greeks have been lied to by their politicians. The Greek oligarchs, under the rubric of 'civil disobedience', set up illegal TV channels and created Media Empires which lied to the people on behalf of those politicians who, in return, turned a blind eye to their shenanigans.
Democracy, as Hayek pointed out, is an information aggregation mechanism. It fails if the people are lied to. Economists don't get this. Lawyers do.
This is what a Greek politician and Professor of Law at Oxford had to say about Syriza-
Over the last four decades, Greece's leaders created a system of clientelism that transformed the country into the most unequal and socially unjust society in the European Union. Pasok, Greece's traditional party of the left, is mired in scandal and seems to have reached the end of the line, receiving just 4.6% of the vote.

The trouble is that, in voting for change, Greek voters took a leap into the dark. The newly elected prime minister, Alexis Tsipras, advocates debt relief and the abandonment of austerity – goals that have broad popular support. And many on the European left are rejoicing at Tsipras's outspoken rejection of German-imposed austerity as the only policy for Europe's troubled economies. But, though Tsipras and his party may be new, the other ideas that they espouse are old – and far from ideal for Greece or Europe.

Neither Tsipras nor his party, Syriza, is tainted by their predecessors' disastrous policies. This should be a good thing, as it could enable Europe's leaders to understand at last that what is at stake in Greece is the fate of a people, not the survival of a failed political class. But Tsipras's first decisions have antagonized the EU and created a climate of confrontation.

The problem is that Syriza is not truly an anti-austerity party. The true advocates of the end of austerity – including the economists Joseph Stiglitz, Paul Krugman, and Simon Wren-Lewis – do so from a European perspective. Like To Potami, a ten-month-old Greek political party of which I am a member, they advocate correcting policy errors that threaten the survival of the eurozone, in order to create a stronger EU.

Syriza does not share this outlook; and, indeed, Tsipras did not seek out To Potami, which received 6% of the vote, as a potential coalition partner. Rather than criticizing austerity as a well-meant policy error, he condemns it as an assault on Greece, a neo-colonial imposition, or a hostile ideological project gone wrong. His language is one of resistance to conquest.

Thus, it is no accident that Tsipras chose the far-right Independent Greeks party as his coalition partner. Both parties speak the same language – that of virulent nationalism – used by Europe's enemies, whether in Dresden or Moscow.

It is worth recalling Syriza's recent history. During the controversy surrounding the Cypriot banking sector's collapse in 2013, Tsipras referred to EU leaders as “gangsters" – the same sort of rhetoric used by far-right European populists like Marine Le Pen and Geert Wilders. More recently, he accused EU leaders of crafting Greece's bailout deal in a way that would enable them to “plunder" the country's assets. In this respect, too, the European left's new hero sounds like no one so much as Hungarian Prime Minister Viktor Orbán and other ultra-nationalists.

Likewise, Greece's new foreign minister, Nikos Kotzias, believes that the EU is a new form of “empire," one that has turned Greece into a “debt colony." (This is the title of Kotzias's most recent book.) Official Syriza documents regularly condemn the EU as an organization that undermines democracy and causes poverty and destitution throughout Europe.

For the past five years, Tsipras has built Syriza's support by attacking the pro-euro Greek parties as “neo-liberal" puppets of Germany. Though Tsipras, too, claims to favor the euro, he never mentions the fiscal discipline that it requires, or that Greece got into trouble because it violated its treaty obligations. He even rejects the conclusions of Eurostat, the European statistical agency, that Greece provided misleading budget data in 2009. Instead, he argues that the revised figures that emerged in 2010 were the result of a conspiracy, and that the Greek officials who released the data should be prosecuted.

Like Hungary and Italy, Greece refuses to define and enforce a 'Social Minimum'- one condition the E.U is seeking to impose. Its 'Socialism' is of the Nationalistic, not Democratic, type.
What should have Germany have done when faced with an interlocutor which came to power by telling lies to its people? Should it have appeased Syriza? Why? That administration crucified its own poor and vulnerable for no purpose other than its own aggrandizement.
Suppose the Germans like helping spendthrifts who heap abuse upon their benefactors. Then, under Democracy, that's what their Government should do. Suppose the meaning of monetary union is - 'a mechanism by which resources are transferred to a bunch of lying crooks'- then Krugman is right. But, since no one told the Germans, they are not guilty of bad faith. We don't trust them to be angels because they aren't angels. We do trust them to enforce the sort of rules without which no monetary union not of angelic origin could survive.

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