The Beginning of the End of the Euro Crisis?

Baruch has been a student of the wondrously dysfunctional Greek
political system long before it became fashionable, and is surprised at the
sudden relevance of what he had always thought to be rather interesting, but
not particularly useful. No longer – Greek politics is currently at the centre
of the world. What is upsetting, however, is that most everyone inside and outside Greece seems to disagree with him about what happened last week. Far from being a calamity exposing the weaknesses of the latest bailout package, Baruch thinks the ramifications of the call by Papandreou for a referendum are deeply positive. Merkel and Sarkozy, and the rest of us, should actually be grateful to him for heading off in Greece what is frankly the
biggest risk Europe and the global economy faces – political risk; specifically
“austerity ennui” on the part of the population, and pandering politicians
eager to exploit it.

Baruch is also unamused by the people who are watching what appears
a train wreck with barely disguised glee, rubbing their hands in anticipation
of the Euro’s supposedly imminent demise, starting of course with the ejection
of Greece. Your celebrated correspondent has no particular love for the common
currency, not least the silly name (“Euro-“ is a prefix, he has always thought),
but once in, the likely costs of leaving are so awful as to make it imperative
to stay in. In the case of Greece, were it to drop out of the Euro, we would be
talking about the instant impoverishment of a modern democracy, whose citizens’  life savings would be wiped out (apart from the  very rich who are able to have accounts abroad, take that, Gini co-efficient!) and the bankruptcy of every exporting enterprise. There would be mass unemployment. Imports such as energy and medicines would skyrocket in price, creating shortages; basic services would likely break down. People would die. It would be less like Argentina, more like post WW1 Germany, or maybe Eastern Europe after the collapse of communism.

Within the living memory of politically active people Greece has fought a bloody civil war, and flirted with fascism. European leaders should probably pause before inflicting this sort of stress on one of the most politically dysfunctional and divided states in Europe, a relatively big fish in the Balkan backwater, itself no stranger to conflict.

Seriously, I wouldn’t want this Pandora’s box opened even
if I was short the Euro, which I am not and which I happen to think may be a
quite bad idea if you want to make money in the near future. Yet never mind the
Eurosceptics who are actually looking forward to it, everyone else seems to be
fairly resigned to it as well. Even clever people. Felix, for instance, sees a “chaotic collapse” of Greece as “inevitable”. Josh Brown cheers him on.

I think the very awfulness of what will happen if Greece is ejected from the Euro in a messy way (and until the treaty is changed there isn’t really another way it can happen) actually makes it more likely that it doesn’t happen. No matter how nasty a generation of austerity may be, it is a walk in the park in comparison with the likely alternative.

And that realisation may just have dawned in Greece last week.

What Papandreou’s referendum call did was to finally prevent the opposition from having their cake and eating it. For ages now, the main opposition party Nea Demokratia (together with all the other parties on the left and right) have been telling the Greeks that PASOK and Papandreou were “doing it wrong”. Had they been in negotiations with the so called Troika, they say, the aid package would be better for Greece. It’s bullshit, of course. In fact the Troika is deeply distrustful of ND, thinking them the more corrupt major party (by Greek standards) nationalist demagogues, tinged with incompetence. It was them after all, after a long period out of power, who fell on the state in the mid 2000s like a dog gobbling a sausage, not only purging even mid-level officials to replace them with their own supporters but also creating a hundred thousand new, underemployed, unsackable state workers for jobs that simply didn’t exist. It may have been the straw that broke the camel’s back. Greek politics was awful before, and god knows PASOK is, shall we say, not unbesmirched by the behaviour which has led the country to this pretty pass. But Nea Demokratia are real idiots, and I mean that charitably.

Bullshit or not, the politics of denial have worked. It’s natural to grasp at straws while in extremis; if politicans are saying Greeks don’t have to impoverish themselves to keep the Euro, they can be forgiven if some of it sinks in. PASOK is deeply unpopular, Papandreou (dubbed “Merkel’s Straw Man” by the Athens dailies, or at least the ones that are left) can hardly control his own party, and up until recently ND was likely to win any election that is called in the near future.

Papandreou must have been pretty sure that calling for a referendum would infuriate Sarko and Merkel, for obvious reasons. But I think his main target was every politician in Greece who has argued that Greeks had any sort of choice about austerity if they wanted to stay in the Eurozone. All those supporters the parties have given jobs to would be the first victims of any collapse and see their incomes smashed (private sector employees, those that still have jobs, could at least see their nominal wages adjusted upwards). ND and the PASOK old guard would immediately lose all legitimacy and relevance. Which is why the biggest storm of indignation against the referendum idea came from the Greek political class itself. Baruch was very pleased to see Antonis Samaras, the head of ND, on TV denouncing the referendum idea and stating flatly that the current bailout was the “only deal on the table”.

It’s no wonder Samaras wants an election as soon as possible; he has lost his only point of differentiation with PASOK and needs to get voted in before people realise that he was blowing hot air all these months. It doesn’t look like he is going to get it anytime soon; he has been out-maneuvered. He and his party no doubt have some dastardly plans to seize power, but with the threat of funds being withheld by the EU it is hard to see what he can really do.

So forget the Sturm und Drang of the announcement and the humiliations
of the immediate aftermath – look at the results. From here, no serious party
in Greece can tell their supporters that the current bailout is anything but
the best they can get. If you want to vote against the deal, you have to vote
communist or extreme right, and I have no doubt many will, but I do doubt they
will be let into any government. The Troika’s favoured outcome, a national
government, is in the process of being negotiated as I write this, with Samaras trying to holdit back, and better still, it looks like it is going to be stuffed with technocrats from Greece’s international diaspora, none of whom have a political base that needs to be satisfied with state-owned goodies, and who will be much more receptive to the advice of the Germans and others who have been put into every ministry as “advisers”. At least for now, Greece is in some form of receivership, which is where it belongs. This is far better than where we were. We need to be grateful to Papandreou for putting us here.

Better still, threatening Greece has allowed Merkel and Sarkozy to show some real steel, to belie their image as slightly muddled consensus politicians who can’t get in front of a crisis. Right now, they look a little more like the ruthless bastards they are going to have to be to deal with the remaining Greeks, and then Italy, and get us out of this mess. Baruch is allowing himself to feel something akin to a deeply unfashionable optimism. Greece is still a political basket case, terribly divided and mistrustful of itself, and possibly ungovernable in many ways. A lot of stuff can go wrong still. But nevertheless I think there is at least a possibility that the tide is turning slowly on the Euro, that when we look back this referendum battle will have been the El Alamein of the sovereign debt crisis, after which things will still ebb and flow, and dark moments fill us with panic, but the overall trend will be towards the light, and recovery.

10 responses to “The Beginning of the End of the Euro Crisis?

  1. Don’t forget, the last time Europe had a currency crisis, Germany let the speculators bite Spain and Italy before caving.

  2. Nice analysis.. food for further thought – thanks Baruch.

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  4. Mr. Baruch it all boils down to this:
    Government Expenditure plus (interest cost times Gov. Debt) =
    Taxes plus New Borrowing plus new currency
    Either you cut the interest or you print money. Correct me if I’m wrong.
    If the Greek nation was a company its debt to equit ratio would be 7.
    Taxes are 50 bn and Central Gov. debt 350. Borrowing money to pay interest cost is a Ponzi scheme pure and simple.
    Something has to give. Either the cost of money (Interest) or you print money and you implement the necessary controls.

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  6. Very enlightening, thanks for your time.

    The big question now is, knowing Greece’s case may be the worst but it’s not unique: will EU achieve a higher degree of fiscal integration? I think this is imperative for the future of the euro: the current arrangement looks unsustainable, since some countries clearly cannot pay their debts and will probably continue to add to them in the following years, until economic activity recover and some fiscal adjustments become feasible. I’ve been hearing lots of speculation on what the “average German” thinks, I don’t know if there’s such a thing and until what point Germans will refuse to look through the current fog and perceive that mantaining the EU is a small cost for their stability and relative success over the past decade.

    Being Brazilian, I also think you overstate the effects of a large currency devaluation, but maybe Europeans cannot take that so lightly (over here, a generation saw their savings wiped out in 1990, and the recover was relatively fast).

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  8. What a relief to discover that I’m not the only person in the world who understands that Papandreou’s call for a referendum was a well-considered and highly-effective act of courage, not stupidity!
    Thank you!

  9. Very interesting take on this. I had thought the referendum suggestion was Frank Spencer-esque in its clumsiness and just couldn’t understand what was going on. But I like your analysis; perhaps it was cannier than that so thank you for taking the time to explain the background. One footnote though. This sentence is hard to parse: “From here, no serious party in Greece can tell their supporters that the current bailout is anything but the best they can get.” because of the negatives used to indicate main actors and concepts (“no serious party” “anything but”) and the use of value judgements as labels (ie, “no serious party”). I think what you mean is: “From here all mainstream parties must publicly acknowledge that the bailout is the best option available”. Sorry to be a pedant over this but I had to first work out what your message was likely to be here and then, separately, work out how your words actually amounted to that.

    • dont you are quite right. Was a terribly constructed sentence. We could all do with an editor I think. I can’t afford one.