The latest eurozone rescue scheme may save Greece for now, but it fails on a basic rule of classical economics
Without a growth plan, the EU faces financial Waterloo | Simon Jenkins | The Guardian
(Guardian) This really matters. It matters more than party conferences or Libyan wars or terrorist scares or Olympic games. Europe faces a Waterloo moment, perhaps even a Munich one, as 17 of its finance ministers dither over whether to rescue its economy from the financial wreckage of the past three years, or let it plunge into renewed depression.
A bad-tempered weekend at the IMF in Washington has reportedly led to a ghost of a plan that makes sense. It involves halving Greece’s debts to German and French banks, repeating the 21% ”haircut” default of last July. This in turn will hurt the banks more than they might stand, so the second part of the plan props them with urgent subsidies. In a third part, some 2 trillion euros would be tipped into the European central bank, somehow to ”firewall” the sovereign debts of Portugal and Ireland and perhaps even Italy and Spain.
This plan is first aid at the scene of the accident. But when all bad options have failed, desperate men turn to worse ones. The summer’s stress tests, bail-outs, Greek promises and quantitative easings are dead in the water. Europe’s weaker governments have gone on spending and borrowing, and banks lending. Greece’s chief paymaster, Germany, is fed up and Greece is on the brink of bankruptcy. Its workers will soon not get paid and its government might fall – an echo of Weimar.
Yet even this plan may not happen. It needs the 17 eurozone countries to agree, and this they cannot do. It is the nightmare scenario of Euro-enthusiasts down the ages, of a supposedly united continent collapsing in chaotic indecision, as in 1914 and 1939, and Germany emerging waving the key. The trouble today is that Germany, however benign, is ruled by a coalition crafted by the post-war allies so as never to exercise strong, united leadership. Even if Germany’s government is willing to rescue the euro, its divided assemblies can refuse. They vote on the new bail-out fund tomorrow, and the coalition’s Free Democrats say they will vote against it.
What if plan A fails? There is always our old friend plan B, which exists in every crisis. Plan B is no plan, anarchy, the apocalypse, the mob, the opportunity. It is never less than interesting. If the euro-17 are unable to make up their minds and Germany refuses to play ball, the system defaults to jungle. The peripheral euro countries find their debts unsustainable and pass into ”administration”. They drop out of the common currency, devalue their debts, inflate their economies and proceed (as Britain used to do) to adjust to their true competitive balance with their neighbours. Europe having failed to discipline them, the market does the job instead.
Plan A is kinder. It attempts to correct the ”category error” of a single currency at least with reference to Greece and for a time. Plan B is a short, sharp shock. It defies the high priests of Euro-centralism and their straitjacket for Europe’s diverse economies. Banks and bond markets would lie in ruins. The rules of ”sovereign debt” would need rewriting. Greece, which has been living as if it were Germany, would start living like Bulgaria.
Europe was never going to be another America or Soviet Union, with one constitution imposing national homogeneity over vast distances, and with people and investment migrating ceaselessly in search of employment. This has been tried in Europe and has failed. There should be a negotiated return to a nuanced relationship between countries and economies. Silesia cannot be forced into the same polity as Cornwall. Europe remains a confederacy of wildly differing habits, cultures and political traditions.
Just as the credit crunch revealed the financial scandals of New York and London, so it revealed the risks in the borrow-and-spend habits of Britain and Greece. It also showed how brittle was the fiscal balance of the eurozone. Sooner or later the different voters of Europe would draw a line at the colossal cross-subsidies of the EU’s financial regime. The only question now is whether that line will be drawn in parliaments or in the streets.
The plan currently in circulation makes short-term sense. But it is a rescue plan, not a growth plan. The frightening realisation is that, at a time of recession, the economic conversation is back to the 1930s, as if Keynes had never preached the woes of austerity. In the past three years, 20 million people have lost their jobs worldwide. This staggering waste of human resources is entirely due to human error, to the political mismanagement of economies, which makes Ed Balls’ boasting in his conference speech on Monday the more inexcusable.
The western economy is in the grip of a textbook liquidity squeeze. There is cash everywhere. British companies alone have some £700bn on deposit, which they are unable or unwilling to invest for lack of demand. The Bank of England has printed some £200bn of quantitative easing, mendaciously claiming it will ”kick-start the economy”. It has merely added to the pile, and is proposing to add more. It cannot explain where the money has gone, or show one constructive idea as to how to boost demand to mop up this lake of liquidity. The bank is back in the dark ages, starving today to inflate tomorrow.
Where have the government’s Tory monetarists gone? Where are their graphs of M1, M2 and M3 and their equations of the velocity of cash in circulation? The liquidity squeeze is nothing to do with George Osborne’s public sector cuts, which are mild, but with the laws of classical economics. In a recession, you do not save, you spend. Why is Osborne building a cash mountain? If nothing is done to ease the constipation in the British economy, when the rest of Europe recovers it will grow and Britain will merely stumble into stagflation.
The worst feature of this crisis is ignorance. People understand military catastrophe. They know guns, bombs, tanks and missiles. Economic catastrophe is silent. Apart from the stock footage of screaming dealers, few people have a clue what bankers do in the office each morning. They have no understanding of bond yields, savings ratios and quantitative easing. They are encouraged to leave economics to the experts. Look where that has got them.