Greece’s budgetary woes, the highest budget deficit in the Eurozone, let one think of the famous statue of Laokoon and his sons, strangled by Poseidon’s serpents sent from the sea. This was Poseidon’s revenge for Laokoon misbehaving, but also for warning the Trojans of the wooden horse which the Greeks had put in front of their city gates – and which later led to the destruction of Troja. (“Timeo Danaos et dona ferentes”: I fear the Greeks, even if they bring presents (like the Trojan horse)).
The serpents are an apt image of the speculators who – according to media reports – have placed 8 bill € in bets for a decline in the value of the Euro as a result of a possible Greece government default. While Greece is a less than 2% economy in the Eurozone, this speculative attack and its root cause, Greece’s age-long “fixing-the-numbers” and being found out, together with the Maastricht Treaty’s no-bail-out-clause, all have suddenly come to a head – with a speculative attack. The Eurozone, its currency and its decision mechanisms are “suddenly” revealed as having clay feet. Talk is of the attacks spreading to Spain, to Portugal, to Italy (together these 4 countries now have acquired the epithet PIGS).
The financial crisis has revealed that the “rationality” and the veracity of the “efficient-market-hypothesis” of financial markets to have been nothing but self-serving myths, propagated by the mainstream of economic thinking and financial engineers, to the own benefit of the latter. The extreme fluctuations in valuations and assessments, the overshooting in both directions of risk perceptions, the purported discipline which footloose financial markets exerted on lax managers of corporations – all these are reminders of ideology and self-serving interest overtaking prudence, sober economic thinking and policy advice.
But real damage may be done in a number of ways:
– Greece’s brutal deficit consolidation (chopping 10 percentage points off in 3 years) is both pro-cyclical and politically extremely dangerous – and even if successful, will not deliver a higher degree of competitiveness of the Greek economy. While it is true that previous Greek governments were themselves responsible for much of the weakening of the Greek economy – in spite of the fact that Greece received large sums of money from the EU, wage competitiveness is not the only, nor the most important reason for Greek weaknesses. Lack of innovative capacity, gaps in education, a reliance on lower interest rates as a result of joining the Eurozone – all these persist and cannot substitute for a strengthening of the manufacturing and services base of the Greek economy. Tourism alone will not save the country!
– Potential spillovers to other Eurozone and EU countries, as a result of real weaknesses or of mis-guided speculative perception by so-called “investors”, speak speculators, may put other countries at risk by denying them access to financial markets to finance their deficits, and/or by rasing their borrowing costs, such that the repayments of old and new government debt crowds out productive public investment. Ireland, Portugal, Spain, Italy are in this category. Countries outside the Eurozone – especially the Baltic countries – face either strong pressures to devalue their currencies, or on their currency boards.
– The Greek situation does not help the aspirations of new entrants into the Eurozone. But if the entry conditions are fulfilled, they have a right to enter. Were this denied, would this weaken the credibility of the Eurozone itself – and cause massive problems in the aspiring countries where populations have undergone severe adjustment burdens with a view to an early future within the common currency zone.
– Like the rest of the world, Europe may (hopefully) just emerge from the deepest crisis in its economy for the last 70 years. While announcements of credible exit strategies from the exceedingly high budget deficits are important to calm the overridingly important financial markets, too-fast an end to budgetary stimulus may stamp out the green shoots and throw us back into an even deeper crisis. The next one will not only be an economic and financial crisis, but also a deep political crisis (viz. the strikes in some of the countries mentioned). The balancing act between what is good in the short run and in the long run is difficult.
What should/could be done?
- The EU no-bail-out rule is not as hard and fast as some central bankers propound it to be. It has emergency clauses which would allow the EU to assist. Alternatively, individual Euro and EU countries could help, of course in a concerted way. There are reports that Germany is thinking just that. This could – horribile dictu – also be done hand-in-hand with the IMF which has a lot of expertise in such programs. The existing EC “sanctions” on Greece are also tough enough, but would need to be complemented by cash. Of course, the moral hazard effect of such a Greece “non-bailout” needs to be considered, and the pressure on Greece to take responsibility for getting itself out of this mess must be maintained.
In the medium run, an international mechanism for orderly sovereign defaults needs to be developed.
- While strict exit strategies with specific spending reductions or tax increases and timelines should be announced, their implementation should take account of the cyclical state of the individual country, and the eurozone in general.
- The asymmetry of a common monetary policy and decentralized fiscal policies in the Eurozone has once more become apparent. Heads of state should quickly revive the age-old idea of more fiscal coordination for the Eurozone countries, whether this would be called coordination or Economic Government, is of secondary importance. But a policy mix of stringent fiscal targets with still-abundant money supply cannot persist.
- We need a vigorous debate on whether the interests of “investors”, of speculators should really be the determining force of economic policy. An orderly financial market, providing utility services to the economy, might – yes – result in higher credit costs, but also in less turbulence, less irrational gloom and exuberance, in short less volatility. Medium-term economic calculus for business investment requires stable – not fluctuating – conditions, cool discussion on perspectives, not minute-to-minute horse trading and herd behaviour. This will be worth higher costs. These are also not a given. If competition among banks reduces profits, there always is a legitimate question of the incidence of higher costs.
- The debate has assumed dynamic about “throwing sand into the wheels of the financial markets” (James Tobin). A small financial transactions tax, if only at the European level, provides disincentives for short-term trading and brings in money.
- EU countries which meet the Maastricht criteria for entry into the Eurozone on a sustainable basis need to be admitted into the club. Non-admittance would damage the credibility of the Euro even more .