It’s the Economy, Stupid…
“…most of the people …were unhappy… Many solutions were suggested for this problem, but most of these were largely concerned with the movements of small green pieces of paper, which is odd because on the whole it wasn’t the small green pieces of paper that were unhappy.” – Douglas Adams.
Or to put it another way, there is nothing wrong with the Euro as a currency and plenty wrong with how much debt we expect our economies and our households and our taxpayers and our citizens to bear.
As a medium of exchange and a unit of account the Euro has been a complete success. As a store of value it is facing some challenges.
These challenges arise from the fact that we Europeans have misvalued our property assets by a considerable margin and the wealthiest of us are trying to get the poorest to bear an unfair share of the burden of those mistakes.
The property mis-valuation occurred at a time when the German economy was in the doldrums, post re-unification and post the ‘DotCom bubble’. German bankers and bondfund managers were getting very little return on their Euros in the German economy. It was perfectly natural for them to seek investment opportunities abroad, especially as the newly minted currency made it easier to measure, price and transact business opportunities.
What was not perfectly natural was for them to forget the rules of prudent investing, to mimic what US and UK banks were doing and to ignore what external advisors were telling them. But as the erstwhile chair of Citigroup, Chuck Prince so neatly expressed “You’ve got to keep dancing while the music plays!”
That the regulators in the EU and domestic economies also abandoned their responsibilities and let the music play at an ever faster tempo at the same time is perhaps just another case of hubris in the postpartum roseate glow of the newly arrived Euro. But that does not excuse their trying to shift the blame for the coming of Nemesis.
The Euro was and is well designed. It is a fine piece of engineering, built largely by the French and the Germans, who know a thing or two about building. But the Euro is the financial equivalent of a car, not a plane or other anti-gravity device. By refusing to use it in the way it was intended to be used and by refusing to keep national debts and deficits in check by the fines and other mechanisms built into the Euro design the politicians and bureaucrats have made fools of themselves and a mockery of the patient efforts of two generations of statesmen.
What they have done is the equivalent of driving it off a cliff. What they are doing now is the equivalent of trying to ……well, actually I don’t know what they are trying to do because they keep changing their minds. First, it was guarantees, then it was bank recapitalisation, then it was austerity, after that it was a ‘unique bond transaction with retrospective contract changes’ and now it seems we are to have ‘austerity with growth’….
If a country has too much debt or is paying its civil servants and other non-exporting workers too much in salaries and benefits then changing currency in order to partially writedown those debts and reduce those costs is the equivalent of shooting yourself in the foot in order to learn to hop.
The point that I wish to get across is that the fault is not with the Euro and is entirely with what burdens our economies are trying to carry. Abandoning the Euro does not solve Greece’s problems or anyone else’s. It most cases it will make them worse because the dislocation effects of the ‘defenestration’ and because of the knock-on effects in the wider EU.
The borrowers are being made to suffer because of the mistakes and the greed of both the borrower and the lender. This is business and it turns out to be ‘bad business. There is no moral superiority of the lender over the borrower. Both are equal parties to a contract, willingly if stupidly, entered into. Making Greece jump through hoops to save the blushes of greedy bankers and feckless regulators and stubborn politicians will be fun while the ‘wheels are still turning’
If Greece abandons or is forced out of the Euro the debts of Greece will still be denominated in Euro’s and the only thing that will have been achieved will have been to make it harder for Greece to get Euros to pay us with.
Returning to my car analogy I will close with another Douglas Adams quote about going over a cliff….
“It’s not the fall that will kill you, it’s the landing….”
This post originally appeared on the TASC blog on Friday, 18th May, 2012.