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The papers are full of speculation about the future for Greece and the Euro.
Can Greece deliver on the fiscal/austerity pact? Or will it crash out of the Euro?
If it crashes out, will Spain and Italy be able to stay in?
Or will Germany agree to fund more State spending in Greece?
Even, will there be civil war in Greece?
It seems to me that there are a few things going unsaid in all of this.
First of all, the immediate issue for Greece is what the papers like to call “sovereign debt”. In other words, the debts of the Greek government. The phrase “sovereign debt” is used to hint that the whole country stands behind the debts of its government.
The Greek government has in the past run huge deficits. Every year its debts have gone up, up and up. As a result, it is now effectively bankrupt. It is being kept afloat by loans from the European Central Bank, in exchange for agreeing to big cuts in its spending.
If you look at the Greek deficit, you will see that the Greek government has already made very large cuts. Almost all the deficit is now accounted for by interest payments on that huge national debt. Because of the overspending in the past, the Greek government owes unsustainable amounts, and cannot afford its interest payments.
The papers talk in panicky terms about a Greek “default-and-exit-from-the-Euro” as though these are inextricably linked. They are not.
The Greek government could theoretically default its debts and continue using the Euro. Certainly, other European countries especially Germany might not stand for that. But it is theoretically possible.
Imagine then that Greece were to default its debts completely. Clearly, it would immediately be cut off from international money markets and would therefore have to balance spending and income. Without those interest payments on the debts, that would mean some quite small cuts.
The key point is that the cuts that would be needed for Greece to pay its way without its debts, would be a lot less than the cuts being demanded by Germany and the Eurozone.
But of course the debtors would suffer. The debtors are mainly German and French banks.
So here is the real situation: Germany and France are blackmailing Greece along these lines: “If you default your debts, we will throw you out of the Euro.”
Entirely separate from this is a currency issue. It is said that Greece is “uncompetitive within the Euro”. That is clear nonsense. Within a single market and a single currency, uncompetitive countries would be forced to cut their prices. In other words, Greek wages would fall. This would happen over time, by a process of Greek wages rising more slowly than those elsewhere in the Eurozone.
Ultimately you would end up with Adam Smith’s comparative advantage playing itself out – so that Greece would lumber on in a sustainable and stable way, albeit with lower living standards than say Germany. Smith’s analysis was based on a world in which there was, almost, a single currency – based on gold and silver. That law of comparative advantage explains why even a country that has a competitive disadvantage in every single sphere of industry could continue to fund itself!
The Euro destroys Greek sovereignty, but there is no reason why it should destroy the Greek economy.
The Greek crisis is a political crisis, not an economic one. The Greek government has borrowed too much, and is now facing the consequences. German and French banks have lent too much, and are facing the consequences.
Let us remember, though, that the Spanish, Italian, French and German governments also have enormous State debts – as, of course, does Britain. The governments of all those countries are guilty of spending too much of their people’s money. They have justified that by appeals to John Maynard Keynes, or by “stimulus for growth”, or by fanciful theories that State borrowing doesn’t matter because it never needs to be repayed.
Across Europe it is, ultimately, Governments that are the problem. They are too big. They spend too much, and interfere too much. Greece is an extreme case – but the other European governments have nothing to boast about. They typically spend 40%, 50%, 60% or even more of their country’s income (compared with 30% or under in more successful economies like the US). Facing resistance from their citizens to the taxes needed to pay for their spending, they have turned to borrowing to hide their profligacy. (Yes, of course the US too has huge government debt – because the phenomenon of the bureaucracy wanting to spend more than it can raise in taxes applies there too.)
It is not just on the spending side that European governments have let their citizens down. By grossly excessive regulation and interference, governments across Europe have hampered the performance of their businesses. They have meddled in and sought to control every aspect of their people’s lives. That has destroyed their sense of individual responsibility, and their confidence in their capability to run their own lives.
Greece is just an extreme case of a problem afflicting the whole of Europe. That problem is nearly a century old. It is called Socialism. If it is not fought back right across the continent, then the rest of the continent will follow Greece down that very dark path towards financial ruin.