What is happening in Europe? Greek prime minister Georgios Papandreou was hauled over the coals for suggesting that the Greek people might want to be consulted on their own future. Let’s consider this. Why should a referendum threaten anyone? Indeed, why should democracy threaten anyone? Or maybe the other way to ask this question is: who is threatened by democracy?
Maybe those who are trying to foist something on the population that the population does not want are threatened by democracy. Let us think a bit about what is going on from a political standpoint.
When you strip everything back, what you see is that each recurring European ‘rescue’ package is nothing more than a bailout for private professional investors who are paid for previous risk-taking by the average taxpayer, who normally pays others to avoid too much risk. This is the issue and, if you ask the average citizen whether it is fair or right that he pays for the mistakes of others, he is likely to say no.
The other observation that we can make is that, all over the world, the ‘too big to fail’ notion has meant that the bill of more and more of the individual debts of certain people and institutions is being transferred to more and more people who had absolutely nothing to do with these debts in the first place. But what is happening is that the amounts are getting too big and, at every stage, the entity that the debts are passed on to becomes less credible. This happened here with the botched bank guarantee. The Irish banks undermined the Irish sovereign, so we got ejected from the bond market.
Then the idea was to shunt on the debt to another bigger lender of last resort, the EU and the IMF. But even the EU/IMF wasn’t big enough to bail out the Irish sovereign (or the Greeks or the Portuguese, for that matter), and the contagion continued.
When it was obvious that the Europeans hadn’t enough money, they went last week to the Chinese looking for loot. The reason they are looking for loot is that the focus is switching firmly to Italy
Now that Italy is the focus of the crisis, things are getting really hairy. If the eurozone is struggling to find enough cash to bail out Greece, how the hell can it bail out Italy?
The G20 was unable to come up with anything concrete last Friday, because everyone is beginning to realise that the problem of living for years on credit is that, when it comes to paying back, someone is going to get burned badly.
At every stage when the EU leadership has shunted the debt of someone on to someone else, it becomes less and less democratic, more institutionalised and more remote from the average person, who is getting fed up and fearful in equal measure. Here in Kilkenny, where I am writing from John’s Street at the www.kilkenomics.com festival, people are increasingly worried about where this is all going to end.
Ultimately, Papandreou, seeing this and realising that Greece faces an enormous choice, decided that it was time to ask for a mandate from the people about their future. This would seem to be what democracy is about. But in response, the rest of the EU leadership (including our own) went ballistic. Why should they be so afraid of the people, particularly when they have not come up with any other solution, bar shunting on the problem?
They are afraid because Papandreou also raised the idea of Greece’s continued membership of the eurozone. In normal circumstances, the eurozone leaders should be happy to be rid of Greece because, without Greece, the euro would be immeasurably stronger. But these are not normal circumstances. If Greece elects to leave, who else will want to leave?
Regular readers of this column will know that it has been arguing since 2007 that the endgame of this eurozone debt crisis will be some break-up of the currency and that the reason is very simple. Membership of the euro gives a massive subsidy to German producers and imposes a massive penalty on producers in the rest of Europe. In addition, the nature of the European economy means that, if the euro wants to stay in place, its main beneficiary will have to tolerate being defaulted on every few years, or at best decades.
If Germany had its own currency, the New Deutschmark would be like the Swiss Franc on steroids. It would appreciate dramatically and force German industry to contract. As things are, German industry has gained a huge market – the rest of Europe – at an exchange rate that makes its goods tolerably priced, so it’s “quids in” for the Germans.
The surplus Germany gets from all these exports finds its way back to German banks.
These banks need to lend this money to someone and, more crucially, German industry needs its banks to lend to the likes of us and the Spaniards and Italians etc, so that we can have the money to buy the German cars – because, if we don’t buy them, who will?
That’s the game, and every so often when the Germans come looking for their money back, it isn’t there. It has been spent.
Once this happens, the present policy is to impose austerity in order to increase the likelihood that the Germans will be paid back. But austerity doesn’t increase the likelihood that the money will be paid back, it decreases the likelihood.
This is the inconsistency at the heart of the euro, and the only way out of it is if we all become better at making things than the Germans are. In fact, the rest of us don’t have to become more German, we have to become better Germans than the Germans themselves, and this is not going to happen – nor should it.
So if nations are not going to change their behaviour and the Germans need to lend enormously to us to buy their goods, of course there are going to be defaults. The only alternative to this is a return to national currencies. National currencies allow us to devalue to compensate for the idea that we might not be as productive as the Germans because we value other things in life. After all, there is more to life than economics.
If this adjustment is not allowed to happen, the rest of Europe – in the euro – simply can’t keep up with Germany.
The best way to understand this dilemma is to consider that, when we had the punt linked to the deutschmark, we devalued six times in 13 years just to try to keep up competitively. Conversely, when we joined the euro and could no longer devalue, we lost 30 per cent competitiveness against Germany. It could not be clearer.
All Papandreou was doing was recognising this for Greece. Without the drachma, Greece can’t work. Europe with all this debt can’t work. You can’t shunt the debt of some people on to others indefinitely. The people will say no, and democracy threatens nobody. The sooner we all see this the better.
Hi David. I have just one comment. At this stage we all see the rationale for leaving the Euro. Can you answer me this question-I have about 400000 euros of a mortgage on a property worth roughly 200000euros. If Ireland adopts the £punt, how is this good for me? I am part of this lost generation -and are you telling me I’ll have to pay this ridiculous mortgage in a devalued currency? It’s bad enough as it is. Please advise-I’ve asked Constantin Gurdgiev this same question via twitter and have had zero response. Tks in advance to any comments @mumenomics
That’s good stuff, but events are gathering speed…. We have a rate of 7+% on ITAL bonds before noon today. So… if yields are artificially controlled to instigate political change [look at the pattern over last 2 yrs] then ITAL will have a reshuffle and a person who will agree to the austerity measures will be in situ……just like IE. On VB on Mon 7 Nov Paul [Sommerville] told it just like it is. So….what happens next? Downgrade of FR…true extent of ESP exp to be revealed…and all of that…probably My question is: When are Deutsche and Co going to… Read more »
Mumenomics.. the only comment I can make is that David and Constantin have been vocal in looking for a ‘debt forgiveness’ resolution.
Yes, and I find it very unsettling that the European liberal lefty media are demanding that democratically elected Berlusconi must be removed from power and replaced with an unelected undemocratic technocrat who has served time with the useless ditherers in Brussels.
THE PILLARS OF OUR SOCIETY – Asking the right questions requires knowledge! ….Financial institutions are a pillar of civilized society, supporting people in their productive ventures and managing the economic risks they take on. The workings of these institutions are important to comprehend if we are to predict their actions today and their evolution in the coming information age…. The above words should trigger a shiver going down the spine of the reader that followed the events unfolding, but there is more to it. Last time I wrote about the importance of using especially the Internet as a source to… Read more »
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David, You are correct again. However, it must be getting clearer that the guarantee was not ‘botched’. Ignoring the Greek voters is not just undemocratic, it is an increasing totalitarian trend within the EU in general. Perhaps we should be more concerned with the destruction of sovereignty and this deliberate move for more corporate control of nation states. It is good to be concerned about the economy but I fear we really have bigger problems. If we allow this to continue, what kind of system are we going to have when the dust settles? One that respects democracy? I really… Read more »
Rotten core at the heart of the neoliberal system is being exposed, States unravelling, everything has its time but as you say, the tragedy in this is that the average, struggling person is being made to struggle more but then that is how power and systems as currently constructed actually work. As George Monbiot correctly pointed out recently in the Guardian, we don’t have wealth creators, we have wealth destroyers, their greed and ineptitude has consumed them and they are trying to bring us all with them. Banks not passing on cuts speaks volumes of where power rests in the… Read more »
Why should a referendum threaten anyone? Good question. Because it might reveal the level of pretence that exists in the media concerning Greece, and indeed the other PIGIS. Maybe because the EU has gone imperial, and imperial constructs tend to have contempt for the people, and regard them as some sort of statistical measurement in the race to prove themselves as per the Freudian size complex. Or maybe because the market is being manipulated, by state institutions that are officially designed to serve the public interest, but who always put the interests of the rich first. Maybe the biggest threat… Read more »
Barosso says everyone has a “legal obligation” to join the Euro.
http://news.bbc.co.uk/today/hi/today/newsid_9634000/9634878.stm
History’s echoes; Many moons ago (including wobbly ones) at this time of year I used to “sense” Christmas. My childhood was not idyllic nevertheless November’s starry skies still managed to herald the approach and existence of a “peaceful magic”. Later as an adolescent I became fascinated by the Great War 1914-’18 and quite frankly that fascination has never left me. The above sentences may seem totally unconnected but bear with me. In imagining Ypres, Verdun, Somme or Flanders etc. I guess I could easily relate to a young man entrenched in hell and gazing up at a starry hope! Later… Read more »