Consider a single-currency area, like the UK. There are bits of it that are doing well. London and the South-East for example, that subsidises the rest from its excess taxation over expenditure. Only London and the South Eastern regions are net contributors to the UK treasury, but it is barely questioned there that it is reasonable for taxes levied in Reading be used to build roads in the Rhonda or Rothesay. Thus the Welsh for example are compensated for having an interest rate not quite suitable for their economy, as interest rates are set for the economic centre of Gravity, which in the UK probably lies somewhere around Oxford.
Now consider the Eurozone. There are no fiscal transfers, because Germans, who didn’t mind subsidising other Germans upon unification, baulk at subsidising Greeks whom they regard as feckless layabouts (erroneously – further discussion here). But the centre of Gravity of the Eurozone probably lies somewhere around Frankfurt. Thus the Germans, and their associated northern European countries have an appropriate interest rate, and the Spaniards and Italians do not. The Spanish Government, denied monetary levers in the run-up to the crisis, sought to cool an over-heating economy by running a fiscal surplus. You cannot accuse the Spanish Government of being “profligate”. The same is true of Ireland. Portugal’s situation wasn’t quite as clear-cut, but their debts were not out of control.
Obviously, the asset price bubbles built up in Spain and Ireland, and the subsequent bust took out their banks, which required bail outs. Denied the stimulus of looser monetary policy, by an excessively hawkish European Central Bank, who’s setting rates effectively for Germany, the only other option to these economies is a devaluation in place – cutting wages and living standards until they’re competitive with Germans.
The falling tax revenues mean deficits. Lack of EU fiscal transfers mean Austerity, and meanwhile the ECB is still not responding with interest rates. For the periphery, even Governments like those of Spain or Ireland who sought so, so hard to be prudent in the good times, the Euro is massively pro-cyclical. There will be booms, there will be massive busts and there’s little, if anything any Government in Madrid or Dublin can do about it. This was predicted by economists from the notorious pinko Paul Krugman to arch-“neoliberal” Milton Friedman.
Added to this, the Greeks were not prudent. They near-openly lied about their debts and deficit to get into the Euro, hoping lashing themselves to the mast would encourage some degree of fiscal sanity. But the problems were too entrenched, and sorting them out meant unpicking the settlement of a civil war. The result is that while the Spanish and Irish have endured a savage recession, the Greeks “devaluation in place” was a depression costing 25% of GDP. A grinding, seemingly endless round of austerity and reform that left 50% youth unemployment and an economy in tatters.
The ironic thing about the election of Syriza in January 2015 is that Greece had done the hard work and by mid 2014 was the fastest growing economy in the Eurozone, and had a primary surplus (meaning they were balancing the books before debt service was considered). Given the bailout terms, Greece’s debt service took a smaller proportion of GDP than did Ireland, Spain, Italy or Portugal. By 2014, Debt to GDP in Greece was actually falling. All they needed to do was keep up the reform, and “Austerity” – continual tax rises and spending cuts would no-longer be necessary. The Germans would get their money back, eventually. Greek growth would take over the heavy lifting from austerity after years of tax rises and spending cuts. Economies emerging from such depressions can often grow fast.
Then, in January 2015, they elected a bunch of hard-left Yahoos, who encouraged a bank-run, shattered what was left of business confidence, and were forced to introduce capital controls because of a childish and unreasonable petulance wrought by economic fantasy which could only have come from a Marxist academic “economist“. Privatise state assets? The horror! Make civil servants turn up to work, and don’t let them retire on 80% of salary at 58? The inhumanity! The Greek people may have been sick of Austerity. But if they’d just seen it through, they’d be heading up now, rather than enduing a 3 week bank-“holiday” and queueing up at ATMs for their daily ration of cash. Syriza have probably cost Greeks another, entirely unnecessary, 10% of GDP, and the resultant continuation of Austerity that comes with it. This makes Yanis Varoufakis (the “minister of Awesome” according to twats on Twitter) the most unsuccessful finance minister in history.
All the pointless yes/no referendum on the terms of the bail-out did was make a Euro exit, something Greeks apparently don’t want, much more likely. As it happens, Alexis Tsipras, after sacking Varoufakis, looks like a man who’s about to capitulate completely. It would’ve been better had he done so much, much earlier, and not caused such a catastrophe for the ordinary Greek citizens.
*slow hand clap*
There is a theory that all this was deliberate; a means to build socialism in the ruins of post-Euro Greece. But this assumes skills and ability “anti-establishment” parties almost never possess. Never ascribe to malice that which can be put down to incompetence.
This crisis is ultimately the fault of Generations of Greek governments, especially the ones who conspired to get Greece into the Euro by all means fair and foul. It’s the fault of the designers of the Euro who ignored all economic advice and wanted Greece in for silly, romantic reasons: Hellas is mythologised as the birthplace of a European idea of democracy. But the current acute crisis was not inevitable. And the blame for that is the hard-left morons of Syriza and the Greek people who voted for them.
“Democracy is the theory that the common people know what they want, and deserve to get it good and hard.” HL Mencken
If you elect the hard-left, you get a financial crisis. Every. Single. Time. Basically because capital is faster-moving than the people who want to confiscate it. Greece was warned. They did it anyway. The only thing people like Syriza and their supporters are any good at is shifting blame onto anyone but themselves.