One size does not fit all - Greece's Euro agony
I was reading an interesting article from Nick Cohen this evening which you can read on the Guardian website here concerning what is going wrong in Greece: he argues that "respectable fanatics" are destroying Greece and by that he means the ECB and Eurozone governments.
His article was very reminiscent of Keynes' famous dictum about how ideas can often be applied long after they have ceased to be helpful:
"Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil."
Much of what Cohen says is dead on. But he appears to have missed a central point.
Where the policies of the European Central Bank and the Eurozone leaders are causing problems for in Greece is absolutely NOT per se in that they are trying to get the Greeks to eliminate corruption, reduce their budget deficit and get themselves out of the cycle of borrowing more and more money.
The problem is that the scale of adjustment they are encouraging Greece to make is incompatible with having your currency shared with more than half the European continent and with having your interest rates and monetary policy set externally by a body which is trying to balance the needs of 19 very different countries.
It's a classic proof of the old point - one size does not fit all.
When Labour predicted that the Coalition's attempts to cut the deficit would lead to a deeper recession and a massive increases in unemployment they were absolutely wrong. Instead we had the highest growth of any major economy last year and British businesses have created nearly 2 million new jobs.
But the doomsayers were only wrong because Britain had our own central bank and our own currency.
If in Britain we had attempted the coalition's policies while within the Euro and subject to the monetary policies which the ECB has been running for the past five years, we would not have the fastest growth of any major economy - instead we would have had exactly the disaster which Labour predicted.
Because you can't attempt a tighter fiscal policy to correct a serious deficit, especially not during a world recession, without balancing it with a carefully judged monetary policy which ensures there is enough demand in the economy to give the private sector a chance to employ the resources you are releasing.
To put it in words of one syllable, if the government is bankrupt and to balance the books you sack a lot of public sector workers, you have to make sure there is enough money in the economy that private companies can hire them instead. Otherwise you get not just an economic disaster but also a humanitarian one.
Critics of the government's economic policy can roughly be divided into two categories. The more intellectually challenged don't understand any of this, and nor do they understand that borrowing more and more money gets you deeper and deeper into a hole until you end up having to spend a ridiculous proportion of public spending just to pay the interest on your debts. Which is where Britain is now, and it'll be worse when interest rates finally rise above rock bottom in a year or two's time.
The more intelligent Labour critics of the government's policy thought George Osborne was too thick to understand the point I made above and would allow Britain to get into a deflationary spiral. Fortunately he isn't that stupid, and neither is the Bank of England.
However, there are plenty of people who argue that the European Central Bank (ECB) is making exactly that mistake, and until a few days ago I thought they had a point.
Clearly, the recent decision to adopt Quantitative Easing demonstrates that the ECB is alive to this danger, but there is still a problem.
The level of monetary expansion which is right for those European countries whose economies are not too badly out of whack, such as Germany, is way out of line with what is needed in Greece, Portugal, Spain and Italy.
I can still remember the exact "Road to Damascus" moment, at (of all places) a TRG conference in the beautiful surroundings of an Oxbridge college, when my concern about a European single currency shifted to outright opposition and I started thinking of myself as a Eurosceptic. It was when a prominent speaker from the German Christian Democrats was asked about the mistakes made when the Germans unified their currency and all he could do was attack those who had correctly predicted what would go wrong, accusing them of not understanding the political imperatives.
This demonstrated both that he either did not understand the implications of the "one size fits all" problem when uniting the two parts of Germany, which would be a far bigger issue for all of Europe; or else he was not willing to contemplate taking the right economic decision if it was difficult politically.
It was immediately apparent to me that if people with that attitude were to take the decisions about any single currency for Europe, the consequences for jobs, incomes, and ultimately public services in Britain could be completely unacceptable.
And bringing us back to Greece, the point where I knew my fears were justified and went from being against the single currency to red-line, "over my dead body" opposition to Britain, joining was when it became apparent that Greece and Italy would be allowed to join the Euro.
This was a bad decision for the Euro and a worse decision for Italy and Greece. It was a classic illustration of the propensity of some EU institutions to choose the best political course over the best economic course.
A single currency has to have harmonised economies. It was obvious to me from the start, and should have been obvious to any intelligent observer, that there was a risk of the new European Central Bank having to take decisions which were very bad for some countries in order to accommodate others. At the time, I was afraid that we would end up with excessive inflation being imposed on countries like Germany and, had we joined, Britain in order to accommodate countries like Greece. This did happen to Ireland at one point, and it would have been the general pattern had it not turned out that the European Central Bank is the one EU institution which generally resists the temptation to put politics above economics.
In the event the general pattern has been precisely the opposite and we have had overly strict policies imposed, arguably on most of the Eurozone and certainly on countries like Greece, as the ECB's legitimate fears about inflation have been given priority, possibly too much priority.
Thank God Britain didn't join - whatever mistakes Gordon Brown made, and they were many, at least he stopped Tony Blair from scrapping the pound and replacing it with the Euro (with a bit of help from William Hague.)
The wise course of action now, from the viewpoint of both the Eurozone and Greece, would be negotiate a planned exit, voluntary and agreed on both sides, for Greece from the Euro on non-punitive terms. Ironically this would make the Euro stronger, not weaker.
Sadly it is unlikely to be seen that way and for that reason probably will not happen. Which means instead that we are likely to see either the new Greek government abandoning it's election promises, defaulting on its' debts, or a unilateral Greek exit from the Euro - any of which will do far more damage to the Eurozone and to Greece.
His article was very reminiscent of Keynes' famous dictum about how ideas can often be applied long after they have ceased to be helpful:
"Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil."
Much of what Cohen says is dead on. But he appears to have missed a central point.
Where the policies of the European Central Bank and the Eurozone leaders are causing problems for in Greece is absolutely NOT per se in that they are trying to get the Greeks to eliminate corruption, reduce their budget deficit and get themselves out of the cycle of borrowing more and more money.
The problem is that the scale of adjustment they are encouraging Greece to make is incompatible with having your currency shared with more than half the European continent and with having your interest rates and monetary policy set externally by a body which is trying to balance the needs of 19 very different countries.
It's a classic proof of the old point - one size does not fit all.
When Labour predicted that the Coalition's attempts to cut the deficit would lead to a deeper recession and a massive increases in unemployment they were absolutely wrong. Instead we had the highest growth of any major economy last year and British businesses have created nearly 2 million new jobs.
But the doomsayers were only wrong because Britain had our own central bank and our own currency.
If in Britain we had attempted the coalition's policies while within the Euro and subject to the monetary policies which the ECB has been running for the past five years, we would not have the fastest growth of any major economy - instead we would have had exactly the disaster which Labour predicted.
Because you can't attempt a tighter fiscal policy to correct a serious deficit, especially not during a world recession, without balancing it with a carefully judged monetary policy which ensures there is enough demand in the economy to give the private sector a chance to employ the resources you are releasing.
To put it in words of one syllable, if the government is bankrupt and to balance the books you sack a lot of public sector workers, you have to make sure there is enough money in the economy that private companies can hire them instead. Otherwise you get not just an economic disaster but also a humanitarian one.
Critics of the government's economic policy can roughly be divided into two categories. The more intellectually challenged don't understand any of this, and nor do they understand that borrowing more and more money gets you deeper and deeper into a hole until you end up having to spend a ridiculous proportion of public spending just to pay the interest on your debts. Which is where Britain is now, and it'll be worse when interest rates finally rise above rock bottom in a year or two's time.
The more intelligent Labour critics of the government's policy thought George Osborne was too thick to understand the point I made above and would allow Britain to get into a deflationary spiral. Fortunately he isn't that stupid, and neither is the Bank of England.
However, there are plenty of people who argue that the European Central Bank (ECB) is making exactly that mistake, and until a few days ago I thought they had a point.
Clearly, the recent decision to adopt Quantitative Easing demonstrates that the ECB is alive to this danger, but there is still a problem.
The level of monetary expansion which is right for those European countries whose economies are not too badly out of whack, such as Germany, is way out of line with what is needed in Greece, Portugal, Spain and Italy.
I can still remember the exact "Road to Damascus" moment, at (of all places) a TRG conference in the beautiful surroundings of an Oxbridge college, when my concern about a European single currency shifted to outright opposition and I started thinking of myself as a Eurosceptic. It was when a prominent speaker from the German Christian Democrats was asked about the mistakes made when the Germans unified their currency and all he could do was attack those who had correctly predicted what would go wrong, accusing them of not understanding the political imperatives.
This demonstrated both that he either did not understand the implications of the "one size fits all" problem when uniting the two parts of Germany, which would be a far bigger issue for all of Europe; or else he was not willing to contemplate taking the right economic decision if it was difficult politically.
It was immediately apparent to me that if people with that attitude were to take the decisions about any single currency for Europe, the consequences for jobs, incomes, and ultimately public services in Britain could be completely unacceptable.
And bringing us back to Greece, the point where I knew my fears were justified and went from being against the single currency to red-line, "over my dead body" opposition to Britain, joining was when it became apparent that Greece and Italy would be allowed to join the Euro.
This was a bad decision for the Euro and a worse decision for Italy and Greece. It was a classic illustration of the propensity of some EU institutions to choose the best political course over the best economic course.
A single currency has to have harmonised economies. It was obvious to me from the start, and should have been obvious to any intelligent observer, that there was a risk of the new European Central Bank having to take decisions which were very bad for some countries in order to accommodate others. At the time, I was afraid that we would end up with excessive inflation being imposed on countries like Germany and, had we joined, Britain in order to accommodate countries like Greece. This did happen to Ireland at one point, and it would have been the general pattern had it not turned out that the European Central Bank is the one EU institution which generally resists the temptation to put politics above economics.
In the event the general pattern has been precisely the opposite and we have had overly strict policies imposed, arguably on most of the Eurozone and certainly on countries like Greece, as the ECB's legitimate fears about inflation have been given priority, possibly too much priority.
Thank God Britain didn't join - whatever mistakes Gordon Brown made, and they were many, at least he stopped Tony Blair from scrapping the pound and replacing it with the Euro (with a bit of help from William Hague.)
The wise course of action now, from the viewpoint of both the Eurozone and Greece, would be negotiate a planned exit, voluntary and agreed on both sides, for Greece from the Euro on non-punitive terms. Ironically this would make the Euro stronger, not weaker.
Sadly it is unlikely to be seen that way and for that reason probably will not happen. Which means instead that we are likely to see either the new Greek government abandoning it's election promises, defaulting on its' debts, or a unilateral Greek exit from the Euro - any of which will do far more damage to the Eurozone and to Greece.
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