There is an ancient Greek proverb, often attributed to Euripides, which states that “whomsoever the Gods seek to destroy, they first make mad.” Whether the Eurozone crisis of 2011 was some kind of karmic revenge for those who sought to destroy Greece, we shall never know: what is clear, however, is that the actions of the ECB throughout that crisis more closely resembled those of a madman whom the Gods had chosen to destroy.
Heaping ever greater austerity measures on an economy already in free-fall, insisting on interest rates which the Greek economy had demonstrably no capacity to pay, and finally, withholding further loans required simply to roll over previous loans could only have had one outcome: And the great surprise is that that outcome came as a surprise to the ECB at all.
Perhaps it was all part of a devilish clever scheme to force a default when a default could never be officially countenanced: To force a resolution that all had to officially condemn as unthinkable. But reality has an awkward way of rethinking the unthinkable to the point where it becomes the most obvious outcome of all: a solution blindingly obvious in hindsight, yet utterly unpredictable to those who should have had the expertise to predict and counteract just such a thing.
Whatever the dynamic in the weeks and months leading up the D(efault) day, the events of the day itself were alarmingly simple and straightforward. The Greek Government announced three things:
- It was unable to meet the ECB/IMF terms for the issuance of further Euro loans.
- As a consequence it was unable to meet debts now falling due in Euros, and
- As a consequence, it was repaying those debts in full in new Drachmas, officially valued as 1 new Drachma = 1 Euro, and would issue sufficient new Drachmas to meet all its future obligations in like manner as well as provide for the orderly running of the Greek economy and Government.
It was then “a matter for the international currency markets”, the official statement noted, “as to whether the official 1:1 exchange rate would hold, and the new currency would be convertible at whatever exchange rates those markets would determine”. The Greek Government was “Officially agnostic” the statement went on, “as to what the new floating exchange rate would eventually turn out to be”.
In the event, no one was surprised that the markets went into a wild selling frenzy, to the point where the New Drachma was worth less than €0.20, and only recovered many months later to reach today’s rate of €0.40 Euro to the New Drachma – a rate which most economists regard as sustainable given the underlying strengths and competitiveness of the Greek economy.
The actions of the Greek Government had several huge and utterly predictable consequences:
- Greece’s National debt was discounted by as much as 80% and most of its creditors – chiefly German banks – lost their shirts as a result. The Greek Government’s finances were almost immediately placed on a much more even keel by the huge reduction in their interest burden and the gross debt repayable.
- Greece’s economy recovered its competitiveness to the point that it quickly returned to growth and job creation mode. Imports became hugely expensive and diminished rapidly, whereas exports grew rapidly to achieve a positive trade balance. Provided Greeks managed to avoid those expensive imports, their standard of living wasn’t effected over-much and at least they now had some prospect of the job.
- The hugely increased cost of imported cars and petrol also gave a huge fillip to the nascent Greek solar energy industry, to the point that the Greek sustainable energy industry (largely solar and wind) now provides 80% of Greek energy needs and also provides c. 100,000 relatively well paid jobs.
- Further afield the Eurozone banking industry was once again in crisis, with Merkel having to do precisely what she said she wouldn’t do – bail-out German banks with taxpayers money. Initially, of course, Merkel flailed about threatening to expel Greece from the EU, until her officials pointed out that there was, in fact, no legal mechanism for doing any such thing. Her defeat by the Greens and the SDP at the next election was a foregone conclusion the moment that realisation struck home.
- The newly elected Portuguese government also seized the moment to distance itself from its “socialist” predecessor and announced its intention to let the “markets decide” the value of the Portuguese national debt – widely interpreted as a thinly veiled threat to also secede from the Eurozone. The ECB almost fell over itself in its haste to offer almost unlimited loans at a nominal rate to avert that possibility.
- Spain, too, nervously looking over its shoulder at its Portuguese liabilities (and potential loss of relative competitiveness) made similar noises, and thereafter seemed to have no difficulty obtaining ECB funds to ensure its banks remained liquid despite a 50% peak to trough fall in Spanish property prices.
- Ireland had pre-empted the issue of penal ECB interest rates by “privately” negotiating a deal with the Obama administration to obtain a borrowing facility with the Fed which obviated the need to draw down any ECB funds. The statement by the “hapless” Irish Premier, Enda Kenny, that Ireland would not be drawing down any loans “at unsustainable interest rates” was widely misinterpreted as a threat to go down the Greek road. In fact the Irish government used the Fed funds to buy back Irish Government debt on secondary debt markets at an average discount of 50% because of the panic in Sovereign debt markets as the Greek crisis unfolded. Apparently Goldman Sacks, a key Obama donor, made a killing in fees acting behind the scenes buying back Irish debt at huge discounts on behalf of the Irish Government. Observers at the time often wondered why the Irish Government seemed to develop a knack of making statements which unsettled the markets whenever a sense of calm was being restored. It turned out the Irish Government managed to reduce the Irish national debt by c. €70 Billion by recyling it almost entirely through secondary markets. In addition, that debt is now largely denominated in US$ which looks a good move now that the Euro has achieved a 30% trough to (current) peak revaluation against the dollar since the Greek exit from the Eurozone.
The irony of the crisis is that the Eurozone economy as a whole has done exceptionally well throughout this crisis – first because the crisis kept the Euro artificially undervalued, and then because the crisis forced the systematic reform of the key EU institutions. The European commission was forced to develop, belatedly, a properly funded industrial and energy policy which resulted in a huge increase in infrastructural spending throughout the Eurozone.
The ECB, for its part, was almost dismantled and rebuilt on an entirely new foundation. Many had likened the Irish Government’s decision to appoint Stiglitz and Krugman as economic advisers as just a fit of peek at the refusal of the ECB to grant it a sustainable interest rate on its loans – one in the eye for the “Austrian School” economists who seemed to dominate ECB thinking. But in the end, their role was more akin to that of Keynes at the Bretton Woods conference – completely recasting the way in which Eurozone monetary policy is run.
Gone are the days when the ECB can freely comment on EU Members fiscal policy (where it has little competence) and neglect its primary responsibilities of regulator of European banking activities, market maker, and lender of last resort. Gone are the days when the Eurozone has a monetary authority but no fiscal authority. It is perhaps a particularly sweet irony that the EFTA (European Fiscal transfer Authority) is funded almost entirely from the Tobin taxes brought in on the banking transactions which had, in the past, done so much to destabilise the European banking system in the first place.
And so here we are in 2015 in a situation where the EU economic situation has gone from strength to strength. Irish debt peaked at 109% of GDP in 2013 thanks to a combination of secondary market repurchases and the dollar devaluation, and is expected to decline to as little as 75% of GDP within 2 years. The Greek economy has thrived to the point where it might be welcomed back into the Eurozone – except that the Greeks have absolutely no intention of rejoining.
The substantial increases in EFTA funded infrastructural spending – agreed as a condition of the Irish Government agreeing to a referendum on ECB and financial regulatory reform – have benefited not only the heavily oil dependent PIIGS countries, but the Eurozone as a whole. The underlying strengths of the Spanish and Portuguese economies, allied to a thriving sustainable energy sector, huge EFTA funded infrastructural projects, and almost unlimited access to Euro liquidity from the new ECB have managed to contain the crisis in property prices and even managed to reduce youth unemployment substantially – the other spark which threatened to undermine the whole Euro concept.
The neo-liberal argument, that economic progress required reduced “Government interference” and greater “free-market reforms” has been comprehensively and devastatingly defeated. The monetarist argument that “printing money” must always lead to inflation has been thoroughly debunked. Even Germany has (slightly) overcome its fear of the inflation monster. Now even the US Government is championing the state led “Migeruan” economics which have made this turnabout possible. Hats off to the pioneers of the European Tribune TARA (There Are Real Alternatives – to TINA) project which helped to make these changes possible. The Alternative economics have become a Reality. Such a pity that the European Tribune has just been sold to a Murdoch led consortium for €700 Million…
