Thoughts on Greece

I love the European Union — it has achieved so much for normal European citizens: Peace, the freedom to travel and (in many cases) prosperity. I also love the idea of a common European currency — although it was terribly exciting as a kid to get exotic notes and coins when travelling, it also made it hard to compare prices and salaries across borders. Indeed, back in the year 2000, I was very active on the Yes side when Denmark held a referendum about joining the Euro (it was narrowly defeated).

However, the EU I liked the best was Jacques Delors’s Commission-run project. Since then, the European Council (where the heads of state get together in private) has taken the lead, and idealism and democracy has suffered.

The EU has disappointed me in at least three regards recently:

Firstly, Barroso and several other European politicians took part in Project Fear’s scaremongering in order to persuade us to remain within the United Kingdom. Given that almost everybody on the pro-independence side supported continued membership of the EU, whereas many people on the No side were already discussing how and when to leave the European Union, that struck me as being rather foolish, short-sighted and undemocratic.

Secondly, the Mediterranean refugee crisis has revealed a huge lack of European solidarity. It’s clear the numbers that arrive in Italy are far too high for one country, but spread across the EU they would be very manageable, and yet lots of countries refuse to do their bit.

Thirdly, the way Greece has been treated has been an unmitigated disaster, not just for Greece but for all of Europe.

The EU has to work in the interest of normal Europeans citizens, and that’s simply not happening in Greece. Normal people are suffering, to a large extent because their former governments borrowed a lot of money and gave it to their rich friends (such as international bankers).

I completely understand that other European countries are worried about moral hazard. Of course you don’t want a situation where a country can simply borrow money and then refuse to pay it back without any negative consequences. However, punishing ordinary Greeks for a century is a rather extreme way to avoid moral hazard, I would have thought.

At the moment, what benefit does Greece actually derive from being part of the Euro? As Frances Coppola put it recently
in Forbes:

Any country can use the Euro as its currency, whether or not it is a member of the Euro. And some do: Montenegro, for example, and Kosovo are both Euro users though they are very far from being accepted into the EU, let alone becoming Euro members. So what distinguishes a Euro member from a Euro user?

Normally, the distinction between a sovereign currency issuer and the (foreign) user of a currency is that the sovereign currency issuer has complete control of the money supply, whereas the user must earn, borrow or buy its currency from external sources. But Greece cannot be considered a sovereign currency issuer. Its central bank can only issue the amount of Euros that the ECB allows it to. That amount has just been frozen by the ECB. Greece must now borrow, buy or earn additional Euros from external sources. That is what currency users have to do, not currency issuers. So Greece has no control of its money supply. It is as if it were using a foreign currency as its domestic currency.

Bloomberg reports that Bulgaria, which is not a Euro member but backs its currency with Euro reserves, has just been allowed to borrow from the ECB at the same rate as Euro members, thus enabling it to firewall its banks from Greek contagion. This is a privilege normally only accorded to Euro members – and it has been WITHDRAWN from Greece. If this is true, then Bulgaria (non-Euro member) can obtain Euros from the ECB while Greece (Euro member) cannot. It is hard to see what benefit Greece’s Euro membership confers, apart from redistribution of seigniorage receipts.

I’m not saying that the best solution would necessarily involve giving a lot of money to the Greek state. Perhaps it’d be better if the Greek banks were to be taken over by the EU, for instance. Or perhaps Greek pensions could be paid by the EU instead. It might be worth looking at what the US would do if a state went bust, or what Germany before 1999 would have done if one of its Länder had done so.

However, some kind of debt foregiveness must surely play a part when a country cannot realistically pay back its debts ever. And Germany of all countries shouldn’t be vetoing it. As the French economist, Thomas Piketty, said to Die Zeit:

When I now hear the Germans say that they deal with debt in a very moral way and firmly believe that debts must be repaid, then I think: What a big joke! Germany is the prime example of a country that has never paid its debts. It can teach other countries no lessons. [Wenn ich die Deutschen heute sagen höre, dass sie einen sehr moralischen Umgang mit Schulden pflegen und fest daran glauben, dass Schulden zurückgezahlt werden müssen, dann denke ich: Das ist doch ein großer Witz! Deutschland ist das Land, das nie seine Schulden bezahlt hat. Es kann darin anderen Ländern keine Lektionen erteilen.]

I can’t help thinking that a lot of the differences between the approach taken to Greece comes down to national bankruptcy laws. In Denmark (and Germany, I believe), if you go bankrupt, you will never be entirely free of your debt. I know of people who did something silly in their twenties, got landed with a huge debt, and a result they’ll never be able to buy a house ever — bankruptcy laws are mainly concerned with ensuring that you’re allowed to keep enough money every month to survive. In English-speaking countries, on the other hand, a bankruptcy actually cancels most of your debt, and you’ll be able to start from scratch with a blank slate.

Apart from cancelling debts, the threats have to stop. In a federal state (and that’s more or less what the Eurozone is today), you cannot expect similar political parties to be in power in all parliaments all the time. (In fact the past twenty years have probably been rather exceptional in that regard, because of the way the Social Democratic and Conservative parties became so similar after the collapse of Communism.) The various treaties and constitutions have to be designed in such a way that things don’t collapse in a heap simply because some neo-Marxists get into power in Greece. That said, even inside the UK most politicians seem to be struggling with finding the right response to the rise of the SNP, so it’s not simply a European problem.

The way the majority of EU countries are acting at the moment, I wouldn’t be surprised if Greece eventually decided it’d be better to leave the EU completely, and that would be really dangerous for the rest of us, given the instability of the geopolitical situation at the moment. Europe really needs to get its act together!