Much more than money

Many economists now claim to have warned that the European Economic and Monetary Union (EMU) project was doomed from the outset.

By PINCHAS LANDAU
May 6, 2010 21:53
4 minute read.
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euro882. (photo credit: )

 
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As the crisis in Europe deepens and casts its shadow across the world’s financial markets, the debate over the future of the euro – more correctly, over the European Monetary Union that is represented by the euro – becomes more intense. Many economists, on both sides of the Atlantic, now claim to have warned that the EMU project was doomed from the outset.

In some cases, this claim is true. But that’s of little consequence compared to the overriding issue of whether the substance of the warning is valid; in other words, is the euro doomed?

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The answer you get depends a lot on the prism through which you look. If your vantage point is financial, or even simply accounting, then it is all too easy to come to the conclusion that Greece is a basket case, effectively unsalvageable because it is fundamentally insolvent.

An essential condition for reviving the Greek economy is to restore the country’s monetary autonomy by giving it back its own currency and interest rates. That way, it can follow a path suitable for its own extreme needs, rather than remaining straitjacketed in a framework in which it is a marginal player.

It seems fair to say that the financial markets are now convinced that Greece must default and restructure its debts. This conviction is tempered by the determination of the rest of the EU, as well as the IMF, to stand behind Greece and support it with as much money as is necessary to prevent a default. (The price tag has quadrupled in the last two weeks but, at €110 billion, is still considered too low by the bond markets, which continue to dump Greece debt.)

But the conviction remains that the end result will be a Greek default, because in the giant poker game under way, if the EU doesn’t fold over Greece, the markets will move on to Portugal, Spain and other weak countries and drive up the overall cost of support to levels that even the entire EU will find hard to accept.

This is a valid, but narrow, way of looking at things. It gives a heavier weighting to the financial aspect than the economic one, which is surely putting the cart before the horse. Even from a purely financial viewpoint, it is clear that the EU needs to support Greece to prevent “contagion” and thereby defend the euro and EMU structure. To this end the Europeans are forcing Greece to accept very draconian conditions that will cause the Greek populace great pain and ensure that the Greek economy suffers massive damage.

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Funnily enough, instead of swallowing their medicine gracefully, the Greek people are seriously unhappy about the fate being imposed on them and are rampaging on the streets of Athens. The mainstream media present the demonstrators as barbarians and the EU/ IMF bureaucrats as saviors, whose good intentions are being spurned and good work thwarted by the Athenian mob.

This highlights the interplay of economics and politics. The original concept of the “polis” – the very terminology we use in this and other debates is Grecian! – envisaged a political entity ruled by its body of citizens. That is the opposite of the case in Greece today, as it is not the case in Ireland and will soon not be the case in other small- or medium-sized European countries.

The leadership of these countries is part of the European leadership elite, whose headquarters are in Brussels, Frankfurt and Luxembourg. As the crisis intensifies, the populace is increasingly in revolt against this leadership.

In Greece, the ostensible source of the friction is economic policy, but the real substance is whether the economic policy being adopted in Greece serves the best interests of the Greek people or is mortgaged to the interests of Greece’s paymasters in Brussels. Ireland is no different – except that the Irish tradition is not to riot and burn but simply to emigrate.

Yet the historic record of countries undergoing severe crises – for instance, Israel in the mid-1980s – is that they can recover, and quite quickly at that. The essential condition for this to happen is that there be a political consensus over what needs to be done, which has the support of all the main political parties and social groups in the country.

A current example of this actually happening seems to be Latvia, where the people are prepared to swallow a fierce austerity package rather than fall back into the maw of the Russian bear. But it is not happening in Greece, at least so far, presumably because the incentive to wear a hair shirt for several years is lacking there.

These examples suggest that even politics, in the narrow and short-term sense of the term, is not enough to explain how severe crises play out and whether countries come out of them severely weakened or, after suffering through them, strengthened both socially and economically. What really matters are fundamental issues of cultural identity and national pride: the kind of stuff that bankers who can’t see farther than their excel sheets and economists bound by theories of rational behavior simply cannot relate to and hence find easier to ignore.

But in Europe, where historical memories are measured in centuries and most peoples’ identities extend over millennia – without which countries like Greece simply wouldn’t exist – these are the bedrock issues.

At least they are in countries, such as Greece, which are still ethnically and culturally homogeneous. As demographic trends eat away at the racial and cultural core of many European countries, even the bedrock may collapse. But what’s for sure is that the current noise about money and markets is just the most superficial and external level of what this crisis is really all about.

landaup@netvision.net.il

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