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.

As the crisis in Europe deepens and casts its shadow across the world’sfinancial markets, the debate over the future of the euro – morecorrectly, over the European Monetary Union that is represented by theeuro – becomes more intense. Many economists, on both sides of theAtlantic, now claim to have warned that the EMU project was doomed fromthe outset.
In some cases, this claim is true. But that’s of little consequencecompared to the overriding issue of whether the substance of thewarning is valid; in other words, is the euro doomed?
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 itis 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 thecountry’s monetary autonomy by giving it back its own currency andinterest rates. That way, it can follow a path suitable for its ownextreme needs, rather than remaining straitjacketed in a framework inwhich it is a marginal player.
It seems fair to say that the financial markets are now convinced thatGreece must default and restructure its debts. This conviction istempered by the determination of the rest of the EU, as well as theIMF, to stand behind Greece and support it with as much money as isnecessary to prevent a default. (The price tag has quadrupled in thelast two weeks but, at €110 billion, is still considered too low by thebond 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 overGreece, the markets will move on to Portugal, Spain and other weakcountries and drive up the overall cost of support to levels that eventhe entire EU will find hard to accept.
This is a valid, but narrow, way of looking at things. It gives aheavier weighting to the financial aspect than the economic one, whichis surely putting the cart before the horse. Even from a purelyfinancial viewpoint, it is clear that the EU needs to support Greece toprevent “contagion” and thereby defend the euro and EMU structure. Tothis end the Europeans are forcing Greece to accept very draconianconditions that will cause the Greek populace great pain and ensurethat the Greek economy suffers massive damage.
Funnily enough, instead of swallowing their medicine gracefully, theGreek people are seriously unhappy about the fate being imposed on themand are rampaging on the streets of Athens. The mainstream mediapresent the demonstrators as barbarians and the EU/ IMF bureaucrats assaviors, whose good intentions are being spurned and good work thwartedby the Athenian mob.
This highlights the interplay of economics and politics. The originalconcept of the “polis” – the very terminology we use in this and otherdebates is Grecian! – envisaged a political entity ruled by its body ofcitizens. That is the opposite of the case in Greece today, as it isnot 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 leadershipelite, whose headquarters are in Brussels, Frankfurt and Luxembourg. Asthe crisis intensifies, the populace is increasingly in revolt againstthis leadership.
In Greece, the ostensible source of the friction is economic policy,but the real substance is whether the economic policy being adopted inGreece serves the best interests of the Greek people or is mortgaged tothe interests of Greece’s paymasters in Brussels. Ireland is nodifferent – except that the Irish tradition is not to riot and burn butsimply to emigrate.
Yet the historic record of countries undergoing severe crises – forinstance, Israel in the mid-1980s – is that they can recover, and quitequickly at that. The essential condition for this to happen is thatthere be a political consensus over what needs to be done, which hasthe support of all the main political parties and social groups in thecountry.
A current example of this actually happening seems to be Latvia, wherethe people are prepared to swallow a fierce austerity package ratherthan fall back into the maw of the Russian bear. But it is nothappening in Greece, at least so far, presumably because the incentiveto wear a hair shirt for several years is lacking there.
These examples suggest that even politics, in the narrow and short-termsense of the term, is not enough to explain how severe crises play outand whether countries come out of them severely weakened or, aftersuffering through them, strengthened both socially and economically.What really matters are fundamental issues of cultural identity andnational pride: the kind of stuff that bankers who can’t see fartherthan their excel sheets and economists bound by theories of rationalbehavior simply cannot relate to and hence find easier to ignore.
But in Europe, where historical memories are measured in centuries andmost peoples’ identities extend over millennia – without whichcountries like Greece simply wouldn’t exist – these are the bedrockissues.
At least they are in countries, such as Greece, which are stillethnically and culturally homogeneous. As demographic trends eat awayat the racial and cultural core of many European countries, even thebedrock may collapse. But what’s for sure is that the current noiseabout money and markets is just the most superficial and external levelof what this crisis is really all about.