7th February 2015

Greek debt

Where emotion has trumped logic

Following the election of SYRIZA numerous commentators have made the point that austerity is not working. They point out that Greek debt rise from 120% of GDP to 177% since the crisis has begun with the economy shrinking by a quarter. For many it's a wonder that the Greeks stuck at it for so long but the Germans are not having any of it. When German politicians speak there is indignation that the Greeks should be let off their debts or even the notion that they could challenge this failed medicine. When these policies are even impacting on the German economy pride is clearly overruling logic. Their indignation is made worst when they are reminded that Germany was in similar position to Greece following the Second World War. These politicians may have a right to be annoyed over this last point, as the war was a long time ago and they do not have to keep apologising for it but they are wrong to ignore the lessons of history. The United States on the other hand has learnt, by using both Keynesian and Monetary tools to drive growth whereas Europe follows the policies of a penny pinching miser that were discredited in the 1930s.

Why the difference? Economic theories do go in and out of fashion and Keynes has suffered from this, especially as these demand based policies proved less effective in the 1970s. Since then the pendulum has swung to the more supply based theories of the market. However this is a topic that is ridden with ideology and there is a desire among some of advocates for the market to disprove Keynesian theory with this depression provided a convenient opportunity. If the performance of the US compared to Europe is anything to go by that argument would appear to be settled now. But still these supply-siders remain in control and continue with their policies of austerity in the hope that they will succeed in the future. These market theories also play well to Germany's deep neurosis over a strong currency stemming from the hyperinflation of the 1920s. Printing money did play a part in that episode but it was the demands for reparations by the allies that were the real cause. With the French in the vanguard the allies sort to punish the Germans for the First World War such that the payments in goods and money were so large they could not even make the first payment. Keynes argued against it but as today emotion trumped logic. The loss of so much wealth is inflationary and so it proved. The situation was made worse by nationwide strikes and state sponsored sabotage following the French occupation of the Ruhr. Ultimately the terms of repatriations had to be renegotiated and once they were more reasonable inflation fell away.

The austerity imposed on the whole Europe is causing the same loss of wealth that those excessive repatriations did. There may not be inflation but people are significantly poorer, have lost their savings which has been accompanied by a rise in right wing parties and movements, even in Germany. The tragedy is that that the Treaty of Rome, the predecessor to the European Union, was to set up to prevent the events like this that would lead to another European war. History rarely repeats itself exactly but as with the aftermath of the First World War the Greek's democratic reaction has turned to the radical but peaceful left, SYRIZA. Should they fail then this may leave the far right as the only remaining option. Even if more moderate forces maintain control we could see the breakup of the Euro and even the Union itself. If that were to happen then anything is possible. One would hope that our leaders would be able to diffuse the situations but the outbreak of civil war in Ukraine and the rhetoric that has accompanied its gradual escalation would suggest otherwise. We are a long way from the abyss but using the lead up to the Second World War as a timetable then it could be as little as 5 to 10 years away. Some may hope that the European economy may pick up before then but with a continuation of low interest rates, tight monetary control and austerity this is unlikely to happen.

As Europe chooses to protect the value of money rather than its citizens our leaders have clearly failed. Will we need another European war to relearn the hard lessons of our grandfathers and great grandfathers?

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