by Florina Vevera
The IMF has yet to approve the temporary deal which should keep Greece afloat till April. Apparently it would like a document with more precise commitments than those in the letter to the EU Commission and the Fund.
The Greek government, which lately has shown more realism, can organize as many votes and general elections as it wants: this will have no effect on its eurozone partners who simply want to be clearer that they are about what Athens is prepared to do. The eurozone is not alone in this affair as the funds allocated to Greece under her rescue plan have been matched by the IMF: both organizations have agreed not to act independently of each other.
What Greece owes its eurozone partners is not that high compared with the bloc’s resources. But allowing Greece to get away with flouting central euro rules would create a precedent that much larger economies such as Spain or even Italy would be tempted to take advantage of under pressure from far-left movements such as Podemos in Spain, as well as far-right ones which resort to the same populist demagoguery as the far left.
Greece will be unable to pay government salaries. It is however likely that Greece will be granted some more money if she comes up with a credible plan and an absolute commitment to honor it. Otherwise it will be default and most probably Grexit. This should not have as a consequence Greece exiting the EU but only the Eurozone. Also, a Grexit should not seriously endanger the euro, but actually, after a time, strenghten it.
The US is pushing the EU towards a deal, worried about the possibility of having a failed state emerge in Europe. But the EU replies that the US is not prepared to put its money where its mouth is.
This is fascinating, but a well known situation. Some say it doesn’t really answer the question “At what cost do we contiue the EU?”
The cost of keeping the EU, even the euro, far outweighs that of ditching them. It is interesting to note that the EU institutions and the EU itself are (officially) the direct successors of the European Recovery Program (ERP) – unofficially of the Marshall Plan. The ERP aimed at rebuilding war-devastated regions, removing trade barriers, modernizing industry, and make Europe prosperous again. It required bringing down the barriers between European states, getting rid of the incredible amount of red tape constraining business, encouraging an increase in productivity, labor union membership, as well as the adoption of modern business procedures. (It is worth noting in that last point that two rather conservative generals, Douglas McArthur in Japan and George C. Marshall in Europe, were in some way the fathers of post WW II free, noncommunist labor unions, with the help, they must be mentioned, of George Meany and Jay Lovestone). The union of Europe was beneficial to the US in at least two different ways: by allowing European not to starve, it made them less prey to Communist and Soviet enterprises, and by creating a single, large market, it made things much easier for American industry. One should not be surprised that the US is sometimes more European than the European themselves: see for instance US warnings to the UK not to leave the EU (a Republican administration would have issued the same warnings).
Uniting a continent made up of old nations, speaking different languages, that have been at war with each other for centuries, was no mean feat. The current difficulties are dwarfed by the achievements, though people quickly forget what these are. Technologically Europe was far behind the US then: this affected not only industry.
George C. Marshall had the foresight to understand that an Europe that would remain divided in small countries would recover only slowly (the roles of William L. Clayton and George F. Kennan should also be mentioned, as well as those of European politicians with “Atlanticist” views, Jean Monnet and Robert Schuman). Paul Hoffman, head of the Economic Cooperation Administration, told Congress in 1949 that Marshall aid had provided the “critical margin” on which other investment needed for European recovery depended. The Marshall Plan was one of the first elements of European integration, as it erased trade barriers and set up institutions to coordinate economic policies on a continental level: it stimulated the total political reconstruction of Western Europe. Who remembers that the OECD, previously OEEC, with responsibilities that later extended to the whole of the industrialized world, was an international agency created to administer the Marshall Plan?
There was also the objective of not resuming the cycle of continental and world war that plagued Europe for so long. The cornerstone of early Europe, the European communities (the European Coal and Steel Community (ECSC), the European Atomic Energy Community (EAEC or Euratom), and the European Economic Community (EEC)), was the agreement between France and Germany that a solid foundation for peace was to be established, and that the strongest foundation would be economic integration. France needed a large market for its agriculture (as well as subsidies as it was not very productive), Germany for its industrial goods.
Though European unification started before them, the main impetus for a political Europe came from Charles De Gaulle and Konrad Adenauer. Since those times, although Germany and France often disagreed on economic matters, politically both countries kept closely aligned, to the point where critics said that Europe was jointly governed by those two countries at the expense of others. The only serious, short-lived political difference came when the Berlin Wall fell, and both François Mitterrand and Margaret Thatcher wanted to slow down the reunification of Germany, prisoner as their minds were of pre-WW II history. After a short hesitation, George HW Bush, advised by Brent Scowcroft and Condoleeza Rice, came down on Helmut Kolh’s side.
The benefits of European integration can be best seen in smaller economies like Portugal and Ireland, or even larger one like Spain, whatever their current difficulties which will be overcome. Before entering the EU, Spain and Portugal had barely entered the 20th century. Since we can’t rewrite history, it is difficult to evaluate how they would have fared without European integration, but it can be shown that they enormously benefited from it. This is not realized by some, who mainly see the US-originated 2008 financial crisis and the 2009 euro crisis that isn’t fully finished yet.
Norway and Switzerland did quite well, without the EU, but this was due to a particular set of circumstances. Let’s simply say that offshore oil in Norway and the role of Switzerland as an international financial and banking center, played a major role.
The Euro, the main proponent of which was France (Germany was quite keen on continuing with the Deutschmark initially), was seen as the missing component of European economic integration. It eliminated the exchange risk as well as a lot of red tape, and presided over a steep increase in intra-Eurozone trade. The problem however was that while a central monetary agency was put in charge of managing the Euro, fiscal policies remained a national prerogative. The contradiction was solved with the so-called Maastricht convergence criteria, which set maximum limits on budget deficit-to-GDP and debt-to-GDP ratios, so that no Eurozone member state can try to live at the expense of the other members. Alas, the necessary discipline was enforced in a lax way, with Germany and France being the first to cheat (but in a small proportion relative to their wealth), but smaller countries doing the same with a vengeance, so that they built an enormous structural (ie unrelated to the business cycle) budget deficit and a debt exceeding their GDP (the case of Spain is different and is much more linked to untimely -ie just before the 2008 financial crisis- huge investment in tourist-oriented real estate investment).
The problem with voters – and governments whose main concern is the next election – is that they only take the short view. This is understandable of ordinary citizens when they are unemployed, see their standard of living dwindle, etc, but less so of governments. But these same governments are elected by those same ordinary citizens, hence the conundrum. Only statesmen with superior leadership qualities can steer their citizens toward accepting temporary sacrifices for medium term benefits. In the EU there is currently in my view only one acceptable leader, Angela Merkel. But she is no Churchill. Only a Churchill could tell his fellow citizens: “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” Perhaps this is now the beginning of the end of the Eurozone crisis, but not yet the end. As for the crisis with Russia, this is just the end of the beginning.
Europe is not a nation and will most probably not become one, it is an economic and to an extent political union of nation-states with a different history (even though they do have also a common history) and languages. The idea of a federal Europe (which would not abolish nations) remains rejected by a majority of Europeans.
Today’s Eurozone has little to do with post-WW II Europe. Inside the Eurozone the fiscal policy rests with the member states while monetary management is centralized. This creates a contradiction that was resolved by the framers of the Euro by setting caps on budget deficit-to-GDP and debt-to-GDP ratios. The lesson of the Greek crisis was that there were no mechanism for seriously enforcing the rule, hence the fiscal compact that provides for pre-vetting of national budgets by the EU Commission. The Euro mechanism is such that if a Eurozone member starts running a high budget deficit, it actually starts living at the expense of less profligate member states. And if everyone runs a high budget deficit, the Euro sinks.
The Greek question is simple in its principle, even if some details are complex. Greece lived beyond her means, spending far more than she earned, going as far as doctoring her national accounts, until one day she could no longer meet her monthly dues. This is when it was at last realized that the Emperor had no clothes. The only solution was a bailout plan, with contribution from both the ECB and the IMF. Greece urgently needs more money, and this will be provided to her, within reason, but only if she doesn’t make a turnaround and proposes to sharply increase government spending. Doing so it would create another crisis.
Deflation is a currently danger, but only at the Eurozone scale: with a single currency, there is no such thing as local inflation. We need to take into consideration the current ECB anti-deflationary policies which use quantitative easing and purchases of government and corporate bonds on the secondary market (buying bonds directly from government would violate the Lisbon Treaty which forbids monetarization of debt). This has yet to produce effects, except on the Euro which is going down relative to the US dollar because of Eurozone QE in parallel with the ending of US QE.
JM Keynes showed that the effect of an economic crisis (in his time caused essentially by excess production compared to shrinking demand) could be curbed by incurring a budget deficit when the economy is at the bottom of the budget cycle, but he certainly never advocated not curbing structural deficit, that which is related not to the business cycle but to structural flaws in the economy – let’s say low competitiveness resulting from rigid rules, a non-responsive banking system, a rigid labor market, etc. The Greek deficit is essentially structural -eg a bloated public sector, inefficient tax collection, all sorts of rigid rules. If these continue whatever money is poured in by Eurozone institutions and the IMF or foreign lenders, the deficit will only continue to grow and “austerity” will indeed become counterproductive.