D J Webb
I’m lucky enough to have been phenomenally busy with work over recent months, and will be very busy for at least another month. But I want to comment on Greece.
Now, it must be understood that all loans are risk products. The nature of the “business” is that the interest rate charged reflects the risk. Consequently, it is not the case that all loans have to always be repaid. The interest rate reflects the possibility that some loans will have to be written off.
German banks who invested in Greek government bonds before 2008 took the risk. The interest rate on the bonds was low–reflecting market presumptions that, now that Greece was in the euro, it would never leave, and so its market interest rates needed to be only slightly higher than those of Germany.
The risk was a political risk. Deutsche Bank and the others believed the statements of European government leaders and invested accordingly. However, at the end of the day, it was a risk.
Those loans should have been written off at the height of the global financial crisis. Deutsche Bank may have collapsed and Germany may have had to launch its own rescue of its own banking system. However, at the time, the concern was for the health of the global economy. A collapse of the euro in 2008 might have led to a global depression–and so the concern was to save, not Greece, but the European banking industry.
Consequently, the loans were not written off. Instead, in the so-called “bailout”, the IMF, the European Central Banks and other EU governments lent Greece the money to pay back its private-sector loans. Deutsche Bank quite wrongly wriggled off the hook. Germany’s banking industry was bailed out.
Please note for those who claim that the Germans are “sticklers for the rules”, that this is not the case where their own interests are directly threatened. The rules stated there should be no bailouts–and that Deutsche Bank should collapse. All of a sudden, the German obsession with rules evaporated! Funny that!
What happened was therefore that private-sector debts were replaced by official-sector debt. Very little of the bailout money went to Greece directly. Some of it went to recapitalise the Greek banking system (which should have been allowed to collapse too), but most of it went to recycle loans elsewhere in the EU. All this talk of how Greece is a bottomless pit is quite off the mark: the money did not go to Greece!
But official-sector debt is harder to get out of. For a start, the German government, the IMF and others are in a position to inflict revenge if Greece repudiates official-sector debt. And so the problem for Greece was compounded.
In order to maintain the fiction that Greece can afford to pay back these loans, the creditors are insisting on huge primary budget surpluses. This phrase refers to the budget surplus before debt servicing is taken into account. By 2018 Greece has now agree to run a budget surplus of 3.5% of GDP.
This is nonsense, of course! The effort of running such huge surpluses will depress economic growth, and the fall in economic growth will in itself prevent a fall in the debt-to-GDP ratio. This is because the economy is a fluctuating organism: it can grow and contract. After 20 years of fairly rapid economic growth, an economy can become two or three times its original size, thus sharply reducing the stock of debt as a proportion of GDP. Economic growth is the main mechanism by which Greece could shrink its debts relative to GDP. However, frenetic efforts to run huge surpluses will prevent that–and possibly counteract the effect entirely. Greece has seen its public finances come almost into surplus owing to wave and wave of austerity–but the effect since 2008 has been approximately a 28% fall in GDP, which means that the debts are a larger proportion of GDP regardless of its heroic efforts to cut expenditure and raise revenue.
A far more appropriate approach would be to run a primary surplus of less than 1% of GDP, allowing rapid economic growth to do most of the work. However, this would defeat the object of meeting heavy repayments. To allow Greece to run a small budget surplus and grow its way out of the debt burden, a lot of the debt would need to be cancelled now.
Greece weakened its hand by refusing to countenance an exit from the eurozone. Only by threatening to leave the euro and repudiate its debts entirely–thereby crystalling in excess of €300bn in losses elsewhere in the eurozone, plus untold billions in credit default swap liabilities (insurance against a Greek default sold as a financial instrument)–could Greece negotiate from a position of strength.
That would require a willingness to undergo initial pain in the transition to a national currency, before fully regaining national control over their economic affairs. Had the Greek government elected in January placed capital controls on the banking system immediately to prevent capital flight the banks would be in a better position today, and they could have ordered the printing of drachma back then, and defaulted on all the debt repayments they have made this year (repayments that they made only by raiding the national pension fund and local government surpluses).
They played a weak hand atrociously, and are left only a day or two away from total collapse of the banking system, without having any drachma printed, without adequate plans for the issuance of temporary coupons or “scrip”, and having lost their pension funds and surpluses in state-owned companies and local government.
So it seems they tossed away all the advantages they could have exploited, and they have now agreed to cut pensions, raise VAT, run surpluses of 3.5% of GDP, place €50bn in a fund to be overseen by European creditors, allow international supervision of the government, legislate to provide for automatic budget cuts if revenue fails to meet expectations, and much else…
Many of these reforms are desirable in themselves. Privatisation is a worthy aim, although better undertaken in circumstances other than a firesale. Slashing unnecessary spending is also a desirable aim. But in the context of a 28% fall in GDP, and in the context where these reforms are being implemented in a non-fiscally neutral way, in order to achieve a large primary budget surplus, this is simply madness.
Bitterness in Greece is quite justified. They have been shabbily treated. It doesn’t really make any difference that corruption in Greece is part of the reason why they got themselves into difficulties. In the end, their debts should have been written off in 2008–with Germany bearing the brunt of the unwise investment decisions of its banking industry.
Consequently, the wider issue for me is the position of Germany. It seems to me that following the reunification of Germany, and particularly with the eurozone crisis, Germany has unwisely been engaged in tearing apart the legacy of Adenauer in rehabilitating Germany as a normal country.
Think about the Irish bailout, where Irish attempts to “burn the senior bondholders” in Irish banks (German and French banks) were not accepted. Instead, the foolish investment decisions of German and French banks became an obligation of the Irish taxpayer, with Irish budget plans being sent first to Berlin–not even Brussels–for approval. Reunited Germany has effortlessly slipped back into imperial mode. The rules are all jettisoned when German interests are threatened, it seems.
I am dismayed by the attitude of the German government, which has sought to pile up difficult demands on Greece in a way that would force its exit from the eurozone. In the end, Greece has meekly complied with everything. But the likelihood is that the issue is not solved. We will be back here again in 2018, with an even larger debt pile to be written off.
Partly for these reasons, I was surprised and taken aback by the Queen’s comments in Germany on the complete reconciliation between Germany and Britain. Germany is a strategic rival of Britain. It is naive to view international relations in any other way. The period of German quiescence lasted from 1945 until 2008. That is now over. We must not view international relations in a childish manner.
I feel instinctively that the Western Alliance survives through inertia: why are we in NATO? why are we in the EU? Why do these organisations exist at all? I have recently stated that the referendum to leave the EU is a trap for patriots, because it is designed to consolidate our membership, and because it relies on the fact that eurosceptics have not agreed on a libertarian economic policy that alone could make a British exit from the EU a success. But let’s face it! NATO and EU won’t last for ever–and I look forward to their collapse!