By Adam Stromme
A dramatic impasse that has stretched back for years could very well come to a head by the end of this week. Absent a deal between the international creditor organizations referred to collectively as the Troika– consisting of the International Monetary Fund (IMF) European Central Bank (ECB) and the European Financial Stability Facility (EFSF)– it is certain that something will have to give: either the creditors will have to relent and restructure, or Greece will be forced from the European Union entirely. Either way, there doesn’t seem to be any room for compromise for members of the European Union. Yet of these two options the former is far less destructive, but would amount to political suicide for the engines of the European economy, mainly Germany.
How did we get to this point?
Many forget that in the early days of European integrationism– well before the days of the unified currency– there was initially only six countries in what would eventually become the Eurozone: Germany, France, Italy, Luxembourg, the Netherlands, and Belgium. As the union began to expand further and further, requirements such as the Copenhagen Accords on human rights and economic considerations were added as criterion for membership to compensate for the disparity in development between old and newly arriving Eurozone nations.
With the introduction of the Euro in 2002, and the effective marrying of monetary policy for the entire region, coordinating the increasingly unwieldy economic union in particular proved even more difficult. This largely owes to an economic imbalance between the export heavy economies to the north and the import or tourism oriented countries to the south, like Greece. The result is macroeconomic unbalance on a massive scale.
Here’s how it works. In a Europe with only national currencies, countries that export heavily increase the demand for their currency, which people need in order to purchase their goods. As the demand for that nation’s currency increases with a fixed supply of the money in circulation, the real exchange rates rise– i.e. the money itself becomes more valuable than other currencies– meaning that production beyond a certain point becomes uncompetitive as the real cost of wages and production rises. This is the irony of having competitive high grade export based economies, and is referred to as “Dutch Disease” after the economic collapse that currency appreciation from newly discovered sources of natural gas exports wrought upon the Dutch in the 1960’s.
The way to avoid “Dutch disease” is to attempt to fix or link your currency to something that will not appreciate as much as an independent national currency might: that’s where Greece and the periphery come in. That’s also why the Chinese– a heavily export based country– peg the value of their currency, the renminbi, to the dollar. Its also why they are so invested in keeping the value of the dollar high, and consequently buy up trillions in U.S. bonds to keep the value of the dollar above their own currency. This phenomenon has led to an interlinking of the Chinese and U.S. economy that British historian Niall Ferguson calls “Chimerica.”
In the case of the Eurozone however, this interlinking is much more perilous for a number of reasons. First, because the imbalance cannot be easily balanced out. Unlike Greece, the United States still has a gargantuan share of the world’s economy. At around 20% of global production, its economy alone is almost the same size as the entire Eurozone. This, alongside its status as owning the world’s reserve currency, enables it to handle chronic trade deficits with much greater ease. The increasingly smaller and less developed countries entering the union present themselves as weights holding down the appreciation of the Euro by all holding the common currency while simultaneously risking becoming systemic risks as they continue to rack up debt that they cannot grow or inflate their ways out of, as has historically been the case.
The way to avoid “Dutch disease” is to attempt to fix or link your currency to something that will not appreciate as much as an independent national currency might: that’s where Greece and the periphery come in
Greece is at the forefront of this phenomenon, and preserving the subsidization effect that periphery economies have on creditor nations such as Germany is precisely why its debt woes are placed in such stark terms. Put simply, a large part of the reason for the very deficits and debt burdens of the southern European countries like Greece is that their spending goes to buy the exports of the Eurozone center, and not promote domestic growth and production.
For every exporter, there must be an importer.
This fact, and the strongly interconnected nature of the European economies to begin with, help to shed light on why the debt problem has continued to be so intractable, and why creditors are so hawkish on surplus spending which could harm the current relationship. Make no mistake, the creditor nations are well aware of the fact that from a purely fiscal perspective, there is no possible way for Greece, let alone many other Eurozone governments, to pay their debt without a compromise in spending to foster growth. Greece’s debt is 175% of GDP, and austerity– like every other instance its ever been used— has only made it larger.
But allowing debt restructuring would risk setting a precedent for other governments and would risk crowding out private investment. Banks and businesses, flush in cash, do not want the smaller governments to take a greater role in picking up the pieces from the slow speed disaster, instead wanting to find ways to invest and profit from the disaster in what Naomi Klein aptly refers to as “Disaster Capitalism”.
[Greece’s] debt is 175% of GDP, and austerity–like every other instance its been used- has made it larger.
That is why there is such a strong incentive to cast the ruling Syriza party in Greece as a bunch of firebrand, radical “Communists.” In many ways, the mandate that Syriza came to power with was unprecedented in its frustration, anger, and militancy, but that could only be expected from a country that has seen well over a quarter of its income disappear– five times the levels the IMF told it to expect— and drug use and poverty rampant throughout the idle country. Despite poverty rates over 44%, news outlets such as The Economist continue to deride the inflexibility of Syriza, which “balks” at the terms it is given, despite the fact that that is precisely the mandate that the coalition was given to govern in the first place.
In reality, there is very little that is radical about the principles of Syriza. Its demands do not consist entirely of debt forgiveness or even debt restructuring, but rather the assertion that the creditors lack the right to completely ban collective bargaining, cannibalize the state welfare system, privatize landmarks, cut pensions (again), or demand repayment without similar ties to growth. Its Thessaloniki program— which is worth a read for context– is thoroughly mainstream Keynesianism and saw many of its key attributes implemented in a less democratic fashion by the very governments and economies that now are demanding their payments unconditionally.
And so we now stand at a moment where the principles and even the very unity of the Eurozone is under question because the countries that are systematically disadvantaged refuse to pay without deference to a democratic mandate. A true compromise will require an adjustment, and without compromise the parties risk compromising the whole Eurozone. And as economist James Galbraith Jr. plainly stated: “new loans for failed policies” is, for the creditors, “no adjustment at all.”