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Smoke and Mirrors and tear gas
Apr. 25th, 2010 12:59 pmThe amiable optimism displayed by the economically naive powers-that-be in the EU when they announced a "safety net" for Greece seemed remarkably unperturbed at the end of last week, despite the previous belief that the mention of the existence of a safety net would obviate the need for its use.
When it became clear that the markets would not lend to Greece at anything like a rate that would make its recovery possible, Greece rang the "emergency" bell. The day when Greece becomes the first eurozone country to default edged a little closer.
But it's still all a bit messy. €45bn sounds like a lot, but it's only a sticking plaster for Greece, which is probably about €180bn in the hole. And the details face political pressures in two important places -- Greece and Germany.
The Germans are being, well, the Germans, about this. For the past eight years or so their factories have produced well-made products, which the Greeks have bought, with promises to pay. Yes, this is the old "We'll count it at 100% even though you haven't paid yet" situation.
The Germans have hailed the export-led economic boom, have bought their new Mercedes (in the north) and BMWs (in the south) after all of these exports went to Greece, in the blithe assumption that all of the goods it had exported would be paid for as promised.
Unfortunately, Greece doesn't actually appear to produce anything in return. They'd been importing all those German cars and washing machines and vacuum cleaners without any underlying ability to pay for them.
So, the Germans see no reason why they should "bail out" the Greeks, while the Greeks see no reason why they should spend 10 years not getting any new German stuff and, on top of that, actually paying for the 10 years of German stuff that they have already got.
Of course it's all more complicated than that. Greece does make some stuff, and it doesn't import all of its stuff from Germany, but basically the gist is there. Germany's economic boom rested on a balance of payments surplus, which requires other countries to have a balance of payments deficit, and eventually either this has to come back into balance or someone else has to default. The IMF and Germany want it to come back into balance. The Greeks, I suspect, would like to default (or, to put it another way "renegotiate" with a level of "debt forgivenness").
In economic terms, it isn't complicated. What's interesting is that economics now comes into conflict with politics. While Merkel and Papandreou might understand all of this, and be willing to agree to a compromise, Germany and Greece happen to be democracies, and so they have to carry their respective parliaments with them. And, more importantly, those parliaments have to carry the people with them.
Whis is where the problem lies. "Austerity measures" and "Debt forgiveness" (which in turn requires sacrifices by the forgivers) still require, in Hobbesian terms, acceptance by the people. You can push the people only so far in a democracy.
So, what if there is no compromise available here that is acceptable to the Greek people and to the German people? Well, Greece and Germany won't go to war. That was a nice 19th century solution, but doesn't really play today. More likely is an end to democracy in the country with the least democratic tradition -- in this case, Greece. The new government could be revolutionary (debt gets torn up, lots of bluster and shouting) or authoritarian (debt gets paid through enforced austerity).
Annd here the army is a factor. One key reason for armies taking over is also economic -- if you try to cut their budget. This is one case where the sword is mightier than the pen.
All of this mess is our own fault -- we encouraged a credit boom that was unsustainable for the next generation. We can hardly moan if the next generation says "bollocks to this" and finds some other solution to sweet and nice democracy.
Democracy itself is a rather narrow spectrum of politics, in that it requires a certain level of wealth and a high level of commonality. Frequently the solution to keeping democracy alive is subsidies -- wheat is a common one —- but we hadn't spotted that the same technique was used in the first world. But rather than subsidising the price of bread (or tortillas) we "subsidised" consumption through the creation of asset bubbles.
The downside to this is the same as when you try to withdraw or reduce the subsidies -- any developing country can tell you that a subsidy on the price of wheat is easy to introduce (and poltiically popular), but you are only creating a rod for the back of democracy further down the line.
However, I have been pleasantly surprised by the extent to which the people of two countries (Spain and Ireland) seem to have realized the extent of the problem and have been willing to knuckle down to beat it. I only hope that the UK is equally realistic when the shit hits the fan. Greece, I fear, certainly won't be. I'll give Papandreou two years at the outside and democracy in Greece no more than four.
______________
When it became clear that the markets would not lend to Greece at anything like a rate that would make its recovery possible, Greece rang the "emergency" bell. The day when Greece becomes the first eurozone country to default edged a little closer.
But it's still all a bit messy. €45bn sounds like a lot, but it's only a sticking plaster for Greece, which is probably about €180bn in the hole. And the details face political pressures in two important places -- Greece and Germany.
The Germans are being, well, the Germans, about this. For the past eight years or so their factories have produced well-made products, which the Greeks have bought, with promises to pay. Yes, this is the old "We'll count it at 100% even though you haven't paid yet" situation.
The Germans have hailed the export-led economic boom, have bought their new Mercedes (in the north) and BMWs (in the south) after all of these exports went to Greece, in the blithe assumption that all of the goods it had exported would be paid for as promised.
Unfortunately, Greece doesn't actually appear to produce anything in return. They'd been importing all those German cars and washing machines and vacuum cleaners without any underlying ability to pay for them.
So, the Germans see no reason why they should "bail out" the Greeks, while the Greeks see no reason why they should spend 10 years not getting any new German stuff and, on top of that, actually paying for the 10 years of German stuff that they have already got.
Of course it's all more complicated than that. Greece does make some stuff, and it doesn't import all of its stuff from Germany, but basically the gist is there. Germany's economic boom rested on a balance of payments surplus, which requires other countries to have a balance of payments deficit, and eventually either this has to come back into balance or someone else has to default. The IMF and Germany want it to come back into balance. The Greeks, I suspect, would like to default (or, to put it another way "renegotiate" with a level of "debt forgivenness").
In economic terms, it isn't complicated. What's interesting is that economics now comes into conflict with politics. While Merkel and Papandreou might understand all of this, and be willing to agree to a compromise, Germany and Greece happen to be democracies, and so they have to carry their respective parliaments with them. And, more importantly, those parliaments have to carry the people with them.
Whis is where the problem lies. "Austerity measures" and "Debt forgiveness" (which in turn requires sacrifices by the forgivers) still require, in Hobbesian terms, acceptance by the people. You can push the people only so far in a democracy.
So, what if there is no compromise available here that is acceptable to the Greek people and to the German people? Well, Greece and Germany won't go to war. That was a nice 19th century solution, but doesn't really play today. More likely is an end to democracy in the country with the least democratic tradition -- in this case, Greece. The new government could be revolutionary (debt gets torn up, lots of bluster and shouting) or authoritarian (debt gets paid through enforced austerity).
Annd here the army is a factor. One key reason for armies taking over is also economic -- if you try to cut their budget. This is one case where the sword is mightier than the pen.
All of this mess is our own fault -- we encouraged a credit boom that was unsustainable for the next generation. We can hardly moan if the next generation says "bollocks to this" and finds some other solution to sweet and nice democracy.
Democracy itself is a rather narrow spectrum of politics, in that it requires a certain level of wealth and a high level of commonality. Frequently the solution to keeping democracy alive is subsidies -- wheat is a common one —- but we hadn't spotted that the same technique was used in the first world. But rather than subsidising the price of bread (or tortillas) we "subsidised" consumption through the creation of asset bubbles.
The downside to this is the same as when you try to withdraw or reduce the subsidies -- any developing country can tell you that a subsidy on the price of wheat is easy to introduce (and poltiically popular), but you are only creating a rod for the back of democracy further down the line.
However, I have been pleasantly surprised by the extent to which the people of two countries (Spain and Ireland) seem to have realized the extent of the problem and have been willing to knuckle down to beat it. I only hope that the UK is equally realistic when the shit hits the fan. Greece, I fear, certainly won't be. I'll give Papandreou two years at the outside and democracy in Greece no more than four.
______________
