Is Greece still viable? (Is Europe?): my piece in Deutsche

[The following piece was commissioned by Click here for the article as it appeared on Deutsche Welle’s website.]

“Perhaps it is historically true that no order of society ever perishes save by its own hand.” [John Maynard Keynes][1]

Most Greeks, deep down, know that Keynes was right. Our current destitution and indignity are the natural repercussions of our own past errors of commission and fallacies of omission. Modern Greece has been skirting the edge of a debt crisis since its inception. After its mini postwar industrial revolution unravelled during the 1970s, it kept pulling back from the abyss through frequent devaluations and bursts of austerity. Entry into the eurozone removed the main instrument of containment in exchange for the empty promise of some alternative shock absorbing mechanism.

For almost a decade after the euro’s birth, Northern European commercial capital kept flowing into countries like Greece in search of returns higher than those the stagnant core economies could deliver. A semblance of convergence was thus founded on a series of bubbles that kept the underlying structural imbalances well hidden. In countries like Ireland, the bubble inflated within the private sector (with the connivance of the state). In Greece, the same bubble sprang up within the state sector (aided and abetted by the developers and the private banks).

From Crash to Bailout to a festering wound

Once the bubbles started bursting (first in Wall Street and Europe’s larger banks, then in Dubai, later in Greece and, finally, in the rest of the periphery), a postmodern 1930s was upon us. Just like in 1929, the Crash of 2008 sparked off

a)    the unravelling of the common currency of the era (the Gold Standard then, the euro today),

b)    the implosion of the deficit countries (which were forced to shoulder the burden of adjustment), and

c)    recessionary winds that blew across the world.

While these sinister developments were universal in scope, the question on everyone’s lips remains: Is Greece viable? Do the Greeks believe it to be? Why are the targets set by the troika never met?

I am very much afraid that these are the wrong questions. It is not a question of whether Greece can be viable within the eurozone but whether the eurozone, as currently constructed, is viable with or without Greece. Put, differently, the question those outside of Greece need to ask is: Why are we still talking about Greece, two long years after its implosion?

Of course the reason is that the expensive remedies applied to the festering wound that is Greece are worsening, rather than improving, the infection. One explanation is that Greece was a recalcitrant patient who refused to take the medicine as prescribed. There is a large element of truth here. However, the Greek state’s incompetence at introducing the agreed reforms is preventing us from seeing the deeper cause: the way that the eurozone bound together the fates of our peoples by means of an edifice that (a) magnified the underlying imbalances and (b) could not absorb a shock like that of the financial meltdown of 2008.

When the eurozone’s weakest link snapped, its government added to the country’s past mistakes another grave error of commission. It denied its bankruptcy and sought loans under conditions that were impossible to meet. In Keynes’ words:

“Greece’s insincere acceptance… of impossible conditions which it was not intended to carry out made Greece almost as guilty to accept what she could not fulfil as the European Union to impose what they were not entitled to exact.”

[Naturally, these are not Keynes’ precise words. But they are close. All I had to do to produce the above ‘quotation’ was to substitute ‘Greece’ for ‘Germany’ and ‘European Union’ for ‘Allies’.[2]]

While pondering the implosion of Greece’s social economy, Keynes’ insights regarding the great paradox that was the Versailles Treaty are quite instructive. Just like Germany in 1920, so too Greece in May 2010 grudgingly accepted its ‘punishment’ in the form of a ‘treaty’ that placed impossible demands upon it. And just like the Allies were to discover in the 1920s, the imposition of these conditions not only depleted the capacity for recovery of the weak, defeated, demoralised nation but, alas, it is proving a constant drain and torment for Europe’s strong nations.

Now what?

To err twice in two years is imprudent. The second bailout package, comprising more loans and deeper austerity, together with the fraudulent ‘voluntary’ haircut negotiations, must be set aside. Until a rational plan is in place that renders both Greece and the rest of the eurozone viable, the Greek state must spend not a euro more than it takes in taxes, while all loan repayments are suspended. An end must be put to the scandal of asking German taxpayers, in the name of ‘solidarity’, to guarantee loans that the Greek state passes on to banks already living off the kindness of the ECB and the taxpayers.

As for Germany, it must decide swiftly between disintegrating the eurozone and reinforcing it by adding to our monetary union that which has been missing from the outset: a mechanism for shifting surpluses to the deficit regions in the form of productive investments(as opposed to handouts or loans). Turning failed states like Greece into sundrenched wastelands within the eurozone, and forcing the rest of the currency area into a debt-deflationary spiral, is a most efficient way of undermining the long term viability of Europe’s core. Even if one thinks that Greece would be getting its just deserts, do the hard working Germans deserve to be quickmarched in that direction? I do not believe they do.

[1] Chapter VI, p.238, The Economic Consequences of the Peace, Harcourt Brace New York, 1920

[2]  “Dr. Melchior: A Defeated Enemy” in Two Memoirs (1949), as reprinted in Collected Writings, Vol. X: Essays in Biography, at p. 428. Naturally, I have replaced the word ‘Germany’ with the word ‘Greece’ and ‘the European Union’ for the word ‘Allies’!

Commissioned by