Last Tuesday, at the CPA Annual Conference in Melbourne, I was invited to debate Norman Lamont, the UK’s former Chancellor of the Exchequer (under John Major’s government), on the Euro Crisis. The event was closed to the public (invitation only) and thus it was not possible offer a video link. But now here is the text of my intervention (that preceded the discussion). You can also hear my spiel by clicking here: Audio (It is a recording I made using my phone – except for the first moments, the audio quality is rather good).
In summary, Lord Lamont and I agreed entirely on our diagnosis of the crisis: The Eurozone was built on foundations that (a) could not sustain a large shock and (b) made a large shock more likely, if not inevitable. Where we disagreed sharply was on what should now happen. He argued in favour of the Eurozone’s dissolution. I argued that a dissolution would cause untold hardship on the global economy, hardship that is utterly avoidable.
Continue reading for the text of my presentation:
MELBOURNE ADDRESS – CPA, Tuesday 16th October 2012
1. INTRODUCTION – Why am I here?
Thank you Robert. Thank you Ladies and Gentlemen.
It is a great honour to be in your midst today. Still, I cannot but wonder: Why am I here today? Is it because of my work on the philosophical foundations of game theory? Or for my book on the global crisis?
Let’s be honest. It is because the Euro Crisis has promoted me from a run of the mill academic to a… renowned Greek economist. A most dubious promotion. But such is this Crisis that the marginal, all of a sudden, acquires undeserved discursive power and is propelled into the centre of things.
Take my country, Greece. At the margins of Europe’s map and economy for centuries, Greece has been in the global headlines for three years. This is quite absurd.
If a crisis in the Northern Territory had the capacity to threaten with disintegration the Australian Commonwealth, the problem would not be with the Northern Territory. Something would have been profoundly remiss with Australian capitalism!
Catherine the Great once said that: “if you can’t be a good example, you will have to be a horrible warning.”
This is, ladies and gentlemen, my task this fine morning: a Greek bearing not gifts but a hideous warning.
2. THIS IS OUR GREAT DEPRESSION – OUR GLOBAL WINTER OF DISCONTENT
When the GFC struck in 2008, we entered not some recession we had to have but our generation’s Global Winter of Discontent, our very own Postmodern Great Depression.
It may not feel like a Depression in the streets of Melbourne today but scratch the surface anywhere on the planet and what you will find is justified uncertainty, legitimate insecurity and potential insolvency.
Can we expect the combined quantitative easing of our Central Banks to help? At the very best it will provide palliative care to a world in need of a cure.
A cure for what? A cure for what I term the Twin Peaks Problem that follows large financial crashes like those of 1929 and 2008:
- The first peak that emerged is made up of massive unserviceable debtsand irretrievable banking losses.
- A second peak consists of equally large idle savings, too terrified to fund productive medium term investments.
The solution requires the mobilization of the savings to produce the income that will pay the debts. Markets cannot do this once caught up in an equilibrium of fear which is only aggravated by universal austerity and merely cajoled by monetary easing.
Can we find such a solution? Of course we can. We did so twice since WW2. Once in 1944 and then again in the 1970s. Both involved a mechanism for recycling global surpluses in the form of productive investment into the deficit regions and sectors.
If our world is now in a state of pronounced bewilderment it is because no replacement has been found for the surplus recycling mechanism which died with the GFC in 2008, at the time the US lost its capacity to use its own deficits in order to recycle other people’s surpluses.
3. EUROPE’S CRISIS AS THE LABORATORY OF THE FUTURE
Which brings me to the Eurozone. It was built on the presumption that America’s recycling of others’ surpluses would continue to provide adequate demand for net exporters like Germany. Thus no endogenous surplus recycling mechanism was built into the Eurozone.
For 8 years the Eurozone resembled a fine riverboat on a calm Ocean. But when America’s recycling powers suddenly gave way, the seas turned stormy and the pretty European riverboat began to take water in. Thus our modern Greco-European tragedy began.
- Instead of treating our systemic Euro Crisis systematically, the Core started pointing moralising fingers at the Periphery
- Europe concentrated on lending more money to the insolvent states to lend to their insolvent banks on condition of harsh austerity that shrinks the national income from which the loans should be repaid
- Bailouts are being funded by CDO-like bonds that contain within them the domino dynamic which causes more European banks and states to fail sequentially.
In short, a dreadful monetary design was defended by toxic remedies. For three years now Europe’s response to the discovery that it had created a monster was an all-out assault on reason.
4. WATERBOARDING GREECE
Almost in a bid to defy my hosts I have said nothing so far about Greece. The reason is that there is little to say. Greece was the flimsiest, most corrupt, least entrepreneurial part of the Eurozone. These are the reasons why the domino effect started there. But it is not the cause of the domino effect!
- Reminds us of how quickly a recession can turn into a depression
- Of Britain’s and Australia’s predicament between the world wars, when they sought to stay within the Gold Standard by imposing self-defeating austerity on themselves
- It also reminds us that when a financial crisis cripples an ill designed multinational currency union, the first thing that happens is a disintegration in the common currency; and very soon after that, we end up with real Nazis in Parliament.
Greece has already undergone the greatest fiscal squeeze ever attempted anywhere.
It is now being fiscally waterboarded to accept new measures that everyone knows will drive our economy further into the ground and guarantee that our partners will never get their money back.
So, why is Europe doing this? Because the alternative would be for its elites to admit that the Eurozone was built upon flimsy foundations.
5. WHAT SHOULD WE DO WITH THE EURO: It’s the politics stupid
In her final Parliamentary speech as Prime Minister, Mrs Thatcher famously said about the Eurozone:
“It’s all politics. Who controls interest rates is political. A single currency is about the politics of Europe.”
Hear, hear, I say. (You know that a crisis is deep when a leftwing Greek economist is missing Margaret Thatcher!)
Where Mrs Thatcher was wrong was in her belief that Europe’s elites had federation on some secret agenda.
Exhibit A that they do not have such an agenda is the current banking union debacle: Everyone knows a banking union is a prerequisite for stopping Italy’s and Spain’s quick march into the Grecian Vortex. And yet Germany is single-mindedly working to wreck in practice the banking union which it agreed to in June.
No, ladies and gentlemen, all talk of a federal agenda is bogus. As the Cambridge economist Nicholas Kaldor had predicted in the 1970s, an attempt to create a flimsy currency union would be a first step not toward a Federal Europe but toward Europe’s deconstruction.
So, what should we do?
Europe is now the laboratory of our global future. We should never have created this Euro. But given that we have, Europe has a moral responsibility to itself, and to the rest of the world, to fix it. Without the Treaty changes, fiscal pacts, or Ponzi Austerity programs that defy basic economic logic.
Technically we can achieve this in weeks. But, as Mrs Thatcher, might have said today, “It’s the politics stupid!”
If we fail, Europe will have inflicted mass pain on the rest of the planet for a third time in a century. And then you will all become Greeks too – and not in the benign sense of sharing a love for Homer, Sophocles and Thucydides.