Last week, Norman Lamont and I addressed the CPA 2012 Conference in Melbourne. Yesterday we repeated that ‘gig’ in Sydney. Unwilling to deliver the same speech as in Melbourne (which was posted here), I chose to discuss the Euro Crisis from a slightly different angle (with very few overlapping paragraphs). As this was a closed-to-the-public conference, I am taking the liberty of posting below my talk and to upload my own recording of that presentation. For the talk’s text read on. For the audio click here.
SYDNEY ADDRESS – CPA, Wednesday 24th October 2012
1. INTRODUCTION – Nothing redemptive about the Euro Crisis
Thank you Michael. Thank you Ladies and Gentlemen.
In May 1991, a certain Paul Keating (Australia’s Treasurer at the time) introduced a vexed nation to the notion of the “recession that we had to have”. I am sure that not a soul in this auditorium has forgotten his comment. What you may not recall, however, is that thousands of kilometres away, another gentleman said, at precisely the same time, said something similar. He said: “Rising unemployment and the recession have been the price that we have had to pay to get inflation down. That price is well worth paying.” The gentleman in question was Britain’s Chancellor of the Exchequer at the time, a certain Mr Norman Lamont, in the presence of whom we are fortunate enough to be finding ourselves this fine morning.
Both Treasurers suffered political damage as a result of their remarks. But, whether one agreed with their policies or not, they had a point: Periods of growth powered by unsustainable credit, riding a bubble in real estate and in finance, give rise almost automatically to the corrective medicine of a recession. Sequential bankruptcies are to capitalism that which Hell is to Christianity: Unpleasant but essential.
- There is, indeed, something redemptive about recessions.
- They weed out companies whose fundamentals do not warrant their survival.
- They correct wayward asset prices.
- They restore profitability to the better companies.
- They arrest humanity’s tendency to think that this time things are different and the laws of sustainable accumulation no longer apply.
Political economists of both the Left and the Right, have always known that which Mr Keating and Mr Lamont dared imply. Karl Marx, Joseph Schumpeter and Friedrich von Hayek are names that come to mind.
Nevertheless Ladies and Gentlemen, when you cast your wary gaze upon our European Continent, you should make no mistake: There is nothing redemptive about the recession we are now experiencing in the Eurozone and beyond. Instead, what we have is a Crisis that we did not have to have, one that produces no benefits, that comes with no silver lining – save perhaps for the morbid satisfaction that some of us feel as the result of having prognosticated that nothing good would come out of the Eurozone’s formation.
But it is, believe me, a rather shallow satisfaction – small pickings in the context of not only the wastelands of many of our countries but, perhaps more ominously, in the context of the grave dangers that the Eurozone’s disintegration harbours for peoples within and without its currency umbrella. People who, I am very much afraid, include not only our British friends but Australians too. After all, no economy is an island!
2. Europe created a monster
Initially, there were meant to be three speakers today on this stage. A formidable Eurosceptic, in the person of Lord Lamont. A representative of what I term institutionalised Euro-Loyalists, indeed a distinguished staffer of the Central Bank of Italy. And I, my greatest claim to fame being that I represent a glorious contradiction-in-terms – a Greek Economist and one that has been arguing since 2010 or a Greek default within the Eurozone.
Sandro could not be with us today, unfortunately. His contribution to balance would be significant because he would be the only one who sees a modicum of rationality in Europe’s handling of the Euro Crisis. For, like Lord Lamont, I too think that we Europeans created a monster in the form of the Eurozone. And just like Mary Shelley’s Dr Frankenstein, whose intentions were not all bad, we now find ourselves unable to control our creation; a vicious beast that is wrecking our neighbourhood with reckless abandon.
To cut a long story short, when we decided to bind our 17 economies together monetarily but not in any other meaningful way, we effectively did two things at once:
- We removed the shock absorbers of flexible exchange rates
- And we ensured that the next shock, when it hit, would be amplified massively
There is no doubt in my mind that the euro was a gross error. In this, I side entirely with Lord Lamont. We should never have allowed the separate agendas of Europe’s different elites to converge into this monstrosity. However, thankfully, for the interests of a lively debate, I shall disagree strongly with Lord Lamont regarding what needs to be done now.
Lord Lamont believes that the Eurozone should be dismantled in an organised fashion. It was a bad idea, let’s wind it down carefully but surely. Alas, this is impossible. No heavily financialised, highly leveraged single currency area has ever been dismantled ever before, ladies and gentlemen. The disintegration of the Latin Union in the 19th century or the Soviet Union and Czechoslovakia in the 1990s are irrelevant experiences in this context.
Consider for a moment how we might unwind the Eurozone. Suppose that it is the weakest link that goes first: The Greek PM summons Parliament on Friday afternoon, passes an emergency bill that reintroduces the drachma forthwith, declares that on Monday the banks will remain closed for a week, till their accounting systems are recalibrated and all notes held within the banks are stamped with indelible ink to mark them out as drachmas (as opposed to euros) etc. etc.
What do you think will happen next? Well, within ten minutes all ATMs in Greece, Ireland and Portugal would run dry, as panicky depositors in these weak economies withdraw as much of their money as they can, either expecting or fearing massive devaluation. Soon after, the Athens, Dublin and Lisbon governments will have to impose border controls impeding capital and human movements, so as to prevent a hemorrhaging of their economies. Instantly, they will have violated the most cherished principles of the European Union. When the financial markets open on the following Monday, intense panic will grip investors and Spanish-Italian bonds will be unloaded in fire sale resembling Margin Call – The Movie. At that point, Mrs Merkel will be presented with a cruel dilemma: Put up half of Germany’s GDP as a backstop for what remains of the Eurozone or succumb to the carefully orchestrated campaign of the Bundesbank to return Germany to the DM. Intense negotiations will begin with The Netherlands, Finland and Austria, perhaps with Poland and Slovakia as well, for their inclusion under the DM umbrella. Paris will be struggling to convince Germany either not to move into the DM direction or, if this cannot be prevented, to take France along for the ride. Germany will, obviously, turn Mr Hollande down and, as a result, a new DM currency union will be created east of the Rhine and north of the Alps. The new DM will go quickly through the roof as capital will flee from the rest of the world to Germany and its new lebensraum, causing a massive decline in exports, a stupendous rise in surplus Europe’s unemployment and, soon, deflation. Meanwhile, the rest of the Eurozone, whether they return to their own currencies or not, will enter a long period of stagflation as both prices and joblessness shoot up and up. At a time when the UK is in recession, the US is walking on egg shells, and the BRICS are bracing themselves for an emergency landing what effect do you think these developments will have on Australia? I submit to you ladies and gentlemen that you will then realise the Made in China bubble that you have been living in over the past three years. I hope and pray that I am wrong but you know that I may be right!
For even if the Eurozone’s dismantling were to be more orderly, with for example a German exit coming first and thus avoiding the worst of the tumult, the end result would be the same: deflation east of the Rhine and north of the Alps, stagflation everywhere else in Europe, a Great Depression in Britain and the United States and crushed dreams in Asia and Africa.
So, my message to my Eurosceptic friends of both the Left and the Right is this: Beware what you are wishing for. For the cruelest God is the one who grants us our wishes. We may wish that inane Euro-loyalists get their comeuppance; that they learn their lesson the hard way. But, tragically, the pain will spread far and wide and the vast majority of victims will be outside the Eurozone and will suffer far more than the Eurocrats.
3. EUROPE’S CRISIS: How to resolve it
If I am right that we should aim to fix the Euro rather than dismantle it, how should we fix it?
One thing is for sure. Certainly not by means of our current policy mix.
- We must end bailouts that are being funded by CDO-like bonds that contain within them the domino dynamic which causes more European banks and states to fail sequentially
- We must stop asking the German taxpayer to guarantee the Periphery’s debts on condition of Ponzi Austerity programs for countries like mine that are akin to a form of Fiscal Waterboarding that eliminates the country’s long term capacity to grow and repay its debts
- We must end the denial that this is a systemic Euro Crisis that requires systematic treatment
- Lastly, we must stop pointing moralising fingers at each other
A second certainty is that federation is not the solution to this Crisis. It is, at this stage at least, neither possible nor desirable as a Crisis fighting strategy. This Crisis is certain to outpace any moves toward federal structures and to destroy whatever Will there remains amongst our peoples for closer union.
So, where does this leave us? How do we fix the monstrous Euro for the sake of the whole planet? The answer is simple: By re-deploying our existing institutions, the ECB, the EIB and the ESM in a manner that ends the Crisis without asking from German taxpayers to guarantee a single euro of peripheral debt or indeed asking the ECB to print the missing trillions and without asking the peoples of Europe to give up more of their sovereignty. Technically, it is more than possible. The problem of course lies in the realm of politics.
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 quoting Margaret Thatcher!)
Where Mrs Thatcher was wrong was in her belief that Europe’s elites had federation on some secret agenda.
Proof that they do not have such an agenda is the current banking union debacle: Everyone knows a banking union now 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 pays lip service to. A typical case of confirming its pledge in the breach rather than in the observance.
In conclusion, ladies and gentlemen, the worst enemies of European unity are those who profess to serve and to believe in it. Not the Eurosceptics.
Indeed, those of us who despise the euro the most have the highest moral obligation to help fix it.
Technically we can achieve this in weeks, in a manner that we may discuss later this morning. But, as Mrs Thatcher, might have said today after consulting with Bill Clinton, “It’s the politics stupid!” And as we have found out over the course of the past three years, and twenty odd Summits, there is no shortage of organised stupidity on Europe’s political stage.