A few weeks ago, I began doing something which I hadn’t done since my College days – I did some reading of and about John Maynard Keynes. Among others, I am just finishing the book “The Battle of Bretton Woods” by Benn Steil. And I am amazed! Two principal issues dominated the negotiations lead by Keynes on the UK side and by Harry White on the US side, namely: the flow of trade and the flow of capital as a result of a new monetary system.
Now I, for one, had not heard much about the flow of trade and capital as the Eurozone evolved since inception. Instead, I seemed to always hear two principal themes: the convergence of interest rates and the external strength of the Euro. Since both developed very favorably, the Euro simply had to be considered as a success.
It was only after Lehman that I began looking more closely at the world-wide flow of trade and capital, albeit not within the Eurozone but, instead, between the US and the rest of the world. And I was staggered by the enormous current account deficits which the US had been running for years and decades. It seemed that the obsessive and no-fear-of-debt-having American consumer had created jobs and wealth in the rest of the world and I started wondering how long that could go on.
When the Greek crisis began erupting in late 2009, the first thing I looked at were Greece’s Balance of Trade figures since the Euro – and I couldn’t believe what I was seeing. Everyone seemed to be worried about Greece’s budget deficit and sovereign debt whereas in actual fact it was clear that the Greek economy was essentially driving itself out of its value-generating activities thanks to the Euro. And none of the discussions focused on that problem. Instead, the logic shared by most everyone was that the budget would have to be gotten under control and then everything else would automatically fall into place.
I was simply baffled how, prior to Bretton Woods, leaders would have understood that the issues are trade and capital flows and, since the Euro, no one paid attention to them. All the numbers showed the scary development since the Euro but no one seemed to deem them important.
The dogma for the EU and Eurozone were the 4 freedoms, including the free movement of trade and the free movement of capital. As long as that was assured, everything would be fine. And now I read (again) that even Keynes was meandering on these issues at the time: believing in the benefit of these freedoms but questioning their ultimate success at the same time (I guess Keynes realized that Great Britain was not ready for completely free trade and capital movement).
In retrospect, I think that Greece, for one, simply was not ready for the free movement of trade and capital; certainly not after the introduction of the Euro. Furthermore, despite being a great believer in the workings of free market forces within an adequate policy framework, I am beginning to wonder whether the completely free movement of trade and capital is a workable proposition within the Eurozone in its present structure (which is why I recently gave up hope that the Eurozone could survive in its present structure).
The opposite to free movement of trade and capital is not necessarily the control of trade and capital. I, for one, believe that the Eurozone, in its present structure, needs a ‘managed flow’ of trade and capital whereby the ‘management’ takes the form of incentives. I remember reading, back in my College days, about the concept of ‘infant industry protection’. The idea is that one cannot expose an economy to world-wide competition if that economy is not yet ready to compete. In the case of Greece, I am not even sure that a return to the Drachma would change all that much in the shorter term. Ok, Greece would immediately become a lot cheaper (‘more competitive’) in foreign currency terms. But being cheap alone doesn’t automatically build up a productive capacity. That requires a long term economic development plan.
I don’t see the operational challenge of a Grexit as unsurmountable at all. If handled well, a one-week bank holiday (at the most) should suffice for that. But I don’t believe that, in a redesign scenario, it is the weaker countries which should leave the Euro. It would be of greater benefit to the weaker countries if the stronger ones (Germany & Co.; i. e. the North) left the Eurozone. That would leave the South with a cheaper currency relative to the North. The South would become more ‘competitive’ pricewise and its Euro-denominated debt would devalue relative to a Northern currency.
That, however, is guessing. What is not guessing is the realization that the free flow of trade and capital, combined with a common currency, has deprived a country like Greece of its productive capabilities and until that issue is properly addressed, the losers of the Euro-structure can have little hope to ever utilize their economic potential.