Millennium Post

European economy is tottering

If the beauty of a Grecian urn had inspired John Keats to write his imperial ode to it, the continuing uncertainty of Grecian affairs is driving the global economy to the brink of an economic precipice. Better would have been if the European Union had taken a decision to call it quits and served time bound notice to Greece to either mend matters or leave the Euro system. A departure of Greece from the Euro common currency system looks like would have been better for the rest of the Euro members as well as for Greece. This is why it should have been good for Greece and for the European Union.
Surely, Greek departure would have meant heavy losses for the banks who had lent money to Greece. Based on reports available, many French banks would have been badly hit. Greece itself would have been thrown into turmoil and the ordinary Greeks would have suffered losses. They would lose their savings, they would lose jobs and they would lose income. Production system in the country would have been severely disrupted. Its trade would have been affected. Established of its old currency – the drachma - should have taken time and giving credibility to the currency should take a long period of economic stability and even prices.

But in the end, with its own currency and the sovereigns powers to issue currency and take independent decisions on economic policies would have resulted in slow re-building of the Greek economy. Left to decide its level of expenses, Greek national governments would be much more prudent as no easy access to cheap global finance would be available. The Greeks would cut their coat according to their cloth, without expressly having some high sounding austerity package. Today, the austerity package is resented as it is perceived to be an imposition from outside, Left to its national governments and its deliberate national choice, in the absence of any other options, Greek national austerity would have appeared a natural course of action.

Greece and the rest of the Europe system should then be able to go their own ways and evolve according to their own strengths and choices. The national economic adjustment measures should have been available to Greece to get out of their current mess.

However, being part of the Euro currency set up, national level policy instruments are not simply available to Greece.

From this point of view, belonging to a supra-national currency union is similar to subjecting yourself to an outside autocratic rule. When Greece wants to depreciate its currency to become more competitive, as it should do now, this cannot be done as the Euro is a common currency. If Greece wants to expand its domestic investment to perk up internal demand, this cannot be done by Greece as it cannot resort to adding to money stock unilaterally. It has to follow certain norms of deficit. Nor can it possibly pursue an independent monetary policy and interest rate regime suitable to its own domestic economy, as it is part of the European monetary system.

In a way, the European common currency has emerged like the gold standard before. Under gold standard, which pegged the monetary system to a certain availability of gold, the financial economy was as if caught in a mould. It did not have the flexibility of adjustment: it cannot be expanded or contracted at will to suit the purposes. One of the contributing factors which aggravated the 1930s recession into Great Depression was the adherence to gold standard. This was strongly debated in those days, between the upholders of the gold standard and those who suggested its replacement with the present system. Among the latter was John Maynard Keynes, who argued for abolition of gold standard with Winston Churchill, the then Chancellor of the Exchequer of one of the most influential global players Great Britain. Norman Montagu, who was governor of the Bank of England, was staunchly opposed to abolition of the gold standard. A gripping account of these battles can be found in a recent book,
Lords of Finance
by Liaquat Ahmad.

In fact, a Greek departure from Euro system can be the first move in the unraveling of the common currency network. Following Greece, several other countries, like Italy and Spain, might follow suit and leave the Euro system. Eventually, France which is talking of scrapping its austerity package and following a different course of policy, might also step aside from the common currency. After all, a common currency does not give freedom of economic policy action that many of the new crop of leaders are showing their keenness to follow. You cannot have the cake and eat it too; you cannot have a common currency with a bunch of dissimilar countries and follow your independent policy course.

If this is the first lesson of the current European economic crisis, the second lesson is that an unsustainable economic situation cannot be saved by giving it propos for long enough. Greece has to face its day of reckoning. Its unsustainable debt cannot be met without default. The faster it sees this resolved the better. European Union has so far given it bail out after bail out against promises of austerity and further austerity. The former has come with driblets of the latter and lots of protests. Rather than this, the Greeks should have been left with what was their doing and trying their own best to come out without any outside bail-outs. The bail-outs were being offered as if gratis to save the Euro.

Here the experience of the US crisis has some lessons. Lehman Brothers was so pivotal to the American financial system but yet by allowing it to go into liquidation, the US policy makers had solved the problem of unsustainability once for all. Once the shock of Lehman’s liquidation was met and dealt with, the US financial system started recovering. For European economy, the time has come to look beyond bail out packages. The fiscal situation in a number of countries like Spain and Italy is similar to Greece. They are all waiting for what action Greece takes after June 17 national elections. There is a real threat to the currency union concept. For the euro leaders, this is a moment of truth.
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