The Euro's long 'Goodbye'!

The general opinion amongst the chattering classes is that the new Greek PM, Alexis Tsipras, has got himself into a lose-lose situation. If he does a deal with the hated Troika, the IMF, ECB and EU, he is dead meat. His political support will evaporate overnight. If he doesn’t, the Greek economy will collapse and Greece will have no option but to default and exit the Eurozone.

 

Both views are wrong. To demonstrate this does not need the expertise of a Nobel economics laureate.

 

The measures imposed by the Troika were badly conceived and disastrously implemented.

 

There was an assumption that harsh austerity measures would solve the Greek problem without much effect on growth and employment even though Greece was already in recession. There would be a modest contraction in 2011 and a return to growth the following year. Unemployment would rise to 15% but then reduce quickly.

 

This was la-la land economics.

 

The recession quickly gathered momentum, as it was bound to do. It is now a fully-fledged depression. Unemployment rose to 28%, hardly surprising when cuts in public service spending dictated by the Troika shoved 500,000 people, 10% of the total workforce, onto the dole queues. Youth unemployment is touching 60%; that is the way to civil unrest.

 

The debt situation is worse than at the beginning of the crisis, partly because Government revenues have fallen as the tax base has shrunk. Cuts have removed a huge block of spending-power from the economy, so the anticipated surge in the private sector has not happened. The only way out of this mess is debt-relief and inflation, neither of which fits the Troika’s grand plan. Or Grexit, which the Greeks don’t want (yet)

 

Here is what Roger Bootle had to say a couple of years ago

 

In 2010 and 2011, Greece implemented fiscal cutbacks worth almost 17pc of GDP. But because this caused GDP to wilt, each euro of fiscal tightening reduced the deficit by only 50 cents. . . . Attempts to cut back on the debt by austerity alone will deliver misery alone.

 

Things have got much worse since.

 

 

Germany now finds itself exactly where it does not want to be. The original post-war concept was a European Germany. Now it is a German Europe. It is overwhelmingly the dominant power, cast as the big bully-boy.  It never wanted to give up the mighty DM, but joining the Euro gave it access to artificially cheap money which has boosted its overly-favourable balance of trade. In doing so it has ruined the Club Med.

 

Writing in the Daily Telegraph, Charles Moore says:

 

‘the single currency has made Germany by far the most powerful country in Europe. It has made it more competitive by giving it a relatively cheap currency. But the euro also threatens to debauch Germany’s unimpeachable post-war achievement, financial soundness. Mr Draghi’s attempts to create a genuine monetary union make the zone’s most important nation terrified that it will lose what it sees as its money to the beggars. The suffering south is trying to take the money of the oppressive north. This is a recipe for strife. So each step towards completion of the euro-dream makes its ultimate break-up both more likely and more explosive’.

 

The plain truth is that this is not about saving Greece; it’s about saving the Eurozone. Brussels is terrified that Grexit might start a Club Med stampede for the exit. Monetary union has been a catastrophic failure. Greece’s new Finance Minister gives it two years. The big question is what can be salvaged from the wreckage

 

What we are seeing is the death-agonies of the Euro. It will be prolonged and nasty but the single currency must eventually collapse under the weight of its fundamental contradiction, that it cannot work without fiscal union and the member countries surrendering complete sovereignty over their financial affairs, as Delors told us years ago; that is never going to happen.

 

That’s a win-win situation in anybody’s  money.

 

Provided it is not Euros.