Greek dependency creates dangerous illusions

By John Browne, cross-posted from Euro-Pacific Capital

Once again the crisis in Greece is threatening the unity of the entire euro zone. Many analysts are asking what must be done to restore viability to the Union’s weakest link. Lost in this discussion is that modern Greece, formed in 1830, has never really been required to stand on its own. Generations of support from abroad, typically given for strategic reasons, has created a false sense of prosperity in the country and has prevented the Greeks from accepting the realities of their current situation.

When Greece fought for its independence against the Ottoman Empire in the 1820s, the struggle became a romantic cause throughout much of Western Europe. Both money, material, and fighters poured into the country (Lord Byron being one of the most famous volunteers). After independence, Great Britain continued to subsidize the new nation, largely to create a bulwark against the Ottomans and the growing Russian Empire. (Greece was an important staging area for the Crimean War of the 1850s). This support continued through both World Wars. In the second half of the 20th Century, the power and popularity of the openly pro-Soviet Greek Communist party turned the country into one of the front lines in the Cold War struggle against the Russians. To tip the balance one way or another, both East and West poured money into the country.

In this context, drawing Greece firmly into the Western orbit, through its absorption into the euro zone, appeared to be the ultimate strategic victory for Western Europe. To Greece, the prospect of Eurozone membership held the enticing prospect of large hidden internal monetary transfers to offset the vastly differing economic performances between the so-called ‘Southern’, or ‘Mediterranean’, nations and those of ‘Northern’ Eurozone members. In its zeal to pull Greece into the Union, the EU ended up accepting figures (put together with the help of Goldman Sachs) that masked the country’s fiscal condition.

Germany, on the other hand, joined the euro for decidedly different reasons. Until overtaken recently by China, she was the world’s largest exporter. In order to protect the interests of its export machine, Germany agreed to trade its legendary Deutsche Mark for the relatively weaker euro in exchange for a protected trade zone that would guarantee the supremacy of German products in the world’s largest market. German politicians saw the euro as a unifying mechanism providing a means of creating a financial empire across the Continent. However, German citizens were accustomed to a strong currency protecting the value of their hard earned savings.

Furthermore, they retained horrific memories of currency debasement and collapse under their 1920s Weimar government. To overcome these fears, rank and file Germans had to be convinced that the euro would remain strong. In order to fulfill both opportunities, Germany’s leaders promised their people a sound euro. Greece and other Southern tier countries in the Union are perceived as threatening that commitment.

The newly elected left-wing Syriza party in Greece, led by Prime Minister Alexis Tsipras, has brought all of these simmering differences to a much fuller boil. Tsiprashas declared that Greece will no longer abide by the rules laid out in the 2012 bailout memorandum that had been dictated by the ECB/EU/IMF ‘Troika’. Tsipras maintains it was agreed to by a previous administration, but under unfair duress, and is, therefore, invalid. (Although this idea has not prevented him from asking that the Germans pay supposedly unpaid WW II reparations debts agreed to in 1953.)

After so many years of support, it appears as if Tsipras cannot allow for the possibility that the Northern Europeans will finally pull the plug. He is also banking on the hopes that the Germans do not want a precedent in which an exit by Greece encourages other Southern countries to leave as well, which might lead to a collapse of the euro. This has set up perhaps the biggest game of chicken in Europe since the Sudeten Crisis of 1938 and the Berlin Airlift of 1961.

This places German Chancellor Angela Merkel in a particularly difficult position. Against German urgings, the ECB recently announced $1.27 trillion worth of Fed-style QE. For years Germany had stood fast against the growing support for the ECB to follow the U.S. Federal Reserve into a policy of attempting to stimulate economic growth through quantitative easing, a process of printing money in order to buy sovereign debt, thereby increasing inflation and lowering long term interest rates.

The decision to go ahead with QE, despite its unpopularity in Germany, has generated among Germans great political anger and increasing disillusion with the EU. In this light, the prospect of giving more support to Greece, as the country threatens to abrogate prior agreements, could not come at a more politically awkward moment.

According to a new Emnid /N24 poll (1/29/15), only 16 percent of Germans agree with a partial write-down of Greek debt. While 33 percent would extend the repayment time schedule, a massive 43 percent of Germans are against any concessions whatsoever.

However, in the present increasingly anti-EU political climate, any mishandling of the Greek situation that leads to a Greek euro-exit could break the euro and lead to the collapse of the entire EU concept. As the EU has the world’s largest economy and the second largest currency, the effect of dissolution could result in a currency crisis and throw a shaky world economy into a catastrophic depression.

Should the Greek situation not be settled, the Anglosphere-led world faces massive political, economic and financial consequences. The EU is possibly its first great experiment in global governance. It believes it must not fail.

Given the entrenched interests, a political solution will likely be found that leaves Greece within the euro. The price may be increased political integration within the EU, with political incentives offered to Germany that will justify the financial costs borne by unwilling German citizens. However, when politics is involved, anything is possible. It appears as if the new Greek leaders are flush with victory and will be willing to risk a wider crisis in order to deliver on their campaign promises.

My hope is that Greece’s longstanding dependency on foreign support makes it a distinct case in the Southern tier. Italy, Spain and Portugal have not been on the front lines of strategic and ideological struggles as often as Greece has been over the past two centuries. As a result, their willingness to make additional demands from the North may not be as deeply ingrained. This means that even if Greece leaves, its exit may be a solitary one, which might result in a stronger Eurozone, and a stronger euro.

While investors might hedge long European positions, they could be wrong to sell Europe short. It is more likely than not that the Eurozone will find a solution that retains Greece, which may make the euro and certain European stocks look cheap relative to the U.S.

Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

Latest posts by Unconventional Economist (see all)

Comments

  1. John Browne said:

    “Greece … has never really been required to stand on its own”

    a bunch of crap

    than he continues:

    “After independence, Great Britain continued to subsidize the new nation, largely to create a bulwark against the Ottomans and the growing Russian Empire. (Greece was an important staging area for the Crimean War of the 1850s). This support continued through both World Wars. In the second half of the 20th Century, the power and popularity of the openly pro-Soviet Greek Communist party turned the country into one of the front lines in the Cold War struggle against the Russians. To tip the balance one way or another, both East and West poured money into the country.”

    Looks like Greece was never allowed to stand on its own because great powers used Greece to pursue their own colonial and hegemonic goals since the independence.

    • Greece got a good deal out of it, as did Bulgaria and Serbia. They carved up the borders of what is today the “Republic of Macedonia.” during the Balkan wars with the consent of the Great powers of the time. Refer to the Treaty of Bucharest for more details.

      Before this Macedonia extended East into modern day Bulgaria and South West into what is today modern day Greece. Look at a map prior to the Balkan wars and you can see these borders as they existed under 500 years of Ottama rule.

      Macedonia was effectively carved up 100 years ago. The part that exists today is the part Serbia basically returned when Yugoslavia was broken apart. Greece and Bulgaria still retain the spoils of war after they turned on each other and their Macedonian allies, who had initially come together in an alliance to drive out the Ottamans.

      • Thanks for the input JC

        Doc Is our overvalued currency been forced on us? Or have we knowingly and willingly lived beyond our means destroying everything and welcoming the overvalued currency?

        Similarly for the Greeks – they’ve lived at a standard far beyond what they would otherwise have been able to do. They welcomed it.

        Have small nations been pushed around militarily through history? Of course but that is a different discussion.

      • “Have small nations been pushed around militarily through history? Of course but that is a different discussion.”

        Pretty much the point I was making too. Small countries will always be brushed aside unless they have the backing of a strategic ally. Take Serbia for example. If Russia wasn’t a broken nation in 1999, NATO could not have bombed them into submission. The Russians would have surely intervened.

        Little known fact is that a small isolated Russian force that made up some of the “peacekeepers” in Kosovo actually broke from NATO command and took the airport in Pristina ahead of the NATO deployment. The NATO commander of the time, Wesley Clark gave authority for British troops to take the airport by force, being the giant peanut that he is! I ebelieve the British commander on the ground in the region told him to go “I’m not going to start the Third World War for you” and basically told him to go jump.

        Shame we have another idiot in charge of NATO’s military arm (why does it have one again???) in this Breedlove character. A charlatan if I ever saw one.

      • Your knowladge of Balkan history is very poor and bias. Obviously you are reading not the right sources.

      • Re, Serbia and Russia, younger generations look west, and that includes Croatia (where many Serbs were born during Yugoslav times).

        However, many smaller nations who recently joined the EU, and those who have not e.g. Turkey, are fighting external forces (mostly imagined) continually for influence over their population, and especially electorates.

        It’s about more wordly youth and working age populations wanting EU membership with the freedoms and benefits offered, which govts. achieved along with commensurate funding and investment, but they then turn round and tell the EU to f’off and mind its own business (glib retort from EU is quite rightly, ‘ok, pay all those funds back that we gave you for development, infrastructure etc., if you can find them…..)

        During severe floods last year there was much regional help and relationship building between thousands of relief workers, military etc. (I guess younger generations) of Serbia, Croatia and Bosnia, but this was neither highlighted nor celebrated in most but especially state Serbian media.

        What was? The great mother country Russia for supplying a few dozen (permanently based in western Serbia) emergency pesonnel, and thank god for the mother Orthodox Church…… hardly reflects fact that most younger or working age Serbs look to or are already in EU, USA, Canada, UK, Australia etc., apart from employment and business related mining and engineering, few would be looking to Russia for a future….. except ageing politicians, church etc.

        States may officially or unofficially ally themselves with bigger allies, which may ensure electoral success (with ageing electorates pining for the old days of certainty), but it does not win them many points from savvy and mobile multilingual younger generations whom for now may not have a voice in the electorate, but that will change…….

        The EU and/or western Europe is changing quickly and positively through youth study and working age mobility, seeing how the world works (more so nowadays than domestic elites) who in turn influence and support friends and family back home. One sees a lot more scepticism towards national governments, especially when they have been used, along with the nation, as a personal business fiefdom for connected political and adminstrative elites.

        The whole notion of the the EU is anathema to Russia and some CEE nations, and probably many in western Europe e.g. U.K., however with growing aetheism or agnosticism, plus the age of reason or critical thinking and less loyalty to the nation state, especially if it is viewed as corrupt, dodgy states should be concerned as to who will support them in future with increasing transparency and an informed electorate?

    • “increased the area of Greece from 64,790 to 108,610 km2 and its population from 2,660,000 to 4,363,000.” – from Wikipedia

      Greece almost doubled because of the decision of the Great powers in the region. They received important agricultural lands, and Macedonia lost all important access to the sea. By the way those extra 1,703,000 people, the majority considered themselves “Macedonian” not “Greek” and they spoke a dialect of the language that is spoken in modern day Macedonia today. These people were forcibly assimilated. Their names were forcibly changed to be “hellenic”, they were beaten if they spoke their language in public, or if the language was shown anywhere in public. These people were forcibly stripped of their dignity and identity by Greece, Bulgaria and to a lesser extent Serbia.

      Greece to this day does not recognise the Republic of Macedonia, it’s language or the right to these people of self determination. It has economically blockaded them in the past, and ensures they have no voice in international affairs to pursue their interests. Greece might have been shafted by the Great powers, and i surely sypathise with their citizenry today, but they also got a sweet deal that effectively doubled their nation in size.

      • I’m not greek or macedonian JC, but your one-sided and blinded nationalist comments just proves my point. Small nations were always used by big powers for whatever dirty goals they had in their mind. They often made conflicts between these small nations (Greece and Macedonia for example) to make it easier to rule both. People in these country would get hooked into local nationalism hating and blaming each other (for something small and stupid like flag colours, name or few km2) while big powers who actually exploit all of them get their way around as “friends” and “allies”. In few decades Macedonia will cease to exist but not because of greeks but rather Albanians, new western allies on Balkans. So while Macedonians were wasting energy on fights with greeks they got Albanian “”trojan” horse made in USA and Germany.

        Greeks were bit tough to rule and easier to bribe compared other countries in Europe (check greek history after WWII) so Germans decided to get them into a huge debt to be able to take over.

        Over the most of human history person or country lending to a bad borrower was paying the price of its bad decision. Why is now different and what makes lenders morally right now? German banks didn’t gave money to greek government because they wanted to help them or make greek standard of living higher but rather to make big money out of greece (not to mention corruption where german companies were bribing greek officials to take very bad loans).

      • @ DoctorX, have you ever ask what kind of language and alphabet Macedonians have? Just make some quick comparasons and you will find what etnic group they are historically and genetically. But sure they are not Greek. The poor knowladge of Balkan history serves very well great powers interests, in our days too.
        And you are right about Albanians, unfortunately. Kosovo was the needed posion for Balkan to be controled by the great powers.

      • ” Macedonia will cease to exist but not because of greeks but rather Albanians, new western allies on Balkans. ”

        Well aware of that Dr X. The US/NATO are the ones that formented the a border skirmish in the early 2000’s btw Macedonian armed forces and what basically amounted to foreign islamic mercenaries (the kind you see making up ISIS today) on Macedonia’s eastern border. In fact the Macedonian army had a very large contingent of them cornered and were ready to “shell” them to death when they were called off by the US. The mercanaries got bussed out.

        “Your knowladge of Balkan history is very poor and bias. Obviously you are reading not the right sources.”

        Lori, care to educate me about Balkan history? Since you have offered nothing but a statement?

      • @JC – – Something you left out – very pertinent to todays problem with Germany being the strongest of the European nations.
        Snip :
        “According to Mark Mazower’s scholarly history, “Inside Hitler’s Greece: The Experience of Occupation, 1941-44,” between 250,000 and 300,000 Greeks died from famine at the hands of the German overlords. “In reality,” Mazower writes, “there was no deliberate German plan of extermination.” The extermination that did occur was rather the result of the calculated destruction of the Greek economy and the stripping of the Greek larder for the Axis armies, the German one in particular. “Who is Mr. Schäuble to revile Greece?” the 82-year-old president of Greece, Karolos Papoulias, demanded last week in response to the German finance minister’s slighting comments about the country for which a teenaged Papoulias fought in World War II.

        Famine was a certain, if not deliberately sought, consequence of German occupation policy, but there was nothing accidental about the destruction of the drachma. The German-controlled Bank of Greece printed up the national currency as the need arose. In the opening months of 1941, before the Germans (and the Italians and Bulgarians) came to stay, a British sovereign was worth 1,200 drachmas. As the Germans cleared out, in November 1944, blowing up railroad tunnels, rolling stock, harbors and such as they left, a sovereign commanded 71 trillion drachmas.”

        More at : https://www.linkedin.com/pulse/greek-monetary-back-story-james-grant

        Personally I hope that Greece tells the Bakers to shove the debt where the sun don’t shine – – –

      • “Personally I hope that Greece tells the Bakers to shove the debt where the sun don’t shine – – -”

        Totally agree. They all should. The Union was a poor choice to begin with. One doesn’t need a union to sign mutually beneficial trade or other bi-lateral agreements.

        One of the bigger issues in Europe is that the economic engine and big power in Germany and to a lesser extent France, but also most of the rest of Europe pander to US interests ahead of their own.

        A European security architecture can only be truly created with Russia involved. This is in Germany’s interest, in Frances interest and indeed all of Europe. A European triumverate Franco-German-Russo allince all connected to Asia and China via the “new, but actually oldest” silk road takes the center of power back to Eurasia. The US will launch WW3 before they allow that. The sad part is it may happen anyway as a result of these obedient European poodles who always do as their master commands.

  2. Currency unions:

    a) promote “internal efficiency” (the elimination of exchange costs),

    at the expense of

    b) “allocative efficiency”, the ability of the price mechanism (i.e. the exchange rate) to signal supply and demand.

    It is astonishing how many people who would otherwise sing the praises of the price mechanism are suddenly converted to suppressing price signals whenever it comes to currency markets.

    The trade-off is rarely a favourable one. The price of monetary union is inevitably fiscal union. And fiscal union inevitably leads to rent-seeking by those who control taxing ans spending.

    Even the US didn’t solve it’s monetary problems until it became a fiscal in in early 1937 (when the Supreme Court – under threat of being stacked by Franklin Roosevelt – re-wrote the Constitution to allow the expansion of the Federal Government).

    Within 70 years the federal politicians had racked up $10 trillion in debt trying to buy off minority voting blocs or simply pursuing their own megalomaniacal ambitions.

    And in Australia, fiscal union has seen the chronic taxation of those industries and regions which actually enjoy a comparative advantage to prop up the politically powerful but chronically uncompetitive metropolises of Sydney and Melbourne. (Tariff protection for Melbourne?? An “international financial hub” for Sydney??)

    Ironically, the development of information technology – and the consequent lowering of foreign exchange transaction costs – was rendering even the ostensible reason for European currency union void even as it was happening.

    Can an end to the disaster before more people have to suffer.

    • Thank you Stephen

      And an overvalued currency that steals about a third of the GROSS income of the regions and distributes it to Sydney and Melbourne.

    • Not to mention it doesn’t work because the nations involved are too diverse culturally and linguistically. The EU project is supported by the USA because they effectively want it as a giant “Americanised” market for all the sh*t they make!

      These countries who are struggling just need to pull the pin and go back to being sovereign states. Politicians need some balls and they need to be upfront with their populace. Is it going to hurt?? You bet it will. Will it fix the problem? Yes it will. These countries need to cleanse the sh*t permeating in their economies. They need liquidation, reset, a clean slate, and part of that is telling bondholders to suck it up and deal with the haircut!!!! Financial instruments are not intended to be underwritten by govts/ troikas / central banks whatever you prefer to call it. The entire globe has run wild because of moral hazars encouraged by big business who have captured the political process in all of these countres.

      • Glad you mentioned the Yanks they have been playing on old wounds and paranoia with both Greece and Turkey selling to both of these States billions in military arms. A nice little cold war earner for the Californian Booster Economy.

        TM.

      • So when things get bad, everyone call for state independency and separation from the union. This looks exactly like this government policy of relieving the richest and burdening the most vulnerable and the weakest in our society. Everyone for himself.
        It is interesting tough how egotism and self interest start dominating any discussion about redistribution of wealth and national income. All that is just a distraction from the real economic problems of our time and the growing inequality and exploitation of human and natural resources. We are boiling slowly so no one could jump from the common pot.

      • The very opposite is true.

        Centralism always favours the strong over the weak.

        Rent-seeking is allocatively inefficient. In the long run it makes everyone (except for the tiny elite of rent-seekers) worse off.

        It is not a zero-sum game. It is a negative-sum game.

        For such negative-sum exploitation to be sustained over time requires as big an economic entity as possible. In a smaller entity it becomes non-viable very quickly.

        Does anyone imagine that the chronically uncompetitive Victorian manufacturing industry would have survived as long as it did without the rest of Australia to feed on? Had Victoria been independent it could have adjusted its currency and focused on those industries in which it really did have a comparative advantage.

        Its population might not be as large as it is today (because people are always drawn in towards the “fountainhead of rents”, making it necessary to extract ever more rents to sustain them). But the population it did have would be wealthier.

        Does anyone imagine that the idea of Sydney becoming an “international financial hub” is anything more than a wasteful pipe-dream sustained by its ability to suck money out of the rest of Australia (through such centrally-imposed policies as compulsory superannuation, and oligopolised industries)?

        Does anyone imagine that New Zealand would be better off today if it had made the mistake of subjecting itself to Sydney-Melbourne hegemony? It would have been “Tasmanianised”. Instead,today, it can enjoy the benefits of CER without the rent-seeking of formal union.

        The EU should have stopped as a customs union, like CER. Australia should not have federated but joined together as a pre-Euro version of the EU.

        Everyone would be better off by eliminating the rent-seeking.

        Everyone will become better off by stopping the rent-seeking.

    • Thanks Corny, I was wondering about that.

      Edit: How is it the Germans can “remember” all the way back to the 20s, yet we here can’t even recall the hardship of the depression/WW2, and turn into mega consumers.

      • KlimashkinaSydney

        collective memory, like collective guilt. “memory” is just a term.

        I know a lot about the Whitlam constitutional crisis, despite not being born. The hyperinflation of the 20s is probably taught in schools over there.

      • That’s not my point. They supposedly remember it to a point it burns them, yet our hardship periods have had little effect on our conscious memory and behaviour. I think what they say about the 20s is overblown.