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Help The Erring Sisters Depart In Peace

You shall not crucify mankind upon a cross of gold, raged William Jennings Bryan against the punitively high interest rates imposed by the gold-based monetary system of his day.  Bryan lost the election, but arguably he won the debate.  FDR took the United States off the gold standard during the Depression, and since then the Federal Reserve has characteristically been the least hawkish of the world’s major central banks, with easy money and cheap credit a principal feature of American political economy since World War Two.

These days, it is a cross of euros on which European countries like Greece are being hung.  The austerity programs that Germany and its colleagues demand of the Greeks as the price of more bailouts impose savage cuts that Greece’s fragile social order may be unable to withstand.

Via Meadia does not see the PIIGS, and especially the serially and intentionally dishonest Greeks, as innocent victims in the euro-imbroglio.  These countries were happy to take the benefits of euro membership but they did not take the necessary steps to protect themselves against the kind of crises they did not face.  Many of them already had very high debts; their borrowing costs fell sharply with euro membership, and instead of using the windfall to ease the structural economic problems that made them uncompetitive, they chose to party.

This was more than unwise, and it is neither possible nor desirable for these countries to avoid paying the price of folly.  Democracies, like individual human beings, grow wise from experience; in the United States as well as Italy and Greece, voters won’t get smarter and insist on responsible leadership until and unless they understand the cause and effect relationships between demagogic politics and economic pain.

But you can have too much of a good thing, even pain.  Greece is a fragile society in some ways; two generations of featherbedding public sector jobs, cash transfers from government and networks of patronage and favoritism grew up in part as mechanisms to enable Greek society — and Greek democracy — to work at all.

As the seeming inevitability of Greek default approaches, and as the price of austerity required to keep Greece in the eurozone keeps rising, we are approaching a point when it makes no sense for Greece to remain in the zone.

The Via Meadia view is that if Greece wants to stay in the eurozone, it needs to drink the cup of austerity to the dregs — but that if it leaves, its EU partners and the international financial institutions should smooth the path.  The effects of leaving the eurozone could be shattering: bank runs, an absence of physical currency, mass failures of businesses and mass bankruptcies of individuals all swelling into a huge economic depression.

Helping Greece make a smoother transition back to the drachma would be something the IMF and the ECB could do — should do, in Via Meadia’s opinion.  The shame of being forced out of the euro, and the unavoidable and long term economic penalty to be paid for state bankruptcy and mass bank failures will provide more than enough pain to “teach Greece a lesson”.  Neither the Greeks nor anybody else will think that they got away with anything.

Doing what we can to help Greece make an orderly if not an honorable retreat from the euro increasingly looks like the most practical as well as the most prudent and most humane course.  The discussion on Greece needs to shift from how to keep it in the eurozone to how to help it leave.

There is another reason to start planning Greece’s exit.  There may be other countries who need to take the same step in the not-too-distant future; the Greek exit can serve as a trial run for the larger and more difficult transitions that may lie ahead.

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  • Peter

    Mr. Mead, the basic problem with Greece is that the country (and its people) has been living at a standard far above its worth in world commerce.

    In this regard, Greece has been parasistic.

    And once Greece leaves the euro, yes, it will make some positive adjustments, but that won’t alter the macro-trend for the average Greek which will experience a slide back to a state close to what their grandparants knew.

    Think about it. What can Greece produce for the world? Tourism has its limits as does olive oil. Can you imagine the Geeks competiting man-for-man with the Chinese or Indians?

    What these developing countries have going for them is motivation to achieve. As such, their people are lean and hunger. Greece, Spain, Italy … the people there are fat and lazy. Come on, you know that.

  • Richard F. Miller

    Dr. Mead:

    The conclusion reached by an article in today’s Forbes will astonish few regulars to this site: one important reason for the EU’s recent struggles is the desire by its elites to maintain their grip.

    Remember that the EU per se, and certainly many of its pronouncements, has little democratic legitimacy. To allow Greece to leave is likely to commence an unraveling–one good reason why the EU has been moving heaven and earth to retain this otherwise (economically) insignificant country.

    You can bet that if Greece walks (or is pushed) there will be others clamoring for the exit–indeed, little imagination is required to see various German political interests coalescing to lead the pack.

  • megapotamus

    Few recall that Greece was very nearly part of the Communist Bloc after the war years. As in the US, the UK, France and elsewhere, the modern hybrid social-capitalist state was in large measure an answer to calls for full-on Marxist Communism. The populace was “bought off” explicitly. This was always a stop-gap at best. We are meeting the Keynesian long run now. What if the vigors and costs of libertarian capitalism were promoted and defended as forcefully and confidently as Communism was at that time? The lessons of our recent trouble is mostly that admitting the nutty premises of Communism, even to satisfy them on terms with notional Liberty is a pyrrhic practice. The fires smolder. They never go out.

  • Gabo

    Wow, just wow. What may make economic sense doesnt always make political sense. There would be a dominoe effect and a complete unraveling of arguably one of the most important currencies in the world. It would also imperil other forms of inter european cooperation and completely destroy the European project. No, this won’t happen. I pray it doesn’t.

  • Kris

    “Many of them already had very high debts; their borrowing costs fell sharply with euro membership, and instead of using the windfall to ease the structural economic problems that made them uncompetitive, they chose to party.”

    Thank goodness nothing like that could ever happen in the U.S.

  • Corlyss

    “Via Meadia does not see the PIIGS, and especially the serially and intentionally dishonest Greeks, as innocent victims in the euro-imbroglio.”

    When the problem with the PIIGS first came to light, I wondered how, or maybe who, was going to make the notoriously corrupt Greeks and Italians pay taxes they obviously aren’t. Dan Goldman had a great observation in the early days of the Greek solvency crisis: “If they were to end corruption, the entire fabric of Greek society would collapse.” Or words to that effect. Let’s set aside for a moment that the states have been living beyond their means on the equivalent of a credit card. Massive corruption, as has been noted for decades, is a punishing tax on an economic system. It can’t be fixed in a democracy absent public outrage at the 1) the money paid for 2) services that never appear. Obviously, based on the street demonstrations demanding more money for the middle classes, the Greeks are not there yet. And as far as I know, the Italians haven’t even started yet. I simply don’t see how Italy and Greece deal with their presenting symptom (imminent default) until the correct the underlying malady (massive corruption). Neither peoples are angry enough at the existence of the malady. Instead they’re trying to avoid confronting it.

  • Greg Q

    “two generations of featherbedding public sector jobs, cash transfers from government and networks of patronage and favoritism grew up in part as mechanisms to enable Greek society — and Greek democracy — to work at all.”

    Could you explain that one a bit more? because it sounds a lot like “the Greeks are worthless human beings, not merely unwilling but unable to produce as much as they consume.”

  • Mark Michael

    Takis Michas has an op-ed column in the Tues. Sept. 20th, WSJ, page A13, “Why Greece won’t reform.” Some key quotes:

    “To stabilize the euro in the short term, there can’t be any taboos,” Mr. Roesler said. “That ultimately includes Greece’s orderly insolvency, if the necessary instruments are available.”

    For the Greek political class, the statement was a stab in the back….But others entertain strong doubts about the willingness and ability of the Greek political class to implement the structural measures that will improve the performance of the Greek economy. “The present government has done absolutely nothing during the last 12 months to speed up privatizations, reduce the public sector or open up closed professions,” Athanasios Panandropoulos, a leading economic analyst told me recently in an interview.

    “In these 12 months it has not fired even one civil servant. The only thing it is doing is trying to tax the private sector out of existence. Why should we believe that they will do something different now?” …

    “Whereas more than 1,000 Greeks were losing their jobs in the private sector every day in August, the government was assuring civil servants with lifetime tenure that their job privileges were not in danger.”

    Structural reforms have been repeatedly announced by Greek officials during the past. Yet nothing has happened. Greece’s plans tend to resemble Soviet Five Year Plans: They look good on paper but have absolutely no bearing on reality. Anyone in government who tries to point this out is forced to resign.

    …Yet in the past year and a half not a single privatization has taken place….The real reason is probably that Greek politicians are loath to give up the system of spoils that they have long run through these enterprises, which are staffed by the party faithful in exchange for votes.

    Back to the United States. Look how the state workers in Madison behaved when Gov. Scott Walker and the R-controlled legislature voted to lower their benefits and give more power to the agencies employing them. Continuous demonstrations in Madison for almost 6 months, was it? D legislators fleeing to Illinois so they wouldn’t have a quorum? The Greek situation is much, much worse, as I understand it. The featherbedding in government jobs is enormous.

    Here in Ohio where I live, the R-controlled statehouse passed a law called Senate Bill 5 which did similar things to the Wisconsin “Budget Repair Bill.” The state workers rounded up 1.3 million signatures to put it on the ballot for repeal this November. Ten’s of millions will be spent on both sides trying to win. WI and OH state workers are paid about 45% more in total compensation than their peers in the private sector, mostly in generous benefits.

    I think Europe in general has a bad problem with overpaid, underperforming government workers, much worse than America’s.

  • Charles R. Williams

    Why should anyone in Europe care what currency the Greeks use? Well European banking is a house of cards built on the lie that all euro sovereign debt is riskless. So rather than allow the house of cards to topple, German taxpayers continue to fund Greece’s primary deficit. It is a game. The Greeks get more than they give in return for continuing to live the euro lie. Austerity subsidized by Germany is better than collapse. It is the Germans – or rather their politicians – that have to face the truth. Who cares other than the Greeks if Greece is bankrupt? It is the idea of Europe that is bankrupt.

  • Jacksonian Libertarian

    I don’t think you can prune in this situation. The EU is held together with duct tape and bailing wire, and once it starts to come apart, the whole thing is going to fall apart. Like the way the Soviet Union and the Warsaw Pact came apart, and for the same reasons. Once the political will to hold the monstrosity together cracks, it will be a rout.

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