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Money The Least Of Europe’s Troubles

It is yet another anticlimax in Athens as yet another austerity deal fails to bridge the gap between Greece and its creditors.

Despite the dramatic cuts to government spending negotiated by Prime Minister Lucas Papademos and Socialist Party leader George Papandreou, leaders in Athens and Brussels continued to lock horns over the debt crisis. Mere hours after the announcement, skeptics spoke up. Germany’s finance minister, Wolfgang Schaeuble, voiced doubts about whether the deal merits the proposed €130 billion bailout. Luxembourg’s Prime Minister, Jean-Claude Juncker, chairing the Eurozone meeting to vet the plan, also stated before the proceedings “there are still a lot of uncertainties.”

Uncertainties there were; the Europeans rejected the Greek plan, demanding additional cuts. And in Greece support for the existing plan began melting even as politicians tried to shore it up to meet the EU objections. A deputy labor minister promptly resigned in protest after realizing that state-subsidized housing programs had been cut. Greece’s two major labor unions have staged strikes and rallies outside the capitol to demonstrate against the new austerity package. And though the crucial Sunday vote in Parliament will be the first test of Greek popular will toward the deal, it will not be the last. The leader of Greece’s New Democracy Party, Antonis Samaras, is now calling for fresh elections. Depending on the magnitude of public dissent, the plan’s wavering endorsement by a majority of the country’s notoriously fractious politicians may evaporate, opening a new chapter of infighting. George Karatzaferis, the leader of the Popular Orthodox Rally, already scents blood—he is the first coalition leader to state his opposition to the package, seeking a pretext to focus potential future electoral retribution on Mr. Papademos.

As March 20 looms—the date by which Greece must have secured a bailout to redeem €14.5 billion of bonds—Germany and its northern allies are hanging tough. As we’ve noted on Via Meadia, increasingly EU leaders think that Greece is a unique case and that a Greek collapse won’t take the whole European financial system down with it.  (Also, the other debtor countries who might be expected to side with Greece think that letting the Greeks go down means more money for them.) As a result, the rest of the EU seems willing, even eager, to push the Greeks to the wall.

This calculation may be correct as a matter of economics. Greece is a small economy and with two years’ warning Europe’s banks have had plenty of time to prepare for default.  And there is something to be said for it from the standpoint of ethics as well.  Few people in Europe have lied and cheated as systematically and as brazenly as the Greeks.  Greek voters need to realize that electing politicians who behave like this has consequences, and Europeans have an understandable interest in ramming that lesson home.  (Less credible motives for letting Greece twist in the wind include the desire of bankers and politicians in the north to bury their own stupid mistakes  before the public realizes just how clueless and culpable the political and financial establishments of Europe have been.)

Whether Europe is ready for the political fallout from a true Greek meltdown is something else. PASOK and New Democracy, respectively the main center-left and center-right parties in Greece, are slime-infested sinkholes of corruption and cronyism to be sure, but they are also the chief forces in Greek political life committed to the forms at least of modern democratic governance. Forcing these parties to endorse the bailout terms in a formal parliamentary vote may be forcing them to sign their own death warrants.

Greece has some very far left parties; at the moment, the three largest combined would get 24 percent of the vote in new parliamentary elections. This is more than either of PASOK (at 11 percent) or New Democracy (21 percent) would get according to recent polls.  As the WSJ has pointed out, the parties that back the EU deal would not have a majority in parliament if new elections were held and the results echoed these latest polls.  With the right wing Orthodox party dropping out of the coalition, it’s easy to see a Weimar-like parliamentary system appearing in Greece in which pro-democracy parties don’t have a majority.

The reality may not be so dire. Greece’s dominant parties have formidable and well oiled election machinery in place, and the reality is that (assuming as seems likely that any Greek exit from the euro would be disorderly) Greece would still be worse off outside the euro than in it — at least for now.  It’s possible that the center left and center right parties can make this case effectively, leading disgruntled voters to stick with them one more time.

But continuing austerity in Greece with no hope for an exit is not going to strengthen Greek democracy. And there are signs — in Romania, Slovakia, Hungary and elsewhere — that democratic culture and institutions in a number of EU states are weak.

Ultimately, the political shortcomings of the European monetary project are more worrying than its economic failures. Europe’s first task wasn’t to build a stable monetary union after 1990; it’s first task was to build an enduring democratic order. Monetary union should have been the capstone of a process of European integration rather than its foundation.

As it is, Europe has some heavy bills to pay — and the non-monetary costs are likely to be higher and more expensive than the cash transfers. Foolish leadership and bad decisions at the top have been Europe’s greatest curse for more than 100 years of failure and decline. From 1950 through 1990 Europe’s leaders made smarter choices and had better results; it looks increasingly as if Helmut Kohl and Francois Mitterand put all these achievements at risk when they made the decision to make monetary union Europe’s grand project with the end of the Cold War.

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  • Kenny

    I said it before and I’ll say it again — imagine what the situation in Europe would be like if the U.S. pulled off its security blanket and those freeloading countries, including France and Germany, actually had to pay for their own defense?

    Tell us what that would be like, Mr. Mead.

    And is that why the U.S. taxpayer still has to foot the bill?

  • Lexington Green

    “Europe’s first task wasn’t to build a stable monetary union after 1990; it’s first task was to build an enduring democratic order.” What if the elites building the European project wanted to move away from democracy, toward a bureaucratic, unaccountable autocracy? What if they knew that a monetary union would create inescapable contradictions, which could only be resolved by cramming down fiscal controls from above? What if they knew that monetary union was a step toward stronger centralized, undemocratic control precisely because it was incompatible with sovereignty or democratic accountability? What if the entire European project is authoritarian and anti-democratic at its core? What if the end of the Cold War meant not the triumph of democratic capitalism but merely the death on one multinational oligarchy, to be succeeded a less brutal but more clever iteration of the same idea based in Brussels rather than Moscow? What if Fukuyama was kinda/sorta right about a Hegelian evolution toward an end state for political organization — but the end state is a cartelized, elitist, fascistic, anti-democratic union of business and government power? That seems to be the direction of convergence for China, Europe and the USA. Democratic capitalism was a phenomenon of the English speaking world that is currently on the defensive, if not in intensive care. The Anglosphere has some big challenges ahead. The 400 year old goal of allowing no single power to dominate Europe needs to be dusted off and examined. It may not be as obsolete as it looked during the Cold War.

  • Mark Michael

    Thomas J. Sargent wrote an op-ed for the WSJ, Feb. 3rd, headlined, “An American history lesson for Europe” in which he told about the relationship between our states and the federal government with respect to debt. Recall, during the Revolutionary War we printed paper money called “Continentals.” They were not backed up with anything, we printed way too many, and the expression, “Not worth a Continental!” cam about! (Ben Franklin benefited, he owned the printing presses!) Well, after the Constitutional Convention and the Constitution’s adoption in 1789 plus, Alexander Hamilton persuaded the feds to take over the debts that the states and the continental government incurred during the Revolutionary War. We paid them off dollar-for-dollar!

    Thus was born the sound dollar philosophy – backed up by gold at $20.67 per Troy ounce. According to Sargent, that debt was worth about 40% of our GDP at the time.

    Quoting the article, “Now fast forward into the next century. To finance canals and railroads, many state governments incurred large debts in the 1820s and 1830s. A financial crisis in the late 1830s pushed many of those state debts into default.

    “Appealing to the precedent set by the 1789 bailout, state creditors asked the federal government to bail out the states once again. After an enlightening debate, in the early 1840s Congress declined, so many states repudiated their debts.

    “In the aftermath of those repudiations, many states rewrote their constitutions to require year-by-year balanced budgets, something they had never done before. As noted, fiscal crises, like the one in Europe today, often produce political rearrangements — at best peaceful ones like these.”

    Sargent goes on to say that if the feds had yielded to the temptation to bail out the states, no doubt they would have assumed greater control over their affairs.

    As it was, we retained a highly decentralized nation until the Great Depression gave statists another “opportunity” to bail out the country, this time not the 48 states and their debts, but the private sector banks and their debts. (Milton Friedman and Anna Schwartz blamed the Fed for its mismanagement of its role as bank of last resort and keeper of monetary policy for a big part of the problem.)

    In any case, FDR and his New Deal ensued and we embarked on a more centrally-controlled economy after that, of course.

    Back to the EU, the euro, and its problems. The American example of the 1830s and 1840s are the better model to follow than what happened in the 1930s and the Great Depression IMO. For sure the smaller countries like Greece, Portugal, Ireland could be let to (mostly) solve their own problems. Is it too late for the bigger two countries, Italy and Spain?

    Both have new more conservative governments that seem to be taking things more seriously. Perhaps they’ll enact the austerity measures needed to get their finances under control. If it’s clear that any bailout will be no free lunch: much sacrifice will be the price of any such taxpayer “help” from Germany, Finland, The Netherlands, et al. Then their voters will better understand the folly of demonstrating in the streets, hoping for a better deal.

  • Kris

    Kenny@1: You mean, what would it be like if European countries still had strong militaries?

    Hoo-boy, pass the popcorn.

  • Luke Lea

    At this point Greece will agree to anything. Just give them the tranche.

    Wouldn’t the better thing be to negotiate a bankruptcy, then put Greece out of the Eurozone? It looks inevitable to me.

  • Jacksonian Libertarian

    “But continuing austerity in Greece with no hope for an exit is not going to strengthen Greek democracy. And there are signs — in Romania, Slovakia, Hungary and elsewhere — that democratic culture and institutions in a number of EU states are weak.”
    It seems these cultures have yet to learn their lessons, and will have to go back to school.
    “Example is the school of mankind, and they will learn at no other.” Edmund Burke

  • Russ

    Giving Greece the tranche solves nothing, since said money immediately goes to German and French banks, banks which pointedly failed to do their due diligence, as half the EU failed its debt targets year after year after year.

    Default will hurt the Greeks, and maybe some unsavory folks will come out to play as they have in Greece’s past — but it certainly beats all the imposed austerity, which does nothing but service debt to others without actually erasing the mark.

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