Saturday, 11 February 2012
Will Greece take the neoliberal medicine?
The long and boring crisis of the Euro continuing, with claims that this weekend it's make or break for the currency. However as we've heard this more than once I guess nobody outside of Greece is holding their breath.
The Euro has always been a bit of a political curiosity here in the UK. The whole European Union project has always been somewhat Janus like, with one head facing towards a brotherhood of nations healing the wounds of two hot wars and one cold one, whilst the other points in the direction of the nefarious neoliberal dream.
As a result the Euro has at various times been loved by liberals who ought to know better whilst being simultaneously hated by the right wing Tories who want to privatise everything in sight.
In the end both sides of the project failed as tensions in Europe are at their highest since 1989, if not 1945, whilst the big corporations are looking decidedly wobbly.
The Euro was supposed to propel the EU into the economic fast lane by setting up a market that would be the Monetarist's dream. Capital would flow effortlessly from country to country and the most unproductive and protective southern European enclave would become models of Teutonic efficiency, surfing towards a prosperous, if unequal, future on a wave of cheap credit.
To sum up what went wrong the easiest thing to say is that almost none of the planned benefits appeared whilst almost all of the feared problems emerged. Greek workers were no more efficient than before but now cost as much as Bavarian ones and the taxis in Florence still cost more than those in Frankfurt.
If it hadn't been for the Credit Crunch it would still have gone tits up, but thanks to the events of the last five years the whole thing is now going to hell in a Ferrari rather than a handcart.
If you want to think about where we are now its easiest to imagine a game of domino toppling in which the dominoes get progressively bigger.
First to fall was the US sub-prime mortgage market, in which crafty bankers sold houses to people who could never afford to pay for them using the age old trick of passing off the debt to someone else and running. Until it nearly crashed the entire banking system it was a wicked wease.
Incidentally US Republican candidate Rick Santorum now believes that the banks were forced to do this by a cabal of socialists, despite the fact that there's no evidence that they needed any incentive other than greed and that the famously non-socialist George W Bush was in the White House. That's just too bizarre to be even scary!
Anyway that crashed the US Housing market, which in turn crashed small banks like Northern Rock, which then crashed bigger banks and investment houses like Lehman Brothers and RBS which in turn crashed the economies of small countries like Iceland and Ireland.
The next dominoes are medium sized countries like Greece and Portugal, but before we come to them it's worth looking at what happened to the last dominoes, Iceland and Ireland.
Both were small countries that had seen their economies, previously grounded on farming and fishing, leap into the stratosphere on the back of huge bank lending and a turbo boosted property bubble.
The Irish have a proud history of being Europe's victims. Usually it's of English thuggery, but this time they mugged themselves. In order to stay in the Euro they turned 70 billion Euros of private debt into public debt, shrank their economy by 20% and gave themselves the toughest budget in the state's existence. But, heh, they're still in the Euro and it still costs a fiver for a pint of Guiness in Dublin.
Iceland by contrast is a nation of settled Vikings, that was still pagan when Edward the Confessor was born, which invented Parliamentary democracy and the soap opera. Not the sort of people to riot in the street, they never-the-less protested in their own way when such austerity was threatened.
What followed was interesting. They told the banks they weren't paying and halved the value of their currency. The economy crashed, saving and jobs were wiped out, but the state was still able to protect the vulnerable and state pensions and other benefits actually went up as a proportion of state spending and relative to average incomes. They don't buy so many foreign cars these days, but Whale Watching is doing really well.
The result of these two policies is interesting. the rather crude economic "Index of Misery", which is just the unemployment rate added to the inflation rate, hit 25 for Iceland, but is now less than 10, whilst for Ireland it started at 6 and has now passed 17.
Early days, but the future looks better for the Vikings.
Which brings us back to Greece. A previously rural economy, famous for fish and olive oil, relatively recently freed from an Imperial neighbour, with a glittering pagan past. A democratic pioneer, but with a Misery Index on the wrong side of 20 and rising.
Which path will she take, Ireland or Iceland?
The EU wants them to take the Irish medicine, and it has very good reason to do so. If Greece leaves the EU its debts will convert to Drachma, which means that even if they were paid back all its creditors would be able to buy would be retsina.
Mostly this would affect the French, and whilst the Little Englanders might initially sneer as those garlic munching Europhiles watch their banks disappearing into la merde, it will be our banks next as they're joined at the hip to those across the channel. First to go would be our own Royal Bank of Scotland, which really is our own as I'm a shareholder now, along with every other tax payer in the country. That's why they gave their boss a massive bonus. It's the same reason bomb disposal teams in Afghanistan get combat pay.
Faced with the prospect of a second Credit Crunch, its no surprise then that we're still applying a Neoliberal remedy to Greece and trying to bail them out.
Perhaps the real question though is, why are the Greeks still taking the medicine?