Winner of the “Funniest Story of the Month” award for August 2015

If you are a regular reader of my blog, you will know that I am working on a “Plan B” for Greece.

During my research, I came across the following article on a web-site called “Project-Syndicate”. I could not help myself having a bit of a laugh as I was reading it. At first, I thought that this was a satirical piece, poking a bit of fun at Tspras and the bail-out plan. On re-reading the article, however, I started to realise that the author was being serious. Mr. Kaletsky really puts a lot of effort into convincing us that Greece will soon become the new “Garden of Eden”.

On the basis of my initial chuckles, I present to you the winner of the “Funniest Story of the Month” award for August.

Why the Greek Deal Will Work

by Anatole Kaletsky (22 July 2015)

Now that Greek banks have reopened and the government has made scheduled payments to the European Central Bank and the International Monetary Fund, does Greece’s near-death experience mark the end of the euro crisis? The conventional answer is a clear no.

According to most economists and political commentators, the latest Greek bailout was little more than an analgesic. It will dull the pain for a short period, but the euro’s deep-seated problems will metastasize, with a dismal prognosis for the single currency and perhaps even the European Union as a whole.

But the conventional wisdom is likely to be proved wrong. The deal between Greece and the European authorities is actually a good one for both sides. Rather than marking the beginning of a new phase of the euro crisis, the agreement may be remembered as the culmination of a long series of political compromises that, by correcting some of the euro’s worst design flaws, created the conditions for a European economic recovery.

To express guarded optimism about the Greek deal is not to condone the provocative arrogance of former Greek Finance Minister Yanis Varoufakis or the pointless vindictiveness of German Finance Minister Wolfgang Schäuble. Neither is it to deny the economic criticism of the bailout provisions presented by progressives like Joseph Stiglitz and conservatives like Hans-Werner Sinn.

The arguments against creating a European single currency and then allowing Greece to cheat its way into membership were valid back in the 1990s – and, in theory, they still are. But this does not mean that breaking up the euro would be desirable, or even tolerable. Joining the euro was certainly ruinous for Greece, but there is always “a great deal of ruin in a nation,” as Adam Smith remarked 250 years ago, when losing the American colonies seemed to threaten Britain with financial devastation.

The great virtue of capitalism is that it adapts to ruinous conditions and even finds ways of turning them to advantage. The United States in the mid-nineteenth century was badly suited for a single currency and a single economic structure, as evidenced by the Civil War, which was provoked as much by single-currency tensions as by moral abhorrence to slavery. Italy would probably be better off today if Garibaldi had never launched unification.

But once unification has happened, the pain of dismantling the political and economic settlement usually overwhelms the apparent gains from a break-up. This seems to be the case in Europe, as clear majorities of voters are saying in all eurozone countries, including Germany and Greece.

Thus, the question was never whether the single currency would break up, but what political reversals, economic sacrifices, and legal subterfuges would occur to hold it together. The good news is that Europe now has some persuasive answers.

Indeed, Europe has overcome what could be described as the “original sin” of the single-currency project: the Maastricht Treaty’s prohibition of “monetary financing” of government deficits by the ECB and the related ban on mutual support by national governments of one another’s debt burdens. In January, ECB President Mario Draghi effectively sidestepped both obstacles by launching a program of quantitative easing so enormous that it will finance the entire deficits of all eurozone governments (now including Greece) and mutualize a significant proportion of their outstanding bonds.

Moreover, European governments have belatedly understood the most basic principle of public finance. Government debts never have to be repaid, provided they can be extended in a cooperative manner or bought up with newly created money, issued by a credible central bank.

But for this to be possible, interest payments must always be made on time, and the sanctity of debt contracts must always take precedence over electoral promises regarding pensions, wages, and public spending. Now that Prime Minister Alexis Tsipras’s government has been forced to acknowledge the unqualified priority of debt servicing, and can now benefit from unlimited monetary support from the ECB, Greece should have little problem supporting its debt burden, which is no heavier than Japan’s or Italy’s.

Finally, Germany, Spain, Italy, and several northern European countries required, for domestic political reasons, a ritual humiliation of radical Greek politicians and voters who openly defied EU institutions and austerity demands. Having achieved this, EU leaders have no further reason to impose austerity on Greece or strictly enforce the terms of the latest bailout. Instead, they have every incentive to demonstrate the success of their “tough love” policies by easing austerity to accelerate economic growth, not only in Greece but throughout the eurozone.

This raises a key issue that the Tsipras government and many others misunderstood throughout the Greek crisis: the role of constructive hypocrisy in Europe’s political economy. Gaps between public statements and private intentions open up in all political systems, but these become huge in a complex multinational structure like the EU. On paper, the Greek bailout will impose a fiscal tightening, thereby aggravating the country’s economic slump. In practice, however, the budget targets will surely be allowed to slip, provided the government carries out its promises on privatization, labor markets, and pension reform.

These structural reforms are much more important than fiscal targets, both in symbolic terms for the rest of Europe and for the Greek economy. Moreover, the extension of ECB monetary support to Greece will transform financial conditions: interest rates will plummet, banks will recapitalize, and private credit will gradually become available for the first time since 2010. If budget targets were strictly enforced by bailout monitors, which seems unlikely, this improvement in conditions for private borrowers could easily compensate for any modest tightening of fiscal policy.

In short, the main conditions now seem to be in place for a sustainable recovery in Greece. Conventional wisdom among economists and investors has a long record of failing to spot major turning points; so the near-universal belief today that Greece faces permanent depression is no reason to despair.”


About Peter Smith

A "foot-soldier" in the wider Post Capitalism Movement. First task - keep spreading the words of change, hope & inspiration.
This entry was posted in Humourous and Serious and tagged . Bookmark the permalink.

2 Responses to Winner of the “Funniest Story of the Month” award for August 2015

  1. LeaNder says:

    Ok, I wondered a bit about “funniest story of the month”, but then I found a link to one of my core interests during the last one and a half decade: Capitalism 4.0The Birth of a New Economy in . Aftermath of Crisis, By Anatole Kaletsky
    “In this controversial book, Anatole Kaletsky puts the upheavals of 2007-2009 in historical and ideological perspective. He shows how the forces that precipitated the financial meltdown are now creating a new and stronger version of the global capitalist system– one that will continue to be led and shaped by the U.S. if its businesses and politicians play their cards well. This is Capitalism 4.0, and it will change politics, finance, international relations, and economic thinking in the coming decades. ”

    Appreciate this link

    But then, I may have limited time to dig through it.

    But since your partner is Polish, what is her position in US/EU politics concerning Russia and the Ukraine?


    • Anatole Kaletsky is far more educated and experienced in these matters than I. That is the only point that I will concede to him.
      There are many other academics, economists and politicians with similar or better education, qualifications and experience as he and those experts have a very different view to his.

      If Kaletsky actually believes what he writes, then it makes him a good spokesman for the Capitalist Elite brigade. That’s it!
      I think he is wrong.

      Currently, I am reading Noam Chomsky’s book, “Necessary Illusions”. Wonderful and enlightening stuff. Rather than reading what I have got to say, I highly recommend that you read at least chapters 1 & 2 of this book. It explains everything regarding the “propaganda” that we are fed. More on Noam Chomsky later on in my blog, I hope.


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