If Greece Defaults, Is It The End of the World?
Tugboat at workImage via Wikipedia
Greek default = Euro crash = end of the world as we know it.
World trade collapses. China - universally considered as the bulwark against the West's recession - grinds to a halt. The other BRIC countries (India, Russia, Brazil) too. And America, already on the brink with historically high unemployment, will tip back into recession.
That's what the media will have you believe. That's conventional wisdom.
The Latest Kink in the Bailout Process
Auditors from the European Union, European Central Bank and International Monetary Fund unexpectedly left Greece last Friday, breaking off the fifth quarterly review they were conducting regarding Greece's compliance with the bailout - reviews are a standard bailout requirement.
By Monday, the markets, jittery as always, came crashing down, losing an average 4% across the globe. Yet all the auditors had was a banal dispute over how the Greek Government intends to meet its deficit targets. It seems they'll be back by mid-September, by which time the Greek Government should have prepared a note for them clarifying its position.
A New Chapter in the Great Recession?
In the gathering gloom about the Euro's future and the conviction that measures to handle the debt (any country's debt, really, but the Greek debt in particular) will cause a deep recession, let's consider the unthinkable: a full Greek default.
Will that be a new chapter in the on-going Great Recession?
The Americans have clung to the idea that they are into a (slow) recovery (that produces no new jobs), and that things will turn out okay in the end provided the world's economy is not rocked by a Euro crash.
That's conventional wisdom too.
Let me don my Pessimist's Hat: I'm convinced we are not out of the woods.
The American so-called recovery is just a bubble on the surface of an on-going Great Recession.
The proof? Unemployment is bad in the US and growing, no question about it,and it is bad everywhere else too. It is abysmal in Spain and Greece, but the rest of Europe is suffering too, with one exception: Germany. And China of course.
But Germany's exports have just begun to slow down again and even China is riding rough waters, what with its imminent real estate bubble that could burst anytime and rising wage demands on the part of Chinese workers that are slowly squeezing China's trade advantage.
So the two world economic tugboats are definitely slowing down and coming into rough waters, if I may be permitted the metaphor.
Let me ask you, is this the time for our politicians to concentrate on controlling deficits when the real problem at hand is lack of growth and unemployment?
When Controlling Deficits Means Killing Growth and Letting Unemployment Increase
No, we're not out of the woods. By a long shot. We are right in the middle of them. European politicians - along with the Republican party in the US that has successfully shackled Obama so far - seem bent on taking every political decisions they can think of to make matters worse.
Needless to say, Cameron and Osborne's drastic cure for Britain that has instantly slowed UK growth and there's no need to go further into this here: it's obvious that austerity measures in Britain can only have the effect of discouraging growth. The stats are in to prove it. And, as we've seen recently with the wild rampage of disgruntled youth in London and other cities, austerity, even just the prospect of it, can cause unusual social tension.
Likewise Angela Merkel has been irresponsibly late in bailing out Greece, only agreeing reluctantly and at the very last minute to do something (half) constructive.
Result? The Greek bailout is now running into trouble, My only consolation is that Merkel is also politically in trouble, as shown by the poor showing of her party at the latest regional elections. This is a woman who has absolutely no understanding of economics and no European vision at all.
The Finns too are showing a total lack of European vision: they want collateral from the Greek Government to cover any funds they might provide to the bailout effort!!! That obviously defeats the purpose.
Actually, the Finns are only expected to provide 2% of the total (small country, small input). But one can't help but wonder about them! The trouble is they've set a bad example: other Eurozone countries have jumped into the fray, including countries that ought to know better like Austria, shamelessly clamoring for a guarantee.
Thinking the Unthinkable: Go Ahead, Greece, and Default
What happens if Greece defaults? Nothing.
Yes, you read that right. Well, nothing in the sense that it won't be the end of the world, and may well signal a new beginning for Greece, finally free of its strangling debt.
Yes, I know, many of you will be surprised that I write something like this, after having so often explained that the way to defend the Euro is to avoid a Greek default.
Let me be clear: I am not saying Greece should come out of the Euro. I'm only saying that a controlled default is the only way out for Greece. To wipe out its debt and start anew on the path to growth.
Actually, it's already in controlled default mode.
In the latest bailout process, private investors in Greek bonds are asked to accept a bond swap taking a thirty percent cut or thereabouts. And the cut is a lot less painful than the one that is already operating in the markets where Greek bonds are trading at nearly half their value. Also, Greece should make clear what policies it will pursue to re-awaken growth.
The problem is: so far, all we've heard are measures aimed at righting the deficit. More taxes, a higher VAT destined to strangle Greek tourism, and a shameful garage sales of the crown jewels - I mean the best of State-owned property: how can anyone hope to sell them at a correct price in these recession times?
Surely, this is not the way out of the recession!
But let's consider for the moment a careful, controlled Greek default.
That means immediate relief on the debt front. Just like Iceland: so much has been written about how lucky Iceland was not to be in the Euro because it could devalue and start afresh. And it has just done that: its economy is not exactly roaring but it is clearly on the way to recovery.
If Greece defaults but stays in the Euro, what will happen? Euro devaluation? Yes, a little bit, and it has already happened: the Euro trades lower against the dollar, in spite of the bad employment news out of the US. Probably this downward slide would continue. The Euro might go down to trading at 1.25 against the dollar, or even lower.
Is a weaker Euro bad for the Eurozone economy? Not at all, it would help European exports, chief among them the German ones that have just stalled.
The German tugboat would start chugging again. Much to the benefit of all its European partners (whose exports would also improve), including Greece.
Let's not forget, please, that the Euro is the second reserve currency in the world after the US dollar. The Euro cannot and is not about to disappear. True, it is badly managed and it walks on one leg only (the European Central Bank) and it lacks its second leg in the form of a federal European Treasury to carry out fiscal measures. Such a Treasury, modeled after the American one, is urgently needed, and that too is a question our politicians should address.
But let me repeat: this has to be a controlled default accompanied by measures aimed at reviving growth and employment.
That is what we should all talk about: how to revive economic growth and create new jobs. Obama is to address Congress next Thursday 8 September, and it will be interesting to hear what he has to propose to stimulate growth and employment in the US. Hopefully, some of his proposals will be heard and followed by the European political class - a class that has been remarkably deaf and dumb on economic issues, in spite of what the best economists of our times are saying, all of them getting hoarse in the attempt to draw their attention to the real problems that beset all of us: slow growth and unemployment, not deficits! I'm getting hoarse too!
Why Keynes Is Neither Irrelevant Nor and Idiot
Every time an economist talks about fighting recession with government intervention in the economy - things like investing in infrastructure, the most basic of Keynesian recipes (and surely the US needs some investment to renew its crumbling infrastructure?) - he is accused of being a Keynesian, as if this were an irremediable shortcoming. If you come forward with a Keynesian recipe to cure our economic ills, you're considered an idiot. You're told Keynesian recipes lead to Big Government, and Big Government is Bad.
Why this extraordinary black and white or cowboys-and-indians vision of the economy?
Why should Big Government be bad in a democratic society that has parliaments to control government?
Big Government is needed in recession times because it is the only economic agent that can be counted on to invest and create jobs. Private agents - businessmen and investors - are too afraid to invest: they don't see any quick returns in recessionary times, so they stay put. They sit on their cash. And that's exactly what the Big American Corporations have been doing since the start of the Great Recession. Sitting on their cash. And avoid paying taxes. And getting the media (Murdoch with his Fox News first among them) to support their Small Government/No Taxes/No Budget Deficit position.
That position is based on a hugely simplistic argument: it's bad for a family to be in debt, right? So it is likewise bad for a country. Future generations will have to pay for our (debt) sins, if we don't put our house in order! This argument calling in the sorry fate of our children and grand-children is really aggravating. Of course, no one wants to willfully hurt one's children. So should we really pull in our belts and go full blast for deficit control? Will that solve the problem of slow growth and unemployment?
Actually History teaches us otherwise.
The Lesson of History: Default Can Have a Positive Outcome!
Not just in Iceland. In the United States too!
Yes, the United States! This is not a typo on my part. I mean the United States, the top economy in the world, the country whose currency forms the basis of international trade. Sure, it happened a long time ago, in 1841, when the Second United States Bank defaulted. It was, to all intents and purposes, a Central Bank default. And it hurt like hell the British investors who had bet on American industrial development and had financed the construction of the first big American railroads. They were left with precisely nothing in their hands!
But America, freed from the weight of a huge debt, started growing again - all through the rest of the 19th century, and of course, the rest is History. And yet, if you examine the history of banking in the United States during this whole period when the great American economic might was being born, you'll be struck by the instability of the banking system (banks didn't last longer than 5 years on average) and more generally, the political mess and uncertainty in which the system operated. Worse than the Euro!
So why can't Greece - and Europe - follow the American example?