Euro meltdown

What happens when an irresistible force meets an immoveable object? The answer is that the situation is impossible.

The Greek debt situation has certainly become impossible. Everyone who has studied the problem admits it is arithmetically impossible for Greece ever to repay its debts.

So a great part of the debt will have to be written off. As Norman Lamont observed in yesterday’s Daily Telegraph:

The Greeks have made mistakes. Yet I have to confess to being more sympathetic to Greece than many observers. The EU has also made mistakes and the crucial one was the failure to write off more of Greece’s debt with the first bail-out in 2010. Greece’s debt now is spilt milk. It will not and cannot be repaid. Even the IMF’s chief economist, Olivier Blanchard, has expressed his dismay at the unreality of the negotiations and called for further debt relief to be a central part of any settlement.

Because of the absence of realistic debt write-off, Greece has had to undergo, to use the official euphemism, the most savage “internal devaluation”. As a result real GDP in Greece fell by 27 per cent; unemployment reached 28 per cent; wages fell 37 per cent; pensions were reduced by up to 48 per cent; and government employment fell 30 per cent.

Even for fiscal conservatives like myself, these policies seem counter-productive. GDP has been falling so fast and the ratio of debt to the economy has risen so sharply (to 180 per cent of GDP), that it is ever more difficult for Greece to pay off its debt.

The German political class finds itself in a horrible predicament. It promised the German public that something like the Greek problem would never arise. I lived in Berlin from 1994-2000, when Helmut Kohl was driving through the replacement of the German mark with the single European currency.

For Kohl this was brilliant politics: it neutered his opponents, many of whom believed more sincerely in the single currency than his own Christian Democrats did. The Bundestag voted almost unanimously for the euro.

But the German people viewed the project with profound misgivings. The general belief, discoverable in any bar in Germany, was that it would be madness to share a currency with the Italians, let alone the Greeks, who were in fact only allowed to join the euro in January 2001, two years after its launch. German savers feared their money was going to be far less safe, and that industrious Germans were bound to end up paying for feckless south Europeans.

The political class brushed these worries aside. It assured the public that there was no question of the Germans having to subsidise the weaker members of the currency union. There were going to be rules, which every country would have to obey, so no subsidies would be required.

In his memoir, Confessions of a Eurosceptic, published in 2012, David Heathcoat-Amory – who predicted that the euro would be a disaster, and in 1996 resigned from John Major’s government over it – described the German approach to Europe:

German politicians would never challenge the basic mission of the EU as they felt that Germany was only tolerable to its neighbours when firmly tied in to a supranational structure…they had a weakness for rules, however unrealistic or unenforceable. For instance, they seemed to believe that the euro would work because the Stability and Growth Pact had put limits on national borrowing. This was somewhat undermined when both Germany and France were both found to have breached the borrowing limit, but no sanctions were applied. The important thing was to have rules even if they were disobeyed.

The Germans should have known from their own experience that a currency union between a rich country and a poor country can only work with the help of very large transfer payments. In 1990, West Germany and East Germany contracted, as part of the process of reunification, a currency union at a rate which made East German businesses hopelessly uncompetitive. Taxpayers in the West had to pay a “solidarity supplement” to rescue the East and bring it up to the West’s level. The westerners grumbled, but they did it.

Are German taxpayers ready to show the same solidarity with the Greeks, and with other struggling members of the euro? It seems most unlikely, for they were told – bizarre and irresponsible assurance – that because Greece was going to obey various unattainable rules, no such solidarity would be required.

The only way for the Greeks to liberate themselves from these punitive and unattainable rules is to leave the euro. But once they have done that, we shall need to show solidarity with them anyhow.







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