The one-day heresy

 

The news channels available on the cable TV in the Florence hotel were obsessed, in four or five languages, with two subjects: sports and the Greek political and financial turmoil.

The Greek situation is serious, but American news media, including financial specialty publications like Barron's, have managed to keep it in some kind of proportion. In Europe, the newscasters and commentators were speaking in tones that suggested the approach of an asteroid that would crash into the Earth and start a new Ice Age.

The EU leaders, primarily France's Sarkozy and Germany's Merkel, were meeting in Cannes at the G-20 Summit. Following the endless hand shaking and smiling for the cameras, the Euro-zone grandees would announce the deal whereby holders of Greek bonds would accept less-than-fatal wounds on their investments in return for yet more austerity by Greeks who felt they were already austere enough, thank you. The threat of Greece dropping out of the euro currency system would be forestalled.

And then the Greek prime minister, George Papandreou -- is every Greek prime minister named Papandreou or Papa-something? -- set the cat among the pigeons by announcing that he would ask Parliament to schedule a referendum, so the Greek citizenry could vote on whether to accept the house arrest imposed by the European Union as a condition of further bail-out money.

Now there was something like out-and-out panic (appropriately, a Greek word). Papa had a brand new bag. This was treason to the Eurocrats! Imagine asking the Greek people whether they wanted to go along with the scheme so arduously worked out on their behalf in the smokeless-filled rooms at Brussels!

The Eurocrats, you see, consider themselves equivalent to Plato's philosopher-kings, the knowledgeable class making the decisions beyond the capabilities of the sorry specimens who inhabit the countries they oversee.

For a day, the Papandreou heresy called down thunder from the depths of the French foreign office to the Olympian heights of Murdoch's Wall Street Journal. "A Greek Euro-Zone Exit Could Be a Tragedy," said a headline in the European edition of the Journal. (The U.S. version of the same story had a different headline.) 

In a column titled Brussels Beat -- perfectly situated for an independent, objective analysis -- Stephen Fidler wrote, "The extraordinary events of the past week in Europe have included the shattering of a taboo that could have profound consequences for the Continent: the public discussion by European leaders that Greece could exit the common currency. ... Sending a message that exit is possible risks creating a crisis of confidence that eventually forces a government's hand, with what economists say are potentially disastrous consequences."

The story continued:

"The prospect of Greece exiting the euro area is seldom viewed with the proper degree of fear and trepidation," argues Willem Buiter, chief economist at Citigroup. He says the bottom line of an exit for Greece is financial collapse and an even deeper recession—or even a depression—with significant collateral damage to the rest of the euro zone.

One major issue, as Barry Eichengreen of the University of California, Berkeley, wrote in a 2007 paper, is that if a country signals it is preparing a currency change, it will likely lead to a sharp depreciation as people "rush out of domestic banks and financial assets, threatening a banking and financial-market collapse."

Dark motives were alleged by some TV analysts. Papandreou, it was said, found himself in an impossible situation, an EU gun to his head and the Greeks who held his political future in their hands ready to riot again if the deal went down. His only option was to avoid the responsibility via a referendum.

Then he had to back down because he lacked the votes in the Greek parliament to support it. No referendum. It would be wonderfully entertaining to read an uncensored account of the meetings between Papa and the Eurocrats after his proposal was announced, apparently without prior notice to Sarkozy et al.

In purely practical terms, given the state of play, the EU politicians were right. For Greece to see off the Euro-zone and go bankrupt might have cheered the Greeks for a brief spell, but it would have been a disaster -- not necessarily for world markets, despite the predictions of Messrs. Buiter and Eichengreen, but for Greece itself. 

It would have been like removing life-support machinery from a hospital patient, or forcing a heroin addict to withdraw cold-turkey. Partly because of EU largesse, partly running on dream economics, Greece has lived beyond its means for so long that most of its people have no idea how to create wealth by earning it. The welfare state has set up expectations that can no longer be fulfilled, but expectations die hard. 

Greece, like other countries -- it's only the most critical case at the moment -- needs to rebuild its economic model. That means first getting rid of the old one. The EU mandarins realize that Greece is in desperate straits, and are trying to engineer a controlled demolition of a dysfunctional system. An uncontrolled demolition is something you don't want to see.