Sunday, July 12, 2015

Stiffing Greece

The news from Europe isn't all bad, for The Wall Street Journal reports

Europe’s standoff with Greece has thrown German Chancellor Angela Merkel into one of the deepest domestic political crises of her 10-year tenure. This coming week, things may well get much worse.

The Social Democrats, the conservative chancellor’s left-of-center junior governing partners, are increasingly criticizing Ms. Merkel and her finance minister, Wolfgang Schäuble, for appearing to be prepared to kick Greece out of the euro at least temporarily. Her conservatives in parliament are demanding a hard line. Ms. Merkel herself has left her options open—a strategy that critics warn is increasingly untenable.

David Dayen explains

What has been happening in Greece has been a long exercise in sadism by European elites, who care only about keeping their political project alive, regardless of how those who must deal with the consequences are affected. Three governments ago, Greece rang up a series of debts that they have no practical ability to pay back. The structure of the eurozone, 19 countries sharing a common currency, encouraged this debt buildup, which manifested through capital flows from the wealthier north to the southern periphery. With a single currency, investors chased higher returns in countries where capital was scarcer; this was part of the core euro design. When the investors pulled out and the debts came due, the northern states, led by Germany, pretended this didn’t happen and demanded their money back.

Eduardo Porter of The New York Times recognizes "a general less about the nature of debt," that "major debt overhangs are only solved after deep write-downs of the debt's face value.  The longer it takes for the debt to be cut, the bigger the necessary write-down will turn out to be." He finds this is

a general lesson about the nature of debt. Yet from the World War I defaults of more than a dozen countries in the 1930s to the Brady write-downs of the early 1990s, which ended a decade of high debt and no growth in Latin America and other developing countries, it is a lesson that has to be relearned again and again.

Both of these episodes were preceded by a decade or more of negotiations and rescheduling plans that — not unlike Greece’s first bailout programs — extended the maturity of debts and lowered their interest rate. But crises ended and economies improved only after the debt was cut.

Germany itself refused to pay its external debt between the two world wars, from 1929 to 1931.  But that was 85 years ago and pre-dated the rise of the Third Reich, so its applicability to the present situation is extremely limited. However, as economist Thomas Piketty notes (photo from the AP, cutting post-WW II debt in half  in 1953)

after the war ended in 1945, Germany’s debt amounted to over 200% of its GDP. Ten years later, little of that remained: public debt was less than 20% of GDP. Around the same time, France managed a similarly artful turnaround. We never would have managed this unbelievably fast reduction in debt through the fiscal discipline that we today recommend to Greece… Think about the London Debt Agreement of 1953, where 60% of German foreign debt was cancelled and its internal debts were restructured.

There are eighteen nations other than Germany which belong to the European Union and use the euro (In map below from Wikipedia, nations in blue are in the European Union and use the Euro; in yellow or red are nations in EU but without Euro; in purple, nations not in EU but which use Euro.)  However, Germany is by virtue of geography, as well as economic and political dominance the leader of the pack.  Piketty argues, "Those who want to chase Greece out of the euro zone today will end up on the trash heap of history. " And at least for now, that's the government in Berlin and its chancellor, Angela Merkel.

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