Friday, November 11, 2011

Authority, the public and the euro

Within the last 24 hours, Italy and Greece have gotten new heads of government. One is a former central banker. The other a former European Commissioner. Both favour the TINA approach to dealing with the euro zone crisis, that there is no alternative to those countries accepting their obligations, repaying their debts and staying within the euro zone.

There is merit in that approach, but only if the Greeks and Italians are fully on board with the changes that would have to happen. Those who work for the state, receive a pension, or have a contract with the public sector would have to be willing and able to live with far less income, however that is required. Private sector wages would have to decline. All of this would be required to ratchet back the expenses of the state, and to ratchet back the cost of production for export products. These dual measures are required to start reducing borrowing, reducing payouts, and earning more money. 

This means that Greece, Italy and Portugal must accept, if they go down this path, that the next generation is a lost one. Most of them will become poorer. The achievements they have made will be diminished. The lie of their prosperity, built on a bubble paid for by bondholders, will be exposed for the sham it is.

These are harsh words, and there are equally harsh words that can be pointed at the bondholders who lent their money to these countries. They are equally at fault for being so reckless and delusional in investing in countries like these without the recipients using that money as an investment in future productive income. That is the only kind of investment that the private sector should be undertaking. The worst part of all this is that we not only need to ask the pointed question of what kind of crack that asset managers at hedge funds were smoking when they treated these countries as equals of more productive countries, but why the other investment managers we expect to be more prudent were doing precisely the same. Pension fund managers and insurance managers were part of this as well.

If Greece, Portugal and even other countries were required to default on part of their debt, it would finally force creditor countries to start doing more than treating Southern Europe as the evil shadow of irresponsibility, recklessness and demise. It would force them to face questions about why they were the first in line with the money to give these countries.

Those are answers that voters in creditor countries should be demanding. Why is economic decision-making in the financial centres of Europe so irresponsible? A departure of Greece from the euro zone, as painful as it may be to begin with, would ultimately benefit both it and the euro zone. An important impact would be making euro zone membership more compatible with economic objectives again, as would be aligning membership with democratice choice. But the pressure it puts on financial centres will force some hard questions about why Europe's rich countries thought that their own economic welfare depended on speculation in a bubble in financial instruments, even if they were in government debt. What all of this has in common is that a short, sharp downturn could force a return to realistic assessments--of political motivations and political choices, not just in Greece, but everywhere in the EU. 

The new leadership of Italy and Greece is based on the premise that political authority can force a country to embrace low inflation and public borrowing. Chile has done that fairly successfully, but only through a military dictatorship. This will be the first attempt at such authoritarianism inside democracies. I almost wrote functioning democracies, but that is giving the countries too much credit at the present time.

This is a social science experiment of great proportions, the likes of which have not been seen for a very long time. Can you use public power to change who a people are and what they want?

We shall see.

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