Friday, 28 October 2011 INDEX

Politely ask the Germans to leave
It has been said that it takes two to Tango, but in truth it's possible to dance alone even if the result would be a fairly pale imitation of the real thing. What you can't do is have a currency crisis on your own. For this it does take at least two: you could call them a buyer and a seller, or a lender and a borrower. In truth they are probably all these things at once.

So it makes absolutely no sense to talk about the Greek economic crisis. Not only that: all the current so called solutions do not address the real difficulties. Bankrupt Greece, or throw it out of the Euro, and you haven't solved the problem at all. If Greece is out of the frame the spotlight is thrown on Spain, Portugal and Italy. And there is a long line of pins waiting to fall down after them.

The real problem is that the Euro is over valued so Greek business can not compete on the world market. As a result the Greek government can not raise enough taxes and the country can not pay its debts.

But why is the currency over valued? In a word: Germany. The German economy is so productive, so efficient that the country on its own is one of the great trading forces of the world economy.

German exporters benefit from the valuation of the Euro since it enables them to sell more goods abroad. Of course, Germany as a whole loses out since if the country was outside the Euro and went back to the Mark imports would become cheaper and the average German could have a slightly more comfortable lifestyle. But there is iron in the collective soul of Germany and past austerity has given them a taste for frugality in exchange for currency stability. When it comes to the Euro, the German view is:

And always keep a-hold of Nurse
For fear of finding something worse.
(Hilaire Belloc)

But what happens if a country is unable to compete in the world market and can not depreciate its currency? The answer is clear, we already know, for we have seen it in the north of England, Ireland, the south of Italy and many other places. Productive, industrial jobs wither. International companies attracted by soft loans or favourable tax regimes are increasingly footloose and fancy free so even if they do build a plant or two there are not as many jobs as there used to be and they stay for a shorter period of time. Low paid service industries (like tourism) become the mainstay of the economy. The Germans get to put their towels on the deckchairs first because local youths have mostly gone thanks to a permanent economic diaspora.

The solution favoured by the politicians (often described as kicking the can down the road) is to let the rich countries subsidise the poor ones, or perhaps more accurately to let the Euro inflate a little so long as Greece, Italy and the others promise to put their houses in order. This may work for a while if only because China may want to invest in the Euro in order to hedge its American portfolio (or to put it another way play Peter off against Paul).

But the Greeks and the others will eventually have to pay if only because in the medium term financial support will result in political interference. In effect the Germans will be telling them what to do. As Homer might have observed: Beware of Germans bearing gifts.

If you look at the problem like this the solution is obvious. Instead of relying on the Germans for hand outs, simply throw them out of the Euro. If this happened there would instantly be a dramatic reduction in the value of the currency (just to publicly suggest the possibility would probably drive the Euro down 5%) and Greek exporters would be back in business. The Euro without Germany would still be a large trading bloc, quite capable of looking after itself.

It might be argued that the Greeks would be in an even worse state since interest rates would rise and servicing their debts would become impossible. But this is hardly likely. If the Greek economy was in a position to pay back its debts at some point in the future, lenders would probably be prepared to accept a lower interest rate.

Posted by Jonathan Brind at 02:59
Friday, 28 October 2011 INDEX