Clause 61: The Pushback Blog

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Archive for July 2015

The July Crisis

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The diplomatic crisis that began World War I played out 101 years ago this month. On 28 June, the casus belli occurred, when the Austro-Hungarian heir and his wife were murdered by Serbian nationalists. By 31 July, Austria-Hungary and Serbia were at war and Russia and Germany were mobilizing.

One of the most interesting features of the crisis was that, reading the accounts of the various participating governments, no one believed that they started the war. Everyone spoke as if they had no choice to do what they had done:

  • Austro-Hungarian leaders believed they could not allow their neighbor to instigate assassination without reprisal;
  • Russian leaders believed that they could not abandon their brother Slavs without losing credibility;
  • German leaders had predicated all their plans on the slowness of the Russian mobilization, and therefore believed that they could not allow it a head start.

People went to war saying, “Home before the leaves fall.” They were cavalier about the risks of the actions that they were taking. Few had any notion of the character of the war they were beginning.

I do not expect the current July crisis, centered on the Greek economy, to result in a shooting war. But what it will result in is serious enough. Like its forerunner a century ago, it features people who don’t understand the consequences of their actions and who see themselves as having no choice but to do what they are doing.

The Greek voters have not helped matters. While poll results had been predicting a close result, the actual vote was a thumping 61-39% result in support of Alexis Tsirpas and his hard-line approach. One ray of hope appeared in the form of the resignation of his finance minister, Yanis Varoufakis, who had made ill-considered remarks comparing the Greek creditors to terrorists last week. But the horse is out of the barn now, and Tsirpas can be sure of his political backing as he resumes negotiations.

Many of the Mediterranean countries are shot through with corruption and clientelism. Favored political groups have become dependent on state handouts. The fact that the state can no longer afford them doesn’t enter into their reckoning. Under these conditions, attempts at reform from above are political suicide missions.

Greece was able to gain admission to the Eurozone in 1999 by showing data meeting the European Union targets, including annual budget deficits below 3% of GDP and public debt below 60% of GDP. By 2004, it had become apparent that the Greek government had cooked the books and these targets had not been met in reality. However, there was no framework in which to handle this.

The Eurozone had been dedicated to expand for expansion’s sake. The dream was of a unified economic entity of 500 million people — larger than the United States — with a single currency and free movement across internal political borders. The European Central Bank would prevent the politicians from inflating the currency in order to hand out candy to their clientele. Within this structure, each country could pursue its own political preferences, but their politicians would have to take the heat for economic consequences of those preferences.

It hasn’t worked out that way. Since 2008, Portugal, Spain, Italy and Greece have all gone through debt-driven troubles. Greece is the worst of the lot, but Spain is not in great shape either. Spanish voters are watching what happens in Greece with great interest.

The referendum now looks like a shrewd calculation by Tsirpas. He now can be sure of his political situation at home as he attempts to shake down the IMF and Germany for yet another bailout and a debt haircut. Tsirpas can point to the result and say that he has no choice; he is only doing what his voters want him to do.

Now we will see what the real consequences of the Eurozone are. Did they leave the central bank in charge of the currency, forcing the elected officials to face the music for their policies? Or did they change the central bank into a fire brigade, committed to do whatever it takes to save the Euro?

The choices now faced by the creditors are all bad. Caving in to the Greeks will encourage the other Mediterranean countries, who don’t want reform either, to push back all the harder. Angela Merkel will face all kinds of heat at home; the Germans are not eager to prop up these other nations at their expense.

However, a hard line position by the creditors has problems of its own. It could force Greece out of the euro. While that in itself might seem desirable, it opens a door in what was meant to be a solid wall. Given the expansive nature of the intent of the euro, there was never a plan to have countries leave. No one knows how it would work. Worse for its proponents, it is a move in a direction opposite to their goals. What becomes of the euro if it is not a permanent arrangement?

Meanwhile, what happens to Greece outside the euro? They would be free to inflate their own currency at the expense of pauperizing themselves in real terms. Exporters would gain, but anyone on a fixed income would lose, as would anyone with money in the bank. The worst-case scenario is a Zimbabwe on the doorstep of Europe.

Events of July 2015 will go far to decide how this mess will play out. Your grandchildren will be reading about this in their history books.

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Written by srojak

July 6, 2015 at 8:32 am