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Analysis
The harsh generosity of Angela Merkel

The harsh generosity of Angela Merkel

Why we should think back to pre-euro era 

by Meghnad Desai

Tue 21 Jul 2015

After the latest Athens bail-out package, observers need to cast their minds back to the pre-euro period. Greece (and Italy for that matter) became prosperous by frequently lowering the value of their currencies and running lax fiscal policies. Greece became wealthy enough for the rest of Europe to admit it first to the European Community and then to the euro area.

So why not let Greece go back to the regime which suits its genius? Greece needs the southern European-Mediterranean laissez passez approach that lets it pass through economic and political barriers with innate flexibility and suppleness. Why harness it to the northern European forced march of Sturm und Drang when the journey requires daring, dexterity and appropriate doses of devaluation? Grexit is the only way out.

German control of the euro is difficult to argue with. Any deviation from fiscal orthodoxy seems like celebrating sin. Yet that is exactly what is needed. Greece needs to get out of this hideous contract. Print its own money - and renounce its debts, as it has done in the past. Wolfgang Schäuble, the German finance minister, should be commended for putting Grexit firmly on the table. We should all support him.

The euro’s macabre comedy must end. The negotiations (yet another final. final round) have brought Greece some interim relief to meet instalments due to the International Monetary Fund and European Central Bank.

So the euro bloc is paying money to Greece and then getting it back again. This apparently preserves the euro area’s integrity, where, as Angela Merkel has said, no haircuts are allowed. Merkel seems to feel she is being generous towards Greece. If this is generosity, I wouldn’t like to see her in unchivalrous mood.

I wonder what the private creditors think of this rule which preserves the loans of public sector lenders from other euro states but allows Greece to pay the private creditors less than their due. It would be far easier to postpone the instalments or forgive them. As it stands, Greece would drive through this crazy roundabout, without, at the end of the charade, being liberated from a single cent of its burden. The debt keeps mounting up.

The euro was established, if we are to credit history, to assure Europe that a united Germany would not be a bully for the rest of Europe. A single currency was meant to bind them in ‘ever closer union’.

What we have instead is a gold standard-like arrangement which robs member countries of macroeconomic sovereignty. Yet, bizarrely, the system failed to check excessive borrowing when credit was flowing. No one warned the peripheral states that repayment might be a problem.

The gold standard in its heyday was strict but the Bank of England ran it with a light touch. The euro has turned out to be a harsher version. If monetary union was supposed to protect Europe from German bullying, then it has failed. The only country which has gained from this cosy arrangement is Germany with its built-in exchange rate depreciation.

If negotiations proceed as planned, Greece will tie itself to years, if not decades, of excess deflation. Restructuring the state, making tax collection more efficient, and increasing competitiveness may all be virtuous aims. But they help an already growing economy grow faster and better. They cannot ignite growth in a dead economy.

The Greek government will be exporting to its creditors whatever budgetary surplus it can manage, rather than reinvesting it in the economy. All the relief will get sent back to the creditors, a dispiriting form of round-tripping.

No private investor, domestic or foreign, would want to invest in a depressed economy which will stay depressed for decades. This is no way to run a country, let alone a continent.

Prof. Lord (Meghnad) Desai is emeritus professor at the London School of Economics and Political Science and chairman of the OMFIF Advisory Board.

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