Should the Greeks have a referendum on
whether they want to stay in the euro? Are the upcoming elections such a
referendum? Would it be better for the Greeks if they left the euro? – Are you,
like me, sick and tired of hearing these questions and then the answers based
on the same stale and superficial logic?
Most commentators assume that it was a mistake of ‘the
Greeks’ to enter European Monetary Union and that they would do better outside
of it. I suspect some undue generalization behind such verdicts. For who do
these observers talk about when they say ‘the Greeks’? It seems evident, for
example, that to the extent that the Greeks are savers they do
not believe that exiting the euro and having again a depreciating local
currency is in their interest. In fact, they expect to get hurt by such a move.
These savers – the forgotten men and women of the crisis – are already holding
their own referendum. They are shipping their savings to Germany, the
Netherlands and Finland in an attempt to protect them from confiscation through
devaluation and inflation. They want their savings to stay in the Euro Zone.
Such ‘voting’ could be characterized as ‘Germanic’, although I would say it
simply serves to show that the interests of those who save are very similar,
regardless of which country’s passport they hold.
Savers play an important role in the market economy. Capitalism is based on capital, and capital is generated through saving and not money-printing, contrary to what many economists and central bankers want us to believe. Prosperous societies have always been built on hard money, which encourages saving and the expansion of the capital stock, and in turn increases the productivity of human labour. Greek savers are no different from American savers or German savers, and the role of money, saving and capital is no different in Greece from that in any other country. The laws of economics change as little from one place to another as the laws of physics. And sacrificing the interests of your savers for some short-term boost to growth will have the same adverse long-run effects in Greece as it has anywhere else.
It is often said that Germany can afford to live with
a harder currency than her European ‘partners’ because she has a strong
industrial base and a high personal savings rate. This confuses cause with
effect. Germany has a strong industrial base and a high personal savings rate because she
has had a relatively hard currency for so long. The absence (at least in
relative terms) of inflation and currency depreciation has encouraged saving,
capital accumulation and efficient, competitive corporate management. The
de-industrialization of Britain, to take just one example, may have been the
result of militant unionism in the 1950s to 1970s, and of the craze for
nationalization of industry but the ongoing policy of currency debasement by
the Bank of England certainly played its part, too.
We should therefore be very suspicious if we are told
that it would be in the interest of ‘the Greeks’ if they adopted a weaker
currency. It has never been in the interest of any country to adopt a weak
currency.
Politics
versus economics
The political urge to superimpose some unifying
‘national interest’ on all citizens runs counter to everything the
decentralized spontaneous market order stands for. The whole point of a market
economy is that it is based on private property and voluntary, contractual
exchange. And voluntary, contractual exchange works so well because two parties
frequently have different interests
or tastes or preferences. If I sell you one of my old vinyl LPs for $2, it
doesn’t mean we agree that this record is worth $2. We disagree. You value the
LP more than $2, I value $2 more than the LP; otherwise we wouldn’t trade. By
trading we have both improved our position. Extended human cooperation based on
private property and free, non-aggressive and voluntary exchange improves the
position of everybody participating in such a society. In the market economy,
not everybody will be rich and not everybody will necessarily be happy. But for
those who prefer a larger supply of things to a smaller supply of things, there
is no better way to achieve this than by participating in a private-property
economy.
The market economy is precisely so powerful because it
is a highly efficient way of human cooperation that does not require ‘common
interests’ or ‘single goals’. To the contrary, it thrives on differences and
still achieves peaceful cooperation. That is precisely its strength, and that
is also what sets it apart from politics. The diversity of human talents,
interests and preferences that is simply a fact of life does not have to be
suppressed and curtailed to fit into the dumb tribalism of politics, which is
always about ‘the Greeks’ need this but ‘the Germans’ want that.
All we need for this cooperation on markets to work is
the rule of law and hard money as a medium of exchange and store of value.
Other than providing these two things, there is no legitimate role for politics
in the economy (and by the way, it can be argued that even money and the rule
of law are best provided outside the state but this is a
different topic). In
that sense, there is indeed a common interest that everybody shares, but not
only all ‘Greeks’ but equally ‘the Japanese’ and ‘the Congolese’: That is a
common interest in a framework that allows human cooperation on markets, and
that framework is simply the protection of property rights (the rule of law)
plus hard and apolitical money. The rest you can safely leave to the people – laissez faire!
Macroeconomics
as politicized economics
Sadly, however, there is a branch of economics that
has been all too happy to look at the world through the prism of politics, and
this branch is modern macroeconomics with its focus on national account
statistics. The macroeconomist, believing that the statistical aggregates he
can measure and observe are also the driving forces of the economy, happily
subscribes to the political fiction of the ‘national economy’. Such an economy
is assumed to be congruous with areas of political jurisdiction, so the
macroeconomist can talk to the politician about ‘the Greek economy’, which is,
we are to believe, a clearly distinguishable economic entity and neatly ends
where the neighbouring countries begin. And he can then ascertain what special
needs this specific ‘national economy’ might have; what its unique requirements
are; and what would be beneficial for everybody living within the borders of
this ‘national economy’. With this dubious intellectual sleight of hand,
the spontaneous interaction of all those people with all their different,
divergent and often conflicting ideas, preferences and tastes who make up the
essentially borderless, increasingly global market economy disappears and is,
conveniently for the political mind, replaced with national objectives and
clear goals. ‘The Greeks’ need a weaker currency. ‘The Greeks’ need lower
interest rates. ‘The Greeks’ need higher inflation. — All of them? — Tribalism
as the currency of politics is restored. And – bingo! – the economist has a
role as policy adviser.
The
mirage of manageable capitalism
If you want to get an idea of how the bureaucratic
elite perceives the world, you only have to open the Financial Times. Take last
week’s edition of May 23. There is the IMF bureaucracy telling the UK
bureaucracy that ‘the Brits’ need lower interest rates and more government
spending. Martin Wolf tells us that ‘the Greeks’ can be helped if ‘the Germans’
accept higher inflation. (Hint: Martin Wolf is almost always in favour of easy
money and a bit more debt to ‘stimulate’ the economy). Then there is Professor
Jeremy Siegel of the Wharton School of the University of Pennsylvania, who
tells us that what everybody in the Euro Zone needs is a proper devaluation
of the euro. It
is, of course, no coincidence that all this advice from the IMF’s Lagarde to
the Wharton School’s Siegel points in the same direction: toward lower interest
rates, more money printing and currency devaluation. The debasement of money is
the cure-all of economic problems, according to our policy elite.
Of course, the logic of Lagarde, Wolf and Siegel is
roughly equivalent to suggesting that you and I would benefit in our little
exchange of old records for dollars if the bureaucrats kept debasing the
dollars or otherwise intervened to artificially prop up the prices of old vinyl
records. Of course, their interventions may occasionally help one party to the
trade at the cost of the other, but they cannot improve the mutual benefit that
you and I derive from this commercial transaction and that is its true raison
d’etre. Most important, however, is that the mere fact that they are
intervening at all – and keep intervening – will raise our uncertainty about
the value of dollars and the prices of records in the future. The whole idea
that their currency manipulations will make our co-operation better or more
beneficial is entirely preposterous.
Helping
Greece through monetary debasement?
Of course, I am not denying that Greece as a political
entity has some specific problems. This is how Professor Siegel in his article
on euro devaluation describes the three key problems:
First, the flight of deposits out of fear of euro
exit. Second, the unsustainable budget deficit. Third, high Greek labour costs
that make Greece uncompetitive, in particular versus Germany.
I think the answers to these problems are
straightforward in a market economy. You can only keep your savers if you are
committed to hard money. For Greece that means, first and foremost, not leaving
the euro. If the budget deficit is too big, which it certainly is, you have to
rein in spending. As I said repeatedly, Greece should not only have defaulted
on some of its privately held debt but also on its loans from official lenders.
Greece should then not have accepted additional official loans and should now
drastically cut public spending. This is hard, for sure, but it is the only
cure for a deficit and debt problem. You cannot cure debt with more debt. And
if labour costs are too high, they have to be reduced. If wages are too high –
and they have risen much faster than in other Euro Zone countries – wages have
to be allowed to fall. For this to happen, the labour market needs to be
liberalized.
Staying in the euro, cutting spending and implementing
structural reforms in order to make the labour market flexible and operable –
that sounds a lot like what the much reviled ‘austerity camp’ prescribes, and I
have to admit that it has economic logic more on its side than the ‘stimulus
camp’. These prescriptions also have the advantage that they directly address
what is wrong rather than try to shift the pain to others, for example to
taxpayers in other Euro Zone countries or to euro-savers throughout the Euro
Zone.
But Professor Siegel does not recommend ‘austerity’.
He recommends devaluation for the entire Euro Zone, one assumes via aggressive
money printing from the ECB and foreign exchange intervention. His belief is
that this will address the competitiveness problem in particular. But
uncompetitive wages in Greece are a relative-price problem, and furthermore a
local one, and not a general purchasing power problem. Many Greek wages are too
high in relation to what consumers – whether in Greece or outside Greece – are
willing to pay for Greek goods and services. By debasing the euro Siegel does
not directly impact the relative prices that are out of whack but he would
inevitably set off numerous secondary and largely unforeseeable relative price
effects throughout the
Euro Zone. The good professor is willing to debase the euro internationally and
by doing so disrupt the entire Euro Zone price structure in order to maintain
the illusion among parts of the Greek population that their wages are
sustainable.
As do most inflationists and currency-debasers,
Professor Siegel only considers the immediate inflationary impact of his
policy, the direct impact on the statistical average of euro prices, which he
believes to be minor. That may or may not be the case, but the aggressive
easing from the ECB that would be required to properly debase the euro would
have many other effects, in particular on relative prices and on capital
allocation, and this throughout the Euro Zone. At a minimum it would discourage
saving and disrupt the process of deleveraging and bank balance sheet repair.
Professor Siegel expressed about capital flight from the Euro Zone periphery
(his first point above) but happily risks it for the entire Euro Zone as his
policy would affect savers throughout the single currency area. And what about
the deficit problem? Does he really think aggressive easing would provide
incentives for fiscal consolidation anywhere in the Euro Zone?
Currency debasement creates a fleeting illusion of
competiveness but would leave the Euro Zone ultimately with more debt, less
saving and less true capital formation, and thus a less well-functioning
economy. Professor Siegel himself states the following:
“Historically, overpriced labour markets
have been cured, albeit painfully, by currency devaluation – an option which is
not open to euro-based economies.”
It was precisely the recognition that this historical
option of the quick fix had too many painful side-effects and that it was not
really a cure to begin with, that made a currency union so attractive, in
particular for countries with a history of currency debasement. By taking the
placebo of currency devaluation away from local politicians in places such as
Italy and Greece, it was hoped that they would finally address the real
structural issues in their economies and stop robbing their savers and thus impairing
domestic capital formation. They have not done so during the first 10 years of
European Monetary Union as the global credit boom was in full swing and simply
allowed them to borrow more. The time for change has finally arrived.
But our most prominent policy advisers seem to have
learnt nothing. After we severed the last link to gold, we have had forty years
of relentless fiat money debasement and debt accumulation to cover up the
rigidities of the modern welfare state. Today, around the world, central banks
have reached near zero policy rates and are resorting to employing their own
balance sheets to keep the overstretched credit edifice from collapsing. Yet,
the chorus of ‘experts’ still thinks that what we need is another devaluation,
another round of QE and another rate cut, if at all possible. Their ideology
has brought about the present mess. It is time we stop listening to them.
In the meantime, the debasement of paper money
continues.
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