THE CITIZENS OF Greece have stated, categorically, that they have had enough. Over 60% of them have voted against the EU proposal and with that have set in motion a series of events that are not fully understood by any the participants in this ghastly human tragedy brought about by hubris.
Minister of Finance Yanis Varoufakis announced his resignation this morning signalling pressure from European leaders to ease dealings with creditors. Already last night, opposition leader and former Prime Minister Antonis Samaras resigned. As Niki Keremeus of the opposition said last night, the next 36 hours require urgent political unity on what is best for Greece.
Hubris, a blind and certain self-confidence, was what gave rise to this malformed currency. Hubris was what sustained the illusion of wealth. Hubris was what fashioned an impossible Troika bailout in 2010. Five years later it was hubris on the part of all parties to think they could fudge the problem again. The Greeks decided to reject a series of political and economic constraints that were not feasible into the future.
Shattered lives, hopelessness and desperation
We, Europe as a community, take some of the responsibility for how this crisis has unfolded. Economically we know the figures well, 27% fall in GDP from peak, almost a third of the population unemployed, half of the under-25 population unemployed. The reality is that Europe has reaped what it has sowed in these programmes.
These grim economic statistics translate into shattered lives, hopelessness and desperation. As was evidenced in Ireland, there was a 57% increase in the incidence of male suicide since 2008 to end 2012. In the case of Greece there was a 35% increase since June 2011 through to 2012 and remain at that level ever since. That is an additional 11.2 people every month in Greece since June 2011 according to British Medical Journal.
Europe has opened a Pandora’s Box of economic misery and euthanised hope leaving nothing for the Greek people. Is there little wonder they have turned to fringe political parties and when faced with an unsavoury ultimatum from a phalanx of technocrats and foreign government officials chose to retain their last shards of dignity.
What makes a monetary union work?
Why do I focus on hubris? Monetary unions are about politics. Monetary unions that work are those where the politics acts as the glue that holds them together, through common aims and purposes. Fiscal transfers are not essential but coordination is important. In the US, only 20% of economic cyclical downturns are smoothed by federal transfers. US economic regions remain distinct. Labour mobility is much higher in the US but in the EU it is clear that within nations that regional labour mobility is strong.
Robert Mundell, the Nobel Prize winning economist, outlined the necessary conditions for a monetary union in his theory of optimal currency areas, lessons drawn from his work at the IMF in the 1960s. The criteria are nearly impossible to fulfil and even the US has some difficulty. The eurozone fails on almost all accounts.
So why did Europe progress with this plan for a single currency? Two men with a problem of history. Francois Mitterrand and Helmut Kohl needed a way to reintegrate a unified Germany into Europe and France needed a way to maintain political dominance of the European Community. In a pact driven by political realities and a desire to defuse the bellicosity of the Franco-German relationship a political currency built on the principles of an economic marriage to ensure political harmony. This was pure hubris.
A currency designed by elites and staffed by technocrats
Historically, Europe has not had a record of success with monetary unions. The European Union, as it was to become, was more than just the Franco-German alliance, and the post-Cold War EU/NATO expansion imperative destined such a parochial economic arrangement to failure. In 1999 when the eurozone was born, the majority of members were not compliant with the Maastricht Criteria of inflation, interest rates, deficit levels and debt levels.
Greece was an outlier but expected to converge and join. In this context it makes the “cooked books” Greece subsequently presented for entry a function of political reality. A currency designed by elites, agreed by elites, staffed by technocrats and with limited democratic credibility or public acceptance was to become of the economic vector by which the post-Cold War European Union was politically glued together. Hubris needs no better illustration.
Separating the banking problem from the sovereign problem
As an economist I have to admit the referendum result is complicating, to put mildly. This does not mean that there are not possible solutions to the Greek crisis. As Karl Whelan of UCD has repeatedly pointed out, if the ECB and the ESM (European Stability Mechanism) were to take over the Greek banking system and place it into a form of conservatorship the banking problem can be separated from the overall Greek debt problem. This would relieve the economic stress of capital flight and the need for ECB support to the Greek banking system purely for the purposes of facilitating vanishing capital out of the country and into domestic hoarding.
Separating out the banking problem from the sovereign problem would allow both to be addressed and remove the unhelpful linkage in the eyes of the markets between the state and banks that persists in Europe. Ideally the Greeks are offered a solution restructuring their debt, most especially their official sector (ie, IMF/EU/ECB) debt into perpetual bonds (consuls as the British called them), reducing their official sector exposure and buying time for the Greek economy to recover and grow. The perverse economic effects of high levels of official sector debt (something the Portuguese are now concerned about) means that a solution that finds a way to transfer the overall quantum of Greek Troika exposure needs to be found.
Greece has offered Europe an opportunity
Structural reforms are necessary but they yield limited positive economic results in the short term, in some cases they reduce economic output during implementation. Greece needs these reforms, as the leaked IMF Debt Sustainability Analysis highlighted, they have the lowest total factor productivity growth in the eurozone but supply-side reforms are at nought when faced to a total absence of demand.
Greek demand has collapsed. Greek exports are expanding but Greece doesn’t have the same favourable foreign direct investment and global export environment of Ireland. Given a programme that will encourage economic growth, Greece is not far from entering primary balance but this would have to be a support package that ensures that demand and supply-side measures are both embraced and aim towards restructuring the Greek economy from the ashes of past domestic and external policy failures.
Greece has offered Europe an opportunity to redress the fundamental flaw of hubris. Nemesis will be quick in her retribution if European authorities and the Greek government in conjunction with the opposition do not find an honourable path towards reconciling the European project with the dignity of the Greek people. It is in all our interests to bind up the economic and political wounds of the past seven years and do all which may achieve a just and lasting resolution.
Sean Barrett is an independent senator in Seanad Éireann, Member of Oireachtas Banking Inquiry and Associate Professor of Economics and Fellow of Trinity College Dublin.
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