Germany to Greece: GO!

In the post below, I opined that if Greece left the Euro, the currency itself would fail and German exports would immediately become more expensive. Thus, the borrower has leverage over the borrowed-from.

Turns out I was wrong. The Germans are making it pretty damned clear that they want Greece out, out, out.

Under the plan, the only way Germany would let Greece stay in the euro now is if it sells 50 billion euros of "very valuable Greek assets," allows international observers to monitor its bailout, and puts automatic spending cuts in place in case it misses its deficit targets. Otherwise, Germany wants Greece to take at least a five year "timeout" from the euro, during which time its debts could be restructured and it could receive humanitarian aid. The entire proposal was less than a page long.

In case there was any doubt, this is an offer Greece can't accept. Sure, selling assets would lower Greece's debt today, but it would make the rest of Greece's debt harder to pay back tomorrow—which, according to the International Monetary Fund, is already unpayable. It's the kind of thing you ask for if you want Athens to say no.

Gee, ya think Germany really does want the Parthenon? I made a joke about that, a few posts down...

So there really seems to be no point in pretending to have further talks. The great Grexit seems to be a done deal. Moreover, there seems little point in pretending that the exit will be temporary...

Bringing back the drachma would either be such a boon to Greece's economy that it'd never want to go back to the euro, or be such a disaster that Europe would never want to invite it back. But in either case, Greece and Europe's trial separation would turn into a divorce.

If the post-Euro Greece manages to avoid too much further pain, other troubled nations -- Spain, Italy -- will also seek a way out. No more Euro.

If you want to know the secret history of the Greek crisis, you really must read this piece by William R. Polk, published in The Consortium. He builds upon a point made by Thomas Picketty: That Germany would not be any kind of economic powerhouse today if West Germany had not had more than half of its debt forgiven in 1953.

Incidentally, neither Polk nor Picketty mentions the concept of war reparations. When France lost the Franco-Prussian war in 1871, the country had to spend the next half-generation paying reparations to the victor. If, in the 1940s, Germany (or the Germanies) had been treated the way Bismarck treated Paris, Angela Merkel would now be leading a nation of resentment-filled paupers.

Let's get back to William Polk's piece. Here are a few choice nuggets:

Another “secret” from the past that returns to haunt statesmen today is that Greece got caught up in clever, but perhaps illegal, manipulation of accounts. Led by the American banking firm of Goldman Sachs, the previous conservative government of George Papandreou did a $15 billion “swap” to hide Greek indebtedness, according to Bloomberg News. Goldman Sachs was alleged to have made hundreds of millions of dollars in the deal – taking that money into its corporate coffers while leaving the debt behind in Greece.

Put simply, in recent years, Greece has become an oligarchy. The very rich avoid civic responsibility. Few pay taxes. They fill Piraeus harbor with mega-yachts and put their money abroad rather than investing in Greek industry. It does not appear that even the self-proclaimed “revolutionary” Syriza government can alter this situation.

Finally, there is the “secret” of the Euro itself. It is a double-edged sword having different effects in different economies. In Germany it was a stimulus. By joining the Euro, Germany virtually devalued its currency so German industry got a significant advantage in foreign sales. In Greece, the effect was negative. By joining the Euro, Greece raised the cost of its exports. Projecting ahead, some economists believe that staying in the Euro would make Greece’s recovery far more difficult.

So that's the big picture: The Greeks agreed to surrender control of their own currency, and thus insured that their exports would take a huge blow. The Greek government tried to paper over the shortfall with financial hugger-mugger.

A blogger named Ari Andricopoulos (previously unknown to me) offers further insights...

A country in the Euro has no control of its monetary policy. Therefore when Greece had negative real interest rates during the boom time, there was nothing it could do to prevent people borrowing money. When added to a government also borrowing to appease special interests, this can be disastrous. But Spain had this problem even whilst running government budget surpluses.

A country in the Euro has very little control over fiscal policy due to the rules determining how much governments can borrow and save. So even if a government wanted to combat loose monetary policy with correctly tight fiscal policy, it couldn't. There was literally nothing within the rules that Spain could have done to prevent the situation it is in now, with around 25% unemployment.

The powers that be were very worried about government money creation as they did not want to debase the Euro. But they didn't bother worrying about private bank money creation. So when Ireland's banks built up huge books of loans, greatly increasing the money supply, nothing was done to stop them. Until it was too late. And the ECB forced Ireland's taxpayers to pay for it rather than the banks' bondholders.

To add to this, one country in the Euro made it a policy to run huge trade surpluses by reducing worker incomes to subsidise exporters. As this was the largest economy in the Eurozone, these had a large impact on the rest of the countries in the union, notably the less competitive ones. The excess savings flowed into the poorer countries and, as Michael Pettis wonderfully explains, there was little they could do other than take on debt.

So overall, it was pretty easy to get into debt.

A couple of days ago, The Independent published a profile of Antigone "Addy" Loudiadis, the Goldman banker who did so much to get Greece into this mess...

But she was trusted by the government which, it should be remembered, was far more right wing than the Syriza party.

What it most liked about her seems to be the way she could magic away the country’s dismal financial position. The trade she came up with is reported to have made the bank hundreds of millions of dollars, although only Goldman knows the true figure.

Reports suggest she was paid up to $12m a year by the time she was named co-head of the investment banking group.

She's now buying up pension funds for a Goldman offshoot called Rothesay Life. Although the question is a cliche, it must nevertheless be asked: How do these people sleep at night?

Xanax? Ambien? Heroin?

How did they pay back Bismarck so fast? Michael Pettis also thinks that the Greek situation is reminiscent of the French indemnity following the 1870-1871 war...

To give a sense of the sheer size of this payment, usually referred to in the literature as the French indemnity, this was equal to nearly 23% of France’s 1870 GDP.(2) Germany’s economy at the time, according to Angus Maddison, was only a little larger than that of France, so Germany was the beneficiary of a transfer over three years equal to around 20% of its annual GDP. This is an extraordinarily large transfer. I believe the French indemnity was the largest reparations payment in history — German reparations after WWI were in principle larger but I don’t think Germany actually paid an amount close to this size, and certainly not relative to its GDP.

Astonishingly enough France was able to raise the money very quickly, mostly in the form of two domestic bond issues in 1871 and 1872, which were heavily over-subscribed.

The debt was paid rapidly, using a bit of the flim-flammery that Gene Wilder's character in The Producers might have suggested. Surprisingly, Germans bought many of those bonds.

Is there any way for the Greeks to pull off a similar trick? I'm quite doubtful, but...maybe. But the first step would have to a be a return to their own currency.

Pettis goes on to make a long, wonkish argument that will interest at least a few of you.