Making Eurozone Hay Whatever The Weather

In a 2010 article in the Guardian on the financial troubles in Greece, the Economics editor Larry Elliott referred to the 1997 IMF bailout of Thailand, South Korea, and Indonesia. He says:

Asian nations found another way of protecting themselves against speculative attacks on their currencies: they used the devaluations that were part of the IMF bailout packages to export their way back to growth.

The result was that they amassed huge foreign exchange reserves, which they recycled into western financial markets, leading eventually to asset price bubbles. The countdown to the crash of 2007 started right there.

In other words, countries devalued to make their exports more attractive.

That is not possible for countries within the eurozone.

Imagine a country contemplating setting up a common currency with a number of other countries, and the deal was that they would all stump up so much per month to enable them to buy supplies at cheaper prices.

And imagine that one of them spent its income on fancy tables and chairs, parties and high incomes for its workers.

You can imagine how the others would be pretty upset.

If they had been smart, they would have agreed at the outset not to spend more individually than they took in as income.

If they had been really smart, they would have given each other access to their books so that they could all see whether there was a risk that one or more of them was going off the rails.

If they had been super-smart, they would have given a veto on each other’s chequebooks so that none of them could write cheques for more than they could afford.

So why were the Europeans so outraged at the idea that they should introduce this power and tread on each other’s sovereignty a bit?

It took a default by Greece to make the Eurozone countries wake up and even contemplate agreeing to contemplate this.

Hidden Benefits In Default

While Germany was powering away and building up its economy, its banks (and French and Belgian banks) were lending to Greece and Italy even though they knew that Greece and Italy were sub-prime economies.

And they made good interest out of the loans. And then when things got tough, they raised the interest rate to compensate for the risk.

But they created the risk themselves by lending in the first place to an economy that they knew was not paying its way.

When the game was up and the fun was over, Germany and France imposed budget restraint on Greece; the budget restraint that should have been agreed and mutually imposed from the start.

Why wasn’t it? Why is there not a code of practise among nations?

The answer is surely that too much money was being made and no-one in the governments of the rich Northern European nations were able to or wanted to stop their banks making hay while the sun shone.

And when the Greek default loomed? Germany and France and Belgium didn’t say – Ah well, it was good while it lasted.

Instead they got public money from across the richer countries of the eurozone to bail out Greece via the ECB.

Who thinks that is a correct view? Professor Otmar Issing, the ECB’s first chief economist.

In an article in the Telegraph of 16 October he is reported as saying he saw:

the first Greek rescue in 2010 as little more than a bailout for German and French banks, insisting that it would have been far better to eject Greece from the euro as a salutary lesson for all.

The Greeks should have been offered generous support, but only after it had restored exchange rate viability by returning to the drachma.

Where Does This Leave Britain

A couple of weeks ago, Mervyn King, the governor of the Bank of England prior to Mark Carney was reported as saying in an interview with Sky News:

During the referendum campaign, someone said the real danger of Brexit is you’ll end up with higher interest rates, lower house prices and a lower exchange rate, and I thought: dream on.

Because that’s what we’ve been trying to achieve for the past three years and now we have a chance of getting it.

So, four months into the Brexit referendum vote, where are we?

The FTSE is holding up because the UK economy is fundamentally strong.

The pound has fallen because hedge funds have taken their property investment portfolios out of the UK.

And the future? The future is uncertain because it’s the future.

If Trump gets in / If Russia and China take a more aggressive stance together over missiles in South Korea and Eastern Europe / if China confronts other countries more aggressively over sovereignty of the South China Sea / if Ukraine is annexed by Russia / if Brexit ever happens…