IT is now clear that Germany, the European Central Bank and others are seriously talking about bailing out Greece. The negotiations could still collapse; but there has been a significant shift over the past 24 hours, with a panicked European establishment increasingly desperate to salvage its beloved single currency. One option would be for Germany to lead a loan guarantee scheme, the details of which remain unclear. Another would be for a special Eurobond to raise cash, while an IMF rescue package has still not been ruled out.
Regardless of which plan is agreed upon, a rescue would fill the City with joy in the short-term – but would cause huge damage over time. There should be no bailout: it is high time that countries and investors learn to live with their mistakes. Everybody should have seen this coming: even mainstream textbooks on European integration and monetary economics have always acknowledged that a sharp recession would inevitably trigger an almighty fiscal crisis that could tear the Eurozone apart.
Europe is merely paying the price for the stupidity and arrogance of its elites, which have long been intent on building a technocratic European state at any cost and in defiance of economic reality. Corrupt and incompetent economies were folded into the single currency, with Brussels turning a blind eye to their repeated violations of the rules limiting budget deficits and the national debt.
In some cases in the 1990s, pressure was even put to bear on City economists who were sceptical of the euro. I know of at least one who forced out of his job at a large bank; continental European governments had made it clear that they didn’t want institutions that worked for them (for privatisations and bonds issuance) to be highlighting the dangers of economic and monetary union. The classic book on the run-up to the euro’s launch remains the Rotten Heart of Europe by Bernard Connolly, the ex-AIG London economist who now runs Connolly Global Macro Advisors; anybody who had read and digested it would have predicted the current crisis.
The weaker Eurozone countries – especially the PIGS, namely Portugal, Italy, Greece and Spain – free-rode on ultra-low one-size-fits-all European Central Bank interest rates, enjoying artificially high rates of economic growth. They tapped into cheap euro-denominated bond markets, helping to finance their deficits on the cheap. The European Central Bank kept rates too low in the euro’s early years, largely to help Germany, which was undergoing a painful and lengthy reduction in costs; this helped fuel a disastrous housing bubble in Ireland and Spain.
Greece and any other European economy that benefits from a bailout would officially have to fulfill extremely strict conditions; they would in effect lose their fiscal independence, a move which would be unlikely to fill the Greek unions with joy. Mass anti-cuts demos are already taking place; in truth, Athens is stretching credibility beyond breaking point when it claims that it will slash its budget deficit from 12.7 per cent of GDP in 2009 to 2.8 per cent by 2012. But it will suit everybody to pretend to believe Greece’s propaganda; so Brussels and Germany will presumably turn a blind eye and extend the loans regardless, robbing the process of any remaining credibility. Eventually, the markets will call Greece’s bluff – and we will be faced with yet another, even deeper crisis. What a mess.