Default or debt forgiveness the options in Greek elections

Economic growth


AlchemistWithin our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough”.  That was the statement by European Central Bank head Mario Draghi in July 2012, where he aimed to draw a line under the Eurozone debt crisis.

Yet here we are in December 2014, and the crisis is back again and likely to become worse.

The problem, as I have argued since September 2011, is that current central bank policies are simply a modern form of medieval alchemy, and cannot possibly solve the debt problem:

Alchemists have always claimed to be able to perform the impossible.  The most common claim was that they could turn lead into gold.  In Europe, the European Central Bank has been trying the same trick.  It claimed to turn near-worthless Greek bonds into German-quality euros.  Now its German board member Jürgen Stark has followed German Bundesbank president Axel Weber in resigning over the issue.  The reason is obvious:

  • The ECB action can only work for a short period
  • Greece, as the blog has argued since May 2010, will never be able to pay its bills
  • Germany will then end up paying the bill, when it is finally agreed that lead is not gold”

And since then, Greece’s situation has become far worse.  Youth unemployment is now above 50%, whilst its economy has shrunk by a quarter since the crisis began.

Unsurprisingly, therefore, its pro-austerity government was finally forced to resign this week.  Elections are due on 25 January, with the populist party, Syriza, currently ahead in opinion polls.  Their declared policy is to write off around half of Greece’s foreign debt – leaving Germany to pay the bill.

The real tragedy is that Europe’s political elite still continue to believe that their alchemy can magically create economic growth.  They refuse to accept the logic of common sense that Europe’s ageing BabyBoomer population make it  impossible to return to the Boomer-led levels of SuperCycle growth.

Instead we need new policies, as suggested yesterday in an excellent article by John Plender in the Financial Times.  One key issue is that the German word for debt, Schuld, also means ‘guilt’.  As he writes:

The logical way forward is debt forgiveness. Yet a moralistic perception of creditors as inherently virtuous and debtors as profligate sinners stands in the way (no matter that such “profligates” as Spain and Ireland entered the crisis with government debt way below the German level). So, too, does a selective German historical memory.

“The paradox of the German view on debt is that Germany has been the biggest developed world beneficiary of debt forgiveness in recent memory. In the postwar London Debt Agreement, German external debt was substantially written off or deferred. The West German economic miracle was thus launched from a clean balance sheet while the Allies remained heavily indebted.”

Deflation is inevitable in the Eurozone, as the oil price falls.  This will make it even more difficult for today’s debt to be repaid.  Printing more money as the ECB now propose will simply increase debt levels, making a bad situation worse.

In turn, this will enable populist parties such as Syriza to build on their success in last May’s European elections.


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