Angela Merkel isn’t too impressed with Greece. According to the FT, she reacted to the news that its prime minister, George Papandreou, is to call a referendum on Europe’s new bail-out deal with “barely disguised anger”. But I suspect much of the world now has a sneaking respect for Papandreou. His plan for the people to have their say on the new bail-out plan may well be more an attempt to save his own political skin than anything else. But nonetheless he has introduced an element of democracy into the European equation where there has long been none. He also seems to be almost alone in understanding that accepting the deal without doing something to gain a political mandate for it is to guarantee its failure.
Economists may think things will be fine if the Greek population simply accepts significantly lower wages and higher taxes. But even if they’re right in theory (and they probably are), how do they expect it to happen? As Russell Napier of CLSA points out, anyone who suggests cutting wages fast in a democracy, without the assistance of inflation, has clearly never tried it. “It is a political impossibility.” You might just be able to do it if you got the whole country on side – hence the absolute need for the referendum – but not otherwise.
The Greek population has discovered its political voice over the last year. Note the surge in violent protests, the endless general strikes and the growing populist demands for a 100% write-off of the debt. Greeks have no intention of enduring years of austerity without a fight, particularly given that all it offers them in return is the vague possibility of a debt-to-GDP ratio of 120% at the end of the decade. It’s a high price to pay for ending roughly where you started.
Yet while the Greek stand adds another element of uncertainty to an already tricky situation, I still don’t think the disorderly break-up that commentators are so afraid of is imminent. I may be being too optimistic, but I think that, in the medium term at least, the euro will survive, just as a weak rather than a strong currency.
We should expect a sweeter deal for Greece to emerge from an irritable Berlin sooner rather than later (see my blog for my take on how Greece has turned the tables on Germany – it is now the most powerful nation in the world). But we should also expect easy money (probably a huge dose of quantitative easing) and in the end inflation as the European Central Bank creates money to buy sovereign debt. That doesn’t sound great, but it’s probably better than the other options. Why have structural disruption, a global banking crisis and a probable depression when you can just print money instead?
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