“Very, very few” economists have been vindicated by events in Greece, says John Dizard in the FT. “The one who has earned the most honour” is Bernard Connolly. He published a book in 1995 called The Rotten Heart of Europe, which said that monetary union was a misconceived mess designed to force countries into a political union. The experiment would end in tears, he claimed. Rather awkwardly, he worked in the European Commission at the time, so he was sacked and shunned.
But he was quite right. The key problem is that the southern countries are less competitive than the northern ones. Once the bubble induced by a one-off fall in interest rates burst, the south couldn’t regain competitiveness by allowing its currencies to fall. It had to devalue internally, clamping down on wages and prices, which depressed demand – giving rise to a vicious cycle. The way to alleviate this problem is for the rich states to subsidise the south. But without a single federal government to back the currency union – as is the case in America – it’s not going to happen.
What’s more, a so-called “transfer union” of this kind would bankrupt Germany, reckons Connolly. “It would have a bigger effect, indefinitely, than the intended Versailles treaty reparations payments.” Germany should leave, he reckons. “That… would minimise the financial damage from the dissolution that is ultimately inevitable.”
Connolly foresaw the US crisis of 2008 too, launching a book in April that year entitled The Worst is Yet to Come. In 2003, he said the American economy was a debt-driven Ponzi scheme and interest rates would have to fall even lower in the next cycle to keep the show on the road. The next bust could now be looming. “We’re getting very close to the state of the world” in 2006/2007. The “house of cards has been rebuilt” and a “puff of wind” could soon blow it over.