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politics. financial crisis. Greek default. euro. fiscal union. European union. Germany

Eurogeddon. It isn’t just Greece’s fault. Really, it isn’t.

   We all know what the problem is:  Europe has a single currency but no central treasury – no overall financial supremo who can collect revenues and disburse them across the 17 eurozone countries on the basis of need and fiscal responsibility.  As they head inexorably toward default, the Greek people are quite rightly furious at being blamed for the financial crisis.  Ok – their public sector was bloated and pensions were extravagant – but they aren’t alone in that.  And yes, the Greeks  aren’t particularly fond of paying taxes.   But this was hardly a secret – and the European banks who lent £400bn to the former Greek government were fully aware that Greece was a fiscal basket case.  So why did they give them the money?   What about due diligence?  Why didn’t someone notice that the government was cooking the books? The lender has a responsibility too. 

      But it’s not just the irresponsible behaviour of  French, German and British banks. When the single currency was introduced, without any safeguards, it played havoc with the less advanced economies like Greece.  How could they compete with the Germans, who suddenly found that they were able to sell their cars and engineering plant at an artificially low price.  Yes, an artificially low  ‘rate of exchange’.  Just as the Greek euro was ‘overvalued’ , so the German euro was ‘undervalued’ – it got a massive trading advantage.  This should have been recognised by the authorities and appropriate action taken. That’s what happens in Britain with the Barnett Formula for Scottish spending, which transfers some wealth north to compensate for the fact that all economic activity tends to be attracted to the south east of England.  

  Ok, let’s not bring up Barnett with all its baggage.  The point is that there is a mutual interest between Germany and Greece in getting some equitable solution to the absence of fiscal union. .  Punitive austerity clearly is disastrous – for Germany as well as Greece.  German economic growth has come to an abrupt halt as Europe prepares for “D” day – default day..  To get all the countries of the euro going again there is going to have to be a central political and economic authority.  And it has to happen now.  And there really is no alternative.     

  I have a confession to make.  I am one of the “guilty men” who supported the  euro and now stand condemned in the eyes of history, according to the overwrought Telegraph columnist Peter Oborne, who has been gracing the television studios all week.  He has penned a ‘j’accuse’ pamphlet, “Guilty Men”, exposing the “leftist clique” that supported European economic integration,. We should be strung up – only hanging’s too good for us. 
  Mind you, it’s an odd left wing clique that included the Financial Times, Tony Blair, the US State Department,  Tory politicians like Kenneth Clarke and Lord Patten, and  business leaders like the former boss of BP, Lord Browne,  and the chairman of BT, Sir Mike Rake.  Actually, left wingers have always tended to be highly suspicious of the EU and the euro because they regarded it as “a banker’s Europe” with no democratic accountability and dominated by a conservative European Central Bank.    One of the main aims of the single currency was to lower labour costs by making it easier for workers from poorer regions to work in wealthier ones – so trades unions didn’t much like the euro either.   The idea that it was a left wing plot is utterly ridiculous.  Almost as ridiculous as blaming the current economic crisis on the euro, instead of on the really guilty men: the bankers, whose reckless greed destroyed the financial system. 

     The sovereign debt crisis in Europe arose because European governments, including ours, unwisely sought to bail out the banks with trillions of taxpayers money.  They thought this would bring stability, but it did not.  By taking on the huge losses of the banks, the governments of Europe only risked making themselves bankrupt.  This wasn’t the fault of the euro, any more than the British banking crisis was the fault of the pound sterling.    The purpose of the single currency was merely to remove barriers to trade and investment.     The purpose of the single currency was to remove barriers to trade and investment, to complete the single market.  Transaction costs alone – that’s changing money every time you crossed a border – were equivalent to 1% of GDP before the single currency was introduced ten years ago.  Mistakes were made, certainly:  failing to stick to the EU borrowing rules among them.  But this was a great civilising project, laying to rest the grim history of economic nationalism 

   And even now, reports of the euro’s demise are premature.   Listening to europhobes like Mr Oborne you’d think that countries who’ve been flirting with sovereign bankruptcy, like Ireland, would be desperate to leave the eurozone and restore their old currencies.  Not so. Go to Dublin – as I have –  and you’ll find that most Irish politicians and civil servants have no desire to restore the punt, despite three years of heartbreaking austerity.   Iceland, the worst victim of the banking crash, is lining up to join the euro.  So are most of the countries of central europe.  What do they know that we don’t?   Well,  Iceland discovered the hard way that having a unique currency in the treacherous global financial environment is like being a chicken without a hen-coop: you may be free, but you’re liable to get eaten for breakfast.

    But if Oborne is right, and the euro is finished, what might Europe look like in ten years time?   A happy collection of sovereign states living in peace and security under thier own precious currencies?  Hardly More likely a collection of embittered, impoverished  and fractious nations engaged in destructive protectionism and other forms of economic warfare.  Take Greece.  If it abandons the euro and restores the drachma, it will immediately default on all its debts, causing a banking collapse. ATMs will have to close indefinitely.  Greek families will discover that their savings and pensions are suddenly worth a fraction of their old value – as happened in Argentina when it defaulted in 2001. 

     Greek sovereign debt, still denominated in euros, will continue to increase as the “new drachma” devalues.   Taxes will continue to rise, as will interest rates, because no one will want to risk lending to the Greek government except on usurious terms.  Yes, Greek exports will be cheaper.  But Greece doesn’t actually do a lot of exporting, and any trading advantage from a depreciated drachma will be small consolation for the loss of around half of the nation’s wealth.  Greece will be looking to tourism to restore its fortunes, but it may find that – with the rest of Europe in deep recession – no one has money to spend on holidays. 

  A Greek default will lead to a wave of shocks across the Mediterranean states and the former Eastern bloc countries.  There will also be banking crashes in France, Germany and Britain because our banks, who lent irresponsible amounts to Greece, Spain etc, will be insolvent.   If the euro breaks apart, it will be devil take the hindmost, as the ex-eurozone countries try to export their economic troubles by devaluing their newly restored currencies.  This is what Britain sought to do after 2008 by allowing the pound to fall by 25% in the hope of gaining a competitive advantage.  It hasn’t worked, here, and it certainly won’t work when every country in Europe is trying to devalue simultaneously.  Trade will grind to a halt as countries erect tariff barriers to protect jobs in vulnerable industries. The social tensions unleashed across the Mediterranean and central Europe will lead to internal conflict as immigrants are scape-goated, and external conflict  as countries blame each other for their misfortunes.  Me? I’d stick with the euro for all its faults.

     I don’t apologise for a second for supporting the European Union and the single currency it created. Not only has it fuelled unprecedented prosperity in Europe, it has been a major force for peace and human rights in the world.  Look at the  progress that has been made in countries like Spain – a fascist dictatorship as recently as the 1970s.  Or all those former communist dictatorships in the east who have been lining up to join Europe.  Look at Ireland today, compared with the backward, essentially agrarian economy of thirty years ago. 

     The architects of the European Union wanted to create a community of nations, united in prosperity, who subscribed to the values of liberal capitalism tempered by strong welfare policies.   It was never a left wing project.   And it isn’t going to go away.  Restore all the old currencies and all that will happen is that Europe – and the world – will be plunged into an economic dark age.   It has fallen to the euro to save the global financial syste

About @iainmacwhirter

I'm a columnist for the Herald. Author of "Road to Referendum" and "Disunited Kingdom". Was a BBC TV and radio presenter for 25 years - "Westminster Live" and "Holyrood Live" mainly. Spent time as columnist for The Observer, Guardian, New Statesman. Former Rector of Edinburgh University. Live in Edinburgh and spend a lot of time in the French Pyrenees. Will that do?


7 thoughts on “Eurogeddon. It isn’t just Greece’s fault. Really, it isn’t.

  1. This comment has been removed by the author.

    Posted by cynicalHighlander | October 8, 2011, 3:25 pm
  2. Democracy or the Banks – which do you want?I believe the people’s of Europe are at a moment of supreme danger and crisis. But the crisis is NOT financial it is political. We stand at the brink of letting Democracy become a dumb show, to rubber stamp what the elite leadership decides is best for them.U.S. Economy Grinds To Halt As Nation Realizes Money Just A Symbolic, Mutually Shared Illusion"It's just an illusion," a wide-eyed Bernanke added as he removed bills from his wallet and slowly spread them out before him. "Just look at it: Meaningless pieces of paper with numbers printed on them. Worthless."

    Posted by cynicalHighlander | October 8, 2011, 3:26 pm
  3. Mr Macwhirter, you obviously know your facts but I have doubts about your grasp of the behavioural sciences.As my mother used to say 'The world is full of people with good intentions'.Nobody, for a moment, doubts the motives of the founding fathers of the European Union. But they have moved on and,Unfortunately, those who have replaced them are more interested in votes rather than facts.The facts are that confidence in the Euro has been lost. We have just been told that Germany and France have a plan to save it but we will have to wait until the end of the month before they disclose the details.When we need a solution before yesterday all we get is obfuscation, dithering and further delay. All of which simply underlines the parlous state the eurozone is in.Being the cynic that I am, could it be that the delay in divulging the 'details' has something to do with giving their friends in high places time to divest themselves of their remaining euro investments?

    Posted by Anonymous | October 9, 2011, 7:49 pm
  4. "ATMs will have to close indefinitely."I was in the Netherlands when they switched the other way, one Hogmanay. ATMs were restocked with the new currency at midnight and were operational immediately. Why would it be that much harder to go the other way, especially with a bit of discreet planning behind the scenes?

    Posted by James | October 10, 2011, 3:15 pm
  5. "Opinion polls suggest a clear majority of Icelanders now oppose joining the EU and the finance minister, overseeing all these changes, is among them."http://www.bbc.co.uk/news/world-europe-15108087

    Posted by McGonagall | October 10, 2011, 3:30 pm
  6. I support the European Union and the single currency it created because it will fuel prosperity into Europe, just like I thought North America should have gone the same way. The US dollar would have greatly benefited from opening the US borders north and south.

    Posted by Christian Allard | October 10, 2011, 4:44 pm
  7. For quite understandable reasons of not wanting to be accused od xenophobia, everyone ignores the elephant in the room – China.As soon as China was allowed into the WTO (see Nick Clegg's pre political history) with GAT tarrifs which unbelieveably favoured and accelerated Chinese exports (rather than used to slow and control China's emergence) it has been obvious to me and many others that the resultant imbalance in World wealth generation would come to a head.No doubt some capitalist nutjobs even entertained the idea that China could be used as a reset button for two hundred years of hard won gains for the working class(includes anyone who works) in the socially developed World.That isn't going to happen. Europe can grow and manufacture all it needs to maintain the standards of living its citizens have come to expect AND provide civilised levels of welfare provision, education, health care, social housing etc. Even in isolation. Europe's people know that and will not accept anything else.The Arab Spring, I believe, is also to an extent driven by a subconscious gestalt appreciation, that China, having largely consolidated its position in Southern Africa will now, inevitably, look North.Adam Smith's 'Invisible hand of God' may well apply to a market, but it most certainly does not apply to TWO markets.Topday we have at least two markets with China 'enjoying' slave labour (aka prison work force), no rights to collective bargaining or right to strike and a much smaller pro rata portion of national GDP being spent on welfare, health, education, social housing etc.In those circumstances, assuming being socially civilised is still a goal for the narket, Smith is null and void.

    Posted by Chicmac | October 11, 2011, 12:07 am

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