Both Sides Playing For Time
My reading of the situation is that both sides of the Greek negotiations are playing for time. An exit of Greece from the euro is a dangerous outcome that neither side desires. The negotiators from "the Troika" are saying that a Greek exit is now easily "contained", but that is just a component of their negotiating stance. The big European banks have massive balance sheets supported with a tiny sliver of equity; they cannot afford to have confidence in the banking system being undermined. And the confidence would be undermined with a Greek exit; once Greece leaves, it will be described as the "first to leave", with markets immediately searching for the second in line.
- Syriza does not want to exit the euro, but it sees that the political centre in Europe cannot survive if it clings to suicidal economic policies. It is waiting for a wider anti-austerity coalition to form across the Euro area.
- The upholders of "sound finance" in the euro area can hold Greece's financing hostage, and wait for Greek voters to be dissatisfied with Syriza's lack of progress.
Since the markets have a hard time looking further forward than the last quarter's earnings, the brouhaha will likely dissipate, even though the political processes that are leading to the likely dissolution of the euro continue their steady progress.
The Albertan Experience
There are very strong political parallels between what is happening in Greece now, and what happened in Canada during the Great Depression. In that earlier period, a radical, poor province faced off against richer, more established governments which toed the line of "sound finance" (which can be defined as the belief that a government is like a household, and needs to balance its budget).
Since most non-Canadians have little reason to care to about the details of Canadian history, I will keep my comments short, at the cost of leaving myself open to complaints by historians. My remarks here are mainly based on Pierre Berton's "The Great Depression (1929-1939)" (which I rapidly re-read this week) which is not an economic history but rather a political history. Nevertheless, it fits with the other histories of the period that I am familiar with.
To give a very brief background, the Dominion of Canada was formed in 1867 by the Confederation of four pre-existing British Colonies, the largest being the Eastern provinces of Ontario and Québec.
The prairie province of Alberta was a latecomer, added in 1905. By the 1930s, it was still a poor province of farmers, as its oil wealth did not manifest itself until after World War II. Politically, the prairie provinces were managed as economic colonies of the Eastern provinces, which were the suppliers of manufactured goods. The prairie provinces thus developed the usual set of grievances as any colonial inhabitants, and these grievances have fed periodic outbursts of populist movements.
In the 1930s, the Albertans elected the first Social Credit government. The Social Credit movement was based on an economic theory that appeared radical at the time, but it may have just represented a somewhat eccentric version of Functional Finance.
Interestingly enough for modern readers, the Social Credit government advocated what would now be referred to as an income guarantee - $25 a month. (Although this may make them appear "left wing" to readers in other countries, they were social conservatives.) Unfortunately for Alberta, they were in a position similar to that of Greece - they lacked direct control of the central bank. Ultimately, Alberta defaulted on its debentures, which was the only Provincial default in Canadian history (or so I believe).
- A politically and economically peripheral entity within a multi-entity currency union elected a party that is arguing for reforms that run counter to a dominant "sound finance" consensus.
- Secession from the currency union was not viewed as an acceptable solution, even to the "radical" party.
- Within the other political units, the centrist parties that were locked into the "sound finance" consensus were under increasing pressure from the radical left and right. The centrist parties were more focused on each other than on finding a solution to increase employment.
- The centrists continuously believed that a recovery was around the corner, and so measures to stimulate growth were unneeded.
- The centrist politicians in the economic core were able to ignore the social costs of widespread high unemployment in the periphery.
The Canadian experience is not particularly encouraging guide for the future. The Government of Canada kept its "non-interventionist" stance throughout the Great Depression. Correspondingly, the downturn in Canada was amongst the worst globally. It was only the entry into World War II that allowed the Government of Canada to discover that it could run large fiscal deficits, and full employment returned (the ugly way).
I would argue that there are two main lessons to be learned from this parallel.
- From a "big picture" standpoint, what matters is the political evolution of the "centre", not the periphery. What happens in Greece matters to the Greeks, but may have limited global impact. The key is whether anti-austerity parties make inroads into larger economies, such as Italy, Spain and France.
- Unlike Canada in the 1930s, the "core countries" of the euro area have functioning welfare states. The social costs of austerity are much less likely to directly imperil politicians in the core, and so they will have an even greater tolerance for economic weakness than their Canadian counterparts did.
Taken together, it seems likely that the unravelling of the euro area will continue for a long time. (Of course, when the end of the euro comes, movement will be rapid. I doubt that I could forecast the timing of such an event, although it will appear "obvious" in hindsight.)
It may be that I am too pessimistic; perhaps the European centre will embrace Functional Finance in the same way the Government of Canada did. This would allow the euro to survive as a currency unit. Although this would be my preferred outcome, it looks politically unrealistic. The ruling elites in Europe seem to have acquired the politically tone deaf sclerosis that was the downfall of their aristocratic forerunners.
(c) Brian Romanchuk 2015