The scene: a windswept precipice at the very edge of Europe overlooking the Aegean Sea. A little man in a business suit stands nervously behind a robust middle-aged woman dressed in what appears, in the failing light, to be a teletubbies jumpsuit. Both are a safe distance from the cliff-face. She is evidently in charge. Two nondescript blacksuited men stand dangerously hunched over the precipice.
“Mario, Jose – pull him up a little – schnell!”, barks the boss at the two bent-over goons as it becomes clear to the innocent bystander that each is holding a trousered leg of a person suspended vertically over the edge and staring down into oblivion.
“Save me, please!” , calls the hapless victim in a distinctly Greek accent, his suit jacket flapping about his topsy-turvy head. “What do you want? We have agreed to a cut of 22% in the minimum wage and a freeze for three years, no salary increases, a cut of 150,000 government jobs. What else can I do? All this austerity will destroy us. We need Keynesian policies that will expand the economy – increased expenditure by the government, reduced taxes and quantitative easing of money.”
The little man taps the boss nervously on the shoulder and whispers: “Angel, we have to keep him alive otherwise we are not going to save ourselves. Greece must stay in the Eurozone for now, or default will be total and there will be a knock-on effect to Portugal, Spain and maybe even Italy.The Euro will be finished and our dream of a United Europe will be in tatters. Let’s bring him up before he pulls the ECB and European Commission down with him”. She swats him off “If you can’t stand the heat, get back in your haute cuisine kitchen, Niko. Leave this to me.”
“Lucas. I want so much to feel your pain. Your people have been so naughty. All those lies about deficits. All those broken promises. Why do you talk to me of Keynes? He is dead – long term. We politicians believe in free market classical economics, the Chicago School – Al Capone, George “Bugs” Moran, Milton Friedman, George Stigler. We might let you off this time but it is not going to help if you don’t reform your public sector, revamp your tourist industry AND – LISTEN CAREFULLY – CONVINCE PEOPLE, INCLUDING THE MEMBERS OF YOUR GOVERNMENT THAT PAYING TAXES IS NOT VOLUNTARY.”
“OK! OK! Just save me!” cries Lucas.
“Sacre bleu, I can’t take this anymore! We must save him”, pleads Niko.
“You galling man! Of course, I am going to save him. But he has to be fooled into agreeing to die slowly and painfully over the next ten years instead of a quick end now. Boys, pull him up! I think he has learned his lesson, but next time it will be the cement shoes “.
The sovereign debt crisis, as it relates to Greece, is turning into a tragedy. The country is clearly between a rock and a hard place. If it defaults on its debt (which thanks to last Thursday’s agreement and last night’s Greek vote will probably not happen this time) it will likely exit the Euro, resulting in exchange rate chaos as the Drachma goes into free-fall from Day 1 and inflation rears its ugly head. There will be wide-scale business failures as corporate debt denominated in Euros becomes hyper-expensive and the public and private sectors will face closed doors to credit markets. On the other hand, by accepting the onerous conditions of the European Central Bank, European Commission and International Monetary Fund , it is starting to look like the Post World War I Treaty of Versailles all over again when Germany was pinned to the wall by the victorious allies and forced to make reparations that pushed the country into crisis. If saddled with its current debt and required to go the whole way on this (albeit including a haircut for private investors) the Greeks really could become the long-term hewers of wood and drawers of water for Europe.
For all the righteous indignation of European leaders towards Greece’s dishonesty over its statistics and its diabolical record on tax evasion, a line in John Maynard Keynes’s General Theory (his masterwork) is particularly apt: “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist”. Although largely discredited in the 1970’s and replaced by the theories of the Chicago School, a modified Keynesianism has made a comeback since the turn of the century – but the politicians are, in computer terminology, “not responding”, preferring to harp back to earlier, widely discredited, laissez faire policies which have little chance of working in the current circumstances. In the past, Keynesianism scored some great successes and, indeed, in the 1950’s British Prime Minister Harold Macmillan was able to boast: “You’ve never had it so good” although it was not entirely clear whether he was talking to the general public or his older brother Dan who had been Keynes’s first love at Eton.
A sanity check suggests that, hopefully, this is one big international confidence trick – the plan being to string Greece along until it gets its house in order while allowing time for Portugal, Spain and Italy to climb totally clear of the danger of default. Once Greece has made itself more competitive by reforming its public sector, revamping its private sector (significantly, tourism) and ensuring that the tax collection system works, debt will be forgiven, credit lines will be opened up and Greece can get going again. Wishful thinking? Perhaps, but don’t go out and buy the cement shoes just yet.