For 25 years, Western policymakers coasted to electoral success on the back of an economic Supercycle. The BabyBoomers’ arrival in the Wealth Creator 25 – 54 age group meant there was just 16 months of recession between 1982-2007. Politics and policy thus hugged the middle ground.
Political debate became based on focus groups, rather than principle. The need for the vision and implementation skills of people such as Adenauer in Germany, de Gaulle in France, or Thatcher in the UK seemed to belong to a distant age.
The Eurozone project reflected this new era. It allowed anyone to join the club, if they passed a few simple tests. So Greece – with a GDP/capita of just $11k in 1999 – became a member, having carefully manipulated its national accounts and gained the pass mark for entry.
Equally, the founders explicitly ruled out a clause to establish how a country might leave. Instead, membership was said to be ‘irrevocable’. An initial study by lawyers at the European Central Bank over possible departure rules in 2009 concluded it was ”so challenging, conceptually, legally and practically, that its likelihood is close to zero.”
Today, of course, the chances of Greece leaving have risen so high that London bookmakers have stopped taking bets on the outcome. This should be no surprise, given that Greece’s GDP has fallen ~20% since 2008. Voters will not continue to vote for economic suicide forever, as the recent election results showed.
Yet policymakers learnt their economics in a different age. They still think a few well-crafted sound-bites will somehow make a difference. And if that fails, they imagine an extra €1tn ($1.3tn) of lending will resolve the issue.
The problem is that they continue to treat symptoms, not causes. Greece is bankrupt because it borrowed too much and cannot repay. Equally, Germany and France don’t want to tell their own voters that they are likely to take the hit, when the money fails to be repaid.
The cash involved is not small change, either. Bloomberg estimates that Greece owes a total of $510bn. That’s equal to the GDP of Poland, Belgium or Norway, ranked 22-24 in the world economy.
The tragedy is that today’s Greek problem was totally avoidable, if policymakers had faced up to the issues 3 years ago, when S&P first downgraded Greek debt. It was clear in January 2009 that the core issue was whether Greece, and others, might have to leave the Eurozone.
Now, the Eurozone train crash is becoming a serious concern for the whole global economy. Policymakers have continued to live in their dream world, bearing out the Financial Times’ warning in August 2008 that:
“In economic crashes there are pauses before the next carriage hits the one in front. This explains how we have since moved from crisis to crisis, with rallies in between, as participants persuade themselves that the worst is over.”
Disaster is not yet certain. But the Greek people will almost certainly vote for anti-austerity parties if new elections have to be held next month, unless the troika of the IMF, EU and ECB change their policies.
Policymakers now have to accept you cannot get blood from a stone. They must also recognise that the lack of any formal Eurozone exit arrangement may well lead to chaos in financial markets worldwide.
After all, since December nobody has been able to answer the blog’s very simple question: what will Greeks use for money in the days after it leaves the euro? How will people buy food and other essentials, and pay their debts to foreigners?
We desperately need industry leaders and others to challenge the wishful thinking that now passes for EU policy. Such debates were common before the Supercycle, as when ICI Chairman John Harvey-Jones took on Margaret Thatcher over industrial policy.
Painful decisions can be postponed no longer.