William Hague, the U.K. Conservative opposition leader and Foreign Secretary, once referred to the euro, the European Union currency, as a “burning house with no exit.”
That sounds about right.
If Greece leaves the euro, it will suffer the tortures of the damned. And if Greece stays in the euro, it will suffer the tortures of the damned.
Listen, I love Greek tragedy as much as the next theatre-goer. Especially Sophocles. But this is ridiculous.
Consider how we came to this point. Virtually all of the world’s economies got whacked, very, very hard, by the Crash of ’08. Essentially, “aggregate demand,” the total demand for goods and services, collapsed, because much of that demand had been sustained by borrowing against wealth (think, “home equity loans,” “margin loans,” etc.), and then wealth collapsed. When aggregate demand drops, there are only four ways out of that hole:
(1) Borrow and spend (aka fiscal policy).
(2) Print and spend (aka monetary policy).
(3) Put everything on sale (aka trade policy).
(4) Say goodbye (aka emigration).
That’s it. There are no other solutions to that problem.
So let’s look at what happened to Greece after the Crash of ’08, when aggregate demand collapsed.
When Greece joined the European Community/Union in 1981, it had to agree to zero tariffs and the unencumbered movement of goods between Greece and other EC/EU members, as well as an external trade policy that is uniform throughout the EC/EU. So after the crash, Greece couldn’t impose tariffs, subsidize exports, establish import quotas, or anything like that.
Trade policy — no.
After Greece adopted the euro as its currency in 2001, it could no longer expand the money supply in order to spur domestic production. The European Central Bank had that authority, not Greece. Nor could Greece impose any capital controls to keep euros circulating within its borders. And as Greece’s economic problems deepened, capital fled the country.
Monetary policy — no.
A government accepting the euro as its currency must commit to keeping its annual budget deficit below a certain ceiling. Fair enough. But what happens if large chunks of government revenue are shipped outside the country to pay external debt, rather than circulating within the country? That just depresses aggregate demand more and more. Greece went into the Crash of ’08 with an external debt of around 300 billion euros — for a country of 11 million people. The mere interest on that debt (forget about principal) sucks an enormous amount of money up out of Greece each year, and sends it elsewhere. That made it impossible for the Greek government to borrow more money and spend it domestically, to restore aggregate demand (think “American Recovery Act”). And Greece’s creditors have insisted that the government run a “primary surplus,” meaning that net of the debt payments, the government actually removes money from the domestic economy.
Fiscal policy — no.
With no trade policy, no monetary policy and no fiscal policy, the Crash of ‘08 and the ensuing turmoil utterly crushed Greece’s aggregate demand. Gross domestic product has dropped 25% — the largest peacetime collapse in any advanced economy since the Great Depression. Unemployment in Greece was more than 25% before this month — imagine what it is now, after the banks were closed. That left desperate Greeks only one option: to leave. And, in fact, the population dropped by 1.5% in just four years. But there are very stiff barriers to exit; among other things, you have to learn a new alphabet. And the population drop further depressed aggregate demand, especially in the housing market.
Emigration — no.
John Maynard Keynes said that the government’s most important economic responsibility is to match aggregate demand to aggregate supply. Too much demand = inflation. Too much supply = unemployment. Greece simply has no tools to match that match. Domestic aggregate demand is far, far short of supply, and it’s getting worse.
The superficial problem in Greece is the external debt. The deeper problem is the relinquishment of national sovereignty, the tools that are needed to raise domestic demand and bring about an economic recovery.
And the alternative, the neologism-of-the-year “grexit,” where Greece just drops the euro? That is, in fact, the only alternative to the slow suffocation of the Greek economy. But no one wants even to think about how fiendishly complicated that might be. How do you mop up a currency that’s been sloshing around for 15 years inside your borders, and replace it with money backed by the “full faith and credit” of a bankrupt nation?
At least for Greece, the euro is one of those many, many things in life that are wonderful in theory, and horrible in practice. And the amount of pain that has been inflicted is staggering.
The house is burning. And there is no exit.