Our Versailles Moment – Imposed Austerity

In an enlightening article in the New Statesman Amartya Sen reflected about the economic consequences of imposed austertity by re-reading Keynes’ The Economikc Consequeneces of The Peace’. As we know, Keynes made clear at the time that the planned (and then mainly materialized) terms of the VersaillesTreaty would move Germany into a economic trap it can’t escape by proper means. Germany after WWI is not Greece of 2010 and thereafter. Still, as Sen shows in such transparent ways, imposing austerity on a ailing economy is opening the door to economic ruin. More so, if the aim to bring down public debts and the public debt ratio, then austerity is probably not the right way to go. What is needed is economic growth, and this can best be generated by a combination of smart fiscal policy and economic-political reforms. The insistence on crude austerity that builds its rational from using a primary budget surplus target as starting point is misleading. Sen reminds on the British case after WW II when the public debt ratio was above 200 %, and rather then going for austerity the government at the time opted for creating the basics of its welfare state.

It is no surprise that close to the end the heat is rising. Austerians are firing up in order to establish the right narrative, for two reasons. First goal is to establish austerity as the right and only adequate receipe and thus to devalue all offers from the Greek government. Secondly, an GREXIT would result in rather unpleasant fights about responsibilities, in particular if the separation would end up in rather nasty outcomes. In such a case the austerians could argue that the whole responsibility is on the side of a ideological Greek government that was not willing to accept TINA. The most aggressive piece I read over the last couple of month is by Jürgen Starck in the Frankfurter Allgemeine Zeitung from June 11. Stack, who was chief economist of the ECB between 2006 and 2012, declared Geece to a ‘failed state’. Unlike former US-President Bush Jr. who used the label ‘failed state’ as pre-text for miltary action Starck does not suggest to throw bombs and to invade Greece. He simply proposes to pull the plug, and to make Greece leave the Eurozone:”At this moment, Greece has neither the political will for reforms nor the institutional ability to implement reforms”, hence the game needs to be finished. Keeping Greece in the Eurozone, so Starck, undermines the reputation of the Euro and its institutional underpinnings.

The whole article is full of exclamation marks and speaks of deep frustration, not at all a text one would expect to read from a former chief economist. Sure, arguments can be made that Greece would be better off with its own national currency. Intellectual integrity demands, however, also to assess the reasons for the Greek mess. And it is here where commentators like Starck lose any integrity as they only hint to domestic Greek politics over the last couple of decades. Greece was neither seen as a ‘failed state’ nor as a ‘failed economy’ by European partners and private financial markets. On the contrary, much was made of the catch-up processes and the signs of modernization, not least thanks to the stimulating effects of the introduction of the Euro.

The room for compromises is shrinking: “”We have lowered our long-term sovereign credit rating on Greece to ‘CCC’ from ‘CCC+’ to reflect our opinion that in the absence of an agreement between Greece and its official creditors, the Greek government will likely default on its commercial debt within the next 12 months” , so Standard and Poor’s. The negotiating team of the IMF took the plane back home as – in their view – there was nothing to negotiate. Jens Weidmann, head of the Bundesbank, stated a day ago that the risk of insolvency is increasing by the day, and on and on goes the list of comments that all underline the same message: Greece has to accept imposed austerity or to leave. In any case, the Greek government lost its gamble. They lose if they keep the Euro by accepting the austerity program. They lose if they give up the Euro as this would oppose the wish of a majority of citizens.

European Integration is – besides many other important rules and values – about the rule of law. As it is, this principle can prodice economic problems. The Highest Administrative Court of Athens just published its decision about the legality of reducing pensions in the private sector as part of an overhauling of the pension schemes , and came to the verdict that this reduction is a violation of the Greek Constitution as well as a violation of European Human Rights. It should be noted that this overhaul has been written by the Institutions. The current demands by the Institutions gon even further, and again risk a verdict of the Highest Court. Observers like Starck may argue that this verdict exactly underlines their argument of an deeply entrenched institutional inability of Greece to come forward with meaningful reforms. For the Greek government the verdict comes as a double-edged sword: The verdict can act as an argument to deal in different ways with the ailing pension scheme then only reducing payments; the verdict must be obeyed and thus adds to the pressing financial calamity of Greece.

Greece today is not Germany in 1919. Unlike Germany, Greece indeed is free to walk away. Imposed austerity only occurs if Greece would stay in the Eurozone. Walking away, though, would not mean to avoid austerity. There is quite a consent between economists that short-term (a few years?) a go-it-alone strategy comes with high economic and social costs. Austerity will not be imposed by the Institutions but a consequence of the implications to return to its own currency. No nice future…