Eurozone crisis: there are no miracles in Greek tragedies

Extrait de: Eurozone crisis: there are no miracles in Greek tragedies, By Jeff Randall, The Telegraph, 26 Sep 2011

Lending ever greater sums to a mismanaged and corrupt economy won’t make it solvent

Just before the roof fell in on Kweku Adoboli, the UBS trader whose “miscalculations” cost his bank $2.3 billion, he posted a message on Facebook: “I need a miracle.” Keep an eye out for something similar from George Papandreou, Greece’s prime minister, who has been telling us: “Let everyone be certain, Greece will not default, we will not let it default.” Nothing short of a supernatural event is now required for that promise to be met – the Greek bubble is about to pop.

There are similarities between Mr Adoboli’s flame-out and Greece’s imminent bankruptcy:

1.      failure of regulation,

2.      credulity of investors and a

3.      desperation to throw good money after bad.

The difference, however, is scale. UBS’s losses are shocking but manageable. By contrast, when Greece repudiates all, or even part, of its 370 billion euros of debt, the foundations of the single currency will crack and many bystanders will be hurt.

Financial pain will be accompanied by the political humiliation of European Union leaders and their apologists in the commentariat who boasted that such an outcome was impossible because there was the “necessary will” to prevent it occurring.

The fallacy at the heart of this crisis is that every financial problem has a political solution. If only.

Yet the Brussels elite and its co-conspirators at the IMF continue to promise that by “doing all it takes” they will, somehow, defy indefinitely economic gravity.

This illusion of political primacy is perpetuated because a confession of impotence would not only undermine the worth of those in power but also expose the euro’s fatal flaw:

Monetary union without fiscal union is a marriage that weds the prudent
to the profligate with no control over the latter’s spending.

Voters who were taught that debt-fuelled consumption was the path to prosperity are now shocked to discover that the racket is bust. Unwilling to accept the agony that comes with retrenchment, they expect those in charge to administer analgesics. In the short run, chary of disappointing the electorate, pusillanimous ministers load up the system with financial morphine. For a while it feels good. Then the patient demands a bigger fix, and another, and another. Eventually the drug providers wake up to a nightmare: the syringe is empty. When costs rise exponentially, even the rich run out of money.

The bail-out of Greece began with a 100-billion-euro package. Very soon a second deal of the same order was required. Now we learn that the 440-billion-euro European Financial Stability Facility may need to be five times bigger to beat back the Debt Beast, which, having gobbled up Greece, is turning its attention to Italy, where Silvio Berlusconi is in a 1.9-trillion-euro hole.

As my Daily Telegraph colleague Peter Oborne explains in his report for the Centre for Policy Studies, Guilty Men, Greece’s calamity and the unravelling of the euro zone are hugely embarrassing for the soi-disant intellectuals who urged the United Kingdom to abandon sterling for the euro. I still marvel at a paper, Why Britain Should Join The Euro, written in 2002 by Richard Layard (London School of Economics), Willem Buiter (Citigroup), Christopher Huhne (Energy Secretary), Will Hutton (ubiquitous Left-wing commentator), Peter Kenen (Princeton University) and Adair Turner (former director-general of the CBI).

It asserts: “Opponents of the euro have forecast disasters which have in fact never happened and which always looked most unlikely… Euro-sceptics constantly underestimated the competence of Europeans and their ability to organise things properly.” What, like allowing Greece to fiddle its entry form?

Euro-fanatics are not alone in being routed by the debacle in Athens. Those who denounced opponents of budgetary incontinence are also squirming. Warnings that excessive debt would drown countries awash with borrowings were dismissed by progressives as cave-man economics. Who are the Neanderthals now?

At the risk of giving Johann Hari, the disgraced plagiarist, more space than he deserves, here’s his analysis: “Debt isn’t the problem. Debt is part of the cure. The facts suggest [we] need to spend more, not less, to get the economy back to life – and pay back the debt in the good times, when we will be able to afford it.”

While Mr Hari is attending truth awareness classes, perhaps he should ask for some lessons in economic history. Between 2003-2007, the UK was, apparently, enjoying a boom. These were the “good times”. So how much debt did the state repay in that period? Answer: nothing. In fact Gordon Brown borrowed, on average, £32 billion pounds a year, clocking up £160 billion of debt at a time when tax revenues should have been tucked away as a shield against future storms.

The lesson of Greece is that lending ever greater sums to a mismanaged
and corrupt economy does not make it solvent.

It defers the day of reckoning, but delivers no salvation. To escape from debt, a sovereign borrower has four options.

1.      It can spend less than it earns and use the surplus to diminish obligations. Greece has little hope of that.

2.      It can sell assets. The trouble is, Greece’s 50-billion-euro privatisation programme knocks only a small hole in its commitments and is way behind schedule.

3.      It can inflate away its debt, but the European Central Bank, the guardian of the euro’s integrity, will not permit Greece to do so.

4.      Finally it can bilk its creditors and start again. It’s a financial solution to a financial crisis – and that’s what Greece will do. Because, as Kweku Adoboli discovered, miracles are hard to find.