The Party’s Over: what next for Greece and the Euro?

The Euro Hydra

The best way to deal with the Euro?

The European Project was built from noble and well-intentioned stuff. A common market which would promote the free movement of people and goods, improve cooperation and understanding, and in turn help build barriers to future conflict.

Who wouldn’t want to buy into that?

But somewhere along that line we’ve gone off the rails. Helmut Kohl and François Mitterand (amongst others) started to have bigger dreams of federal integration too. This was the grand political project whose trojan horse was the creation of a single currency, the Euro. However even since it’s launch it has been a solution in search of a problem, and now the bad economics at its core have seen it mushroom into the dictionary definition of a boondoggle project. When adopting the Euro, the tools needed to run the divergent economies of Greece, Spain, Germany, France and Finland were transferred to Frankfurt. Initially, a sudden burst of cheap credit made everyone believe the Euro project was a winner, and a spending spree ensued. But now the poor economics of the Euro have come back to bite us, and the economic tools needed to help at least rectify some of the problems left in its wake are no longer to hand to those that need them.

So now we have a situation where Europe – which should be turning to face the great challenges of our time with a united front – is instead turning it’s back on the world to fight internal fires of it’s own making.

So what to do?

First, kill the debt. People who lend money at high risk should pay the consequences for extending credit in those circumstances. A bitter pill to swallow, but better that than creating an anger vacuum in Greece into which some genuinely crazy and scary ideas might get sucked in and take hold.

Second, kill the Euro, not just in Athens but in Europe. Battling the Euro feels like battling a Hydra – you cut off one head only to watch another two grow in it’s place. Better then to go straight for the heart. Maybe then Europe can start looking beyond it’s own navel and start tackling some of those other issues out there that need our intellectual clout and creativity to get sorted. Time to wake up and shake off that hangover. The party’s over. There’s work to be done. Europeans – and the European project itself – should and can be better than this.

The World is Getting More Free


Green countries are free, yellow partly free, purple not free.

Here’s the key headlines I picked up from a recent presentation at UI by David Kramer on the World Freedom Report. You can follow Freedom House on twitter  @FreedomHouseDC

  • We are seeing the longest period of decline in freedom (now running at 7 years) in decades, with 16 countries improving but 27 declining – obviously not so positive news!
  • There are 90 countries currently ranked as free (46%), and these account for 43% of the world’s population
  • There are 58 countries ranked as partly free (30%), which account for 23% of the population
  • There are 47 countries ranked as not free (24%), which account for 34% of the population (but note that China alone accounts for over half of the population in this category)
  • Of the 47 countries ranked as not free, 9 countries are ranked as the “worst of the worst” (this now includes Mali)
  • While we have seen a global “blossoming” of press freedom between 1980 and 2000, there is now real concern over current trends which show significant backsliding (the current trend is negative). As an interesting aside: Turkey now has the largest number of journalists in jail in the world; within the EU there are growing concerns over Greece and Hungary; and Cuba was noted as a particularly poor example of press freedom in the Americas
  • Finally we also need to look at the bigger, more optimistic picture too: in my lifetime (i.e. between 1972 and 2012) the number of countries ranked as free has doubled, the number of partly free has also risen dramatically (up from 38 to 58), and  the number of not free is dropping steadily (down from 69 to 47), and this despite the fact that there are now 38 more countries to take account of since 1972!

No amount of “cunning plans” will save the Euro now


Why the Euro project should embrace failure

“Never ascribe to conspiracy that which is adequately explained by incompetence.” Napoleon

Here’s an interesting question you don’t hear asked very often, if at all: What specific problem was the introduction of the Euro supposed to solve?

It’s interesting because the point of initiating new projects is usually to solve a problem or improve something. Trouble is, when you think of the Euro in these terms, it is hard to grasp what its introduction was supposed to actually achieve.

I can think of three possible answers. Let’s call these the federal, peace and convenience cases.

The federal case

Proponents of this view believe that the Euro is a necessary stepping stone towards tighter European integration. While the ultimate goal of this trajectory may or may not be the emergence of a truly federal state (a United States of Europe, so to speak), it is clear that this camp values the further integration of such things as taxes, labour legislation and welfare provision. Why? Because this would build a stronger EU block, one which would then be a true giant on the world stage, one which could both challenge the current hegemony of the United States and the ambitions of China at the same time.

Regardless of whether you are a supporter of this vision or not, one of the key issues with this explanation is that by introducing the Euro first, the federal camp has put the currency cart before the reform horse. For the Euro to have any chance of working, you really do need to work towards better integration of taxes, labour laws and welfare (amongst other things), but you need to do this before introducing a single currency. Doing it in reverse order merely exacerbates and amplifies these differences, rather than helping to keep them in check. Think Greece and Germany and you can see this is precisely where we are now.

Peace has broken out?

The second suggested problem goes something like this: countries that share the same currency don’t go to war. There is no doubt that this is a noble aim – who amongst us doesn’t want peace? Unfortunately this is not proving to be true. If anything the fissures and strains being caused by the Euro are actually putting Europe at risk. It is probably far-fetched to say that the Euro itself will lead to war; however with insults flying across borders and the far right parties pitching into the emerging political void, it is most certainly not helping with regard to keeping friendly relations between states.

The lazy traveller

The third and final problem that the Euro has been stated to solve is that of convenience. In short: single currencies are convenient to travellers, and means we don’t need to visit that Forex shop so often. This argument would be laughable if the current situation wasn’t so serious. On another level it’s not even true. We’ve had a single currency for years. It’s called a credit card.

Sound foundations?

So if the Euro isn’t doing such a great job of fixing any of the three potential problems we’ve identified, where does that leave us?

Some may still argue that, even though the Euro wasn’t designed to fix or improve anything, the principle of a single currency is still economically sound; therefore the Euro should stay and is worth fighting for. The big question to ask here is this: why do the proponents of the Euro believe this?

I think those who argue that the Euro is built on sound economic foundations are either having a joke at our (very considerable) expense, or woefully naïve. Like Napoleon, let’s be generous and assume the latter.

To demonstrate the poor economics of the Euro, here’s some extremely interesting analysis from Michael Cembalest, the CIO of JPMorgan. What he’s done is look at over 100 factors against which countries could be compared (such as global competitiveness, government institutions, corruption, debt levels, health and education, business sophistication, labour markets and capacity for innovation – to name but a few), and then put some countries into different, imaginary groups to see how they stack up to the actual grouping of the EMU.

Michael Cembalest's data shows how poorly the EMU region stacks up.

Michael Cembalest’s data shows how poorly the EMU region stacks up.

If you have a close look at this, and you’ll spot the killer punch. Even a grouping of a random selection of countries (those that begin with the letter “M”) have more in common when looking at these 100+ factors than the current grouping of the countries in the EMU block.

That’s pretty alarming.

As Cembalest argues, “you can ignore economics but it doesn’t mean that economics is going to ignore you”. That, in a nutshell, is the headache we are dealing with now. In other words we’ll need to put in the hard work and slog of the getting the reform horse right first, before we should even consider attaching a currency cart. You basically need to drag that tall bar way down, and as you can see, that’s some task.

Euro to blame?

But is this really all the Euro’s fault? Isn’t it just being portrayed as a scapegoat here? Surely there are other factors at play? That’s true; there are plenty of fundamental reforms out there that need to happen in order to get some of the worst performing countries back on track.

But here’s where the Euro has had a huge part to play in actually stopping those radical reforms from happening. When the Euro arrived, it flooded some of the more fragile markets with cheap credit, propelling them into a looking glass world where it seemed more or less anyone could afford more or less anything. Governments and peoples (we can’t just blame the politicians here) went on a spending spree, and all of those much needed reforms were put on ice – if not forgotten about altogether. It was party time! Big up your debt! Trouble is, all those problems didn’t go away, they just went into hibernation, and now the party is most definitely over, they’re back and they’re hungry, and no amount of Euro dollars seems to be able to satiate their appetite.

So if the Euro is not fixing any problems but instead generating them, and it’s also not economically sound too boot, then it starts to look like what it is – a failing political project that is literally costing us billions (if not potentially trillions) to keep on life support. It is, I suspect, one of the greatest boondoggle projects ever conceived by mankind. What makes this even more tragic is that the road we are heading down is one paved with good intentions, such as integration, peace and convenience.

Cunning Plans

So what should we do? The answer is, I think, obvious. We kill it. There is simply no way to save something that is this fundamentally unsound, and nor should we try. There are serious issues and reforms to deal with and the Euro is taking up far too much of our time, resources and money. Europe needs to be competitive again, and spend more money supporting R&D and entrepreneurs, but the Euro is getting in the way and throwing us off course.

Killing something is not a pretty solution, I admit, but better that then the endless series of hastily agreed carrot and stick solutions (the “bailouts and blackmail” approach) whose rules and goalposts change from one horrendous incident to the next. All too often they feel like the real life equivalents of the “cunning plans” that Baldrick from Blackadder proposes – “My Lord, we’ll solve the problem of the sinking house by building another floor on top”.

The brave (and competent) politicians we need now are not the ones with yet another rescue plan for the Euro, but the ones who come up with the best plan for the least painful exit. As Gideon Rachman on the FT once argued, the German’s have the best quote for this kind of situation, “better an end with horror than a horror without end.”

Footnote: I am very much a pro-European, but I am definitely very sceptical about the Euro. It is possible to hold both of these propositions without being in contradiction. In fact it is precisely because I am pro-European that I am anti-Euro.

Europe’s future will be muddled

merkel cameron hollande

An uncomfortable alliance

Here’s a short, provocative and interesting piece on the past, present and future of Europe by Anthony de Jasay on the Library of Economics and Liberty. It was written before the current debacle in Cyprus, but the conclusions – that Europe will muddle on for the foreseeable future through an increasingly uncomfortable alliance between the UK, France and Germany – will, I think, hold true. At least for now.

Anthony de Jasay, “A Triangular Europe: Three Incompatible Conceptions.” March 4, 2013. Library of Economics and Liberty. 27 March 2013. <>.

Bankers’ bonuses? The EU should bend it like Beckham

david beckham pegFar reaching policy decisions based on populist politics are rarely a good idea, and the recent call to cap banker’s bonuses by the EU is no exception.

It’s true to say that banking reform needs to be considered: we need a way of trying to prevent contagion when big banks fail in the future (and fail they most certainly will) that does not involve governments stepping in with tax-funded bail-outs. While there are some interesting ideas for reform out there (such as narrow banking), capping pay isn’t one of them. Why? There are four good reasons.

First, on a practical level it simply won’t work. If the bonus is linked to base salaries then base salaries will simply be raised. Not only that, banks will surely find another technical loophole to exploit, which will mean that in order to keep up with them the EU capping regulation will have to get ever more complex and Byzantine in turn. Both of these inevitable responses to the cap will simply add to the present craziness, not reduce it. And that’s before we can add in the fallout of any unintended consequences of this decision that we won’t see until it’s too late.

Second, on an idealogical level, it shouldn’t be the job of governments or the EU to set the salaries of staff in companies, even when the state is a key shareholder. If you think that’s not true, ask yourself this: how would you feel if one day you got a letter from the government telling you what your salary should be? You’d probably think it was none of their business, and you’d be right.

Third, it’s clearly populist. If anything, many professional footballers are paid even more than bankers. It would be interesting to see the fans reaction if the EU started to regulate those salaries too, especially when those footballers decided to take their skills elsewhere. Rather than seek to punish bankers, perhaps we should be encouraging them to act more like footballers instead? In promising to give his six figure PSG salary away, David Beckham has scored a real public relations coup with the fans. Populist? You bet! But the banking sector would do well to listen and learn from the likes of Beckham if it wants to turn its own public relations disaster around.

Fourth, banks and people will simply move. Maybe not in the short term, but when it comes to that next big decision about where a bank might prefer to locate it’s next enterprise, or where to look for that next job, surely the EU, where it will be hard to attract good staff because of the salary caps, will move lower down the list. And with that loss of wealth for the cities that play home to the banking sectors comes a general loss of everything else that helps to support it.

Reforming the banking sector to reduce fallout and contagion from future loses will be both complex and necessary. But in deciding to attack the wrong problem with it’s usual weapons of choice –  interference and bureaucracy – the EU has shown itself once more to be wide of the mark and lacking somewhat in imagination. By going after bankers bonuses it is clearly trying to win back some much needed public goodwill, but in the process it risks further crippling it’s own ailing economy. The last thing we need now are further measures to make the region less competitive on the global stage. That would be like shooting yourself in the foot. Better to be like Beckham and put your best foot forward instead. A little bit of his imagination and flair wouldn’t go amiss either.

Further reading: