On the Supremacy of The Irrational: Pushing Greece to the Brink of Implosion

While Europeans saw the decision of the eurozone Finance Ministers to back away from a funding plan for Greece and demand an affirmative Greek vote and a further austerity program as a smart political move, other parts of the world saw it as yet another internecine failure to comprehend what is going on in Greece and the conditions of the Greek people.  Europeans refuse to consider that it is the euro which has driven Greece to its present state and believe Greece would enjoy no confidence from the international market if it defaulted whether within the euro or by adopting its own fiat currency.  Nor do they understand that a default within the euro would be a disorderly default, while a planned (is there enough time?) default with a fiat currency could be orderly.  The question of confidence is in how long the euro will continue destroying its current account balance deficit members with its refusal to adopt proper fiscal transfer mechanisms consistent with an economically efficient monetary union.

The essential and fundamental differences between a fiat currency and the euro have confused many commentators and economists, because they do not recognize the euro's failure to provide a fiscal transfer process creates a denial of national fiscal policy and how continued political demands for more and more austerity is destructive of aggregate demand creating a perceived lack of political will which engenders a growing lack of international confidence in the ability of the euro to serve the people of the eurozone.

While John Dizard dismisses Greek protests as just "striking civil servants" who will have no impact on Greek politics and incorrectly assumes that periodic monthly large withdrawals from Greek banks are runs on the banks and a banking crisis when there are no lines of clamoring depositors demanding their money.  He assumes a default is coming and that it will be within the euro and it will cause Greek banks to fail, because they own Greek debt, as do many individuals, pension funds, and foreign banks.  Wealthy Greeks, beginning for a period in 2010, have and are periodically moving money out of Greece, as well as other assets such as yachts, to avoid taxes and ordinary Greeks have started this year to withdraw deposits in order to maintain living conditions, i.e., they are devouring their savings, as we have written in this recent post.  This is consistent with a currency crisis, which is a lack of confidence, rather than a banking crisis.  The Greek protestors are a diverse group of union members. unemployed, pensioners, and small business people, who despair over the loss of sovereignty, threats to democracy and human freedom from eurozone proponents who demand political unity at any cost which cannot fix the euro, and living conditions which are spiraling down.  They have had enough of austerity and politicians who cannot serve the best interests of the people.

In order to protect the euro, Greece, Ireland, and now Portugal have been forced into austerity and bailout designed to defend core European banks.  Ireland was conned into accepting indentured servitude for its citizens.  Portugal has been duped into accepting austerity which the ECB demanded and which the Portugese may find unpalatable more quickly than desired.  Greece has been pushed and pushed to the brink of enslavement as the eurozone demands absolute fiscal control of Greece as core Europe continues to hide the capitalization needs of its large and smaller banks.  At what point will a people not fight back?

If Greece were to default, why would they not do so in an orderly process which includes withdrawal from the euro and redenomination of its debt in its own fiat currency, devalued in relation to the euro, which would protect its banks and citizens?  It would not be easy, but, if it were thoroughly planned, the substantive economic damage would be primarily contained to eurozone banks and foreign holders of private debt which would still be income producing.  This is not a scenario which I relish, nor one I have advocated, but the eurozone seems committed to implosion as long as it defends the euro as a currency without a fiscal transfer process and demands austerity and human misery of its less economically powerful members even if it means the destruction of sovereign rights to protect its citizenry and democracy.  I would much rather see eurobonds, a fiscal transfer mechanism, and coordinated investment from the European Investment Bank, as Rob Parenteau and Jan Kregel have written and/or tranche transfers, as Yanis Varoufakis has proposed, although I wonder if tranche transfers by themselves might just delay the end game.  Unfortunately, we do not live in reasonable times.  The Irrational rules.  Are we doomed to relive the currency crisis of 1931 Germany which was caused by a lack of political will and deficit reduction economic policies, which created an international lack of confidence in Germany's ability, despite a trade surplus, to pay international debts in a currency fixed to the gold standard?


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