Germany's Carthaginian terms for Greece
The last time Germany needed a bail-out from world creditors, it secured better terms than shattered Greece last week.
7:21PM GMT 12 Feb 2012
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The US, Canada, Britain, France, Greece, and other signatories at the London Debt Agreement of 1953 granted Chancellor Konrad Adenauer a 50pc haircut on all German debt, worth 70pc in relief with stretched maturities. There was a five-year moratorium on interest payments.
The express purpose was to give Germany enough oxygen to rebuild its economy, and to help hold the line against Soviet overreach. This sweeping debt forgiveness caused heartburn for the British - then in dire financial straits, themselves forced to go cap in hand to Washington for loans. The Greeks had to forgo some war reparations.
Yet statesmanship prevailed. The finance ministers of the day agreed to overlook the moral origins of that debt, and the moral hazard of “rewarding” a country that had so disturbed the European order.
The Wirtschaftswunder whittled down the burden of German debts to modest levels within a decade. Germany emerged as a vibrant democracy and a pillar of the western security system.
Greece has less strategic relevance, and must comply with tougher terms.
The EU deal will in theory cap Greece’s public debt at 120pc of GDP in 2020 - at the outer limit if viability - after eight years of belt-tightening and depression, if all goes perfectly.
Since nothing has gone to plan since Europe’s austerity police began to administer shock therapy eighteen months ago, even this grim promise seems too hopeful.
The Greek economy was expected to contract by 3pc in 2011 under the original EU-IMF Troika plan. In fact it shrank by 6pc, and is now entering what the IMF fears could become “a downward spiral of fiscal austerity, falling disposable incomes, and depressed sentiment.”
Manufacturing output fell 15.5pc in December. The M3 money supply crashed at a 15.9pc rate. Unemployment jumped to 20.9pc in November, up from 18.2pc the month before, and is already above the worse-case peak pencilled in by the Troika.
Some 60,000 small firms and family businesses have gone bankrupt since the summer, the chief reason why VAT revenues dropped 18.7pc in January. The violence of the slump is overwhelming the effects of fiscal retrenchment. So much Sisyphean effort for so little gain.
You can argue that Greece has dragged its feet on EU-IMF demands - though the IMF is careful not make such a crude claim, offering mixed praise in its last report.
But as Professor Vanis Varoufakis from Athens University says: “If we had better implemented the measures, the worse it would be: the economy would be comatose, and the debt-to-GDP ratio would be even more explosive.”
So yes, like Germany accepting the terms of the Carthaginian Peace with a gun to its head in 1919, Greece signed “an insincere acceptance of impossible conditions” - to borrow from Keynes - hoping that sense would prevail with time.
Greece must cut 150,000 public sector jobs by 2015 under the latest accord, and fiscal policy will tighten by an extra 1.5pc of GDP beyond the squeeze already under way.
“There are another 50,000 shops and small businesses hanging on for dear life that are expected to collapse over the next six months,” said Prof Varoufakis.
Premier Lucas Papademos pleaded for national unity the weekend. "We are just a breath away from ground zero. A disorderly default would set the country on a disastrous adventure. Living standards would collapse and it would lead sooner or later to an exit from the euro."
Well, perhaps, but remaining in EMU is also a disastrous adventure, and living standards will certainly collapse, which is why it ultimately makes no difference whether or not the Greek parliament backs the latest accord (I write before knowing the outcome of Sunday’s vote).
The policy cannot command democratic consent over time. The once dominant Pasok party has collapsed to 8pc in the polls. Support is splintering to the far Left and far Right, just like Weimar Germany under the Bruning deflation.
The next Greek parliament will be packed with “anti-Memorandum” fire-breathers, and any attempt by Greek elites to prevent elections taking place must push street protests towards revolution.
In a sign of things to come, the Hellenic Police Federation has called for the arrest of Troika officials on Greek soil for attacks on “democracy and national sovereignty".
It is clear that Germany’s finance minister Wolfgang Schäuble wishes to expel Greece from the euro, calculating that Euroland is now strong enough to withstand contagion, and that the European Central Bank’s `Draghi bazooka’ for lenders has eliminated the risk of a financial collapse.
“We can’t keep sinking billions into a bottomless pit,” he said on Friday.
Earlier he was caught on camera telling his Portuguese colleague that Lisbon can expect softer terms on its rescue package but only once Europe has dealt harshly enough with Greece to satisfy German public opinion.
Any slippage by Greece will be seized upon as a pretext to withhold the EU loans.
It is certainly arguable Greece has no hope of clawing back viability within monetary union and should therefore return to the Drachma.
While Ireland has pulled off an “internal devaluation” inside EMU by deflating wages, it has an open economy, a high trade gearing, and a current account surplus: Greece has a deficit of 9.4pc of GDP after four years of slump. Greece’s “equilibrium real exchange rate” is overvalued by 33pc according to IMF data.
But that is not the argument made by Mr Schäuble. As high priest of the “household fallacy” - the false equation of macro-economics with the budget of a Schwabian Hausfrau - he thinks Greece is in trouble because it spends too much, not because it is trapped in debt deflation with a badly over-valued currency.
From there he progresses to the next fallacy of thinking that Portugal, Spain, and Italy will pull through as long as they cut, cut, and cut again.
If Portugal spirals down in much the same fashion as Greece once austerity bites in earnest - and therefore misses target after target - it is likely that Mr Schäuble will turn on Portugal with equal fury, because that is how he sees the world.
Each failure is ascribed to lack of moral fibre, not to the design flaws in the currency project that he himself helped create and foist on the German people against their wishes.
Belief that EMU fall-out from Greek exit - or “Grexit” in market slang - can be contained by firewalls and more fiscal austerity assumes that Greece is a special case, alone brought low by turpitude.
If you think, as I do, that Greece did indeed commit a host of sins but is also the first of several victims of a mad ideological experiment that shackled together economies with different growth rates, wage bargaining systems, productivity patterns, sensitivity to interest rates, and inflation proclivities - without fiscal transfers or sufficient labour mobility to cushion the effects - and that this disaster was compounded by Germany’s (beggar-thy-EMU-neighbour?) wage squeeze, and compounded yet further by sharp monetary and fiscal contraction at the wrong moment in the states most at risk, then you will expect the crisis to grind on whatever happens in Greece.
The EMU end-game is harrowing for Greece, but it is also ghastly for Germany. Berlin has accumulated ruinous liabilities without yet solving anything, and is fast squandering sixty years of diligent statecraft.
By demanding a budget viceroy for Greece, and now an escrow account to seize Greek revenues at source, the Merkel-Schäuble government has crossed a diplomatic line and brutalised EU politics. “Memorandum Macht Frei”, as one Greek newspaper splashed.
Would Konrad Adenauer ever have made such a blunder?
