Overwhelming

Canadian Finance Minister Jim Flaherty (picture Joshua Sherurcij)

This blog has described before the difficulties associated with Greek departure from the eurozone. It would reduce the Greeks to a cash or even barter economy for a while, and destroy many people’s savings and investments.

However, given that the latest news from Greece – billions being withdrawn from banks each day in cash – perhaps that is already happening, in which case the alternative to staying in the euro might not look so bad.

Kitty Ussher in the New Statesman notes that Greece cannot be expelled from the euro, but if Greek exports are to gain competitiveness on international markets via a more favourable exchange rate, Greece would need to choose to leave.

Opinion polls tell us that a majority of Greeks want to stay in the euro, but opinion can change. We cannot be sure that Greece will stay.

How did we get to this ridiculous situation?  How could a small country with only 2 per cent of the eurozone economy create such a crisis for the whole of Europe?

The answer is political indecision.

Jim Flaherty, finance minister of Canada, explains here how the European countries failed to overwhelm their banking crisis at the outset. In Canada, in the United States and also in Britain, enough funds were credibly made available to ensure that investors were in doubt that any stricken bank could be saved. The turmoil following the demise of Lehman Brothers was bad enough; it was not allowed to get any worse.

In the EU, by contrast, the sums of money were never enough. National governments were grudging, and each summit struggled to come up with a big enough commitment, and analysis after each summit revealed that the promises apparently made were never quite as promising as they looked. Rather being overwhelmed, the problem was simply postponed.

The whole point of putting up more than enough money was to reassure investors. But putting up less than that secured the opposite outcome: investors took fright and departed from the European capital markets. Governments and banks are now kept alive by state loans rather than by private sources. This is not what a free market, capitalist eurozone founded on sovereign national governments was supposed to look like.

And to get out of this situation now, to provide assurance to investors in order to buy enough time to enable things to get back on course again, will require ever larger sums of money, sums far larger than the ones that national governments baulked at two years ago. Back then, a few hundred billion euros would have sufficed to have overwhelmed the problem. Today, maybe even several trillion will be insufficient.

We have been here before. Writing in Egypt in 1942, in his pamphlet “Peace – what then?” (which you can read here), he put it like this:

“Every country, now in the war, wished to avoid the German menace and tried to avoid war. Each changed its attitude from one of conciliation to one of a brave show of force many times, but very seldom did these brave shows of force coincide. Consequently Hitler was able to attack and overcome them one at a time. There can be little doubt but that if all the nations now occupied by Germany had withstood and attacked at the same time Germany would have been overrun as quickly as she overran the Low Countries. Or very likely if they had unequivocally stated their unity at the outset on this vital matter of solid common defence the Nazi attack would never have come. But this unity was not to be. Each nation first of all thought of itself and acted accordingly. On such a basis united and therefore effective and decisive action could never result. Even Britain and France were until the eleventh hour divided on a policy concerning the Nazi menace. That delay had its tragic influence upon the course of the war as we all know.”

A common threat was allowed to pick off its victims one by one, because each hoped that it would not be caught. Only when the scale and the extent of the threat were truly understood, when opponents of the threat were willing to place the goal of victory above their narrow individual interests, was an effective response created.

The parallel in the eurozone is obvious. But who can lead Europeans to victory?

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