Uneasy Money

Despite the belated acquiescence of the Greek government to Eurozone demands that further austerity measures be imposed, the latest news updates from Brussels continue to sound ominous, Eurozone officials now insisting on even tougher measures than previously demanded as evidence that Greece is finally getting serious about carrying out its commitments to bring its finances under control. All participants in this tragicomedy have plenty to answer for, but as I, along with many others, have said before, the primary blame rests with the policy of the European Central Bank, which, obeying the dictates of Mrs. Merkel and her government, has a policy that has allowed nominal GDP in the Eurozone to grow by just 5% since 2011, an average rate of growth of only 1% a year. For Greece, this policy has meant a catastrophic fall in nominal GDP since 2008 of about a third. No country could survive such a sustained reduction in its nominal GDP without irreparable damage to its economy.

The responsibility of successive Greek governments for the current disaster is palpable and universally recognized, but the responsibility of the ECB and its German masters for the damage to the Greek tragedy is equally palpable, but scarcely mentioned, at least outside of Greece. What is even less mentioned is how contrary this policy has been to Germany’s own self-interest, because, in devastating the Greek economy through the – dare I say it, yes I will say it – INSANE policy of the European Central Bank, Germany has, in what might easily be construed as a policy of deliberate and sadistic torture, doled out to Greece just enough in the way of loans to prevent its default over the past five years, even as it has systematically destroyed the capacity of Greece to repay the very loans that Germany has extended to Greece.

It is worth recalling that just over 90 years ago, another European country was in the midst of a debt crisis, a crisis that country had brought upon itself by its own irresponsible — indeed reckless and even criminal – policies. In case you don’t already know which European country I am referring to – and even if you don’t know, you should be able to guess – I am referring to Germany, which, in its pursuit of its goal of European domination and a colonial empire to match, if not, overshadow those of Britain and France, provoked the start of World War I, leading to the deaths of 17 million military personnel and civilians. The outrage against Germany after the War was such that, after the collapse of the German government and the flight of Kaiser Wilhelm, the subsequent Versailles Treaty of 1919 imposed punitive terms on Germany, obligating Germany to pay war reparations to the allies, primarily France on whose soil the Western front was largely fought.

In what was his most famous work until he wrote the General Theory, J. M. Keynes, who was on the British delegation to Versailles conference, wrote The Economic Consequences of the Peace in which he accused the allies of imposing a Carthaginian Peace on Germany, because the burden of reparations was beyond the realistic capacity of Germany to bear, thereby making Keynes a kind of national hero in Germany (“sic transit gloria mundi,” as they say). The next decade seemed to confirm Keynes’s warning, because Germany was either unable or unwilling to make the reparations payments required of it, and the United States and the rest of the world, by raising tariffs throughout the 1920s, showed little inclination to accept the trade deficits that would have been required if Germany had made the reparations payments it was obligated to pay. As if to demonstrate its incapacity to pay its debts, Germany in 1923 opted for a hyperinflationary meltdown of its economy — the political equivalent of a hunger strike — in a kind of passive-aggressive show of defiance toward its debt obligations.

Meanwhile, the prospect of receiving reparations payments proved to be equally unsettling on the chief prospective beneficiaries of those payments, the French. While most of the rest of Europe was struggling to restore their currencies back to gold convertibility, by adopting austerity measures aimed at reducing public expenditures and raising revenues, the French felt that they could adopt afford to increase public expenditures, because after all, “le Boche payera tout” (the Hun will pay it all), “Boche” being a French slang term of endearment for Germans that has somehow come to be translated in English as “Hun.”

The notion that it would be the Germans who could be made to pay for their self-indulgent extravagance had a poisonous effect on the French economy in the mid-1920s, causing a rapid inflation, and capital flight, which not halted until Raymond Poincare formed a national unity government in 1926 and Emile Moreau was appointed Governor of the Bank of France, together managing to halt the inflation and stabilize the franc, setting the stage for their own disastrous gold accumulation policy starting in 1927, thereby precipitating, with a huge assist from the Federal Reserve Board, the Great Depression.

There are really two points that I want to make by recounting this sad history of the aftermath of World War I. First, one might have expected that, having once been victimized by the demands of its European neighbors that it pay the debt obligations it owed them, the Germans might have some feeling of empathy or understanding for the national suffering imposed when creditor nations try to collect debt obligations beyond the capacity of the debtor nation to repay. But there is hardly any sign of such an awareness in Germany today. Rather the attitude seems to be “the Greeks must pay whatever the cost.”

Now one might say, in defense of the Germans, that the debts incurred by the Greeks were voluntarily undertaken, while the debts imposed on Germany were imposed against the will of the Germans. But that seems to me to be a distorted view of the war reparations imposed on Germany. The German nation went to war enthusiastically in 1914 in hopes of achieving European, if not world, domination, the same ambition that led to another war enthusiastically supported by the German nation only 20 years after the end of the previous war. The war reparations imposed on Germany after World War I may have been excessive, given the economic realities of the situation, but there is no reason to think that, given the appalling suffering caused by German aggression in World War I, the war reparations imposed upon them were less legitimate obligations than the current debts owed by the Greeks to the Germans.

The second point that I would make is that there is certainly nothing noble or uplifting about the French attitude “le Boche payera tout.” Indeed, the attitude was both irresponsible and ultimately self-defeating, for two reasons. First, there was never a realistic way of compelling the Germans to pay, and second, even if the Germans could have been compelled to pay, the consequence would likely have been damaging to the French economy, because transfer payments on a large scale tend to undermine incentives to produce (the “Dutch disease”). Nevertheless, there was a certain selfish logic underlying the French attitude that is not hard to understand.

However, the current German attitude that the Greeks must pay whatever the cost is, at a very deep level, irrational. Forcing the Greeks into national bankruptcy or to leave the Euro will only guarantee that the Greeks will never pay the Germans back what is owed to them. If the Germans want to be repaid, the only possible way for that to be accomplished is to ease the current debt burden sufficiently to allow a reconstruction of the Greek economy, thereby enabling the Greeks to produce enough to service their debt obligations. As long as Greek nominal GDP is growing less rapidly than their debt obligations, that will never happen. That simple truth seems beyond the power of German comprehension.

What are the Germans even thinking? Who knows what they could possibly be thinking? Maybe Donald Trump could tell us. Or consider the fable of the scorpion and the frog:

A scorpion and a frog meet on the bank of a stream and the scorpion asks the frog to carry him across on its back. The frog asks, “How do I know you won’t sting me?” The scorpion says, “Because if I do, I will die too.”

The frog is satisfied, and they set out, but in midstream, the scorpion stings the frog. The frog feels the onset of paralysis and starts to sink, knowing they both will drown, but has just enough time to gasp “Why?”

Replies the scorpion: “It’s my nature…”