I note with some concern the election in Greece of Syriza.
Whether it actually proves a disaster will depend on the European Union – and Angela Merkel in particular.
I argued when the Euro-crisis first emerged that there were only two broad solutions – either for the countries in trouble to leave the Euro and devalue their currency until they were competitive in the markets again or for the Eurozone to become to become one fiscal unit – a United States of Europe, if you like, with, for example, harmonised tax rates and one collective Euro-debt (not exactly fair on those countries not in large amounts of debt).
The pound’s devaluation in the market was one of the necessary conditions for the UK’s economic recovery. Greece shares a currency so cannot devalue on it’s own.
Instead the Eurozone members after much procrastination decided upon a typical Merkel-esque fudge. There is limited fiscal union – there is now a banking union and Eurobonds, for example. Mario Draghi finally calmed the markets a couple of years back by promising to do “whatever it takes”.
Now we have to wait patiently for many, many years for there to be internal devaluations within the affected countries, with falling prices and falling wages until countries such as Greece and Spain are competitive once more.
Meanwhile, the people of several European countries continue to suffer for the cause of the political project – the Euro.
No wonder the likes of Syriza and Podemos are gaining fans in their respective countries with their promises to spend more money they don’t have and not pay back debt.
The danger now is that of any kind of move towards granting the proto-communists their promises to the Greek people of ending austerity and more importantly, writing off debt.
As an economics graduate and one with a particular interest in behavioural economics, moral hazards must be avoided. In the UK we missed out on our opportunity to inflict punishment on bankrupt banks such as RBS by rescuing them. The banks as a cultural organisation are unlikely to have learnt their mistakes. In America, Lehman Brothers went bankrupt and far more has been achieved in the way of regulating and restructuring banks.
The same moral hazard applies here. If Syriza achieve their goal of debt write-off, Podemos will want the same in Spain (assuming they won the election). There would be similar demands from other indebted countries – Ireland, Portugal, Italy, France – and the UK. The UK’s debt as a share of GDP is not a million miles away from Greece.
We should not have any debt haircut – neither should Greece.
My advice has not changed. Greece and Spain should leave the Euro to devalue their currency, and become competitive once more or the Eurozone fiscal union needs to be completed thoroughly, instead of just a patch-up job.
In reality there may be some Merkel-esque fudge once more – for example interest-free loans to Greece, which would be acceptable in my view.
But the important message must remain – if you spend profligately, you must pay your debt.