What can we learn from Greece’s crisis?

Summary: Now the final act has probably begun in the long divorce of Greece from the European Monetary Union. Ignore the predictions. They’re just wild guesses. Rather let’s take this moment to contemplate how Greece — and Europe — got here.  {1st of 2 posts today.}

“Europe will be forged in crises, and will be the sum of the solutions adopted for those crises.”
— Jean Monnet in his Memoirs (1978). He was one of the architects of the program to unite Europe (see his Wikipedia bio).

After years of confident assurances that all would probably work out for the best, Greece has gone off a cliff. This was long expected by readers of the FM website. In July 2007 they read that the European Monetary Union probably couldn’t survive the next recession in its current form. The cracks opened in 2010; in February 2012 I predicted it would not survive the crisis.

Europe’s lending and monetary stimulus programs to the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) delayed the crack-up until 2010 and extended the slow decline since then, Now the crisis has begun. It will almost certainly bring big changes to Greece. As for the rest of Europe, and to the unification program, who can say? Greece is small, but it might create large precedents for others to follow.

While journalists report the exciting events to come — entertainment for America’s outer party (managers and professionals), because what difference does it make? — we can ponder how this happened and what America can learn from this.

We’ll see many economists explain why this resulted from incompetent politicians. This crisis would have been manageable if tenured economists at majored universities ran the world! Barry Eichengreen (Berkeley) says “Path to Grexit tragedy paved by political incompetence.” I suspect that a tag-team of Solon, Pitt the Younger, and Washington would have found this crisis difficult to handle.

Rather look to the mistakes made at the beginning, when the European Monetary Union was created. Major economists warned that the structure was flawed. The Euro was launched in 1999. More economists warned Europe’s leaders, and the growth during the first 8 years gave an opportunity for reforms. They were ignored as Europe’s leaders did what we all do: listened to experts who told them what they wanted to hear.  (See the economists’ warnings here.)

Now they have to patch the system in the midst of a crisis. Greece has to default, probably leaving the euro weaker than it was in 2014, which was weaker than 2013. Years of depression have burned away its reserves and its vitality.

My guess how this plays out

1. I suspect the Troika (the EU, ECB, and IMF) have detailed and long-standing plans to contain this crisis, even should it become Grexit (exit of Greece from the euro).
2. I believe the Greek government has done little preparation (perhaps not even planning) for this crisis, and even less for Grexit.
3. This will end badly or very badly for Greece. The EU will provide humanitarian assistance, but its leaders will consider this a cheap lesson for the other members about the consequences of adopting even mildly Leftist policies.
4. I suspect that the Troika will successfully contain the crisis. However, as we saw in 2008, sometimes these fires burn out of control.

Lessons learned for America

Fundamental reforms should be made during good times, not during political and economic storms. America’s political regime has many deep structural flaws. The Senate is filled with rotten boroughs. The simple framework of three Branches has mutated into a complex array of power centers, many with minimal accountability to the public (much of the Deep State is almost invisible to the public). Perhaps most seriously, the legitimacy of the government’s institutions has dropped to alarmingly low levels (as in Gallup’s Confidence in Institutions poll).

Europe’s leaders ignored economists’ warnings until a crisis both proved the problem but made it almost impossible to solve. When will we address the flaws in America’s system?

Update: essential reading about the crisis of Greece

Francesco Saraceno, who notes that Greece made most of the concessions, that the Trioka’s terms were not only disastrous for Greece but also unlikely to work (continuing the depression caused by their previous terms), and that the Troika likely goal was breaking Greece’s Leftist government — and discouraging other nations from following its path.

See these for more valuable analysis…

• “Greece Over the Brink” by Paul Krugman (Nobel laureat in economics).
• “Europe’s Attack on Greek Democracy“by Joseph Stiglitz (Nobel laureat in economics).
• “Greek referendum: a ‘No’ would bring new economic darkness” by economist George Magnus — “Leaving the EU might not be the panacea some believe”.

For More Information

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If you liked this post, like us on Facebook and follow us on Twitter. See all posts about Greece, the European Monetary Union, and especially these about the perilous state of the European Union…

• Forecast: Can the European Monetary Union survive the next recession? Probably not. — July 2008.
• The periphery of Europe – a flashpoint to the global economy, 8 February 2010.
• Today Europe’s leaders took another step towards the edge of the cliff, 27 October 2011.
• Europe passes the last exit. A great crisis lies ahead. — 21 February 2012.
• Forecast: Europe has chosen a harsh future. All the paths for Greece lead into darkness — February 2012.
• The Fate of Europe has become visible. Only how and when the break comes remains uncertain. — June 2012.
• Whither Greece after the election? Why do they stay on a doomed course? — June 2012.
• The hidden goal of Europe’s leaders. See it and then their actions make sense. — July 2012.

Skipping ahead to the present: A high stakes cage match: Nationalism vs. the European Union — June 2015.