26th April, 2010
Dear readers….this is my latest Huffington Post.
“The humiliating surrender of Greece’s economic autonomy came just last Friday, 23 April, 2010. The democratically elected Prime Minister, George Papandreou transferred to unelected officials in Brussels and Washington the power to determine Greece’s fiscal policy. In other words, decisions about taxation, and how tax revenues should be spent.
Back in 1765 Bostonians such as James Otis and Samuel Adams regarded “taxation without representation as a form of tyranny”.
Today, a nation that served as the cradle of western democracy will effectively be governed by remote, invisible and unaccountable officials.
When Greece’s leaders agreed back in 1992 to sign the Maastricht Treaty, and set up a currency union, they gave away powerful levers for the democratic management of their economy – to EU bankers.
First, they surrendered the power to determine the value of the Greek currency; the exchange rate. Since 1st January, 1999 the value of the Greek currency has been fixed by bankers and policy-makers based at the European Central Bank (ECB) in Frankfurt, Germany.
There were advantages to the introduction of a European-wide currency. It cut the cost of cross-border transactions, made financial markets more liquid, and allowed larger banking firms to provide a wider array of banking services to the people of Greece, as well as the rest of Europe.
But on balance, the people of Greece have gained less from the arrangement than have financial institutions. The EU and ECB turned a blind eye to the way banks, like Dusseldorf’s IKB, gambled in foreign markets, including in CDOs sold by Goldman Sachs.
Under the watch of the ECB, European bankers became lax about lending, including to Greeks. Their banks grew too big to fail.
None of this appeared to matter much, until the financial crisis erupted. The ECB had to step in to rescue private banks, with ‘quantitative easing’ or hundreds of billions of Euros of ‘enhanced credit support’.
Back in Greece, the surrender of control over the value of the currency made it impossible for her finance minister to respond by devaluation.
Not so Britain, which remained a member of the European Union, but whose government wisely declined to surrender control over sterling, and refused to join the Euro in 1999.
So Britain like the US enjoys relative autonomy. Both have responded to the global financial crisis by refusing to intervene as the value of currencies fell. This made exports more competitive, and raised a barrier to imports.
As a result both the US and the UK are re-balancing their economies.
Not so the Greeks. They have had to adopt and adapt to an exchange rate better suited to the needs and expectations of the German economy.
But it’s worse than that. By joining the Euro, Greece gave away the central bank’s power to set an appropriate rate of interest for Greek economic conditions. Again, this is in contrast to the UK and the US, where central bankers retain the power to set the base rate of interest, and influence other rates.
For Greece the ‘price’ of lending was set by the ECB in Frankfurt at a rate more appropriate to Germany than Greece, as Germany is regarded as the ‘engine’ of the European economy.
As a result, Greek households and companies have, for a decade, had a rate of interest a little too low for Greece’s good.
Low rates in turn encouraged reckless borrowing on the part of Greek banks, companies, households and the Greek government.
Reckless borrowing was aided by the lifting of barriers over movements of capital across the Eurozone, so that Greeks could borrow from e.g. German and French banks, as well as their own.
At the same time, the EU turned a blind eye as the Greek government worked with Goldman Sachs to securitise the public sector’s debts, and disguise the full extent of Greece’s expanding deficit.
As long as the private banking sector thrived on these arrangements the ECB and EU governments like Germany and France ignored their activities.
But then the private financial system crashed, and hit Greece hard. The government’s economic management had been weak, and even deceptive, and partly as a result of the constraints of the Euro, her private services and manufacturing sectors uncompetitive.
The government’s debt ballooned, and soon Greece needed loans to finance the deficit. This vulnerability, combined with the open nature of the Greek economy, made the country a sitting duck for the speculative attacks of players in the global bond markets.
Last Friday, rather than default on debts, the Greek Prime Minister capitulated to their demands and surrendered control over Greece’s fiscal policy to the EU and the IMF.
Today Greece lives under a regime that Bostonians back in 1765 would have regarded as tyranny. While there have been protests and riots, it is not clear that Greece has the equivalent of a Boston Tea Party. Or, like Bostonians that Greeks will join with the Irish, the Portuguese and Spanish – whose autonomy is similarly threatened – to fight for independence.
So we must wait and see. For as history shows, gaining independence is a struggle not easily won.