As we survey the bombed out rubble of the Greek economy this morning we should consider the major lesson of it to us all: We should never underestimate the ability of politicians to entirely screw up any- and every- thing. It's true that they don't always do this, that's not the point which is being made. It is that they do have their hands on the reins of power and that reign can indeed lead to the most almighty gaffes. As we're seeing. The probably sensible answer to this is to not allow the politicians to have very much power thus reducing the areas of life they can potentially mess up.
Now of course I am going to say this, being at the minarchist end of the classical liberal spectrum. But economists far more famous (and far better ones) than I are saying much the same thing today. Take, for example, Barry Eichengreen:
The implication is clear. Never underestimate the ability of politicians to do the wrong thing. I will try to remember next time.
Given Professor Eichengreen's eminence he is of course being rather politer than I am. But we are indeed saying the same thing.
So I stand by the economic argument. Where I need to mark my views to market, however, is for underestimating the role of politics. In particular, I underestimated the extent of political incompetence – not just of the Greek government but even more so of its creditors.
Yes, we're...
In January Syriza had run on a platform of no more spending cuts or tax increases but also of keeping the euro. It should have anticipated that some compromise would be needed to square this circle. In the event, that realization was strangely late in coming.
...saying....
Still, this incompetence pales in comparison with that of the European Commission, the ECB and the IMF.
...very much the same thing.
However, I would go back further and insist that the mistakes, while these recent ones do qualify as such, started a lot earlier. In 1989 in fact, when the very idea of the euro was first being bandied about. And when the sadly much maligned John Major had the right idea. Which was the "hard ecu," that is a common European currency, legal tender in all, but also retaining all of the national currencies as well, each legal tender in each nation. Combining the near cost free trading ability across the Single Market of a single currency with the flexibility of a national currency where that is required. Everybody laughed back then but that was the correct solution.
That isn't what was done, instead we got the euro. And there were then two further mistakes made, both for political reasons. The first concerns the idea of optimal currency areas. And this was widely discussed in the late 1990s (those who really ferret around will be able to find me doing so in the archives of sci.econ at the time), that the whole of the EU was simply too large an area to be such an optimal area. Maybe Benelux and Germany would make a reasonable area to start with. Probably not adding France though, and pretty much not Italy and definitely not the periphery.
But for political reasons as many people as possible had to enter and so various blind eyes were turned to people fiddling the numbers for entry. Greece most certainly did, but in various ways so did France and even Germany itself.
The second political mistake was that it was to be monetary union, not fiscal union. That second is the idea that German tax revenues should be used to pay unemployment pay in Greece. And if you're going to have such a large monetary union you've simply got to have that fiscal union as well. It's not just the US that would not work as a single currency area without Federal transfers, even somewhere as small as the UK is not an optimal currency area without such fiscal transfers. But there was no way, politically, that such fiscal union could be implemented at that time.
There was no shortage of people much more distinguished than myself saying all of these things at that time of course. Milton Friedman was pretty vocal on the subject for example.
The way the euro was set up it just wasn't going to work. We didn't know what would be the disaster that overtook it, only that a monetary union, without fiscal union, across an area of such economic disparity, would not work over time. Something we found out pretty quickly as the low interest rates associated with Germany's economic problems in the early 2000s set off the mother of all real estate booms in Ireland and Spain. Yes, that was evidence of a failure of the euro. Greece is just the flip side of the same problem, what happens in busts rather than booms.
Professor Eichengreen is talking about the recent mistakes, in the past few months, made by the politicians. In which he is of course correct. I am talking about the fact that the whole project was a mistake, right from the start. And it only went ahead for political reasons, despite the economics always being against it.
The lesson of both, the short and the long term, being that we should never underestimate the ability of politicians to do the wrong thing, to screw up. At which point we should be making sure that politicians are restricted to only those things that must be done, and which only can be done through politics, to minimize the areas of our lives that politicians have the ability to screw up.
