Germany should not lend to Greece

There are two sensible answers to the Euro crisis. Greece could leave the Euro, devalue its currency, and come to an accommodation with the markets over what it needs to do to enable it to borrow again. That would be the best answer for the Euro, and would enable Greece to take part of the cuts in its living standards through devaluation, as the UK is under its own version of an unsuccessful economic policy based on too much state borrowing. Alternatively, Greece could cut its public spending more substantially, until the markets believe it can then afford the debt it needs and already has.

Instead, the governments debate two dangerous answers. They take seriously the idea that Greece should fail to make payments on its debt – a form of government theft from the savers who have in the past supported Greece and believed its promises. They discuss lending Greece more money on easy terms, based on the absurd idea that the way to sober a drunkard is to give them another drink.

I find it suprising that so many governments, Euro commentators and so called experts expected the Euro scheme to work when they put several economies into it that had not come into line with the performance and costs of the core countries. I and a few others warned strongly about the dangers of the debt and the starting exchange rates when we made the case against the UK establishment, arguing that the UK should never enter such a scheme. In “Just say No: 100 arguments against the Euro” I pointed out the destabilising effects of the countries having different levels of debt and different levels of new borrowing. I said “Controlling budget deficits is central to this task” of creating a decent currency. It was quite obvious that for the scheme to work member states had to surrender domestic budgetary control to the EU, to avoid free riding on average interest rates or to avoid Greek style disasters. Indeed, in the founding paperwork of the Euro it was spelt out that member states had to keep their stock of debt to 60% of GDP and their extra borrowing each year to no more than 3%. The decision to allow relaxation of these necessary rules has led directly to the Greek crisis.

It was also clear that a country had to bring its private sector costs into line with the zone as a whole as well as control its state deficit. “If you cannot devalue your currency when your costs are too high, you have to sack people and close factories” – exactly what has happened to the olive belt economies.

It does no-one any favours to imply there is a quick fix, or to suggest lending Greece billions this year will solve the problem. The underlying problem is fundamental. The Euro can only work and be a decent currency if there is in effect one state budget for the Euro area. Germany needs to reinforce the rules over how individual members do borrow, not grant an easy loan and watch as Greece still fails to sort out her borrowing habit.

Promoted by Christine Hill on behalf of John Redwood, both of 30 Rose Street Wokingham RG40 1XU


  1. uberVU - social comments
    April 29, 2010

    Social comments and analytics for this post…

    This post was mentioned on Twitter by JohnRedwood: New blog post: Germany should not lend to Greece

  2. Duyfken
    April 29, 2010

    There's an unfortunate typo in the sixth line.

    1. Mike Stallard
      April 29, 2010

      That was a little below the belt methinks!

  3. Duyfken
    April 29, 2010

    In addition to the relaxation of the rule to limit debt to 60% of GDP, the situation is exacerbated by concealment and misrepresentation of some (all?) countries' financial position. Inadequate monitoring and policing by the EU of Euroland members must be a factor in Greece's downfall and we have a parallel in UK with the way Brown has shifted so many liabilities off the balance sheet.

  4. alan jutson
    April 29, 2010

    The reputation for German economic and monitary commonsense, has until now been the reason for the Euro remaining a stable and strong currency against many others.

    As soon as it is realised that Germany alone cannot, and will not be able impose its own fiscal management rules on other Countries, then the Euro has a problem.

    One size fits all sounds good, but does not work in practice in anything, let alone different Countries, different cultures, different types of economy, different tax rules, different tax systems, different Public spending programmes, different political party's, etc.

    It really is a wonder the Euro has been stable for so long.

  5. Mike Stallard
    April 29, 2010

    Well, if you let one get away with it, the rest will follow suit.
    Portugal is in the queue now.
    Spain has had a Socialist government for some years and it, too, is in the pipeline.
    I wonder how many British (and Scottish) banks have "invested" in junk bonds.
    I also wonder whether their collapse will, once again, be underwritten by the British taxpayer.
    Just what we needed when the national debt is coming up to the trillion mark at just under £6,000 a second.

    1. simon
      April 29, 2010

      Mike , I think you are right to feel further bailouts are on the cards .

      Another smash and grab raid on the average man .

      How can it be right for the ordinary man and woman to underwrite banks and depositors in banks which are so highly geared and engage in risky activities rather than mundane retail banking ?

      The country can't afford to provide liability insurance on this scale .

  6. Mark
    April 29, 2010

    This is the choice that should be put to Greek voters. Indeed, we may face it here in the UK, although we start from the more flexible position of being outside the straightjacket of the Euro. However, if our debts overwhelm us it is an option that should be considered – and firmly rejected. We will have the benefit of observing the progress of the PIIGS within the Euro and the different courses they have followed in the mean time. Trouble in Euroland should give heart to Eurosceptics: the contradictions they foresaw are coming to light.

    Europhiles should have learnt from Lord Rutherford: injecting supposedly neutral particles in a bid to secure ever tighter bonding results in fission of the atom. They have the Atomium in Brussels as a reminder. We can only hope that any fission is of low energy, and doesn't set off a chain reaction.

  7. waramess
    April 29, 2010

    How can you expect the Euro members to take a logical view when they have gone so far down the path of an illogical argument?

    Should Greece leave the Euro, which they probably will not, then the rest of the PIIGS will probably do so and the Euro will unravel.

    In any event, leaving the Euro will not be a solution as the debt still needs to be repaid and the printing press will not help them. Certainly coming to an accommodation with its creditors would be a painful business and one that would not relieve it of its current problems.

    I must declare an interest as I have some good friends in Greece however, having allowed Greece into the Euro knowing full well it's economy had not converged with that of, for example , Germany it is now up to the members to bail it out, and to bail out any other member who gets into trouble.

    Make the promoters of this foolish little exercise feel the pain of their actions. First a small pain, that is Greece then a bigger pain that will be Spain and then the unbearable pain of Italy.

    Maybe that will make them think twice or more about pouring money into the great global warming nonsense

  8. oldrightie
    April 29, 2010

    The only thing propping up the Euro is vanity and the fear of losing face. Reality will change that and with more damage than otherwise would be the case. The West will suffer mass unemployment before it ever recovers. Inevitable but politically ignored.

  9. GJ Wyatt
    April 29, 2010

    Merkel's position is impossible.
    The Euro will be damaged whether she gives way or not.
    If she gives way the begging bowl passes to other countries prolonging and widening the crisis, and the voters in NorthRhine-Westfalia give her a kicking.
    If she does not give way then Greece either exits somehow or gets plunged into long-term depression until wage cuts restore competitiveness and the public finances are brought into balance by spending cuts. Her domestic position would be shored up but opprobrium heaped on her from abroad.
    It's time for Mutti to give tough love to her profligate foster children.

  10. Dorothy Wilson
    April 29, 2010

    10 green bottles?

  11. Ian Jones
    April 29, 2010

    As a saver I would rather we were in the Euro and the only policy available would be cuts rather than printing our way to oblivion. The Bank of England is still creating new money on a massive scale simply by having the bank rate at 0.5%.

    Banks use mortgage debt and Govt debt as collateral, borrow at 0.5% which they then lend out at 4%. They then take the new debt and use it as collateral for more money at 0.5% to lend out at 4%…… its a massive theft from savers to bail out debtors.

    It all ends the way of Japan……

    1. Lindsay McDougall
      April 29, 2010

      In two weeks time, we should be under better direction, and able to have a new monetary policy based on targetting a measure of inflation that includes asset prices, and a new Governor of the Bank of England.

      Why not wait rather than throw ourselves under somebody else's chariot wheels?

      By the way, why is 2% better than 0% as an inflation target?

      1. GJ Wyatt
        April 29, 2010

        Because of money illusion. Nominal falls in wages are strongly resisted, so a real fall in wages needs price inflation faster than the nominal wage rise. The 2% target keeps the labour market more flexible.

      2. Mark Parker
        April 29, 2010

        Presumably 0% is considered unachievable.

        Since 2% has proved to be unachievable most of the time, the presumption seems correct.

        The pre-2002 inflation metric of choice was RPIX, currently 4.8% (March number). The MPC has a lot to answer for.

      3. DavidB
        May 2, 2010

        I recall reading that inflation was desired to force people with money saved to invest it. If the value of money did not constantly depreciate people would be loath to invest. It was the desire to maintain the value of their savings which created the imperative to risk investing in order to try to maintain the value of the depreciating money.

        Presently the state wants people to be so hacked off with being paid 1/2% in the bank as inflation soars that they will just spend the money. My flight back from Madrid was full yesterday. Maybe savers are getting the hang of it.

  12. David B
    April 29, 2010

    There is one issue that has not been mentioned which is that the Euro is a political creation to push forward a Federal agenda in Europe. This means that countries were let in for political considerations rather than economic ones. I seem to remember at the time the French manipulated their state pension scheme from a liability to an asset so they could meet the 60% rule.

    The recent decision to relax the rules was also taken for short term political reasons that were taken in the hope that the economic realities would not catch up.

    Now the economic realities have caught up the politicians may have to wake up and take notice. It will be interesting to see if they will accept the reality or will they try to continue to fight against the economic realities.

    Either way the mess will last a long time

  13. Lindsay McDougall
    April 29, 2010

    As things stand, the most likely source of a soft loan to Greece is the IMF, to which we contribute. The IMF has no useful role in the modern world.

    What do you say to the arguement that it has been British foreign policy for centuries to seek a balance of power in Europe?

    A single government with the Euro as its currency would be a dominant Continental power and it is not in our interest that such a power emerges.

    We should be campaigning for Greece and others to leave the Euro.

    Reply: I don't think it matters so much given the huge relative decline of Europe and our interests in Asia and the Americas. They will fall out with each other eventually anyway.

  14. lola
    April 29, 2010

    Large nationalised currencies are the hallmark of totalitarianism. If you have control of the manufacture of a monopoly currency under ultimate threat of violence you have control of the people.

    What we need are more currencies, not less. Money made and issued by private banks for their customers use. This will also have the extra benefit of requireing banks to be more prudent and to return to discharging their duty as their clients fiduciary. Gresham's (after whom a thoughtful father named me) Law will apply. 'Bad Money drives out good, if it is at the same price.' Of course the 'good money' of the 'good banks' will buy more stuff than the bad money of the bad banks. The 'good money' will have a higher price than the 'bad money' and the bad money will fail. You can see practical examples of this all over the world when countries like Zimbabwe debase their own currency the locals turn to another, usually the USD. Or when investors desert national currencies for Gold, as they have been doing with Sterling. I am not sure about the return to a Gold Standard, I know Mr R is against it, but it would be a revelation if at least one Government did actually try to run sound money. This current crew has totally trashed our currency and savings. Ah well, one can but just hope.

    Bring on the implosion of the Euro.

  15. Mark Parker
    April 29, 2010

    When the state of California ran out of cash last year they printed IOUs (since their constitution forbids general borrowing.)

    Perhaps Greece could do the same: pay their public sector workers and pensions in a mixture of euros and euro-like promisary notes to be redeemed at par one day, an unspecified day in the future.

    They could then slide out from under the euro gradually, running two currencies side by side. The IOUs would tend to devalue compared to actual euros but they could be kept bouyant by 1) the government accepting them at par for all payments of fees, taxes, etc. 2) An asset sale of islands etc with IOUs treated as par here as well, and 3) occasional random redemption of certain batchs of IOUs so no-one could safely discard or ignore them.

    To avoid a technical default the government would use what euros it has or can borrow to redeem bonds as they become due.

    1. Stuart Fairney
      April 30, 2010

      I have to say, this is a far more interesting suggestion than anything the Greek government have come up with, perhaps the only problem could be with debts denominated in Euros, a declining "new drachma" would effectively see the debt increase. Perhaps the only way around this would to be a bit naughty and simply state that all euro debts are now transferred to the "new drachma" For sure, any IMF/EU bailout is a temporary measure only.

      I just wonder if the stupid pride of Greece's political class which took them in to the Euro will be able to swallow the medicine? If not the patients slide and convulsions seem set to continue.

  16. Sir Hugo
    April 30, 2010

    The obvious solution is for Germany to leave the Euro.

  17. Sweevyshoonee
    May 1, 2010

    Thanks for writing, I very much liked your newest post. I think you should post more frequently, you evidently have natural ability for blogging!

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