Greek debt crisis: the failure of the euro wasn't just predictable, it was predicted

By Matthew Dal Santo Tuesday 30 June 2015

Photo: There has been a rush on ATMs in Greece in recent days. (AFP: Aris Messinis)

Though it became gospel around the globe, euro-enthusiasm was always misguided. The crisis currently facing Greece shouldn't come as a surprise, writes Matthew Dal Santo.

Has a Greek default begun? Or is this just the European Central Bank's way of affording the country's feckless inhabitants a foretaste of what it would be like?

It's too early to say. Either way, it's clear that what has failed here is not the negotiations; it's the euro itself. Put to the test, its entire foundation has been found wanting.

The worst of it is that all this - the acrimony between Brussels, Berlin and Athens; the misery induced across Greece by depression-era levels of unemployment - was not just entirely predictable but actually predicted.

Anyone who subscribes to the London Review of Books will have noticed the reappearance over the weekend of the 1992 essay 'Maastricht and all that' by Wynne Godley - a man who, according to his own biography, started his working life as a 'professional oboe player' and ended it as director of applied economics at Cambridge.

Godley's was not the profile of the usual Eurosceptic. On the contrary, he was a strong supporter of European integration.

What he objected to was its form. "It took a group of bankers," he wrote in a trenchant criticism of the 1992 Maastricht Treaty that set out the plan for establishing the euro, "to reach the conclusion that an independent central bank was the only supra-national institution necessary to run an integrated supra-national Europe."

This dismissal of the role of the state in the management of the economy was a proposition which Godley as a Keynesian simply couldn't accept - and one which, though it became from the late 1990s gospel around the globe, displayed its deficiencies in spectacular fashion with the collapse of Bear Stearns in 2007.

But if Godley's first big criticism of Maastricht was that it entailed a vision of the nature of the economy that only an investment banker could embrace, his second big criticism was the corollary fudge Maastricht attempted to make about the euro's impact on national sovereignty. Just because the euro didn't create a federal government to manage what was now to all intents and purposes a federal currency didn't mean that Europe's nation-states remained their own political and economic masters.

Typically, the euro-enthusiast tells the public a nauseatingly win-win story. Nothing is being lost with European integration, just wonderful new things created. For European countries, the EU doesn't mean an undignified surrender of historically hard-won independence, but a giant bring-and-share party where, magically, European integration doesn't entail the loss of national sovereignty but simply the pooling of some of its attributes: e.g., border controls, the ability to print money. (If it helps, think of Brussels as home to a giant lazy Susan.)

As Godley saw, however, when it comes to currency union, the bring-and-share model is an illusion. Once European governments have put their drachmas and guilders, francs, lire and marks on the common table, they then discover that they've handed over whole branches of economic and political responsibilities too.

Despite supporting what he never ceased to call the "noble cause of European integration", therefore, Godley wasn't to be fooled:

It needs to be emphasised from the start that the establishment of a single currency [...] would indeed bring to an end the sovereignty of [...] component nations and their power to take independent action on major issues.

And this is precisely what has happened. Faced with the slump in the global economy produced by the default of US investment banks in 2008, Greece could no longer devalue its currency. On the contrary, the euro strengthened as the dollar sank.

That left Athens at the mercy of the European Central Bank in Frankfurt, the sole institution created to manage the single currency. It might agree to cover Greece's mounting debts or it might not. Either way, the voice of more powerful members of the currency union - above all, Germany - would count for more in its decision than that of Greece.

Starting from 2010, the seat of the Greek government was thus effectively transferred from Athens to Brussels, Washington and Berlin. Left in Greece itself was little more than the power to administer national policies and implement sovereign decisions made abroad. In Godley's words, a country in such a position "acquires the status of a local authority or a colony".

For this reason, the referendum the Greek government has called for next weekend wrongly is seen as simply irresponsible or bizarrely pointless. Yes, the terms of the bailout the Greek people are being asked to ratify or reject will have expired. Yes, the Greek government might already have failed to make its June 30 repayments.

But in appearances at least, Greece is still at the negotiating table. Rather than jumping, Greece has effectively waited to be pushed out of the euro.

This not only allows the blame for the resulting economic repercussions to land primarily on Angela Merkel and Christine Lagarde's shoulders. It also expresses the fact that Athens sees itself not as reclaiming a sovereign right to set monetary and fiscal policy surrendered with the adoption of the euro, but as asserting rights it never ceased to possess.

Whatever the outcome, by calling the referendum and imposing currency controls, Athens is showing that, politically and economically, it's master in its own house.

So much was foreseen by Godley in 1992:

It should be frankly recognized that if the depression really were to take a turn for the worse - for instance, if the unemployment rate went back up to the 20-25 per cent characteristic of the Thirties - individual countries would sooner or later exercise their sovereign rights to declare the entire movement towards integration a disaster and resort to exchange controls and protection [...].

The only thing that could have prevented this was a federal European government, possessing the legitimate political power to transfer resources from those member states less scathed by an economic slump to those suffering more.

But Maastricht declined to create such a body and left responsibility for such counter-cyclical interventions to inter-governmental negotiations - which is another way of saying that it left nobody with responsibility for addressing such an eventuality that possessed the means to do anything about it.

That was a cruel bargain, as Godley knew.

If a country or region has not power to devalue, and if it is not the beneficiary of a system of fiscal equalization, then there is nothing to stop it suffering a process of cumulative and terminal decline, leading, in the end, to emigration as the only alternative to poverty or starvation.

Like the idea of depression-era unemployment, in 1992 those words doubtless seemed dramatic. Today, they're a fair description of reality.

In the ultimate riposte to Maastricht, the message from Athens is not that Greece failed the euro, but that Greek sovereignty - and, implicitly, the sovereignty of all EU member-states - is simply incompatible with the euro.

It won't thrill those sceptical about the whole European project to learn that his solution to this crisis would have been more integration, not less.

Matthew Dal Santo is a Danish Research Council post-doctoral fellow at the Saxo Institute, University of Copenhagen.

Greek debt crisis: the failure of the euro wasn't just predictable, it was predicted - The Drum (Australian Broadcasting Corporation)