Whoever wins the Greek election today – and at this stage it looks being the pro-euro party, New Democracy – it still looks impossible for Greece to remain in the euro zone. The sort of internal devaluation (reduction in living standards) required is too much for any nation to bear.
Markets will likely rally today but the rally will be short-lived. That’s because Greece is a minor player and its default was already more or less in the market.
The broader issue is that the euro is essentially a broken currency peg. Greece, Spain, Italy, Ireland and Portugal have overvalued Deutschemark pegs that have become unsustainable. Greece is the first to go because it cooked its books, but the others are just as vulnerable.
The roots of the problem go right back to the fall of the Roman Empire in 476, when the German Odoacer removed Romulus Augustus and became king of Italy. But as Australian historian John Hirst points out, the conquerors of Rome were actually various German tribes who were rivals to each other.
The Franks went on to rule what became France, and although Charlemagne controlled an area significantly larger than France is now, no single dynasty ever again controlled all of Europe as the Romans did, apart from the brief efforts of Napoleon and Hitler.
China was overtaken by the Manchus, who formed the Qinq dynasty, India was invaded and controlled by the Mughal emperors and the Middle East by the Ottomans. China and India remained single entities and are now regaining their former economic strength after centuries of colonalisation and incompetence, while in Europe power, and culture, remained dispersed.
For a long time, says Hirst, the dynamism of Europe’s economic and intellectual life derived from the fact that no single power was in charge. “Its diverse inheritance could be fully explored and extended; the Greek faith in mathematics was realised during the Scientific Revolution, which created a new basis for technological innovation.”
Now that diversity is the source of Europe’s weakness, but the irony is that it’s a unified Germany that is ascendant, as opposed to the non-unified German tribes that destroyed the Roman Empire in 476 and created Europe’s diversity in the first place.
Even greater irony: European Monetary Union was an attempt by France and Germany to preserve European diversity by ensuring there would never again be the sort of attempt to restore the Roman Empire that was conducted by Hitler.
With the benefit of hindsight the project was flawed from the start because of the cultural diversity it was meant to preserve; the euro, if it happened at all, should have been a Franco-German currency peg, including the Benelux countries. The histories and characters of Italy, Greece and Spain were simply too different.
However, yesterday’s Greek election was never going to be the euro zone crisis’s Lehman moment because the sort of money market and bank run that was triggered by the collapse of Lehman on September 15, 2008 has already been going on for some time, and not just from Greece.
Also unlike Lehman, Greece is not about to simply run out of money today – this one is a slow-motion train wreck.
The five countries with overvalued currencies as a result of the EMU currency peg are faced with years of debt deflation as the price of their membership of the euro zone. It is an impossible price for them to pay, but the banking integration that followed the imposition of a single currency has meant that the cure – exit – is worse than the disease.
The question for the European authorities – and everybody else in the world – is whether the gradual dismantling of the euro and the economic depression in much of Europe can be managed without the sort of catastrophic international bank run that was triggered by the dismantling of the US housing and sub-prime mortgage in 2007-08.
This could be done through a combination of putting off fiscal compliance and the provision of lots of liquidity in the meantime. Already German Chancellor Angela Merkel has said Greece will be given longer to comply with fiscal targets and the ECB has said it stands with a money hose.
But neither the fiscal nor liquidity actions are likely to be sufficient. Austerity needs to be replaced by growth and overwhelming monetary stimulus is needed to restore confidence in the banks. There is no sign yet in Berlin or Brussels that this is understood.
This article first appeared on Business Spectator.