Greek Tragedy: Lessons for Britain

We have previously commented that there is virtually no limit to the sacrifices which Eurocrat politicians of all Euro-countries will impose on their fellow citizens to keep the Euro project alive.

With the coming to power of a left-wing government in Greece, there is now frenzied speculation among European politicians and journalists as to what will happen next.

The most important guide to the future is to realise that the European political class will do anything to protect what they regard as their greatest and proudest achievement – the euro.

The most bizarre comments are from the new Greek government itself to the effect that it wants Greece to stay in the euro – the very system which has brought it to disaster.  But of course it wants most of its debts cancelled!

The second extraordinarily bizarre comment is from the so-called Troika of the EU/ECB/IMF who would have to agree to any Greek debt cancellation within the euro framework.  The remark was to the effect that if Greece didn’t go along with the Troika’s demands, it could lead to a Greek exit from the euro (Grexit), resulting in “financial disaster” and “ruin”.

Everything points to the need for Greece to devalue its currency and the only way to do this is to re-establish their original currency, the drachma, at a rate well below the rate (341 drachma to the euro) at which it entered the euro in 2001 (perhaps 500 to the euro).

Greece is already suffering ruin

One despatch from Greece (by Nick Squires) describes the plight of one district on the outskirts of Athens.  Here doctors working on reduced wages from the state, or for a charity Médecins du Monde, see malnutrition on a daily basis, children no longer being vaccinated against polio, measles, TB and hepatitis – a disease time-bomb waiting to explode.  There are hospitals with no sterilised instruments and clinics with no doctors.  Under 24 years old unemployment is around 70%, GDP has fallen from 2008 by around 25%, about the same as in the USA in the 1930s after the crash of 1929.  This is for a country whose per capita GDP was €19,000 as recently as 2012, doubtless flattered by the effect of the loans it took on after 2001 and for which repayment is now due.

Managing the transition to the drachma

If the Eurocrats and the Greek political establishment – including now the new party of government, Syriza, would just accept the inevitability of Grexit, they would find the transition from euro to drachma relatively easy.  Clearly the external finance side would have to be managed by, in effect the sort of debt relief that Nigel Lawson persuaded the IMF to do for African countries in the 1980s, probably in Greece’s case converting euro loans into drachma loans at a rate which Greece could be expected to manage in 2-3 years’ time.

Germany has no justification for resisting Greek debt forgiveness

Before creditors like Deutsche Bank get hot and bothered by this “haircut”, they should recall that they lent very freely to the Greek public sector after 2001 to enable it to undertake massive infrastructure projects which the country actually couldn’t afford.  An outstanding example is the Athens metro system with tunnelling equipment, rails, rolling stock, ticket machines and signalling equipment all supplied by German companies, Siemens AG and Herren Knecht AG.  Keeping an exporting country’s currency low, relative to the importing country’s (which is what the euro does for Germany) is exactly what the forerunner of the ECB, the Reichbank, did during the 1930s, turning Eastern and Central Europe into German economic colonies without the need for a shot to be fired.

Lessons for Britain

Most if not all British people will be heartily glad that Britain is not part of the euro.  This blessing is no thanks to the political and business establishments which almost to a man from the Maastricht Treaty signing in 1992 were in favour of abolishing the pound sterling, with all the dire warnings we are now hearing again with respect to leaving the EU – political isolation, our goods being shut out of “Europe”, the City losing business to Frankfort and Paris, and so on.

However the Greek disaster should tell the British people that Britain is not out of the economic wood resulting from its own borrowing spree in the 2000s.

Just as in Greece, Britain has a bloated public sector, which has been spending 20% more than the government can raise in taxes for several years now, with only a slow decline in this over-spend realistically likely in the next 5 years.  As a result, Britain’s government debt (now 100% of GDP) is heading towards 120% of GDP (from about 45% when Labour’s Gordon Brown became Chancellor in 1997), not so far below Greece’s deficit (156% in mid 2014).

Loans have to be repaid applies to Britain as well

Greece’s problems stem from the same political attitude as Gordon Brown’s – namely that Britain can always borrow its way out of trouble.  So far it has been able to, but loans carry interest and have to be repaid and Brown never had any realistic plan for repayment.  As it is, interest on existing loans is costing the British taxpayer more than £50 billion per year, more than the defence and transport budgets combined, or half the yield from VAT.

Lessons from 1976

Things can change very fast on the finance front, as Gordon Brown’s predecessor in the previous Labour government (1974-79) Denis Healey found out in 1976.  The only organisation with the financial muscle to bail out the Wilson-Healey administration was the IMF who suddenly responded to Britain’s request for a loan with the same sort of medicine it has applied to Greece – cut government spending, above all cut the public sector wage bill and raise taxes.

Britain’s current crop of economic illiterates

Only one of the eight political parties vying for votes next May have published any sort of plan for reducing Britain’s huge public sector deficit (around £100 billion) or reduce its public debt (around £1,500 billion).  Indeed the three regional parties have simply announced their desires for more hand-outs, while the Greens, with pretensions to be national, have thoughtfully offered to let all illegal immigrants become legal, along with unquantified numbers of immigrants from Asia and Africa (and Calais) to come as they please.  At the same time the Greens oppose fracking, nuclear power, and coal, thus ensuring that the UK will have no industry to employ them or heating to keep them warm (see next post on energy by Stephen Bush).

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One Response to “Greek Tragedy: Lessons for Britain”

  1. jon livesey says:

    UK national debt is not headed towards 120% of GDP. It will level off around 90% in 2015/16.

    And comments like “have to be repaid” sound terribly wise, but they are also nonsense. Yes, we have to pay interest on the debt, but we – collectively – also own the debt. The interest we pay on the debt goes to the insurance and pension companies that then pay out to us.

    Oh, and for good measure, the reference to the “Wilson-Healey administration” is wrong in two ways. First it was Callaghan, not Wilson. Second, that loan wasn’t to pay off Sterling denominated debt, but to defend the Sterling exchange rate, something we no longer do.

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