Even though my belief in a better future for Greece has not evaporated entirely, I do have to admit that my basic belief started falling apart some time between the first and second election of this year. About two months ago I wrote that Greece had probably crossed the point of no return.
So has the time come to admit defeat? Probably so! But a society’s admitting defeat, resigning itself to being a failed state, is somehow against my nature. So I thought that I should, one by one, take the themes on which I had rested my case and show where I erred in my thinking. Time will tell whether this will be the first post in a series, or the first and the last post at the same time…
I erred in thinking that political leadership (particularly at the EU-level) would have more knowledge of how an economy works. That within one country, the expenses of one economic agent (be that an individual, a family, a company or the state) are the revenues of other economic agents. That within an economic union, the foreign revenues of one country are the foreign expenses of other countries. Particularly of Germany I would have expected that kind of knowledge because it had a prime example of it within its own borders a couple of decades ago.
I had lived in the US when the Iron Curtain fell, when Germany was unified and when the West gave the East the same hard Deutsche Mark as a currency, more or less on a 1:1 exchange rate basis. I had my own small company at the time and my employees asked me what I thought of that. I told them something like: “Knowing the Germans, they will probably run the dredging machines over that archaic, inefficient and run-down economic structure; then they will build up a new economic nirwana from scratch and within a few years that region will probably be the most attractive, competitive business area of all of Europe. Something like a Silicon Valley not only for IT but for business in general”.
Well, I had overlooked a small detail. Other areas of Europe would have been threatened by that new competition and of all those areas, the one threatened the most would have been the former West Germany. Tough enough for Germany to have reasonably strong competitors in other countries but to have the greatest competitor of all within its own borders — Gor forbid the thought!
As became known later, West German industry certainly did not reach out a helping hand but, instead, actually hindered the few good Eastern businesses to be successful. Even West German unions contributed their own part to making sure that jobs in the West would not be endangered by new jobs in the East.
And to perfect the disaster, the West gave the East an overvalued exchange rate (which, at the time, may have been seen as a “gift” in the English language but turned out to be a “Gift” in the German language). Now, so the thinking went, all the East Germans would have to do was to become, overnight, as efficient as the West Germans had become in 4 decades after WW2. A society which for 4 decades had been told that the state would take care of them was now expected to jubilate that they could take care of themselves.
The West knew that there would have to be transfer payments during a transition time. I believe that transition time was originally capped at 5 years. Today, more than 20 years later, those transfer payments are still in place and I understand that the sum is now approaching 2 TREUR. That makes almost 100 BEUR per year!
So there could not have been better proof of the following fact: if an economic region within a larger union, for whatever reasons, cannot develop its own economic strength, there will have to be transfer payments. Since nobody likes transfer payments, the primary goal in any union must be to have each and every economic region develop its own economic strength. If that were to mean that one’s own economic growth is slowed a bit, then that would be the price to pay. At the end of day, it would be a small and temporary price to pay because, if all goes well, the sum of both will be better than what each individual part could have accomplished on its own (in fact, that was one of the ideas behind the EU structural funds).
Moral of the story?
One can’t have the cake and eat it. There is only one effective way to get one’s loans repaid by a weak borrower — all parties involved have to figure out how to make the borrower strong again. For the Core to sell a lot of goods to the Periphery without paying attention to what the Periphery is doing with those goods and where they get the money from to pay for them is totally short-sighted. If the Periphery is importing consumption goods and paying for them with vendor loans, the exporters will sonner or later not have a Periphery to export to (and they will have to write off their accounts receivable from the Periphery). Thus, it is in the interest of the Core to make sure that the Periphery remains (or becomes again) a strong borrower. Even it that means selling less to them short-term (and possibly contributing to local production with direct investment in the Periphery).
Is that really so difficult to understand?