Published in the Nikkei Asian Review 25/6/2015
Greece’s slow-motion economic trainwreck has not just eroded the Eurozone’s flawed monetary union. Regardless of the outcome of this week’s crisis meetings in Brussels, permanent damage has already been done to the prestige of two entities that are key elements of the post-World War II settlement: the International Monetary Fund and the European Union itself.
Rarely have the leaders and institutions of the Western world looked so strategically inept as they have in their panicky and vindictive responses to the Greek crisis. The prospect of Greece being ejected from the EU, bankrupted and left to the tender mercies of rapacious Russians, human traffickers and Middle East extremists should be beyond the realm of possibility. The fact it is not speaks volumes about the vacuum of responsibility at the heart of Europe.
Put that together with the American wavering that very nearly kyboshed its own proposed Trans-Pacific Partnership scheme. Now add China’s growing assertiveness in the South China Sea, its successful launch of the Asian Infrastructure Investment Bank and Western mishandling of the Ukrainian crisis that has driven Russia into China’s arms: you can almost hear the shifting of the tectonic plates of global power.
ON LIFE-SUPPORT
The Greek philosopher Heraclitus said that “character is destiny” – and the Greeks are far from blameless in the making of their own disaster. That much was true not just for Greece, but also for many other European countries, including the U.K. which overspent and over-indulged in the heady mid-2000s.
What is so unusual about the Greek situation is not the unsustainability of that earlier boom, but the length and depth of the bust. The resulting decline in economic activity of about one third has not been seen in a wealthy country since the 1930s and five years on from the first EU-led bail-out package, the Greek banking system remains on life-support.
By contrast, the Asian crisis of 1997-98 was not as severe and much shorter-lived. Even Iceland, this century’s poster-child for financial excess, is almost back to peak economic activity and boasts an unemployment rate of just 4.5%. In all these cases, substantial currency depreciation and default / debt forgiveness were crucial factors in the healing process. In contrast, the distressed countries of the Eurozone were locked into the lethal embrace of “an ever closer union” that robbed them of control over the main economic levers; monetary policy, the exchange rate and, ultimately, fiscal policy.
The hubris of the creators of the euro was to assume that they could graft north European economic cultures onto southern European countries without any such compensating mechanisms. Their insouciance about the consequent economic meltdown has made euro-scepticism a vote-winner in the UK, France and, most recently, Denmark
Even now, the overriding priority amongst the technocratic Euro-elite appears to be to maintain the euro currency in its present form, no matter what the cost in terms of unemployment and social collapse in southern Europe. The common-sense alternative, allowing a country to make a managed exit from the euro and restructure its debts while remaining a member of the EU, is too taboo to be even discussed.
“TOO BUSY SAVING THE WORLD”
The IMF has been involved in the Greek debacle from an early stage and forms one pillar of the “troika” – alongside the European Central Bank and the European Commission – that has taken such a harsh line with Greece.
The IMF’s reputation has been under fire since the Asian crisis of the late 1990s, when its demand for deep fiscal retrenchment regardless of the state of public finances appear to have intensified the troubles of countries like Indonesia. Since the collapse of Lehman Brothers in 2008, it has suffered a deeper credibility crisis. Its economic forecasts have proved to be consistently too optimistic and, not coincidentally, its favored policy of tax hikes and spending cuts has been criticized as totally inappropriate to the “new normal” world of low growth.
The IMF’s own research department eventually admitted that the economic models used to justify fiscal retrenchment were flawed. Even so, that did not stop IMF chief Christine Lagarde from being more Teutonic than Germany in her demands for Greek tax hikes in the recent emergency meeting. Last November Lagarde gave the same advice to Prime Minister Shinzo Abe, even as the Japanese economy was still reeling from a previous rise in the consumption tax. Fortunately he had the good sense to ignore her, a path of action that Greek Finance Minister Yani Varoufakis probably envies.
Both the EU and the IMF date back to the immediate post-war period and were conceived to be technocrat-run supra-national institutions that would act as regulators and co-ordinators of the liberal capitalist order as it faced off against communism. Since the end of the Cold War both have expanded their remit very significantly. In so doing they have become increasingly remote from ordinary citizens – and indeed common sense – while hubris has become ingrained. All too symbolic here were the Nero-like antics of the disgraced former IMF chief Dominique Strauss-Kahn who claimed he was “too busy saving the world” to attend more than four sex parties per year.
Can such institutions reform themselves and restore credibility? Theoretically it is possible, but would require deep cultural change that rarely occurs unless enforced by outside pressure. Companies operating in competitive markets have to restructure and downsize in order to survive. Supra-national institutions experience no such pressure. Accountability and transparency are often non-existent. Such was the case with FIFA, which is merely the most egregious example of what can happen in a governance vacuum.
Ultimately the only discipline that can curb the hubris of the technocrats comes from politics, which currently means the populist parties of left and right, and the financial markets with their tendency to “rebel” explosively against an unsustainable status quo. It makes for an unsettling outlook.
MESSAGE FOR ASIA
From this fiasco there are three clear messages for Asian countries. First, supra-national institutions are inherently political and should be subject to as much accountability and media scrutiny as possible. Second, control over monetary policy, fiscal policy and currency is a vital asset that should never be discarded. And thirdly, if any large country comes up with a proposal for “ever closer union” make sure you are not on the invitation list.
