The Greek Crisis, an Article in THE CONVERSATION

7 Jul

Eurozone's shared identity the final tragedy of the Greek crisis

Wesley Widmaier, Griffith University

Economic policy is not a morality tale. The Greek tragedy is that the Europeans have treated the Greek crisis as a question of national character. In their outrage at the Greeks – in the context of broader view of austerity as the way out of the European crisis – they have not only weakened their collective economies, but also jeopardised the fate of the European experiment itself.

The risk is that the larger goal of the European project – to create a sense of shared identity – may be undermined by an incidental economic means to that end, in the creation of a euro – a mechanism of economic discipline.

The reasons for this tragedy go deep into European history. Coming out of World War II, European leaders decided nationalist excesses should never again be permitted to divide their people. They therefore sought to create a supranational union, one that would unite the continent in a common vision. In 1950, French Foreign Minister Robert Schuman proposed the establishment of the original European Coal and Steel Community – the grandfather to the modern EU – as a way to “make war not only unthinkable but materially impossible”.

Ironically, given what the Euro has become, Schuman’s vision was never based on any commitments to “hard money” or free trade. Quite the opposite. The tragedies of the 1930s were widely attributed to a classical gold standard that had enforced austerity on the European people. As the European economies collapsed in the early 1930s, states were forced to cut spending and raise taxes – contributing to an ever-worsening slump.

In contrast, the point of the European Coal and Steel Community was to raise the prices of its members’ commodity and manufacturing exports. The ECSC would do this by enabling its initial six countries – most importantly, including France and Germany – to collude and fix coal and steel prices. In this sense, the early European ideal was not about free trade or convertible currencies – it was about enhancing the collective welfare as a means to political union.

Over the decades to follow, the economic dog nevertheless came to wag the collective welfare tail. As the German economy grew more important, German influences in European economic institutions would increase – leading to a shift toward more free market, hard money views. There were deep cultural reasons for this: German memories of the 1920s were of hyperinflation, while the German successes of the 1930s in using fiscal stimulus were repressed from collective memory, for obvious reasons.

The result would see European economic institutions – most notably the European Central Bank – evolve and place financial rectitude and monetary stability ahead of growth. This has been the case even when intellectual arguments for austerity – primarily as a means to limit inflation – make little sense, as the high unemployment of recent years has broken any link between fiscal deficits and inflation.

Large deficits absent full employment are not a problem – they are the solution, enabling revived growth. Greek austerity only makes Greek repayment more difficult, whatever one’s view of their pension system.

Over the past five years, the EU has taken what should have been a practical matter of economic policy – to run deficits during a recession – and turned it into a morality tale.

Internal Greek politics have nothing to do with the macroeconomic needs of the European Union – which would benefit from debt forgiveness across the continent to enable rising demand. On top of this economic malpractice, one can superimpose political error, as austerity politics have revived political extremism and nationalist sentiment across the continent. This is the very essence of a tragedy – as the postwar European dream may be undermined by incidental mechanisms established to bring it into being.

The Conversation

Wesley Widmaier is Australian Research Council Future Fellow at Griffith University.

This article was originally published on The Conversation.
Read the original article.

4 Responses to “The Greek Crisis, an Article in THE CONVERSATION”

  1. gerard oosterman July 7, 2015 at 12:14 pm #

    Greece is a poor cousin in the European context and if we believe we care and share about each other, the better off ought to care and share for the less well off. Greece has given much to the world and today millions still go there to be inspired. I feel Greece ought to be forgiven for spending more than they can ever earn.

    • auntyuta July 7, 2015 at 8:54 pm #

      I agree, governments should look after the less well off, the rich should be taxed more and the poor less. Why should the poor have to come up for the debts that the rich accumulated? And interest rates should never go through the roof. The shareholders want no reduction in profits, no, no, people have to pay off their debts and with more and more interest: this is what they say. They cannot afford to miss out on profit. But they do not consider how much they are going to lose when the shares lose on value at the stock-market. Maybe if they were a bit less greedy in the first place, they would not run this increased risk of losing on the stock-market.
      And why on earth is a country that is not all that well off, given a loan so they can buy armament? Why does Greece need to buy weapons? Who’s going to attack them?

  2. stuartbramhall July 8, 2015 at 9:34 am #

    IMF director Christine Lagarde’s recent embarrassment is especially ironic: for months she’s been attacking the Greek people for not paying taxes and it turns out she doesn’t pay tax herself: http://www.telegraph.co.uk/finance/economics/9298501/Christine-Lagarde-attack-on-Greece-backfires-as-she-pays-no-tax.html

    • auntyuta July 8, 2015 at 10:07 am #

      Yes, how embarrassing, indeed. 🙂
      Thanks for the link and for commenting, Stuart.

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