After a long blogging hiatus, we’d planned on bringing you a startling, insightful, and typically lyrically written expose into the Greek crisis. But not for the first time, the bloody Germans have ruined our plans.
For those of you not yet aware, the European Central Bank and the IMF have joined hands to inject a cool trillion of liquidity into the Eurozone. Even in these dark times, that’s not a number to be sneezed at. Markets around the world perked up at the news, ending a rather turbulent two week slide. Happy times for all. Break out the bubbly and the bitter.
The SMB is a little amazed by this turn of events. The Germans run the ECB, in fact if not name, and your typical German is about as fond of your typical Greek as they are of venereal disease. The idea that a group of staid, humorless German bankers would ride to the rescue of the freewheeling Aegeans over the objections of the German public was, if not impossible to imagine, at least a little bit farfetched.
But they did, and they deserve some credit for that. In Germany, children are still told scary bedtime stories of Weimar hyperinflation and that, if they’re not gute kleine jungen und mädchen, a devaluing Reichmark will get them in their sleep. They’re a happy bunch, these German bankers.
As a result, you’ve an ECB that’s terrified of any action that might be seen to encourage inflation or underwrite the fiscal irresponsibility of others. When they first announced a rather underwhelming rescue package of a mere 140 billion euros, the SMB was both unsurprised and nervous. The euro project still looked like it was going to crater in a fairly spectacular fashion, taking a big chunk of the world economy with it.
Since then, the ECB has gotten its act together. But what then, for the future?
First, make no mistake – the can has been simply kicked down the road. The liquidity injections will be used to purchase bonds in distressed countries, allowing Greece to roll over her debt for the foreseeable future. It does nothing to address the long-term potential of Greek default, nor does it change the structural imbalances that have driven Greece debt and deficit to the astronomic levels of 140% and 13% of GDP, respectively.
The first lesson, then, is to not read too much into the rescue. Just as the rescue package hasn’t answered the question of Greece, it hasn’t answered the growing doubt about the viability of the Eurozone. The inquiry has simply been rescheduled to a more favourable time, when the European economy has returned to ruder health and the possibility of contagion is mitigated. But rescued? Hardly. Scratch the skin of the major players, and beneath the surface you’ll see nothing has changed.
Secondly, commentators should resist the urge to view Greece as a moral tale. True, the Greeks were almost comically irresponsible. The idea that an incoming president can discover that his deficit is double the official estimates is stupidity on a breathtaking scale.
But while the Greeks have been a partner to their own downfall, the Spanish haven’t. And in Spain lies the more cautionary tale. Fiscal responsibility didn’t protect Spain from large capital inflows, which drove a bubble economy, a rise in asset prices and wages, and an unsustainable housing binge. And fiscal responsibility hasn’t helped Spain deal with the euro straitjacket on the downside, which makes it impossible to devalue their currency as they’d like.
Perhaps Greece can be saved. Perhaps it simply fails at a time more convenient for its currency partners. The question of the euro, though, is as pertinent, and as unanswered, as ever.
ADDENDUM: It’s now clear to us that the ECB has said that the liquidity operations will be sterilized – even as they purchase bonds, they’ll withdraw an offsetting amount of money from elsewhere in the system. If this all sounds like sewing up someone’s chest wound before stabbing them in the throat, then it’s probably because it is. Hopefully, they aren't serious.
ADDENDUM 2: They’ve also tied up a majority of the funds in a special vehicle that requires parliamentary approval. It’s like they’re actually afraid of doing anything that might result in a degree of measurable success.
Special thanks to John for the German.
