The Need for Confidence and Practical Policies

A floating exchange rate regime wouldn't allow  Greece the kind of eononomic autarchy that Britain enjoyed in the nineteenth century, the United States in the twentieth century, and possibly China currently.  There will, therefore, always remain the need to convince foreign lenders if persistent import-export deficits cannot be eliminated, i.e. constant constraint on economic policies.

Practical policies inevitably involve the inconveniences and 'imperfections' experienced in an environment subject to egregious human behaviour, including political, social, and frictional effects.  In the appropriate situation, short-term deficit financing, can have its place; but in practice Keynesian theory has limitations both in the longer run, and most particularly for economies that cannot avoid the implications  of financing persistent export-import deficits.  The PIIGS,

France, and the UK illustrate another constraint, the need to retain the confidence of creditors, both domestic and international. It is evident that the level and persistence of their deficits are begining to emphasise importance of the long term viability their fical and monetary policies.

Serious economic advice and policy must take into account the world as it is, not the world as we might like it to be.

Allocating Blame for the Greek Crisis

Greek pensioners and wage eraners have benifited form the policies implemented by the government they choose. To that extent they are responsibile for the present situation in Greece.  Evidently the politicians they supported are also responsible for the Greek situation, they did not exercise prudent leadership.  That is the past, now the consequences are more evident. Even pensioners and wage earners cannot reasonably expect to be paid more than the economy can afford in terms of real resources (goods and services). This is not a 'blame game'. No one is trying to punish Greek pensioners and wage-earners, (Usually, it is the creators and managers of Ponzi schemes that are prosecuted and jailed).  The issue is simply one of matching expenditures to the resources available.  An economy cannot consume more than it produces, no matter what economic system is used.

Inflation is not at present on the cards for Greece because it is in the Eurozone.  Continuing profligate expenditure patterns under a flesible Greek currency regime would inevitably involve inflationary problems. Lack of productivity and flexibility in the Greek private sector can in the long run can be addressed by Greece, and with the help of Europe provided such assistance is directed to productivity increasing investments and not squandered or diverted to consumer spending and social benifits.  There is a need for Greeks and Greek authorities to face up to the constraints imposed by the need to retain the confidence of internal and international lenders.

Renewed and sustained growth is required. Investor confidence could then be regained, and outside help expected provided realistic reforms are being implemented.

Japanese domestic savings, considerably higher than Greek or European levels, permitted very high japanese deficit financing. But this alone has not saved Japan from its long lasting recession.  Japan has  failed despite the advantages and disadvantages of enjoying their own fiat currency and flexible exchange rate regime.  Eurozone considerations are not the real cause of Greek difficulties.   Such difficulties stem, more fundamentally, from a lsck of investor confidence in Greek prospects comensurate with the level of debt incurred by Greece.

At the European level the present mess is undoubtedly the fault of our so-called 'political leaders' who operating, largely behind the closed doors, in the European Council, have inflicted on Europe a monetary system with inadequate institutional, procedures and regualtive structures, including a failure to establish effective peanalties for non-compliance.

From the first days of the ECB and Euro, our European 'leaders' chose to avoid the constraints on personal/political autonomy that a viable Eurozone required.  European electorates and opinion leaders are also responsible to the extent they have encouraged and permitted their national representatives to get away with evasion, obfustication, small-minded nationalistic attitudes, and shoddy compromises.

If we really wanted to reform the economic structures of the EU, we could do well to examine such politically taboo subjects as agricultural subsidies.  But perhaps that is a subject we should adress another day.