My Funny Greek Valentine
Is your figure less than Greek?
Is your mouth a little weak?
When you open it to speak
Are you smart?
— “My Funny Valentine”, Rodgers & Hart
A confluence of events last week may represent a turning point in the continuing crisis over the Euro Zone, and particularly what to do about the specific problem of Greece.
As Michael has pointed out earlier, there has been a conflict between economies strongly advocating austerity (in the Euro Zone, primarily Germany), and those advocating stimulus (primarily the Greeks and other debtor nations, such as Spain, Italy and Ireland).
German Chancellor Angela Merkel has taken a hard line, mostly in keeping with the sentiments of the German people, that the Greeks need to get off their lazy κώλοι and get to work. This means severe austerity measures, and the Germans (at least publicly) have taken a hard line on this issue.
From the Greek side, a May election which gave a second-place finish to the left-wing Syriza party (Coalition of the Radical Left, ΣΥΡΙΖΑ) only hardened positions. Syriza’s leader, Alexis Tsipras, swore quite publicly that he would not accept German-backed austerity measures. There are 300 seats in the Greek Parliament. In the May 8 election, New Democracy’s leader Antonis Samaras (with 108 seats) failed to make a proper coalition in the three-day window given by the Constitution, so Syriza (with 52 seats) took a crack at building one. Syriza also failed. That left markets in a turmoil and the Greeks facing the very real prospect of a disorderly exit from the Euro Zone.
In the June 17 election, both New Democracy and Syriza gained seats from the May results: New Democracy now holds 129 seats (21 more than before) and Syriza holds 71 (up 19 seats). New Democracy again got the chance to form a government, now needing only 22 seats’ worth of coalition partners.
The Germans also began to soften their hard austerity line, at the same time a weak consensus has started to form around the idea of a more Federalist Europe, at least in the realm of fiscal policy. It has become clear that if the Euro is to survive, that Euro Zone nations will have to give up a great deal of autonomy in the realm of economics. German Finance Minister Wolfgang Schäuble said Wednesday,
We need a deepening of the monetary union, with a common monetary policy and a long-term European Minister of Finance. This won’t happen tomorrow, that’s true, but the chance that everything goes faster is here now.
What Schäuble and others are suggesting is a scheme very much like the United States system, with a strong central bank setting fiscal policy for the entire Euro Zone. Aaron Burr is no doubt rolling in his grave.
Perhaps the Euro Zone’s weak federal fiscal authority was doomed to failure, in the same way the newborn United States reached a similar crisis in only two years. Under President George Washington, Secretary of State Thomas Jefferson and Attorney General Edmund Randolph argued against the establishment of a central bank, while Secretary of the Treasury Alexander Hamilton argued in its favor. (At the time, there were only four members of the Cabinet: State, Justice, Treasury and War.) In “Opinion on the Constitutionality of the Bank” (1791), Hamilton wrote:
Now it appears to [me], that [the ability to create a central bank] is inherent in the very definition of Government and essential to every step of the progress to be made by that of the United States, namely — that every power vested in a Government is in its nature sovereign, and includes by force of the term, a right to employ all the means requisite, and fairly applicable to the attainment of the ends of such power; and which are not precluded by restrictions and exceptions specified in the constitution, or not immoral, or not contrary to the essential ends of political society.
It leaves therefore a criterion of what is constitutional, and of what is not so. This criterion is the end, to which the measure relates as a mean. If the end be clearly comprehended within any of the specified powers, and if the measure have an obvious relation to that end, and is not forbidden by any particular provision of the constitution — it may safely be deemed to come within the compass of the national authority. There is also this further criterion which may materially assist the decision: Does the proposed measure abridge a pre-existing right of any State, or of any individual? If it does not, there is a strong presumption in favour of its constitutionality; and slighter relations to any declared object of the constitution may be permitted to turn the scale.
an opinion which, of course, resonates even today, as we wait for the Supreme Court ruling on the constitutionality of the Patient Protection and Affordable Care Act.
At the same time as the Greeks held their second election in as many months, the Group of 20 (“G-20″) nations met in Los Cabos, Mexico. Likely sensing a “teachable moment”, the G-20 released a statement in favor of strong Federal authority in Europe over fiscal policy.
Euro area members of the G20 will take all necessary measures to safeguard the integrity and stability of the area, improve the functioning of financial markets and break the feedback loop between sovereigns and banks. We look forward to the Euro Area working in partnership with the next Greek government to ensure they remain on the path to reform and sustainability within the Euro Area.
We support the intention to consider concrete steps towards a more integrated financial architecture.
President Obama summarized the communiqué:
There are going to be a range of steps that they can take, none of them are going be a silver bullet that solves this thing entirely over the next week or two weeks or two months. But each step points the fact that Europe is moving toward further integration rather than breakup. Even if they can’t achieve all of it in one fell swoop, if people have a sense of where they’re going, that can provide confidence and break the fever.
A review of the G-20 economies, and those of the Euro Zone countries now in fiscal crisis, shows the order of battle for those fighting for austerity vs. those fighting for stimulus.
Debt as Percentage of GDP
G-20 Nations in Black, Selected Debtor Non-G-20 Nations in Red
|Country [or EU]||GDP (2011, trillion USD)||Debt as Percent of GDP (2011)|
It’s apparent from this table that there’s only a very loose association between debt and the markets’ perception of fiscal strength. Ireland and the United States have similar debt as percentage of GDP, but very different treasury bond rates. Similarly, of the G-20 nations, Russia has the lowest debt percentage but is not perceived as an especially strong economy. If the United States can get its legislative house in order, and Congress passes a comprehensive set of tax reforms combined with austerity measures, then the markets appear poised to regain their lost confidence.
The G-20 statement, a loosening of German austerity attitudes, and the Greek vote all converged earlier this week making it possible for Greeks to form a coalition government. Wednesday in Greece, New Democracy (129 seats), Pasok (33 seats) and Democratic Left (17 seats) announced they have formed a coalition government and New Democracy leader Samaras will be sworn in as Prime Minister. It remains to be seen whether this coalition can hold long enough to authorize the transfer of fiscal authority to a European Central Bank.
In November 1942, as the tide of war began to shift in Britain’s favor, Winston Churchill famously observed, “This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” Is this the end of the beginning for the Euro Zone fiscal crisis? What effect will Europe’s troubles have on the November election?
- Greeks Vote In Election Critical to Euro Zone Future (blogs.barrons.com)
- A Critical Vote in Greece on Its Standing in the Euro Zone (nytimes.com)
- Greeks vote for euro as pro-bailout parties claim victory (smh.com.au)