My Funny Greek Valentine

Econ­o­mist cover by Jon Berke­ley.

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.

Schäu­ble points the way: sideways.

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.

Sources: List of G-​​20 Economies; Nom­i­nal GDP; Pub­lic Debt

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?

Related arti­cles

• Greeks Vote In Elec­tion Crit­i­cal to Euro Zone Future (blogs​.bar​rons​.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)