One can go into long convoluted explanations but, as I see it, there are two basic problems, one leading into the other. The more superficial problem is that in a single currency zone without the option of devaluation purchasing power will drain to the more competitive countries. To continue buying in the common currency people, companies and governments in less competitive (and poorer) countries have to borrow but this is a temporary solution for the obvious reason that they must pay back with interest so pretty soon borrowing makes this problem worse.
At that point the rationale of the common currency zone is stuck in an unresolvable dilemma. All the twists and turns have merely been “kicking the can down the road” – and each time the problem re-surfaces it is bigger and more threatening. What does “kicking the can down the road” mean? It means borrowing more in order to pay back the last lot of loans.
What makes it a little bit confusing is the way that the debt gets transferred from agency to agency at each can-kicking stage. What has basically happened is that the other European states have wanted the Greek state to be turned into a debt collecting agency on behalf of the Eurozone governments and for the IMF. A key problem here is that the Greek elite does not actually pay taxes – they have taken their money and everything moveable to Switzerland or places like the London property market. Like the rest of the global elite they too believe that “only the little people pay taxes” and by now the little people have been ruined. The other option is to sell off the public sector to the creditors. However the Greek people have now elected a government that says that they can’t pay – a government that does not do what it is told by the creditors and whose finance minister did not wear a suit and a tie.
At each stage the debts have mushroomed larger still as Greece has got poorer. Originally these debts were owed to French, Dutch and German banks but now they are mainly owed instead to European agencies. These agencies like the European Financial Stability Facility, run on behalf of 19 governments and based in Luxembourg, raised the money to lend to Greece (to kick the can down the road) by borrowing 145 billion euros from the bond markets. (Bonds are loans – when you buy them you are handing over money to the bond issuers because they promise to repay eventually and in the meantime pay an interest rate.)
So the solution to the debt – the kicking the can down the road – has been to borrow more – to create more debt and merely change whom the debt was owed to. These bonds (loans) were however “guaranteed” by the 19 European governments. To get the bond markets to cough up the money to finance the Greek debt the bond holders were told that if all else fails the governments of the eurozone would get the tax payers of Europe to pay. Many of these governments are in a pretty difficult situation themselves – so that might mean the guarantees being passed back to Germany……and the IMF has admitted that at least one third of the Greek debt are unrepayable.
If you kick the can down the road repeatedly you eventually run out of road. What should have happened much earlier in this process was an admission that the French, Dutch and German banks had made a mistake lending to Greece and they should have taken their loss. Perhaps Greek officials and Goldman Sachs, which helped to hide the fact that Greece could not pay, should have been prosecuted. However, as we have seen there is a deeper problem. Eurozone has failed because it has a structural flaw in it. It cannot be mended and it will fall to bits either now, or perhaps later. Meanwhile…at the other side of the world the Chinese stock market just crashed for other reasons. The crisis of 2007/2008 is back….only much bigger this time.
These are thoughts to supplement my explanation above in the light of an interview of Yanis Varoufakis on YouTube at an event in Zagreb where he explains his approach to understanding of the Eurozone problems. If you want to watch it you can find it here.
The story I described above is one of dealing with debts arising out of trade imbalances. In the words that Varoufakis would use what was lacking in the Eurozone was a surplus recycling system to recycle the surpluses of the powerful countries (Germany) back to the deficit countries (Greece) so that they could keep on exporting to the deficit countries.
Prior to 2008 this was not such a problem because Germany was exporting also to the USA on a substantial scale and then investing the dollars that they earned through the exports back into Wall Street and its financialisation processes. This gave Germany the money that they could afford to spend into the European periphery countries and inflate bubbles there that kept people buying the Mercedes Benzes. (European money spending on the infrastructures of Spain, Ireland, etc which underpinned the property booms that the banks pumped up). After the crash of 2008 the export market to America crashed and that had two effects. Firstly banks in southern Europe were crushed as the property bubbles there popped AND Germany lost export markets to the USA far more than France, Italy and Spain did. Germany’s exports were more than proportionately effected by the Wall Street crash. Among other consequences of the Eurozone crisis is that it suits Germany to have a weak Euro to retain as much as possible of its shrunken US export market.
The Varoufakis explanation is thus one of coping with imbalances, of demand recycling from the surplus countries so that deficit countries could continue to buy imports – and then the breakdown of the mechanisms for demand recycling between countries.
I dare say that this IS part of the story – however from an ecological economics perspectives it seems to me that it is easier to handle imbalances when all are growing because energy is abundant. Here we come to the second, deeper problem that I alluded to in the first paragraph. When all are growing then all are confident and imbalances can be covered by borrowing and lending because there is confidence that debts will be eventually be repaid. Also if all are growing state deficits and state borrowing are lower because tax revenues come in and expenditure on social problems are lower.
So one can turn the Varoufakis argument on its head. Growth was not only the RESULT of the existence of demand recycling mechanisms for surplus countries – the existence of recycling mechanisms for surplus countries could also be explained by the existence of growth. Growth made the recycling easier…. And growth was crucially a result of abundant energy (not part of the Varoufakis explanation).
To repeat – the Varoufakis argument that growth could continue when mechanisms were found to recycle purchasing power from surplus countries to deficit countries can be turned upside down. When growth occurs in deficit countries (even if it is not as fast as in surplus countries) then there is a mechanism to send the purchasing power back – capital export. Thus while Greece (and Spain and Italy and Ireland) was growing there were good reasons to send money to Greece – to invest in the building of holiday hotels for example, or in the building and civil engineering companies that built the hotels and the roads to the resorts. This was not buying and importing Greek goods – but it was putting money back into the pockets of Greeks in the form of investment in the business activities of a growing economy. If deficit countries are growing then mechanisms will exist to recycle purchasing power internationally. Once growth stops then there is no reason to send money to deficit countries and they are in trouble – as has happened throughout southern europe and Ireland. I think that this is the most plausible way of seeing things. And the reason that growth began to fall off was rising energy prices because of depletion, because we are reaching the limits to economic growth. Because energy enters into all economic activities this undermines growth because people and companes struggle to service their debts AND pay the higher energy prices. That’s the ultimate reason that interest rates had to come down through quantitative easing.
Further it is not an accident that the breakdown of the Bretton Woods system occurred when the US had, for the first time, to start importing oil, and when the price of oil rocketed. The dollar went from being on a quasi gold standard to being a quasi oil standard. It was part of the deal with Saudi Arabia and other countries – they sold their oil for dollars. If you wanted to buy oil you needed dollars so to keep putting your surplus back into the US and keeping it in American banks made sense. (The City of London was also able to survive largely because sterling became a petro-currency at this time too.)
[Minor edit, 5:03pm: changed ‘cheap energy’ to ‘abundant energy’, since the issue is availability rather than price.]
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Brian Davey graduated from the Nottingham University Department of Economics and, aside from a brief spell working in eastern Germany showing how to do community development work, has spent most of his life working in the community and voluntary sector in Nottingham particularly in health promotion, mental health and environmental fields. He helped form Ecoworks, a community garden and environmental project for people with mental health problems. He is a member of Feasta Climate Working Group and former co-ordinator of the Cap and Share Campaign. He is editor of the Feasta book Sharing for Survival: Restoring the Climate, the Commons and Society, and the author of Credo: Economic Beliefs in a World in Crisis.