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Again, The Good Ol’ Debt Trap
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Lynn says the problem was basically with the concept of the euro, which was more a political convenience rather than an economic solution. The seed idea dates back to Napoleon Bonaparte, Victor Hugo and John Stuart Mill, and its ultimate creation under the aegis of Brussels and Frankfurt was a victory of the implausible over the rational and, hence, had to be short lived. The irony was not lost when European Central Bank president Jean-Claude Trichet had been revelling in the glory of the euro just about a month before the drama was staged. A decade was a long time for such episodes to be played, as Greece, not known for its honesty, kept fudging its numbers and promised to be a good boy when entering the euro. The community was only too keen to have as many members under it, and closed its eyes. The drachma, which no one would touch, was alchemised into the euro as the country gained acceptance.
Lynn feels that there was always a difference between Europe's north and south, and two variants of the euro could be a solution to the current crisis. Germany is the proverbial conservative player, which set the rules and followed them assiduously. While it was known that the rich would pay for the poor, Spain and Ireland misused the largesse available through the common low interest rate policy on buildings, which was not sustainable.
As the crisis exploded, there was acrimony as Germans felt they should not be helping cheats, while the Greeks went back to Nazi history to say continuance of support was reparation. Bringing in the IMF to play the bad cop helped the German cause and the Euro ego as the possible collapse of the currency was more a threat to the concept, than the Euro economy.
Lynn takes us through the events as if in fiction without being judgemental. He explains the complexities of the fiasco where French banks held Spanish, German and Italian debt. So, no one could be allowed to fail, else all would go down. Devaluation could not happen because of a single currency and neither could one inflate to lower the value of debt as Zimbabwe did.
Lynn poses some interesting queries on brea-king up the euro. If Greece was kicked out, it would go bankrupt and its creditors could suffer. So, restructuring was necessary. The other option is to have Germany exit as its Deutsche Mark is stronger than the euro. The mark will appreciate, but Germany's exports will not suffer as quality is a distinguishing factor anyway. But the euro will collapse as it will be dominated by the French and Italians who the Dutch or Austrians do not trust. That is the rub.
Lynn concludes by leaving us ruminating on three lessons. First, do not put politics before economics. Second, let markets decide the outcome (means: let Greece go bust). Last, be suspicious of all grand schemes such as the euro, which do not leave room for error. He ends by saying that the West's intellectual dominance started in ancient Athens also died, probably, here. That is the touch of a journalist, which leaves you thinking.
Matthew Lynn is a commentator for Bloomberg Television, a columnist for Bloomberg News and MoneyWeek in the UK, and a regular contributor to the Spectator in London. He has worked for the Sunday Times in London for 10 years as a business writer and columnist. He is also the author of the Death Force series of military thrillers, under the pseudonym Matt Lynn.
Sabnavis is chief economist at CARE Ratings