Michael Pettis, the Beijing-based economic theorist, has written a magisterial blog post that Matthew C. Klein, the American historian/ financial commentator, regards as 'literally the best analysis of the euro area's problems we've ever read'. Likewise, I was blown away by the power of Pettis' argument, but I must pass on this issue until I have finished Philippe Legrain's 'European Spring: Why our Economies and Politics are in a Mess and How to Put Them Right' and at least started Yanis Varoufakis' Europe after the Minotaur: Greece and the Future of the Global Economy.
Pettis' piece is a blog post but, at some 25 pages long, not as we know them. It was crying out for a summary. Happily Matthew C. Klein has provided an excellent one in Alphaville in the FT: Michael Pettis explains the euro crisis (and a lot of other things too). Of course, I urge you to read Pettis or, if you don't have the time, to read Klein extensive summary of the Pettis post (accessing the Financial Times is less troublesome than you might think, but as I have a sub, I don't know what precise hurdles you might face).
Those as yet unconvinced that either is worth their time should take note of the following particular nuggets to be found among all the gold-standard writing.
1. The European debt crisis is not a conflict among nations…the imbalances that led eventually to the current crisis had their roots in hidden transfers between different economic sectors within Europe and not between countries…Resolving a debt crisis involves nothing more than assigning the losses. In the current crisis these costs have to be assigned to different economic sectors within Europe, but to the extent that the assignation of costs can be characterised as exercises in national cost allocation, it is easy to turn an economic conflict into a national conflict.
2. Until now, an awful lot of Europeans have understood the crisis primarily in terms of differences in national character, economic virtue, and as a moral struggle between prudence and irresponsibility. This interpretation is intuitively appealing but it is almost wholly incorrect, and because the cost of saving Europe is debt forgiveness, and Europe must decide if this is a cost worth paying (I think it is), to the extent that the European crisis is seen as a struggle between the prudent countries and the irresponsible countries, it is extremely unlikely that Europeans will be willing to pay the cost. (My emphasis)
3. Except in Greece, in Europe the main political parties on both sides of the political spectrum have until now chosen to maintain the value of the currency and protect the interests of the creditors. It has been extremist parties, either on the right or the left, who have attacked the currency union and the interests of the creditors. In many cases these parties are extreme nationalists and oppose the existence of the European Union. (Not surprisingly he prophesizes doom if these take control of the debate.)
I appreciate, these points might come over as assertions that you either accept or do not. But they are accompanied by serious historical analysis linking the deleterious effect on German industry of the reparations paid by France after the Franco-Prussian War to the calamitous effect on Spain of recent resource transfers from Germany. The former he claims were the largest reparations in history and equivalent to 23% of France's annual GDP (20% of Germany's). But he goes on to point out that the resource transfer (much of it in the form of loans from German banks) to Spain between 2000 and 2009 (in the form of loans, of course) was greater, coming in at 31-32% of annual GDP. His crucial point is that 'The great beneficiary of French "largesse" turned out not to have benefited any more than Spain had benefited from German largesse 135 years later'.
This rather turns the table on the usual narrative. While he is careful not to assert that the problem was created by German outflows as opposed to Spanish inflows, he does point out (quite rightly to my mind): 'If it were the latter case, however, it would be an astonishing coincidence that so many countries decided to embark on consumption sprees at exactly the same time. It would be even more remarkable, had they done so, that they could have all sucked money out of a reluctant Germany while driving interest rates down. It is very hard to believe, in other words, that the enormous shift in the internal European balance of payments was driven by anything other than a domestic shift in the German economy that suddenly saw total savings soar relative to total investment.'
This helps scotch another false narrative – that of competitiveness. Here, cued up by Pettis, Michael C. Klein nails it.
For all of the suffering that has occurred in places such as Spain, Ireland, and Greece, we shouldn't forget that German workers have suffered from stagnant wages and decaying infrastructure.
One of the worst costs — for Germany — has been the lack productivity growth. For all the talk of Teutonic competitiveness, German labour productivity has grown at the meagre pace of just 0.6 per cent per year, on average, since 1998. Output per hour worked is actually lower now than it was in 2007. For perspective, this track record is worse than that of practically every other rich country — including Greece and Spain!
(Source: Organisation for Economic Co-operation and Development, author's calculations)
Happily, Pettis is not only in the business of deconstructing false narratives. He also suggests solutions. Along with the Greek Finance Minister Varoufakis, he does not see the issues in terms of zero-sum games. Both are enamoured with linking repayments to growth. The congruence of approach between the two is such that it is not surprising that Pettis states 'Varoufakis should really take the lead in designing an entirely new form of sovereign debt restructuring, not just for Greece but for the many countries, in Europe and elsewhere, that will soon follow it into default'.
If the Greek crisis were not so serious, for Greece and for Europe, the following quip might have been amusing: 'when someone like Yanis Varoufakis proposes that there are ways in which partial debt forgiveness increases overall economic value, instead of merely creating moral hazard, worried economists often recoil in horror, while finance or bankruptcy specialists (and an awful lot of hedge fund managers) shrug their shoulders at such an obvious statement'.
I hoped this has whetted your appetite for both pieces.