Europe, Greece and The Current Mess

The current mess in Greece is not the real problem. Greece is simply the outcome of a much larger problem. The problem is the entire Euro project, which was from the beginning doomed to fail. It will probably survive the current crisis, but in the long run it has to die. When it does, we can only hope that the entire idea will be buried so deep that it'll be right next to dinosaur bones.

What do I mean? Philipp Bagus offers us a brilliant explanation in his book The Tragedy of the Euro(also in .pdf). Click here to see a short article by Bagus on how the ECB compares to the Fed. Bagus deals mainly with economics, but the authoritarian origins of European integration have been documented elsewhere.

European integration had many liberal proponents who dreamed of a free Europe. We didn't get that; we got an unaccountable bureaucracy of elitist technocrats. Let me quote Hans-Hermann Hoppe to show why this shouldn't surprise us.

...every state is threatened with "exit." Especially its most productive citizen may leave to escape taxation and the perversions of law. No state likes this. To the contrary, instead of seeing the range of control and tax base shrink, state agents prefer that they be expanded. Yet this brings them in conflict with other states. Unlike competition between "natural" persons and institutions, however, the competition between states is eliminative. That is, there can be only one monopolist of ultimate decision-making and taxation in any given area. Consequently, the competition between different states promotes a tendency toward political centralization and ultimately one single world state.[1]

As a de facto part of the American Empire, political integration could hardly be carried out through war in post-war Europe. Less aggressive means were used, and thus we got the EU and as an extension the Euro.

This may seem like a rather cynical and pessimistic view of the world, but let's see how the Euro fits into all of this. Like the Fed, the national central banks in Europe operated as a way to monetize public debt and serve political interests(mainly banks).[2] The political powers in Europe had a big problem, though. The German central bank, the Bundesbank, wasn't doing what others(mainly the French) wanted. Or, to put it another way, the Bundesbank wasn't printing money fast enough.

Every time the Bundesbank raised its interest rates, the French were obliged to follow suit. [...] "We may have the nuclear bomb, but the Germans have the deutsche mark," officials at Elysée Palace, the office of the French president, apparently said.[3]

Chapter 5 of Bagus' book and the Der Spiegel article really explain it in detail, so check them out. To put it bluntly, the French gave Germany reunification on the condition that Germany gives up the Mark. France wanted to get rid of Germany's monetary authority and saw the collapse of the Soviet Union as an opportunity to get rid of the dreaded Bundesbank. Obviously the ECB needed to be more inflationary than the Bundesbank, otherwise it would've been pointless. Unsurprisingly the ECB is just like that.

Ironically the collapse of the Soviet Union and the secession of Eastern Europe from the Soviet Empire coincided with a completely undemocratic(e.g. a large majority of Germans wanted to keep the Mark) political maneuver and power grab in Europe.

The Tragedy of the Commons

At this point let me quote Philipp Bagus at lenght:

The Fed buys government bonds outright, while the ECB accepts them as collateral for new loans to the banking system. Economically, the effects are identical. The money supply increases when the Fed buys government bonds. When the ECB grants a loan with government bonds pledged as collateral, the money supply increases as well.
...
Because the ECB does not publish the collateral provided for its loans, we do not know how many Greek government bonds, for example, are provided as collateral for ECB loans.
...
Imagine that the government has a deficit and issues government bonds. Part is bought by the banking system and used to get additional reserves from the central bank, which buys the bonds or grants new loans, accepting them as collateral. The banking system uses the new reserves to expand credit and grant loans to, for example, the construction industry. With the new loans, the construction industry buys factors of production and pays its workers. The workers use part of the new money to invest in funds. The investment funds then use the new money to acquire government bonds. Thus, there is an indirect monetization. Part of the money created by the fractional-reserve-banking system ends up buying government bonds because of their preferential treatment by the central bank, i.e., its direct monetization.[2]

So the ECB monetizes government debt both directly and indirectly. Ok, so basic stuff and nothing new? All central banks do this, but with the Eurozone there's a problem(many different issuers of government debt).

Monetizing debt means that new money is created. Those who get the new money first benefit, because they now have more money and prices haven't risen yet. Those who get it last suffer, because prices rise before their incomes do. It's a transfer of wealth. In this case to the government who issues the debt.

So the Euro is an institution that transfers wealth to those governments who run the biggest deficits. So why should the situation in Greece surprise us? Their extravagance was being financed by the more responsible nations.

That means that the ECB was bailing out Greece even before May 2010. It did not have to buy the Greek bonds outright; it only had to accept them as collateral. If the ECB had not accepted Greek bonds, Greek debts could not have mounted to such an extent. The Greek government would have had to default much earlier.[2]

As long as the ECB and the banking system work as they currently do, there will be no escape from disaster. If all of this is not bad enough, the moral hazard is being worsened with bailouts.

The short-term solution for Greece is a balanced budget and a (partial) default. It really is that simple. It might be "politically impossible," but that's just another way of saying that politicians don't want to do it. The point is that even if they don't want to, they can and they should.

The long-term solution is the end of the Euro.

[1] Hans-Hermann Hoppe The Paradox of Imperialism
[2] Philipp Bagus The Fed and the ECB: Two Paths, One Goal
[3] Der Spiegel Was the Deutsche Mark Sacrificed for Reunification

Additional reading on the relationship of the state and money:
Hans-Hermann Hoppe Why the State Demands Control of Money