“Meetings are indispensable when you don’t want to do anything.” So thought economist John Kenneth Galbraith and, had he been alive today, I doubt the succession of meetings on Greece and the Euro would have changed his mind. Who, in the their right mind, wishing to achieve something, in this case resolving whether or not Greece is to remain in the euro, would begin a meeting at 4 o’clock on a Sunday afternoon? Well, the latest meeting of Eurozone leaders did just that which, if nothing else, rather proves the point about the lack of right minds and yet, surprisingly, does appear to have reached an agreement.
Remarkably, EU Council President Donald Tusk has been hailed as the ‘father’ of the agreement as a result, according to the Financial Times, of blocking the exit of Greek PM Alexis Tsipras and German Chancellor Angela Merkel, who had decided after 14 hours of talks that they had reached a dead end. As they made for the door at 6 am, the former Polish prime minister is reported to have said, “Sorry, but there is no way you are leaving this room.” At a critical moment, Tusk moved to prevent the fatigue and frustration from triggering a historic rupture for the Eurozone, the FT wrote.
Tusk told the press that after almost 17 hours of talks between Eurozone leaders, the Eurozone is now ready to talk about assistance from the European Stability Mechanism for Greece in return for “major reforms” and financial assistance for the country. A privatisation fund has been set up which will be located in Greece and managed by Greeks, and not in Luxembourg and managed by Germans as the Germans had reportedly wanted. Athens is to start selling off state assets worth EUR 50 billion, with the proceeds to go into the fund co-supervised by its creditors, half of which will be use to recapitalise Greek banks and the other half will pay off Greek debts.
A man, a door, two European heads of government and the rest is history. Which, of course, it soon will be, since while this latest deal may have averted the immediate chaos, it fails to deal, as Eric Beinhocker points out on BloomberegView with fundamental problem of the Eurozone, which is that it is unable to deal with divergent economies.
To do this successfully, a currency union must have mechanisms to deal with the differences between states, which include large fiscal transfers. Thus, in the United States last year, the largest donor, Delaware gave 21 per cent of its GDP through the federal budget and the largest beneficiary, North Dakota, received 90 per cent. In 2011, Germany made a net contribution of 0.2 per cent of GBP to the EU budget and Greece received 0.2 per cent.
Similarly, the banks in the Federal Reserve System reallocate assets to smooth over regional current account deficits and surpluses, whereas if Greece runs a deficit with Germany, its central bank accumulates debts to the Bundesbank indefinitely. It’s hard to see German taxpayers agreeing to write off a proportion of those liabilities regularly, whether to Greece or anybody else.
Another reason US states don’t leave the dollar union is that they have to balance their operating budgets, with only the federal government being able to run a long term deficit. In contrast, Germany and the other EU states have rejected any kind of Eurozone sovereign bond arrangement that would pool deficits. And the US does have a genuine single market and national banking union whereas the EU’s lack of this has allowed real interest rates and inflation to diverge across the Eurozone, leading to a loss of competitiveness and credit boom and bust in the Mediterranean belt.
The Eurozone is now stuck in a half-way house between a fully integrated union and a more flexible exchange rate mechanism. Unless Greece becomes more like Germany or the Eurozone more like the US, neither of which is on the agenda, another crisis beckons. The best answer would be a managed Greek exit from the Eurozone since repeated bailouts and austerity simply will not, nay cannot, achieve the desired objective.
So Donald Tusk may now be hailed as the father of an agreement between his dysfunctional children, but dysfunctional they remain. He should have reminded them of Einstein’s wisdom: insanity is doing the same thing over and over again and expecting different results.