Bailouts won't change a thing...

Whilst most people are increasingly likely to greet news about Greece with a sense of fatigue, the main battle lines appear to criss-cross political camps. The arguments have been rehearsed endlessly so I spare you another repeat. However, there is one aspect that receives less attention. It's the ability of the Greek government to reform as opposed to its willingness to do so.

Much of the discussion hinges on whether Greece can get the breathing space through another bailout (or a long term debt relief) to reform its economy and become competitive in the world markets again. This assumes however that the Greek government has the wherewithal to actually carry out reforms at this stage. It seems to me that this is a huge assumption to make given the parlous state of its tax system and the traditionally low levels of administrative governance in the country. So, despite all talk about the pros and cons of bailouts, even if Greece would be afforded some space and time, it is unlikely to emerge any time soon as the all new and shiny South European twin sister of Germany.

This aspect shifts the perspective from what the Greek government is willing to do (triggering nasty discussions about blame) to what it can and can not do, prompting a realistic calculations of the chances to reform. It is that realism that should guide politicians on Monday what to do about Greece, rather than indulging in fantasy scenarios.

Why the Euro is still stable

When Britain dropped out of the ERM, some people got very rich. George Soros was one of those who  bet against the pound remaining in the ERM and the windfall from the decision of the British government (reportedly more than 1 billion dollars) made him a rich man for the rest of his life. The current crisis of the Euro should equally see plenty of hedge funds betting against the Euro but nothing similar to the ERM disaster has happened so far. The question is why is no one betting against the Euro? The answer is an interesting one and reveals why the Euro is not dead by any measure.

First, the Euro has remained stable in terms of currency fluctuations. The reason is that, while capital flight from Greece, Spain and Italy has certainly occurred, the surplus money has mainly been invested in German bonds, which balances out the Euro capital flows across the currency zone. Second, Spain and Italy have actually imposed bans on short-selling which prevents hedge funds to bet against Spanish and Italian bonds. With Greece the case is slightly different. Although credit default swaps are still in place, any heavy betting against them may trigger a large scale default of the country which in effect wipes out any chance of gaining a profit in the process. So there are limits to the profit you can make in a highly speculative market. Traders know that and hence stay away from an overheated Greek bond market.

But a look at some of the capital transfers within the Euro zone also indicate why the currency is still stable. Although there are some serious divisions between those countries that lose capital there are also winners such as Germany. In order to balance the loan commitments between individual national central banks and the ECB, the German Bundesbank has lend back much of the capital it gained through the bond market to the ECB. According to the New York Times, the Bundesbank lend the ECB over a 12 month period more than 730 billion euros up till June this year, double the amount it led in the previous 12 month period. So, while the Euro is internally riven with divisions, the overall capital transfer balance ensures that the Euro itself has not come under the onslaught of traders betting against a Euro collapse. However, as Moody has pointed out recently in its report on Germany's credit rating, Germany's ability to counteract some of the effects of this capital flight is not unlimited. So the picture can change very quickly and we may still see some people getting very rich indeed.

When the money runs out for Germany

The credit rating agency Moody's has put Germany on a watch list. The agency is concerned that Germany may not be able to fulfill its credit obligations in the long term because of the continuing crisis in Greece and Spain.

As the German Finance Minister pointed out, Greece and Spain are quite different cases. Greece is simply refusing to cut its expenditure despite receiving billions of pounds from German taxpayers to pay exorbitant wages to its civil servants in a bloated government sector.

Spain however faces a different crisis. The Spanish government has introduced significant reforms and is on its way to join Portugal and Ireland as the poster boys of reform. However, the legacy that drags Spain into the morass is located in the banking sector and rooted in an unprecedented property boom that lasted almost a decade. Now, Spanish banks are sitting on unsustainable debt with people unable to service their mortgage payments.

So far, most observers have thought that Germany can deal with Greece whose economy represents only about 2 percent of the Eurozone economy as a whole. However, Spain is a different case. The Spanish economy is the fourth largest in Europe and there is no chance that German taxpayers can rescue the Spanish banks without facing significant credit downgrading themselves. So Germany is in a tricky situation. What to do?

It seems that no one would benefit if Germany's credit rating deteriorated. In fact, with German borrowing potentially costs going up, the ability of Germany to help others would be impaired significantly and the whole edifice of Eurozone stability would crumble within weeks.

That's why the German chancellor now needs to show that she can be strong in the face of adversity. She needs to insist that the Greek government either introduce significant wage cuts in the public sector to bring their expenditure under control or she has to insist that Greece leaves the Euro. Likewise there needs to be more fiscal discipline amongst other Eurozone countries and the French president Hollande has to be made understood that this is no time for economic stimuli in his country for which the German taxpayers would need to pick up the bill.

The most important step Chancellor Merkel can do however is to remain firm in refusing to allow the European Central Bank to directly issue so called Eurobonds, which would be another way of providing money to France without the responsibility strings attached. Only if these conditions are met will Germany be able to play the role of main creditor in the Eurozone rescue operation. And no one is served if Germany goes the way of France or Greece.

When shoddy research is supposed to justify policy

There has been plenty of debate about why Germans are presumably unwilling to bail out other European countries in the Eurozone. And the German government has found itself increasingly under pressure to grant so-called Eurobonds, a financial instrument issued by the European Central Bank which in effect spreads responsibility for public debt in one country amongst all other countries in the Eurozone. Since many countries have amassed enormous public debt that they simply cannot service at this time, underwriting their national debts means nothing less than asking the German taxpayer to pay for the profligacy of other European nations. 

Now observers often note that Germans reject Eurobonds because they are afraid of inflation, a sentiment that is rooted in the painful experience of hyperinflation between 1920-23 in Weimar Germany. The Pew Center has now published some polling data that appear to show that Germans are willing to strike a more balanced approach, allowing some inflation in return for growth in the European economy. However, once you drill down into the results, the findings are not as robust as they may think. Here is what the Pew Center asked Germans in the polling what they are most concerned about (rank in order), offering respondents various options. The researchers from Pew found that ‘Germans are more concerned about unemployment (70% say it is a major threat) than they are about inflation (56%). Among the European nations ..., the Germans are the least fearful of rising prices’. 

They conclude that this may give Angela Merkel some room for manoeuvre and possibly support Eurobonds. But not so fast! Looking at the polling again, it seems that the researchers from Pew confuse a snapshot of German attitudes with their attitudes under conditions of future change. 

In other words, Germans may currently not be concerned about inflation exactly because they know that Angela Merkel stands fast and would not allow the European Central Bank to issue Eurobonds. If you wanted to know what Germans think about the danger of inflation once Eurobonds have been introduced, you would have to ask exactly that. So, it seems that it is the certainty with which the German government has conducted itself in the face of pressure that allows Germans to fear inflation less than unemployment. 

Responsible politicians in short supply

Many commentators suggest that the exit of Greece from the Eurozone offers her the best chance to emerge from social, political and economic paralysis. This summary in The Observer today of the costs of a Greek exit from the Euro however makes chilling reading. It highlights the immense social costs that Greeks would incur once bailout money from the IMF and Germany would stop.

Vicky Price offers some illustration of the dilemma.

As the leader of the communist movement Syriza refuses to accept the conditions of the bailout, yet demands the continuation of the bailout payments, his willful insistence on clinging to contradictory positions is about to push Greece over the edge of governability. Political responsibility may just be a virtue too far for some opportunistic politicians.

Austerity jeopardised

'The tide of European public opinion is turning’ said John Sopel of the BBC yesterday. Reviewing the results of the French presidential elections from the foot of the Eiffel-Tower, most observers in the BBC studio seemed to think that austerity policies, allegedly championed solely by Angela Merkel and the evil Germans, have fallen out of favour with people across Europe. This of course is also the line the Labour Party in Britain has been pushing for months now: 'Austerity does not work and it is time to change course'. As Andrew Neill pointed out to Ed Balls on the Sunday Politics Show yesterday, neither of the Eds has yet said how much this change of policy would cost the British taxpayer. 

The picture is somewhat clearer in France. Francois Hollande has promised his voters two main changes: to reverse the pension reforms introduced by his predecessor and to employ sixty thousand more teachers. While he, like the British Labour Party, has not said how to pay for these changes, Hollande has suggested that the fiscal pact, signed by all Eurozone countries but not ratified yet, needs to be re-negotiated. 

As the sentiment against austerity gains strength across Europe, there are two main arguments about how to finance any policy change. First up is the suggestion made by the pseudo-communist party Syriza in Greece that ‘the Germans’ should pay’. There seems to be little traction with this sort of argument amongst centre-right or centre-left to simply deposit all debt that Greece and other countries have raked up in the last two decades on the German doorstep. However, the argument draws its persuasive force from a powerful source, that 'the rich should pay for the poor'. 

What the outspoken leader of the assemblage of Greek communists Alexis Tsipras does not say, of course, is that any money transferred from German coffers to pay for Greek debt is hardly a transfer from the rich to the poor. More accurately, it is a transfer from those who work hard and have made the difficult decisions about welfare and public service reforms, to a country where most people consider it a crime to pay taxes. 

The second argument finds its latest manifestation in France, articulated by the president elect Francois Hollande. He wants to finance his programme of growth by taxing the rich and by changing the rules for the European Central Bank (ECB) to allow the bank to issue bonds directly. In effect, it would mean that the French government can borrow money without regard to its credit rating. Noticed the trick? Of course, there is no way any country can borrow above and beyond its means, so what Hollande is suggesting is to allow the ECB to lend money to France with Germany underwriting the debt. Lurking in the background is exactly the same mode of thought as in Greece: the ‘rich’ should pay for the poor. 

What do Hollande and ... have in common? Their arguments are animated by the same denial of government responsibility that has brought so much misery to Europeans already. It is a continuation of the old 'spend spend spend' policies that refuse to acknowledge that there is always somebody who has to pay for the debt. The only difference between Britain and the Eurozone is that in the Eurozone it's the Germans who have to foot the bill, whereas in Britain there is no other government that could pay up for us. 

Where does that leave Europe? It seems closer integration of fiscal and political affairs have not ushered in a new sense of responsibility but a new wave of ‘beggar thy neighbour’ approach. Hopefully, Angela Merkel will resist any moves to water down the rules of the fiscal austerity pact. What France and Greece need are reforms to make its industries more competitive and for its politicians to accept responsibility, not another round of ‘free for all’. 

Deja vu in France

Francois Hollande (left) and Nicolas Sarkozy (right)
Picture courtesy of  BBC

There you have it: Francois Hollande and Nicolas Sarkozy, the candidates of the main centre-left and centre-right, are through to the second round of the French presidential elections. While Holland, the candidate for the Socialist Party does not exactly promise milk and honey to his French compatriots, he does want to roll back the modest reforms put in place under Sarkozy. In particular, the rise of the pension age from 60 to 62 (in Germany the pension age is 67) attracted the ire of some of the French electorate. 

We have been here before. The last Socialist President in France, Francois Mitterrand, equally promised a lot. After being elected he dramatically expanded the state sector to reduce unemployment, yet found that there was little money left in the state coffers and had to back-paddle very quickly to avert economic disaster. 

There is a significant difference between Mitterrand and Hollande however. As Mitterrand promised to commit more public money to correct the ills of the French economy, he only gambled the money of the French. Now France has the Euro and any public spending commitments that cannot be met from taxation and public borrowing within the rules of the austerity pact signed with other Euro member states, will have to come from somewhere else. 

Hollande thinks he has solved the dilemma. He announced that he wants to renegotiate the recently signed Euro stability pact to allow the European Central Bank to lend directly to the French government. In other words, he wants to be able to tap into the cheap money underwritten by a more competitive German economy and German tax payers while delaying or reversing the much needed economic reforms in France. 

Whatever he thinks he can achieve by increasing the already enormous mountain of debt of the French state, the past should be a reliable benchmark of his chances of success. Mitterand’s actions triggered a rocketing inflation that threatened to spiral out of control and throw the French population into a deep economic crisis. He reversed course within a year. It seems that Hollande has failed the test of any responsible politician even before he wins his right to move into the Elysee Palace: learn from past mistakes. 

Why Cameron's European policy is good for Europe

David Cameron’s veto on the European fiscal treaty in December last year has raised much debate. His recent wobble on this issue has prompted some commentators to accuse him of a U-turn, ultimately implying that his initial veto lacked purpose. 

A French contributor to the BBC programme Dateline London summed it up: ‘Sarkozy must be wondering what Cameron’s position actually is. It makes little sense. Either engage more closely with Europe or get out!’

I have articulated my view on the veto previously on these pages, so there is no need to repeat it here. However I do disagree fundamentally with the ‘either-or’ view that is often expressed in the media when it comes to Europe. 

First of all, let’s remember one thing: the British position has always been one of polite distance to the European project of further political integration. This is not a policy originating with Cameron’s coalition. Only months after his first election victory, Tony Blair noisily announced that he will take Britain to ‘the heart of Europe’, and promptly forgot about it. The best thing one can say about Blair’s engagement with Europe is that it was one of cautious engagement when it suited his domestic agenda. In fact, there is little evidence that much of what was going on in Europe was ever more than an annoyance to Blair. That was one of the reasons that his bid for the European Presidency failed. Britain under Blair was nowhere near the centre of Europe. 

And how could it be otherwise? The fact is that Europe is a two speed continent, and has been for some time: one part of Europe pursuing economic and political integration, while the other keeping its distance. 

So if Britain’s European policy has not changed much, why the call to ‘either join or get lost’ from some other European partners? Why the ire for ‘British intransigence’ when it came to the veto? 

The real threat to the European politicians who cannot wait to have powers transferred to an unaccountable bureaucracy in Brussels is that Cameron’s vision of Europe as an economic trade zone may gain track with some of the people across Europe who are tired of failed European institutions and backroom stitch ups for plum jobs for their clapped out national politicians. 

Just like Margaret Thatcher before him, Cameron has formulated an alternative vision that commands supreme legitimacy: the maintenance of national democracies combined in a free trading area across Europe. His insistence that such a Europe based on free trade and free markets is viable, forces Sarkozy, Merkel and others to articulate the advantages of their vision in much more detail. 

Without Cameron’s alternative vision, Europe would be driven by a political project that has little more to its name than the logic of the French-German relationship. For Britain this may never be sufficient as a basis of pan-European policy. And in that, Cameron is right. It is not a question of ‘in or out’. It is a question of what the ultimate purpose of Europe should be. Britain may continue to find a different answer to this question to other nations. 

Why the Euro is not dead (yet)

As with so many things in life, your own experience gives shape to what you know and what you see, yet often only at the exclusion of other viewpoints. So it is with the British debate on the Euro. The currency that celebrates its decennial this January is thought to be doomed by most British observers. For them, the only question worth answering is when the final collapse will happen and whether or not it will drag the entire European project with it. 

You only have to take a flight to Berlin, as I did over the Christmas holidays, and pick up some German papers to understand how alien this view is to German opinion-makers. Believe it or not, German newspapers and journals thought they had genuine reason to celebrate the birth of the common European currency ten years ago. 

And, contrary to British public opinion, they might just have cause for celebration. Despite all nay-sayers, the Euro is for all intents and purposes actually doing very well. Especially so for German purposes one might add. In terms of stability, the Euro is more stable than the Deutschmark, with ten year inflationary rates of less than 2% (the rate for the Deutschmark was more than 5%). Even more importantly for the export orientated industry in Germany, it remains a comparatively weak currency which boost German growth to an extent not experienced since the 1970s. 

It is these undoubted advantages of the currency to the German economy that many British commentators fail to factor into their calculations of impending gloom. The Euro is not only a political project, it is also one that has produced unprecedented growth rates in Germany at a time of shrinking manufacturing output for the rest of Europe and struggling industries across the Western world in areas where Chinese producers offer more competitive conditions. 

Whether the critics of the Euro like it or not, it is most likely to survive as long as the German people take a rational view of the enormous benefits that the common currency has brought. And for those who harbour some nostalgia for the Deutschmark, help is afoot: there are still about 13 billion Deutschmark in circulation in Germany. If you like you can even pay at high street shops in Berlin with the old currency which is still legal tender. 

If a victory, then only a pyrrhic one

So David Cameron got his victory and so did the Eurosceptics in his party. While they are undoubtedly busy celebrating, Labour only managed some pipsqueaks from the sidelines. And the Liberal Democrats are practicing public loyalty to their coalition partner by exercising a stony silence on Europe. 

But this is a serious issue and we should not leave it to the Eurosceptics. If you believe the UK papers, the Euro is bagged and tagged. Yet, they are wrong. The Euro will survive because the political spirit that sustains it, European solidarity, cannot and will not go away. 

As the Eurozone countries are struggling to find the right mechanism to address the economic imbalances between them, the spectre of a Euro breakup was raising its ugly head, but it was never a plausible scenario for anyone who knows what Europe feels like on the continent. That is something many Brits forget. Europe is a feeling as much as it is a political project. And there is no politician in the Eurozone who can ultimately wrest herself free from the main thrust of the European spirit: mutual solidarity and closer integration. 

To maintain that the Euro would survive was a questionable account as long as the economic crisis made it difficult for Merkel and others to dish out enormous sums to countries like Greece, Italy, Ireland and Spain. But pay they will. And that is why the gradual but steady distancing of Britain from the European integration project amounts to nothing less than the biggest foreign policy mistake of the last decades. As Europe finds a solution to the Eurocrisis and embarks on closer integration, it will strive to reform and strengthen substantially the European institutions that can deliver fiscal oversight, the European Commission and the European Parliament. 

The result will be that Britain will fail to have a seat at the table to influence the direction of future European integration. Thatcher’s legacy, to nail the Tory colours to the mast of a trading and tariff zone, will come to haunt Cameron. Europe will go the other way, towards fuller integration and Cameron will be hostage to the veto he so courageously wielded yesterday. The uncertainty of Britain’s position in the emerging Europe of the future will mean that business and the people of Britain will suffer in the long run. Cameron may celebrate today, but his victory will turn out to be a pyrrhic one. 

Why Nadine Dorries worries me

I am worried. And I am worried about something that I never thought I would be in my lifetime. I worry that the life I have built up here in the UK rests on precarious foundations. Let me explain. I am German. I have moved to the UK in 1996 and, by all accounts, settled here successfully. I work at a university, joined a political party and will stand for council elections in May next year. That's not a bad achievement in terms of integration I think. 

However, listening to Nadine Dorries on Newsnight yesterday (you can watch her exchanges with Sir Malcolm Rifkin HERE 9:30mins into the programme) I am not so sure anymore that I made the right choice. Her comments made me feel very insecure indeed. And I never thought I would ask myself the question: do I, as a German, have a future in the UK? 

All of this of course is a result of the Eurozone crisis and the moves by France and Germany to forge a closer union. I always believed (Euro or no Euro) that closer co-operation would happen. Europe was designed to contain some parliamentary and legal components which meant that nation states gave up some of their sovereignty. Don't get me wrong: I always recognised that there are huge problems with this transfer of powers to the European Union in some areas, not least the fact that there is still no elected government of Europe but only a motley crew of bureaucrats and clapped-out national politicians who decide what we eat, consume, trade and produce. 

Yet, I was never in doubt that the way to address these problems was to engage with others in the European Union and find a way forward. Yet, if it was up to Nadine Dorries, all bets are off. As the countries in the Eurozone will grow closer together, Britain may move away from European institutions. Yet it was these institutions that, by and large, have protected my legal status in the UK. It is because of Europe that I am being treated exactly the same as any British citizen when I apply for a mortgage or a job in this country. 

I could become a civil servant in Leeds, draw a local government pension and, incidentally, if I decided to move to Germany again at the end of my working life, I could transfer my pension pot to Germany without any hitch. It is this ease with which we are moving around in Europe that is remarkable, though often unnoticed. This wouldn't be the case anymore if Britain takes a step away from Europe, adopting a position more akin to, say, Switzerland. Arranging health care, pension arrangement and applying for work visa can be a nightmare for anybody from Switzerland or any other non-EU country living in the UK. 

In a way what I am saying I think is that I never really felt like a foreigner here. Living as a German in Cardiff or Leeds felt more like being in a different part of your home country where people somehow happen to speak a language different to your own. If Nadine Dorries and the Eurosceptic wing of the Conservatives have her way, this feeling may not last. Moving away from Europe and its institutions will create uncertainty in the minds of people like me. My position, and incidentally the position of tens of thousands of expatriates living in Spain, Portugal or Italy, will become precarious. That is why I am worried.  

Why the Eurozone crisis may bring about a more democratic Europe

While everyone talks about the Eurocrisis and the economic woes of some countries in the Eurozone, the need to forge a closer fiscal union between Eurocountries may in fact bring about some much desired movement in another area as well: Europe's democratic deficit. 

Over the last decades, the democratic deficit has mainly been a topic for academics and disgruntled Eurosceptics. Yet the problem is real and has always had the potential to undermine the entire European project. As Europe grew closer together and transferred some powers to Brussels, it was never quite clear how to ensure that Brussels' bureaucrats were held to account for what they did. A result of this has been that auditors have refused to sign off the books of the European Commission for the last 13 years. This may sound like an obscure argument but it goes to the heart of budgetary responsibility and democracy. 

In effect, the European Commission has been spending taxpayers money (contributions from European nation-states) without having to say HOW it spent it. Since the European parliament is at best a 'quasselbude' (a place to chatter), the European Commission has also not been held accountable by the elected politicians we sent to Brussels. 

The overall effect is complete impunity for budgetary decisions by the European Commission and Brussels' bureaucrats. This is no small feat in the history of democracy. The European Commission must be the first quango in history that can spend taxpayers money without ever being held to account. 

This may all change now. Why? Pretty much everyone is agreed that the Eurocrisis needs closer fiscal co-operation. Part of that co-operation is supervision of fiscal rectitude in countries that run a deficit and require a bailout such as Greece, Italy, Ireland, Spain and Portugal. 

The obvious choice would be to select those to monitor budgetary responsibility of bailed out countries who pay the bill: the Germans or the IMF. Yet, this is politically impossible. No Italian or Irish government would permit German civil servants to scrutinise the national budget. It would also raise some serious questions about the accountability of those governments to their own electorate. 

The proposal that is emerging instead is that the European Commission or a newly created body in Brussels will take up this task. This brings us back to the democratic deficit. Any monitoring of national budgets in Brussels will require robust democratic legitimacy. So as European leaders muddle through the economic crisis and try to devise a reliable mechanism for budgetary discipline and independent supervision, we may just see some significant progress on creating more democratic European institutions as well. Let's keep fingers crossed, for our sake and for the sake of Europe. 

Why Michael Howard is wrong about Germany

Last night, I had the privilege to attend an event of the Welsh Conservative Party which invited the former leader of the party Michael Howard to Cardiff. Howard gave a brief but thoughtful speech in which he outlined the bleak economic future for Britain. The comments that made me listen up especially however were those when he implored the German government to take responsibility for the Euro. Paraphrasing slightly, he said Germany had benefitted enormously from the Eurozone but now it was time for the Germans to step up to the plate. 

I am always a bit puzzled by these sort of remarks that imply that German leaders have been acting irresponsibly so far. It strikes me as an odd claim to make, not least because the German government is actually a coalition government between the Christian Democrats (Conservatives) and the Free Liberals (Free market liberal party), and just approved an austerity budget which has already shown some good results. Public debt is down and with a bit of luck (the German government found another 55 billion pounds stashed away in the vaults of one of the banks it nationalised in 2008), public finances are very sound indeed. 

But what really puzzles me is when people say that Germans now need to underwrite the debt of the other Eurozone countries. Why should they? Is that something we in the UK would volunteer to do? Let's take this step by step. First, Germany has benefitted from exporting into other Eurozone countries not because of the Euro per se, but because it reformed its employment regulations under Gerhard Schroeder's government, and has introduced the necessary changes to its pension system and public services during the boom times. 

Another factor which contributes to the current competitiveness of German products is wage constraint that has been negotiated between companies and unions in 2008 at the height of the financial crisis. It is  because all Germans agreed to contribute to bearing the burden of the economic crisis together that is now paying off in increased competitiveness. These decisions were not easy and they often incurred high political costs from all political parties and sacrifices from ordinary people. Therefore, to lambast Germans for being irresponsible is a bit rich, to say the least. 

But criticising German leaders for irresponsibility is also a peculiar strategy for British politicians given that, I am convinced, no British leader would countenance the transfer of billions of pounds from the British taxpayer to the the Italian, Greek or Spanish coffers. Think about it for a moment. All you have to do is to put yourself into the shoes of Germans being asked to provide hard earned taxpayers money to prop up profligate governments which have been on a spending spree for the last decade and refused to implement the changes to their public services that are required to remain competitive in the Eurozone. 

Why should somebody working 40 hours at an Aldi till in Berlin or Hamburg pay for a Greek pensioner who retired at 50 and takes home a monthly pension she could only dream of? 

I am absolutely convinced that there will be a solution to the crisis of the Eurozone (which in fact is a debt crisis, not a currency crisis). As part of this solution, Germany will do what it takes to, which may include to approve of the ECB to buy up Italian, French or Spanish bonds. And I am also certain that, at least in part, Germans will pay for the mistakes of other countries. Their notion of European solidarity will move them eventually to bail out much of the Eurozone. But I think it is only fair to insist on some solid guarantees before you part with your hard earned cash. Michael Howard should know that. He would expect nothing less from a British government if things were the other way round. 

Would Greek default bring Greek prosperity?

There have been few things that arouse people's feelings like the impending Greek default. The airwaves and the print media are full of informed and some less informed opinions and debates. Essentially there are two camps at the moment: those who feel that the austerity imposed on Greece is unjustified and creates unacceptable hardship for the Greek population and those who think that Greece has to pay for its sins.

I have advocated the latter but, I have to admit, there is little comfort in such a view. The Guardian comments pages carried an articulation of the first view, you can read it here http://www.guardian.co.uk/commentisfree/2011/sep/19/greece-must-default-and-quit-euro

The author essentially advocates a default of Greece and the re-introduction of the drachma in quick succession. He believes this will allow the government to de-value the currency and postpone the austerity programme, hence producing less pain for the Greek population.

The fascinating aspect of this view is that it operates with some of the conventional market-supply side frameworks it attacks. De-valuation is believed to bring about a quick recovery of the Greek economy, an increase in Greek exports and hence a significant rise in tax revenue.

This view is, strangely enough, as short sighted as all the IMF programmes of the 1990s were supposed to be. Yet, default is a favourite view of the opponents of reforms and austerity. Why?

There are several simplistic assumptions that would work against a successful recovery if Greece defaults and leaves the Euro.

First, a default will not only be bad for Greek credit in the future, but also for the rest of the European banking system, which, whether they like it or not, is the one that will have to lend the money to Greece once it leaves the Euro. A banking crisis will make quick lending on favourable terms and interests rates to the Greek economy or her government unlikely.

Second, a recovery of the Greek economy will depend on competitive industries and having goods to export. Greece has neither. It is essentially, as many observers commented, still a closed economy, importing goods from the Eurozone (on account of demand through high salaries in the bloated public sector) but able to export little since it has only a slender industrial basis. Being competitive in the world markets, in turn, would depend on attracting investment which, again, cannot come from Government since it is flat out broke, so requires the banks in the Eurozone to chip in. This is highly unlikely given the prior default.

Third, the default will remove any incentive to reform the tax system and to shrink the bloated public sector with massive pension liabilities. So, even after a default, the government will still face an enormous annual expenditure which will drive up inflation.

Last but not least, Greeks are saying they are hurting now since they cannot buy goods anymore as their wages are decreasing. However, things would be even worse after a default and the re-introduction of the Drachma. Since most goods are IMPORTED from the Eurozone, leaving the Euro will make these goods prohibitively expensive. The Drachma will not buy much in the way of IKEA furniture or French perfume. What will be left to buy are goods manufactured in Greece, of which there aren't many. Hence the Greek population will experience a far more serious decline of their quality of life after leaving the Euro than now.

The simplistic equation: leaving the Euro + devaluation = less austerity fails to recognise that Greece in future still needs an enormous amount of steady investment to improve its industries. Any short term relief from the postponement of the austerity and reform programmes are likely to backfire.

To have any chance of overcoming its problems, Greece needs to stay in the Euro and swallow the bitter pill of giving up its fiscal independence. This is a small price to pay for the chronic mismanagement, budget falsification and billions of Euros they received.

Why are we failing?

It’s been 10 years since the attacks on the World Trade Centre in New York and the sense of crisis has not gone away. George Packer wrote recently in the New Yorker (George Packer: Coming Apart, New Yorker, Sept 12 2011) that the past decade has been one of missed opportunities. No other attack on the US has left the country in a more divided state than 9/11. 

For Packer it is a lack of political leadership, a lack of a unifying narrative that prevented the country to become great again. Although his analysis is thoughtful and measured, I think the crisis has a deeper cause than an absence of a grand narrative. 

There is no doubt that the US, just like the countries in Europe, experience an unprecedented challenge in the economic, political and social sense. Since the late 1990s, the economy has failed to create winners in the middle and lower middle classes. Real wages have been stagnating, jobs have migrated to China or, in the case of Europe to the former post-communist countries, and economic foundations turned out to be shaky, built on enormous personal and governmental debt. As we anxiously watch the jitters in the stock markets and the wrangling of political leaders to get to grip with the Euro crisis, there is above all one interpretation that emerges more strongly than others. It is that we are clueless, bereft of any ideas how to find the exit to this economic and political disaster unfolding before our eyes. 

To be clear, there is no shortage of options, nor any lack of experts. What is missing is a consensus of what we want to achieve, who we want to be in a world that is bound to be fundamentally different to the one in 2001. 

For Packer and others it is a lack of consensus on the basic principles of economic and political life. Yet, despite the rise of the Tea party, I am convinced that political debates in the distant past were often just as acrimonious as the ones we witness. We just have a very short memory, and historians often don’t help by telling grand narratives of unified people marching forward under a banner of national will and determination. 

What we forget I think is that democratic politics is always characterized by a multitude of options. What creates certainty is not the stability of principles, or the sureness of political leaders. Roosevelt dithered about the entry into the European War before Pearl Harbour just as Lincoln’s professed motifs of going to war were a subsequent abbreviation of many ideas. 

What democracy is, above all, is a mechanism to deliberate freely, to think about the options available and to foster a consensus. The crisis we are in is not a crisis caused by a lack of confidence or of principles we hold dear. It is above all a crisis of practices, of mechanisms that structure and organise our public discourse, and bring to bear rational thought on what to do next. 

Given human nature, this should be no surprise. We all feel from time to time anger, rage or despair and our reactions to events around us are often guided by those sentiments. Yet, eventually we come to realise, in our own individual world, that gut feelings are a bad guide to solve our problems. We sit down, take stock and think what might genuinely solve the difficulties we are in, rather than what would satisfy our immediate feelings. This isn’t always easy. It is uniquely comforting to give in to anger and wrath. But once we cool down, and we think clearly we often come to different, ultimately better conclusions about what to do. 

Politics is no different. Why should politics be the rational deliberation guided by a clear vision of the public good? Politics is a creation of human beings, engaging with each others with all their flaws and shortcomings. So we built mechanisms to ensure that rational thought would prevail. We ask people to ‘represent’ us, politicians who, we think, would be able to remove themselves from the influence of gut feelings. 

Yet, politics has also become more immediate, more direct and infinitely more instant through a proliferation of technological means, social networking and the ever present media. So, the structures we originally put in place to ensure that rational thought prevailed in public debate are about to fail. The choices we have about what to do with the economy are not a domain of experts anymore, everyone, including myself, has an opinion which may often just reflect his or her own interests. 

In other words, our political frameworks are failing, parliament, government and civil service are not delivering the disinterested consensual decisions any more. They are moving closer to the strife and uncertainty that characterises all our daily deliberations and arguments. We, as individuals, have always been subject to our emotions, yet our political institutions are progressively becoming subject to them too. The result is a cacophony of voices rather than an emerging choir of finely tuned registers. What has been failing us since 2001 is not the will to unite, to come together, but the absence of political and economic frameworks that provide carefully deliberated decisions about the public good. 

To pay or not to pay for other people's sins?

The Euro crisis is currently focussing some economic and political minds while we witness the possible default of Greece and other Eurozone countries in slow motion. As with all economic problems, there are just as many opinions as experts, but more and more people agree, that eventually, there is only one outcome: Greece leaving the Euro. Many people in the UK (including myself) just feel lucky that we didn't join the Euro, yet, being a German, I also feel for my countrymen in this difficult moment. The question raised all over the airwaves is: Why aren't Germans simply digging into their pockets and bail Greece out? The sums needed are ridiculously small compared to German's GDP. The current installment due this Friday is a meagre 8 billion euro.

However, there is something called 'moral hazard' and its absence in national economies has a fundamental effect on how governments are behaving. Although I am not an economist, here is what I think about the 'moral hazard' of unlimited bailouts.

It's commonly known that Greece, after joining the Euro, lived way beyond its means. It also suffers from a serious lack of economic competitiveness and deep-seated problems with tax-evasion and low revenue. The shocking examples of public sector employees retiring at the age of 55 in Greece with pensions at the value of almost 80% of their last salary are well known. More interestingly, the public sector has also expanded dramatically over the last decade. The reasons are obvious. Having joined the Euro, Greek bonds were gold-plated and desirable. No one thought that a Eurozone country could default. Hence interest rates were low and the Greek government went on a spending spree of enormous proportions. A curious side effect of the massive expansion of state services is often that private enterprises are crowded out, which in turn means less revenue and more borrowing. That does lasting damage to any market economy.

Interestingly, this is not just the story of Greece. This summer I was in a small town in Spain. I was looking for a gym to work out and was told that there used to be several private ones but they had all shut down. Instead the town now had a huge brand new leisure complex that was run by the council. Private fitness studios just couldn't compete with the subsidized prices of the council leisure centre and had to close. The leisure centre was indeed impressive. For a town of about two thousand residents, the centre boasted a 50m swimming pool and a fully equipped gym with various sports halls. This was all available for 2 euros a go.

Now, needless to say, most of the equipment was little used and the swimming pool was almost always empty when I was there. Yet, this was all built and run by the council at an enormous cost to the taxpayer. Well, actually not: it was actually run on borrowed money and it is this what I call the lack of moral hazard. The Greek government, just like the Spanish one, knew one thing. If they couldn't foot the bills anymore, somebody else would. The Germans would always pay up since they benefitted from the Eurozone by exporting to the Eurozone countries.

That in effect meant that countries such as Greece and Spain could spend money like a drunken sailor and never be held to account for it. Until now that is. Wolfgang Schaeuble, the German finance minister, says he refuses to throw more money into a bottom less pit and Angela Merkel is under pressure by her own party not to release the latest bailout installment to Greece.

People say that the Euro is doomed and Greece should default and leave the Euro. Yet this scenario is fraught with problems. Few spell out exactly what would happen to Greece if it indeed left the Euro. Who in their right mind would buy the Drachme if it is re-introduced? The most realistic scenario is that Greece would experience a far worst run on its currency and its banks then it does now. Also, where will the recovery come from once it has left the Euro? Greece does not have any competitive industries. In fact, it is, as one observer called it, even now still a 'pretty much closed economy'. Once outside the Euro, currency exchanges would add to the costs of any producer. Who would invest in a country like that?

The harsh truth is that Greece needs to pay for its party, one way or another. What Germany can do is to stabilise the situation temporarily until the Greek economy recovers. Until then it needs to do what all governments do in these situations: sell the family silver, reduce the extent of bureaucratic controls that stifle private initiative and scale back public services where they hold back free enterprise.

If the Greek government is genuine in their reforms, I am sure the Germans will be willing to pay the bill for now. Yet as we say in German: 'Erst die Arbeit, dann das Spiel.'