Unravelling the Greek basket case

Once again the world is impatiently awaiting a European summit at which once and for all the continent’s problems will be comprehensively solved – or not. If history is anything to go by, we should not set our hopes too high. For modern Greece there has never been a lasting solution.

You may agree or disagree with Georg Wilhelm Friedrich Hegel’s deterministic world view, but it is hard to argue with the philosopher’s grim assessment of governments’ ability to learn: "What experience and history teach is this — that nations and governments have never learned anything from history, or acted upon any lessons they might have drawn from it.”

Since these words were written 180 years ago Europe’s dealings with Greece have proved Hegel right time and again. Greece is not a country with temporary economic, fiscal and monetary problems. It is a permanent basket case. Despite this, Europe has never found a way to deal with it.

Since Greece gained independence from Turkey after its war of independence (1821-29), the country has been plagued by recurrent budget crises, frequent state defaults and long periods of being cut off from international capital markets. There was no shortage of attempts to put Greece on a more stable trajectory by integrating it into international monetary arrangements. And yet they all failed eventually.

The first attempt to give modern Greece a convertible silver currency was in 1828. It was suspended only four years later when the budget deficit was so high that the government resorted to printing paper money to pay for the ongoing conflict with Turkey. A return to the silver standard began a few years later but the Greek government continued to borrow heavily from the central bank for its expenditure – hardly a sustainable fiscal arrangement.

After more tumultuous years with yet another departure from silver to paper and back, Greece in 1867 sought refuge in the Latin Monetary Union, one of the forerunners of today’s euro currency.

Effectively, LMU was a gold and silver-backed monetary union with the French franc at the centre, and Greece hoped to benefit from the monetary stability it offered. Being part of a big monetary union with many other European nations also gave it access to deeper capital markets.

From a Greek point of view, it was perfectly understandable why they were so keen to join the club. The only question is why the other members of LMU admitted Greece despite its poor economic structures.

Not even observers closer to the historic events could see the point of Greek membership. In his ‘History of the Latin Monetary Union’ report, University of Chicago economist Henry Parker Willis summed it up nicely, and it is worth quoting at length:

"It is hard to see why the admission of Greece to the Latin Union should have been desired or allowed by that body. In no sense was she a desirable member of the league. Economically unsound, convulsed by political struggles, and financially rotten, her condition was pitiable. Struggling with a burden of debt, Greece was also endeavouring to maintain in circulation a large amount of inconvertible paper. She was not territorially a desirable adjunct to the Latin Union, and her commercial and financial importance was small. Nevertheless her nominal admission was secured, and we may credit the obscure political influences … with being able to effect what economic and financial considerations could not. Certainly it would be hard to understand on what other grounds her membership was attained.”

Replace ‘Latin Union’ with ‘European Monetary Union’ and the paragraph quoted above could have been published today. In fact, it was published in 1901. Already back then, Willis came to the conclusion that monetary union in Europe did not work, which again sounds like a prophecy of things to come:

"The Latin Union as an experiment in international monetary action has proved a failure. Its history serves merely to throw some light upon the difficulties which are likely to be encountered in any international attempt to regulate monetary systems in common. From whatever point of view the Latin Union is studied, it will be seen that it has resulted only in loss to the countries involved.”

One of LMU’s problems was Greece. The country had introduced paper money that was only valid domestically and it also reduced the gold and silver content of its coins in violation of international agreements. No wonder that other LMU members became increasingly frustrated by Greece’s refusal to play by the rules.

The Swiss ambassador to Paris allegedly once complained that monetary union with Greece was an ‘unhappy marriage’ from which there was no easy escape. Eventually, however, the other LMU countries lost patience and ordered Greek coins retired in 1908. Effectively, they kicked Greece out of the union because they were fed up with it.

Greece then had to readjust its monetary policy and managed to return to LMU in 1910 under a gold standard, but by then the LMU was already fragile. Four years later, the union was effectively abandoned at the start of World War I and formally dissolved in 1927.

After LMU, Greece’s monetary history remained a roller-coaster. The drachma devalued and became pegged to the sterling in 1928. It devalued again before being pegged to the US dollar in 1953. In 1975 it was floated and devalued immediately, followed by big devaluations in 1983 and 1985. Only in preparation for the euro did the Bank of Greece eventually announce a ‘hard drachma’ policy in 1995, but its entry into the European Exchange Rate Mechanism required yet another devaluation.

After this turbulent monetary history of Greece, it was surprising (to say the least) how easily Greece managed to become part of the eurozone. Either Greece had fundamentally changed its whole economic system as grown over two centuries overnight or Greece’s European partners had not learned their lessons from history.

This weekend, European leaders will once more decide on how to deal with Greece. It looks as if even in case of a Greek default, which now looks like a certainty, the country could remain a member of the eurozone.

Rumours have it that Hegel is laughing in his grave.

Dr Oliver Marc Hartwich is a Research Fellow at the Centre for Independent Studies.

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Thanks, great story (Unravelling the Greek basket case, October 20). Let's hope the break up of this monetary union doesn't happen at the start of a war.
Greeks and gifts. An old problem seen anew.
The only solution is to create euros and pay off the banks of Greek debt then remove Greece from the EU. It's Greece's problem. Keeping them in the EU makes it everyone's problem.
I think the writer moved too swiftly from 1928 to 1953 with such little detail. WWII was by far the most significant economic event in modern Greece's history (Unravelling the Greek basket case, October 20).
Greece is a huge problem and at the same time a big lesson to those architects of the Maastricht Treaty http://en.wikipedia.org/wiki/Maastricht_Treaty - read the section under criteria and you will be horrified by actually how many countries have "broken the rules" of membership.
There may be an argument for an "A" league and a "B" league euro - the "B" being some 30 per cent lower than the "A" - say parity to the US dollar. At least on that basis trade with the eurozone countries could continue vs one currency and the weaker economies see some export price advantage on what goods they currently have to sell and perhaps induce foreign investment.
Reverse problem in the case of Greece is that their import bill is significant and a currency related rise in that bill might swamp any potential benefits of export growth. Again in the case of Greece, about 74 per cent of GDP relates to services/tourism. Current civil unrest will badly damage the toursim component and may be that we see civil war (God forbid) which could spread elsewhere. That would send Greece back to the dark ages. Sadly it is a complete basket case (Unravelling the Greek basket case, October 20).
Hartwich ought to spare us the ridiculously precious apercus from Hegel, about whom he knows little and understands still less (Unravelling the Greek basket case, October 20). Hartwich displays a singular inability to understand what the central problems with inter-capitalist rivalry in the eurozone (Martin Wolf came closest yesterday - and three hundred people visited my blog thereafter) when he wrote of "the structural mercantilism at the core of the eurozone" - and he did mean "the core", namely, Germany, France, Holland and Finland. If I sound harsh, so does Hartwich.
Greece's economy is not sustainable (Unravelling the Greek basket case, October 20). It loses money every year. It's out of options. Trouble is it could flag trouble that spreads to other economies in the region, which have similar issues. You can't bail it out. I think it needs to fundamently fail and then rebuild, but 3 million people also need to leave, their social security system ripped up, government employment slashed to 40 per cent of existing levels. It would be mayhem and no-one knows the outcome to such vast social dislocation. It could be the wildfire that burns through much of Europe. The Germans should get out and batten their hatches. Maybe I'm wrong - but I've seen nothing to change my mind
Well there is no need to throw the baby out with the bathwater. Greece should get kicked out of the eurozone and I'm sure they would be very happy and are praying for that to happen, but most definitely not out of the EU (Unravelling the Greek basket case, October 20).
The EU and the eurozone are completely separate animals/entities.
The Greeks have done nothing wrong enough to get kicked out of the EU and the EU would be all the poorer for losing them.
The people who should also be kicked very firmly are the people who dreamed up the nightmare of the eurozone on the simplistic formula/basis that it was founded upon originally.
The Greeks and Romans created Europe (Unravelling the Greek basket case, October 20). Now they are about to destroy it. Hubris to nemesis.