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Greek lessons for Scotland

February 21, 2012
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Here’s an example of exactly the risks I was talking about in last week’s piece for the Scotsman:

Greece… has no real independence when it comes to fiscal policy any more, and if everything goes according to plan, it’s not going to have any independence for many, many years to come.

Greece has been politically independent for 180 years.  As part of today’s €130 billion bail-out inspectors from the International Monetary Fund will be installed in Athens to check whether the government is enacting the necessary cuts. It will have to set up a separate account that must always contain enough money to service its debts for the next three months. Papademos (or whoever replaces him when voters revolt again) will be obliged to privatise more state companies than already promised.

The price of staying in the euro, which is vastly overvalued for Greece, is long-lasting deflation in an economy that’s already been in recession for half a decade. If the plan works, which I doubt, in effect the government won’t really be governing. It’ll be the technical supervisor over a plunge in pay and a massive diminution of the state.

Scotland’s not Greece. It’s got an estimated public debt:GDP ratio of 70-80%, much lower than the 120% target Greece is supposed to hit in 2020. The trade deficit has been estimated at 4% for the past eight years, compared with Greece’s 10%. Hopefully, the Scottish government is more credible and the country’s a better place to do business.

But the euro’s clearly not a very liberating place for the smaller, peripheral countries. As so many people have noted, the eurozone isn’t an optimal currency area. One interest rate doesn’t fit all countries and the European Central Bank is paranoid about inflation. There’s no way of performing fiscal transfers or limiting spending.

Portugal’s probably next in the firing line, and then maybe Spain, and Italy and Ireland. The euro blueprint was dodgy from the start — and I doubt the currency can ever be made to work properly.  It’s wrong to blame the peripheral governments entirely for their travails. When a fisherman catches too many tiddlers in his net, he doesn’t blame the holes for being too small. He gets a new net.

The lessons for Scotland should be clear. Abandoning the pound for the euro would be folly. A new currency would be a step into the unknown. In the event of independence, even keeping the pound would expose Edinburgh to the icy stare of the international debt markets. Paradoxically, Scotland may have more independence on tax and spending now than it’d have in the event of political separation.


UPDATE: Jeffrey Sachs, never an economist i’ve had much time for, says that the European Central Bank’s liquidity injections “…changed the perspective from what was unmitigated disaster and a self- fulfilling crisis over the cliff, to a very painful period for Greece but not a catastrophe, even for the other countries of Southern Europe… The mood is brighter.”

Not a catastrophe? I can’t see how much worse things could be for Greece. Brighter for whom? Certainly not the fifth of the Greek workforce that’s unemployed or the many millions who’ll suffer a collapse in wages in the decade ahead.

Unfortunately, in their efforts to reject Keynesianism, economists like Sachs and Edmund Phelps (also quoted in the article) don’t even realise they are supporting the sort of remedy that Keynes himself would have promoted. He wrote extensive about management of the money supply and believed that monetary and fiscal policies were both weapons to help boost demand.

Liquidity injections won’t themselves solve the Greek problem, though, because the economy has been subjected to swingeing cuts at a time when it needs expansion. The economy won’t be able to generate the government revenues needed to pay back creditors. Fiscal policy must play a part in restarting the growth engine.

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