A view of Greece from the Outside - Commentaries and Opinions
Saturday, October 12, 2013
Reading Up On Keynes...
A few weeks ago, I began doing something which I
hadn’t done since my College days – I did some reading of writings of and about John Maynard Keynes.
Among others, I am just finishing the book “The Battle of Bretton Woods” by
Benn Steil. And I am amazed! Two principal issues dominated the negotiations
lead by Keynes on the UK side and by Harry White on the US side, namely: the
flow of trade and the flow of capital as a result of a new monetary system.
Now I, for one, had not heard much about the flow of
trade and capital as the Eurozone evolved since inception. Instead, I seemed to
always hear two principal themes: the convergence of interest rates and the
external strength of the Euro. Since both developed very favorably, the Euro
simply had to be considered as a success.
It was only after Lehman that I began looking more
closely at the world-wide flow of trade and capital, albeit not within the
Eurozone but, instead, between the US and the rest of the world. And I was
overwhelmed by the enormous current account deficits which the US had been
running for years and decades. It seemed that the obsessive and
no-fear-of-debt-having American consumer had created jobs and wealth in the
rest of the world and I started wondering how long that could go on.
Thus, when the Greek crisis began erupting in late 2009,
the first thing I looked at were Greece’s Balance of Payments figures
(particularly the Balance of Trade) since the Euro – and I couldn’t believe
what I was seeing. Everyone seemed to be worried about Greece’s budget deficit
and sovereign debt whereas in actual fact it was clear that the Greek economy
was essentially driving itself out of its value-generating activities since the
Euro. And none of the discussions focused on that problem. Instead, the logic
shared by most everyone was that the budget would have to be gotten under
control, reforms made and then everything else would automatically fall into
I am simply baffled how, prior to Bretton Woods,
leaders would have understood that the issues are trade and capital flows and,
since the Euro, no one paid attention to them. All the numbers showed the scary
development since the Euro but no one seemed to deem them important.
The dogma for the EU and Eurozone were the 4
freedoms, including the free movement of trade and the free movement of
capital. As long as that was assured, everything would be fine. And now I read that
even Keynes was meandering on these issues: believing in the benefit of free
trade and capital flows but questioning their ultimate success at the same time
(I guess Keynes realized that Great Britain was not ready for completely free
trade and capital movement).
The opposite to free movement of trade and capital is
not necessarily the control of trade and capital. I, for one, believe that the
Eurozone, in its present structure, needs a ‘managed flow’ of trade and capital
whereby the ‘management’ takes the form of incentives. I remember reading, back
in my College days, about the concept of ‘infant industry protection’. The idea
is that one cannot expose an economy to world-wide competition if that economy
is not yet ready to compete. In the case of Greece, I am not even sure that a
return to the Drachma would change all that much. Ok, Greece would immediately
become a lot cheaper (‘more competitive’) in foreign currency terms. But being
cheap alone doesn’t automatically build up a productive capacity. That requires
a long term economic development plan.
Regarding the alternative of a Grexit, I don’t see the operational challenge as unsurmountable at all. If handled well, a one-week
bank holiday (at the most) should suffice for that. But I don’t believe that,
in a redesign scenario, it is the weaker countries which should leave the Euro.
It would be of greater benefit to the weaker countries if the stronger ones
(Germany & Co.; i. e. the North) left the Eurozone. That would leave the
South with a cheaper currency relative to the North. The South would not only become
more ‘competitive’ pricewise but its Euro-denominated debt would devalue
relative to a Northern currency.