Persistent Misjudgement

Published on 2015/07/07

Angela Merkel and the other EU policymakers were in for a big surprise or indeed in for a shock that last Friday in June. Sigmar Gabriel said he was “appalled” by the behaviour of Tsipras. No one had expected anything like it, the media said unanimously. But the amazement only reflects the colossal prior error in judging the Greek Government. The FRANKFURTER ALLGEMEINE SONNTAGSZEITUNG got it quite right when writing on 28 June:

“Rarely ever have governments and political observers been as fundamentally misguided as with their judgement of the incumbent Greek Government. Following the general election on 25 January, the majority of them expected the incoming Prime Minister to tone down soon enough and forget about the bulk of his campaign rhetoric. But that is not what happened.” Thus wrote the FRANKFURTER ALLGEMEINE SONNTAGSZEITUNG on page 26.

On 02 February, right after Tsipras’ victory at the ballot box, I included an emphatic warning in this very newsletter not to misjudge the incoming government. Here is what I wrote at the time:

“Moderate politicians across the ages have always underestimated the irrational momentum of ideologists. For one thing, this is because they themselves are used to thinking along more or less rational lines. Secondly, it is quite normal for them to ignore their campaign promises once they are in office. So they project their own behaviour – mistakenly so – onto ideologists like Alexis Tsipras and his economics professor from the radical-left. History teaches us: Whenever extreme ideologists were about to seize power, moderate politicians always calmed their nerves by arguing that ‘things won’t be as bad as they sound now’. Once in power, or so they hoped naively, the extremists would come to their senses and back away from their twisted theories. They expected realistic policies to take the place of campaign-trail bombast. For European policymakers, the time has come to wake from their daydreams.”

This is what I had to say in February 2015 – and I’m sorry to say that events have borne me out. It is terrible to realise that any sensible person could have known five years ago, at the outset of the “Greece bailout,” how this thing would end. At the time, EU policymakers believed temporary financial aid would soon fix the problem. It proved to be another colossal error. Was there no way to tell what would happen? Oh yes, there was. More than five years ago, in February 2010, I wrote verbatim in this newsletter:

“Since the bailout will be associated with painful stipulations for Greece, it is easy to see how the Greek people will respond: Nationalist and socialist resentments against Europe and particularly against Germany will be fuelled. The blame for the necessary austerity measures will be put on others – although Greece has long lived above its means, and cheated its way into the Eurozone – meaning that other European countries, specifically Germany, will get the blame. While the Euro was actually meant to expedite the political unification of Europe, the path currently pursued will result in the division of Europe and in massive domestic strife in the Eurozone. So the bailout of Greece is just another one of these ‘unavoidable’ measures that contains the germ of future crises and calamities in it.”

Sad to say, everything I wrote in February 2010 came to pass in the exact same way during the five years since. Let me recall what Angela Merkel promised on 28 February 2010: “We have an agreement that rules out the option of bailing out other nations.” Quite right, so we do. But the agreement was broken. In the intervening years, the EU member states or the ECB spent several hundred billion euros on “Greece’s bailout”, more than has ever been spent on a debtor bailout in the annals of mankind.

Why go to such trouble? Why spend thousands of hours negotiating? Why earmark billions in aid money? Greece is worse off today than it used to be. Economically and politically, Greece is a failed state. There is no positive outlook – neither with the euro nor with the drachma.

For the sake of comparison: How would you rate the prospects of a company with the following characteristics:

  • The company no longer has a viable business model.
  • It lags hopelessly behind its competitors.
  • Rather than blaming itself for the situation, it squarely lays the blame on others.
  • It consistently refuses to cut costs.
  • It hasn’t got a single idea for a new product.
  • It is over its ears in debt.
  • The management has delayed filing for insolvency for years.
  • The management has repeatedly cooked the books.
  • The management is inexperienced and completely out of touch with reality in its actions.
  • The management pours abuse on the company’s noteholders.

Would you keep lending money to such a company or guarantee its debt?
But actually, Greece is not even the problem. On the contrary: The euro would be much, much weaker if the eyes of the market players were not collectively trained on Greece. The true issues involve Italy and France. As soon as market players become aware of the fact, the euro will take a nosedive. Accordingly, I remain as convinced as ever that it is a good idea to keep a major part of your money in US dollars.

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