Thursday, June 23, 2011

Greece, Economists, And The Value Of The Euro

Is the euro bad for Greece? "I’ve never seen Europe in such dire straits," Roger Cohen writes in yesterday's Times. "Greece is full of the aganaktismenoi, or the outraged, who resent the sharp cuts and sales of state industries made necessary because there is no drachma to devalue in order to regain competitiveness. Like protesters in Spain, they feel the poor and unemployed are paying for the errors of politicians, the evasions of the rich, and the whole globalized system that rewards the tech-savvy initiated while punishing those left behind."

Hmm. You devalue, you become more competitive. The ideal of European unity cannot trump this macroeconomic axiom, one that economists as different as Paul Krugman and Martin Feldstein take for granted and increasingly resentful Greeks have a right to embrace. Once--so the argument goes--countries in Greece's position would not have been forced to deflate, radically cut budgets (hence, services) or engender widespread anger from the poor and unemployed. They could have cheapened their currency and counted on cheaper exports to jump-start growth. The euro, however, is a kind of hammerlock rich European countries like Germany now have on them, a kind of IMF scold sitting on their shoulder, and advantaging--wait for it!--German exports.

"Many Greeks and Spaniards feel Europe is no more than a scam," Cohen reports without quite endorsing the "feeling" but without quite contradicting it either. "Their anger is understandable...Open borders are beginning to close again. Turkey is turning its back on the Union. Germany has checked out from its postwar European idealism." Quel dommage. You'd think the euro were a seductive credit card offer that had needed Elizabeth Warren to explain the fine print. Greece, Cohen concludes, should simply reconcile itself to a default (well, an "orderly default") and exit the euro. Presumably, Portugal and Spain should follow suit.

THE ECONOMIC AXIOM Cohen rehearses here is just quaint. What exactly would Greece be exporting more cheaply with devalued drachmas? Yes, olive oil and hotel rooms would be cheaper? But who really wants the things Greeks make, including Greeks? Almost 80% of its economy is "services." Agriculture is 4% of its GDP and over 12% of its population. By comparison, 2.5% of Israel's economy is agriculture, and 2% of the population works in it.

To think that Greece would be able to devalue itself out of crisis assumes a world of 1950, not 2010; a world in which "factories" made most of what people needed--toothpaste, tires, pencils, toasters; things everybody could learn to make with a few imported recipes and blueprints--and local factories could get a leg-up on imported versions of stuff if labor costs could be driven down relative to more developed countries; a world in which growth happens because of "import substitution." Does any seasoned person think this is the world we still live in?

Today, production is in a world ecosystem whose drivers are scientific, a changing complex of know-how, advanced information technologies, networks and supply-chains, global branding, financial instruments--indeed, "the whole globalized system that rewards the tech-savvy initiated while punishing those left behind." If Greece has a hope of developing, it is by getting Volkswagen, Phillips, Bayer, Thomson, ABB, GE Capital, Samsung--and the INSEAD business school--to expand hubs in Athens, invest in local enterprises that might be drawn into their supply chains, inject their DNA into Greek commercial life. The path to development, in other words, is not cheap labor in the hinterland, but intellectual capital from the metropole. Israel in the 1980s and 90s was paradigmatic.

And the beauty of the euro zone for Greece--such was the commercial principle along with the political ideal--was the stability and predictability it aimed to give to metropolitan investors, much like the stability Israel finally achieved when it pegged its currency to the dollar, and held firm, after a decade of reckless devaluations. If you were Volkswagen, thinking about setting up an advanced car seat plant in Patras--with all the forward planning and investments in training and robotics this requires--would you want to have to deal with the added risks associated with periodic devaluations? How would you negotiate wage contracts, when imported goods (i.e., your workers' most favored goods) suddenly rise in price, kicking off new rounds of inflation, fueling rushes into real estate, hence, new bubbles?

Greece's inflation rate is now 4.5%. What would it be with constantly devaluing drachmas? How would foreign investors (like, notionally, Volkswagen) like to see all of its local assets lose 20% of their value overnight, or be constantly negotiating contracts according to a cost-of-living index? The point is, no sane business manager would like this environment much at all. It would be easier for Volkswagen to put the plant in Hungary. And the suffering Greeks would feel owing to ongoing devaluation would be at least what they feel with deflation--worse, since they'd be struggling also with an inflationary spiral.

A EUROPE UNITED by the euro is not, as Cohen puts it (channeling its rashest critics), "a borderless order conceived by technocrats, sustained over a heady period by low interest rates, appreciated by the moneyed classes who made more money..." It is a solid conception about how European businesses needed--as then-Volkswagen CEO Carl Hahn put it to me in 1990--a "European platform for global competition." The fact that Greece cooked its books does not degrade this vision. It raises the question of how economies like Greece can be slowly improved and integrated, over a generation, while structures and regulations are put in place so that--national sovereignty be damned--books cooking cannot go on.

Canada, in a way, has been a model here. To sustain its federation, along with the Canadian dollar, Ottawa's "technocrats" have had to transfer wealth, year-in, year-out,  from southern Ontario and oil-rich Alberta to Quebec and the Maritimes. Toronto bankers and Western oil companies like to gripe about this, the way, no doubt, German bankers and industrialists do, if only with their shrinks. It is comforting to think you can just throw those reckless, lying, hot-blooded Greeks out of the euro in way that would not send waves of insolvency, frozen lending, recrimination, and panic through global financial markets, much like the collapse of Lehman Brothers did. It is comforting to think that Greece would then be better off, more "competitive," though it would still be mired in debt and begging for loans.

Alas, this is wishful thinking all around. Richer European countries will have to be transferring wealth, along with critical know-how, to poorer countries for a generation. Germans will live well enough anyway, like middle-class Chinese who, by buying American debt at near zero interest, keep subsidizing American trips to Walmart where they buy guess what. In fact--and here the old macroeconomic axiom is useful--the downward drag on the value of the euro occasioned by continuing subsidies to Greece (Portugal, etc.) will keep German (French, etc.) exports a good deal cheaper than they would otherwise be. If Germany were still on the Deutsche Mark, and enjoying years of trade surpluses, what American would now be able afford a Jetta made in Wolfsburg? Would an Indian be able to afford a Siemens CAT-scan?

I DON'T MEAN to imply something too comforting here myself. The Greek crisis has given every reasonable person occasion to think about the shape of the world we are building, and Cohen is right to wonder whether ordinary citizens, struggling with reverses and the fears if being left-behind, can take it all in. "Strikes and violent protest are one measure of a Europe that now leaves many citizens unmoved by the great achievements of European integration," he writes. Fair enough. But what--armed with obsolete economic theories valorizing vaguely national and "working class" grievances--will move them?

The crisis should be a time when our best liberal commentators, reflecting on the mistakes and dissembling of the Greek government, redouble efforts to build institutions of pan-European governance and regulation, that is, make the pan-European currency more viable and stable. This, not default, is just what EU visionaries like Jacques Attali called for this earlier week.

Which brings me to a final word about the uncharacteristic glibness of Cohen's column. I can't help imagining the reverence with which, say, Joseph Conrad would have held the European Union, or wonder what he would have made of writers who, growing complacent about its dull workings, fail to see the fragility of civilized liberalism. The EU's legal, commercial and physical structures are breakwaters against relentless national tides. The euro in this sense may be the greatest political achievement of our lives. We can lose it.