Richard Koo On German Politicians And Greece:
There was a unanimously held belief that nothing will improve without extensive structural reforms and that any aid provided in the absence of such reforms will do little more than buy time.
One influential parliamentarian, for example, argued forcefully that Greece was not yet a modern nation-state and that it continued to operate under the ideas and systems of the Byzantine and Ottoman empires. He felt this had to change before further aid could be provided. Greece’s tax collection system was singled out for special criticism. The same politician spoke of a Greek friend who tried to report to the local tax authorities that he had a pool at his house but was told not to declare it since the paperwork was so troublesome.
Another individual remarked that many of Greece’s democratic institutions are run on the basis of personal and historical connections and that it was difficult to believe that elections were decided on the basis of policy debate.
This comment prompted one person to note that Greece had been allowed into the euro because it was the cradle of Western democracy, but today’s Greece shared little with that nation. He felt it had clearly been a mistake to let the country into the euro.
Another representative said that, regardless of what happens in the short term, Greece should ultimately leave the eurozone, devalue its currency, and rebuild its economy to restore competitiveness.
As I say, four issues:
Q: Who pays for the fact that German banks lent money to Greek politicians who did not have a mandate to impose the future taxes needed to pay the money back? A: German banks and taxpayers.
Q: How is Greece to balance its taxes and government spending going forward? A: That's the Greeks' business.
Q: How is Greece going to balance its imports and exports going forward? A: Three possibilities: (i) continued depression, keeping Greece so poor they don't want to buy any imports; (ii) higher inflation in Germany so that Greek relative costs can gradually decline over time coupled with substantial aid from Germany to keep the costs of internal adjustment bearable; (iii) exit from the eurozone, default, devaluation, and the subsequent export boom.
Q: What happens if Greece chooses option (iii)? A: Germany faces the same dilemma then as it does now, only with Italy, Portugal, and Spain rather than Greece, and at ten times the size.
Sensible German politicians would choose option (3.ii). Senseless German politicians would try to push for option (3.i) and might well wind up with option (3.iii).
