Some Things are Predictable

Greece and the Eurozone

At the time of writing, it would appear that the EU and Greece have patched together some sort of a deal to keep the Greek economy afloat.

No real surprise there.

It’s a classic EU fudge of course and obviously temporary, but it allows both sides to back away without obviously backing down. We’ll be here again, no doubt about that.

The problem of course is that Greece is unable to operate as a member of the Euro.

It’s not the only member with difficulties of course, but it does appear to be the only one with no real chance of changing that situation.

 

This has been known for years!

The thing that needs to be remembered is that it was well known that Greece should not have been a member from the start, or at any stage.

This is not hindsight, it was known well in advance of the launch of the Euro.

Look at the diagram below. It’s taken from a report that was prepared by UBS in the mid-1990s. I don’t seem to have the full reference, if anyone does then let me know.

They looked at the potential EU members – there were only 15 at the time – that might join the Euro.

Greece and the EurozoneUBS did the analysis under 3 headings:

  • Countries that would qualify by meeting financial criteria – the ‘financial ins’;
  • Countries that would qualify because their economies were already well integrated through trade and other linkages – the ‘real economy ins’, and
  • Countries that would join because their political decision makers wanted them to – the ‘political ins’.

 

Eurozone Membership

The first two sets of criteria – the financial and real economy analysis – are both economic criteria.

Ideally, membership would be based on these criteria alone but the EU and the Euro is fundamentally a political system or arrangement that uses economic policies and arrangements to achieve its aims.

So who should be members of the Euro? Who became members? Who did not?

We can argue about the location of some countries – I would put Belgium into the ‘financial ins’ category for example.

What is clear is that membership was comprised of those countries with a political wish to be members. The only exception is Sweden and I don’t think Sweden was ever all that politically committed.

Look at the countries that were not in the economic categories but were politically in favour – Italy, Spain and Portugal.

Is anyone surprised that these countries had subsequent problems?

But look at who is a definite ‘not in’ on this analysis. Yes, it’s Greece.

They jumped into the ‘political ins’ group in the years following the UBS analysis and joined the Eurozone, but they never came close to joining the other circles.

 

So, Where to Now?

I emphasise again that this diagram is from the mid-1990s. It is not hindsight. This was all well known long before the Euro was formed.

There is an important conclusion to be drawn apart from the fact that Greek membership of the Euro was, and remains, an unworkable political decision.

Simply being a member of the Euro will not draw a country into the core economic area of the EU.

That had been a hope. It would help if much else was done, but it is detrimental otherwise.

The calculation so far is that a Greek exit would be too painful for the Euro and so it is to be avoided.

But the balances have shifted and more brinkmanship will change this calculation.

The Euro is a political arrangement and core politicians are not going to let it fall apart without a real fight.

Does the temporary deal give enough time for a disruptive but managed exit? Probably not.

Experience tells us that the EU has a huge capacity to operate on the basis of recurring temporary deals.

The only limits are that the deals do not obviously violate the Treaties and that the patience of negotiators is not exhausted.

On both cases we must be very close to capacity limits.


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