One of my favourite books ever is John Lanchester’s first novel “The Debt to Pleasure”, published some 15 years ago.  John Banville reviewed it in the Guardian (here).  I have it on my list to re-read it, as I am curious as to whether it will stand up well to the passage of time.  I have also read and enjoyed a number of Nabokov books since, and Banville says that Lanchester’s style is “uncomfortably close to late Nabokov, at once brilliant and unfocused, and glutted on its own richness, but of course, this is part of the joke”.  So perhaps I will be disappointed.

Anyway, Lanchester has recently published a book about the financial crisis, called Whoops!, which I haven’t read but which got pretty good reviews (particularly from non-financial reviewers).  Lanchester writes that “I’ve been following the economic crisis for two years now.  I began working on the subject as part of the background to a novel, and soon realized that I had stumbled across the most interesting story I’ve ever found.”

I followed a Twitter link the other day to an article by Lanchester in the London Review of Books, where Lanchester is a contributing editor.  The article, covering the Greek financial mess, the Euro, German attitudes and more, is worth reading.  Here’s a short extract:

From the worm’s-eye perspective which most of us inhabit, the general feeling about this new turn in the economic crisis is one of bewilderment. I’ve encountered this in Iceland and in Ireland and in the UK: a sense of alienation and incomprehension and done-unto-ness. People feel they have very little economic or political agency, very little control over their own lives; during the boom times, nobody told them this was an unsustainable bubble until it was already too late. The Greek people are furious to be told by their deputy prime minister that ‘we ate the money together’; they just don’t agree with that analysis. In the world of money, people are privately outraged by the general unwillingness of electorates to accept the blame for the state they are in. But the general public, it turns out, had very little understanding of the economic mechanisms which were, without their knowing it, ruling their lives. They didn’t vote for the system, and no one explained the system to them, and in any case the rule is that while things are on the way up, no one votes for Cassandra, so no one in public life plays the Cassandra role.

The last sentence is so sadly true.  We needed more Cassandras in Ireland from 2002 to 2005 (after that it was too late anyway).  Voters everywhere, but particularly in Ireland, are not interested in deferred gratification.  As they say, democ­racy is the worst form of gov­ern­ment ……… except for all the oth­ers.

OK, so I’m not a professional economist, or a qualified lawyer, but fools rush in …..

Firstly, do the EU Treaties, and Article 125 in particular, really prevent a bailout of Greece, as we see/hear said frequently?  I don’t think so, but it depends what you mean by bailout.

Article 125 of the TFEU (post-Lisbon Treaty) states: “The Union shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume …… etc etc”.

So, despite what some commentators have said, there is no prohibition on lending money to Greece; what can’t happen is for the EU or any Member State to take over its loans, or give it “free money”  And I would think that, as long as the interest rate charged is not unreasonably low, there would be no problem.

Secondly, almost regardless of what interest rate the Eurozone members charge Greece , I expect to see a challenge brought in the German Constitutional Court to the German participation in the loan facility.  I have already commented on that Court’s robust attitude to all EU matters, and the way it jealously guards what it considers is its ultimate right to decide if Union activities are ultra viressee this post

In a famous case in 1993, a Eurosceptic member of the FDP Liberal party took the Maastricht treaty to the German Constitutional Court in Karlsruhe, claiming that the abolition of the deutsche mark (as part of the creation of the Euro)  was unconstitutional. The court only agreed to permit the ratification of the treaty by Germany on the basis that currency stability would be as well protected by the European Central Bank as it had been by the Bundesbank.  There has, in effect, been a threat hanging over the ECB and the Eurosystem that at any time the good judges in Karlsruhe might seek to trump their actions; this would bring to a head the unresolved issue (at least in the minds of the German judges) as to who, in law, gets to make the final determination as to whether an action of the EU is ultra vires, and goes beyond the legal authority conferred by Member States in the various EU treaties.

Thirdly, a question: why is the Euro being hit so badly by the fiscal woes of Greece and other delinquent states, when the value of the dollar is apparently not affected by the budget deficit and debt problems being experienced by (for instance) California?

Fourthly, if Greece defaults (and some observers believe this is very likely), might the resulting grief suffered by that country’s citizens be a help to the Irish government in its battle with our public service unions?  Maybe Greece needs to be the sacrificial victim, pour encourager les autres?

There is now a prospect of Germany and other Euro members co-ordinating a bailout of Greece’s finances, supposedly to support (rescue?) the Euro.  I wonder if this is an example of political pride get in the way of sound political economy.

I didn’t see the US Federal Government, much less individual US states, stepping in to bail out California’s finances after they got into a mess.  Where was all the talk about intervention being needed in California so as to protect the US Dollar?

So why not let events take their course in the Eurozone?  Eventually, the cost to Greece of raising new debt would become sufficiently high that it would be forced by the market into massive expenditure cuts, just like California. The standard of living in Greece would fall to what is justified by their national output. Just think West Virginia.

I don’t think German taxpayers should permanently subsidise the standard of living of badly-managed Eurozone countries, at least not to any great extent.

If you say to me that expenditure cuts couldn’t happen in Greece because there would be civil unrest and political collapse, then I suggest that it would be better if Greece were not in the Euro zone in the first place.

I don’t think the above is special to Greece, by the way – it applies to any PIGS member. (Is Ireland still a PIGS member?)

There was an interesting comment piece in the Financial Times  a few days ago called “Why Greece will have to leave the Eurozone”.  The writer was Desmond Lachman who is a Resident Fellow at the American Enterprise Institute.  The AEI is conservative think-tank, whose Board of Trustees is graced by the presence of Dick Cheney, amongst others.

As a commentator, Mr Lachman doesn’t appear to be a loose cannon or a right-wing nutcase.  He is a former managing director and economic strategist at Salomon Smith Barney and also served as deputy director in the IMF’s Policy Development and Review Department.  And the FT is hardly a fringe publication.

The thrust of Mr Lachman’s article is set out in the first paragraph, Read the rest of this entry »