A New Versailles Treaty Haunts Europe. (And this time it is not just me thinking so…)

Last May, when the ‘rescue’ package was imposed by the EU and the IMF on Greece, all commentators were talking of a ‘bail out’ for Greece, differing only on whether it was deserved or not. A minority protested that the supposed rescue was bad for Greece, in that it came with some many strings attached (the crippling price of massive austerity above all) which rendered it not a rescue but, rather, a form of cruel and unusual punishment. It was at that same juncture that I put forward a different kind of argument in an article entitled A New Versailles Haunts Europe (see below for the full text of that article). Not only was the EU-IMF ‘rescue’ plan bad for Greece but, even worse, it was bad for Germany. That it was akin to the Versailles Treaty that the Great War’s victors had imposed in 1920 upon the defeated Germany. Back in May, that analogy of mine was deemed somewhat eccentric. Now Handelsblatt,  Germany’s leading financial newspaper, says exactly the same thing.

The gist of the Versailles Treaty was not so much that it punished Germany and caused Germans untold collective pain but that, in the end, it was an own goal; a terrible deal even for the victors; an own goal that John Maynard Keynes had anticipated and the rest of world came to recognise when it was too late, in the 1930s. My conclusion was thus: …turning countries like Greece into sundrenched wastelands, and forcing the rest of the Eurozone into an even faster debt-deflationary downward spiral, is a most efficient way of undermining Germany’s own economy. Assuming, for argument’s sake, that Greece is getting its just deserts, do the hard working Germans deserve a political elite that quickmarches them straight into economic catastrophe?

So, when the other day (19/11/2010) Handelsblatt,  Germany’s leading financial newspaper, splashed on its front page an article entitled Versailles Without War (a critique of Mrs Merkel’s policy to debt-stricken countries like Greece), I was elated. For if it took only six short months for Handelsblatt to come around to the viewpoint in my May www.re-public.gr article (that the asphyxiation of indebted countries is a boomerang that will traumatise Germany) perhaps it will not be too long before the European powers-that-be come around to our modest proposal for a collective, pan-European escape from the crisis. The rays of hope always appear when least expected: at the night’s darkest moment.

For the full text of my original article (published in 2010 in a now-defunct e’journal, by the name re-public.gr), read on:

Yanis Varoufakis – A New Versailles haunts Europe or Furiosa Teutonicorum insania1


 
 Yanis Varoufakis argues that the EU-ECB-IMF financial support package constitutes punishment for Greece. With the exorbitant interest rates that it charges, and given its steadfast resistance to any renegotiation of Greece’s existing debt, it pushes Greece further into insolvency. Just like a cruel doctor administering enough medicine to keep the patient alive for a while longer so that she keeps suffering more excruciating pain, but not enough medicine to prevent her from shuffling off the mortal coil, so too the EU-ECB-IMF package, as it stands, only prolongs the Greek state’s agony without preventing the inevitable bankruptcy.

1. Personal virtue, Greek transgressions and the legacy of Versailles

Germans see Greeks as insufferable spendthrift over-reachers. Hard working, well drilled, innovative, technologically advanced, and with a history of substantial belt-tightening when their country faced a serious decline in its products’ competitiveness,[2] the German people are now furious that a small nation’s profligacy should shake violently the very foundations of that to which they have invested their collective post-war energies: the stability of their currency.

Their wrath is all the more understandable when placed in an historical context. When the German nation surrendered after the Great War, the allies exacted their pound of flesh from its collective body. No mercy, no compunction, no magnanimity for the vanquished. The Versailles Treaty imposed heavy reparations on the already defeated and decimated nation and let its people fend for themselves, after the nation’s wealth was stripped by the victors.

While the rest of the developed world was re-joining the Gold Standard, the single currency of that era, Germany was forced to stay outside (since it had no gold left after its ignominious defeat) and print its own money. Starved of investment, and forced to pay reparations between 2% and 3% annually to the victors, its currency began inexorably to devalue. The result was a hyper-inflation that wiped out the German middle class’ hard earned savings and paved the ground for the Nazi takeover, which followed after the shockwaves of 1929 had reached the already devastated country. The rest, as they say, is history.

Since then Germany has resolved, almost in one voice, never to allow a similar decent to a destitution caused by a currency collapse. While happy to contribute heftily to the European Union’s budget, and to pick up large bills whenever some European project demanded it, the one thing they will not fathom is any violation of the austere set of monetary policies which kept their DeutschMark strong and which was meant to be carried over to the new pan-European DK, the euro.

Last September, after the newly elected Athens government announced that Greece’s deficit was double what the previous government was reporting, Germans pinched themselves. For they could not believe that even a southern European state can engage in such a game of subterfuge. A few months later, when the money markets ganged up against Greek bonds, many Germans felt that the Greeks had got their comeuppance.

Retribution was the order of the day, especially in the mindset of a nation that, over the past century, has accepted its collective punishment gracefully and managed to rise out of the mire through sheer hard work and extensive reform. Greece should to pay for its sins too. For Germans, the cost of saving the Greek state from the clutches of the money markets was not the issue. The issue was that Greece should suffer a deserved punishment for putting at risk a club which gallantly bent the rules to have it admitted as its member. And when the said club is the one issuing the currency in which the German people trade, save and take collective pride, that punishment took on the significance of a crucial bonding ritual.

2. The true legacy of Versailles

The problem with moral outrage is that it is rarely a sound basis for economic policy. Personal virtue is important but it is an unsafe guide for dealing with a crisis and a poor historian of its causes. A good example is the aforementioned 1919 Versailles Treaty which condemned Germany to years of reparations. At the time, the victors felt morally justified to impose heavy penalties on a country that had started the most murderous war hitherto.

But was it wise? No, it was not. John Maynard Keynes, who was later to shine important light on capitalism’ capacity to stumble, fall and then find it impossible to get to its feet unaided, was at Versailles while the Treaty was being hammered out. Upon his return to Cambridge he collected his thoughts on the matter and came to a gloomy conclusion.

In short, Keynes suggested that the victors had imposed a Treaty upon the losers that was not just pitiless toward them but that it was self-defeating from the perspective of the victors as well. In that sense, retribution was exacted at a price that the victors miscalculated; a price that was just as steep for the punished as it was for the punishers. And by golly was Keynes right!

The reparations proved insufficient to mend the finances of France and Britain but perfectly adequate for draining the German economy of life and, thus, creating the circumstances for the hyper-inflation that softened its society up for Hitler’s meteoric rise.

After 1929, and the momentous crash on Wall Street that was to spread like a disease in the form of the Great Depression everywhere, the countries that enjoyed low inflation during the 1920s courtesy of the Gold Standard suddenly realised that, in deflationary times, a common currency is like a ball in chain attached to the sinking person’s leg. Unable to coordinate economic policies, they started jumping ship, one after the other; abandoning the single currency (the Gold Standard) and embarking upon a deflationary war of all against all.

The immediate causes of the world financial panic — for that is what it is — are obvious. They are to be found in a catastrophic fall in the money value, not only of commodities, but of practically every kind of asset… Debtors of all kinds find that their securities are no longer the equal of their debts… Few governments still have revenues sufficient to cover the fixed money charges for which they have made themselves liable. Moreover, a collapse of this kind feeds on itself. [3]

The result of all this inability to come to terms with a simple truth, namely that forcing the deficit countries to deflate was a plague on the house of the (until then) surplus countries, was wholesale poverty for everyone and a real war that humanity has since been trying to put behind it. In Keynes’ words:

…the insincere acceptance … of impossible conditions which it was not intended to carry out [made] Germany almost as guilty to accept what she could not fulfil as the Allies to impose what they were not entitled to exact.[4]

If Versailles teaches us anything it is that the strong do not always impose upon the defeated a Treaty that is in their own interests. Sometimes they get carried away by their urge to punish, flex their muscles a little too energetically, and in so doing end up punishing themselves. This is my fear for the recent financial package that was imposed by the European Union and the International Monetary Fund upon another defeated country: Greece.

3. A New Versailles is born

Keynes wrote the following in the introduction to his 1920 book on the consequences of theVersailles Treaty: 

Moved by insane delusion and reckless self-regard, the Greek people overturned the foundations on which we all lived and built. But the spokesmen of the European Union have run the risk of completing the ruin, which Greece began, by a financial assistance package which, if it is carried into effect, must impair yet further, when it might have restored, the delicate, complicated organisation, already shaken and broken by the 2008 crisis, through which alone the European peoples can employ themselves and live.[5]

These are, of course, not exactly Keynes’ words. But they are not far off! All I did was to replace some of his worlds with the ones appearing in bold above. Indeed, Keynes might have just as well been writing about the Greek fiscal calamity and the IMF-EU-ECB package that was, effectively, imposed upon the bankrupt Greek state.

My claim here is simple: The EU-ECB-IMF package is a most peculiar sort of punishment. Indeed, it is an irrational sentence both because:

(a) it constitutes a cruel and unusual punishment and 
(b) it is bound to hurt the punishers disproportionately more compared to a fairer punishment for Greece.[6] Ironically, from this perspective, it is not very dissimilar to the original Versailles Treaty!

Why do I claim that the EU-ECB-IMF package constitutes punishment, when all it reportedly does is to save Greece from bankruptcy? Because, I suggest, it does no such thing. With the exorbitant interest rates that it charges, and given its steadfast resistance to any renegotiation of Greece’s existing debt, it pushes Greece further into insolvency. Just like a cruel doctor administering enough medicine to keep the patient alive for a while longer so that she keeps suffering more excruciating pain, but not enough medicine to prevent her from shuffling off the mortal coil, so too the EU-ECB-IMF package, as it stands, only prolongs the Greek state’s agony without preventing the inevitable bankruptcy. And when the bankruptcy comes, it will come at a time of a smaller national income and a higher overall debt level. It is not, therefore, unreasonable to describe this package as a punishment that is as cruel as it is unusual.

Be that as it may, why do I also argue that the EU-ECB-IMF package is self defeating for surplus countries like Germany who provide the additional loans? The answer is simple: After the Crash of 2008, Germany sailed into uncharted stormy waters. For the first time in thirty years, its surplus is not being sucked up by the United States’ trade deficit. Until 2008, the German miracle was built not only on typical German hard work and fiscal responsibility but also on the gross fiscal ‘irresponsibility’ of the United States that run deficits large enough to absorb the industrial production of the great nations of Europe and Asia. Now, we need new sources of fiscal ‘irresponsibility; so that Siemens, BMW and the rest of Germany’s gleaming industrial giants can find buyers.

In this context, turning countries like Greece into sundrenched wastelands, and forcing the rest of the Eurozone into an even faster debt-deflationary downward spiral, is a most efficient way of undermining Germany’s own economy. Assuming, for argument’s sake, that Greece is getting its just deserts, do the hard working Germans deserve a political elite that quickmarches them straight into economic catastrophe?

I do not believe they do. But it has happened before and it may happen again. To quote Keynes’ 1920 book on the Versailles Treaty one last time:

Perhaps it is historically true that no order of society ever perishes save by its own hand.[7]


Notes

[1] – Translated into “The Germans’ raving lunacy”. See E. F. Heckscher, Mercantilism, Revised [2nd] ed. London: Allen & Unwin, 1962 at vol. 1, p. 56

[2] – Following re-unification in the mid-1990s and then again in 2002 onwards.

[3] – John Maynard Keynes (1932). ‘The World’s Economic Outlook’, The Atlantic Monthly.

[4] – “Dr. Melchior: A Defeated Enemy” in Two Memoirs (1949), as reprinted in Collected Writings, Vol. X: Essays in Biography, at p. 428.

[5] – I have replaced ‘Greek’ for German; ‘European’ for French and British; ‘Greece’ for German; ‘financial assistance package’ for Peace; ‘the 2008 crisis’ for war. See the ‘Introduction’ to John Maynard Keynes’. The Economic Consequences of the Peace, Harcourt Brace New York, 1920.

[6] – E.g. letting Greece default and allowing the ECB to bail out the banks (Greek, French and German).

[7] – Chapter VI, p.238, The Economic Consequences of the Peace, Harcourt Brace New York, 1920.

4 thoughts on “A New Versailles Treaty Haunts Europe. (And this time it is not just me thinking so…)

  1. Pingback: Crush the Greeks! | The Corner

  2. Pingback: Immobilier in the News « The Rogue Couch

  3. The people who are running Greece are one and the same as those who put Kolokotronis (Greek “George Washington” during the Revolution in 1821) in jail in 1830 because they marked him a dangerous revolutionary. This hero’s only fault was that he did not want European involvement in the affairs of Greece at the time. The European Union was meant to be a platform for economic cooperation between states – not a monetary union or an open border situation as it is now. “Progress” in infrastructure – at what price? We have the Rion-AntiRion Bridge now, so what! We can’t pay the tolls to go across it because Greeks have lost their jobs! Rich politicians and their businessmen cronies have drained the country dry of any available funds and they could care less what happens to Greece. Their money is in offshore accounts and they will retire to their properties in London, Switzerland, or the States if the country collapses. They are like the Tsiflikades (landed gentry) and Priests in 1821 who hoped the revolution would fail as they believed the Turks offered them more security than the revolutionaries.

    Greece needs to return to its own currency so, after total default like Russia and Argentina, it can print what it needs to pay off future debts – as do countries like the States and Britain. Illegal immigrants will immediately leave as they will not have “hard currency” to send home. Major drug dealers will stop targeting Greece as they too will not relish the thought of being paid in Drachmas for their “hard work” importing drugs. Dismantling the country because the Papandreou clan and their cronies filled their coffers in Switzerland with EU and tax-bribe money is not the answer. They have done enough harm to the country already by gutting public schools and national health and sending pension funds to the Cayman Islands. Bankers, politicians, and businessmen stole Europe’s money along with their counterparts abroad.

    Look at Turkey — it fortunately was not allowed in the euro and it has become the “China of the Middle East”. Factories have flocked there because of its cheap labor and it is a Holiday Paradise because of the low cost of its services. They still care for their elderly as the Greeks once did and now most people have work to show for not joining the Euro. It was the simplicity and hospitality that was Greece that was magic for so many holiday makers – not the infrastructure that was missing. It was also the caring of her people for the elderly, the ill, and the helpless. We have the Euro and infrastructure now, but we also have homelessness, heroine, and hell. Give me no infrastructure if all the above is what you call progress!

    At least with the Drachma corruption affected only Greece — now it affects the rest of the world. While all the political parties in Greece have a share in the current situation, the Papandreou clan did the biggest damage. With the slave trade in Eastern Block women, extreme nepotism, illegal immigration, homelessness, public-school destruction, tax evasion, and drugs, this family has been the caretaker of destroying the Greek people’s values and Greece itself. A return to “soft currency” would see a disappearance of the above as Drachmas cannot leave Greece as easily as Euros.

    The European Banks and the IMF want to tax the life out of what is left of Greece instead of taking their businessmen cronies in Athens to court and jailing them until they come up with the money in those offshore accounts. They do not care that some of the best doctors like Papanikolao and architects like Doxiades had come out of the Greek school system that was totally gutted by PASOK for political expedience. They do not care that Greece is the cradle of Democracy, Philosophy, Mathematics, and on and on. They do not care that Greece was the first Allied victory against the Axis in WWII. They want their money from the people of Greece who are struggling to find jobs, pay rent, and live off a dwindling retirement.

    In the past there were Philhellenes and statesmen like Venizelos (Statesman in 1925) who helped Greece, now only default and the Drachma will save her after what the banking system and the Papandreou’s have done to disgrace Greece. Every Greek is to blame for having allowed the corruption to go on believing they had meson (pull), but this system worked for Greece with the Drachma. It does not work for the Euro, and austerity brings only breadlines now.

  4. Pingback: EURO CRISIS « Greek Left Review

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