The circumstances of 1920-1923, when hyperinflation exploded in Germany, are eerily similar to the circumstances that Greece finds itself in today. Then Germany was facing the burden of complying with the terms of reparations imposed under the Treaty of Versailles which drained it of its reserves of gold and cause a huge current account deficit. And guess what? They cheated.
Now Greece is burdened with the onerous terms imposed by the EMU which turned out to be a self inflicted wound (just as the Treaty of Versailles to Germany). On top of that, locked into the Euro it has run an increasingly serious current account deficit, since it is unable to devalue its currency. And guess what? They cheated.
Back-then the government of Germany was weak and frightened of its public sector workers who were disposed to strike, and riot. So it gave into them and paid their unaffordable wages and benefits; ditto Greece today.
Then fiscal discipline collapsed in Germany and foreigners shorted the currency; now the foreigners are shorting Greece’s debt.
Then the option for Germany’s neighbours was to come in and help, and relent on their demands, or if not to stand back and watch the country implode. Either way they were going to be losers, in the event they chose the “implosion” option which helped nudge Germany towards the Second World War.
And for Greece; now what?
The burden is on Germany and France to sort something out, if they allow Greece to default that risks the dangers of a domino effect that might spread into Portugal, then on to Spain, Ireland and Italy. And that will solve nothing because the banks in Germany, France, Netherlands and U.K. who hold the debt will need to be either allowed to fail, or be bailed out, and of course the dream of the Euro as the “gold-standard-fiat currency” will be shattered.
Yet the EU has no power to force the population of Greece to accept the pain that their own elected governments have been unable or unwilling to impose.
It’s easy to take a 12.7% budget deficit and a huge current account deficit, draw a line through those numbers and suggest a target of half. But if the democratically elected government cannot do that, one wonders what chance do the bureaucrats from Brussels have, given they were so expertly suckered by…
