Could the "Credit Crunch" be worse for Europe than America?

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 the previous government.

Even before the “transition” to change has started there are problems, for example the civil servants responsible for collecting taxes went on strike.

Everyone agrees that one of the problems in Greece is that so few people pay any tax, particularly the millionaires; only a bureaucrat could come up with a plan to solve that problem by cutting the salaries and benefits of the tax inspectors!

Here’s an idea, keep the basic the same, and put them on a bonus scheme, it worked for bankers, why not tax-inspectors? There are two ways to solve any cash flow crisis, (a) spend less, or (b) earn more – unfortunately accountants are hard-wired to think that the only way is to spend less.

What’s ominous is that although the signs were there for a long time, the whole thing was politely kept under the carpet, until there was a “big surprise”. The dynamics reminds me of the way the credit crunch unfolded, like in slow motion.

• 2006: ` Everything is wonderful
• 2007: A little blip but easily contained.
• 2008 July: “The US Banking System is Safe and Sound”.
• 2008 September: PANIC stations.

The amount of money that European Banks are exposed to the PIIGS is more than the amount of money that U.S. banks were exposed to on toxic assets, and how is it that the word “Credit Default Swap” always comes up in the conversation?

The background for the Credit Crunch and the “Euro Crunch” are alarmingly similar, in U.S.A. the core idea was to use the financial muscle of the state to help poor people in America own their own homes (although I have yet to understand how doubling the price was helpful, perhaps one day someone will explain that to me). The logic was that America was Big and Powerful and that was a “Just War”.

The story in Greece and the other PIIGS was that the all powerful European Union and its brand newly invented fiat currency that had checks and balances built in to stop governments cheating, (which is ultimately what destroys all fiat currencies), would be almost as good as a gold standard.

And thanks to that the great and Powerful EU could afford to help the less fortunate members by loaning them money, it was Big enough and powerful enough to do that.

Well now is the time to find out how big and powerful the EU and the Euro really is, bearing in mind that even with all the great designs and checks and balances, governments always find a way to cheat.

And particularly in a democracy where the incumbent has a hand dealt to him of “heads I win and tails you lose”, so he overspends to keep the electorate happy, so he get’s voted in next time; and well if that doesn’t work, the next guy has to bite the bullet and cut spending, so the spendthrift get’s elected the next-time after that.

The only way invented so far to stop politicians doing dumb, self-serving things like that is to put a woman in charge. Like Margaret Thatcher, and nowadays Angela Merkel, and the fact she’s in the seat is about the only good news that’s going in Europe these days.

Perhaps there’s hope for Sarah Palin after all?

Disclosure: No positions