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The Tyranny of Greece Over Germany

If Greece is driven out of the euro, it will be because Brussels and Frankfurt have chosen to hold the Greek banking system hostage.

No, I haven’t lost my mind. That headline is the title of a classic book by Eliza Marian Butler, which argues that German culture was warped by an obsession with ancient Greece, which has nothing at all to do with the current problems of macroeconomic policy.

But the book’s title came to mind when I read the economist Simon Wren-Lewis’s meditation on two different hypotheses for the disastrous turn to austerity in 2010. One hypothesis, as he writes, is that it was just bad luck: Greece blew up at the end of 2009, and false analogies between Greece’s economic problems and those in other countries soon dominated the policy debate; you can call this Hellenization of discourse the tyranny of Greece not so much over Germany, but over the Organization for Economic Cooperation and Development as a whole.

The other hypothesis is that Greece was simply a useful tool for people who would have turned policy in the wrong direction anyway. If Greece’s economic troubles hadn’t happened, these people would have found other excuses. Consider, if you will, the fact that Nick Clegg, Britain’s deputy prime minister, recently declared in a column in The Telegraph that recent events in Greece are an argument for austerity policies.

I mostly agree with the second hypothesis, not just for the reasons that Mr. Wren-Lewis mentions, but because of what I was hearing in the fall of 2009, pre-Greece – namely, that even within the Obama administration, and despite very low borrowing costs, many officials had managed to convince themselves and each other that the United States’ fiscal position was fragile. Others were hearing the same thing.

Greece certainly made this sell easier. But the determination to obsess over the deficit in the face of mass unemployment ran deep.

Internal Devaluation in Greece

One point that seems relevant to discussions about Grexit (a Greek exit from the euro): At this point it’s not clear that Greece needs a big boost in competitiveness. “Internal devaluation” via falling wages is incredibly costly – but Greece has already been paying incredible costs, and has achieved a sharp fall in relative wages.

Why, then, might an exit from the euro happen? The main answer would be the Greek banks, which are dependent on the availability of a lender of last resort – a role that the Greek government can’t play, because it doesn’t own the currency.

What this means is that if Greece is driven out of the euro, it will be because Brussels and Frankfurt have, in effect, chosen to hold the Greek banking system hostage, and Greece has declined to pay the ransom. Kind of a different perspective, isn’t it?