Nine People Who Saw the Greek Crisis Coming Years Before Everyone Else Did
Although the problems in Greece didn't begin making big headlines until 2009, a number of economists, politicians and professors spotted cracks in the European currency union as early as the 1990s. Meanwhile, it's interesting to note that the country had a tough time making it into the single currency in the first place. Greece failed to qualify for the euro in 1998 before being granted admission in 2001.
The iron lady vs iron EU.
Photographer: Jeff Overs/BBC News & Current Affairs via Getty Images
Here are some people who must have had crystal balls.
The British economist wrote about his own concerns in a 1992 article for the London Review of Books:
What happens if a whole country—a potential ‘region’ in a fully integrated community—suffers a structural setback? So long as it is a sovereign state, it can devalue its currency. It can then trade successfully at full employment provided its people accept the necessary cut in their real incomes. With an economic and monetary union, this recourse is obviously barred, and its prospect is grave indeed unless federal budgeting arrangements are made which fulfil a redistributive role. ... If a country or region has no power to devalue, and if it is not the beneficiary of a system of fiscal equalisation, then there is nothing to stop it suffering a process of cumulative and terminal decline leading, in the end, to emigration as the only alternative to poverty or starvation.
They will say that we are subsidizing scroungers, lounging in cafés on the Mediterranean beaches. Monetary union, in the end, will result in a gigantic blackmailing operation. When we Germans demand monetary discipline, other countries will blame their financial woes on that same discipline, and by extension, on us. More, they will perceive us as a kind of economic policeman. We risk once again becoming the most hated in Europe.
In an article for the Eastern Economic Journal, published in 1999, the economist discussed his concerns for the future of the euro currency:
Under the EMU, if investors are at all hesitant about any one member’s debt, they can buy another member’s debt without incurring currency risk, since there is no exchange rate variability among the currencies of member countries. Because member nations now are dependent on investors for funding their expenditure, failure to attract investors results in an inability to spend. Furthermore, should a member’s revenues fail to keep pace with expenditures due to an economic slowdown, investors will likely demand a budget that is balanced, most likely through spending cuts. In other words, market forces can demand pro-cyclical fiscal policy during a recession, compounding recessionary influences. … Even if there were no imposed limits on countries’ deficits and national debts, the structure of the EMU makes it nearly impossible for a country to enact a counter-cyclical fiscal policy even if there were the political will. This is because, by giving up their national monetary sovereignty, countries are no longer able to conduct coordinated fiscal and monetary policy, essential for a comprehensive and effective remedy to periodic demand crises. Why would countries voluntarily sacrifice the ability to conduct a coordinated macroeconomic policy, especially at a time when official unemployment rates are in double digits and there are clear deflationary pressures?
In a keynote address with the Bank of Canada in 2000, the Nobel laureate offered some cautious words when asked about the future of the euro.
I think the euro is in its honeymoon phase. I hope it succeeds, but I have very low expectations for it. I think that differences are going to accumulate among the various countries and that non-synchronous shocks are going to affect them.
In December, 2008, the former Greek Prime Minister mentioned the country's economic data in a speech to the country's parliament. It later emerged that Greece had flattered its debt profile through a series of deals.
"... Creditors are aware that statistical data presented by the Greek government have nothing to do with reality ... [Euro area member states believe that] Greece should be forced to apply to the International Monetary Fund for lending, so that the monitoring of the Greek economy becomes a responsibility of the fund, and not the European Commission'."
Countries that wish to compete for benchmark status, or to improve the terms on which they borrow, will have an incentive to reduce fiscal deficits or strive for budget surpluses. In countries where this becomes the overriding policy objective, we should not be surprised to find relatively little attention paid to the stabilization of output and employment. In contrast, countries that attempt to eschew the principles of “sound” finance may find that they are unable to run large, counter-cyclical deficits, as lenders refuse to provide sufficient credit on desirable terms. Until something is done to enable member states to avert these financial constraints (e.g. political union and the establishment of a federal [EU] budget or the establishment of a new lending institution, designed to aid member states in pursuing a broad set of policy objectives), the prospects for stabilization in the Eurozone appear grim.
According to her autobiography, back in 1990 the former Prime Minister of the United Kingdom warned that the single currency could not accommodate stronger and weaker economies. Here she is describing arguments with John Major about the topic:
We had arguments which might persuade both the Germans — who would be worried about the weakening of anti-inflation policies — and the poorer countries — who must be told that they would not be bailed out of the consequences of a single currency, which would therefore devastate their inefficient economies.
As early as 2001, this economist anticipated flaws in the euro zone because its political structure does not allow individual member nations to manage a financial crisis due to the currency union.
History and logic dictate that the credit sensitive euro-12 national governments and banking system will be tested. The market’s arrows will inflict an initially narrow liquidity crisis, which will immediately infect and rapidly arrest the entire euro payments system. Only the inevitable, currently prohibited, direct intervention of the ECB will be capable of performing the resurrection, and from the ashes of that fallen flaming star an immortal sovereign currency will no doubt emerge.
L. Randall Wray
This economist was critical of the structure of the euro zone in his 1998 book, Understanding Modern Money.
Under the EMU, monetary policy is supposed to be divorced from fiscal policy, with a great degree of monetary policy independence in order to focus on the primary objective of price stability. Fiscal policy, in turn will be tightly constrained by criteria which dictate maximum deficit-to-GDP and debt-to-deficit ratios. Most importantly, as Goodhart recognizes, this will be the world’s first modern experiment on a wide scale that would attempt to break the link between a government and its currency. ... As currently designed, the EMU will have a central bank (the ECB) but it will not have any fiscal branch. This would be much like a US which operated with a Fed, but with only individual state treasuries. It will be as if each EMU member country were to attempt to operate fiscal policy in a foreign currency; deficit spending will require borrowing in that foreign currency according to the dictates of private markets.
It remains to be seen whether the most recent deal agreed between Greece and its creditors can paper over the cracks.