Treuhandanstalt for Greece – the first glimmer of a solution?

All the so-called ‘solutions’ for keeping Greece in the Eurozone have been targeted at the symptoms. Too much debt or not enough money; Greece spends more than it earns, so either cancel their debts or give them a load of money. That sort of thing works well enough to address the debt, but not the deficit.

Which is why Angela Merkel hates it. In there mind’s eye she sees Greece’s National Debt as some sort of nasty sawtooth function starting at 0 in 2001, dropping to -loadsamoney in 2011, injection of loadsamoney from someone probably Germany, rinse and repeat every 10 years.

Merkel's vision of Greece's finances. Nasty, eh? Each red oval is a injection of Someone Else's Cash

Meanwhile, over at FT Deutschland we have the Dutch finance minister de Jager snarling about the way club Med have taken over the ECB and the clowns are running the circus. You don’t need to speak German to understand the graphic showing the vicious circle (Teufelskreis). Basically the kitty is empty, the government goes to the IMF, IMF gives money with strings that include raising pension age, weakening employment protection etc, the voters go on the streets, kick the government out, new government forms, goes to IMF etc..

So de Jager wants to take the process out of the hands of the Greek government, by privatising the state organisations in a similar way to how West Germany bought out the East German state-owned organisations. He has to sell the money going to Greece to his own Dutch voters, insisting the money is only doled out via a Greek Treuhandanstalt.

It might be a solution. What needs to happen in Greece is for the rule of law to be broken – the contracts that established the absurdly low retirement age and overmanning would be annulled, just as the rules of the old East Germany were written off. There will be a lot of losers in that game.

Now you can’t impose that sort of thing from outside. But Greece will have an election in June, so a clear message ‘ we offer this solution, that has worked before, and the money to make it fix your problems’ together with the clear alternative ‘or you need to find a different way on your own’ is binary enough to be put to the vote.

The problems seems to be that the Greek constitution doesn’t work with the Eurozone – it can’t achieve enough productivity to have any hope of sorting the balance of payments. There’s not enough trust in the action of Government to get enough tax revenue to pay for what it does. Indeed, de Jager is most forthright about it –

Weite Teile der griechischen Wirtschaft sind nicht nur sozialistisch, sondern fast kommunistisch organisiert

Large parts of the Greek business are organised not so much along socialist lines, rather they almost organised along communist lines.

Before the Euro Greece could simply devalue to adjust. That’s the great thing about having your own currency – if you can’t be bothered to be productive, your currency will fall to make imports dearer to compensate, so your national lifestyle choice can be retained. Greece doesn’t have this luxury now, something has to change. Greece and Germany are outliers in Europe, and somehow thay have to become more alike. There are huge risks – a lot of what Greeks think of as rights and value will be written off.

Interestingly, there is a similarity between the Treuhandanstalt proposal for Greece and the analogy to the nascent USA drawn by Ray Dalio (hat tip to Monevator). At the moment Europe is a collection of countries each pursing their national self-interest. There is no executive tax-raising entity called Europe [1].

The early American states had many of the problems Europe has now, including trade imbalances and debt. This too took about a decade to show up, post Independence. What they did to resolve it was create the United States of America. Pretty wild, eh?

They had advantages over Eurozone Europeans, though.

  • no extensive history of fighting each other like rats in a sack
  • a single language
  • greater commonality of situation (all had recently become independent from Britain)
  • no common currency

East Germany compared to Greece

Although I see the Griechische Treuhandanstalt as a potential technical solution, I don’t think it will fly. East Germans shared a common pre-war history with West Germany, a common language and a common culture. There were obvious things wrong with their pre-unification existence in terms of material wealth and restrictions on movement. It’s interesting that even so, there was a lot of turmoil and discontent in the actions of the Treuhandanstalt, as things east Germans had taken for granted such as job security and some entitlements were wrecked in the upheaval and the shift to private enterprises from the old State run enterprises.

The West Germans weren’t all chuffed either. I recall my grandmother grouching about how her generation had rolled up their sleeves to rebuild Germany after the war and implement the Wirtschaftswunder (economic miracle of postware Germany under Adenauer) and now their pensions were being taxed another 1% to do the same for the East. The Hartz reforms of the early 20o0s in Germany reduced the level of unemployment benefits, and caused some public unrest.

The equivalent of the economic handouts to Greece was the acceptance of the OstMark at parity with the West German Deutschmark. The East German economy was a basket case and this vastly overvalued the Ostmark.

However, it would be churlish to say that the buying out of East Germany by the West has been anything other than a success

Let’s take a look at the comparison with Greece. Greeks have had a great time of the early 2000s, so all they see is loss in any move to a Griechische Treuhandanstalt. That’s the greatest problem – there’s no real upside. As Christine Lagarde said, it’s payback time for Greeks. That’s a hard sell, and voters are likely to flip the bird to such a suggestion, even if the alternative isn’t all milk and honey either.

So although it’s the first suggestion about the Greek crisis that might work at a fundamental level, I don’t expect to see Greeks to vote for a Greek THA. That’s the trouble with IMF tough love in a democracy, it’s not a vote winner. And herein lies the problem with democracy all round – it’s hard to get votes for tough  decisions. I’m still expecting a Grexit

[1]before UKIPpers jump in, if the British Government didn’t agree to the level of EU taxation it could secede which is not so much the case for say, Idaho.