Drachmatis Personae: Angela vs Bob

In my second Silicon Valley job 30 years ago, I launched the engineering department of a start-up PC company years before IBM rolled out the PC or Apple the Macintosh. ACS was run by the most plausible Southern good-ole-boy salesman you could ever want to meet. Bob could talk the hind legs off a donkey. He so inspired me, it took a year for me to realise that hardware, operating system and applications could all be invented by a staff of six—but they couldn’t also be developed into reliably bombproof products.

As red figures ate through the $1m in venture capital Bob had bamboozled out of Xerox, Bob and I had a heart-to-heart. “We have a problem, Bob” I confessed. “Our actual income can’t justify keeping this scale of development.” Bob disagreed and shared a little of his genius with me. “You’re off by a country mile, Dave,” he beamed. “If I owe $5k, yes I have a problem. But, since they’re into us for over $1m, it becomes Xerox’s problem.”

These thoughts came back after the non-event G8 summit in Washington was followed by a NATO summit in ‘da Windy City’. Both produced similarly vacuous statements over withdrawal from Afghanistan and taking the air out of the fiscal panic (a.k.a. ‘Eurocrisis’) over Greece. Both issues have headlined around the globe for years to the point of boredom with most folk. But while a simple solution exists for one (just bale out), resolution of the Eurocrisis lies much more in the ‘rock-and-a-hard-place’ category.

Much though I disagree with former Chancellor Alastair Darling on policy, his refreshing frankness on Sunday’s Andrew Marr show was an overdue lesson in clarity; Europe has had four years to learn from the banking crisis that struck in 2007; they appear not to have done so. As a consequence, continued dithering means the bigger the crash is likely to be once enough people agree that the Euremperor still has no clothes.

In the course of the noughties, our banks forgot their main role of financing business and devoted much time and money in speculation—either within themselves or in a variety of questionable ‘instruments’, among which were accidents-waiting-to-happen like junk bond packages and treasury bonds from places like Greece.

Unfortunately, few leaders are showing rigour equivalent to Mr Darling’s candour. But as one of them is Angela Merkel—this may be the only reason Europe’s entire fiscal structure is not disintegrating around our collective ears. Yet. Just as Darling & Brown baled out British banks with almost £1tn in loans, so the Germans have shored up overextended European banks’ imprudent willingness to buy up government debt—not just in from Greece but in other overheated economies across the Mediterranean.

Almost everyone is pressuring Angela to budge on a little more generosity towards Greece. She’s having none of it and she’s right. Though it is hard to find politicians anywhere who agree with her, that has more to do with the toxicity of the situation than with any flaw in her fiscal thinking. M. Hollande, the new French President talks austerity but walks a softer line than Sarkozy did. Spain’s Treasury Minister, Inigo Fernandez de Mesa is similar, arguing for Greece to be accommodated and denying that Spanish banks are in imminent need of any bail-out (although the Torygraph begs to differ and shares in Bankia, Santander, etc plunged 20% at the end of last week.)

The origins of all this lie in incompatible ambitions for the EU among its members. Skeptical as Britain always was, the EU’s French/German heart of 20 years ago beat faster as a huge boost in members from communism’s collapse and German re-unification  made anything seem possible. The dream of a single trading bloc of 350m using one single currency beckoned. For public (especially German public) consumption, criteria for euro membership were portrayed as strict. But Italy only qualified because no-one could imagine any euro without them. Greece didn’t qualify but was let in anyway. The boom of the noughties raised all boats, meaning shortcomings and stresses could be papered over.

In Britain, Irn Broon steadily sold off the UK silver by raiding the pension funds, selling off the gold reserves, syphoning burgeoning tax receipts off to pay for social programmes—in short, living beyond our means. On the Continent, the same: banks bought euro-denominated lucrative Greek (and Spanish, etc) debt, which the Greeks used to fund pay rises and pensions they couldn’t afford. In both places, politicians pretended their short-term vision would suffice, secretly aware that, some time later (hopefully, much later) someone else would reap the whirlwind they had sown.

Comeuppance came earlier than any predicted. The worthlessness of many bank-created ‘instruments’ brought down both creators and customers in 2007-8. The rot was only stopped by countries printing money that had no backing to lubricate the otherwise creaking global fiscal machine as banks and business ran for cover, calling in loans and snapping shut any cash outlay in sight. As a short-term expedient, it worked. But as a long-term solution, it has flaws, not least when faced with the ‘Bob’ philosophy.

Whereas most countries pulled on sackcloth and ashes and skidded into sullen austerity, such was the omnipotence of the ‘Masters of the Universe’ of Canary Wharf and their ilk who, ever since the 1988 ‘big bang’ in the City, have been feverishly inventing a slew of financial derivatives and hedge strategies, that their personal money machines kept them ‘earning’ six- and seven-figure bonuses, even as the financial institutions they served (and the punters who invested their life savings in them) took a serious hammering.

The defiance of fiscal gravity by bank directors and traders was not lost on a public now hit by collapsed jobs, pensions, house prices and salaries. But, worse, it convinced the public in places like Greece that defiance and chutzpah could sustain their bloated salaries and pensions, despite their country alone being palpably deficient in means to sustain them. Given that they were eurozone members, they could afford wages & benefits over the odds because their neighbours could not let the euro fail.

As a international version of Bob’s scenario, it is entirely plausible. And, as long as Greece lacks the political will to change as they are being asked to do, the problem is not really theirs: it is indeed the eurozone’s. Having failed to keep the nerve prior to their April elections, their inability to form any government means that the June 11th elections will be equally inconclusive, leading to a summer of uncertainty. While others sweat, they’ll just keep getting overpaid and hoping for the best.

And, rather than being supported to hold the line on Greek (and anyone else’s) austerity, Angela is under new pressure from Hollande in France (to show something from his new presidency) from Obama in the US (to avoid frightening American horses prior to his own election in November) and even her own unions, who have just secured an austerity-busting 4.8% wage rise.

Forget that Greece should never have been let into the Euro in the first place, ejecting it now would mean an instant default on all its loans and Treasury notes. This, in turn, would mean serious deficits at banks who had made (and perversely continue to make) those loans. In other words, the banks, far from learning from the ludicrous over-stretch of four years ago, have hardly changed their ways. Since virtually none of their boards were hung by their thumbs for their earlier behaviour, this is no surprise. It seems a couple more failures are needed for them to finally relearn their banking business.

But it means that the combined pressure on Merkel of eurozone solidity and further bank runs guarantees that Greece can brazen it out indefinitely—or at least until the entire euro economy falters from pouring all its cash into the likes of inefficient Greece when it should have been tooling up to meet insatiable demands of the new Chinese consumer.

At that point, when the bulk of European business has been crippled, the Greeks will simply revert to the drachma, suffer a couple of years of austerity not much worse than they are baulking at now—and then quietly prosper as their devalued drachma brings in tourists by the million. But not as many, nor as rich tourists as if their Bob-style bluff were to fail, Angela were to prevail and Greece were unceremoniously booted out of the euro right now. It would be short-term pain for long-term gain.

But who’d dare take centre stage to force such a tragedy?

About davidsberry

Local councillor, tour guide and database designer. Keen on wildlife, history, boats and music. Stood for the Scottish Parliament 2011; lost by 151 votes.
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