Rich core to blame for Greek tragedy

This is my latest comment from Fund Strategy.

A key prejudice about the Greek crisis is that the Greek people are to blame. Even when criticism is aimed at the government it is usually for indulging the population’s aspirations for greater affluence.

From such a warped perspective the Greek population needs to rein in its ambitions. Austerity is, in this view, the necessary medicine for the indulgence of earlier years.

In reality the Greek people are the last people to blame for the financial chaos in Greece. Western governments and international institutions should bear the responsibility.

The crisis of the eurozone, of which Greece is perhaps the most high profile expression, cannot be understood by simply looking at the periphery. It only makes sense if the eurozone as a whole, including the core countries, are taken into account.

Core European countries, most notably Germany, benefited from the eurozone set-up for many years. Essentially they curbed consumption at home while exporting more to the eurozone periphery countries. The advent of the euro meant their exports were more competitive than they would have been if they had retained their own currencies.

Consumption in the periphery was in turn partly financed by banks from the core countries. Greece, for example, was buying German goods and borrowing from German banks at the same time.

It is therefore misleading to see the “bail-outs” as attempts to save Greece or other peripheral economies. They are primarily designed to maintain the integrity of the banking systems of the core countries.

The crisis is integrally bound up with the structure of the eurozone. It can be seen as a mechanism to benefit the richer countries at the expense of, if necessary, the poorer one.

More fundamentally it shows the reluctance of the rich countries to tackle their underlying economic problems. Instead, their inclination is to muddle through by using such means as extending credit. Indeed last week’s annual report from the Bank for International Settlements, the central bankers’ central bank, showed the global economy has come no closer to resolving its imbalances since the 2008-09 crisis.

International institutions such as the International Monetary Fund reinforce this tendency to avoid the difficult problems of economic restructuring. They may have succeeded in temporarily patching up the global economy, or doing deals with indebted nations, but they are incapable of devising a path for strong growth.

For the true culprits in the Greek tragedy look elsewhere then the streets of Athens.