Thought du Jour

Economic journalist Samuel Brittan’s views have not changed. He predicts that Greece will abandon the euro sooner or later, and sooner would be better than later.

A Greek debt default, however disguised, is a foregone conclusion. More interesting is the fate of the euro. On November 5 last year, I wrote that Greece should and would leave the euro, but most certainly could not give a date. Little has changed since then despite the increasing complexity of the financial packages being negotiated to save Greek membership. It is time to look at what the UK chancellor Denis Healey used to call the real economy. Greek unit labour costs have risen by 50 per cent since 2001. This compares with a eurozone average of about 25-30 per cent and a German cost increase of little more than 6 per cent. ….

Even a return of the Greek military dictatorship would be hard put to reverse this cost disadvantage with a frozen parity against Germany.

Samuel Brittan, “Greece’s euro exit can now only be a matter of time, Financial Times, 24 June 2011.

Sir Samuel Brittan (born 1933) is a columnist for the Financial Times. His columns are archived here.

The disintegration is likely to be a messy process and it will take time to clarify whether there will be a reversion to national currencies or whether two or three successor zones will emerge. Indeed, the insistence of the German government on impossibly severe fiscal policies makes one wonder if it really wants the euro to continue in its present form. Wolfgang Schäuble, the German finance minister, has said: “Should a eurozone member ultimately find itself unable to consolidate its budgets or restore its competitiveness, this country should as a last resort exit the monetary union while being able to remain a member of the EU.” ….

Euro-federalists will fight tooth and nail to prevent a disintegration of the eurozone. They are powerfully reinforced by banks with investments in the peripheral countries. But if something is unsustainable it will not be sustained.

Samuel Brittan, “The futile attempt to save the eurozone”, Financial Times, 5 November 2010.

The full column (ungated) will eventually be posted here.

[Central Bank origins] usually were remote from control of inflation or output or anything resembling modern macroeconomic policy. The Bank of England was established in 1694 by a group of City merchants lending money to finance the wars of William III. Even the US Federal Reserve, which was founded much later in 1913 in response to the bank crisis of 1907, was primarily concerned with the stability of the commercial banks. In the 19th century rough price stability was expected to result from using gold as the ultimate form of money. The role of the central bank was to ensure that, despite any paper money or other credit instruments issued by governments, the gold convertibility of the currency was maintained. In the course of the 20th century the gold link was … cut. Thus central banks were left by default with the task of maintaining the value of the currency. Even then many were just as concerned with the welfare of commercial banks and the financial system as a whole.

How have they performed in their enlarged role? At a cursory glance, none too well. So far from curbing the notorious German hyperinflation of the 1920s, the then head of the Reichsbank plaintively observed that he was printing money as fast as the machinery at his disposal allowed. At the Bank of England, governor Montagu Norman bullied Winston Churchill into returning to gold in 1925 at an overvalued parity, which helped trigger the General Strike the following year. Later he prevented the 1929-31 Labour government from embarking on public works to counter rising unemployment. Worst of all was the unwillingness or inability of the Fed to prevent a massive decline in the US money stock at the onset of the Depression.

There followed a gap of several decades in which central banks were demoted. But it can hardly be said that they have achieved distinction in more recent years.

Samuel Brittan, “Take central banks down a notch”, Financial Times, 30 July 2010.

In a few days or so, an ungated version of this column should appear here.

Financial Times columnist Samuel Brittan has a superb column today on exchange rates, the euro, and the Greek crisis.

I am attracted to Professor Martin Feldstein’s idea (Financial Times, February 17) of a temporary euro exit for Greece followed by re-entry at 20 or 30 per cent below the present level. But if that occurred there might not be a euro to rejoin. So it is a last resort. There is an alternative to try first, which might be called an internal devaluation. When Margaret Thatcher was struggling to wean her colleagues from pay and price controls she at one stage considered a compromise: a temporary wage freeze – in an emergency – after which normal negotiating procedures would be restored. In the case of Greece today it would have to be not just a freeze, but a negotiated reduction in nominal wages. Such a course would cut against Greece’s fiercely independent habits and traditions. But surprises can always occur.

Finally, an offbeat idea which is not an alternative to the others, but can run alongside. Countries in the Middle Ages often operated with two or more currencies: an international one such as the ducat or florin, and local currencies with more restricted use. Could not such a local currency, whether or not called the drachma, emerge in this way with or without the sanction of the Greek government? It would surely be better than being crucified by the international financiers.

Samuel Brittan, “Greek light on an over-hasty project”, Financial Times, 19 February 2010.

It is not necessary to go back to the Middle Ages to find countries with multiple currencies. Until very recently, in much of Latin America ‘strong’ currencies – usually the US dollar – circulated alongside a weak, nonconvertible domestic currency. Zimbabwe is another recent example of this phenomenon.