At every twist and turn in the eurozone crisis we hear news of some cunning plan to solve the eurozone’s problems. The latest plan is the so called fiscal union, which as I explained in a recent post is not actually a fiscal union at all. Meanwhile the newspapers in feature articles and letter columns are awash with more such plans offered by various thinkers, pundits and economists. I have long since lost count of the number of plans.
What all these plans have in common is their quite extraordinary complexity. They remind me of the similarly complex plans of the 1920s such as the Dawes Plan and the Young Plan, which were designed to enable Germany to go on borrowing money whilst running a trade deficit so that it could continue to make reparations payments. In the end all these plans failed and Germany defaulted on its reparations payments. It is now generally acknowledged that what these plans instead did was weaken the financial system and help pave the way for the Depression.
Speaking for myself I am at a complete loss to understand the need for these plans or why the sovereign debt problems of some eurozone countries should have become a problem for the eurozone at all. What would have been simpler when Greece ran into difficulties last year than for Greece to be told that since the eurozone is only a currency union Greece’s debt problems did not concern it and that Greece needed to resolve its debt problems by itself by talking directly with its creditors? Possibly Greece might have defaulted but why should that have affected the euro? Some of Greece’s creditors might have found themselves in trouble but given that all the relevant treaties and the repeated statements of the German government say that the eurozone is not a transfer union the creditors would in that case have had no one to blame but themselves. If the creditors had gone bust then it would have been for the governments of the states in which they were based to decide what to do. Any of the creditors that were banks could for example have been quickly nationalised with steps taken to protect their depositors. If the banks had been allowed to go bust this would not have cost much money at all.
If a Greek default had led to a contagion effect so that other eurozone governments were forced into default the same principle would apply. Though even more banks might have had to be nationalised in the end the debts of the defaulting countries would have been written off. Since the eurozone is only a currency union there is no reason why any eurozone state that had defaulted on its debts would have had to leave it. There would have been no need to impose austerity on the defaulting states or large transfers on the remaining solvent states.
It seems to me that the course I have just outlined would not only have saved everyone a great deal of time and trouble but is a great deal simpler than any of the plans proposed. It also has the advantage of being the course that was originally envisaged in the treaties as well as being consistent with the prevailing free market economic philosophy of our times. A large number of bankers would have lost their jobs and their shareholders would have lost their money but given that they foolishly lent money on the assumption that the eurozone is a transfer union when the treaties clearly say otherwise they would have had no one to blame but themselves. Isn’t accepting responsibility for one’s mistakes what capitalism is supposed to be about?
Instead we have a never ending succession of plans. Perhaps some genius somewhere will come up with the plan that works. Or possibly, in the spirit of Mr. Micawber, something else will turn up. I suppose we will have to wait and see.