By Laurence Ticehurst
The Forbes piece linked below contains some of the worst “political economy” analysis that I have ever seen because the author — John Tamny — uses a sanitized, laboratory approach to his take on economic theory and ignores the cultural and political realities on the ground. This is important because his Forbes byline states that he is “political economy editor at Forbes.” He is also “senior economic adviser” to Toreador Research & Trading.
In addition, he cites a “conservative” magazine piece whose premise he spends his article attempting to discredit, but doesn’t refer to it by name, or provide a link to it. This is a sign of insecurity as he appears to not want readers to consider the other article on their own merits.
Specifically, Tamny cites the following from the article in question — “A common currency for the European Union was always a bad idea, because it required a common monetary policy for very different economies.” This statement is correct for many reasons beyond the one cited on a “common monetary policy.” Yet Tamny claims that books will be written refuting its thesis — meanwhile Rome (the Euro currency) continues to burn.
So who are the grownups at Forbes that allow such nonsense to be published under its name?
The only article I could find that appears to fit Tamny’s description is from Mike Shedlock of Townhall.com and Sitka Pacific Capital Management, though the two articles I found and had time to review (referenced below) do not contain the quote in question — but Shedlock is prolific and so has many articles posted. Shedlock writes about economic issues, and has written extensively on Greece lately. His column from Jan 4th is cited below, which at least is on point regardless of whether it is the specific article to which Tamny refers, and I’ve posted another Shedlock column dated Feb 19th that lays out the economic reality on the ground in Euroland about the Greek situation.
Tamny misses the real issues with the Euro currency and Greece. First, he compares the Euro currency block to the US and the dollar, using West Virginia and NY as proxies for Greece and Germany. This is absurd as the US is one country with a single overall culture comprised of several subcultures that our economy, body politic, and system of government have always incorporated. Hence, the fact that WV cannot “compete” with NY is irrelevant, because it doesn’t have to in the general sense of the term. That states do compete for jobs among companies is another matter. In short, whatever the cultural differences are between WV and NY are in no way comparable to those between Greece and Germany, or more broadly between southern Europe and northern Europe. ( Also, NY and WV have been in a currency union since 1860! )
Second, Tamny ignores the reality pointed out by Shedlock, namely, that no rational person believes that Greece will ever be able to pay its $272 billion in debt to Euro countries or EU financial institutions (Oops alert for Tamny/Toreador clients, some of which might have bought Greek debt). Hence, they will default eventually — it’s only a question of time –, and in fact the EU/Euro block has already granted a partial default by extending the debt owed to certain EU institutions and/or Euro-block countries and reduced payments some time ago (and this week they have reached another four month extension assuming that Greece provides a credible response on its budget, but this only delays the inevitable).
In sum, politically and economically Greece cannot repay the vast bulk of its debt — or will not incur the immense pain required to do so –, and politically Germany cannot allow Greece any more leeway. The Germans are already on the hook for roughly 73 billion Euros in Greek debt — direct loans including 15 billion Euros and guarantees for the rest (see second Shedlock link, which cites a paper on the details of Greek debt, also linked). They are not in the mood to get snookered again.
Third, Tamny misses the real point about a Greek Euro withdrawal, re-adoption of the drachma, and default/devaluation. Yes, it might be true that Greece would have to pay interest on any future debt incurred in Euros or dollars, as perhaps Argentina did when it reentered the international bond markets several years after defaulting in 2002. Nonetheless, as with Argentina, Greece will still be able to start anew after defaulting on, say, 80% of its $272 billion in Euro debt.
Regardless of Argentina’s problems, it nonetheless got away with defaulting and is back to borrowing money from international creditors. That the interest on this new debt is paid back in dollars is beside the point. As with a company entering bankruptcy — which is essentially what Greece will be doing at some point — the firm sheds much if not most of its debt, creditors take control of the company, and it reemerges from bankruptcy as a “new” entity with little or no debt. It still might have to pay higher interest rates on newly-incurred debt because of its reputational problems, but it has new life and can gain sustenance with new debt even at higher interest rates.
Finally, by ignoring the cultural/political issues involved in the Greek/Euro mess, Tamny misses the bigger and more relevant points – 1) Greece cannot compete with Germany, et al. — and as noted the WV/NY comparison is inapt; 2) Greece must rebuild its economy the Greek way, it cannot do so the Germany/Northern Euro way; 3) dropping the Euro and readopting the drachma is the only way that Greece can achieve point #2; 4) a Euro Grexit is likely to be the first finger out of the Euro dike. Consequently, once other similarly-situated countries see that the world doesn’t end after a Greek Euro withdrawal, and in fact that economically over time Greece appears to be recovering, such countries will are likely to follow Greece’s example, eg, Portugal, Spain, Italy, etc.
This is the real fear of the EU/Euro-block elites — a Grexit contagion that spreads through Europe thereby destroying the very concept and existence of the Euro currency, which in turn might threaten the very existence of the EU itself — another flawed concept, which the always-prescient George Friedman of Stratfor Global Intelligence explains in a January 11, 2015 article entitled, “Europe Rediscovers Nationalism” (linked below).
So it is Tamny that needs to “get over it” — Greece is going to pull out of the Euro, and this will be a real and substantive withdrawal that will shakeup the entire Euro block and possibly the EU — regardless of the fact that Greece will have to pay the interest on future debt in Euros (as long as that currency exists, which I don’t think will be too long) or dollars.
Tamny, as an economic advisor to a research firm with Wall Street clients, is indirectly on the payroll of various Wall Street financial institutions or companies with a vested interest in keeping the public on the “Euro is a great idea” theme — which like most issues involving international business, benefits chiefly the big business interests, and in this case, Germany and other leading Euro-block countries, at the expense of the countries with weaker and less developed economies.
It may not be a coincidence that in the summer of 2014 the Forbes family sold a majority stake in Forbes Media to a Hong Kong investment group Integrated Whale Media — read Chinese. It would therefore be ( perhaps ) unwise any longer to count on Forbes being the necessarily-free market media outlet providing sound economic/political analysis that it used to be. A link describing this transaction is included below.