Last weekend, I watched Ken Burns’s excellent documentary called “The Wars”. It chronicles the events of World War II in the amazing manner that we’ve become accustomed to from Burns.
At the risk of getting a lot of hate comments, I’m going to draw similarities between what is happening now between Greece and the Eurozone with what happened in the 1938 Munich Agreement.
The attendees of the 1938 Munich Agreement were Germany Chancellor Adolph Hitler, British Prime Minister Neville Chamberlain, Italy’s Benito Mussolini and France’s Edouard Dalodier. At that meeting a treaty was signed which allowed Germany to take over the border areas of Czechoslovakia known as the Sudetenland. Since this also included just about all of Czechoslovakia’s fortifications, it left the country defenseless when the Nazis rolled in and took over. This directly led to an easy path for Hitler’s forces to move into Poland and start World War II.
Let’s look at what happened at 1:30am on September 29, 1938 when the pact was signed.
The fact that it was signed at 1:30am was a major warning sign. Who signs any sort of agreement of that magnitude without a good night’s sleep? And when was the bailout plan passed by the Greek parliament? You guessed it, very early in the morning. Eerie.
The situation in Germany was that Hitler thought he could get away with just about anything. With the German people still wounded by losing World War I and the negative effects of The Great Depression as a backdrop, Germans were looking for some way to gain control over a life that seemed incredibly bleary. And then Hitler took advantage with his campaign of intimidation and rousing of the German masses which led to obtaining 14,000,000 votes and 230 seats in the Reichstag. When people feel unfairly beaten down long enough (regardless of whether or not it was correct), intense and violent pressure for change often builds up quickly within that group of people.
Hitler would continue his tactics of intimidation to gain the chancellorship of Germany. A key factor in his final accession to power was that the parties opposing him failed to unite strongly against him.
The British also had suffered greatly during World War I and The Great Depression and were desperate to avoid another war with Germany.
So, Prime Minister Chamberlain went into the meeting with one thought: avoid another war. And by signing the Munich Agreement in 1938, he seemed to do just that.
Upon his return to Britain, Chamberlain was hailed for his diplomatic prowess. Yes, the British people cheered him as a success. However, it soon became clear with the Kristallnacht pogrom of November 10, 1938, the invasion of the rest of Czechoslovakia on March 15, 1939 and the invasion of Poland later that year in September that Chamberlain had failed. By trying to be nice to Hitler, he led Britain and the rest of Europe right into the start of World War II. In the end, the major lesson learned from that failure was that “appeasement doesn’t work.”
Now we see the Greek debt crisis and the similarities are obvious. Instead of Chamberlain, we have a coalition of German Chancellor Angela Merkel, French President Nicolas Sarkozy, and the rest of the Eurozone finance ministers. In Hitler’s place is the Greek government. The collective of the Greek government has shown a tremendous ability to manipulate situations to their own personal advantages despite the suffering of their own people.
Last summer, we saw stock markets around the world meltdown as the threat of a Greek default seemed to dominate the airwaves. It seemed impossible to read about anything else. And like so many times before, Greece made promises, Greece broke promises, and Greece received its installment (tranche) of euro bailout money.
And like Hitler who realized he had a tactical advantage when he met with Chamberlain, the Greek government also knew that it wielded a significant trump card: the threat of defaulting and causing a domino effect that would topple the economies of Portugal, Ireland, Italy, and Spain (the entire group now referred to as the PIIGS countries). The Greeks also held another huge advantage: the declarations by both Merkel and Sarkozy that there was no way that they would let Greece default and leave the Eurozone. Talk about giving away all of one’s bargaining power.
So Greece did what the government could do without causing massive protests in the streets: it kept delaying its reckoning day. Like North Korea with its repeated threats of developing nuclear weapons if countries do not give it money (and getting away with it), Greece has played its hand masterfully by promising many things, collecting a lot of money from the Eurozone, and then returning little.
The Greek government talks about an additional round of sweeping cuts, reducing the minimum wage by 20%, and raising taxes. Yet missing from all of this “window dressing” is any significant structural reform which is what the country desperately needs. Collecting more money from the lower-middle to middle class while not making wealthy tax evaders pay what they should have paid (as well as what they should pay) is one example of horribly flawed policy. The maze-like level of complexity of the country’s exporting policies makes it incredibly difficult for large companies to maintain consistent capital flow. These are the reforms that Greece should have embarked on years ago and which they should rapidly change now. But they don’t.
And this brings us to the latest plan “passed” by the Greek parliament. When I read the news this morning, I was shocked by the way some media outlets were saying that the bailout vote “easily” passed. Really? I wish. That would have made me feel more assured that this was a concerted effort throughout the Greek parliament.
First, I remind people of the strong-arm tactics Hitler used to gain power in the Reichstag. With that said, let’s look a bit closer at those 199 votes. The Greek parliament seats 300. Therefore, one might think that the vote was 199 – 101. Actually, it was 199 – 74 with 5 abstaining from voting for a total of 278. It’s not clear what happened to the remaining 22, but that seems to be the way that Greek math is going these days.
The vote seems like a clear-cut victory, but it isn’t. Before the vote was cast, members of the ruling parties were threatened by their leaders with immediate expulsion from their parties if they voted against the bill. I’m not exactly sure how that is democracy, but it’s Greece. And in the end, 43 deputies who voted against the bailout plan were immediately expelled from their parties. Now that’s “gunboat diplomacy” at its finest.
Remember this, if 43 members of the Greek parliament were strong enough to follow their consciences and vote against the plan even though the repercussions would be harsh, think about how many others would have voted against the plan if they hadn’t been so brutally threatened. In the end, Greek Prime Minister Lucas Papedemos got the votes, but the 199 – 74 differential is not real. If all members had been allowed to vote without fear of being cast out of their parties, I can guarantee that the vote count would have been significantly different. And most likely, the bailout plan would not have been passed.
Why does this matter? Because you know that when the April elections roll around in Greece, a lot of politicians are going to start speaking out against the plan. In fact, the man thought to be in line to become Greece’s next prime minister in April is Antonis Samaras of the New Democracy party. The fact that 21 of his own deputies defected because of the bailout vote means that his party now holds only 62 seats in the parliament.
Greek politicians have a long history of promising whatever they need to promise to survive to fight another day. This is one of the reasons that the pension system in Greece and the civil service corp is so bloated.
And Germany, mindful of 1938 and what happens to those who continue to appease, has taken a far harsher tone this time than last summer. It, as well as the rest of the Eurozone finance ministers, is demanding that the next tranche of bailout funds will be released to Greece provided that there is a guarantee that the promises made now will be honored after the April elections. For better or worse, the Eurozone leaders have made this a requirement for signing off on the next tranche.
It’s understandable. Germany and the rest of Europe is tired of broken Greek promises. They are tired of having to go through this drama every few months and the markets remaining volatile. Market volatility can lead to extremely unhappy investors who fund political campaigns across the globe. And so everyone is weary of this long-standing Greek drama. It’s kind of the same way that the British were weary of the thought of another war with Germany in 1938.
If all this isn’t worrisome enough, listen to the words delivered by Samaras to parliament just before Sunday’s vote (as translated by today’s Wall Street Journal):
“… I ask you to vote in favor of the new loan agreement today and to have the ability tomorrow to negotiate and to change the current policy which has been forced on us.”
So, the assumed new Prime Minister of Greece has just told everyone in the Greek parliament to do whatever it takes to try and get the next round of euro bailout money and then renege on the agreement and try to “renegotiate” it right after they get the money. He has clearly stated that Greek parliamentarians do not have to honor the plan they passed today. This is the kind of nonsense and games which happens when there is a history of appeasement. Didn’t Hitler promise the Soviet Union’s Stalin that he would never invade the Soviet Union? We saw how great that promise went.
To make matters worse, German Finance Minister Wolfgang Schaeuble said yesterday that “Greece will be saved in one way or another”. This is like a government telling a company that it’s too big to fail. And we saw that the only thing that caused was for large American corporations to take even greater financial risks that have harmed millions of average Americans.
Therefore, Greece has become the latest incarnation of relying on the opposition’s desire for appeasement to get what it wants. And this doesn’t even include the fact that the passed proposal still hasn’t made all the cuts necessary to satisfy the current requirements of the Eurozone leaders.
Appeasement doesn’t work.
The way that this will all play out is so predictable that if I could wager a bet on it, I would pretty much bet everything I have.
Here is what will happen. Not much will be changed from the current bill. The reported 325 million euros in savings that still have to be added to the plan will just be “paper worthy”. In essence, someone will write a quick paragraph that means nothing and everyone knows it. So, the 325 million euros in savings will magically appear, Eurozone finance ministers can tell the public that they held the line and that Greece met their requirements, and then that 325 million euros in savings will disappear the very moment that the Greeks get the next tranche of euro bailout money.
Greece will also give the Eurozone finance ministers some sort of paper that promises to uphold the agreement (and let’s remember that the wording of the plan the Greek parliament passed this morning states that it will only be in effect until 2015, although it says that the Eurozone will help Greece indefinitely until Greece reaches the point where it can borrow on its own. Talk about a bottomless pit!!!!) long after the April elections, even though everyone knows that any promise from Papedemos’s party will be worthless after the April 2012 elections when his party loses and a high-probability ditto for Antonis Samaras’s party which now stands a chance of losing its majority position in Parliament and getting booted out of power.
Remember those 43 deputies who were kicked out of Papedemos and Samaras’s parties for not voting in parliament for Sunday’s bailout plan? Collectively, they now form the 3rd largest party in the parliament. And it wouldn’t surprise me if angry Greeks rallied behind them in the April elections and defeated Samaras’ New Democracy party.
In short, Greece and the Eurozone finance ministers know that there is absolutely no way to get a long-term binding agreement from Greece to follow the austerity bill that was just passed. Both Papedemos and Samaras know that they can’t give it, and the Eurozone finance ministers would be fools to think that any guarantee they receive now would be worth more than the paper on which it is written.
Samaras also has to be worried because if he publicly declares that the agreement is binding if he wins election in April, there’s an incredibly good chance that the opposition will use it to defeat him in April. So, it’s in Samaras’s best interest to not promise anything and say something like, “Well, I’m not the prime minister right now so I can’t make such promises.”
As for the Greek people? If you think that they rioted a lot last night, that was nothing. They are angry, but every Greek person with whom I spoke today has told me that no one in Greece really expects the plan to be upheld beyond the April elections. If you want to see real riots, watch what happens if all parties (the ruling parties and the opposition) all sign a legally binding agreement that Greece will continue to honor this plan beyond April 2012 and through its conclusion in 2015. Then the rioting will rise to a completely different and horrifying level.
Everyone keeps talking about how terrible it would be for the Eurozone if Greece left. Everyone keeps saying how terrible it will be for Greece if the country leaves the Eurozone. I don’t completely buy either argument. If the Eurozone could kick out Greece and make sure that the remaining PIIGS countries do not default, the only people non-Greeks who would be hurt are those holding worthless Greek bonds.
How can a country with such an overwhelming debt burden, in the midst of a terrible economic contraction, and basically a country that doesn’t produce any major goods hope to cut so many jobs, cut the minimum wage, and still gain greater tax revenue to pay off its debt? No semi-intelligent person really believes that it’s possible.
And let’s say that bondholders of Greek debt agree to take an 80% loss or do some sort of bond swap to delay collecting on their debt, because the structural problems in Greece are myriad, the only thing that will happen is that bondholders a couple of years later will be asked to take another 50% or greater loss on the bonds they hold in the future. Wow, if that doesn’t sound like a de facto default, I don’t know what does.
There is one final problem, and I haven’t seen anyone write about it yet. Now that the Eurozone financial ministers have drawn the proverbial line in the sand with their demand to get a binding agreement that Greece must honor this plan for the duration of the plan (i.e. until 2015), what happens when they don’t get it and Greece tries to renegotiate? Won’t investors and the general public’s impressions of these financial wizards change as quickly as British public opinion boomeranged against then-Prime Minister Neville Chamberlain? In the U.S. (and I’m sure most other parts of the world), loan agreements are signed because everyone knows that mechanisms are in place to enforce them. By failing to get a binding agreement for Greece on the latest bailout plan passed by the Greek parliament, and by still giving Greece its next tranche of loans, what kind of message is this sending to everyone else?
Appeasing the Greek government to try and prevent the loss of luster to the euro will fail if the Eurozone finance ministers choose this route. And like a child who tests his/her boundaries and gets away with more and more things, one has to worry about what this teaches not only to the child but also to the child’s siblings.
By appeasing the Greeks now, the Eurozone could be setting itself up for a spectacular descent when the people of Portugal, Ireland, Italy, and Spain start to get upset and say, “If Greece is getting so much, then shouldn’t we also get our fair share of debt relief?” Psychologically, Chamberlain’s acquiescence to Hitler in 1938 sent a clear message to Mussolini and Japan that Britain was unwilling to hold the line and that the country was weak. This is why the Eurozone finance ministers have to take a hard stand now.
Of course Britain showed them during World War II that it was just as courageous as any of them, but wouldn’t it have been far better for everyone on both sides if the war had never started?
Appeasement doesn’t work.
Let Greece default. Let Greece rebuild on its own. Greece has become like a gangrenous infection on the Eurozone. The only way to save the rest of the Eurozone is to not appease Greece this time and to hold the line. Greece believes that by passing this measure (which their own leaders have already admitted are temporary) they can buy enough time to get the bailout money in March, and then repeat the whole drama again in a few months.
My advice to the Eurozone leaders is this: let Greece default and immediately call the leaders of Portugal, Ireland, Italy, and Spain together, and tell them that substantial reform must happen. The leaders of the Eurozone have been saying for a while that the loss of Greece will be catastrophic for the Eurozone. If Greece infects the other PIIGS countries with its attitude, will this not be even more catastrophic? If the other PIIGS countries see how difficult life is in Greece after it leaves the Eurozone, wouldn’t this be the greatest and most efficacious way of convincing the leadership of these countries to get their ships in order to stay in the Eurozone? Everyone talks about how terrible it will be if Greece leaves the euro. They talk about the “drachma days” of 30 years ago. But that doesn’t really register with people today.
Kick Greece out, let it suffer, and then allow it to get its ship in order and the reapply for membership in the euro club. Hey, when Americans declare personal bankruptcy, we wipe the debts clean (unless some of them are student loans), prevent them from using credit cards for a short while, and still allow them to use dollars.
Most Greeks have already moved most of their money out of Greek banks anyhow, so it’s not like people will starve. And the reintroduction of the drachma (or even use some other name to break the negative associations of this currency in the past) will probably be followed by fairly rapid devaluation of the currency compared to the euro. But that will then be followed by an equilibrium point, and combined with strong structural changes in Greece, the currency can gain value and the country can gain stronger footing as opposed to now where so many of its citizens feel that the government has cut not just to the bone but also into the bone marrow.
Already the Eurozone has thrown way to much money into the Greek bottomless pit. And seriously, what is the Eurozone really doing? Let’s be honest. It’s giving 100+ billion euros every few months to Greece so that Greece can reservice its debt. Translation: the Eurozone is giving 100+ billion euros to Greece and then the Eurozone is taking back 100+ billion euros in debt owed to them by Greece. And the only thing that has happened is that every day that this drama with Greece continues, only one thing is sure: the Eurozone is losing money.
This is why appeasement doesn’t work: because the appeaser always gets hurt in the end.
Most likely the Eurozone finance ministers will sign off on the next tranche of bailout money without getting its most important requirements met by Greece. They will appease Greece the same way that Greece has been appeased in the past.
Everyone knows that appeasement doesn’t work. But I guess that some people require learning this lesson the really hard way.
I hope that the Eurozone finance ministers will not budge from their demands of an ironclad guarantee from Greece that they will abide by the plan, but logic tells me that the courage does not exist to hold the line.
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