“Sovereign” debt

At long last, some public commentators have begun to focus on the core of the so-called “sovereign debt” crisis: it’s not sovereign debt. Our modern definition of sovereignty began with Jean Bodin (Les Six Livres de la République, 1576), who defined “souveraineté” as the right to make law binding on all in general and each in particular. Bodin mentioned some of the key elements of this right to make law: coining money was one of them. Any country that does not control its own currency has no sovereign debt; it’s as simple as that.
The countries in the Euro zone, with the possible exception of Germany, do not control their own currency. The recent negotiations make it clear that Germany has the deciding vote on questions related to the Euro, so one could argue that it has something close to sovereignty with respect to currency. Sovereign countries also control their fiscal policy. Once again, the Euro zone countries do not qualify, because they clearly do not control such policies.
The Business section of the NY Times has, at long last, begun to address this issue (other mainstream media have been little better). On Wednesday, 2 November, a story quoted V. Serafeimakis, identified as a senior official as one of Greece’s main oil and gas distribution companies (Avinoil), as saying “The real problem is that we are now operating under a foreign currency.” Quite so. On Friday, 4 November, in an excellent column, Floyd Norris posed the issue of why it was so anathema to European leaders that Greek voters actually have a say in the financial policies of Greece. As Norris rightly pointed out, European leaders essentially have said fiscal policy no longer belongs to the people of Europe: they must henceforth do what the Brussels bureaucrats, under orders from German bankers, tell them to do.
Norris and others (for example, al-Jazeera’s news anchors) have suddenly discovered that the combination of a common currency (i.e., a fundamental element of sovereignty in the hands of an external authority) and “sovereign state” political and economic policies is an oxymoron. The choice appears simple: create a common set of political and economic policies, set by a central authority, or return control of currencies to the states.
Banks have fallen victim to their own hype and disingenuousness: Greek debt is not sovereign debt. It’s not the equivalent of borrowing by the governments of the US or the UK; it’s the equivalent of borrowing by Rhode Island or Mississippi. The markets have gotten around to that point of view in a hurry, raising Greek short-term debt interest rates from under 2% to close to 30% over the last two years. As Americans look at this situation, we might consider that Greece looks a lot more like Germany than Mississippi looks like the Megalopolis states running from Boston down to northern Virginia. Greece’s per capita GDP, about $30k, is far closer to those of Germany or France ($40-42k) than the per capita SDP of Mississippi ($32k) is to that of NY, NJ, or Massachusetts ($56-58k), let alone Connecticut ($64k). West Virginia, with its per capita SDP of $35k is a different world from Virginia ($53k, a figure that does not take into account the massive gap between wealthy Virginia north of the Rappahannock and impoverished Virginia, west and south: the median household income in Lee County is $29k, in Loudoun County, it’s $114k). Europe’s “state” economic disequilibria are little different from those in the US, and within those “states” Europe has far less economic inequality among social groups than we have in the US (in terms of the Gini index of inequality). The Euro zone’s real outliers are the East Central states (Czech Rep., Slovakia), whose per capita GDPs are well under $20k. No wonder Slovakia balked at bailing out Greece (in American terms, it’s like asking Mississippi to bail out Georgia, both in terms of per capita GDP and in terms of overall GDP size).
The Federal solution (deeply rooted in European history, by the way) will create a central monetary and fiscal policy and dramatically reduce the authority of national governments (and, by extension, the effective power of those who elect them). Listening this morning to a German analyst discussing the Greek situation, one got a clear sense of how thoroughly Germany dominates the Euro zone. As he said, many other countries have an anti-Europe party; Germany does not. Why should it? Europe dances to Germany’s tune. Any country that does not understand that rule, has to leave, as Chancellor Merkel made crystal clear to PM Papandreou with her comments about the referendum.
What will happen if Greece does leave the Euro zone? We have plenty of historical evidence of countries leaving what were, in effect, imperial currency zones. We could look to the newly created states of 1919, like Poland or the Baltics or Czechoslovakia, which had to create new currencies and abandon old ones (often more than one – the Poland of 1920, for example, had been part of three different currency zones in 1914). The shift did lead to massive inflation, in part because the largest nearby economy (Germany) had government induced runaway inflation.
Assets valued in drachmas will lose much of their value, because the Greek government – following in the footsteps of countless predecessors, including those 1920s Germans – will inflate its way out of debt. More recently, we can follow the case of the split between the Czech Rep. and Slovakia in the 1990s. Once all the dust had settled, the Slovak koruna was worth about 20% less than the Czech one. That’s roughly the difference in the per capita GDPs: the three easily accessible estimates for that statistic – from the World Bank, the IMF, and the CIA – disagree sharply about Slovak per capita GDP – a high of $18.4k from the CIA, a low of $13.5k from the WB. The IMF figures suggest a difference of about 13%, the WB figures a difference of 30%. (The CIA figure for Slovakia seems grossly inflated.) By that standard, one would expect a devaluation of the drachma, vis-à-vis the Euro, by something like 33% [if we make the comparison to the Euro big boys, France and Germany; bringing in the other three states that matter – Italy, Spain, Netherlands – would lower the comparative per capita GDP and suggest an inflation more like 20%]. Greece’s catastrophic debt ratio to GDP, however, is far, far worse than anything seen in the Czech Rep. or Slovakia in the 1990s, so the initial period of adjustment will likely be even worse.

One thought on ““Sovereign” debt

  1. The baton of sovereignty has passed from national leaders meeting in national capitals to leaders meeting in summits.

    Leaders now announce regional framework agreements, which waive national sovereignty, and establish working groups and edicts. These establishes regional economic government. Freedom and choice are mirages on the Neoauthoritarian desert of the real. Silvio Berlusconi’s People of Liberty party, also known as People of Freedom party, is an anachronism in the age of diktat. A totalitarian collective is forming in the Euro zone: totalitarian collectivism is the EU’s future. Ron Paul’s agenda for freedom and the Austrian economic philosophy of free enterprise, are dead on arrival in the age of diktat.

    The citizens of Greece were not given an opportunity to vote and the citizens of German will not be given a choice to leave the EU and print a new New Deutsche Mark. Greeks are not Germans, yet under all may very well be one living in a Federal Union and Fiscal Union. EurActiv in article Eurozone Breakup No Longer Taboo, relates that Angela Merkel, speaking at the “Falling Walls” argued that it was time for “a breakthrough to a New Europe”, in which member states would integrate further.

    The largess of the PIGS will no longer be tolerated. Rachel Donadio of the NYT writes “It’s a historic moment,” said Roberto Napoletano, the editor in chief of the business daily Il Sole 24 Ore, which has been running campaigns to alert Italians that their savings and businesses are at risk without credible leadership. “Italy has to act, but it can do it.” “We have lost a capital of confidence,” Mr. Napoletano said, adding that it was time for the country to “invest politically in a government of people who have the capacity to do what for 20 years no one has done in Italy.”By that, he said, he meant making the structural changes that economists say Italy needs to quicken growth and stay competitive, including making its labor market more flexible, creating a more efficient tax code and tax collection system, and cutting red tape. Since it was re-elected in 2008, the Berlusconi government has done virtually none of those things.

    The accumulated debt of the Eurozone will be will be applied to every man woman and child therein: austerity measures, structural reforms, pension overhauls, and debt servitude will be de rigueur. Greeks cannot be Germans, the former are of the olive state, and the latter are of the industrious state. One is club med, and the other industrious; yet both will be one, living in a New Europe, featuring a Federal Government, a Fiscal Union, a Common Treasury, the nationalization of banks, and the ECB empowered as a bank, with the aim of enforcing austerity measures, structural reforms, pension overhauls, and debt servitude, as de rigueur.

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