August 6, 2012
In 1919, the Treaty of Versailles was signed as a peace agreement after World War I. Under the treaty, Germany accepted that they had caused the war and therefore were obligated to pay reparations to the tune of US $31.4 billion (US $442 billion in today’s money). This was deemed excessive by many economists at the time, and should have taken roughly seventy years to pay. Incredibly, Germany did pay, and doing so took them more than ninety years, with the final payment being made in October 2010.
Not surprisingly, most Germans at the time (and until the present day) have regarded the treaty as the brutal gouging by the victors of the war.
Today, the shoe, as they say, is on the other foot. The debt owed by Greece is in the neighbourhood of US $345 billion (reports vary). The likelihood of eventual repayment is very slim indeed. And, not surprisingly, the Greek people feel the same way the German people did following the signing of the Treaty of Versailles. Correspondingly, events in Greece bear similarities to those seen in Germany in the 1920’s.
So, will we be looking at a repeat of Weimar Germany for Greece in the coming years?
The first developments will most assuredly occur in connection with the new Greek government. It most certainly is not in the interests of Greek politicians to recommend to the Greek people that they bite the bullet, give up their over-the-top entitlements, and begin behaving in the sane and frugal manner that will one day allow their children to have a promising future. Once a country has gone down the socialistic road and arrived at Failure, there has never been a historical occasion (to my knowledge) in which the politicians (or the recipients of the government largesse, for that matter) have said, “Oh, dear, we seem to have chosen the incorrect road. We’d best do the right thing now, and pay the piper for our error.”
No, any politician who holds onto even the slimmest hope of maintaining public office will invariably imply that those who are asking to be repaid their loan are dictatorial overlords.
The Greek election is now over, and the more conservative candidate has won. To many observers, this is a hopeful sign — that Greece will take a turn toward austerity. However, these observers are overlooking the fact that the level of debt is already beyond the level that can be repaid. Additionally, historically, even those new governments that call for austerity learn quickly that the recipients of largesse rarely accept the level of austerity necessary to make true restitution. The Greek coffers are now nearly empty and, conservative or not, a further bailout will be sought. Concurrently, the beaks of the other little birds in the PIGS nest are also opened wide for more.
Recent history has seen an exception to this rule in Iceland, where the bankers were told to stuff it. The country started over again and was quickly on the mend. The reader will note that, Iceland’s application of laissez faire economics has allowed for a quick turn-around, just as laissez faire did historically, prior to the adoption of Keynesian economics. (No wonder few economists or political leaders are keen to discuss Iceland if at all possible — they might just have the answer.)
Hence, we are not likely to see an Icelandic solution in Greece. We are more likely to see Weimar Greece. A significant drop in the demand for goods would be coupled with a drop in economic output, along with increased unemployment. A rejuvenated drachma would suffer devaluation immediately. A loss of 50% would likely be a minimum.
If the comparison to Weimar Germany were complete, food shortages would occur, with accompanying riots. The more desperate the people of Greece became, the more likely they would turn to a saviour who promised impossible positive change. (Opportunity time for an Adolfus Hitledopoulos, who may be waiting in the wings.)
Here is an interesting quote from Stephen Leeb, Chairman & Chief Investment Officer of Leeb Capital Management, in “King World News”, on 14th May:
History shows that given the choice between inflation and austerity, people are going to choose inflation every time. Germany is a great example. It’s true you had incredible inflation in the 1920s and you had awful things taking place, especially to the poor people in Germany…
What crushed Germany in the 1930s was 25% unemployment. During the 1920s, unemployment never got above 10%. Hitler came about in the 1930s because of 25% unemployment. Nobody wants to see worldwide depression and massive unemployment.
The logical solution would be to allow a collapse. To be sure, both blood and red ink would flow, but, as a result, Greece would emerge sooner as a country of people who learned, painfully, that their only solution is to pick up their socks and begin to rebuild. But this will not happen. As absurd as it may seem, renewed bailouts will occur even if Greece exits the EU. The process will likely be a slow, agonizing one that promises to be no less painful than the quick alternative.
As much as the Greek people may characterise those who provided bailouts (and now call for austerity) as demons, those same people and their leaders will almost certainly return to the trough of those demons, rather than face the more painful, but quicker alternative. Observers may plan on a long winter of Greek discontent.