Tuesday, February 10, 2015

Be careful what you wish for: or how Germany's blame game has backfired

The election of a Syriza-led government in Greece and its subsequent stand-off with Greece's creditors has disrupted Europe's preferred approach of kicking the can down the road. My colleague David Woodruff is not optimistic about Greece's bargaining position. Germany clearly has every incentive not to cave in to Greece's requests, not only because they prefer not to admit that Greece is insolvent, but also for fear of the ramifications a Greek win could have elsewhere.

Spain will vote in 2015, and current opinion polls gave Podemos, a party just past its first birthday, the lead over Spain's traditional governing parties, the Partito Popular and the Socialists, who together barely muster half of voter preferences in a recent poll. The failure of austerity has created a fertile terrain for alternative political forces, especially in the Southern periphery.

The Grasshopper and the Ants.png
"The Grasshopper and the Ants" by Source. Licensed under Fair use via Wikipedia.

But there is a further reason for the success of new political forces such as Syriza, Podemos and Italy's Five Stars Movement. The dominant narrative of the Euro crisis is that of the Ant and the Grasshopper: unlike the virtuous North, who saved for the winter by running balanced budgets and reforming their economies to make themselves more competitive, the South overspent, overborrowed and failed to reform, leaving their economies vulnerable to downturns. Their politicians wasted money on pointless airports (although, see also Berlin's new hub), protected rent-seeking groups and often lined their own pockets. In a more sophisticated version of this story, Jesús Fernández-Villaverde and colleagues argue that credit booms have an effect analogous to expansionary monetary policy, masking political incompetence in the eyes of voters and allowing corrupt politicians to claim credit for illusory economic growth.

Southern European politicians probably are exceptionally venal: Transparency International certainly thinks so. But blaming poor governance in the debtor nations handily shifts the focus away from the structural flaws in European Monetary Union that made such a crisis likely however well Southern European countries had been governed. German surpluses, in a monetary union, had to roll up somewhere, and they rolled up in the Eurozone's weakest economies, because that is where opportunities for investment appeared greatest.

The 'blame the victim' narrative has been effective up to now in distracting attention from the structural failure of EMU. So effective in fact, that it is widely believed in Southern Europe too: support for established political elites, the (mostly) men responsible for presiding over the disaster, has collapsed. Now that the credit taps have been turned off, Southern European voters have, albeit a little late in the day, reacted to the corruption and incompetence shown by the likes of Papandreou, Samaras and Berlusconi by turfing the rascals out. So now they will see sense and elect politicians that embody the austere virtues of Angela Merkel. Right?

Wrong. The elites that governed the South in the first decade of the euro may have been corrupt and incompetent, but they were committed to euro membership and (formally anyway) its rules. When the Troika came knocking, its recommendations - despite there being good reasons for thinking they would make matters worse - were accepted and largely implemented. Just as they escaped the blame for their own errors in the pre-crisis period, they are now crucified by their voters for policies decided elsewhere. And rather than turning to incorruptible experts to implement the austerity regime, Southern European voters now turn to politicians who would rather ditch that regime altogether. As Silvio Berlusconi's star waned, Italy voted not for the sober, Davos-attending former Eurocrat Mario Monti, but for rabble-rousing anti-euro comedian Beppe Grillo. And the Papandreou dynasty has been replaced by the tie-less Tsipras and Varoufakis.

The ant and the grasshopper indeed. Perhaps another fable is more appropriate here: the Tortoise and the Eagle. Or be careful what you wish for: you might get it.