Ask the people horror! Greece goes mad!

There is almost universal consternation in Europe at the decision of the Greek Prime Minister Papandreou to hold a referendum on the terms of the second bailout. Le Monde reports someone close to the French President as saying ‘Greece’s gesture is irrational and dangerous’.

Of course they don’t like democracy in the EU – it so often seems to interfere with their plans which as we know are for our own good. This blog, by contrast, does not find democracy irrational and dangerous and wishes the Greeks well.

Actually, it may well not go the wrong way for Europe. Papandreou is clearly fed up with being squeezed at one end by his people and at the other by his masters in Brussels and Frankfurt, and could well emerge with a mandate to go ahead. Polls suggest that whilst the people think the austerity measures are too harsh, they don’t want to leave the eurozone.

So what is good? The best thing would have been if Greece hadn’t joined the eurozone. The next best thing, for the Greeks at any rate, is if they had left in a controlled manner over a year ago. To appreciate what is going on it is vital to remember that the euro is first and foremost a political construct. Olli Rehn, the European Commissioner for Economic and Monetary Affairs said that they had known at the time that Greece’s financial statements were cooked up. They went ahead, you see, because they felt the politics were more important than the economics. The idea was that every crisis – and they had enough warnings, they knew there would be the odd crisis which would put the euro’s bindings under stress – every crisis would lead to gradual political integration.

And so it seemed to them at the start of this crisis. The German sense of discipline would slowly seep into the minds of the South, and, in return for help, the eurozone would move gradually towards a fiscal and political union, each member’s budget being approved by Brussels.

What they had not taken into account is that the peoples of this continent are genuinely different. Those in the south are less disciplined, less protestant than those in the north. And because of this the south is less efficient. So unless steps are taken to improve labour market regulation, remove the vested interests that are barriers to growth and make everyone pay their taxes there will be a widening gap between the olive belt and the protestant north. A bailout can only staunch the wound, not heal it.

Greece has years of relative inefficiency in its veins and this is not a problem which can be dealt with in a hurry. It needs, and Italy, Portugal and Spain also need, a devaluation of one sort or another. The Germans and the bureaucrats think it should be an internal devaluation: that is simply to make the people poorer with higher taxes and less welfare. Greece would be left in an overvalued currency and its exports would be uncompetitive. Not even the tourists would go. In Italy I see German tourists complain about how expensive everything is – not just Gucci handbags but food in the supermarket. This is because the food is priced to include Italian levels of efficiency with German currency values. Greece is the same only worse.

So in my view the Greeks ought to reject the bailout and improve or not improve their economy at their own pace. This would mean defaulting on all its debts, except that held by its citizens, which would be translated into the new drachma. If in time they were to choose to go into this experiment again, they should be free to do so.