“Deprived” My Foot

I don’t know about you, but I’m tired of hearing that Greece is being “deprived of fresh Euros” by the ECB, or by the European Commission, or that those bodies are “moving toward cutting off its money supply.” That’s to say nothing of the Greek government’s suggestion that Greece is being “blackmailed” by these authorities.

Such talk seems to suggest that Eurozone members are like so many helpless hatchlings, their outstretched beaks agape in anticipation of the ECB’s regular and solicitous regurgitations of liquid sustenance.

At the risk of belaboring the obvious, I’d like to take a stab at putting this misguided metaphor to rest.

Consider for a moment, then, how two other Balkan states — Kosovo and Montenegro — manage to get hold of the euros they need to support their economies. Although the euro is their official currency, neither is part of the Eurozone, and neither has had a formal agreement of any sort with ECB such as could allow it to count on being able to borrow euros from that institution, strings or no strings, in a pinch.

Yet neither territory complains of being “deprived” of euros by European authorities, much less of being “blackmailed” by them. Nor do Panama, Ecuador, and El Salvador — all dollarized Latin American nations — complain that the Fed isn’t sufficiently forthcoming with dollars. (Panama did once have reason to complain of blackmail, when the U.S. blocked paper dollar shipments there as part of its effort to topple Manuel Noriega. But that was a special case.) If the ECB and the Fed won’t deal directly with these countries, on any terms, how do they manage to get their hands on the euros or dollars they need to keep their banking systems and their economies functioning, if not thriving?

The answer is that both the euroized states of the Balkans and the dollarized ones of Latin America have no choice but to get hold of euros and dollars the old fashioned way: by earning them. That means that, to add to their stock of currency, they must bring in, through exports, remittances, and tourism, more euros or dollars than they spend on exports, remittances, and tourism, or else they must get foreigners to invest more in their country than they themselves invest abroad. In other words, euros flow into Kosovo and Montenegro when they have a surplus balance of payments, and flow out when they have a deficit. The same goes for Panama and dollars. Ditto, for that matter, for Alaska and dollars. In still other words, these states import their currency, and must pay for it, in the same way that they and other states import automobiles, and have to pay for those.

In principle, Greece could have imported all the euros it needed, without having to get them directly from the ECB, provided it exported enough goods, or attracted enough foreign capital, to end up with a sufficiently large balance of payments surplus. For some years, while newlywed Eurozone members were still enjoying their long honeymoon, Greece did just that, relying mainly on foreign capital inflows to stay flush. The trouble is that the flows in question consisted largely of revenue earned on sales of Greek government debt, and that the Greek government, instead of employing that revenue productively, so as to be able to collect taxes sufficient to keep its credit afloat, used the money it borrowed to further fatten an already bloated public sector. The subprime crisis, to be sure, confronted Greece — along with much of the rest of the world — with tight money. But with the help of a more responsible government Greece might eventually have gotten through its debt crisis, as Spain and other formerly debt-crippled Eurozone members have managed to do. European authorities, it’s true, contributed to Greece’s spending spree, by giving Greece’s creditors reason to assume that they’d never let any eurozone state default and that they’d never let the eurozone shrink. Those authorities may also be faulted for not recognizing the futility of their attempts to make a Greek bailout conditional upon severe austerity measures. Still, the Greek government is ultimately to blame for having borrowed, and then squandered, so much.

Now Greece, its credit in shambles, is on the verge of collapse. For some time now it has had to depend on direct ECB support of its monetary system, and unless Greece’s latest reform proposal is accepted by the EU, that support will run out. Yet it blames its predicament, not on its own government’s profligacy, and not on its resulting inability to raise the euros it needed to stay solvent through the normal operations of international exchange, but on the strings the ECB and other lenders have attached to their offers of emergency funds.

Stuff and nonsense. When an entire multi-national currency area runs short of money, it is presumably some central bank’s fault. But when one country alone runs short, the blame rests squarely with that country’s own misguided policies.

This is cross-posted from Alt-M.org.