“If the General Election of December 1918 had been fought on lines of prudent generosity rather than imbecile greed, how much better the financial prospect of Europe might now be,” wrote Keynes in the ‘Reparations’ chapter of The Economic Consequences of the Peace.
I’m certainly not suggesting there is a real parallel between now and then. But listening to the news about Cyprus (where the banks are closed for two more days – to ensure the banking system functions “smoothly”) does make one yearn for a bit of ‘prudent generosity’ among German politicians and voters ahead of September’s federal elections. German banks have the second largest non-Russian exposure to Cyprus, after the Greek banks, and the German banks are the most heavily exposed to the Greek banks and government too. German taxpayers are supporting German banks which lent tens of billions of Euros to Greece and Cyprus; this is a statement about accounting identities. Meanwhile the solution to a bankrupt financial system is – more debt?
Michael Pettis’s recent book The Great Rebalancing, (reviewed here), looks at the domestic policies in Germany whose result is a permanent current account surplus with the inevitable consequence of capital outflows from Germany. Reading it convinced me that what Europe needs is a sort of German equivalent of the Marshall Plan for the Mediterranean economies, an investment in growth. Obviously a stupidly naive hope.
Back to the microeconomics…..
The Economic Consequences of the Peace (Classic Reprint)