“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 .
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 , (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…..
[amazon_image id=”1451008155″ link=”true” target=”_blank” size=”medium” ]The Economic Consequences of the Peace (Classic Reprint)[/amazon_image]
The headlines are full of Greek politics – will the country opt out of the austerity/bailout/Euro package or not? It seems the rest of the Eurozone is presenting the issue as an ultimatum.
It set me to wondering why there hasn’t been more discussion about exactly what the terms of the bailout cover, and why. Because it was a shock to learn – via Paul Seabright’s recent Princeton in Europe lecture – that by 2008 Greece had become the world’s fifth biggest arms importer (pdf), and the second and third biggest customer for German and French arms exporters respectively, presumably in deals financed by German and French banks. Even in 2011, Greece’s defence spending amounted to 3.2% of GDP, the highest in Europe as a share of GDP, and $1230 per Greek citizen.
(Parochial note – the UK is the world’s 5th biggest arms exporter, Europe’s 3rd behind France and Germany, and our biggest customers by 2008 were the US, India and Chile.)
Stopping the purchases would make a handy dent in the 9% of GDP budget deficit. So surely would ending interest payments – even defaulting – on those loans that financed the earlier arms build-up. If German and French banks were encouraged to extend them by their governments for geopolitical reasons, then those governments should take responsibility and face their own taxpayers, rather than placing the whole burden on Greek taxpayers.
This obviously isn’t the whole story. After all, not that many Greeks are taxpayers (only just over half, it seems), so there is definitely a need for Greece to face up to its own responsibilities too. But I find it odd that the story about Greece’s astonishing military build-up isn’t better known. All I could find is one Guardian article that mentioned it.
The data source is the highly-regarded . This is one of the shadowy areas of the global economy that economists don’t discuss enough, along with the outright illegal economy – as I touched on at the weekend with a little rant about the vampire cephalopods of the global economy.
[amazon_image id=”0199695520″ link=”true” target=”_blank” size=”medium” ]SIPRI Yearbook 2011: Armaments, Disarmament and International Security (SIPRI Yearbook Series)[/amazon_image]