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A New Versailles haunts Europe or Furiosa Teutonicorum insania[1]

varoufYanis Varoufakis argues that the EU-ECB-IMF financial support package constitutes punishment for Greece. With the exorbitant interest rates that it charges, and given its steadfast resistance to any renegotiation of Greece’s existing debt, it pushes Greece further into insolvency. Just like a cruel doctor administering enough medicine to keep the patient alive for a while longer so that she keeps suffering more excruciating pain, but not enough medicine to prevent her from shuffling off the mortal coil, so too the EU-ECB-IMF package, as it stands, only prolongs the Greek state’s agony without preventing the inevitable bankruptcy.

1. Personal virtue, Greek transgressions and the legacy of Versailles

Germans see Greeks as insufferable spendthrift over-reachers. Hard working, well drilled, innovative, technologically advanced, and with a history of substantial belt-tightening when their country faced a serious decline in its products’ competitiveness,[2] the German people are now furious that a small nation’s profligacy should shake violently the very foundations of that to which they have invested their collective post-war energies: the stability of their currency.

Their wrath is all the more understandable when placed in an historical context. When the German nation surrendered after the Great War, the allies exacted their pound of flesh from its collective body. No mercy, no compunction, no magnanimity for the vanquished. The Versailles Treaty imposed heavy reparations on the already defeated and decimated nation and let its people fend for themselves, after the nation’s wealth was stripped by the victors.

While the rest of the developed world was re-joining the Gold Standard, the single currency of that era, Germany was forced to stay outside (since it had no gold left after its ignominious defeat) and print its own money. Starved of investment, and forced to pay reparations between 2% and 3% annually to the victors, its currency began inexorably to devalue. The result was a hyper-inflation that wiped out the German middle class’ hard earned savings and paved the ground for the Nazi takeover, which followed after the shockwaves of 1929 had reached the already devastated country. The rest, as they say, is history.

Since then Germany has resolved, almost in one voice, never to allow a similar decent to a destitution caused by a currency collapse. While happy to contribute heftily to the European Union’s budget, and to pick up large bills whenever some European project demanded it, the one thing they will not fathom is any violation of the austere set of monetary policies which kept their DeutschMark strong and which was meant to be carried over to the new pan-European DK, the euro.

Last September, after the newly elected Athens government announced that Greece’s deficit was double what the previous government was reporting, Germans pinched themselves. For they could not believe that even a southern European state can engage in such a game of subterfuge. A few months later, when the money markets ganged up against Greek bonds, many Germans felt that the Greeks had got their comeuppance.

Retribution was the order of the day, especially in the mindset of a nation that, over the past century, has accepted its collective punishment gracefully and managed to rise out of the mire through sheer hard work and extensive reform. Greece should to pay for its sins too. For Germans, the cost of saving the Greek state from the clutches of the money markets was not the issue. The issue was that Greece should suffer a deserved punishment for putting at risk a club which gallantly bent the rules to have it admitted as its member. And when the said club is the one issuing the currency in which the German people trade, save and take collective pride, that punishment took on the significance of a crucial bonding ritual.

2. The true legacy of Versailles

The problem with moral outrage is that it is rarely a sound basis for economic policy. Personal virtue is important but it is an unsafe guide for dealing with a crisis and a poor historian of its causes. A good example is the aforementioned 1919 Versailles Treaty which condemned Germany to years of reparations. At the time, the victors felt morally justified to impose heavy penalties on a country that had started the most murderous war hitherto.

But was it wise? No, it was not. John Maynard Keynes, who was later to shine important light on capitalism’ capacity to stumble, fall and then find it impossible to get to its feet unaided, was at Versailles while the Treaty was being hammered out. Upon his return to Cambridge he collected his thoughts on the matter and came to a gloomy conclusion.

In short, Keynes suggested that the victors had imposed a Treaty upon the losers that was not just pitiless toward them but that it was self-defeating from the perspective of the victors as well. In that sense, retribution was exacted at a price that the victors miscalculated; a price that was just as steep for the punished as it was for the punishers. And by golly was Keynes right!

The reparations proved insufficient to mend the finances of France and Britain but perfectly adequate for draining the German economy of life and, thus, creating the circumstances for the hyper-inflation that softened its society up for Hitler’s meteoric rise.

After 1929, and the momentous crash on Wall Street that was to spread like a disease in the form of the Great Depression everywhere, the countries that enjoyed low inflation during the 1920s courtesy of the Gold Standard suddenly realised that, in deflationary times, a common currency is like a ball in chain attached to the sinking person’s leg. Unable to coordinate economic policies, they started jumping ship, one after the other; abandoning the single currency (the Gold Standard) and embarking upon a deflationary war of all against all.

The immediate causes of the world financial panic — for that is what it is — are obvious. They are to be found in a catastrophic fall in the money value, not only of commodities, but of practically every kind of asset… Debtors of all kinds find that their securities are no longer the equal of their debts… Few governments still have revenues sufficient to cover the fixed money charges for which they have made themselves liable. Moreover, a collapse of this kind feeds on itself. [3]

The result of all this inability to come to terms with a simple truth, namely that forcing the deficit countries to deflate was a plague on the house of the (until then) surplus countries, was wholesale poverty for everyone and a real war that humanity has since been trying to put behind it. In Keynes’ words:

…the insincere acceptance … of impossible conditions which it was not intended to carry out [made] Germany almost as guilty to accept what she could not fulfil as the Allies to impose what they were not entitled to exact.[4]

If Versailles teaches us anything it is that the strong do not always impose upon the defeated a Treaty that is in their own interests. Sometimes they get carried away by their urge to punish, flex their muscles a little too energetically, and in so doing end up punishing themselves. This is my fear for the recent financial package that was imposed by the European Union and the International Monetary Fund upon another defeated country: Greece.

3. A New Versailles is born

Keynes wrote the following in the introduction to his 1920 book on the consequences of the Versailles Treaty:

Moved by insane delusion and reckless self-regard, the Greek people overturned the foundations on which we all lived and built. But the spokesmen of the European Union have run the risk of completing the ruin, which Greece began, by a financial assistance package which, if it is carried into effect, must impair yet further, when it might have restored, the delicate, complicated organisation, already shaken and broken by the 2008 crisis, through which alone the European peoples can employ themselves and live.[5]

These are, of course, not exactly Keynes’ words. But they are not far off! All I did was to replace some of his worlds with the ones appearing in bold above. Indeed, Keynes might have just as well been writing about the Greek fiscal calamity and the IMF-EU-ECB package that was, effectively, imposed upon the bankrupt Greek state.

My claim here is simple: The EU-ECB-IMF package is a most peculiar sort of punishment. Indeed, it is an irrational sentence both because:
(a) it constitutes a cruel and unusual punishment and
(b) it is bound to hurt the punishers disproportionately more compared to a fairer punishment for Greece.[6] Ironically, from this perspective, it is not very dissimilar to the original Versailles Treaty!

Why do I claim that the EU-ECB-IMF package constitutes punishment, when all it reportedly does is to save Greece from bankruptcy? Because, I suggest, it does no such thing. With the exorbitant interest rates that it charges, and given its steadfast resistance to any renegotiation of Greece’s existing debt, it pushes Greece further into insolvency. Just like a cruel doctor administering enough medicine to keep the patient alive for a while longer so that she keeps suffering more excruciating pain, but not enough medicine to prevent her from shuffling off the mortal coil, so too the EU-ECB-IMF package, as it stands, only prolongs the Greek state’s agony without preventing the inevitable bankruptcy. And when the bankruptcy comes, it will come at a time of a smaller national income and a higher overall debt level. It is not, therefore, unreasonable to describe this package as a punishment that is as cruel as it is unusual.

Be that as it may, why do I also argue that the EU-ECB-IMF package is self defeating for surplus countries like Germany who provide the additional loans? The answer is simple: After the Crash of 2008, Germany sailed into uncharted stormy waters. For the first time in thirty years, its surplus is not being sucked up by the United States’ trade deficit. Until 2008, the German miracle was built not only on typical German hard work and fiscal responsibility but also on the gross fiscal ‘irresponsibility’ of the United States that run deficits large enough to absorb the industrial production of the great nations of Europe and Asia. Now, we need new sources of fiscal ‘irresponsibility; so that Siemens, BMW and the rest of Germany’s gleaming industrial giants can find buyers.

In this context, turning countries like Greece into sundrenched wastelands, and forcing the rest of the Eurozone into an even faster debt-deflationary downward spiral, is a most efficient way of undermining Germany’s own economy. Assuming, for argument’s sake, that Greece is getting its just deserts, do the hard working Germans deserve a political elite that quickmarches them straight into economic catastrophe?

I do not believe they do. But it has happened before and it may happen again. To quote Keynes’ 1920 book on the Versailles Treaty one last time:

Perhaps it is historically true that no order of society ever perishes save by its own hand.[7]


[1] – Translated into “The Germans’ raving lunacy”. See E. F. Heckscher, Mercantilism, Revised [2nd] ed. London: Allen & Unwin, 1962 at vol. 1, p. 56

[2] – Following re-unification in the mid-1990s and then again in 2002 onwards.

[3] – John Maynard Keynes (1932). ‘The World’s Economic Outlook’, The Atlantic Monthly.

[4] – “Dr. Melchior: A Defeated Enemy” in Two Memoirs (1949), as reprinted in Collected Writings, Vol. X: Essays in Biography, at p. 428.

[5] – I have replaced ‘Greek’ for German; ‘European’ for French and British; ‘Greece’ for German; ‘financial assistance package’ for Peace; ‘the 2008 crisis’ for war. See the ‘Introduction’ to John Maynard Keynes’. The Economic Consequences of the Peace, Harcourt Brace New York, 1920.

[6] – E.g. letting Greece default and allowing the ECB to bail out the banks (Greek, French and German).

[7] – Chapter VI, p.238, The Economic Consequences of the Peace, Harcourt Brace New York, 1920.