Germany 1919, Greece 2010

April 26, 2010

Greece’s decision to ask for help from its European Union partners and the International Monetary Fund has triggered a new wave of notes on where the country’s debt crisis stands and what will happen next. For the most part, they have managed to avoid groan-inducing headlines referencing marathons, tragedies, Hellas having no fury or even Big Fat Greek Defaults.

Perhaps this is because the latest reports are pointed. They focus on the need to solve the Greek debt crisis before it spreads to bring down others and even shake Europe’s monetary framework loose.

Barclays Capital reckons the 45 billion euros or so of aid Greece is being promised is a drop in the bucket and that twice that will be needed in a multi-year package. JPMorgan Asset Management, meanwhile, says that to bring its 130 percent debt to GDP ratio under control Greece will need the largest three-year fiscal adjustment in recent history.

But perhaps the most unusual note yet on the crisis comes from Ted Scott, a director at  F&C Investments.  He takes aim at Germany’s  reticence about taking on its traditional role as EU paymaster (including the IMF being brought in from outside the euro zone) and its hardball approach of demanding yet tougher action by Athens.

Germany should remember the impact that the 1919 Versailles Treaty after the First World War had on its own population by imposing draconian terms, he says.  Keynes called it a “Cathaginian Peace” after the harsh terms Tome imposed on Carthage after the end of the Punic War.

I am not suggesting the consequences of the Greek sovereign debt system will be anything like as drastic as in the 1920’s and 30’s, especially with regard to the political situation. However, if Keynes were alive today I feel sure he would be arguing strongly against a deflation of the Greek economy that the internal austerity package is imposing, as well as the loan agreements that carry onerous interest repayment terms. Already, the Greek austerity package has proved unpopular and led to demonstrations, just as the peace treaty did in Germany did 90 years earlier.

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