But the combination of fiat currencies and economies that are in a slump changes the game. Money, no longer tied to gold or any other firm anchor, can be created instantly, in infinite quantities, on the technocrats’ say so. And so long as factories have spare capacity and unemployment keeps wages in check, there is unlikely to be any significant penalty from inflation.
.. By delivering on its inflation target, in other words, the ECB can help Italy and Spain compete against Germany and the Netherlands, gradually eroding the gap in labor costs that lies at the heart of Europe’s troubles.
How Germany Prevailed in the Greek Bailout
“The belief that the euro can be used to bring about the economic ‘re-education’ of Europe’s south will prove a dangerous fallacy — and not just in Greece,” Joschka Fischer, a left-leaning former German foreign minister,wrote this week.
.. Meanwhile, Mr. Schäuble, Ms. Merkel’s finance minister, is a hard-nosed politician who was paralyzed from the chest down by an assassination attempt in 1990, and he is more popular in Germany (70 percent approval in a recent ARD-DeutschlandTrend poll) even than Ms. Merkel (67 percent).
.. “Mrs. Merkel has behaved in an incredibly modest way,” said Marcel Fratscher, president of the D.I.W. Berlin think tank. “You couldn’t find her saying a bad word about Greece or anything populist, and even though German public opinion was very strongly in favor of a Grexit and no bailout deal,” he said, using shorthand for a Greek exit from the eurozone, “they secured a deal with no Grexit.”
How the Greek Deal Could Destroy the Euro
These tensions are not new. Germany always thought of the euro as an improved exchange-rate mechanism built around the Deutsche mark, and France had bold but vague ambitions of a real international currency that would enhance the effectiveness of Keynesian economic policy. These fundamental differences were papered over at the launch of the euro because both François Mitterrand and Helmut Kohl agreed that the single currency should first and foremost serve as a means toward the greater aim of European political integration.
.. Indeed, the European institutions led by Germany seem to have decided that waging an ideological battle against a recalcitrant and amateurish far-left government in Greece should take precedence over 60 years of European consensus built painstakingly by leaders across the political spectrum.
By imposing a further socially regressive fiscal adjustment, the recent agreement confirmed fears on the left that the European Union could choose to impose a particular brand of neoliberal conservatism by any means necessary. In practice, it used what amounted to an economic embargo — far more brutal than the sanctions regime imposed on Russia since its annexation of Crimea — to provoke either regime change or capitulation in Greece. It has succeeded in obtaining capitulation.
.. This forceful attitude and the several taboos it broke reveal that the currency union that Germany wants is probably fundamentally incompatible with the one that the French elite can sell and the French public can subscribe to. The choice will soon be whether Germany can build the euro it wants with France or whether the common currency falls apart.
.. Over the long run, France, Italy and Spain, to name just a few, would not take part in such a union, not because they can’t, but because they wouldn’t want to. The collective G.D.P. and population of these countries is twice that of Germany; eventually, a confrontation is inevitable.
.. Meanwhile, Germany has built a politically and morally coherent narrative that obscures an economically deceptive vision based on the idea that abiding by the rules alone can create prosperity and stability for the European Union as a whole. This narrative has wide support across the German political spectrum and the clear backing of the German public.
.. This unhappy marriage could last for years, but it will substantially increase the chances of anti-establishment parties coming to power across Europe, because mainstream leaders can no longer disprove the assertion that the euro as it stands has become both economically and politically destructive.
Greece, the Sacrificial Lamb
None of this makes sense even from the perspective of the creditors. It’s like a 19th-century debtors’ prison. Just as imprisoned debtors could not make the income to repay, the deepening depression in Greece will make it less and less able to repay.
.. Consider the case of milk. Greeks enjoy their fresh milk, produced locally and delivered quickly. But Dutch and other European milk producers would like to increase sales by having their milk, transported over long distances and far less fresh, appear to be just as fresh as the local product. In 2014 the troika forced Greece to drop the label “fresh” on its truly fresh milk and extend allowable shelf life. Now it is demanding the removal of the five-day shelf-life rule for pasteurized milk altogether. Under these conditions, large-scale producers believe they can trounce Greece’s small-scale producers.
.. One underlying problem in Greece, in both its economy and its politics, is the role of a group of wealthy people who control key sectors, including banks and the media, collectively referred to as the Greek oligarchs. They are the ones who resisted the changes that George Papandreou, the former prime minister, tried to introduce to increase transparency and to force greater compliance with a more progressive tax structure. The important reforms that would curb the Greek oligarchs are largely left off the agenda — not a surprise since the troika has at times in the past seemed to have been on their side.
.. Normally, the I.M.F. warns of the dangers of high taxation. Yet in Greece, the troika has insisted on high effective tax rates even at very low income levels. All recent Greek governments have recognized the importance of increasing tax revenues, but mistaken tax policy can help destroy an economy. In an economy where the financial system is not functioning well, where small- and medium-size enterprises can’t get access to credit, the troika is demanding that Greek firms, including mom and pop stores, pay all of their taxes ahead of time, at the beginning of the year, before they have earned it, before they even know what their income is going to be. The requirement is intended to reduce tax evasion, but in the circumstances in which Greece finds itself, it destroys small business and increases resentment of both the government and the troika.
.. When a country is down, there is all manner of mischief that can be done.
.. But these policy debates are really about ideology and power.