As the Greek crisis dragged on, most people will have felt that they didn’t need to look far for an explanation as to what lay behind it. Lazy reporting and racial stereotyping will have persuaded them that the Greeks – a feckless lot, no doubt – spent more than they should, got into debt, took out loans from the hard-working Germans and then wouldn’t repay the loans because they refused to tighten their belts. The popular consensus seems to be that they have got what they deserve. But there is another narrative that tells a somewhat different story. That story contains important lessons for New Zealand. It is one of a powerful economy enforcing its will on its weaker neighbours and refusing to acknowledge that it has thereby made it impossible for them to dig themselves out of a hole.

That story begins at the turn of this century when the Greeks, along with many others, were persuaded that being part of Europe required them to give up their own currency and accept the euro. A single currency meant a single monetary policy and a single central bank – and guess who decided what that policy should be and what the central bank should do? Germany, by far the most powerful economy in the euro zone, ran it to serve its own interests, but life wasn’t so easy for the weaker countries. The Greeks, for example, with their smaller and less developed economy, had no chance of surviving the competition from efficient German manufacturing. They suffered in particular from having to live with an exchange rate that suited the Germans but which was completely inappropriate for their own industry. The normal remedy of devaluing their currency to a more appropriate level was, of course – locked in as they were to the euro - not available to them. We do not need the benefits of hindsight to make this point, since many commentators, myself included, foresaw the inevitability of this outcome at the time.

The Greeks knew they would struggle but believed that, by throwing in their lot with a single economy in which German economic strength provided a kind of guarantee, they had covered most bases. Their political commitment to the European ideal would protect them, they thought, if the economic waters became choppy. As things predictably began to go wrong, and the Greeks found they had to borrow to keep their heads above water, they were assured that they could look to the Germans and others to help them out. But this was in the days of cheap and plentiful credit; when the Global Financial Crisis struck (and the Greeks had no responsibility for that) and the cheap credit suddenly dried up, the creditors who had happily loaned to the Greeks wanted their money back.

Savage Austerity

But the Greeks didn’t have the money. And the price they had to pay for borrowing yet more from the International Monetary Fund (IMF) and the European Central Bank was that they had to accept a programme of savage austerity. The cuts they were then forced to make meant that 25% of the Greek economy simply closed down and 60% of young people were left without a job. Again, as some commentators observed at the time, it was impossible to see how the Greeks could ever find the resources needed to repay their debts when the austerity demanded by their creditors was forcing their already weak economy to become so much smaller and to keep going backwards.

And so it proved. The Greek economy, completely shattered as it is, discovered that it was completely unable to pay the debts that staying in the euro meant for them. And yet, apparently learning no lessons from that experience, the price that creditors insist upon for a continued bail-out is yet more austerity which can only mean yet more closures and unemployment. Leaked papers show that the creditor institutions themselves – and the IMF in particular - recognise that the continued austerity now demanded will make it even less possible for the Greeks to pay back their debts. The crisis will, in other words, continue to worsen as the Greeks find themselves unable to meet the conditions demanded of them.

So why are the Germans and other creditors determined to force the Greeks into such a damaging dead end? The answer is that they care little for the travails of the Greek people. It is hard to overstate the ruthlessness with which powerful economies pursue their own self-interest. Their focus is not on the Greek poor and unemployed but on those countries that are watching the Greek situation closely – countries like Spain, Portugal, Bulgaria, even Italy, that have faced similar problems, and suffered similar penalties, but that have not yet been compelled by pressure from their populations to resist a further descent into even more austerity.

Pour Encourager Les Autres

The fear from the financial Establishment and from the Germans in particular is that the Greeks might find a way to demonstrate to other similarly afflicted countries in the euro zone that there is a way out – and that those other countries would then follow a similar course. The rational course for the Greeks to take, after all, would be to leave the euro zone, restore their own currency and then print the drachmas needed, as monetarily sovereign countries are able and entitled to do, and repay their debts in devalued drachmas. Creditors who have so evidently pursued what they see as their own interests could have little complaint if the Greeks did likewise. The creditors, however, are determined to protect the euro, because it is the one weapon that ensures that there can be no backsliding. The euro was put in place so that, whatever temptations – or even imperatives – there may be, there can be no going back. The grim and unrelenting disciplines of neo-classical economics demand nothing less.

Whatever the eventual outcome, the crisis has stripped bare the pretensions of those powerful forces who talk with less and less conviction of the European ideal and of democratic rights. The “Europe” in whose service so much sacrifice is now demanded is a cartel of bankers, financiers and Rightwing politicians who have no interest in democracy, or jobs, or the living standards of ordinary people. As the Greek people suffer, and plead “no more”, it is not the travails of the Greeks – or, for that matter, the Spanish, or the Portuguese, or the Italians – that weigh with Europe’s powerful; their sights are fixed on maintaining austerity and discipline, on adhering to ideology and doctrine.

The bail-out deal forced through the Greek Parliament at the behest of European creditors makes absolutely no sense in economic terms, but it is the geo-political consequences that are most worthy of note. The Greeks have been treated with scarcely concealed contempt. They have been deliberately and ruthlessly humiliated. The wishes of the Greek people and of their elected Government have been over-ridden by external forces who have no concern for their welfare or for the value of democracy.

The Greeks have suffered this fate, not because they are uniquely culpable, but “pour encourager les autres”. The message has been deliberately designed for the rest of Europe. It is addressed to all those other small and medium-sized members of the euro zone who have suffered under the austerity regime forced upon them.  The message is stark – there is no escape. Any country that might contemplate, as an alternative to euro-austerity, the reclamation of the powers of self-government and monetary sovereignty will be ruthlessly cut adrift. Even the Greeks, benighted as they are, could not brave that fate. The euro-zone is quite evidently a straitjacket, centrally applied and disciplined, whose rules over-ride democracy and the interests of ordinary people.

And who or what, exactly, runs this arrangement from which there is no exit? It is German economic power. The troika of the IMF, the European Central Bank and the European Commission may look comfortingly like a European or even international authority, but the levers of power are actually moved by the German government. The mailed fist is now clearly visible. Any country in the euro zone that steps out of line will find itself forced back, with its own government and parliament sidelined and left impotent. There can be no debate. There can be no alternative to austerity; neo-classical economic policy and continued stagnation at best is, by decree of the German government, the only option.

The German goal seems to be the establishment of German hegemony across the whole European economy by ensuring that the policies framed in Berlin are adopted and applied across the continent. But the way forward is not without its risks and casualties. Any misapprehension about how Germany sees its role in the new Europe has now been dispelled. More importantly, the European ideal has been seriously compromised. A Europe revealed as simply a vehicle for German power is a very different entity from the force for peace and unity which has been sold to the people of Europe so far.

Riding The Tiger

What has all this got to do with New Zealand? Are there any lessons we should draw from it? The answer is that, like the rest of the world, we are sure to be affected by the impact that the Greek crisis will have on the euro zone and the European economy. Either a Greek exit from the euro on the one hand or an intensification of austerity on the other would act as an increasingly important road bump for the prospects of recovery in the already austerity-ravaged European economy. And, at a time when China is slowing and stock markets around the world are jumpy, the markets on which New Zealand depends will inevitably respond badly to continuing problems in Europe.

But the lessons are more specific than that and have a more direct bearing on our economic future than might at first seem the case. The Greek experience of throwing in their lot with the Germans and trusting them to play the game is a salutary reminder of what can happen when small economies get into bed with much more powerful (and often more ruthless) operators. All too often, they end up like the “young lady from Riga, who smiled as she rode on a tiger. They returned from the ride, the young lady inside, and the smile on the face of the tiger”. A similar naivety is exhibited by our Government and policy-makers. Our economy is already dangerously dependent on a single commodity, and our Government seems all too ready to emphasise that dependence by putting all its trade policy eggs into one basket.

Our anxiety to maximise our one trading advantage, by currying favour with powerful potential partners, has led us into some treacherous waters. We have, for example, rapidly built up a Chinese market for our dairy produce with the result that – without any assurance that that market will remain open to us - we are now virtually economic prisoners, forced to meet almost any Chinese demand in order to retain a market that has become our life blood. Our Government has deliberately chosen, for example, for fear of offending Chinese opinion, to avert its gaze from the obvious effects of Chinese intervention in the Auckland property market. This growing dependence would matter less if it were not for the fact that we have apparently not recognised that the Chinese interest goes beyond merely buying our products in a normal trading relationship, but extends to acquiring control of the productive capability itself.

We are not unique in attracting attention in this way. Chinese capital has been deployed across the globe in pursuit of assets and capacity that they see as valuable. This is not a cause for criticism – the Chinese are entitled like anyone else to pursue their own interests. It is simply a statement of fact. We, however, seem unaware of what is happening. It is no accident that an increasing proportion of our dairy industry is passing into Chinese hands, as we stand by and watch. Dairy farms themselves, processing plants, manufacturing capacity, expertise of various sorts are now owned by Chinese operators; their production increasingly by-passes New Zealand economic entities and suppliers and is marketed by Chinese companies directly to the Chinese consumer. Our farms might just as well have been relocated to Zhejiang province.

Again, it is no accident that this direct supply to the Chinese market has meant that the proportion of New Zealand dairy production handled by Fonterra is falling. And while the proportion of our dairy production under Chinese control is still quite small, there can be little doubt that it will grow. We need to understand the implications of that development. At a time when demand for, and the prices of, dairy produce on international markets have both fallen steadily, it will not be helpful to those adverse developments that the Chinese need no longer bid to the same degree in international auctions against foreign competitors when they are growing their own sources of supply. 

Nor is it just the ownership of the physical product that has passed into foreign and often Chinese hands. The decision to allow non-farmer ownership of “units” (or, in other words, shares) in Fonterra has meant that we must now face the prospect of a significant part of the income stream from our most important industry to pass into private (as opposed to cooperative) and often foreign hands. Our anxiety to improve the market for our dairy produce has led us into another potentially dangerous relationship. Free access for those products into the US market has long been touted as the “holy grail” of trade policy. So keen are we to achieve this (and, it must be said, so great are the barriers to doing so), that we are apparently ready to sign up – in a so-called free trade agreement - to whatever concessions are required of us in order to get even a slightly improved deal for dairy produce.

NZ Needs To Understand The Risks We Run

The little we know about the secret negotiations for the Trans Pacific Partnership Agreement (TPPA) so far suggests strongly that we are ready to give up significant benefits, such as the relatively low prices we pay for pharmaceuticals brought about by the role that Pharmac plays. We will have to accept severe limitations on other aspects of our ability to organise the way our markets operate. Even more importantly, we will willingly concede a large part of our powers of self-government by allowing foreign corporations to sue our Government in specially constituted tribunals, and to force that Government to change its policies and legislation in the interests of those corporations, whatever the people of this country want – a power not, of course, enjoyed by domestic companies. A decision taken by our Government and Parliament in the New Zealand public interest that had the effect of limiting the profits of an overseas company could be overturned or require substantial compensation to be paid.

The irony is that these sacrifices are most unlikely to achieve much of what we want. The US dairy industry is too powerful and too protectionist to throw open its market to competition from efficient producers overseas; and they have yet to reveal their hand and to bring their political influence to bear on the negotiations we are still pursuing. We have, it seems, spent months making concessions in the hope that the US will at some point deign to offer a deal on dairy produce, with little evidence that such an outcome is at all likely. Yet again, we have naively focused on the hoped-for but unlikely to materialise benefits we seek while averting our gaze from the risks we run and the prices we have to pay.

In these two instances – China and the US - and even in the more familiar relationship we have with Australia through the Closer Economic Relationship (CER) arrangement, we over-estimate our ability to hold our own against the interests of much more powerful economies and over-state the degree of trust we can repose in them as economic partners. The Greeks – and other smaller European economies – have made similar mistakes and are now paying the price. The global economy is moving increasingly towards just a few spheres of economic influence, dominated in each case by one powerful economy.

Smaller economies like our own can retain our independence and power of self-determination only if we recognise the risks and take action to protect ourselves. We may not be as constrained as the Greeks were when they joined a currency union, but our Government is apparently ready to give up a large part of our powers of self-government in order to gain concessions that will be made only if they serve the self-interest of our partners. Our Government has stars in its eyes, if it believes that our powerful partners will look after our interests at the expense of their own – and they have the power to ensure that it is their interests that prevail. It is time we took a more hard-headed approach and understood the risks we run. Just ask the Greeks!