Good for the Greeks

Recently by Gary North: The Federal Debt Elevator: Going Up


Have you noticed the media reports on the intolerable nature of austerity in Greece? Have you read anything that praises this austerity and calls for more? You’re about to.

The austerity we read about is a code word for “government spending cutbacks.” In a media world run by Keynesians, the thought of cutbacks in government spending is a nightmare scenario. Keynesians believe that government spending is the source of both stability and growth in an economy. Any suggestion that the government has been spending far too much money is regarded as heretical.

The idea of the economic benefit of imposing greater austerity on all governments rests on a presupposition that is antithetical to Keynesianism, namely, that private spending should be overwhelmingly dominant in an economy, with government combined spending – national, state, and local – preferably in single digits. (See the warning of Samuel to Israel in 1,100 B.C.: I Samuel 8:14, 17.) In an era in which this figure is always above 40%, and even higher in Western European countries, austerity on this scale is considered economically insane. Yet this lower level of taxation was universal prior to the First World War. The war justified a massive ratcheting up of taxation and debt, a ratchet that never reversed.

For Keynesians, austerity for governments is the equivalent of austerity for the people. The idea that the government should tax less, borrow less, and inflate less is anathema to Keynesians. Such austerity would supposedly cut the flow of wealth to the people. Without the state acting as the source of the funds to buy goods and services, we are told, an economy would fall into unemployment and despair.


The news from Greece is bad from the point of view of Keynesians and commercial bankers. The expected bailout from Northern Europe’s politicians, on behalf of large European banks, did not appear over the weekend. All week, the media had reported on the softening of Germany’s Merkel toward the idea of another bailout. She had resisted a year ago, but at the last minute, she capitulated. The 2010 bailout arrived. This time, without warning, her last-minute switch did not produce the expected result. The weekend meeting of finance ministers did not produce the expected extension of government-to-government loans to the Greek government.

Stock markets had risen as the weekend drew near. Investors believed the headlines. They thought that European politicians would conduct another raid on their national treasuries, so that the Greek government could still make regular interest payments to Northern European banks. The bailout, as always, was to be a big bank bailout, disguised as a bailout to the Greek government. But then, without warning, the finance ministers decided not to do it. They issued a statement.

“Debt sustainability hinges critically on Greece sticking to the agreed fiscal consolidation path, the plans of collecting €50 billion in privatization proceeds until 2015, and the structural reform agenda which will promote medium-term growth.”

Last week, Greek protesters once again took to the streets. They sent a message to the Greek government: no budget cuts. In a sense, the decision of the finance ministers over the weekend sent a counter message. If the cuts do not proceed as promised by the Greek government, there will not be a new bailout.

Push has come to shove. The Greek government is facing a squeeze. The demonstrators seem to represent the majority of Greek voters. If the government makes the cuts, it will probably lose the next election. If it refuses, then it may not get the next round of loans.

The Northern Europeans may be bluffing. They are putting big European banks at risk. If Greece defaults on its debt, big banks will take a hit. So will large American banks, which sold default insurance to European banks.

This is a political game of chicken. The fate of the euro is on the line. If Greece’s government decides to pull out of the European Monetary Union and to return to its own currency, the governments of Portugal and Spain may see light at the end of their respective fiscal tunnels.

Governments resist austerity. Politicians buy votes with spending. But because they do not control their domestic currency systems in Europe, they must rely on borrowing and taxes to fund their spending. They cannot call their respective central banks and demand that the banks buy bonds by means of newly created fiat money. This puts them at the mercy of bond buyers, who are notoriously unmerciful. They have their own bond vigilantes. These investors can veto plans of politicians by refusing to lend at low interest rates. By holding out, they force the politicians to pay higher interest rates. Politicians hate that. If rates go too high, this can cause a recession. Politicians prefer to conceal this by having a central bank become the lender of last resort. But the European Central Bank resists playing this game.

Greece is now the test case. Iceland stiffed the European bankers by defaulting on its external debt. This has led to a revived economy, something that the media do not discuss in detail. Iceland has done better than Ireland, which capitulated to the EU and the European Central Bank.

Ireland v Iceland: Economy, part 1Ireland v Iceland: Economy, part 2

Iceland had this enormous advantage: it never joined the European Monetary Union. It now enjoys low rates on its bonds. This indicates that Greece can escape from the trap by pulling out of the EMU and defaulting on its external debt. This would send a message to Portugal and Spain: deliverance is available. Stiff the foreign creditors and abandon the euro.

As for government austerity, it is good for the private sector. It is bad for government trade unions. The unions resist austerity measures.


We see union members in the streets of Greece. We see – or at least hear from – the finance ministers of the European Union. But the famous silent majority remains silent.

Voters in Germany do not want another bailout. But they didn’t want the first one a year ago. That did not constrain Merkel’s government. Germany remains the paymaster, just as it has for a generation.

Voters throughout the West have been educated in tax-funded schools to believe in Keynesian economics. Nevertheless, they are growing restless with the endless calls for bailing out spendthrift governments and the creditors who lent them the money at low rates.

The forgotten man pays his taxes, pays his bills, pays his debts, and shows up on time every morning. He understands austerity. Austerity for him means doing his job and paying his bills. It means foregoing luxuries that he cannot afford. For him, austerity means a monthly budget.

He then hears that austerity for the politicians of Greece is unthinkable. He may believe this with respect to his own government. He has imbibed Keynesianism. But Keynesianism has always had a problem explaining to voters why they ought to pay higher taxes in order to bail out spendthrift foreign governments. This is why government-to-government foreign aid programs have always been unpopular. When voters hear that they must pay higher taxes in order to bail out foreign governments, they rebel. They are not convinced.

Because the real reason for the bailouts is the investment risk of large, government-protected banks, the politicians have trouble persuading voters that another round of bailouts is a good idea. If politicians said that a failure to bail out the Greek government would lead to the bankruptcies of specific banks, this could – probably would – cause a run on these banks. They don’t want to risk this.

The big banks of Northern Europe have put the politicians in a trap. The politicians face the wrath of the voters, who are sick of the bailouts. But the politicians are afraid of crippling the biggest banks, since these banks are the source of funding for the domestic governments. If the banks stop buying domestic government debt, the politicians will have to raise taxes or else suffer the ultimate indignity: austerity. They want to avoid both.

The forgotten man is the backbone of every social order. In his name, politicians and bureaucrats write the checks. The common man is supposed to grin and bear it. The bailout policies come out of his hide, yet politicians insist that they are bailing out Greece’s government on his behalf. He isn’t buying it any more, if he ever did.

So, senior politicians and their finance ministers are going through the motions of driving a hard bargain. If they were serious, they would tell the Greek government that there will be no further bailouts, no mater what. They would quit deferring the event that most analysts think is likely: Greek default. The only questions are: (1) the timing of the default, (2) the amount owed when it happens, and (3) the language that the Greek government uses to disguise default.

The forgotten will remain forgotten. He does not control the decisions made at the highest levels. The move to monetary and political unification in Europe did not come as a result of a mass movement. It came because Jean Monnet, working from no later than 1918 on, pushed for this. He did so on behalf of corporate, banking, and political interests that favored the centralization of money and power. Monnet, Robert Schuman, and the band of brothers who pulled off this centralization from behind the scenes were never seen by the common men of Europe as the architects of the demise of the old Europe. They, too, have become forgotten except for a handful of historical specialists, most of whom approve of what they did.


There was only one man who reported on this for half a century: Hilaire du Berrier, the “spy from North Dakota.” He died in 2002. His small-circulation newsletter, HduB Reports, chronicled these events and the players. I have a set of this remarkable newsletter on a CD-ROM. This has never been released publicly. Someday, I hope to make it available to serious researchers.

In a 1999 interview with him, another remarkable historian, Jim Lucier, discussed the advent of the euro. Du Berrier made some observations that have gone down the memory hole. They need to be dredged up.

Well, on the first of January Europeans are supposed to get the euro, and lose their national currencies. When the proponents of European integration first set up that European movement at the end of World War II, they told Europeans it was just a common market in order to drop trade barriers and eliminate customs duties. Then when they got the European countries in so far they couldn’t back out, they told them it was to form a Republic of Europe – a country, a supernation, with a parliament in Strasbourg and Brussels and a central bank in Germany. Now they have gone so far that 11 nations are committed to this new money – and are being told that it is a political move and they are going to be governed by a central parliament.

The men who set it up did so in secret meetings in the U.S. Embassy in Paris shortly after the war. David K. Bruce was the American ambassador then, and his wife, Evangeline, in her memoirs said that she saw the European movement take shape before her eyes. She said, “It could have been done elsewhere, but it was done there, and one could actually see the idea crystallizing. The talks went on daily, and in the end they beat out what was really the original plan for the Common Market.”

Dean Acheson from the United States and Jean Monnet and Robert Schuman from France did the planning. George Ball, an American, was a lawyer for Monnet. John Foster Dulles was part of it, too.

By 1999, du Berrier had been writing for 40 years about what was taking place. He summarized it.

Well, these countries that have gone into it will see that their sovereignty is being taken over because the Parliament of Europe, this superstate Europe, is to take precedence over their native parliaments, laws and constitutions. So the once-independent countries are becoming provinces.

This process is still going on. But the Greeks have thrown a monkey wrench into the system.

I heard a speech almost 40 years ago by a Yale economist, now at Harvard, Richard Cooper. He said that by 2000, there would be an integrated currency and central bank in Europe. He was right. But du Berrier saw that it might not hold.

Insight: What’s going to happen to the euro? Will it be a strong currency or will it cause a depression in Europe?

HduB: The best authorities in Europe are divided. Some say that it will cause trouble; some say that it will be so strong that it will cause loss of confidence in the pound sterling and the dollar. What this is going to do is to strike at tradition. At the very same time that Europe is hit in the solar plexus of its traditions, you are going to have the start of the Islamic war. Between the two, Europe is going to have a rough ride.

The euro is not going to hold. The domestic crisis of unemployed Islamic men, who have not integrated into the European nations that house them, is accelerating. The best laid plans of mice, men, and one-world bureaucrats are not going to come true. But it will take a shaking of the economic foundations to dislodge rule from Brussels. That shaking has begun.


The failure of the finance ministers to come to agreement over the weekend indicates that the Greek debt crisis is worse than the public was led to believe. The media indicated that there would be a short-term papering over of the crisis. But the strategy of kicking the can has been abandoned for now. The finance ministers decided to let the Greek government make the next move.

There is no way that Greek politicians will impose the austerity measures required by northern European politicians and bureaucrats. So, one side or the other is going to capitulate. Given the success of Iceland’s politicians, the Greeks seem to have the upper hand.

The Greeks’ domestic Keynesianism is going to triumph over the EU’s international Keynesianism. Sooner or later, northern Europe’s politicians will say no to another bailout. Greece’s politicians will also say no to austerity. That will mark the beginning of the end of the euro.

Hilaire du Berrier would have loved this. I know I do.

June 22, 2011

Gary North [send him mail] is the author of Mises on Money. Visit He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North