Over the past 6 years I’ve repeatedly warned that monetary policy is the Achilles heel of the right. Perhaps the most famous example was the US during the 1920s, where small government policies under Harding and Coolidge were ruined by tight money under Hoover. Tight money that was strongly supported by conservative economists. That opened the door to a left-wing government full of counterproductive statist ideas such as the NIRA, the Wagner Act, minimum wage laws, and one really good idea–monetary stimulus.

Now it just so happens that in the short run cyclical factors dominate structural factors (except in the most extreme cases.) Although the recovery from the Great Depression took longer than it should have (8 years), growth rates were pretty high, and things looked good in a relative sense, especially given the abysmal performance of the economy during the early 1929-33 period. The left got credit.

Exactly the same dynamic played out in Argentina, just replace 1929-33 with 1998-2002. Argentina also saw a cyclical recovery under a new left-wing government, despite really bad statist policies. It is only recently, more than a decade later, that the heavy price for economic mismanagement by the left is becoming apparent. Greece is far and away the Western European country that most resembles Argentina, right down to the dysfunctional electorate and extremely low levels of civic trust. So will Greece repeat the pattern of Argentina? My guess is that it will almost certainly do so to some extent. The new government will probably be viewed as relatively successful, even if it does a poor job in an absolute sense.

I think it’s always a mistake to think in terms of “victims and villains”, although that’s how almost everyone approaches these issues. In this case, Greece is both victim and villain, as in Germany. The Germans are to blame for a tight money policy that is partly (but by no means entirely) responsible for a resurgence of extremism in Europe. The European left is also partly to blame, as their ignorance of monetary economics has resulted in the right dominating the debate over ECB policy. The Greek electorate is to blame for electing one corrupt and inefficient government after another, and in this election a particularly nasty party has taken power.

I do not know how this will play out. In a logical world the troika would go into the negotiations demanding concessions from Greece. After all, the earlier debt forgiveness was conditional on painful structural reforms. Now that Syriza has abandoned those reforms, the troika should offer less aid, demand more debt repayment. Instead they seem likely to reward this bad behavior with even more concessions, which would be basically telling the Spaniards that they’d be fools not to elect Podemos.

I suppose we should not be surprised by any of this, as ISIS is financed by tens of millions of dollars in aid from European governments. I think it’s fair to say that Europeans are not especially aware of the incentive effects resulting from bailing out bad behavior. However the new Greek government is so extreme that it’s quite possible a deal will not be reached–as the Germans clearly won’t agree to the sort of massive bailout required to meet Syriza’s campaign promises.

So a “Grexit” is certainly possibility, even if a bit unlikely. And here’s another irony, a Grexit may be the best outcome for Syriza. There would probably be six months to a year of financial chaos (as occurred in Argentina), followed by many years of very strong RGDP growth for which Syriza would get credit (as in Argentina.) The new Greek currency would immediately lose half of its value, creating a huge boom in industries such as tourism. Are the Greek leftists aware of this? Is that why they seem to be making demands that cannot be met? I have no idea.

More broadly, I see the rise of extremists on the left and right as the end of the European Dream. Here’s an analogy that may or may not be useful. In the 1960s, America had a dream of a color-blind society. We passed civil rights laws. But it never happened, and at some point over the next few decades the dream was quietly abandoned. In recent years blacks have been falling further and further behind whites, and it’s is now more or less accepted that the problem won’t be fixed in the foreseeable future. Oh sure, the left still talks about the curative powers to Head Start, but I can’t believe anyone really thinks it would make much of a difference. In Europe, there was also a dream that people would stop thinking in nationalistic terms, and start thinking of themselves as “Europeans.” Now it’s back to victims and villains. Like many black, Hispanic and Native Americans in the US, people on the southern and eastern periphery of Europe increasingly think of themselves as victims of an unjust system. In contrast, rich countries in the north and west of Europe increasingly “blame the victim” and see “cultural problems” that seem almost intractable.

Instead of supply-side reforms to bring Greece up to the level of Switzerland, there is resignation that the task is impossible, and talk of “fiscal union,” a code word for a permanent program of welfare-like transfers to the countries with dysfunctional governments.

That’s what I see happening in the foreseeable future. In the very long run the European Dream may succeed (as may the American dream.) But we are far from that goal, indeed in Europe (as in America) governments are not pursuing the sorts of policies that would even begin to move us in the direction of an equal society. In neither place have they gotten beyond the “victims and villains” mentality, toward constructive utilitarian reforms where there is no place for “blame” and “deserve.”

PS. Just to be clear, although this post focused on monetary policy, I believe the European economic model was unsustainable even with good monetary policy. However, it would have taken longer to become apparent, and the crisis would have been more gradual.

Update: It was pointed out that this post was confusing in places. My fault. My point was not that countries should not be criticized for bad policy. Thus in the top part of the post I pointed out that Germany could be blamed for favoring tight money, and various Greek governments for enacting statist policies. Rather I think it’s a mistake to think in terms of victims and villains. It’s a mistake to try to assign overall blame to one particular actor for complex economic problems. Instead of simply blaming the Greeks, or blaming the Germans, we need to focus on specific solutions for specific problems.