Beware Of Greeks Bearing Referenda

Authored by Russell Napier, originally posted at,

'And so it did happen, like it could have been foreseen
The timeless explosion of fantasy's dream
At the peak of the night, the king and the queen
Tumbled all down into pieces.'


Bob Dylan- Ballad in Plain D (1964)

For many years this analyst has expressed the opinion that the political dream that is the Euro would only end with the destruction of a democracy. Only at that point will the political elite of Europe, who genuinely believed that a single currency would reduce the risk to democracy in Europe, understand how the Euro can destroy democracy. That realisation would indeed be the ‘ explosion of fantasy’s dream’ for Europe’s political elite and lead them to reconsider their commitment to a single currency at all costs.

The Constant Scapegoat… Easily Undone

And so ‘at the peak of the night’ on June 28th 2015 ‘it did happen, like it could have been foreseen’ by anybody prepared to even countenance that the sovereign peoples of Europe would not go gently into a Federal States of Europe. Investors need to prepare for the inevitable political solution: referendums across Europe on the constitution of the Federal States of Europe needed to sustain the Euro. Events this weekend will trigger the search for the democratic legitimacy for the single currency and the centralised constitution it requires.

Each One Of Them Suffering From The Failures Of Their Day

There can be no two figures more symbolic of Europe’s ruling political elite than Jean-Claude Junker (President of the European Commission) and Christine Lagarde (Managing Director of the IMF). While market commentary will no doubt focus on the political failure of Greece, it is the political failure of the un-elected ‘ king and the queen’ of European political integration that will be marked by the events of Sunday June 28th 2015. Their failure will signal the turning point when the political incumbents of Europe realise that a political integration of the Eurozone must urgently seek democratic legitimacy. Without political integration fiscal integration cannot be legitimate, and without fiscal integration the Euro cannot function as a single currency.

Answers Of Emptiness

The political integration so urgently sought requires the greatest peacetime constitutional change ever seen in Europe, and it must thus be clearly defined and then democratically endorsed. And as no blueprint for the final constitution of the Federal States of Europe has ever been put to a vote in Europe, no democratic legitimacy for that massive constitutional change exists. Events in Greece starkly show the democratic deficit that Euro participants pay for single-currency membership. If events in Greece do not force Europe’s political incumbents to seek democratic legitimacy for the new constitution, their replacement by more strident voices is inevitable:

“I’ll be Madame Frexit if the European Union doesn’t give us back our monetary, legislative, territorial and budget sovereignty,”

Marine Le Pen June 23rd

The Solid Ground has remarked before, with reference to the ex Managing Director of the IMF, Dominique Strauss-Kahn, that lawyers make bad economists and that a bad economist , while able to count, really does not know what he is counting. Junker and Lagarde, like Strauss- Kahn, trained as lawyers and evolved into finance ministers and economists. They have shown a mastery of legal prescriptions and also that they are capable of counting, but these skills are more suited to an accountant than an architect of a new currency.

The Tombstones of Damage

The Euro will represent the zenith of this approach to economics that focuses on clearing prices, but ignores the socio-political consequences of achieving clearing prices. If you want to know how long the socio-political consequences of a search for ‘clearing prices’ can last, visit any major Irish sporting event. At some stage in proceedings you will hear sung “The Fields of Athenry”--- a lament for the consequences of Sir Charles Trevelyan’s policy in the 1840s of allowing the export of grain from a starving Ireland in pursuit of market clearing prices. The result was over 1 million deaths and, when combined with mass immigration, a forty percent decline in the population of Ireland between 1841 to 1881. The population of Ireland still sing the song, 170 years on, in memory of how market prices were allowed to clear, but how society paid the price. One day, but not yet, there may be more people on the island of Ireland to sing it than when Sir Charles introduced his market solution for famine in 1846.

All is gone, all is gone

Trevelyan’s policy succeeded in its own terms, but the human misery it created produced a political legacy that has lasted for more than a century and a half. When an economic system enforces such misery on a people in pursuit of clearing prices, it is the system that eventually changes. So Greece must leave the Euro and live with a market clearing mechanism which is compatible with the chosen goals of that democracy. Much more importantly the Euro experiment itself must change to recognise the political impossibility that reaching clearing prices, while maintaining political and social stability, can be achieved. That change began this weekend.

What’s wrong and what’s exactly the matter?

If only the lawyers running the Euro would listen to the world’s smartest lawyer, Charlie Munger:

' Never, ever, think about something else when you should be thinking about the power of incentives.'
Charlie Munger

There are incentives above economic welfare in Europe. They are incentives of sovereignty, pride and dignity which are preventing clearing prices delivering the single currency and the Federal States of Europe needed for any single currency to work. It may be that the people of Greece are not yet finished with this political experiment. They may respond to the increased pain inflicted by the ‘king and the queen’ to vote ‘Yes’ in next Sunday’s referendum. This does not mean that the political experiment of the Euro has succeeded. That day will still mark a failure for the great political experiment because it will mark yet another milestone along its journey (or perhaps millstone around its neck) when the political dream of a single currency was achieved at the expense of political rights.

In A Screaming Battleground

Whether the vote on July 5th will see Greece survive with a democratically elected government must be in severe doubt, whatever the result. The ‘king and the queen’ will then increasingly be seen as sovereigns over a system which destroys rather than promotes democracy. That system will then fail. Lawyers are trained to argue either side of an argument. Their ability to do so is wonderfully enhanced when both sides have the ability to pay. The lawyers running the Euro now realise that the economic clearing mechanism imposed by the single currency is bringing political change, and so a new argument is needed. It is needed because the coming political change endangers the careers of those incumbents.

With Strings Of Guilt They Tried Hard To Guide Us

Given the reality of this political clearing, what is the legal solution? Referendums across the Euro Zone. This permits the incumbents to argue for the Euro, but to permit the people to choose the outcome. It permits the incumbents to potentially keep their jobs and possibly even their single currency. Referendums across the Eurozone that spell out the degree of fiscal and political integration necessary to sustain the single currency are now all but inevitable.

The Lies That I Told… In Hopes Not To Lose

The people of Europe walked into a Euro without any understanding of just how far fiscal and political integration would have to go. How much farther that process still has to go is now clearer, as is the tactics of the end-game required for the degree of political integration necessary to receive a democratic endorsement. The events in Greece at the weekend make it even clearer to the incumbents that they will have to go for that democratic sanction sooner rather than later, or hear much more from ‘Madame Frexit’ and her like. It is not just Greece and the United Kingdom that will see referendums to decide their constitutional relationships within a Federal States of Europe.

Are Birds Free From The Chains Of The Skyway?

The loss of democracy and the imposition of capital controls in Europe was a dreadful forecast for this analyst to make almost six years ago. It will get worse from here. More capital controls will be essential when the incumbent politicians finally go to the polls to seek a democratic mandate for the Federal States of Europe. The uncertainty associated with such polls will create massive movements of capital that could very well create massive economic volatility ahead of such polls.

From Silhouetted Anger To Manufactured Peace

The imposition of ‘temporary’ capital controls would thus be seen as politically necessary to permit the people of Europe to vote for their future without this economic gun to their head. So the real news from Athens on the last weekend in June 2015 was not that Greece would have a referendum on membership of the single currency and capital control; it was that the whole of Europe would come to have referendums on membership of the single currency and capital controls. It is not often that The Solid Ground strays beyond the words of Bob Dylan for inspiration, but on this occasion only Dickens, writing about a revolution in France, can accurately describe the scale of uncertainty which faces the populations of Europe as they search for a new post-war constitutional settlement that, we must hope, is delivered via the ballot box:

"It was the best of times, it was the worst of times,
it was the age of wisdom, it was the age of foolishness,
it was the epoch of belief, it was the epoch of incredulity,
it was the season of Light, it was the season of Darkness,
it was the spring of hope, it was the winter of despair,
we had everything before us, we had nothing before us,
we were all going direct to Heaven, we were all going direct the other way."


Charles Dickens: A Tale of Two Cities (1859)