Canute.pngA thousand years ago, the Viking King Canute had himself carried into the sea by his courtiers. He was the most powerful king of his time. But by showing that he could not turn back the incoming waves, he hoped they would understand that he was not all-powerful.
This is a lesson still to be learnt by European policymakers, including those at the European Central Bank (ECB). They continue to try to turn back the tide of debt restructuring in Greece, Ireland and Portugal.
Thus the EU Commission has told the European Parliament that Greece must not restructure its debts, because this would have “devastating implications” for Greece and the euro area. Whilst the ECB has said it would be “political suicide which would lead to poverty“.
But if Greece clearly cannot repay this debt, pretending it cannot happen, helps nobody. Have policymakers not learnt the lesson from US Fed Chairman Ben Bernanke’s experience, when he said in July 2007 the sub-prime crisis would only cost $100bn?
The problem, as the blog discussed back in December, is that the EU cannot have monetary union without fiscal union. Hopefully, the current talk from policymakers is just a smokescreen, whilst they develop a proper action plan. But if it isn’t, and they really believe they can turn back the tide, then markets might have an very unpleasant shock ahead.