The term “realpolitik”(1) was coined in the mid-nineteenth century by a fellow named Ludwig von Rochau.(2) If you asked ten people what it means today, nine and a half of them would say something like, “It means the sword is mightier than the pen,” or “Might makes right,” or “He who has the power makes the rules.”(3)

Those answers are close, but they’re not quite what von Rochau had in mind. Von Rochau, after all, was an idealist, a man who firmly believed that the core insight of the Enlightenment (roughly 1620 to 1780)(4) was that ideas matter more than raw power. In fact, von Rochau was an Idealist, a member of the German movement that believed in working toward the improved society that should and could be, rather than the flawed society that was.

The Idealists were committed to ideas like justice and mercy, freedom and open inquiry, decency and human dignity, and to implementing those notions in the governments of the day, especially in Germany. Unfortunately for von Rochau, Germany wasn’t ready for Idealism, and, one day after he and a group of idealistic students unwisely decided to storm a police station in Frankfurt, he was sentenced to life in prison.

Von Rochau managed to escape and fled to France, where he lived for ten years. But matters continued to go downhill for poor von Rochau and his fellow Idealists, and when Bismarck restored Frederick William IV to power in 1848, von Rochau fled again, this time to Italy.

But instead of finishing out his life like an increasingly cornered rat, von Rochau reflected on the political failures of Idealism and sat down to write his book. In particular, he grappled with the central problem of his own life: how could enlightened people enact enlightened ideas in a world that cared only about raw power? The answer was realpolitik, an approach to politics that recognized the need to engage in practical, effective action without ever losing sight of the ideas without which politics was a barren desert. Enlightened ideas, von Rochau pointed out, don’t implement themselves magically.

All this is important because what von Rochau meant by realpolitik is what Angela Merkel means by realpolitik, not what Bismarck meant and certainly not the airy-fairy, Cloud Cockoo Land idiocies that have characterized EU policy for the past thirty years.

True, it took Merkel – and Germany – a long time to get where they are today, but at least they got there and, as a result, the EU actually has a future, instead of just a past. For thirty years Germany was like the young von Rochau, full of idealistic passion and convinced that if errant societies (Greece, Cyprus, etc.) were treated with generosity and patience, they would magically evolve into Germans. (Well, maybe not Germans, exactly, but at least into honest, hardworking, taxpaying, politically moderate democrats.)

That was Germany’s plan and it executed that plan with the usual German efficiency. But since it was a bad plan, it got the entire EU into some serious hot water. Germany had forgotten what Mike Tyson knew: “Everybody has a plan until you get punched in the mouth.”

Germany had already weathered a few light jabs over the years, a biff here, a bop there (Cyrus, Ireland, Portugal, Spain), but it was Greece that finally landed the roundhouse wallop that joggled Germany’s brain into abandoning Plan A (Cloud Cuckoo Land) and adopting Plan B (realpolitik).

If you read the newspapers – a regrettable habit – what you will hear is that by insisting on tough terms for Greece Merkel is killing the dream of a united Europe. It’s possible, of course, that those tough terms will in fact lead eventually to a Grexit, but so what? Imagine what persisting in Cloud Cockoo Land would do to the Eurozone – was Germany simply to keep bailing out failed and dishonest partners forever? Where would that end? (It would end in a Gerxit – pronounced “jerks-it,” an exit from the Eurozone by Germany and its northern European allies, leaving France and southern Europe to twist slowly in the wind.)

I have no idea, where all this Greek business will end, but I do know how it will get there: led kicking and screaming by Germany, trust has ended and verification has begun:

Does Greece need to sell off badly mismanaged state-owned assets? Those assets will be put into an EU-controlled fund and sold off. (Since Greece can’t be trusted to do it.)

Does the Greek pension system need to be utterly reformed (the system is bankrupt, but women can retire at age 50).(5) Money will flow to Greece after the reform legislation is passed.

Do the Greeks need to start paying their taxes, reforming their labor markets, opening service sectors to competition? The money will flow after Greece reforms its tax, employment and service laws.

Oh – Greece passed laws but didn’t actually implement the reforms? The money flow stops.

Is this demeaning to the proud people of Greece? Who cares? If they don’t want the money they don’t have to take it. Think of it as “receivables financing,” or factoring. A company that has demonstrated that it can’t manage itself and hence can’t borrow money or sell bonds goes to a lender for receivables financing. The company’s accounts receivable go into a lockbox arrangement controlled by the lender. The lender uses the cash to pay down the loan and releases some of it to the company under stringent conditions. This arrangement might allow the company to get back on its feet and it might not, depending entirely on how well the company manages itself going forward.(6)

In other words, led by a realpolitiking Germany, Greece is being offered and given much-needed financial assistance – including, eventually, much-needed debt reform – but only in return for real change, not empty promises. Forget what you read in the newspapers. This is the best thing that’s happened in Europe since they invented the grape.

(1) The term was originally German, of course, and was capitalized – Realpolitik – because those wild-and-crazy Germans capitalize every noun. But us more sensible Americans capitalize only some nouns, according to a long list of utterly impenetrable Rules.

(2) Grundsätze der Realpolitik, angewendet auf die staatlichen Zustände Deutschlands (“Practical Politics: an Application of its Principles to the Situation of the German States”).

(3) These answers are based on Otto von Bismarck’s misreading of von Rochau, an error that, however, allowed Bismarck to practice the ruthless statecraft that was necessary to unite the many German states (Bavaria, Saxony, Baden, Hesse, etc.) into one nation under the dominance of Prussia.

(4) In French, “Lumières,” and in German, “Aufklärung.”

(5) If they work in “arduous and unhealthy” jobs like (these are actual examples, folks) hairdressers, clarinet players, pastry chefs. Presumably, if a Greek woman worked in a job that actually was difficult – a coal miner, let’s say – she could retire at 30.

(6) When I was a young lawyer I spent many unhappy hours drafting receivables financing documents for my firm’s client, Mellon Bank (now Bank of New York Mellon). Talk about an arduous and unhealthy job…

Next up: Puerto Rico and the End of Political Innocence (Part 4)

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Please note that this post is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.

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