My earlier post making some parallels between attitudes to Greece and attitudes during the Irish potato famine of the 1840s was picked up by others in Ireland and Greece, and has drawn some interesting reactions. Thankfully most understood that, as I wrote: “Of course the Irish famine is different in degree and form to the difficulties being faced by many in some Eurozone economies.” So why did I still want to make the comparison? The trigger was the denial of responsibility highlighted by the Lancet study I referred to, and the common alternative view that all problems were down to a corrupt or inefficient Greek government and economy.
I wanted to make the parallel with the Irish famine for three reasons. First, there seemed to be the same type of deflection of blame going on today as at that time. Second, ideas about what could and couldn’t be done in terms of economic relationships were central. Third, the verdict of history is pretty clear with the Irish famine. The British government did provide some famine relief, but what history remembers is that it was not nearly enough. History remembers the action and inaction of the British government, and not the inefficiencies and inadequacies of Irish agriculture.
One response to my criticisms is that without Troika or IMF support, austerity would have been much more immediate and intense. This is of course true: unable to borrow at all, the Greek government’s primary deficit would have had to fall to zero even if all interest payments on debt had been halted. But as I noted above, the headline from history is not that the famine would have been worse still if the British government had not provided any relief, but rather that it did not provide enough.
Troika assistance to Greece made two major mistakes. First, wishful (at best) thinking about the amount of government debt Greece could support. Second, the Troika imposed a front loaded austerity programme that was far too severe. How much of the subsequent collapse of the economy was due to this is unclear, but few seriously doubt it played a major role. As I noted here, the estimates by the Troika of the impact of austerity that were made at the time ignored basic and widely accepted macroeconomic analysis.
Mistakes get made, particularly in a crisis. When these mistakes become evident, as they did pretty quickly in the case of Greece, there are two possible responses. The first is for those who made these mistakes to admit responsibility, and try and learn the lessons. I think the IMF has to some extent tried to do this, as I noted in this earlier post. The second possible reaction is denial, and to seek to blame others. It is this response that history does not look too kindly upon.
Denial takes many forms. There are many myths. One of the most invidious is that the failure of Greek debt to stabilise is because the Greek government failed to undertake the required austerity. This is simply not true, as this excellent study of all the assistance programmes to Eurozone countries by Pisani-Ferry, Sapir and Wolff documents. (See also the numbers I presented in this post.) The austerity programme was always far too severe, and became more so over time.
Another myth is that workers refused to cut wages, thus preventing the necessary adjustment in competitiveness. To quote the Pisani-Ferry et al study: “It is only for wage-based competitiveness indicators such as unit labour costs that the improvement is noticeable. Thanks mostly to downward wage adjustment, ULCs started to decline already in 2010 and the trend accelerated strongly in 2011-12.” So the image of the stubborn Greek worker refusing to face reality is incorrect.
There is also a denial of the extent to which the Troika promoted its self interest, rather than doing what was good for the Greek people. No doubt part of the failure to recognise the necessary debt write off was wishful thinking, but it is difficult to believe that it had nothing to do with who held that debt. As this Breugel study shows, the term ‘privatisation’ appears ten times more often in Commission programme documents than the word ‘poverty’. When it became possible that Greece might elect a government headed by Syriza, Greece was threatened with exit from the Eurozone not because the Troika believed this prospective government might do more harm to the Greek economy, but because they threatened to suspend interest payments.
A good example of this self interest is defense spending, and German built submarines in particular. Greek defense spending is well above the Eurozone average. An obvious initial austerity measure would have been a complete suspension of Greek spending on overseas produced military hardware. This is one example where austerity could actually be expansionary: Greece benefits from the reduced tax burden, but the demand impact is felt entirely overseas. Any fears about Turkey could have been covered by assurances from other governments. Indeed, given the alternatives, it seems criminal not to have made this a condition of Troika support. But of course this would be to ignore where this hardware was built - mainly in Germany and other Eurozone economies.
As Merkel is reported as saying: “But we never asked you to spend so much of your GDP on defence”. Yet the Troika has not been afraid to ask for many things. One of the myths is that Troika loans have not involved much conditionality - as Pisani-Ferry et al note, “the Troika has immersed itself more and more in the sector-speciﬁc regulation of microeconomic behaviour.” The extent of corruption in the procurement of Greek military hardware is immense, but the bribes have been paid by companies in other Eurozone countries, particularly Germany.
It is clearly nonsense to argue that the damage done to the economy and health of the Greek people is all down to corruption and inefficiency within Greece and nothing to do with Troika actions. Denial of responsibility is particularly dangerous if it means not admitting your mistakes but instead repeating them. The tragedy of the Greek political class is not that they failed to enact Troika policies, but that acquiesced to them. The one ray of hope is that now the Greek government is no longer running a primary deficit, so it potentially has much stronger negotiating power. I only hope they use it.
Earlier posts on Greece
17/03/14 The sharp but effectual remedy
13/06/13 How a Greek drama became a global tragedy
19/04/13 The stupid cruelty of the creditor
14/11/12 Greece: continuing the disastrous ‘squeeze and hope’ strategy
23/07/12 Playing with Fire in the Eurozone
23/05/12 Why I can still believe the Euro will survive, just