Winner of the New Statesman SPERI Prize in Political Economy 2016

Saturday, 21 February 2015

Greece: a simple macroeconomic guide

In reading this, which I will come back to, I thought something short and simple was required

In 2010 periphery Eurozone countries, including Greece, faced two problems: government deficits were too high, and as a result their economies had become uncompetitive. (Excessive deficits - public or subsequently socialised private - had allowed the economy to run too hot which pushed up inflation leading to a loss of competitiveness.)

The deficits needed to be reduced. Under flexible exchange rates this could have been done with relatively little cost in terms of unemployment because competitiveness could have adjusted to its appropriate level immediately via a nominal depreciation. The demand lost from lower public spending could be compensated for by more competitive exports. In a monetary union, this cannot happen, so a period of unemployment is inevitable to restore competitiveness.

The key macroeconomic question is how quick adjustment should be. Should competitiveness be restored quickly or slowly. Macroeconomics has a pretty clear answer which comes from the Phillips curve (of whatever variety) - slow is much more efficient. So it makes sense for some institution like the IMF to provide loans to the government to allow it to eliminate deficits gradually. There are lots of political and social reasons to make adjustment gradual as well, but this is just about the macro.

Those are general principles. When it came to Greece, the Eurozone made three key mistakes.

1)    Too much austerity too quickly, violating the logic of the previous paragraph. Sharp austerity can almost appear self-defeating in deficit reduction terms, as it plunges the economy into severe depression, making adjustment of any kind more difficult. The Troika has to take direct responsibility for this mistake.

2)    There was only partial (and delayed) default on Greek government debt (see below). This was clearly not in Greece’s interest, but it had benefits to other Eurozone countries.

3)    Adjustment was required in an environment of Eurozone recession and deflation, caused by needless fiscal austerity in the non-periphery countries. Restoring competitiveness is much more difficult if the countries you are adjusting with respect to have very low/zero inflation (because people resist nominal wage cuts).

That is the past, but it has direct implications for today. (2) means that the Troika were demanding Greece ran large primary surpluses in the coming years to pay back the remaining debt and adjustment loans. This makes correcting the error in (1) much more difficult, because it implies yet more austerity. In terms of macroeconomics it is a clear mistake. (If Greece could eliminate its negative output gap, it would be running a primary surplus of over 7% according to the OECD, which would be enough for everyone.)    

Now back to this Vox piece. It displays so much that is wrong with macro arguments coming out of the Eurozone at the moment. Examples:

a.    “For an economy in the dismal Greek situation, it essentially made no difference that it remained a member of the Eurozone ..” This ignores the basic macro in the second paragraph above. This denial of the importance of wage and price rigidities, which leads to the key cost of being part of a monetary union, has typified the Eurozone project from the start.

b.    “Since in all these cases painful adjustment was inevitable and costly, one should take the combination of the rescue packages and adjustment programmes as what they really are – a device helping to avoid a sudden fiscal and current account adjustment with even larger immediate pain.” It is of course true that with access to markets cut off, adjustment without any support from the IMF or elsewhere would in macro terms have been much more immediate and painful. But the implication is that the speed of adjustment matters, and in particular that it can still be too fast. The article makes no attempt to address this central issue. The message that comes across to Greece is that you should be lucky you got something.

c.    “During the past five years Greece indeed underwent serious reforms and fiscal consolidation. Progress has been remarkable …” What is remarkable is the extent of the collapse in the Greek economy. Some kind of recession was inevitable, but not a complete collapse in GDP, where over half of young people are unemployed. The article tries to suggest that this is just par for the course, rather than a function of the amount of austerity imposed.

d.    “A debt relief of public creditors could not substantially improve the comfortable state of the Greek government, let alone be justified easily vis-à-vis its lenders.” This is disingenuous. It is true that the effective interest rate on Greek debt is relatively low compared to other Eurozone countries, but nevertheless the lenders are demanding Greece run significant primary surpluses now, and they need not make this demand

I could go on and on, but this is meant to be short. To sum up, the problems displayed by this article amount to a neglect of the importance of wage and price rigidities, and the impact that fiscal austerity can have on demand leading to a needless waste of resources. In other words, a denial of basic Keynesian ideas.  

85 comments:

  1. I notice that they exclude Malaysia, the success story of the Asian crisis. Malaysia rejected IMF prescriptions. Devalued, repegged, imposed capital controls and eased fiscal and monetary policy. And experienced the least pain. Not that this means it would work everywhere.

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    1. Yes that is correct Eric. Malaysia ignored New Keynesian advice from the IMF and its chief economist, Stanley Fischer, no less. And at the time Mahathir was really ridiculed for "not understanding macro-economic theory". The reason the IMF pushed forward austerity policies after the Asian Financial Crisis was for "credibility and commitment".

      The IMF in an incredible swing in the orthodoxy now endorses capital controls in some cases. Ultimately what the IMF does does not depend on theory (which is a good thing) but what is the conventional American political wisdom (not a good thing).

      I do not agree with what Germany is doing at the moment. But I do see Greece's problem as very fundamental relating to its trade and industrial structure. A devaluation I would suspect, as in many such countries leads to a sharp rise in the cost of imports (for which there are no substitutes) and a potentially serious balance of payments crisis. I suspect Varoufakis is historically very literate and understands Marxian theory. He refers to "debt colonies". Countries that got out of this predicament carefully managed foreign exchange reserves and were very careful about a dependence on foreign capital. This sounds very consistent with that.

      Together with immediate debt relief, there has to a push towards Eurozone fiscal integration that must be careful not to absorb any new entrants. Politically a tall-order, but the only way out. Capital controls and fiscal easing will bring some relief in Greece, and the former is going to have to happen less their be a drain on capital from Greek banks. But it will not bring a lasting solution.

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    2. Another thing about this episode that reminds me of the IMF and the IMF/MIT economist's response to the Asian crisis. Have you noticed how often the Greeks are referred to as "tax cheats and welfare scoundrels". In the 90s it was all about the Asian countries being "corrupt". Recalling the tragedy of the history I almost puked when Krugman and others went on about this. It not matter if they were talking about Singapore or Indonesia or anywhere - they generalised across the board. There are issues relating to institutional weaknesses in some cases, but it was a very convenient justification for austerity policies.

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    3. There was nothing New or Old Keynesian about the IMF advice during the Asian crisis. But it was terrible advice: initially, it was tighten monetary and fiscal policy and defend pegs. Then when devaluations were forced upon economies in recession, the IMF still advocated tight fiscal and monetary policy (worried about inflation .. which never materialised). Malaysia scared the hell out of the IMF because they devalued, re-pegged and after briefly flirting with tight policy, introduced capital controls and completely reversed course. As a result, their recession was shallower and briefer, and their recovery stronger. Much like the US in the recent post-crisis phase. BTW, the IMF policies were designed by economists with "Anglo saxon" training. No nationality has a monopoly on being wrong ... or right.

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    4. "There was nothing New or Old Keynesian about the IMF advice during the Asian crisis."

      The New "Keynesian" bit was the 'credibility and commitment', which they got off the New Classicals, who got that off Friedman, who got that off old Gold Standard era monetarism.

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    5. It not matter if they were talking about Singapore or Indonesia or anywhere - they generalised across the board. There are issues relating to institutional weaknesses in some cases, but it was a very convenient justification for austerity policies.

      The 'shock therapy' urged on the ex-Warsaw Pact states, the 'anti-corruption campaigns' and 'crisis management' urged on the Asian countries, and the current 'austerity' campaign enforced on the Eurozone countries seem to differ mainly in name only.

      There seems to be only one small ideologically-acceptable set of tools in the toolbox and the international finance crowd has demanded that that tool set be used in every situation of economic crisis since the early 90's.

      Which would be fine if it worked. But performance has ranged from poor to disastrous and the folks who love that tool set seem to be entirely unaware of that. In fact they seem unconcerned with or out of touch with reality in a way very similar to the kind of disconnect displayed by ultra-committed Leninist-Stalinist types.

      max
      ['Which seems to leave the bulk of the population waiting for a 'God that Failed' situation.']

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    6. I am pretty sure Krugman wrote about the Asian crisis previously and, frankly, I am also pretty sure he'd criticize the IMF on this bit -- and his models definitely display a neokeynesian flavor.

      I am getting tired of this: people blaming economic theory by using strawmen -- and not out of stupidity or ignorance, but because politicians or well paid hacks keep iinvoking nonsense to justify whatever idiotic policy they prefer, claiming economists did it once it's a total mess.

      For God's sake, the vast majority of the profession has been hitting their heads against the wall during the last six years because no one listens. When we say don't go ahead with fiscal consolidation, they go straight ahead and claim victory when a brief relief of cuts allows GDP to grow a bit. When we tell them QE in the US won't get inflation to kick in at the ZLB, you have people yelling in anger that it will... For years and still not admitting their mistake.

      From inflation, growth and interest rates... Mainstream economics has been extraordinarily useful and accurate in the last years. I can't believe people still keep banging that nail when there's no nail to bang. Hell! Even heterodox economists took part to this exercise of projection, daydreaming about failed models. I got news for all of you: a model that is wrong will somewhen yield poor advice and, so far, despite historically rare events, it has not been the case
      case.

      If you want to criticize economics to help improve it, fine. I am all for discussion, but not for strawmen.

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    7. Re IMF and capital controls: Iceland entered into IMF program Nov. 19 2008, following the collapse of the Icelandic banks Oct. 6-9. On Nov. 29 the Central Bank of Iceland, co-operating with the IMC, announced capital controls, which shows that by then the IMF was open to the fact that the controls can be the right tool under certain conditions. – By the end of 2012 it was official: IMF approved of controls given certain circumstances as it had indeed done in Iceland four years earlier.

      However, talking about capital controls in Malaysia as relevant for eventual controls in Greece seems to be ignoring the fact that these controls are fundamentally different in all but name. In Malaysia, as in Iceland, the problem was lack of foreign reserves/currency. Currency outflows had to be stopped, there simply was not enough currency to meet the demand for converting the domestic currency (both countries had had highly attractive interest rates attracting international investors; that’s another saga).

      Capital controls in Greece would serve the same purpose as in Cyprus: preventing banks collapsing as lack of trust caused depositors to withdraw their funds. Notably, the controls were put in place in Cyprus at the same time as the bail-in, i.e. as part of that whole action.

      Consequently, it seems to make a lot more sense to look to Cyprus when discussing possible capital controls in Greece. The Malaysian situation was of an altogether different nature.

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    8. "I am pretty sure Krugman wrote about the Asian crisis previously and, frankly, I am also pretty sure he'd criticize the IMF on this bit -- and his models definitely display a neokeynesian flavor."

      He did, and he was big on the corruption part of the story. He also by the way said that Japan's government/GNP ratio was too big in the early 2000s! I've rarely seen a chameleon like Krugman.

      Sorry, just like the policy prescription that followed the Asian Financial Crisis (and policies that led to the problem - namely liberalisation of capital flows and domestic financial system based on the efficient allocation of resources arguments), "shock therapy" after the fall of the communist Soviet Bloc, ill-advised monetary and regulation policy that led to 2008, in all these things mainstream, especially New-Keynesians, and especially New Keynesians from MIT and attached to the IMF, played a big role, in fact THE role, in advising that countries took such policy positions.

      I agree with them re austerity and Greece (although I disagree with Krugman in saying (or used to say) that exit from the Euro is the answer)- but unfortunately these guys have no intellectual credibility at all. I'm sorry but it would be nice to get a little bit of humility from these people sometimes.

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    9. "Consequently, it seems to make a lot more sense to look to Cyprus when discussing possible capital controls in Greece. The Malaysian situation was of an altogether different nature."

      This is true, and a good comment. However, if Greece were to have its own currency, it would face these types of problems. Wren Lewis looks at the export side, he ignores the import side. Import costs would rise, and there is not the value added in Greek exports or a sufficient import substitution structure to cover this. This is a recipe for a foreign exchange crisis under its own currency (difficulty in acquiring sufficient foreign currency for exchange to cover the costs of imports). Lower fuel costs are helpful, but the problem is the import of expensive German capital equipment etc.

      But I agree with your comment, and capital controls would not solve the problem in Greece to the extent it would in Malaysia.

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    10. New Keynesians have to up their game. We now have the history of their responses on the historical record regarding the Asian Financial Crisis, the advice they gave the Japanese pre and post bubble, the advice given up to and after 2008, and shock therapy after the fall of the Soviet Union. They need to sort out when an efficient allocation of resources in the financial sector is important, when credibility and commitment is important, when fighting corruption is important and when dealing with depressed demand is important (and things they don't think much of - industrial and trade structures and institutional and social structures). Personally I would rather have country specialists than people with models in MIT make these judgements.

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    11. "I've rarely seen a chameleon like Krugman."

      Yes. The man seems to learn from his mistakes. It's a darned thing!

      "Which would be fine if it worked. But performance has ranged from poor to disastrous and the folks who love that tool set seem to be entirely unaware of that."

      The people who push for the ideologically restricted toolset are just fine with its performance. They themselves profit from its use quite handsomely. That's what counts to them. They don't give a shit about anyone else. In fact, money has a lot more value when other people don't have as much.

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  3. The main contribution of this "German" line of reasoning has nothing to do with macroeconomics as we know it. It is the view that recessions/crisis are ways to push through institutional reform. Taken to its extreme this argument is absurd: it implies near-permanent recession. But it cannot be dismissed so easily. It does appear that institutional reform across the Eurozone and at a national level occurs during crises or under duress. Weighing up these trade offs is another matter. But we should think about this issue.

    My own bias is that institutional reform has likely been taken close to its limits and a massive pan-Eurozone stimulus is urgently needed to foster any belief in populations that it was worth it.

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    1. "It does appear that institutional reform across the Eurozone and at a national level occurs during crises or under duress."

      Exactly, this is true even of the Northern member states, although to a lesser degree.

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    2. Are you the same guy who attacks New Keynesians under the guise of pro-austerity, because your arguments are all the same.

      The whole "reform under austerity" is basically Germany's line of argument.

      It has been an utter fiasco when measured on every reasonable metric. The only reason why it is pushed through is for ideological reasons. "Reforms" is just a byword for neoliberal policies.

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    3. Indeed.. 'Reform', 'Restructuring', 'Improving competitiveness', and so on.. always seems to amount to the same policy. Privatize everything, hack away at social provision, attack employee protections, cut tax for the wealthy and abolish any capital controls. The reasons change, the policy response doesn't.

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  5. "The deficits needed to be reduced... In a monetary union, *this cannot happen, so a period of unemployment is inevitable to restore competitiveness.*"

    Because of wage and price rigidities. As a matter of policy this is particularly heartless and counterproductive.

    We're going to boost unemployment as a matter of policy? Even conservative politicians go on and on how their preferred policies will boost growth and jobs.

    So of course voters are voting against austerity policies in Greece. PASOK went along with it to maintain their line of credit and stay in the Euro zone, but Syriza is in effect saying it's not worth it. So the ball is in the Troika's court.

    I see the primary surplus as the main thing. 1.5 percent or get out of the euro zone with its overly tight gold standard monetary policy. Will Germany give on this?

    With the East-Asian financial crisis, China side-stepped the whole thing by having capital controls. And after it was over, China stocked up on foreign reserves so it would never ever have to go to the IMF. China is the anti-Greece.

    The IMF used to be like the Germans: very hard-core about their structural adjustment programs. But possibly they've seen what they did with the East Asian Crisis. We have a savings glut as US Treasuries are in high demand.

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    1. " "The deficits needed to be reduced... In a monetary union, *this cannot happen, so a period of unemployment is inevitable to restore competitiveness.*"

      Because of wage and price rigidities. As a matter of policy this is particularly heartless and counterproductive."

      More heartless than central banks perpetually striving to keep 2% of the workforce unemployed (even in countries with poor safety nets for the unemployed)? I presume the argument that says high unemployment is worse than high depreciation/inflation has to do with the latter being more egalitarian/progressive. It is perhaps fitting that Germany has beaten wage rigidity with workers collectively pledging to work fewer hours for a while, and that is something other countries could emulate and subsidize, among other measures that would be more productive than just making Nazi-references about the Germans.

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    2. Oh, Anonymous, your views change with each comment. I wish you had one handle.

      "More heartless than central banks perpetually striving to keep 2% of the workforce unemployed (even in countries with poor safety nets for the unemployed)? "

      I don't follow. Eleven percent unemployment is much higher than 2 percent and is an enormous waste of resources.

      "I presume the argument that says high unemployment is worse than high depreciation/inflation has to do with the latter being more egalitarian/progressive."

      Yes high levels of unemployment are pretty much worse than anything else. Which is why I wish America would copy the German program you mention about shorter hours. I also wished American corporations had labor reps on their boards etc.

      Still the German monetary policy is insane. A focus on austerity and competitiveness hasn't worked as the continent sinks into deflation and the ECB is forced to do a trillion euro QE. Everyone can't have trade surpluses like Germany does.

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    3. "Oh, Anonymous, your views change with each comment. I wish you had one handle."

      That's presumably because there are multiple people posting anonymously... Still my views are indeed more complicated than pro-austerity or anti-austerity.

      "I don't follow. Eleven percent unemployment is much higher than 2 percent and is an enormous waste of resources."

      So lower the hourly wage then, that's basically what depreciation would be do anyway.

      "Still the German monetary policy is insane. A focus on austerity and competitiveness hasn't worked as the continent sinks into deflation and the ECB is forced to do a trillion euro QE. Everyone can't have trade surpluses like Germany does."

      How can a focus on competitiveness be insane? Are the Germans these days the only ones who realize that there is a world outside the Eurozone and that that world is changing rapidly (20 years from now who's going to hire an Italian or Greek to do work that a Chinese can do just as well but in half the time and for half the pay, if they don't watch out they're going to be nostalgic for the time when unemployment was "only" 25%)? Trade surplusses aren't required to be a successful member of the Eurozone.

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    4. After Greece and Italy leaves the Eurozone they can devalue their currency so that unemployment won't be so high. The problem is that when wages the world over are at Chinese levels, who will buy Germany's exports? Nobody will be able to afford them.

      As an American I was hoping a social democratic Europe would provide a check on and counter weight to the United States. Looks like Germany might blow it up over excessive spite and moralizing which would be a shame.

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    5. "After Greece and Italy leaves the Eurozone they can devalue their currency so that unemployment won't be so high."

      If they think that's better for them, why don't theyjust leave?

      "The problem is that when wages the world over are at Chinese levels, who will buy Germany's exports? Nobody will be able to afford them."

      German exports are either of better quality for the same price, or simply cheaper (because of higher productivity) than Southern European exports. Germany simply delivers more bang for buck and that's why they'll have a better chance of surviving in the future.

      "As an American I was hoping a social democratic Europe would provide a check on and counter weight to the United States. Looks like Germany might blow it up over excessive spite and moralizing which would be a shame."

      Social democracy only works in countries like Germany. The state is generous but people have to pay high taxes and be productive. Southern Europeans want the high wages and generous state but don't want to pay the high taxes and be as productive as Northern Europe. If you want to see a social democratic powerhouse rise you should look to Northern Europe, or hope Northern Europe can reform Southern Europe.

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    6. "As an American I was hoping a social democratic Europe would provide a check on and counter weight to the United States. Looks like Germany might blow it up over excessive spite and moralizing which would be a shame."

      As a European, I'd love to have a social democratic Europe too! Instead, we have the same race to the bottom we have globally, because caring about people, the environment and other things might cost someone some money they supposedly need to win the game.

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  6. Four of these authors are members of the german economic council, which was discussed here yesterday. Notably absent is the fifth member, Peter Bofinger, the Keynesian. In his place is Benjamin Weigert, a staff member. I bet they're trying to replace Bofinger with Weigert.
    Isn't it interesting how this article doesn't make economic but legal arguments, i.e. the contracts have to be fulfilled? "Political contagion"?
    One of their arguments for austerity is the debt-to-GDP ratio, yet they don't mention that this ratio has only increased since the beginning of austerity.
    Reading this piece makes me angry.

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    1. Prof. Bofinger is the most prominent German Keynesian, but he declared himself opposed to a debt writedown for Greece.

      Something must be wrong with those Germans.

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    2. "Something must be wrong with those Germans."

      Divided loyalties. Everybody wants their money back.

      The best way to deal with the debt would have been for the various governments to buy a market-valued stake of the French and German banks (and diluting the existing ownership) to bail them out and let them and Greece sort it out. Even with Greece defaulting, the market would have then taken care most of the rest (loan interests, credit rating, etc.). Maybe some small bailout would have been needed, but you could have offset that with the bank shares. But of course you can't do that because bankers.

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  7. I think that you can pretty much dismiss the article when you reach the words "anglo-saxon world". Of course this is not about the misconceptions of the "anglo saxon" world (which does not exist as a coherent entity) but the superior intellectual clarity and moral purity of the German one (aka "Northern European") , and the superiority of ordoliberalism as a social organizing principle.

    There is an ugly and frightening element of ethnic pride and self belief in Deutsche bloc analyses of the Eurozone crisis that needs to be acknowledged and called out. The self belief is so strong that, as Simon notes, the analyses tend not just to omit but to reject widely accepted economic principles and historical evidence.

    Now most people see German Financial Minister (and Merkel's enforcer) Schauble as a proud ignoramus but it is a charge that it is all to easy to level at many of the German/German inflected analysts of the European component of the global financial crisis.

    If one side in a debate believes things that just are not true no consensus is ever going to be reached. Instead the EU needs conflict and resolution, let is hope that Syriza's brave stand is the beginning of that process.

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    1. Compared to the Anglo-Saxon countries the German bloc countries have less economic inequality, higher social mobility, lower executive pay, lower deficits, more generous social welfare systems, lower crime rates, and get more bang for buck on their education systems which are also more egalitarian, and they have political representations that are more genuine reflections of the outcomes of elections.

      I'd say they have reason to be proud of what they have accomplished. I would also be wary of thinking the Anglos-Saxons know the cultures and ways of Southern Europe better than the German bloc countries that are closer to Southern Europe and have and had much more interaction with it.

      Saying that the German bloc flatly rejects Keynesian ideas is indicative of not listening to what they have to say: they simply maintain that Keynesian ideas do not apply to the situation in several Southern European nations (in other words that sustainable potential output is not much higher than actual output for those countries).

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    2. In addition, the German bloc does not trust Southern European politics one bit. A history of corruption, unstable government, overspending and even outright forgery of statistics have caused the German bloc to see Southern European politicians (and perhaps their voters as well) as monkeys with guns and that's why they insist on detailed (and in a way undemocratic) reform plans that are decried as colonialism by outsiders.

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    3. "hey simply maintain that Keynesian ideas do not apply to the situation in several Southern European nations (in other words that sustainable potential output is not much higher than actual output for those countries)."
      You may be right but this is almost more worrying than other explanations of the German approach. Do they - does anyone - really believe that an economy that has collapsed as far as the Greek one, with unemployment as high, is running near to its sustainable potential output.

      Nothing in the Vox article removes the impression that the major purpose of the bail-out - coming as it did in the teeth of earlier German insistence that the EMU should be bail-out proof - was to rescue German and other European banks from the consequences of their lending. Indeed the sentence "Greece’s main creditors are the member states, and the European banking sector is in much better shape than in 2010." seems to support, implicitly, that view.

      Finally, there is a phrase "each country always has the option to abandon these contracts, which in the current context means exiting the Eurozone and the EU" - AND THE EU (sorry, I can't see any other way of emphasising the phrase). This is raising the stakes beyond what we have seen so far, and the quasi-official status of the authors seems to throw down a challenge to the rest of the EU: is this a chance to get rid of the Greeks once and for all?

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    4. "Do they - does anyone - really believe that an economy that has collapsed as far as the Greek one, with unemployment as high, is running near to its sustainable potential output."

      It's possible in principle. If you make it so that labor is more expensive than what the market will pay for the product of that labor, and that happens to be something Southern Europe is really good at (they also lack legal opportunity, or societal appetite, for part time work and have relatively large amount of unreported unemployment). Some countries in the Middle East and North Africa have known very long periods of high unemployment, even when GDP was growing. In any case it's better to discuss the evidence (whether you think there is enough or not) for this viewpoint than to just yell that some of the most successful societies in the world don't have a clue about economics.

      "Nothing in the Vox article removes the impression that the major purpose of the bail-out - coming as it did in the teeth of earlier German insistence that the EMU should be bail-out proof - was to rescue German and other European banks from the consequences of their lending. Indeed the sentence "Greece’s main creditors are the member states, and the European banking sector is in much better shape than in 2010." seems to support, implicitly, that view."

      Of course the German bloc isn't being altruistic here, it wasn't with any of the PIIGS. If it was about altruism they would have given the money to countries that are really poor. But, that's not just about the German bloc banks, they've already been forced to take a loss and IIRC they are not the ones providing the newer loans. The German bloc wants to protect the euro and wants to get back the loans that the bloc's governments gave the Greek government. And they would also, if it ever came to exist, want a more fiscally responsible Greece to stay part of the EU, to help strengthen the long term strategic goals of the Union.

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    5. Anonymous 21.1.2015 11:11 - this is equivalent to have a wife you don't trust at all, and pretending the wedding to last. It would be a nightmare, wouldn't it ? In addition, leaving Greece aside, as concerns PIIGS the crises was much more caused by profligate Northern lenders than by Southern fiscal irresponsability.

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    6. Anonymous, you point out that Germany runs its own affairs extremely well. I totally agree that other countries should aspire to have the prosperity and social mobility Germany achieves. If the Southern European countries were to become as one with Germany and there was full political and fiscal union with all the taxes pooled and people voting for joint political leaders without regard as to whether they were German or Greek, then the euro would make sense. But its incredibly destructive to have the current arrangement as things are. Your attitude seems to be that Greek people might as well be left sitting on the sidelines unemployed. IMO its deranged to try and lord it over another country in that way. Wouldn't it make more sense for Germans to just stick to ruling the Germans since that is something they do very well as you point out.

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    7. @stone

      Yes, it was a mistake to let some countries into the Eurozone, most of all Greece. But alas, that cannot be undone, there is no mechanism to kick countries out. Back in 2010 I supported the idea to split the euro into a neuro and a zeuro, but that was before all the aid money started flowing and there is no mechanism to force such a split. I don't think you can ask the German bloc countries to just stick to ruling themselves while at the same time asking them to risk taxpayer money by bailing out other countries. It's natural for them to want to keep tabs on things when they borrow money to the country that re-elected Berlusconi god knows how many times (and has had an average of one new government per year since 1946) or the country that was caught forging its economic statistics (and managed to run a >6% deficit during the good years of 2003-2007), with both of these countries' names synonymous with corruption and tax evasion.

      @Marco Cattaneo

      Where there is a profligate lender there has to be a profligate borrower, or a complete moron of a borrower, you can't have one without the other. Ireland might have gone the route of economic stimulus because its economy is fundamentally productive, but its small government would have made that difficult. The other PIIGS are all unproductive and had to be kicked down a notch one way or another (it would have happened through depreciation if they were not in the Eurozone), though of course Greece was much worse than Spain.

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    8. Anonymous, I get the impression that you consider the euro to be a burden on Germany. Wouldn't the best option be for Germany to now voluntarily exit the Euro? Germany then would be rid of the burden and the PIIGS would get the depreciation of their debt overhead that they so urgently need.

      As it stands you seem to just be throwing your hands in the air and saying the PIIGS are getting what they deserve. Don't we need to face up to the fact that the debt that came from Germany bailing out the PIIGS' creditors has been largely "spent" on the wastage that comes from unemployment. Obviously every unused hour of human and machine time is permanently lost. It is moronic to pretend that we might recoup it; it's spilled milk; water under the bridge etc. In the face of that, you seem to suggest that it is now appropriate to impose an endless state of debt depression on the PIIGS regardless of how much further wastage of human (and other) resources that causes. Let's remember, before the Euro, Greeks and Italians did function perfectly well. You might argue that Germany functioned even better but then again that's largely a matter of taste. The Greeks didn't all want to emigrate to Germany the minute they could did they. The alternative of "Kicking down a notch" via depreciation is TOTALLY different from what is happening now because depreciation need not entail any unemployment and all the waste and misery that entails.

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    9. Anon. 21 Feb 2015 at 15.13

      "The other PIIGS are all unproductive and had to be kicked down a notch one way or another (it would have happened through depreciation if they were not in the Eurozone)": to me depreciation is 100% fine, but you have to be in favour of breaking the wedding - ie the euro - then. BTW Italy makes € 480 bln in exports and € 50 bln in trade surplus. So it's not unproductive now and would be hugely successful with a 20% gross labor cost reduction. Italian companies do fine in export, ie when demand is there; they suffer domestically because austerity insanely killed internal demand.

      "Where there is a profligate lender there has to be a profligate borrower, or a complete moron of a borrower, you can't have one without the other": they both made mistakes. The point is that a banking lender should know better than an individual borrower. Banking profligate lenders, mostly French and German banks, got a bailout largely paid by other Eurozone countries. Many innocent Greeks and European taxpayers are suffering because of this.

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    10. "Anonymous, I get the impression that you consider the euro to be a burden on Germany. Wouldn't the best option be for Germany to now voluntarily exit the Euro?"

      Yes, in the long run it might be better if Germany left and the other German bloc countries went with them, but that still leaves a lot of loose ends and could threaten the EU itself, which holds a lot of long term strategic significance.

      "BTW Italy makes € 480 bln in exports and € 50 bln in trade surplus. So it's not unproductive now and would be hugely successful with a 20% gross labor cost reduction."

      Needing a labor cost reduction to become successful is pretty much the definition of being unproductive (which is always relative to the rest of the world).

      "Italian companies do fine in export, ie when demand is there; they suffer domestically because austerity insanely killed internal demand."

      Everything does fine when the demand is there for the right price. Italy cannot build its entire economy around the things it exports. Perhaps you're right that a little bit more of government spending can boost Italian domestic demand sustainably but I really doubt it and it will only get worse in the future (low fertility, rigid labor laws, large influx of low-potential immigration), though the problems are much less acute than in Greece because Northern Italy is still working hard.

      "they both made mistakes. The point is that a banking lender should know better than an individual borrower."

      A banking lender should be expected to be as greedy as possible, to expect otherwise shows naivite and incompetence on the part of the borrower, but here I actually agree with you that European banks profited from being too big too fail. Though most eventually paid back their bail out money or were nationalized, so you can't exactly call the bail out free money, and of course Northern taxpayers footed a much larger part of the bail out bill. This all comes back to the heart of the matter: the North doesn't see the whole affair as an incident, they see it as just another occurrence of a cycle that they wish to break. They say that the South was warned many times to get its fiscal act together and they worry that if the South doesn't show it can reform now it will just slide back into its old, unsustainable, ways and then 20 years from now the South would again become an "innocent victim" of the evil predatory banks (the North doesn't think it's a coincidence that only less productive countries that have issues with corruption and high deficits keep falling victim to the banks) with the Northern taxpayer again having to chip in.

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    11. Anonymous, "A banking lender should be expected to be as greedy as possible"

      -True, and that is why it is so essential that goofy debt burdens devalue away.

      What the euro set up does, is to lock in the real value of the debt burden. If you think that devaluation is somehow wicked then you need to accept that debts need to be written down and the "greedy bankers" need to suffer the losses rather than being bailed out. I agree that it is wrong to make Northern taxpayers service the debt via bailouts -but let's be clear, the bailouts are paying for bloated creditor banks in the North and for the pointless waste engendered by unemployment.

      Also let's not rewrite history, Italy may have run big deficits before the Euro but they just were like water off a duck's back because of devaluation. It only becomes an issue when devaluation stops happening and so the debt burden causes unemployment and wastage of real resources. It is just a matter of taste whether to run small/no deficits and not have devaluation or to run big deficits and have devaluation. Both work fine. I, like you, would vote for a "Northern style" of fiscal management but I don't see any reason to try and impose that on other countries. What is dumb is to bailout creditors who have lent in a profligate style to a country still operating as though it had a devaluing currency despite being in the euro. Those creditors concocted all that debt and get to keep all of that "fictitious financial capital" as though it were real -all at Northern taxpayers' expense and with great collateral damage.

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    12. "Yes, in the long run it might be better if Germany left and the other German bloc countries went with them, but that still leaves a lot of loose ends and could threaten the EU itself, which holds a lot of long term strategic significance."

      Isn't it true that if it was an amicable parting and everyone agreed to maintain free trade, then it could turn out well? After WWII the financial card table really was thrown over and everyone had to start afresh and yet that created a golden age. I really think we have the potential to all flourish from this point forwards. Let's face it, money is a purely social construct so everything we do or fail to do in the name of money is entirely our fault.

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    13. "A banking lender should be expected to be as greedy as possible, to expect otherwise shows naivite and incompetence on the part of the borrower"

      That doesn't echo so well in the context of the original crisis and the derivatisation of sub-prime mortgages.

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    14. Anonymous at 3:26 wrote:

      "Needing a labor cost reduction to become successful is pretty much the definition of being unproductive (which is always relative to the rest of the world)."

      You're writing of Italy, but how do your words not apply equally to Germany? Most of Germany's improved competitiveness since the introduction of the Euro has come through wage compression, full stop. In fact, German labor productivity growth has been very low since the introduction of the Euro - notably worse than the US, Japan, Sweden and even the UK. In that respect, at least, Germany has done no better than the rest of the Eurozone and seems itself to be in need of genuine structural reform.

      - Dave Larson

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  8. In other words, a denial of basic Keynesian ideas.

    Yes. Or perhaps a stubborn determination to wipe Keynesian ideas (and implementations) off the face of the earth.

    max
    ['Can't really reason with fanatics.']

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    1. 'Can't really reason with fanatics.'

      You mean Keynesians like SWL?

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  9. In that Vox article they use the examples of Korea, Thailand, Estonia, Latvia, Lithuania and Greece. They say that it makes no difference whether the countries devalue their currencies. To me the crucial point is that to efficiently get out of a budget crisis (and to avoid getting into it the first place) it is essential that a country both has its own floating exchange rate currency and has all of its debt denominated in its own currency. That vital condition wasn't true for ANY of the examples they give was it?

    When they claim that, "For an economy in the dismal Greek situation, it essentially made no difference that it remained a member of the Eurozone" - are they being obtuse or what? Do they genuinely believe that if Greek debts had devalued then they would now be just as hard to pay back? Do they genuinely believe that had the Greek currency been free to float in the profligate years, then it would not have devalued leading to less Greeks buying BMWs etc and so the "dismal situation" never becoming so in the first place?

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  10. Reparations for Greece will be just as effective as reparations for Germany were after ww1!

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    1. Good thing they don't have a large military!

      Delete
  11. Greece is no ordinary economy. The "importance of wage and price rigidities" in Greece was (and is) so huge that any rescue package would be extremely expensive and, frankly, unaffordable and impossible to pass any of the Eurozone parliaments or the IMF board of directors. In any case, I am sure the Greek government would be extremely happy to see "Keynesian" economists persuade authorities in their countries to continue to bankroll them. Or, indeed, to persuade private lenders of the merits of "expansionary" large-scale waste of resources. Keynes, of course, would never endorse such waste. The most "Keynesian" economists have accomplished is elicit tepid expressions of support from leaders, such as Obama. Sadly, only Germany was able and willing to part with any money. One is reminded of Churchill's assessment of an earlier Greek disaster (not financial, although dearth of money was a cause of it) in 1922 : "On the one side the cries of a man drowning. On the other, words of support from those who have no intention to get themselves wet".
    The sorry fact is the Greece had priced itself way out of the world market and, also, because of a decade of extremely low Eurozone interest rates, "malinvested" itself out of the world market. Bankrolling Greece, while it ran down this malinvestment in fixed capital and human skills, is the "Keynesian" recipe. The money to pay for it was not there (and would, certainly, not be there, were Portugal, Ireland, Spain, Italy and, even, France to get the same cure). The alternative, writing off that whole malinvestmentright away, would be too terrible to contemplate. Living standards would plummet at least 40% in Greece, plus, in the world economy, the Lehman collapse would be eclipsed, were Greece to default big time.
    On the question of Greece, I believe it is time for "Keynesians" to mark their beliefs to a world of budget constaints and, indeed, to Keynes.
    George J. Georganas (posting as Anonymous because of IT clumsiness)

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    1. You are not the only one with difficulties of commenting in this particular blog,
      see the many "anonymous", while apparently posting successfully at deLong's

      SWL doesn't seem to care.

      I have wordpress and typepad accounts and comment on quite a number of other economics blogs as genauer since years

      but rarely here, and only as anonymous

      Delete
    2. What is the issue here that I am not supposed to care about?

      Delete
    3. I use the "name/URL" option and put in my wordpress address in that way. That seems an effective workaround. My guess is that google is trying to manoeuver people into using the google account default.

      I'm just grateful that SWL takes the trouble to host this blog.

      Delete
    4. If the "anonymous" people are experiencing the same issue as me, then what happens when I try to comment under my wordpress account, is that it just sends up a page saying "you do not own that account". So the only option is to either use the google account or be anonymous or as I mentioned, put the wordpress account in as "name/URL".

      Delete
    5. It's not just SWL's blog that does this. Nick Edmonds and JW Mason also have blogs on Blogger and the same effect occurs on those too. I just double checked now.

      Delete
    6. Great post George Georganas, one of the best I have seen on here. I really feel for the Greek people, as I did for the victims of Communist-Collapse Shock Therapy and the Asian Financial Crisis, but the hypocrisy of the New-Keynesians and the way they wash their hands of historical disasters really gets to me.

      Delete
    7. Sorry for expanding some more on the technical,

      now I can post as genauer, ...., but, ..... but, .... everybody can do this.

      Because I am not that Deena owning this, since 2007, long before I started commenting, and at some point became problems with some blogs and my nickname "Genauer"

      Delete
    8. genauer, would a solution be to log in with a Google account, if you have one?

      Delete
    9. my reply disappeared and I reposted on your blog

      Delete
    10. genauer, I guess Google have lost sight of their "Don't be evil" corporate motto :)

      Delete
  12. It is very clear that they are misguided Keynesians, like Krugman that is. As per the following historical facts, Keynes never said what they say.

    Keynes considered innovating entrepreneurship as the most decisive factor in economic growth and employment expansion. So, while he was adamantly opposed to initiatives by the state which encouraged rent-seeking entrepreneurship, he recommended the introduction of institutional arrangements to create an optimistic business climate. Only in instances where such efforts failed to bring about the expected results, did he suggest the expansion of public debt to finance productive investment, such as infrastructure, or to cover the difference between savings and investment. It is worth noting that Keynes never retracted his support for such kinds of public investment. He distinguished between current government spending and government spending for capital investment by stating the following:

    "I should aim at having a surplus on the ordinary Budget, which would be transferred to the capital Budget, thus gradually replacing dead-weight debt by productive or semi-productive debt ... But I should not aim at attempting to compensate cyclical fluctuations by means of the ordinary Budget. I should leave this duty to the capital Budget.”

    Keynes made a similar proposal to the committee on public spending in the United Kingdom for the purpose of achieving balanced budgets. In contrast to what is asserted at times, he did not propose the increase of taxation to reduce unemployment, since such a policy would reduce effective demand, add a major disincentive to the economic activities of individuals, and increase tax evasion. Also, in various writings that addressed the issue of overcoming the economic crisis, he stressed that any increase in public spending should be used solely for investment and production purposes and not for consumption (e.g., gifts to veterans of wars) for two reasons. First, because the repayment of interest and loans increases public debt, since the returns from public consumption expenditures are small, and, second, because the multiplier effects on employment are far greater when resources are used for investment. Realizing the dangers of heavy state interventions, he suggested that public investments ought to be undertaken with extreme caution, and subject to scientific scrutiny by a panel of economists not associated with the policies of the government, since he considered politicians insufficiently qualified and unfit to undertake such a project. Moreover, in his work on how to pay for the war he pointed out the dangers of increasing public debt, since in his view it reduces the incentives of individuals to work and creates inflation. From the above we surmise that, if Keynes were alive today, he would not agree with the expansion of the public sector, either through funding consumer spending or the proliferation of public enterprises and organizations. The economic policies that were designed and applied after the Second World War, which contributed to the spectacular enlargement of the state, would not gain his support. Ironically, many policies that were implemented in his name, reflect the views of his descendants and not his own.



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    1. Wonderful post!

      Since people like SWL et al. are hard to convince, it might be a good idea to give bibliographical details for Keynes's points .

      Delete
    2. Anon@22Feb01:02, You point out that Keynes advocated public works as a way to ensure demand. I think Kalecki said it best in 1943:
      http://mrzine.monthlyreview.org/2010/kalecki220510.html

      "The government spending programme should be devoted to public investment only to the extent to which such investment is actually needed. The rest of government spending necessary to maintain full employment should be used to subsidize consumption (through family allowances, old-age pensions, reduction in indirect taxation, and subsidizing necessities). Opponents of such government spending say that the government will then have nothing to show for their money. The reply is that the counterpart of this spending will be the higher standard of living of the masses. Is not this the purpose of all economic activity?"

      Delete
    3. From what I've seen, rightwingers are actually a lot more receptive to the concept of a citizens' dividend than to public works as a way to deal with lack of consumer demand and automation eliminating manufacturing jobs etc. Leftwing types seem to imagine that a citizens' dividend is politically impossible BUT it is the fear of "big government" herding people around pointlessly that really scares those on the other side. A citizens' dividend would not entail more government controlled employees and so is actually more palatable. Let's face it, Alaska is one of the few places with a citizens' dividend and that is hardly a place for socialism.

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  13. I find your blog very enlightening, and was wondering if you could please clarify this statement:
    "In 2010 periphery Eurozone countries, including Greece, faced two problems: government deficits were too high, and as a result their economies had become uncompetitive. "

    I would think it must take a few years for a country to "become uncompetitive". So, if government deficits caused the lack of competitiveness, they must have lasted a few years.

    But I thought:
    - Spanish government debt declined from substantially as share of GDP from creation of Euro to eve of crisis (I think from about 60% to about 30% of GDP, I think "eve of crisis" might have been something like 2007 or 2008).
    - Irish government debt was very small on eve of crisis (I think about 11% of GDP).

    Are Spain and Ireland among the "periphery Eurozone countries" you mention?
    Do I have my facts wrong/am I misunderstanding them?

    Thanks for your very thoughtful blog.

    Steve H

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    1. You are right - in terms of generating excess inflation, it was private sector excess that was directly responsible in Spain and Ireland. However the correct policy response to that would have been a mixture of macroprudential controls on private borrowing and a tighter fiscal policy, so in that sense government deficits were too high. (Actual deficits seemed OK at the time, but that was partly because they were flattered by the private sector boom.) I discuss some of these issues in this recent post:

      http://mainlymacro.blogspot.co.uk/2015/01/alternative-eurozone-histories.html

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    2. Thanks for your response.

      Steve H.

      Delete
  14. Great piece, as always. No comment on substance as you and PK have it covered .

    But a personal note on sticky wages. I teach at Korean Uni. In 2002 I came to Korea teach and watch the world cup. My salary in 2015 is almost identical. Same for my colleagues.

    Maybe just a Korean foreigner thing and anecdotal, but odd.

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  15. I would argue that the problems in Greece go beyond macroeconomics. As former Greek Prime Minister Papandreou once admitted: I can easily pass a law that forces the rich to declare their holdings and pay their taxes, however I have no means at my disposal to make anybody comply with this law. This is quite a statement. So what did the Greek govt do in order to comply with the bail-out conditions? It pushed the lower middle classes into poverty and left the upper crust virtually untouched. Cutting is so much easier than forcing to pay or comply in an institutionally gutted state.
    The big mistake was that other euro zone governments lent directly to Greece in the bail-outs. This guaranteed that politics would always trump economic logic. They want their money back and asked for a ridiculously high primary surplus target. If the IMF alone had managed the bailout – as it used to do in emerging markets crises – things could have been different. But then again, the monies involved surpassed the IMFs capacity, a massive debt haircut should have been implemented back in May 2010, but politics would not allow it...

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  16. What would have been the alternative to "austerity" rules when the several rescue packages for Greece were being put together? Greece was already factual bankrupt in 2010 and its debt was progressively divided among the other Eurozone member states and their tax payers. If the Eurogroup would have allowed Greece to borrow again, this would have signaled the markets that the bailout potential is in fact unlimited. Consequently, the interest rates would again have become (far) too low, and the inflationary wage bubble would have grown even further.

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    1. Put up a smaller bailout package to let Greece continue to function, possibly through the original lender banks, and nationalize them (internationalize?) i.e. bailing them out by taking a share of ownership. Put more controls on bank lending in general, punish the managers of the banks in question. Then the market (and the banks i.e. their owners) would have borne the risks and responded accordingly and it wouldn't have mattered to anyone else if Greece had partially or even fully defaulted its debt. The debts would have been paid back to the governments from the banks' eventual future profits.
      See anything wrong with that?

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    2. That's still lets Greece itself off the hook. They'd have less of a reason to avoid running 6% of GDP deficits again during the next boom, and so on... Other countries might catch on, your basic moral hazard really.

      Delete
    3. Well, it lets Greece off the hook in the sense that private lenders (or their owners) would bear the risk of their risky lending. It doesn't let Greece off the hook in the sense that its credit rating would fall dramatically and nobody in their right minds would lend it any money any more simply because they wouldn't get it back. Greece simply couldn't run those deficits any more because they need someone to lend them the money allowing them to do so.

      As for the letting Greece off the hook for not paying, are you serious? You don't think they're off the hook now? The current figure must be some 50% of the original value and even that's optimistic. The inflation will probably eat a lot of that away eventually anyway. Greece is determined to pay it back now, but there will be more wiggle room in the future if the economy in the eurozone ever really picks up. It's just that now we have nations socializing the market risks and rewarding reckless lending - talk about moral hazard there! And look at the credit ratings, the good borrowers get higher interests because nobody will step in to pay their debts. We need less incentives for banks to not act stupidly, not more. You can't borrow too much if nobody lends you the money.

      I suppose one good thing did come out of this: the two corrupt, former major parties are now out in Greece - probably permanently - and non-corrupt Syriza is in. It might have happened using the other way as well but maybe not. Hell of a price, though: Greece's economy in shatters and everyone else deep in debt and the rules thoroughly circumvented as opposed to Greece in much better shape and other nations now major owners in large, profitable banks.

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    4. And by "circumvented", I mean "effectively broken".

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    5. "Well, it lets Greece off the hook in the sense that private lenders (or their owners) would bear the risk of their risky lending."

      The opposite is true: Private lenders would still assume that Greece will eventually be bailed out again and again -- and probably their assumption would be correct. So there would again be nothing that prevents an excess debt accumulation. A full-blooded transfer union would be the consequence.

      Greece must exit the Euro.

      Delete
    6. I think you failed to realize that the owners of the lenders would have their ownership diluted. That would have an effect. So would the falling Greek credit rating. So would possibly renegotiating/stripping the executives of the repossessed banks of their pay and possibly jobs. (Other banks) continuing the practice would simply end up getting themselves nationalized or bankrupt. Here's the thing: Bankers don't like being subservient to (=owned by) democratic governments because that means tighter regulations, increased oversight and, thus, less money and more convictions. And of course, would Greece then had defaulted on the debts (as is sort of its prerogative as a sovereign state), the heads of those executives, who made these decisions, would have rolled regardless. There's bailout and there's bailout: There's no incentive to taking risks that lead to bailouts where no actor profits.

      What I outlined was a way to organize the bailouts in a way that the lenders bear the risks and by allowing Greece the option to default on its debts. No bank will lend out money to an insolvent nation when that model of bailout is the template being used, because defaulting is the better choice for an insolvent nation. Greece obviously would have then had to make cuts anyway, but they would not have been forced on them by anyone else but themselves. A transfer union would not appear since the bailout would happen through nationalization of banks and/or bankruptcies and nationalized banks would not be allowed to act as irresponsibly. Get it now?

      I'm not saying Greece was innocent, not by any measure. I'm just questioning the point of punishing them this much for the sole joy of punishing them (because it's economically inefficient and socially untenable) and saying we shouldn't have rewarded(!) the lenders by the transference of the debts onto other, more solvent nations. Markets should bear the risks they take. A bailout should happen if there's a systemic risk or failure, but then there should be no profit in it for anyone and regulation has to occur to prevent it happening in the future.

      Delete
  17. This comment has been removed by the author.

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    1. This comment has been removed by the author.

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  18. [corrected re-post]

    The article by the - much admired - Mr. Wren-Lewis leaves at least as many questions open as the article it quotes.

    Speed of adjustment: under the existing program, fiscal adjustment stretches already over 7 years. Stretching it further, to, say, 10 or 15 years, raises at least two questions:

    (i) is 10-15 years of continued fiscal contraction doable? How long can a country live in a fiscal bind? May it be poltically more sustainable to accept more pain in the short term, but then be done with adjustment and move on? The Baltics seem a case in point.

    And (ii) - who pays? Reducing the short-term fiscal effort means accumulating more debt. Should Greece push public debt to 200+ percent of GDP – which would require primary surpluses of 6-7 percent in the long-run to keep debt sustainable, rather than the current 4.5 percent?

    Debt relief. Now for (ii) Mr. Wren-Lewis has a solution: more debt relief, beyond the write-off already granted in 2012 and the reschedulings that have brought Greece's effective interest rate on public debt below Germany's.

    Technically, every debt problem can of course be solved by shifting the burden from debtors to creditors (or to third parties). In this case, European taxpayers would pay instead of Greece's. Though not only of Germany, but also Estonia, Latvia, Slovakia, Slovenia—countries with lower per-capita incomes than Greece.

    Which taxpayers should pay is first a question of fairness - long before it is a macro question (which is why talk of “clear Macro mistakes” in this context seems rather off). Should other Europeans cash in such that Greece’s long-term primary surplus can remain below 4.5 percent of GDP- a level that is already below that of, say, Italy? Should they cash in to further reduce Greece’s adjustment need - a need that is so large because Greece entered into crisis with a structural primary deficit of 10 percent, in turn the consequence of Greece's fiscal deficits of 6-10 percent of GDP in the midst of the pre-crisis boom? [In this regard, btw, Greece is very different from all other periphery countries, hence characterizing Greece as “facing the same issue” as everyone else is misleading.]

    Now, maybe the other Europeans should indeed pay, maybe not. I can see arguments both ways. The existing adjustment program - specifically the amount of debt relief delivered through it and the corresponding primary surplus target - reflects a view of what the involved parties considered fair and doable. Mr. Wren-Lewis may have a different view and this is legimitate, but then this view has little to do with Macro.

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  19. I posted a comment on Thai post here: http://brahmanstream.blogspot.co.uk/2015/02/greece-simple-maceconomic-guide.html?m=1

    ReplyDelete
  20. Anonymous22 February 2015 at 03:01

    "After Greece and Italy leaves the Eurozone they can devalue their currency so that unemployment won't be so high."

    If they think that's better for them, why don't theyjust leave?

    In Greece there is brain washing since 2010. People think that we (the Greeks) take the loans from EU and pay the pensions and the wages in public sector. Plus they think that Greece will be destroyed if we return to drachma. Reality is that after one-two chaotic years (as P. Krugman wrote) crisis will be a bad memory for Greece.
    Also propaganda for the reasons of crisis make people not to react. They think that is Grece's fault instead that it is euro coin fault.
    If we stick to eurzone very bad things will happen. I wonder why USA leave Germans to do their things given the situation exists in Libya, Syria, Turkey, Ukraine.
    Who needs Greece to be a mess?

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  21. I would agree with Prof Wren-Lewis's analysis of the situation in Greece and the dubious IMF role and recommendations. Supporting example is another most recent IMF patient, Ukraine. In the first Memo signed in early 2014, when the situation after the Maidan revolution was already spelling out future turbulence and great destabilisation risks, the IMF insisted that Ukraine's central bank abandons the fixed peg and simultaneously provides unlimited access to refinancing to commercial banks that started to experience massive deposit withdrawals. Without due control from the regulator (and the IMF), most of the refinancing was used by banks to buy foreign exchange. This sent the Ukrainian currency into the devaluation downfall. War that followed with its impact upon the economy (about 20-30% of country's GDP immobilized by now) has further increased a panic and speculative demand for foreign exchange. Ukrainian currency had lost 100% of its value by end-2014. Since more than 75% of all retail goods are imported, including fuel, medicines and food, consumer inflation spiralled and reached 25% by year end. Further devaluation in 2015 practically destroyed national currency (400% devaluation now compared to end-2013). As a result, the central bank lost its control over the situation and the devaluation-inflationary spiral has materialised. IMF disbursed in 2014 only slightly more than USD 7 billion out of original 17.5 bn insisting sometimes on controversial conditions (i.e. purchase by the CB of forex on the open market into reserves during the peak speculative demand). The new EFF conditionalities agreed now envisage very tough fiscal consolidation, mainly through 200% hikes in utility tariffs, dramatic cuts on salaries, benefits, bonuses, taxes on pensions, excise duties and other measures. Against the unprecedented squeeze (40% down) on real incomes, this will completely destroy domestic demand, entrepreneurial activity and business investment, the only remaining drivers for economic growth. Export effect from massive devaluation has been minimal. Inflation and further devaluation are main risks that have already undermined financial stability and economic prospects. Fiscal imbalances, due to ongoing conflict, continuing devaluation and economic slump, are difficult to predict. Foreign assistance package committed so far has been far short of both external and internal imbalances meaning that the shortfall would be met via the further massive monetization of government debt. The circle closes.
    What can be done by CB and government in these dire circumstances? Please advise. If you, colleagues, would like to get a better grasp of Ukraine's economic situation and outlook, please write to: yp1306@gmail.com. Would provide you with proprietary analytics and personal conclusions on this burning issue.
    Yuri, Kiev (Ukraine).

    ReplyDelete
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  23. Hello all. I am a citizen of Greece and I can honestly say things are not looking very promising here. Whether or not the drachma worked its rather not important in my opinion,since its all about the Greece exports. The demand lost from lower public spending could be compensated for by more competitive exports and this is, in my opinion, what can save us and if not save us help us out tremendously.

    ReplyDelete

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