Not part of the mediamacro myths series, but in a way related.
Chris Giles has a recent FT article where he describes how non-Greek policymakers (lets still call them the Troika) see themselves like parents trying to deal with the “antics” of the problem child, Syriza in Greece. He splits these parents into different types: those that want to act as if the child is grown up (though they believe they are not), those who want to be disciplinarians etc. As a description of how the Troika view themselves, and present themselves to the public, the analogy rings true. It certainly accords with the constant stream of articles in the press predicting an impending crisis because the Greeks ‘refuse to be reasonable’.
In FT Alphaville Peter Doyle writes about a recent meeting at the Brookings Institution in Washington, the highly respected US social science research/policy think tank. In that meeting Wolfgang Schäuble and Yanis Varoufakis, finance ministers of Germany and Greece, gave back-to-back presentations. He describes how “Schäuble was avuncular, self-effacing, and Germanic, and was tolerated rather than warmly embraced by his hosts.” In contrast “when Varoufakis spoke, eyes burning with anger, his hosts were animatedly engaged.” The audience actively sympathised with the position of Greece, and asked “how it felt to be right but penniless”. He writes “There was no doubt where the hosts’ sympathies lay between their two guests.”
I am not surprised at all by this account. The arguments that many of us have made about how far Greece has moved and what agonies it has endured in order to satisfy the unrealistic wishes of their creditors are I think widely shared among our colleagues. We know that if Greece was not part of the Euro, but just another of a long line of countries that have borrowed too much and had to partially default, its remaining creditors would be in a weak position now that Greece has achieved primary surpluses (taxes>government spending). The reason why the Troika is not so weak is that they have additional threats that come from being the issuer of the Greek currency.
It is important to understand what the current negotiations are about. Running a primary surplus means that Greece no longer needs additional borrowing - it just needs to be able to roll over its existing debts. Part of the argument is about how large a primary surplus Greece should run. Common sense would say that further austerity should be avoided so that the economy can fully recover, when it will have much greater resources to be able to pay back loans. Instead the creditors want more austerity to achieve large primary surpluses. Of course the former course of action is better for Greece: which would be better for the creditors is unclear! The negotiations are also about imposing additional structural reforms. Greece has already undertaken many, and is prepared to go further, but the Troika wants yet more.
As Andrew Watt points out, from the perspective of the Eurozone and IMF, this is all extremely small beer.  You would think the key players on that side had more important things to do with their time. The material advantages to be gained by the Troika playing tough are minimal from their perspective, but the threats hanging over the Greek economy are damaging - not just to investment, but also to the very primary surpluses that the Troika needs. So why do the Troika insist on continuing with brinkmanship? Can it be that this is really about ensuring that an elected government that challenges the dominant Eurozone political and economic ideology must be forced to fail?
In a recent post that I (jokingly) entitled ‘Should economists rule?’ I suggested that much of the debate about the delegation of economic policy to economic experts was really an issue about political transparency rather than diminished democracy. Elected politicians normally always have ultimate control. Sometimes ‘delegation’ amounts to little more than making the advice they receive transparent: contracting out the fiscal forecast to the OBR would be an example.  All that democracy loses in this case is the ability of politicians to conceal or manipulate the advice they receive, and to fool the public as a result. Greece may be (unfortunately) a good example of how far politicians are prepared to go in misleading their own electorates to cover-up their mistakes and achieve their own political ends.
 The IMF mainly consists of hundreds of economists, but it is run by politicians, and on issues like this the politicians tend to take control.
 With central bank independence they do lose control, but normally with the power to take back control in some way. Furthermore, if the undemocratic central bank persistently made bad decisions, taking back control would be popular. An exception is the ECB, which may help explain why many of its words and actions are seriously problematic.
The primary surplus is in doubt for 2015: http://www.forbes.com/sites/timworstall/2015/02/16/greece-still-has-a-vast-problem-it-doesnt-have-a-primary-budget-surplus/ReplyDelete
Aside from that, all the talk about a primary surplus treats the conditions the debt as malleable, whereas Europe has built a sense of rule of law. The rule of law says contracts usually need be fulfilled unless both parties change them.
And then there's the possibility of a bankruptcy caused by temporarily insufficient liquidity instead of by fiscal unsustainability.
Taking this into account, the Greek government's fiscal freedom of action is likely very much negative and the talk about some once-positive macro figures is politically irrelevant.
Greece's problem is that the new, coalition government of political upstarts has the antipathy of career politicians by default, is "impolite", promised too many unicorns during the election campaign and is lacking fiscal freedom of action. They behave as if they were entitled to get billions from the 'institutions', when in reality the treaty underlying the common currency says the opposite.
The more antipathy the Greek government produces in Germany and other countries, the easier their governments will slip away in case of a Greek bankruptcy without being blamed much for the sunk costs of 2011-2014 aid.
Another problem of the Greek government is that the initial aid didn't bail out Greece, but its stupid debtors. And those were already saved from their stupidity, so they don't lobby for more aid any more. In other words; a Greek bankruptcy would not be much of a 'systemic risk' any more.
"The rule of law says contracts usually need be fulfilled unless both parties change them"Delete
The word 'usually' is rather important in this context. For unusual situations there is in most jurisdictions a legal mechanism for relieving people and companies of their debts when they are unable to pay them.
Or force majeure.Delete
But in this case it's about state bankruptcy.
The ability to choose default and/or Grexit is the freedom of action of the Greek government. Blackmailing doesn't seem to work well any more.
There is no freedom of action from a possibly existing primary surplus, so all the talk and writing about primary surplus in the context of Greek policy options is misleading.
Why did Greece borrow too much in the first place? Partially because banks had the impression (rightly) that the EZ would not let a sovereign fail. Same applies on our domestic scene: government stands behind depositors, which means that banks get funded at an artificially low rate. Then we all wonder why private debt is at record levels.ReplyDelete
That's in large part about income distribution changes, though - since for every unit of currency borrowed there's also someone who saved a unit of currency.Delete
Consumer debt is in part a buffer that delays the obviousness of income distribution changes, since those who become relatively poorer can maintain their relative consumption with credit for a while.
''Can it be that this is really about ensuring that an elected government that challenges the dominant Eurozone political and economic ideology must be forced to fail?''ReplyDelete
Isn’t that obvious? The reason the creditors are keeping such a hard line against Greece is that they want to deter other countries from questioning and changing the German paradigm of austerity. Imagine if small Greece succeeded in overturning the austerity policies of Germany, immediately Italy or Spain would demand the same.
Btw Paul krugman is pretty clueless on his recent comments about the Greek crisis on the economic and political side.
On politics he believes that the creditors stance is determined by ideology or by the belief in expansionary austerity. Also it seems that he doesn’t understand the German motives. He thinks that Schäuble is some kind of radical who wants Greece out of the euro for punishment.
Of course all these are sheer nonsense.
Germany wants Greece inside the euro(fear of contagion) but humiliated and capitulated so than can be an example for avoidance to the other European countries. OF course Schäuble doesn’t believe that austerity expands the economy,. He is a pragmatist ,he is not even an economist, but he knows that it contracts the economy and he wants exactly that.
PK comes across as totally naïve in European politics.
On the economics side he seems to believe that a collapse of the euro would be a disaster for Greece and Europe. But there is zero evidence for that. Monetary unions have collapsed in the past without disastrous results and many times with beneficial results . Also there is zero evidence that a change of currency creates serious economic disruptions for the country that attempts it..
He has an outdated American perception of Europe. He thinks that EU is the one thing that prevents Europe from going into war. So if the euro collapses the EU will collapse although they are two different things and war will ensue or the far right will rise. The reality is that the chance of war between European countries is practically zero whatever happens to the euro.But all this fear mongering plays into Germanys hands as I will explain now.
I think Schäuble is merely concerned about the risk to the German taxpayer, which is indirectly a risk to Merkel's Chancellorship and thus his own power. At the same time he knows the German public doesn't want more money sent to Greece.Delete
BTW, the debate in Germany about Greece isn't about "austerity". It's about "Reform". German media highlights the huge potential for improvement in Greek legislation, and thus there's little inclination to help Greeks who have many at least superficially much more comfortable policies and refuse to give them up before accepting de facto transfers.
The fact that Greeks have suffered a lot and fallen into poverty due to "austerity" is based on the underlying fact that they were poor in the first place, having a horrible economic structure. They fell back to reality, that's why they fell so deep.
No they were not poor. Greek GDP was around 90% of German GDP in 2008.Delete
Austerity made them poor reducing GDP by 25%,sending U to 30% this is ECON 101 when you reduce the deficit, GDP falls.
That the lack of reforms can reduce the GD of a country is hilarious..
I was right about the german propaganda...
Interesting. You dare to come up with this 100% fiction of yours in this place?Delete
Your statement is ludicrous in its face, and the stats as I just pulled them out of tradingeconomics.com (a very convenient website) are:
Greece 2008 GDP per capita, EUR: 23,493.23
Germany 2008 GDP per capita, EUR: 36,009.62
That's about 65%. During a boom in which a goods trade balance deficit substituted for lacking Greek secondary sector output.
Here's some more about the 'quality' of the Greek economy:
12 of Greece's companies were among the 2,000 largest of the world in 2008:
7 from banking sector
1 Coca Cola subsidiary
Secondary sector for export? What's that?
‘’ Greece may be (unfortunately) a good example of how far politicians are prepared to go in misleading their own electorates to cover-up their mistakes and achieve their own political ends.’’ReplyDelete
Simon as you correctly pointed out Germany wants for the new Greek government to fail.
But I want to comment on this last line. The reason that germany follows that line it’s not the german electorate.The german media (with Bild the prime example) can manipulate the german opinion thinking that greeks are lazy,they are spoiling our money so they can ensure german support for the policy towards Greece.Besides history has shown us that german people are pretty susceptible to progadanda. Nor the past mistakes of European policy leaders can explain their stance.
It is pretty easy to understand what happens if you study the bargaining game between the two sides Greece and the creditors.
Three are the main factors
a)The greek banking system is in life support from ECB.If the creditors decide to pull the plug as in Cyprus 2013 Greece would have only two options full surrender to the creditors so that liquidity can be restored or exit from the euro.
b)Debts to IMF and ECB are maturing and Greece is running out of cash. A default inside the euro would accelerate deposit withdrawals and will create further uncertainty that will hurt the greek economy and ultimately new greek government’s support.
Also it could give ECB the excuse to pull the plug as in a) or impose capital controls.
All these would severely weaken Greece bargaining power vis a vis the creditors.
So time is on creditors side..
c)the greek government as repeatedly has stated is against exit from the euro as also a large majority of the greek population as their first priority.
All these 3 together imply that Greece doesn’t want to leave euro and as time passes life inside the euro without agreement with the creditors would become more and more difficult. As time passes the bargaining power of Greece inside the euro would become non-existent so a capitulation to creditors wishes seems the inevitable result.
And all these are very well understood by the creditors.
So is Schäuble rational or radical?
He is pursuing a strategy that is in Germany’s interest, humiliation of Greece,I explained before why this is so, and it’s only matter of time before he succeeds.
Can something go wrong in Germanys plan?
Maybe the greek government can change stance and threaten with exit from euro if only to get a better deal. Or the fear of an a accident could force the creditors to back off from some of their most crazy demands and ropose a reasonable compromise to Syriza.
But until now the creditors don’t seem to fear these kind of considerations. They’re eating time waiting for the Greek surrender.
So it’s not ideology, fanaticism, belief in the confidence fairy,expansionary austerity,inflationphobia that is driving germans and Europeans behaviour. It is a rational behaviour from their part.
They want to punish the new government, because it is in their interest and they have the necessary means to do it essentially without risks.
Can you indicate a post on Greece where you have considered the effect of tax dodging on their primary surplus.ReplyDelete
«It is important to understand what the current negotiations are about. Running a primary surplus means that Greece no longer needs additional borrowing - it just needs to be able to roll over its existing debts. Part of the argument is about how large a primary surplus Greece should run. Common sense would say that further austerity should be avoided so that the economy can fully recover, when it will have much greater resources to be able to pay back loans. »ReplyDelete
I think this analysis as to "what the current negotiations are about" is rather based on imagination.
Yes, Greece now have achieved a primary surplus, and moreover they have also achieved a balance of trade. So in theory austerity so far has been "successful", and if the debts can be rolled over, which isn't impossible, the Greek government can maintain the current situation and does not need new funds.
However the price of primary budget balance and of a balanced trade account have been a 25% cut to GDP and a similar cut to consumption, that is the living standards, for greek voters. Sure, their GDP per capita in PPP terms is still higher that of several other EU members, in particular it is way higher than that of Bulgaria, never mind neighbouring Turkey; and a lot of Bulgarian and Turks immigrate even not to Greece to enjoy a much better standard of living.
But Syriza have promised their voters not a continuation of a balanced primary budget and of balanced trade accounts and keeping GDP at 25% lower than what it used to be: they have promised to their voters "the end of austerity", which their voters can only interpret as increased consumption, going back at least partially towards pre-crisis levels.
Now the problem for Syriza is that they understand this very well, and they also understand very well that while greek voters want to consume more, somebody has got to pay for that extra consumption. The difficulty is that more consumption means principally more imports, and Greece is in no position to boost exports to pay for those imports, both because they don't have much in the way of export industries, and because their potential export targets are also not exactly booming.
If Syriza voters want more consumption, which means more imports, and more exports cannot be the way to pay for that, maybe the Greek government could subsidize those imports and Syiriza would then win the elections.
The problem is that if "the end of austerity" for greek voters in effect means a balance of trade deficit and a government budget primary deficit, that means changing the current situation, and *someone* must finance those deficits.
The conclusion is that in effect Syriza is asking the other EU members to finance their re-election campaign by lending them new money to boost imports and thus the standars of living of their potential voters.
Now that's politics, not economics, and usually in politics one does deals, in which both sides get something. Syriza's position is that they want the other EU countries to finance an import surge so that they can win the next elections, in exchange of... nothing at all.
That's what all the negotiations are about. The several EU members that have lower GDP per capita at PPP than Greece currently has are particularly angry about Syriza's position.
«the creditors want more austerity to achieve large primary surpluses.»ReplyDelete
This is all about rolling over loans: in order to roll over loans they have at least to be "performing", that is Greece must at least pay interest on them.
The EU etc. have reduced interest rates on Greece's debts to ridiculously low levels, considering that Greece is bankrupt, because they are as interested in "pretend and extend" as the greek government is.But with debt at something significantly larger than GDP even interest rates of 2% a year mean 3-4% if GDP for interest repayments per year, and thus a greek government primary surplus of that size. What the greek government is in effect asking for is to capitalize most of their interest payments, which is not at all the same as rolling over the debt, because it involves new debt.
«greek voters want to consume more, somebody has got to pay for that extra consumption»ReplyDelete
The situation of Greece is that before the crisis they had enjoyed a consumption surge based on an imports surge financed by foreign debt, because before the crisis exporting countries like Germany were willing to provide vendor finance to boost their exports.
Now exporting countries are no longer willing to provide vendor financing, and that is the basic problem that Greece is facing.
What exporting countries seem very willing to provide is "pretend and extend", that is rolling over debt at very low interest rates, but only as the very low interest rates are actually paid, because they are not willing to provide extra debt to capitalize interest payments, never mind willing to finance a higher level of imports.
PS suppose that paying interest on the greek debt takes 3-4% of GDP per year, In 10 years this adds another 40% of GDP to greek debt. And of course the greek government would not care less about that, as long as debt and capitalized interest were rolled over indefinitely.
«from the perspective of the Eurozone and IMF, this is all extremely small beer.»ReplyDelete
Not at all! Greek debt is small compared to Eurozone/IMF perspectives, but it is large compared to EU bank capital.
Because in the "easy" days of vendor financing the credit extended by exporting countries to importing countries was enabled not by additional funds, but by greatly ballooning the leverage ratios of the banks involved, a "marvelous" trick as long as it lasts.
To prevent a greek default from actually busting most EU banks the EU government have transferred to the "institutions" the greek debt held by the banks that lent to importing countries thanks to "fantastic" leverage ratios enabled by the EU governments.
The problem is that it is the "institutions" that now have those "fantastic" leverage ratios, and there are international treaties that say that member governments have to recapitalize them if their very thin capital layer is wiped out by even a small default like the Greek one. But most institutions members are not exactly able to provide their share of that capital, so "pretend and extend".
What about this for a less excited view:ReplyDelete
In his talk at the Brookings Institution, Schäuble stressed the danger of moral hazard.ReplyDelete
Indeed: If game theorists like Varoufakis or leftist loonies like Syriza manage to get money for nothing from their creditors, that will be an invitation for all other Euro countries that are in difficulties to try the same.
So I as a German taxpayer want the Eurogroup countries to hold out.
I don't think that after all his any government likes to say: hey we want the same as Greece. This is all so humiliating.Delete
QE is not money for nothing?Delete
It is much simpler:ReplyDelete
The new Greek government never came up with a credible plan. It never had one and given the profile of the elected representatives probably it l never get one.
It threw out the Troika. The EU has no visibility at all about the true situation any more.
It reversed various reforms, stopped privatisations and plans to increase the minimum wage and pensions. A country that has pension spending which is the highest in the EU.
We are far away of even discussing the right level of primary surplus that Greece should ideally serve. The EU never ruled that out to adjust that and signals have been sent in this direction from various sources.
We simply have an incompetent populist government with a mix of communist and fascist background that tells completely different stories internally that it tells the external world.
We can have a fair discussion why such a government has been elected, but it is a fact that Greece never came up with a credible plan and so far not even sent credible people to negotiations.
That Scheuble might have appeared grumpy compared to Varoufakis in front of Brooking institutions is still polite given the calibre of people and proposals he had to deal with.
To repeat one of the posts: PK and this commenter are incredible naïve.
You are incredibly naive. Most of the bailout went to northern banks. The German govt's trade surpluses are a deficit in real goods and services. Merkel et all are playing divide and rule and this is capital fighting against German, Spanish, Greek and Dutch workers.Delete
I do not understand your point.Delete
It is the nature of bailouts that most funds go to serving existing debt. Still in balance Greece received more than it repaid. This softened the path of consolidation from what would otherwise been a default and exit from the euro. It is easy to condemn a policy when you cannot offer any alternatives.
I cannot make any connection of the other points you mentioned with the content of the article.
My remark of naiveness relates to the ignorance of the political situation and now elected politicians in Greece that aim to unwind the limited reforms Greece already made.