Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday 7 May 2015

The IMF, Greece and economic reality

I’m glad I was not the only one who was disappointed to hear that Yanis Varoufakis had been sidelined in Greece’s ongoing negotiations with the group formally known as the Troika. Mohamed El-Erian writes (HT Ann Pettifor)

“Varoufakis was a breath of fresh air in this protracted and exhausting Greek economic drama, which involves alarming human costs in terms of unemployment, poverty and lost opportunities. Backed by considerable economic logic and a desire to do better, he pressed for more realism in the policy conditions demanded by Greece’s creditors. And he never tired of reminding people that Greece's recovery wasn't that country's responsibility alone.”

I have also never met him, although we once commented on each other’s views on the Eurozone before he became finance minister, and we may even have linked to each other’s blogs. Although I am no Marxist (whether ‘erratic’ or any other kind), Yanis has is a sensible macroeconomist’s view of the world. That alone may have made him the wrong kind of person to negotiate with Eurozone finance ministers.

The other economists who get a look in during these negotiations are at the IMF. Their position has always been problematic. It was they, partly through an inexplicable under estimation of the fiscal multiplier, who allowed the Troika to trash the Greek economy with austerity on an epic scale. They also foolishly allowed the rest of the Troika to believe that partial rather than full default would allow Greece to regain solvency. (For the details, see this short guide.) However, unlike their Troika colleagues, the IMF can admit and learn from its mistakes, rather than trying to cover them up. It is now reported to be telling the Eurozone finance ministers that they must write off more of Greece’s debt before the Fund will release more money.

Will the IMF force Greece’s creditors to see some sense? The problem is that we have been here before, and the IMF backed down. It may be full of economists, but it is ultimately run by politicians who may have too many ties to those in the Eurozone. But as Ashoka Mody says, the IMF’s credibility is at stake. It should stop trying to pressurise the new Greek government into making reforms that contradict its election platform, and instead focus its efforts on getting the rest of the Troika to be realistic. Above all else, Greece must be helped out of its depression as quickly as possible. Sensible macroeconomists, including those at the IMF, know that makes sense. If Yanis Varoufakis could not achieve this, perhaps the economists at the IMF can do better.


  1. I heard a BBC business correspondent say that negotiations will go better now that Varoufakis has been sidelined, because Varoufakis turned up at negotiations in a leather jacket not a suit.

    1. what great judgement on thr part ofthis correspondent.....

  2. Mr. Wren-Lewis, you don't realise that your policy advice would simply result in total politcal deadlock: Greece obtaining no funds, having to impose capital controls and running out of euros to pay pensions, salaries etc.

    Beyond the politics, also the logic of your argument is odd: in what way does a domestic election platform entail the right to demand unconditional loans from foreign governments?

    I also sense that (like many analysts) you ignore the fact that Greece had FINALLY re-emerged from depression in 2014. In Q3 Greece posted the highest growth rate in the eurozone. Unemployment had started falling. Greece was re-gaining access to financial markets. These were significant developments whatever the cynics say.

    The political crisis starting in Dec. 2014 and the Syriza-ANEL victory in January have trampled down the green shoots of recovery - and for what? Really - for what?

    What are Syriza-ANEL really trying to achieve? As many observers note, after the 100-billion-euro default of March 2012 and, just as significantly, the enormous rescheduling of debt maturities and slashing of interest rates, debt-servicing costs are really quite manageable. In fact, between 2015-2020 average debt-servicing costs are more benign for Greece than for the majority of EU member states.

    Not only that: in NPV terms, Greek national debt is arguably already below the levels of some of the Euro area countries - such as Italy and Portugal - that you seem to argue should take a hit now to cancel debt for a hostile and reform-resistent Syriza-ANEL coalition.

    That can't be the way forward. Can it?

    1. The OECD currently think that the output gap in Greece is 11%. That is not re-emerging from recession, that is a criminal waste of resources, and you cannot blame Syriza for that.

    2. "In fact, between 2015-2020 average debt-servicing costs are more benign for Greece than for the majority of EU member states."

      You should really get your facts straight. Take a look at Ameco. Interest payments as a percentage of GDP for Greece: 4%. Euro Area: 2.5%

    3. "Beyond the politics, also the logic of your argument is odd: in what way does a domestic election platform entail the right to demand unconditional loans from foreign governments?"

      Quite right. Bravo. Hear hear.

      "You should really get your facts straight. Take a look at Ameco. Interest payments as a percentage of GDP for Greece: 4%. Euro Area: 2.5%"

      I hate this kind of reply, I mean really hate it. The commentator made a specific claim: there are a majority of EU member states in a worse position than Greece. Your counter-claim does not contradict this. It is thoroughly possible that both counter-claim and claim are true: a majority of EU members states could be in a worse position, but several big ones could be in a much better, so the over-all average could be better. Now maybe the claim is wrong for all I know. But if you want to counter-claim with the haughty "Get your facts straight" you could at least get the logic correct. So either counter-claim with the correct counter-fact: x EU states have lower servicing costs than Greece (with x >= half of the EU states). Or get off your high horse. Thank you.

    4. @Mainly Macro

      I don't deny that Greece still faces a large output gap. I think there is reason to blame Syriza-ANEL for having blocked the incipient narrowing of the output gap. Without the political disruption post-Dec. 2014, a process of automatic closing of the output gap could have taken hold. Just as in the Baltic countries post-2010, there was reason to expect that growth could accelerate once the bulk of fiscal cuts had been done, as Greek data in Q2 and Q3 seemed to confirm.

      @Kosta Kalevras

      When interest payments refunded and deferred are subtracted from the headline figure, actual debt-servicing costs over 2015-2020 are in the region of 2% to 2.5%. This will change in the 2020s but EU governments signalled in 2012 that there will be a further and more permanent reduction in interest rates (in exchange for reforms- which I think is reasonable).

    5. @ Anonymous 7 May 2015 at 02:51

      "What are Syriza-ANEL really trying to achieve? "

      This is pretty clear, I think. Syriza is trying not to implement additional depressing policies that were part of the 2010 agreement like further layoffs, cutting pensions, using the primary surplus to reimburse debts (better to focus growth), ... This is repeated ad nauseam by VF and Tsipras. During the 2014 election campaign, Samaras also came out against the full implementation of these policies.

      We don't know the state of negotiations today (e.g., if EU/IMF still insist on these policies) and we don't know how these institutions would have dealt with a new Samaras government but I cannot avoid the impression that part of the standoff is to teach a lesson to a left government (many EU countries are lead by conservative gvts [Germany, Spain] and left-leaning gvts are either compromised [bank bailout was done to save French banks as well] or have other problems that need benevolent EU attititude [Italy]).

      What Syriza brought was possibly more credibility on the tax evasion, cronyism, clientelism accountability than previous governments (in any case, this should be the measure of success of Syriza government). Right now, the tragedy is that because of the standoff, these hard earned gains that you mention (e.g. a small primary surplus) are being lost. In any case, I don't think that these "gains" should be seen as a measure of success of the previous policy. As SWL and other economists have said, the Greek economy is in a terrible shape and the same "gains" might have been achieved at a much lower social cost.

      I would return the question: "What is EU trying to achieve?" and, whatever it is trying to do, "Is it likely to work and is it fair?"

    6. 'In what way does a domestic election platform entail a right to demand unconditional loans from foreign govts'

      Why indeed, unless:
      1. They are not foreign governments, but members of a common currency with a common central bank, that is they have pooled their sovereignty.
      2. Greece is not 'demanding' but attempting to set out the real world implications of 1.
      3. The loans, like all loans, are ultimately conditional on Greek recovery in a recovering Eurozone, for which read 1, then 2, then go to 4.

      4. Activate the EIB as eurozone proto treasury, as it was always intended to be at its genesis, and save the project, or saw off the Greek branch and see if the tree lives?

    7. Look, Hugo, your background is in economics or some other social science, I guess?

      I would be very surprised if you are a lawyer. By forming a common currency the individual countries definitely did not pool sovereignty beyond matters of monetary policy. In fact, a no-bailout clause was stipulated in the Treaty on the Functioning of the European Union (article 125).

      Until 2010, it was widely assumed that bailout loans would very likely be in breach of the no-bailout clause. The framework of the ESM has been so carefully structured that the ECJ in Strasbourg just about let it live after the ESM was attacked in several countries for its alleged illegality. But the wording of the ECJ ruling in 2012 is critical and will act as a major constraint on any additional debt relief and easing of loan conditions:

      "The granting of financial assistance to an ESM Member in the form of a credit line, in accordance with Article 14 of the ESM Treaty, or in the form of loans, in accordance with Articles 15 and 16 of the ESM Treaty, in no way implies that the ESM will assume the debts of the recipient Member State...It should be observed in that regard that, under Article 13(6) of the ESM Treaty, any financial assistance granted on the basis of Articles 14 to 16 thereof must be repaid to the ESM by the recipient Member State and that, under Article 20(1) thereof, the amount to be repaid is to include an appropriate margin."

      If ESM members like Portugal, Malta and Slovenia read this last sentence carefully they could already claim current ESM loans to Greece to be illegal, since the margin of them borrowing on the markets relative to Greek borrowing from the ESM is negative.

      The EIB is another matter entirely. You know that.

    8. Dear Anonymous
      I am not a lawyer, but have enough law to read the ruling in Pringle. If you believe that CJEU would act to defeat the Troika then I pity anyone taking your counsel. The court will protect the project, even if it has to argue White is black / monetary is not economic. It keeps the game going by maintaining its right to judicial review of the ECB and invoking proportionality. When this thing dies it won't be the CJEU left holding the smoking gun.

    9. As to the EIB being a different matter, I don't remember reading about the ESM in the Delors report.

    10. Hugo, my point is not about the ECJ defeating the whole EMU project. What matters are the legal restrictions on bailouts which remain substantial. Your earlier post seemed to suggest a consensus about the 'pooling of sovereignty' and that this entails the granting of unconditional loans / debt relief. The ECJ made clear that critical limitations to that remain in place.

      Pooling of sovereignty in a more meaningful way would require treaty change.

  3. I think it tells you everything you need to know about the state of affairs between Greece and the EU/IMF that Greece has had to sideline their real economist.

    In a similar vein, (if what was reported in the media is correct) when Varoufakis visited London, George Osborne patronized him about the need for austerity. Oh dear.

  4. Euro officials are not stupid and have resources to analyze the situation in detail. In particular, German policymakers and their advisers can read history. They know that imposing depression leads to extremism, ergo. by forcibly imposing depression they are actively seeking that political outcome. The entirely foreseeable rise of Golden Dawn / Marine Le Pen is not an accident.

    German policymakers could not expect the economic policy prescriptions they have thus far proposed, to actually work, or lead to meaningful convergence. There is no way for the noose to stay just tight enough for their favored structural reforms to take place.

    So the question is how does the German policymaker benefit from the rise of extremism in Euro periphery? Will they just shrug their shoulders and say "who could have known..."?

    Of course not, they will attempt to use the election of extremists to undermine the very notion that democratic nation states should have primacy, and instead seek to impose a "European solution", which just happens to have German hegemony.

    I draw my conclusion: if you discount incompetence, all you are left with is the alternative.

    1. There is, unfortunately, a very very rational and selfish reason for the ruling elite of Germany to keep promoting their policies, even though they know they are broadly destructive. It's the same reason rich people always and everywhere have wanted to depress the economy - they want inflation kept absurdly low. If you are rich because you own bonds and deposits (as opposed to, for example, equities), then you become an extreme inflation hawk simply to protect your assets.

      Germany also has a political problem. The intelligent ones know that the best chance of extracting as much money as possible from their Greek "investments" is to develop a long term growth programme. But that would involve short term compromises, and no politician ever (in any country) wants to make the correct long term decision. They'd much prefer to cause a disaster, as long as the disaster happens in the future, when their opponent is in office, so they can be blamed.

  5. Dr. Wren-Lewis,

    If Greek output gap is 11% and given that Greek government spending as of GDP was 58.5% in 2013, then government spending as of GDP would still be above 50% if output gap was zero, wouldn't it? It appears that structural spending by the Greek government remains high. Please correct me if you think I'm wrong.

    Given that spending has already been cut, this simply shows the astronomical scale of public overspending in the years before 2010, doesn't it? It is a shame but we can't blame everything on troika.


    1. I think that most people are aware of the fact that the Greek government did not behave properly and that is why Greece had such a large economic problem. But then again, which governments did a good job? And the question is how to proceed after we have agreed that the Greek government did not behave well in the past.

    2. I'm not sure why it's supposed to be a problem that government spending is a high proportion of Greek GDP compared to the likes of Ireland. Denmark and Sweden are generally considered to be good economic performers, and they have rates over 50%

    3. @Anonymous8 May 2015 at 02:49

      That's Ok. But Denmark and Sweden can afford it.

      Greece under the current government seeks to maintain a structurally high level of public spending/GDP ratio while not being able to pay its way or borrow on the bond markets.

      I can understand that other eurozone countries, including those poorer than Greece - like Latvia and Slovakia - find it perplexing that they are expected to cover the gap in Greek public finance.

    4. @Anonymous8 May 2015 at 03:28

      "I can understand that other eurozone countries, including those poorer than Greece - like Latvia and Slovakia - find it perplexing that they are expected to cover the gap in Greek public finance"

      I agree and I think that Greece should be required to run a primary surplus but Greece should not be forced to fully reimburse the 2010 bailout, which was forced through its throat. This bailout was done to save foreign banks and perhaps the European financial system and there is no reason why the price for this should be entirely paid by Greece. It is a tragedy that this crisis is viewed mostly through the prisms of nations rather than who actually benefited and/or lost during these years.

      Greek welfare state has been re-dimensioned (pension, health care, unemployment), private salaries went down and Greek people has paid a huge price in the last 5 years and the. If Greece can now run a primary surplus and Syriza always said it wanted it (obviously it cannot during a standoff where everybody waits to see if Greece will still be part of the Euro tomorrow) , it is now its business what percentage of GDP is public.

      The 2008 crisis was not Greece fault, the fact than banks are highly leveraged are not Greece fault, and rules have been breached by others. Even now, I don't see why the fact that the ECB is able to enforce an average inflation of 2% over EU is not viewed as a problem. This is part of the contract like the 3% deficit or the 60% debt. When Germany was implementing 2010 Agenda before 2008 and you had inflation in southern countries, large trade imbalance, etc. ECB did not increase its rate. If ECB played its role of neutral enforcer of rules (admitted that it is possible), Greece (and Spain and Italy and Slovakia and Estonia) could regain competitivity in a manner more symmetric to what happened when they lost it in the 2000 years. If countries with a surplus refuse to have more inflation than the average, it is part of the problem.

    5. if the crisis was not totally the fault of Greece, the fiscal condition, with large deficits and a large debt, left them in desperate straits once the crisis hit.

      Probably, unpleasant as it will be, leaving the euro and devaluing the currency will lead to improved economic growth after a nasty recession.

  6. There was a clip of George Osborne saying something to an interviewer about the election the other day and he was clearly primed to drop "Greece" into the soundbite; he actually said nothing of import about anything other than the G word. As a bunch of politicians, these Old Etonians are mendacious as the Medicis.

  7. When if ever will they stop looking at each other as opponents and start seeing themselves as collaborators?

  8. Lets be honest. The Greek economy was never that big, as Varoufakis had the temerity to point out, the bailouts helped repay the banks that had lent to Greece and everyone else has been cutting exposure (on balance) ever since to get to the point where Greece going completely down the toilet woukdnt be that big a deal (outside Greece).


Unfortunately because of spam with embedded links (which then flag up warnings about the whole site on some browsers), I have to personally moderate all comments. As a result, your comment may not appear for some time. In addition, I cannot publish comments with links to websites because it takes too much time to check whether these sites are legitimate.