Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday 18 June 2015

The Eurozone’s cover-up over Greece

Whenever I write about Greece, a large proportion of comments (maybe not a majority) could be summarised as follows: how can you side with Greece when its economy is so inefficient and its governments so inept and after everything we have done for them. I have no illusions about the inefficiencies and corruption endemic within the Greek economy. Nor do I want to become an apologist for any Greek government.

What does seem to me very misguided is the idea that European policymakers have already been generous towards Greece. The general belief is that had they not stepped in austerity in Greece would have been far worse. This seems simply wrong. If European policymakers have been generous to anyone, it is the Greek government’s original creditors, which include the banks of various European and other countries.

Suppose that Eurozone policy makers had instead stood back, and let things take their course when the markets became seriously concerned about Greece at the beginning of 2010. That would have triggered immediate default, and a request from the Greek government for IMF assistance. (In reality at the end of 2009 the Euro area authorities indicated that financial assistance from the Fund was not “appropriate or welcome”: IMF 2013 para 8) In these circumstances, given the IMF’s limited resources, there would have been a total default on all Greek government debt.

If that had happened, the IMF’s admittedly large assistance programme (initially some E30 billion, but increased by another E12 billion in later years), would have gone to cover the primary deficits incurred as Greece tried to achieve primary balance. That E42 billion is very close to the sum of actual primary deficits in Greece from 2010 (which includes the cost of recapitalising Greek banks).

What that means is that the involvement of European governments has not helped Greece at all. With only IMF support, Greece would have suffered the same degree of austerity that has actually occurred. The additional money provided by the European authorities has been used to pay off Greece’s creditors, first through delaying default in 2010 and 2011, and then by only allowing partial default in 2012. (I’m not sure the two groups see the division that way, but if some of the IMF money was intended to pay off Greece’s creditors, you have to ask why the IMF should be doing that.)

It is pretty clear why the European authorities were so generous to Greece’s creditors. They were worried about contagion. (For more on this, see Karl Whelan here.) The IMF agreed to this programme with only partial default, even though their staff were unable to vouch that the remaining Greek public debt was sustainable with high probability (IMF 2013, para 14).

The key point is that the European authorities and the IMF were wrong. Contagion happened anyway, and was only brought to an end when the ECB agreed to implement OMT (i.e. to become a sovereign lender of last resort).This was a major error by policymakers - they ‘wasted’ huge amounts of money trying to stop something that happened anyway. If Eurozone governments had needlessly spent money on that scale elsewhere, their electorates would have questioned their competence.

This has not happened, because it has been so easy to cover-up this mistake. Politicians and the media repeat endlessly that the money has gone to bail out Greece, not Greece’s creditors. If the money is not coming back, it becomes the fault of Greek governments, or the Greek people. That various Greek governments, at least until recently, agreed to participate in this deception is lamentable, although they might respond that they were given little choice in the matter. (Some of a more cynical disposition might have wondered how many of the creditors were rich Greeks.)

The deception has now developed its own momentum. What should in essence be a cooperative venture to get Greece back on its feet as soon as possible has become a confrontation saga. If the story is that all this money has gone to Greece and they still need more, harsh conditions including further austerity must be imposed to justify further 'generosity'. Among the Troika, hard liners can play to the gallery by appearing tough, perhaps believing that in the end they will be overruled by more sensible voices. The problem with this saga is similar to the problem with imposing further austerity - you harm the economy you are supposed to be helping. (Some see a more sinister explanation for what is currently going on, which is an attempt at regime change in Greece.)

That this is happening is perhaps not too surprising: politicians act like politicians often act. The really sad thing is that playing to the gallery seems to work: politicians using the nationalist card can deflect criticism that should be directed at them for their earlier mistakes. It happens all the time of course: see Putin and the Ukraine, or Scotland and the 2015 UK election. I wonder whether there will ever come a time when this cover-up strategy fails. Futile though it might be, I just ask those who might see this as an ungrateful nation always demanding more to realise they are being played.


  1. If Greece were to default on ECB loans, would the cost to the rest of the Eurozone be real (in terms of a tangible, financial or inflationary) or reputational? I ask because it appears to a non-macroeconomist that ECB generated liquidity is just a "virtual" expansion of the monetary base. In a smaller sovereign this might result in inflation, but isn't this risk much reduced for a large entity such as the Eurozone?

    1. " just a "virtual" expansion of the monetary base. In a smaller sovereign this might result in inflation"
      Think about real resources not money. There are very few hairdresses who can't fit in an extra head of hair.
      A depressed economy may well quantity not price expand.

    2. Also, the money multiplier is false if you think that is what causes inflation. I suggest you see this:
      Banks don't lend out reserves.

    3. Also, the money multiplier is false if you think that is what causes inflation. I suggest you see this:
      Banks don't lend out reserves.

    4. Greece owes real money, and some entities are going to lose if Greece defaults.

      But the big loser could be the EMU. If Greece leaves the EMU and goes back to a devalued drachma and recover; Italy and Spain may not be willing to tow the line.


    6. i never understood why the IMF pumped so much monney in Greece. Generousity is for sure not the reason. Now a few months further down the road it starts to make sense. Could it be that Greece needed to stay so refugees could basicly walk in european union territory. Since Greece is a financially troubled place they could not provide a proper security.
      As for the refugees part another question pops up. Why were they allowed to spread all over europe while it is clear that fear and hatred between the citizens and refugees can only become problematic. It will never decrease. Why did our leaders bring fear into our homes? doesnt make sense to me

  2. I'm not sure I agree with this. Around a third of Greece's pre-bailout debt was held by domestic creditors, primarily banks and pension funds. You say that if they'd had IMF support without EU intervention, they'd have defaulted on their debt and suffered the same austerity as they did in reality, but this seems to ignore the point that in that scenario, their financial system would have collapsed, necessitating bail-ins and other recapitalization efforts. Austerity plus bail-ins sounds a lot worse and more painful than just austerity.

    1. you're wrong: the Greek banks and pension funds didn't try to offload that debt (on the government's orders, so spreades wouldn't rise even higher) as German and French banks did (the main holders of Greek debt). When the PSI happened, 98% of the debt held by Greek banks, pension funds, and Greek creditors, and almost noone else, was eradicated. The financial system collapsed, as did pension funds, and that did require bail-ins and other recapitalization efforts. The end result was austerity, plus bail-ins, plus 220 more billions of debt overhang. You can google everything I said, and there's also kkalev's blog here on blogspot that regularly analyses BoG and Eurostat data for the Greek government and banking system, and also has several articles on PSI's costs.

    2. sorry, his blog moved to kkalev4economy on wordpress, my bad

    3. I'm sorry, but Greece has emphatically not had bail-ins. Greek depositors have not had their money seized and the banks' bondholders have not had their holdings forcibly converted into equity.

    4. that's not exactly true. After the PSI, banks were recapitalized through the HFSF, the debt of which was added to the Greek national debt, and when that happened a new property tax was enacted to cover the cost. Also several Greek businesses with ties to the state contributed to the recapitalization, plus there was an extensive media campaign which implored Greeks to buy Greek Bank shares and contribute to the recapitalization, or else. It was a voluntary bail-in, that worked. The pension funds collapsed with the PSI, and most pensions were cut from 30% to 75% (the average pension dropped 61% as you can see in today's Guardian )

    5. "as German and French banks did (the main holders of Greek debt)."

      Well, we can just throw what you said in the bin, since the UK was up there as well.

  3. Ex Bundesbank President Karl-Ottoman Poehl has been very clear about this. The various packages did not bail out Greece. They bailed out French and German banks who had allowed greed to overcome fear in their lending decisions. The IMF negotiators were always aware of this and were deeply unhappy. Some of the IMF's biggest quota holders have also expressed anger.
    Previous Greek governments should have taken a tougher line while the damage could have been imposed more on private sector lenders. But the current government inherited an unsustainable policy imposed by outsiders who want to conceal the mistakes they made.

    1. "They bailed out French and German banks"

      And we can throw what you just said in the bin too, since the UK banks were up there as well.

    2. Gobanian
      You are right on Poehl. However Poehl was strongly against the bank bailout and disgusted that tax payers had to settle the bill. He was also very clear that Grexit was the best solution. He did not like Greece staying in the eurozone but he hated the way banks could transfer their losses to taxpayers.

  4. Thanks very much, I would add the press as the major enablers of this misrepresentation, but then I guess they work for the banks.

  5. I think this is completely wrong. The IMF would have requested much tougher measures without EU support. Are you really arguing that they would have lent to Greece after a complete wipe out of other creditors? That hasn't happened even in Argentina, where the government paid back 30c on the dollar. IMF would have requested capital controls at the very least. The greek financial system would have collapsed. Private lenders took a more modest haircut in 2012, but still it was a hefty amount around 50c. The cost of the Greek financial system re-capitalization would have been much much higher since they were bailed out with the other european banks.

    Even if you accept the assumption that the same resources would have been available through the IMF, what difference does it make? The depression would have still happened. They would have less debt now, but no additional resources either. Instead of dealing with EU governments, the Greek government would be tangled in lawsuits with EU banks to recover some money. They would still likely have little/no access to financial markets.

    That's not to say that you are wrong arguing the bailout was mostly driven by the need to save European banks. That's certainly true. You could argue they should have nationalized the banks instead, and that's not an unreasonable position to take. That might have been better. But that seems reasonable to me. Each country looks after its own citizens. Are you arguing the IMF is an altruistic organization that doesn't simply try to minimize the disruption to its own main shareholders? I think that's pretty wrong as well...

    You are also glossing on the detail that the Greek government falsified its own accounts. The size of the deficit was a surprise. Banks let on the basis that an entire nation is not a criminal enterprise. You must agree that it is somewhat exceptional for a nation to lie in such a way.

    1. you're correct on many points but a) you should take into account what the so called bailout actually entailed, did it help the Greek economy? Did it support the Banks and pension funds at all? and b) about the so called "falsification" you should read this wikpedia article about the 2004 financial audit, and pay heed to its sources,_2004 .

      Also, on latest news you don't read about in the international press, the courts seem to conclude that the (second) upwards revision of the deficit on 2009 was actually falsified, so as to secure a bigger IMF and EU involvement and minimize or completely eradicate any losses for European banks... details will soon emerge in the following weeks, but I think that you'll only find them on the websites of Eurostat, EU Commision, and the Greek statistical agency. You should also know, without me wanting to sound like I support conspiracy theories, but it's clear if you do a little research that the major news networks (almost all other EU media just reproduce their articles) are pretty damn selective on what they widely publish on the matter.

  6. I have much sympathy for this analysis. However, consider the following: Would the IMF as sole remaining lender have tolerated continued Greek non-compliance with program conditionality? In a default scenario it is unrealistic to expect optimal policy making in country with weak institutions. In all likelihood the IMF would have abandoned Greece just as it did with Argentina in 2001 or it would have been kicked out by the Greek government. It is debatable if the average Greek today would be better off if Greece had been left alone back in 2010. Also, in such a scenario Greece would have had to leave the euro zone. This is something a majority of Greeks do not want, still today. They know why.

    1. Greece would have been better off leaving the Euro. They could have devalued their currency as Argentina did. The Greeks voted in Syriza because the IMF plan wasn't working. They were suffering *unprecedented* amounts of economic pain with no reward forthcoming.

    2. @Peter:
      ''The Greeks voted in Syriza because the IMF plan wasn't working.''

      and why is it not working? I would think because the IMF could not follow the normal recipe of devaluation.

      I understand syriza rejects the troika, but syriza has not been honest with their voters: they should have told them they would also reject the euro and go back to the drachma. But than they probably would not be voted into power.
      The tragedy is Greek politicians and Greek voters are deceiving each other, and if this continues they will not jump but pushed out of the eurozone. Or maybe this is the plan of syriza anyway, they just prefer to be pushed so they can blame the EU.

  7. If I am so nice as to pay your debts to your bank and only ask you to pay me decades later with ridiculously low interest, does that give you the right to refuse payment because I am shareholder of the bank?

    Professor Wren-Lewis has finally left the ranks of macroeconomists that can be taken seriously.

    1. Talk of 'rights' is not helpful. The question I would ask is why were you so silly as to offer to pay (half) their debts in the first place. If you make silly investments like this, are you really surprised you do not get your money back? If someone did it on your behalf, I think you should get cross with that someone.

    2. Mainly Macro18 June 2015 at 04:59

      So you really believe that one has the right to say: You were silly enough to believe I would repay you so I owe you nothing...

    3. Anonymous

      It happens with individuals and companies all the time. And for similar reasons.. if you always insist on full debt repayment and never compromise, you end up with debtor's prisons, and you'd stifle enterprise because anyone borrowing money to start a business would face destitution if it went wrong.

      And on the other side, those who lend money know about these laws and so make sure that those that they lend to have a reasonable chance of repayment. If they think people are like to walk away, they refuse to lend or charge high rates of interest.

      And so with Greece. If you are lending billions, you really should be doing a bit of due diligence. The banks made bad bets and lost.

    4. Andrew18 June 2015 at 06:03

      Where is a sovereign nation's debtor prison?

    5. It's their entire population that is held captive.


    6. Unknown19 June 2015 at 05:57

      "It's their entire population that is held captive."


    7. "It's their entire population that is held captive."


      (diff anon) Fundamentally what the Greek crisis shows is the dangers for certain countries of globalisation. Countries like China and Japan (c19th) were very carefully managed into the international capitalist system (which historically based heterodox, rather than orthodox Ricardian Theory, can explain well). Greece might have been OK if the EU went for full political and fiscal integration before it let in the Eastern Bloc (which made it politically impossible). So Greece now has a structural economic/terms of trade problem and is in a dependency relationship with its major creditors.

    8. Unknown19 June 2015 at 05:57

      So you think one is in debtor's prison if one cannot live beyond one's means?

  8. If Greece defaulted in 2010, it would have left the euro and probably the EU. EU governments - and the European taxpayer - gave money so that would not happen. That seems to be an exceptionally generous show of solidarity. What is tragic is that in those five years Greece did not restructure, so that all that generosity went down the drain, and Greece is still faced with the possibility of leaving the euro and the EU.

    1. That's just a bald faced lie. (Not surprising coming from Anonymous) For five years Greece did was it was told to and suffered an unprecedented amount of economic pain. You just flat out ignored everything Simon wrote!

      But there was no light at the end of the tunnel. The Troika were just stringing it along with no reward for the economic pain. That's why the Greeks voted in Syriza.

      It would have been better for the Greeks to have left the Euro at the beginning than to have suffered as they have suffered.

      What's tragic is that so many people like you have swallowed the lies you've been fed.

    2. "Greece did was it was told to and suffered an unprecedented amount of economic pain."

      No, Greece did not do what it was told to do but it did suffer an unprecedented amount of pain.

    3. Liar. Look at the graph.

      Who goes on the Internet just to lie and lie and lie. Shameful.

    4. Obviously Peter you are not able to understand that the Troika demanded other things that what can be represented in that graph. That's not so much shameful as stupid.

    5. Here's John Cassidy in tne New Yorker where they fact check. Going under Anonymous shows your cowardice.

      "Between 2009 and 2014, under the guidance of the troika, Greece was subjected to a huge fiscal shock, which led to a local version of the Great Depression. G.D.P. fell by about a quarter. The unemployment rate rose to twenty-eight per cent. After all this pain was endured, the public finances have improved quite a bit. Until recently, when uncertainty about the bailout extension caused another economic downturn, Greece was expected to run a primary surplus this year. (That means it would have covered the costs of all its expenditures except interest payments on its debts.) The country’s overall indebtedness has continued to grow, but largely as a consequence of the bailouts, which piled debt upon debt."

    6. Here is Varoufakis, today:

      "That Greece needs to adjust there is no doubt. The question, however, is not how much adjustment Greece needs to make. It is, rather, what kind of adjustment. If by ‘adjustment’ we mean fiscal consolidation, wage and pension cuts, and tax rate increases, it is clear we have done more of that than any other country in peacetime.

      The public sector’s structural, or cyclically adjusted, fiscal deficit turned into a surplus on the back of a ‘world record beating’ 20% adjustment
      Wages fell by 37%
      Pensions were reduced by up to 48%
      State employment diminished by 30%
      Consumer spending was curtailed by 33%
      Even the nation’s chronic current account deficit dropped by 16%.
      No one can say that Greece has not adjusted to its new, post-2008, circumstances. But what we can say is that gigantic adjustment, whether necessary or not, has produced more problems than it solved:

      Aggregate real GDP fell by 27% while nominal GDP continued to fall quarter-in-quarter-out for 18 quarters non-stop to this day
      Unemployment skyrocketed to 27%
      Undeclared labour reached 34%
      Banks are labouring under non-performing loans that exceed 40% in value
      Public debt has exceeded 180% of GDP
      Young well-qualified people are abandoning Greece in droves
      Poverty, hunger and energy deprivation have registered increases usually associated with a state at war
      Investment in productive capacity has evaporated."

      You are stupid and ideologically brainwashed, Mr. Anonymous.

    7. So the poster who goes by the name Peter thinks he is being heroic because he is exhibiting the name Peter. I guess that proves the kind of logic behind the rest of what he says.

    8. He provided numbers to back up his claims, what have you provided to support your argument? So what was Greece was told to do by the Troika, but did not do. Can you provide some evidence?

  9. Paying interest in a sovereign nation, even in the Euro, is a choice by the government. It is a welfare payment - like paying pensions.

    So the choice presented, when viewed like that, goes like this.

    The Greek government can either

    - pay Greek pensioners a pension - who will then spend money in Greece and create demand for goods and services from Greek businesses

    - or they can pay a pension to people outside Greece who will, at best, spend that money elsewhere in the Eurozone but more likely just park it in a bank somewhere.

    The 'rights' of the pensioners to be paid is just as strong and valid as the 'rights' of bondholders.

    Of course if the ECB were less inflexible then they could generate sufficient demand circulation in Greece to employ all its people and that would ensure both pensions could be paid.

    What good fortune the Germans had that our sights were less short in 1945 - but then respect for millions of dead ensured that the mistakes of 1919 were not repeated.

    Hopefully we won't require millions of dead this time to learn the lesson.

  10. These critics of Greece remind me of the allies and their treatment of Germany. Self-centered stupidity.

    "As the Young Plan did not allow a devaluation of the Reichsmark, Brüning triggered a deflationary internal devaluation by forcing the economy to reduce prices, rents, salaries and wages by 20%.[42] Debate continues as to whether this policy was without alternative: some argue that the Allies would not in any circumstances have allowed a devaluation of the Reichsmark, while others point to the Hoover Moratorium as a sign that the Allies understood that the situation had changed fundamentally and further German reparation payments were impossible. Brüning expected that the policy of deflation would temporarily worsen the economic situation before it began to improve, quickly increasing the German economy's competitiveness and then restoring its creditworthiness. His long-term view was that deflation would, in any case, be the best way to help the economy. His primary goal was to remove Germany's reparation payments by convincing the Allies that they could no longer be paid.[43] Anton Erkelenz, chairman of the German Democratic Party and a contemporary critic of Brüning, famously said that the policy of deflation is a:

    rightful attempt to release Germany from the grip of reparation payments, but in reality it meant nothing else than committing suicide because of fearing death. The deflation policy causes much more damage than the reparation payments of 20 years ... Fighting against Hitler is fighting against deflation, the enormous destruction of production factors.[44]

    In 1933, the American economist Irving Fisher developed the theory of debt deflation. He explained that a deflation causes a decline of profits, asset prices and a still greater decline in the net worth of businesses. Even healthy companies, therefore, may appear over-indebted and facing bankruptcy.[42] The consensus today is that Brüning's policies exacerbated the German economic crisis and the population's growing frustration with democracy, contributing enormously to the increase in support for Hitler's NSDAP."

  11. There are two elephants in the room: The Tale of Two Cities, and an adolescent growth spurt like the union in America had in the decades before the Civil War. I do not wish to argue with them; I merely observe they are there.

  12. This is a sincere article. Still, I have three main quibbles, and would appreciate Mr. Wren-Lewis' reaction.

    1) Prof. Wren-Lewis advocates a solution - full default in 2009/10 - for which there was zero political support at the time. Neither in Greece nor in the rest of Europe. And not only because of contagion fears, but because full default would have forced Greece out of the euro, as the ECB could no longer have accepted Greek bonds as collateral.

    Should someone - the EC, IMF? - simply have forced Mr. Wren-Lewis' solution down the Greeks' throat?

    2) It seems stiff to state that OMT was the consequence of contagion from Greece. OMT reacted to a run on Spanish and Italian government bonds that, in t urn, reflected concerns about an imminent break-up of the euro area. The starting point were idiosyncratic doubts about Spanish and Italian credit, in Spain related to economic concerns (housing bust and the impact on economy and banking system), in Italy more to political (Berlusconi) factors. These became self-fulfilling once risk spreads crossed a certain threshold, as investors assessed that Spain and Italy were too large to fit under a standard EU/IMF, limited-resource rescue program. The ECB made clear that it would act as LOLR, thus stopping the rot.

    Greece was, at the time, ring-fenced under the Troika program. I don't see through what transmission mechanism Spain or Italy would have suffered Greek contagion. Far more likely seems to me that Italian and Spanish pressure points would have built up anyway. Greece or no Greece, OMT was a missing element in the euro area architecture and would have become necessary in crisis.

    3) Austerity - reducing the debate to this is, in the Greek case, incomplete to the point of misleading (a point that I keep making). Greece's debt is sustainable only with a primary surplus of 4.5 percent. Less austerity thus requires necessarily debt relief, i.e., transfers from the creditors to Greece. Real losses for other European taxpayers have to be weighed against the gains from less harsh adjustment in Greece.

    This means in practice that the Troika can offer Greece less austerity only if the Europeans offer large-scale debt relief, which the latter have to justify vis-a-vis their own taxpayers. Not only German taxpayers, also Spanish and Portuguese taxpayers and Baltic pensioners. And this is a hard sell when the Greeks themselves draw a red line at reforming a severely loss-making pension system.

    1. 1) The question to ask is what good did transferring around half of privately held Greek government debt to the Troika do. With full default the EZ could have avoided Greek exit if it wanted to.

      2) I did not mean to imply that OMT was the result of Greece. But, at least according to IMF documents, fear of contagion was the motivation for partial and delayed default.

      3) The 4.5% figure is only because the Troika bailed out the original creditors. With a fraction of that money, the Troika (+ IMF) could have given Greece a reasonable time to adjust with less austerity. Whatever the politics at the time, bailing out Greece's creditors was a huge mistake, and to be honest everyone (but especially Greece) is paying the price of that mistake right now.

  13. First Anon asks excelent question that noone seems to dare answer but which i always point to when Greece is in question.
    "If Greece were to default on ECB loans, would the cost to the rest of the Eurozone be real (in terms of a tangible, financial or inflationary) or reputational? I ask because it appears to a non-macroeconomist that ECB generated liquidity is just a "virtual" expansion of the monetary base. In a smaller sovereign this might result in inflation"

    The cost of Greek default to the rest of the EZ is about 0€. How is that possile?
    It is possible because money came from ECB printing money on computors or as he calls it "virtual". But all money is virtual no matter if on paper or on computors and it value comes that you can exchange it for what you need, for the real value like food or plane ticket. Value in money is,again, that you can exchage it for a real value stuff, is it "virtual " or on paper why it matters? You got real value for it that you use, that is what money is for, what shape it takes is irelevant.

    So, ECB printing money was used to pay off the banks that held Greek debts, how is that any person would loose money if Greece defaults? Simply, it would not. Nobody in EZ would lose a cent with default.
    Now, other nations gave guarantees for loses of ECB if Greece defaulted. They gave no money, only guarantees, but when nations spend they spend by printing new money. Nations print Securities which become money when spent, basically, printing money. Securities pay money to holders in interest payment which is payed with more of newer securities. Conclusion, nations will only incur more of the debt, "virtual" debt, not pay with peoples money in case of a Greek default.

    But why would aditional liquidity in a banking system create inflation as anon claims, weather small or large nation? Inflation can come only when real resources are asked for with additional liquidity.

    But liquidity from ECB in bailout was not for buying real teaources which would possibly create inflation, it is only for settling accounting in banking system. Real resources were bought long time ago and exporters to Greece ot their money right away from banks that wrote it down as Greek debt.

    Greek debt came from 3 sources: importing, too high interest rate and from times when UK was medling in Greece creating a civil war.

    Inflation comes only when printing is used to demand new real resources in allready hot economy, not when it is used to settle accounting from buying resources long time ago. Settling debt to ECB is about destroying money Greece owes. Issuing credit to Greece was money printing and settling debt is money destruction. No taxpayer would lòose a cent if Greece xefaults

    1. Greece's major fault is that its economy is concentrated in only two sectors - Maritime Services and Tourism.

      The former was and still is an excellent manner to "offshore" profits for those who run that business. They are simply paid abroad for a service that is performed abroad. Which is why many have amassed fortunes that reside in much of Europe.

      (The Greek government needs a FATCA-like rule. FATCA requires Americans with foreign accounts to report them. This rule is also applied to many nationals living abroad - and were Greece to apply it, it could tax all capital gains of those accounts.)

      Moreover, the Greek government does not lay taxes on income of the Greek church, which has sizable land holdings. Thus annual property taxes escape the Greek government from such properties.

      There is this element of tax avoidance and even evasion that is not suitably addressed by the Greek government presently - nor has it ever been.

      The EU has asked for the Greek government to broaden its manufacturing sector. As Poland has done, or even Hungarians. That seems to be Mission Impossible in Greece.

  14. The always excellent Michael Pettis has covered what will be necessary but it sounds like default will be the only way for creditors to face it.

    This timeline shows a few Greece cover-ups.
    Can a word they say be believed.

  16. Article well written.

    I will share it.

    Why not present it in TED conference?

  17. I suggest people check out Varoufakis proposal in the minutes of the latest negotiation.

  18. Link:

    My take: euro bad idea as a currency. Blowing up the euro (which could happen) a worst idea. Yeah, politicians cover their behinds as is their wont. But so much covering can come back and bite you in the same locating.

  19. I agree that the Greek bailout was about saving the EU banks. But given what happened after Lehman, that was understandable at the time.
    Unfortunately bailing out Greece (or the banks) killed the no-bailout clause of the Lisbon treaty, and we are now on a slippery slope to more bailouts or even a possible fiscal union with eternal transfers from rich to poorer countries.
    Which is probably not in the long term interest of the poorer countries BTW, as why become more competitive if you can solve it with receiving fiscal transfers? It will only cause eternal Dutch disease.
    Given there is no popular support for a fiscal union (or more bailouts) in Northern Europe, and there is no guarantee that giving Greece more loans or debt relief would bring back Greece back on their feet as Greece starts to look like a failed state trapped in the wrong currency, it seems to me there is only one solution: bring back the drachma. This will cause hardship, but at least it will force Greece to take control of their own destiny, and will stop the blame game between Greek and the creditors that is paralyzing the country,

  20. This is a bit too cute I think. What ever the intervening transactions were, had Greece paid its original debts, European institutions (and the taxpayers behind those) would not be looking at defaults. The original loans to Greece were a style of bailout, because Greece was unwilling to operate as a country that was prepared to honor its debts. Take a big black box and put it around the entire operation and what you see is lent money flowing into Greece and payments against those loans not flowing out...the net money was consumed by Greeks in exactly the manner that their democratically elected governments decided it would be. To say that the lenders were foolish is all well and good, but Greece said they would pay and choose not to. Other Europeans may have thought it better for the first creditors to take the giant hit, but does anyone think that such a hit would have zero public financing implications for those other Europeans? It is fair to say that Greece as a nation set out to enrich themselves by billions in this and did so. That Greece did not use the money all that effectively when they had it might not be a huge shock.

  21. Say you have a job, you make 60k a year and have a 250k mortgage balance ( more of it should have been paid earlier, but you were not as diligent when you were younger).

    Suddenly your bank decides that you are too much in debt and you should double your mortgage payments from 1k per month to 2k per month.

    You cut spending, start buying grocery at the dollar store, rent out a room in your house and even start taking your medication every second day. You manage to come up with an extra $800 per month but this is still $200 short of the $1000 you need to make your payments.

    You try to argue to the bank that you can pay for the house but not this quickly because you just don't have enough cash but the bank insists "Sell your car and you will be able to make your payments".

    You are forced to sell your car, which allows you to make your mortgage payments for the next few months however your job requires you to have a car so you become unemployed (see Greece's 25% unemployment). In order to make a few mortgage payments, the bank has forced you lose 60k in salary this year. Who is responsible for this loss, you or your bank?

    After this disaster, you are no longer in position to make any payments. Should the bank give you a loan so that you can buy a basic car, get a job, start making money and restart doing at least part of your payments?

    If the bank is willing, you could take the high road and offer to pay part of your debt even after the bank has screwed you over this much, but maybe, if the bank is still acting incompetently and erratically, it wouldn't be unreasonable to just default and go see another bank for a car loan that allows you to have a job.

    Consider that Greece can't "sell the house". You cannot sell a country (especially one that is falling apart from not being able to afford maintenance).

    Consider that since you have only been taking your medications every second day your health is deteriorating and you may never be able to work and pay any debt back if things continue like this.

    What is the solution here?

    1. Engage in a second job and you wouldn't worry.

      Greece could have reformed his tax system; higher taxes and you don't need austerity.

      It's all about institutional change stupid.

    2. There are no second jobs in the country as austerity as forced the public and private sector to disinvest, that is to sell the tools and infrastructure necessary for work. People have to leave the country to work, but that leaves those that stay behind even worse off as the expats don't bring their share government debt with them.

    3. True, no second jobs - officially! Inofficially, most people, particularly those having a job with the state, have three jobs but pay no taxes! The whole thing is completely Byzantine!
      I'm living here since 14 years.

    4. See, it seems to me that everything Benoit wrote is common sense. (Of course I know that in economics (as in most serious sciences) common sense has to handled sceptically until hard analysis and evidence backs it! But until someone says how Benoit's analogy doesn't apply, it is a useful discussion springboard.)

      Here's another example. Consider failing schools - the kids getting low marks, bad discipline in the classroom, low morale in the teaching staff, not enough money for their special dificulties, the best people getter better jobs elsewhere leaving the less good teachers behind, leading to the kids getting low marks...

      How's the government to handle this? One solution is to cut failing schools' funding as a "punishment". But how's having less money going to help? Another solution is to give them more funding. But isn't that "rewarding failure"? And how are the successful schools going to react? Are they going to wonder why they "bother" being a success?

      It seems to me that those on the economic right regard money (and funding, debt, etc) as moral matters. You shouldn't reward failure, so you should cut failures' funding. Those on the economic left regard money as an instrument for doing things, a technology for (they hope) making the world a better place. The successful schools' reward is that they are successful - that's the good in itself, not how much money they have.

      These are stereotypes and simplifications, but not I think unfair ones.

      Benoit, may I repost your example on my work bulletin board?


  22. The Greek philosopher Nikos Dimou has been studying for sixty years the national character of his countrymen. His analysis? "Greeks live twice over their financial resources. They promise three times more than they can deliver. They claim to know than four times more than what they have really learned. And their feelings are set to five times more intense than what they actually feel.

  23. Good comment. I do not share your opinion but makes your position understandable to me.
    Hoewer I do not understand why you are not proposing a Grexit together with a negotiated maybe partial default. This would be my conclusion from your take.
    Prof wren Lewis, a response would be very much appreciated

    1. Prof Wren Lewis, a response would be very much appreciated.


    2. There are costs and benefits for Greece of Grexit. For the rest of the Eurozone there just seem to be costs.

    3. Prof. Wren-Lewis,

      Kindly explain: Would keeping Greece in the Eurozone reduce Eurozone's costs ?

    4. Yes, because they are more likely to get some of their money back. Particularly if they reduce their demands now.

  24. {What does seem to me very misguided is the idea that European policymakers have already been generous towards Greece.}

    Oh? Really?

    A massive debt of over $300B owed Europe and the IMF, most of which is tariffed at 3% of GDP in payback (until 2020, renegotiable after) is not generous?

    Who would make that sort of repayment scheme with Greece, if not the EU? Who?

    So why should Greece do a Grexit. It would be utterly foolish of them. Then again, I wouldn't put it past them either. Greece has a political class that stinks to high-heaven, one that is largely responsible for this mess to begin with.

    In fact, to begin with, Greece's politicians at the time cooked-the-books to get into the EU ...

    1. And since the above is a grave accusation, here is substantiating fact:

  25. This is excellent! A very astute observation but of course would embarrass those players responsible so that a change of course is, unfortunately, unlikely. Sad. I only hope that they don't get away with regime change.

  26. The zone, bankers and politicians may try to cover up as much as they can. Nobody believes them anymore.

    Interestingly, because of this whole bail-out mess I've found new sides in me. For example, I'd feel just pure pleasure if someone shot Katainen. He betrayed his own country wanting to be a commissioner.

    One of many other revelations: Never have I felt such a disgust towards other European countries than now in this house of cards. I'm fiercely trying to buy only goods made in my home country. If that is not possible, I consider Asian or Central/South American made (tired of US lies too).

    I feel people are getting mad all around. If only we survived without a war, though.

  27. How will the outstanding (and presumably not longer serviced) Greek debt affect Greece' exports in the event of a default and exit from the Eurozone? Would Greece be allowed to trade freely with the rest of the EU, or would the other countries impose some kind of central clearing or other restrictions? Would Greece have to shift their trade to non-EU countries in order to have the export-led recovery a devalued Drachma is supposed to bring?

    1. Since a major part of the Greek economy is tourism based, a switch to the drachma would immediately help the Greek economy. A devalued drachma would lower real wages and provide immediate help to whatever Greece ex[ports- olives, ouzo, etc.

      Four years ago I was recommending that Greece unilaterally declare that 50% of all debt be converted to non-interest bearing bonds but that those bonds could be used for taxes- in other words, a system of two currencies. Since 'bad money drives out good money', these 'bonds' would instantly become the national currency and the bonds would lose value at least to the LIBOR discount rate, the
      Greek economy would have had a defacto devaluation and price/wage fall.

  28. Consider that the goal of the EU might not be economic. The EU is using the debt as a collateral to demand further European integration. That's not in the best economic interest of Greece, or even Europe. But the economy is not the goal!

    For example, you write: "Contagion happened anyway, and was only brought to an end when the ECB agreed to implement OMT (i.e. to become a sovereign lender of last resort).This was a major error by policymakers - they ‘wasted’ huge amounts of money trying to stop something that happened anyway."

    But if the goal of the EU was to have further integration (like the OMT program), then they did exactly the right thing!

  29. How about abolishing the compound interests instead? Simple and generous solution!


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