At first sight the negotiations between Greece and the Troika
seem to be simply a battle about resources: how much of the pie that is Greek
national income their creditors should receive. There have been many similar
types of battle over the years - what makes this one unusual is that the
creditors have a unique weapon on their side. With primary surplus
approximately achieved, Greece’s bargaining position would normally be
extremely strong. The Eurozone creditors would be desperate to salvage what
they could from their foolish decision to effectively buy some privately owned
Greek government debt. The only reason the Troika is able to call the shots is
that it can threaten to eject Greece from the Eurozone. [1]
Part of the deliberate mystification that goes on here is to
present Eurozone exit as if it somehow automatically follows if there is a
Greek default. But of course Greece has already defaulted, and it remains in
the Eurozone. Greece wants to remain in the Eurozone. What will stop them if
they do default will be a run on their banks, and a refusal of the lender of
last resort for their banks - the ECB - to act in that capacity. Again this
will be presented by the ECB as inevitable given the ECB’s own rules. But as
Karl Whelan points out, the ECB in reality has
considerable discretion, and it has been using that discretion in its role as
part of the Troika.
Still, even if the sides are a little unequal in their power,
is it still just a battle over resources? One side advocates left
wing/populist/humanitarian policies and the other side policies that are more
of the consensus/neoliberal/tough variety. [2] One side has suffered a massive
fall in GDP partly as a result of previously agreements, while the other is
negotiating over what is to them peanuts. So there is plenty of opportunity to
pick sides based on preferences. Both sides would almost certainly be better
off with an agreement, so it also makes sense for people to appeal for
flexibility, which is why I signed this letter.
But to pick sides, or to call for flexibility from both, misses
the main point. Yes, this is a battle over resources, but it is a battle where
one side is using its power to pursue a policy that is very short-sighted,
involving incredible hubris, and which is ultimately self defeating. The Troika are not acting in the long term
interests of those they represent. This is I believe what Amartya Sen was
saying when he compared these negotiations to the Versailles
agreement.
The most obvious example of this are the Troika’s continuing
demands for positive primary surpluses and the austerity measures required to
achieve them. This is just stupid. It continues to waste large amounts of
valuable resources, as well as inflicting real suffering. It certainly is not
in the interests of Greece, but it is almost certainly not in the interests of
the creditors either. If you shrink the pie, you are less likely to get the
amount of pie you have a claim to. (Martin Sandbu goes through the maths here.) It is disgraceful that key parts of the
IMF plays along (or worse) with this. In the past I have described
how heterogeneous the IMF is, but taking absolutely no notice of what your own
research department says about austerity is crazy. Ambrose Evans-Pritchard talks about the Fund's own credibility and
long-term survival being at stake. Keynes, who helped found the organisation,
would be turning in his grave.
What about all the reforms that the Troika is insisting on? It
is tempting to look at each in turn, and apply our economics expertise to come
to an evaluation. If a reform demanded by the Troika might tend to increase the
long run pie, then perhaps they are right to insist on it. This neglects one
small issue: democracy. The Greek people have elected a government with a
mandate. The Troika appear to be acting as if this is neither here nor there,
and that is deeply worrying, at least to those of us who are very weary of yet
further economic and political integration. (For those who have that integration as their
ultimate goal, Greece can be seen as an annoying obstacle that should be thrown
aside. [3])
The hubris of the Troika is incredible. They have convinced
themselves that they must override the democratic wishes of the Greek people
because the Troika have the wisdom about what is good for the Greek economy.
This is the same body that with its superior wisdom prevented full default, and
imposed ridiculously strong austerity on Greece and crashed the economy as a
direct result. To cover up these errors they play to stories in the media about
the lazy and privileged Greek people, stories that largely disintegrate when confronted with evidence. Now they shrug their
shoulders and say I have to keep on the same disastrous path because my
electorate gives me no choice!
Amartya Sen is right. This is our Versailles treaty moment. It
could be so very different. No doubt some of Syriza’s mandate may be unwise,
but their own economists may recognise that and welcome the excuse to shelve
them. The Troika and Syriza’s negotiating team could be cooperating in that
endeavour, but I’m pretty sure that is not what is happening. On austerity the
priority of the Troika should be to eliminate the Greek output gap, which means
in the short term less rather than more austerity. This would not just be in
the interest of the Greek people but also the interests of the rest of the Eurozone.
[1] This is why I think these negotiations are less like bargaining over a mutually beneficial
exchange (rolling over lending in exchange for reforms),
and more like a discussion with a mugger over which of your personal
possessions you hand over.
[2] Or add any other description you prefer - my point is that
they differ and people have strong views about them both in principle and
practice, and therefore pick sides accordingly.
[3, postscript] Karl Whelan shows here that Giavazzi’s piece is as grounded in facts as some other FT op-eds.
Banking rules dictate that money printed for loans have to be destroyed as the loans are being repaid. Euros that Greece has to pay back have to be destroyed,not exchanged for resources as you claim. This is not a battles for resources but about following banking rules.
ReplyDeleteEuros for greek bailout were printed with billateral debt agreements from EU nations that allowed ECB to print new money and pay off the banks that held greek debt. The same amount has to be destrpyed as Greece pays it back.
Liquidity trap, ZLB, is a byproduct of money being destroyed faster then being created by new loans. Economy fully depends on new liquidity provided by new debt (printing money) since debt is money and money is debt.
Government deficit spending also adds money. Government is like a bank overall. It spends first then issues tax and bonds.
DeleteThat's true for a sovereign government, like UK, US etc, but not for Greece. They are users of a currency issued by the Eurozone, so when the Greek government spends, it must get that money by either taxing the population or by borrowing from the EU.
Delete"They have convinced themselves that they must override the democratic wishes of the Greek people because the Troika have the wisdom about what is good for the Greek economy."
ReplyDeleteIf the people of another country were to vote, "Let's all move to England," would the English think it had to respect those democratic wishes? When there is an international agreement in the balance, it's not just the democratic wishes of one country which determines what happens. The democratic wishes of the other side is as equally important. You can be pretty sure that, if there is an agreement, it is because Merkel will ignore the democratic wishes of the German people.
See my reply to NM below.
DeleteHi Simon,
ReplyDeleteAs you acknowledged in your previous post "Greece and primary surpluses", some negative gap is necessary to restore Greece's competitiveness vis-à-vis their real exchange rate.
Perhaps the budget surplus should be set according to a macroeconomic target to adjust to changing economic circumstances. For example using the budget surplus to roughly target an inflation rate of 0%, would allow Greece's real exchange rate to depreciate compared to the rest of Europe (inflating at ~2%) while avoiding painful deflation. The target would be incredibly rough, and in practice have wide error margins, but it would at least be some sort of objective measure as to how much spending can be allowed in contrast to the costly bargaining that currently occurs every time a bill is due.
This would produce a smaller, though still negative, output gap while allowing Greece to regain competitiveness.
"For those who have that integration as their ultimate goal, Greece can be seen as an annoying obstacle that should be thrown aside."
ReplyDeleteDerp, derp, derp. The reason behind the Greek standoff is that some countries have handed over money, and are being asked to hand over some more, and they want a say as to how that money is used. That is normal. That is what a federal system resolves - but there isn't a federal system yet, so that's why there's a problem. Duh.
Actually, some countries handed over some money. Rather than accept that they aren't going to get it back, they want Greece to continue a charade where money is put into Greece and then funnelled back out again to the creditors. As SWL notes, the reason Greece has been forced to play along is that the creditors control the ECB and thus are able to prevent it from fulfilling it's treaty obligations as the lender of last resort. i.e. they have explicitly threatened to cause a banking crisis if Greece defaults.
DeleteGood point. It's also inconsistent to argue - as in the above piece - that the Greek government has a democratic right to refuse reforms which would benefit the Greek people, but the Troika (which represents creditor governments which also have been democratically elected) does not.
DeleteBlenheim - the Greek people voted for the Greek government on the basis that it wouldn't do some of said reforms
DeleteBlenheim - I did not say they had a 'right'. I suggested that the Troika might start acting as if they recognised that the wishes of the Greek people mattered.
Delete@Anon - and the people of the creditor nations voted for their governments on the basis that they would get their money back.
Delete@Mainly Macro - you suggested that the Troika is acting against the wishes of the people that it represents, as enacting austerity shrinks the "pie" (the Greek economy). Presumably the Greek government is doing the same with the types of reform you consider in your thought experiment in the third-from-last paragraph (by failing to enact growth-enhancing reforms, they also shrink the pie). But you treat one as unconsionable, and the other as a democratic right, even though the Troika is acting on behalf of democratically elected Governments.
As I said before, I did not talk about rights. What I said was the actions of the Troika made it much more likely that the governments they act on behalf of would not get their money back. That was the point of the post, and Sen's article, yet you seem to want to pull everything back to a contest between Greece and the rest.
DeleteYou concede above that *some* of the actions of the Troika (insisting on certain reforms) make it more likely that the pie will be bigger and hence, presumably, will make it easier for the Troika to be repaid.
DeleteIn this they are clearly not acting against their own long term interests (and may even be acting in the interest of many Greeks).
Professor - do you think that the creditor countries should allocate the marginal Euro in debt relief for Greece or a LDC (e.g. in Africa or South America)? And if there is debt relief for Greece, why should it come from existing creditor countries rather than the UK or US?
ReplyDelete(combining the above, should some of the UK's Department for International Development's budget be rerouted from going to LDCs to Greece?).
If Troika politicians were honest, they would say: we imposed much too much austerity on Greece, and we used taxpayers money partly to bail out those who had originally lent to Greece, so now that means we will not get our money back. It is pretty clear that is what happened. But they are not honest, because they know what the reaction would be. So they try and paint a different picture to hide their mistakes. And, as your question shows, it is working.
DeleteI sort of agree (about Greece not being allowed to default) being the responsibility of the Troika. But I don't think that should matter when weighing up costs and benefits, as outstanding debt is what matters, not how that debt was accrued (debt is the state variable).
DeleteWhat you're proposing is a transfer from a set of countries to Greece in the form of debt relief. But presumably this relief, should it not occur, could be spent on other things. Is the marginal Euro given to Greece in debt relief as valuable as if that Euro was spent in Sub-Saharan Africa?
The question was a bit loaded, but it was genuine in that you might think that e.g. the multiplier in Greece was so large that even though Greek citizens are much better off than those in SSA the return was much higher in Greece. Or perhaps the utility of the representative Greek is much lower than those in other, putitatively poorer parts of the world (if there are large habits in consumption?).
The point of the post and Sen's article is that the Troika's policy makes it less likely EZ countries will get their money back.
DeleteSouth Saharan Africa is a red herring. Why would the German gov. give away money to the poor in Africa if they haven't done so before?
DeleteAs an Austrian, yes, I do support direct transfers to Greece (and re-distribution within Europe) and I'm relatively sure they need the money more than we do.
I have been going through BBC references to the letter sent by the 364 economists to the Times in March 1981 and I see that, in a piece by Stephanie Flanders, 13 March 2006, Sen appears on that list as well:
ReplyDelete'Some 364 of them later signed a letter to The Times, claiming that monetarist policies had no basis in economic theory, would deepen the recession and should be abandoned. Everyone who was anyone, it seemed, had signed, including two past and future Nobel Laureates (James Meade and Amartya Sen), several future Blair advisors (including Julian LeGrand and Anthony Giddens) and at least one future Governor of the Bank of England, Mervyn King.'
Flanders' piece continued that:
'The economists who signed the letter thought that it would be impossible for any government to survive unemployment of 3 million. Margaret Thatcher proved them wrong. And the letter itself? Well, unfairly or not, the letter became something of a joke on the economics profession, as Lord Howe confirmed. "I've actually produced a definition of economists as a result: that an economist is a man who knows 364 ways of making love, but doesn't know any women." Budgets, and Chancellors, sure aren't what they used to be.'
Note how Flanders points only to the political, along with Howe, whereas every account I have ever read looks at the economic disaster that was the MTFS.
On 15 September 2009 on her BBC blog, afte the 2008 crisis, Flanders continued as before the crisis:
'You can have all the economists in the world on your side, that doesn't make the politics any easier. Come to think of it, given the level of public respect for the economics profession these days, their backing could do more harm than good. Margaret Thatcher had 364 economists come out against her - in a letter to The Times - when she raised taxes in the middle of a recession in 1981. And look how that turned out.'
This is a very good example of why you should always worry about who writes history. As you say, the MTFS as a macroeconomic strategy was a disaster, yet that seems to have been ignored.
DeleteI am not sure I understand what you mean by the ECB lender of last resort role. Are you arguing the ECB should accept Greek bonds as collateral after the Greek government default on the other creditors? Lend to Greek banks without requiring collateral against it? Wouldn't that be monetization of Greek debt which is explicitly excluded.
ReplyDeleteI read an article about thinking of the situation as an ultimatum game and I think the comparison is very apt. The EU has been transferring real resources to Greece for the last few years. Just not enough to stop the austerity but only to limit it a bit. You are clearly arguing that not giving them a "fair" amount is morally wrong and justifies the current government behaviour.
But don't the Greek themselves have some responsibility? The ECB has a strong hand only because Greek banks have lost deposits at a huge rate in the past few months. If the greeks are bailing out why should the eu government plug that hole. Doesn't that count for something?
If you heard that your central bank was thinking about not acting as LOLR for your bank, what would you do with your deposits there? The ECB can create a run on Greek banks, which gives them tremendous power. And they are part of the Troika.
DeletePlease explain why the wishes of the Greek electorate should count for more than the wishes of the creditor countries' electorates. Whatever you think of the Troika demands, they are the demands of elected governments. They provide the resources; surely they should have the right to set the terms on which these resources are made available. Whether those terms are economically rational or not may be debated, but that is an entirely different question. If you want a short answer to the reason why few in Germany listen to the Anglo Keynsians, your effective claim that the Greek electorate's wishes should somehow overrides that of the Germans (or Finns, or Dutch, or French, or Italians, ...) when setting the terms on which German etc. resources are provided to the Greeks gives you a clear answer.
ReplyDeleteFor one, the electorates of the creditor countries don't know what structural reforms means.
DeleteThe answer to your first question is simple - because the reforms are to the Greek economy, and lending to a government does not give the lender any automatic right to dictate what that government should do. It should therefore matter when the Greek people vote for a different government, but the Troika are acting as if it does not.
DeleteI did not claim that Greek wishes should override those of the Troika. But you are falling into the trap that Troika politicians want you to fall into - of making this and us vs them contest. Sen's point is that acting in this way makes everyone worse off.
Mainly Macro10 June 2015 at 08:09
DeleteOf course, lending to a government does not give the lender any automatic right to dictate what that government should do.
That is exactly what Schäuble says.
The Greeks have a perfect democratic right to choose poverty beyond that they already have.
and be forced out of the Eurozone. As I said, it is the choice a mugger gives you.
DeleteI must confess I am genuinely amazed at your position, which I am unable to interpret in any other way as saying that A, who wants resources from B, has a right to define the terms on which B hands over B's resources to A. That position makes no moral sense to me, I'm afraid. I genuinely don't think B has any right to do so. I write that as someone who has a lot of respect for your writing in general and is in favour both of asking Greece to run no more than token surpluses (say 0.1% GDP) for the next several years, and generously restructuring the debt.
DeleteBut I'm not saying that (see last para of post)! The terms - by which you mean reforms - should be negotiated. My quarrel was that B appears to think that the terms should be unaffected by the change in government. But the main point of the post is that the terms B are currently insisting on mean that B is less likely to get their money back.
DeleteMainly Macro10 June 2015 at 08:34
DeleteProf. Wren-Lewis,
You seem to know a lot of muggers that offer you money and leave you the possibility of refusing it.
But that isn't the usual definition of a mugger. What in all the world brought you to make such a comparison?
Because the option of refusing the money comes with the proviso that if you do, we will throw you out of the EZ. So the idea that Greece is just being offered money (actually mainly rolling over existing debt) in exchange for prescribed reform, which they do not have to take, is misleading.
DeletePerhaps a better analogy is this. I offer you a job, and agree to pay you. You do not have to take the job, but if you do not, you might just find that your house is on fire, and the fire brigade will not come to your rescue. In those circumstances I doubt that you would say that you are really grateful for that choice, and pleased that you are being paid for the job.
Corporate Finance 101:
DeleteIn the presence of a debt overhang a company's equity holders have no reason to inject equity to finance new projects since any improvement in the company's free cash flows will mainly increase the debt holders recovery value and not the equity payoff.
The official lenders are holding senior (English law) claims on the Greek sovereign yet they want to be able to call the shots in the same manner as equity holders without bearing the corresponding risks (equity is a call option on future free cash flows). All this while the actual Greek stakeholders (government and people) are asked to increase their 'equity injections' through large future primary surpluses with very little saying on the policy mix.
Really sorry but you cannot have taxation without representation, nor management without an equity claim. If you want to 'call the shots', you have to pay for your mistakes as well.
"and be forced out of the Eurozone. As I said, it is the choice a mugger gives you."
DeleteWhat's wrong with being forced out of the eurozone?
A battle about resources?
ReplyDeleteWhat resources? Name three!
Ports (privatisation), land and workers.
DeleteMore about suppressing Greek imports TBH.
Why Sen is right about what is being done to Greece?
ReplyDeleteHe isn't - sadly enough.
I think you're missing the point made most clearly by Tony Yates when you say:
ReplyDelete>> This is the same body that with its superior wisdom prevented full default, and imposed ridiculously strong austerity on Greece<<
If the austerity that was imposed by the troika when it financed massive deficits was "ridiculously strong", then what superlative would you have left to describe the consequences of default? Greece would have needed to move to a primary surplus immediately from 2010 if nobody was prepared to lend it more money. I can hardly imagine the consequences of this.
The troika reduced the amount of austerity that Greece needed, not increased it. This is just a fact. What you and Sen ought to be arguing (as Tony points out) is that it would have been advantageous for the rest of the Eurozone to provide *even more* help. This might be correct, but what was provided strained the limits of political possibility (I have to add my voice here to the people pointing out that Schaueble was also elected democratically). Germany has a constitution, which requires all the programs to be endorsed by the Bundestag. The program for Greece involved the largest amount of German money that could have been passed.
I wrote the post partly because I thought Tony had missed the point that Sen was trying to make. You could make exactly the same point about Versailles. You could say that the reparations demanded of Germany only partially compensated the Allies for the cost of the war (they could have demanded much more), and to demand anything less would have been politically impossible - both of which I'm sure was said at the time. But that does not alter the verdict of history: Versailles was a huge mistake.
DeleteIn the case of Greece the counterfactual is also more complicated. The EZ delayed default, and then only allowed partial default: the sums given to Greece are large because of those two mistakes. It would have been much better if full default had happened in 2010, and the money used to allow a more gradual transition to primary surplus.
Your point also has no implications for the current negotiations. Greece has now approximately achieved primary surplus. The Troika are demanding further austerity as a condition for essentially rolling over existing debt and not being thrown out of the EZ. Demanding further austerity now is bad for both sides, whatever you think about the past.
Greece would have needed to move to a primary surplus immediately from 2010 if nobody was prepared to lend it more money. I can hardly imagine the consequences of this.
DeleteSure but the bailout was not an act of selfless generosity on behalf of the creditor bloc, Germany and the institutions judged that their interests would be worse affected by Greek default than providing the bailout and because they set the parameters I think you can hold them responsible for the programs failure, its political tenor and the degree of misery inflicted. Saying the Greek's had no better option does not justify what was done (or its stupidity). Who knows,perhaps the massive printing exercise that Greece's inevitable default would have provoked would have been better for Greece - it certainly would have been worse for Germany.
The troika reduced the amount of austerity that Greece needed, not increased it.
Again, even if its true in the medium term, that's an incidental side effect, the Troika deserve no credit for it. Insert your metaphor here but there is no thanks due to Germany or the institutions for preserving their own best interests (and plenty of criticism due for how they chose to run their economy under EMU and then shrug off the consequences).
There is a moral dimension to this and I think the rather abstract terms we discuss the bailout programs obscure it. Program conditionality is about states with money setting the domestic political agenda for a state without money and Schauble's democratic legitimacy to negotiate for Germany does not mean he has any democratic legitimacy to set Greek pensions, unless you dig Thomas Hobbes.
We all know that EMU is a disaster but I think it is fair to say that the disaster has not been shared around equitably.
Well, "Greece has achieved primary surplus" is only true as a backward looking statement. Tax collection has gone through the floor, and the monthly figures are only being kept in cash balance by delaying disbursements and not paying bills.
DeleteAnd this is all because of Syriza's actions. Before the election, this was a country which had returned to GDP growth and which was able to finance itself in the private market. Since Syriza came to power, it's gone back into recession and developed an incipient banking crisis.
The troika have actually been very flexible, but Syriza's determination to chuck away progress made by the Samaras government had been very destructive (the refusal to even talk to the troika team for months was particularly destructive of investment and confidence). Even on good Keynesian grounds, it's reasonable for the troika to require that if they're putting up money which reduces, not increases the necessary degree of austerity, then Syriza has to at least make lip service towards working with them. Otherwise, the multiplier on new lending goes to zero and the "stimulus" is just financing capital flight.
. Before the election, this was a country which had returned to GDP growth and which was able to finance itself in the private market.
DeleteFirstly given that Greece's GDP dropped by more than 25% since the program began I think judging the program as a success when a 1% GDP growth rate this year _might_ be achieved is pretty generous.
Secondly it's arguable whether the growth happening because of the "reforms" or in spite of them. Is there a case to make that it's the ECB's good graces that allowed Greece to borrow commercially again and not anything to do with the program?
Thirdly taking the long term effects of the program into account (various kinds of hysteresis: eg: 500k young people emigrating) the Greek economy's continuing improvement might not be good for Greece's future.
Finally Syriza's opposition to the Troika program was substantially about the program being scheduled to get more austerian for the next several years and Syriza had a strong case to call "Punitive counter-productive bullshit" on that.
Really sorry but:
Delete1) Greece had a cash reserve of around €7bn during April/May 2010.
2) Whether or not Greece defaulted, it still had every right to use the IMF resources. Actually, it was the IMF €22bn that covered Greek primary deficit cash needs during 2010-2012, while the EU funds were used exclusively for repaying maturing bonds. Add the €7bn in cash reserves and the €7bn increase in T-Bill issuance during the same period and you have plenty of funds to cover deficit and interest payments.
The decision in 2010 was not between more or less austerity but between defaulting or repaying maturing debt.
"It would have been much better if full default had happened in 2010, and the money used to allow a more gradual transition to primary surplus. "
DeleteIt would far better to Grexit and adopt functional finance and not worry about the deficit or surplus level.
I fell as though many of the supporters of Troika seem to be simply falling into a fallacy of sunk costs. Yes Greece has been lent money, but even if we assume it's creditors are wholly self interested (which I severely hope they are not) it is simply not in their interest to try and grind Greece into the ground to get money back. Here I believe Sen's comparison to Versailles is particularly apt.
ReplyDeleteHoping therefore that Troika also have some interest in global prosperity, it seems madness for them to act in the way that they do.
I think the point SWL has set out is that if in your desire to punish the debtor nation you chop one of its hands off, and this causes default on debt repayments, chopping the other hand off will make it even more unlikely that the Troika will get its money back. So it's better to lend a hand to get all of Greece's resources working so as to produce a surplus (it's what the USA did for Britain at the start of World War II, but he likened it to lending a fire hose?). That surplus can then be used to pay off debt without reducing Greece's capacity to pay off its debts. To put it another way, hopefully, things move from a loose - loose scenario to a win - win (or, at least, everyone losses less).
ReplyDeleteShaunT
Morality is ironic, especially in economics. The Greeks are lazy and corrupt, so we must gut their economy, even as we cut off our nose to spite our face. Sen's article is required reading. I think it provides insight into the psychology of morality. What we call morality or justice is often petty vengeance. An eye for an eye and the whole world is blind. Will the troika see clearly?
ReplyDeleteAs an amusing aside to this issue, in the country in which I live (Finland), one of the most ferocious proponents of the policy of enforcing austerity on Greece, people took to the streets in the capital yesterday to protest against cuts made to their rights to place their children in state-funded kindergartens. These were minor cuts, limiting the right of parents who are not working (or households in which one parent is at home) to put their children into state-subsidised day care. It would probably be correct to assume that many, if not most, of the marchers are in favour of a hard line being taken against Greece, since such a policy is highly popular in Finland. A casual observer might arrive at the conclusion that when it comes to the so-called 'morality' of structural reform, in northern Europe this only means reform imposed upon others, not 'us'. I expect more of this one-eyed notion of morality in the coming months as the new Finnish Goverment's cuts kick in - in the name of God, do it to 'them', not to 'us'!
ReplyDeleteThis discussion is incomplete without the acknowledgement that part of the current impasse is not directly economic, but is instead an effort to punish Greece for daring to elect a center-left government.
ReplyDeleteIt is the elephant in the room, the use of the European component of the global financial crisis by Germany and the European Institutions to promote a right wing agenda and to try and ensure it's permanency by legally enshrining.
DeleteI think the EU post the GFC was Germany's invasion of Iraq, with fiscal profligacy as WMD, the banks as Saudi Arabia and the elimination of the possibility of social democracy as regime change.
It's not as if the current Greek situation was unexpected, except perhaps by the Troika. The term "Carthaginian Settlement" in the context of Greece was used back in 2011 by John Cassidy in the New Yorker.
ReplyDeletehttp://www.newyorker.com/magazine/2011/10/10/the-demand-doctor
The Troika might as well have sown Greek fields with salt back in 2010. Short of war, it's hard to see how they could have done more damage. In fact, Greece would have been better off declaring war on Europe and allowing itself to be occupied: The armistice terms couldn't have been any worse than what was imposed. The trick was that the Troika got the Greek Cacistocracy to do their dirty work for them without the need for an occupying force!
Not unsurprisingly, the Greek people revolted. Syrizia was in effect created by the Troika, and is the only popular voice of reason in Greece now. If the Troika is determined to destroy them, they'll be dealing with Golden Dawn next. There are far more parallels with Germany between the wars than are comfortable.
So, we all know where the Treaty of Versailles lead.
ReplyDeleteThere seems to be an amazing degree of complacency about where a Grexit could take us. Forget that Troika's policy have failed in their own terms, that the contraction of the Greek economy means that it is less likely that the creditors will get their money back. Are we really to believe those who tell us that the consequences of the Greeks being expelled from the Euro will be negligible, that there is no chance of another financial meltdown.
It was the Greeks who introduced us to the idea that Hubris was followed by Nemesis. The unwillingness to solve a problem that could be resolved overnight if the ECB were willing to devote a fraction of the cash it is putting into quantative easing has the potential to put the whole European project at risk.
So what are we going to do when the Russian tanks take yet another slice of the Ukraine?
Its like watching children playing with matches!
The hubris of the author is incredible. He has convinced himself that the other Eurozone countries must accept the democratic wishes of the Greek people to get permanent transfers from the other club members because the Greek people have the wisdom about what is good for the other Eurozone countries' economy.
ReplyDeleteThe author ignores that Greece marxist style government started to unwind reforms already taken and no progress is achieved on pensions, labor market reform and public institutions and corruption.
This author blames the Troika for the current mess in Greece and at the same time links to an article from Karl Whelan stating all the good progress Greece has made since then.
Nobody is denying the progress already made but it is not enough and the current government is incapable of even making a credible plan.
This is not a Versailles moment. Greece has the option to default and exit the Eurozone. Germany had not. Greek can go if it wants, but it cannot impose its corrupt rules of how a currency club works on the remaining other 18 members.
I have consistently argued that excessive austerity has been bad for both sides, and so far I have been right, so no hubris there. The Troika has been horribly wrong in its analysis. You can think of the election of Syriza as an example of that miscalculation. If my government had lent money under completely unrealistic assumptions about being paid back, assumptions of its own making, I would get cross with my government, rather than reserving all my anger for the country that the money was lent to.
DeleteThe troika didnt have a lot of choices in what it could offer the Greeks. Nearly all IMF programs are overambitious and rarely achieve the goals initially set. If you achieve more than half of it you are probably good. In that sense - given the protracted situation it probably was a success.
DeleteSO FAR I HAVE BEEN RIGHT
What else is hubris?
You cannot prove this. There is no prove that an alternative path would have achieved even less.
Your BELIEF that excessive authority has caused this drop in GDP rests on a business cycle model that derives numbers based on a general trend that has been corrupted by years of excessive fiscal deficits. A gdp of a small country that mainly consists of consumption and tiny investment and exports has severe structural issues.
Syriza did a great job in demonizing the troika and styling Greece as a victim. Political reform is rarely popular. Schroeder lost out to Merkel, schuessel to Faymann and rajoy could be next.
My belief is that this drop in gdp was inevitable given the cleanup of this rotten situation. The eurozone had enough trouble itself and it was likely the best offer it could make to Greece. It is not assured a softer approach would have achieved even less.
"Your BELIEF that excessive authority has caused this drop in GDP rests on a business cycle model that derives numbers based on a general trend that has been corrupted by years of excessive fiscal deficits. "
DeleteFiscal deficits are neither good or bad. Businesses depend on aggregate demand. There is a large amount of evidence for fiscal stimulus.
Less austerity is correlated with more growth.
Of course nothing is certain in economics or outside of it.
"It is not assured a softer approach would have achieved even less."
Delete?
Perhaps it would be productive to both sides of this debate, if one were to list the things that the money to be left at the discretion of the Greek government were to be spent on :
ReplyDeleteRehiring cleaners for the Ministry of Finance at a cost approximately three times the previous rate.
Financing the deficits of supplemental social security funds that were founded as self-financing entities but have ended up being bankrolled by the Greek state taxpayers.
Continuing early retirements at average age 56 in the public sector.
Continuing paying average pensions of nearly 900 euros per month, while the starting salary is less that 600 euros per month (both before income tax).
Continued employment of entirely needless staff in state organisations that have no purpose except to draw salary for their staff, after their jobs have been automated away.
The list could go on and on. The author of the original post and Sen fail to note how politics is being done in Greece for at least the last 194 years. The main purpose of the government is to enable the political parties in power to buy votes at the expense of taxpayers and lenders. When, in 2010, the two largest parties in Greece were forced to cut the age-old largesse, they lost 50 (fifty) percentage points of their combined share of the vote (down drom 80% to 30%). The new government, elected four months ago, promised to revive exactly those age-old favours to the electorate. Can a country where such obscene vote-selling and vote-buying takes place be properly called democratic ?
I believe that continued financing of such value-destroying actions is detrimental both to Greece and to to its partners in the rest of Europe.
If those microeconomics arguments have no traction in a macro blog, one should consider whether huge or less huge budget deficits did ever lead to fast growth in the Greek economy. For as far back in time as statistics for the Greek economy exist, one observes that any additional aggregate demand created by the budget deficits leaks away into balance of payments deficits. It is the model case of a "small open economy". I believe its characteristics have been known to macroeconomists for a very long time. Has anyone come up with a different argument for such economies ?
George J. Georganas
Useful to see some facts on this subject. These facts are at the heart of the negotiations. The gulf in resolving them has resulted in the IMF going home. Much of what is read on blogs is just spin for Syrisa.
DeleteThere won't be much writing about Greece on blogs when the electorate next elects a far right wing government that promises that they can have their cake and eat it.
Anon - If a government in a small open economy buys more non-traded goods, how exactly does that leak away?
Deleteam - I was writing much the same well before Syriza came to power - e.g. this from 2012
http://mainlymacro.blogspot.co.uk/2012/11/greece-continuing-disastrous-squeeze.html
I thought this habit of seeing social spending as "favors" had gone out of fashion in micro. Apparently not! But you also seem to have a very high opinion of Papdemos's government. I wonder if their fall on popularity had anything to do with the collapse of the Greek economy since 2011?
DeleteI'm wondering why any private lender would even consider financing such an entity? This habit of bashing Europe's south, when research has generally found hours to be longer than in Germany, is I think obscuring other factors that produce economic differences in the EU.
Government boosting the demand for non-traded goods is precisely what brought Greece to ruin in the first place. How can one recommend more of the same ?
Deletehttps://unofficialdimioannou.wordpress.com/2013/09/07/greece-victim-of-excessive-austerity-or-of-credit%E2%80%91induced-turbo%E2%80%91charged-dutch-disease/
Easy credit, due to membership of the Eurozone, allowed Greek businesses to get out of the tradeables, where prices were set by the merciless world market, and into non-tradeables, where they could earn better returns. Easy credit, due to membership of the Eurozone, allowed the Greek government to borrow heavily, so as to keep aggregate demand high, so that all those newly-produced non-tradeables could be bought locally and at "good" prices.
Once the borrowing capacity of the country was exhausted, the whole edifice came crashing down. Diagnosing a deficiency of aggregate demand in Greece is not the correct diagnosis. It is supply that is deficient. And how could it not be, when there are 2,7 million people (in a population of 11 million) receiving pensions (out of current income, as pensions were left unfunded in the credit-induced boom). Moreover, because of the previous boom in investment on non-tradeables, the country is awash with empty buildings. Hence the tide of non-performing loans (one-third of the outstandings) swamping Greek banks. How could the government encourage building more ?
Mismanagement of Eurozone membership led Greece to huge malinvestment, both in the wrong capital assets and in the wrong human skills. People specialised in stamp-setting in public employment are long-lived assets and cost enormously to repurpose. Yet, even today, most of the brightest Greek young people and their parents prepare for such careers. The ones than can, emigrate. Malinvestment of the worst sort continues. This is the true Greek tragedy. Misplaced sympathy is not helping the people of Greece. They are in a far deeper hole than one can imagine and false diagnoses push them ever deeper.
George J. Georganas
"How can one recommend more of the same?" Because the situations are completely different. Everyone agrees about the broad outlines of what was wrong before 2010, but two wrongs do not make a right. Recessions that are needlessly too deep are just a waste of resources and cause unnecessary suffering. That is not misplaced sympathy - just very simple macroeconomics.
DeleteDoes "everyone" really agree on what was wrong before 2010 ? If the entire production-investment choices of Greece before 2010 were wrong, there is not any meaningful, competitive in terms of the world market, underutilised capacity in the Greek economy. To illustrate, one can recall the chemical factories in communist Eastern Europe that were built on the assumption of cheap feedstock from the former Soviet Union. Would it make sense to keep aggregate demand so high, as to render even those white elephants viable ? No, because that aggregate demand would, also, suck in an untenable level of imports and render exports even more uncompetitive.
DeleteThis is not just scenario drawn up in one's mind. It is precisely what has happened in every single year in the Greek economy since 1821 !
We are agreed that any discretionary spending allowed to the Greek government should be chanelled to appropriate uses as much as possible. You suggest non-traded goods and services. Even if that were the right recipe, the people who voted in the new government have given it a mandate to restore the pre-crisis standard of living. That standard of living required a balance of payments deficit of over 10% of GDP. So, in reality, neither you, nor I propose anything in line with the wishes of the Greek voters. The crucial difference is that the recipe for boosting aggregate demand requires more resources for a less likely benefit. Greece needs to repurpose its factors of production as quickly as possible.. Chanelling them into uses that cannot give Greece a place in the world division of labour means storing more trouble for a country that has brought upon itself far more than its fair share.
George J. Georganas
Versailles aimed at getting money OUT OF Germany; the Troika aimed at not having to put more money INTO Greece. From that standpoint, the Troika accomplished its objective: Greece's current account had turned positive in pre-SYRIZA days; i. e. the country had become financially self-sufficient.
ReplyDeleteThe standard reaction is, of course, that the Troika never put any money into Greece; that the money went to the banks, instead. Not quite. The critical years were 2010-12 when Greece had a primary deficit. Durings those two years, according to IMF, 41 BEUR of rescue loans stayed in Greece. Now, 41 BEUR is not all that much when comparing it to total rescue funds during the period of 247 BEUR but it is a lot of money when comparing it to zero (which would have been the case if the Troika had not ‘helped’ Greece).
Another reaction is that all the Troika is concerned with is to get its loans repaid. Well, I don’t think anybody of sound body and mind expects Greece to be able to nominally reduce its debt in the next decades. All they are hoping for is that the debt can be serviced, can be considered as ‘regularized’ and can ultimately be refinanced in the markets.
I think the Keynes of 1919 would have taken issue with several of those who cite Keynes today. In his “The Economic consequences of the peace” he painstakenly analyzed 'Germany’s capacity to pay'. He went through the German economy industry by industry. If economists today, instead of only discussing fiscal and monetary policies, would also analyse the productive capacity of the Greek economy, they would quickly find out where the problem lies and why simply increasing aggregate demand won’t help much in the longer term (example: total machinery market is a little over 300 MEUR annually!). Yes, if all people in the cinema – instead of only one – stand up to get a better view, they will all see equally poorly. But if the movie projector is defective, it won’t matter whether one stands up or sits down.
Not one government since 2010 has developed an economic development plan for the Greek economy. McKinsey proposed what I considered a very good such plan back in 2011 but it was quickly shelved by the Papandreou government. The Samaras government didn’t even comment on it and SYRIZA considered it the product of neoliberal thinking. That’s fine. But that does not free a government from the responsibility of developing such a plan. The Greek economy is incredibly far from being able to satisfy the desires of Greek consumers. Increased spending will automatically go into increased imports. The import lobby is happy; the export lobby non-existent. When Yanis Varoufakis became Finance Minister, he told me that developing an economic development plan would be one of his first priorities. Haven’t heard anything since. The Thessaloniki Program is a listing of certain expenditures and very uncertain revenues; no more. What Greece needs is a plan to increase the economic value creation capacity of its economy. The Troika is to be blamed for only thinking about not having to put more money into Greece and not putting pressure on Greece to make a plan. Of course, a successful plan would also work for the benefit of the Troika in as much as its success would increase ‘Greece’s capacity to pay’.
I urge all the economic brains who are writing about Greece to start publishing proposals about alternative economic plans for Greece. Monetary and fiscal policies are sideshows when there is no real economy to play with. In fact, the debt is a sideshow as well because it could be resolved by a few dozen people in a conference room. To make possible the increase of Greece’s economic value creation capacity is for the best brains and a job for many years.
Yes, Keynes encouraged housewives to go out and spend money but somewhere in the small print he added “provided that they buy British goods”.
you make lot of sense.
ReplyDeleteMr. Wren-Lewis either hasn't read the output of the IMF research department, or he hasn't understood it. All IMF studies skeptical of austerity condition their recommendations on the existence of fiscal space - which is exactly what doesn't exist on the case of Greece.
ReplyDelete