Winner of the New Statesman SPERI Prize in Political Economy 2016

Wednesday 8 July 2015

Austerity is an integral part of the Greek tragedy

Too many people, including many in the Troika, see the Greek struggle as just about transfers from one debtor nation to lots of creditor nations. That is why they perhaps saw the Greek referendum as an unhelpful move, as just inflaming nationalist sentiment. As Dani Rodrik puts it “What the Greeks call democracy comes across in many other – equally democratic – countries as irresponsible unilateralism.”

It is, however, not just about transfers, or what economists call a zero sum game. It is also fundamentally about austerity, as Dani Rodrik, Thomas Picketty, Heiner Flassbeck, Jeffrey Sachs and I say in this letter jointly published in the Guardian, Le Monde, The Nation and Der Tagesspiegel (and thanks to Avaaz for making this happen).

I think many people believe that a debtor country must somehow inevitably suffer large scale unemployment as a result of having to pay back at least some of its debts. But this comes more from a moralistic view than thinking about the macroeconomics. In an open economy, the real exchange rate (competitiveness) will adjust to ensure ‘full employment’ is preserved, whatever primary surplus (taxes less non-interest spending) a government needs to service and pay back its debt.

Under flexible exchange rates this competitiveness adjustment could happen immediately. Things are not quite so simple in a monetary union: competitiveness cannot immediately adjust because of wage and price rigidities. A period of ‘excess unemployment’ will be required to push wages and prices down if the country is uncompetitive in relation to required primary surpluses. However the excess unemployment can be relatively modest. In fact, because of the structure of the standard Phillips curve, it is much more efficient to achieve gains in competitiveness gradually through a measured increase in unemployment than quickly through a rapid rise in unemployment, for reasons I outlined here when talking about Latvia.

To achieve this efficient outcome may well require the government to reduce its primary deficits gradually, because without this fiscal support while competitiveness adjusts output could fall rapidly. This in turn will require more government borrowing, and if the government cannot do this from the markets, the IMF or other governments should step in to ensure this efficient adjustment can take place and avoid the waste and suffering of unnecessary unemployment.

This is what failed to happen in the case of Greece. Whether this was just the result of poor Troika calculations, or a consequence of feeling that creditor bankers were more of a priority (see, for example, Mark Blyth), need not concern us here. Once the mistake became clear, perhaps creditor voter fatigue meant additional loans were not politically possible. But to demand primary surpluses (i.e. to take money out of the country) while unemployment remains so high - as the Troika continues to do - is unforgivable in my view. It clearly makes the unemployment problem worse - see here, footnote [2]. At best it indicates an impatient creditor with no concern for the welfare of the debtor, but given the responsibility the creditor has for the debtor’s current position it is far worse than that.

That is not the only reason Greece’s story is about austerity. Its problems were made worse by the austerity across the Eurozone as a whole, and the deflation which that has brought. Deflation increases the real value of nominal debts. It also makes competitiveness adjustment more difficult because of a well known non-linearity.

Even those that have a great dislike or distrust of Syriza should recognise that Syriza is also a product of acute austerity, a point which the referendum reaffirmed. As economists might say, Syriza is endogenous.

That the Greek economy now lies broken is not the inevitable result of imprudent borrowing a decade ago, or structural weaknesses, or a left wing government elected just a few months ago. It is also the result of the actions of those who effectively ran the economy from 2010 to 2014, and their imposition of draconian austerity. Greece long ago recognised the folly of its borrowing, and has made a start on addressing its structural weaknesses. The Troika has yet to acknowledge its own part in making this tragedy.


  1. The problem with Greece lies, to a very large extent, in the confusion in many people's minds (and not least politicians) between economics and morality.

    Morality tells us 'neither a borrower nor a lender be' or at least that if you are forced to borrow you must pay your debts. Morality tells us that the creditor is always doing a favour to the debtor and so the debtor is morally obligated to repay the creditor the money that belongs to the latter.

    Economics suggests something a bit different. Economics tells us that the relationship between creditor and debtor is one of contracting parties each expecting to benefit from the deal. Economics tells us that past actions should not affect calculations of future benefits (sunk costs). And perhaps most importantly, economics tells us that government repaying its debts may be the wrong thing to do in certain circumstances, such as when other actors are also trying to increase their liquidity.

    So how to convince politicians that fair is foul and foul is fair? The most obvious case is the one you make in this and the preceding post: that applying a rigorous 'moral' option on Greece will clearly leave both parties - debtors and creditors - worse off. This is beginning - slowly - to be recognised in public discussion but there is a long way to go. A second approach is to underline to 'free market' apologists the inherent contradiction in forcing taxpayers (in both Greece and the rest of the Eurozone as it happens) to pay debts that have been freely contracted between consenting parties (albeit perhaps not always in circumstances of complete openness). Unfortunately, there seem to be rather few people in positions of influence who can see any contradiction between attacking government spending as legalised theft and insisting that taxpayers must compensate private sector lenders for bad loans that the latter have entered into. But we have to keep trying.

    It seems more likely than not that all will end badly. But Pierre Moscovici did admit this morning that forcing Greece out of the Euro would transform the common currency into a fixed-rate mechanism, implying that we would be back to the 90s if not 80s in terms of the creation of a single currency trading area. So perhaps there is some hope.

    1. «who can see any contradiction between attacking government spending as legalised theft and insisting that taxpayers must compensate private sector lenders for bad loans that the latter have entered into»

      There is a thing called democratic accountability: voters who elect crooks and kleptocrats as their government are fully entitled to suffer the consequences.

      Of course no individual greek is directly liable for the debts of Greece's state, as the state in effect is a limited-liability shield. But if this means that Greece's state ends up bankrupt, the voters who elected the state governments who caused that bankruptcy cannot complain about the consequences of their choices.

    2. That is ridiculous. Greece emerged from a right wing military dictatorship into a democracy constrained by that exact history. That is there was no prospect of an actual left-populist party like Syriza being allowed to take power initially, instead what democratic space there was was granted to two parties themselves dominated by elite families and more or less corrupt from the get-go. You saw and see similar mechanisms operating in countries like Turkey and Egypt were opportunties for actual populist parties (in those cases generally Islamic) were and are suppressed by a more secular military. You could multiply examples of this across both SE Asia and in Latin America where democratic choice has always been constrained by the very real (and often actualized) possibilities of military intervention.
      Your argument basically comes down to "Gee well they could have elected a responsive democratic government that didn't give in to the kleptocrats". Well you can tell that to the machine gunned corpse of Senor Allende. Without actual full democracy calls for 'democratic accountability' are a pure sham. Or perhaps a sham or a mockery of a travesty of a sham.

    3. «an actual left-populist party like Syriza being allowed to take power initially,»

      SYRIZA is a left-populist kleptocratic party, they only seem less bad because they were outsiders at the national level. They are just getting their turn as insiders in the general kleptocracy.

      «democratic choice has always been constrained by the very real (and often actualized) possibilities of military intervention»

      Like in Italy for most of the period before the collapse of the USSR.

      «Without actual full democracy calls for 'democratic accountability' are a pure sham.»

      I don't know what you think «actual full democracy» looks like and whether it exists in this world, but if Greek is not a democracy it should be expelled immediately from the EU, because its founding treaties allow membership only for democracies.

      Also I reject the idea that a less-than-perfect democracy absolves voters from accountability for their political decisions, even when they are somewhat constrained.

      Also «actual full democracy» or even just «democracy» is not something that voters get given as a gift: it is to be fought for. Someone wiser wrote: «God forbid we should ever be 20. years without such a rebellion. The people can not be all, and always, well informed. The part which is wrong will be discontented in proportion to the importance of the facts they misconceive. If they remain quiet under such misconceptions it is a lethargy, the forerunner of death to the public liberty. We have had 13. states independant 11. years. There has been one rebellion. That comes to one rebellion in a century and a half for each state. What country ever existed a century and a half without a rebellion? And what country can preserve it's liberties if their rulers are not warned from time to time that their people preserve the spirit of resistance? Let them take arms. The remedy is to set them right as to facts, pardon and pacify them. What signify a few lives lost in a century or two? The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants. It is it's natural manure.»

      But this is high-brow talk when the proper topic is a just the vulgarity of a huge fraudulent bankruptcy and whether those who enjoyed the benefits should also suffer the consequences as they kept voting for the direct culprits or someone else because those who kept voting for the direct culprits should not be accountable for the consequences of their voter. If not them, who should be then shaken down for the thieving they enabled?

  2. Yet again, Mr Wren-Lewis, you demonstrate a complete lack of understanding of the most basic economics. It is baffling that you are allowed to teach future generations of economists.

    1. And yet again you fail to mention what this basic economics is!

    2. Rohan is, perhaps, a Swabian housewife!

    3. Mr Wren-Lewis has just taught "basic economics": Greece is burnt by two austerities: the troika programme, and the deflation in the EZ. Mr Schäuble and other Swabian wisemen should resign just as Mr Varoufakis has. It would have been cheaper for European taxpayers simply to recapitalize French and German banks, liberating Greece from part of her debts. Much, much cheaper, and less painful for everybody.

    4. Simon, Basic economics tells us that the economy is like a household and you need to balance the books. Surely you've listened to some of our good chancellor's sermons?

  3. So how did Greece run-up an enormous debt?

    1. It had a relatively large debt before 2008 due to mismanagement, and this debt then exploded as of 2008 as austerity crashed the economy (and shrank the tax receipts that come with economic growth).

    2. "how" is simple: EU regulations gave debts from all EU states, even those run by crooks and kleptocrats, an AAA rating.

      The "why" is far more interesting: between 2001 and 2011 Greece had net imports of more than €230 billion of euros, of which more than €70 billion were enjoyed during the post-2008 "austerity" period. In 2008 greek net imports reached 20% on top their baseline GDP, €35 billions over that year, and this graph gives the details:

    3. A large number of highly paid private sector bankers did a complete analysis of their economy, tax collection and ability to repay, and on this basis decided to lend them quite epic amounts of money.

  4. Prof. Wren-Lewis,

    You and your colleagues say the troika imposed draconian austerity.

    Now, austerity means reducing public spending and/or raising taxes.

    Reducing austerity therefore means raising public spending and/or lowering taxes. Unfortunately, that requires money for the government, which it ususally doesn't have. So it has to borrow. But no one is willing or obliged to lend, so if it doesn't find lenders the government has no way of reducing austerity.

    From 2010 onwards, except for a short interlude under the former government, Greece was not able to borrow except at prohibitive interest rates.

    That means that austerity was inevitable, whether imposed by the Troika or not.

    So your letter is pointless.

    1. I'm sure you forgot to preface this with "Assuming the IMF doesn't exist..."
      Good work.

    2. they can print drachmas?

    3. I thought that was what my post was about!. As I have said before, the mistake was to spend all that money bailing out Greece's private creditors, so the much smaller amount left for Greece was too small. But right now, the Troika is demanding primary surpluses, so it is taking money out of the Greek economy.

    4. Mainly Macro8 July 2015 at 07:41


      So you agree that austerity would have been inevitable. So the only thing to discuss is: Would it have been less severe or less long without the Troika and the credit from the Eurozone and the ECB?

      That can only be answered counterfactually. If we have no facts we need solid theoretical macroeconomic arguments. And those would have to answer the following questions:

      Could Greece have survived without credit? After all, they had been living beyond their means - i.e. on credit - for years before the crisis.

      If not, where would they have got credit? Who would lend to a defaulter - esp. when a large part of the macroeconomic profession preaches their moral right to default so they could always use that line of argument the next time? The Eurozone did it for the sake of European unity - and that argument has become pretty frayed by now.

      Could you please answer those questions?

    5. Yes. So many fail to take on board this basic point about which direction cash flows are going!

      And that would have been possible -- taking money out of the Greek economy to feed its creditors -- had the creditors not insisted above and beyond that they be able to dictate further conditions on successive Greek governments.

      Conditions presented as necessary to restore the Greek economy -- and followed by its government for years -- conditions which conclusively failed, neither restoring growth nor reducing the GDP debt burden.

      And of course your faithless interlocutor at 3:28 not only fails to understand these points but pretending to correct you, introduces errors of his own! Reducing austerity obviously does *not* necessary require additional borrowing, particularly under conditions where a surplus exists.

      Naturally, I say this without any hope of changing the minds of Troika apologists; they have proven themselves remarkably immune to both facts and reasoning.

    6. Has anyone considered "orderly Grexit"?

      1. Reissue drachmas for internal use
      2. Euro savings and debt are unchanged
      3. Greek government switches (timing?) to internal payments/tax collection in drachmas
      4. After some stabilization of the drachma/euro exchange rate, renegotiate some or all of their external euro debt into drachma
      5. Left market adjustment in the currency balance debt/imports etc gradually

      Yanks Varoufakis stated some concerns about feasibility of Grexit in a blog post back in 2012. Those concerns included the time required to plan and execute a reissue of drachmas (that would only work with Euro/Troika cooperation and forebearancd) and the disparity between euro-denominated savings and drachma-denominated incomes, which he concluded would hyper inflate the drachma. Getting through drachma/euro rate stabilization would be the tough bit, but maybe an orderly cooperative implementation has a chance of success?

      Why not a dual-currency Greece?

  5. The never ending story: austerity would have been imposed on Greece without financial help from the EU+IMF. However, Greece got the credits not by borrowing it from the capital markets but from the EU. It might have not been sufficient but they GOT CREDITS to increase spending. What they (government) did with these credits is also well known in Bruxelles.

    1. Without EUs help, Greece's default would lead to either a big internal devaluation in the EZ, or a mixture of that and depreciation outside. But now, after EUs help, Greece's default will lead to either a big internal devaluation in the EZ, or a mixture of that and depreciation outside. Except from a baseline of a country that is 25% poorer.

      What the govt did with that credit was roll over privately-held govt debt into officially-held govt debt, and offset some damage from ECB policy, but I'm sure you're insinuating something as damning as it is nebulous.

    2. Obviously, you don't get it! THERE IS NO AUSTERITY!! AUSTERITY is a red hering!

    3. @Anonymous 8 July 2015 06:11:
      Austerity is the process whereby a government moves to reduce its budget deficits (and thus its borrowing) and restore medium-term (or structural) balance to its overall budget. When net public spending falls (in levels or absolute € terms) by around 30% over a couple of years, and so does public sector employment, that is a move to restore balance to the public budget; it is often called "austerity". This is precisely what has been taking place in... Greece!... since 2010.

  6. Simon, great letter. It was great you could write that with your esteemed colleagues. My only quibble is with putting too much faith in devaluation. Historians, heterodox and development economists have a point when they point out that this often exacerbates problems in countries with structural balance of payments issues. And Eichengreen has caught on to this;

    "In Greece’s case, moreover, there is the problem that the country’s leading export, refined petroleum, is priced in dollars and relies on imported oil, which is also priced in dollars. So much for the advantages of a depreciated currency."

    This is an important moment, as your letter demonstrates. If Germany agrees to fund Greece out of its predicament, and Greece accepts institutional reforms, this could be a Marshall Plan moment for Greece. It could also be the opportunity that sets in train political and fiscal union in Europe.

    What we DO NOT WANT, however, is institutional reforms that mean widespread privatisations and firesales to foreign creditors which could lead to a further dismantling of productive capacity in Greece which in the end will only benefit overpaid bankers and submit Greeks to further misery.

    1. if they pay for the oil with dollars they receive for the refined oil and their labours costs are now in drachma?

    2. No. For example if a country has few substitutes for imports, the price of the non-substitutable imports with devaluation goes up, and this can mitigate any advantage from a price reduction in exports. It is particularly a problem for if your very exports are heavily dependent on, for example, foreign produced machinery. Any reduction in export prices from a devaluation would be largely offset by the increased prices of imported inputs.

      So this is obviously not the result you get from an open-economy ISLM model.

      In the particular case of refined oil there will be no effect from devaluation, because they buy in dollars and sell in dollars so whether they have euros or drachma as their national currency is irrelevant.

    3. Just a qualification to the above - it assumes that labour costs are a relatively small proportion of the total costs - which is I think is a fair assessment. Refining is likely to be capital intensive - that would require purchases in Euros or Dollars. So the net effect could actually be quite negative.

    4. Greece buys/imports crude oil and sells/exports refined petroleum/other oil products. The difference (in$/Eur) is the cost of refinement. On this, they are competing against other refineries in the area (whether in Turkey, Russia, Libya, etc.). With devaluation, they will very likely become more competitive as the internal cost components of their refining will effectively become cheaper. Thus they will likely be able to refine even more petroleum as BP, Shell, etc. send more oil to refineries in Greece than elsewhere. While their imports will increase, their exports will also increase, i.e. the economic value of their refining will increase as Greece is able to make more profit/money from refining oil.

  7. "In an open economy, the real exchange rate (competitiveness) will adjust to ensure ‘full employment’ is preserved,"

    1. Intelligent people normally give reasons for their views.

    2. It is conceivable that unemployment will not stabilise at "full" if fiscal policy is too tight...
      If Simon is correct then every nation with a floating exchange rate has full employment forever! The evidence suggests they do not, to say the least.
      The world is a closed system. The idea that everyone can export to prosperity is total madness, especially in Greece where they have little to export. If the whole world is introducing austerity, search for exports is fool's gold.
      Full employment has to be created via appropriate fiscal policy and use of employed fixed wage buffer stock (not NAIRU, either Job Guarantee or your proposals.)
      "Intelligent people normally give reasons for their views."
      Indeed. Wren-Lewis has not though. He has pretended that if Greece introduces the drachma everything will be brilliant.

    3. The post was not meant to be about what happens if Greece exits, or an extended discussion of open economy macro. The key point is this. For an individual open economy in steady state, a tighter fiscal policy will be matched by a real depreciation, whatever the exchange rate regime. In moving to this new steady state, under fixed rates the improvement in competitiveness happens slowly through wage and price adjustment.

    4. Random,

      The idea that floating exchange rates brings full employment for the entire world does not rely on the idea that “everyone can export to prosperity”. Reason is that when a country devalues, some import substitution takes place.

      Next, the fact that devaluation (regular or internal) won’t work for Greece does not prove much. Greece is an oddball. See this Bruegel article, the final chart in particular:

      “Full employment has to be created via appropriate fiscal policy…”. That’s a bit better. However, the balance of payments cannot be totally ignored. That is, stimulus (monetary and/or fiscal) will bring full employment. But if that leads to an external deficit, the latter cannot go on for ever, can it? So periodic devaluations / revaluations are needed.

  8. Has Sach's changed his tune on austerity?

    1. No. Sure he was a big part of the mistake in the transition period of the ex-Soviet communist bloc (which he has learned from), but he was one of the few critics of the IMF's SAPs during the Asian Financial Crisis during the age of the Washington Consensus.

    2. Sachs' mistakes vis-a-vis post-socialism were less about austerity (as problematic as that is), and more about how "economies" really work. He left out power, institutions, and the like, and was clueless about how big of a change in institutions, practices, and the redistribution of power post-socialist change really was. And even then, when he's back on more familiar turf, he still gets it wrong now & then--I seem to recall Krugman or someone else calling him out for making pro-austerity claims (I think vis-a-vis the USA, but I could be wrong).

    3. " seem to recall Krugman or someone else calling him out for making pro-austerity claims "

      It was not so-much pro-Austerity, but a criticism of expansionary macro that leads to unsustainable consumption (from an ecological point of view) and credit expansion that fuels housing and other such bubbles. He was pointing to the long run impact of short run stabilisation policies. Wants more fiscal targetting rather than just a monetary expansion. Not really the immediate problem facing Greece.

  9. I still don't understand the your exact solution. If you are arguing that Greece is in a dire situation and that we should send aid, then say so explicitly. Given that the GDP per capita is still fairly high, it doesn't seem an open and shut case, but I can accept it.

    The multiplier argument I really don't understand fully. Let's say you are correct and the multiplier is 1.5. So the government increases spending by 5% of GDP. The economy soars and grows 7.5%, tax receipts increase by 2.5% of GDP (as you suggested in a previous post). So debt/GDP ratio goes down by 5% (7.5% growth vs 2.5% budget deficit). Success? If it was a single period game sure enough, but we really need to keep going... The following year, government keeps spending at the same level. On the second year there is no extra growth (as we simply kept the previous year spending). So on the second year debt/GDP goes back up 2.5% (no growth and still the deficit). We cannot decrease spending since the multiplier is going to screw us again, so debt/GDP starts growing again for ever. Even with debt relief we'll get in trouble again...

    I have assumed no inflation and no potential growth, so this is not realistic, but I really don't see how complicating the model really changes the situation...

    You need either very high multipliers or very high tax rates at some point in time to make the creditors whole again...

    1. The key point of the post is about the transition to a new steady state where competitiveness is much improved. Because it takes time to get there, you need fiscal support to prevent unemployment becoming too high. In other words, improved competitiveness will get you to full employment eventually, so all that fiscal policy needs to do is bridge the gap.

    2. «the transition to a new steady state where competitiveness is much improved»

      That is a very sad point of view, because it is quite irrelevant to Greece's situation: Greece does not have a competitiveness problem, it did not go deeply in debt because of a lack of competitiveness, and does not suffer from austerity either.

      Greece went deeply in depth simply because it had a debt-financed import surge of astounding proportions:

      To the point that greek GDP rose between 2001 and 2008 almost entirely thanks to consumption on imports; in 2008 greek GDP was about 20% higher than 2001 GDP almost entirely because consumption of imports was 20% of 2001 GDP.

      After this immense (more than €230 billion) import surge, Greece went back (rather slowly) in 2014 much to the same trade balance it had in 2001 and much the same GDP it had in 2001.

      That also means no austerity has happened before SYRIZA took power: GDP in 2014 was about the same as in 2001, when Greece was not a victim of austerity, and was considered a rich country with a good lifestyle. Actually in 2014 GDP per capita at PPP is somewhat higher than in 2001, a feat that several richer EU countries have not enjoyed.

      Sure, the greek government is bankrupt, but that because as the crowning "achievement" of the import surge the greek voters took all those nice imports for themselves and loaded the loans on their government. Greece is not bankrupt: just the cash assets of greek citizens both in their country and abroad amount to 2-3 times their government's debt. Put in commercial terms, Greece in 2001-2011 engineered a fraudulent bankruptcy of their government in order to pay for a fabulous increase in net imports to their own benefit.

      «you need fiscal support to prevent unemployment becoming too high»

      In 2014 more greeks were unemployed and poorer than in 2001, but given that greek GDP is much the same as in 2001, and GDP per capita at PPP is better, that means on average greeks are the same or better off, and thus any impoverishment of some greeks must be due from redistribution from poor greeks to rich greeks, and indeed that has happened, because of greek government policy, mostly of boosting tax evasion by rich greeks, not because of creditor policies.

      Put another way Greece is not poor (GDP is still four times higher than Bulgaria and another 10-12 european countries) and has not suffered austerity, but the kleptocratic greek elites, of which SYRIZA is part, want foreign taxpayers to fund the greek welfare state with the money of german, french, italian, etc. taxpayers, not that of rich greek taxpayers.

      EU taxpayers are already donating €5 billions of euros to Greece every year in aid, and have been doing so for decades, and several dozen billions a year in subsidized interest payments and debt default insurance on greek debt for several past years, with the effect that greek government interest payments are currently half of what they were before the crisis.

      All this has nothing to do with competitiveness; Greece had already gone through a sensible and effective competitiveness boosting programme some years ago, to the point that part of rate of unemployement is likely due to the increased in productivity.

      The myths that Greece has a competitiveness problem and is suffering from debt because of it, and is being impoverished by austerity are just part of the propaganda story shared by both many EU governments, who don't want to tell their voters just how absurdly generously they have subsidized and continue to subsidize greek consumption, and of Greece's kleptocratic elites, who just want more fiscal transfer from EU taxpayers to avoid taxing their own rich citizens to pay for the greek welfare state.

    3. An increase in imports cannot raise GDP!

    4. «An increase in imports cannot raise GDP!»

      I was tempted to reply with just one of

      * "OMG I flunked National Accounts for beginners! :-)"
      * "Amazingly, true and irrelevant"
      * "In your dreams!"

      but this deserves a bit more explanation.

      Our blogger seems to me to either:

      * forget or misunderstand that total imports are reported as wholesale "fob" prices, but imported stuff is sold as final consumption at retail prices, which include GDP-relevant "value added" (as it is mostly nationally sourced services).

      * cleverly state, in a very oxonian style, something true but irrelevant that may give that the impression that the argument replied to is grossly flawed.

      As to the first point of course when someone imports to Greece a container full of frozen lamb that is not going to be sold to the final greek consumer, at the same price paid wholesale "fob" to the foreign supplier. It is difficult for me to imagine a case in which a massive import surge happens without a pretty large impact on GDP.

      In the greek case the very clear graph that I posted suggests a pretty direct impact and a factor not too far from 1 between greek GDP and net imports in the halleluiah days of 2001-2011; it seem therefore plausible to imagine that every €1,000 of imported stuff has been resold to the final greek consumer for more than €2,000 thus generating not far from €1,000 of GDP as wholesale and retail value added.

      For additional information, rather different from true but
      irrelevant statements, let's look at the "halleluiah!" year of
      2008 compared to the regular year of 2001:

      * Net imports in 2001 were $9 billions, in 2008 were $51 billion, difference $42 billion.

      * GDP in 2001 $216 billion, GDP in 2008: $274 billion, difference $58 billion.

      * Private final consumption in 2001 is €101 billion, in 2008 is € 164 million,
      difference is €63 billion, or let's guess $90 billion.

      * Active population in 2001 was 4.6 million (total 10.9), in 2008 was 4.9 million (total 11.1), difference 0.3 million.

      Now the numbers "speak" very clearly! "Details" to ponder.

      * An increase of 300,000 "active" people, from 4.6 million to 4.9 million, coincides with an increase in final consumption from $101 billion to $164 billion, and in net imports from $9 to $51 billions!!! That's a 4% increase in activity generating a 62% increase in final consumption, and an increase in imports of 560%!!!

      * Net imports increase by $42 billions and GDP by $58 billion. Looks like import-related retails sales *could* have increased by $100 billion. Entirely by coincidence that private final consumption increased by $90 billion!!!

      Also note the following numbers as to how much "Austerity is an
      integral part of the Greek tragedy" in 2014:

      Active population:
      2001: 4.6m
      2008: 4.9m
      2014: 4.7m

      Activity rate:
      2001: 77% for males, 50% for females,
      2008: 78% for males, 55% for females
      2014: 76% for males, 59% for females.

      Final private consumption:
      2001: €102b
      2008: €164b
      2014: €128b

      Some of the numbers are of questionable quality (even if they are mostly or wholly official OECD sourced ones), but *whatever* :-).

    5. Perhaps it would help if I try to parrot Economists and use some of their jargon.

      To me it looks like that a lot of fashionable progressives have been fooled by a story that Greece's economy was enjoying an endogenous boom until the bad luck of the 2008 financial crisis undermined their well-earned prosperity, through a lack of credit to support investments and production, and that now envious foreigners are trying to undermine the return to that endogenous boom by pauperizing the greek population to make them into cheap serfs.

      To me instead the greek situation is the result of two enormous exogenous shocks, a sudden surge in lending at 1% interest rate post joining the eurozone around 2001, which the greeks used to fund a colossal surge in net imports, which they enjoyed very much (around $100,000 per household over less than 10 years), until the second exogenous shock, which was the end of such lending and a slower end to the surge in net imports. The first exogenous shock boosted greek GDP by 20% from its 2001 level, and the second shrank it back by the same to its 2001 level when near-balance of the trade account was achieved again.

      There was I think little structural growth of the greek GDP, just a one time wall of lending for a few years, and after that things, thanks to the great generosity of its EU partners, merely went back to the quite high pre-shock situation, without any appreciable austerity visible in the aggregate numbers.

      The situation of Greece (as distinct from the greek government) post-crisis and pre-SYRIZA was not one of being exploited by the rapacious brutality of their lenders, but simply of a return to a pretty high level of living standards (in the aggregate) without the temporary boost given by extreme lending.

      The main difference between civilized republics and banana republics seems to be the reaction when there is a huge *positive* exogenous shock, such as the discovery of great natural wealth, or "wells" of huge 1% loans. Banana republics seem to prefer to gobble that as fast as possible, distribute it mostly to predatory elites and their patronage networks, and spend most of the windfall on consumption, as conveniently summarized by Tony Blair here:

      «Bank lending has been growing at an annual rate of around 20 per cent (excluding borrowing to fund house purchases); credit-card debt has been increasing at a phenomenal rate; and these have combined to bring a retail-sales boom – which shows up dramatically in an increase in imported consumer goods» «The fact that we have failed to use oil to build a productive and modern industry for the future is something historians will deplore.»

  10. There is only one original problem here – John Maynard Keynes was not the architect of the Eurozone.

    (Had he been assigned the task, he could have done that and made it work - a bespoke variation on Bancor)

    Your group would have a point to make if that had been the case.

    But he didn’t and you don’t.

    (And there is no economist on earth right now that can hold a candle to the genius of JMK.)

    Angela Merkel has to deal with the facts on the ground. And one of those facts is that she has a constituency. And by the way that constituency is a democracy.

    The egomaniacal fools that have been running Greece don’t seem to understand that theirs is not the only democracy in the EU.

    They don’t get to determine ground zero for democracy.

    Not in this millennium.

    Tsipras is toast.

    He’s riding his motorcycle in the dead of night, sometime next week in the direction of Moscow.

    He’s going to lose whatever happens, and his constituency is going to turn on him.

    It wouldn’t surprise me at all if these fools don’t even have a real world contingency plan to issue their own currency.

    Meanwhile, Varoufakis bears most of the responsibility for what’s going to happen now. This guy has an ego as big as Greece’s Target2 liability. He did enormous damage in his attitude toward a number of other democracies.

    Speaking of Target2, there will be hell to pay in resolving that upon Grexit.

    1. This comment has been removed by the author.

    2. Concerns about the Target2 balances accrued by trade surpluses could be attended to by buying things from Greece.

    3. "could be attended to by buying things from Greece"

      true if that happens

      but with Grexit - depending on how the rest of the Greek NCB balance sheet is resolved - Target2 becomes a more obvious international capital account liability denominated in foreign currency (the Euro)

      the issue really is that it needs to be identified as an international foreign currency debt at that point, whereas the position has just floated in limbo in Target2 land while Greece has been a member of the Eurozone

    4. If you are going to make comments on this blog, then please try and read the posts you are commenting on rather than making remarks that ignore it.

    5. As it is now though, that is how international trade transacted using debt works , the exporter receives an IOU and then they buy from the importer , if they don't the debt is not extinguished.

      In your secenario the international debt would be in one currency but the assets of the Greek Banks that service it would be in another currency and so it may not be mathematically possible to pay the complete of the former from the latter because, if the Dracma devalued , the Greek currency borrowers would pay off their loans that are re-denominated and quantified in a fixed amount of Drachma, before that point is reached.

  11. According to the political economist Zoltan Pogatsa – he has written a book about “The Political Economy of the Greek Crisis” the following are the key areas where the Greek state is wasting/losing money
    - Defense spending (3.5% GDP)
    - Funds leaking offfshore (5% GDP)
    - Untaxed shipping (not quantified)
    - General corruption (not quantified)
    He estimates a total of 10-12% of GDP which is either not collected or misspent. Five years into the crisis, much of the above has still not been properly addressed.
    The latest IMF publication, the one recommending a debt haircut - talks about a “weak reform effort”. The EU commission (ok, you might question its motives) concluded in a research paper (“The Puzzle of the Missing Greek Exports”) that weak institutional quality accounts for a large part of the poor export performance of the Greek economy.

    So, the claim in this open letter about Greece already having “deregulated”, “cut government spending” and “raised taxes” is dubious. As long as Greece does not make genuine progress in implementing structural reforms, the positive effects of a debt haircut – even total forgiveness of the troika debt - will be squandered.

    1. The claims are not dubious but true. Any continuing problems did not cause Greek GDP to fall by 25%. Draconian austerity will harm any economy, whatever its faults. Stopping austerity will allow a recovery, whatever its faults.

    2. So, how does Pogatsa suggest Greece keeps ships from switching to another flag after higher taxes? Or, for that matter, keep Turkish ambition focused elsewhere so it can cut down on military spending?

      Current tax receipts already push hard against the empirical limit of maximum collection /GDP under stable regimes. The reduction in govt spending easily exceeds 30%. But let's not cloud gut feeling with facts.

    3. Well, Tsipras admitted today that tax evasion in Greece has been allowed to "run riot", so I do believe that a lot of work needs to be done in this field.

      Anyway, my point is that by collecting taxes from the rich (which is still not happening) and cutting back on defense, Greece could have avoided many of the harsh austerity measures.

    4. I agree (although I would note that - according to the OECD - tax and non-tax receipts by the Greek government are higher as a % of GDP than in Germany). But the obvious thought occurs - isn't the current Greek government much more likely to achieve these things than their predecessors? If so, why is the Troika not working with the government to achieve this?

    5. Precisely. It is farcical for the troika to simultaneously shout "Look at how corrupt the Greek political system is" and "Our first priority is to return the politicians who created and benefited from that system to power".

      Syriza has been in power for five or six months for the first time ever during a catastrophe, they haven't had time to build the patronage networks and bribery arrangements that PASOK and ND created and benefited from.

    6. «Any continuing problems did not cause Greek GDP to fall by 25%.»

      The fall of 25% of greek GDP from 2008 was not mainly caused by any problems or austerity or anything other than Greece running out of borrowed money to finance net imports. The surge of GDP between 2001 and 2008 and its fall back to 2001 level in 2014 has almost no other reasons. This graph illustrates:

      Unless one wants to argue that Greece has a natural right to receive an extra 20% of their earned GDP as free net imports, as some people have done. But then the question becomes why should greek imports be paid for by the taxpayers of other countries, when there are several EU countries that are much poorer than Greece, and their living standards could be transformed by infrastructure investment with the same enormous amounts.

    7. Mainly Macro8 July 2015 at 08:05

      How do you stop austerity if you can't get money?

    8. Nicholas Martin9 July 2015 at 20:05

      Simon writes: "isn't the current Greek government much more likely to achieve these things than their predecessors?"

      Actually, if you follow the writings of a number of Greek political scientists (e.g. Stathis Kalyvas, Ioannis Glivannos [ok, a lawyer], Manos Matsaganis, Nikos Tsafos, and the anonymous "Greek Analyst") you will see that it is not unreasonable to entertain real doubts about the true willingness and capability of Syriza to break with the clientalistic system. Rhetoric is very easy, esp. when it mainly remains on the level of fulminating against "oligarchs", whom nobody ever liked, and nobody ever "was".

      I'll mention just two points to support this doubt. But first some obligatory throat-clearing: I have only a limited understanding of the Greek situation. The points mentioned below are not intended as "proof positive" for the case that Syriza may be rather less committed to reigning in clientalism and tax evasion than meets the eye, but simply as indicators suggesting that this may indeed be the case.):

      - Coalition with ANEL (a breakaway ND group led by a Karamanlis-era ND minister) and appointing as President of the Republic another minister from the Karamanlis government. Given that another and more reliably reformist (and leftwing, as opposed to rightwing with antisemitic tinges!) coalition partner would have been readily available (To Potami) the choice of ANEL does not inspire confidence regarding true desire to break with the existing Greek political economy.

      - Setting up Parliamentary Committees to investigate the origins of the crisis that Greece finds itself in, while restricting these committees to investigating the post-2008 period alone, and not investigating also the Karamanlis (ND government) period of the mid-2000s when debt really exploded (as PASOK requested) or investigating the history of the Republic back to 1980, when A.Pap laid the foundations of Greece's modern clientalistic polit. econ. (as ND requested).

  12. This reads as a sensible economic analysis.
    Two remarks though:
    You write excess unemployment is needed to push prices and wages down, but it can be modest. That begs the question how much is ''modest'' and how to manage this.
    The second issue has less to do with economic models, but is important in the case of Greece I think: Greece was used to a process of automatic adjustment with devaluation and inflation, suddenly that was not possible anymore and it requires time to learn how to adjust with internal devaluation. Add to this the state is seen as weak and dysfunctional, than you risk that the country breaks down instead of turning around, as seem to have happened with Greece. Greece not only needed to adjust prices and wages, but also turn around it's governance model, and re-invent it's business model how to earn more money as borrowing was not an option anymore. That combined was probably asking too much.

  13. " A period of ‘excess unemployment’ will be required to push wages and prices down if the country is uncompetitive in relation to required primary surpluses. However the excess unemployment can be relatively modest"

    It's odd that they system requires unemployment - a social bad - to adjust. There must be a better way than forcing people who want to work to be unemployed.

    1. The Germans have a program of work-sharing which reduces hours instead of having layoffs. That would be one way to go.

    2. First Peter - it is THE cost of a fixed exchange rate/monetary union regime. The second Peter is right that you want to design institutions/labour markets where this kind of adjustment can happen with a smaller cost.

    3. "Surely there is a better way"
      See this: is NO need for unemployment ever. The government can and should maintain full employment at all times (and price stability.) Of course this isn't described in the ideological textbooks.
      The govt simply puts open an unlimited job offer at £x/hour (say the living wage.) When inflation gets high, people move to the fixed wage buffer This employed buffer stock has a ton of advantages compared to NAIRU - reduced hiring cost to employers, retain skills, sets minimum standard to eliminate shite jobs. Then you get rid of labour regulations and allow competition in the labour market. The useful output produced by JG workers is a *bonus*. The reduced hiring costs mean greater private sector employment for a given level of inflation.
      Beyond that there are numerous advantages to do with social solidarity - people like to be told what to do and have something to do, this is the hard bit for the left to swallow - but the military are never short of recruits e.g. And the costs of crime, etc.
      Employed fixed wage buffer stock > NAIRU
      The cost of unemployment every day is huge. It is criminally insane that successive UK governments have deliberately promoted it to control inflation.
      And there is *nothing* the unemployed can do about it. Seriously. If it goes "too low" tighter policy results in more unemployed.
      Every person unemployed is a personal disaster for the individual person.

  14. Anonymous9 July 2015 at 03:13

    Mainly Macro8 July 2015 at 07:41


    You haven't yet answered my questions, but by coincidence, Olivier Blanchard answered them in his blog of the same day

    My questions:

    Could Greece have survived without credit? After all, they had been living beyond their means - i.e. on credit - for years before the crisis.

    If not, where would they have got credit?...


    "Even before the 2010 program, debt in Greece was 300 billion euros, or 130% of GDP. The deficit was 36 billion euros, or 15½ % of GDP. Debt was increasing at 12% a year, and this was clearly unsustainable.

    Had Greece been left on its own, it would have been simply unable to borrow. Given gross financing needs of 20–25 % of GDP, it would have had to cut its budget deficit by that amount. Even if it had fully defaulted on its debt, given a primary deficit of over 10% of GDP, it would have had to cut its budget deficit by 10% of GDP from one day to the next. These would have led to much larger adjustments and a much higher social cost than under the programs, which allowed Greece to take over 5 years to achieve a primary balance.

    Even if existing debt had been entirely eliminated, the primary deficit, which was very large at the start of the program, would have had to be reduced. Fiscal austerity was not a choice, but a necessity. There simply wasn’t an alternative to cutting spending and raising taxes. The deficit reduction was large because the initial deficit was large. “Less fiscal austerity,” i.e., slower fiscal adjustment, would have required even more financing cum debt restructuring, and there was a political limit to what official creditors could ask their own citizens to contribute."

    Do you find anything wrong in that?


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