Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday 14 July 2015

Greece and Trust

Nick Rowe pulls me up on a point that I didn’t make in my account of what should have happened to Greece after 2010. I argued that some external body (e.g. IMF) should lend sufficient money for Greece to be able to achieve primary surplus (taxes less non-interest government spending) gradually, thereby avoiding unnecessary unemployment. Gradual adjustment is required because the improvement in competitiveness required to achieve ‘full employment’ with a primary surplus cannot happen overnight because of price rigidity.

Nick’s point is that for this to happen, the external body has to have a degree of trust in Greece: trust that it will not take the money and at some stage default on this new loan. This trust may be particularly problematic if Greece had defaulted on its original debt, which I think it should have done. This, after all, is one reason why Greece would not be able to get such finance from the markets.

This is what the IMF is for. Governments are more reluctant to upset the international community, and so defaults on IMF loans are rare. As Ken Rogoff writes: “Although some countries have gone into arrears, almost all have eventually repaid the IMF: the actual realized historical default rate is virtually nil.”

But does this help explain why other Eurozone countries keep going on about how Greece has lost their trust? I think the answer is a clear no. In fact I would go further: I think this talk of lost trust is largely spin. The issue of trust might have explained the total amount the Troika lent from 2010 to 2012. However, as I have said often, the mistake was not that the total sum lent to Greece was insufficient, but that far too much of it went to bail out Greece’s private sector creditors, and too little went to ease the transition to primary surplus. (The mistake is hardly ever acknowledged by the Troika’s supporters. Martin Sandbu discusses the - misguided - reasons for that mistake. [0])

The reason the Troika give for lack of trust is that Greece has repeatedly ‘failed to deliver’ on the various conditions that the Troika imposed in exchange for its loans. The Troika has tried to micromanage Greece to such an extent that there will always be ‘structural reforms’ that were not implemented, and it is very difficult to aggregate structural reforms. However this is exactly what the OECD tries to do in this document, and if I read Figure 1.2 (first panel) correctly, Greece has implemented more reform from 2011 to 2014 than any other country. [1] We can more easily quantify austerity, and here it is clear that Greece has implemented almost twice as much austerity as any other country. [4] The narrative about failing to deliver is just an attempt to disguise the fact that the Troika has largely run the Greek economy for the last five years and is therefore responsible for the results. [3]

You could argue with much more justification that the failure of trust has been on the Troika’s side. Greece was told that the austerity demanded of it would have just a small impact on growth and unemployment, and the Troika were completely wrong. They were then told if they only implemented all these structural reforms, things would come good, and they have not. You could reasonably say that the election of Syriza resulted from a realisation in Greece that the trust they had placed in the Troika was misguided.

Given these failures by the Troika, a reasonable response to the election of Syriza would have been to acknowledge past mistakes, and enter genuine negotiations. [2] After all, as Martin Sandbu points out in a separate piece, a pause in austerity in 2014 had allowed growth to return, and because Greece had achieved primary surplus new loans were only required to repay old loans. But it is now pretty clear that large parts of the Troika never had any real wish to reach an agreement. Over the last few months we were told (and the media dutifully repeated) that the lack of any agreement was because the ‘irresponsible adolescents’ of Syriza did not know how to negotiate and kept changing their minds. We now know that this was yet more spin to hide the truth that large parts of the Troika wanted Grexit.

The lesson of the last few months, and particularly the last few days, is not that Greece failed to gain the trust of the Troika. It is that creditors can be stupidly cruel, and when those creditors control your currency there is very little the debtor can do about it. 

[0] Greece was prevented from defaulting because of fears of contagion of one kind or another, which meant that Greece was taking on a burden for the sake of the rest of the Eurozone. The right response to these fears was OMT, and direct assistance to private banks, as Ashoka Mody explains clearly here. But given that this was not done, what should have then happened is that once that fear had passed, the debt should have been written off. But politicians cannot admit to what they did, so the debt that was once owed to private creditors and is now owed to the Troika remains non-negotiable.
[1] The Troika can also speak with forked tongues on this issue: see Mean Squared Errors here (HT MT).

[2] I am often told that the Troika had to stand firm because of a moral hazard problem: if Greek debts were written down, other countries would want the same. But the moral hazard argument has to be used proportionately. Crashing an economy to avoid others asking for debt reductions is the equivalent of the practice in 18th century England of hanging pickpockets.

[3] I am sometimes asked why I focus on the failures of the Troika rather than the mistakes of Syriza. The answer is straightforward - it is Troika policy that is the major influence on what happens in Greece. And when the Troika gives Greece’s leaders the choice between two different disasters, it seems rather strange to focus on the behaviour of Greece’s leaders.

[4] Postscript: Peter Doyle suggests that, all things considered, Greece overachieved on fiscal adjustment     


  1. «the external body has to have a degree of trust in Greece: trust that it will not take the money and at some stage default on this new loan.»

    So in the proposed 3rd bailout the eurozone partners of Greece asked for the incredibly generous offer of a further €86 billion of new funding (after the greek government said many times they would not need any new funding) to be collateralized for €50 billion (2/3) not just by the "full faith and credit" of the greek government, but by greek government assets too. That a gigantic loan given at extraordinarily soft terms to a bankrupt, lying government be collateralized does not seem to be that awful.

    The reaction of a SYRIZA leader is entirely understandable:
    «The leader of Tsipras’s coalition partner, the populist Independent Greeks, [ ... ] Panos Kammenos said a demand that Athens hands over €50bn in assets from privatisations as collateral for fresh loans was a form of “confiscation” and “we cannot agree to that”.»

    Calling collateral «a form of “confiscation”» shows how much to «trust that it will not take the money and at some stage default on this new loan».

    1. Why don't you try and address the arguments in the post?

    2. Well, one of the arguments was Nick Rowe's comment... You quoted him.

      But the other reason is that I have already commented on how trustworthy the "institution" are. BTW the "institutions" are in effect just the other 18 Eurozone democratic governments, as they are very influential with the EU, quite influential in the IMF, and can make and unmake the euro treaties that make up the ECB. And the bailout was in effect an amendment to those euro treaties.

      As to them my already argued positions is to largely agree with you that:

      «But politicians cannot admit to what they did»

      and therefore I think the 18 EU governments are not much trustworthy but because of the opposite reasons you mention elsewhere: they have been misleading their voters pretending they have been imposing austerity on Greece when instead they have given Greece as a whole and also the greek government a very generous bailout, risking quite a lot of their taxpayers' money, even if only 3% of total EU GDP (but a fair bit more of Eurozone GDP) on risky loans to the greek governments and in their effective (actuarial value) writedown, plus considerable amounts of new cash disguised through the ECB "overdraft" (which other countries also enjoy of course).

      I think that the behaviour of the 18 euro governments has been undemocratic to their own voters and by prioritizing colossal covert help onto one relatively rich country, even if fashionable and strident, they have been unfair to less fortunate EU members.

      As already explained at long length I think that Greece (as distinct from their government) has had an exceptionally soft landing after their huge borrowing boom, and there has been no *aggregate* austerity, so I cannot criticize the 18 EU governments for that.

      To Greece and the greek population the 18 EU governments have been I think quite honest as well as supportive: they have largely bailed out as Blanchard points out the greek private holders of greek government debt, they have provided all the funding they have promised, they have given a very large if covert reduction in the burden of greek debt, they have looked the other way while the ECB extended an immense overdraft to greek banks keeping them afloat and helping greek citizens preserve their savings, they have continued (with the other EU members) to pay Greece their net negative EU budget contribution, without impounding it to pay the debt, they have promised publicly aid when the SYRIZA government tried so hard to turn a soft landing into a disaster. Those 18 governments are mostly neoliberal, mostly unprincipled, mostly tied up in arcane compromises to make the eurozone and the EU half-work, but to me it seems that they delivered a lot despite the opposition of many of their voters.

      In particular they gave a lot if deceptively to avoid a formal greek default, which as I commented earlier is much more in the best interests of Greece than that of those 18 governments.

    3. Of the 86 billion, what, perhaps 80 is returned to creditors, and the remaining 6 is collateralized at 50? Any loan shark would be proud.

  2. You claim that 18 finance ministers and IMF and ECB did not want to do a deal. I find that hard to believe. Assuming this would be true however, did the Greek government need 5 months to figure this out?
    A more credible explanation is that the Greek government wanted to buy time, until the previous deal expired in June, and than they would hope the financial markets would put so much pressure on the other countries that they would retreat and accept a better deal for Greece at the last minute.
    A high stake gamble that backfired.

    1. Exactly, only it backfired and the Greeks were forced to accept a compromise that was essentially the same as one that they rejected in May.

    2. Your belief is wrong, and your credible explanation nonsense. Evidence?

    3. My guess is as good as yours, why is it nonsense? Why did the Greek government negotiate for 5 months, with zero progress, with Greeks taking deposits from banks and the Greek economy coming to a standstill? That would be irrational behavior from the Greek government, unless it was part of some grand strategy.

    4. I think the last few days provide pretty good evidence about why there was not an agreement - many on the Troika side wanted Greek exit. Surely that must be obvious by now? The Greeks had nothing to gain by delay, because the uncertainty was destroying their economy.

    5. You seem to imply that's not fair. But why is that not an acceptable position? The Euro has not been an unqualified success. Reducing the size by removing some members will likely make it work better. It's not like Germany has been hiding the fact, they said it many times...

      Many people are arguing they would be better off leaving. I personally think Europe is doing them a favour by pushing them out. It will give politicians an excuse to cancel the debt and devaluation will help the economy.

      Refusing to lend additional money is not blackmail. And I don't see much difference between Greece borrowing money from the ECB or from other EU states. At this point Greek banks and the Greek state are basically the same thing. At the end of the day all Eurozone countries are on the hook for any funds provided by the ECB. At some point any money lost will need to covered by less seigniorage or government funding.

    6. If the Greeks had nothing to gain with delay, why did they continue the hopeless negotiations that destroyed their economy? It doesn't make sense.

    7. Your use of the term "Troika" is very misguiding. I suppose nobody thinks that the "Troika" - consisting of the European Commission, the European Central Bank and the IMF - was pushing for Grexit; these institutions are to face huge trouble if Grexit happens. But some european countries and their leaders might favour (temporary) Grexit.

    8. FullTimeAnalyst15 July 2015 at 11:57

      Mainly Macro, you completely lost me at the last paragraph. Citing Varoufakis as the (only) proof that the Troika (?!?! even Varoufakis limits this opinion to EC instead) wanted a Grexit is almost proof of the opposite. Varoufakis is NOT an objective source and has an extreme interest in spinning last 6 months as a mission impossible. Who can blame the guy.. . That said, even now Grexit is anything except a certainty, so you prove a case that hasn't even materialized. Moreover, when did this grand scheme come into play? Before or after Syriza victory? Please also provide reason to believe 18 democracies successfully managed to hide and align to this new strategy without any 'leaks' apart from Varoufakis.
      Lastly: if Grexit was the aim, the 6 months have been an utter waste of time and resources. Even the worst politicians could've accomplished a Grexit at much better terms (for all parties involved).

    9. I said many, not all. If you do not trust Varoufakis as a source, how about this:

    10. Schäuble ≠ Troika

    11. (Schäuble ≠ Troika) ∧ (Schäuble ∉ Troika)

  3. Who was supposed to take the decision to default on the debt? The creditors? That's a pretty strange opinion. I don't think anybody is saying the Greece cannot default. They say Greece cannot default inside the Eurozone as that was the original agreement. They could have defaulted back then or at any time since. They have this power even now if they want to use it... The banking system has been recapitalized once and would likely be re-capitalized again now... Greek government have the power to leave the Euro and nobody is going to stop them...

    I doubt the IMF would have been as generous as you make it. The IMF is not an independent and altruistic body. It's an organization funded by the main developed countries for their own benefit. Greece is a fairly rich country by international standards, I very much doubt large funding would have been available. Who would have been so generous? The UK is saying today they don't want to participate in the EU bailout. I doubt they would be so liberal with their money in 2010. Same for the US... Without devaluation, I doubt that the IMF would have lent the money anyway. They only lent the money because they bent the rules, since they expected the EU to make them whole, since Greece didn't have the money...

    Their is an explicit agreement of no fiscal solidarity between EU countries outside the EU budget aid funds. This is the reality. No European country wants to lose control to this extent.

    Your argument is basically the following: Greece suffered a disaster and other countries should have helped to avoid most bad consequences for the Greek population by funding the adjustment process and forgiving the debt. Well I don't think there is any treaty that mandates such support. Your recipe would have not helped the creditors. It would have greatly helped the Greek population. But there are many poor people around the world, much poorer than Greek people even today. And we do little for them.

    1. good points.
      And I would like to add there is an (implicit) element in these blog posts from non-eurozone citizens expecting the creditor nations to show more solidarity.
      How about all EU countries showing some solidarity? But Swedes, Danes or British are not expected to show solidarity, because they didn't sign up to bailouts.
      Eurozone citizens didn't either!
      The British government said today they would not foot the bill for rescuing Greece, we are talking a potential 1 billion here. The new bailout deal for Greece is worth 80 billion but still the creditor countries are painted as stupidly cruel.
      Bailing out Greece has been the biggest mistake eurozone governments have made, they should simply have rescued their own banks only.
      Now all austerity blame is being put on the creditors, but if Greece would have defaulted on debt (which would mean just restructuring), I would expect austerity to have been just as harsh for the Greek.

    2. Where does it say that default is not allowed in the Eurozone? Greece has already partially defaulted. History shows that if creditors refuse to accept that their loans to governments cannot be repaid, all they do is harm the debtor country so that it is even less likely to pay.

      The only rule the IMF bent was in not insisting that more of Greece's original debt was written off. The argument about 'other poor people' is silly; this is about creditors and debtors.

      The mistake the Eurozone's politicians made was to bail out Greece's private sector creditors rather than provide loans for Greece to adjust. By refusing to admit this mistake, it just does Greece more harm.

    3. Isn't it more or less implied by the no monetary financing? After default the Greek banks needed re-financing... Where would the money come from?

      I think it's hard to argue that the main aim of the Greek bailout (saving the EU banks) was a mistake/unsuccessful. That's the reason there was any money available... Reducing the effect on other EU economies was the target. Not saving Greece. And from that point of view it was successful...

    4. ''Where does it say that default is not allowed in the Eurozone?''

      Default is allowed, financing debts of other eurozone countries is not. That is the reason why eurozone governments do not want to offer debt relief, only extend maturities.

    5. «Reducing the effect on other EU economies was the target. Not saving Greece.»

      *Postponing* to better times the effect on other EU economies was certainly a goal, and it is a legitimate goal.

      However avoiding default was principally in the interest of Greece (and the greek government), as it would most likely lead to exit from the EU. It is so much in the interest of Greece that the SYRIZA government are now prepared to pay *some* price for avoiding that default.

      «Default is allowed, financing debts of other eurozone countries is not.»

      That's not quite worded right: it is not *obligatory*, but any government in the EU, eurozone, or around the world who wants to finance the debts of other eurozone countries can do so. Strangely enough nobody else volunteered to lend a lot of new money to Greece at very soft conditions.

      The bailout treaties have been the formal arrangement by which the 18 euro countries have instead made it obligatory on themselves, within certain agreed limits, to bailout Greece at very soft conditions.

      «That is the reason why eurozone governments do not want to offer debt relief, only extend maturities.»

      They have offered free default insurance by buying bankrupt debt and delaying by many years its payment, they have extended maturities, and greatly cut interest costs.

      That is a huge amount of debt relief even if it does not appear to be so. The SYRIZA government have taken shameful advantage of that to dissemble that debt relief has not been given and by asking fort *more* overt debt relief, cutting the actual value of the debt again.

  4. Thanks Simon. I will leave it to others to argue whether they think you are right or wrong on the specifics, since my brain is not good on that sort of thing.

    I do reckon that with the latest "deal" though (if it actually goes through), trust is becoming much more of a two-way issue. Because now Greece is more the one that has to deliver first.

    I think that thinking about this in terms of trust can help us understand better the flawed political structure of the Eurozone. If there were a single Eurozone government (one central bank, one government) trust would be less of an issue. The "federal" government would just tell the "provincial" government what it would have to do, and what it would do in return.

    1. I find the notion that we should judge whether we can trust someone by the extent to which they can do themselves harm rather strange.

    2. Well, when I repay a loan, I harm myself.

      But yes, this "deal" is a rather cruddy one. Bringing back the drachma, even at this horribly late stage, looks like a less bad choice, and would make it less impossible for Greece to (eventually) pay back the creditors. The output gap is probably 10 times larger than the 3% or so of GDP needed to service the debt.

      And it would make Greeks take responsibility for their own mistakes. And genuine pride in their own successes. Better than jumping up and down yelling "Oxi!".

    3. Nick
      Repaying the loan does do them harm, but presumably less harm than not repaying would do them. Else, why repay?

    4. Roy: Jevons said that, in economics, bygones are forever bygones. And that is what we teach our students in ECON 1000, when we tell them to ignore sunk costs. Only the present and future matter. But in the real world past promises do seem to affect current actions (sometimes), simply because they were made. Even though in the present they are nothing more than ink marks on bits of paper, they seem to affect what happens today and what people expect to happen in future.

      I should have done a PhD thesis on some sensible macro topic, but instead I got myself lost in that thicket.

    5. Nick
      Agreed we should ignore sunk costs. But we seem to have evolved not to (at least sometimes). Greece is respecting some of those norms so arguably has earned (some) trust. Creditors seem to be kicking a man when he's down - perhaps pour encourager les autres. Does this all tell us something about who to trust?

    6. And isn't your first paragraph just a definition of money?

  5. «Greece suffered a disaster and other countries should have helped to avoid most bad consequences for the Greek population by funding the adjustment process and forgiving the debt. Well I don't think there is any treaty that mandates such support.»

    The EU is founded on the treaties, but most importantly on a shared sense of "it is up to all of us to deal with the issues of any of us".

    The bailout treaty that expired at the end of June was a new treaty in which the 18 countries of the eurozone overrode the «no fiscal solidarity» agreement because of that. It was a very generous bailout that subsidized Greece in a covert way with a very large dose of financial help, for the purpose of ensuring that Greece had a soft landing by avoiding a formal default and dropping out of the EU. As a result there was no «disaster»: Greek GDP slowly glided down to its 2001 starting point once the huge borrowing boom ended, and did not overshoot, and actually mid-2014 started growing again, without booming net imports and government losses.

    Now that Tsipras and Varoufakis have done their "magic" there is a chance of an actual disaster, and this is what european leaders stated as public committments:
    «Martin Schultz, the president of the European Parliament, has said that
    Brussels is ready and willing to give Greece emergency loans if a humanitarian
    crisis breaks out. Speaking to German newspaper Die Welt, he said (My
    knowledge of German is on a par with Ben Bloom's, so here's a Google
    "Maybe we will have to give emergency loans to bridge to Greece so that
    public services can be maintained and needy people get the money. Funds in
    Brussels would be shortly available. [We will not] leave people in Greece in
    the lurch."$
    Mr Schulz said a no vote tomorrow could spell disaster for Greece.$
    "If the Greek government has no more money, because the reform plans of
    the partners have been previously rejected in the referendum, then the
    situation will not definitely improve. Without new money, salaries can not be
    paid out, the health care system does not work, the power supply and the
    public transport failure and essential goods can not be imported because they
    can not pay [for them]."$
    Earlier, Wolfgang Schaeuble, Germany's finance minister, also insisted that
    Europe would not abandon the needs of the Greek people.$
    Here's the response from Dimitris Yannopoulos, the head of Yanis Varoufakis's
    (very small) press team:$
    "Well, that's some relief! Wolfgang Schäuble sees difficult talks ahead, but
    he promises that the Greek people would not be left in the lurch" — Dimitris Yannopoulos (@DimitrisY) July 4, 2015

    1. «Now that Tsipras and Varoufakis have done their "magic" there is a chance of an actual disaster»

      And greek voters! Let's not forget that greek voters endorse with a > 60% vote that "magic", entirely democratically.

      The rest of the EU will not forget soon that it was not just Tsipras and Varoufakis who caused the need for a third €86 billion bailout treaty, but the democratic choice of the vast majority of greek voters.

  6. The reason the Troika doesn't trust Greece is very simple: they haven't repaid any of their debts. And there are many people (you included) who advocate outright debt repudiation. Delivering on the austerity measures is irrelevant. Having basically no ability or incentive to repay the newly borrowed money has pretty large relevance...

    As a matter of economics, I understand and agree that austerity has negative short term effects. But it's not really that short term any more. is it? Shouldn't the austerity enacted in 2010 start to fade by now? I don't really believe austerity is expected to have long term effect on potential GDP, unless you add some extra effect from long term unemployment... There must be something else going on or it doesn't make as much sense...

    1. It is pointless to pretend that debts can be repaid when they cannot. Austerity stopped in 2014, and the Greek economy grew.

    2. Yes, austerity has short term negative effects. It's the difference between gradual adjustment versus crashing and burning, followed by explosive growth. The Greek debts to the Eurozone only have to be repaid some time after 2020. How deep a U-shaped curve the Greek economy goes through between 2010 and 2020 does not matter much to the creditors. Propping up the Greek economy in the meantime may have allowed somewhat more timely repayment and higher interest rates but would also have costs tremendous amounts of money, I mean seriously, letting the Greeks adjust gradually would have meant something like giving them 10% of their GDP for 5 years in a row, at the very least. Meanwhile the creditors also had political goals: preventing contamination, enforcing budget rules and preventing the whole thing from happening again 20 or 30 years from now, goals that were worth some amount to them.

      Simon, and some other economists (most of them not living in the eurozone), maintain that gradual adjustment it would have allowed the creditors to get a lot more of their money back, that it isn't worth it to think past fixing the immediate problem (the rich countries simply CANNOT afford many more bailouts in the near future even if they wanted to) and that long term strategic goals don't matter (there have even been goals for Germany to become less competitive, to help out Southern Europe, never mind that Germany has to run to stand still in the competition with China, India, US, UK, Japan, Korea, etc...)

      But most of all they seem to hold the mistaken belief that it should be about the good of the poor Greek people. Well, it just isn't about them and it shouldn't be either. There are places far worse off than Greece in the world and even in Europe (pity those poor Bulgarian and Latvian bastards who pay taxes to support Greece). Greece only gets special treatment from Europe because of strategic and political reasons, if those reasons are worth 50 billion euros to Europe than they'll accept a 49 billion euro loss through Greek austerity to achieve those goals. If they find Greece cannot or will not serve those goals than they'll cut their losses and leave Greece to the (Russian) vultures. The IMF has no reason to grant Greece any favors other than that European countries are influential within the IMF.

    3. So whenever the IMF is asked to provide assistance to an economy, it should check first whether there are other people in the world with a lower income per head?

      Like many of these comments, you completely ignore the fact that most of the money has bailed out Greece's private sector creditors, not Greece. If it had gone to Greece, it would have been a very different story.

      And it is insulting to imply that if I was working in a Eurozone country my views would be different.

    4. "It is pointless to pretend that debts can be repaid when they cannot."

      Well actually they'd "only" have to repay something like 10 billion euros per year in the 2020s and 2030s, that debt would have included the 7 billion euros they were to receive this year and would have enabled them to pay off the more immediate IMF loans. With even modest levels of growth and the generous EU-subsidies they receive this all should really not be a problem, they'd be paying off something like 1.5-2% of GDP per year (comparable to what Germany and the Netherlands pay in national debt interest today).

    5. "So whenever the IMF is asked to provide assistance to an economy, it should check first whether there are other people in the world with a lower income per head?"

      No, only when it's giving out special treatment, as it is with Greece.

      "Like many of these comments, you completely ignore the fact that most of the money has bailed out Greece's private sector creditors, not Greece. If it had gone to Greece, it would have been a very different story."

      I cannot believe an economist could actually say that. Greece's immediate problem was its debt. Restructuring that debt to be lower, with a later repayment schedule and lower interest rates equals helping Greece itself, it is equivalent to handing Greece tens of billions of euros in cash, if you feel the need to view it that way. If you paid off someone's student loans would you not say you were helping that person and that person should not complain you're not paying off his debts AND giving him money in the bank? If the Greeks feel otherwise they should leave the Eurozone: fiscal union without political union (even if just defacto as now with the outside micromanaging of Greek policy) is financial suicide for the rich countries, they will never accept it, can you blame them?

      "And it is insulting to imply that if I was working in a Eurozone country my views would be different."

      Well I haven't heard you advocate Britain should become less competitive out of solidarity with Southern Europe, but mostly that was aimed at Paul Krugman, nice fellow and I like his comments on all things American, but who consistently views Europe through an American lense (does he even know the electorate and politicians in Germany overwhelmingly view a welfare state as a human right and want Greece to have one too, they're not the American Republicans he makes them out to be) and whose butt isn't on the line if Northern Europe gets in economic trouble, a region that has high debts of its own, as well as aging populations, climate change/energy transition to deal with (someone has to be doing something about that, we can't all think of nothing but out pensions and rigid wages) and a need for increased defense spending.

    6. Why do you think the IMF requires deep haircuts on previous creditors? Is it because they have the debtors interest mostly in their mind? Or is it because a lower starting debt burden makes it much more likely that they themselves will be re-paid?

      The IMF looks after itself. Deep haircuts on previous creditors are the best insurance on the IMF itself being repaid for the new loans (given that there is no equivalent of debtor in possession in sovereign defaults)...

    7. You can of course argue that Greece needed more than the equivalent of tens of billions of euros in cash, but you can't say they didn't get money or weren't helped and then it becomes a question of what would have been in it for the creditors to give even more money, especially at those precarious moments where it wasn't unthinkable that Greece would just take the money one day and run from the Eurozone the next day.

    8. «pointless to pretend that debts can be repaid when they cannot»

      That "pointless" is quite an overstatement and somewhat unreasonable, as it also means not recognizing how big the help the eurozone partners have given to Greece.

      "Extend and pretend" in the case of greek government debt has had several very positive consequences:

      * A formal default, which a formal debt forgiveness would entail because of various legal reasons, is something that could be very expensive for the EU partners, because various private entities or treaty organizations would have to be recapitalized by their members explicitly, and in proportion to GDP, and there are countries with a large GDP involved that are not in a good position to do so *now*. This is how Tsipras and Varoufakis have been trying to blackmail their EU partners, something that in EU politics is considered betrayal. This is the main reason why *all* EU member governments detest Tsispras and Varoufakis so much. However currently some creditor countries think that they can cope with a formal default.

      * Avoiding a formal default is of really great value to Greece because it is just about the only way to keep Greece in the EU, especially after their government blackmailed their partners by threatening a default. It is of such enormous value to Greece that even Tsipras blinked, and cut Varoufakis loose, and for the vast majority of SYRIZA's enemies to vote with SYRIZA.

      * Avoiding a formal default has allowed the creditor countries to hide how colossal have been the handouts already given to Greece. These have mostly been in the form of an enormous cut not in the "headline" amount of the debt, but in its *actuarial present value*. In effect depending on the assumptions one uses the greek government debt has been effectively cut to one half or a third of its "headline" amount, by "reprofiling" both the duration, the repayment schedule and the interest rate. Any more overt debt forgiveness than this and the voters of 95% of eurozone countries would revolt.

      I personallty think that as Schauble and ministers from many other countries think, it would be in the best interests of the EU if the greek government declared or was formally declared in formal default, dropping out of the eurozone and losing their ECB overdraft, and then out of the EU as they switch back to the drachma, losing their 2-3 of GNI no-strings-attached net contribution from the EU budget and freedom of movement. But it is arguable either way.

      You seem to think with that "pointless" that it would be in the best interests of Greece too.

  7. So, Simon, if the policy of the Eurozone is as wicked as you say, why did you describe the euro as "a beacon of hope and prosperity" when you co-signed that letter to the Guardian last week (along with Piketty, Stiglitz and Rodrik)?

    To answer my own question, somehow or other the euro has come to be seen as a "progressive" project. But it's pretty odd that the one thing Piketty and (say) Sarkozy can agree on is the absolute need for the preservation of the euro.

    So how did a French geo-political project to contain Germany and maintain France's position as at least co-leader of the EU come to be regarded as progressive by left wingers such as yourself?

    Seen from this perspective of course, the absolute need to preserve the euro, what do the shattered hopes and blighted lives of a few million Greeks matter? If this is what it takes to save the euro, then so be it. But then what would it take for you to give up your love of the euro and agree with me that the whole euro project has been hopelessly misguided and should be abandoned forthwith?

    1. You fall into the trap of assuming that what current governments are doing is somehow inevitable given the Euro. It is not. The tragedy of the Euro is that it has become dominated by the ideology of austerity.

    2. But you fall into the trap of wishful thinking: the euro of your dreams is somehow just round the corner, if only Angela Merkel can be persuaded to appreciate the beauty of Keynesian economics.

      In reality, the Germans will always resist becoming donor of last resort to the rest of the eurozone. Just like back in the 1980s they resisted becoming the locomotive of the world economy. They have form. After all, in the last resort they could leave the eurozone themeselves which would then certainly collapse, just as the Soviet Union collapsed when Russia decided to leave.

  8. The Greeks DID get their primary surplus requirement reduction (which I think is a sensible step). The same reduction the Troika had already proposed back in May (and if accepted then would have saved the 2015 Greek GDP billions of euros). Now they have until 2018 to get a primary surplus of 3.5% of GDP. This should be doable given that they receive a net positive EU contribution of 1% of GDP (Germany is a net payer with negative 0.25%).

    The Troika has been trying to micromanage the Greek economy because apparently it is very difficult for Greek governments to come up with practical policy changes: they'd rather talk about "mystery tourists" finding minute amounts of lost VAT tax amounts than about taxing their rich (oh, I suppose they talked about that one and I'm sure all 3 accountants they put on it worked very hard, but alas, no additional revenue) and shipping companies. Yes, in absolute numbers Greece has implemented more policy changes than any other European country and yes, they've had the most austerity, but that doesn't say much when the majority of those Greek policy changes represented very little money and when Greece also had much larger budget issues than any other European country (having three times the troubles and doing twice as much to solve those troubles does not make one top of the class). There's just so much in Greece that hampers the economy, costs the government money and doesn't even help the poor, stuff that still hasn't been touched yet or only very little, sometimes even deliberately avoided in favor of other measures that do hurt the poor. Greece's culture of conspiracy thinking blames the outside world for all of it, to the delight of the Greek rich. Would the Greek poor really suffer if Greece sold off an airport? Heck, they could give 90% of the proceeds to the poor and still the Greek budget/debt would be better off, the Troika more pleased and the Greek economy more likely to grow than in the current state, so yeah, that's why the Troika proposes those things.

    The negotiations lasted so long because the Greeks could not convince the Troika HOW they were going to meet certain goals, while both parties more or less agreed on what those goals were for a long time before last week. The Greeks kept coming up with reforms that would not be practical to implement and/or would not raise the required amount of revenue.

    1. I think your comment can be summarised as 'the Greeks did not do what they were told'.

    2. And I think you already frame them as the eternal victim (the way the Greeks always liked to see themselves, today it's Germany, yesterday it was Turkey and "capitalism", the only constant always being that it can't possibly because of the Greeks themselves that they do not enjoy a Scandinavian welfare state with American levels of taxation).

      I mean seriously, Greek proposals to achieve goals both parties already agreed on have consistently been of very low quality. Negotiations are a two-way street, but one side usually has a stronger hand (the Troika in this case). The Troika gave way on primary surplus requirements (as they should have), the least Greece could do is propose practical reforms, but they stalled for months protecting the interests of the Greek rich. Do you really believe that if the choice is between two reform plans, with the same revenue, the troika would deliberately insist on the more regressive one?

    3. "I think your comment can be summarised as 'the Greeks did not do what they were told'."

      That's a purely emotional argument by the way. If the Greeks want to feel good about being defiant then so be it but then they shouldn't complain about the situation of their own poor and the "cruel" treatment they receive from other countries. There is no inherent value to being defiant for the sake of being defiant. If the creditors propose selling off an airport and that's better for your own poor than the alternatives on the table (which will not include free money) then you sell an airport, at least if you feel more responsibility towards your own people than your own ego.

    4. «than the alternatives on the table (which will not include free money)»

      But the argument by SimonWL, Krugman, and the greek government seems to be that free money is essential and indeed it is owed to Greece for humanitarian reasons.

      Their point seems to be that the greek economy in 2008 had low unemployment and acceptable living standards because of a large inflow of "free" (never-to-be-repaid loans) money, that unemployment between 2008 and 2014 rose and living standards fell because the "free" money inflow ended, and the way to go back to that situation is to therefore to give Greece and the greek government a large amount of grant money instead of loan money, for many years, in order to enable the greek government to have significant deficits and Greece to have large net imports, because the GDP-per-person and *average* living standards Greece had in 2001 and 2014 are unacceptably low for an EU member.

      That is I think quite true as far as it goes: giving a large annual inflow of free money to Greece and its government would most likely allow them to run a large net import position and a large government deficit, restoring the employment levels and living standards Greece had in 2008, instead of those it had in 2001 and 2014.

      I have asked several times the advocates of restoring the flows of "free" money Greece received in 2008 not as loans but as grants if they think that there is a way to restore greek GDP and living standard to the 2008 level without involving large government deficits and large net imports funded by several more years of inflows of "free" or free money as in 2008, and I think that so far I got no answer.

  9. After all of this drama the simple question remains. Why is a whole continent in uproar and a whole country in economic ruin just so that a tiny subsection (the Greeks who are still employed on pre-2010 contracts) of their combined population can cling on to wage rigidity (because their seems to be a consensus that Greece would be wealthier and more Greeks would be employed if they had just taken a damn pay cut/shared jobs, which, incidentally the Germans have done in troubled times in the past and which would be the inevitable result of Greek currency devaluation anyway). Of course another question might be: what prevents the Greeks (or anyone else) from indexing their wages against inflation making wages rigid even against devaluation?

    1. Wages have fallen by an average of almost 4% from 2010 to 2014 in Greece

    2. Because of new contracts (which means the youth gets shafted by the same generation that already shafted them through unscrupoluos borrowing in the past) and 4% isn't enough by a long shot. Devaluation would certainly have led to more than 4% in wage reductions. But what do you think is the reason few contracts have an inflation indexation clause (I'm genuinely interested in that question)?

  10. "I am often told that the Troika had to stand firm because of a moral hazard problem: if Greek debts were written down, other countries would want the same. But the moral hazard argument has to be used proportionately. Crashing an economy to avoid others asking for debt reductions is the equivalent of the practice in 18th century England of hanging pickpockets."

    It's disproportionate to Greece, after all it's not Greece's fault there are other weak Southern European economies willing to exploit a precedent, but it's entirely reasonable to Europe as a whole. Rationally it is entirely rational for Northern Europe to want to keep Italy and Spain close for strategic reasons and in that light not care more about the lifestyles of 10 million Greeks than about those of 10 million South Sudanese or Chadians.

    Hanging a conscript for starting a camp fire on a mountaintop at night is disproportionate to that man, but entirely rational to his unit that was trying to escape from enemy territory alive.

  11. Greece looks good in the aforementioned OECD report (Figure 1.2). But perhaps this is mainly because of the vast amount of problems to work on. One gains the lead by simply picking the low-hanging fruit if compared to others facing harder tasks. A improvement relative to your competition doesn't mean you're absolute on par yet. Especially when you're far behind.

    Read this comment:

    from Q4 2013

    Cleaning up this legislative archipelago will make for a better overall investment climate as legal uncertainties are removed and the economic and administrative machinery is oiled
    Partial reform will yield only partial results, and Greece’s Olympian efforts at recovery risk becoming a long and painful marathon

    I suppose not *that* much changed in 2014.
    Sounds like a long way to go, doesn't it ?

  12. I agree with your conclusion "It is that creditors can be stupidly cruel, and when those creditors control your currency there is very little the debtor can do about it."

    A sensible government should constantly strive to arrange it's economy so that it does not become subject to creditor control. The Greek government has not had avoidance-of-creditor-control as a primary objective.

    The troika, for each of it's loans to Greece, has had this avoidance-of-creditor-control as a goal for Greece. Each successive loan has been accompanied with more demanding and specific suggested reforms, all aimed at eventual reduction of creditor control by eliminating the need to borrow.

    The world is now watching. What can we trust Greece to accomplish with this new loan?

    1. The Troika's strategy is 'pretend and extend': pretend that as a result of its latest conditions Greece will be able to repay its debts, and therefore lend them more. There is nothing you can do to stop this foolishness, except

      (a) try to explain the foolishness (Varoufakis)

      (b) hope that something turns up (Tsipras)

      (c) leave

  13. It seems apparent the only choice is Grexit now or Grexit later. I only hope if they choose later, they will have prepared for it.

  14. S W-L: "The mistake the Eurozone's politicians made was to bail out Greece's private sector creditors rather than provide loans for Greece to adjust. By refusing to admit this mistake, it just does Greece more harm. "
    Here is Olivier Blanchard: "Critique 2: The financing given to Greece was used to repay foreign banks
    Debt restructuring was delayed by two years. There were reasons for it, namely concerns about contagion risk (Lehman was fresh in memory), and the lack of firewalls to deal with contagion. Whether these reasons were good enough can be argued one way or the other. In real time, the risks were perceived to be too high to proceed with restructuring.
    Partly as a result of this delay, an important fraction of the funds in the first program were used to pay short term creditors, and to replace private debt by official debt. The bail-out did not however only benefit foreign banks, but also Greek depositors and households, as one-third of the debt was held by Greek banks and other Greek financial institutions.
    Moreover, private creditors were not off the hook, and, in 2012, debt was substantially reduced: The 2012 private sector involvement (PSI) operation led to a haircut of more than 50% on about €200 billion of privately held debt, so leading to a decrease in debt of over €100 billion (to be concrete, a reduction of debt of 10,000 euros per Greek citizen).
    And the shift from private to official creditors came with much better terms, namely below market rates and long maturities. Look at it this way: Cash interest payments on Greek debt last year amounted to 6 billion euros (3.2% of GDP), compared to 12 billion euros in 2009. Or put yet another way, interest payments by Greece were lower, as a proportion of GDP, than interest payments by Portugal, Ireland, or Italy.

    1. If you think about that Blanchard comment, it does not actually challenge what I say, which is that more of the original debt should have been written off. (After all, the IMF had to bend its own rules to agree to the loan for this very reason.) The excuse was concerns about contagion. But bailing out Greece's creditors was not the only way to deal with contagion.

      But even if you accept the idea that Greece had to be left saddled with an unrealistic amount of debt for the sake of the rest of the Eurozone, that suggests that when those fears of contagion disappeared (like now), then the debt should be cancelled. But Eurozone politicians will never have the courage to cancel money that their 'taxpayers' have lent to Greece. Which is why we are in the current mess.

  15. "thereby avoiding unnecessary unemployment. "
    All unemployment is unnecessary.

  16. You say that 'the Troika wanted Grexit'. Several commentators have said this, and indeed Varoufakis implies it in the linked interview. But I don't understand why any of them would, particularly the IMF and the ECB. Can you explain your take on it if you have a moment please?

    1. I said 'parts of the Troika. Read this

  17. Yes and if the Troika wanted Grexit then That explains the even worse deal on offer and why Greece is seemingly accepting it. In a complex game of reverse psychology Greece is playing its last pawn to protect its king against the Troika's King and Queen. This whole drama may seem petty and adolescent but Greece has in the process laid open the hidden motives behind Eurozone negotiations for the whole world to see.

  18. S W-L: You say that "it is now pretty clear that large parts of the Troika never had any real wish to reach an agreement" and when this view was questioned by Anonymous (14 July at 3.06) you simply say "Your belief is wrong, and your credible explanation nonsense. Evidence?".

    How wonderful that you can be so certain of the private views of 18 European Finance Ministers, the ECB, and the IMF. Your evidence for that would be - what? Meanwhile, in support of your case you appear to rely on a New Statesman interview with Varoufakis, whom you seem to think is a disinterested reporter.

    Come on - surely you can do better than that?

    Come on. You can surely do better than that

    1. «S W-L: You say that "it is now pretty clear that large parts of the Troika never had any real wish to reach an agreement"»

      That is something that can be conceded because it is on public record that *many* eurozone governments were against the very generous terms of the greek bailout, because their voters, democratically, are against it, right or wrong.

      All 18 EU governments were however willing, in classic EU-consensus fashion, to continue the terms of the already agreed second bailout treaty, and continue deceiving their voters, following the lead of the majority, but not at any price.

      SYRIZA thought that threatening to blow up the fiscal position of several weak eurozone members by defaulting would scare the majority, but obviously instead made them a lot less popular instead, because the EU cannot work if one member tries to be actively nasty to the others.

    2. I had thought the views of the German finance minister were by now well known, although it appears as if he has favoured Grexit for some time

    3. Sorry, it has been no secret since 2012 that Schäuble prefered a Grexit. The issue was, that Merkel did not supported a Grexit. Schäuble as good Parteisoldat (soldier of the party) worked therefore on the non-Grexit solution.

      This friction, which could have been exploited by a clever Greek opponent (unfortunately in short supply), vanished two weeks ago with the announcement of a Greek referendum.

      Merkel did change her opinion, not Schäuble, and Merkel followed Schäubles assessment of the situation. The rest, including the strange refusal of the Greek government to grexit, is now more or less entaining TV program.


    4. People seem to ignore that the Troika did substantially restructure Greek debt in 2012. The key question is why did the Troika take a much harder line this time? Was it because they were fed up that they were still being asked to do this, and failed to recognise that the reason was entirely their own doing? Or was it because of the election of Syriza?

    5. Restructuring debt is nice, but without changes that lead to a functional state they are of quite limited value. As nothing substantial happened at that front, the willingness of many governments to sink more money decreased, no wonder with most of their voters being against more payments, there is no meaningful political left left supporting Greece.


  19. At this point Greece is a vassal state and while the Troika can proclaim Veni Vidi Vici the other states of Eurozone should consider what this means for sustainablity and the Union.

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  21. «But politicians cannot admit to what they did»

    I have thus reread your blog that phrase points to:

    as it relates to our widely divergent views as to the kind of deception the 18 euro governments have practiced, and to me it seems to say that Greece could have done an Argentina, by defaulting on the debt, letting the rest of the EU deal with their financial systems going bankrupt without any consequences for Greece, getting €42 billions in loans from the IMF no-strings-attached (or none mentioned), to cover the government deficits and recapitalize the banks, and then Greece would be in the same situation as in our timeline's 2001 («With only IMF support, Greece would have suffered the same degree of austerity that has actually occurred»).

    But Y Varoufakis has argued cogently that would also have implied exit from the eurozone and soon thereafter from the EU unless the greek government and banks got not just IMF loans for €42 billions but also an unlimited overdraft at the ECB, which would not have happened, but a huge (if not unlimited) one has happened in the current scenario.

    Also the argument used against the current 2014-as-2001 (in the aggregate) situation is that in 2014 unemployment is much higher than in 2008, and 2008 is the baseline. In the alternative scenario of default followed by IMF limited overdraft then unemployment would be likely much higher, because the IMF loans would not have paid for the 2010, 2011, 2012 net imports, only the 2010, 2011, 2012 government deficits, the IMF loan would certainly have to be repaid, and the default, the fear about further issues, the eventual exit from the euro and the probable exit from the EU would have had a catastrophic effect on the greek economy, an effect that Tsipras and Varoufakis have worked very hard to achieve in our current timeline.

    It is amazing for me to argue with people who seem to think (and I may be misunderstanding) that one or both of these are realistic positions:

    * avoiding a formal greek default has had no real value for Greece;
    * Greece is entitled to its 2008 economic situation as a vested right to be restored at the expense of the other 18 euro countries;

    because both points seem so delusional to me, for the many substantive reasons already mentioned. It is even more amazing that both those positions, if they are those indeed I describe, seem so popular with the Varoufakistas, and they seem so convinced of the evil and dishonest natures of those euro governments who don't agree with them.

    1. You should read the IMF postscript on what happened from 2010 onwards. From that it is clear that the IMF had to bend its own rules to allow loans to Greece without (initially) any default. There reason for doing so were worries about contagion. So to suggest that a greater debt write-off was not possible seem strange.

  22. Prof. Wren-Lewis,

    You are a very trusting person. You trust there will always be enough money available.

    And you have delivered macroeconomics from the constraints of common sense.

    And you have uncovered the secret side of the Troika's dark intentions.

    Time for the Ig-Nobel prize.

  23. I think the OECD finding that ”Greece has implemented more reform from 2011 to 2014 than any other country” has to be put into perspective. After all, Greece still has not found a way to collect meaningful taxes from its rich and still lacks basic and important arrangements such as a land registry.
    In this context it is bizarre that the euro group is concerned about the way Greek bakeries operate…

    1. «Greece has implemented more reform from 2011 to 2014 than any other country” has to be put into perspective.»

      But it is true, the greek economy while being far from being that flexible is a lot less inflexible than it was. Greece does not really have a competitiveness problem as the 18 euro governments try to pretend in order to pretend to demand austerity. The problem that Greece had in 2001-2008-2014 was not a loss of competitiveness really, it was a massive "free" capital inflow and then its end.

      I think that the greek economy competitiveness is good enough for its 2001,2014 levels of GDP per person, which are pretty much in the "developed economy" bracket, even if the lower half.

      «After all, Greece still has not found a way to collect meaningful taxes from its rich and still lacks basic and important arrangements such as a land registry.»

      Those have been politically unacceptable in Greece. Perhaps many greeks think that making the rich pay taxes is the thin end of the wedge: the concern may be that if even the rich have to pay taxes, everybody else will be made to pay them too. "Tax morale" seems inversely proportional to long periods of foreign occupation and extraction.

      «In this context it is bizarre that the euro group is concerned about the way Greek bakeries operate…»

      It is largely (but not just) theater for their home voters and parliaments, as the bailout is a fiscal commitment, and in several countries the expenditure has to be approved:
      «If that is successful - the institutions will inform us whether that has been successful -we will have a Eurogroup conference call either on Wednesday night, but probably on Thursday morning to assess that, and that will be the signal for the other Ministers to go to their national parliaments. This is not valid for all ministers, but I believe six or seven have to go to national parliaments. Myself, I have to go.»

      The other reason for the level of details is that the eurogroup think that they cannot agree a "framework" of overall objectives with the greek government and let the "clean and effective" greek political system and civil service come out with the detail policies and implement them. I think that they even put words to this effect ins some official press release or IMF report, but I can't remember where.

    2. C. Meyer: I agree about bakeries - the extent to which the Troika have tried to micro-manage Greece is incredible. I think there is a large element of naivety or wishful thinking on the part of the Troika here. True structural reform is difficult to do, and takes time. Measures imposed by the Troika were never going to make an unsustainable level of debt sustainable.

      I also think the 'long way to go' argument suffers from a similar problem. Could comments like this also be made about Italy, for example?

    3. "I agree about bakeries - the extent to which the Troika have tried to micro-manage Greece is incredible."

      Don't leave out the part where this is a) something the troika resorts to because the Greeks refuse practical measures to tax their rich more (btw they themselves come with detailed proposals on how such and such reform will raise 10 million euros, the micromanaging certainly isn't the troika's idea alone) and b) because they want to set precedents for reform that other Greek sectors can then point to in front of a judge or parliament.

      "I also think the 'long way to go' argument suffers from a similar problem. Could comments like this also be made about Italy, for example?"

      No, there is no "Northern Greece" the way there is a Northern Italy. Italy has a mentality problem, just like Greece, especially in the South, but it has harsh and stringent regulations that overcome this problem and as a result their tax collection and statistics production more or less function. And that is precisely what Northern Europe tries to get Greece to do, plus some competitiveness reforms that they can try to push through while Greece is dependent on them.

    4. In 2013, tax and non-tax receipts in Italy were 48% of GDP. In Greece, 47.8%. In Germany 44.4%

    5. Greece has a slightly bigger "black economy" than Italy (and of course much bigger than that of Germany, in relative terms) and Greece is a net receiver of EU-funding worth about 2.5% of GDP (while Italy is a net contributor) in addition to all the bailout money they've been getting to prop up their budget. On top of that Greece is squeezing alot of it from its poor (the austerity you so decry). Italy certainly has a tax problem compared to Germany but it's been doing better than Greece is even after Greece has been hammered by international pressure for years now.

      As to Germany, they simply choose to collect fewer taxes than they could. Germany is also among a group of countries that pays very low, or sometimes even negative interest on loans.

      Of course it's dangerous to just compare income relative to GDP: countries have different levels of privatization, semi-privatization (so the same expenses show up as government expenses for one country and private expenses for another country), different spending levels for local governments and different states of infrastructure (stuff like depreciation or value increases of government-owned equipment, real-estate and infrastructure have a measurable impact on international government income/spending figures).

  24. Nicholas Martin16 July 2015 at 20:43

    Hello Simon
    I'm sure you'll agree that simple quantitative measures of how many reform-laws have been enacted in parliament is a very poor (not to say, near meaningless) measure of how much reform has occurred. So I'm both surprised and disappointed to see you go for that.

    The real questions are

    1) what exactly is in the content of the laws? Do they really change institutional structures and incentives, or do they just create new loopholes, exceptions, and protections?

    2) to what extent are the laws on the books actually being implemented?

    My impression from what I hear both from Greek commentators and friends involved in some of the Troika work is that on both counts the reform efforts often fell very short, but not having studied it in any detail (ie., worked my way through the relevant legislative packages and tried to get some information about implementation) I will happily defer to people with better information. But I don't think an OECD summary chapter counts as that.

    1. "So I'm both surprised and disappointed to see you go for that." If there was something better, I would use it. But as you subsequently point out, the only alternative at the moment is "impressions", and I find it very difficult to sort out which verdicts are objective and which are not.

      However the more important point is aptly summed up in a recent VoxEU article:

      "Regarding debt sustainability, there are solid theoretical foundations, measurement expertise, and broad econometric consensus on offer by academic economists. In contrast, regarding structural reforms, academic economists remain puzzled over not only how these reforms start and evolve (and could thus hopefully help solve the crisis), but also how to properly measure and econometrically assess their implementation. It is ironic that both stances are ignored outside of academia, where evident certainties and obvious truths abound instead."

    2. "Regarding debt sustainability, there are solid theoretical foundations, measurement expertise, and broad econometric consensus on offer by academic economists."

      Except that the consensus on Greek debt is not what you seem to think it is. Greek debt is entirely serviceable as it stands. The Troika demanded primary surplusses may not have been, but those have been lowered and delayed and will eventually be achievable (with austerity GDP shrinks like a geometric series: it will slow down and stop and even in the worst case scenario the new primary surplus and reform proposals would take another 5% off of Greek GDP, after which the debt will still be serviceable and the economy will start to grow at some point).

    3. Your 5% figure is very optimistic - see my earlier calculations. You are right that if primary surpluses level out at some number, GDP will eventually start growing again. As competitiveness improves it may do so earlier. But the debt to GDP ratio rises as GDP falls. The only way I think Greece could regain market access without writing off some of this debt is if the interest rate is permanently reduced to almost zero and that this debt becomes subordinate to private sector debt. All this just to save political face!


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