Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday 3 July 2015

The ideologues of the Eurozone

It was all going so well. True, Greek GDP did shrink by 25% over 4 years, unemployment rose to 25% and youth unemployment to 50%, but before Syriza’s election Greek GDP had actually stopped falling. Further austerity was planned so that Greece could start to pay interest on its enormous debts, together with various ‘reforms’ that were so obviously in the interests of the Greek economy, and the consensus forecast was that the Greek economy might start to grow at a pace that would also stop unemployment rising. Who knows, in a decade or so it might even fall below 20%.
But then disaster struck. The Greek people went and spoilt everything by electing a government that suggested that there might be an alternative to all this. Of course the Greek people are not really to blame: how can they be expected to understand there was no alternative to their suffering. The real blame must lie with the ‘populist’ politicians who pretended there could be an alternative. The ever patient and understanding Troika negotiators then had to deal with ‘adolescent ideologues’ who were prepared to use the suffering of the Greek people as a means to achieve their own political ends. They were cheered on by pundits and economists on the left in the UK and US who wanted nothing more than to use Greece as part of a ‘proxy war’ to get more Keynesian policies in their own countries.

If you think the above parody is over the top, click on the two links. The hypocrisy of some of the commentary on Greece is amazing. When the ‘adolescent ideologue’ Mr Tsipras shows a statesman-like maturity in being prepared to compromise in an effort to get a deal, he is accused of inconsistency and not being able to make up his mind. When those who he is negotiating with push him further than he is prepared to go, he is accused of ‘taking Greece to the brink’ by having the temerity to ask the Greek people to choose. (Any mature politician knows that in modern Europe you only call a referendum when you know you will get the answer you want, and when that does not happen you ignore the result and call another one.) Mr Tsipras is accused of failing to grasp that other nations too have democracies, as if the Troika had shown huge respect for democracy by acting as if nothing was changed by Syriza’s election.

The OECD estimate that the output gap in Greece is currently well over 10%. In plain English that means that those currently unemployed could be producing something useful and GDP could easily expand by at least 10% without generating any increase in inflation. (Greek inflation is currently around -2%.) That would not only be in the interests of Greece, but also in the interests of Greece’s creditors. It is a way of achieving the primary surpluses that the Troika wants without inflicting more pain. It is also absolutely undeniable that further austerity would tend to reduce GDP, just as past austerity has done. So everyone can be made better off by giving Greece the breathing space so that its economy can recover. But apparently it is childish to try and negotiate for such an outcome.

Why is it impossible for the Troika to agree to such a deal? They say their own democracies would not allow it, but it is part of being a good politician that you can afford to compromise when that compromise is in everyone’s interest. I suspect that in at least some cases this argument is a smokescreen, particularly when you see what Mr Tsipras is being told he should do. There is a pattern here. For the ECB to act as a lender of last resort was impossible, and the only answer was yet more austerity - until that austerity had been put in place and OMT became possible. When the French government tried to meet deficit targets by raising taxes rather than cutting spending, they were told that this was the wrong kind of austerity. When it came to Quantitative Easing (QE) some were quite explicit - a problem with QE is that it might take some pressure off governments to undertake austerity and ‘reforms’. So perhaps only when the Syriza government has fallen and their successor agreed to more austerity and reforms will it turn out that the Troika can after all be flexible about restructuring debt.

One of the charges frequently made against opponents of austerity in the Eurozone is that we are really seeking the failure of the whole Euro project. The opposite is nearer the truth. The problem for the Euro project is that it has become captured by an economic ideology, and austerity is that ideology’s principle weapon. A self-confident and mature Eurozone would be able to tolerate diversity, rather than trying to crush any dissent. A Eurozone captured by an ideology will insist there is but one path, and that the imperative of austerity is too important to accommodate democratic wishes. Pursuing that ideology has brought the Eurozone to the brink, where it is prepared to force out one of its uncooperative members. Critics of austerity are not trying to destroy to Eurozone, but save it from the grip of this self-destructive ideology. 


  1. So, your point is that "Only when the Syriza government has fallen and successors agree to more austerity the Troika can restructure the debt" which means that Greeks must sacrifice Syriza (and democratic values) to save themselves and their children's children.

    Then they will be adults, and do just that, because the world (and the EZ even more so) is not all about democracy, values, justice, flowers and happiness....

    1. His point is that the Troika have double standards. His point is that if that happens, the Greeks will continue to suffer enormously. They won't be "saving themselves." My view is that it may lead to the rise of the rightwing in Greece and across Europe as we saw with Bruning's deflation and the rise of the Nazis.

    2. several ECB officials have hinted that a NO vote will make them pull ELA. In that case there'll be bank bail-ins, the second biggest contributor to the Greek CA balance, Greek bank subsidiaries in East Europe, will be sold off for free, Greeks will loose all their deposits since the deposited sums are really small and large deposits to support a bail-in non-existant. What do you expect them to do exactly??

    3. I don't think that was Mr. Wren-Lewis' point, I believe he is stating the Troika's point of view.

    4. I also think that if the "yes" wins, the troika will after all be willing to make more compromises but that will be under the pretense that they have a "more mature" government to negotiate with. Now, it will ironically be Syriza's success as it is pretty clear that without the escalation of the last days, the Greeks would have gotten a worse deal. No matter what Juncker and the others are saying.

    5. @Anonymous 1: I don't believe in this nightmare scenario. Of course the most extreme folks like Schäuble and Weidman would probably dream of that. But there is a limit to what is politically acceptable.

      Remember that they were vehemently opposed to the "whatever it takes". But without it there would be no EUR any more and in the end, and after the final court ruling, they had to shut up.

      And look, tonight Donald Tusk declared that the referendum was NOT about staying in the eurozone. That contradicted all the statements of his EU colleagues of the last days. Other declarations have also been more conciliatory. These folks know that no matter what they said they won't be able to let Greece burn - because in the end that would be too high a price for the EU. And most of them are not committed enough to their deadly idelogy.

  2. Isn't it ironic that the Tory Party blew itself apart over entry into the ERM in the 1990s, then exited the ERM when the Germans wouldn't do what the UK government wanted them to, and then that same Tory Party campaigned in 2010 and 2015 on the UK economy 'turning into Greece' without their being elected.

    If the Greeks exit, and by 2020 their economy is doing better in comparative growth than those peripheral economies still in, what will the Tories go on then?

    1. Yes, a real disaster for the Tories not entering the Euro!

  3. Regarding France and "the right kind" of austerity, Krugman blogs;

    "But the creditors keep rejecting Greek proposals on the grounds that they rely too much on taxes and not enough on spending cuts. So we’re still in the business of dictating domestic policy."

  4. "But apparently it is childish to try and negotiate for such an outcome."

    I don't think it was childish to ask and try.

    But, it has been obvious for a long, long time, that politically that was not on offer. The counter-party also has electorates to answer to (pesky democratic accountability again).

    What was childish was to treat the negotiations as some kind of exercise in game theory, where you kept on threatening to poison yourself if you didn't get your own way because that would make the other side unhappy.

    But really, none of this matters. Economics is not a morality play. it doesn't matter who is to blame. What matters is what should be done now.

    So, advise the people who may be listening to you. You do have some influence on this.

    Yes or no?

    Krugman says no.

    I think he is hopelessly wrong, and he makes hardly any nods to how easy it would be to exit the euro.

    Remembering that you are not a dictator and the optimal economic outcome is not available.

    Time to choose.

    I say yes. Syriza has been a large mistake by the (mainly) well-intentioned.

    1. It is interesting that you are so desperate for me to give advice to Greeks, particularly as you think so little of my political judgement, but so uninterested in my advice to the Troika. Your "The counter-party also has electorates to answer to (pesky democratic accountability again)" is just window dressing - what influence did those electorates have when the Troika changed the terms of its lending to Greece a couple of years ago?

    2. Hugo, austerity has been so successful in Greece (and Spain and even in the UK); i can hardly see why the Greek people elected Syriza in the first place? How could that have happened?

    3. 1. But we all know what your advice to the Troika is: you've told us at length several times. It isn't an interesting question.

      Which way the Greeks should vote is both interesting and difficult. It is all fine and dandy saying things like

      (i) the euro was badly designed
      (ii) the Troika should be more flexible
      (iii) austerity was counterproductive in Greece

      yes, we know all that. But none of that resolves the difficult and pressing question:

      What should they do?

      Be bold and brave. Krugman was, he said vote no (I think he is potty - on this occasion).

      If your answer is (as I suspect) a very reluctant yes (see also, I think, Martin Wolf) , the conclusion is that the earlier endorsement of Syriza was a mistake (as I think it was), indeed a terrible and self indulgent one.

      2. As for democracy, more attention should have been paid to the 2013 German federal election and the Merkel's osition on bailouts. That ended the room for the kind of flexibility Syriza wanted.

    4. rob sol

      I think austerity has been a disaster in Greece (and deserves that name, which it doesn't in the UK). Even alleged posterboys for austerity like Spain are no such thing. No argument from me.

    5. Hugo, what Greece is likely to get from Merkel - which is what she is advocating - is more austerity and we could see greece in 5 more years with 40% unemployment and -45% GDP. Better off getting rid of the EURO and going back to the Drachma. Sure it is dangerous, but it might succeed.

      As to the UK; austerity has merely been terrible and not a disaster. Almost no economic growth but people do have jobs thought they are earning less on average. Nothing to write home about.

    6. So, you are a no then. Interesting. It is annoying that S W-L won't fess up, when it is such a key, dramatic, and dividing choice.

      Seems to me that that won't help a country in Greece's situation (with its debt denominated in euros even if it leaves) at all. I can certainly agree that Greece should never have entered the euro, but that is not the same question as whether it should now leave

      But then, intelligent people agree with you.

      As for the UK, and whether one and a half year's relatively mild fiscal consolidation amounts to 'austerity', a debate for another time.

    7. "If your answer is (as I suspect) a very reluctant yes (see also, I think, Martin Wolf) , the conclusion is that the earlier endorsement of Syriza was a mistake (as I think it was), indeed a terrible and self indulgent one."

      Why is it "self-indulgent" to have advocated for Syriza? Do you have to be a moon-eyed idealist to support any party other than one willing to be the pliant servants of the troika, doing whatever they are told? You seem to believe that because Syriza is trying to resist the pointless imposition of decades of depression, they are fools.

    8. Also on this question of whether to vote no or yes, does anyone else find it strange how many people seem to be arguing simultaneously that the referendum question is out of date and meaningless and the result will have a critical impact on subsequent negotiations? How can both those things true at once?

    9. SH: So the Greek electorate's choice when it voted for Syriza was self-indulgent. As the Greek people are finding out, democracy in the Eurozone is a very withered creature, at least for some.

    10. I thought that it was highly unlikely that Angela Merkel and the troika were going to bend. And so the choice was to leave the EMU - and create a currency in some form or other - or continue on with austerity.

      The Greek people seem to want to end auserity witthout defaulting on their debt. Those two choies are almost surely not compatible. The referendum will help determine which direction Greece will go in the immediate future.

      Bbut more austerity and its conaequences could change the mind of the Greek people.

    11. No, I think the Greek people voted to end austerity, but also to remain in the euro. A default on the debt was a given. Whether you consider a default incompatible with remaining in the euro is something else.

    12. Given Angela Merkel, the Greek people will have to choose between austerity and leaving the EMU and maybe even the EU. If I were King of the Forest, I would allow Greece to stay in the EU; I am not.

  5. I'd read both those pieces, which were I think praised by people I respect like dsquared and Tony Yates, and was struggling to reconcile them with what I read by others I respect like your good self and Krugman etc. And I am still struggling.

    You mean this sarcastically: "The Greek people went and spoilt everything by electing a government that suggested that there might be an alternative to all this" but by then had they already reached that point where the debt was an accounting fiction, and the smart thing to do was keep the EU money rolling in and not promise the impossible of staying in the EU whilst undoing imposed austerity? i.e. was there really a (sane) alternative? I think disagreements may come down to whose behaviour you take as given and who you think need to do the adjusting to that reality. You see the EU as being the side that ought to be changing, others think the EU have gone as far as they were ever going to and the Greeks needed to be realistic. All this said I do not know why the EU did not accept the Greek offer than involved a one off corporate levy.


    1. I struggle too. I think your remark about which side you take as given is very perceptive. But even so, the pieces by Stephens and Ubide are terrible - trying to pretend that the Troika are adults and the Syriza government children is, well, childish.

    2. thanks

      this by Duncan Weldon is interesting, has more to it than just EU politics, looks sensible to me ... but is it also an example of analysis that takes EU as given and then asking whether Syriza picked the right/wrong strategy? He does not say that Syriza strategy involved hoping the EU would recognise that they were imposing bad policy on Greece ... would it have made sense for Syriza to proceed on that basis? Duncan does not say that the EU should have seen the position that Syriza was in and bended ... should he be? Or is "they were never going to do that" the right stance?

    3. same in some economic models I suppose - who is represented as making choices in the presence of whose "reaction function" - also reminds me of two ways of seeing Putin - one which says West guilty of not appreciating how he sees the world and ought to have avoided provoking him, other which says Putin has no business reacting like that.

    4. There is an asymmetry... the Greek people have their lives and those of their children at stake, while the Troika negotiators have nothing but their ideological baggage in the pot and are risking nothing more than losing a little face. Yet they're still happy to play this horrible brinkmanship with the future of Europe and the lives of millions of people. I assume none of the negotiators are in much danger of losing all their savings or not being able to pay their bills or not being able to get healthcare or a job or a pension or a house. The Troika people have a kind of moral hazard; the the long run, it'll be much the same to them personally whether they win or lose. Meanwhile, to the Greeks and indeed all Europeans who are just keeping their head above water, it is personal and very serious.

  6. Spot on, Simon. It is truly amazing how ideology can interfere with economic analysis and understanding. (I really don't think the troika's actions are based on interests and political alliances alone. This kind of thinking has been deeply entrenched for over two decades now.) The only question is when enough citizens in Greece, or the UK, or the USA, or anywhere will wake up to the con game.

  7. I don't really see how filling the output gap with deficit spending helps the creditors. Even under pretty heroic multiplier assumptions (e.g. 1.5 multiplier and 40% tax take) the extra funding would not be self financing. Debt/GDP ratio might go down, but notional actually goes up. And at some point the support has to be withdrawn... Won't GDP collapse at that point? Isn't an economy 10% below potential more likely to grow endogenously than one at capacity?

    If the market was willing to finance the deficit, fair enough they should do it. But who is willing to lend? Or at what rates?

    1. The Troika want to take money out of the economy with austerity designed to achieve primary surpluses that can then be transferred to themselves. That reduces GDP. Greece wants that not to happen.

    2. Well the troika represents the creditors, so yeah they want to be repaid something. Have creditors ever wanted anything else? I don't understand.

      I fully agree it would help the Greeks, but that's not really relevant to the other European countries, is it? I can even agree it would be a fairly efficient form of aid, likely to be quite cost effective. But it would be outright aid.

      Surely the troika just wants to maximize the amount it can extract from Greece. That seems reasonable to me since they are unlikely to get back even a fraction of what they put in.

      It's a gross simplification, but the return for extra funding is simply multiplier * tax take. Unless you argue that number is greater than one, giving money to Greece is a bad investment. This assume no multiplier/tax collection risk (including the risk of the Greek government simply keeping the money afterwards).

    3. You are assuming that the Troika will get back what it is already owed by Greece whatever happens at the margin. That seems unlikely. Lets go through the maths. Suppose the Troika demand a primary surplus worth 1% of GDP. Using a Xer of 1.5 and a tax/transfer take of a third, then to achieve higher taxes worth 1% of GDP the Greek government would have to reduce GDP by 3%. So the Troika will be better off by 1% a year, but the Greeks worse off by 4% - the 1% transfer and 3% GDP loss.

      Now if that was the end of the story, then the social loss will be 3%, but you are right that the Troika will still be better off. But if lower GDP means that Greece is less likely to repay its existing debt, then it is quite possible it could end up worse off. In other words if Greece can find a way of sharing that social loss, the Troika's policy could end up harming itself.

      You can think of what is currently happening as a stochastic version of this. As a result of demanding this primary surplus, Greece is having a referendum that could see it leave the Eurozone. That in turn could mean it defaults on all its Troika debt, which would clearly leave the Troika worse off.

      The key point is this. Because of Keynesian aggregate demand effects, this is not a zero-sum game. Collectively it makes sense to avoid Keynesian unemployment, because this wastes resources. Although any gains from avoiding this waste may appear just to go to Greece, in reality they are likely to be shared to some extent, and if this is not the case the Troika should think of mechanisms by which they can be shared.

    4. I've been trying to get my head around this. Simon is right. Given sensible keynesian assumptions, it's not a zero sum game, and there's a Potential Pareto Improvement from the sort of policy Simon advocates. But I can't think of any simple way to turn it into an actually Pareto Improving deal where both sides gain. How do the winners (Greece) compensate the losers (Germany) without undoing the effects of fiscal loosening?

      I think we need some sort of "pump priming" model, where Greece borrows and loosens now, to get it out of the bad equilibrium into the good equilibrium, where it can slowly tighten again and repay Germany, without dropping back into the bad equilibrium.

    5. Nick seems to answer his own question sensibly.

      It's about timing. You pay down debt when you have a full employment economy. Even with monetary lock in Euro I would think the tradeoff, in effective fiscal multiplier, would shift.

    6. I am not really convinced. It is true this is not a zero-sum game. We have assumed a big multiplier so there is something to share. But in order to get a pareto improvement deal you need the government to accrue this gain. If the gain is distributed to the population at large the initial lender has no claim on it (since it only has a claim towards the state) and will not be repaid. This is true even if they had no debt at all. You need to assume that at some point the tax take would be high enough to cross the break-even point.

      Assume that there is a 10% gap and that the economy is in steady state (just to simplify the analysis), deficit spending can increase the GDP back to capacity, but unless that Xer * tax rate is greater then one (not necessarily initially but on average) the debt will explode.

      Now it might be reasonable to believe the population at large will accept higher taxes in order to get the funding, but I am not sure I can easily see the Greek population really accept pushing taxes to the necessary high levels. It doesn't seem crazy to me to be reluctant to lend the money under these conditions. I personally wouldn't lend them money even if they had no debt at all.

  8. It's remarkable how much this narrative that the Greek government are reckless unserious ideologues and the troika are hard-headed realists goes unchallenged. Endless attacks on Tsipras for being confrontational, volatile... meanwhile Europe's leaders tell the Greek people that if they don't vote the correct way in a referendum they'll be thrown out of the euro. The whole affair is almost too depressing for words

  9. Can anyone explain commentary like this from Vicky Pryce:

    "In truth the creditors’ offer to the Greeks differs little in terms of overall austerity to that asked for by the Greeks except on where some of the pain may fall and that hasn’t been explained to the Greeks. There has been too much austerity but a no vote would make things worse. It would almost certainly mean banks becoming insolvent, an exit from the euro and a much faster decline in economic activity with hyperinflation following as the drachma that is introduced instantly devalues.”

    A yes vote would keep banks open and give mandate for a deal to be struck that recognises the new Greek realities and includes, as the IMF now says, restructuring of the debt which every economist knows is unsustainable. This would offer some light at the end of the tunnel. A no vote would make that almost impossible to accomplish and could plunge Greece into years of economic turmoil."

    Why can they not negotiate a new deal after the "no" vote? Such a vote would simply be a rejection of the creditors' past terms, which the IMF now seems to agree were no good. Why are they forced to cause more economic turmoil in Greece rather than returning to negotiations? Did the referendum just hurt their feelings too much or something?

  10. I do not want to comment on the stateman-like behaviour of Tsipras and Varoufakis.

    I also do not want to comment on the level of public expenditures France now reached making it look like a semi-communist country.

    My question is:
    - Why is France getting a carve-out for meeting the deficit criteria of 3% now for years?
    - Why is Spain getting the same?
    - Why could Portugal and Ireland get this carve-out as well?
    - Why are 18 countries plus the commission, the ecb and the imf so evil to Greece only?

    My laymans understanding is that Greece politicians had little credibility in the past and are not credible at all now. More or less money does and did not make much of a difference though at least some limited reform was enacted during what is your definition of austerity. The government actions in the first five month show that this government is even less capable of enacting economic reform than the previous two ones.

    Given this why do you not propose a Grexit plus extended humanitarian aid?
    Why do you want to Greece to stay in the Eurozone when it is clear it is not intending to play to its rules? Why shall 18 countries - including poorer ones than Greece - bend to Greek requests and adopt the Greek style of economic thinking?

  11. In the para starting “The OECD estimate…”, SW-L claims that more demand in Greece would benefit Greece and its creditors. That depends on whether the money for that demand is a loan or a gift to Greece.

    If it’s a gift, then obviously Greeks and creditors benefit, but creditors AS DONORS clearly lose out. If I give £X to Oxfam, obviously I lose out. On the other hand if it’s a loan, then creditors DEFINITELY lose. Reason is that if €X is loaned to Greece and is spent in Greece, that will suck in roughly €0.1X of imports. So Greece is even further in debt!

    If the Greek government eventually recoups the €X in taxes and repays creditors, there is still the €0.1 debt to pay for.

    In the case of a gift, we’d have moved into a form of fiscal union, which is a big step.

  12. From a New-York Times column

    "Domestically, the government has overseen the unraveling of many reforms, done little to crack down on tax evasion and corruption, and repeated the cronyism of the past with blatantly political appointments in the public sector."

    My parents in Greece tell me the same thing and it is a widely shared view among greek professionals. Their struggle is that they know that Euro policies are wrong but they don't trust themselves Syrizia (or any other parties) to be able to handle an exit from the Euro. They also hope that, at some point, Europe will do the right thing and offer a chance to Greece.

    I don't know if this assessment is realistic or gloomy. I do lack knowledge of Greek politics to have an independent judgement on this matter. I don't know if Syriza "unraveling" of the reforms will cause long-term economic damage or not. I don't know if there also examples of competent people placed at positions that matters, besides the examples of cronyism. While Syriza might not be the ideal, is it worse/better than previous government?

    Can Greece handle an exit from the euro if forced too or is it a risk to big? How much the success of this transition depends on Europe? Let's say that Greece manages somehow the transition, can Greek economy and society as is today functions once the straightjacket of the euro has been removed?

    1. How well did Greece function before the Euro? How well after the Euro was adopted?

    2. I don't know if it is possible to turn back the clock...

      I am not an economist but my impression from going back to Greece every year in a small provincial town on the continent is that Greece functioned differently (Athens and Thessaloniki - almost half of the greek population - is probably a different story). There were fewer or no foreign supermarkets (e.g., Liddle, Carefour. Pratiker, Export), more local industries (e.g., fabrics, tabacco, marmelades, sodas). Villagers (older generation) were working on their fields and needed little need for money (they were in part replaced by albanians and romenians who are now leaving or have already left). This summer, the bar of the village is closed because the family moved to Germany.

      What about developing competitive industries? Well, there are some stories of start-ups and investment funds in Greece around the largest cities but this is going to be excessively difficult. If Greece can do it, all the better but this would not be the Greece before the Euro.

      Would it help to put in place some import barriers to support local commerce and industries that have disappear because they were not competitive? Is devaluation enough?

  13. Part of the problem is that it is not clear how the current arrangements make the Troika genuinely interested in long-term Greek economic success other than just generating surpluses to service the debt.

    The 1953 London debt conference where German debt was restructured did exactly that and made the creditor nations genuinely interested in German progress.

    Pity that the institutions, and Germany, have forgotten the message of that programme.

  14. Jim O'Neil commented that China creates the equivalent of a Greek economy every 3 months; maybe we're focusing too much time on the wrong problem.

  15. Simon: "Why is it impossible for the Troika to agree to such a deal?"

    Almost all deals require trust, especially intertemporal deals with no 3rd party to enforce them. If the Germans had trusted the Greeks, they could have found a deal that was better for both Germans and Greeks. But the Germans didn't trust the Greeks to deliver. Their trust has almost certainly diminished further in the last months, and especially days.

    1. I have no reason to believe members of the Troika's account of the negotiations than those of Syriza - have you?

    2. It doesn't really matter whether I trust Syriza (I don't). What matters is whether the Germans (and the Finns and the IMF etc.) trust Syriza. My hypothesis is that they don't, they trust them less than other Greek governments, and trust Syriza even less now than when negotiations began.

      Syriza might not trust the Germans either, but that matters less in this case. Lenders need to trust borrowers more than borrowers need to trust lenders.

    3. Not that the Germans trusted other Greek governments much either.

    4. In negotiations it is important that you believe the other side wants to negotiate. If accounts like this are only half true, it looks like Syriza had good reason to doubt that.

      The position of the IMF on debt relief looks particularly problematic.

      If I put forward the hypothesis that the 'trust' issue is another Troika smokescreen, do you have any evidence against?

    5. The NYT's sources are "...according to people who were in the room with him" i.e. Syriza people.

      But let's suppose it is 100% true. It would fit my hypothesis that German trust in Greek governance, and Syriza in particular, was low and diminishing over time. With diminishing trust, the feasible part of the Contract Curve would be shrinking over time.

      "From time to time, however, Mr. Tsipras would push Mr. Varoufakis into these meetings, joking to his aides that he enjoyed seeing Mr. Dijsselbloem and Wolfgang Schäuble, Germany’s finance minister, squirm as the Greek finance minister lectured them on the need for debt relief."

      Good God. That makes the Syriza side look worse than I thought they were. If you want an agreement, you don't do that. What sort of signalling equilibrium is this?

      My evidence for the trust hypothesis: it seems to fit the facts, without assuming irrational Germans. And it fits common experience; lenders are always wary of trusting borrowers, especially those who have defaulted, have had one writedown/extension, and are now asking for a further writedown/extension. And if the borrowers have made promises to their electorate that it seems to you they cannot keep, and if you know that their own preferred option is different from the one they are negotiating for their people.

      The "costly punishing" hypothesis can't be ruled out ("you cheated me, and I'm going to make you pay, even if it's costly to me, to maintain my reputation, so I can do deals in future"), But if trust were not a problem punishing by imposing a fine (making them repay the loan) would normally be preferred by the lender than forms of punishment that were costly.

    6. Nick, as I said I think all this stuff about trust is window dressing. It is just the kind of thing you would want your press to say, together with elaborate discussion of how difficult it was negotiating with Syriza etc. Germany has not trusted Greece since 2009, with good reason - end of story.

      What does seem to me clear is that debt relief was kept off the table in the negotiations simply to suit German politicians. Everyone knows debt will have to be restructured in some way, but Germany did not want to concede that in negotiations because it was embarrassing politically. The deal could have been closed if this had been added.

      So if there is a negotiations story here, this is it. What is really worrying, from my point of view, was that the IMF was prepared to indulge Germany on this.

    7. ''Germany did not want to concede that in negotiations because it was embarrassing politically. ''

      in the media it has been reported that according to the troika Greece first needed to deliver on reforms, and in the future debt relief could be discussed. It was used to put pressure on Greece. This was not just the Germans, I think IMF (Lagarde said herself reforms first, debt relief later) and other eurozone countries agreed this was the right approach.
      I don't understand the focus on debt relief by the Greek government anyway, why not agree to park debt relief for some future Greek government to discuss, and concentrate on how to get the economy growing again?

    8. Prof. Wren-Lewis,

      This exchange has convinced me to change from your blog to Nick Rowe's.

    9. Nick, You are off on a useless tangent.

      That said, I trust the Greeks. They have endured 5 years of economic torture to stay in the Euro. Their economy has declined by 25%! How is that not an epic demonstration of loyalty to the Euro? Still, they may yet vote yes on the referendum to endure more torture to stay in the Euro.

    10. That's obviously true. Most EU politicians could not admit the size of loses. They never could. This is obvious from the beginning. They extended maturities and added interest holidays so that they could say the notional had not been cut (and the notional is a meaningless number). Even now the IMF is proposing the same extend and pretend game, just to avoid cutting the notional while providing a similar economic benefit.

      Why was it so important to have debt relief now? To make sure Syriza didn't lose votes? Why is that more important than Merkel's (much closer) elections? At the end of the day, Germany will be okay whatever happens to Greece... Between risking their re-election chances and sinking Greece, I doubt it was a hard decision. If Syriza didn't know this, they are incompetent...

  16. What I want to know is, what happens if the Greeks vote "Yes"? Sure SYRIZA leaves, PASOK/ND/whoever take charge, and agree to whatever the Troika demands: but who in the EU will agree to another €100B from the ECB to recapitalize the Greek banks after this last bank run? Or will they just leave Greece without a functioning banking system?

    The Europeans have dug themselves one hell of a hole: they've been forcing Greece out of the EZ for months now. I don't think they can walk any of this back.

  17. Mr Wren Lewis, you are making a very important point here. Because Syriza has been constantly accused of 1) being dangerous leftist idealogues 2) being populists.

    But as you wrote the "adults in the room" are themselves idelogues and in fact live in an alternative reality. As Varoufakis pointed out in his Bloomberg interview nobody else believes the debt is sustainable.

    But that brings us to the second point. They are also populists themselves because they deluded their electors (when they have been elected that is!) into believing that the Greeks would ultimately repay their debt. They are now prisoners of this lie and can't escape it. They have also been careful not to mention that so far it is the former creditors that have been bailed out. Now the German socialists can say that they defend the hard-earned money of the German workers. It would be harder to explain that the money of the brave workers went once again to the big banks.

  18. I am voting on Sunday and I am tempted to vote No as I feel anger and frustration after
    years of austerity and negative coverage. However, apart from the obvious change of curreny, I am not really sure of what will happen if Greece does leave the eurozone. Certain details, such as a shortage of medications, seem horrific.. Could someone here please give me an idea of what may happen?

  19. Some events are in the wrong order here. The drop in GDP and the increase in unemployment occurred before the austerity began.
    Rubbish you say!
    Well check the data for the year of Greece's all time record tax receipts and note down the figure. Then look at the first year after that when the government spent less than that number ( it was 2013 ).
    What happened between 2009-2012 was not austerity as the government was spending more than it had ever had in its best ever year. It was a horrendous misallocation of resources.
    If Simon Wren-Lewis has a more practical definition of austerity then he should define his terms.

    1. Acute austerity occurred in 2010 and 2011 (look at underlying primary balances). True, GDP started falling before that, just as in the rest of the Eurozone (I wonder why?!).

      So the fall in GDP had nothing to do with austerity, because austerity did not happen. So how exactly does private sector demand rise when public sector demand falls?

    2. Diff Anon.

      "So how exactly does private sector demand rise when public sector demand falls?"

      We are talking about a very small open economy here, ie driven by net exports.

    3. Net exports do not increase automatically as domestic demand falls. It takes time for prices to fall and external demand to respond. Which is why Greece needs time without austerity and everything that goes with that austerity.

  20. Austerity is economic moral puritism. Reading comments here and the 700 over at Krugman makes it obvious ; Greece has been boy and must be punished. There is no model, no empirical evidence, just vindictiveness. Economics is not a morality play.

    Vindictive you may me, but as Ghandi said, an eye for an eye and we're all blind. You have to start with a simle fact - Greece cannot pay right now. Crippling them won't get money back.

    If in 10 years Germany is back on the Mark they will have lost. And the Geopolitics? Unkown. And unknown is bad for economies, including my darn equity portfolio.

    Happy 4th fellow Yanks.

  21. Sorry one more point ._.

    The US has states like Mississippi . It's like our Greece .They can't run deficits but if they a hurricane or slump they get aid and cash transfers. No one in a rich state like California cares.

    Do the northern Euro countries care about the sourthern ones? This a political question. Europeans prior to the EU did seem to like killing each other . I thought that was the point of it.

    1. Typos due to typing on a ps4 controller.

    2. And a lot of the stabilization happens automatically. As states do better, the feds get more income tax from them, and spend less on the mostly income-linked welfare programs. The reverse is true when state economies falter.

      Which was Krugman's point today regarding Puerto Rico. There hasn't been an official bailout program that had to be negotiated and planned and pushed through a balking Congress. Income fell, so their income taxes fell. The number of unemployed and poor rose, so more people qualified for unemployment insurance, SNAP, and Medicare.

  22. Slightly off-topic (but not really), if you thought Hans-Werner Sinn was bad, just watch, Clemens Fuest will be even worse.

    1. Thank God for Fuest!

    2. Thank God for Fuest! He was a Professor at Oxford - SWL ought to know him - and so knows something about "Anglo-Saxon" economics.

  23. In an interview to an aged Bertrand Russell he was asked what whould he recomend to young people..... he said .... "look at the facts .... never what you think you believe.... always look at the facts"...

    The europen political class forgot that simple premise .... !!!! they think they are on the right truck .... that is the worst part of this story....

    "The rule of law"...... forgeting the spirit under which the same rules where made..... they have the means to transform things....

    The Greek adolescents in power are there because of the same policies that did not work....

    DO not forget Mr Trichet saing how fantastic work he did regarding the low inflation indicators...... then he raised rates because was afraid of a posible inflation pic up.... 2010

    sorry my english

  24. Yes, we eurozoners failed. Now it's time you anglo-saxons who have been screaming from the sidelines to put your money where your mouth is, and loan money to Greece to close the output gap.
    I think the IMF said they need another 50 billion or so.
    What, you don't want to loan money to Greece to help them? In that case please shut up.

  25. Somehow I can imagine that if the same VSP's had been commenting on the US election in the fall of 1932, they would be saluting Herbert Hoover for his highly successful economic stewardship. After all, they would say, despite intense pressure he managed to maintain the dollar peg to the gold and had made impressive (though not ultimately successful) strides toward balancing the budget. And, indeed, the economy had bottomed out and was showing early stirrings of recovery. And now that irresponsible populist Roosevelt was threatening to undermine the whole thing.

  26. SYRIZA knew the only way out was debt reduction and that would not be on offer from the Germans and other countries in the Euro. They also knew that Greeks would not be willing to give up the Euro.

    The problem becomes then how to convince the Greeks to leave the Euro and the Germans et al. to let them while staying in the EU.

    Not convinced but an argument can be made.

  27. Stepping back and taking the macro view of the macroeconomic discussion, I should think it would help (in realism, rhetoric) to keep fundamentals front and center, and the most fundamental of the fundamentals is that to pay debt requires work, and policies that force people to stop working are, prima facie, apt to be counterproductive. In other words, advocates of a policy will put people out of work in order to pay off their debts have a heavy burden of proof.

    This view of the facts is simple enough that it might even have some effect on discussion.

  28. Tatiana Damjanovic5 July 2015 at 12:28

    I have a rather curious question. Who and why adopted word "troika" for "The tripartite committee led by the European Commission with the European Central Bank and the International Monetary Fund"? In my subconscious it has very strong association with NKVD as " the authority to issue rapid and severe verdicts without the right to appeal"

  29. Just so. The "ideology" to which Professor Wren-Lewis refers is Naomi Klein's "disaster capitalism," AKA economic shock doctrine.

    STEP 1: Create an artificial phoney financial crisis (sometimes requires a military invasionas in Iraq 2003; but can also be accomplished by loaning unrepayable money as in Greece 2012, or changing bankruptcy laws to make getting out of debt impossible as in America 1998, etc.)

    STEP 2: Use the financial crisis as an excuse to ram through economic “emergency measures” which systematically dismantle the social safety net and set up savagely regressive crony capitalism looting to strip-and-rip the entire society of its saleable assets via control fraud by multinational corporations.

    STEP 3: When the emergency measures worsen the economy, use that as an excuse to ram through even more viciously regressive neo-feudalism.

    STEP 4: When the neofeudalism gets so extreme that riots break out, use them as an excuse to impose authoritarian Pinochet-style dictatorship in a police state where labor leaders get assassinated, protesters rounded up and “disappeared,” and foreign banks and multinational corporations replace the elected domestic government as the prime organ of governance.


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