Winner of the New Statesman SPERI Prize in Political Economy 2016

Wednesday, 1 July 2015

What I did on my holidays

I'm just finishing a short break walking in Scotland, and the fact that I have not posted a blog over the last week tells you the weather has not been too bad. However I did find the time to write a piece for the New Statesman on Greece, which can be found here. My favourite sentence is this:

"That the governments of the eurozone continue to display a macroeconomic understanding of fiscal policy equivalent to that of Angela Merkel’s imagined Swabian housewife is perhaps not surprising – it has been a consistent pattern since the eurozone began."

That sentence is followed by a few on the role of the IMF, which deserve amplification, and I'll hope to do that shortly after I leave Scotland.

42 comments:

  1. I think the piece you should have written on holiday was the one on Syriza's record on reforms and their reform plans. You could write it even whilst asleep, or hanging from a rock. Or maybe you have actually written it and posted it here after the word "Scotland."

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  2. Great article.

    But I find the following 2 passages contradictory:

    "without Troika assistance it would have had to endure something even worse and far more immediate."

    "If it [the bailout] had not been done, and some of that money had been used to allow less austerity to be imposed on the Greek people, we would not be at the present impasse."

    So do you think the bailout helped Greece or not?

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    1. this is an illustration of how bailout helped Greece currently circulating on twitter https://pbs.twimg.com/tweet_video/CIb4AMuWUAAQyts.mp4

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    2. Sounds like he thinks the bailout was better than no assistance at all, but the troika still mishandled it and it should have been much more helpful to the Greek people than it was. I don't think it's contradictory

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    3. Having read the piece in full, I think he might be suggesting that the troika should have let Greece default on its private sector loans and instead lent new money directly to the government to be used to regrow the economy -- as opposed to a bailout mostly to repay Greece's creditors

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    4. Prof. Wren Lewis

      If this is your understanding a Euro exit of Greece would have been a logical consequence at this point in time. Obviously this was not desirable. You cannot have both. Either default and Grexit, or keeping the Euro.

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    5. Prof. Wren Lewis

      it is disappointing and very unfortunate that you advertise a reasonable and balanced comment in the New Statesman with a quote full of gross simplifications and national clichés. It is about the same level as comparing PK and yourself with commies.

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  3. You might also wish to say something on the changes you have made to your 'Some blogs I regularly read' sections, the ins and the outs, and on the general state of macroeconomic blogging compared to financial journalism over the last 5 years, say?

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  4. Thank you for organising the long line of mistakes that has led us to this point in a clear, rational story. Yet now there is this referendum, and a decision to be taken after that. So, I wonder, what is the main question now? I suppose it is not whether the Eurozone should or respect the democratic choices of the Greek people or not (this question was indirectly answered by those who noted that one can’t run a gold standard in a group of (separated) democracies: what that question tells us is only that two different systems have now clashed). The main question, in my view, is whether or not the euro will become the currency of a democratic political union, in which the next crisis will be addressed by a European government answerable to a genuinely representative European parliament (in such a framework the question above does not arise, for it will be the democratic process to provide the solutions for which we now rely on rules – necessarily imperfect – such as the stability pact or the conditions for the OMT programme or EFSF-ESM assistance). And, given how big the risks and opportunities before Europe are, I would judge the solution of this crisis by one yardstick only: whether or not the outcome brings us closer to that form of political union. I fear that a ‘Yes’ vote, which is likely to be followed by more years of austerity in Greece and procrastination in Europe, will leave us even more distant – through deepening divisions, fatigue, dissatisfaction, and a feeling of hopelessness and lack of political agency – from that project than we are now. Whereas the crisis that is likely to follow a ‘No’ might lead national governments to move towards political union (hoping that it will be a controllable and controlled crisis, not a destructive one). So the Greek referendum brought us to an important crossroads: and the paradox is that while many say that Europe is blind to the democratic principle, it will be mainly Greek voters who will choose which way Europe goes: gradual dissolution, or a leap forward.

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  5. So.

    yes or no?

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    1. Play fair! What about a "don't know" or "none of the above" option?

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    2. There are only two options on the ballot paper.

      Not that S W-L's political judgment has proven very good on Greece

      http://mainlymacro.blogspot.de/2015/01/let-us-hope-for-syriza-victory.html

      His economic views are always interesting of course..

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    3. If my political judgement is so bad (and I agree, I did underestimate the inflexibility of the Troika), why are you so keen to want a yes or no?

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    4. because that is the only question that counts (at least between now and Sunday).

      So.

      yes or no?

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  6. > would have had to endure something even worse and far more immediate.

    Arguably, the current situation is at least as bad as what would have happened then. With the benefit of hindsight, wouldn't Greece have been better going it alone from the start? i.e. refusing to be part of these bailouts.

    The government would have had to run a surplus immediately, but then again it is expected to run an even bigger surplus today.

    And the banks would have had to be resolved without any Greek state support. Again, that sounds like the situation today.

    It would have required a drastic restructuring of the Greek banks' balance sheet. Perhaps a significant haircut on all deposits at Greek banks. But it would arguably have been better for Greece than what has transpired over the past five years. And it would be better for everyone in the long term, moral hazard and all that.

    Come to think of it, we might get exactly this in the coming months. Greek state fully cut off from the markets, and running a surplus immediately. And Greek banks restructured drastically. What was the point of the last five years then?

    But, of course, the powers-that-be had another agenda.

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    1. Aaron,

      Argentinas GDP dropped by 60% in a year after default. Greece GDP dropped by 25% over 5 years.

      So there are worse scenarios!

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  7. I very much like most of your writings, but on this Greece affair I'm afraid can't agree with your conclusion.
    You say that "the rescue package, designed to ease the Greek government’s transition to balance, was far too small. The Troika thought that the Greek government could quickly cut spending and raise taxes with little consequence for the rest of the Greek economy".
    But then (forgive me if I'm too blunt) out of thin air you conclude that out of its own making, the Troika, "was completely and predictably wrong. Sharp and intense austerity played a great part in reducing GDP by 25 per cent and creating mass unemployment”.
    Then you pivot over the private creditors bailout process, but thinking it back, you are fair into considering that in a situation which required more fresh funds, perhaps the EU (which by the way is comprised by countries with their own people, and wishes or needs) couldn't sell that easily to the voters or just to their own technocratic fiscal planning, because “… it would have saddled Greece with a debt it surely could not have repaid, and (again) may have been unacceptable…”. Nonetheless after this, you return to your earlier implied assertion, concluding that they were cheap, due to either their "austerity" minds, or the media lobbying, or whatever. By the way you don’t even mention that after 2012 restructuring, the Greek debt bears a fancy interest rate, quite near to what it has been customary to much more creditworthy countries. Which is of no less importance, considering that decisions are always taken in a context of some risk.
    But there was no alternative to bailing out the creditors back in 2010, because in Europe they had no clue of the mess in which they had got into, caused by the unfortunate idea of sticking to a unique common currency, between members that do not think deep inside themselves as brothers. No matter how stupid that was, you may agree that you cannot give up on such an issue just like that. So contrary to your opinion, if private creditors had got a hair-cut, then out of the resulting uncertainty in 2010 the euro would have collapsed. Only after Trichet departed, the ECB could get it right, and the restructuring was done.
    All right; you proceed that “over the past year the Greek government has managed to achieve approximate primary budget balance”. But surprise, there it comes a new Greek government that builds on the lie that it is possible to stay in €, ask for additional relief & fresh funds and get them, all along calling names on capitalism, the f. € zone and any other business which certainly is not theirs to decide for the whole world.
    By rejecting several rules that allow capitalism to work, the Greek government has had a stubborn & frequently inconsistent behavior, eluding any firm commitment to anything less than asking for debt restructuring & yet more funds through some “creative” way involving securities held by ECB or whatever the vehicle they are in (surely subject to a new restructuring afterwards).
    In fact the Europeans know very well that they can only collect pittances from Greece for quite a while, and that they will have to give additional debt relief in the future But at least they have to be sure to take out of the Greek government’s head the foolish idea that if the EU doesn’t accept their demands, the monetary union and the world’s oligarchic and savage capitalism will implode for good. Hence Syriza will have to comply and cease with its threats, and only then ask for the rest. If it doesn’t suit her, surely the door is open for her to go..

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    1. "But there was no alternative to bailing out the creditors back in 2010 ...." You need to say why.

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    2. You are right. It seems something is missing in my writing. But, in a way, it was intertwined on both arguments, yours & mine. Needless to say that is entirely my fault, for leaning on your usual honesty presenting facts and interpretation no matter what, makes no excuse for clarity.
      So, in 2010 money was needed: a) to pay debt; b) give Greece room for structural adjustment, whose magnitude of course depended on the circumstances, relative strength in negotiating and the inevitable second guessing of both parties.
      By then, what the EU knew was that bookmakers had taken Greece for the lame duck European Lehman’s relative in the world financial nightmare, so that no one would lend her a dime. And here’s the point. If you let her down, what would have happened to some other countries, with let’s say half or a quarter of her troubles. For it is worth remembering that we are not here with a flexible exchange rate system, not even one in which to assume (at least for some cases) the collection of your monies back, be it by year 4000. In short, what would have been the guess on prospective sequential “hair-cuts”? That all would be just fancy painted paper. Hence the outcome was crystal clear: pay & shut up; it’ll be easier to give some away later, with less of an audience.
      The danger loomed on the misunderstanding, until some clever guys, caught between the old timers of the gold standard era, and the rumbling of bullying speculators, said well, you want German? Ok I’ll give you some. Give me all that you want of your Spanish stuff (or Italian, or Portuguese or whoever deserves it) and fuck off. We know they'll pay.
      That restored Say's law a.k.a. S=I. And then things got back to normal, when reasonable long, long term fiscal reliability pays handsomely well against often crazy capital movements.
      Moreover, that allowed to Greece’s restructuring & (some) hair-cut thereafter.
      As for the infortunes of austerity in Greece and who is to be blamed, I think one has to have a deeper look at the strange bulge in government spending around 2011, which for me without better insight, looks like the effects of reallocation to cover more people or something of the sort, such that there has been more uneven pain than overall figures suggest. I’m sure that you as a Keynesian & Fiscalist expert (which is what I like of you most; I’m 57, so around the same geological layer) may get way better assessment on that clue. The same goes for violent shifts in expenditure targets, with the subsequent change in relative prices. How much you can do to smooth that and the volume of funds needed to address it, is not for me to tell.

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    3. SW-L asks why there was no alternative to rescuing the banks that had loaned to Greece in 2010. My answer is: “otherwise the European banking system would have crashed”.

      And that’s the umpteenth time the fractional reserve bank system has been rescued from its own follies. In contrast, under full reserve, bank shareholders would automatically take a big hair cut (or would never have loaned to Greece in the first place), so no taxpayers’ money would have been devoted to rescuing private banks.

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  8. The difference the Swabian housewife and Simon Wren-Lewis is that he thinks the money is always available and she knows it isn't.

    She's right.

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    1. Yes... the same way she and you know supply creates its own demand, right?

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    2. Anonymous No.32 July 2015 at 07:09

      Exactly. Always worth remembering. Lest we forget macro economics works just like a household... (btw Anonymous No.2, I do get your irony)

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    3. The Swabian housewife is still right.

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    4. Yes she is. But only about her household.

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    5. Yes, repeating and insisting that the Swabian housewife is still right will of course make it so. (You might want to let her know than unlike her household an economy has its own central bank, can issue currency, can issue bonds, collect taxes, can rollover debt as it matures...can honour the debt it issues given it is sovereign over monetary policy ( though constrained by inflation possibility here)...)

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    6. Simon:

      And why aren't the Greeks doing all that? Then everything would be hunky-dory.

      Is the Swabian housewife on to something?

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    7. Look at the results of the Swabian house wife's economic and fiscal measures on Greece. Does it look like to you she's onto something?

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    8. @Anon - If you hadn't noticed, for example, the Greeks can't issue their own currency.

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    9. The Swabian housewife in action:
      https://www.youtube.com/watch?v=PhhzJ-yNJzU

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    10. Because they don't have their own Central Bank. The issue isn't that greece has hit some sort of boundary of realism or good taste in terms of macroeconomic policy, it is that they have hit a wall of political resistance from those who share their Central Bank.
      In a common currency area, this kind of thing requires co-ordination, which would require inflationary policy in Germany. Instead, you have a quasi-moralistic view about debt, peddled on the basis of this imaginary salt-of-the-earth representative household, and it is this myth which prevents the policy levers SWL has referred to from being operated correctly.

      The Swabian housewife is the obstruction, not the solution!

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    11. gastro george2 July 2015 at 15:53
      Anonymous3 July 2015 at 04:08

      Obviously, Greece doesn't have a central bank and cannot issue its own currency.

      Doesn't that make it closer to a household than an "economy"?
      If so, shouldn't it follow the rules of a Swabian housewife rather than ignore that it has no own central bank and cannot issue currency,given it is not sovereign over monetary policy?

      And isn't that true of all the Eurozone countries?

      Pieman

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  9. SW-L claims that more demand inside Greece will enable the Greek government to collect more tax and thus repay creditors. (Para starting “From a macroeconomic viewpoint…”) Nope. More demand inside Greece would suck in imports which would make Greece even more indebted to other countries or to banks and non-bank entities in other countries.

    The extra demand will of course enable the Greek government to collect more tax off the Greek private sector, but that’s just a re-arrangement of wealth or money WITHIN Greece.

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    1. Wait, so more demand will give the Greek government more tax revenue? What prevents that from being an international re-arrangement through the government using that revenue to repay creditors?

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    2. It all depends in whether the extra money that enables the extra demand is a gift or a loan to Greece. Obviously if it’s a gift, then no problem. By the same token if the US gives the UK $100bn then loads of Brits can help themselves to 2nd homes in Florida and Cadillacs without the UK as a whole going into dept.

      As to Greece, if 10bn is loaned to Greece for the purpose of boosting demand in Greece, then Greece is initially an extra 10bn in debt. When spent, very roughly 1bn will be spent on imports. That’s another 1bn of debt. If the Greek government recoups all that 10bn after a few years and repays creditors, there is still the 1bn of imports to pay for.

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  10. Since early 2008, southern Europeans have been allowed to borrow and print themselves out of the pain, but this has not prevented the collapse. In 2013, there were signs of recovery, but 2014 showed only a sideward movement in manufacturing output. Spain's and Greece's unemployment rates are around 25 percent, while youth unemployment hovers around 50 percent. By January 2010, when the first debate about Grexit flared up, Greece had received €48 billion, or 22 percent of its GDP, in extra credit from the printing press (Target credit). Now, five years later, Greece's stock of net credit from foreign public institutions (Target plus fiscal) stands at €267 billion, which is 145 percent of GDP. (This is, incidentally, equivalent to twenty-nine U.S. Marshall plans for Germany, given that the Marshall aid that Germany received in the post-war era added up to 5 percent of Germany's GDP in 1952. The Marshall aid was part of the forgiveness of German debt, amounting to 20 percent of GDP, mentioned in the London Debt Agreement of 1953.) Greek finance minister Yanis Varoufakis is right when he says that all this help was useless, given that the country's rate of unemployment now is more than twice as large as five years ago and that the Greek state is bankrupt.
    Furthermore, the loose budget constraints have worked against the re-adjustment of relative prices. By conducting capital and hence investment demand from north to south, the ECB's OMT program and other rescue operations have dampened both the inflationary forces in the north as well as the deflationary forces in the south.
    Even after six years of crisis, the realignment of relative prices of Italy, Portugal, and Germany has been infinitesimal. In terms of the GDP deflator, only Greece and Spain have devalued by 7 percent or 6 percent, respectively, relative to the rest of the Eurozone, but that is clearly not enough.
    If the ECB stops luring savings capital from north to south and gives up its "whatever it takes" philosophy, markets would by themselves bring about the necessary realignment by inflating the northern European countries. In particular, the current German construction boom, a result of investors' attempts to shield their wealth in turbulent times, would be rekindled and lead to higher wages and prices in Germany, boosting German imports and undermining the competitiveness of its exports, thus driving the Eurozone back towards an equilibrium of relative prices. That is a neoclassical recipe for a neoclassical problem and the neoclassical therapy should be flanked by institutional reforms in Greece. The reforms I have in mind are those which according to Acemoglu and Robinson would lead to “inclusive” institutions. That takes time and in the meantime the Drachme as an parallel currency would be helpful.

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  11. SWL means well but ...

    The 900+ word article in the NS was a wasted opportunity.

    Who reads the NS? Labour people and two Tory interns who are paid to read it. SWL had a platform many write but few are read.

    On the 8th Osborne will stand up and again compare the UK with Greece to justify further austerity. He is that predictable. The labour response will point out the hardship to be handed out to our weakest citizens. There will be no labour economic alternative. Labour need ideas.

    The mistake the Greeks made was to give up the Drachma. A labour response to Osborne is to say we have our own sovereign currency we have not made the Greek mistake and Osborne doesn't know how to use our most powerful economic weapon. The pound.

    The snarky remark about a Swabian housewife is counter productive. To compare Merkel to a Swabian housewife boosts her in Germany. A better approach is to state that the European Project is in real danger. Growth in Europe is the only way to save the European Project. Europe needs a concerted fiscal response to bring growth. We need bigger government deficits in the major European countries and we need them now.

    Leave the snarky remarks to those of us below the line.

    thats it fartig

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  12. The problem with that piece is that, unusually for an economist, it is backwards looking. it concerns what the errors in the past were.

    But, frankly, so what? Economics is not a morality play, we are often told. The question is what should be done going forward.

    Now, in theory the optimal solution would be some kind of debt restructuring. but that isn't on the table. What Greece had on offer was not *that* appalling, at least in the short term. The refusal to accept it seems to have led to disaster and collapse in short order.

    Krugman in the NYT at least seems to me to be answering the question that needs answering today, as opposed to what should have been done in 2010. Is it yes or no.

    He says no, and leave the euro. I think this is crackpot. Greece's debts are denominated in euros. How will Grexit change that? How is there any Grexit path that does not involve Greece becoming an economic island cut off from everywhere else (and a very small one)?

    The only option now is to vote yes, and just accept whatever is now on offer from Eurogroup, which will be worse than last week. Yes that postpones the decision until later, the solvency problem doesn't disappear, but we are looking at a 25 year timeframe to solve that.

    Syriza seem to have hopelessly overplayed their hand. The negotiating strategy seems to have been "no agreement will be bad for you - as well as terrible for us". This was plausible when the world was full of fear in 2010, not so much now.When the other side said no, they had no exit strategy.

    Like their supporters, they seem to have mistaken an economically sensible case for a remotely viable political one. The lesson from taking people like Varoufakis more seriously than they deserve is clear.

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    1. Never a good idea to examine past mistakes - it might even make you do something more sensible in the future!

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    2. To say that it is unusual for economists to look backward and reflect on errors made in the past is wrong and also displays an enormous ignorance of economics and the output of economists. Examining and reflecting on past errors and good practice from events of years gone by is almost a pre-requisite in macro econ based studies, textbooks etc.
      as for krugman saying 'no', as he briefly explains, to vote yes means more of the same economics of the madhouse being imposed upon them by the troika, so more of the hardship and no hope for the future, or a 'no' vote, which would very painful indeed, but as he points out, countries have taken this very difficult path before, and have come out of it in time...so at least there is the prospect of a future for Greece...unlike with the 'yes' vote if that does mean 'more of the same', which doesn't work and is not working.

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    3. Hugo(Spinning)4 July 2015 at 11:54

      I don't agree.

      Economics is a consequentialist discipline. Economists tend to be utilitarians. That makes the discipline remorselessly forward looking.

      That means the past is just evidence. It provides us guidance as to how we should behave in the future; see S W-L's reaction to my post. I do, of course, know full well that economists spend a lot of time looking at this. My point is rather why they look at it.

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