When I recently visited Berlin, it quickly became clear the
extent to which Germany had created a fantasy story about Greece. It was an
image of Greeks as a privileged and lazy people, who kept on taking ‘bailouts’
while refusing to do anything to correct their situation. I heard this fantasy
from talking to people who were otherwise well informed and knowledgeable about
economics.
So powerful has this fantasy become, it is now driving German
policy (and policy in a few other countries as well) in totally irrational
ways. In particular, Germany refuses to discuss debt relief with Greece, yet
seems quite happy to see Greece leave the Eurozone, the inevitable consequence of which would be that Greece
would obtain much greater debt relief through default. Talk about cutting off
your nose to spite your face. What is driving Germany’s desperate need to rid
itself of the Greek problem?
One possible answer is that Germany finds the truth about
Greece too upsetting, too challenging. This is because since 2010 Greece has done most of what the Troika asked of it. In
particular, changes in its government’s underlying primary budget balance (i.e.
the degree of austerity enacted) have been greater, by a long distance, than
any other European economy. For many outside Germany what has happened to
Greece as a result is hardly surprising: austerity is contractionary, and
austerity on steroids is ruinous. Yet Germany is a country where the ideas of Keynes, and therefore
mainstream macroeconomics in the rest of the world, are considered profoundly
wrong and are described as ‘Anglo-Saxon economics’. Greece then becomes a kind
of experiment to see which is right: the German view, or ‘Anglo-Saxon
economics’.
The results of the experiment are not to Germany’s liking. Just
as ‘Anglo-Saxon economics’ would have predicted, the results for Greece under
the Troika have been a disaster. After dutifully taking the medicine for years,
and seeing the collapse of their economy, finally the Greek people could take
no more. Confronting this reality has been too much for Germany. So instead it
has created its fantasy, a fantasy that allows it to cast its failed experiment
to one side, blaming the character of the patient.
The only thing particularly German about this process is the
minority status of Keynesian economics within German economic policy advice. In
the past I have drawn parallels between what is going on here
and the much more universal tendency for poverty to be explained in terms of
the personal failings of the poor. These attempts to deflect criticism of
economic systems are encouraged by political interests and a media that
supports them, as we are currently
seeing in the UK. So much easier to pretend that the problems of Greece lie
with its people, or culture, or politicians, or its resistance to particular ‘structural
reforms’, than to admit that Greece’s real problem is of your making.
Even following all your arguments in what you say, isn't there another argument from a German perspective? The risk would be to turn the euro zone into a transfer union without any sort of political union (and without any democratic legitimisation). What has been the cost of German re-unification? I don't know, I'm not an economist. But following your macroeconomics 100%, the case still isn't straightforward, or is it?
ReplyDeleteSo what? People have claimed before that the Maastricht treaty left this bit out because a crisis would create a de facto tranfser union, which would in turn force a political union.. 'naturally'.
DeleteSo what? Firstly, that would be a gross violation of the German constitution. And it would not be a very democratic process to force the Germans into a political union against their will. If that is the plan, then why not ask the people. In fact, ask the peoples of Europe. Second, it is probably other nations and/or their governments in Europe who are more opposed to a political union than Germany. Schäuble would likely think it a great idea to have some grand United States of Europe. If you say that some people have claimed something - that's hardly legitimisation for, well, anything, is it?
DeletePlease don't get me wrong. In my opinion, huge mistakes were made, exactly when people thought it would be a good idea to force a political union against the presumed will of the peoples of Europe. Of course, huge mistakes then were made with this horrible austerity nonsense. And a lot more mistakes were made in between. At this point, it seems to be the Greeks who have to pay the biggest price for these mistakes.
However, I don't think there is an easy, straightforward solution to all of this. In particular, I think there needs to be a democratic process to figure out what the people all over Europe want to do. In my view, that is the biggest sin of the German government: to pretend that everything is under control and thereby preventing exactly the debate needed to sort out a response to our problems.
@Christos: does this wishful thinking of yours explain the irrational behavior of Greek people wanting to stay in the eurozone at any cost?
DeleteUnfortunately for them, the people in the creditor nations don't want a transfer union, they will fight tooth and nail to prevent it. They would rather limit the eurozone to a Northern block with comparable economies (which was the original preference of those countries anyway).
Crucially missing from this story about transfer unions is that powerful members of the Eurogroup (including Germany) have pressured the ECB to break the law and withdraw liquidity from Greek banks.
DeleteThe problem here is that this is the end of the single currency. You don't have a single currency if banking problems in one region result in bank runs because the central bank won't do it's job. As any members of a Neuro will find out when the NL banking system blows up...
If Germans don't want a political union they should just leave the monetary union. Or do they want all the benefits with none of the costs? They are not exclusive, for the monetary union to work, you NEED the political union. Look at Canada. There are "have" and "have-not" provinces. There are provinces with high productivity and others with low. Provinces run their own budgets for health-care, education and other things. Unemployment insurance is federal.
DeleteAlan7 July 2015 at 14:25
DeleteIn 1991, German chancellor Kohl declared in a speech to the Bundestag that a currency Union could not work without political, i.e. fiscal union. He promised that he would not give up the D-Mark in the negotiations of Maastricht without political union. He broke that promise because the other countries of the Maastricht refused political union. So you should blame them and ask them to leavethe monetary union.
@Alan did you know that the way you described Canada is exactly the way Germany itself is constituted? Germany is a federal country. As well Germany proposed back in the 90s for the EU to become such a federal political union.
Delete@The Author and Christos did it ever come to your mind that the rules set with the bailouts by the Troika werent even close to what the Troika itself wanted? Because of the way the EFSF and ESM are setup the the debts have to be guaranteed to be sustainable. In order for this to happen Greece would have to go through reforms of the gouvernment body the public administration the payroll taxes (indirect: pension system) and the juduical system (quick link but there are many more references out there:http://www.globalopportunityindex.org/opportunity.taf?page=rankings).
If the Troika would have enforced all this the greek gouvernment and public would have chased them off on the very first sight. But back then it simply wasnt possible for the Eurozone to default Greece and cut them loose because of the risk of infection throughout the periphal countries plus France. So basically the policy of the Eurozone so far was buy time for themselves to restructure Greece debts while at the same time give Greece the opportunity to at least get the necessary reforms under way. According to IFO institute the Greece gouvernment got about 160 billion Euro out of the 280 billion Euro packages for that job (the other 120 billion Euro going back to the Eurozone banks to keep them afloat). With those 160 billion Euro 2 things happened: About one half was used to cover the flow of private savings out of the country instead of regulating it through laws and the other half was used to keep up the consume rates of the people. Nothing sustainable was acchieved with that money.
And now the final deadline arrived. The Eurozone decided that now the risk of contagion for the rest of the Eurozone became manageable compared to the risk of public uprise against another bailout in the creditor countries.
And while the Eurozone restructured, consolidated and solidified (even though I personally am uncertain wether that was enough to survive a Grexit) Greek is next to an Abyss. But at least they are still standing proud. Still not understanding which chances they got in the past. In 1981 when they joined the EC, in 2001 when they became a Euro member and in 2012 when they got their second, not bank bound package and haircut. So keep on blaming everybody else. But I fear that wont help you to have a better future.
You make some good points. However, you view of what Greece actually did is narrow: See Karl Whelan: https://medium.com/bull-market/the-ft-lets-itself-down-again-francesco-giavazzi-on-greece-92988bc675eb?%3Fftcamp=crm%2Femail%2F_DATEYEARFULLNUM___DATEMONTHNUM___DATEDAYNUM__%2Fnbe%2FMartinSandbusFreeLunch%2Fproduct
DeleteOther countries transferred vast amounts to Germany at the end of WWII, including in the form of debt relief and the US Marshall Plan. Did that turn the world "into a transfer union without any sort of political union"?
ReplyDeleteAs SRW pointed out on interfluidity, it is the willingness to frame structural dynamic coordination issues in terms of national characteristics that is the most shameful aspect of this sorry business, the betrayal of the European project. They may lack the 'Keynesian' cognitive capacity to recognise the limits of a policy internal devaluation, but they should still be able to recognise that from stock flow consistent perspective there will always be a Greece in the Eurozone under current arrangements. People go mad together but wake up on their own.
ReplyDelete''but they should still be able to recognise that from stock flow consistent perspective there will always be a Greece in the Eurozone under current arrangements.''
Deletewhy didn't Greece realize this? Do they lack the cognitive capacity too or did they join the eurozone in bad faith assuming there will be fiscal transfers from the creditors who lacked the cognitive capacity to realize this?
'Did they join in bad faith'. I don't know what they were thinking. I know that the 10% of GDP fiscal component of the EZ specified in the McDougal and Werner reports was dropped in Delors and at Maastricht. It wasn't dropped because they knew it wasn't key, but to get the political ball rolling. But they put in a proto EU treasury in the form of the EIB and some, like Stuart Holland who was there, say the politicians knew it would fail unless the fiscal piece was activated. So there was indeed bad faith at the beginning, because the founders (at least outside Germany) knew it couldn't work. But there was also hope the politicians today would continue to act in the spirit of the project and build the burning house up, away from the flames. The bad faith is with the past, not from Greece.
Deletethe scourge of monetarism blinded them.
DeleteAll true, and deeply depressing also.
ReplyDeleteI think most people associate Anglo-Saxon economics with Thatcher, Reagan, Neo-liberalism, IMF Structural Adjustment Policies, Sargent, Fama, Prescott etc than Keynes. I think an interesting thing about Germany is although it is arguably anti-Keynesian in that it does not believe you should fine-tune an economy through macro-policy, it is very pro-government and anti-market (ie does not like laissez faire- but has lots of regulations). There is a centralised wage setting process that adjusts inflation. It is basically socialism that follows rules in macro-policy, including as in the DM era, a strong and stable currency. Exchange rates, monetary and fiscal policy, are generally not preferred instruments for demand management. THat is left to prices and incomes policies and the corporatist centralised wage fixation system.
ReplyDeleteOne thing for sure, Germany is not neo-liberal - at least to itself. I think ideally it would like Greece to be part of its system, which would only happen with fiscal union.
I am pretty sure the person who started using the term Anglo-Saxon economics was French who did not like British and Americans pontificating about how France should deregulate its economy and wind back its welfare state.
DeleteYes, exactly.
DeleteThis is absolutely nonsense what you tell here. The centralist wage fixing system is not existent. You have certain industries were you have bargaining between trade unions and employer organizations which results in what is called Tarifvertrag. These are private organizations that ultimately represent workers and employers. This is often not without frictions, Germany experienced a string of strikes this year. Everyone remembers pilots, train drivers, etc.
DeleteThe biggest bul*sh** is what yoú call wage fixation system. There is no government intervention in this process. If you want my explanation why Germany had such moderate wage inflation it is the following:
After unification starting in 1990 Germany had a kind of boom and bust scenario in the nineties with fiscal expansion in the nineties, suddenly "negative" current account (unbelievable today, but look at the numbers) and later rising unemployment and slow growth (the sick man of Europe story).
Before Schroeder started Agenda 2010 he had double digit unemployment (therof up to 20% in the Eastern part) soaring social security spendings and increasing uncompetitiveness esp. due to illiberal labor markets.
By introducing Agenda 2010 he made it easier fire people and reduce the incentive to stay unemployed for longer time by reducing the time and amount of unemployment payments. Unemplyment peaked in 2005 at 12.5% and it took nearly a decade to halve it. The liberalization of the labor market and the reduction in unemployment benefits led to a weaker negotiation position of trade unions.
In the last three years Germany had one of the highest increases in real wage rate amongst Eurozone countries.
Shouldn't you be happy for Greece then? If the default will result in more debt relief isn't that better for Greece? Why are you against the exit? I am confused...
ReplyDeleteI honestly don't think that's actually true. Default will not decrease how much European governments will get back. At some point the Greek government will have to go back to the creditors and reach an agreement on the previous debt. They will offer to pay a part of it, as all defaulting countries have always done. Since the currency union is sub-optimal, breaking the union must be the way to increase the amount of resources available to repay the creditors. Greece will be able to use devaluation/monetary policy again to offset fiscal policy and things will get better. For everyone...
I think German politicians might find it easier to face the losses this way. A transfer union requires Northern Europeans to govern Greece as there are a lot more Germans than Greek and any political union will inevitably reflect the will of the majority. Nobody wants that, so they need to part ways. Their is not enough solidarity between this groups for the union to work.
All this talk about Germany greatly benefiting from a weak euro is wrong. The example of China, Sweden and Switzerland prove that they could keep the euro/DM down with QE or other policies. The Euro was pretty strong until QE was announced. So the Euro is mostly a function of European monetary policy not the inclusion of Greek in the area.
When did I say I was against (or for) exit?
DeleteWell you make the case there are going to be less resources to pay creditors in case of default, which seems like a strong argument against exit (since it would seem to imply there will be even fewer resources for the Greek themselves).
DeleteDo you think the transition costs will swamp the benefits of a more optimal monetary policy?
Krugman clearly thinks that Euro exit will solve many problems, do you disagree?
You misunderstand. Creditors will get less after Grexit because they will then have less power over Greece.
DeleteI disagree... They might have less power over Greece, but they will still have a pretty powerful hand (e.g. EU membership and access to European financial markets) and even if they get a smaller slice of the pie, the pie itself will be bigger. Anything which increases the pie will be net positive for creditors. We will never know since we cannot run the experiment twice, but I don't think it's as obvious as you make it...
DeleteJust because you default, your debts don't just disappear. Ask Argentina. Even when the large majority of creditors have agreed the restructuring, they are still struggling with the hold-outs. Are you really arguing that Europe will have less influence in Greece than US in Argentina?
Anonymous7 July 2015 at 04:59: You can't talk sense to a wooden post.
DeleteAnonymous 7 July (original post) - Sorry, but you're simply wrong, even if you do buy into the German Frieburg School of economic thought (FYI - the article doesn't mention it, but it's the dominant school of economics in Germany by Germans and not accepted or used outside of Germany, except perhaps in pockets of Austria).
DeleteYes, Germany will get back considerably less money if Greece defaults. This is well-known and acknowledged by the creditors and Merkel/Schauble. They view this as a "cost of doing business" or the amount it takes to make an example of Greece to the rest of the eurozone countries if they consider leaving the euro or only request debt relief in the form of an interest rate cut. The IMF reports that the creditors would lose and extra 80 billion euros at least from a default.
On the exchange rate thing: again, 100% wrong. You cannot legitimately compare a country that is one the euro to countries who have their own currencies because euro countries, including Germany, do not have the sovereign right to engage monetary tools such as QE. That is the responsibility and role of the ECB. Secondly, yes, the euro is significantly undervalued for the German economy (numerous studies and vast amounts of data confirm this, not the least of which is the fact that Germany has the world's largest trade surplus and trade imbalance, not China, which is a country and economy much larger than Germany's. China is also undervalued but in their case, it is more direct and deliberate since China does not have a free floating currency - it has a managed currency with semi-official pegs, especially to the US dollar, and still the Germany/euro undervaluation is larger). Conversely, the euro is greatly overvalued for some economies, including even France and Italy. Again, plenty of data available to show this. So, yes, Germany has benefitted enormously from its position in the euro. It is effectively an N-th currency in a gold exchange system (such as the US in the Brettonwood system after WW2) where all the other economies in a currency union are tied to one economy (Germany) and that one economy sets the monetary policies for the whole group. The benefit of being the N-th currency in such a regime is that you get to "export" any and all inflation to your fellow currency union members, but you also can export deflation, which is actually worse, which Germany is doing and the US never did under Brettonwood.
Oh, and yes, I am an Anglo Saxon economist. And an American. And an EU citizen (Irish). And did a master's dissertation on 20th century economic history. So, please save your breath and time and rather than responding, you should go pick up a non-German economics textbook, or at the minimum, a history book or last week's IMF report.
Tangential, but why isn't there a fixed, measurable way to calculate the effects of proposed policies by either side used? Any number of reference models can be employed for this purpose. Otherwise, each side can just make numbers up as they go along.
ReplyDeleteThose standardized, measurable calculations exist in "Anglo Saxon economics". The problem is that German politicians are making judgments based upon their sense of morality via disproven austerity policies rather than making judgments based upon reliable, tried-and-true economic wisdom that has held up repeatedly, including throughout the entire Greek crisis, that clearly indicates how you can calculate the effects of austerity, deflation, etc., on an economy. The vast majority of German politicians follow a uniquely German school of economic thought called the Freiburg School that is a pre-1930s form of economic thought that is not taught or adhered to anywhere outside of Germany, except a few pockets in Austria, because its theories are rejected by economist from the left and right around the globe. Seriously. Monetarists and Keynesians alike reject their ideas, especially as it relates to the euro and Greece. Indeed, while there is some differences in explanations, Monetarists and Keynesians both agree on what needs to happen in Greece (debt reduction) and why the "bailout" has been an utter failure that has made matters much worse.
DeleteSurely there must be more then one way to manage a successful economy. You can hardly argue that Germany is not a successful economy. You might prefer a different way, but Germany's model works for Germany. I think it's difficult to export it, but you are asking them to abandon a system that worked well for them for many years. You might think that demand management through fiscal and monetary policy is the optimal way, but Germany has managed it economy through different channels (with more direct cooperation at the level of unions/employers) for a long time with successful results.
ReplyDeleteI don't think it's fair to impose a change of that model to Germany, when it was not agreed when the Euro started. There are 2 possible ways to modify the Euro: abolish it or make every European country agree on a single model. Well they cannot agree, so it should be abolished. Work on procedures for a more orderly exit from the monetary union and let each country decide what it wants to do... The dream of a European superstate cannot be imposed on the European people... Until there is no agreement, let the European project be more humble...
Germany has never imposed austerity of the Greek kind on itself.
DeleteIt is not wholly true that Germany is unaware of Greek needs regardinf the huge debt. The Five Point Plan expounded this morning through the Bild Zeitung is as follows: (1) Grexit, (2) No third bailout, (3) Haircut of 50% of Greek debt, (4) Humanitarian aid, (5) EU structural funds (35bn euros till 2020) for investment in Greece.
ReplyDeleteSo, being really Keynesian, you must not stick to the gold-standard at all costs. This could be valid for Greece regarding her present gold-standard, i. e., the euro.
I don't keep up with Bild, but the simultaneous proposal of 'No third bailout' and '50 percent haircut' is so ludicrously self-contradictory that I believe it's real.
Delete'Grexit' x '50% haircut' = 'very little/no debt relief' because of the rapid devaluation of the new drachma. That is, unless the Greek gov debt was suddenly denominated in the new currency rather than Euros.
DeleteWhy is 50% hair cut plus no third bailout self-contradictory? (Serious question, not a gotcha-question).
DeleteBecause the effect of the hair cut would be too small given the devaluation (i.e., we'd need, a 70, 80 or 100% haircut)?
Or because if you are going to give up a lot of money you might as well give them the bail out and keep the debts booked as assets on your side of the ledger instead of writing them off?
Isn't the Bild proposal in effect a quasi-standard IMF Program:
1) devaluation
2) major debt restructuring
3) hard budget constraints (no further bailout)
4) stimulus that doesn't even have to be paid back (structural funds)
5) humanitarian aid to tidy up (some of the *ample* chaos)
There's a deep irony in Merkel and Hollande demanding that Tsipras bring "economically credible" proposals to the table. They were part of the Troika's utterly failed policies - they should have no credibility left... but as with media macro, this is not how it works...
ReplyDeleteAs for opposition to Keynesianism being the only thing particularly German, I wonder how much influence the language has in this. As in that the German word for debt, Schuld, is the same as for guilt. I certainly do think the calvinistic protestant culture of Germanic countries has an influence of their view of debt. These probably are not the cause, but they sure make it easier to tell the myths.
ReplyDeleteYou should read the piece I wrote that I linked to on this. If these were that important, you might expect Germany to have lower government debt itself.
Delete74! http://www.tradingeconomics.com/germany/government-debt-to-gdp
DeleteLet's do a thought experiment: shortly after the crisis Greece came clean that they lied about their debt and deficit levels and the music stopped, no more money.
ReplyDeleteLet's assume the other eurozone countries would not have bailed out Greece, Greece would have defaulted on debt, and banks would have lost (part of) their money (assuming this would not have caused contagion).
What would have happened in that scenario? The IMF would have stepped in? What would have been their solution? I cannot believe that the IMF would have proposed fiscal stimulus.
Somehow Greece would have needed to start living within it's means and therefore austerity. And since Greece cannot devaluate in the eurozone, they would be faced with a structural trade imbalance and competitiveness problem that they suddenly need to solve as nobody wants to loan them more money. Therefore they still would need to turn to internal devaluation, pension cuts and many more painful measures.
In short, would it have made any difference if the other eurozone countries would not have stepped in with their approach? In that case I can't see how you can blame the eurozone countries (or Germany).
Who you can blame is Greece who has been stupid enough to join the straightjacket of the fixed currency arrangement as there is simply no reasonable solution anymore to help a country in the position of Greece.
I agree with a lot of what you say: see this post
Deletehttp://mainlymacro.blogspot.co.uk/2015/06/the-eurozones-cover-up-over-greece.html
But you miss one crucial point. The European governments did intervene, to bail out Greece's private sector creditors, and thereby keep Greek debt unrealistically high. If this debt had stayed in private hands, Greece would have the option of default/restructuring which the Troika say is now off the table (because they became the creditors). That is why Greece is now in a much worse position than if the European governments had done nothing.
(Of course they could have used the money they spent bailing out private sector creditors - including their own banks - to provide more transitional loans to Greece, allowing less drastic austerity, but that is a separate point.)
I don't think that's realistic.
DeleteLet's assume that the Greece had defaulted. European government would have bailed out/nationalized/re-capitalized the banks. The Greek debt wouldn't have disappeared. It would have simply been moved in some bad bank/government agency and the EU government would have ended up owning the debt anyway (in exchange for equity in the banks, but that hardly matters for Greece). Greece would have still needed funding for the short terms and it would have had to ask the same people for the money. Do you really think that pushing European banks towards insolvency would have made EU governments more generous? It's still the same people...
Recapitalizing the banks would have real effects in the other countries (and given that people that pay taxes are the same people who have money in the bank maybe not that great effect), but at the end of the day, ECB/EU governments would have owned the Greek debt anyway.
Anon: in your scenario the pain would have been felt by the private shareholders of the recapitalised banks. The Greek debt on the balance sheets of the banks would have been written down to a realistic level (a good starting point for a sensible debt restructuring) and the governments would have owned equity in the banks (which they could later sell).
DeleteQuite different.
What seems lacking from the whole of this sorry business is any consideration of the potential international security consequences of following particular economic policies to the bitter end. Most previous debt forgiveness / bailout was surely the result of realpolitik considerations. An impoverished Greece must surely attract the attention of Russia and China, despite their own problems, as it would offer a way into the Med and a very expose or non existant NATO southern flank.
ReplyDeleteMainly Macro7 July 2015 at 06:47
DeleteI admit I exaggerated - a bit. But the Greeks still don't have a decent tax collecting system although that has been a subject between Greece and the Troika since the beginning. They did not bother to ask the Swiss for details of Greek money in Switzerland - not even the leftist anticapitalist Syriza government. What is a fantasy is the statement that the Greeks have done most of what the Troika wanted.
But I would rather have your comments to my other points.
The ideas of Keynes are not really regarded as wrong in Germany, but the way they are translated into policy in other countries is. Germany is well-aware of the need to enact countercyclical measures, but it tends to reject one-off spending packages, or the dynamism of "anglo-saxon" economies in favour of automatic stabilizers, and of a tighter legal environment to constrain cyclical excesses. For example, as a consequence of the low interest rates and of Germany's stable economic situation, housing prices have started to strongly rise in the big cities. As a consequence, the so called "Mietpreisbremse" (rent brake) has been passed as law just recently. This will somewhat limit the growth of a housing bubble even though the exploding revenue of the property tax and of public land sales have been a boon for some communities.
ReplyDeleteIn fact, I don't think that Germany is unwilling to see that Greek austerity has been destructive in the economic sense, it's more that Germany thinks that the destruction is necessary. Maybe one of the possible outcomes of the Greek crisis will be the possibility for us to watch Germany's first attempt at nationbuilding.
"Germany thinks that the destruction is necessary. Maybe one of the possible outcomes of the Greek crisis will be the possibility for us to watch Germany's first attempt at nation building."
DeleteCan I just say - if that is truly reflective of German public or elite opinion, that is bloody terrifying.
Alexander:
DeleteYou are quite right. Germans are perfectly aware of Keynesian economics and apply it when they think it is necessary. In fact, Paul Krugman (if it wasn't SWL himself) pointed out that Germans were quite Keynesian in 2008 with an expensive cash for clunkers programme. But they are more willing to wait how markets will develop .And they consider fine-tuning the economy as doomed to failure: England tried it in the fifties to seventies, but with its recurring devaluations of the pound, they consider it a counterexample. SWL's macroeconomics seems to believe those times are still there, with a central bank - BoE - doing the government's bidding as its lender of last resort. Germans are aware that independent central banks can react differently. In 1991, the German government had to pay over 9,25 % for 10year Bunds because the Bundesbank had raised interest rates after reunification.
By the way, for a time Keynesianism may have been considered as not politically correct since the Nazis' spending programme in the thirties was, in effect, Keynesian avant la lettre. But those days are long past. The present attitude is not to rush things but to wait how they develop and then step in - with Keynesian policies - when necessary.
As for Greece, Germans think its system neither worked before its entry into nor afterwards and not even now during the crisis. So something has to be changed - but for Greeks, it is a matter of national pride not to change.
As Lord Curzon wrote in 1890: The normal Asiatic would rather be ill-governed by their own kind than well governed by Europeans. That statement is universal and not limited to Asiatics. And the Greeks have taken it to its extreme: They have decided democratically that the Eurozone countries have to give them money without the prospect of being repaid, and the pride of the Greeks requires that only they decide how it will be spent.
" So something has to be changed - but for Greeks, it is a matter of national pride not to change." You are repeating the fantasy. Greece has done most of what the Troika asked it to do.
DeleteMainly Macro7 July 2015 at 06:47
DeleteI admit I exaggerated - a bit. But the Greeks still don't have a decent tax collecting system although that has been a subject between Greece and the Troika since the beginning. They did not bother to ask the Swiss for details of Greek money in Switzerland - not even the leftist anticapitalist Syriza government. What is a fantasy is the statement that the Greeks have done most of what the Troika wanted.
But I would rather have your comments to my other points.
"The ideas of Keynes are not really regarded as wrong in Germany"
DeletePretty much every aspect of German trade policy and ECB interest rates for the past 15 years contradicts that. Yes Germany did a tiny stimulus in 2008. That trifles in comparison to pushing for the ECB to raise baseline interest rates in 2010.
"Maybe one of the possible outcomes of the Greek crisis will be the possibility for us to watch Germany's first attempt at nationbuilding."
DeleteInteresting post Alexander and I agree with it absolutely. There are quite a few American economists who write blogs and do not really make any effort to understand Germany and call it neo-liberal when it is not. It seems that you are right about the measures Germany takes to manage demand and prices - together with collective bargaining.
They also keep saying that a devaluation will get Greece out of its predicament.
On the above remark, I am absolutely sure that Germany wants to rebuild Greece. And it wants to invest its low yielding capital there, and I really believe, genuinely help the Greek people. But that is not possible without political and fiscal union. The Marshall Plan helped Germany, and even if that was micro-managed (which I do not think it was) I am not sure that would help Greece. And remember the US had enormous authority at that time, so really political union was not necessary. To some extent there will have to be institutional reform to get the industrialisation Greece needs.
"it's more that Germany thinks that the destruction is necessary. Maybe one of the possible outcomes of the Greek crisis will be the possibility for us to watch Germany's first attempt at nationbuilding."
DeleteI am confused, isn't Greece already a nation? What "Germany's first attempt at nationbuilding" means?
Like the USA did with Germany (and to some extent Japan and South Korea) after World War II, they guide the country towards an institutional setup in their fashion. The USA wanted to pull (West) Germany into the capitalistic democratic West, but also as a state with a weak central power and strong regions so that centralising tendencies approaching fascism would be harder to do. Germany might want to strengthen Greek institutions, tax collection, anti-corruption agencies and so on... and if it was up to Germany, the new Greek policy élite would be more ordoliberal, i.e. a target of a balanced budget, zero inflation, and so on... Maybe the old Greek institutional framework is going to collapse without the money, and will all political parties eventually discredited.
DeleteThe idea that Germany would not be de facto shut out of Greek markets for a generation after Grexit seems a bit optimistic. I expect Germany nation-building Greece would go down about as well as US nation-building Iraq, and would probably require the same tool-set.
DeleteHousing (land) bubbles need to be controlled by land value taxation. This is Georgism.
DeleteI would agree with much of the above, the mainstream reporting about the Greek crisis and especially the flawed “bailout” of 2010 is somewhat distorted in Germany.
ReplyDeleteHowever, the public anger is directed against the Greek state, not the Greek people. What has contributed to this storyline is precisely the lack of “structural reforms”, a field to which the author seems to attach little importance. Greece is seen by the German public - sadly with some justification - as a country that lacks many basic institutional arrangements of modern capitalist economies. There is no land registry, there is no tax administration that would force rich people to pay (some) taxes, offers from Switzerland re disclosure of offshore funds are ignored, politicians from left & right feed the clientelist system, corruption and impunity are pervasive. If Greece were to make some progress in this field, the benefits would be enormous over the medium term.
Greece did not vote No to structural reform. The voted No to continuing 25% unemployment, and that is a consequence of Troika demands. It would be quite reasonable to worry about backward features of the Greek economy, if the Troika (and the German media) also took some responsibility for the consequences of its other actions, and adjusted their policies as a result. There is no justification for continuing to ask for primary surpluses.
DeleteSo, where are the structural reforms?
DeletePlease do some research to get out of the fantasy, starting perhaps with the OECD here:
Deletehttp://www.keepeek.com/Digital-Asset-Management/oecd/economics/economic-policy-reforms-2015_growth-2015-en#page21
The new government was voted exactly because it's not corrupt. Greeks voted "no" exactly because the government would fall and previous corrupt politicians would again come to power. The Syriza government immediately started negotiations with the Swiss authorities, google it:
Deletehttp://en.protothema.gr/government-targets-greek-deposits-in-swiss-banks/
The result:
http://greece.greekreporter.com/2015/03/27/swiss-banks-will-not-release-information-on-suspected-greek-tax-cheaters/
Greece was sending tons of real structural reforms to the EG meetings (tax reform, constitutional debt brake, R&D investment etc), and everytime Scheuble would say that they got no real proposals, and there's no basis for discussion. When the government dropped the 50-page reform documents (eg
http://www.in.gr/files/1/2015/06/04/267653823-Greece-Staff-Level-Agreement-proposal-3-6-2015.pdf
), and sent just 5 pages outlining tax hikes and pension cuts three weeks ago, suddenly it was "the first real reform plan from Greece". But the Greek prime minister was asking for a debt swap (NOT debt relief, just owing to a different entity) of Greek bonds the ECB has, between the ECB and the ESM, so that Greece would be able to participate in the QE, or else he wouldn't sign. Germany said it's my way or the highway. The prime minister called for a referendum, in which he supported the No vote because as he said, "we want meaningful reforms, and a management of our debt that will render it sustainable, and not another can-kicking deal".
That's what's been going on. Does that have ANY resemblance to the news you've been getting in Germany and other EU countries??? probably not.
Mainly Macro7 July 2015 at 08:11
Delete"Please do some research to get out of the fantasy, starting perhaps with the OECD here:"
May I quote from that Report, p. 199:
"Priority should be given to ensuring that the multiple reforms introduced during the recession and recovery context are being fully implemented."
In other words: They are not being fully implemented.
Page 21, which you quote, does not contradict that.
So it seems you have managed to let the Greeks pull the wool over your eyes.
The claim made was that Greece had done NO structural reform. As the OECD numbers show, that is false: in recent years Greece has undertaken more reform than other countries. The fantasy is that because structural reform has not been 'complete' or 'fully implemented', GDP has fallen by 25%!
DeleteI don't understand why it is -obviously- a huge challenge to state that
DeleteA.) the huge GDP contraction was a mistake
AND
B.) structural reforms were sketchy and action time to short
Isn't there a single narrative that has swept across the western world since 2008, as much in Germany as in the UK and US, namely that the banks that did the lending could not be blamed for what their lenders did with the money - I don't know what the opposite of the First Mover idea is, the Second Mover?
ReplyDeleteAs such, home owners taking out 120% mortgages and Greece are the same moral issue for the Second Movers' movement, because all other roads lead to banks and the role they play in funding political parties and in society in general (see Shiller at Project Syndicate, Sep. 20, 2013, The Best, Brightest, and Least Productive?)
According to Leonid Bershidsky, the Greeks have already benefited greatly from German largesse - http://www.bloombergview.com/articles/2015-07-07/how-greece-s-bank-bailout-benefited-greeks
ReplyDeleteAnd his economic basis for this piece of nonsense is what exactly? Sounds like he's adept at repeating talking points sans actual evidence.
DeleteYes, quite.
Delete@Anonymous7 July 2015 at 13:00
Deletewhere are your numbers?
The Germans do not want the Greeks out, they do not want to pay more money.
ReplyDeleteThat is quite a difference. They think they will continue to have to pay, reinforced by the IMF's sustainability report which stated that Greece needs another 50bn over the next three years.
That of course is not true, as all that money is really re-scheduling old Troika debt, as assumptions were to ludicrous.
I have just summarised on my blog why the Germans would probably agree to a debt restructuring which would allow them to ensure Greece does not borrow any more money, and Greece pays at least its interest back.
Surprisingly, it can be done. But nobody is putting a proposal like that forward. Shame, I think.
https://radicaleconomicthought.wordpress.com/2015/07/07/how-to-negotiate-debt-relief/
DeleteMatt Usselmann7 July 2015 at 07:08
"The Germans do not want the Greeks out, they do not want to pay more money."
That is the truth in a nutshell.
What more money? Germany hasn't given a red dime to Greece. Money went into "Greece" and left within nanoseconds for the accounts of German banks. The losses incured by the German taxpayers so far went entirely to those stealth bailouts. The writedowns that took place were just writeoff of the usurious interest that Greece paid to those private parties that Germany insisted they keep paying, bringing Greece back to square one. If Greece gets debt relief it wont be more debt relief, it will be the start. All the aid has been to German banks that were paid 100 cents on the Euro for assets that were worthless.
DeleteSorry, French banks and then German and Italian banks. Germany is liable for approx. € 90 bill. One third for bank bail outs that stabilised not only the Greek banking sector, one third went into capital flight and one third increased the wages of the civil servants of the Greek state and did stimulate the Greek economy - admittedly not strong enough.
Delete@JohnW: it's not that simple, please read
Deletehttp://www.bloombergview.com/articles/2015-07-07/how-greece-s-bank-bailout-benefited-greeks
Oh really? So why didn't they go with Varoufakis' original proposal back in February, "we want not 1 cent, just take our ECB debt and pass it to the ESM. We'll be able to participate in QE, and our reform program guarantees a low 1% primary surpluss and modest GDP growth, extend the maturities accordingly so that we can repay it without defaulting".
DeleteThey didn't like that because it was an immediate solution that kept Syriza in power and would also drop further "reforms" (tax hikes and wage cuts) from the original program.
Matt and first Anon: this rather suggests otherwise
Deletehttp://www.nytimes.com/2015/06/30/business/dealbook/the-hard-line-on-greece.html
Simon, you might appreciate Stiglitz's USA Today column which makes many of the same economic points (though without your emphasis on German delusions):
ReplyDeletehttp://www.usatoday.com/story/opinion/2015/07/07/greece-crisis-referendum-eu-austerity-column/29763347/
-Ken
Kenneth Duda
Menlo Park, CA
And the comment:
DeleteIf you think the creditors are being too harsh, perhaps you should lend Greece your money.
That isn't the point. The point is that the reforms that are being insisted on, make it less likely that the creditors will get their money back, not more.
DeleteThank you for such clear perspective. I think everybody should fully read (or re-read after the few months since the publication) and ponder the story from the story-teller himself http://www.nytimes.com/2015/04/16/opinion/wolfgang-schauble-german-priorities-and-eurozone-myths.html . This narrative gets undeservedly muted after the noisy opening scene where the bad guys just spend and spend but is critical as you point out to how the whole piece continues and ends.
ReplyDeleteSimon, I suspect that if you want to make sense of the "German" (actually, northern and eastern European) position, you must view it not through a macro-economic, but through a political-economic lense, where the main concerns are not short-term growth or employment (or for the Germans probably even getting their money back -- that has probably been written off), but avoiding moral hazard and longer-term transfers, and getting structural reform.
ReplyDeleteIf we assume that "Germany" doesn't greatly care about short-run growth in Greece either way or even that much about getting its money back, but cares greatly about
1) bringing Greek budgets into balance ASAP, so debt can be serviced and no further transfers are necessary,
and
2) structural reform (assumed to be the key to longer-term sustainable growth),
while believing
3) that Greek governments are much less trustworthy than other Eurozone governments, due to the country's political institutions and culture (populist clientalism) and the poor experiences with previous Greek governments as well as the current one in terms of actually implementing agreed programs,
and believing
4) that short-term stimulus is not useful when dealing with deeply corrupt institutions, because it will not lead to sustainable growth and competitiveness, just to a short jump in GDP/employment numbers which disappear once the stimulus is withdrawn
and believing
5) that moral hazard is a major concern in the Eurozone (if transfers are readily available, no country will undertake structural reforms to attain "competitiveness")
then might German behavior make more sense?
Because of 5) and 4), one seeks to attain 1) through austerity.
Because of 5), 4) and 3), one is unwilling to write off debt or provide meaningful stimulus to attain 2).
How much structural reform has Greece really done (this is an honest question, not a gotcha-question)? Meaning, strengthening tax collection and statistical agencies, building up bureaucratic capabilities in ministries, breaking up cartels & introducing competition into product markets, making appointment procedures less clientalistic and more meritocratic, and making it easier to set up new businesses, and to lay off workers?
The received continental wisdom on this is that very little has actually been done, and what was done had to be forced on the Greeks. (Whether this is true or not, I'll leave open -- though I'd be very interested in your views and data -- my point is to try to construct a logic to the "German" view.
I certainly don't think it has anything to do with, if you will forgive me, pop psychology about Debts and Guilt, or even with unwillingness to have one's beliefs about economics challenged.
I endorse ech of your arguments and I want to add a comment concerning "austerity". You hear a lot about "austerity" in the context of the Greek situation.
DeleteIn Greece’s case, however, austerity is largely a red herring. In UK, austerity was a choice: financial markets were happy to keep lending the two countries more and more money to cushion their recessions. But the Greek government did not have a choice: it could not run a bigger budget deficit. Nobody would lend them the money! Greece’s European partners have demanded reforms and some austerity from the Greek government in exchange for their money, approximately € 330 billions but absent that money Greek fiscal policy would have been even more austere.
Clarification to Point 1) above about Germany's assumed priorities. Really it should read,
Delete"bringing Greek budgets into balance ASAP, so debt can be serviced THUS ENABLING THE COUNTRY TO REFINANCE ITSELF ON THE MARKETS and THUS removing the need for further transfers".
If it is all about moral hazard, why were Greece's private creditors bailed out? I find the idea that a country would want to emulate what Greece has just gone through laughable.
DeleteOne reasonable hypothesis as to why they were bailed out is contagion fears. One can retrospectively debate how great those risks really were in 2009/2010 ("huge" seems a reasonable assessment to me, but I may well be wrong & am happy to stand corrected), but surely that was a reasonable concern at the time?
DeleteIn any case, the German right was always pretty aggressively in favour of private creditor bail-ins, and I've repeatedly heard (again this may be incorrect, tho' I tend to believe it) that Schaeuble personally was all along very much in favour of private-sector bail-ins -- but of course he was not the only one taking decisions. ECB, I understand, was most strongly opposed to it.
Obviously no country would want to go through the Greek experience, but isn't that also slightly beside the point? The concern, from the "tschörrmäähn" perspective, is not that other countries would want to become the next Greece, but that the Greek case is setting a precedent for whether or not reform agreements must be adhered to, or whether one can always rely on another bail-out of some sort. (Note that I'm not sure I fully subscribe to this view -- tho' I am sympathetic to it, as I am also sympathetic to the idea that requiring surpluses in a depression is a bad idea -- I'm primarily trying to reconstruct an argument.)
I would strongly urge you to take these political-economic concerns more seriously, not because these are "my" ideas (they are not), but because they probably provide a better avenue for understanding the Northern-Eastern European perspective than, if you will forgive me, pop-psychological ruminating about debts, guilt, morality, and unwillingness to give up received perspectives. I'm not urging you to accept these ideas -- I'm not sure I do so myself -- but I think taking them very seriously will make for a richer dialogue --- and frankly make it easier for you to engage "German" academics and policy makers (if that is in part your concern).
@NM: very good reasoning
Delete@NM: As a German economist I simply affirm your arguments. That's what is discussed in my department. We take macro-arguments serious but we uprate the polit-economic points.
DeleteThank you. On the original creditor bail outs I can imagine how Germany was more reluctant than other EZ countries and the ECB. But given that mistake - which meant saddling Greece with an unrealistic level of debt - I would expect some sympathy for the subsequent need to restructure debt.
DeleteThe argument against - that is that it would encourage other countries to want to renegotiate - seems weak on two levels. First, restructuring has already been done, and that encouragement did not happen. Second, circumstances change, and it seems crazy not to be able to adjust - particularly when those circumstances are in large part of your own making (austerity reducing Greek GDP). Which brings me back to a reluctance to acknowledge the impact of austerity.
Hey,
ReplyDeleteI'm an economics student in germany currently in 2nd year.
I can tell you that our macoreconomics course has as much keynes in it as any.
I don't think that economics in germany is taught any different than anywhere else (at least at my university).
However, i think that the german, almost irrational stance on greece is led not by economic advisers but by the "ordinary" citzien.
"Normal" people (without any background in economics) dont know anything about keynes or even what fiscal austerity means.
When they try to understand the greek situation they think about greece not as a country but as a person.
They think greece(the person) has lend to much (had a great time) and now doesn't want to pay back.
When talking to "normal" people i was first shocked to realise that some of them actually want greece to suffer.
This irational thinking comes mainly form the personification of greece.
Then politicians want nothing more than to stay politicians.
So they don't listen to their economic advisors ( or get the ones which say what the want to hear).
But "listen" to their voters, the "normal" guy.
Eventhough this leads to a situation which isn't benefitial to germany as a nation.
But is benefitial for themselfs ( at least in the short run).
Also, you should listen to german mainstream media. it makes me sick.
In other words, there is little difference between the average "German" (as you paint them) and the average American (not entirely a stereotype).
DeleteVery frightening.
America is substantially Germanic in origin and not from so long ago. We fall for the same moralistic vs. rational narratives repeatedly and like in Germany and Northern Europe, those narratives are used against ourselves in our social welfare systems, our reactions to bank sponsored frauds (mortgage crisis), and our opinions in regard to foreign aid and assistance (when we do grant it to undeserving dark skinned folk we make sure our organizations blow most of the money on overhead so none goes to the people we purport to serve).
DeleteIt's not just Germany.
Yea thats probaly just how people are.
DeleteIt's really shocking to see it in action though.
Makes you ask difficult questions.
I don’t think the “Germanic” explanation works. Once upon a time, Americans were generally supporting of neo-Keynesian policies: think of the support for unions and the New Deal. When did all that support start to unravel? Post-Civil Rights, when the Republicans (unfortunately) managed to refract anything close to Keynesianism through the lens of racism. The Southern Strategy suggested that welfare, or anything that could be considered aid, stabilizers, or whatever, was taking from hard-working whites (especially white working class) and giving it to “lazy blacks,” “welfare queens,” and the like. It was race-based resentment, and it could fuel austerity policies.
DeleteI sense something similar in Europe. Listen to the rhetoric not only of Germans, but of many Brits and others outside Greece. “Punish the Greeks for not being spendthrift.” Well, this is a major oversimplification, but it can work because of this use of “the Greeks” and considering them to be something inherently different from “Germans” or whomever. “The Greeks” are lesser than hard-working, upstanding Germans—except we know that Germany has flouted rules about budget deficits, depressed wage inflation to improve its position artificially within the EU, and has been strong-arming the ECB and the rest of the EU.
Racism, ethnocentrism, nationalism—this is all driving this tragedy. Not a competition of positions of potentially equal validity—we know the austerity position has no empirical support, and one could easily make moral arguments about helping Greece.
And so yes, it's not just Germany, although their voices are louder for various structural reasons.
The problem is not what is taught in universities, but the policy advice given by economists in Germany. You should read my post on this that I link to here.
DeleteNo, Simon, that is not the problem. Other advice is out there in spades. The problem is that German (and other) politicians, technocrats, and electorates reject it--either out of hand, or as not feasible, etc. Something is clouding their judgment, as it were.
DeleteWhat might that be? Racism (as I suggested above). Class (bail out the financial elite but try to cover the tracks, so blame the Greeks). Political power (make an example of Greece so Germany is hegemonic, with a few close allies in tow). Some combination of the above.
This is not just an issue of “good advice versus bad.” When you write, “The problem is not what is taught in universities, but the policy advice given by economists in Germany,” you are stating a tautology. The advice given would be “good” if the policies were followed are “good”—otherwise, they are not getting good advice. But like I said, it seems there is plenty of alternative ideas—from the IMF, the Greeks themselves, you & Krugman & Piketty, et al.
Until someone addresses these deeper problems—classically exogenous to economic theory—then this problem will repeat itself.
I think you miss two things. First, Germany largely ignores external advice, so Krugman etc irrelevant. Second, the dominant discourse among those who give policy advice in Germany is very different from other countries like UK/US.
Deleteo.k. what you are saying may be true about what is taught in universities but who are the influential economists in Germany? folks like Hans Werner (un)Sinn.
ReplyDeleteAnd read this
http://www.theguardian.com/commentisfree/2015/jul/06/tsipras-restore-trust-greece-eu
Quote: "Greece was not alone in being hit by the financial crisis. The prudent handling of reforms by other governments like Portugal, Ireland, Spain and Latvia was hugely successful. We now see stable growth rates, recovering economies and governments paying down their debts early."
What's the unemployment rate in Spain? It's just not possible to have a rational conversation with these people.
Sorry this should have been posted as a reply to the comment by the German student about macroeconomics teaching in German universities...
Deletenot great - 23% (the chart makes you think it's a good thing by virtue of how they play the numbers: http://www.tradingeconomics.com/spain/unemployment-rate
Deleteyouth unemployment is just a bit under 50% so that's a total disaster (again, the chart's tweaky): http://www.tradingeconomics.com/spain/youth-unemployment-rate
also check out the debt/GDP ratio for Spain - keeps going right on up (which happens with years of punishing austerity where you crater the economy):
Deletehttp://www.tradingeconomics.com/spain/government-debt-to-gdp
Thanks for the link. And that's what he and his political allies call "hugely successful". The author really has to be a complete fool. And he's writing this nonsense in the Guardian, he's not speaking at a CDU meeting, not giving an interview to Bild Zeitung. It just shows the unfathomable foolishness of these politicians.
Deleteit's interesting plugging in Portugal, Latvia or Ireland into any of those categories and sizing it out to 2007 (pre-crash) and the same things are persistent across the board - ZERO recovery where it looks only marginally better than the worst years. (but if you size it out only more recently it "looks better.")
DeleteDear Professor:
ReplyDeleteAs a German myself I'd like to offer a different interpretation of why many German economists are optimistic about austerity measures, at least until recently.
Similar to the political and some other part of the "elites", these professors are largely in favor of a unified European state, or at least of ever-progressing European integration. Therefore, they have an almost ideological love for the Euro - but mostly out of political reasons rather than out of economic conviction.
Therefore they have to support the current way of credit- or guarantee-based bailout measures. I guess, most of them would in fact be in favor of true unilateral credits. But they know that the public would never accept a permanent transfer system, since the regular guy on the street is by far not that much convinced of a continued deepening of European institutions. (Think for example of the opinion of the UK population if they wanted to transfer half a trillion EUR to other countries - unconditionally.)
As a consequence, as only the austerity afflicted lending remains, they have to pretend that these measures have been successful - or outrightly lie about it. Even supposed Keynesians like Peter Bofinger still claim that the current pathway will eventually work. But I would claim, that deep down below they know that they're wrong.
A previous commenter mentioned Hans-Werner Sinn. He can give a quite impressive and detailed presentation of why austerity is not working in Greece (and even advocates unilateral transfers in this case) and recommends the Grexit. But he goes on to say that the other crisis-ridden countries should remain under status quo. That is because he fears the breakdown of the European project, and doesn't want to be called an Anti-European. But if you're honest you'll agree that European citizens are not yet ready for an European super-state with a large-scale permanent transfer mechanism.
Regards
M.S.
Then the European experiment (or dream) is over. Without fiscal integration (at the least--political integration is really necessary, preferably with real democracy), the euro will be inherently unstable. Further, the "euro" is at risk of becoming a renamed deutsche mark, the ECB simply the Bundesbank in new clothes.
DeleteI agree that Europe is not ready for a European super-state. But I disagree that the Euro is inherently unstable. It is the austerity mindset that has led to this crisis.
Delete“But I disagree that the Euro is inherently unstable. It is the austerity mindset that has led to this crisis.”
DeleteAnd this gets back to a point I made above (in response to your 9:15 comment). You think this is just an issue of policy X vs policy Y. Both policies are out there. WHY advice X is taken & advice Y rejected is a different matter.
And this contributes to euro instability—no mechanisms in place to stabilize the euro, to create common interests to counteract the different interests (and nationalism). To take a page from Polanyi—no state = no currency or economy that can last. Without that overarching state—which does more than transfers and stabilizing factors—you rely on hoping (against hope) that a few ministers agree on the useful policy.
It’s politics, Simon, not economics—and it’s institutions taken seriously.
I apologize, but I ask the same question, because I think it's very important to answer directly, and except for Paul Krugman I haven't seen anyone else do it (I'll start reading some of your links.)
ReplyDeleteDo you really think it is in Greece's best interest to stay on the Euro?
Leaving is very costly. But if they stay, they stay in a disparate currency zone that's enormous compared to them, with little or no fiscal union, and a central bank dominated by inflationaphobes and VSPs. It seems like this may not change much for generations, meaning perhaps regular and very long lasting depressions, recessions, lost decades. You don't think that cost is greater than the cost of leaving, especially for your children and grandchildren?
I have avoided answering this question, because I do not know the answer. But I do know that Greece wants to stay in the EZ.
DeleteAs far as the politicians, there's an aggravating common norm to take their words and positions as what they really want, and then say, oh, why do they think this. A good example is how Obama was not for gay marriage when he first ran in 2008, and then he "evolved". I've never heard a pundit say what should be obvious; based on Obama's history, level of education, all of the other things he's said and done, and positions he's taken, and the political situation at the time, it's very unlikely he "evolved". Very likely, he was pro gay marriage in 2008, and well before, but he lied because he thought the cost in political capital, and to his odds of winning at that time, were too great to say so.
DeleteObama was also against the individual mandate for his health insurance program in 2008. Did he suddenly have a lobotomy in that particular region of his brain, because there's no other way to explain how a man with that kind of demonstrated intelligence and doing his homework over a lifetime, could not understand that his health insurance program was impossible without an individual mandate. And then, of course, the lobotomy healed just after he won the election, and he supported and passed the individual mandate. Because we can never say that he was obviously lying; a man that intelligent and educated and prepared obviously does not believe something so obviously wrong to anyone who's studied the situation; he's obviously lying for what he thinks is a very worthy cause, to help his odds of election and actually being able to implement the program.
So, I would not be at all surprised if Tsipras secretly preferred to get the hell off the Euro as soon as possible, but he says he wants to stay on, and that he's trying to stay on, as a political strategy. That way, when the short-term hardship sets in he can say, it's not my fault, I tried to stay on the Euro but they made it impossible.
As far as the people of Greece, a strong very low inflation currency feels like a very good thing to laypeople. Few understand the economics of being able to devalue; the importance of being able to stimulate if your tiny economy is doing much worse than the giant zone is doing on average, the ZLB, etc. So it's not surprising at all if the Greek public wants to stay on the Euro, and just get debt and austerity relief.
I was not suggesting that the fact that most Greek people want to stay in the Euro means it must be the right thing to do. All I was suggesting is that given this wish, it makes sense to work within a framework where they do.
DeleteOne complication with Grexit is the insistence of many outside Greece that Grexit also means leaving the EU. I suspect that would be costly to Greece. Now as far as I can see there is no reason why Greece could not stay in the EU with its own currency. But with the rest of the EZ governments in their current mood, who can say what will actually happen.
Yes, clearly it's best they stay in the EU, and there are other EU countries that aren't on the Euro.
DeleteAnglos were a germanic tribe ...
ReplyDeleteAnd the Saxons?
DeleteI don't think that Germany has a anti-keynes agenda or that its policies reflect in any way a textbook anti-keynesism. Germany is one of the exponents of the keynesian welfare states. Granted they have a horror of inflation but for the last 50 years they ran big deficits by offering unsustainable public services
ReplyDeleteI have read some essays by Keynes though I admit that i am not an expert on him. His economics is separate from the welfare state - except for the fact that a welfare state provides automatic stabilizers when the economy is in recession. There are plenty of very conservative economics, professors who think of themselves as liberatarian, such as John Taylor or Gregory Mankiw, who are followers of Keynes.
DeleteKeynes said that the boom and not the bust is the time for austerity in the treasury so he does not advocate deficit spending in all seasons.
Dear Professor,
ReplyDeleteI think it is not a fair assessment to say that there was not debt relief. I'll outsource the evidence to Paul De Grauwe.
http://www.voxeu.org/article/greece-solvent-illiquid-policy-implications
This article clearly suggests that there is very little room for other Euro countries to concede substantial compromise before Greece delivers on the structural reform proposal.
Dear Double Bob
DeleteWhat are the structural reform proposals and which parts has Greece not deliverred on?
I ask because I suspect, like many people that tout the term about, you don't really know.
For an extra mark discuss whether they can be seperated from austerity, and the feasibility of implementing them at the same time as austerity.
Cheers,
@ Robert
DeleteInteresting article and I would be interested by SWL opinion and other economists in this regard.
My reading of it is that debt is less significant than it appears at first sight as a result of previous restructuring. Therefore, additional austerity is not needed (at the same time, the author encourages Greeks to pursue their reforms to make their economy more competitive but the two issues are distinct).
However, the fact that debt is worth less than what is written on the books must be acknowledged by creditors, which they refuse to do.
"First, politicians prefer to live in a fictional world allowing them to pretend no losses have been made so that they can hide the truth to their own taxpayers."
"Second, in order for this solution to be applied the insatiable desire of some creditor countries to punish the Greek for their misbehaviour must be overcome."
I think that Syriza would immediately accept such a proposal (in fact not so different from what Varoufakis proposed in February).
Hi,
DeleteI normally refer structural reform for things like labor flexibility, pension reform (retirement age, etc.), etc. I am not an expert in this field but a good example would be recommendations by IMF in this report: https://www.imf.org/external/pubs/ft/sdn/2013/sdn1302.pdf
I am not so sure how the progress is as it is not that widely reported by media. However, this link suggests that the country still needs to do more. http://pdf.reuters.com/pdfnews/pdfnews.asp?i=43059c3bf0e37541&u=2015_06_16_02_52_ed177e75f710480cbee291683c26d44e_PRIMARY.jpg
I guess haircut is definitely a great short term response to current high debt issue but I cannot stop having this thinking in my head:"If not now, when will Greece swallow the bitter medicine called structural reform"
Strategically, I think this is the best time to "nudge" the country to change.
Ideally, the best time to implement structure reform is when the economy is booming but I think this is not very realistic. I think only Singapore government can do this.
Personally, I think Greeks chose the wrong party at the wrong time in the last election.
I think at this juncture, the downside risk is higher than the upside potential if the country opts out of the Eurozone. Most economists probably under estimate the downside risk of the chaos ensuing such departure due to complex interplay between politics and economics in such situation. As much as everybody would like to ignore, the probability of Greece falling into political chaos leading to high inflation and low growth (i.e. bad equilibrium) is far from zero.
If the Greeks want to be in Eurozone, I don't think they have any other option but to adopt to rule of the game set by other stronger countries. I think in many ways, political and cultural infrastructures of many countries in Euro Bloc are not prepare to handle such situation yet.
I've read the article cited by Robert Robert and it seems clear enough to me that it doesn't say what he thinks it does, in fact, it's actually contradictory to what he says it is - at least to me.
DeleteI think Simon's overall assessment and in detail is excellent. I see comments where references to Anglo-Saxon economics not bing in line somehow with the comment made by Simon.
He's clear enough on what he's referring to, which is Keynes, as opposed the current bunch of louts.
The NY Times has a significant story that the Germans haven't learned an obvious less - and don't seem to remember too much of their past. The story is about a February, 1953 story in which various credit nations wrote down roughly 50 percent of Germany's external debt and made a vast number of other concessions.
The details almost don't matter, but only eight years after a war that all but destroyed much of Europe, creditor nations which included most of Europe, including the Greeks were needed to sign on to the write down. They did. The Germans benefited. That triggered the German miracle, not some internal norms that accomplished it all.
Incidentally, France in 1870 paid all of its war reparations to the new German Empire sooner than anyone expected. The German war reparations were essentially wiped out, despite the clear legality. None of that matters in this area.
What matters is what works.
Someone in comments cites a Spiegel piece which broadly questions Merkel's leadership. Leaving conclusions to others, it was interesting that she made a joke about how the Greeks refused to pay for German submarines it had ordered because the subs were "cooked."
What is significant in that comment is that they were "crooked" in multiple ways. One was the German firm that designed and built the first submarine at Kiel a decade ago, produced a defective product and the sorting out process included South Korean Navy complaints about the many defects of the Class 214 submarines.
The other Greek-German submarines were build in Greece with as much local content as possible (as did Turkey on similar orders).
The other part of "crooked" is an earlier generation of Greek officials took corrupt bribes from corrupt German corporations that secured the contracts. If Greek officials were corrupt, an obvious truth, then there were a great many people who illegally paid bribes from the very countries that now are getting a little nutty.
Greece has for some years spent far more in adjusted military spending compared to its neighbors and the EU as a whole. Fully more than a quarter of Greek military spending during this period went to Germany. Only the United States sold more.
The story a while back about the IMF turning down reductions in military spending is bizarre and probably true. There is no benefit to industrial, weapons designers and builders to Greeks cutting their defense budget.
There is too little good news in all of this. But assuming Greece defaults and there is no agreement,there are going to be no orders with either Germany or other external suppliers. The arms suppliers won't go bankrupt, but Grexit will end most of those contracts - which should have never happened.
I think Simon's post makes a lot of sense. The blame fixing and all the rest doesn't resolvethe conflicts or make it easier. I don't know where Greece is headed, but there's not going to be a lot of singing by the fireside at night.
Austerity has failed. What is happening in Greece has less to do with Greece,but to serve as an Admiral Byng. As Voltaire said in Candide, "Dans ce pays-ci, il est bon de tuer de temps en temps un amiral pour encourager les autres" Greece may very well be Europe's equivalent to John Byng.
There are, after all, elections scheduled this year around the European fringes, Spain, Portugal, Spain - and the elections so far this year indicate a repudiation of those who bent over for austerity.
I think I am not disagreeing with the idea of some form of "economic or time value of money haircut" on the debt. But I am not so sure this idea is realistic as this implies further subsidies from the other Eurozone members. In particular, it requires bigger subsidies (relatively speaking) from nations other than Germany or France.
DeleteI think I agree that Germany, France and maybe Italy should provide more "fiscal assistance" as their banks benefit the most from the original bailout. The original bailout shifted the risk from the banks in those three countries to public balance sheet of the whole Eurozone.
Currently, 10y bund is yielding less than 1% at the moment so anything lending by the German government to the Greece government is generating positive cash inflow. The deal is even sweeter given the fact that the cost of the risk is shared by the other Eurozone countries.
However, one must also admit that Greece hasn't done enough structural reform at least not to the level deem necessary by the IMF as outlined in this report:
https://www.imf.org/external/pubs/ft/scr/2015/cr15165.pdf
So, given such a bad track record, I am not so sure how one can have high confident on Greeks ability to implement the structural reform without some sort of external pressure. Like it or not, "gentle choke" maybe needed.
From that report, unless there is a clear evidence that Greece has changed, it is hard to see why the other Eurozone members need to fight tooth and nail to subsidy a "clearly developing" country in the developed country club. (Here I am talking more than just level of income but also other fundamental economic indicators). Here I am giving the benefit of doubt to the Eurozone bloc because it is very possible that they just don't want the country in the bloc. If this is the true objective, then Greece is better off leaving the monetary bloc. Economically speaking, taking a EUR150bln hit is a small change for bloc. There will be political cost for sure. On this front, I have the sense that there maybe domestic political gain from kicking out Greece.
One also needs to note that, Greece had decades of opportunity to reform on their own accord but apparently they opted not to. Overall, the country's track record hardly exudes confident and trust.
In a perfectly rational world, the best strategy is contingent claim, i.e. further debt reduction is contingent upon fulfilling certain structural reform milestones. However, I doubt this is effective as the problem of interpretation will never go away without trust.
"From that report, unless there is a clear evidence that Greece has changed..."
DeleteThere is clear evidence that Greece has changed since 2010. See http://coppolacomment.blogspot.it/2015/07/a-new-deal-for-greece.html for a comment of the IMF report.
Nowadays, Greece leaves within its means. Salaries, pensions, spending (health cares), ... have been cut and taxes have been increased as requested by creditors. What SWL and other explain is that unemployment and GDP fall (by 25%) are the mechanical consequence of such a politics unless it can be offset by devaluation, which Greece cannot within the EZ. It is not the result of Greece not having fully implemented all requested reforms. In fact, the requests that Greece cut more the pensions to produce a higher primary surplus would only make the problem worse since it would take money out of the Greek economy.
What is infuriating is that the creditors (except partially IMF) have never admitted that the Greek predicament is the very result of such extreme austerity. Making debt reduction contingent to additional reforms like further pension cuts or tax increases is self-defeating. Blaming it on the lack of implementation of the "reforms" is disingenuous.
The problem is not that Greece has not reformed (it has) or does not need further reforms (it needs), but what kind of reforms we are talking about. Greece would benefit of reforms such as improvement of its tax collection capacity, pension system, public administration, etc. as long as there reforms are NOT asphyxiating Greece economy. In fact, Syriza has proposed to continue to implement this type of reforms and is probably well if not better placed than previous government to implement these reforms.
The real point of discord is the insistence that Greece should be able to reimburse the whole debt in the future. To keep this fiction, creditors impose that Greece must produce significant primary surplus (starting immediately with further cuts and tax increase to aim at a 3.5% surplus in the coming years) while continuing to negate the cost and inefficacy of such policy.
Another infuriating aspect is that the fact that the cost linked to the impossibility by Greece to fully reimburse the debt without some kind of arrangement is entirely placed on the shoulder of Greece. While Greece has a clear responsibility for pre-2008 debt [note below], the responsibility for ballooning of the debt since 2010 is to a large extent related to the policies that were imposed to Greece by its creditors in the following years. Citizens of other countries should hold their own government responsible - and not Greece - for that.
Note: There would be much more to say about responsibilities pre-2008 in relationship to the disparities, winner and loosers of the EZ (the discourse here should be how EZ policy might favor some countries to the detriment others). Spain and Italy would be much better examples to discuss this issue but a significant part of the problems of Greece originate from belonging to this club. At the political level, the fundamental problem might be that the countries that benefited from the club might feel entitled to these benefits (such as a comparatively low exchange and interest rate) which exist only because they are part of the club and come as a costs to the other members of the club.
So if the Anglo-Saxon way works so well why there a foodbanks in UK?
ReplyDeleteAnd if the Anglo-Saxon way works so very well why are there cuts at NHS?
The government is obsessed with austerity. Seriously, there is no "Anglo Saxons,." Elites are waging class warfare everywhere.
DeletePerhaps governments should try the Anglo Saxon way in America and England and see how well it works.
DeleteBy the way, Keynesian economics may get the economy back to NAIRU level of employment, but that is not going to ensure that the benefits are distributed to all members of society proportionally.
There is no tradeoff between unemployment and inflation. The government can offer jobs at £x/hour and use a fixed wage employment buffer stock in place of NAIRU. This ensures full employment and price stability and as hiring costs decrease increases private sector employment for a given level of inflation whilst competing away shite jobs.
DeleteYou can't make a developing nation into an advanced nation simply by throwing subsidies and cheap credit at it for a few decades. I've heard interviews with Greeks who are afraid that if they abandon the Euro, they will become a developing nation again. Sadly, they never stopped being one; they were just a rich one for a time. And now that time is over.
ReplyDeleteThe disgustingly bigoted thing about it all is that my fellow Germans are suddenly all in favour of 'Anglo-Saxon' Keynesianism when it comes to our OWN economy. Especially if you feed their damn greed a little, make it look like they could personally benefit.
ReplyDeleteEarly on in the credit crunch, what Merkel did was fast-track a stimulus package for the car industry, thinly veiled with some transparent environmental excuses; the German version of 'cash for clunkers', the 'wrecking premium' ("Abwrackprämie").
You got €2,500 if you threw out a perfectly good car in order to buy a new one. The old one had to be shredded, which had to be certified. Which is of course absurd because no matter how long you run an old car and no matter how dirty its emissions may be, it can never compensate for the environmental impact of building a new car. Which was quickly pointed out by all sorts of people. Who then became the bad guys.
People got so crazy with greed they even threw away cars whose resale value was clearly a lot more than €2,500 just so they could get their hands on that "government" money. Which was of course our own tax money.
There is a non-turbulent and gradualist alternative to either staying with the euro or full grexit to a new drachma: remaining in the eurozone (for as long as needed), but issuing a national parallel currency. And the smart way to do this is to implement it as pure "electronic money", no bills and coins. This also has the advantage of giving the Greek government significant additional leverage in negotiations with the Troika. The proposal is described in detail in this paper:
ReplyDeletehttp://www.paecon.net/PAEReview/issue71/AndresenParenteau71.pdf
The newly retired Greek finance minister three days ago:
<< ...
"If necessary, we will issue parallel liquidity and California-style IOU's, in an electronic form. We should have done it a week ago," said Yanis Varoufakis, the finance minister.
California issued temporary coupons to pay bills to contractors when liquidity seized up after the Lehman crisis in 2008. Mr Varoufakis insists that this is not be a prelude to Grexit but a legal action within the inviolable sanctity of monetary union. ... >>
See http://www.telegraph.co.uk/finance/economics/11719688/Defiant-Greeks-reject-EU-demands-as-Syriza-readies-IOU-currency.html
A question lingering in my mind: how exposed were the German Landesbanken to Greek sovereign debt in 2010. It would be absurd if the Greek are paying for a bail out of de facto German public banks, especially given these banks' disastrous policies in buying US mortgage debt.
ReplyDeleteOdd. When we were negotiating in the EU 20+ years ago the French and others would accuse the UK of being too keen on "Anglo-Saxon economics", meaning market based solutions, in contrast to the European idea of solidarity, more support for ailing industries, centralisation and so-on. No-one ever talked about Keynes one way or the other.
ReplyDeleteHow words change their meaning!
Here you go Simon: https://en.wikipedia.org/wiki/Anglo-Saxon_model. It seems some people still think "Anglo-Saxon" economics means the Chicago school, not Keynesianism.
ReplyDeleteThe Euro was always primarily a political rather than an economic project but for it to work it had to be grounded in economic and banking realities. As we all now know, post GFC, this was not the case. We now also know that the Greeks should never have been allowed to join the Euro.
ReplyDeleteWhilst not disagreeing with what SWL has written it seems what is driving events here is the reported views of the German Finance Minister ( who was trained as a lawyer not economist) that neither the politics nor the economics support the continued membership of Greece in the Euro. This would explain the impasse in the negotiations.
Whilst one can understand the logic of Herr Schauble's position, his view that the political and economic consequences of a Grexit are manageable seems to me to be highly debatable.The really important delusion here ( fantasy if you like) may be that the risks have all been calculated and can be contained. Reminiscent of the Lehman Bros bankruptcy I think
You're point right imo - and Greece inside the Euro was clearly a political decision aswell: The aim was to show the all-European reach of the currency, till the far south-east, knowing that this would also strengthen the use of the Euro in the non-EZ Balkan states. Which is why the obviously false statistics were tolerated.
DeleteI still tend to think that Schäuble was always bluffing about the "manageable Grexit" thing, it's so clearly not the case. But I'm not 100% sure; after all there's enough ppl who believe their own propaganda...
The Eurozone is not viable if a member can kicked to the curb. If I were creditor I'd be furious at Germany . Default is inevitable short a miracle.
ReplyDeleteThere is a serious political cultural problem. If Germany can lord it over all of the zone it's doomed democraticaly.
Austerity has in terms of fiscal consolidation, growth , employment, and basic moral decency. O, and Germans never paid ww2 debts and got the Marshall plan bailout. They also got the Berlin airlift.
I think there will be a muddle through or a breakup.
Kinda reminds me of an economic version of the Israeli Palestinian conflict. Goes way too long, unnecessary suffering, irrational resentment, dehumanization of the other, etc.
You got a kinda nice currency there Germany. Cheap exports. How you plan on keeping it?
In regards to Greece,
ReplyDeleteWhat are the potential origins of aggregate demand growth in Greece? There are only five potential contributors:
1) increased public sector borrowing
2) increased net consumer borrowing (less saving, more credit)
3) increased net business borrowing (more investments backed by credit)
4) increased net exports (export growth, import reduction)
5) sale of assets/ equity to foreign buyers
(1) cannot happen unless Greece expands its tax base.
(2) could easily happen - this will require a better banking system (better able to assess consumer creditworthiness and extend properly priced credit) or higher retirement ages (less need for saving to smooth income)
(3) could easily happen - if the regulatory/ tax/ legal environment were more conducive to new investment, with privatizations, with accessible capital/ bond issuance markets or if banks were in a strong position to expand their balance sheets backing business investment
(4) could easily happen - if the state were to focus on (A) discouraging consumption of traded goods (e.g. raising tax on petrol) or (B) expanding supply side for traded goods/ services production in Greece, e.g. with a higher retirement age, leaner bureaucracy, fewer barriers to forming and growing businesses, a simpler tax system, lower payroll taxes
(5) there isn't much that the state or public sector can do here. If it happens it happens.
Yes - Greece does indeed need to focus on expanding aggregate demand. That is no excuse for fiscal recklessness nor is it a credible demand that taxpayers in Slovakia & Estonia should pay for generous Greek pensions. Rather, the need for aggregate demand growth in Greece is grounds to focus on actionable policies listed above under points 1-5 (i.e. the focus must be on points 2, 3 and 4). Sadly, Syriza has no material plans in this direction - it is clearly Syriza's intent to depress demand further in Greece, driving up unemployment in Greece to even more horrendously destructive heights.
Structural reforms *are* about expanding both supply and crucially demand in the Greek economy - and achieving more equitable and positive social outcomes. Clientelism in the Greek government (among Syriza even more than its predecessors) is what has ruined Greece.
All of Greece hits the wall when you ask about the dodgy accounting and tax evasion, falsification of accounts and kickbacks and, ... (fill in the blank)
ReplyDeleteYes. Much better to speak of drunken driving.
DeleteTried to share this blog on my FB page - but the following message appears?!! Warning: This "Message Contains Blocked Content: Your message couldn't be sent because it includes content that other people on Facebook have reported as abusive."
ReplyDeleteNice comment, thanks (from a German)!
ReplyDeleteOne point:
Germany doesn't care about Greek debt - it's just a tool to force this ruinous austerity policy on Greece and, indirectly, on all of Europe. The real risk, from Berlins perspective, is not losing money, but allowing some kind of alternative within the Eurozone which would undermine their power.
Whether or not they actually believe in their own ideology is another question.
Why Germany is so concerned about Greece's poor financial condition. It is nothing but a political gameplay which German doesn't want to lose. They are on the track of striking the iron when it is hot strategy.
ReplyDelete