Winner of the New Statesman SPERI Prize in Political Economy 2016

Wednesday 1 June 2016

Greece under Troika rule

The repayment of foreign loans and the return to stable currencies were recognized as the touchstones of rationality in politics; and no private suffering, no infringement of sovereignty was considered too great a sacrifice for the recovery of monetary integrity. The privations of the unemployed made jobless by deflation; the destitution of public servants dismissed without a pittance; even the relinquishment of national rights and the loss of constitutional liberties were judged a fair price to pay for the fulfilment of the requirements of sound budgets and sound currencies, these a priori of economic liberalism.”
Karl Polanyi (1944), “The Great Transformation” (p142)

This quote (HT Jeremy Smith) could almost be written today about Greece. I had once thought that the lessons of the interwar period and Great Depression had been well learnt, but 2010 austerity showed that was wrong. I therefore used in a 2014 post an earlier example of where one country allowed another to suffer for what was thought to be sound economics and their own ultimate good (‘a sharp but effectual remedy’): the British treatment of Ireland during the famine.

The British held back relief because of a combination of laissez-faire beliefs and prejudice against Irish catholics. Replace famine relief with debt relief and Irish operating an inefficient agricultural system with lazy Greeks and an economy in need of structural reform, and the two stories have strong similarities, although of course the scale of the suffering is different.

To understand why the Greek crisis goes on you need to understand its history. That the Greek government borrowed too much is generally agreed. What is often ignored is that the scale of the excess borrowing meant default was pretty inevitable. But Eurozone leaders, worried about their banking system (which held a lot of Greek debt), first postponed default and then made it partial. The real ‘bailing out’ was for the European banks and others who had lent to the Greek government. The money the Eurozone lent to Greece largely went to pay off Greece’s creditors.

There was absolutely nothing that obliged Eurozone leaders to lend their voters money to bail out these creditors. Pretty well all the analysis I saw at the time suggested it would be money that Greece would be unable to pay back. If European leaders felt their banking systems needed support, they could have done this directly. But instead they convinced themselves that Greece could pay them back. It was a mistake they will do anything to avoid admitting.

To try and ensure they got their money back, they along with the IMF effectively took over the running of the Greek economy. The result has been a complete disaster. The amount of austerity imposed caused great hardship, and crashed the economy. Whereas the Irish and Spanish economies are beginning to recover and regain market access, Greece is miles away from that, and the Troika’s structural reforms are partly to blame.

Austerity did achieve primary balance on the government’s accounts, which means that the government only needed to borrow to rollover existing debt. But the Troika wants 3.5% primary surpluses by 2018: they want to start getting their money back sooner rather than later. This was and is an absurd demand, and is quite likely to mean that the Troika gets less of their money back in the end. It is clearly preferable to allow the Greek economy to first recover, and then work out over what period debts could be repaid. Right now Greece needs more aggregate demand not structural reform, yet the Troika insists on taking more demand out of the economy.

The requests that the Syriza government made in 2015 were eminently reasonable, as my joint letter with Flassbeck, Piketty, Sachs and Rodrick explained. It was defeated by an exercise of raw political power: Germany and the ECB were prepared to expel Greece from the Eurozone. The Greek people were not going to be allowed to escape from the debtors prison of Troika rule. Greece is even excluded from the debt relief implied by the ECB’s quantitative easing.

Despite Martin Sandbu’s optimism, the recent deal is essentially more of the same. The IMF, which knows it makes no sense to ‘extend and pretend, has again capitulated. The reaction to the IMF’s paper on neoliberalism has generally missed the key point. It is not fanciful to believe that the paper is directed at those within the IMF like Poul Thomsen, the head of their European department. Falling GDP will continue to be blamed on the Greek government, even without its former finance minister. Of course one day the Greek economy will recover, just as the Irish famine came to an end. But history, as taught in Britain as well as Ireland, does not remember the British troops guarding the shipments of grain leaving Ireland during the famine as heroic upholders of the rules of law and contract. Nor will it do the same for the members of the Troika that keep Greece in poverty.


  1. Hypothetically, is there anything that the British Government could do to aid the Greek Economy? Could we, say, create a sort of Marshall Plan which could be used to stimulate Aggregate Demand in Greece? It's not going to happen I know but I wanted your thoughts on the feasibility of that sir.

  2. I think it was Hayek who said that there's nothing more destructive of the very idea of the rule of law than to expect to approve of every instance of its application. Hume made the same point - justice is an artificial virtue, and the civilised man moderates his sentiments of pity and revulsion because he knows that more harm than good will be done if he guides his conduct by them. Are we absolutely certain that a Laplacean demon, motivated by the desire to maximise aggregate utility and looking into an indefinite future, would always do what "progressive" academic economists would wish to see done?

    [English landowners bankrupted themselves to try to help tenants into coffin ships to send them to a country which didn't have a welfare state, but did have a civil war which Yankees could avoid for $300, and Irishmen could be made to fight in, straight off the boat. I'd venture to suggest that a 40 Euro flight to the UK, 30 hours a week on the minimum wage, and a de facto post-benefit income of £1400 a month is rather different].

  3. So Troika rule is not working, but what would?

    Perhaps time to dust of some proposals from last year relating to supplementary currency:

  4. Greece joined an organisation (or should I say cheated its way into an organisation) namely the EZ, where the rules are perfectly clear: each country pays its own way. The EZ is not a fiscal union (where rich countries subsidise poorer ones). Maybe it SHOULD BE a fiscal union, but it just isn't.

    Given that fact, it is of course tempting for a country to run into debt and then scream blue murder about its resulting poverty. Greece has form going back 200 years when it comes to cheating its creditors. That trick might work, but richer EZ countries are under little moral obligation to help Greece. If Greece doesn’t like the EZ, it’s free to leave. The UK, Switzerland and other European countries are not in the EZ. They seem to be doing OK.

    1. Seems to be quite a lot of anthropomorphising here, as though a country could 'scream blue murder.' The inept design of the EZ is now very clear. The horrible consequences of this inept design are being disproportionately endured by poor Greeks. This is, I suppose, just their bad luck, but for the arbitrarily lucky to turn their backs on the arbitrarily unlucky is mean-spirited at least, and also threatens dire political consequences.

    2. To put it another way, is a Greek bus driver more responsible for the ineptitude of the design of the Euro than is a German banker? if not, why should we accept that the consequences of that ineptitude should fall so much more heavily on the shoulders of a Greek bus driver than on those of a German banker?

    3. > or should I say cheated its way into an organisation

      Come on. No. You can blame a lot on Greece and its governments but this is not true. It has been explained by no less than Eurostat, among others.

    4. patrick amon1 June 2016 at 18:13

      What about the bus drivers who owed their jobs and the right to retire early to the party they were affiliated to? In public transports, that was and is the rule. In private transports, his boss who gave him the job probably got his licence the same way. Do you doubt the bus driver didn't know that?

    5. Well, Patrick, if you aren't prepared to have the populations stand behind - and if necessary suffer from - the consequences of their elected government how will anyone ever be able to rely on the assurances of such governments? Varoufakis thinks that there is something "undemocratic" in the Troika not accepting his government's democratic "mandate". That, of course, involves giving the present Greek government the same right that the Athenian democracy had when it decided that Euboea might make a nice little weekend place.

    6. patrick amon1 June 2016 at 17:23

      The inept design of the Euro was due to French and Italian politicians who foolishly forced it on an unwilling Germany as the price of reunification. The German policy makers were, as Martin Wolf has pointed out, aware of the implications of a currency union without fiscal union and realised that Germany had to adapt. That is what it did and so made the best of the euro. Other countries did not, the most inept being the Greeks.

      Clearly, the best thing for Europe would have been not to introduce the Euro. Once it was there, the best policy was to stay out, as Britain and others did, or to adapt. The silliest policy was to cheat one's way in like the Greeks and Italians without adapting.

    7. «is a Greek bus driver more responsible for the ineptitude of the design of the Euro than is a German banker?.»

      The greek bus driver is totally innocent of that, as the principle of collective responsibility is not popular, and so is the german banker, for the same reasons.

      The democratically elected government of Greece in 2004-2010 committed massive public accounting fraud (confirmed officially by the greek prime minister in the greek parliament) to borrow a lot of money that they distributed among their political machines, knowing that they would never repay it. With that fradulently borrowed money they temporarily zoomed greek GDP by 20%; when that money ended, greek GDP went back to its previous level. Greek governments have done something like this pretty regularly every 20 years for the past hundred years.

      Note that most of the borrowing this time was from french banks (the german government bailed out both the french and the greek governments in effect). Also, note that the borrowing was almost entirely spent on imports, because as Y Varoufakis said the greek economy does not produce much of what people want to buy.

      «if not, why should we accept that the consequences of that ineptitude should fall so much more heavily on the shoulders of a Greek bus driver than on those of a German banker?»

      The consequences have simply been that in 2014 greek GDP was the same as in 2004, when it was considered that of an affluent country, at a level of 4 times the GDP per capita of Romania, which is considered a poor country. At the peak in 2008 greek GDP per capita was 5 times that of Romania. That boost was funded with about $50 billion a year of fraudulent borrowing, something like on average $15,000 per year per greek family of extra income.

    8. The IMF appear broadly to agree with Varoufakis now that an insistence on unfeasible primary surpluses will continue to contract the economy such that creditors will get less, rather than more, of their money back. If they're right it's hard to avoid the conclusion that the continued demands for further austerity in Greece are primarily punitive in nature, or are a means of threatening other EU states. I'm not sure how helpful invidious comparisons with Romania are. Does mass unemployment in Greece help Romania somehow? Certainly, the EU should pursue economic growth in Romania. I'm confused as to how stifling it in Greece is supposed to help. Varoufakis, Craig, has repeatedly granted that a change in government in Greece does not liberate Greece from commitments made under previous governments. His objection is to Schauble's insistence that 'elections cannot be allowed to change anything.' If you think that there is nothing undemocratic about that, well, fine, I suppose.

  5. "obliged Eurozone leaders to lend their voters money to bail out these creditors" Had to read this three times: I think you mean "... lend their voters' money to bail out ...". Might be clearer if you said "taxpayers'" but that has political connotations!

    On the content, fully agree and would like to think that some of the discussions below the line here have helped to clarify your views. It still needs saying, as I have found in recent conversations with defenders of the troika. But the big weakness of your (and my) position is that even with debt relief the creditors and institutions are far from convinced that any Greek government is capable of running the economy efficiently - or even at all.

  6. It is perhaps time to realise that the end of the Westphalian system is actually the aim here.

  7. Thank you for the quotation by Karl Polanyi: It shows one needn't believe everything he says.

    When a private person or firm defaults, their assets go into a receivership and, at least in some countries, anything earned during bankruptcy also goes to the receiver except a minimum income.

    Since there is no receivership for sovereign countries, they can keep all their domestic assets and pull a long nose at their creditors - unless they need more money from them. If the creditors then say the defaulting country has to submit to the unpleasantnesses of bankruptcy, what's wrong with that? After all, the Greeks had the fun of spending the money they borrowed. Now they have to pay the price. Any objection?

    The comparison with the Irish famine is ridiculous. The living standard in Greece is still higher than in some other Euro countries.

    1. > After all, the Greeks had the fun of spending the money
      > they borrowed. Now they have to pay the price. Any objection?

      Actually yes.

      Although the Greece's mismanagement of its finances (especially regarding the pension system) is well documented, it takes two to tango. If the (mostly non-greek, mind you) banks hadn't lent all that money during the 00s, there would be more pressure to the Greek government to curb expenses. Without it... well, we know how the story ends.

      Some points to note here:

      1. This argument is sometimes compared to "the baker made me fat". This is logically and factually wrong. In particular, the hypothetical baker is under no obligation to watch my waistline. In stark contrast, the efficient allocation of capital the reason we have banks in the first place. It is literally the bankers' job description.

      2. This in no way dismisses the very real responsibility Greece has for this mess. But it is not only morally correct to share at least some of the borrower's pain to the irresponsible lender, it is also good policy. It avoids creating a moral hazard for the banks ("I don't care if the loan is bad, I get paid anyway") and thus helps in future crises being generated in the first place.

    2. «The comparison with the Irish famine is ridiculous.»

      That's quite an understatement.

      «The living standard in Greece is still higher than in some other Euro countries.»

      Indeed 7 our of around 19. The greek GDP per capita is around 4 times that of Romania, it had surged to around 5 times when spending the borrowed money.

      That said, the return in 2014 to a mere 4 times the romanian or bulgarian level, which is the same level it had in 2004, has been painful.

      Not because the income level in 2004 was painful, but because it has become more unequal: the same overall GDP is achieved with a lot less workers, who now produce and often earn a lot more than in 2004. That is the reduction back to the 2004 level of GDP has been done by increasing unemployment, not reducing incomes to the level of 2004.

      Some other affluent countries in the eurozone have seen no increase in GDP per capita between 2004 and 2014, but this because it has been stationary, not gone up by 20-25% and then down by the same amount, with a significant fall in the number of people employed.

      This BTW according to the official statistics, which are still rather unreliable. For example a large part of the fall in employment between 2004 and 2014 has been due to a large fall in employment of young people, and this fall has been going on at the same rate also in the 2004-2010 boom days.

    3. This comment has been removed by the author.

    4. dandraka2 June 2016 at 02:08 identical with
      Dimitris Andrakakis3 June 2016 at 01:34

      " But it is not only morally correct to share at least some of the borrower's pain to the irresponsible lender, it is also good policy."

      That is exactly what happened: The private sector was forced by EZ politicians to write off 100b € - in other words, the banks lost that amount, so what was a repayable loan turned into a gift to the Greeks.

      Is it so hard to understand that a bank that makes a bad loan is later punished by not getting it back in full, if at all? That is not just good policy, it is hard reality. So you are reproachfully demanding something that happens every day. Enjoy and be happy.

    5. The punitive tone of the expression 'pay the price' is unmistakable, and says it all.

    6. Most of the money provided by the EU and IMF to Greece has not gone to the Greek people but has been used to bail out the banks. It’s only the bill that has been sent to Greece.

      The banks and EU leaders cannot avoid their responsibilities. Yes, the Greek government of the day fiddled its books (with the able assistance of Goldman Sacks) to meet the criteria to enter the Eurozone but the other governments knew what was going on. Admitting Greece was a geopolitical decision, as was the extension of the EU to include Romania and Bulgaria, and failing to follow through by taking the economic measures needed to make it a success led inevitably to disaster.

      Did Greece import too much? Yes, internal trade imbalances are a major weakness of the Eurozone. But it cuts both ways. Germany and some others export too much. It’s a profitable business even if it causes disruption. Similarly, Greece’s inability to repay its loans is as much the responsibility of the lenders as of the borrower. A bus driver is not responsible for assessing the viability of a loan to a government. He is responsible for driving a bus and if he crashes it he risks losing his job and his licence, and perhaps facing criminal charges. A banker is paid for assessing a customer’s ability to repay a loan, and the French, German and other bankers failed to do their job. They didn’t carry out due diligence and they mispriced risk but they didn’t care because it was good business and justified big bonuses. Senior bankers have made far more out of this than any Greek bus driver.

      The comparison of Greece and Romania is irrelevant. It’s like saying the Great Depression didn’t happen because the US was a rich country. But I do think the Greek government made a negotiating error by concentrating too much on its own debt position, rather than challenging austerity at a Europe-wide level, for example, by demanding a major infrastructure programme aimed at the poorer countries of eastern and southern Europe.

      The stupidity of imposed austerity is that it is self-defeating. Whatever one thinks about how much debt Greece should repay, someone who is unemployed can make no contribution to doing that. One of the interesting ideas raised by Varoufakis was that the target primary surplus and loan repayments should be linked to the rate of growth, i.e. Greece should repay when it could. This would have been similar to making corporate debt into equity by giving lenders a stake in Greek recovery and hence in the steps needed to achieve that.

    7. patrick amon3 June 2016 at 15:33


      Sorry for my choice of words. All I meant was that greeeks were now required to pay back their loans as they had promised.

      Any objection to that? Is that still punitive?

    8. Lyn Eynon3 June 2016 at 23:52

      Could it be " that even with debt relief the creditors and institutions are far from convinced that any Greek government is capable of running the economy efficiently - or even at all"? And for good reason?

      Cf. David Sweet1 June 2016 at 04:03 above.

    9. (@Anonymous, 3 June 2016 at 05:57: I removed the duplicate comment, thanks for spotting it)

      "That is exactly what happened: The private sector was forced by EZ politicians to write off 100b € - in other words, the banks lost that amount, so what was a repayable loan turned into a gift to the Greeks"

      Unfortunately, that is NOT what happened.

      I don't have the numbers in front of me (and TBH it's too nice a Sunday afternoon to spend 1/2h looking for them) but the thing is that, by the time the PSI came around, hedge funds and most of the EZ (GR exculded) banks were long gone. These 2 years of delay had effectively bailed them out.

      That is not to say they didn't incur losses --they did. But their share, and accordingly the debt relief for Greece, would have been much bigger if PSI had happened in, say, Q4 2010.

      At the same time, GR banks and pension funds had been "politely asked" (i.e. forced) to buy more goverment debt, which magnified their losses and their recapitalization needs post-PSI.

    10. While we're on the subject,

      In general, though, for reasons such as those indicated by Craig Ross above, the principle that debts be repaid is a principle to be upheld. The key objection to the Troika's demands of Greece is that they are counter productive. Not only have these demands had dreadful humanitarian consequences, they have also dismally undermined Greece's ability to repay it's debts. Debts are repaid through work. According to the glib, populist narrative, the problem is Greek laziness. The reality is that it is the Troika's demands that have left a huge proportion of working age Greeks in involuntary, indeed depairing, idleness.

  8. Since you started bashing British Empire, i am suspicious of how much Greek debt was their own fault.
    "That the Greek government borrowed too much is generally agreed." This sentence represents a huge problem especially since it is a general agreement which means there is no need to question that opinion. I will.

    How much debt of Greece is incured by British financing Greek king to wage a war on his own people 1944-50? Exiled king needed finacing to get back to power and Britain helped financialy and by force. The cost of civil war was put on Greek debt. That is not their own fault.
    Another part of their debt is interest rate. Since Greeks as a colonial nation always had dependent monetary policy that means that their interest rate is always higher and much higher then Taylor rule and Philips Curve demands it. As a colony that borrows in foreign currency they tought that they have to keep raising the rate in order to atract more finacing to refinace old debts and service it.
    Since every country only refinance old debts and service it with new debt (which is a fundamental rule of trade) the question is How much of that debt is due to higher then needed interest rate, especially in last years when rate reached 27% in 2011?
    Most probably the Greek debt without British forcing it on them and with Taylor rule interest rate levels would be on par and probably even less then German debt level.

  9. The tragedy in Greece is that the Greek government was not willing to leave the eurozone. The correct move was to preemptively exit the eurozone before being expelled. Declare it a bad idea and have the drachma notes already printed and ready to go. But none of the Syriza government were willing to do it.

  10. No, Draghi's Ecb was NOT ready to expel Greece. Neither were France and Italy.

  11. Having located that Polanyi quote, I can see that it refers to the 1920s, so we should recognise that the insistence of loan repayment and stable currencies was not just economic dogma but also concerned the post-war balance of power. Political factors have also played a role in the treatment of Greece. As you say, Europe’s leaders have been unable to admit their mistakes. To do so would throw open the whole question of the political direction and structure of the EU.

    Polanyi starts his following paragraph with the observation that “The 1930s lived to see the absolutes of the 1920s called in question.” By then the world had experienced the Great Depression.

  12. "Of course one day the Greek economy will recover"

    Yes but in the long run...

    In the meantime what about the 3.5% target that will surely be missed? The automatic cuts are then supposed to kick in... If the Tsipras government manages to survive another round of spending cuts, it will mean further contraction of the economy and there is seemingly no end to the negative feedback.

    So it looks like it can end only when the situation becomes so dire that the creditors have to decide if they want Greece to become a failed state or not.

    For this reason I am not sure if I am quite following you when you say that the situation in the eurozone looks like a (very sub-optimal) equilibrium. I am certainly not in a position to argue about the economics but is it politically sustainable?

  13. I would agree that Greece has been appallingly treated.

    However, the irony is that the majority of the Greek people want to remain in the EZ. Schauble was angling for a Greek exit last year and even offered to finance a Greek exit. What would have made more sense than a managed and negotiated Greek exit?And Merkel wanted Greece to remain in the EU. Greece could have had the best of both worlds, without the loss of sovereignty to the Troika and punishing austerity. It would have been free to sort out its internal problems in its own time behind it own currency.

  14. "If European leaders felt their banking systems needed support, they could have done this directly."

    Really? When I remember the discussion about the exposure of German banks to Greece of only about 40 billion and the decision not to follow this national bail out path -that was known to be cheaper than alternatives in 2010 - the reason given was that other countries in southern Europe would not have been able to do so.

    Was Portugal with the same exposure as Germany but only 20% GDP and a government under real stress able to bail out their banks in 2010? Was Italy? France?


  15. The Greeks said Oxi, but they did not have the confidence to accept the logical corollary - that they default, and leave the EZ, as YV proposed. The Greeks did not believe that their government, their institutions and indeed they themselves were capable of sorting themselves out, outside the EZ, and possibly even the EU. Ironically, one effect of the Troika's misguided policies may be that the Greeks are now more confident of their ability to sort themselves out. I certainly felt that (purely subjective impression) when I visited in April, after 2 year's away. Money was being spent, on paint of nothing else. The place was tidy. People generally seemed less terminally depressed / defeated than they were in 2014. Maybe, sometime soon, they'll give the Troika two fingers and walk.

  16. The greek parliament have a set of free options, any of which they may freely choose:

    * Declare formal bankruptcy and fuck over their EU victim.

    * Exit from the eurozone and the EU and fuck over their ex-EU partners.

    * Accept the $50 billion per year of unconditional fiscal transfers that the USA and the UK have jointly offered to their loyal ally Greece to restore their GDP per capita to 5 times the level of Romania instead of the 4 times that they consider cruel and unusual punishment.

    The greek parliament is sovereign. Make a choice.

  17. "Declare formal bankruptcy and fuck over their EU victim."

    Whatever. Why did the Germans sign up to bailing out banks exposed to Greek government debt with public money, rather than letting the banks go to the wall, writing out the losses on both sides, and recapitalising them via the administration process?

    We already know that debtor’s prisons don’t work. That’s why we created the bankruptcy procedure to fucking fuck over creditors.

    1. There are no bankruptcy procedure or debtor's prison for sovereign countries. That means they can fuck their creditors as long as they want to - as long as they do not want more money from them. Would you lend the Greeks?

      If you are so free of your money, may I ask you for a loan of 100,000 € (or less, if that amount isn't available)? You can be sure I will repay you - I'm Greek, and I don't pay taxes, so there is absolutely no risk for you.


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