Winner of the New Statesman SPERI Prize in Political Economy 2016

Monday, 17 October 2016

Structural Reforms and Greece

Should the Troika - the Eurogroup, ECB and IMF - be concerned about how bread is sold in Greece? You would think they had more important things to worry about, like getting Greece out of the huge recession caused by their own policies. But no, you would be wrong. The Troika decided that standards specifying the weights that loaves could be sold at were a restrictive regulation, and demanded change.

This is one of the examples Joe Stiglitz quotes in his new book on the Euro, which I review in the New Statesman here. Now you might agree that at the very least this represents a misdirection of the Troika’s energies, and more generally that it involves unwanted interference in national sovereignty. But in Joe Stiglitz you have one of the best economists in the world, so he also tells you that there is a long-standing economics literature on how regulations like these can increase competition because they facilitate comparison shopping.

Stiglitz is very critical of many other ‘structural reforms’ that were imposed on Greece by the Troika. The only structural reforms that it might have made sense for the Troika to suggest were measures that would have moved resources into exports, thereby helping an external demand led recovery (see Ireland or Spain). As I note, even here Troika meddling may have had undesirable consequences.

As I said in a recent post, a little knowledge can be a dangerous thing. But of the three parts of the Troika, the IMF ought to have the knowledge to do better. (The ECB has apparently just created a task force to consider economic reforms.) Over 1,500 economists work at the Fund. Whether that knowledge gets to the right people at the right time is another matter. But I suspect the main problem at the fund is politics rather than economics. I have written about this recently, in the context of an Independent Evaluation Office report on the IMF’s Troika role. Here is a more substantive piece by Edwin Truman at the Peterson Institute in a similar spirit.

Greece is currently trapped in a debtor's prison created by the Troika. The Troika insist that debts have to be repaid. The IMF knows the prisoner does not have the ability to do this, but does not have the political will to demand that as a result the prisoner should be released. Debt repayment requires yet more austerity, which kills the chance of the recovery, so even with austerity debts are not repaid. Some debt forgiveness is probably in the interests of everyone, including the creditors, because after a recovery Greece will be in a much better position to pay any remaining debts. But it is politically unattractive for the creditors, so it does not happen.

This is a disaster for Greece, but a bad omen for Brexit. Those who advocated Leave say it is in the Eurozone's interests to agree favorable trading terms with the UK. To do otherwise would be to sacrifice economic interests to make a political point. The obvious irony of course is that this is exactly what Brexit was: sacrificing economic interests to make a political point. But Brexiteers want to believe, in their topsy turvy way, that European leaders would not be as reckless as they are. Greece is an example of how Europe's political leaders can also discard economic logic if it is in their own political interest to do so. 


  1. A once in a lifetime opportunity for the European elite to kick the British establishment in the nuts......

    Why wouldn't they?

  2. History proves this is nothing new! but in the end economic reality or revolution/war forces change,maybe just this once,political insanity can be changed by chaos! because one of the great achievements of divide & rule is that it is very hard to unite people,even in revolutions/wars

  3. I think maybe it is also unattractive to be part of a collective that systematically maintains the prison of debt in Greece. Unless we are willing to change that system.

  4. Ireland has a veto.

  5. Another contradictory post. The only card the EU has (and it is a huge one!) is threatening UK citzens abroad, and obviously indirectly EU citzens here.

    Greece can leave anytime, as can the UK. France is a better example. Hovering around 10% unemployment and overly tight fiscal policy. Greece has many other factors despite the continent wide tight fiscal imposed.

    "Europe's political leaders"

    That would be Alexis.

    If they really are that bad and this is a power struggle, we have to make a "prison break", whose side are you on? SO you support Grexit Simon? Or not? Answer me.

    "But Brexiteers want to believe, in their topsy turvy way, that European leaders would not be as reckless as they are"

    They have an export based economy due to their recklessness. They must *import demand*

    Ultimately their recklessness will cause the destruction of the project. Sad really.

    Of course none of this matters to Jeremy Corbyn's party of capital and his crazy supporters. Workers on tap whenever business moans, and keeping a reserve army of unemployed because there are never enough jobs to go around. Rather than producing skills shortages:

  6. "Greece is currently trapped in a debtor's prison created by the Troika."

    No. The debtor's prison was created by the Greeks themselves. They made their bed.

    1. Anonymous does not apparently know what a "debtor's prison" is or was. So they ought to do a little bit of reading. It is not a metaphor or turn of phrase. It is a barbaric and counterproductive institution that has seen the scrap heap of history.

  7. The institutions only have power over Greece because Greece is still willing to play their game. Had they chosen Grexit, their calvary would be over. The big difference here is that if Britain is willing to leave on WTO terms, the Europeans can make their choice. What the new government would like is eminently reasonable.

    The problem for the EU countries is that they can't do any damage to the British economy until after Brexit actually occurs (and how much damage they can even do is questionable), but the elections in Germany and France (and potentially Italy) will be just as Britain's exports begin to surge and unemployment falls (according to my crude J-curve on this napkin).

    Hopefully the contagion will catch on during negotiations, which will seriously damage the hand of the EU.

  8. Prof. you describe a chronic episode of economic mismanagement motivated by a destructive (and anti democratic) right wing ideology. You then lament a democratic British decision to terminate the powers of these same policy making bodies over future UK policy making. The EU, you seem to suggest, is so mad & bad that it is dangerous to provoke it by voting to leave. We must sacrifice domestic democratic accountability for economic reasons because the EU will certainly sacrifice its economic interests in order to punish any defector from its authority. You are describing a hostage situation.

    If they have gone to the mad lengths of developing an irrational and counterproductive economic dogma (by fixing it in perpetual treaty concrete) then this unfortunate fact clearly supports the case for leave. If the policy product of these EU institutions is as retrograde as you describe then why would you advocate continued submission to its authority?

    If free trade with Europe requires a degree of policy subordination that is not required in our trade with anyone else then why is this not a concern to you (and other remainers)?

    Is the policy retrograde despite the absence of democratic accountability at EU level or is it retrograde precisely because of this absence of democratic accountability?

    It doesn't seem to me that offering a meta version of Stockholm syndrome (even one as widely shared amongst Britain's great and good as this appears to be) provides as convincing a refutation of the wisdom of crowds as you seem to believe.....

  9. There’s a way of bringing the Greek economy up to something nearer capacity while at the same time enabling it to repay debts, and that’s to have Greece impose import tariffs, as suggested (so I’ve been told) by the German economist Heiner Flassbeck. That comes to the same thing as Greece devaluing its currency.

    Obviously that contravenes one of the founding principles of the EU, but desperate times call for desperate measures. If the price for cutting unemployment in Greece is a temporary violation of the above principle, that sounds to me like a good bargain.

    The article by Flassbeck is at the link below. My German isn't good enough to understand it, though.

  10. I totally agree that it is against the public good to have the deregulation of bread sales as imposed on Greece. But it seems to me that it is an example of a much wider phenomenon where there is a (twisted) economic logic that is valid on its own terms notwithstanding the fact that it is against the public good. Deregulating bread sales prevents customers from effectively exerting competition on producers and retailers. The consequently inefficient market creates opportunities for profiteering and waste that in turn increase economic churn and so tax revenue within a framework where it is economic activity that gets taxed. The same mechanism drives much of the economic "reforms" such a PFI schemes and the UK mess of an electricty market that nevertheless boost the value of sterling by giving foreign investors great opportunities to extract from the UK public.

  11. I fail to see why you recommend Edwin Truman's piece at the Peterson Institute. It is mostly a verbose collection of internal IMF gossip. Do we really have to read things like:

    "As I used to say when I was a US official offering guidance on IMF programs, "The world is round.""


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