Winner of the New Statesman SPERI Prize in Political Economy 2016

Sunday, 2 September 2018

Lessons from the Greek tragedy unlearnt

I realise I have not written much about Greece since the open letter to Angela Merkel that Thomas Piketty, Jeffrey Sachs, Dani Rodrik, Heiner Flassbeck and I wrote in July 2015 (see here and here). Nothing has changed to alter the views I expressed then. The excess borrowing, some of which they kept secret, of Greek governments before the crisis was always going to involve painful adjustments subsequently. Eurozone governments and the Troika (Commission, ECB and IMF) turned a painful adjustment into a major calamity.

Unfortunately for a UK audience I have to stress this has nothing to do with the EU, and everything to do with the Eurozone and what I called in one post the “stupid cruelty of the creditor”. Private banks were happy to lend to the Greek government because they mistakenly believed their money was as safe as if they were lending to Germany. Other governments first delayed and then limited Greek default because they were worried about the financial health of their own banks. They replaced privately held Greek debt with money the Greek government owed to other Eurozone governments. From that point voters would always want all their money back. In an effort to achieve that the Troika demanded and largely achieved draconian austerity and a vast array of reforms.

The result was a slump which crippled the economy in a way that has few parallels in history. Most economists understand that in situations like this it is ridiculous to insist that the debtor pays all the money back. For basic Keynesian reasons this insistence just destroys the ability of the debtor to pay: it is not a zero sum game between creditor and debtor. This is why so much of German debt was written off after WWII, as we noted in our letter.

By July 2015 the Greek government was able to pay for its spending with taxes, so all it needed was loans rolled over. The Troika would only do that if the Greek government started running a large surplus to start paying back the debt i.e. further austerity. It made much more sense to let the economy recover first, but the Troika did not see sense. They got their way only because the ECB cut off the supply of Euros to Greece. The only way out for Greece was to leave the EU and its people did not want this. Outside the Eurozone a government in a similar situation would have defaulted in 2010 and its creditors would have lost their money, or it would have defaulted once it got to primary surplus. Being in the Eurozone with the ECB doing the creditors bidding was a different story.

The cost to Greece was not just a much reduced standard of living but also, as Frances Coppola describes, it meant
“Newborn babies are dying of completely treatable conditions, adolescents and young adults are killing themselves, and adolescents and adults are dying of diseases associated with poor diet, alcohol abuse and smoking, and of treatable illnesses”

in far greater numbers than elsewhere in Europe and in Greece before the crisis. Most of this is the result of the stupid cruelty of the creditor: the Eurozone governments, the ECB and the IMF. I compared the indifference of other Eurozone countries to the suffering they imposed on Greece to the inaction of the English government during the Irish famine.

It did not help that the dominant voice in the Eurogroup was a German government that frequently appeared not to understand basic Keynesian economics, but as we know in the UK that kind of thing can happen anywhere. It did not help that the IMF overrode its own procedures in assessing whether debts could be repaid under pressure from key European governments. It did not help that many of the conditions the Troika imposed on Greece as structural reforms were counterproductive in helping the adjustment process.

But the major lesson I draw from all this is that intergovernmental loans within the Eurozone are a very bad idea, because they just encourage creditors to be stupid. Outside the Eurozone, once a debtor economy has achieved primary surplus it can default on its debts and that gives it some power over creditors. That helps prevent disasters like Greece happening elsewhere. Inside the Eurozone the creditors have too much power, because they can threaten to cut off money to a member's banking system or throw you out of the club. The Eurozone has not learnt this lesson for obvious political reasons, which makes it a dangerous club to join. If you are unfortunate to live under a Eurozone government that secretly borrows too much, many more of your countrymen will die as a result of being in the Eurozone.


  1. Your piece gives a very good reason as to why the EU will fail.

    You say that inter governmental loans are a bad idea because they encourage the creditors to become stupid and you are right. This has meant that default will bring down, or at least put pressure on other EZ banks, and this is to be avoided at all costs.

    To say that the EZ is a dangerous club to join is IMV an understatement; if there is anything which will speed up the inevitable disintegration of the EU it is the failure of the Euro and that failure is almost impossible to avoid.

  2. I've not really understood why Greece wants to remain in the Eurozone. Didn't Germany have a proposal a few years back where Greece could exit, default, and rejoin the Eurozone after a few years? Why didn't Greece take that route?

  3. "Unfortunately for a UK audience I have to stress this has nothing to do with the EU, and everything to do with the Eurozone."

    The Euro is an integral part of the EU project. All EU countries are expected to adopt the euro when their economies are ready – except Denmark which has an official opt out and the UK which is leaving.

  4. It's becoming impossible not to laugh in disbelief when you say things like this;

    "I have to stress this has nothing to do with the EU"

    The Eurozone comprises 19 of the 28 nations of the EU. As you correctly say about Greece;

    "Most of this is the result of the stupid cruelty of the creditor: the Eurozone governments, the ECB and the IMF"

    How can you believe this is NOT about the EU?

  5. I would be interested in your views or blog on the situation in Italy that seems intent on default and perhaps eventual withdrawal from at least Eurozone?

  6. You are right in showing the cruelty of the Eurozone governments to Greece. But there is one important element in this: Germany. This state has become the indisputable master of the Eurozone and, having the ECB under its full command (possibly by blackmailing its board), it uses it as its weapon of choice against other members of this unholy currency alliance.
    It is as if we have a pack of wolves, a blood-thirsty leader and a mass of 28 frightened members of the pack, completely subservient to the head wolf. This is eurozone today. The leader wants to make examples of what happens to those who dare disobey, therefore he does not hesitate to destroy any member who dares defy him. At the same time, he takes pleasure in feeding off the blood and flesh of the rogue member, just like a vampire.
    The desire of Germany to be a predator state to colonialise the entire eurozone must not be neglected or overlooked. In the case of Greece, Germany has been the only force determining the austerity measures, approving governments, and eventually consciously executing genocide plans on the people of Greece. For example, the deterioration of health care is a deliberate measure to reduce the population. This has been coupled with measures of economic punishment for the two extreme ends of the population spectrum: child births, which are penalised via the tax code, as children are considered taxable evidence of certain pre-determined levels of income, and early deaths on the elderly, both via deteriorating health care and via aggressive reductions to pensions of the order of 50-60% since 2009.
    At the same time, German state companies are stripping Greek assets at knock down prices: recent purchases include the port of Thessaloniki to a German-dominated consortium and, the greatest scandal of all, the acquisition of the 14 most profitable airports of the country by Fraport. The ridiculously low price for the airports was not even paid via Fraport funds, but via loans from (supposedly cash-starved) Greek banks!

  7. What was done to Greece was intolerable but is this not a lesson for us all? I wonder if we should not believe politicians who promise but have no hope of delivery! Are electorates in general not guilty of being gullible? Depending upon our elites to make all the decisions and allowing them to much unquestioned power?

  8. Thanks simon,

    I have highlighted this post at my modest blog.

    As I say there are people with blood on their hands. What makes this worse any idiot should have known what would have occurred when these policies hit home.

    An utter disgrace


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