The wheels on the bus

I have an image in my mind. Its a bus running downhill, and its brakes have failed. There are four men in the front cab. The two men in the middle are both trying to control the steering wheel to keep the bus on the road. The man to their right has control of the accelerator, and is pushing on the gas hoping this will crash the bus to the right. The fourth man to their left controls nothing, but as his pleas to stop pressing the accelerator fall on deaf ears, he begins to wonder whether it would be better for the passengers to grab the wheel and crash the bus to the left. The three other drivers do not agree on very much, except that it is all the fault of the guy on the left, and now appear to be thinking about throwing him off. As the bus hurtles downhill swerving from side to side, its passengers are battered, some injured, and a few are jumping off.

I do not need to explain the symbolism. I tried to change the image to explain why the man on the right refuses to stop pressing on the accelerator of growing primary surpluses, but gave up because the real reason is that he wants to crash the bus anyway. (The argument that the Eurozone’s rules do not allow debt write-offs is just nonsense.) Otherwise I think the image works well. The two men in the centre represent Tsipras and maybe Hollande. Hollande is saying that if only you would let me have the wheel (‘structural reform’) all would be well, but in truth the main reason the passengers are being injured (unemployment and welfare cuts) or are jumping (migration) is the speed of the bus.

The central question is whether the men in the middle are delusional. By keeping the Greek economy on the road that is the Eurozone are they only going to prolong the agony with the same inevitable crash which is Grexit?

There is only one reason for optimism that I can see, although it assumes yet further reductions in Greek living standards. The hill the bus is travelling along will begin to flatten out and the road might even start to rise as Greece becomes more competitive in terms of price. I outlined here why that has not yet boosted the Greek economy to the extent it has in Ireland, but if unemployment remains at or above 25% Greece should get even more competitive. Instability and unwise Troika interventions may delay the process, but eventually the tourists will come. The Eurozone does contain a natural correction mechanism: it is just slow and painful.

If this does eventually lead to sustained growth in Greece, it does not excuse what has gone before: recoveries do not justify recessions, and government profligacy does not have to imply a 25% fall in GDP! However this correction mechanism is not bound to succeed, if it is countered by another dynamic, which is one that has been and continues to be imposed by the Troika. That dynamic is austerity chasing primary surpluses when that austerity makes the economy shrink. Macromodels would probably tell us which dynamic will win out, but they will not factor in a deterioration in the financial position of banks (already not good as Frances Coppola points out) as the economy stagnates, and the deteriorating social and political situation that austerity brings.

So the eventual outcome still depends on the decisions of the Troika. It always has of course. The truth that their apologists find so uncomfortable is that the Troika has been in charge of the economy since 2010, and therefore is responsible for the mess we are now in. The idea that all would be well if only Greece had undertaken every item of structural reform they specified (and a lot was done) is just silly. Now it appears as if it is all the fault of the former Greek finance minister, because he dressed funny, or kept wanting to talk about economics, or did some contingency planning - it is so absurd you couldn’t make it up.

One ray of hope offered by Anatole Kaletsky is that now “ritual humiliation” has been achieved, the Troika will be more forgiving. I wish he was right, but this argument fails to account for the German finance minister who clearly believes that exit is the best option. He wants the bus to crash for the sake of the other cars on the road. An optimistic view would be that the shock [1] of what was done to Greece a few weeks ago will bring others to their senses, and Schäuble’s influence on the Eurogroup (and strangely the IMF) will decrease. I fear the larger truth is that the non-German bloc in the Eurozone does not have an alternative economic vision to offer (although it clearly exists), and will never face Germany down.

[1] Link added 31/07

After Oxi, what next?

A lot of the commentary on Greece fails to see why the Greek No vote changes anything. This view tends to see the stance of the Eurozone group as simply expressing their own voters’ preferences which will not be changed by what happened yesterday. Here is an alternative reading.

It starts from a simple observation. The Troika will get far less of its money back (if any!) if Greece is forced out of the Eurozone. (I say forced out because Greece does not want to leave, so Greek exit is first and foremost an ECB decision: if you think otherwise read Karl Whelan and Matthew Klein and Paul De Grauwe. [1]) That is why creditors are generally weak in negotiations of this kind. Things are different in this case only because the creditors include the ECB, and Greece wants to stay in the Eurozone. The Troika has played this for all it is worth. They were relying (you could say gambling) on the Greek people, one way or another, deciding that they would agree to the Troika’s demands because they feared Greek exit more.

So far this strategy has failed. First they pushed Tsipras further than he could possibly go, hoping perhaps that Syriza would collapse in recriminations. Tsipras’s response was a unifying referendum. They then gambled that Greece would say no, and they lost that too. Tsipras continues to offer the Troika the chance to be more reasonable. He followed the referendum not with triumphalism but by removing his finance minister. This was both a signal - I really want a deal, even though it will in all probability inflict further (unnecessary) pain on Greece - and a lifeline, because the Troika can now say that an important obstacle to a deal has been removed. (An obstacle, because Varoufakis was too open - something politicians and much of the press hate - and too honest about the other side’s lack of economics.)

Now the Troika seem to face a simple choice. Agree a deal and get a little more heat from your political opponents at home for ‘giving in’, or force Greek exit with the risk that you will get a lot more heat when Greece defaults and people realise you have lost all their money. If they are really just interested in getting as much of their money back as possible, it would seem crazy to throw away their best card by forcing Greece out of the Eurozone.

Of course rationality may not prevail, or interests may be rather different. The IMF may continue to be an unhelpful nuisance. (If you think my criticism of their role was harsh, read this from Peter Doyle.) Some within the Troika will be happy to go for Greek exit because they think nationalist sentiment can overcome any kickback from the subsequent Greek default. Others may fear a deal may encourage anti-austerity sentiment in their own indebted countries.

Unfortunately there is a third possibility, which is probably the worst possible outcome. To prevent any loss of face, the Troika may continue to gamble, waiting for days or even weeks, and watch ECB pressure, together with reluctance by Tsipras to introduce a new currency, gradually bring chaos to the Greek economy. Only then will it negotiate, allowing any deal to be portrayed as the result of desperation by the Greek government. In which case, recent European politics will have reached a new all time low.    

[1] Postscript: Martin Sandbu provides a very clear account.

The ideologues of the Eurozone

It was all going so well. True, Greek GDP did shrink by 25% over 4 years, unemployment rose to 25% and youth unemployment to 50%, but before Syriza’s election Greek GDP had actually stopped falling. Further austerity was planned so that Greece could start to pay interest on its enormous debts, together with various ‘reforms’ that were so obviously in the interests of the Greek economy, and the consensus forecast was that the Greek economy might start to grow at a pace that would also stop unemployment rising. Who knows, in a decade or so it might even fall below 20%.

 

But then disaster struck. The Greek people went and spoilt everything by electing a government that suggested that there might be an alternative to all this. Of course the Greek people are not really to blame: how can they be expected to understand there was no alternative to their suffering. The real blame must lie with the ‘populist’ politicians who pretended there could be an alternative. The ever patient and understanding Troika negotiators then had to deal with ‘adolescent ideologues’ who were prepared to use the suffering of the Greek people as a means to achieve their own political ends. They were cheered on by pundits and economists on the left in the UK and US who wanted nothing more than to use Greece as part of a ‘proxy war’ to get more Keynesian policies in their own countries.

If you think the above parody is over the top, click on the two links. The hypocrisy of some of the commentary on Greece is amazing. When the ‘adolescent ideologue’ Mr Tsipras shows a statesman-like maturity in being prepared to compromise in an effort to get a deal, he is accused of inconsistency and not being able to make up his mind. When those who he is negotiating with push him further than he is prepared to go, he is accused of ‘taking Greece to the brink’ by having the temerity to ask the Greek people to choose. (Any mature politician knows that in modern Europe you only call a referendum when you know you will get the answer you want, and when that does not happen you ignore the result and call another one.) Mr Tsipras is accused of failing to grasp that other nations too have democracies, as if the Troika had shown huge respect for democracy by acting as if nothing was changed by Syriza’s election.

The OECD estimate that the output gap in Greece is currently well over 10%. In plain English that means that those currently unemployed could be producing something useful and GDP could easily expand by at least 10% without generating any increase in inflation. (Greek inflation is currently around -2%.) That would not only be in the interests of Greece, but also in the interests of Greece’s creditors. It is a way of achieving the primary surpluses that the Troika wants without inflicting more pain. It is also absolutely undeniable that further austerity would tend to reduce GDP, just as past austerity has done. So everyone can be made better off by giving Greece the breathing space so that its economy can recover. But apparently it is childish to try and negotiate for such an outcome.

Why is it impossible for the Troika to agree to such a deal? They say their own democracies would not allow it, but it is part of being a good politician that you can afford to compromise when that compromise is in everyone’s interest. I suspect that in at least some cases this argument is a smokescreen, particularly when you see what Mr Tsipras is being told he should do. There is a pattern here. For the ECB to act as a lender of last resort was impossible, and the only answer was yet more austerity - until that austerity had been put in place and OMT became possible. When the French government tried to meet deficit targets by raising taxes rather than cutting spending, they were told that this was the wrong kind of austerity. When it came to Quantitative Easing (QE) some were quite explicit - a problem with QE is that it might take some pressure off governments to undertake austerity and ‘reforms’. So perhaps only when the Syriza government has fallen and their successor agreed to more austerity and reforms will it turn out that the Troika can after all be flexible about restructuring debt.

One of the charges frequently made against opponents of austerity in the Eurozone is that we are really seeking the failure of the whole Euro project. The opposite is nearer the truth. The problem for the Euro project is that it has become captured by an economic ideology, and austerity is that ideology’s principle weapon. A self-confident and mature Eurozone would be able to tolerate diversity, rather than trying to crush any dissent. A Eurozone captured by an ideology will insist there is but one path, and that the imperative of austerity is too important to accommodate democratic wishes. Pursuing that ideology has brought the Eurozone to the brink, where it is prepared to force out one of its uncooperative members. Critics of austerity are not trying to destroy to Eurozone, but save it from the grip of this self-destructive ideology.