In recent days there has been a tiny bit of discussion on this blog about whether a group of 9 unelected philosopher-kings should be able to decide social issues for 330 million people, so it seems appropriate that I turn my attention briefly to the chaos rolling over Europe and the threat of a Greek exit from the EU. From the outside looking in it seems like the three main powers involved in this shit-show (the European Central Bank, IMF and European Commission) have refused to give any serious ground on their demands, even though these demands are obviously not going to help Greece out of its crisis, and have instead decided to essentially dictate to Greece the terms of its fiscal, labour, welfare and banking policies. Given that they are well aware of how much their austerity policies have failed, and know full well that Syriza was voted in on the promise of no more austerity, it’s just ridiculous bloody-mindedness that drives them to force their ultimatum on Greece. The ECB even appears to have withdrawn its standard emergency credit line for banks experiencing instability, without any justification. They’ve basically made clear to Greece that they won’t accept any political options except those that suit their ideology. This is not how politics works, and it’s no surprise that under this pressure Syriza have decided to tell the troika to jump. Paul Krugman (who for some reason I never normally read) has a particularly deft explanation of this referendum decision:
until now Syriza has been in an awkward place politically, with voters both furious at ever-greater demands for austerity and unwilling to leave the euro. It has always been hard to see how these desires could be reconciled; it’s even harder now. The referendum will, in effect, ask voters to choose their priority, and give Tsipras a mandate to do what he must if the troika pushes it all the way
This is how politics should work, and giving Greece a week of grace to sort this out and set a clear future path would be a good way to indicate respect for its political autonomy. This is also the reason that David Cameron’s promise of an in-out referendum, though insane for Britain, is politically the right thing to do. Tsipras has taken the chance to make sure that his country’s decision is politically validated, and that he can make his final decision about the euro from a position of democratic legitimacy; the leaders of the EU’s main powers are flabbergasted by this, and the troika are confused. It appears that they don’t understand where their authority ends and the democratic demands of the people of Europe begins, and it looks as if a lot of Greek people are going to have to go through a fair amount of pain in order to teach them. This is disappointing, given the states involved are apparently all democratic, and it gives the lie to what I think is increasingly shaping up as the central fiction of the European project: that it can stop another war in Europe.
The EU is a fairweather friend
This isn’t the first piece of brinksmanship that has been deployed by an EU member in recent time. A few weeks ago Italy’s prime minister, Matteo Renzi, threatened to issue Schengen visas to refugees coming from Africa and send them on to other parts of Europe, after it was revealed that not only were other countries doing nothing to help, but German, French and Swiss authorities were turning migrants back at their borders, forcing Italy to manage both the rescue and the housing and welfare of tens of thousands of migrants – even though most of those migrants are hoping to move north to other parts of Europe. Basically Italy had to shoulder this whole burden because the rest of Europe has shown itself unwilling to help its members when they face serious problems. The same could also be said for the UK’s welfare and work problems: it is obvious that the UK is a preferred destination for migrant labour in Europe, because everyone in Europe learns English and the pound is so strong, but the EU has absolutely refused to bend the rules for the UK on welfare and migration issues.
You may not agree with the specific governments on any of these issues (I don’t agree with the UK, for example) but I should hope it’s obvious what the problem here is: the EU member states are fairweather friends. They can carefully hammer out a compromise agreement on a shared issue like the free movement of labour or the role of the ECB that will enable them to handle the normal, stable times, but they are completely unwilling to compromise their own interests for the greater good when extraordinary circumstances roll around. The free movement of labour is fine but sharing the resettlement of refugees is impossible, and will be left for the country that happens to be unlucky enough to get them first; shared work and welfare goals are fine but they absolutely won’t consider an exception for a country that is bearing an unusual proportion of the effects of those rules; stability targets are fine but no one is willing to risk either their ideological purity or their own taxpayers (Germany’s constant petty battle cry) when a shared financial crisis hits one of their weakest members unusually hard. Basically, the countries of Europe are behaving like fairweather friends who pat you on the back and congratulate you when you have a success, and are happy to split the bill at your Friday pizza-and-beer nights, but would rather you didn’t come if you’ve fallen on hard times and might like to skip paying for the odd Friday night. They’re happy to talk about helping you move house, or minding your pets while you visit a sick relative, but strangely they’re all busy when the time comes.
This is funny because the regular refrain we hear from the EU’s main sales merchants is that the EU establishes a bulwark against the risk of a future war in Europe. I’m sorry, but if the countries of the EU can’t come up with a mutually acceptable target for distributing 50,000 refugees among a population of 350 million without being threatened with an ultimatum, it’s unlikely that any one of them are going to pause for even the blink of an eye if war is in their interests. Indeed, while the EU rumbles on with its chaotic and obstinate mismanagement of what should have been a complete non-crisis in Greece, certain countries on the eastern edge are entertaining military antics by a non-EU member (the USA) that threatens to involve them in a war so catastrophic that they’ll all be running to Greece. If this is how you construct an “ever closer union of peoples” that will guarantee peace, then peace must be pretty easy to come by.
The reality is that war isn’t going to happen inside Europe because no one wants it, and the major powers are aging so fast that they are no longer able to field a decent war machine. I think this is great, and one of the many untold benefits of rapid aging, but I don’t think it has much at all to do with the European project, which is looking increasingly like a German/French alternative to colonialism, intended to drive down the competitiveness of the European periphery and ensure the centre gets access to reliable markets and a long-term pool of cheap labour. Students of history might suggest that this is exactly the wrong way to go about ensuring a non-chaotic future: the students of Greece are likely to soon provide an object lesson on the topic.
If the EU wants to retain any kind of democratic legitimacy, its member states need to think about how to rein in their executive, and start giving more credence to the (disparate) complaints of countries like Greece and the UK, about precisely how governance should work in such a confederacy. Because right now it’s looking like a couple of people from primarily northern and western powers think that they can dictate political terms to entire nations on the periphery. That’s empire, not union, and I think people are starting to notice …
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Addendum: Joseph Stiglitz also seems to think that the EU is behaving poorly, and Krugman has a couple of pieces pointing out that Greece wasn’t as badly off as we are told, and austerity has really done Greece no favours.
July 1, 2015 at 3:43 pm
”From the outside looking in it seems like the three main powers involved in this shit-show (the European Central Bank, IMF and European Commission) have refused to give any serious ground on their demands, even though these demands are obviously not going to help Greece out of its crisis”
This is one view on it. Another is if I lent you $50 on a clearly defined repayment plan with interest, which you spent. Then you asked for $10 to pay the interest. And another loan of $50 more cause there’s a really cool thing at the shops.
I support Greece’s right to make its own political decisions and their right to default on a debt. The catch on that is their options are “Pay back the debt” and “Default”. “Arrange an alternative borrowing schedule” is something that they have to agree with their actual lenders – you can’t just say “My voters decided you should give me more money!” which devalue German votes in a way not seen since the fall of the Berlin wall.
The problem here is everyone is working to avoid the shit storm of a default. And life is much simpler when it’s simplified down to those brass tacks. Greece because they like borrowing money and never paying it back, the others because their living in a vain hope that they money that got pissed up the wall may dribble back into their pockets.
”Tsipras … can make his final decision about the euro from a position of democratic legitimacy;”
This is purest bullshit. He’s not asking “Keep the Euro and pay back our debts or leave it and deal with the fallout” the referendum is “Do we accept the terms of the debt repayment plan that is no longer on the table?” [1]. What message can come from a No vote? Should the Germans say “Well, the Greeks really don’t want to pay us, so I guess they keep the money?” This referendum is the worst of all possible words:
1. It fails to give the Greeks a clear choice between two options available to them
2. It doesn’t provide any path forward
3. It seeks to bind a bunch of people who simply aren’t bound by it
In contrast Cameron’s in/out referendum on Europe is a model of coherence and sense. No wonder that the troika and others are confused.
On your other point about how Europe behaves in general, I’d say it’s caused by my central criticism of the EU. It’s a solution in search of a problem. It accrues powers, but absent a central vision no one will sign up for giving it the powers it would need to actually solve the problems you’ve identified. And everyone is right to withhold those powers – does the EU want to be hard working like Germany? Short-sighted like Greece? Endlessly obsessed with trivial celebrity nonsense like… OK, maybe they can agree on that one. Until “Europe” comes up with a vision of what it is and gets its people to sign up to that vision then it’ll always be a bureaucracy and not a nation. And I’m not sure that’s possible or even desirable.
[1] This is roughly equivalent to “Our debtors require we pay them back True or False?” The debtors don’t give a shit what the electorate of Greece thinks the bit of paper says – they’ve got the bit of paper where the Greeks signed up to pay the money back.
July 1, 2015 at 4:14 pm
You’re speaking about the creditors as if they are an ordinary bank, rather than a part of the financial instrument that Greece supposedly is a mutual member of. Because (at least some of) the creditors involved in this are representatives of the issuers of fiat currency that ostensibly is supposed to work in the interests of the people of Europe, there’s no particular reason for them to behave like an ordinary bank (or ordinary loan shark) – so the outcomes you attribute to them don’t need to apply. However, they seem to be much more interested in the ideological and moral goal of getting Greece to live up to past promises than the ideological and moral goal of fixing Greece’s economy so that the people living in it can be happy and contribute to the European polity. For example, you absolutely can say “My voters decided you should give me more money” because one option that is always available to issuers of fiat currency is to print more money. It doesn’t devalue German votes if the assumption is that a future German collapse would also be able to gain from the same attitude.
If Greece votes no the Germans will absolutely say “the Greeks don’t want to pay us so they keep the money” because that is exactly what will happen. And this is why the central powers need to stop acting as if they are the same as a normal bank or a loan shark. If I decide to walk away with the $50 you lent me you can send your ugly cousin around to break my legs. Germany can’t do that to Greece, so why have the Troika spent the last six months speaking down to the new government as if that’s exactly what’s going to happen? They have only two choices: do things in a way that helps restore Greece to primary surpluses and get their loan repaid sometime in the far future, or watch Greece walk away with 110 bn euros of their money and never see it again. One of these options is better for the Greek people, but the Troika seem to think that this is the least important consideration. Why?
I actually wonder if the Greek government is really “working to avoid the shit storm of a default” or if, as we were contemplating a few months ago, they have been aware since they won the election that a default is inevitable without extreme largesse from the Troika, and the last 3 months of “negotiations” have been simply them drawing out the process long enough to prepare alternative plans, i.e. to get the machinery in place for a default. The main evidence against this theory is that there is no evidence for it, and it’s hard to believe anyone could keep such plans secret.
I can see many ways that the European Union can be a good thing to improve Europe in terms of both politics, governance and finance. Unfortunately, the way it is structured seems basically designed to make it fail during any crisis, and to fail in such a way as to exacerbate pre-existing tensions and prejudices. Greece is a good example of this: unsurprisingly, the Greek economy is running into trouble that is a perfect vehicle for expression of northern contempt for southern fecklessness, and because every aspect of response to the crisis has to be negotiated at the time there is lots of opportunity to make that contempt show. Whereas if there were a pre-existing, well-understood mechanism for bailing out economies in financial trouble, this would have been enacted, the problem would be passed, and all the tensions between north and south would have barely had time to flare up. Instead the system has been set up to ensure that the Greeks have to repeatedly go cap-in-hand to the Germans, who then set unachievable targets for the Greece that they fail to meet, have to revisit, producing another round of cap-in-hand negotiations. It’s the perfect mechanism for reviving and stoking old tensions …
July 2, 2015 at 8:59 am
“You’re speaking about the creditors as if they are an ordinary bank, rather than a part of the financial instrument that Greece supposedly is a mutual member of.”
Would you be more comfortable if the example I gave was a banking co-op? And instead of the deadbeat ripping you off he was ripping off you and all your friends (for individually smaller amounts of money)?
”so the outcomes you attribute to them don’t need to apply”
The key outcome I identified was being paid back or defaulting on the deal. Negotiating a settlement is a subset of defaulting – it’s just one where all parties get pissed off instead of lumping it all on one or the other. And negotiated settlements are available with banks and loan sharks too.
”However, they seem to be much more interested in the ideological and moral goal of getting Greece to live up to past promises than the ideological and moral goal of fixing Greece’s economy so that the people living in it can be happy and contribute to the European polity.”
I suspect their more worried about the moral hazard of accepting that countries can duck out on repayments – because:
a) that means other nations will want to do it too (PIIGS); and
b) it means that investments are vastly less valuable. Imagine if the bank you had money in explained that while it was indeed your money that you couldn’t get any of it because the little old lady down the road really needed it. Thank you for your involuntary donation and could you please deposit some more money? Would you be inclined to put more money in, or keep you cash under the bed?
“For example, you absolutely can say “My voters decided you should give me more money” because one option that is always available to issuers of fiat currency is to print more money.”
Printing more money just invites inflation which is a flat tax on everyone. There’s a reason inflation above a target of 2-3% is regarded as a bad thing. And while it’s easy to say “This time won’t hurt” the history of Europe is that “this time” is never just “this time” it’s always “every time until it finally hurts”. [1]
”It doesn’t devalue German votes if the assumption is that a future German collapse would also be able to gain from the same attitude.”
This is a philosopher king attitude. You’ve decided the German people are too stupid to make a decision now that could impact them later, so you’ll decide to accept on their behalf. They’ve clearly indicated “No. We prefer austerity, not bail outs” in their voting patterns and acceptance of policies enforced on themselves. Who are you to say those are irrelevant and they just have to suck up a bill and the right to be idiots in the future?
”The main evidence against this theory is that there is no evidence for it”
The main evidence we have seems to suggest that the Greek government thinks exactly like you do. They think that their democractic mandate is the only one that matters and that other people need to bend to their agenda because otherwise bad things. They fail to realise that the other parties may be looking at broader issues (i.e. long term trends and other nations) and frankly cratering Greece now to avoid the same thing happening to some bunch of idiots every 10 years is actually the long term moral good.
Fundamentally, economics is like the environment:
1. It’s incredibly hard to predict or even measure accurately
2. It’s always tempting to make “this time” the exception to the rules, but all that sets is a precedent (“Let’s keep using coal! Just for a little!”)
3. Everyone thinks they can offload their problem to someone else
4. We should fundamentally listen to the majority consensus of experts on the topic
[1] That’s actually the history of the human race on everything. Racism. Economics. The environment. Everything were people think they can get a free lunch they eat until the entire place is a dustbowl. You’re keen to avoid it on stacks of topics. I’m keen to avoid it on those and on the economy too.
July 2, 2015 at 10:29 am
I don’t accept the comparison with a co-op either. These are states, not private actors or business cooperatives. They have different reasons for making loans and enforcing loans. A coop or bank can’t print money to make up for lost money (as the ECB, Bank of England, Bank of Japan, and Federal Reserve are all doing/have done), and it can’t invade your house, kill your cat and sell your belongings as a state can. It also can go out of business, whereas a state can’t, since its constituent parts will continue to exist no matter what stupid decisions it makes with its money [unless those decisions end up at a Turner Diaries fork in the road!]. The idea that the sole responsibility of the ECB is to collect money owed, or the sole responsibility of debtor states is to pay their debts, is a very restricted view of international finance.
This is what’s driving my perspective on Greece. None of these positions and debates should be about who owes money to who and how signed what. They should be about what is best for Greece and Europe. I think this is how Syriza see it too, because they see the straitened thinking of Germany and the ECB as completely counter-productive to Europe as a whole and I agree with them (and I extend this analysis to e.g. the UK which is considering absolutely insane laws about surpluses). I don’t think they “think that their democratic mandate is the only one that matters,” they think that the policy ideals driving the conditions placed on Greece are ultimately bad for all of Europe, and they aren’t going to let their economy be used as an object lesson to encourage the others. I also think that Varoufakis doesn’t think default is as bad as others do, and is one of the economists (like Milton Friedman and Paul Krugman) who sees the design of the Euro as fundamentally flawed. Like Friedman and Krugman, I think he believes that the Euro needs a mechanism to offset individual countries’ loss of sovereignty in their own currency, and if he can’t get it, then default is better for Greece in the long run than continuing to be part of a fundamentally inflexible currency union. Which makes me think that the Syriza plan was always: force a rethink on the economic fundamentals of the Euro (unlikely) or leave (risky).
But I don’t see you agreeing with this until you accept that fiat currency works differently to the gold standard.
July 2, 2015 at 2:25 pm
Well, as I understand it, the mechanism is “German (and French) banks will lend you money to buy German etc goods; when the debt gets too large the troika will come in and re-arrange things so the debt is now owed by the government rather than anything which can actually declare bankruptcy; when that gets too hot politically there will be a choice offered between selling everything to foreigners while living on brand dog-food or just living on no-name dogfood…”. For the record – Greeks work longer hours than Germans, pensions have already been cut 25%, unemployment is at 25%, youth unemployment at 50%, and none of the “pain is good for the economy” prescriptions have worked anywhere (Latvia, Ireland, Cyprus…)
Also for the record, Syriza met troika terms on the macro side. The troika insisted that the deal had to include all their details. Kind of – it’s not enough you agree to clean the footpath, you have to do it with a toothbrush held between the teeth.” There’s a high degree of institutional sadism going on here.
July 3, 2015 at 11:51 am
This morning the IMF has announced it believes Greece needs 50bn in new loans, a moratorium on repayments and grace until at least 2050 or some other delay until the planet has warmed… apparently it didn’t share this information with the rest of the troika, which suggests that they aren’t working very well together and can’t even agree on what is needed. Meanwhile Yanis Varoufakis is posting letters that he sent to the committee on his blog, because he says that his position is being routinely misrepresented by the spokespeople of the troika, and they are breaching long-standing protocols as part of the negotiation process. Now someone from the troika is suggesting that the government should be replaced with a “technocratic government” until Syriza can be replaced in an election, i.e. they’re going to ignore the democratic will of the Greek people until they get a government they can deal with …
It’s worth remembering that the choice of govt in Greece at the last election was not “Syriza or some sensible people,” because the “sensible people” were the centre-left/centre-right govts whose cronyism, corruption and incompetence over 20 years had got Greece into this position, and the Greek people swept them away at the last election. The choice was between Syriza and Golden Dawn. If the Troika’s representatives don’t like dealing with Tsipras and Varoufakis and are uncomfortable about how their technical staff are being treated in Athens, how do they think they will handle the thugs that Golden Dawn sends to “negotiate”? And will they even be able to keep their staff in Athens if Syriza is replaced? If they appoint a technocratic government and wait for Syriza to be replaced, they may find themselves facing Golden Dawn. Even if they get the old technocrats back, the same cycle of economic destruction and failed bailouts, presided over by a corrupt centrist party, will simply prolong the inevitable. Syriza are in government because the Greek people realized their problems won’t be solved by the old crew. So if the Troika aren’t happy negotiating with the people they consider to be “radicals” they need to have a long hard think about who else they can negotiate with, absent the ability to unilaterally appoint a German leadership…
July 6, 2015 at 12:03 pm
The Guardian finally has some information on how the situation could go. The one I found best was:
http://www.theguardian.com/world/2015/jul/03/greek-referendum-what-the-experts-say
Note: Everything here is an attempt to pool my ignorance with others here and see if a more meaningful answer will show up. I’m mostly interested in ideological positions (“They should repay their debts” or “They’re a democracy that signed up for European deals that offered support”) from an perspective seeking to understand them. So please feel free to call out any assumptions you think I’m making and ask for reasoning.
My reading of the assorted posts today can be summarised as “The way that events go and the order they happen in could wildly affect the outcome”. because it’s a set of political decisions that need to be taken and the possibility space for each decision is driven by the circumstances when it is made.
Noteworthy points are:
1. No one seems to want Greece to leave the Euro (except me, who’s just sick of the bloody dance and I don’t think policy decisions should be made based on emotional reasoning like that)
2. The broad economic consensus appears to be that the Greek debt is unsustainable (e.g. the IMF and every economist at the link above say that)
3. Some form of debt haircut and some form of structural changes to the Greek economy are necessary to solve the current situation and prevent it happening again [1]
The experts assumptions about how events will pan out seem unclear and the order they think events should break in is also unclear. For example:
1. Pryce and the Greek economists seems to think a Yes deal would have allowed a deal with Europe to keep the banks open then negotiate further. A No vote would lead to a swift exit with no possibility of negotiation.
2. Krugman and naysays seem to think a Yes was agreeing to overly harsh controls due to insufficient negotiation and that a No would lead to more negotiation.
The next important events appear to be:
a) Do European leaders resume negotiations fast enough to settle the markets and avoid other decisions being forced?
b) Does the ECB extend liquidity to the Greek banks long enough for negotiations to proceed?
It’d seem that b) is the key decision, which is likely to be influenced by a). if the Greek banks run out of cash then all the negotiations in the world won’t matter. The Greek government would need money to allow it’s people to perform basic transactions [3] and the bond markets are basically a side show to whether people can buy food [4]. If that money doesn’t come from the ECB, then either a) Russia provides a cash transfer or b) the drachma comes back (and immediately goes into free fall).
If the drachma came back, basic economic activity in Greece would work (e.g. you can pay for any labour or Greek produced goods required), but the rapidly falling drachma would sorely hamper any import activities – so foreign made goods will be hard to come by. From memory, Greece is a net food importer, so that could include food…
Therefore, based on European trends (e.g. the urge to kick the can down the road) and the desire for everyone to save the Euro I’d assume that the ECB will resume some sort of funding lifeline to the Greek banks, though not necessarily enough to raise the withdrawal limits currently in place [5]. The negotiations would restart. The Greeks will seek to lift the capital controls, which may trigger another crisis if the other Europeans don’t want them too. The negotiations will then grind on till the next major deadline, though the 20/7 deadline probably will be waved past as no one wants to confront that problem so soon after the current car crash. The final outcome is still totally up in the air.
Other considerations in negotiators minds (that I don’t think will comparatively drive much) are:
1. Greece is on the border of Europe and they’ve threatened to just let in anyone who wants to
2. The US (and the rest of Europe) don’t want Greece getting a loan from Russia as that’d put Greece into Russia’ orbit. [6]
These either hinder good will or work alongside existing desires anyway, so I’d expect them to change decision making weighting a little but not in a way that will matter. Europe will only kick Greece out of the Euro if they have to and (for example) US pressure will do little to change that.
[1] The first three points come through in varying degrees in the expert opinion article linked. It’s interesting to see how the emphasis and assumptions seem to shape the Yes/No advice from each expert. Sadly the assumptions aren’t spelled out there. [2]
[2] It’s almost like I should go to more specialised economics sources for insightful economics inputs. But on the other hand I don’t want to pay for access to those so…
[3] Stopgap measures like IOUs and barter may extend the timeline between banks running out of money and the drachma coming back.
[4] More technically, the bond markets are showing the expectation that the Greeks default and the interest rates they face and if they default (more) then the ECB money will stop.
[5] Because while the other Europeans would want negotiations to restart, but may leverage the chance to keep the pressure on Greece.
[6] Gotta confess I don’t really see what the issue on this is. I’d rather have the economic basket cases weighing down my opponents. It’s basically the strategy that won the Cold War.
July 6, 2015 at 1:36 pm
Regarding your noteworthy points, I would say first I don’t agree with 1): I think Krugman and Stiglitz at least think Greece would be better off not in the Euro (and probably so for some other countries too), although they might not think leaving right now is a good plan. I can’t say I “want” Greece to leave the Euro but as it is composed the Euro is a fundamentally flawed system and any country not in the European core should be making a plan to get out.
Regarding the unsustainability of debt and the need for a haircut, Piketty here observes that Germany has benefited repeatedly from having its debts voided or restructured, and is in no position to lecture others on the issue. He also observes that debt restructuring in those cases was the right idea and enabled Germany and France to recover from huge problems in much better ways than the UK was able to. It seems clear to me that this should be seen first and foremost as a matter of economic sense rather than morality.
I would add to your background points that it isn’t clear that there is any mechanism to kick Greece out of the Euro, and the ECB’s decision to withhold financial support to the banks may have been illegal (Varoufakis was threatening to take them to the court of justice). This opens the prospect of an unedifying couple of months in which a bitter French and German leadership try to turn the screws on Greece to make them leave “voluntarily” due to a lack of mechanisms to forcefully eject them…
So I think I agree, first the ECB will restore liquidity, then negotiations will restart from a framework of debt relief – as advocated now by almost everyone except Merkel.
I don’t think anyone is seriously concerned about the Greece/Russia thing – I doubt Russia is going to be as forthcoming now that oil prices are tanking, and although Syriza’s leaders talked about it that seems to be more their option of last resort. I would guess that would happen if they leave the Euro, and then things go worse under the Drachma than anyone is expecting.
But who knows?!
July 6, 2015 at 9:08 pm
“Piketty here observes that Germany has benefited repeatedly from having its debts voided or restructured”
“Think about the London Debt Agreement of 1953, where 60% of German foreign debt was cancelled and its internal debts were restructured.”
The wikipedia link:
https://en.wikipedia.org/wiki/Greek_government-debt_crisis
says that:
“Overall the two debt restructuring measures accounted for a 40.7 percentage point debt-to-GDP decline, so that it only ended at 156.9% ultimo 2012, down from the 197.6% it would have ended on if no debt restructure measures had been performed.”
This decline looks to be about 25% of the overall Greek debt. It would be useful if Picketty could advise what the correct level of debt forgiveness is, unless one sees his reference as a “clean slate” to 100% discount (which I don’t believe). Or he could even just mention something to the effect of “More of what has already been done in a limited way is needed.”
Also, Picketty claims:
“The Eurogroup’s notion that Greece… will reach one percent surplus in 2015, then…”
But it’d seem the target that Greece has been set is a surplus ignoring interest repayments (i.e. they’d still be losing money each year, but wouldn’t be if they didn’t have any debts). That’s found in the 2015 budget target stats at:
http://www.wsj.com/articles/greece-misses-target-on-budget-surplus-1421244654
which says:
“The country’s primary budget surplus—which doesn’t take into account interest payments—for the January to December period reached €1.9 billion, missing a €4.9 billion target set by the Greek government and its international creditors.”
So Picketty’s argument is looking a bit disingenuous to me if he’s going to fail to provide context. It doesn’t mean he’s wrong, but does mean I’m less tempted to listen to his arguments if I’ve got to bother double checking everything.
“the ECB’s decision to withhold financial support to the banks may have been illegal (Varoufakis was threatening to take them to the court of justice).”
Yeah, but this isn’t going to lead anywhere. The ECB has to provide support if the banks are solvent (able to meet their financial obligations), but the instant the ECB withdrew support capital controls were needed. Unless the ECB rule contains a definition of solvent that can’t be interpreted multiple ways this would probably just lead to a circular argument. If Greece is in the Euro then it’ll be swept under the carpet. If they leave the Euro then the other powers will tell them they’re a bunch of penniless bums.
This is really just a sideshow because if any court tries to tell a nation “You have to obey a rule that will severely economically damage you” the traditional response is “Says you and what army? And I mean that literally.”
Basically it more Realpolitik than real laws.
“So I think I agree, first the ECB will restore liquidity, then negotiations will restart from a framework of debt relief”
I don’t think I say the negotiations would take a framework of debt relief. I’d say there is a 50/50 chance that the restarted negotiations just grind on with the current 60 euro/day bank rules in place until Greece cracks. Or that the other nations say “We’ll lift the need for capital controls, but this talk about a debt relief framework dies on day 1.”
About the only thing that seems to have advanced is that Yanis Varoufakis won’t be in the room. How much of a role he plays outside the room will probably be invisible to us.
July 7, 2015 at 12:42 pm
“I’d assume that the ECB will resume some sort of funding lifeline to the Greek banks, though not necessarily enough to raise the withdrawal limits currently in place.” – Paul
“So I think I agree, first the ECB will restore liquidity, then negotiations will restart” – Faustus
The ECB appears not to have reopened the funding line according to:
http://www.theage.com.au/world/greek-banks-may-run-out-of-cash-by-end-of-week-20150706-gi6i3w.html
“Late on Monday the European Central Bank announced it would not provide extra liquidity to Greek banks. Instead, it passed a resolution making it harder for Greek banks to access emergency funds, making their collapse more likely, more quickly.”
So it looks like the EU has taken the hardline stance we didn’t expect. Given that and the Guardian headline [1] saying there are 24 hours to negotiate a settlement it appears that the EU has put a range of unconditional surrender options on the table (fold or piss off).
The Greek’s aren’t going to fold, especially after a referendum that they regard as giving them a better negotiating stance [2]. And while the EU has a habit of setting deadlines that come in a day late, a two day window still isn’t enough to bridge a gap like that. [3]
So, that looks like the end of this discussion. The Greek banks run out of money later this week and all that’s left is the decisions on nationalisation and how much money depositors/investors lose. And the open question of who was stupid enough to leave their money in a Greek bank after having years of warning signs (e.g. generally poor people with low financial literacy, aka the people who can least afford to lose it. [4]).
So, I nominate moving onto the next steps:
1. Celebrating the Greek’s reclaiming their dignity and economic sovereignty in a burnt out wasteland.
2. Planning emergency aid shipments into a first world nation that hasn’t experienced a natural disaster
3. Location scouting for where the next Mad Max film should be set. The islands are nice, but probably don’t have enough roadways.
[1] 22:10 6/7 record at http://www.theguardian.com/world/live/2015/jul/06/greek-referendum-eu-leaders-call-crisis-meeting-as-bailout-rejected-live-updates#block-559ad96fe4b032a39a3bad47
[2] And that lots of others, including me, regard as “Sorry, what was the question again? How am I meant to interpret that?”
[3] I’m still not convinced the EU won’t give into it’s habits and extended ultra violet special emergency loans to kick the decision date out to 20/7 (when the ECB loan payment is due), but maybe they’ve finally maneuvered themselves into a place where they have to make an actual decision.
[4] And German banks who apparently increased their bond holdings from 3b to 10b over the last couple of years. But who cares how institutional idiots do. They took a calculated risk and lost.
July 7, 2015 at 1:10 pm
The Guardian has more detail on the 1947 and 1953 reconstruction agreements in Europe, with citations from a historian of the process. In short: Greece received cash transfers equal to 200% of GDP in 1947, and in 1953 German debt fell to 20% of GDP while much of the rest of Europe struggled on 200%. Back then debt relief decisions appear to have been made primarily on the basis of pragmatic rather than moral principles – even though Germany’s debts were racked up in an exterminationist war. Now they appear to be only interested in moral principles, even though the whole world is much wealthier than it was then.
The Guardian also has an extract from Varoufakis’s book on Europe (written before he became minister I think) where he proposes debt relief for the entire Eurozone, but says Merkel won’t take the decision because of domestic political risk.
If the ECB has decided to refuse emergency liquidity assistance then I can only see that as a deliberate policy of screwing Greece out of the Euro. This is deeply immoral, and punishes young people with the least responsibility for Greece’s past mistakes. It also means that the eurozone will never see their money. It’s small change for the European economy anyway – I’m sure they’re very happy to have stood on principle!
I wonder if Cameron is looking at this attitude towards Greece and rethinking his approach toward negotiation and referendum? He may be starting to think the lack of respect for national sovereignty from the European northern powers does not bode well for his negotiations … which is going to make his position during referendum campaigning difficult. Imagine the position: “The EU wouldn’t budge on any of my demands, but please vote to remain part of it because it doesn’t undermine national sovereignty at all!”
July 7, 2015 at 2:14 pm
“The Guardian has more detail on the 1947 and 1953 reconstruction agreements in Europe, with citations from a historian of the process”
The Guardian article actually appears weaker than the links I provided. It notes that Greece for a much higher cash payment in 1953 than German for valid reasons. Good. It notes that German debt fell to 20% of GDP while others didn’t, but doesn’t provide much information on what the level of cuts were. Based on that I’d still assume Germany had a 60% cut and Greece has had a 25% cut.
“The Guardian also has an extract from Varoufakis’s book on Europe (written before he became minister I think) where he proposes debt relief for the entire Eurozone, but says Merkel won’t take the decision because of domestic political risk.”
I haven’t read his book, but my knee jerk reaction would be negative. Debt relief is awesome for debtors, but terrible for investors, especially the elderly living on fixed investments and similar endowments. You can assume that a non-trivial amount of the debt is held by pension funds and university endowments. If I were to write a book calling for those things to have their income slashed I doubt it’d be regarded as a positive, but that’s a part of what he’s proposing. The rest is taking money from other investors.
At the end of the day, there’s no way to take money from a company without impacting real people – companies are just a way of pooling money and saying something like “The bank will take the loss” is the same thing as saying “all the people who invested in the bank will take the loss”. Sometimes that’s the right thing to do (i.e. to avoid a bigger loss from a total default), but it should never be regarded as a happy option. The happy option is the borrower makes wise investment decisions and repays their debt (while making some cash/benefit themselves).
“If the ECB has decided to refuse emergency liquidity assistance then I can only see that as a deliberate policy of screwing Greece out of the Euro.”
Yeah. I guess so.
“He may be starting to think the lack of respect for national sovereignty from the European northern powers does not bode well for his negotiations”
Yeah. On the other hand I can imagine the German/French position: “Please explain why you are a special snowflake unlike us crude continent dwellers.”
The real problem remains the EU being a one size fits all badly model. It’s basically the classic European problem of a small group of madmen trying to impose a utopian vision on people without bothering about little things like establishing a democratic mandate to do so. Greece is getting screwed by the economic constraints of this. The UK wants to opt out of parts of the social and economic constraints – good luck on either.
July 7, 2015 at 4:08 pm
Isn’t the link you provided about Greek debt? Not post-WW2 reconstruction debt?
Regarding Varoufakis’s proposal, this site claims to provide information on who holds Greek debt, and it is almost entirely national banks and international organizations. It appears about 65Bn is owed to companies (including Greek banks) and bondholders, and the remaining approximately 300 bn is owed to countries, the ECB and the IMF. Given that they are part of the Eurozone and the EU, defaulting on debts to these countries would, in a country sovereign in its own currency, be equivalent to defaulting on a debt to oneself. Also, one assumes those countries are making money from the loan repayments. Google tells me at time of writing that the return on Greek bonds is 15%, a 14.3% spread on the Bund (ha!) so presumably given Germany holds 56Bn in Greek debt, it is making about 9bn a year in interest repayments. Wikipedia tells me German tax takings in 2012 were 590bn, of which 40% is income tax plus other direct takings. So if half of Germany’s debt was waived and interest payments dropped to (e.g.) 4bn, that would be equivalent to a less than 1% reduction in total German taxation, of which less than 40% would be income tax. This is what Merkel calls German taxpayers being on the hook for Greek profligacy. And of course all of this is within the context of a single currency zone where (in theory) everyone is sovereign in everyone’s currency.
Thus, debt could be relieved at almost no real cost to any actual businesses. In order to avoid a loss in income equivalent to less than 1% of the total German tax take in 2014, Germany wants to see a 25% drop in incomes of ordinary Greek citizens plus a bank run. All of this because the euro’s designers didn’t bother to figure out an emergency funding mechanism for unusual crises, and are insisting on moral approaches to debt repayment that have never had any role in past crises.
I actually think that the UK does have a reason why they are a special snowflake on some of their demands (i.e. migration). But looking at the Greek situation, I can see that Cameron might think “it doesn’t matter how special I actually am, no explanation is going to cut it.”
July 8, 2015 at 2:40 pm
Hmm, I started writing a reply, but it drifted towards opinion rant rather than commenting on events and predicting (like my other comment above). I’d like to avoid that here. So it got deleted.
If you want to debate the virtues and vices of the system, I’d prefer to not do it below somewhere I said I was going to ” I’m mostly interested in ideological positions … from an perspective seeking to understand them.” 🙂
I note the latest news from the Guardian (and others) is that Greece has 5 days to do a deal. I’ll just note that blinking and extending the timeline (earlier I believe the Greek banks were 48 hours away from running out of cash) is in line with my expectation of the EU community.
On some level, regardless of how often both sides talk at each other without hearing or how often I’m told that the end will be in X days, I still think I expect the politicians involved to find some way of kicking the can down the road just another day or two or order they have the chance to avoid the blame.
The decreasing time frame on each kick is however in danger of demonstrating Xeno’s paradox. Eventually each kick of the can will have to be performed in the same press conferencing announcing the former delay and then eventually delegated to algorithmic trading then eventually even that will be too slow and the longer delayed conclusion will have to play.
Seems a lot of drama for delaying the end result another week. Better to save the money and put it towards buying relief supplies for Greece.
July 8, 2015 at 3:04 pm
Practically speaking I don’t see how the sides can come to an agreement if the euro leaders refuse to consider debt relief, and the Greek side are being at all realistic about their repayment efforts. The latter requires debt relief, but it appears the euro leaders have ruled this out and are only willing to consider lending more money – which will simply delay the inevitable and make it worse when it comes. Tsipras says he wants a permanent exit from these rounds of debt negotiation, which barring the discovery of oil (and a recovery in the oil price!) is impossible without debt relief. Lending another 60bn Euro without some kind of recognition of the impossibility of paying off what’s already there is just playing silly-buggers. My impression is that the Greek side have been talking for some time about the impossibility of their position, but the euro leaders – and especially Germany – seem to think there’s some magic way in which Greece can pay off a debt of this size. Even if Greece completely caved in on all their demands, and the Greek economy didn’t flatline, how long would it take?
I interpret the 5 day extension backflip as just an attempt to turn the screw so that Greece leaves the Euro of its own volition (through introducing IOUs out of desperation), thus saving the euro leaders from some of the “blame” for the fragmentation of the Euro. I think they’ve gone from “kicking the can down the road” (a phrase I’m thoroughly sick of btw) to “trying to look like they aren’t to blame.” If it’s true that there’s no way for them to kick a country out of the euro, they have to turn the screws until that country leaves by itself. I read somewhere this tactic being compared to the treatment of the dude in Office Space who is moved into the basement …
July 8, 2015 at 7:50 pm
“My impression is that the Greek side have been talking for some time about the impossibility of their position, but the euro leaders – and especially Germany – seem to think there’s some magic way in which Greece can pay off a debt of this size.”
It’s interesting how our biases and reading habits results in a different set of impressions. I’ve read it as Germany et al are refusing to discuss debt relief unless Greece puts in place structural reforms because without those reforms even total forgiveness would just eventually lead to the situation recurring.
I mean there has already been one round of debt forgiveness and payment deferrals, why would they refuse a second one if the circumstances were right? And it’s not like they’re not going to lose stacks of money one way or the other.
I’d still expect Germany to accept a serious austerity offer aimed at a structural surplus, even if it was just on paper. But I’d suspect that even if there were predictions showing a reasonable structural surplus could be reached and sustained then it probably wouildn’t be a good idea for Greece. The other nations (i.e. Ireland and even Spain) are getting over their downturns, but Greece has already taken such a massive hit that waiting through another 10 years would be too painful. Better to take it on the chin and let the drachma fall into the toilet so that a faster recovery can happen (i.e. Krugman’s advice to devalue the drachma).
July 8, 2015 at 9:45 pm
I read this morning “Merkel rules out debt relief,” and remember the euro leaders (or ECB?) asked the IMF not to publish its report recommending debt relief. The Troika are more interested in further lending and further austerity, not debt relief or restructuring. Especially now that a “radical” government needs to be brought down.
I don’t think there is a “serious austerity offer” that can actually help Greece pay off its debts at this stage, even if the Germans were interested in one. Much of its rescue loans (as much as 80% according to Wikipedia) are going into refinancing previous debt – the majority of which is now held by European public sector institutions – and they have already hugely reduced government spending (by about 25% I think since 2009; just try to imagine the effect that would have on the Australian economy!). My impression is that this is the point Syriza were making when they entered power (Varoufakis made this explicit), that debt relief is more important than ongoing injections of temporary money – I remember Varoufakis stating this directly, that further loans at this stage were just putting off the inevitable. This seems to be the opinion of most economists.
This is why I can’t see grounds for successful negotiation, and the refusal to extend emergency funding to private banks to last until just Sunday is telling. The euro leaders will accept nothing now except complete capitulation and the abrogation of Greek sovereignty, but they don’t have a mechanism to force Greece out of the Euro so they’re going to starve them out and pretend they’re not to blame.
But remember, the Euro was intended to bind Europeans together! They’re one big family!
July 9, 2015 at 6:39 am
“I read this morning “Merkel rules out debt relief””
Tsipras and Varoufakis have also repeatedly ruled out further cuts. I’ve got to say that I don’t believe any of them are totally serious when they make a public statement before a negotiation. It’s just a question of what the other side needs to pay to get that option back on the table.
“I don’t think there is a “serious austerity offer” that can actually help Greece pay off its debts at this stage”
I’m not sure it’s that simple. It’s more likely that the Greeks need to chose which outcome they want to aim for. Available options would be:
1. No further austerity! Greek leaves the Euro and drachma devaluation leads to vast price increases in foreign goods, but Greek politicians can claim that’s not their fault
2. Further austerity! Greece stays in the Euro, gets some debt relief (not as much as they want) and spend another decade undergoing a crappy recovery (i.e. the current situation continues for ages and gradually improves)
The options the Greeks want and the Germans don’t are:
3. The Greeks win! Germans lose! No austerity, debt relief, Greece in the Euro. German voters can get stuffed. The Germans (maybe) learn a lesson that lending to Greeks is a stupid idea. The Greeks’ learn that borrowing from Germans is a great idea and should be pursued at every opportunity.
“that debt relief is more important than ongoing injections of temporary money”
To be clear, I’m not trying to ague that debt relief is bad as part of a package/deal. The IMF thinks it’s good and necessary. Merkel says one thing but is a politician. The Greek people think its awesome. The German people hate it.
“they have already hugely reduced government spending (by about 25% I think since 2009; just try to imagine the effect that would have on the Australian economy!”
The government spending had to fall. It was running a perpetual loss even if you ignored debt payments. On the other hand the GDP has also fallen 25% triggered by those government cuts and probably worsened by uncertainty and fear.
The fact the economy has gone down 25% is why I don’t think any austerity based option isn’t going to fly. It’s not necessarily that it wouldn’t work in the abstract, but its probably not the best option and its also politically impossible inside Greece.
This year the Greek structural deficit (the government surplus/deficit ignoring debt payments) was positive (not massively so, but somewhat). The other countries that had austerity enforced (i.e. Ireland [1]) are recovering. It’s possible to argue that austerity wasn’t the fastest way to get to this [2], but it does seem to have (eventually) worked [3]. By contrast by Greece’s terrible starting point and half hearted approach has drawn this out till we reached the current situation.
Would have full throated austerity have worked earlier? I don’t know. But I don’t think anyone who would actually have to experience it is willing to try now. So the options are either Europe dodging any decision in the hope that something shows up or Greece leaving the Euro.
[1] http://www.budget.gov.ie/Budgets/2015/Documents/Budget%202015_Economic_Fiscal_%20Outlook_%20Ireland.pdf
[2] And we should assume that every economist will push their favour theory as being the best one that should have been followed.
[3] Iceland’s devaluation of their currency also worked. Hence Krugman’s argument to go to the drachma.
July 9, 2015 at 9:17 am
OK, Greece needs to put in a proposal by midnight Thursday: http://www.theguardian.com/world/2015/jul/08/greece-crisis-tsipras-under-pressure-to-submit-reform-blueprint-to-creditors
This is an easy prediction to make:
1. Tsipras will put in a proposal that the rest of the EU describes as missing required information or similar [1] (basically it’ll be a polite-ish way of saying “half-baked”)
2. Frantic work will proceed on Friday to close off the biggest gaps
3. Saturday Tsipras will announce that his proposal was always fine and that the other nations are attempting to rob the Greek proposal of it’s dignity
4. Sunday – this is the real decision point that can’t be predicted:
Will the EU buckle again to the Greek (alleged) incoherence? If so, more of the same chaos ahead as they attempt to at least agree a common language to disagree in.
Will the EU finally realise they’re getting played by a master or madman? If so, Grexit.
Regardless of what happens, we can expect it’ll take longer to arrive than current deadlines. Frankly, if they were uni students this crowd would never have delivered an assignment on time and, much like the real world, they’d all deserve to be failed.
[1] This appears to be the Greek standard proposal.
July 9, 2015 at 9:24 am
We can’t discount the possibility that this point it’s a game of chicken- the cost of grexit for both sides is too high, but they know there is no alternative, so they are going to wait for the other to swerve. If so I think Greece will initiate grexit on Monday to end the public pain, and the euro leaders can cry crocodile tears and claim they never wanted it. But I think the political fallout for them will be greater long term. Syriza inherited a poisoned chalice and always faced huge domestic political risks, but merkel was not inevitably going to be the German leader who lost 60bn of German money and presided over the beginning of the euro breakup…
July 9, 2015 at 1:13 pm
I agree it’s a game of chicken, though to be clear I think that game relates to blame rather than outcomes.
The next set of questions that would be useful to have answered is what the impact will be in and outside Greece. But I’m feeling a little too busy to bother writing down my understanding/guesses.
The real risk for Europe isn’t Greece in or out of the Euro, it’d seem to be Greece in or out of the EU (and to a lesser extent NATO).
July 10, 2015 at 11:42 am
http://www.theguardian.com/business/2015/jul/09/greece-debt-crisis-athens-accepts-harsh-austerity-as-bailout-deal-nears
What the hell? Greece comes up with a realistic package of cuts that their creditors could possibly agree to?! They did it in a timely fashion?! And there’s talk of debt relief?! All bets are off. My previous assumptions that this pack of idiots were too incompetent to literally steer a car off a cliff (and far too qualified to do that metaphorically) may be in error. Accordingly my new predictions will reflect the laws of physics current observed in Greece. I predict the dead will rise and walk amongst us with an unstoppable thirst for sangria, etc.
On the bright side for Greece, if this fails it’s definitely the other sides fault. Excuses like “Germany and many other European countries rule out an outright debt cut, arguing it would be illegal under European treaties.” don’t hold much water when the nations in the treaty are the ones assessing whether it can be changed or overlooked! That’s like me saying I can’t lend you $50 because I have firm rules against lending money that would need my own permission to change.
I suppose a compromise on debt relief could be worked out. Like setting interest to near 0% and delaying it a long period of time (like 50 years) – that’d inflate away most of the debt, which is pretty close to debt relief.
Side note: This view from nations other than Germany opposing more help from Greece is interesting. Especially for the fact that austerity worked for them (judging by GDP and average income, unemployment not show): http://www.theguardian.com/world/2015/jul/09/poorer-than-greece-the-eu-countries-that-reject-a-new-athens-bailout
July 10, 2015 at 11:49 am
Is it a realistic set of cuts though? Or is the definition of “realistic” and “unrealistic” actually driven by what is politically expedient? e.g. last week it would piss German voters off to accede to Greek demands so offers were “unrealistic”; this week it would piss German voters off more to break the Euro, so offers become “realistic”? I’m suspicious about these two words, which are very subjective when reported to us without the details of the underlying document. But assuming that it’s true then yes, the ball is in the euro leaders’ court. I note that in addition to these strict rules on debt relief a member of the ECB has openly stated that the bank “has no mandate to safeguard the solvency of banks and governments”, which suggests that they aren’t feeling very inclined to give emergency liquidity assistance. It also suggests to me that the ECB has just decided that the Euro is not a fiat currency – debts are inflexible and the currency issuer refuses to take on the core roles of a currency issuer under a fiat system. Perhaps it might be a good idea to abolish fractional reserve banking, if that’s how they plan to run their currency?
This could be an example of gambiting by the Greek government – present credible offers knowing the Euro leaders won’t offer debt relief, then withdraw the offer when the Germans don’t deliver and walk away from the whole thing with your head held high. A compromise is not a compromise if the only thing you want in exchange for it is something the other side can’t or won’t give…
July 10, 2015 at 3:20 pm
“It also suggests to me that the ECB has just decided that the Euro is not a fiat currency – debts are inflexible and the currency issuer refuses to take on the core roles of a currency issuer under a fiat system. “
Hmm. It is a pretty weird fiat currency. Given it has 19 key stakeholders, the flexibility works at a continental rather than national level. That means that debts are able as flexible for a nation in the Euro as they are for an Australian state.
That doesn’t make it not a fiat currency, but does eliminate (or greatly reduce) on of the key advantages if offers.
“Perhaps it might be a good idea to abolish fractional reserve banking, if that’s how they plan to run their currency?”
That sounds fun. I’ve always wondered what a modern economy locked up by a lack of liquidity would look like. And the work arounds using hyperinflation should be fascinating to observe from a distance.
I totally support this idea. But with the caveat that I support all potentially massively destructive ideas being tested in a way that doesn’t threaten me or those near me. So my support should probably be taken with a grain of salt. I 100% oppose it for use in my country (or the UK in case I move back there if some idiot brings it in in Australia)
“This could be an example of gambiting by the Greek government – present credible offers knowing the Euro leaders won’t offer debt relief, then withdraw the offer when the Germans don’t deliver and walk away from the whole thing with your head held high.”
Could be. But that comes back to our game of chicken analogy above. If the two sides accidentally agree because they both want to propose a deal that is almost but not quite what they think the other side will accept then it’s a win in my eyes. And if they don’t then I guess one side will have “won” the game they’re playing (and both lost in the eyes of people who want Greece in the Euro).
July 10, 2015 at 7:20 pm
I hope it’s obvious I was being sarcastic about fractional reserve banking … the idea of having a system like that without a central bank willing to step in seems kind of ludicrous to me.
Yes, the Euro is increasingly looking like the individual countries have no more control over their currency than an Australian state would have – except that an Australian state, being part of the same polity as its federal rulership, probably has greater political influence than any single nation on the periphery of Europe has over the centre. Now it’s Greece, but sometime in the future it could just as easily be Latvia, Portugal, wherever …
July 10, 2015 at 9:14 pm
Looks like the sarcasm tag didn’t work properly. Maybe you missed a <
😉
Hmm, for EU states versus Australian states the important differences would seem to be 1) the fiscal policy is actually set at the centre and considers each bit (including wealth transfers as required) 2) the people get to choose their representatives and kick them out (none of this "I'm a German politician so who cares what Greek's think?") and most importantly 3) Australians fundamentally think of themselves as Australians and, given a decent argument, are willing to kick in some money for the other states (with some limits – WA is pretty pissed off about their share of the GST).
July 10, 2015 at 9:16 pm
Which brings us to the key issue: despite the eu, Europeans aren’t being United…
July 12, 2015 at 3:59 pm
I just thought I’d add two links here, while we wait to see how terribly the negotiations this weekend will go. First, my observations on Greece’s economic malaise back in 2013 when I visited Rhodes, including my observation that despite supposedly “profligate” spending ordinary Greeks aren’t seeing much in the way of Government services. And second, Greece has a huge defense budget, about 4% of GDP, which has been surprisingly untouched by austerity – the latest offer appears to include a 200 million euro cut, but there are insinuations that the IMF vetoed a previous 400 million cut, presumably because it would have preserved pensions. This Guardian article from 2012 shows how more than a third of Greek military spending goes to Germany and France, and describes involvement of German companies in bribes to guarantee contracts. It appears that Germany was more than happy to be the beneficiary of deficit spending before the financial crisis, and quite happy to participate in illegal means to secure that spending … Greece was admitted to the EU in 1981 I think and its economy has clearly been in trouble for a while, so for just how long have the main powers of Europe been turning a blind eye to areas needing deep reform because it benefited their domestic industry?
July 13, 2015 at 1:35 pm
“for just how long have the main powers of Europe been turning a blind eye to areas needing deep reform because it benefited their domestic industry?”
Everyone has turned a blind eye towards Greek finances since their entry into the Euro. It’s not hard to find links to topics like “Goldman Sachs constructed derivatives to fudge the Greek books so they could enter the Euro.” By contrast, protecting your domestic industry is practically good politics [1].
I recall working with an Italian in London who told me one of his former projects was implementing a foreign exchange system for the Italian government. His description was they had constructing a system and set of accounts that would allow Italy to enter the Euro while the real accounts were being maintained “under the desk”. At the time I don’t think I fully believed him, but the Greek (and Italian) experience suggests he was far more correct than I credited him with.
“despite the eu, Europeans aren’t being United…”
And the other topic is that despite being bureaucratic, they aren’t very good a following the rules (e.g. debt limits, bribery)
[1] Assuming the German politicians weren’t in on the bribes. If they weren’t, then it just reflects badly on the German companies and Greek politicians.
July 13, 2015 at 3:48 pm
There is some far away land where “the market” rules, and governments don’t look after political interests, and all accounts accurately reflect reality. It’s just very far away – so far that no-one has ever been there.
The German government transfers very large mounts to the former East Germany, both in direct payments and subsidies to firms. Ditto green energy and farmers. The UK government and the City pee in each others pockets all the time. France has an excellent state-owned rail system and so on. These are not news. And the accounting is famously bent to accommodate party donations, the political line of the day (repeat at every press release “Labor waste, with big figures). But all this is too good for the Greeks.
It’s not about money – it’s about control (as in “we set the terms such that you will always owe, so we can always tell you what to do”).
July 13, 2015 at 8:11 pm
Yeah. Nah.
There is a reason that there are corruption indexes (i.e.: https://en.wikipedia.org/wiki/Corruption_Perceptions_Index ) and it’s basically that rattling off some poseur cynical attitude on how everywhere is corrupt is bollocks. There are real and measurable and material differences in how corrupt nations are [1].
Saying the German government has transfers to the former East and calling it corrupt is like calling welfare a corrupting influence. 1) Someone will do it and 2) they’re nuts.
There’s a world of difference between above board wealth transfer payments or government ownership of a utility and money paid in a paper bag. And there’s even steps in between – just ask Bill Shorten. But these things aren’t all the same and they don’t all occur at the same rate. And it’s OK to be varying amounts of pissed off about them.
As for control, there is a aspect of that to the latest deals, but some of this is shaped by the Greek’s previous willingness to commit to various reforms and then somehow never get around to them. Here’s an example from 2012: http://www.reuters.com/article/2012/02/08/us-greece-promises-idUSTRE8171FG20120208
If a “partner” in a deal has repeatedly failed to deliver, it’s reasonable to demand cash up front. And amusingly enough, that’s exactly the problem that the Greek economy now finds itself in…
I mean it’s not even like the IMF didn’t impose these deals on half a dozen other nations, but no one wanders around saying “The Irish have been set-up to be perpetually in debt so the Germans can control them!” because it’s manifestly untrue. It’s almost like the IMF set a bunch of conditions, loaned some money and then the advice worked [2]. But Greece pisses along gladly paying Tuesday for a hamburger today and looks stunned when the cooks finally get sick of it.
[1] Not that the indexes are themselves 100% transparent, but the fact there are shades of grey is sort of my point.
[2] If you want to argue that there were better options, go right head. It’s dead easy to find a Nobel prize winning economist who will agree with you. But I don’t recall anyone like that advancing conspiracy theories about “control”.
July 14, 2015 at 12:39 pm
Paul
For the last six months or more the press has been full of pharmaceutical grade bullshit as the different sides spin madly. As usual, the bankers have the best PR machine, so the story that Greece is a land of lazy pensioners quaffing ouzo at the public expense has hogged the headlines. (“89% of taxes uncollected” – bullshit; “Greek pensions way higher that EU average”: no – Greek social security is low, but the payments go more through the pensions system than through very low unemployment benefit – so also bullshit). I could go on.
A patronal system is not necessarily corrupt – it just distributes the social cake through different channels. Those who want to get their share through changes to tax laws find this inconvenient. We should go along with them why?
It’s not a conspiracy about control – read the agreement. It’s about control (no legislation without EU approval; assets in a fund in Luxembourg…). No debt write-downs! Even though the debt is unrepayable. If you refuse to let someone go bankrupt, there’s a reason…
July 14, 2015 at 4:03 pm
“For the last six months or more the press has been full of pharmaceutical grade bullshit as the different sides spin madly.”
The link I provided was from 2012. I agree that the PR messages have been coming think and fast (“Lazy Greeks” versus “Something about democracy meaning you can always vote for more money” [1]), but this isn’t a recent problem and the comments about other nations not wanting to fund Greece are there in the 2012 article, so this isn’t new in any way.
Ultimately it seems to boil down into a couple of camps and it’d seem that some camps can’t even grasp the precepts necessary to interact with some other camps arguments.
“There is some far away land where “the market” rules, and governments don’t look after political interests, and all accounts accurately reflect reality. It’s just very far away – so far that no-one has ever been there.”
“A patronal system is not necessarily corrupt”
The corruption we were talking about was whether the Greeks had faked their books and bribes that had been paid on defence contracts. Then you came in with welfare payments to East German and French ownership of rail lines. These things aren’t similar.
There are massive differences between falsifying a report or cash in paper bag and electoral pork barreling. And talking a cynical line about how everywhere is corrupt is needless nonsense.
“It’s not a conspiracy about control”
“we set the terms such that you will always owe, so we can always tell you what to do”
Statements about keeping people in perpetual debt to control them are a conspiracy theory. We’re lucky there are’t any Jews in this scenario otherwise we’d hit Godwin’s Law pretty quickly.
“If you refuse to let someone go bankrupt, there’s a reason…”
See – this is more conspiracy theory talking. How about “Neither the Germans nor the Greeks wanted to take the final step to the Greek’s going bankrupt with all that entails (though the Finns were OK with it)”?
Nah, “there has to be a reason” and that reason is probably “so we can always tell you what to do”.
See? That isn’t a code. There are the words right there.
Yeah, Europe wants to control what the Greeks do. But lenders tend to be like that to varying degrees. Or you could try going to a bank to borrow $100k and say “I may invest it, I may put it all up my nose” and see whether they have an opinion on lending to you. The difference is that Europe doesn’t really have many options about not paying – they’re already way too close to a suicide pact on this thing.
[1] I’ve got to concede I don’t understand some of these arguments. Krugman’s I can follow – “Leave the Euro and damn the torpedoes” but anything about the referendum and democracy and what Europe should do could have been in actual Greek as far as I’m concerned.
July 15, 2015 at 9:21 am
okay, so the bullshit goes further back than six months. My point on subsidies is that when they are German, that’s fine: when they are Greek, that’s crime. Cooking the books is something the Greek government did in open collusion with the EU and the banks. And it’s something practically every EU government has done.
For corruption – Schauble admitted receiving cash in an envelope, and lying to parliament about it. And was pushing for Greek assets to be put in a Luxembourg fund which he heads (no possible conflict there, right?). Yet he is finance minister?
On the control thing – the IMF (and the EU privately) have admitted that the debts will nevr be repaid, so the sensible thing is to write them off. But the EU refuses. Why?
On the whole creditor/debtor thing, just try to keep in mind that a country is not a person, nor yet a company.
On the patronal thing – all countries have an element of this. See George Brandis and arts funding, the Abbot Direct Action climate scheme, the Howard Liberals MP slush fund. It can get out of hand, but it’s normal politics (including in Germany). Self-righteous noises about probity don’t hack it.
July 15, 2015 at 12:28 pm
“On the control thing – the IMF (and the EU privately) have admitted that the debts will nevr be repaid, so the sensible thing is to write them off.”
The latest leaked IMF paper appears to be calling for “a 30-year grace period before [Greece] has to start paying off its debts”: http://uk.reuters.com/article/2015/07/14/uk-eurozone-greece-imf-report-idUKKCN0PO1C920150714
Pretty much everyone is on board with restructuring the debt (except maybe the Finns). But it’s important to note that there are massive difference between changing the payment periods/haircutting the debt and writing the debts off. I presume you aren’t suggesting a 100% write-off. The difference between grace periods and haircuts is much smaller – the actual terms being applied really matter and it’s not the sort of thing I expect to see reported in sufficient detail in papers/reports I read.
“…write them off. But the EU refuses. Why?”
You keep saying this like this. Why? I just can’t find any details of what the final deal will look like. Every report I can find mentions key stakeholders (i.e. the IMF) calling for some form of debt relief. But as far as I can tell what that will look like is unclear.
The German’s are clear that it won’t be a haircut. Apparently there is some German law that prevents it (though it didn’t seem to apply last time?). But as I’ve said, various restructuring options (including this “grace period” from the look of it) are basically variations on haircuts.
“On the whole creditor/debtor thing, just try to keep in mind that a country is not a person, nor yet a company.”
In general, nations have all sorts of options that people don’t. Living forever. Declaring war. Setting tax rates that make people virtual slaves. But on the topic of debt their options are about the same as humans – pay or don’t and live with the consequences.
What other options are you seeing? Devalue their currency? Because Greece has about as much ability to do that as you or I do.
July 15, 2015 at 12:29 pm
“You keep saying this like this.”
This should be “You keep saying things like this.”
July 15, 2015 at 1:20 pm
I think the institutional pressures and the corruption need to be linked in some way. In a low-growth, low-interest environment in central europe, with flat consumer demand, there’s obvious need for institutions to find higher yield investments on the periphery and a strong incentive for them to hide the risk associated with those investments – especially if, as we can now see clearly, the central powers are willing to use extreme political coercion to ensure that investors don’t wear any risk. Similarly there’s a strong incentive for central industry to find new markets on the periphery, which is how Germany somehow managed to sell submarines to Greece in the middle of an existential crisis. Obviously Greek corruption and willingness to hide their accounts is not Germany’s fault, but equally it’s the responsibility of German investors not to collude with it, and knowing that it is happening not to expose themselves to its risks. Of course we now know they didn’t have to worry, because the government will protect them at any cost. I’ll be writing a post on this issue of investor responsibility later [comparing with Iceland] so let’s leave that aside for now, however.
The deal is now in, and it seems to be a terrible piece of bastardry. First, it appears that the IMF and EU are at odds and the EU isn’t facing up to the reality of the situation. My reading of the statements so far is that the EU sees a difference between “debt relief” (waiving debts) and “debt restructuring,” which they seem to talk about in different terms – at one point they were ruling out the former and proposing the latter. Regardless, Tsipras seems to think that he has negotiated both a restructuring, a large new loan, and possibly relief. This is significant because with restructuring, he can use the new loan to pay off old loans and not suffer interest payments on the new one, giving (I guess) a reprieve for the Greek economy – which is what Syriza were seeking all along. Tsipras has also made clear that he didn’t believe Greece was in a position to manage an exit – he thinks they didn’t have the resources or expertise, something Varoufakis backed up in a recent New Statesman interview where he said he wasn’t convinced that Greece could manage Grexit. Tsipras further claims that the referendum got him a better negotiating position, so that he could obtain new loans and restructuring, but he thinks the conditions put on the new deal were terrible for Europe and for Greece. He seems to have been doing the best he could under circumstances that basically gave him no choices.
The conditions of the new deal are also a clear signal that the EU has no respect for democracy outside of the precious German population. Kazimir tweeted openly that the harsh conditions were a response to the “Greek Spring” (he later amended this to “Syriza spring” just to make it more personal). Schauble has now admitted that debt relief is not illegal, and Varoufakis thinks that the whole shit show has been managed by Schauble. The conditions also reek of hypocrisy: they demand Greece do things (like Sunday trading and pharmaceutical sales in supermarkets) that no other European country does – certainly Germany doesn’t – and that will have negligible effect on Greece’s economy. As Vox put it, this is just trolling. They have made it clear that they will accept nothing less than the complete abrogation of Greek sovereignty – no bills being passed without German approval – which is basically indentured service, and nothing like bankruptcy. And finally, the euro leaders are now implying that although Greece might get some liquidity funding, all the other parts of the eurozone’s side of the deal – restructuring, further loans and debt relief – are still undecided. This is not the behaviour of a democratic institution with a shared currency, but of an imperial power.
Regarding debt relief, my belief is that all debt to other european nations should be written off – that would be about 300 bn euros, leaving 60 bn (90 if you include the IMF). If this bothers Germany then the process should be extended to all cross-border debt for public institutions denominated in Euros. The ECB can print the money to make up the difference, and given the high unemployment and demand crisis facing the remainder of the EU it can only be a good thing. Even if the ECB didn’t print a single Euro the cost would be negligible – Germany would lose 9bn max a year from Greece, offset by whatever it is paying to other debt holders in Europe, which is a trivial amount. About half of European nations are above their “sustainability threshold” (which is an arbitrary fiction in any case) and they all use the same currency, so it would be literally the equivalent of defaulting on themselves. And since the biggest sustainability issues are in the countries most in need of transfers from the centre, it would essentially be equivalent to a welfare flow.
But as Varoufakis says in his New Statesman interview, you can’t talk economics with the eurozone leaders: you might as well “sing the Swedish anthem.” So we won’t see anything sane or rational here. Anyway, Greece has sunshine and nice beaches, so they deserve to be punished.
July 15, 2015 at 7:23 pm
Paul
One thing countries do is set the value of money. Money is basically a general debt. The amount of debt in circulation tends to rise beyond what can be paid over time (people promise more than they can deliver) and needs to be reset by some form of cancellation. Since governments are the ultimate guarantors, the debt overhang tends to end up with them (notice the way the first two tranches of Greek bailout swapped private German and French debt for Greek government debt, or ditto US private debts for public in the GFC?). So periodic sovereign debt cancellations are built into the system. Have been for centuries. A certain amount of duck-shoving is inevitable, but the system does not work if all the costs are shoved onto the weakest party: that just leads to sequential failure of the overall system.
July 15, 2015 at 7:45 pm
Peter” “keep in mind that a country is not a person, nor yet a company.”
Paul: “Devalue their currency? Because Greece has about as much ability to do that as you or I do.”
Peter: “One thing countries do is set the value of money.”
See, this is just untrue. Countries with a fiat currency they control can set the value of their money. Countries without a fiat currency they control (due to e.g. gold standard, dollarization, or membership in the Euro) can’t do that on account of the fact they don’t control their currency.
July 15, 2015 at 7:47 pm
I think Peter is aware of that Paul, and in light of that the alternative is debt relief. I read somewhere that varoufakis wrote a blog post in 2012 explaining why Greece can’t be like Argentina- I suspect that is a large part of why
July 15, 2015 at 9:37 pm
Paul
What faustus said but, to expand – gold standards, dollar pegs (or sterling pegs when Britain ruled the waves) or Euro membership all forego control. So the reset has either to take the form of sovereign default (as frequently happened in the C19 and early C20), or a write-off negotiated with the controller. In this case the controller is refusing to allow either a default or a write-off. This sometimes happened pre 1945. The two common outcomes of this in the C19 were force (“gunboat diplomacy”) or revolution (Germany was subject to both 1919-1921 and again in 1945). Often first one, then the other. Bretton Woods envisaged orderly write-downs as a substitute.
It’s built into the system.
July 15, 2015 at 9:38 pm
… And built out of the euro…
July 16, 2015 at 5:58 am
And hence my point that Greece’s options are basically the same as yours or mine – the key one being “negotiate with your lender and see what you guys can agree on”. Because war is the only other one we agreed on and revolution is the other one I missed.
But negotiation isn’t a magic wand. It, as Faustus points out for the Euro, does not have any particular solution built into it. In this case it has about 19 subtly different expectations around what the solution would look like ranging from “It should never happen” (Thanks Germany) to “You lent me the money, it’s your problem” (Thanks Greece).