So, what would your plan for Greece be?

by Daniel on February 16, 2012

Reading the media and blogs, it seems to me that left and right are united in the view that the Greek default is being handled appallingly, that the current attempts at a solution are childishly obviously wrong and that everything is the fault of someone, probably the Germans. My own view – that it is not at all clear what the direction of policy is, and that although I don’t agree with the troika plan, it’s recognizable as a good-faith plan made by conscientious international civil servants working under unimaginably difficult political constraints in an economic context that was irreparably broken before they got there – is, as always, unpopular.

I don’t have a solution myself – the more I end up discussing this with people, the more I am reminded of the London Business School proverb taught on some of the gnarlier case studies, which is “Not All Business Problems Have Solutions”. So, CT hivemind, what do you think the best outcome is? Below the fold, I note some talking points, aimed at preventing our commentariat from falling into some of the pitfalls and mistakes which appear to be dominating debate at present. Because the whole issue is a twisty turny maze which at times seems to consist of nothing but false moves, I am presenting it in the form of a “Choose Your Own Adventure” book. I would note at this stage that I could probably have presented it in a funky HTML way rather than making you scroll up and down, but I have convinced myself that this is a feature rather than a bug – the medium matches the message here, because international debt negotiations are cumbersome, inconvenient and irritating too. Also, it is probably easier than it needs to be for readers to end up at the wrong paragraph and get a confusing jumbled narrative which bears little resemblance to the decisions they thought they’d made. Again, this is a crucial part of giving you the authentic international financial diplomacy experience.

I will have another post on this in a few days (more realistically: in a week). But for the meantime, I’d be very interested if CT readers would play the game below and let me know, in comments, where they ended up. And also, if having ended up there, they were left with a strong feeling of having been bamboozled into something they didn’t really want to do.

Update: It is no longer literally impossible to reach #50 (and therefore #15 and #21). I don’t think this was a popular path, but sorry. Thanks to “M” and “Vasi” for noticing.

INTRODUCTION

Welcome to Choose Your Own Troika Program For Greece! You are a junior member of the One World Government, and you have been given the job of coming up with a proposal to resolve the Greek crisis. You have also been given an advisor who will help you talk through the consequences of decisions. Remember that you have to consider the economic consequences of the various policy choices, but that there is no point in submitting a proposal which is politically unacceptable to either the Troika or the Greek government. Good luck!



1:
You are sitting in an office with your advisor, Maynard. You have been asked to come up with a workable solution for the troika and for Greece, which needs to be politically and economically acceptable to both parties. Maynard’s job is to take your ideas and turn them into a proper proposal to be submitted. He has a long list of decisions for you to make. “First of all”, he says, “we need to decide whether there is any more money on the table. Do you think that Germany (and Netherlands, Finland, etc) can sell any more fiscal transfers to Greece, given their domestic politics?”

If you answer “Yes, I know it’s going to be difficult, but we have to plan on that basis”, turn to 32.
If you answer “I think we have to plan on the basis that there isn’t”, turn to 47
.



2:
A sharp intake of breath from Maynard. “Right! Let’s go there! And leave the Euro?”

If you say “Yes, leave the Euro”, go to 18
If you say “No, I didn’t say that. I think we can structure this to keep them in the Euro.”, go to 34.


3:
“Right, details”, say Maynard, picking up a legal pad and a sharpened pencil. “This is a kind of internal devaluation strategy, am I right, with a future string of fiscal transfers written in to soften the transition?”

If you say “Yes, you’re right”, then go to 26
If you say “No, I am thinking more of an investment-driven plan”, then go to 36


4:
“So to summarise, we’re going to look for a degree of further debt relief but keep Greece in the Euro and try for rough current account balance over the long term”, Maynard says. “So this is an internal devaluation strategy, right?”

If you answer “Right.”, go to 31
If you answer “No, you don’t understand at all”, go to 7.


5:
“You’re going to take a lot of flak for this from some quarters, but it seems to me to be that you could do a lot worse”, says Maynard, finishing his tea. “In terms of consumption smoothing and reducing the fiscal adjustment, I don’t think you’ll do better – you’ve written down the debt and you’re getting structural current account funding. But there is not really much escaping from the fact that Greece is not going to get back to the levels of consumption (or more accurately, the gap between consumption and production) that it saw in the 2000s. A lot will depend on the gap between the maximum amount that is politically possible for the Eurocore to deliver in terms of fiscal transfers, and the minimum amount that is needed to prevent riots in Greece. Which is a parameter outside our control, unfortunately. But at least this plan sorts out the debt, and gets Euroland on the road to fiscal union. Let’s get it written up”.

THE END


6:
Maynard is looking at you quizzically. “This is presumably some seriously heterodox idea. Even with a total moratorium on the debt, there is a fundamental problem with targeting current account balance while not really addressing the difference in relative costs. What’s the plan, Stan?”

You shoot him a baleful look and say …

If you say “We need a step change in ECB policy to target higher inflation in core Europe. Greece is in recession, so a higher target for Europe-wide inflation is going to help improve our relative unit costs”, turn to 17
If you say “We need to improve competitiveness by investing in the Greek economy. We should be negotiating in terms of the structural reconstruction funds to be made available to improve Greece’s capital stock”, turn to 44.


7: “So, if not internal devaluation, what? Are you sure you want to have current account balance as one of your aims?”, Maynard asks.

If you want to reconsider this, go back to 32

“Ok, we are gunning for long term equalisation of Greek competitiveness. So what’s the plan, Stan?”

If you answer “We need stimulus in Germany, and accommodative monetary policy from the ECB. We can get Greece back onto competitive terms by an internal revaluation of the creditor countries rather than an internal devaluation by the debtors”, go to 17.
If you answer “We need a five year plan. We can carry out structural reforms under the auspices of a tightly-drafted IMF program, with funding for capital investment. Clearly this means that Greece is giving up a lot of political independence, but maybe that’s not a bad thing”, go to 27.
If you answer “Structural funds and lots of them. If we flood the Greek government with money, then it will end up in regional development, particularly if we put some sort of conditionality on it. We are stuck with the Greek political system, unfortunately, but they will perform a lot better if we stand behind them”, go to 42.


8:
Maynard puts his teacup down and assesses his notes. “This is going to be very difficult for the Greeks to manage politically, you know. Since the context is a disorderly defaulter and we are giving up fiscal sovereignty for them, you would have to guess that the Troika plan is going to involve quite a lot in the way of internal devaluation and shock treatment restructuring. So you have the humiliation of the default, the humiliation of imposing a fiscal viceroy on them, and then they get a whole load of shock treatment in return for some structural current account financing. This is the policy mix that pretty much defines the ‘IMF Riot’. Go on then, let’s write it up. It is a bit depressingly close to a lot of policies that didn’t work, though.”.

THE END


9:
“Now that, conversely, is going to be a tough sell in Greece. Tea?” While Maynard pours you a cup, he asks about how the fiscal balance is going to be looked after.

If you answer “We will need to delegate Greek fiscal policy to a European agency, committed to the aim of bringing the primary deficit into balance after fiscal transfers as soon as possible”, turn to 25.
If you answer “There is no point in austerity in this plan. The devaluation will be followed by aggressive Keynesian stimulus”, turn to 51.
If you answer “We will draw up a plan to achieve primary balance over the medium term, and negotiate with our EU partners for the deficit financing required”, turn to 37.


10:
“So, an internal devaluation strategy, with some of the pain of adjustment financed by the debt default”, says Maynard. “There’s going to be a lot of pain for Greece anyway. I think you might be underestimating the deadweight costs of the default itself, and although Greece is a lot closer to primary surplus than it was a few years ago, it’s still a way away (unless you use a funny measure counting privatisation receipts and not counting accruals spending). So there’s a lot more fiscal austerity on the way for them, in the context of a blown-up banking and savings system. And I suppose that if it turns out ex post that you were too pessimistic about further money from the troika, that’s a bonus.”

“The good thing about this strategy is that if Greece goes for it, they don’t have to negotiate it with anyone. As a result, it might be what they end up doing anyway if a negotiated settlement fails. So we should definitely write it up, on that basis alone. But I can’t help feeling that we ought to be able to do better”.

THE END



11:
“Doesn’t work”, Maynard immediately says. “The investments are only going to raise productivity in the long term, and the debt ratio is explosive in the short term. And you can’t expect structural funds to be poured into an economy that’s clearly not on a sustainable debt path. The horrible thing is, if you write this idea up and submit it, it has a decent chance of being accepted because you are avoiding all the tough decisions. But two months from now, we’ll just be back in the same room, trying to come up with a proposal when this one has fallen apart.”

“See you then”, he adds, pointedly, as he walks out of your office.

THE END.


12:
“I think we’ve got off track here”, says Maynard, pouring a cup of tea. “If they’re leaving the Euro, then we have to be aiming for current account balance, at least in the long term. Do you mean that we are going to aim for current account balance, or that we’re not leaving the Euro?”

If you answer “The first”, go to 55.
If you answer “The second”, go to 38.


13:
“Ooh. So, having carried out the disorderly default, we are basically going to suggest that the same Greek government which has so comprehensively failed for the last forty years is going to restructure the economy to a modern value-added basis, with no wage cuts, and that the rest of the EU should just stand back and write them cheques to cover the fiscal deficit and finance a massive investment programme? Something like it has worked once in the past, but the relationship between Greece and the EU isn’t really very like the relationship between the UK and the Falkland Islands. And the Falklands had better governance. This would be absurdly aggressive as an opening negotiating position for the Greek side – as a suggestion for a solution it’s politically insensitive to say the least. I’ll submit it to the process, but I am frankly not optimistic about your career.”

He finishes his tea and leaves your office.

THE END


14:
“That’s definitely a significant adjustment”, Maynard warns you. “Since Greece ran large structural deficits (which were the counterpart to its fiscal deficit) for most of the 00s, we are basically saying here that we can’t return to the pre-crisis consumption path. This isn’t really a growth-oriented or cyclical policy; we’re trying to smooth the transition to a structurally lower standard of living in Greece. Just to be sure you know that, because it is going to factor into the political decisions later on”.

“I understand”, you answer. “But let’s deal with that later. We need to consider our debt strategy. My proposal is …”

If you say “That the current process is a can-kicking farce. We should just plan for a straightforward default on the debt”, turn to 22.
If you say “That part of the fiscal contribution is going to have to take the form of a significant further reduction in the debt by the official sector, over and above the private sector contribution already made”, turn to 39.
If you say “That we have to find a solution within the constraints of the current nominal debt level. We’ve got a certain amount of private sector writedown, but there won’t be any more”, turn to 49


15:
“This seems like a bit of a long shot, frankly”, Maynard says. “I can sort of see how you could bring the troika back on side after a Greek default by adopting the orthodox IMF playbook. But even with that, it’s going to take a lot to bring them back into the fold after we’ve made them angry with the debt strategy, and a hell of a lot to convince them that they should go on providing current account support without any real control over how it’s spent. I suppose that Greece still has the threat of leaving the Euro in this strategy though, so it’s not an unplayable hand from their point of view. What the hell, let’s write it up. Although it looks a lot like the policy mix that defined Argentina, before they defaulted and left the dollar peg. I’ll take it away and get it written up.

He is shaking his head as he leaves your office.

THE END


16:
“The Argentinean solution”, Maynard says. “I suppose it worked for them, so it can’t be ruled out, can it? But … Argentina was and is a commodity exporter with a clear way to raise hard currency revenues. Greece has got tourism and shipping as its exports. The tourism generates soft currency, and the shipping … well, with the best will in the world, I am not seeing those hard currency revenues coming back to Greece if it is in the state that this plan is going to leave it in. It looks like a roll of the dice to me. Remember that even today, Greece has twice the GDP per capita of Argentina.”

As he leaves, Maynard starts to hum the theme from “Evita”, but thinks better of it.

THE END.


17:
“Would you try to live in the real world please?”, Maynard demands. “We are here to work out a package for Greece, not renegotiate the Lisbon Treaty. To start with, to get the sort of Euroland-wide inflation that would make a real difference to Greece’s competitiveness or debt burden would imply double digit inflation in Germany. But more fundamentally, this is a long term solution to a short term problem. What are we meant to do about Greece now and in the next couple of years? I’m not going to let you avoid all the tough decisions by assuming a deus ex machina.”

Go back to 1


18:
“I think we’ve gone a bit off track here”, Maynard says. “You’re planning for a disorderly default, and leaving the Euro. Which, by the way, means that you’ve caused a financial meltdown and credit crunch in Euroland. But having done both those things, you’re planning for the Greek economy to still maintain a structural current account deficit (even though it’s not in a single currency any more) and to have this deficit financed by its European partners.”

“You don’t mean what you say here. Do you mean that you want to go down this road because you don’t expect long term current account support from Europe, or that you’re looking for temporary current account support outside the Euro because you do expect the current account deficit to close in time?”

If you answer “The first”, go to 47.
If you answer “The second”, go to 33.


19:
Maynard is chewing his lip; he is frustrated, although not unsympathetic. “This is pretty close to the current state of negotiations”, he says, shaking his head, “but there’s still a big gap between the minimum that the Greeks need to maintain political deliverability, and the maximum that the Germans are willing to deliver without any strings. There’s a fundamental credibility problem here. I can’t really fault your logic, but the politics look unworkable”.

He shrugs his shoulders and leaves your office, in the direction of the word processing department.

THE END


20:
Maynard hands you his pad. “I can’t work with this. We’ve taken Greece out of the euro and imposed a disorderly default. Now, with Europe in financial meltdown, we’re asking for the equivalent of a Marshall Plan, with no restructuring of the government system that caused this crisis? What, exactly, would the core European nations be getting out of this deal? Once Greece is out of the Euro, there’s a strong presumption that it’s off their hands, and the disorderly default and rejection of any loss of sovereignty reinforces that view. You are being much, much too blasé about the dangers of a financial crisis. This looks to me like the sort of mistake that gets written about in history books. Submit it if you like, but not with my name on it, please.”

THE END.


21:
“Forget it”, says Maynard, shortly. “You can’t announce a disorderly default and then turn around and ask for no-strings cash. There might be the germ of an idea here, but it needs to be based on, at the very least, a negotiated writedown. Shall we go back and rethink the debt strategy?”

If you answer “OK”, then go to 46.
If you answer “No, I have made my decision on debt strategy”, go to 57


22:
Maynard gulps. “As you wish. And will Greece be remaining in the Euro?”

If you answer “Yes, definitely”, go to 41
If you answer “No, Greece has to leave the Euro, temporarily or permanently”, go to 33


23:
Maynard’s hands are trembling slightly as he pours a cup of tea. “Well, let’s go there, then!”, he says. “Default in the Euro, or default out of the Euro?”

If you say “In”, go to 10
If you say “Out”, go to 52


24:
Maynard’s tone of voice turns hostile. “How, exactly, is Greece going to maintain service on an unreduced burden of euro-denominated debt, if it leaves the Euro? Will you concentrate, please? I think we’d better start again from the beginning.

Go back to 1


25:
Maynard reads from the yellow legal pad on which he has been taking notes. “To recap, your plan is that Greece should declare a unilateral moratorium on its debt, while remaining within the Euro, and should then negotiate the appointment of a special commissioner to bring the primary fiscal balance back to zero, while enacting an internal devaluation to restore competitiveness”.

“It’s got a certain coherence to it. We would at least be addressing the long term problem of the debt burden. Everything would really depend, however, on how much we could get for Greece in the way of fiscal transfers, and we do not really help our case with the moratorium – this is likely to cause them all sorts of problems, and doesn’t really do much to establish the Greek governments good faith. We can build some or that credibility back by showing Greece’s willingness to accept a tax commissioner, but this is going to be a very difficult political sell in Greece. In fact, when you combine that with the wage cuts, then I think that this package may be completely impossible to implement in Greece. It would certainly have the crowds on the streets, even if the fiscal transfers were very large.”

“I will have it typed up and submitted”, he mutters, “but I think it has little chance of being seriously considered”. He excuses himself and walks out of your office.

THE END.


26:
“The short term debt path on this one is going to scare a lot of people”, Maynard remarks. “After all, you’re effectively deepening the austerity while trying to maintain service on an unserviceable debt burden. This plan has got a further restructuring or crisis more or less written into the numbers a few years down the road”.

You wait for his final cutting remark, but it never comes.

“But, there’s worse things than that. What we have here is a classic Eurofudge, and I think Europe might go for that. And if Greece goes along with your idea, they’ll certainly be playing the game the troika’s way, and I think they would have the right to expect a generous debt writedown further down the track, by which time we might have a less toxic political climate. If this works, we’re making real progress to a new Greece and a new Europe.

“The problem is, will it play in Greece? If you think the current situation isn’t politically sustainable, then this plan definitely isn’t. It scarcely matters whether we’re going to include a sovereignty deal or not – although we will have to fill in that detail before the draft is complete. We can only go ahead with this line of thinking if you are convinced that the Greek political system is a lot more robust than it appears to be. On that basis, let’s start drafting”.

THE END


27:
“It’s worth a try.” Maynard shrugs. “We negotiate down the debt, then put Greece into effective administration by the Euroland partners, aiming to restore competitiveness by investment. If it worked, it would be heroic. I do worry that you’re asking a lot from both sides, politically – don’t underestimate the national humiliation factor for the Greeks here, or the reluctance of the Germans to put so much money into what is effectively a regional development scheme. If it works, it certainly forms a strong basis for fiscal union. Maybe that will help sell it. I’ll go and get it typed up”.

As he leaves your office, he is whistling, “There May Be Trouble Ahead”.

THE END.


28:
“Baby steps in the direction of fiscal union? Or something?”. Maynard is not looking wholly sceptical as he drains his tea.

“So the idea here is that we’re going for a unilateral moratorium on debt – I still think this is far too aggressive, by the way – and then immediately throwing Greece on the mercy of the court, looking for large restructuring funds and giving up the governance in order to get them. This is a bit of a shock-treatment approach, and you shouldn’t underestimate how much disruption and political stress it’s going to cause in Greece, but I can see your idea here in trying to minimise the short term impact and maximise the consumption smoothing. I think the problem with it is the size of the funds that would be needed, and also it is going to take a lot of work to convince Europe that the end of the road here has a Greece with sufficient competitiveness to maintain current account balance. It’s not wholly dissimilar to Yanis Varoufakis’ ‘Modest Proposal’. A difficult sell to the creditor countries, but I think it deserves a chance. I’ll get it written up and submitted. Somehow, though, I think you’re too good for this naughty world.”

THE END.


29:
Maynard screws up his face, like he’s tasted something sour. “We have to respect budgetary arithmetic here”, he says. “If we are not restructuring the debt, then it is going to be on an explosive path, and so the fiscal transfers needed to maintain service on it will also be on a growing path. Since the Greek economy is not going to generate enough output to pay the debt, a writedown is necessary out in the future. The only difference here is that Greece is going to be a constant debtor on the brink of default, continually in breach of its debt and defict targets and at the mercy of the troika; so it will effectively have a constant IMF program in return for its current account financing. At the right level, however, this might not be the worst plan – basically, it’s can-kicking forever. It’s economically equivalent to a plan whereby we just negotiate a writedown in return for a permanent IMF program.

Maynard passes you a slim folder. “I happen to have had such a plan in my bottom drawer”.

Go to 5


30:
The smile evaporates from Maynard’s face. “We need to be serious here”, he says. “This plan would be very hard on the Greek people indeed. In its favour, this is actually the only success story I can think of – it’s basically what Latvia did. Against it, Greece isn’t Latvia. It has much weaker institutions and it hasn’t just finished a decade of hyper-growth. And lots of people don’t think that Latvia was all that much of a success story. And the debt numbers were a lot better. I think this plan will play well with the harder-nosed members of the troika, but I suspect that the Greek government will run a mile from it. I’ll write it up”.

As he leaves your office, you can hear him muttering “And I suppose it will get you a job in a think tank”.

THE END.


31:
Maynard’s brow furrows. “We’ve got a tricky tightrope to walk here. If we can presume enough debt relief to bring the long term fiscal position to a non-explosive path, then the Euroland partners are already contributing quite a lot. Asking them to provide even more in the way of structural subsidies is going to be tough, although I suppose we are at least showing them a path to sustainability. The question is going to be – can we rely on enough fiscal support for Greece to smooth the path of adjustment and welfare spending to make the internal devaluation bearable for the Greek government? Hmm, how much political autonomy are we going to ask Greece to give up?”

If you answer “I think we are going to need escrow accounts and a tax commissioner at the very least”, go to 45.

If you answer “I just don’t see it as politically feasible to put a German taxman in charge of the Greek finance ministry”, go to 19.


32:
“I’m sure you know what you’re doing”, Maynard says, with perhaps a flicker of sarcasm. “At some point in this process, we may have to start thinking about exactly how much, but let’s put that to one side for the time being. The next decision relates to the Greek current account. Are we going to aim to bring it roughly into balance?”

If you answer “There isn’t a sustainable solution which involves Greece structurally consuming more than it produces. We need to get the economy back into balance”, turn to 14.
If you answer “I don’t think current account balance is a realistic aim. Greece is going to need structural fiscal transfers, like Alabama or Wales”, turn to 48.


33:
Maynard is scribbling notes on his legal pad. “So”, he says, “We’ve got a disorderly default here, and Greece is going to leave the euro in order to get back to current account balance, and we are going to be asking for fiscal transfers and subsidies to maintain living standards in Greece during the readjustment. This makes a kind of sense, but wow … you are doing a lot of damage to the economy of Euroland here. This has a financial crisis and credit crunch really quite likely across the Euro area, which is hardly the best environment for financing a generous fiscal bailout for Greece. Are you sure you don’t want to rethink your debt strategy?”

If you want to rethink your debt strategy, go back to 14

“Presuming you don’t, then well – leaving the Euro is at least going to mean that we don’t have to worry about executing an internal devaluation. But Greece has quite a big import bill, and it is going to be asking for transfer payments to pay for medicines and fuel. Greece isn’t Iceland, it doesn’t have much of a stock of overseas assets to draw on. So, what governance arrangements would we be thinking of when arranging this transfer package?”

If you reply “Clearly there will have to be a tax commissioner and considerable loss of sovereignty”, go to 54.
If you reply “There is no need for governance changes. The adjustment package can just take place through EU structural funds, although obviously the amounts will have to be very big”, go to 20.


34:
Maynard pours himself another cup of tea. “This seems like a pretty aggressive way to treat the Troika, if we are assuming that Greece will still be dealing with them. But hey, let’s game it out. We’re keeping them in the Euro, and looking for structural fiscal transfers to fund a structural current account deficit (which is presumably going to have its counterpart in a structural fiscal deficit). And I suppose the idea is that we are going to get them to throw themselves on the mercy of the court, claiming that the domestic political tensions were just too urgent to support the debt burden for another minute. Might work, I guess. So, are we going the full monty in terms of Greece giving up sovereignty?”

If you answer “Yup”, go to 8
If you answer “Nope”, go to 50


35:
“Tough guy!”, Maynard grins. “So we’re going to advise Greece to maintain service on the debt, with no external help. In or out of the Euro?”

If you reply “Out”, go to 43.
If you reply “In”, go to 30.


36:
Maynard puts his pad of paper down and looks you in the eye. “I have to warn you that this kind of scheme, where the burden of adjustment is taken away by a big investment in infrastructure, is quite a long way away from the mainstream. And there aren’t very many credible examples of them working”, he says. “But what the hey, we’re here to think out of the box sometimes. What kind of governance arrangements are we thinking about?”

If you answer “Actually, I was thinking of a scheme based on a more stimulative monetary policy from the ECB”, go to 17.
If you answer “A big IMF program”, go to 56.
If you answer “I don’t think the Greek system will bear big governance changes. We will have to do it through EU structural funds”, go to 11


37:
Maynard’s nose wrinkles. “Since you’ve just declared a disorderly moratorium, negotiating for fiscal support from the people you’ve just defaulted on is perhaps going to be a little bit difficult. Not wholly impossible I suppose – as Greece still maintains the threat of Euro exit, which would be considerably more inconvenient for them – but very difficult. You’ve also got the anti-stimulative effect of the internal devaluation to think about, so from the perspective of the Greek people, this is still going to look and feel a lot like austerity, combined with the humiliation of default.”

“I don’t like this plan. It does reduce debt levels, but in a needlessly swashbuckling way that is likely to cause as many problems as it solves. Quite apart from anything, we would need a subsidiary plan to reconstruct the Greek banking sector. I will submit it under your name, but I have little hope that it will prove acceptable to either the Greek or the Troika side”.

You might have heard him muttering an insult under his breath as he walks out, but you might have been mistaken.

THE END


38:
“OK”, says Maynard, between sips of tea. “This is getting somewhere. Negotiated writedown within the euro and then … what?”

If you answer “An IMF program, to go alongside the structural current account financing”, go to 5.
If you answer “Big structural investment funding from the EIB or something similar, to offset the structural current account deficit”, go to 53


39:
“Right”, says Maynard, pouring two cups of tea. “That’s the meat of the package right there. Now – are we putting together a plan which involves Greece staying in the Euro?”

If you answer “Yes, definitely”, go to 4.
If you answer “I can’t see how it can”, go to 55.


40:
“So this is a sort of ‘graceful exit’ idea then?”, Maynard asks. If we can keep Greek society together, then we get money from the Troika to rebuild the banking system after the consequences of Euro exit, and to smooth the consumption path. But I worry about the politics. If you put an IMF program in place, it’s going to be very difficult to avoid your goal of not pursuing too much austerity or internal devaluation. And the standard of living in Greece is going to have to fall quite a lot in the near term, as the price of essential imports rises. Greece currently has twice the GDP of Turkey and I think it’s quite likely that your plan would end up narrowing that gap considerably. It seems more or less politically feasible to me, but the economics are pretty tough for Greece and Euroland. I’ll type it up and submit it, but I honestly think we have to be able to do better than this.”

“Do we?”, you reply.

“I don’t know”.

THE END


41:
Maynard is clearly worried. “This is going to be a very tough sell indeed for the Eurozone partners. You’re asking them to keep Greece in the Euro and keep making either new loans or fiscal transfers, in the context of a disorderly default. Are you sure you don’t want to revisit that decision?”

If you do, go back to 14

You silence him with a look. He walks over to the refreshments trolley and pours himself a cup of tea.

“I am not at all sure about this. But let’s fill in the rest of the details. Is the plan going to involve an internal devaluation?”

If you answer “Yes. There will need to be wage controls and benefit cuts. We need to get the cost of production in Greece down far enough for it to be able to compete within Europe”, turn to 9.
If you answer “No. That’s bad cyclical policy.”, turn to 6.


42:
Maynard makes a face. “If the Greek government was capable of delivering an outcome like that, it’s hard to see how they would have got into this situation in the first place. Frankly, the fate of the structural funds that have already gone in is unlikely to make anyone optimistic about doing the same thing on ten times the scale. I’ll give it a try and get it typed up, but it seems very unlikely to me that this is politically sellable, and even if the Troika have a sudden attack of generosity, it probably won’t work. Still, dream big”.

He leaves his cup of tea behind and walks out of your office.

THE END.


43:
“I was joking”, Maynard says, a somewhat concerned expression on his face. “Greece can’t leave the Euro and plan to stay current on Euro-denominated debt. Shall we back up a few stages?”

Go to 47


44:
Maynard gulps his tea. “Quite ambitious. Do you really think that the only thing wrong with the Greek economy is that it hasn’t had enough foreign investment poured into it? This is going to be a tough sell for Germany, and not just for them. But let’s game it out – what are the governance arrangements you’re thinking of?”

If you answer “A radical overhaul. All the investment spending should be carried out by the European Investment Bank, while the Greek budget falls under the responsibility of a specially appointed fiscal commissioner”, turn to 28.
If you answer “I don’t think any specific governance arrangements are either feasible or desirable. All the investment spending can be carried out under the normal mechanisms of EU structural funds”, turn to 13.


45:
“Baby steps in the direction of fiscal union!”, Maynard exclaims. “I wonder, though, is it really workable? This is effectively the German solution for the DDR - we effectively mutualise the past debt liability, hand over political control to a more functional entity, who is going to impose wage cuts, and then put a regime of transfer payments in place to smooth the adjustment path. I can’t say it’s not sensible, but the DDR had a fairly tough adjustment path and for obvious reasons, I don’t think we can count on the transfer payments being anywhere near as generous. I’ll just go and get it typed up – I think the troika will be glad to see this spelled out, but I do worry that you’re asking the Greek side to bear much more in the way of austerity and humiliation than it’s capable of”.

THE END


46:
“OK, we’re getting somewhere”, Maynard says. “A big writedown of the debt will help a lot in terms of the fiscal balance, and then we can move to talking about the level of the structural fiscal transfers. This is basically taking us toward fiscal union, so it can’t be done quickly, but I can see how it’s moving in the right direction. Do we have Greece staying in the Euro?”

If you answer “No, they leave the Euro”, go to 12.
If you answer “Of course, yes”, go to 38.


47:
Maynard pulls a face. “Well, at least we’re being politically realistic here. Plan for the worst and hope for the best, I suppose. That really cuts down our options and makes them in general much more unpalatable. I guess the debt strategies boil down to disorderly default, or tough it out”.

If you reply “Well, disorderly default it is then”, go to 23.
If you reply “Well, tough it out it is then”, go to 35.


48:
“I think we’re scoring points for economic realism here, but storing up political difficulties for ourselves later”, Maynard says. “But let’s game this one out then. What’s the debt strategy?”

If you say “That the current process is a can-kicking farce. We should just plan for a straightforward default on the debt”, turn to 2.
If you say “That part of the fiscal contribution is going to have to take the form of a significant further reduction in the debt by the official sector, over and above the private sector contribution already made”, turn to 46.
If you say “That we have to find a solution within the constraints of the current nominal debt level. We’ve got a certain amount of private sector writedown, but there won’t be any more”, turn to 29


49:
“So”, Maynard says, “The plan is that we’re only going for the current debt restructuring offer, and looking to get back to current account balance in some way. I guess that means we’re saving the fiscal transfers for later, to soften the burden of adjustment. Might make sense, I guess – although I think a lot of people are going to question the debt dynamics without any further restructuring. And this plan has them staying in the Euro, yes?”

If you answer “Yes”, go to 3.
If you answer “No”, go to 24.


50:
“Rrrrright”, Maynard says. “I am not really seeing the troika handing over a load of no-strings cash for an indefinite period with no control over how it’s spent. But go on, amaze me. Is there any element of internal devaluation or restructuring in this one?”

If you answer “No, there isn’t. I would be looking for structural funds to invest in productivity improvements. There are a load of projects in the tourism and transport industries”, go to 21.
If you answer “Yes, there is”, go to 15


51:
Maynard is no longer even pretending to be polite. “With respect, this is ideological bouillabaisse. It sounds like you have heard of ‘Keynesian stimulus’, perhaps at university, and decided it was a good thing. Greece doesn’t need a cyclical policy; it still has the problem of consuming in excess of its production. And in any case, even if you carried out that fiscal policy, you are offsetting it with the antistimulative effect of the internal devaluation. Not that you could carry out this fiscal policy – you planned a disorderly default, don’t you remember? That means that you can’t run deficit financing, because nobody would lend to you. Except the troika, but you burned your bridges there by declaring a unilateral moratorium. You can submit this plan if you like, but you’ll have to get it typed up yourself. I’m not having my name anywhere near it”.

He throws his papers down onto your desk with some force, and slams the door on the way out.

THE END.


52:
Maynard smiles. “The full Argentina, eh? Before you start congratulating yourself, I think we should remember that Greece doesn’t have a natural gas monopoly like YPF. It isn’t an exporter of primary commodities priced in dollars. It’s a tourism and shipping economy, and its GDP per capita is rather more than twice that of Argentina. I am less than sure how well the Argentine outcome forecasts the likely consequences of Greece doing the same. I don’t know how they would pay for essential imports, and suspect that the answer might be quite unpleasant. On the other hand, I suppose it might be the cathartic event that is needed for a thorough transformation of Greek politics. I’ll write it up.”

He is whistling the theme from Evita as he walks out the door.

THE END


53:
“If”, Maynard says with a sigh, “unlimited amounts of money were available on a structural basis, this would be my favourite solution of all. Something like it is Yanis Vourofakis’ ‘Modest Proposal’. But it doesn’t seem to me to have the ring of political possibility – Germany has politics too you know. And if we are going to try to smooth Greece’s path to fiscal balance, while concentrating the transfers in new capital investment projects rather than budget consumption spending, then we are going to keep running into financing constraints. Maybe, just maybe, Greece can grow its way out trouble, but I think it is going to be difficult to convince anyone that this will happen in the absence of a plan for thorough and complete transformation of Greece’s political institutions. Let’s run it up the flagpole, though, and see if anyone salutes it.”

THE END


54:
Maynard is staring at his legal pad. “This looks like a mess to me. Greece has defaulted, left the euro, and had a tax commissioner appointed – how many more humiliations can you heap on them? Economically it has a certain internal logic but politically it is all over the place and I think that kills the chance of the transfer payments which you need if you’re going to achieve primary balance after the default without massively contractionary domestic fiscal policy. We can type it up and submit it, but I think it’s only going to be looked at as an example of the kind of idea that an economist might come up with”.

THE END


55:
“There’s a bit of tension in that, don’t you think?”, Maynard asks. “You’re negotiating a debt writedown for Greece, and then we plan for them to leave the Euro. That’s going to need to be carefully handled, or the Eurolanders are going to seriously doubt their good faith. It’s also quite likely that this would cause a financial crisis and credit crunch in Euroland, which would seriously impair their ability to help Greece. Still, let’s game this out. I suppose we don’t have to address the question of internal devaluation if we have an external devaluation, but we’re going to need a lot of fiscal transfers in the meantime. What sort of terms are we going to arrange them on?”

If you answer “It’s going to need to be a pretty strict IMF program”, go to 40.
If you answer “I don’t agree that we will need big fiscal transfers. Once Greece is outside the Euro, it can start building back growth again”, go to 16.


56:
“I can’t see the IMF going for that at all”, Maynard says. “Without some action on the debt burden, the money is pouring in from the official creditors on the investment side, but then pouring out to the official creditors on the debt side. It’s effectively just a somewhat random redistribution of income between the official community. Unless you’re going to attempt to achieve fiscal surplus, but in that case you are proposing so much in the way of spending cuts and tax rises that it’s hard to see what you had against internal devaluation. This is messy, horrible can-kicking in the most pejorative sense, avoiding all the tough decisions. Submit it if you like, but I wash my hands of it”.

He doesn’t meet your eye or wish you well as he leaves your office.

THE END


57:
Maynard shrugs and say “Well then, if you think that there is no chance of a negotiated writedown, and you want to follow this line, then I think the only ethical thing you can do is refuse to submit a proposal. There’s no point in just wasting everyone’s time with a disorderly default, followed by a proposal for no-strings cash for pie-in-the-sky regional development funds, to be administered by the same Greek government structures that got them into this mess”.

He mutters something as he walks out of your office. It sounds like “Well, what can you do?”. There is a look of grudging respect in his eyes as he shakes your hand.

THE END

{ 482 comments }

1

Kieran Healy 02.16.12 at 6:46 pm

53.

A. Strange. Game. Professor. Falken. The. Only. Winning. Move. Is. Not. To. Play. How. About. A. Nice. Game. Of. Scottish. Secession?

2

Eric Rauchway 02.16.12 at 6:48 pm

This is great, dd.

I ended up at 5.

3

Daniel 02.16.12 at 6:53 pm

To forestall some critcism – I am expecting to take a bit of pushback on 17, and fair enough. PabloK on twitter made the reasonable point to me that a lot of the purpose of protest and resistance is to change the shape of what’s politically possible, and this is what I’m hoping (perhaps unrealistically) to discuss in the followup post. The CYOA book is meant to simulate what you would end up doing if you were a troika civil servant working within the constraints of the system that employs you, not what you would want to support in the real world which isn’t so artificially constrained. Basically people shouldn’t feel “bound” to the policy at their terminal node.

4

js. 02.16.12 at 6:57 pm

I have a question (I ended up with the “full Argentina” very quickly which doesn’t seem like a good idea). Anyway, the question:

Assuming that further fiscal transfers from Germany etc. are politically unfeasible, isn’t there something that the ECB can do? I understand that as per its mandate, it can’t be a lender of last resort, but does that mean it can’t take any action at all? Any action that might help, that is. Or is it that any action that it does take will effectively involve fiscal transfers from Germany, etc.?

5

Sus. 02.16.12 at 6:57 pm

Good fun (at least from the safe distance of my ivory tower). I wound up at 5.

6

marcel 02.16.12 at 7:01 pm

I don’t have time to read this at the moment, but the intro was great. Much as I think you wnet bonkers in that long ago post on bankers, we – well I – miss you very much.

DD come home.

Your tone and usual thoughtfulness and intelligence are sorely missed.* I do think you should open up your own blog to general readership again (unless you were getting too many trolls). Anyway, I will go through this, this weekend. Perhaps too late to comment usefully here, but I may nevertheless learn something.

*Yes, other posters at CT, esp. BW & MB, are remarkable for their tone, wit and intelligence, but each is special in their own special way.

7

Nicholas Mycroft 02.16.12 at 7:01 pm

10.

8

hardindr 02.16.12 at 7:03 pm

I got to page 52, not sure that is a good thing…

9

BelgianObserver 02.16.12 at 7:03 pm

I wound up in #52, “full Argentina.”

10

Alan B 02.16.12 at 7:06 pm

I end up at 5. IMHO the IMF’s mistake in Greece (and the Greek programme is better with the Fund than it would have been without it, but that’s a really low bar to clear) is not insisting on the medium-term fiscal transfers that would have made this sustainable.

11

nick s 02.16.12 at 7:06 pm

I’m at 10 as well.

12

Keith 02.16.12 at 7:09 pm

52., and brilliant.

13

geo 02.16.12 at 7:11 pm

Very ingenious, dd. A meta-comment, though: ie, one offered without reference to your very informative sequence 1-57, and indeed without very much concrete knowledge or understanding of the situation at all. That phrase in your first paragraph, “unimaginably difficult political constraints,” seems to me unfortunate. It could, after all, (and regularly does) appear in New York Times and Economist editorials. For the sake of candor, and to take full advantage of the teaching opportunity offered by the crisis (never waste a crisis, as a great political visionary admonished us), would you consider substituting here and elsewhere in the post (eg, for “politically and economically acceptable”) something like: “It behooves us always to remember that the grubby digits of the financial elites are locked in a vise-like grip around the throat of the plebs, and that the said elites have the legislating, regulating, and economic-advising class tucked neatly in their pocket.” Just so it’s clear where those constraints come from, and no one is tempted to imagine that they are laws of nature or anything like that.

14

Pete 02.16.12 at 7:11 pm

I’d just like to declare that I think this is a brilliant piece of work, even if the comments turn in to arguing with the ref over “it wouldn’t happen like that!”.

(first run through: no money -> tough it out -> stay in euro)

15

Eimear Ní Mhéalóid 02.16.12 at 7:11 pm

I’m really only commenting to point to Brigid Laffan’s IT article and ask what people think. There is no painless way of addressing the problems that built up in Greece during the 2000s, when a combination of cheap money and profligate spending put it on an unsustainable fiscal trajectory.
FWIW, a quick try to pick least worst ended up at 53.

16

Eimear Ní Mhéalóid 02.16.12 at 7:13 pm

17

Derek Young 02.16.12 at 7:13 pm

This is brilliant. I ended at 26. Actually worked quite well because I’m not sure they’re capable of much more.

18

Tom 02.16.12 at 7:14 pm

@ 6 – Word. Miss the writing and would like to read D’s blog. This piece looks brilliant, will digest with more time.

19

Barry Freed 02.16.12 at 7:19 pm

Full Argentina. Then I was eaten by a grue.

20

J. Otto Pohl 02.16.12 at 7:21 pm

I got to 40. I think that most of the developed world is going to have take a serious hit in their standard of living. It makes no sense to be paying uneducated and unskilled workers in Europe more than what a PhD makes in Africa. Not if you have the free flow of capital and business across borders which has been the case for some time. To lesser extent there is also a free flow of labor. Honestly why pay Greek workers $75,000 a year to do what people in parts of Asia and Africa can do just as well for $20,000 a year? So there has to be a global equalization with Europe and the North America having a reduced standard of living as standards rise in parts of Asia, Africa, and Latin America. If everybody in the world makes $20,000 a year it will be a nice, but not huge increase for me. But, I think a lot of people in Obrunistan would find that figure intolerable given their current expenditures. Ultimately I think they are going to have to learn to live on a lot less. Africanized Ramen noodles, Afromie (Indomie in African light soup), however are awfully tasty. So there is that to look forward to.

21

Pete 02.16.12 at 7:27 pm

geo: this is _not_ just a problem of elites; average middleclass voters aren’t keen on vast amounts of their taxes being sent abroad.

22

geo 02.16.12 at 7:34 pm

Thanks, Pete, I’m aware of that. I’m thinking more of very serious rich-soaking and financial-industry reforms. You know — politically impossible stuff.

23

Zorba 02.16.12 at 7:34 pm

I get to number 10. However, I have a question about it. What do you mean by “internal devaluation strategy”? I assume that you mean a combination of default and austerity. Is it reasonable to also assume that Greece will default on its fixed internal liabilities (e.g, pensions)? If so doesn’t this strain the political feasibility of number 10’s devaluation strategy?

24

jim 02.16.12 at 7:36 pm

I, too, ended up at Full Argentina fairly quickly. Better write the next installment quickly. If Greece is to exit, it would make sense to do it before the elections (and then PASOK runs in full nationalist mode, which is their only hope for maintaining any parliamentary presence). Catholic Easter is a four day holiday for much of the Eurozone, but ordinary working days for Greeks: the perfect opportunity to convert to the New Drachma.

25

Craig 02.16.12 at 7:42 pm

Daniel,

I just want to say that this is the awesomest thing in the history of EVER. Could you do one of the advanced ones where you have to roll dice and track your character’s hit points next?

26

Doctor Slack 02.16.12 at 7:42 pm

Since perspectives like this one appear to be outside the game’s parameters, I elect not to play. But kudos to dsquared for the effort.

27

jamie 02.16.12 at 7:48 pm

Ended up at 53. can’t see it happening without an SDP led coalition in Berlin (quite possible) and a KKE led Greek leftist coalition govt (more implausible).

28

Colin Ryan 02.16.12 at 7:50 pm

I got to 53.

29

BelgianObserver 02.16.12 at 7:53 pm

J. Otto Pohl–yes, that is a wonderful prediction based on economic history.
/sarc off

30

alexandre delaigue 02.16.12 at 7:57 pm

Ended at 10. But I really would like to arrive at 5.

31

LizardBreath 02.16.12 at 7:58 pm

Another 53 here, for what it’s worth.

32

Henri Vieuxtemps 02.16.12 at 8:00 pm

Honestly why pay Greek workers $75,000 a year to do what people in parts of Asia and Africa can do just as well for $20,000 a year?

Surely you can always find someone somewhere willing to do the same job for a bowl of rice/day. So then, that has to be the right standard of living for everybody.

33

JW Mason 02.16.12 at 8:03 pm

Like others, I ended up at 53, which seems like the right answer.

Of course it’s not politically feasible, within the constraints of the current political configuration. But there is NO solution that is currently acceptable to all actors. That’s what it means for something to be a crisis! Crises are only resolved when something in the situation that was previously thought to be a fixed, structural parameter, turns out to be (or becomes) an endogenous or policy variable instead.

34

Peter K. 02.16.12 at 8:10 pm

Full Argentina. On the one hand yes I like many people don’t fully comprehend and appreciate the differences between the economies of Greece and Argentina.

I just believe the alternative is worse.

As a junior member of the One World Government, I would consult with Argentinians who dealt with their default and with smart(!) IMF officials who had dealt with imploding economies and defaults.

I would plan as if the default and exit were a fait accompli but would consult with the Greeks about accepting a last second deal from the Troika if they came up with a generous plan that allowed Greece to grow again. But it would have to be pretty good. A disorderly default could be disastrous for the Eurozone (see Lehman.) especially if Italy and France decide to leave.

Won’t Greece have a primary surplus this year? That is they’ll have a budget surplus when interest payments aren’t counted? As I understand it, countries that default usually do so once they’ve achieved a primary surplus.

As a painful as a default and exit would be, it would also be a moral hazard lesson to the banks not to lend so freely to Greece in the future AND for the Greek officials not to cook their books during boom times. But of course they’ll all forget about this “teachable moment” after a few years.

Regarding Germans, they just bailed out East Germany so I doubt they’ll go out of their way to bail out Greece (or the banks via Greece). The ECB should one-up Japan and aim at an inflation rate of 2 percent or even 3(!) percent, but they’re in thrall to a weird cult of sadomonitarism and are horrified at the prospects of even mild levels of inflation.

35

Charrua 02.16.12 at 8:12 pm

As someone who actually lived through the original “full Argentina”, let me tell you, it’s really, really bad. And no, there are no soybean crops in Greece either.
But the question is not what we propose inside the limits of the politically possible (the situation in Argentina was unsolvable on those terms, too, after all), it’s what we think will happen.
My bet is that this mess can go on and on for quite some time and the tipping point will if and when some kind of bank run happens. If that’s the case, then yeah, “full Argentina”.

36

StevenAttewell 02.16.12 at 8:13 pm

I’m with geo on this, “it’s recognizable as a good-faith plan made by conscientious international civil servants working under unimaginably difficult political constraints in an economic context that was irreparably broken before they got there – is, as always, unpopular” doesn’t really accurately describe the situation.

You can see it in comments throughout the press that these civil servants don’t think this plan will work or are acting on deeply irrational beliefs , because there’s no plausible economic theory about how a country whose economy is shrinking by 7% a quarter can impose these levels of austerity and hope to repay their debt. Either this is meant to be a stalling device to ensure that the rest of Europe can survive a default and Greece’s exit, or the Eurobureaucracy need to be replaced en mass by people who understand Keynesianism.

37

MPAVictoria 02.16.12 at 8:13 pm

“Surely you can always find someone somewhere willing to do the same job for a bowl of rice/day. So then, that has to be the right standard of living for everybody.”

Sometimes you say exactly the right thing Henri.

38

Matthew 02.16.12 at 8:19 pm

I got neunzehn

39

kent 02.16.12 at 8:19 pm

Much atrios reading ==> Argentina for me too.

40

BelgianObserver 02.16.12 at 8:20 pm

Either this is meant to be a stalling device to ensure that the rest of Europe can survive a default and Greece’s exit,
_________________________________

Bingo.

41

Dan Karreman 02.16.12 at 8:22 pm

Ended up at 5. The really, really depressing thought is that this is supposed to be my best case scenario. Can I at least dream of some sneaky Draghi-version of 3 % inflation or 5% NGDP growth target from ECB?

42

J. Otto Pohl 02.16.12 at 8:26 pm

Henri:

The equalization also means that my standard of living has improved dramatically. In the US I was making nothing from 2004 to 2007. Nothing is infinitely less than $20,000 a year. Now if you include my benefits now I am making over $15,000 a year. If you gave everybody $20,000 it would mean most people in the world including a few highly educated Americans would be a lot better off. Btw a bowl of rice is only 50 peswas so $20,000 a year can buy a lot of rice, much, much more than one bowl a day. But, I guess its okay to have lots and lots of unemployed people making nothing so that you can make $75,000 a year.

43

M 02.16.12 at 8:31 pm

Is my search function on the blink or is there no way to get to 50?

44

Steve LaBonne 02.16.12 at 8:36 pm

I can’t see how we avoid 52 (a catastrophic outcome that was baked into the Euro from the start); it’s impossible for countries like Greece (or Portugal) to use the same currency as Germany without the kinds of massive fiscal transfers that in the US flow from California and NY to Alabama and Mississippi. And that will happen several days after never. So we can only hope that the can-kicking somehow allows the ultimate shock to be softened somewhat.

45

Mandos 02.16.12 at 8:36 pm

52, it’s a no-brainer. No, it’s not Argentina, but the difficulties for Greece in a disorderly default are oversold relative to its current trajectory, which is really really bad, bad in the sense of “pandemic from bad hospital hygiene due to cutbacks” bad, which is, as I said, really really bad.

You have to view it in terms of a Prisoner’s Dilemma—economists don’t seem to have trouble doing this so why aren’t they doing it in this case? Disorderly default BY SURPRISE is Greece’s Samson option, and there’s no point in having one if Greece doesn’t have a point at which it will use it, preferably at a point which causes the most damage to the rest of Europe (and I live in the Rest of Europe). So ideally Maynard should not even be in this conversation—he should be getting very drunk now, and writing up his resignation letter.

46

QCIC 02.16.12 at 8:50 pm

Where is the option to send in the German or French military to administer the country since the people are clearly incapable of managing it themselves. That is how we have handled failed societies for 20,000 years, and it works, why stop now?

Or threaten to give it back to Turkey? Maybe that would get the Greek s moving. They fought so hard for their homeland two centuries ago, and they have since done run it into the ground. They need some cold water thrown on them. A Turkish annexation is just the thing.

You have 1 year to get yourselves out of debt without further bailouts or Turkey is a EU member and all of Greece becomes part of Turkey again.

You know actual consequences and penalties for lack of results instead of playing grab-ass all the time. People are capable of amazing things if they feel they need to do them. The problem with Greece is no one makes them do anything.

47

Jimcat 02.16.12 at 8:50 pm

I got to 30, which is what I would like to see happen. But Maynard is right in that it would probably be unpalatable to the Greek government.

But by the rules of this game, I’m a policy wonk whose job is to write a proposal, not to save Greece. I’ve always wanted to work for a think tank.

48

Billikin 02.16.12 at 8:52 pm

Well, I ended up in an infinite loop. ;)

Time for the ultimate question: What would Zorba do?

49

Jon V. 02.16.12 at 8:53 pm

Brilliant. I ended at 53. Treat Greece like Alabama, indeed. TPM Barnett must be feeling very proud of himself right now (see his GREAT POWERS).

50

Billikin 02.16.12 at 9:02 pm

J. Otto Pohl: “It makes no sense to be paying uneducated and unskilled workers in Europe more than what a PhD makes in Africa.”

Or, equivalently, it makes no sense to pay a Ph. D. in Africa less than uneducated and unskilled workers in Europe.

The solution to global inequality is not global impoverishment.

51

mpowell 02.16.12 at 9:02 pm

I cheated by playing multiple times, but I think ending up at 26 is the most realistic answer as a path forward for the engaged actors to pursue. This is a political problem as much as it is an economic one and instead of just jumping forward to the right amount of debt reduction and austerity for Greece, you’re going to have to take multiple steps with both sides making concessions as reality bites more sharply. What would be really nice is to find a way to structure this process in a way to put pressure on the Greeks to reform their political system, but I don’t know how to go about doing that that wouldn’t be counter-productive.

I think there is an error in there. The link on 34 to 54 seems to be the wrong link since the graph at 54 assumes conditions in conflict with those at 34 (membership in the Euro).

52

Niall McAuley 02.16.12 at 9:04 pm

#27 here.

53

John Quiggin 02.16.12 at 9:08 pm

So, I reached 19, but never got to sack Draghi and institute QE on the scale needed for a Europe-wide recovery, which is clearly essential if Greece is to be rescued. Isn’t this story looking too hard at Athens and not enough at Brussels?

54

Anderson 02.16.12 at 9:09 pm

Full Argentina.

… I just reread Judt’s Postwar (2005), and the current headlines are all that much less surprising re: Greece.

55

Kevin 02.16.12 at 9:10 pm

Brilliant. 10.

56

Mandos 02.16.12 at 9:13 pm

And also, this exercise, while clever, is rigged to be a “but this is HAAAARD” sob story for Eurocrats.

No, it’s not hard. The consequences are bad. But the decisions? Not that hard.

57

Vasi 02.16.12 at 9:14 pm

I want to get to 5 (fiscal union w/IMF program), but I don’t think more transfers are actually going to happen, so I get 52 (Argentina).

By the way, numbers 50, 15 and 21 aren’t reachable.

58

Flipjack 02.16.12 at 9:17 pm

Great post! Entertaining, educational, and fun! Thanks

59

Flipjack 02.16.12 at 9:17 pm

Great post! Entertaining, educational, and fun! Thanks

60

Ja 02.16.12 at 9:17 pm

Nice idea, but to do this on the web without links blows my mind in terms of inconveniencing the readers!

61

sanbikinoraion 02.16.12 at 9:17 pm

I too echo the calls for more Dsquared, more of the time, and got to 52 like many others. Infuriating to play, incidentally, on my tiny smartphone screen.

62

Rob in CT 02.16.12 at 9:17 pm

I don’t know what I’m doing, but I ended up at 53.

Really cool post.

63

MPAVictoria 02.16.12 at 9:22 pm

“And also, this exercise, while clever, is rigged to be a “but this is HAAAARD” sob story for Eurocrats.

No, it’s not hard. The consequences are bad. But the decisions? Not that hard.”

And the Eurocrats aren’t even the ones who will have to face any of the consequences! That is what drives me crazy about this whole situation. It is easy to recommend crippling austerity when it is for other people.

“So, I reached 19, but never got to sack Draghi and institute QE on the scale needed for a Europe-wide recovery, which is clearly essential if Greece is to be rescued. Isn’t this story looking too hard at Athens and not enough at Brussels?”

And this!

64

Dan 02.16.12 at 9:25 pm

Disorderly default out of the Euro is the only realistic option. I’m sorry, but that’s just what’s going to happen, and the only question is “When?”

Don’t Cry For Me, Argentina, indeed.

Excellent post.

65

Just some guy 02.16.12 at 9:26 pm

Here is how it will end for the Greeks (I hope):

66

Steve LaBonne 02.16.12 at 9:32 pm

Here’s how it will end for Europe (I fear): http://www.youtube.com/watch?v=dpzwvlEVLgM

67

mds 02.16.12 at 9:34 pm

Isn’t this story looking too hard at Athens and not enough at Brussels?

Well, Austerity Now is certainly sinking the rest of the Eurozone, as Spain is dramatically demonstrating after doing everything they’re supposed to, without massive riots even; now the German economy is showing contraction, and that’s in the complete absence of the ouzo-stained hand of the profligate lower-class Greek pensioner at the controls.

68

christian_h 02.16.12 at 9:42 pm

#16 (which is pretty much the same as #52). One of the most fun blog posts I’ve read in a long time, despite the rather non-fun subject matter.

I do agree with one of the assumptions I think DD is making – that a disorderly default (combined with leaving the Euro) would be much tougher than many people seem to assume. Of course the situation many Greek people are in is already desperate; my favourite solution in light of this would be a revolution, but I’d have to admit it is likely that this solution would run into problems similar to the ones the Russian revolutionaries encountered – namely that a revolutionary Greece will be stranded without external help and forced to correct its economy through “primitive socialist accumulation” – not exactly a holiday.

69

Δημήτρης 02.16.12 at 9:43 pm

Μπράβο σου, συγχαρητήρια , δεν πολύ αστείο να παίζεις με κάτι όταν δεν το ζεις ; Έλα όμως στην θέση μου και στην θέση όλων των Ελλήνων και μετά θα δούμε αν θα έχεις όρεξη για τέτοιου είδους παιχνιδάκια. If you don’t understand that, Idon’t care. I don’t think that you are able to know what we are living, and I don’t mean me, I’m talking about a lot of people in Greece who are homless. If you don’t know that two homlesss people died one month before because of the cold, and you are sitting behind this fuking computer and lough! FUCK YOU !!! Come to Greece to feel how it is to don’t have job, home and food, to feel how it’s to be a piecefull demonstrator who demand his royalties and breath chemical gases from police, being struck by police who must PROTECT you, and then come here again and play your fuking game!

70

Mandos 02.16.12 at 9:43 pm

And the Eurocrats aren’t even the ones who will have to face any of the consequences! That is what drives me crazy about this whole situation. It is easy to recommend crippling austerity when it is for other people.

Yep. I mean, these are the things we know:

1. Any single currency zone needs some form of smoothing mechanism to manage uneven productivity etc.

2. We know that German public opinion, which is basically a key political barrier, is firmly against pretty much ANY form of these smoothing mechanisms. Seriously, name a single realistic balancing mechanism of sufficient size that a majority Germans would accept, except permanent Greek poverty or expulsion?

3. Despite the fact that it actually a form of self-cannibalism, German public opinion very conveeeeeniently aligns with malfeasant interests that by rights should have been completely hosed by this crisis, but are conveeeeniently not. But that is, again very conveniently, because the very Eurocrats (and Americrats) that we’re supposed feel sorry for ‘cuz-this-is-HAAAAARD have only EVER tried to sell bailouts that reward the malfeasant actors even further, or at *best* minimize their haircuts.

4. Greeks were *prevented* from having an immediate say in a critical aspect of their future by people who knew VERY WELL that the Greek public would, quite correctly, choose the Samson option having been given NOTHING but ultimatums that blame their rather common, mundane minor social peccadilloes. The Greek public, as a collective, turns out to know the score very well.

If we view this FROM the perspective of the people most affected by this, there is absolutely no reason to think that any of this means that there is a difficult decision. The rest are just excuses.

71

Billikin 02.16.12 at 9:46 pm

The Euro Zone crisis has echoes in family therapy. There is a dysfunctional system (the Euro Zone), and Identified Patient (Greece) that is considered to be the problem, and there is an attempted solution (Austerity for Greece) that is not working.

Normal interventions for such dysfunctional families include first, a recognition that the problem is systemic, not simply something that the identified patient is doing or not doing, and second, a recognition that the attempted solution is part of the problem. Everybody’s behavior needs to change. The next step is usually to stop the attempted solution, and do nothing, or do the opposite. Doing nothing means a Greek default, I suppose. That does not sound too good. The opposite would be what? Not lending money to Greece and anti-austerity measures. Grants to Greece?

In any event, the Euro Zone is not asking for therapy, and so would not be inclined to accept such advice.

72

Omega Centauri 02.16.12 at 9:53 pm

No time the play the game. But I propose “national debtors prison for the entire population of Greece”! Ohh, wait, I think that is the current plan already…..

What about selling off some islands to the highest bidders?

73

JFM 02.16.12 at 9:54 pm

10/52 – easy until the Euro question, but I don’t think Greece gets to choose.

74

Judith 02.16.12 at 10:00 pm

A deeply thoughtful, canny post. Will save to digest this weekend.

75

tomslee 02.16.12 at 10:00 pm

“1: You are sitting in an office with your advisor, Maynard.”

I remember spending an evening at a bar with some Communist Party types in 1982 or thereabouts. The Teaching Assistants’/Part-Time faculty union of which we were all members [hey, topical CT reference 30 years on!] had just passed a motion in favour of Solidarnosc and opposed to the declaration of martial law in Poland [look at Poland now. See, it worked!] and the CP’ers were angry. “What would you do if you were the Polish Government?” they demanded. A very smart friend of mine [Anne McKay, now in Greece, appropriately enough] said “There’s your problem. I wouldn’t be the Polish Government.”

I guess what I mean, semi-seriously, is that we should not only ask “You are sitting in an office with your advisor, Maynard…” questions, fascinating though they are, but should also ask “You are out of work and sitting in your home in Athens with your husband Evangoulos…” questions.

76

Substance McGravitas 02.16.12 at 10:05 pm

I guess what I mean, semi-seriously

Yes. My first thought was that an alternative was to consult your friend holding the piece of masonry.

77

JW Mason 02.16.12 at 10:11 pm

So, I reached 19, but never got to sack Draghi and institute QE on the scale needed for a Europe-wide recovery, which is clearly essential if Greece is to be rescued. Isn’t this story looking too hard at Athens and not enough at Brussels?

Yes.

we should not only ask “You are sitting in an office with your advisor, Maynard…” questions, fascinating though they are, but should also ask “You are out of work and sitting in your home in Athens with your husband Evangoulos…” questions.

And yes.

This is a smart & fun post, but it’s also a great example of the way debates are defined by the questions that aren’t asked.

78

Nick 02.16.12 at 10:12 pm

Amazing post. I’ve played a couple of rounds but can’t find one where Germany and anyone who wants to stick with them leaves the euro, forms a stronger currency, allowing the ECB to relocate to Milan for a proper devaluation and easing.

Situation kinda reminds of the woody allen hostage negotiation: http://www.youtube.com/watch?v=t4sdnb0sYTc&feature=youtube_gdata_player

79

Henri Vieuxtemps 02.16.12 at 10:16 pm

If I am a junior member of the One World Government, all I’m thinking about is this: how can I use this shit to become a senior member?

80

Andrew Burton 02.16.12 at 10:18 pm

53.

I backtracked and saw Maynard was slightly more polite if I’d asked for IMF funding and gone to 5. But 53’s where I ended up. Fun!

81

Phil 02.16.12 at 10:22 pm

I ended up at #19. I wonder if I should look for a job in Brussels?

82

bert 02.16.12 at 10:25 pm

Number 14 assumes that private sector involvement is now done, there’s no returning to that well, and the only way to get more out of private bondholders is disorderly default.
Maybe so, if this is all about getting a deal before March 20th.
Extend the horizon beyond that, though, and there could be further writedowns, which one would hope would go in tandem with public sector involvement. The ECB has already said it would only look to get back its holding at cost.

I went in expecting to come out the other end can-kicking. Instead I wound up in Argentina, I think mainly because the last week has worn away the last of my faith that the politics will hold together. In particular you’re starting to hear the line that default wouldn’t be the end of world, stated with confidence, and at times from unexpected sources. Whether or not Draghi intended to cause this, that seems to be the effect.

83

Ray 02.16.12 at 10:36 pm

26. I win a box of eurofudge!

84

jim 02.16.12 at 10:40 pm

“We give them money-but are they grateful?
No, they’re spiteful and they’re hateful”

85

ed_finnerty 02.16.12 at 10:48 pm

This is great. I expect someone will make it linkable.

Ended up on 26 by trying to behave in the same way that decisions to date have been made. I don’t think this is the best strategy but rather the one that the ‘hyperinflationist scare mongers’ will follow.

I think that they (ECB) and for that matter the FED et al. should just have embraced inflation and repudiated the debt through currency value destruction a long time ago.

86

Phil 02.16.12 at 10:49 pm

#27 seems like a better option to me now, but it probably isn’t realistic any more. Two years ago before the first bailout there was probably more goodwill on both sides to attempt something bolder, but now I don’t see it happening.

By the way, great post Daniel.

87

Rappar 02.16.12 at 10:49 pm

I went in straight line to 52; and Greece being a tourist destination, shall be cheaper and more touristic with a very weak New Drachma :)
The rest will be interesting to watch.

88

Dan Karreman 02.16.12 at 10:52 pm

Ok, a couple of points:

I thought the point of this exercise was to play Eurocrats? Obviously this looks very different from Athens, Australia or Sweden (where I’m sitting).

Euro + no smoothing mechanism = opt out. Germany (+ the true what-nots) might not like this but that’s the reality. The real debate is about the scale and types of smoothing, not about whether to smooth or not.

Breaking up the Euro = this little game is pointless. I guess that we can pretend that ejecting Greece does not equal breaking up the Euro, but it is simply the case Greece leaving the Euro means a massive bail-out of the Eurozone banking system (+ probably unimaginable collateral damage). Lehmann would look like a picnic in comparison.

The big problem with the full Argentina scenario, apart from the ones d-squared already has pointed out, is that Argentina had a unilateral dollar peg. The Argentina default had a miniscule effect on the dollar-zone. Now, is it anybody who believes an Argentina-type default by Greece would have a miniscule effect on the Euro-zone?

Incidentally, I think that this is what Atrios means when he says that Greece should default. Not that they should default but that they should threat to default. I don’t think Atrios wants to see Greece burn. He just want them to negotiate better. After all, Greece has the nukes.

89

Douglas Knight 02.16.12 at 11:13 pm

90

Dan Hardie 02.16.12 at 11:13 pm

I ended up at 40. What surprises me about Maynard’s response is when he says that he thinks it will be politically quite feasible, although economically problematic. I think even that could be rather optimistic.

Since there’s no constitutional mechanism within the various EU treaties for leaving the Euro, for the Greeks to do so, there has to be both a powerful coalition of the other Eurozone members saying ‘Go!’ and a parliamentary, and maybe electoral, majority within Greece saying ‘Leave!’

Neither of these strikes me as terribly likely. Which leading French and German politicians are even hinting at kicking the Greeks out? And how keen will the Greeks be on leaving, once they realise that the likely consequence of exiting the Euro will not be a return to growth but a dose of the IMF’s least tasty medicine?

91

Dan Hardie 02.16.12 at 11:20 pm

Billikin at 47: ‘Well, I ended up in an infinite loop. ;)’

As any British male of a certain age can tell you, the infinite loop is all part of Dsquared’s hommage

92

shah8 02.16.12 at 11:25 pm

I wound up on 54, and I think I will be right.

However, I do want to say that I don’t think 52 can happen, unless it was an unintentional and disorderly 52. I’m also amazed that we haven’t really talked about mid-90s Cuba in terms of structural polico-economic reform. I think that there are real similarities in situation, but I also think that the extent to which Cuba was better off, structurally and situationally, than Greece (and how bad those times were in Cuba) illustrates just how profoundly screwed Greek people are.

Now, how I got to 54…
1>>32>>48>>2>>18>>33>>54 (Everyone, please put up maps! No point in just saying where you ended up)

1) I think, that for all intents and purposes, the crisis is about recycling of surpluses and the real world materialization of Dani Rodrik’s trilemma. Reread this post:
http://rodrik.typepad.com/dani_rodriks_weblog/2007/06/the-inescapable.html
Holding that trilemma in mind more or less means that one probably cannot be forced to consider political “realities”. If the politicians and the population are out of their minds, tripping on their authority over Greece, it just means that sooner or later, they’ll be disabused over what options they *really* have…

So, onto 32–Greece is not capable of existing right now without transfer payments, and if stupid people think that Greek people will stay home, with the lights out, no heat, and no water, then that’s their problem. Given how Italy reacted to the prospect of Libyan refugees, I simply don’t think that further fiscal transfers can’t be sold to the populations. 47 is just not viable, because the government as of now, has no ability to redirect funds to essentials, and given the energy imports needed, they probably would have even less capacity to generate enough electricity to do *any* restructuring at all. Sooooo, you don’t want no Al Queda Greece or nuttin’ like that? Pay up.

At 48, I choose to break up one aspect of the trilemma with a default and exit. Reversing economic integration is much easier, in terms of domestic politics, than completely obliterating democracy or the nation-state of Greece. Given that *all politics are local*, the ability to prevent a European-wide financial crisis was never in the cards. The focus here should be state-building on top of the foundations of popular consent, because that offers the most possible speed of recovery. One tangential benefit of a debt wipe and exit (and a primary reason why this path would be resisted for as long as possible) will be the end of Dixiecrat globalism, where credit is global, but both information and people are local. Any future credit would actually have to be underwritten based on real ability to pay. No more vender financing for Germany’s weapons, or cars, say for Greece or any other overextended third world country.

When 18 happens, I ultimately expect the world wide real estate crash to deflate the world, relative to Greece and the other small peripheral Euro countries. In other words, I expect the global crisis to take out Eastern Europe and Spain, at the very least, and driving down the costs of Greece’s lack of international competitiveness. While there might not be fancy robotics there, there are also not the *costs* of keeping idle fancy robotics operating there. The crisis will drive the scales from elite eyes (not the policy wonks, of course), and drive much more effort into preserving governance rather than commerce. The banks cannot keep ahold of policy forever, I’m saying…They either move things in the right direction, or a populist will move in the direction of his aspirations.

Obviously, there will be a more rigorous oversight of governance, as a result of deepened crisis. Greece will not have so much trouble with it, because they will certainly not be the only ones under emergency management (not to be confused with the miniMussolini versions in the US).

I think this more “economically minded path” will win out out of sheer practical necessity.

93

Sumana Harihareswara 02.16.12 at 11:29 pm

(The unreachable nodes are a longstanding Choose Your Own Adventure tradition.)

94

Brian 02.16.12 at 11:29 pm

“34: Nope” leads to 54 which is clearly a mistake. It would be easier to fix if you’d maintained a binary heap arrangement of the paragraphs but I guess that would be less exciting.

Anyway, that item at least needs editing. And it’s unfortunate since that is the only sensible way forward (ongoing subsidies, stay in the Euro, immediate default, maintain Greek sovereignty).

95

Steko 02.16.12 at 11:31 pm

Got #53 as well.

So here’s my solution:

Greece starts to issue “Greek euro” vouchers as a pseudo-currency. These vouchers replace x% of most direct internal payments by the government including public worker’s salaries (including local govts), pensioners, contractors, etc. They probably aren’t useful to purchase goods and services but you can pay taxes with them and there’s also an explicit guarantee that Greece will redeem these for actual euros at full value in say 10 years (so basically a 0% interest bond). The austerity rate (x) is adjusted every year (or more often?). In return they get EU bailouts and creditor haircuts that are tied directly to x. So if Greece voluntarily stomachs more austerity, they are rewarded.

Also they need to massively reform their tax collection. If they can’t collect properly from the ultrarich, then new taxes are needed that they can’t hide from. Take the deficit financed tanks from the army and give them to the Greek IRS and start busting into billionaire’s villas and throwing people in jail.

96

Daniel 02.16.12 at 11:34 pm

#83: yes, looking at it, I forgot to put the boilerplate “you’ve unilaterally caused a Eurozone meltdown and now this!” text in there – I think it must just have been because #40 was already so depressing to write.

97

Al 02.16.12 at 11:56 pm

Where is the option of bailing out Greece by issuing Eurobonds which Greece could refinance its debt at manageable interest rates?
I know the Germans are adamantly against Euro bonds, but I think they will give in to prevent the whole EU structure from collapsing.

98

Tom 02.17.12 at 12:05 am

Well done. Ingeniously worked out. But I’d like to say that I think in general people are focusing way too much on Greece, a small country, an outlier wrapped up in an especially poisonous set of domestic and international politics, which allows crabbed, moralizing interpretations of the eurocrisis to crowd out everything else. The real answer is that everyone should be focusing much much more on Spain and Italy. In particular, Spain is a much larger country than Greece, facing almost as much suffering and pain. Greece is inconsequential compared to it.

99

Asteele 02.17.12 at 12:06 am

Another 53 here, but if I had to guess what will happen I’d go with 10

100

tomslee 02.17.12 at 12:10 am

I ended up at 5 with an increased sense (if that’s possible) of my own macro-economic ignorance.

101

politicalfootball 02.17.12 at 12:12 am

Another 53, but Maynard is correctly disdainful about the political feasibility.

102

tomslee 02.17.12 at 12:14 am

As per shah8’s request: 1 to 32 to 48 to 29 to 5.

103

ltr 02.17.12 at 12:16 am

This is mean-spirited and pretentious garbage.

104

Peter T 02.17.12 at 12:23 am

Lovely post.

Are there options not on the table? If the problem is how 1. debt and 2. mismatch between Greek consumption and production, then

1. Debt can be written off (has been, will be). Problem for others more than for Greece. The UK can give lessons, using RBS and Blackrock as cases.

2. The issue is to lower consumption without simultaneously lowering production – ie to boost Greek domestic production while lowering imports. Anyone remember that we used to have these handy things for doing just this? Called tariffs? Greece opts out of free trade for a period – imposes a tax on foreign goods and services. OK, so it’s out of the economic EU for a while. But it’s still in the political EU, and maybe even in the monetary EU.

Given a choice between Mussolini, starvation and somewhat less free trade, I’ll take the third. Depressing that so many Eurocrats are havering between the first two.

105

politicalfootball 02.17.12 at 12:25 am

My guess is that 5 is dsquared’s “correct” answer.

106

politicalfootball 02.17.12 at 12:35 am

I keep thinking that the result in Europe is ultimately going to be governed by some variation of Stein’s Law: Events that can’t happen, won’t.

But I keep having a problem with irresistible forces and immovable objects. Germany (and others) absolutely aren’t willing to do enough to keep Greece in the Euro. And Greece can’t leave the Euro.

107

jim 02.17.12 at 1:12 am

1>47>23>52.

That’s the fastest shrug possible. There’s no political will in the Northern countries (Germany, Holland, Finland etc.) to send good money after bad (that’s the point of the Randy Newman lyric; I’d add that Germany has gone through this with the DDR). Without transfers Greece will default. Default within the Euro is unsustainable inside Greece. So exit and default.

One point: Greece depends largely on tourism for foreign exchange. TV reports of Greeks burning stuff in Athens doesn’t lead people to think in terms of seeing the Parthenon this summer. Exit and devaluation leads to ads for the Greek islands that say your dollar (or pound, or even euro) has never gone further.

108

Sandwichman 02.17.12 at 1:12 am

The Sandwichman’s solution involves the issuing of Manx Euros. He can’t disclose further details at this time due to the sensitivity of ongoing negotiations.

109

Lee A. Arnold 02.17.12 at 1:13 am

28.

110

P O'Neill 02.17.12 at 1:18 am

Don’t hate the player, hate the game.

I got to 16, didn’t like it, and then got to 5. But still didn’t like it. Separately saw this quote in the NYT today and thought it brought something new to the table:

“Austerity is like every potent medicine; an overdose of it can kill the patient,” said Holger Schmieding, chief economist at Berenberg Bank in London. “The tragedy of Greece is that they overdelivered on the austerity and underdelivered on the structural reforms; as a result, Greece is in a big mess.”

And that’s why I think 5 is troubling. The IMF has no expertise in structural reform, but there may be a path of stay-in-Euro, medium-term financing, but some prospect that the reforms will be effective enough to avoid structural transfers. But the current set of troika representatives are not the ones to do it. Can we get some Brazilians from the 1990s adjustment period to work on it?

111

Anonymous 02.17.12 at 1:24 am

Greece doesn’t have twice the GDP of Turkey, it has twice the GDP per capita. Turkey has thrice the GDP of Greece. However, Turkey isn’t a threat to Greece and it shouldn’t be used as a scarecrow to manipulate Greek domestic politics.

112

William Timberman 02.17.12 at 1:41 am

My solution: Find an Archduke somewhere, and send him on a goodwill trip to Santorini.

113

TheSophist 02.17.12 at 1:46 am

When I left school this afternoon, four of my students (seniors at a US private school) were, of their own volition, working their way through their third or fourth iteration of the game, arguing passionately at every branch.

I’m not sure what this shows, except that DD’s effort has created a superlative educational tool, and maybe that their is a smidgen of hope for the younger generation. (I also enjoyed the collective facepalm when I pointed out to them the provenance of “Maynard”.)

114

h4x354x0r 02.17.12 at 1:50 am

I did it with what I would imagine is the mindset of a selfish-righteous VSP. I hit the Full Argentina before I even needed to blink. That’s saying something, considering all the scrolling.

This is absolutely brilliant, BTW. Thank you.

115

The Raven 02.17.12 at 2:02 am

I’m still exploring options. I think the sensible thing, generally, is to bail Greece out and to aim at Greek andGerman political reform.

But the underlying problem is that the Euro was–and we all know it now–a giant mistake. Question is, how do you hominids deal with it?

116

The Raven 02.17.12 at 2:10 am

By the way, I quickly got to 5 and 53. But I’m still exploring. I’m an olde tyme gamer: we tend to treat things like this as meta-puzzles.

117

Edmund in Tokyo 02.17.12 at 2:24 am

32 14 39 4 31 45

So keep on bailing furiously, while putting the Germans in charge of anything we can get away with.

But while we’re at it, let’s give Greece a parallel electronic currency administered by the Greek mobile phone networks: a sort of halfway-house between a return to the Drachma and a supermarket loyalty card scheme.

118

Jeff R. 02.17.12 at 2:24 am

My own approach landed me in (full) Argentina. My most optimistic view put me in the Latvian scenario, and my guess-at-what’s-actually-going-to-happen, possibly unsurprisingly, landed me at 11.

119

FrankG 02.17.12 at 3:08 am

I like this article a lot very imaginative and interesting presentation and content. However using hyperlinks would rather than item numbers would really enhance the reading experience.

120

James B. Shearer 02.17.12 at 3:15 am

52, full Argentina.

121

Rich S. 02.17.12 at 3:38 am

I got to 53.

122

jonahcrane 02.17.12 at 3:41 am

great game! well done .. i ended up at 5, which seems reasonably plausible under the circumstances (especially since it leaves you wondering whether the politics will permit you to implement your plan … which may appear to involve a bit of cheating given the parameters of the game, but so be it). In the real world this would likely play out over a couple years where we’re muddling through and constantly faced with uncomfortably high tail risk as we are now with the mid-march rollover date in greece.

i will take some time to work through some of the other paths — this is an excellent exercise and one i would recommend to any policymakers trying to game plan this situation.

123

To 02.17.12 at 4:00 am

Ended up at 17. Seriously, I don’t see how we get out of this mess without sending the Lisbon treaty down the shredder.

Greece needs to regain competitiveness alright. Which means reducing not only labour costs, but also capital costs, i.e. writing down debt. Not only govt debt, but private debt. Start by “nationalising” all the banks and putting them under EU supervision. Write down all loans: commercial, mortgage, consumption, by 30%, no questions asked. Levy a one-time 30% tax on all bank account balances over a few kEUR and use it to cover some of the banks’ losses. Convert 30% on the banks’ debt into govt bonds and have the EFSF buy them. Have the EFSF take all the institutionally-held govt debt and refinance it at 4% with maturities 5-30 years.

THEN, get a general reduction of wages to 30% less than their 2008 value.

We don’t need an EFSF, ESM, whatnot to save Italy, Spain, etc. We need monetary stimulus.

124

Omega Centauri 02.17.12 at 4:27 am

I can’t help but view this excercise as being stuck in the forest, and not being able to determine what to do because the trees block out view, and won’t let us take a straight line. So here’s an example of Heinberg giving us a view from high earth orbit to maybe change our perspective:
the Fight of the Century
In any case I liked his prologue:

As the world economy crashes against debt and resource limits, more and more countries are responding by attempting to salvage what are actually their most expendable features—corrupt, insolvent banks and bloated militaries—while leaving the majority of their people to languish in “austerity.” The result, predictably, is a global uprising.

Not I all sure I buy the full on collapse is inevitable message, I seem to think that some sort of advanced technological civilization is still possible. But, in any case, we are currently at his 4A.

125

JW Mason 02.17.12 at 4:38 am

The issue is to lower consumption without simultaneously lowering production – ie to boost Greek domestic production while lowering imports. Anyone remember that we used to have these handy things for doing just this? Called tariffs?

Indeed.

This bit from the original post has been bugging me:

here is not really much escaping from the fact that Greece is not going to get back to the levels of consumption (or more accurately, the gap between consumption and production) that it saw in the 2000s.

It’s written as tho the parenthetical is just a minor clarification of the main sentence, but it’s really not, it’s saying something quite different, and eliding that difference seems a bit misleading.

See, if the underlying issue is that the Greeks were living beyond their means in the 2000s, i.e. consuming more than their country was able to produce, that problem has been solved. I haven’t looked at the numbers, so maybe I’m wrong, but I would be shocked if the fall in final demand over the past five years does’t substantially exceed the current account deficit as of 2007. And the point is even stronger when you consider that potential output will have increased somewhat even during the recession. So it is no longer the case that Greece is consuming more than it can produce. The problem is, rather, that policies that stimulate an increase in production of Greek goods will, under current arrangements, also produce a large increase in demand for imports, which can’t be financed without inward financial flows of some kind. But this is not an immutable fact, and in principle there are policy tools (other than improved competitiveness, the only one that can be mentioned in polite discussion) to change it.

126

john c. halasz 02.17.12 at 4:44 am

@102:

The proposal has been mooted before, regardless of whether Greece stays in the Euro or not: impose a sharply higher VAT, which is rebated to exporters and tourists and imposed on imports, while counter-balancing it with a sharply progressive, mostly negative income tax. (That should also address some of the tax collection problem, as VAT evasion schemes are well-known and fairly easily enforced against, while the tax is almost self-enforcing, as operating through the business supply chain.)

127

JW Mason 02.17.12 at 5:15 am

OK, I should not have written 123 without looking at the numbers first, because it turns out I was wrong. Final demand in Greece has fallen by about 10 percent since 2008, but the current account deficit in that year was nearly 15 percent of GDP. 15 percent, wow. I had no idea.

Argentina’s incidentally was never above 5 percent, which I suppose is another important reason why they may not be a viable model for Greece…

128

tangopenguin 02.17.12 at 5:32 am

1 – 32 – 48 – 46 – 38 – 5, and Greece is like Alabama or Wales. I guess you take the good with the bad in a union. I didn’t feel bamboozled, more like it was headed toward the inevitable.

129

shah8 02.17.12 at 5:41 am

Remember, that’s 15% of a GDP that’s twice Argentina’s GDP, and how much of Greece’s GDP was genuinely worth anything to anyone else (relative to peers and not really as a kind of hedge?).

In the end, I really, really, really, think that people who think that a *deliberate* set of choices leading to 52 are seriously not really thinking about the sheer impossibility of that, or of the sheer unpleasantness it implies. It was *terrible* in Argentina, in a naturally rich place, for about 6 months to 2 years. It’s *impossible* for Greece to function at all, as a country or as a society without transfer payments, and it would be deeply unpleasant for Europe as a whole, as economic refugees 5 times the size of the Mariel Boatlift washes ashore onto the core economies…

130

B.J. 02.17.12 at 5:52 am

I first ended up at 10, assuming that Germany won’t pay for Greece, and that there’s no way Greece can or will tough it out. Essentially, that’s the facts-on-the-ground approach. (Everyone will make noises about the Full Argentina, but neither Greece nor Germany actually wants it to happen; Greece will fall apart, and the Eurozone will be shaken, which ultimately undermines Germany.)

If I thought it would sell, I’d go for 27; the path goes 1>32>14>39>4>7>27. (Unfortunately, if this could be pulled off, we wouldn’t be in this mess in the first place.) 45 (1>32>14>39>4>31>45) would also be nice if Greece weren’t in the Samson position right now. 5 is probably the best compromise that’s possible, assuming Germany is willing to play ball and Greece is willing to be reasonable.

I see a lot of people got 53. Unfortunately, while eminently possible, it’s a bad idea in the long run. The Modest Proposal would only work if Greece’s political institutions were functional right now, and Greece is anything but functional. Socializing Greece without expecting any reforms in return is the definition of moral hazard.

131

Meredith 02.17.12 at 5:57 am

Herodotus, Histories 8. 111. 1 (trans. Godley) (Greek historian C5th B.C.) :
“Themistokles [the historical general who led the Greek defense against the Persians] gave them [the people of the small island of Andros] to understand that the Athenians had come with two great gods to aid them, Peitho (Persuasion) and Ananke (Necessity), and that the Andrians must therefore certainly give money, they said in response, ‘It is then but reasonable that Athens is great and prosperous, being blessed with serviceable gods. As for us Andrians, we are but blessed with a plentiful lack of land, and we have two unserviceable gods who never quit our island but want to dwell there forever, namely Penia (Poverty) and Amekhania (Helplessness). Since we are in the hands of these gods, we will give no money; the power of Athens can never be stronger than our inability.”
(For Kostas’ father, who I hope is still tending his vegetables on Andros.)

132

Meredith 02.17.12 at 6:04 am

Should have cited my google search source of memory’s springs:
http://www.theoi.com/Daimon/Penia.html

133

adam.smith (was Sebastian(1)) 02.17.12 at 6:34 am

I got to 5. I wanted to go to 53, but couldn’t get myself to believe that would even be remotely realistic politically.
But yeah – it’ s the first question where I wasn’t sure so I could have easily ended up in Argentina, too. I feel 5 is quite optimistic.

134

Andrew Burton 02.17.12 at 6:44 am

If our unnamed hero and Maynard were to get to Mornington Crescent, would the Greeks win?

135

Left Outside 02.17.12 at 6:57 am

I ended up at The Full Argentina (could be a Fry up with a Steak, which sounds a whole lot more palatable).

Without an ECB revolution the Greek’s are screwed, and there will be no revolution at the ECB. I don’t see the ECB credibly commiting to inflation anyway, short of installing an Argentine there’s nothing they can do to convince people they’ll follow through. Oh dear, run away. Or, everyone in Greece emigrates, London is very nice, please bring restaurants.

136

Henri Vieuxtemps 02.17.12 at 8:20 am

Tariffs is right, I think. Tariffs and subsidies tied to the physical location (Greece, in this case), and the number of persons employed at that location. And higher wages.

137

Daniel 02.17.12 at 8:26 am

Tariffs and subsidies tied to the physical location

Very difficult to make this consistent with the Single Market I think.

138

JR Mason 02.17.12 at 8:28 am

5

I am not convinced it works out both because it will be hard to get Germany to send more money and the Greeks seem like they are in total denial about both their ability to continue living bey0nd their means and to escape paying any sort of taxes. I like the solution I got to mainly because I think that although political pressure is building in the solvent countries to resist further transfers, once it becomes clear that the Euro might well blow up and in so doing even further damage the creditors as well as the debtors, they will probably be willing to pony up a bit more to avoid that result. I don’t see how you get the Greek public to face the fact that they have been living in a mirage though.

On the other hand, I think that anyone who thinks that any creditor is getting more than 50% of their money back is rapacious in some way or living in a dream world. This includes non-Greek governments and institutions.

(Also, normally I comment under a handle of some sort, but with a JW Mason, how could I resist using my real initials?)

139

lbsterling 02.17.12 at 8:55 am

Just wanted to mention I wound up at 45, since nobody else seems to have done so.

Does that make me an optimist? I didn’t feel very optimistic going in.

Great post.

140

Andrew Fisher 02.17.12 at 9:05 am

I too ended up at 19.

I’m not a junior member of the World Government, but I’ve held junior policy roles in other organisations. The game doesn’t give you a set of success criteria, and this seems to me to match reality – the key players are not actually clear what they are trying to achieve. In the past European elites would have taken this crisis as an opportunity to advance towards ever closer union: now we are just trying to manage the crisis.

141

Henri Vieuxtemps 02.17.12 at 9:19 am

Very difficult to make this consistent with the Single Market I think.

Right. Should be “Tariffs – comma – and subsidies tied to the physical location”. Tariffs against producers external to Europe, subsidies for producers based on their location inside Europe. This wouldn’t be too inconsistent with the single market, would it?

142

Henri Vieuxtemps 02.17.12 at 9:27 am

…although I understand Germany did try (massively) the subsidies approach after the reunification and it didn’t work too well. So, who the hell knows. Oh, well, I guess I’m with christian_h: revolution! Du passé faisons table rase.

143

Sam Dodsworth 02.17.12 at 9:42 am

Coming in late, with 52 (“The Full Argentina”). I didn’t go in with any particular expectations beyond a vague wish that more people would notice that capitalism is a bit rubbish.

144

ajay 02.17.12 at 9:49 am

We know that German public opinion, which is basically a key political barrier, is firmly against pretty much ANY form of these smoothing mechanisms. Seriously, name a single realistic balancing mechanism of sufficient size that a majority Germans would accept, except permanent Greek poverty or expulsion?

Worth noting here that the EU has involved Germany transferring money to other countries pretty much from the start. The difference here is that the German government wouldn’t be paying the money to impoverished Greek farmers, but to the Greek government itself. But the idea that German public opinion is firmly against any kind of transfer payment to other countries doesn’t fit with the last fifty years of history.

145

David S. 02.17.12 at 10:09 am

I’m with Omega Centauri #72 – they’ve got plenty of islands, time to sell some. I’m sure a group of American billionaire libertarians would love to buy a few for the purpose of going all John Galt forever and showing the rest of us that they are totally NOT INSANE.

Beyond that there is the island nation of Cyprus. Until now its problems have seemed insurmountable, but if Turkey would like to make Greece an offer… (And if certain assurances regarding entry into the EU were to be included, by say a relieved Germany, I’m sure Turkey would be very interested).

146

Luis Enrique 02.17.12 at 10:10 am

Argentina,

But I had to start again after not being offered the ECB printing press option I was looking for after 47

147

Daniel 02.17.12 at 10:12 am

Turkey is apparently much less interested in EU entry than it was two or three years ago and I have to say who can blame them. Support for EU entry has collapsed from over 70% to around 40% and they are now seemingly more interested in being the leading democracy in the Islamic world.

148

NK 02.17.12 at 10:23 am

Excellent post and fine writing!

Ended up at 37.

I wish there was a “print money” scenario in which the ECB bails out all PIIGS.

149

Alex 02.17.12 at 10:31 am

You left out the step “let the file mature for a week or so while generally BACAI”, which seems a popular one. I picked 53, btw.

150

Alex 02.17.12 at 10:34 am

Beyond that there is the island nation of Cyprus. Until now its problems have seemed insurmountable, but if Turkey would like to make Greece an offer

I’m fairly sure the Republic of Cyprus, an EU member in good standing, might object to the idea that Greece could sell it.

151

Seconds 02.17.12 at 10:35 am

Print one or even two trillion Euro and give them proportionally to every EU nation to lower their public debt. *IF* the EURO depreciates, that’s even better. Done.

152

ajay 02.17.12 at 10:51 am

Support for EU entry has collapsed from over 70% to around 40% and they are now seemingly more interested in being the leading democracy in the Islamic world.

Because they’ll still be allowed to torture journalists if the standard is “slightly better than Egypt” rather than “ECHR-approved”. Better to rule in hell, etc.

they’ve got plenty of islands, time to sell some.

And there’s still plenty of bits of Parthenon left unexported! We could make up a complete set this time!

153

Daniel 02.17.12 at 11:18 am

I’m fairly sure the Republic of Cyprus, an EU member in good standing, might object to the idea that Greece could sell it.

I like this idea. You could solve a lot of problems in Ireland if they were allowed to sell Liverpool to the Malaysians.

154

Mandos 02.17.12 at 11:23 am

Because they’ll still be allowed to torture journalists if the standard is “slightly better than Egypt” rather than “ECHR-approved”. Better to rule in hell, etc.

It would put them at par with the Americans, and who can argue with that?

155

john haskell 02.17.12 at 11:28 am

It’s interesting that “but Greece doesn’t have soybeans” passes for some kind of clever remark on this blog.

Russia doesn’t have soybeans either. Nor does it have Greek islands. Mexico doesn’t have soybeans. Thailand doesn’t have soybeans. Lots of countries have had to default, or devalue, or both, over the past century, it was bad, but it’s what you do when you run out of money.

If Greece had defaulted and exited the Eurozone in May of 2010 (when it obviously should have) we would now be reading articles about “Greece’s Economic Miracle.” Instead we’re reading articles about how the Greeks don’t have money to buy insulin. Which brings us back to the beginning of the blog post – this is childishly, obviously wrong.

156

ajay 02.17.12 at 11:35 am

You could solve a lot of problems in Ireland if they were allowed to sell Liverpool to the Malaysians.

You could solve a lot of problems in Britain that way, too.

(This was always my preferred solution to the NI problem back in the 1980s – tell the Chinese they can have Hong Kong back, right now, no strings attached, but they have to take Northern Ireland as well. The Republicans want the Brits out; they’re out. The Loyalists don’t want unification with the South; they won’t get it. The Chinese want HK back; they’ll get it, and their very own territorial enclave in Europe as well, with one of the continent’s best deepwater ports, and a bit of colonial payback against the horrible foreigners. Gerry Adams and Ian Paisley get put somewhere a long way away, and everyone’s happy!)

157

Daniel 02.17.12 at 11:39 am

If Greece had defaulted and exited the Eurozone in May of 2010 (when it obviously should have) we would now be reading articles about “Greece’s Economic Miracle.” Instead we’re reading articles about how the Greeks don’t have money to buy insulin.

Totally disagree. If Greece had defaulted and exited the Eorozone in May of 2010, we would be reading articles about how Greek diabetics were dying.

158

Richard J 02.17.12 at 11:44 am

You could solve a lot of problems in Ireland if they were allowed to sell Liverpool to the Malaysians.

Arguably, with NAMA and the increased interest in core UK property among SWFs, this is exactly what’s happening in practice. [That said, for job reasons, I’ve been speaking to people who’ve looked at buying pieces of NAMA’s UK portfolio. With varying degrees of tact, ‘not with a bargepole’ seems to be a common response.]

[30, by the way.]

159

Daniel 02.17.12 at 11:47 am

Also, further to 155, Thailand doesn’t have soybeans but has never, ever, defaulted on any of its debts or those of the Kingdom of Siam (along with the USA, it is one of a very small number of countries that have paid all of their sovereign obligations ever in full with no forgiveness, and arguably it beats the USA because there were quite a lot of state-level defaults in the nineteenth century).

Mexico has defaulted lots of times and has basically stopped producing soybeans since NAFTA, but it does have oil, and so does Russia. Mexico and Russia are pretty much the paradigm cases of countries that defaulted and devalued but were able to use their dollar-commodity exports to continue to buy vital imports. The example that comes to my mind of a defaulting debtor that isn’t a commodity producer is Germany and their experiences with default have been absolutely awful. Graham Greene’s The Third Man is a story about the aftermath of debt default in a non-commodity economy.

160

ajay 02.17.12 at 12:04 pm

The example that comes to my mind of a defaulting debtor that isn’t a commodity producer is Germany and their experiences with default have been absolutely awful. Graham Greene’s The Third Man is a story about the aftermath of debt default in a non-commodity economy

…set in Austria…

161

Adrian Kelleher 02.17.12 at 12:18 pm

What political obstacle forced the results of bank stress tests in summer 2010 to be kept secret? And why was EZ banks’ exposure to peripheral debt kept from the public? The sins of politicians from core countries against Greece might be forgiven, but what of their deliberate deception of their own voters?

The game in the OP is like inviting players to take the wheel in Thelma & Louise just after the car has shot off the cliff.

162

Neville Morley 02.17.12 at 12:18 pm

Belated #5, with significant pessimism about its actual political feasibility and serious doubts about whether this is really where I wanted to end up…

163

Daniel 02.17.12 at 12:19 pm

true, although I think in the broader historical scheme of things I am not making too much of a distortion in implying that the economic state of Vienna in the immediate aftermath of the Second World War was largely the result of policy decisions taken in Germany.

164

Mikey 02.17.12 at 12:21 pm

GREAT post, very ingenious. I ended up at “5”.

165

Daniel 02.17.12 at 12:22 pm

What political obstacle forced the results of bank stress tests in summer 2010 to be kept secret?

They weren’t kept very secret.

166

Salem 02.17.12 at 12:23 pm

“along with the USA, [Thailand] is one of a very small number of countries that have paid all of their sovereign obligations ever in full with no forgiveness”

In the 1930s, moving off the gold standard was considered default. It was certainly a repudiation of existing sovereign obligations. I don’t think any country can make those types of claims.

167

Salem 02.17.12 at 12:25 pm

Also, the USA had a straight default in 1862.

168

Daniel 02.17.12 at 12:27 pm

I’m not sure I would count leaving the gold standard as a default. But if you do, then the Kingdom of Siam did indeed leave the gold standard in 1932, shortly after the pound sterling did. They replaced it with a convertibility peg of the tical to the pound sterling.

169

Dan Hardie 02.17.12 at 12:32 pm

Dsquared: ‘The example that comes to my mind of a defaulting debtor that isn’t a commodity producer is Germany and their experiences with default have been absolutely awful.’

One reason that there wasn’t starvation in Germany in 1947-8 was that the British Government imposed bread rationing on its citizens- who had not had bread rationed during the war, although other foodstuffs were- and shipped the surplus grain to the Germans, who had been fighting the British two years previously.

Dsquared got his example (‘The Third Man’) wrong, but his point is right: the German postwar experience was horrific, and disaster was only averted by measures that just aren’t thinkable today.

170

soullite 02.17.12 at 12:41 pm

I really do hope that this isn’t meant to be taken seriously.

“What would you critics do! – but you can only make choices I’ve already decided you’re allowed to make and which have outcomes I’ve predetermined” is not really much of an argument. No matter how fun Ezra Klein seems to think it is.

171

Daniel 02.17.12 at 12:45 pm

soullite: I agree that’s a valid criticism – see my remarks in comment number 3 above, and I am going to address this in the follow up post, hopefully. But I think it is a useful exercise to try to see this from the point of view of both the Greek government and the troika, who actually do have to work within a set of political constraints that they wouldn’t necessarily choose to have.

172

ajay 02.17.12 at 12:48 pm

163: OK. I thought you were drawing a narrower comparison, but if the argument is “non-commodity producer default leading to World War Two” then fair enough.

One reason that there wasn’t starvation in Germany in 1947-8 was that the British Government imposed bread rationing on its citizens- who had not had bread rationed during the war, although other foodstuffs were- and shipped the surplus grain to the Germans, who had been fighting the British two years previously.

A point worth making.

173

Daniel 02.17.12 at 12:49 pm

One reason that there wasn’t starvation in Germany in 1947-8 was that the British Government imposed bread rationing on its citizens- who had not had bread rationed during the war, although other foodstuffs were- and shipped the surplus grain to the Germans, who had been fighting the British two years previously.

another time, another time … if you want a less horribly grim portait of an economy basically going for option #30 above, Whisky Galore and Passport to Pimlico come to mind.

174

Daniel 02.17.12 at 12:49 pm

I thought you were drawing a narrower comparison

Actually I just forgot that Vienna wasn’t the same place as Berlin.

175

robotslave 02.17.12 at 12:52 pm

@169

While the type of argument that goes “here’s (a lot) of choices wot I think you’ve got and their (many) consequences according to me” is artificially constraining, and endlessly arguable in its particulars, it’s quite a bit better than the type that goes “you are poop and I don’t have to think about any poopy consequences to my solution to the problem, which I do not have to spell out in any detail at all, because you are poop.”

176

Jordan 02.17.12 at 12:53 pm

I ended up on 45. The funny thing is, I did not want to go the option of tough austerity but my own lack of familiarity with technical economics terms meant I did not know what I was choosing half the time.

177

Mandos 02.17.12 at 1:07 pm

Unless something changes dramatically, we are still going to hear of Greek diabetics dying. Or if it’s not that, it’s another thing. Since all the *actual* solutions are foreclosed…

178

robotslave 02.17.12 at 1:23 pm

I’m not sure how soybeans made their way into this discussion, but they’re a fairly low-value crop with relatively high usage of a critical natural resource, water.

Absent the US Bureau of Reclamation, which effectively imports 90% of the flow of the Colorado river, Mexico, or more specifically, the mexicali area around the delta of that river, would have more than a few acres producing soybeans.

Instead, those acres are, or were, relocated to California, at no small expense to the US taxpayer.

179

Salem 02.17.12 at 1:30 pm

“I’m not sure I would count leaving the gold standard as a default.”

Well, that’s not how the US Supreme Court ruled (see e.g. http://en.wikipedia.org/wiki/Perry_v_United_States).

Basically, the US government had issued WWI bonds (Liberty Bonds) with payment specified by a gold standard (“The principal and interest hereof are payable in United States gold coin of the present standard of value” i.e. $20.67 per troy ounce). Then the government attempted to annul this clause (and all contractual gold clauses) and pay off the debt in a devalued dollar ($35 per troy ounce). The Supreme Court held this to be breach of contract (i.e. default) but refused to apply any remedy, so creditors had to eat a 41% loss.

It’s basically the same as Greece paying off their Euro-denominated debt in New Drachma, and the devaluation was a huge boon to the US economy, just like it would be for Greece. The point is, the USA has done basically the exact same thing that it is now UNTHINKABLE for Greece to do, and the rewriting of history is serving a political purpose.

180

Sallyoo 02.17.12 at 1:44 pm

I got to 52 (and wore out a scrolling arrow in the process!)

181

Adrian Kelleher 02.17.12 at 1:45 pm

@Daniel

First it was attempted to keep both the stress test results and even the evaluation criteria secret. When that effort failed, the tests were rigged to enable the banks to conceal their sovereign debt exposure and their true state of health.

The stress tests included only the banks so-called trading ledgers and not their bank books. In other words, all banks had to do was decide that they intended to hold certain bonds to maturity and those bonds magically disappeared from the tests — and investors’ scrutiny — altogether.

Christine Lagarde told journalists it was “one of the hardest possible tests” and that it accounted for the possibility of “a sovereign debt crisis”. Pressed as to whether it addressed default risk, she reassured the interviewer that “if you look at the details of the test, it was a major sovereign debt crisis… Look into the details, you’ll see.”

But what constituted “a major sovereign debt crisis” in Lagarde’s mind was a transient market wobble in secondary trading with all bonds being fully honoured upon maturity, a fact she (and all her eurozone colleagues) made every effort to conceal from the public. There was in reality no way for non-insiders to gauge the impact of a default on any bank’s finances.

As Wolfgang Münchau pointed out, “the testing mechanism was calibrated to fix the result. The purpose of the exercise was to ensure that the only banks that failed it were those that would have to be restructured anyway.”

So what political hurdle prevented governments of the creditor countries from coming clean with their own voters about the true state of health of their banks? Or was it a simple case of politicians placing their individual interests ahead of the national interest?

182

Ed 02.17.12 at 1:47 pm

There is something wrong with the “Greece can’t default because it has nothing to export” argument.

If a country or region truly has nothing to export, its absolutely incapable of producing something people elsewhere want to buy, then by definition we are dealing with a very poor country. The only examples of this I can think of are places where the population is made up of hunter-gatherers and/ or nomads, and resource extraction economies after whatever the resource is has run out. In the first example the people of these places don’t exactly have access to insulin either, and in the second example the place just becomes poorer, though the pain is usually managed through some sort of combination of emigration and welfare paid from taxes collected from richer areas (often because they don’t want to be swamped with migrants).

Anyway, this isn’t really the case with Greece, which if nothing else has tourism. Sunny places where people from richer and colder climes like to go to for vacation or retirement usually do very well economically, usually well enough even to support a grifter economy, though maybe not on recent Greek level.

183

Steve LaBonne 02.17.12 at 1:48 pm

The frustrating thing about these exercises is the reality that Greece (and ultimately other relatively weak European economies) CANNOT remain in the Eurozone without real fiscal union that provides the kinds of fiscal transfers that my Federal tax dollars provide to Alabama, yet it appears that Germany will NEVER agree to this. I cannot see how any “solution” that involves Greece keeping the Euro is anything other than pure fantasy. I’m not saying that Greece going full Argentina is a good option; it’s horrific, for Greece and quit possibly for the entire world economy. But there is no alternative in sight unless you have some real reason to believe that the Germans will fork over. And I really don’t see it.

The Euro should never have existed in the first place, but now that it’s there it can neither stay nor go without massive damage because the Germans are still not willing to accept the ground rules of a functioning common currency. Now, is it fair to expect the Germans to pay a lot more? Of course not, and I’m not bashing them. But given that the Euro was created (with enthusiastic participation by the German elites if not the population at large), despite many warnings about the inevitability of this kind of situation, the situation is what it is regardless of fairness or of how anybody feels about it.

184

TheraP 02.17.12 at 1:52 pm

I got the “The End” on just a couple of tries.

My question: What is “The End”? The end of “WHAT”? A total complete melt-down of the world economy or of what?

Just a question… But I realize, as a therapist I realize this, we may not know…. I suspect you said that in your post. Fine post, by the way. (I got here via Felix Solmon.)

185

dsquared 02.17.12 at 2:00 pm

Anyway, this isn’t really the case with Greece, which if nothing else has tourism. Sunny places where people from richer and colder climes like to go to for vacation or retirement usually do very well economically, usually well enough even to support a grifter economy, though maybe not on recent Greek level.

yeh. But then we need to start looking at Turkey’s GDP per capita, or that of the Balkan states. Which would be a somewhere between a 30% and a 60% decline in living standards in Greece. As a way of avoiding “austerity”, this strategy seems to involve a hell of a lot of austerity.

186

robotslave 02.17.12 at 2:06 pm

Oh, I forgot to do the thing where I actually answer the question.

I’ve got a problem with that, actually, but it’s a personal problem, not a complaint with the format of the thing. The problem is that I’m old enough to have actually read a few of those CYOA books when they were first published, and I was the difficult, paste-eating child who just read them straight through like ordinary books, paying no heed to the suggestions to “turn to page eleventy-three for this or that.”

Later in life, of course, I fell probably a little to hard for the “post-modernist” fashion that some of you may remember. Anyway.

When I did actually try to do this game according to the rules, I got to “well, why shouldn’t Greece be Alabama?” and stopped. It’s taken me a while to think it through and realize that France is going to have a really nasty tantrum if it’s cast as Illinois.

So my answer is “I haven’t finished yet.”

187

dsquared 02.17.12 at 2:08 pm

Adrian (#180) – sorry to have been sarcastic earlier, but the 2010 stress tests are kind of my specialist subject – I did a hell of a lot of work on them. And my conclusion was that there were no secrets here. It wasn’t difficult to get the banking book exposures, and anyone who wanted to and who knew how to use excel could carry out whatever stress test they wanted.

The basic reason that all the banks kept passing the stress test is that their sovereign exposures were very small. The only ones that were greater than total capital were the exposures of the Greek, Spanish, Italian, Portuguese and Irish banks to their domestic sovereigns. The exposures to GIIPS countries were an order of magnitude smaller than the exposures to US subprime.

The only really questionable aspect of the 2010 stress test (which was corrected for in 2011) was that the Irish Financial Regulator used a set of macroeconomic assumptions (or more accurately, a table for converting macroeconomic assumptions into land values and loan losses) which was much too optimistic. But this had basically nothing to do with the sovereign crisis – it was the Irish banks that brought down the Irish sovereign, not vice versa.

188

dsquared 02.17.12 at 2:12 pm

Steve: As ajay notes above, it’s not necessarily the case that the Germans won’t agree to these levels of transfers. Paying other people’s bills for them in the interest of keeping a long term stable, peaceful and prosperous Europe has basically been the story of postwar Germany. Obviously the bill is going up a bit, but so are the stakes.

189

ajay 02.17.12 at 2:16 pm

The point is, the USA has done basically the exact same thing that it is now UNTHINKABLE for Greece to do, and the rewriting of history is serving a political purpose.

Salem, in terms of “making its creditors accept less repayment on existing debt than the original agreement laid down”, Greece is doing exactly that, and to a greater extent than the US did. This is the famous haircut on Greek debt which has been discussed here in previous threads (such as Niamh’s post, here http://crookedtimber.org/2012/01/30/the-medicine-is-killing-you-take-some-more/#comment-400555 ). If you didn’t know it existed, you really shouldn’t be in this conversation at all.

As noted before, the problem here is not “what can be done about the very large amount of existing Greek debt?” That’s a relatively easy and close-to-solved problem, and problems like it have been solved in the past. The problem is “what is going to be done about Greece going forward?”

190

Steve LaBonne 02.17.12 at 2:17 pm

Steve: As ajay notes above, it’s not necessarily the case that the Germans won’t agree to these levels of transfers.

I sure as hell hope you’re right. But if I were a German worker, who does not really pay much attention to events outside of Germany, who never wanted the Euro in the first place, and whose union has already agreed to years of wage restraint to cover the costs of absorbing East Germany, would I vote against any party that proposed this? Damn straight I would.

191

ajay 02.17.12 at 2:19 pm

Paying other people’s bills for them in the interest of keeping a long term stable, peaceful and prosperous Europe has basically been the story of postwar Germany. Obviously the bill is going up a bit, but so are the stakes.

“The French went in to protect their inefficient farmers from commercial competition, the Germans went in to cleanse themselves of genocide and apply for readmission to the human race, and we went in to screw the French by splitting them off from the Germans. Everyone else is just in it for the perks” – Sir Humphrey Appleby.

192

dsquared 02.17.12 at 2:20 pm

You might be right. But I keep thinking of something a trader pointed out to me at a dinner last year. “The German people wouldn’t stand for the expansion of the EU to Romania and Bulgaria. They wouldn’t stand for the introduction of the Euro. They wouldn’t stand for reunification at 1:1 Ostmarks. They wouldn’t stand for having American nuclear missiles parked in their country for forty years. In general, the fact that the German people won’t stand for something doesn’t mean that it isn’t going to happen”. It’s a very different kind of democracy to the UK or USA.

193

R C Jennings 02.17.12 at 2:31 pm

Just great, one of the best pieces of analaysis I’ve ever seen – can we get Angela to play ?
Where would she end up ?

194

ajay 02.17.12 at 2:32 pm

would I vote against any party that proposed this? Damn straight I would.

This would only make a difference if the result was a different party getting into power that opposed it. Not much point the furious German public kicking out Merkel if Gabriel then gets in and does exactly the same thing, as he might well.

195

Steve LaBonne 02.17.12 at 2:40 pm

Sad that lack of democracy is the only thing that might save the world from the consequences of the Euro, which is the result of a previous failure of democracy…

Not the sort of thing that can go on forever without the kinds of consequences with which Europeans of all people ought to be conversant. The Eurocratic elites have been playing with fire for quite a while now.

196

Noumenon 02.17.12 at 2:41 pm

Do this up with hyperlinks and people might actually try it.

197

Mandos 02.17.12 at 2:43 pm

You might be right. But I keep thinking of something a trader pointed out to me at a dinner last year. “The German people wouldn’t stand for the expansion of the EU to Romania and Bulgaria. They wouldn’t stand for the introduction of the Euro. They wouldn’t stand for reunification at 1:1 Ostmarks. They wouldn’t stand for having American nuclear missiles parked in their country for forty years. In general, the fact that the German people won’t stand for something doesn’t mean that it isn’t going to happen”. It’s a very different kind of democracy to the UK or USA.

Meaning, *even* less of one, apparently.

198

robotslave 02.17.12 at 2:44 pm

I’d agree that Germany has been a very different democracy than the UK or USA, but not all of that difference has been capitulation to government policy.

With that said, I personally think that something changed in German democracy in 1989. I’ve encountered more than a few who seem to think it hasn’t. To each his own, I suppose.

199

Phil Koop 02.17.12 at 2:46 pm

1. The “real-life” version of the game has not 50 nodes, but 50,000. Individually, most of these are extremely improbable; in aggregate, they have appreciable probability mass. There is a pretty fair chance that events will wander off the map given here.

2. Just because an outcome would be appalling is not a reason that it won’t happen. It certainly hasn’t been an observable feature of human history hitherto. Everyone knew that WWI would be a very bad outcome, but that didn’t stop it. Likewise for the “full Argentina.”

3. Just because everyone knows that an outcome would be appalling doesn’t mean they appreciate just how appalling it will truly be. There are always consequences unforeseen; again, WWI serves as an object lesson. In the case of the full Argentina, it seems to me that there is a tendency to underestimate how bad the effects will be for people who aren’t Greek. No doubt the Troika is confident that it can control the “real” contagion due to knock-on effects from mass Greek default, which are at least somewhat measurable. The degree of psychological contagion is harder to measure, so confidence about it is less warranted. And what about political contagion? Will Greece spark a “European spring?” Will we see a 21st century version of the Colonels? Counter-reactionary terrorism?

200

ZeLuiz 02.17.12 at 2:56 pm

Great game. I stopped at the Argentinian option. What would ‘Maynard’ say if Greece decided to emit bonds on the German war debt and pay off her own debt with them – on the understanding that the only option for creditors would be accepting these bonds at face value or having their credits written off?

201

John Lease 02.17.12 at 2:57 pm

Nothing like whistling the theme for Evita.

202

neurosciencist 02.17.12 at 3:08 pm

ended up at 26. not quite sure why or what that means

203

MPAVictoria 02.17.12 at 3:15 pm

“This would only make a difference if the result was a different party getting into power that opposed it. Not much point the furious German public kicking out Merkel if Gabriel then gets in and does exactly the same thing, as he might well.”

Sometimes I think I will go insane. Why do voters have NO options but stupid neo-liberal garbage?

204

Andrew Lilico 02.17.12 at 3:15 pm

Right at the start, you incorrectly assert that the only way an economy can function with a significant current account deficit is if it receives large fiscal transfers. But that’s just wrong. Lots of economies with floating exchange rates have large current account deficits if they secure large capital account surpluses. In essence, by insisting that a current account deficit can only be achieved in combination with fiscal transfers, you assume away most of the merits of a floating exchange rate – begging the question of the whole game.

205

Josh G. 02.17.12 at 3:19 pm

In the case of the full Argentina, it seems to me that there is a tendency to underestimate how bad the effects will be for people who aren’t Greek.

But why should the Greeks care about that, when the rest of Europe clearly doesn’t much care about their well-being? Right now, the fact that Greece can cause a measurable amount of trouble for the rest of Europe through the “full Argentina” is its strongest negotiating leverage – something to be embraced, not rejected.

206

Andrew Lilico 02.17.12 at 3:21 pm

Even if one follows the scenario in which the current account comes into balance and one wishes to leave the euro, your game forces one to be requesting fiscal transfers from outside. But that makes no sense – why isn’t there an option of Greeks just becoming poorer (in the style of Latvians). Maybe you think that would leave to revolution or something – but in that case your game should lead us to a “The End” in which that happens. You shouldn’t forbid us from investigating this, especially given that that (an exit from the euro without any subsequent fiscal transfers from Eurozone members) is what most people think will actually happen. You rule out, by definition, the base case scenario!

207

Kransky 02.17.12 at 3:22 pm

Next week, the Italian debt crisis. Dungeons and Draghi

208

Mandos 02.17.12 at 3:36 pm

3. Just because everyone knows that an outcome would be appalling doesn’t mean they appreciate just how appalling it will truly be. There are always consequences unforeseen; again, WWI serves as an object lesson. In the case of the full Argentina, it seems to me that there is a tendency to underestimate how bad the effects will be for people who aren’t Greek. No doubt the Troika is confident that it can control the “real” contagion due to knock-on effects from mass Greek default, which are at least somewhat measurable. The degree of psychological contagion is harder to measure, so confidence about it is less warranted. And what about political contagion? Will Greece spark a “European spring?” Will we see a 21st century version of the Colonels? Counter-reactionary terrorism?

The effects of the Argentina Solution may well be *very* bad for many people who aren’t Greece. That is why it is the Samson option, and why an actually democratic Greece would have already used it by now.

209

Mandos 02.17.12 at 3:42 pm

MPAV:

Sometimes I think I will go insane. Why do voters have NO options but stupid neo-liberal garbage?

The very game that dsquared has created, and the fact that dsquared created it, gives us our answer. But you probably already knew that…

210

Steve LaBonne 02.17.12 at 3:43 pm

Right now, the fact that Greece can cause a measurable amount of trouble for the rest of Europe through the “full Argentina” is its strongest negotiating leverage – something to be embraced, not rejected.

Which means that like other current European leaders, Greek politicians are catering to the needs of their (trans-national) class, not of their constituents.

211

brian Gilbert 02.17.12 at 3:46 pm

Having said that Germmany and a couple of others could not get support for further bailout you say there must be a disorderly default. But Greece and everyone else have had pleanty of time to plan for an orderly default.
The Euro notes indicate the country of issue so can immediately be used as Drachma for a start.
Holidays in Greece would suddenly be half price or less so tourism income would take off.straight away.
A floating exchange rate along with a immediate default means the immediate end of the need to borrow foreign currency. With a sudden rise in the cost of imports there would be a sharp rise in jobs to replace them locally.

212

ajay 02.17.12 at 3:54 pm

Sometimes I think I will go insane. Why do voters have NO options but stupid neo-liberal garbage?

The “garbage” in this case being a commitment to indefinitely continuing fiscal transfers from Germany to Greece (despite the unhappiness of the German voters). Not entirely sure why that’s neoliberal.

why isn’t there an option of Greeks just becoming poorer (in the style of Latvians). Maybe you think that would leave to revolution or something – but in that case your game should lead us to a “The End” in which that happens.

There is: it’s option 30. No further fiscal transfers, stay in the eurozone and tough it out.

213

Daniel 02.17.12 at 3:55 pm

Right at the start, you incorrectly assert that the only way an economy can function with a significant current account deficit is if it receives large fiscal transfers

I don’t think I do – 30 and 52 are outcomes with no fiscal transfers, and in a lot of the cases like 53, you can see that actually I am talking about EIB funding which might or might not be on a capital account rather than fiscal surplus. But realistically, a) Greece is right now today a recipient of fiscal transfers from the EU, and b) how on earth are we going to get Greece to run a structural capital account surplus ex the euro? It’s not exactly as if a debt default and rioters on the streets is going to turn it into a FDI hotspot.

214

Adrian Kelleher 02.17.12 at 3:55 pm

@dsquared

The Irish banks did indeed bring down the Irish sovereign — in spite of having passed the stress test handily just a few months earlier.

It may have been simple to find out the exposure by country, but this information was not sufficient. What was not accessible was the exposure for each individual bank. The gross figure hid huge variations from bank to bank and given that the tests envisaged neither a sovereign default nor a bank failure, neither the impact of a sovereign default nor a bank failure could be evaluated.

I can only express astonishment at your conclusion that “sovereign exposures were very small”. French banks’ sovereign PIIGS exposure at that time amounted to 40% and German banks’ to 96% of their entire tier 1 capital at that time according to the OECD.

From the linked article:

“The contribution of the 5 countries where most of the market focus has been – Greece, Ireland, Italy, Portugal, and Spain – is only €14 billion or 1% of the Tier 1 capital of EU banks.

“Yet a different picture emerges when we consider the sovereign debt exposures held on banking book, which are much larger than those of the trading book – around 83% of the total… If a bank fails, the question of whether sovereign exposures are held in the banking book or in the trading book disappears. If a bank were to fail, the resolution authority would have to realise asset sales in the market to meet demands from depositors and other creditors. The latent losses on the sovereign portfolio in the banking book would be realised. Therefore, shifts in the market values of sovereign debt held on banking books must be relevant for creditors and stakeholders, unless stress-tested banks can be assumed never to fail.”

In other words, unless the entire financial system of the eurozone could be assumed to enjoy the enormous subsidy of an implicit sovereign guarantee — which would obviate the entire procedure — then investors could not assess the health of even the financial system of a given country, let alone the market value of a given bank. Banks were holding the dodgy bonds on their banking book specifically so they could be accounted at nominal value even though these assets were trading at sizable discounts on the markets — a straightforward accounting fiddle.

Of course sovereign exposure was only part of the total exposure as peripheral banks have huge obligations to those in the core and the domestic banks would be finished the moment a sovereign default occurred. Let’s remember that countries like Spain, Portugal and Greece are under no legal or other obligation to make good losses their domestic banks’ creditors might suffer.

As you must surely understand the outcome was a complete whitewash, as pointed out by Münchau. But this was not a fraud designed to fool anybody in the markets, or even those interested in politics. Rather, the whole charade was for the benefit of the little people: the savers in France and Germany, so that they’d be reassured and resume spending as normal.

That had nothing to do with political obstacles and everything to to with protecting politicians like Lagarde at voters’ expense. As is always the case with confidence boosting measures, it’s other people that were felt to require more optimism. The political and financial leadership, be they in Dublin, Berlin or Salonika, certainly weren’t going to be the ones to throw their savings on the bonfire.

215

jim 02.17.12 at 3:56 pm

Josh G. @203:

Exit and default isn’t an option that can be credibly threatened. To telegraph exit is to rob it of what effectiveness it has. For it to “work” it has to come as a surprise. It’s like devaluation in the old days. That was something you’d never even contemplate until you actually did it.

216

Peter K. 02.17.12 at 3:57 pm

3. Just because everyone knows that an outcome would be appalling doesn’t mean they appreciate just how appalling it will truly be. There are always consequences unforeseen; again, WWI serves as an object lesson. “

WWII should serves as a lesson to the Troika. The Carthaginian Peace imposed on Germany had some unforeseen consequences like another World War and holocaust. The beatings will continue until a) morale improves or b) a demagogue takes the reins.

217

Steve LaBonne 02.17.12 at 4:05 pm

Not entirely sure why that’s neoliberal.

It all depends on who ends up with the money. Right now almost all the bailout money is bailing out the banks, not the Greek people.

218

Joelbaek 02.17.12 at 4:12 pm

5. Very informative and interesting – and didn’t mind scrolling up and down at all;-)

219

Metatone 02.17.12 at 4:14 pm

@210 Correct IMO.

I ended up at the Full Argentina, because I see no willingness in the German *political class* to push money into Greece. Indeed they are busy generating roughly one new proposal a week (viceroys, escrow) that ensure that money going into Greece is efficiently paid to creditors asap.

As such, there is nowhere to go other than the full Argentina, not because it’s a good idea, but because that’s where we are headed no matter how many other options we try to activate – Greece has no future in a currency union with a country like Germany unless there can be fiscal transfers. It’s just the reality that a Euro with Germany in it is too high for Greece to compete with anyone without massive infrastructure and industrial investment – and I see nowhere for that to come from…

220

Dr. D 02.17.12 at 4:28 pm

Love it! Actually I got to #50 in my first attempt but will try again… ;)

221

Katherine 02.17.12 at 4:36 pm

I was one of those annoying kids who started at the result I wanted in Choose Your Own Adventure, and then worked my way back to see how to get there.

So, erm, 53?

222

ajay 02.17.12 at 4:38 pm

216: still doesn’t sound very neoliberal. Essentially Germany is bailing out its own banks by passing the money through Greece, you’re saying. True, but a notably incomplete picture: remember who owns most of that Greek debt that Germany is preventing the default on.

223

Dr. D 02.17.12 at 4:41 pm

Love it! *whistles Evita*

224

Steve LaBonne 02.17.12 at 4:44 pm

216: still doesn’t sound very neoliberal.

Bailing out German banks at the expense of German workers, i.e. at the price price of continuing the trend to grater income inequality in German, isn’t neoliberal? Then what on earth would be, in your definition? Seems to me like pretty much a museum-quality specimen.

225

dljoy 02.17.12 at 4:49 pm

While Daniel gets us in the mood with his quip that “not all business problems have a solution,” and all the rest of you have such fun with this “game:” does anybody, anybody have a thought or a care in their brain for what the people of Greece are actually going through? The thing that took me over the line was the couple with the disabled daughter who tried to leap through a window after both losing their jobs so that then, at least there would be somebody to care for their daughter. People are leaving Greece in droves because life there is becoming unsustainable. Does that matter anymore, or are people just pawns on a board to be moved around while we play? This attitude that policy does not have to be responsible for the consequences to actual people, and that we can’t possibly be concerned about, due to the many structural impediments and sheer political expediency does not bode well for any of us, but I am particularly offended to see it actually turned into a game that we can sit home and play from the convenience of our laptops. Let them eat cake. The emperor has no clothes. What are the magic words to get our civilization back in touch with reality?

226

ajay 02.17.12 at 5:05 pm

222: but surely state support of domestic industry (in this case, the financial industry) is about the opposite of neoliberalism. You wouldn’t call a whacking great taxpayer subsidy to BMW “museum quality neoliberalism”, would you?

227

Glyn Morgan 02.17.12 at 5:12 pm

I got to 5 (via 48 and 29). I doubt, however, that really is the end of the game, because there are a lot of options between the two poles you specify: (i) what is politically possible for the Eurocore to deliver in terms of fiscal transfers; and (ii) the minimum amount needed to prevent riots in Greece.

So far as (i) is concerned, the average Bild reader seems to think that the Greeks must sell assets (their islands or whatever). If that assessment is current, then sale of Greek national assets must be on the table if further fiscal transfers are to be politically possible. In order to get the FT/FAZ readers on board, fiscal transfers must have some point other than permanent austerity. The Eurocore needs to make transfers contingent on changes in the Greek laws governing the professions (which are often de facto closed cartels) and small businesses (which are ludicrously regulated).

So far as (ii) is concerned, the Eurocore needs to make special efforts to ensure that the austerity cuts hit the rich in Greece rather than the poor and the sick. How (or even whether) this can be done is a very tricky question.

228

John D 02.17.12 at 5:13 pm

I went through it 2 ways by answering 1 different ways, and I can’t remember what happened on the first go round. Like Daniel said, the format mixed up my thoughts in a way that seems appropriate. I got to 5 on the second way, and feel probably a bit self-congratulatory about it.

This was the right time and topic to bring back the Choose Your Own Adventure.

229

Alex 02.17.12 at 5:14 pm

I’ve seen it asserted elsewhere that the Greek current-account deficit is now essentially made up of a) oil and b) debt service. If b) is true, it would make a trip round the Argentine dance floor with Dame Default quite a bit more advantageous/quite a bit less shit.

Obviously, a) is a serious problem for the Argentine option.

Meanwhile, a really good post would be a summary of what is currently actually proposed, as to be honest I’m losing track of the details beyond “substantial haircut, some sort of funding from the troika, struggling on, plus a recreational IMF internal devaluation programme, and a cardboard Angela Merkel in every bedroom”.

230

otto 02.17.12 at 5:16 pm

One way to think about this Choose Your Own Adventure is that a lot of grim outcomes really are “equilibria” in the sense that by the time you get to a crisis point the ‘best outcomes’ taking all the political existing constraints into account are often awful.

So a CYOA as a German ‘negotiator’ in the Treaty of Versailles negotiations probably ends up with the Germany signing the treaty, war guilt and financial/reparations clauses included (“the Allies have politics too you know”). Multiply your examples as you like.

231

Eli Rabett 02.17.12 at 5:26 pm

0. OK, no one is going to trust the Greeks anymore,

1. Greek gets cut loose from the Euro. See 0

2. The negotiation is about who pays what to whom for the banks, but the costs are split between the banks, the EU and the Greeks. That is where the negotiation is

Each of the parties can escape some of the costs if they cooperate. The full Argentina cannot be contained in Europe. And, oh yes a lot of EU regional money flows to Alabama Greece anyhow.

232

Daniel 02.17.12 at 5:28 pm

Bailing out German banks at the expense of German workers

Not true. Although I think me and Adrian are going to have to agree to disagree on the 2010 stress test because I just don’t recognise his version and he doesn’t recognise mine, the 2011 EBA exercise gave a comprehensive picture of the sovereign holdings of the German banking sector and they’re tiny. And they would be even tinier today if Deutsche Bank hadn’t, in order to act like a good corporate citizen, stopped selling down its Greek portfolio halfway through the year because this would be against the spirit of the PSI writedown deal.

233

Daniel 02.17.12 at 5:35 pm

This attitude that policy does not have to be responsible for the consequences to actual people, and that we can’t possibly be concerned about, due to the many structural impediments and sheer political expediency does not bode well for any of us, but I am particularly offended to see it actually turned into a game that we can sit home and play from the convenience of our laptops. Let them eat cake. The emperor has no clothes. What are the magic words to get our civilization back in touch with reality?

To be honest, I find this kind of grandstanding holier-than-thou rhetoric just as offensive. You don’t get to lecture other people about getting “back to reality” when you yourself are refusing to address the genuine economic and political constraints that are in existence. The entire post was written about the actual and very serious dilemmas facing anyone who is trying to find a solution for Greece and I fucking well defy you to find any single hint of a remark that trivialises these very serious problems. So basically all you are complaining about is that I wrote it in that form, so that it would get readers and so that people would actually think about the consequences, rather than a turgid repetitive white paper that would have to spell out all 24 of the possible policy combinations that I discuss. Which is weaker than a nun’s ouzo. Get over yourself.

234

JohnR 02.17.12 at 5:39 pm

I’m probably grossly over-simplifying, but it seems to me the best-case scenario under any option is “Greece is FUBARed in the short term and God help them in the long term”. That being so, what do they have to gain by staying in the EU and letting the Big Boys beat them to improve morale, and conversely, what do they have to lose by cutting loose and taking their chances with a devalued Drachma? I’m obviously no politician, because my answer is simply to tell Brussels and Germany where they can cram their “austerity”, default on the loans (after all this, why isn’t it first choice to give the big banks a colonoscopy with a spiked pole at every opportunity? They did it to everybody else.), go back to the Drachma and try to set up some sort of direct trade agreements with Spain, Portugal, Ireland, the NAFTA bunch and Asia, and accept that it’s going to be terrible going for a while (Weimar/Zimbabwe-grade, maybe, but hopefully not for too long). I mean, given the state of things, you’d have to be unbelievably optimistic to think it’s not going to be like that anyway, and at least this way Greece isn’t being bent over a table by Germany just for kicks.

235

William Timberman 02.17.12 at 5:41 pm

And throughout all of this, the ECB — with some judicious re-numbering — maintains the purity of its mandate, everyone solemnly promises to help create the conditions for future Greek competitiveness (i.e., ability to pay the creditors standing in line to be paid) and €130 billion changes from one approved set of hands to another. It’s a fine line, someone says. We don’t, of course, want riots, bloodshed, or mass starvation, but on the other hand….

In other news, German electricity suppliers, smelling blood this winter, are discovered to have taken a page from Enron’s playbook, and made creative use of rolling blackouts to plump up their ROI.

When I read a fleeting comment on the Internet that the Euro crisis reflects, not an economic imbalance between sovereign economies trapped together in an ill-fitting straitjacket, but a new arena for the conflict between capital and labor, I’m inclined to say, so what else is new?

236

Shameer 02.17.12 at 5:44 pm

Can’t the following strategy work to some extent?
The ECB decides, as a one-time gesture, to print and give 5000 Euro per person (based on the country’s population) to every government. Germany simply passes the amount through to its citizens as a cheque. This makes the German people happy. Greece uses it to pay off some of its debt and give it breathing room. The Euro is devalued slightly and there is a moderate amount of Euro area inflation, which helps the GIPSIs bring their prices more in line.

237

Daniel 02.17.12 at 5:49 pm

and conversely, what do they have to lose by cutting loose and taking their chances with a devalued Drachma?

Their banking system and maybe as much as 50% of the hard currency purchasing power of their imports. I think Alex is right above that oil is a major component of Greece’s imports and oil is priced in dollars. I think I am going to blame Paul Krugman a little bit for being patient zero of the myth that Argentina’s devaluation and default was economic panacea – it was probably the right answer for Argentina at the time, but it wouldn’t have been the right answer if Argentina had a foreign official sector creditor that was prepared to lend it tens of billions of dollars. I am getting a little bit impatient (again, sorry) at the presumption that the troika are “beating up on” Greece. They’re actually financing the Greek current account and fiscal deficits and significantly reducing the amount of austerity that Greece would need to go through if they weren’t there. I mean, really, think about what you’re saying in your parenthesis “Weimar/Zimbabwe-grade, maybe, but hopefully not for too long”. The word “serious” has been devalued of course by all the Very Serious People, but really, be serious.

238

JW Mason 02.17.12 at 5:51 pm

There is something wrong with the “Greece can’t default because it has nothing to export” argument.

My understanding of the argument was more like this:

1. Greece’s exports (tourism mainly) are priced in its own currency.
2. This means that the short-term result of a devaluation will be a *fall* in Greece’s export earnings, as measured in euros (or dollars etc.) (Since the euro price of a vacation in Greece will fall immediately, but the increase in the quantity of Greek vacations will only rise gradually over time.)
3. So a Greek devaluation would require a large *further* fall in Greek imports, and in the Greek standard of living, in the absence of financial inflows from the outside.
4. Under current circumstances, the only form those inflows can take are loans or transfers to the Greek government. Which presumably won’t be forthcoming after a default.

This is a very different situation from pre-default Argentina, where (1) new borrowing was mainly financing interest payments on the existing debt rather than a current account deficit and (2) exports were priced in dollars, so devaluation did not reduce dollar earnings.

you incorrectly assert that the only way an economy can function with a significant current account deficit is if it receives large fiscal transfers. But that’s just wrong. Lots of economies with floating exchange rates have large current account deficits if they secure large capital account surpluses.

Sure, that’s exactly what Greece was doing until a couple of years ago. But I think the record is pretty clear that private capital flows are not a viable way to finance large, persistent current account imbalances — at best, they require excessively high interest rates to attract short-term inflows; more usually, they’re unstable and associated with large fluctuations in asset values. Floating exchange rates just make things worse in this respect.

I sure as hell hope you’re right. But if I were a German worker, who does not really pay much attention to events outside of Germany, who never wanted the Euro in the first place, and whose union has already agreed to years of wage restraint to cover the costs of absorbing East Germany, would I vote against any party that proposed this? Damn straight I would.

I agree that part of the problem here is that Germany’s “success” in running current account surpluses hasn’t corresponded to a rise in the standard of living for ordinary Germans, quite the opposite. But that’s part of the irony here. The solution, at least in the medium term, does not have to be higher transfers to Greece, it could just as well be higher incomes in Germany, some of which would naturally end up spent on imports from Greece and the rest of the periphery. Thats more or less the excluded 17 — except there it’s framed in terms of competitiveness, whereas I would argue income effects are more important.

239

Steve LaBonne 02.17.12 at 5:57 pm

222: but surely state support of domestic industry (in this case, the financial industry) is about the opposite of neoliberalism.

Uh, no, but thanks for playing. Feeding the vampire squid at everybody else’s expense IS neoliberalism.

And on Daniel’s #232, to the extent that non-German creditors are being bailed out, that makes it worse from a German voter’s point of view, not better. And underlines the point that the interests being served are pretty much purely those of a supra-national elite.

240

Steve LaBonne 02.17.12 at 6:02 pm

The solution, at least in the medium term, does not have to be higher transfers to Greece, it could just as well be higher incomes in Germany, some of which would naturally end up spent on imports from Greece and the rest of the periphery.

Yes indeed. But as in the US, nobody even within sniffing distance of actual power has any interest in trying to bring this about. That’s at the root of the entire problem.

241

Sebastian 02.17.12 at 6:12 pm

“Which would be a somewhere between a 30% and a 60% decline in living standards in Greece. As a way of avoiding “austerity”, this strategy seems to involve a hell of a lot of austerity.”

Here’s the thing that I don’t understand, and I really wish someone would explain to me.

Daniel’s quote above is always used as proof that Greece just can’t leave, but the quote is an abbreviated idea. Unless I’m wrong the fully formed concept as currently pushed by the ECB/German government/and technocrats is:

A) Greece stays in the Euro, gets massive austerity imposed upon it, and NEVER GETS A CHANCE AT ECONOMIC RECOVERY because the ECB etc. keeps getting to set inflation rates and trade policies leaning heavily toward Germany while the alleged periphery (which frighteningly seems to include Italy, Spain and maybe France) stays mired forever.

this is contrasted with

B) Greece defaults, has massive austerity forced upon it by the fact that it can’t borrow, AND HAS A CHANCE OF RECOVERING, because it is not longer strapped to the horrifically non-helpful ECB and the dramatically overvalued for Greece euro.

Somebody is clearly misunderstanding something, and I hope to god it is me, because if the technocrats think that A is the better choice for Greece (and Italy and Spain), I suspect they are in for a very rude awakening that will end up screwing all of us over (again).

Will somebody please explain this to me?

242

Steve LaBonne 02.17.12 at 6:15 pm

I’m right where Sebastian is, and if we’re both wrong I’d love to see an explanation as to why.

243

David Merkel 02.17.12 at 6:16 pm

Well done, tea and all.

I ended up at 52. The economics will eventually drive the politics.

244

Daniel 02.17.12 at 6:17 pm

Sebastian: basically in A) Greece does have a chance of recovering – it’s a bit of a canard that the ECB sets policy so as to keep Germany and France booming and the periphery in recession and I don’t really see how anyone can look at policy since 1999 and conclude that. And in B), the “massive austerity” is much more massive than the “massive austerity” in A, and the initial GDP decline is much bigger. And if you have a 25% leg down, then you need quite a lot of years of recovery to get you back to where you were.

245

The Raven 02.17.12 at 6:19 pm

Daniel, #237: they’re going to go through pain, stay or leave. At least if they leave, there is an end in sight. If Greece stays in the Euro… tell me with a straight face that its creditors are ever going to let Greece of the ropes. Increasing indebtedness until, finally, a desperate default, will be the result of all that “austerity,” just as it has been in the US mortgage scams.

246

Steve LaBonne 02.17.12 at 6:26 pm

I don’t really see how anyone can look at policy since 1999 and conclude that.

I don’t see how anybody can NOT conclude it. Especially if you improve its accuracy by deleting “France” from your statement. Only the Germans (or more accurately, the German financial elites) have benefited from ridiculously low inflation targets maintained in season and out.

247

otto 02.17.12 at 6:29 pm

Is there an outcome which produces a larger fall in Greek GDP / output but involves a faster return to full employment in Greece? There’s not much discussion of variation in employment outcomes and any tradeoffs involved in DD’s CYOA.

248

Jan Poloniecki 02.17.12 at 6:29 pm

I got as far as 33, where Maynard made a mistake. He assumed that default had to be disorderly. Why would you have an advisor with unknown experience? Doubtful whether you would want one long on opinions and emotional reactions. Better someone with technical information like figures for Greek CDS. So no one associated with the troika then.

249

AlexH 02.17.12 at 6:31 pm

How about the German government pays for every German citizen to have a free Greek holiday, with a wallet full of spending money vouchers that have to be spent there or they are lost. The Germans get a free holiday, the Greeks get their debts paid off, it’s win-win all round, no?

250

Adrian Kelleher 02.17.12 at 6:38 pm

The data doesn’t suggest it’s such a canard to say ECB thinking is dominated by the core.

Note that rates were below the Taylor rule level for both core and periphery during 2001-2005, and that the ECB operated within its legal 2% inflation ceiling only fleetingly during the period prior to 2006.

251

Martin 02.17.12 at 6:39 pm

27. Forgiving Greek debt and even temporary transfer payments are a small price for Germany to pay in return for not casting doubt on the permanence of the Eurozone. But in return for bailing them out, Germany will demand that corruption will be reduced and people and corporations start paying their taxes. If Greece is unable to reduce corruption, they will leave the Euro. If that happens, default seems certain.

252

Sebastian 02.17.12 at 6:45 pm

“Sebastian: basically in A) Greece does have a chance of recovering – it’s a bit of a canard that the ECB sets policy so as to keep Germany and France booming and the periphery in recession and I don’t really see how anyone can look at policy since 1999 and conclude that. “

How does Greece have a chance of recovery? It is being assaulted with (to it) sharply deflationary monetary policy combined with sharply contractionary fiscal policy combined with an already overvalued (for them) currency. If we are looking at (from the point of view of say 2004 or 2005) sharply diminished European prospects for growth [whether because they were too optimistic at the time, or because things of actually gone downhill from there] and we are, Greece’s chance for recovery seem incredibly slim.

None of your scenarios indicate for example an even modest inflationary component (say long term 3% or 4%), which means for Greece, ever long deflation.

How does that end up with recovery? It seems to me that all of the technocrats just assume a Greek recovery if they stay in, because without that assumption B is a live option. But on the other hand, what are the REAL chances of a Greek recovery while staying inside the euro? Hell for Italy you had to propose a historically unlikely 2% growth rate (didn’t even happen in the boom 1990s and 2000s for Italy) and a doesn’t-look-realistic-at-the-moment bond rate. And comparatively Italy has its shit together. Greece is nowhere near that. What is its path to growth? It seems to me that it involves more magical thinking than even the vain hope that the ECB will allow inflation (which you seem to think is 100% off table).

253

Metatone 02.17.12 at 6:50 pm

@244 Daniel – I’d be happy to agree with you, but I think your argument would be stronger if you could actually identify the process by which Greece has a chance of recovering under scenario A – because I’m struggling to do so, but I don’t have your keen sense for this one it seems.

254

JW Mason 02.17.12 at 6:51 pm

Sebastian,

I think a real Eurocrat would also say the chances of recovery are better in A because under external tutelage, Greece will be forced to undertake competitiveness-enhancing structural reform that their own political system has not been able to deliver. Not that I buy it (especially since structural reform can just be code for lower wages) but that’s what they’re selling. In fact one of the arguments you hear against exit is precisely that it will let countries avoid the necessity of reforming their labor market institutions, tax system, etc.

255

el Bufon 02.17.12 at 6:55 pm

awesome game.

Another 52. (Full Argentinean). For what it’s worth.
However, to dig Greece out of the whole she is in, competent and honest administration is a necessary requirement.

Contradiction in terms?

256

Sebastian 02.17.12 at 6:58 pm

Also, isn’t there the sneaking suspicion that Greece will have to limp along under hyper-austerity for 3-5 years and then STILL default with all of the pain of the default.

What do you think the chances of that are?

Is there any scenario where THAT is better for Greece? [It would clearly be better for Germany of course, but for Greece it just represents an additional 3-5 years of pain before even starting the pain that starts the hope of recovery].

257

Phil 02.17.12 at 6:58 pm

I think the only way recovery could come with option 5 is to hope that it buys time until mid-autumn 2013. At that point, hopefully, the SPD might win the German federal election and, hopefully, join Hollande as de facto joint center-left leaders of the EU/eurozone. Heck, maybe even Cameron would be so weakened by then, that the UK might be willing to join in or acquiesce to a new center-left (or at least centrist) vision of Europe-wide recovery. I don’t think that concatenation of events is probable, but that seems like what would need to happen politically, and even then, one can’t be sure what the center of gravity on EU issues would be within the PS and SPD by 2013.

258

Omega Centauri 02.17.12 at 7:09 pm

Well anything possible in the step by step neo-liberal paradigm leads to disaster. The key isn’t to play around trying to tune this broken paradigm, but to come up with some bold way forward. Then try to change the politics to make it possible (because all of the alternatives are much worse). So if we go back to the Heinberg essay, which no one commented on, and think about creating something that the combination of Greek people and countryside can do that can sustain them for the long term. To me a fairly obvious answer, is to make them into a European energy colony. In return for the investment needed to make the country into a major (solar?) power exporter to Europe, we have the right to run roughshod over any local NIMBY forces. At least we would be transferring money to get them to build something, rather than transferring money simply to ease the burdens of their trip down the road to hell.

259

Daniel 02.17.12 at 7:15 pm

Whoa, we have moved the goalposts massively here. “ECB thinking is dominated by the core” is not the same as “ECB policy always keeps the periphery in recession”. Germany and France are two of the most populous countries in the Eurozone and massively the biggest economies. How can they not have a higher weight? But that *doesn’t* mean “Permanent recession for the periphery”. Does anyone remember the Celtic and Iberian Tigers? How did we get into this mess? Furthermore, ECB base rate is 1%. How much easier is monetary policy meant to be? This is exactly why I put #17 in there – too many dei ex machinae.

Ireland currently has positive GDP growth. It’s not as strong a recovery as one might want, and in many ways the policy mix is totally suboptimal. But recessions do end. If nothing else, the Pigou Effect ensures that. All this “Greece Can Never Recover Because Of Cough Mumble The Germans Have Their Boot On Its Neck” rhetoric really isn’t as convincing as people think. Remember that anyone proposing default or euro exit is giving the ECB and Euroland policy structure as much as a 20% head start in the “time to recovery” foot race.

260

Daniel 02.17.12 at 7:18 pm

and also:

Is there any scenario where [limping along for 3-5 years and then defaulting] is better for Greece?

Since in 3-5 years the maturity schedule would ensure that Greece had no non-public-sector creditors, I’d argue that in nearly all scenarios this is better for Greece. The default terms would end up being much less destructive. In general in economics, delaying a problem is a good idea.

261

Metatone 02.17.12 at 7:19 pm

@Daniel – 255

But isn’t there a specific Greek problem in that the internal devaluation needed to become competitive and start growth is bigger than that of Ireland? No European HQs of US companies, etc?

262

Metatone 02.17.12 at 7:23 pm

Correction – much bigger than Ireland

263

JasonC 02.17.12 at 7:32 pm

The problem is the node transfers are completely false, within 3 steps.

Greece can try to stay current on its Euro denominated debt and do so without further help (beyond existing Troika agreements to roll debt at 4.5% rather than having Greece try to sell bonds at 35% that it can’t sell), and after leaving the Euro.

It can pay all its other obligations in drachmas that devalue. It might choose not to because it prefers to screw its foreign creditors rather than domestic constituencies, but pretending it is impossible is pretending.

Greece spends 31% of GDP annually, its debt service is 7% of GDP at the rates offered by the IMF. Pretending it can’t pay debt service is just that, pretending. What it can’t do is keep robbing Europe to pay pensions and civil service salaries and welfare to deadbeats.

264

side_shore 02.17.12 at 7:33 pm

@Otto Pohl (20)
Nobody is paying Greek workers $75,000 a year. I m not sure if that was figurative speech or not, but just to clarify that average salary in the private sector in 2010 was approximately 20,000 euros, so that is more like $28,000 at the time. Add to that the highest direct and indirect taxes in Europe. Not to mention the almost non-existent public medicare and education system which forced people into further expenses in order to receive those services. So yeah it was pretty bad for the average Greek even before the recession went full scale and that was 2010, when people still had jobs. The $75,000 you refer to, only applied to some public utility entities. No hard feelings, just felt that I needed to point that out.

265

ben w 02.17.12 at 7:34 pm

Dei ex machinis, Daniel.

266

Daniel 02.17.12 at 7:37 pm

261: yes but this is just a fancy way of saying that the Greek economy is in a much worse underlying state than the Irish economy. Whatever your policy choice, it’s going to have a better outcome in Ireland than in Greece.

267

side_shore 02.17.12 at 7:44 pm

@QCIC (46)
Apart from the fact that your comment is disgusting and I will dare say racist, it also exposes the extent of your ingorance in respect of the EZ crisis.

1) This crisis is not just the result of mismanagement from crooked politicians, but the systemic problems of the Euro currency itself. The surplusses observed in northern countries like Germany and Finland is basically the other side of the coin, of the deficits observed in the south (Greece, Italy, Portugal, Spain). Even if Greece had a responsible, and untouchable government between 2003 and 2009, the deficits would still be there, smaller, but still there. Different countries competing on the same currency, is just not working without a fiscal union. A monetary union will not suffice.

2) Taking over the Greek administration by French and Germans is what has essentially happened during the past couple of years anyway . Not having any discretion on how to spend your budget, and receiving orders from German and unelected officials from Euroland is basically the same thing. For example the Greek government is required to cut down pensions, and funding in schools/hospitals/universities but is forced to execute contracts with Germany and France regarding arms that we do not need. This is hypocricy at its best.

The bulk of the money handed out to Greece is essentially a baillout for insolvent German and French banks, since only a very small portion of that money is spent in the Greek economy. The rest goes back to the ECB, other European central banks, the bond markets, and primarily insolvent EU banks, in order to pay for the debt. If Greece manages to produce a surplus in 2012 (which I doubt) then all of the “bailout” money will be going to the banks and other bondholders. People tend to forget that the socalled bailout is not as if Greece is getting the money for free. It still has to pay for some considerable interest.

3) Sure Greece is governed by some very bad politicians. But a) The Europeans have repeatedly blocked any cry for elections and/or other democratic procedures. So the Greeks are basically stuck with these crooked politicians till further notice, and b) even if Superman took over managing Greece right now, he would fail. What is required by politicians in Greece right now is to implement drastic change while the economy is in a free fall and without any possibility to export their way out due to the strong currency. Imposing repeated austerity, and giving out new loans to a country that could not even pay the old loans is a farse. The economy is shrinking 7% annualy for 4 consecutive years. Thats a Great Depression for Greece.

268

Sebastian 02.17.12 at 7:51 pm

“This is exactly why I put #17 in there – too many dei ex machinae.”

But all your ‘in’ scenarios posit an enormous ‘return’ to growth. Saying ‘recessions end’ isn’t what we’re talking about here. Your Italian scenarios require them to have growth year after year, that they reached in only two quarters of the last 15 years (before the global recession) and is on average twice what they actually got in the last 15 years (again not even counting the global recession). You need 2% growth when Italy has averaged 1%? If we just have a recession ‘ends’ scenario, Italy doesn’t get to your needed level of growth. And Italy has a near balanced budget, so if it defaults much of the nightmare scenario of Greece doesn’t happen.

Back to Greece, Greece is even worse off. It need massive growth for a decade. When ‘recessions end’ are you positing 5% growth each year for a decade with 7-8% growth a few of the years? Of course not. Under hyper-austerity combined with a deflationary (for Greece) ECB policy how is that going to happen?

“Since in 3-5 years the maturity schedule would ensure that Greece had *no non-public-sector creditors*”.

Think about what you’re saying here. What you’re saying is that in 3-5 years the default would only hurt Greece’s pensioners. Brilliant outcome for Europe, not so much for Greece.

“In general in economics, delaying a problem is a good idea.”

In general, in economies with steady growth, delaying a problem is a good idea because even small levels of growth compound over years to erase even big economic problems.

In economies with long term negative growth, that isn’t the case all, right? The problems compound over time because you have to borrow more and more AND you eat all your seed corn/investment potential.

Assume a Greece with negative growth 3 years out of the next 5, zero growth one year out of the next five, and less than 2% growth one year out of the next 5. Looks pretty grim, AND if they have to default then it would have been better to default now.

Is that a low probability scenario?

What about negative growth 2 years, zero 2 years and less than 2% growth 1 year? Pretty grim and better to default now instead of then.

Is that a low probability scenario?

269

DD 02.17.12 at 7:53 pm

Man, that is totally my job what you describe! And let me tell you, it’s pretty impossible!

270

Sebastian 02.17.12 at 7:55 pm

Hell what if it is just [just??? sigh] zero growth when averaged over five years. Is that a low probability scenario?

271

Daniel 02.17.12 at 7:56 pm

What you’re saying is that in 3-5 years the default would only hurt Greece’s pensioners.

No, Greek pension funds are in the private sector. What I meant was that the troika and ECB (and maybe the Greek banking system to an extent) would be the only creditors, and so a writedown on Greek debt would be much easier to negotiate on much easier terms. I’m not interested in what might be necessary for long term debt service in Greece because I don’t think anyone is planning that.

In the case of Italy, can we at least note that the 4.5% bond yield you regarded as highly improbable is now where the 5 year is trading? Italy has a huge amount of financial wealth (much more than Germany) and so, as I’ve regularly said, I’m not worried about debt arithmetic there either unless the yield gets onto a near-term explosive path – it just ends up being a situation like Japan.

272

Daniel 02.17.12 at 7:59 pm

And all your scenarios in 268 beat the alternative of a 20% decline over two years followed by 5% positive for three years. Default really isn’t costless.

273

mrearl 02.17.12 at 7:59 pm

I, too, was tangoing in Buenos Aires before I remembered what Maynard, given his name, should have said earlier: “If you owe your banker a thousand pounds, you are at his mercy; if you owe him a million pounds, he is at yours.” Better send the Greeks the money, one way or another.

274

el Bufon 02.17.12 at 8:04 pm

In addition to above:

I wanted to arrive at full default, because I do believe that devaluation is one requirement for Greece to get back on her feet. Others being to build social contract allows reasonable tax collection ratios, less corruption.

Staying in the Euro means imported deflation for Greece and others – because nothing short of outrageous measures will force the Germans to accept much higher inflation (regardless of government). Even some French economist are now questioning the Euro introduction as a mistake, ( Mr. Ambrose P from the Daily Telegraph having a piece “French-socialists-Latin-revolt-against-Germany”).

And I beg to differ on the “permanent deflation ” issue. As long as the productivity growth rates (aka relative competitiveness) differ between the core and the rest, AND the Euro is managed to fit the core needs – the deflation effect will be permanent. The celtic tiger/ Iberian effect were fuelled by cheap credit. It’s not about starting at different levels, it is about increasing differences as we go along.

One previous commentator mentioned the unpleasantness and difficulties of the aftermath of the Argentinean default. However, he did not mention how sad the atmosphere was in the months and years before the default (with deflationary pressure in full force), the creeping, subconsious feeling of no hope, no future. I was only visiting, but it was very, very sad. No the ideal background for a risk-taking, enthusiastic growth building future, I have to say.

Thanks to FT alphaville for the link, by the way.

275

Sebastian 02.17.12 at 8:17 pm

“In the case of Italy, can we at least note that the 4.5% bond yield you regarded as highly improbable is now where the 5 year is trading? “

The 10 year is still at 5.5% and has only been below the really quite dangerous 6% for about 14 days, so I’d be reluctant to get excited about that. And didn’t your Italian survival scenario require BOTH 5% yields and 2% annual growth? That 1% annual growth difference is enormous after just a few years. And that would be assuming that Italy can get to the halcyon days of 1995-2005 where they averaged 1% growth.

“And all your scenarios in 268 beat the alternative of a 20% decline over two years followed by 5% positive for three years. Default really isn’t costless.”

No, you’re positing that after negative growth for 5 years they won’t need to default. In those scenarios we get bad growth under the euro regime AND still have to default and eat the 20% decline over two years then, right?

How likely is it that this is kicking an almost certain default down the road? If that is what is happening you don’t get to impute the pain of the default on the default now scenario without remembering to impute the pain of the default on the default later scenario.

276

Sebastian 02.17.12 at 8:22 pm

Sorry, I found your quote on Italy, I don’t know why I keep attributing more likely scenarios to it than you actually put in.

“No, I don’t see that. If you can get the Italian government bond yield down to *4%* (through some combination of quantitative easing and shortening the average term, which is very long), then *2% real growth*,* 2% inflation* and 1% primary balance (a not wholly ludicrous combination) gets the debt balance down pretty quickly.”

So 4% yields are still a long way off, 2% real growth seems incredibly unlikely for Italy to the point of nearly magical thinking, and the ECB doesn’t seem thrilled about 2% inflation as a long term goal (it nearly always undershoots it rather than letting it average around 2%).

Italy is fucked.

Greece, worse of course.

277

Oliver 02.17.12 at 8:28 pm

Is there any hope Germany could end up aiding only Greece?

278

Theowyn 02.17.12 at 8:41 pm

#52

Painful, yes, but quick. And honestly, no matter how many other paths they try first, I think the Greeks will end up there eventually.

279

matti 02.17.12 at 8:42 pm

I ended up in 45.

280

Tom 02.17.12 at 8:54 pm

I got to step 52, but it shouldn’t have taken 4 or 5 steps. Leave the Euro, default, go back to the drachma, stop robbing one person to support another, and restore some semblance of free market capitalism. Anything else is just dragging out the torture and postponing (and worsening) the inevitable.

281

Chris Clarke 02.17.12 at 8:55 pm

Actually you can jump automatically to any of the paragraphs by using the browser Find facility (ctrl-F) and typing in the paragraph number. e.g. just entering “52:” into the pop-up windowette using my browser will instantly display para 52: so it’s almost as good as a hyperlink!

282

Daniel 02.17.12 at 8:57 pm

The 3 year Italian government bond yield is 3.5%. I don’t know why we would be thinking about 10 year bonds when the average maturity in Italy is already so long.

For Greece, there is all the difference in the world between a default agreed, on the basis of sensible negotiations with Euroland government creditors (ie, basically, a pure fiscal transfer) and a disorderly take-it-or-leave-it default right now on private sector debt. My default scenario is actually pretty costless. It’s basically what was agreed for Poland.

283

Daniel 02.17.12 at 9:18 pm

Someon has done a hyperlinked version here if you want to do the whole bloody thing with training wheels.

284

Stephen 02.17.12 at 9:21 pm

Peter K @216
“WWII should serves as a lesson to the Troika. The Carthaginian Peace imposed on Germany had some unforeseen consequences like another World War and holocaust.”

The ghost of Cato the Censor impels me to say: if you think that the peace imposed on Germany after WWII was remotely Carthaginian, even in the Soviet zone, you should fall on your sword at once. Useful advice: sharpen it first.

If you mean WWI, ditto. Compare situation of Carthage 20 years after defeat: Germany, ditto.

If you mean many Germans felt they were cheated out of what till September 1918 felt like imminent victory: too bad.

285

MPAVictoria 02.17.12 at 9:23 pm

Daniel just curious why you haven’t responded to Sebastian’s point regarding 2% growth.

286

john c. halasz 02.17.12 at 9:32 pm

@226:

“but surely state support of domestic industry (in this case, the financial industry) is about the opposite of neoliberalism.”

LOL!

287

Daniel 02.17.12 at 10:17 pm

285: basically we’ve been through it before and there’s nothing more to say. I think it’s a reasonable target, he doesn’t.

288

gates1588 02.17.12 at 10:38 pm

Suggestion – translate the game into Greek and publish it as far and wide as possible within Greece. Tabulate the accumulated game results. Follow that path.

289

shah8 02.17.12 at 10:44 pm

I think the more serious gap in the argumentation is the impact of synchronous deflation in the rest of the world would have on the medit countries. Recoveries from recessions and depressions usually has been about some other roaring economies hurling cash debris on the starving shores of depressed countries.

290

André Lamelas 02.17.12 at 10:48 pm

I was reading this post and I had some time in hands so I made an interactive version of this: http://lamelas.org/troika

:)

291

Alex 02.17.12 at 10:59 pm

How does anyone’s answer change if we focus on the fact the Greeks have already had a 16% drop in GDP (i.e. 0.75 Argentinas)? There’s a Yorkshireism about the guy who asks you the way and turns out to be so lost that the only answer is “well, I wouldn’t start from here…”

What fraction of the eventual losses from default have we already had? I mean, if default is in itself GDP-destroying, operating in “pre-default” for an extended period of time can’t be very good either. The massive fiscal retrenchment has been in the house forever now, confidence couldn’t be worse, wages are falling and unemployment rising, and there are all kinds of stories about individual businesses hitting trade financing constraints.

That’s actually quite a bit like default. Just without the monetary expansion, or the end of external debt service as a claim on the hard currency earnings.

Another thought in re: tourism. The J-curve effect is a thing, but holidays are typically booked long in advance and tour operators tend to swing over the year between running huge overdrafts and running huge credit balances. Further, the reason for this is that they book hotels and charter aircraft and generally undertake obligations in the winter, market like hell round about now, and then start to sell and collect.

So if ’twere well if ’twere done, ’twere well ’twere done now. On the other hand, the payments structure of the tourist business is the kind of thing that nobody in charge of this is likely to understand (and I don’t) and that is likely to contain the Weird.

292

Sebastian 02.17.12 at 11:31 pm

“basically we’ve been through it before and there’s nothing more to say. I think it’s a reasonable target, he doesn’t.”

Actually we haven’t, I don’t believe you’ve ever justified the 2% growth rate assumption. Now maybe I’m using the tools wrong, I’m perfectly willing to believe that, but it appears from places like this that even if you use a 20 year period like 1987-2007 (so you avoid the recent recession polluting the data [if you believe that it should be excluded, which I’m not at all sure of, but let’s give you the benefit of the doubt]) you don’t see Italy hitting 2% growth very often, and when they do it tended to be more at the beginning of that period [back when they were spending like crazy] rather than the middle or end of that period [when they started following the austerity concept]. And the last multi year period that they came close was 2000-2003 which was followed almost immediately by 3 years of almost zero growth. So it seems hard to justify a 2% growth assumption in Italy unless you think things are going to be much better than they have been in the last 10 years (even discounting the world wide recession).

If we add in the last 3 years of course the picture looks dramatically worse but I’m willing to buy [kind of] that we can treat the last 3 years as a one off [hopefully].

And while I’ll admit that I can be a pain, I’m really trying to wrestle with how this can possibly function.

Also you’re assuming 2% inflation when in fact the ECB (though admittedly its life has been short) has tended to undershoot the target rather than let it overshoot.

293

Thomas Jørgensen 02.17.12 at 11:40 pm

The fact that italy has been doing so very bad on growth is actually a very good reason to think that they could, in fact, do better in the future. It is not *difficult* to find places where the italian economy could wring out some more productivity! Of course, this assumes that one is willing to do something about the factors which has been choking italian growth…

294

Daniel 02.18.12 at 12:00 am

What fraction of the eventual losses from default have we already had?

I think not necessarily very much.

295

Phil Koop 02.18.12 at 12:02 am

@Josh G. (205)

I don’t think you have fully appreciated what I was trying to say. Obviously it would be absurd to expect the Greeks to nobly sacrifice themselves for the rest of us. But there is a common factor behind many of the stupid things that humans do, such as starting wars or small businesses: overconfidence. The case in hand has some similarities to war; each side knows that it will be costly to continue diplomacy by other means, but each side also underestimates the cost to itself and overestimates the cost to the other. Consequently, each side overestimates the strength of its position. Eventually, a bluff is called that is not a bluff and the outcome that everyone wanted to avoid occurs.

296

Daniel 02.18.12 at 12:06 am

Looking at this thread, I can see that I can take the time I had set aside to do statistical analysis of the results and get drunk instead – nearly every bugger ends up in #52. I think this is potentially because I wrote #1 wrong. Once you have decided “There is no more external money”, then you are on a path which basically leads to either Latvia or Argentina so it is not surprising that most people get Argentina. The “more money” track has loads more branches than the “no money” one. This is admittedly partly because I wrote the “more money” track first and was getting seriously bored by the time I did #47 et seq. But it’s also because there genuinely are lots more possibilities if you introduce the potential for more support; if you don’t, then what is there to negotiate about?

I think it may be that people just don’t understand how much Germany has given already and how much money is continually being advanced for Greece (which is a bit of a pisser, as that was one of the points I was trying to make with the post). But I don’t think my wording helps and looking back at #1, I think I could have done a better job in nudging people toward the idea that “No money” is actually a quite extreme assumption to make.

297

chrismealy 02.18.12 at 12:13 am

Isn’t “how much Germany has given already” just cycled through Greece and back to German banks?

298

shah8 02.18.12 at 12:15 am

Well, there is also the point that whatever deal Greece gets, Portugal and Ireland’s gonna want sumadat, too.

In fact, I don’t see any chance that the gap between what the European polity is willing to “invest” and what would prevent riots in Greece being small and paperable over, because there is also a strange attractor issue that’s flowing from the interplay between current events and future expectations among a number of states, not just Greece. I think, effectively, there is no solution that involves Greece staying in the Euro that does not simultaneously alter the Euro in unpredictable ways, the most predictable being that exporter countries will have to establish a system of refunds built around “stabilization funds”.

299

Daniel 02.18.12 at 12:32 am

Isn’t “how much Germany has given already” just cycled through Greece and back to German banks?

Specifically German banks no – do a ctrl-f for “stress test” and you’ll see me and Adrian Kelleher arguing about this. The general creditors of Greece yes, but this is just saying “Greece hasn’t defaulted”. If you were struggling to meet your mortgage payment and I lent you the cash on mates-rates terms, would you say “Daniel hasn’t given me anything, all the money has just gone to the banks”?

300

Dionysis 02.18.12 at 12:59 am

I ended up at 26 (optimistic much?)

Since I don’t have the time right now to follow all the paths, could someone list the nodes that lead to this fabled “outcome 52″?

301

Peter Frase 02.18.12 at 1:20 am

Well, for the record, I ended up at #5. I think I sort of intuited the point you were making about the money already advanced, even without fully comprehending it, and figured “in for a penny, in for a pound”.

302

nick s 02.18.12 at 1:20 am

I think I could have done a better job in nudging people toward the idea that “No money” is actually a quite extreme assumption to make.

I think it was the “can sell… given their domestic politics” that nudged me down the Latvientina path early on, which discounts the ways in which “more money” can be finessed domestically as “no more money”.

303

Jawbone 02.18.12 at 1:40 am

@296–awesome post. But I’m not sure that “no more money” is so extreme. At some point a limit is met, and my read of, for example, “debt crisis live” at the Telegraph is telling me that we’re near that point. The fact that the new gov’t in Spain is finding the books to be cooked in a way such that the deficit is worse than previously reported would seem to be a factor favoring this view.

Looking forward with anticipation to next week’s offering!!

304

jim 02.18.12 at 1:43 am

Daniel@296:

Yes. It might be worth exploring the possibilities of Greece out of the Euro but still in the EU and what support might be forthcoming in that case. Particularly if the debt remains Greek Law Debt.

I really don’t believe that absent political union (where the EU has some tax/spend authority separate from individual state tax/spend) ongoing transfers from one sovereign to another are politically possible. New York State would not willingly subsidize Alabama, although the USA can tax New York residents and spend the proceeds in Alabama. For a short period, on an emergency basis, all sorts of things are possible. But they can’t be institutionalized. And Greece needs an ongoing institutionalized source of funds.

It’s this that forces most of us to 52. There may be some who want to get there for ideological reasons, but most of us end up there because we don’t see any sustainable flow of funds to Greece in the long (or medium) term.

305

Salient 02.18.12 at 1:43 am

Looks like the consensus is #52, let’s cry for ‘full Argentina.’

I keep getting 57, though.

“We’re defaulting on everything. We’re leaving the Euro. Lend us some money.”

Those do not need to be spoken to the same entity, so I’m a little skeptical of Maynard’s claim You can’t announce a disorderly default and then turn around and ask for no-strings cash.

If I were Greece I’d be in full-rush negotiations with China as far as secrecy allows, which might be mere nonsense, if China didn’t have every reason in the world (and a growing reason at that) to take a particular interest in European shipping. Some days it feels like the best contribution one can make to the discussion is Listen. Hey. Listen. Hong Kong is not China. No, really, it’s not. Honest! For real! Hong Kong is not China!

I mean, fine, it’s always possible one day Hong Kong will just get forcibly absorbed by the PRC wholesale, but, uh, that hasn’t happened yet, and why are we all taking that as a tacit assumption when negotiating the future of Greece? Hong Kong is not China!

306

Phalcon 02.18.12 at 1:51 am

Daniel

The exercise was great. I think though in some of your comments you can lean to heavily in economic thinking or political thinking as the only two determinants. You may miss a little about the hard practicalities of the situation. Who can benefit most with the least effort (there is a little bit of reality for you to consider in all arguments).

When looking at sovereign defaults there is a strong argument to be made that what can matter in some practical sense is who are the larger holders of the debts. There are plenty of studies that show that the willingness of a sovereign to default depends on who will suffer the most. When a significant enough of debt is held by foreigners there is a higher incident of defaults (presumably cause there is more of an incentive)

That is why “external debt” is often favored versus domestic debt. Part is because of the increasing burden in debt/GDP given a local ccy devaluation, but the fact that foreign holders own foreign ccy debt precipitates and reenforces that notion they will be defaulted on first. So they feed on each other.

Exceptions exists, such as Russia GKO mkt, which by the way was very heavily owned by foreigners, many operating through local entities. Oddly enough foreign ccy Eurobonds in Russia were not defaulted on (perhaps because many were used to park russias central bank reserves (a common practice back in the 90’s to assure USD reserves were not low yielding).

I agree with the previous comment that your point of default and devaluation being strictly beneficial to exporter nations seems off on two accounts:

1) You dont really site strong enough evidence to back up your claims that default and devaluation is only beneficial to commodity nations or large exporters. Iceland may be small but its a good case where your argument doesnt hold.

2) It seems to me that many defaults are determined by a short calculation on who will suffer the most (foreign investors or domestic). In so far as a country can to a certain extent choose its course of action, history is littered with many examples of defaults against foreigners as preferential short term course.

If Greece were to default, what is its optimal yet practical scenario?

307

a different chris 02.18.12 at 1:52 am

I wound up at 8. Not unhappy about that, I always suspected that I was deep down a “United States of Europe” guy – maybe having all my life been part of a, well literally “the”, United States, it could just be that’s just only what I can really understand.

Because #8, to me, isn’t a Greek solution but the only way to go in the long run. That is: My admittedly underinformed gut tells me that it’s better for Germany and the other top dogs to to have a USofE than to have a re-fractured currency zone. So do Greece, then the rest of the PIIGS as they come up, and before you know it Gerhard’s your uncle.

This is fun, going to don a different personality and go back in and see what happens…

308

Luis 02.18.12 at 1:57 am

I’m actually thinking someone should do a wiki version of this. Besides letting Dsquared adjust #1, it would allow the “we need to adjust the politically possible” crowd to add scenarios like:

“Maynard notes that people are rioting outside your offices. If you think this will persuade German bankers to allow 4% inflation, turn to 58.”

Or what have you.

309

a different chris 02.18.12 at 1:58 am

I should say the leap for me was taking a deep breath and saying the Germans will dig into their pockets somehow. They did this for reunification, and people my age at the time (30) would probably have told you they felt more kinship with Greeks than those who grew up on the other side of the Iron Curtain. I didn’t of course know to ask that particular question, but I do remember it didn’t take much to get an earful about basically “we don’t give a fuck about those people, it’s just those damn old farts currently running the country that think this is a good idea). I don’t know how the elites got the masses to pay, but they did.

310

Luis 02.18.12 at 1:59 am

(And since I realize this comment may be prone to overinterpretation of comments, I mean that sincerely; I think it would be an interesting experiment in letting the more activist commenters here brainstorm about what outside-the-eurocrat-box actions would lead to which improved outcomes.)

311

Salient 02.18.12 at 2:19 am

Sorry, I just now noticed that ajay already brought this up way upthread.

The Chinese want HK back; they’ll get it, and their very own territorial enclave in Europe as well, with one of the continent’s best deepwater ports, and a bit of colonial payback against the horrible foreigners.

Yes, Chinese wholesale absorption of the Greek shipping industry currently controlled by Hong Kong is exactly the kind of ‘well fuck you all then, enjoy your comprehensive Eurozone meltdown which we’re about to initiate as violently as possible, while we Greeks bask in the showerful sunshine of Renminbi now flowing our way’ solution that Greece presumably should be threatening the troika (and for that matter, Hong Kong) with. Granted, it’s a damned awful solution that’s almost perfectly calibrated to maximize non-Greek suffering (certainly including inducing instability in Hong Kong), I would hate to see it happen, and (thankfully I suppose) it’s apparently far more aggressive than Greece is willing to be, but it’s also a damned potent threat to bring to the bargaining table.

I’m not sure the parallel modest proposal (China gets HK + Northern Ireland, Northern Ireland gets to leave UK) quite matches up (China gets HK + Greece, Greece gets to leave Eurozone). Sure, kneecap Hong Kong’s current foothold in European shipping hard enough and you permanently fuck up their re-exports badly enough to enable you to claim them all for yourself, but it’s an open question whether HK could maintain themselves on the strength of their financial and market sectors alone. Presumably buying out Greece and in exchange taking over control of a huge amount of Eurozone-China shipping and the bulk of China-HK-US shipping would be worthwhile on its own merits, even if China didn’t manage to collapse and impoverish and then absorb Hong Kong?

312

Daniel 02.18.12 at 2:34 am

1) You dont really site strong enough evidence to back up your claims that default and devaluation is only beneficial to commodity nations or large exporters. Iceland may be small but its a good case where your argument doesnt hold.

Iceland has allowed the krona to depreciate a lot, but it didn’t have a fixed peg (and so there’s no exit/devaluation) and it absolutely hasn’t defaulted on its sovereign debt. I think it is because of the ongoing negotiations on the Icesave liability (which Iceland also hasn’t repudiated – they keep saying they’re going to pay it, but the negotiations are when and on what terms) that everyone thinks Iceland is a poster child for default, but it hasn’t defaulted so it can’t be.

313

Salient 02.18.12 at 2:36 am

And crap, now I see that D^2^ brought it up in the original CYOA:

Maynard pours himself another cup of tea. “This seems like a pretty aggressive way to treat the Troika, if we are assuming that Greece will still be dealing with them.

It just gets lost in the shuffle because there wasn’t a “well fuck the Troika, in fact let’s design this to hurt them as much as possible” option, because Maynard’s looking at solutions that (1) are hopefully somewhat acceptable to the troika, or at least not obviously guaranteed to wreak havoc on the rest of the Eurozone, and (2) are sane. Screwing over the economies of both the Eurozone and Hong Kong in one fell swoop is pretty insane, though it gets points for sheer ‘categorically fuck over everyone who has invested in us, in order to solicit permanent funding of our deficit from what will eventually be the country with the largest economy in the world’ cynicism. If you believe that the Hong Kong economy is unsustainable and demolishing its re-exports is the way to speed its collapse, and that China is far more likely than the Eurozone to finance Greek deficit spending indefinitely in exchange for lucrative and exclusive public-private partnership in which China assumes functional control of Greek shipping, and you’re either Chinese or Greek or sociopathic enough to desire that both of these things happen even though you’re not a citizen in one of the countries that would make out positively in such an event, presumably you’re permanently stuck at #34, with Maynard gawking at you in shock.

314

Timothy Scriven 02.18.12 at 2:37 am

Default. Socialize industry. Expropiate the wealth of the bourgeois. Raise the red & black flag. Smash the state. Convene general assemblies and workers councils with a federated structure & recallable delegates. All factories, offices, shops and farms to workers democracy. Call on the workers of all Europe to arise against State & private parasites in defence of their own rights, and those of Greece, call for a worldwide indefinite general strike.

Didn’t really fit into any of the answers above but I note that I have some supporters in Greece.

315

robotslave 02.18.12 at 3:05 am

@314

Raise the red & black flag. Smash the state. etc etc.

I note that I have some supporters in Greece.

Well, in Athens, at any rate. And they do look ever so heroic on your television nakedcapitalism.com your niche politics blog of choice, don’t they?

316

a different chris 02.18.12 at 3:11 am

arrrggghhh, I hope the sub-game was everybody figuring out I meant “5”, not 8….

317

Raf Manji 02.18.12 at 3:26 am

Lovely piece thanks.

I ended up quickly at #52 like many others. Like Iceland, Greece must realise the error of its ways and leave the party it should never have gatecrashed. Boy, the hangover will be immense and no amount of painkillers will really help. But let’s remember this is about numbers on a spreadsheet….eventually, with the help of a cheap drachma, things will fund a new equilibrium and we can all head back to Mykonos for 80s revival parties.

It reminds me of Otmar Issing’s private statement to a visiting economist back in 1997…that the Greeks and Italians would get into the euro over his dead body….sadly it is their own bodies that have died.

I’d like to add one proviso to my selection:

- There is the option for Greeks to become truly European…..simply give up any notion of sovereignty and lead the march towards full fiscal union and the United States of Europe. I don’t believe it will happen but it is an option. The theory of being “half-pregnant” has been clearly demonstrated.

318

Fall in Queue 02.18.12 at 4:13 am

Daniel,
A question: if EZ banks are in as good a shape as you say, why would a Greek default and exit from the euro be so threatening to the rest of Europe? (Honest question, no snark intended.)

Great work, by the way.

319

Henry Harris 02.18.12 at 6:43 am

Greece finally shows sincerity to get onboard w the austerity program with the rest, The bond holders, all but ecb take 70% cuts, Payment is made march 20th by ecb/greece. AAA’s leave Euro not EU. China, US, Brazil, Japan Australia boost ESM to E-1T. AAA’s receive trustee status to financial payout of trust (EFSF E-500B). Banks that fail sold (financed) to ESM nation banks. CDS triggered all around. Euro/$ to $.80.

320

Adrian Kelleher 02.18.12 at 9:26 am

@Daniel, 299

If you happened to own the bank in question, I’d say yes.

321

Detlev 02.18.12 at 9:30 am

I get to 52.

What supports my opinion is that the Greek (rich) do not show any solidarity with the Greek (poor): I know a real estate company in Berlin that sold 2011 about 100 Million Euro worth in real estate object only in Berlin to Greek investors. So can anybody explain to me why the German taxpayer should do more than the Greek themselves to save the country?

Great job to develop this test – but I am quite sure the politicians will work out some sort of idiotic compromise that serves to nobody and that cannot be imagined by the creator(s) of the test…

322

Henri Vieuxtemps 02.18.12 at 10:34 am

I don’t know if it’s as obvious to everyone as it is to me, but ‘structural fiscal transfers’ = ‘fiscal union’ = ‘the loss of sovereignty’ = ‘no democracy’. It comes with “the power to regulate interstate commerce”, which means, in practice, that the central government has more or less a complete control over all socioeconomic conditions in the regions. You’ll end up with the same ‘united states’ model: concentrated top-heavy power with the same (or worse) level of corruption. Sure, it’s more stable, but so is an absolute monarchy.

323

john haskell 02.18.12 at 11:16 am

Daniel, you’ve no doubt noticed that Fitch just upgraded Iceland to “investment grade.” Of course back in 2008 everyone said it was going to be a disaster… was this blog up in 2008? I guess I need to take a look.

You are obviously correct that Thailand hasn’t defaulted, that’s because the Germans never stripped them of their ability to devalue.

324

john haskell 02.18.12 at 11:18 am

Graham Greene’s novel The Third Man is about the aftermath of default, you’re right. Military occupation and World War Two were just incidental.

325

john haskell 02.18.12 at 11:39 am

How many referenda does Iceland need to have before we decide that Iceland isn’t going to pay the Icesave claims? Or is it OK to just have a member of the Icelandic government say “we don’t want to default” and we will agree then that Iceland isn’t in default.

“Treasury minister Danny Alexander said the decision was “disappointing” and the matter would go to an international court….The time for negotiations is over. Iceland remains obliged to repay. The issue is now for the courts to decide,” Mr de Jager said in a statement.”

hmmm… that kinda sounds like a default

326

tony Maher 02.18.12 at 11:46 am

The full Argentina.

Greece has just achieved it’s first primary surplus.

It’s external trade position is less rosy as Maynard indicates. Energy in particular is going to have to be rationed.

The possibility exists that additional IMF support is still possible after all devaluation was a standard requirement of IMF plans before they got nobbled by the EU.

Saving the euro would give a different answer of course – but if the objective is to give Greece the best chance of recovery then it’s 52.

327

Phalcon 02.18.12 at 12:14 pm

Daniel…Response on Iceland

1) “Iceland has allowed the krona to depreciate a lot, but it didn’t have a fixed peg (and so there’s no exit/devaluation)”

If you mean there would be no maxi-devaluation (in terms of discrete event), yes that is true. But the net effect would be the same over say 6 months. Iceland devalued 35% in a very short time frame, which by most accounts Greece would face a similar devaluation. In addition, IMF and ECB plans can be put into effect to stabalize the currency and put Greece back on a path to rejoin the Euro at a devalued rate and at a time of better debt dynamics. Iceland was all on its own…and vilified.

So i dare say the net effect over a still very short time frame would be similar.

2) “it absolutely hasn’t defaulted on its sovereign debt”

Daniel, you know full well when we talk about defaults for a financial crisis, the government has two choices. It can default on its sovereign debt OR it can default on its effectively nationalized banking debt/obligations (an option Ireland might have wanted to explore at one time).

Which one depends on where the bigger problem lies and who would lose (foreigners or domestics from my previous point which you did not address). If the banks as the case in Iceland and Ireland are with balance sheets multiples of their GDP and a significant enough portion of their liabilities are to foreigners then there is the incentive to default on the bank liabilities. If it is sovereign debt, as such is the case in Greece and Portugal, then that is the debt of choice.

At this stage in the game we all realize that bank debt and sovereign debt are very blurred and can switch hands or can be selective defaulted on, all by the will of the government.

I also take exception to the notion that an obligation that is promised to be negotiated later isnt a default. Any moratorium on debt or obligations passed a grace period of say 90 days is a default. Those deposits have been covered by other entities for 3 years now. A work out of those “obligations” may one day happen, but by all means that is a default. The moneys were not paid out and still havent for 3 years and more running.

328

tony Maher 02.18.12 at 12:15 pm

I think it may be that people just don’t understand how much Germany has given already and how much money is continually being advanced for Greece (which is a bit of a pisser, as that was one of the points I was trying to make with the post). But I don’t think my wording helps and looking back at #1, I think I could have done a better job in nudging people toward the idea that “No money” is actually a quite extreme assumption to make.”

1.) This German money is nearly all guarantees backing EFSF bonds – the hard cash for Greece has therefore been raised on the markets. The interest rates for these monies were also punitively high and have had to be reduced. This is therefore not a hard cash no strings transfer payment like E. Germany was. Obviously these guarantees are a risk to Germany.

2.) The decision for 52 is not only determined by your admittedly extreme case of “no money” (IMF funding was actually made conditional on devaluation until this euro crisis) it’s also driven by the good faith priority to decide an option that has the best chance of providing a platform for the future recovery of Greece. This cycle of subsidised austerity has already demonstrated itself to be an exercise in wasteful futility.

329

James A Donald 02.18.12 at 12:37 pm

Obviously, the bottom of the problem is not enough money. And equally obviously, Greek taxes are far, far above the Laffer limit. So you have to do what a bunch of ex Soviet Republics did. Cut taxes back to the Laffer limit, and cut expenditure.

A good step in that direction would be to cut all taxes to one third of their present rates, and all expenditures, including bond interest and repayments, to one third of their present rates – either fire two thirds of public servants, or cut their salary to one third of present values, cut pensions and welfare similarly.

The government would then have a surplus, and would not need to worry about the fact that no one would lend it any more money.

330

Daniel 02.18.12 at 12:45 pm

if EZ banks are in as good a shape as you say, why would a Greek default and exit from the euro be so threatening to the rest of Europe?

they can handle an orderly, negotiated sovereign default no problem if it’s handled properly
– in fact of course they are doing, because they’re currently negotiating as much as a 70% loss in the “bond exchange”.

They can’t handle a Euro exit, because that’s a totally chaotic and unplanned event that would immediately delay all sorts of payments and then possibly settle them in drachma when the corresponding liability is in euro. The actual first round damage done by this might be quite small, but the thing is that nobody would know, and so what happens then is you tend to get “wait and see” behaviour – but “wait and see” is basically equivalent to a continent-wide bank run.

They might or might not be able to handle a disorderly default – the financial damage wouldn’t be that great, but people would then certainly start looking at Portugal and maybe even Spain or Italy, and it could start the same sort of panic. I personally would regard it as money well spent to not find out.

331

Daniel 02.18.12 at 12:50 pm

Phalcon, Iceland didn’t default on its nationalised banking sector obligations either. Nyi Landsbanki, Nyi Glitnir and Nyi Kaupthing all paid depositors and creditors in full.

What Iceland did allow to default was the international subsidiaries of Landsbanki, Glitnir and Kaupthing. There is no analogy here to Greece; the Greek banks have some international subsidiaries (mainly in Turkey), but these subsidiaries aren’t bankrupt and don’t have massive liabilities; they’re in general much more solvent than the head office.

And I think you’re just wrong about Icesave constituting a default – do you really think Moody’s would have raised Iceland back to BBB minus if it was still in default on a 3bn liability? The Icesave liability doesn’t have a maturity date or agreed interest rate because it was never constituted as a debt; it’s just a gentlemens’ agreement between Iceland, the UK and the Netherlands, which the Icelandic government still intends to honour.

332

Daniel 02.18.12 at 1:22 pm

I think we have kind of achieved reductio with 326 above:

The full Argentina.

Greece has just achieved it’s first primary surplus.

It’s external trade position is less rosy as Maynard indicates. Energy in particular is going to have to be rationed.

Thank God we’ve got rid of all that awful austerity! Just a little bit of energy rationing!

333

christian_h 02.18.12 at 1:48 pm

John (323.) that’s because the Germans never stripped them of their ability to devalue.

Much as I hate German capitalists and Merkel, that is simply unbelievable. At no point was Greece forced, coerced, begged or in any other way encouraged by Germany to enter the Euro. Greece decided to do so, and it allowed the government to finance an absurd fiscal and current account deficit for quite a long time. This re-writing of history reminds me of the British comrade who claimed that the EU privatized British Rail.

334

Phalcon 02.18.12 at 1:56 pm

Daniel.

I respect your comments and so i will avoid equivocation. I had just two point to make which i hoped would add more dimensions to this excellent exercise on Greece’s path.

1) The point of bringing up Iceland was to show that a non-exporter or commodity producer can suffer devaluation and be used as a tool effectively, which it has by most accounts.

The primary choices for non-reserve currency countries that have over extended their balance sheets are default, devaluation, or some combination of both.

2) Default is considered usually when there is sufficient foreign losses to justify it. That tends to be the main driver of what type of default occurs. Whether you consider Iceland a default or not (which yes i agree it didn’t default on a bond obligation or public debt so there was no public default, but it didnt have large external public debt to do so ) but at the time it fully intended not to pay those foreign depositors ( a type of external debt) and was forced to by the UK and threat of IMF withdrawal, etc… (modern day gunboat diplomacy, nothing “gentlemen-like” about it).

These points i think are general refinements to the decision tree, but do not take away at all the points of Greece’s special situation as a member of the EZ and EU.

335

CD 02.18.12 at 2:00 pm

Maynard left me to write the report at #15. Excellent exercise!

336

Mr. Violet (@EuropeanViolet) 02.18.12 at 2:34 pm

@Dan Davies,
I had some problem in understanding your post so I worked on it for making it into a flow chart. I worked on it with Google drawings. You can access to the original file and copy it in your Google-account if you want to re-work it here.

Unfortunately when I had almost finished, it started manifesting problems in showing the texts (maybe for the big size), so I had to export it as an .svg, convert it to a .png and then re-uploaded to google-docs here.

The best way would have been to rely on a database since the beginning and then use a webframework for presenting the data in chart form, but I hadn’t time to do that so I thought to rely on google-drawings… it worked till almost the end, but it didn’t let me to check for mistakes and last refining.

Anyway, perhaps I have just reverse-engineered the material you used for writing your post. I don’t know. My effort was in order to make it more readable. The next step would be to implode the chart and extract the 21 possible paths and put them in plain English for folks, but I am not sure I will have time to do that. Let me know if you intend to work on it.

Also there are some nodes which were duplicated, but it’s not clear to me if you did it just for stylistic reasons or you tried to convey some alternative meaning.

337

tony Maher 02.18.12 at 2:53 pm

Daniel,
The following from the Economist:

http://www.economist.com/blogs/freeexchange

We have already achieved reductio – that has come in the unlovely guise of “expansionary austerity”. Now it’s either the formation of a full eurozone debt and tax union (outside the competence of a mere Troika official) or a Greek default, euro exit and devaluation.

52.

338

john haskell 02.18.12 at 3:09 pm

@ christian_h, nice try, but under the Maastricht Treaty Greece was obliged to enter the Euro.

339

Sebastian 02.18.12 at 4:32 pm

“It comes with “the power to regulate interstate commerce”, which means, in practice, that the central government has more or less a complete control over all socioeconomic conditions in the regions.”

I don’t really see this as true. Alabama and Mississippi both get ongoing very large transfers and are not under the complete socioeconomic control of Washington DC. And they are substantially different from the midwest states that get large transfers, so inter-state variety is clearly possible.

That said, we do that in the US because we think of people from Alabama as “Americans” and I’m not at all sure that “Europeans” or whatever has the same valence. But the US experience suggests that you can have transfers for more than a hundred years with a minimum of griping and still quite a bit of state autonomy if you have the right political framework/mindset (the mindset may be the more important part).

340

Eric Parks 02.18.12 at 4:32 pm

Beautiful work. Probably the best analysis I’ve seen out there that makes an actual sense of the options out there without the hysterics involved from all sides. In my opinion it’s required reading for anyone trying to make sense of the current predicament. As a Greek-American entrepreneur building a start-up with international funding while living and working in Greece today I would love to have seen work like this at earlier stages. Informative and educational without being boring. Kudos.

341

G. Mcthornbody 02.18.12 at 4:55 pm

I like 45 – put the Germans in charge – although I don’t think that’s very likely to happen at all. I do think the idea of selling islands is a lot of fun. Perhaps Greece could offer them to the Germans as equity:p

It’s too easy to get to the full Argentina. It’s good bye, good luck, oh crap!

I’m still trying to pick some of the more probable solutions, but that’s much harder to do when you don’t live in the eurozone and aren’t an economist.

342

Henri Vieuxtemps 02.18.12 at 4:57 pm

@338, what autonomy? When 90% (or whatever the number) of all taxes are collected by the central government, the provinces get no autonomy. And these transfers, what are they? I bet it’s done mostly though the pentagon. So, if the US model gives any clues, you’ll get the same wicked military keynesianism, with a trillion euros/year spent on ‘defense’, with a bunch of military bases and arms produces in Greece and Portugal (and god knows, Italy already has enough American bases there).

343

William Timberman 02.18.12 at 5:16 pm

In today’s F.A.Z. economics section, Hans-Werner Sinn recommends the full Argentina for Greece, and when asked how serious the danger of contagion will be for Portugal and others, he says this:

It’s already present, but it’s being made good use of by the creditors on Wall Street, in London and in Paris. They say: If you don’t save Greece, the world will collapse. In truth, their asset portfolios will collapse, not the world.

He thinks that Greece should use the latest €130 billion tranche of the troika support funds to cushion its exit from the Euro. Interesting…and timely, given that the game (not just DD’s game) now seems to be almost up.

344

christian_h 02.18.12 at 5:23 pm

John (338.): yes of course that’s why various other member states are not in the Euro – because Greece couldn’t help but join, forcibly dragged in by the Fourth Reich. And I had forgotten that Hemut Kohl threatened invasion of every other EC country if they didn’t accept the German Maastricht diktat. It also clearly slipped my mind that Chancellor Schroeder personally made sure that Greece slightly misrepresented their budget figures in order to join the Euro – without a doubt against strenuous protests from Greek government officials.

Then again, pointing out that SNCF isn’t privatized didn’t convince the comrade either – in his view, M. Thatcher was forced by the EC to privatize BR, by hook or crook.

345

JW Mason 02.18.12 at 5:25 pm

I’ve seen it asserted elsewhere that the Greek current-account deficit is now essentially made up of a) oil and b) debt service.

A little poking around on Eurostat suggests the following approximate breakdown (in billions of euros):

Balance on goods: -25
… of which oil: -10
Balance on services: +15
Balance on income: -2
… of which interest: -1.8

So yes, it’s essentially all oil and debt service, but really it’s essentially all oil. (It would be interesting to compare Argentina pre-default; maybe I’ll do that on my own blog.)

Greek GDP is around E160 billion, so that works out to a current account deficit of 7 percent of GDP, and a deficit on goods and services of 6 percent of GDP.

346

JW Mason 02.18.12 at 5:51 pm

Oops! Sorry, Eurostat does not annualize quarterly data. I corrected that for the goods and services balances, but forgot to for the income account. So it should be:

Balance on goods: -25
… of which oil: -10
Balance on services: +15
Balance on income: -8
… of which interest: -7

Making “essentially oil and debt service” look like a much better characterization.

Ugh. I also got Greek GDP wrong, it’s more like E220 billion, so that gives goods and services and current account balances of -4.5% of GDP and -8% of GDP respectively.

Meanwhile, Yanis Varoufakis today is pitching an approach that doesn’t show up in this game: default, plus stay in the Euro, plus ECM support for the Greek banking system. In DD’s version, the only option for financing the current account deficit is fiscal transfers, but in principle you can avoid that if the ECB buys *private* debt from Greek banks on a large enough scale.

347

JW Mason 02.18.12 at 5:52 pm

ECM s/b ECB.

348

JW Mason 02.18.12 at 5:54 pm

Re Sebastian @339, one can’t help noting that the political relationship of Alabama and Mississippi with the federal government has not been entirely uncontested.

349

silbey 02.18.12 at 6:01 pm

There’s no Kobayashi Maru maneuver available, is there?

350

Dragon-King Wangchuck 02.18.12 at 6:26 pm

If you’re still tallying, I ended up at #10 as well. A great game, but I’m a bit uncomfortable with playing it because despite the very little as I know about economics, I know even less about Greece.

My question is about the whole “Greece can not realistically produce as much as it consumes” thing. Has this always been true? I mean, didn’t Greece do pretty well after the troubles leading into the early seventies? Well at least up until teh global financial meltdown.

I mean demand for shipping and tourism aren’t going to just disappear. Maybe temporarily retract, but if anything these seem (to me) to be pretty sound industries moving forward past the next couple years.

Is it just a question of state revenues? It’s not like the multi-billion euro tax evading black market only started developing since 2000. Aren’t most of the “entitlement” issues that the Greeks were indolently wallowing in and have to have fixed with brutal austerity – well hasn’t Greece had those issues even during times of extraordinary growth?

351

geo 02.18.12 at 7:06 pm

343: They say: If you don’t save Greece, the world will collapse. In truth, their asset portfolios will collapse, not the world.

Well, which is it?

352

William Timberman 02.18.12 at 7:54 pm

geo @ 351

I have no idea, but it does seem that in the view of a certain class of people, their asset portfolios are the world. My own take on it is that conceiving of the world as divided into Wille und Vorstellung has always had its limitations, and that our present difficulties are just the latest manifestation of them. Then again, I’m currently reading Graeber’s Debt, which presents all sorts of interesting new (for me) insights into the difference between what exists and what we make of it. I can’t help being haunted, though, by his recitation of the body counts which have accompanied each new Vorstellung. It makes you wonder whether individual human experiences amount to much of anything, except to those condemned to them.

353

robotslave 02.18.12 at 8:14 pm

The Pentagon is not the means by which continuing transfers are made to certain states in the US, as implied @342. Nor is stout patriotic camaraderie, as suggested @339.

The mechanism is the progressive federal income tax*. The Alabamæ aren’t getting a juicier federal spending package** per person than the Illinoises. Rather, the Dakotaken are simply putting less into the kitty, on account of being poor and thus paying tax at a lower rate.

* Ah, but what about corporate taxes, you ask? This is America we’re talking about— corporations are people! Rich people. And they live in the same places where all the other rich people live.

** I’m sure one of the three people reading this is either sputtering about pork, or working up a demographic argument about social security and medicare. Sure. But the effect of variation in the pork spread*** or the density of retirement homes pales in comparison to the effect of tax brackets.

*** OK, except in Alaska, with its minuscule population and utterly bonkers oil royalty. And to which the implied argument @348 doesn’t apply. And it’s not even pork, strictly speaking, as the royalty is paid according to the 1959 terms of statehood on joining the union.

354

Barry Freed 02.18.12 at 8:23 pm

FWIW and at this late date, having already noted above at comment #19 that I arrived at the full Argentina, I forgot to add as per your request that I felt very strongly indeed that I’d been bamboozled into doing something I didn’t want to do. Looking at the various end state options available I’d wanted to get to something like 5 but wound up listening to Evita nonetheless.

355

ARTIE 02.18.12 at 8:35 pm

Great post! Loved it !
I got to 45 ! Scrolling down the comments (maybe I missed some) , I saw it wasn’t a very popular result . Only 2 ended there , the one admitting he picked 50% of the alterantives by chance. Being a Greek, living in Greece, I think Maynard’s “…you’re asking the Greek side to bear much more in the way of austerity and humiliation than it’s capable of…” could be repelled with appropriate political practice and communication policies from both Greek and European politicians .
@Meredith (131) Thanks for the Heredotus extract . I confess Ididn’t know it. As a Greek knowing the exact meaning of “Penia” and “Amechania” , I hate to leave myself in the hands of these Gods.

356

Henri Vieuxtemps 02.18.12 at 8:50 pm

The Alabamæ aren’t getting a juicier federal spending package** per person than the Illinoises. Rather, the Dakotaken are simply putting less into the kitty, on account of being poor and thus paying tax at a lower rate.

Taking less doesn’t constitute a transfer. If state A pays less than state B, and then all the loot is spent of building and operating an ammunition factory in state B, then, despite paying less, state A is being robbed by state B.

357

Stephen 02.18.12 at 8:50 pm

Suppose we try playing this admirably interesting game set back a few years, from the time of the beginning of the crisis.

1. “Do you think that Germany (and Netherlands, Finland, etc) can sell any more fiscal transfers to Greece, given their domestic politics?” Well obviously, a few years ago, yes, they did. Go to 32.

” The Greek current account. Are we going to aim to bring it roughly into balance?”
Looking at http://www.tradingeconomics.com/greece/current-account, there was never any such aim. Go to 48.

“What’s the debt strategy?” The actual strategy as it developed “We have to find a solution within the constraints of the current nominal debt level. We’ve got a certain amount of private sector writedown, but there won’t be any more”. Go to 29.

Maynard screws up his face, like he’s tasted something sour… “Greece is going to be a constant debtor on the brink of default, continually in breach of its debt and defict targets and at the mercy of the troika; so it will effectively have a constant IMF program in return for its current account financing. At the right level, however, this might not be the worst plan – basically, it’s can-kicking forever. It’s economically equivalent to a plan whereby we just negotiate a writedown in return for a permanent IMF program.

Maynard passes you a slim folder. “I happen to have had such a plan in my bottom drawer”. Go to 5.

“In terms of consumption smoothing and reducing the fiscal adjustment, I don’t think you’ll do better – you’ve written down the debt and you’re getting structural current account funding. But there is not really much escaping from the fact that Greece is not going to get back to the levels of consumption (or more accurately, the gap between consumption and production) that it saw in the 2000s … But at least this plan sorts out the debt, and gets Euroland on the road to fiscal union. Let’s get it written up”.

THE END

So we’ve followed a logical path to an acceptable conclusion. Now what can possibly have gone wrong?

358

Jason McCullough 02.18.12 at 9:44 pm

An interesting angle I haven’t seen discussed much is what the best plan would be if you completely ignore politicial viability. Something like “the ECB buys all the problematic debt and the Greek government behaves perfectly” – what do they do to get the imbalances under control then and fix the excess consumption?

359

robotslave 02.18.12 at 10:14 pm

@355

Er, are you pulling my leg, or are you just sort of fixated on The Pentagon?

Take 105 fruits from A, and 95 fruits from B. Now give A 51 apples, 29 oranges, 17 bananas, two pears, and a mango. Give B 52 apples, 27 oranges, 18 bananas, and three pears.

Each state has received 100 fruits. You have transferred 5 fruits from A to B.

The apples are social security and medicare. The bananas are wages, jeeps, jeep repairs, and office supplies, all for your army mens. The pears are bandages and Prozac for former army mens. There are lots of different kinds of oranges, none of them militarized. The mango is a new Predator Drone operations center.

A was robbed of five fruits. A got the mango. B got more total military fruits.

360

Blackeyebart 02.18.12 at 10:40 pm

Good fun and fair enough that working within the system seldom solves really big problems. The very problems that working within the system was supposed to prevent.

One of the interesting side issues is how perceptions slide depending on your viewpoint. When they were buying Greek bonds the ECB stressed the market price. Now they own them they are stressing the denominated value.

Many people get hung up on the illegality of defaulting, yet when has defaulting ever been legal?

The emergence of a new Greek currency is being sold as a means of devaluation, but it should be obvious that introducing a new currency of no fixed value is an invitation to burn the banks. The fact that it doesn’t exist as notes and coin makes that certain. It should be obvious, but it isn’t. Almost no-one agrees that this might just be be problem. Because they don’t see the pothole they cannot avoid it. (For the record I oppose burning banks. It won’t help.)

The only way to achieve a “successful” default is to stay the Euro. Greece has that choice, but many think that the ECB has the power to prevent that. But how? Greece would have to set up capital controls but Eurocash will flow across borders anyway.

You have established that the conventional wisdom does not provide an answer. But strong action from Greece would create a situation where Mr Maynard would be arguing against cementing in place the powers that Greece has taken. When you have nothing to lose why not negotiate?

361

Henri Vieuxtemps 02.18.12 at 10:44 pm

I don’t know about fruits, and social security/medicare is payed to individuals, who move around, between states. Moreover, the social security tax is REgressive, and social security benefit of an individual strongly correlates with his/her average contribution. Not much of a state to state transfer there, if any.

Military spending, on the other hand, accounts for about a half of the rest of the spending. I don’t have any numbers, but intuitively military spending must be the largest by far (if not the only) component responsible for the state to state transfers.

362

G. Mcthornbody 02.18.12 at 10:55 pm

I missed this from yesterday. http://www.project-syndicate.org/commentary/stiglitz148/English

why should an involuntary restructuring lead to worse contagion than a voluntary restructuring of comparable depth?

I’ll have to play the Greek adventure game again.

363

Tom Bach 02.18.12 at 10:58 pm

About half of fiscal 2010 discretionary spending paid for defense, and most of the rest went for domestic programs such as agricultural subsidies, highway construction, and the federal courts (see figure 3). Only 3 percent of discretionary spending funded international activities, such as foreign aid.
http://www.taxpolicycenter.org/briefing-book/background/numbers/expenses.cfm

tax rates
http://www.economist.com/blogs/dailychart/2011/08/americas-fiscal-union

364

Tom Bach 02.18.12 at 11:04 pm

That should have been tax rates after transfers; PR has a negative 200 odd percent. NM is around negative 190

365

John Quiggin 02.18.12 at 11:04 pm

Following up my earlier comment, I found the answer at 17. Fixing the ECB isn’t a real-world solution, and therefore we are all screwed. That seems about right to me.

366

James Edwards 02.18.12 at 11:10 pm

I was able end at #5 which was needed in the first place even though I would be taking lots of flak in the process.

367

robotslave 02.19.12 at 12:25 am

@363

Transfer calculations do not leave out mandatory federal spending, apart from debt service or other spending that doesn’t go into states. Nor should they.

@361

I don’t think we can continue this conversation until we agree on what a “transfer” is. To me, it involves both collection of revenues on one end and spending on programs and services on the other. And when I look at both of those pieces, I see far more variance on the collection side due to graduated federal income taxes than I see on the disbursement side due to lopsided discretionary (pork-barrel) spending.

In 2009, the US spent $705B on the military, including veterans affairs and supplemental war allocation. The US population was 306M. Federal military spending in Alabama was over $12B, 1.7% of the US total. The population of Alabama was 4.75M, 1.5% of the US total. Therefore, Alabama received higher than average per-capita military spending. And yet Alabama was then, and still is, a net recipient of transfers.

I just don’t see how you can argue in the face of those numbers that The Pentagon is somehow the broker of interstate transfer payments. I’m also increasingly convinced that you’re simply obsessed with The Pentagon, and not particularly interested in the topic I thought we were discussing.

368

Sebastian 02.19.12 at 12:36 am

“When 90% (or whatever the number) of all taxes are collected by the central government, the provinces get no autonomy. And these transfers, what are they? I bet it’s done mostly though the pentagon.”

Ummm, no. And also no. First the tax take of the federal government vis a vis the states is nothing near 90%. Federal tax is nearly all income tax, while states (except Nevada and I think one or two others) get both income taxes and sales taxes. I’m not sure what the exact breakdown is but I think a good thumbnail sketch sounds like 60-40 or 65-35. And that isn’t counting the progressive nature of the federal tax, by which people in California and New York (who on average are MUCH richer) get taxed at a noticeably higher rate.

So even on the ‘tax in’ stage of things states like Alabama and Mississippi are doing well compared to other states. But they also get more per capita out of things like Social Security, Medicare, Medicaid, Food Assistance, Electricity Assistance, Housing Assistance, etc. Essentially for almost any major social program in the US (and contrary to popular belief their numbers are large) these states get more per person than the rich coastal states.

The military thing used to be spread around much more, but after the base closing commission that isn’t true. And if you are talking pure defense systems spending you’re talking about Virginia, California, Texas and Florida, and I think Colorado (not the net recepient states.

The idea that Mississippi and Alabama have no autonomy is frankly deeply weird. At this point they certainly have more autonomy than Greece. And they arguably had more autonomy than say Poland under the USSR umbrella.

369

Peter T 02.19.12 at 1:13 am

Comments along the lines of “Greece must shape up, end corruption, establish a clean efficient tax system etc, etc” amount to “Greece must become just like what we imagine Germany/UK/Holland to be” ie – NOT Greece. It’s a patronal society, it’s social support networks and much else are based on a web of personal ties and obligations. The transition would be wrenching, long term and involve a lot of hurt. And if the end of policy is to mould us all to some version of Dusseldorf then the Greeks (and many others) are unlikely to buy in.

On another point, if access to oil is part of the Greek problem, Iran has lots going cheaply in special deals. If you are going to annoy the Great Consensus, then you might as well go all the way.

370

john c. halasz 02.19.12 at 2:12 am

@350:

Pardon me for interrupting these earnest deliberations with cheesy clips from a cheesy movie of cheesy Greek nationalist narrative, except that it might be informative with respect to mentalities, beyond neo-liberal financial niceties. (I’ve deliberately chosen the English subtitled versions rather than the best musical versions).

http://www.youtube.com/watch?v=NdMy_RyIpQk

371

Peter Whiteford 02.19.12 at 2:41 am

I got to 5 on the hyperlinked alternative quite quickly – but that’s probably cheating because I read the most of the earlier comments along the way.

Also Stephen’s later comments at 357 are a bit worrying.

372

JW Mason 02.19.12 at 4:29 am

Stephen @357 reframes the issue in a very provocative way. I would be interested in seeing Daniel’s response, if he’s still reading.

373

robotslave 02.19.12 at 5:51 am

@368

A minor quibble: state and local taxes (sales tax, property taxes) are spent almost entirely in-state, and don’t figure into transfers. Except for debt service, for that portion of debt held by other states, or entities in other states, but that sounds like such an stupendous pain in the nubbins to track down that I’d very much prefer to just make the assumption that it would be so small as to put no appreciable dent in transfer totals.

Transfers are done by the Feds. And the primary mechanism of transfer is the graduated income tax. The “rich” states still have quite a lot of public-assistance beneficiaries in them, and the two gorillas, Social Security and Medicare, are not means-tested (yet. It seems likely they will be, sooner or later. Sigh).

At any rate, I think this is unlikely to affect anyone’s thinking about transfer payments to Greece from United Europia, as the general consensus seems to be that they’re 1) politically impossible, 2) unsustainable, 3) won’t solve the problem* anyway, and 4) induce ideological vertigo.

 

* “the problem” here referring to the narrower problem of “Greeks are shiftless layabouts who need a little spine put in them.” This is, of course, a problem entirely of perception, but ongoing transfer payments to Greece would exacerbate it.

374

robotslave 02.19.12 at 6:49 am

@357

Go to 32.

“The Greek current account. Are we going to aim to bring it roughly into balance?”
Looking at http://www.tradingeconomics.com/greece/current-account, there was never any such aim. Go to 48.

I think you’ve tried to pull a fast one on us. Go back to your chart, and set the start date to Greece’s entry into the eurozone, January 2001.

Notice that with the scale of the y-axis adjusted, and a longer history, it becomes apparent that since the crisis, the current account has in fact been heading substantially in the direction of balance, not away from it, nor stagnant.

So from 32, turn to 14.

From there, it’s pretty clear we go to 39 (chop government spending) and on to 4 (stay in the Euro). To go on to 7 from there would be to implicitly choose massive Euroland spending in Greece, which obviously didn’t happen. So we go instead to 31, where we did not bring in a German tax commissioner, and we end up at 19:

19:
Maynard is chewing his lip; he is frustrated, although not unsympathetic. “This is pretty close to the current state of negotiations”, he says…

375

robotslave 02.19.12 at 7:00 am

As an aside, could someone in the IT department please turn off the bbcode or wiki-formatting or whatever it is that’s turning asterisks into bullet points, and converting double quotes into open-close pairs, and bunging up blockquotes? Or perhaps give the user the option to disable it? Or at least document the mystery formatting-language along with the HTML tags in that little yellow box under the comment textarea?

376

JW Mason 02.19.12 at 7:45 am

robotslave, I have probably asked about this 20 times over my years commenting here. The response is pretty much invariably, “Oh but it’s great to have this secret formatting code — look, here’s an example of the cool stuff you can do with it.” Followed inevitably by a second comment saying, “Oops, that’s not what I thought would happen.”

377

UserGoogol 02.19.12 at 7:57 am

Henri Vieuxtemps: It’s not actually linearly correlated. The Social Security benefit formula is a nonlinear function of how much you pay in. They take your average income under the cutoff over thirty five years, adjust it for inflation, and then you get 90% of the value of that under $767/mo, 32% of the value between $767/mo and $4624/mo, and then 15% of whatever’s left. So if you made a low income, you get a higher percentage of your previous income as SS benefits. Of course on the other hand lifespan varies, but still there’s a very real redistributive component to Social Security.

378

UserGoogol 02.19.12 at 8:02 am

And of course Medicare and Medicaid is a very big part of Federal spending too, and there the benefit system is completely different: you just get health insurance.

379

robotslave 02.19.12 at 8:08 am

Ah, of course.

I was obviously assuming rather too much of an entrenched public services administration when I thought that surely there must be someone in the building who either a) is willing to terminate a redundant program that, small and vocal pool of beneficiaries notwithstanding, actively punishes most of the public, or b) actually understands the program well enough to explain it to anyone.

380

Henri Vieuxtemps 02.19.12 at 8:28 am

@365 Therefore, Alabama received higher than average per-capita military spending.

Per capita spending alone doesn’t tell you anything. If the amount of federal tax per capita in Connecticut is 2 times of that in Alabama, and per capita military spending in Connecticut is 1.5 times higher than in Alabama, then Alabama is still getting a net plus transfer.

The idea that Mississippi and Alabama have no autonomy is frankly deeply weird. At this point they certainly have more autonomy than Greece.

Now, that’s just ridiculous. Without getting into details, just the fact that we are discussing a realistic possibility of Greece quitting the euro should tell you everything about their levels of autonomy.

381

Henri Vieuxtemps 02.19.12 at 8:43 am

Henri Vieuxtemps: It’s not actually linearly correlated.

I know, and never said it is linearly correlated. It is positively correlated, however.

Any any case, while social security and medicare do indeed result in an interstate transfers, it is coincidental. If tomorrow Connecticut becomes the state with highest concentration of retirees, it’ll get the loot, instead of Florida.

382

robotslave 02.19.12 at 8:49 am

@380

We can continue this discussion if you can provide a definition of interstate transfers that I can at least get a quantitative foothold on. As it stands, I have no idea how you’re calculating them, or if you’re even making a good-faith attempt at numerical argument at all.

383

Henri Vieuxtemps 02.19.12 at 8:57 am

Taxes collected in one state and sent to another to be spent there would constitute a transfer.

384

robotslave 02.19.12 at 9:23 am

@383

I can’t do any quantitative assessment with that. What I would need in addition is your description of which specific taxes collected in states count toward transfer balance, and which specific means of “sending” those taxes to other states would count. I would also, of course, need similar definitions of any other forms of transfer you’re planning to count toward the totals.

385

Peter Whiteford 02.19.12 at 10:28 am

386

nearlyretiredanticipatingpension 02.19.12 at 10:51 am

I get quickly to 52, “the full Argentina”. Not through malice but necessity.

Then I scrolled back to 69 and 129. Ouch.

Then I noted your comment Daniel: “But I don’t think my wording helps and looking back at #1, I think I could have done a better job in nudging people toward the idea that “No money” is actually a quite extreme assumption to make.”

Extreme? You’re joking, surely? In real life at the household level “no money” is the frequent, sensible and necessary response to costly ambitions and enticing gambles.

So I’ve learnt something – the small discipline of personal budgeting bears little relation to the grand game of money. Thanks.

PS: I know nothing about economics, but I didn’t need to say that did I.

387

jonytk 02.19.12 at 11:32 am

I end up in 30!!, and althought it says greeks are not going to take it;
it’s what is going to happend.

388

Guido Nius 02.19.12 at 11:48 am

Late to the game (I enjoyed it, thanks).

I got to the end in 4 steps when taking the ‘get it over with’-decisions and it took me 8 (or 9) steps when taking decisions which seemed less Santorumish. With that I don’t know if I have learned what is the right plan forward but I do think it is safe to assume that if you are really serious about trying to find the right plan it is going to cost you time. If you do not want to spend the time, you can always take a quick way out. You can try to combine that with the ‘moral high road’-feeling, but your interest will be more in being proven to be right than in finding the balanced way out.

Anyway, in a more or less fair world, there will always be transfers insofar as they are there to expediate a situation in which such transfers are no longer necessary. What I would prefer is that the transfers were transfers and not loans or if loans then loans on a friendly basis. It might be humiliating for Greece to have to accept ‘gifts’ but it would be better to regain pride rather than to overshoot on a primary surplus. Not even such countries as have started world wars should be subjected to debt prison.

389

Oliver 02.19.12 at 12:04 pm

The emergence of a new Greek currency is being sold as a means of devaluation, but it should be obvious that introducing a new currency of no fixed value is an invitation to burn the banks.

Why would you think so? Paying back some of the debt with the printing press means that the banks get back more in nominal terms. In addition, a bank run makes more sense
while you fear a future devaluation or you know that the government cannot print money to prop up failed banks.

Secondly, if you have the choice between killing your banks or killing the real economy by deflation, you kill the banks.

The physical currency is a red herring. You send the police and/or army into the banks and stamp the seized notes. Nobody has an incentive to forge such a stamp.

390

Stephen 02.19.12 at 1:27 pm

robotslave @374

No, I wasn’t trying to pull a fast one: and in my opinion you are being a little disingenuous in wanting to look at data starting from Jan 2001, being the beginning of the Euro. The relevant date for my thought-experiment is surely the date at which, with Maynard’s advice, the hypothetical search for a solution to the crisis began; and saying that the financial crisis began in January 2001 is rather like saying that the catastrophic defeat of the Japanese navy began in December 1941. Rhetorically effective, but misleading as a guide to the relevant choices of strategy at the time.

All that looking at the Greek current account data from 2001 establishes is that the balance became steadily worse till 2008, and has remained bad ever since. You say that “since the crisis, the current account has in fact been heading substantially in the direction of balance, not away from it, nor stagnant”. If you date the crisis from the time when Greek government borrowing costs started to rise, October 2009, the subsequent course of the current account seems to me to have been affected by two factors. One is the annual peaks that correspond to the Easter and summer holidays; unsurprisingly, these always show an improvement on the autumn figures, though it is noticeable that these peaks were less in 2011 than in 2010. The other is an improvement in the year-end dip between 2009 and 2010, though not between 2008 and 2009 or between 2010 and 2011.

You will remember that Maynard’s question at 32 was “The Greek current account. Are we going to aim to bring it roughly into balance?” If that has in fact been the Greek government’s aim, it must (for reasonable values of “roughly”) have been a distinctly long-term one. I’m assuming that the plan Maynard has to advise on is not that long-term: it’s a crisis, isn’t it?

391

robotslave 02.19.12 at 2:05 pm

@374

My apologies, I didn’t mean to imply that the crisis began in ’01; I meant only to imply that when a larger time frame is charted (did you actually try this?) it’s much easier to see that the current account since the ’09 crisis has in fact been moving in the direction of balance, not against it, nor stagnating.

In general, shorter terms (smaller samples) are more distorting when you’re charting data; this is a tried and true spin-doctoring tactic. I shouldn’t accuse you of giving us a misleading chart; it is unfortunate, though, that the default period displayed on the page you linked is potentially misleading.

And yes, I do rather think that the term over which one might expect to crawl out of a hole that deep and back up to rough balance, particularly in the midst of a crisis, would be more than two years.

392

Peter Erwin 02.19.12 at 2:29 pm

Henri Vieuxtemps @ 342:
And these transfers, what are they? I bet it’s done mostly though the pentagon.

Well, no.

This is a 2008 breakdown of “Defense Department” vs “other agencies” spending on a state-by-state basis in the US. The Defense Dept. portion is typically between 10% and 20% of federal spending in each state. (Outliers: W. Virginia: 4%; New York, Idaho, Iowa, and Minnesota all about 7%; Alaska: 38%; Texas: 40%; Virginia: 44%.)

The two states with federal spending/federal taxation ratios of 2.0 or more were (as of 2005) Mississippi and New Mexico, in which the Defense Dept. share of federal spending was 20% and 11%, respectively.

393

robotslave 02.19.12 at 2:51 pm

@386

I think the lesson you’ve learned is in fact a rather valuable one: that national budgets are actually not much like household budgets at all.

There are quite a lot of pundits and think tanks hard at work to convince us otherwise, but that doesn’t mean we’re going to start building howitzers in our kitchens*, or that your government can collect disability pay if it falls off the loading dock at work.

 

 * well, most of us, anyway.

394

Henri Vieuxtemps 02.19.12 at 2:51 pm

Sorry Peter, I already responded to a bunch of similar ‘well, nos'; it’s too boring to start repeating it. See above.

395

Vassilis 02.19.12 at 3:54 pm

1 – 32 – 14 – 39 – 4 – 7 – 27. Not sure there is a catch there. Seems to me politically and economically feasible. “External administration” for investment funds is much more sellable (to the Greek public) than administration of wages and pensions. And the “Germans” may not be to averse to “putting money”, because this will be investment money that will generate profits.

396

wasistweimar 02.19.12 at 4:32 pm

53. What do the Germans want more: to maintain the Euro or to punish Greece?

397

Stephen 02.19.12 at 4:35 pm

Robotslave@391

Gracious apology accepted.

Yes, I did look at the whole series from 2001, hence my comments about things getting worse from then to 2008.

Yes, you’re right about short-term datasets being hard to interpret, but they’re all we have. Taking a look at another source, the tradingeconomics.com site: if we date the Greek government debt crisis from late 2009, we have then 2010 with the deficit at 11% of GDP and 2011 at 10.5%. I wouldn’t want to argue from those figures that the account will “roughly balance” by 2030, long after Maynard’s retirement, but I would suggest that we are not looking at a policy response to the crisis that was intended to operate at all quickly, as far as the current account is concerned.

But why peer into the crystal ball when you can read the book? Somebody better informed than I must know what measures, if any, the Greek government did actually undertake after the debt crisis began to balance the current account, and over what time these were expected to work. NB measures actually undertaken, not vague aspirations.

Can some deep student of the crisis please oblige?

398

Diana Issidorides 02.19.12 at 4:49 pm

This is a great post. Fun and educational. I ended up at #53, but I’m going back to play with different alternatives.

399

MPAVictoria 02.19.12 at 5:25 pm

How about an option where the people revolt and line up the bankers, politicians and technocrats against the nearest wall?
/Mostly kidding
//Really enjoying this piece David.

400

Vsquared 02.19.12 at 5:38 pm

Played it twice (one critical decision can go either way). Ended up in 53 or 28. I can see how one can easily end up in 5. I am glad I read Dsquared’s comment about 17 — 17 riled me up.

Kudos and chapeau for the effort. I’m impressed.

401

Doug 02.19.12 at 5:38 pm

DD @330 “They can’t handle a Euro exit, because that’s a totally chaotic and unplanned event that would immediately delay all sorts of payments and then possibly settle them in drachma when the corresponding liability is in euro. The actual first round damage done by this might be quite small, but the thing is that nobody would know, and so what happens then is you tend to get “wait and see” behaviour – but “wait and see” is basically equivalent to a continent-wide bank run.”

Just so. I’m reminded of the 150 German economists calling for an orderly delay of the euro’s introduction in, what, late 1997? Maybe Jan/Feb ’98? By that time, you could have order, or you could have delay; what you could not have was both.

402

Vsquared 02.19.12 at 5:40 pm

BTW, what is meant by “fiscal transfers”? EU structural funds? We got (more than) our fair share in the 80s and 90s, but not so much lately, I think. I hope loan-based aid packages, such as the current ones, aren’t considered fiscal transfers, right?

403

Vsquared 02.19.12 at 5:40 pm

“We” means Greece above, by the way.

404

Sebastian 02.19.12 at 5:45 pm

“A minor quibble: state and local taxes (sales tax, property taxes) are spent almost entirely in-state, and don’t figure into transfers.”

Correct, but since they are spent almost entirely in state, and almost entirely at the discretion of the state, they represent a fairly high degree of autonomy–which Henri appears to deny.

“Now, that’s just ridiculous. Without getting into details, just the fact that we are discussing a realistic possibility of Greece quitting the euro should tell you everything about their levels of autonomy.”

Ok, this was just lazy writing on my part. Mississippi and Alabama have enormous amounts of spending autonomy (which is certainly one of the most important facets of state autonomy on a practical level)–EVEN THOUGH they get large transfers. I.e. the fact that they get large transfers doesn’t for the most part mean that they get less autonomy.

My response was to your “I don’t know if it’s as obvious to everyone as it is to me, but ‘structural fiscal transfers’ = ‘fiscal union’ = ‘the loss of sovereignty’ = ‘no democracy’. It comes with “the power to regulate interstate commerce”, which means, in practice, that the central government has more or less a complete control over all socioeconomic conditions in the regions. ” and the response was “Alabama and Mississippi both get ongoing very large transfers and are not under the complete socioeconomic control of Washington DC. And they are substantially different from the midwest states that get large transfers, so inter-state variety is clearly possible.

That said, we do that in the US because we think of people from Alabama as “Americans” and I’m not at all sure that “Europeans” or whatever has the same valence. But the US experience suggests that you can have transfers for more than a hundred years with a minimum of griping and still quite a bit of state autonomy if you have the right political framework/mindset (the mindset may be the more important part).”

I think by now asking us to focus on the ‘right’ to leave the EU or the US, you’ve accidentally abandoned your point about socioeconomic conditions. So to come back to it, it is quite possible to have very large, very long term economic transfers and not end up under the “complete socio-economic” control of the transferring party. You should visit different states in the USA, they really truly are very different from each other. I’d venture to say that people are often fooled by the common language. The difference between New York and California is at least as great as France and Germany, and much greater than say Holland/Germany. The difference between Idaho/Mississippi/Alabama/Missouri/Minnesota is as big as even say Portugal/Greece/Holland. And you’ll note I haven’t even mentioned Texas, which is completely different from nearly the rest of the US.

“Any any case, while social security and medicare do indeed result in an interstate transfers, it is coincidental. “

This is using ‘coincidental’ in ways that I’m unfamiliar with. Alabama and Mississippi get net transfers because they are poorer on average and across multiple dimensions than people in richer states. That is ‘coincidental’ in the sense that if it was Delaware that was poorer, it would be getting the net federal transfers, but not ‘coincidental’ in any other meaning of the word. Mississippi and Alabama have been poorer for a hundred years. So it isn’t coincidental that they get more transfers, they get more transfers because they have more of the poor people.

I’m pretty sure that we wouldn’t be having this discussion if Greece was as rich as Belgium. So we’re having this discussion because Greece is where many of the poor are. For a while this was dealt with by issuing large ‘loans’ that aren’t getting paid back.

405

Thanassis 02.19.12 at 10:42 pm

Hi people,

a greek person speaking. I have to make a small comment on political vs. economical factors with respect to which ones are going to weigh more in my opinion.

It is (at least according to my personal experience) evident from the politics and the way the people see them in Greece, that a sizeable bit of more austerity imposed from Europe is going to cause even harder resistance from greek middle-class (which are on the way of becoming low-class, if not already there, and are THE most numerous part of society still), which in turn is going to direct their vote to the conservative and very nation-oriented-going-populist parties (at least if they don’t change their life views overnight or if something horrible doesn’t happen and given that the ideological alternatives at this moment in Greece are still meager), which is going to mean for Greece going itself willingly out of the Euro and refusing to pay the debt, with the goods and the bads that this brings. The up part for the greek politicians that way is that it creates their own baron-state with no one to tell them what they do, the down part is that they won’t get so much money and votes, but they can work this out I think. For the people in Greece there is no up part in this scenario, but then again maybe there isn’t in any (at least short-term). So one has to take that into account when wondering about if one or other fiscal policy will work.

I think, however, that the aforementioned scenario doesn’t suit anybody, so it’s all about finding a solution which is tractable in the euro and long term, which of course depends on Europe’s and Germany’s concessions – which is interesting for me, as I am Greek but living in Germany and paying my taxes here. So I win/lose either way!

Anyway, the “make your own plan” game got me to 10…but a lot of other plans I find as plausible, and none of them do I find nice (it is however a nice and challenging problem). As a reply to 225, I think one has to see, that what the greek people are going through is painful, but I really think that apart from other things, that is the result of not making informed choices or not caring enough for the future. And that of course is the mistake of the previous generation, so mine (I am 27) are paying (literally and metaphorically) for it now. So what I would suggest apart from all this policies to save Greece, is to try to educate people more about what their (political) actions mean in today’s (economic) world. If not, the “greek problem” will sprout again somewhere else.

406

AK 02.20.12 at 12:05 am

I blundered through the first time and ended at 25: hitting the not-so-golden combo of a disorderly default and yet more austerity for Greece.

The one I wanted was 28: Greece exchanging a getting a less wrenching transition in exchange for giving up quite a lot of sovereignty. I got there in the end.

By the way, you are a superb writer.

407

Sam Dodsworth 02.20.12 at 10:10 am

Daniel@332 Thank God we’ve got rid of all that awful austerity! Just a little bit of energy rationing!

This got me thinking… when I hear “austerity” I think of nasty right-wing policies that punish the worst off. So my first reaction to this was that energy rationing would be much better than (say) selling off public assets or a massive cut to the heathcare system. Which, in turn, makes me think that the terms of a bail-out or default are much less important than the domestic policies that go with it. But my impression is that the terms of any bail-out would effectively require the Greek government to pursue nasty right-wing policies?

None of which is a tremendous insight, I know, but I think it’s the elephant in the room here. Just talking about the flow of money only gets us so far.

408

deliasmith 02.20.12 at 1:16 pm

The difference between New York and California is at least as great as France and Germany, and much greater than say Holland/Germany.

No it isn’t.

409

Steve LaBonne 02.20.12 at 1:54 pm

Re 407, for most of the people pushing austerity, the nasty right-wing policies are a feature, not a bug.

410

SamChevre 02.20.12 at 3:51 pm

Any any case, while social security and medicare do indeed result in an interstate transfers, it is coincidental.

But IIRC it’s still the biggest component of the “Red States get more than Blue states from the Federal government” issue, since a lot of people (e.g.) work in New York, and retire in Florida.

So maybe that’s the solution; Germany gives a 1% higher pension to any German pensioner wo lives in Greece.

411

Henri Vieuxtemps 02.20.12 at 4:00 pm

They, and the Brits, already retire to Spain in droves. All it does is creating RE bubbles.

412

ajay 02.20.12 at 4:25 pm

So maybe that’s the solution; Germany gives a 1% higher pension to any German pensioner wo lives in Greece.

I suspect that Germans might not be very keen to retire to Greece right now, given what the Greek papers have been saying about Germans for the last year and a half.

413

robotslave 02.20.12 at 5:27 pm

@410

it’s still the biggest component of the “Red States get more than Blue states from the Federal government”

It isn’t, though. There is no meaningful correlation between the states with the highest percentages of senior citizens and the states that receive the most federal spending per tax dollar.

There is, however, a very good correlation between the poorest states and the ones that get the most for their tax dollar— because poorer people pay income tax at lower rates.

The redistribution happens overwhelmingly on the collection end, not on the disbursement end.

The erroneous “more benefits” explanation is the result of lefties making political hay about the transfers, the spin going along the lines of “oh the righties are such hypocrites look at them wallowing in benefits at the expense of the lefty states.” The truth of the matter is that “red” states get more benefits per tax dollar collected simply because they pay lower taxes. Because they’re poor.

I suspect us lefties simply prefer to work ourselves into a froth over “republican hypocrisy,” rather than berate the poor for voting against their (or rather, our) interests.

414

robotslave 02.20.12 at 5:31 pm

second link, for federal spending per tax dollar, should go here, but I’m sure you’ve already seen the posts on every liberal blog everywhere that have the map with net state transfers colored red and blue, next to the map of presidential election results in the same colors.

415

Richard Gadsden 02.20.12 at 5:46 pm

At point #7, can’t I have the option of “no, I want to equalise Greek competitiveness long-term by deliberately reducing productivity in the rest of the EU by trashing the German and French education systems”? Please?

I just want to see how sarcastic I can make Maynard at this point.

416

ajay 02.20.12 at 5:48 pm

I suspect us lefties simply prefer to work ourselves into a froth over “republican hypocrisy,” rather than berate the poor for voting against their (or rather, our) interests.

But do they? Poorer states tend to be more Republican, but that doesn’t mean that poorer people are more likely to be Republican. In fact, it’s those red states where the correlation between “being rich” and “being a Republican” (and “being poor” and “being a filthy socialist Muslim Communist Nazi atheist stormtrooper”) is strongest; poor people in red states are voting Democrat in droves. But everywhere in the US, if you’re rich, you’re more likely to vote Republican.

417

ajay 02.20.12 at 5:50 pm

The hypocrisy doesn’t really apply at personal level – but you can still criticise, say, Republican governors and senators, who tout the virtues of self-reliance while bringing home as much pork as they can for their own states.

418

Richard Gadsden 02.20.12 at 5:51 pm

While I’m here, how much would FYROM pay for the Greeks to withdraw their objections to the name “Macedonia”?

And how much would the Turks pay for Greece to recognise the TRNC?

Could that bring at least some money in to start bailing out the debt.

419

JW Mason 02.20.12 at 5:54 pm

Anyone who liked this post really ought to read Wolfgang Munchau in today’s FT: Greece Must Default If It Wants Democracy. It’s like watching someone with a ringside seat at the actual negotiations work through DD’s game in real time. (Interesting also the kinds of outcomes that “Maynard” is fine with, but that the FT columnist regards as an unacceptable violation of democratic principles.)

420

JW Mason 02.20.12 at 6:00 pm

rather than berate the poor for voting against their (or rather, our) interests.

Given your general level of knowledge about this stuff, it’s hard not see this as deliberately misleading. It’s well known that the partisan differences between relatively poor and relatively rich state is entirely driven by the behavior of more affluent voters. Poor people in Mississippi are no more likely to vote R than are poor people in New York. So your sneer at “the left” is baseless.

421

Tinks 02.20.12 at 6:48 pm

Hi Daniel, I’d like to approach it differently. With the ECB LTRO’ing, the bank run problem appears ‘addressed’. At least for now.
The elephant in the room is the competitiveness problem post-resolution.

Greece is crippled by the lack of a globally competitive ‘anchor’ industry. The greatest impediment to resolving current issues is the uncertainty surrounding what a still-uncompetitive post-bailout Greece means for the Eurozone and future of the Euro currency.

Given the lengths all parties to the current drama are willing to go to in order to try to find a way through (replacement of governments, rewriting of laws), the time, I believe, has come for bolder actions.

Proposed: That the IOC announce the granting of Athens, Greece as the semipermanent home of the Summer Olympic games for the 2024 (XXXII) through 3024 (LVII) Olympiads. Winter games will continue to travel, unchanged.

London hosts the 2014 games, Rio the 2020 games. By doing this now, no budgets are compromised or complicated by the change.

Starting in 2024 provides an 11 year preparation time, which is long enough for the current unpleasantness to be addresed, and preparations made.

Crucially, it gives Greece a national asset that finance can rely on delivering on for an extended period of time. That the government can use as a transition vehicle for the rebalancing of staffing levels, and that the entrepreneurial public can count on for the creation of their businesses.

Corollary benefits: you can’t turn a spade in Athens without uncovering archaeologically significant material, so any new construction would have to address this constraint – if Greek architects and engineers can develop new specialties, techniques and disciplines they can eventually be exported, for example.

Beneficiaries:
– The Games themselves: from infrastructure to organization, longer term planning and amortization provide efficiencies to the organization and management of the events and whole.
– The Competitors: now that the budgetary pig in the python is no longer a concern of hopeful hosts, budgets at all levels can restructure and focus expenditures to benefit athletes, training facilities and public education programs.
– Games Attendees: who can make long term plans and benefit from an economic ecosystem that really does cater to their needs with abundant choice.
– The Eurozone: is demonstrably United, and trade balances even out with increased tourism and economic activity throughout. Protests and molotov cocktails are bad for business!
– The Euro: becomes that much more of a real currency having taken just one more step towards political unity.

Losers:
– Potential host cities and nations whose actual ‘losses’ are theoretical.
…aaand….

For the rest of the world, the “sacrifice” is small and abstract – for Greece, the benefits are numerous, immediate, consequential and durable.

Tweet, Tumbl, blog – whatever your preference, please do what you can to get this into the broader public discussion, and hopefully to receptive eyes and ears where it matters. A democracy is at stake.

Warmest regards from Toronto,

422

robotslave 02.20.12 at 6:51 pm

@418

You’re right, it’s probably best not to refer to one myth when attempting to debunk a related but different myth. I’m sure there’s some much less provocative reason that left-bloggers like those maps so much.

I’ll definitely stand behind the contributions-not-disbursements argument, though.

And in that light, rich red-state voters (and the republicans they elect, @416) aren’t being hypocritical at all, as they tend to be rather entirely in favor of making income taxes less progressive— which would have the effect of reducing the net positive transfers indignities their home states enjoy must suffer.

423

JW Mason 02.20.12 at 6:59 pm

I’ll definitely stand behind the contributions-not-disbursements argument, though.

As you should, since you’re right, and its an important point. Which is why it bugged me so much to see you drag out the old poor-states-vote-R-eans-poor-peope-vote-R canard. But side we now seem to agree that’s a myth, no harm no foul.

424

ajay 02.20.12 at 7:02 pm

It’s well known that the partisan differences between relatively poor and relatively rich state is entirely driven by the behavior of more affluent voters.

This isn’t completely true, as noted in 415: poor Mississippians are more likely to vote D than poor Connecticutters, as well as rich Mississippians being more likely to vote R than rich Connecticutters. Rich State, Poor State goes into details

http://www.stat.columbia.edu/~gelman/research/published/rb_qjps.pdf

(Note to self: save time by picking shorter example states.)

425

JW Mason 02.20.12 at 7:08 pm

Ajay,

Sure, of course. I believe that only strengthens my original point, to coin a phrase. (Except in this case it really does.)

426

Salient 02.20.12 at 7:17 pm

I’m sure there’s some much less provocative reason that left-bloggers like those maps so much.

Wait, less provocative? No, no. We like those maps because it’s soft evidence of the fact that quite a lot of candidates decrying ‘government intervention’ and ‘welfare’ are really just bigoted exploitative assholes. I’m not going to get into details OT, but those maps are things you wave in the Republican congressperson’s face while saying, “no really; when you say ______, you’re racist. You’re not getting down on poor people paying too little tax and receiving too many benefits, you’re getting down on black poor people paying too little tax and receiving too many benefits. Look (see Fig. #1). Rural poor, overwhelmingly white. Read your allegedly non-racist statements here, here, and here. Do they apply to the white poor? No. Just blacks. In fact you go out of your way to craft statements that don’t apply to the rural poor. You’re not even just ragging on urban poor (see Fig. #2). Just blacks. Q. E. *slam the papers down on the table* D.”

427

Steve LaBonne 02.20.12 at 7:27 pm

In fact, it’s those red states where the correlation between “being rich” and “being a Republican” (and “being poor” and “being a filthy socialist Muslim Communist Nazi atheist stormtrooper”) is strongest; poor people in red states are voting Democrat in droves.

Which of course is why the Republicans in those states are so busy passing vote-suppression laws that selectively disenfranchise the poor and non-white.

428

ajay 02.20.12 at 7:33 pm

421: nice one!

One addendum:

“Losers:
– Potential host cities and nations whose actual ‘losses’ are theoretical.
…aaand….”

…aaand… the corrupt and self-important members of the IOC, who will not now enjoy their four-yearly extravaganza of being wined, dined, bribed, buttered up etc by the bigwigs of five or six hopeful cities around the world, because the decision-making process will now consist of a rubber stamp with “ATHENS AGAIN” on it.

(Oh, and BTW Rio is down for 2016; 2020 hasn’t been decided yet. London is 2012.)

Two caveats though.
First, the estimated positive economic effect of a summer olympics is about $5 billion. A boost of $1.25 billion every year would be nice, but it’s not much of an industry to have. The GDP of Greece is $300 billion or so.
Second, the continuing economic boost would of course be smaller, because a lot of that is the boost from constructing all the Olympic hardware, and Greece wouldn’t have to do that every four years.

429

Douglas Knight 02.20.12 at 10:19 pm

Robotslave@422, Peter Erwin@392 linked to a document that breaks out contributions and disbursements.

—-

1. Now I’ll *play* with the _comment_ **formatting**.

* [same link](http://www.nemw.org/images/taxburd.pdf)

430

Chris 02.20.12 at 10:24 pm

Ended at 52: “full argentina” haha :)

431

tm99 02.20.12 at 11:46 pm

The longest I got was 1 -> 32 -> 14 -> 49 -> 24 -> 1 -> 32 -> 14 -> 49 -> 3 -> 36 -> 11
Try it yourself http://jsbin.com/abidah

432

Amature Technocrat 02.20.12 at 11:58 pm

45. With an emphasis on austerity, especially for public pensions and liberalizing the labor market. Greece should be grateful that anyone is still interested in helping them.

If the Greeks won’t accept that, northern Europe should cut them loose and let them default. In other words 52 with the assumption that it will go badly for Greece. At least that would serve as a lesson to Portugal/Spain/Italy of the price of rejecting reforms.

433

G. Mcthornbody 02.21.12 at 12:43 am

So it’s Monday and I’m all excited to see what number Greece and the troika pick from Daniel’s debt game. http://www.reuters.com/article/2012/02/20/us-greece-idUSTRE8120HI20120220. Go team Eurozone?

434

Lee A. Arnold 02.21.12 at 3:42 am

(Just randomly intervening, sorry not to have read through 400 comments, my profuse apologies) According to vsquared as I remember from a Bloggingheads, Greek suicide rates have increased 40%.

435

Amature Technocrat 02.21.12 at 3:56 am

How I got to 45
32 – Additional help from Germany, etc. Greece has to make major sacrifices either way, they would be wise to accept conditions in exchange for help. The demands asked of Greece are really no worse than the consequences of default.

14 – Greece must balance consumption with production. This is the root of the problem. It must be addressed because no one is willing to further subsidize Greece. I prefer real solutions to postponed consequences.

39 – Write down debt further. The middle ground between maintaining unsustainable obligations and total default. It demonstrates some seriousness by the Greeks while giving them a realistic hope of improving the situation. Also, I think I misread this as suggesting Greece would write down its entitlement obligations.

4 – Stay in Euro. If Greece is going to go to all the trouble of fixing its economy and maintaining good standing, it may as well enjoy the benefits of the currency union. Greece can become competitive without currency devaluation by reducing labor regulations, improving it’s taxation, and reducing the public sector.

31 – Internal Devaluation. I have little confidence in stimulus or other top-down approaches to investment and growth

45 – German “receivership.” The price of German aid. Greece has not earned enough trust to escape oversight. Honestly if you look at the self governance they’ve had, it’s not such a great sacrifice. I would push Greek austerity to the breaking point because I think they have more to lose from a default than Germany, and letting them off too easy creates moral hazard.

436

Substance McGravitas 02.21.12 at 4:52 am

http://www.businessweek.com/news/2012-02-13/greek-doctors-battle-hospital-superbug-as-crisis-depletes-budget.html

Feb. 10 (Bloomberg) — Greek doctors are fighting a new invisible foe every day at their hospitals: a pneumonia-causing superbug that most existing antibiotics can’t kill.

The culprit is spreading through health centers already weighed down by a shortage of nurses. The hospital-acquired germ killed as many as half of people with blood cancers infected at Laiko General Hospital, a 500-bed facility in central Athens.

437

robotslave 02.21.12 at 7:55 am

@429

Yes. And in that summary for 2005* you can easily see a very good correlation between low tax burden and net positive transfer, and little to no correlation between low payments and net negative transfer.

 * studies of this issue generally use ten-year samples, to smooth out variances in year-to-year federal spending due to things like one-off payments for big projects.

438

Henri Vieuxtemps 02.21.12 at 9:47 am

very good correlation between low tax burden and net positive transfer

Why, you can also see a good correlation between very high spending in places like Virgina, Maryland, Alabama and a net positive transfer. In Virginia, in particular, they spend what it looks like double of the average. And most of it is through the dod and homeland security, I’m sure.

439

Eli Rabett 02.21.12 at 11:54 am

438, yes, in addition to DC, the Hampton Roads/Norfolk area is home base to much of the Navy

440

Steve LaBonne 02.21.12 at 1:21 pm

It must be addressed because no one is willing to further subsidize Greece.

If so, then the whole idea of “Europe” is a farce and should be abandoned. Despite my frequent exasperation with Alabama’s political culture (and its malign effect on the nation’s), we are all Americans and I say that Alabamians should actually get quite a bit more federal help than they do (though it would be nice if it could be designed to bypass their nasty right-wing state and local governments). Any “European” who does not feel the same way about Greece is indicating that he or she does not really believe in the “European” project. (Extra hypocrisy points for insisting that Greece must remain in the Deutschmark Euro zone while somehow magically becoming “competitive” via crippling deflation and impoverishment.)

441

ajay 02.21.12 at 1:29 pm

“It must be addressed because no one is willing to further subsidize Greece.”

[citation needed], definitely, because this is far from definite. As discussed above.

442

robotslave 02.21.12 at 4:11 pm

@438

The data under discussion were introduced in comment #392, as part of a nice argument against your Pentagon Transfer thesis.

Your response to that comment was, and I quote it in entirety, “Sorry Peter, I already responded to a bunch of similar ‘well, nos’; it’s too boring to start repeating it. See above.”

The problem is that your arguments up to that point had consisted of refusing to consider anything other than cherry-picked data, complaining about methodology you clearly didn’t even try to understand, and generally re-asserting your a priori argument: “I have a gut feeling that transfers are due to military spending, therefore transfers must be due to military spending, and any data suggesting otherwise should be rejected out of hand.”

Yes, the US government spends quite a lot of money at large military installations when it’s fighting two foreign wars at once. Thanks ever so much for discovering that for us.

Now please, make a good-faith, comprehensive, quantitative case for your theory of The Pentagon as primary agent of transfer payments.

443

Henri Vieuxtemps 02.21.12 at 4:32 pm

Thanks for the lecture, brother.

Yes, that’s my gut feeling; I thought I made it clear from the beginning. Versus, at this point, your gut feeling, because this data doesn’t tell what portion of the spending that is military/security related. The case of Virgina, at least, (and a few more states) it does seem to confirm my intuition.

444

Sebastian 02.21.12 at 4:42 pm

Yes, if you get to cherry pick Virginia you win the argument.

Which so far as I can tell means that in factual reality you’ve lost anyone else who looks at the real data.

You really can have massive inter-state transfers without relying heavily on military expenditures. Which should be good news for the EU, but I suspect it won’t actually be, as those transfers do not appear to be forthcoming.

So now that we’ve seen the ‘solution’ chosen, what do you think? I think that even their pessimistic forecast looks wildly optimistic and the baseline projection is a joke right? Do even the authors of the memo believe in the baseline projection or is it a pure ass covering game at this point? I mean the *pessimistic* assumption is allegedly that Greece goes through the wringer on even more austerity this year and magically gets to only 1% contraction for 2013? The Greek economy is in ‘oops I think I dropped something over the cliff’ freefall right now and we’re swiftly approaching March 2012. Maybe the assumption is that if you lose enough you can’t contract further? It seems like literal self-deception at this point, but I can’t really convince myself that anyone believes it.

Are things so screwed up that the published baseline really is considered the likely scenario? That their pessimistic scenario really looks like something I’d have justifying as the most optimistic scenario? Is this what they really think? Are they assuming a bunch of other EU actions that aren’t listed?

445

robotslave 02.21.12 at 4:42 pm

@443

OK. Thanks for finally being honest about the kind of argument you’re making, and the kind of evidence you’re willing to consider.

446

Henri Vieuxtemps 02.21.12 at 5:09 pm

You’re welcome, of course, but I believe I’ve been honest from the beginning. And why wouldn’t I be?

447

robotslave 02.21.12 at 7:04 pm

@444

The projections I think are little more than cover for postponing the same old bag of difficult actions and decisions. As for the “actual doing things” part of the plan, I for one have no idea where to slot the deal into Daniel’s decision tree.

Since more rescue money was in fact coughed up, we can at least get from 1 to 32. After that, I’m lost; whether we go to 14 or 48, the next question is debt strategy, where the options are full default, public sector writedowns, or no writedowns at all. What we’ve actually got is more private sector writedown. I think Daniel may have inexplicably overlooked “let’s have some more of that delightful can-kicking farce, please.”

It might be worthwhile to ponder the possibility that this farce is a solution of sorts. Getting together every year or two for an “emergency” writedown of a few points, if repeated often enough, will eventually knock the debt down to manageable levels, or eliminate it entirely. Slow, incrementally negotiated, partial default?

There also seems to be a “squeeze tube until fresh government emerges” component, but that might be outside Maynard’s wheelhouse.

448

Blackeyebart 02.21.12 at 8:31 pm

@389

I understand the devaluation point, except that to achieve any beneficial effect in Greece you would have to stuff the pockets and bank accounts of Greek citizens with Drachma. Only you don’t have any Drachma. At least not yet.

The non-existence of the currency that you are introducing is not seen as a problem by almost anyone. They propose that change the bank accounts to Drachma and continue to use the Euro as cash.

So Greeks will have two currencies. The Drachma that can only be used to pay bills (and taxes – many people see that as creating a value for it, which is daft.) and to convert into the Euro so Luigi can buy his lunch. The drachma will be purely theoretical. Except to the bank teller trying to explain to someones old mother why she is only getting €100 for her pension instead of €150 or whatever.

Let us presume that all debts were converted to Drachma at the same time that the bank accounts were. There is now no urgency about paying your bills. The Drachma may drop in value but that is your creditor’s problem. Who cares about the value of the Drachma to someone else?

But by converting the balance of your bank account to Euro’s you can, perhaps, avoid the continued devaluation. The banks could, if required by the Government, limit the amount you convert but they can’t stop it because there is no alternative. The pressure will be on to convert as much as you can.

The devaluation will happen immediately. On day one when you go to the bank to convert it to Euro, they will not give you 1:1. The lower the rate, the greater the fear, and therefore the greater the pressure to convert. It will be hard to convince anyone that the Drachma will rise in value.

This is surely a mechanism for the maximum possible devaluation. A currency has to be seen as safe to be useable. The Drachma will be seen as unsafe. It will never recover.

449

JW Mason 02.21.12 at 8:47 pm

So it looks like the Troika has settled on 45, plus a magic growth pony? Or am I reading it wrong?

450

Amature Technocrat 02.22.12 at 1:39 am

@440
–“If so, then the whole idea of “Europe” is a farce and should be abandoned.”

Fine with me. I should have been more clear though. I think Germany et. al. will subsidize Greece, but only in order to help resolve the crisis, not as a semi-permanent feature of relations. Maynard compares my result, 45, to the DDR. I don’t think Greece can expect any better, and I don’t think Germany ever agreed to carry the periphery into prosperity. It is not a coincidence that the most fiscally responsible countries are the most reluctant to seek “ever closer union.”

451

Andrew F. 02.22.12 at 1:53 am

This is great, but I think Maynard & Company should be thinking about their plan with more than one end-state in mind.

The benefit of certain actions is not only that they might lead to the most preferred outcome, but also that they reduce the probability of the least preferred outcome.

Each delaying action provides additional time for Europe’s banks (and the rest of the world) to prepare themselves, and for Europe’s other peripheral nations to improve themselves, thereby reducing the probability of contagion should Greece eventually slip loose the bonds of the Euro (so to speak). The troika may lose the fight, but they’ll keep the house.

452

Advise 02.23.12 at 4:02 pm

Hyperlinks would make browsing better.

453

Stephen 02.23.12 at 4:19 pm

I wound up at 52. But I think the ball can be kept in the air for a littlw while longer. During that time, I hope The Troika can be knocked off their internal austerity plans, which will somewhat shorten the period of total horror in Greece.

454

Ilmari 02.23.12 at 4:59 pm

My third computer game, the others were in 1968 and 1980. This one was great fun. Ended up in #5.

455

Jason Hubbard 02.23.12 at 5:38 pm

Re: #17: We are living in the real world. The world in which Sarkozy is about to be replaced by Hollande; the world in which Mario Monti sees a role for an expanded role for the ECB which includes the Euro bond. The world in which Germany will take the blame for the failure of the recent Greek deal, having gotten everything it wanted.

Your options give too short a shrift to drastic political changes which are predictably going to happen over the next few months. It is blatantly evident that the Euro as a whole cannot function without serious political reforms, which must allow for a major restructuring of the Euro’s monetary policy.

So long as the Eurozone structurally prefers default to expansionary monetary policy, it will carry a higher risk premium in comparison to fiat currencies whose central banks are allowed to carry out expansionary monetary policy, as the costs of sovereign default are much greater than the costs of monetary inflation. More, the closer an individual Eurozone member comes to default, the steeper that risk premium curve will get, as the increasing premium itself will make the risk of default greater. The only way to fix this is the issuance of Eurobonds backed by the ECB’s guarantee, the same guarantee that backs the debt of the US, English, Japanese, etc.: that the central bank will print money rather than face default, that default will only follow unsustainable inflation.

Eurobonds should be the only debt so secured; sale of Eurobonds could then be used to buy troubled sovereign debt, which the ECB could write down in order to lower debt burdens on states facing sovereign defaults. More, Euro rates could then be set universally against the performance of Eurobonds, rather than varying on a nation by nation basis according to that nation’s sovereign debt. This would have the effect of flattening price differentials across the entire Eurozone, with all financial institutions indexing to the same currency securities; further, it would make the balance sheets of banks more secure as their holdings were more equally comprised of the same Eurobonds, rather than the debt of their particular sovereign. Sovereign Eurozone debt could then be managed like municipal debt, much as the debt of the individual US States is managed as municipal debt without strong impact on the performance of the dollar as currency. This would have the added benefits of maintaining fiscal sovereignty for the member states of the Eurozone, and giving the ECB real teeth in maintaining fiscal discipline in each member state by it’s selection of which sovereign debt to buy on what terms.

What it will require is the Germans to live with some inflation. But Germany is one state of twenty, and the political tides are turning against it.

456

DrJim 02.23.12 at 6:04 pm

I ended up at #45, which I think is not unrealistic (but definitely suboptimal) because the Germans have the most powerful negotiating position and this satisfies their need to see the Greeks suffer. And, of course, the whole idea of a common currency without fiscal union as well is absurd and should have been recognized as such from the beginning, but we are where we are … But where in your game is the best outcome – the one where Germany accepts some moderate inflation for a few years, thus allowing Greece (and others) to accomplish “internal devaluation” with a little less pain? (Possibly accomplished, per John Quiggin above, by QE) I know this would be politically difficult for Germany, and is unlikely because the Germans don’t feel they have to concede much (or, rather, feel that the little they have conceded is a lot), but the possibility should be there.

457

David Fields 02.24.12 at 2:02 am

28.

Excellent.

Coming over from Krugman’s blog.

Can people really think so rationally IRL?

458

thorgamma 02.24.12 at 3:32 am

1->47->23->33->54 Yes; I have all the answers. ;-)

459

Rich 02.24.12 at 4:14 am

52. Interesting to see how this really plays out. Probably a few others may have to take this route too eventually.

460

Paul 02.24.12 at 5:53 am

Try twine or quandry for making branched scenarios, Both are free

461

Goran Semb 02.24.12 at 6:37 am

1-32-48-46-38-5.

462

Tuur 02.24.12 at 10:23 am

10

463

Positroll 02.24.12 at 12:48 pm

Re: 53: Here’s my personal version of Varoufakis’ ‘Modest Proposal’, that I hope would avoid a few political pitfalls. It’s more about saving Europe than Greece, though.

Step 0 – to be discussed later

Step 1: ECB creates an amount X of central bank money out of the blue. IMO 2 trillion EUR should suffice, but I am open for change in this respect.

Step 2 – how to use the money
a) 70%: based on capita / member state (MS). Credited to ECB accounts that will be held in trust by the ECB for those Euro-countries who implement the stability pact (and thereby limit their future debts). The money on these accounts can only be used to pay for government bonds coming due within the next 10 years.
In order to reduce the impact on inflation, the claims by the MS against the ECB come due in yearly intervals, depending on the financial situation of the MS. That is, Greece, Portugal and Ireland can access the money at once. Spain, Italy and Belgium in years 2-5, later France and Germany only in years 9-10.
The ECB makes clear that (1) this is a one-time occurrence, due to the great recession, and won’t be repeated, (2) it will accept higher inflation for the duration of the measure (say 3-3,5%, anything else would be shot down by Germany), but would return to 2-2,5% afterwards..
b) 15-20% (ca.300- 400 billion) go directly to the ESF, to be used before and in addition to the guarantees of the MS.
c) 5-10% (100-200 billion) go to a special fund (or one of the existing European ones?) to finance Pan-European infrastructure (e.g. the HSR link between Spain and Portugal).
d) 3% for countries whose currencies are pegged to the EUR and who might suffer from the plan.
e) 2% to mitigate contingencies

Step 3: Those MS; which now do have again some financial leeway (e.g. Germany, Netherlands, Austria, Finland, maybe France) will use this leeway to step up their own (infrastructure) investments and to reduce the impact of inflation. E.g. in Germany, taxes on life insurance could be abolished, consumption taxes could be reduced, and basic income / stipends (for pensioners, students) could be raised. In addition, Germany could grant an income tax rebate to anyone travelling to the PIGS (say 50% of the hotel bill up to 300 EUR / year – a nice gift to German voters which won’t drive up German inflation and help reduce the trade imbalances).

Step 0: Before announcing the plan, the ECB buys up sovereign bonds of MS that are traded below value, up to the amount as defined by Step 1. This increases “bang for the buck” – hopefully a lot. Since the ECB is in effect only using money that is earmarked for the SM in question anyway, there can’t be any complaints that the ECB is violating the treaties.

Result:
– the financial pressure on most MS is reduced a lot, making it very likely that especially Spain and Italy will be able to get out of the whole. This avoids speculation against them, making it again easier to finance their remaining debt needs. Still, they will have to continue to go to the markets for money, so the pressure to keep up systemic reforms remains.
– more money in the North for investment and consummation, creating growth at a time we really need it.
– yes, more inflation, but in a manageable amount, and in a way that allows Germany to fight of its social impact while profiting from growth opportunities + better financial stability (making sure that pensions can be paid in the future). For German politicians this will be a lot less difficult to sell than a break up of the Euro and a bank bailout.
– The ECB does not have to take on a political role, but simply does its job: regulating the amount of money in the system. The job of forcing Greece etc to reform is left with the political players, including the ESF (which is bolstered with money that can be used before the MS have to pay up themselves.

464

Jay Ackroyd 02.24.12 at 2:01 pm

Full Argentina is where I end up.

The question (channeling atrios) is whether Full Argentina is inevitable, and so (recalling Rogoff and Reinhart) ’tis best done quickly.

Also, I really don’t see how solutions that essentially strip Greece , and therefore Greek citizens, of sovereignty is sustainable. The mechanism for the EU installing governments in member nations is not fully explicated anywhere I’m aware of, while most of these solutions will be regarded by Greeks as unacceptable. If they are not allowed to change the government at the ballot box, well……

465

John S. 02.24.12 at 2:01 pm

A nice exercise. I ended the exercise at 52. My goal was to move the process along as fast as reasonable to minimize the time that the Greek people would suffer while the core euro nations fiddled.

The euro nations have committed themselves to an undemocratic monetary union that is extremely flawed economically and legally. The euro monetary union serves a few nations very well, but brings great harm to 60-70% of the nations in the monetary union.

466

Migeru 02.24.12 at 3:00 pm

Seeing 47, it’s apparent that in 1 you consider a “bailout” whereby Greece gets to pay interest for the privilege of being a conduit for cash to flow from Germany to Greece’s creditors to be a “fiscal transfer” from Germany to Greece.

This allows me to go 1 -> 32 -> 48 -> 2 -> 34 -> 8

The reason I wind up in 8 is that I interpreted “Greece will need permanent fiscal transfers, like Wales” and “loss of sovereignty” as “there will be EU-directed investment into the Greek economy”. This qualifies as permanent fiscal transfers outside the sovereign control of Greece. Instead what 8 proposes as loss of sovereignty is “the IMF riot”.

Oh, and evidently I cheated and backtracked at least twice. I did feel bamboozled or, to be fairer, I found that there were some hidden assumptions about the meanings of words in choices that weren’t readily apparent on a first reading.

I suppose you play this game with the Troika you have, not the one you wish you had…

467

Migeru 02.24.12 at 3:09 pm

In fact, puzzlingly (for me), at 32 (and alter) you interpret “bringing the economy into balance through investment à la Varoufakis” to be “not permanent fiscal transfers”. There’s a lot of semantics buried in this little exercise.

468

ajay 02.24.12 at 3:12 pm

it’s apparent that in 1 you consider a “bailout” whereby Greece gets to pay interest for the privilege of being a conduit for cash to flow from Germany to Greece’s creditors to be a “fiscal transfer” from Germany to Greece.

Actually, the money will flow from Germany to Greek pensioners and hospitals. The money that goes to Greece’s creditors will be money raised from Greek taxpayers.

(This makes exactly as much sense as what you said.)

469

Tirxu 02.24.12 at 3:41 pm

I ended up in 10, after having been chided for not leaving in the real world. Interesting game. I will explore the other paths now.

470

RanDomino 02.24.12 at 3:46 pm

Disappointing. How about an option to socialize all property, seize all Greek private financial assets over let’s say $30,000 in Euros, seize and sell all luxury goods in Greece (such as cars, pleasure boats, jewelry, etc), and transfer all the businesses to the workers? Sure, the technocrats of the world would look on in horror, but fuck them. The problem in Greece is not the Greek people as a whole, but the Greek bourgeoisie. Austerity, but only for them!

471

ernie 02.24.12 at 4:24 pm

“Don’t Cry for me Argentina”

472

James Prichard 02.24.12 at 9:11 pm

#54

473

Nikos 02.24.12 at 9:16 pm

Since the ECB (“deus ex machina”, I liked that) does not want to do its job, I got sent back to #1 and asked to “live in the real world”. Problem is, the real world does not have much connection to reality anymore.

474

Frances Coppola 02.24.12 at 9:30 pm

Not surprisingly, since I have been arguing for quite some time that Greece should default and leave the Euro, I ended up at 52. Maynard wasn’t as opposed to the idea as I thought he would be, but clearly had concerns about Greece’s viability as an independent state (and the future, if any, of its democracy – I know that song too!). However, the game-changer is this report from the CEPR in Washington, which concludes that Greece is in many ways in a BETTER position than Argentina was at the time of its default:

http://www.cepr.net/documents/publications/greece-2012-02.pdf

Maynard may like to read and ponder the implications of this paper.

475

Rob 02.24.12 at 10:03 pm

(Not an economist of any kind)

I initially ended up at 10 (Greece defaults while inside the Euro) – I’m deeply pessimistic about the competance of the Eurozone leadership; Maynard is giving it too much credit to call it a ‘strategy’, this is more or less what you get by twiddling your thumbs and doing nothing until the clock runs out.

Playing again… 53, and then 5, when I discovered that Maynard thinks the IMF is more likely to play ball than the Germans. If the EU is going to have a single currency like it was a country, then it need the rest of the institutions too.

476

Lawrence Krubner 02.24.12 at 10:59 pm

I am curious if it would be acceptable to turn this into game? I’d like to put each option on its own page, to make it easy to track which paths are popular.

477

James McGowan 02.25.12 at 2:42 am

The actual formula is to muddle through all the while saying one thing and actually doing something else e.g. Draghi – excellent choice – smart. In time perhaps the ECB will be granted the power it is in fact now using. Well led (Bernake) the US Fed shows the EU the way out — poorly led (Greenspan) shows the importance of the Chairman and what havoc a poorly led FED may wrought. Most important though the FED is like it as not pretty xxxxxxx independent and that is why a well led FED proved essential to ending the 2008 crisis. The US got out of its 2008 crisis by TARP – massive bail out all the way round. The EU must allow the ECB to act with as much flexibility as the US’s FED. The FED does not care if Mississippi is bailed out by funds from California – the important thing is to right the entire ship. The EU is either a union or it is not. All this wrangling, moralizing, withholding and complaining by Germany (who has benefited enormously from the union) indicates they want their cake (the EU) but are not willing to pay the price (a large measure of their sovereignty). Germany has to truly lead (is not the leader the most humble?), provide along with every other Euro Zone member sufficient funding to right Greece and institute policies that stimulate growth all the while working to grant more authority to the ECB similar to the authority of US’s FED. In return for funding Greece over time must reform its pension system to come into line with other EU countries. Paper over the immediate financial crisis all the while effecting policies that stimulate growth (raise inflation targets). Growth — not moralizing, paralyzing austerity — will in time ease debt burdens. The ECB/EU should bear in mind TARP in the end actually made money for the US. It was perhaps the greatest papering over ever!

478

rba22 02.25.12 at 3:11 am

16

479

James McGowan 02.25.12 at 5:36 am

Why did you remove my post? It was polite and made the implicit point what is currently going on in Europe (and so clearly, unwittingly expressed in this overly complex CT blogpost) is simply not manageable without a more empowered/engaged ECB. What did I do wrong?

480

Micki St James 02.25.12 at 8:23 am

#10

481

Jos 02.25.12 at 10:56 am

Very useful. I made the wrong choices (there is no right one though)

482

Richard M. Mathews 02.25.12 at 4:57 pm

I got to 45; but it seems to be that the correct answer, right from the start, is to say, “XYZZY.”

Or perhaps there is the answer from “The Mouse That Roared“: Greece declares war on Germany, with no intention of winning.

Comments on this entry are closed.