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.
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!
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.
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.
“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
“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.
“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”.
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.
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.”.
“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.
“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”.
“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.
“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.
“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.
“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
“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 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.
“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
“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.
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.
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.”
“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
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
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
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
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 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”.
“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”.
“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.”
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
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”.
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.
“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.
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.
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
“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.
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
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.
“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
“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.
“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”.
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.
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.
“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
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.
“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”.
“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.
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.
“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
“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.
“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
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.
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.
“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.”
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”.
“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.
“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.
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.