Who blinked?

Stathis Kouvelakis …Jacobin, today I think

Let us begin with what should be indisputable: the Eurogroup agreement that the Greek government was dragged into on Friday amounts to a headlong retreat.

The memorandum regime is to be extended, the loan agreement and the totality of debt recognized, “supervision,” another word for troika rule, is to be continued under another name, and there is now little chance Syriza’s program can be implemented.

Such a thorough failure is not, and cannot be, a matter of chance, or the product of an ill-devised tactical maneuver. It represents the defeat of a specific political line that has underlain the government’s current approach.

I’m so confused … I want to review what you have said, but as the first comment said, its like half the people are calling one winner and half the other, and we are just watching the thing without any idea of, exactly, what when down.

Pretty sure this is not an exercise in game theory with punishment and attemps to out tactic the others, maybe except for one negotiation partner involved. Schäuble would be relieved if the Greece economy did good, with or without Euro.

I’m still just reading and watching, pretty much without comment. Too soon to tell even what’s tactical yet. Since I’m reading thousands of words, I obviously don’t mind other people opining. There are a lot of events scheduled, and I am sure there will be surprises (Will Ukraine gov’t fall?), for the next six months or so, and most of the commentary is a kinda praxis. If T & V can’t get the deal through the Greek legislature and the gov’t falls, the deal will no longer look so good.

Naked Capitalism has had full coverage for a couple weeks, including a lot of links in the posts, in comments, in Lambert’s twice-daily roundups. Opinions differ.

But in general I don’t think it’s productive to do the “who blinked” bit. It was a sensible compromise. Both sides gave up some real red lines.

I think this is about right. The framing in terms of “chicken” never struck me as appropriate in this case. It was clear form the beginning that there was a range of compromise outcomes that would be acceptable to both parties, while walking away would be costly to both (though much worse for Greece).

In the end Syriza did win relaxation of fiscal targets for 2015, and got the green light to implement some of its social programs within these (as yet unspecified) targets. Surprisingly they also got the green light for reinstating “smart” collective bargaining and other labor protections, though what exactly that means is anyone’s guess. But they gave up on privatisation and of course ending troika supervision (I wonder if they ever really thought that was a possibility).

I wouldn’t pay too much attention to the intra-party grumbles within Syriza right now; people like Lapavitsas are in any case in favor of euro exit, so of course they would grumble. Opinion polls show 80% of Greeks support the deal, so I don’t think a revolt is imminent (or if there is one, it is likely that Syriza will get the support of other parties to get the deal approved).

“It is better to be a live jackal than a dead lion, for while there is life there is hope.” And so there is still hope here. The big news here, I think, is that both sides seem want to reach some sort of not-disastrous deal.

Personalities and realpolitik, I think, are the questions here. I don’t believe that the IMF has suddenly turned wholeheartedly Keynesian, personally; my impression is that it’s more a matter of it being easier to vote for things they know are not going to pass. On the other hand, it hard for me to believe that someone as authoritarian as Schaeuble has in fact turned over a new leaf. Still, with luck, the members of the troika will end up pointing at each other, providing the plausible deniability for an easing of austerity.

@JQ: My understanding is that privatisations where the tender process has begun have to go ahead, but I could be wrong.

I think it’s more interesting to prognosticate into the future:

Scenario A:
These 4 months give Syriza the time to plan an orderly exit from the eurozone. And the time necessary to convince the people of its necessity. Long live social democracy.

Scenario B:
These 4 months give Syriza the time to come up with a fiscal policy that is expansionary while not reliant upon significant external financing. Remains in eurozone, sniggers at Germany.

Scenario C:
Four months pass and Syriza cannot figure out how to do B, goes back to the Eurogroup for more money, hopes that the austerity tide has turned and that they’ll get better terms (e.g. more policymaking autonomy). The new-old PASOK.

Yanis Varoufakis’ NYT op-ed Feb 16, No Time for Games in Europe I thought was very articulate in expressing the view that Grexit is neither an attractive option nor an effective threat for Greece. The political problem for Greece is much larger and more diffuse; Greece needs allies in France and Spain and Italy, needs time to develop a narrative more favorable to its position in the Europe at large. In the long run, Greece needs to change the focus of conversation from reform of Greece to reform of the Euro — that’s going to be a long hike.

I think I would score the agreement as announced as a technical loss for Greece on points. Given that the new government did not have time to prepare — almost certainly did not have the administrative capability yet even to manage capital controls, let alone the collapse of its banks — the Greek government could hardly play a fully defiant game. They had to play for time, and they got a little time on not particularly attractive terms. The inevitable necessity of playing for time seems to be too little appreciated on the Left. Kindred Winecoff’s summary seems fair enough to me.

I’m a little surprised that SYRIZA’s leadership chose to trumpet a victory. Tsipras has the rhetorical chops to handle a far more nuanced narrative, and it might be wiser to adopt a narrative centered on admitting an initial loss: losing the first skirmish but keeping the forces together for further maneuvers and battles of a long war.

The statement by Germany’s “Five Experts” (Sachverständigenrat) that appeared on VoxEu.org, Greece: No escape from the inevitable (Feb 20) was pretty vicious. If anyone wants to parody German neoliberalism as reverse-fascism (“We cannot be held responsible — we were only giving the orders, those who carry out the orders are totally responsible for the results.”) they will have this model of the real thing to overcome.

The idea that austerity is being given up in favor of microeconomic “reform”, as the OP suggests, is just a continuation of a pattern of determined misunderstanding by liberal economists of just what the Euro project has always been about. Krugman has been very guilty of this: preaching Keynesianism and failing to identify the motives and purposes of the Euro architects. JW Mason, on his Slack Wire blog, has a very useful post on what the Euro is about.

The Euro was deliberately designed to prevent Keynesian interventions — there’s no scope for Keynesian fiscal policy in the Euro system. All that a debtor country in trouble can do is austerity and the austerity is a means of institutional discipline and reform. The only policy options available are “structural”. And, this was the plan from the get-go.

It wasn’t entirely nefarious, and it wasn’t a goal hidden from electorates back when. It was a selling point. Taking away the safety valves of patronage make-work employment projects, inflations and devaluations, while pressing for institutional reforms in tax systems and public administration was a package deal that was popular in the peripheral countries. The horrifying reality of deflation still isn’t appreciated fully, I think — not as fully as the opportunity to profit from the misery is appreciated by the psychopaths.

I don’t know how many of the current Euro principals are neoliberal true believers and how many are cynical opportunistic representatives of the predatory financial class. Probably many are both. Greece has to hope that there are quite a few technocrats and politicians, who are neither, who are basically muddle-headed, shallow and at least somewhat open to feeling queasy about consequences for the innocent and helpless and merely or formerly middle-class. These latter are the people, who are going to “compromise” step-by-step.

The devil is in the details goes the old adage, and I suspect that is especially true in terms of some of the particular “reform” and “privatization” schemes being pressed in the peripheral countries. There really isn’t a particularly good argument for how reducing the minimum wage in Greece or eliminating rent control in Lisbon is going solve anything. It’s just class warfare. Privatizations are often even harder to justify on legitimate economic grounds — selling the power company in Greece is crazy and selling public beachfront looks corrupt, because mostly it is corrupt.

I was a little surprised that SYRIZA was willing to yield so readily on not reversing the privatizations. It seemed like they caved completely on public broadcasting, which surprised me a lot. But, maybe they plan to hold some of the privatizations up notwithstanding their agreements — that’s certainly the approach I would take — they are useful hostages, in game theory terms. The Greeks could, potentially, get a lot of mileage out of exposing some of these deals in more detail, as well as imposing costly delays on powerful people when retaliation is necessary. (Maybe, it is even to their advantage to have plausible deniability wrapped up in an official policy of letting privatizations go forward.)

The much more difficult long-term problem is how to shape a European left agenda for reforming not Greece, but the Euro. As Podemos rises in Spain, this will become a more urgent matter. I admit I do not understand even in vague outline what can be done. Even if SYRIZA could master the administrative structures of the Greek government and gather in majority support in the famously fractious body politic, I do not see how they could manage a unilateral Grexit that wasn’t a short-term catastrophe and a long-term drag. They have to find a way forward in the Euro, by reforming the Euro and re-shaping Euro-policy to be less determinedly anti-democratic and anti-social-welfare. I cannot even imagine what that looks like.

“In a context where the primary deficit target has been relaxed to an unspecified degree, it’s going to be relatively easy to identify offsetting savings without much of an impact on aggregate spending.”

Can you clarify what you mean here? Even though they got a vague change to the primary deficit target they also pledged that any changes they make will be fiscally neutral; doesn’t that lock them into exactly whatever budget trajectory Greece was already on before? And if they identify an offsetting spending cut doesn’t that by definition mean the pension increase will not increase aggregate spending? (Also how is it easy to identify any savings at all given how the Greek budget has already been slashed and burned, and Independent Greeks probably would refuse military spending cuts?) Or do you mean they could identify fake savings through accounting tricks which the EU would decide to ignore?

while the Eurogroup conceded only what was going to happen under all scenarios, since Greece was going to miss its targets whether they agreed to do so or not

This may be true, but they were still going to *try* to meet those targets. Measures including a doubling of the lowest VAT rate and further pension cuts were in the pipeline but now got called off. That’s a win.

In fact it is very likely that the main reason the previous government brought forward the presidential election, thus causing the snap general elections, was that they did not believe they could get such measures through parliament.

Authoritarian i think is a fair characterisation of Schäuble, nationalist rather not. My estimate is hes not a nice person or one i would share much political opinons with. The US characterisation is still just completly wrong. To think the EMU is about German nationalism for a start is completly off in a very weird way. While hes not into changing his non existing own opinon within a second quite like Merkel, most visible Schäuble is definitly his job role, not his personality (whatever that might really be, always hard to guess).

Note that Greek Euro membership is mainly challenged from the right side of the political spectrum in Germany. It also looks like the more the AFD is moving towards a libertarian/ethnocentric mix that already has been sucesfull in almost any other European country (FPÖ, PVV, UKIP…..albeit not Le Pen in France, thats more classical right wingery, the more sucesfull they become).

All modern negotiation analysis requires the separation of “win-win” elements from “win-lose” elements, both of which are present in almost any deal from buying a used car to structuring a monetary union. It’s not very useful to claim that a negotiation is just one or the other.

The view from the markets probably most closely resembles JQs, which is to say Syriza achieved a modest victory. The Troika’s unwillingness to hold absolutely to a hard line, in the view of many, takes Grexit off the table to a pretty substantial degree. The very positive reaction across Greek debt and equity markets amounts to a reasonably effective voting machine.

The weighing machine will take more time to operate.

The message I get from the deal is that yes, the Troika still holds the hammer, but they a) choose not to use it now and b) probably won’t use it in the future as long as talks are constructive. The comparatively moderate gives and takes of each side belie rhetoric which was far more polarized.

I agree also with comments upthread that the #1 think Syriza won was a bit of time. They didn’t have a lot of time between election and potential default to construct much more than an ad hoc strategy to address policies with multi-year dimensions. IF they use the time productively, they managed to kick the can forward 4 months and can likely more effectively choose what to barter to achieve more of their plaform aims.

The last comment I’d add is that, if Syriza can continue to deliver 4 months of surplus they gain a little bit of negotiating credibility and potentially can use this to purchase a few more consessions on austerity.

I don’t know that anyone blinked. I think Syriza played to a reasonable draw and has now called “time-out.”

When I consider the Spanish and Italian reaction to all of this — clinging to the gunwales of the neoliberal ship of fools while kicking at the Greeks behind them who are trying to grab hold of their ankles — I have to think that, however drawn out the process of subjugation to the imperatives of neoliberalism may be, it won’t end well. The social democrats of Europe, like the Democrats of the United States, have already declared which side their bread in future will be buttered on. The rest of us will wait, eyes glittering, just outside the reach of their still quite impressive fire. If the guy with the poker falls asleep, you know what will happen next.

My second comment above will make more sense — I hope — when my first is released from moderation.

ps – I do wish the term austerity was canned. Every country in which austerity is tried experiences massive increases in debt. I would call it more something like the LBO strategy. Just as Miliken and his henchman would roll a firm by supporting some mook who would buy it and put the cost of the purchase on the company, increasing its debt, in order to justify cannibalizing it and destroying the labor force, the LBO policy in Europe is to use debt as a weapon – not against countries, but against the old enemy, labor. The upper 10 percent in all the depression countries – Ireland, Portugal, Spain, Italy, Greece – are always with the “austerians”. It is a dream come true. For the Greek plutocrats, it is almost as good as the junta. And just as with LBOs, the advisors , camp followers and leaders all come from the speculative sector – finance. Its bold for, say, Germany, with a bank system that was saved from its own incompetence by the Fed, to turn around and lecture other “nations” – but LBO ideology depends on pressing its paradoxes into the face of the working class and making them eat it.

Ireland straddles this divide in that its political class has delusions to being a northern European country, whereas we’re not.

Ireland has the exact opposite delusion. It’s one of the richest countries in Europe, with gdp per capita higher than France, but it thinks that it’s not only a poor country that can’t be expected to pay for its own bank bailouts, but an industrial backwater that can’t possibly compete unless it hands out massive corporate tax breaks.

But isn’t Ireland one of the richest countries in Europe because they followed a developmental plan based around attracting foreign investment ? Corporate tax breaks were only one part of that (whether they were right or wrong, morally or practically, I dont really know. Nor care about the morally part, I have to say. )
I’m going by Sean O Riain’s new book ‘the Rise and Fall of Ireland’s Celtic Tiger’, where he argues that the underlying structure of the Irish political economy is closer to that of the Southern economies than Northern:

“This is rooted in large part in Ireland’s failure to develop a system of innovation, a set of institutions and policies thatcould support a dynamic indigenous industrial sector. This was cause by a number of complex factors. Most fundamentally Ireland failed to make a transition from an agricultural economy to an industrial economy.”

He goes on. I havent finished the book yet, but that’s his point, more or less. (they became reliant on foreign investment and brokerage politics because they missed out on the post war corporatist political economy that developed in western europe)

Continued from O Riain’s book to clarify his argument, apologees for length and parochialism:

“There are of course significant differences between the various countries, but a number of key patterns can be noted. Ireland lagged behind other small open economies in (primarily public sector) social services and industrial employment. The figures also show that Ireland’s share of employment in agriculture and construction remained relatively high, mirroring the Med countries. FIRE was prominent within the employment structure, similarly to the liberal group of countries…..(ME :continues in this vein)
Ireland made some progress in some ‘leading edge’ sectors….but still clearly bore the imprints of having missed two key revolutions in european capitalism. The first was the manufacturing exports boom of he ‘Golden Age’, while the second was the major expansion in public social services through the post war decades and beyond. Despite the evidence of ‘convergence’ on european norms in income and, to a lesser extent, employment, this analysis suggests that under development of manufacturing exports and social services over the decades has never been overcome in Ireland….Even after the Celtic Tiger years, Ireland remained an incomplete model of development and european convergence, running ahead of the med periphery in terms of structural transformation and income, but remaining significantly behind the continental economies..in terms of employment in key privaye and public sectors.”

@38:

As everyone knows, certainly in Ireland, because of its corporate tax haven status, there is a large gap between Irish GDP and GNI. In 2010, the figures were $40,400 ppp and $33,500 ppp respectively, a difference of about 17%. In GNI terms, Ireland is on a par with France, though there might be large differences in structural and distributional terms. Certainly, Ireland is relatively wealthy, but not much more so compared to its EZ peers. So it would be hard to call the Irish, given the recessionary conditions that they are laboring under, “delusional”.

It is rather like proclaiming that Ireland, at the end of the potato famine, had at last turned the corner and was becoming more efficient.

I see nobody agrees with my suggestion about wild exaggeration.

Ronan – very interesting, thanks. But Irish agriculture *is* industry, in a lot of important economic senses. The country has a huge comparative advantage in some kinds of farming.

Certainly, Ireland is relatively wealthy, but not much more so compared to its EZ peers

Give over. “You can’t expect us to be able to pay – we’re not all that much richer than you!”.

It’s one of the richest countries in Europe, with gdp per capita higher than France, but it thinks that it’s not only a poor country that can’t be expected to pay for its own bank bailouts

On the other hand this reflects much of what (justifiably, IMHO) frustrates people like Krugman and Wren-Lewis.

Ireland went through a deep recession, with per capita gdp now lower than in 2004 (and actually, surprisingly to me, contracting in 2014) while unemployment remains above 10% (these are not among the richest people in Europe I bet). Did it have to be that way?

New York is one of the wealthiest places in the world; what would happen if it were expected to pay for its own bank bailouts?

52 – your accounting is very interesting. Here’s the formula: advocate a ruinous economic policy and then compare the ruin it causes to an edited past. I don’t like construction, so we will just take it out. In the same way, I don’t like, say, finance, or nuclear power, or coal, so we can ease those out of the GDP figures too, and pretty soon – with a little hocus pocus – we can say, proudly, that austerity has produced a huge boom in Europe.

However, this rosy picture is disturbed by the idea that it is all about nationality:

“Otherwise (since Ireland was not exactly keen on sharing the fruits of the property bubble with the Ruhr rustbelt) you’ve got a system under which booms are national but busts are European, and that kind of sharing of profits vs losses creates really bad incentives, as people have noted in other contexts many times.” This of course makes no sense. If the Irish builders weren’t borrowing from German bankers, than there would have been no boom. And that borrowing was, presumably, good for the German economy – unless of course German bankers were selfishly staying away from those poor squats in the Ruhr.

In fact, of course, the German worker has been getting screwed, increasingly, since the neo-lib reforms of the late nineties, and the medium wage has stagnated, Americanly, all through the austerian boom. I doubt that this situation is going to be remedied by the fact that the Irish state – in cahoots with the EU – decided to back “their banks”, of which they took a very inclusive view. . In fact, the capital of all those banks is international. Banks are paid a lot to take risks. But in the new world, those risks are paid for by the people who never extended the money, to begin with – but of course, in the name of the poor steelworkers in the Ruhr. They must be awful appreciative of the Irish government! I bet the celebration of St. Pat’s day in Dortmund brings tears to their eyes.

Mistakes were made.

53 – Here’s the footnote from the NERI working series: http://www.nerinstitute.net/download/pdf/neri_wp20131_private_bank_debt_public_finances_.pdf

“For example, data provided by the Bank of International Settlements in March of 2011 show that
in Ireland, in the third quarter of 2010 (just prior to the bailout and in the same period as funds
were flowing out of the Irish banks), total foreign bank exposure including banks in the IFSC was
US$156.3 billion of which $57.8 billion related to German banks and $37.4 billion related to UK
banks. Only in Spain did German banks have a higher exposure, at $85.8 billion, in the third quarter
of 2010 (Bank of International Settlements, 2011). In the first quarter of 2012 total Germany bank
exposure in Ireland had fallen to $18.2 billion while in Spain it was $45.9 billion.”

What does that mean, exposure? It means that the Irish Nationwide, Irish Life & Permanent, Bank of Ireland, Allied Irish Banks, Anglo Irish were vehicles through which German banks invested in the Irish economy. I mean, this game of three card monte is threadbare. It lacks credibility. The Troika would never have been set up in the first place if German, British and French banks weren’t hugely exposed.

Again, it is the banker’s idea, when times are booming , that nations are archaic remnants of the cold war era and must get out of the way of the new international flows in capital, and in bad times, they forget all about their previous propaganda. This is about class interests. The argument about the immoral Irish housebuyer or the profligate Greek is really the same argument that was expressed by Rick Santelli in the rant that started the tea party. It is a special juncture of morality and economics homebacked for the rentier.

The big deal in Ireland was the commitment to protect bank bondholders, who deserved to lose every cent

I also disagree with this; in particular with the implicit idea that this would have had no consequences at all for Ireland in the short or long term.

In the long term, while I personally find the “we have to be a tax haven because otherwise our educated, English-speaking population simply can’t compete in a modern economy” argument to be a bit laughable, it’s clearly in Ireland’s interests to be a place where the rule of law operates and the commercial environment is stable. To have burned the bondholders would have required them to carry out an overnight change in Irish company law (to, ex post, strip bondholders of their status as creditors pari passu with the depositors), and one that was pretty specifically aimed at robbing foreigners. That sort of thing doesn’t really seem consistent to me with Ireland’s longer term development strategy.

But in the short term … oyyyyy! Remember that Ireland’s budget was at the time in large primary deficit, and that no private sector investors were prepared to buy the bonds. So Ireland’s government financing was more or less entirely dependent on the troika, which means that it was entirely dependent on approval by the Bundestag.

If your government financing depends on the agreement of the Bundestag, is it a good idea to unilaterally change domestic law to cause a financial crisis for your biggest creditor? Ireland’s number one priority at that time had to be to preserve its ability to borrow from Germany and France. Burning Germany and France would have immediately turned that financing into a political impossibility (or as we call it in European politics, “an impossibility”).

This isn’t like LDC or emerging markets finance. Not even for Greece, and Ireland is a much more developed and financialised economy than Greece. The counterfactual case that people seem to be judging things against (one in which Ireland reneges on its previous commitment to support the banks, but still keeps just as much external financing) is something that couldn’t have happened.

As this instance shows they are bailing out lenders, mostly North European, who made bad loans. The money is sent by way of peripheral governments, but none of it stays there.

Twitter users will also have seen me ranting about this one. If Crooked Timber had a whip-round to pay my mortgage off, I think people would be a bit surprised if instead of saying “thank you”, I said something like “Well, you’ve done nothing for me. All that money went to shore up the profits of HSBC plc, just using me as a conduit”.

It’s the nature of debt crises that they tend to happen to people and countries who have a lot of debt. Again, the fact that the majority of the bailout package ended up being spent on debt service is a result of past Greek borrowing levels, not current troika stinginess. The size of the package was determined by the size of the debt burden that needed to be serviced. What Greece (Ireland, etc) got out of it was the ability to limit the damage done to their credit in the long term, which is a very valuable thing.

The real problem here isn’t individual borrowers or lenders but the post-Bretton Woods system of financialised capitalism as a whole.

I’m not sure I agree with this either, but to the extent that it’s true, I don’t think that Ireland can be completely exonerated from having had anything to do with it.

I would also suggest that arguments of the form “Anyone who is such an idiot to lend to a basket case like me deserves to lose every cent they get, and then to have to lend even more as punishment for their irresponsibility in lending to the likes of me, and then to lose that too” are probably best made after having achieved a fairly substantial budget surplus, rather than as part of the argument for a further lending program.

Since Irish government debt is serviced out of the Irish tax base, GDP is the relevant metric, not GNI and definitely not median household income.

the trusting innocents running the major global banks

You’re joking, obviously, but actually there’s a serious issue here. For the entire period of EMU, everyone was allowed to believe, and in many cases explicitly told, that the EMU members jointly and severally guaranteed each other. Well into 2011 (this is another thing everyone except me seems to have forgotten – luckily I was writing a daily research note about it so I can check my files), the official position of the German government was that it was inconceivable that an EMU member state would be allowed to default. I just don’t accept that taking governments at their word is evidence of culpable naivete.

And going to a much deeper point of economics, as you know the “epidemice of irresponsible borrowing” represented the market responding to the price signal of lower interest rates. But what would the world look like if banks didn’t respond to lower interest rates by increasing lending? Answer: it would look like Euroland in 2013, ie pretty bad. If monetary policy has been set to expansionary, then lending is going to expand, and if the banking system had actually followed this policy of being so prudent that they reversed the policy chosen by the ECB, then some other method would have been found to get the credit into the economy (my evidence for saying this is that it is what was actually done).

This is a great example of a Zizekian “unknown known”. We got a property bubble because we wanted one.

I typed out a whole thing on Ireland and then it was eaten. Long story short: the Irish government doesn’t regret its strategy of employing foreign capital to fuel domestic development, and in fact is doubling down. Why? Because it’s largely worked. The decision to guarantee the banks was part of a very long term developmental strategy, and any of the eurocrisis countries would gladly trade places with the Irish today.

Regarding lenders and borrowers (ie JQ @66) it surely isn’t a coincidence! It’s the same story since the end of Bretton Woods: current account surpluses get recycled until the imbalances are too hard to sustain and/or there’s a policy innovation in the core that cuts short the previous cycle. Latin America, East Asia, US, EMU… these are all part of the same story. Pablo Beramendi’s (Duke poli sci) recent work is very good in explaining why particular countries were borrowing to spend on housing this time, and Herman Schwartz (U Va poli sci) is generally good on the broader global structures, but the point is that none of this is very surprising: if some countries are trying to develop by accumulating surpluses then it is only rational for others to develop via deficit-fueled investment. S-I = X-M, after all.

Eventually this will have to unwind, and when it does both the creditors and debtors will suffer to a greater or lesser degree, but in the meantime quite a lot of development could have occurred. If it has the adjustment will be more easily manageable and far less painful than it would have been otherwise, while also leaving the level of development at a higher level than it would have achieved under other reasonable counterfactuals. This was certainly true of Ireland and many East Asian economies in the 1990s. It’s also been true of many surplus economies. But recycled foreign surpluses (ie CA deficits) could also be malinvested or consumed rather than invested. In that case not much real development might have occurred, and the accumulated debt will loom large.

All to say: Ireland and Greece are very, very different cases indeed.

“I just don’t accept that taking governments at their word is evidence of culpable naivete.”

Excellent. All professionals in all professions should aspire dance thus gracefully in the face of failure.

“We got a property bubble because we wanted one.”
Yeah, we all killed the Kennedys.

The trouble is that the left discussion on the Eurozone crisis is conducted in terms of Keynesian economics per se, when it’s not actually about economics; it’s about politics.

Q:What’s the optimal deficit path for Greece?
A: “Whatever the Eurogroup is willing to finance”.

Assuming a relationship of trust under which Germany finances a slower adjustment path and Greece tackles powerful interest groups is a lot more unrealistic than assuming a can opener.

The problem is, it’s not entirely clear to me whether you are talking about what *will* happen with the Greek crisis, or what *should* happen.

I’m trying to talk about what should happen, but taking massively obvious and unchangeable political constraints (like “finance ministries of democracies don’t take on open-ended commitments to fund other countries’ budgets without getting some political concessions in return”) seriously. If anyone thinks I’ve made a mistake in identifying what is a genuine constraint on the process and what is a value judgement about policy, I’d find that very interesting to discuss.

But without that, it seems to me that a lot of people’s alleged “solutions” are just real assume-a-can-opener reasoning ignoring big and important political realities and ending up with something about as useful as the annoying bloke at the left-wing political meeting whose answer to everything is “well, first, we have to build a viable socialist alternative”.

To be frank, I think that part of why I’m having trouble with the “pro-Troika” or “pro-austerity” position is that it reminds me of so many ill-fated “structural adjustment programs”. So many of those pushing it sound like Anon.! Cracking down on corruption or tax evasion is “empty populist nonsense”, whereas slashing pensions, cutting wages, firing civil servants, privatizing utilities, going after the dreaded unions, and deregulation are bold and necessary reforms! Moreover these are all described as “reform” or “economic reform”, with the implication that only an idiot would oppose them. And it’s all topped off with patrician sneering at the “poor” and “uneducated” Greeks. It’s as if the case for a more “liberalized” economy is somehow so obvious, it doesn’t even have to be made!

sorry a fair *number* of the critics.

I would agree that much of the Left discussion is framed by an anachronistic Keynesianism. Neoliberalism has successfully used the Euro to prohibit fiscal policy and lock the liberal national state up in a cage, where it is toothless and molting. What we have is the reincarnation of the gold standard.

The neoliberals are going to get themselves into high moral dudgeon and argue, “there is no alternative!” ad infinitum. To the extent that the neoliberals have booby-trapped the obvious exits, they are right. “Just say no” is not a practical path, as the more realistic (in my uninformed estimation) factions of SYRIZA apparently recognize.

The Left is just beginning to think about the need to design and manage the institutions of money. It is not an idea that has much appeal on the Left, I guess. Maybe, that’s a fatal shortcoming.

dsquared @52
“In 2004, it doesn’t seem to me to be at all unreasonable to guess that ~10% of Ireland’s GDP was accounted for by the construction of buildings that shouldn’t have been built. ”
That should read 10% of Ireland’s GDP was accounted for by commissions on the sale of land at inflated prices.

P.S. I think IN general, the discussion of this issue concentrates too much on the government deficit and too little on the trade balances.

The Germans are, apparently, angry at the Greeks (and the Spanish and the Portuguese and the Italians) for the “heresy” of not believing in ordoliberalism.

What is the basis for this psychologising? Is any explanation really needed beyond “The Germans, like many other countries, are not keen on policies which involve taking hundreds of billions of euros of their money and sending it to other countries, with a large chance of never getting it back and not getting anything in return”? That seems more parsimonious to me, and has just as much explanatory power.

In general, words like “punish”, “dash hopes” etc all basically mean “put limits on the amount they are prepared to lend”. There’s a sensible case to be made that those limits are too low, but this isn’t it – as Kindred says, people seem to be suggesting that German lending to the periphery was irresponsible and punitive and there should be much more of it.

Daniel,

Your depiction of the situation contradicts what you have written at the outset of the crisis: that the whole EU edifice was built on the implicit assumption that country debts will somehow be covered by the EU as a whole and (I add) that the ECB is a true lender of last resort. The fact that the treaty said otherwise (and that German people really wanted it the way the treaty was formally written) you suggested was officially and us officially obfuscated during the good times. Otherwise, Greece did not ever have the same risk profile as Germany, yet it borrowed with German rates for quite a few years, which is baffling. Now, when times got bad, two things happened: Germans decided they really wanted inflation at 0 and decided that the rule about ECB finding country deficits would be enforced rather forcefully. Greece would not be asking Germany for money now if a Germany didn’t control the ECB the way it does.

Now, of course claiming “why are you now of all a sudden asking me to play by the rules” is a rather weak argument. But at the same time it
S rather weak to claim that what Greece needs to breathe is actual Euros taken out of German pockets and transferred into Greek ones .

Since I’ve helped throw this thread off kilter a little, a question (to anyone, sorry JQ if this is completly irrelevant) but what would have been Ireland’s options in 2008 if they hadnt been in the Euro (either the Euro didnt exist or they didnt join) I understand the crisis probably wouldnt have happened in that scenario, but hypothetically.
I dont really understand monetary policy, but the argument for non Euro membership seems to be Ireland would have had more leeway to do as they pleased on the debt (although I think Kindred’s right that *they did do* what they wanted on the debt, that there wasn’t really much support among the major political parties to not pay it) and that they would have been able to devalue the Punt, which would have done something or other (im not 100% sure) Was there a hypothetical softer landing there ? Was there any option for Ireland to not join the Euro, but to remain outside of it with the Punt pegged to it ? Would that have been a better option ? (a better option hypothetically, as again there was a good bit of support, at least among the political class but afaik also the population, for Euro membership)

“Oddly, Icelanders don’t seem to make this mistake – they know that the Icelandic bubble was an Icelandic bubble. I think it’s probably because they did actually have a series of criminal trials.”

I don’t really buy this, tbh. I didn’t live in ireland for most of the crash, but as far as I could see most of the blame was put on domestic sources. Most of the protests were certainly over specifically local issues (cuts to the health sector, public sector pay, now water charges etc) which is also probably why they largely went unnoticed outside Ireland. I think most people recognised the major causes were domestic, for no other reason than people were more than aware of the specific local characters involved in all the skullduggery, and understand the way Irish politics functions.
At the time the Troika were in the country, the mood shifted a bit, and I think people were right to be annoyed, but still the blame was mainly assigned domestically afaik. Except perhaps from my demographic, which might fairly be called the chattering classes, but I wouldnt take them as representative.

reason @ 84,

Not only is Germany obsessed with maintaining a healthy trade surplus, it’s obsessed with keeping inflation low. If Germany allowed itself higher inflation, it would make the adjustment process of the periphery easier.

As Krugman has pointed out, Germany made itself more “competitive” in the 2000s when the periphery had higher inflation rates. It was easier for them to adjust while they want the periphery to do it the hard way – with high unemployment and wage and price rigidities – with deflation. It’s kind of hypocritical.

It’s weird when the autsterians claim that Greece “didn’t try” these past five years.

http://www.cepr.net/index.php/blogs/beat-the-press/nyt-fact-checkers-go-on-strike-as-column-on-greece-gets-submitted

“The claim that the other three countries had similar austerity programs is wrong. According to the I.M.F.* the decline in the structural deficit between 2007 and 2014 was 6.0 percentage points of GDP in Ireland, 1.8 percentage point of GDP in Portugal, and -4.1 percentage points of GDP in Spain (the structural deficit grew larger over this period). By comparison the structural deficit in Greece was cut by 12.5 percentage points of GDP over this period, more than twice as large as the deficit reduction in Ireland, the most austere of the other three countries.”

* http://www.imf.org/external/pubs/ft/weo/2014/02/weodata/weorept.aspx?pr.x=82&pr.y=14&sy=2006&ey=2015&scsm=1&ssd=1&sort=country&ds=.&br=1&c=182%2C174%2C178%2C184&s=TX_RPCH%2CGGSB_NPGDP%2CBCA_NGDPD&grp=0&a=

Greece tried “expansionary austerity” for five to six years. It didn’t work. So they elected Syriza to try something else. Syriza isn’t going to blink and return to the same old failed policies.

What do the austerians and Troika expect? All dsqured and Winecoff appear to say is

“either continue with the same failed policies or you won’t get *any* bail out money.”

If that’s the answer of the Troika then we’ll see a Grexit.

As I’m hearing the conversation….

Varoufakis to Charlie Hebdo: Après nous, le déluge.

Wolfgang Sch&auml,uble, wrestling with the machinery of German parliamentary ratification: This leftish attitudinizing is unhelpful.

D-squared: We’ve spent decades nailing all your exits shut (H/T Bruce Wilder). Do you really expect us to redesign this grand edifice just to spare one insignificant band of malcontents the consequences of their own profligacy? Von wegen!

My response: If it won’t bend, sooner or later someone will find a way to break it.

Three lesser points.
1. The EU Commission is new. Same-old new you might think, but the switch from Ollie Rehn to Pierre Moscovici makes some difference, and Juncker doesn’t have Barroso’s problem of leaning over backwards not to look soft on Iberians. So the troika first-tier decisionmakers are : Lagarde (French), Blanchard (French), Moscovici (French), Juncker (Luxemburger), Draghi (Italian). Not the first team you would pick to enforce ordo-neo-liberalism. Of course, they all operate under severe institutional constraints. But personalities matter at the margin, and the troika will be making a lot of judgement calls over Greece in the next few months. Schäuble will be very worried they are going native. “Going native” means talking up the campaign against tax evasion and talking down the primary budget surplus.

2. Most commentators are dismissing the dropping of the term “Troika” for “the institutions” as pure window-dressing. Really? Sophisticated grown-ups don’t usually have bitter rows over nothing. Officials from the Commission, the IMF, and the ECB will still be flying regularly into Athens airport. But they will no longer be a plenipotentiary team. The officials sent to meet them will be slightly lower in rank. They may also themselves be replaced by slightly more junior colleagues. Tsipras and Varoufakis have a greater right to insist on dealing with principals whose interest is to solve the problem rather than underlings whose interest s to prolong it. A small win for Syriza no doubt, but still a win.

3. The patchup deal is terrible news for Rajoy and Sanchez of the PSOE. To puncture the threat from Podemos, they needed Syriza to fail abjectly. It hasn’t. At the very least, Greeks, unlike Spaniards, have enjoyed the refreshing sight of a government fighting for their interests instead of spinelessly kowtowing, and Spaniards have no reason not to want the same. Nothing short of Grexit can save the PP and PSOE now, and it would be unspeakably dangerous for Spain. Rajoy is not William the Silent, but neither is he the kind of crook capable of buying an election at that price.

103 “Neither of these things are true, though, are they Vasilis? The banks weren’t “made whole” – they lost 70% of their exposure on GGBs”

This figure is whack. The agreement was for a voluntary 50 percent haircut. It is improbable that the private banks decided to throw in another 20 percent out of their well known generosity.
http://www.dw.de/greek-haircut-when-50-percent-is-not-half/a-15508757

After long negotiations with EU leaders in Brussels last week, private sector representatives from the banking, insurance and financial industries agreed to write down their debts by 50 percent – on a voluntary basis.
The voluntary nature of this haircut was a crucial component of the eurozone rescue deal. A mandatory writedown that disregarded investors’ wishes could have triggered payments on Credit Default Swap (CDS) contracts – freely traded financial instruments that act like an insurance policy against default or debt restructuring.

To find out where the money went, one should look to Yiannis Mouzakis’s analysis, since he has compared the documents from all sources. 11 percent of the loans so far, according to Mouzakis, have been used to keep the state functions of Greece going.
http://www.macropolis.gr/?i=portal.en.the-agora.2080 Mouzakis also explains how the Private Sector Initiative worked.

During the PSI, bondholders were offered new bonds with a face value equal to 31.5 percent of the face amount of those exchanged. They were also given sweeteners in the form of cash-equivalent EFSF notes maturing within 24 months for 15 percent of the face value of the debt exchanged. Also, they were offered short terms EFSF notes for the accrued interest. This totalled 34.6 billion euros or 14 percent of the combined financing needs.
An added 11.3 billion euros was used to buy back over 30 billion euros worth of debt in the second debt reduction initiative of 2012.

Basically, the banks did much better on Greece than they did on, say, mortgage backed CDOs.

@ Daniel 102

“Meanwhile, Greece got EUR100bn of financing that wouldn’t otherwise have been available – without the program there would have been much more austerity.”

No the alternate scenario would have been Greece leaving the Eurozone, defaulting and switching to their own currency.

Most people agree they would have been better off than the six years of disastrous austerity we’ve seen. The most common comparison is Argentina 15 years ago.

How can you say “without the program there would have been more austerity” with a straight face? Is anyone saying that?

The IMF predicted a mild recession and then growth.

What Greece got was they remained in the Eurozone. If Germany kicks them out maybe we’ll actually see how much better they do.

Daniel: “Everyone made bad decisions during the runup to the crisis (hence, the crisis). But nobody made decisions which were so much worse than anyone else that these blame arguments can be made to look like anything other than the backward-reasoning they are.”

If it’s anything like the banking system on Wall St, it wasn’t ‘bad decisions’; it was fraud by the elites, pure and simple (or rather, pure and complex, to dupe people).

FWIW, here’s Stathis Kouvelakis (Syriza Central Committee) from yesterday. Lots of smart things in here.

” Nor is there much recognition of the fact that the Greeks endured much harsher, more drastic levels of fiscal retrenchment than any of the other deficit countries.”

This was my impression as well (unless anyone can complicate these graphs)

https://brianmlucey.wordpress.com/2015/02/17/a-picture-of-change-greek-reforms-in-reality/

Very intersting https://t.co/tyI8fgEddk

dsquared @60 “Kindred is dead right above. In context, “Germany pushed hard for austerity” just means “Germany tried to a set a definite limit on the extent to which it had to finance other people’s budgets”. In actual fact, that limit turned out to be too low – in the sense that if Germany had taken bigger risks, the overall outcome might also have been better. But even if you’re correct in blaming the fire department for sending two trucks instead of three, you still need to ask the question of who actually started the fire.”

One should note that “finance other people’s budgets” is a very very weak burden when you can issue debt with negative yields.

For instance in order to “finance” greece, Germany could give away random greek vacations to its citizens. All paid for by bonds issued at a negative rate. Bond buyers would be literally paying to send germans on vacations, and this would be helping Greece out at that same time.

Sometimes it’s helpful, at least to me, to take a step back and consider ongoing ordoliberal vs. (outdated, apparently) Keynesianism as tools for addressing budgetary shortfalls/chronic deficits.

So here are two real-life, recent examples from the U.S. for comparison purposes:

Minnesota, reeling from 8 years of Tim Pawlenty, now governed by Mark Dayton (DFL – Democratic-Farmers-Labor Party):
http://www.huffingtonpost.com/carl-gibson/mark-dayton-minnesota-economy_b_6737786.html

vs.
Illinois, which has recently elected Bruce Rauner its governor. Some of his good ideas for dealing with the state’s deficit: massive cuts to education, Medicare, health, transportation, and community funding (structural reforms). Rauner is opposed to the minimum wage (wants municipal employees to become “right to work” employees), to unions, to public pension funds (he wants to privatize them and convert them to 401ks, which is pretty rich because Rauner became a billionaire as a hedge fund manager managing … Illinois pension funds). He wants to cut public employees’ salaries from an average of 49,000 to 39,000 at one fell swoop (except for senior staff who support his office). One thing he won’t be doing (or at least, claims he won’t do, because it would be bad for business) is raise corporate/individual taxes on high earners.

http://www.huffingtonpost.com/robert-creamer/il-governor-rauner-gets-7_b_6742500.html
http://teacherpoetmusicianglenbrown.blogspot.gr/2015/02/governor-rauners-budget-proposal-ash.html
(One of the comments on the post’s threads explicitly refers to Greece and the other EU “PIGS”.)

Perhaps we could revisit the two states in four years and review which is faring better.
When I’m home (Illinois), friends-relatives ask me, “What’s it like to be living in a corrupt/tax-evading/austerian country like Greece?” I tell them it’s not too different from what living in Illinois will soon be like – after all, Illinois can’t issue its own currency, has the worst deficit in the country, four of its past seven governors have served / are currently in prison, and it’s proposing to overcome its problems through “structural reform”.

Rauner’s getting really strong push-back, and I wouldn’t be all too surprised if the Mayor of Chicago’s being forced into a runoff by failing to receive +50% might have had something to do with the entire state’s collective awakening to what ordoliberalism really means.

Daniel, a rather major problem in the German position as you describe it is that insistence on too fast adjustment has, at every step of the way, made it less likely that the loans will be repaid, and more likely that new loans will be needed. This was predictable, and indeed predicted. Were German (and eurozone and IMF) policymakers deluded about this, or was punishment part of the point? I don’t know.

Moreover, there is the role of the ECB to consider. Had the ECB been allowed to play the role of lender of last resort from the beginning it’s possible that the crisis could have been contained to Greece alone, with little contagion. And by resisting higher inflation, Germany is propping up the profits of its own exporters at the expense of unemployment elsewhere in Europe.

It is true that Germany’s strong fiscal position is what’s held the eurozone together. So Germany is not a pantomimes villain. But that’s not to say that Germany has used its position wisely, or that debtor nations have no cause to complain.

Daniel, a rather major problem in the German position as you describe it is that insistence on too fast adjustment has, at every step of the way, made it less likely that the loans will be repaid, and more likely that new loans will be needed.

This is true – it was a timid policy when a bold one was needed. Or at least, that’s what I think, because I regard Greece as basically an industrialised and developed country, albeit one with lots of political problems. So I think it has a normal fiscal multiplier, normal monetary policy response function etc.

If I believed that Greece should be seen not as the least developed of the developed markets, but the most developed of the emerging markets (a question on which the compilers of, eg, the MSCI indices appear totally unable to make up their mind), I might take a different view; that no amount of stimulus is going to help and that all the loans are doing is financing capital flight. I think that’s much too harsh, but one can’t say it’s totally ridiculous – at various points, I think Varoufakis has looked like he might be saying something similar. I think this is the basic error German economists have made (apart from the general error that Keynesianism is really unpopular there).

So yes, I think they’re deluded. The Germans, that is. As for the IMF, it’s not a question of what I think – they are deluded and they printed the evidence in their “mea culpa” report on the Greek program. Although this got them a load of totally undeserved plaudits because it included a recommendation for (meaningless, and not for them) debt restructuring, they absolutely refused to give an inch on the speed-of-adjustment question. They even titled a subsection “It Is Hard To Argue That The Speed Of Adjustment Was Too Fast” (or something similar, from memory). That’s idiotic, so we know that at least one party to the troika was in cloud cuckoo land on the effects of the program.

Moreover, there is the role of the ECB to consider. Had the ECB been allowed to play the role of lender of last resort from the beginning it’s possible that the crisis could have been contained to Greece alone, with little contagion. And by resisting higher inflation, Germany is propping up the profits of its own exporters at the expense of unemployment elsewhere in Europe.

I share this view. (And indeed, I made the point about LoLR repeatedly when I was at the Bank of England in the 1990s, and so did lots of people who weren’t as lowly as me). But the fact that the ECB wasn’t a lender of last resort was not exactly unknown at the time the treaty was signed, and the fact that the Euro was meant to be a low inflation currency was one of the main reasons why countries like Greece signed up to it!

Ronan, Euro membership remains very very popular in Greece. The main reason is stability. I think people intuitively understand that our political class, having failed at easier problems will handle the transition catastrophically. There is a big risk the country will be owned very quickly by a small number of people with wealth outside the country, and corruption will increase.

@ Winecoff 106

I don’t think you get the macro because that’s what we’re disagreeing about. Mostly you appear to ignore monetary and currency policy. China could keep its currency undervalued. That’s not austerity. That doesn’t cause sky-high unemployment. If China had gone the Greek route, they would have had another revolution.

But Greek is locked in the euro gold standard and so must adjust via sky-high unemployment and poverty. Would you rather be the German banks suffering millions in lost profits or the Greeks suffering a depression worse than the Great Depression?

Many of the anti-austerity people feel Greece would have been better off defaulting and the German banks would have gotten nothing.

But hopefully JQ is right and this is the beginning of something where anti-austerity parties gain power in Spain, Ireland, Portugal and then Italy.

The Germans need to decide: either run higher inflation, accept more fiscal transfers or leave the Euro.

Krugman agrees with OP John Quiggin in his column today:

“Still, nothing that just happened justifies the pervasive rhetoric of failure. Actually, my sense is that we’re seeing an unholy alliance here between left-leaning writers with unrealistic expectations and the business press, which likes the story of Greek debacle because that’s what is supposed to happen to uppity debtors. But there was no debacle. Provisionally, at least, Greece seems to have ended the cycle of ever-more-savage austerity.

And, as I said, in so doing, Greece has done the rest of Europe a favor. Remember, in the background of the Greek drama is a European economy that, despite some positive numbers lately, still seems to be sliding into a deflationary trap. Europe as a whole desperately needs to end austerity madness, and this week there have been some slightly positive signs. Notably, the European Commission has decided not to fine France and Italy for exceeding their deficit targets.

Levying these fines would have been insane given market realities; France can borrow for five years at an interest rate of 0.002 percent. That’s right, 0.002 percent. But we’ve seen a lot of similar insanity in recent years. And you have to wonder whether the Greek story played a role in this outbreak of reasonableness.

Meanwhile, the first real debtor revolt against austerity is off to a decent start, even if nobody believes it. What’s the Greek for “Keep calm and carry on”?”

http://www.nytimes.com/2015/02/27/opinion/paul-krugman-what-greece-won.html?smid=tw-share

Daniel @ 119:

“But the fact that the ECB wasn’t a lender of last resort was not exactly unknown at the time the treaty was signed, and the fact that the Euro was meant to be a low inflation currency was one of the main reasons why countries like Greece signed up to it!”

Did the Greeks realize that low inflation in Germany meant deflation for the periphery?

Which Greeks signed up for it? The corrupt elite who cooked their books? Seems like collective punishment to blame all of the Greeks.

I can’t decide whether the very short lease Greece continues on will make it possible to accomplish much more than address the humanitarian crisis – which is extremely important in itself, but the cost offsets work out at least in theory, so the Institutions seemed to accept that something has to be done.

For me, the long-term question – here expressed in layman’s, not financiers’ terms of course – is “how do refashion a country which never passed through the Industrial Revolution into a 21st century economy?” Considering Greece as an “emerging” rather than a “developed” market, which I think is correct, how can this be achieved? What’s it going to, uh, produce (for export)? Tourism, yeah, ok – the thing is, pundits toss around the word “tourism” as if it were the magic bullet, but then you start to discuss the actual details of tourism, and it’s a lot trickier – and less profitable, actually, given that tourism is now controlled largely by foreign operators who negotiate prices that barely cover costs and for payments that may come a season late – than it sounds, and I think the 18% may be near the upper limit for its possible contribution – maybe 20, not much more. Agricultural goods? For sure there can be vastly better land use, only about 30% of cultivable land is currently used, but with the possible/partial exception of the central Thessalian plain, “industrial” agriculture is a no-go for geographic reasons. Perhaps “sustainable agriculture of luxury produce”? Greece has some valuable (est. 50-60b worth) industrial minerals, and these could presumably be more systematically exploited, exclusively for the export market. Cf. http://www.sciencedirect.com/science/article/pii/S2212567114006947
The Aegean basin (Cycladic Islands and Milos in particular) has large reserves of geothermal energy that could be exploited for, inter alia, desalination. Fisheries? Greece, despite its tiny size, has the longest coastline in Europe, and it’s by and large still clean.

At the end of the day, whatever the outcome of this unhappy and unpleasant phase in Greece’s brief but troubled financial history, the country needs to figure out how to become reasonably rich – not as rich as Germany, but rich enough that it can both resist over-stimulation of its economy in prudent fashion, and weather global financial fluctuations, including moderately severe ones.

P.S. If any of the other Greeks reading the thread know of a full-length Syriza development document to direct me to, many thanks – I’d like to see one that covers all sectors, and from the short-, medium- and long-term perspective.

Winecoff @ 106

I apologize if my comments came off as insulting or lecturing towards you and dsquared (as I see you two agreeing on many things). They weren’t intended that way. My target was “your reasoning” which many other people share so I didn’t intend to get personal. Many people share my views – the Keynesian view – so it’s really a clash of viewpoints not people.

I’m not saying this is cost-free for the Germans. It may be that they see the cost of keeping Greece within the fold as too much. Maybe they don’t see Greece as reformable. Then they would be well within their rights to halt the bailouts and put a halt to throwing good money after bad. I don’t think the Keynesians really dispute this.

But what we argue is that the Troika (IMF, ECB, Euro commission) program isn’t working. What I’m arguing is that it would be better for the Greeks to dump it if they can’t get a better deal which allows them to grow and bring down unemployment. Many of us believe that yes a Grexit would be painful for a few years, but in the long run it would be better than a continuation of the last 5 years. If the Germans don’t want to pay to keep the Greeks in the eurozone, they’re well within their rights to stop paying for the bailout.

Daniel, in substance then we don’t really disagree.

But the fact that the ECB wasn’t a lender of last resort was not exactly unknown at the time the treaty was signed

It wasn’t unknown, but my impression is that everyone assumed if put to the test it would be, no? And in the end the assumption was right of course, just too late.

the fact that the Euro was meant to be a low inflation currency was one of the main reasons why countries like Greece signed up to it

Well but you can have too much of a good thing, right? I don’t think anyone signed up for deflation, or for trying to catch up to Germany with 0% inflation.

Kindred, are you saying you are an actual economist, and therefore you know what you’re talking about? Because — and maybe this is a problem with the crude medium of blog posts — you sure don’t sound like it.

If a country switches from consumption to investment, what impact does this have on GDP? It has no impact on GDP, because investment counts towards GDP. What impact does it have on employment? It has no impact on employment, because producing investment goods requires labor, and anyway the labor market should clear after adjustment. What really happened? Greek GDP contracted by 30% since 2008, and unemployment is now 25%. Austerity doesn’t mean switching from consumption to investment — it means switching from consumption to nothing. Whatever problems Greece has, they are not going to be solved by idling a quarter of the workforce.

The example of China doesn’t do what you want it to do. When the crisis hit, China switched to spending 50% of GDP on investment goods, which meant the impact on GDP and unemployment is small.

Your comments seem motivated less by objective economic analysis, and more by a moral analysis that identifies totally with bond holders. Your only real argument is that somehow the Greeks feel entitled to spend German money. But if Greece had quit the Eurozone in 2010 and defaulted completely, how bad would the consequences have been for Greece? A 26% decline in GDP? 31% unemployment? How bad would they have been for the Eurozone? It’s hard to say for sure, but they could have been severe, and they definitely would have been severe for Greek debt holders. Instead of quitting the Eurozone, Greece stayed in, with possibly no direct benefit to itself and some direct cost, but considerable benefit to the Eurozone, and to its debtors. Though I guess by your social welfare function, which seems to be the sum of utilities of bond holders, with everyone else receiving a weight of zero, the Eurozone has no reciprocal moral obligation to Greece.