Greece, decision theory, and the sure-thing principle

by John Quiggin on July 6, 2015

Lots of people have raised the suggestion of applying game theory to the the Greek debt crisis. I haven’t attempted this, reflecting my general scepticism about game theory in the absence of a well-defined strategy space. But now the Greek government and public have made, what is, in effect, a final move. In view of the No vote, Syriza can’t accept a deal that doesn’t include an explicit debt write-off or one that obviously crosses its stated red lines. Within those parameters, its clearly eager for a face-saving compromise.

For the other side (effectively the Troika and the German government), since Syriza’s move has already been made, the problem has now been reduced to one of decision under uncertainty, which is something I am comfortable with. More precisely, it’s a choice between a “safe” option, with an outcome that is fairly predictable, and a “risky” option where the outcome is uncertain.

The safe option for the European insitutions is to cave in, write off lots of debt and lose a lot of face. (Added in response to comments: the loss of face will particularly affect the elites in peripheral countries that accepted austerity, and will mean a further shift away from austerity in general. But the effect of a non-disastrous Greek repudation would be far greater).

The risky option is to foreclose, and force Greece out of the eurozone, and leading to a repudiation of debt. The possible outcomes involve several interdependent sources of uncertainty

  • Whether the Greek economy does so badly that the Greek public regrets their choice and throws the government out at the next opportunity
  • Whether exit from the eurozone is followed by exit from the EU
  • Whether the process generates a broader financial crisis

From the European viewpoint, all of these outcomes except one would clearly be worse than an immediate backdown. If Greece leaves the euro and recovers, the whole austerity project will be shown up as the failure it is. If Greece leaves the EU (and especially if the UK also does) the European project is done for. And, while the institutions seem to have convinced themselves there won’t be a financial crisis, their past track record gives little ground for confidence.

So, the only case that could conceivably counted as a win is the one when the Greek economy fails, but Greece stays in the EU and there is no immediate financial crisis. I’d argue that, even here, the damage to confidence in the euro and to the European project would be greater than the costs of a backdown. If that’s right, then the “sure thing” principle applies to this decision. Backing down is the best option with probability 1.

Even if least-bad case is regarded as slightly better than a backdown, any reasonable calculation of expected payoffs for the institutions concerned would indicate that backing down is the rational choice. That doesn’t mean that such a choice will be made. People aren’t generally rational after all. Moreover, individual rationality may not be the same as institutional rationality. Quite possibly, failure will be seen as career-ending for key individuals, notably Lagarde, Merkel and perhaps Juncker. So, they may prefer institutional disaster to personal failure.

From the viewpoint of Australia and the world at large, there’s no doubt about the outcome we should prefer. European austerity has been a complete failure and raises the threat of a new global financial crisis. The sooner this delusion is abandoned, the sooner it will be possible to address the real source of the problem: the unsound and unsustainable growth of the financial sector.

{ 312 comments }

1

politicalfootball 07.06.15 at 2:20 am

Backing down is the best option with probability 1.

This is only true if you fail to take into account the rest of the South, which is watching closely and has the opportunity to learn from the Greek example. What does the EU want the people of Spain to take away from this incident?

In other words, doesn’t your concern about a well-defined strategy space still apply?

2

Paul Montgomery 07.06.15 at 2:24 am

I can only hope your regular optimism is correct this time, Prof Q. Either way, hopefully we get change, because the status quo has sucked.

3

John Quiggin 07.06.15 at 2:26 am

@political football: The worst case for the Troika, in this respect, is if Greece leaves the euro and prospers, or merely avoids disaster. That will fatally discredit all the peripheral governments that went along with austerity.

On the other two points, I’d argue that the costs of either an exit from the EU or a general financial crisis outweigh any benefits of shooting one economy pour encourager les autres.

4

Rich Puchalsky 07.06.15 at 2:34 am

Neoliberalism only lasts under there-is-no-alternative, because no one outside of a very tiny elite actually likes neoliberalism. Demonstration that there actually is an alternative has to be the worst case by neoliberal decision makers.

The three outcomes under the risky outcome described above are not “alternatives to neoliberalism” that are viable, because they are more or less worse than neoliberalism. (Number 2 — Greece exists from eurozone ands EU — may not be bad for Greece, but it can be presented as bad for everyone else). Therefore, they are preferable to the safe option from an individual standpoint, an institutional standpoint, and a class standpoint.

5

Collin Street 07.06.15 at 2:36 am

See, it’s a principle-agent problem: european leaders are not european countries, and their incentives are not aligned. The only outcome that offers a chance of not humiliating the european centre-right leadership is a greek exit [controllable] followed by greek failure [unpredictable]. It’s a fifty-fifty bet, but that’s still better than “letting the greeks end austerity and showing that you were wrong all along”.

In particular Schauble has invested considerable effort into this: he can’t afford the reputation hit of a backdown, even if germany can.

6

Marshall 07.06.15 at 2:39 am

Recall Cuba is still getting through a period of intense economic isolation since the ’50s. Assuredly parts of that were not fun at all, but it was an interesting place to visit and some beneficial social reorganization occurred. And for Greece, I don’t suppose there will be an actual embargo?

7

Bruce Wilder 07.06.15 at 2:43 am

John Quiggin: . . . there’s no game theory left for the Troika . . .

I don’t think I would call the next move, “just a decision under uncertainty”.

As a tactic, it reminds me a bit of non-violent civil disobedience, where the point is to unmask violence and evil intent.

You have a lot of confidence in your own evaluation of what would, and would not further the credibility of the European project (and I tend to agree with your view), but it seems to me that SYRIZA is struggling to change the neoliberal political narrative that blames the Greeks for Greece.

The non-violent protester has to resist the human impulse to fight back, in order to make the moral narrative as clear as possible to on-lookers, who have the political power to force authorities to intervene or change course. It is not clear to me that there are any on-lookers in the EU with that kind of democratic power.

I fear the technocrats-in-charge will imagine that the low-risk strategy is to punish Greece severely, in an attempt to constrain what they imagine to be a neo-socialist contagion. And, the Greek government will have to act in some way to respond to what could shortly become a humanitarian crisis of the first order. And, however the Greek government attempts to respond will not necessarily look good in the Media, where a narrative of Greeks being Greeks will be pushed.

8

Anarcissie 07.06.15 at 2:46 am

I would think the US ruling class would have an interest in this crisis, and maybe a consensus about what would be best for it, plus a lot of weight to throw on the appropriate levers.

Given the militaristic outlook of the US r.c., and the warmth of current weather in its neighborhood, I doubt if they want Greece to be wandering off the plantation.

9

politicalfootball 07.06.15 at 3:00 am

One really can’t argue JQ’s point about what the Troika ought to do – it’s what the Troika ought to have done years ago. Instead, it has played for (and, in the short run, achieved) this outcome:

So, the only case that could conceivably counted as a win is the one when the Greek economy fails, but Greece stays in the EU and there is no immediate financial crisis.

I don’t see anything in the referendum that changes this logic, except that the Troika now may have strategize toward a Greek failure outside the EU.

But I’m just recapitulating JQ, who said:

So, they may prefer institutional disaster to personal failure.

That said, it’s still astonishing and edifying to see Tsipras make this pro-growth, pro-EU, pro-democracy play. One can only wish him, his people and the EU the best, even if it’s difficult to be optimistic.

10

Sandwichman 07.06.15 at 3:28 am

What has happened in the Greek referendum is a political earthquake. Before making predictions, it would be prudent to wait and see whether it generates a political tsunami. My intuition is that the neoliberal consensus is built on vulnerable party foundations and if it becomes clear to people that the institutions can be defied, it won’t be up to the authorities to determine what happens next.

11

dsquared 07.06.15 at 3:51 am

I think this leaves out the fact that if Greece stays in the Euro, it is likely to need constant transfers forever. If it leaves, but stays in the EU, then these can be reduced from a level in the tens of billions to something like what Romania or Bulgaria get. As a non-Euro state with a GDP level somewhere around the former communist states, Greece also loses political influence, and so can’t cause as many problems as it has in the past about things like the Balkans or Turkey. There’s a lot of favourable things about Greek Euro exit from the point of view of creditor states, and to suggest that losing Greece would be fatal to the EU is to take an excessively credulous view of the “cradle of civilisation” PR. It would be much less of a blow than, say, Australia losing Tasmania.

The key here is to see that Greece is a financial liability to the creditors. So it needs to be a political asset. It was quite an achievement on the part of the last couple of governments to bring this into doubt and make a credible case that losing a member could make the EU stronger but they did it.

I still think losing Greece would be a net negative for Europe (and a tragedy for Greece, albeit that if the EU had spare capacity to make transfers, Romania is a more needy candidate), so I agree with John’s conclusion. But it’s not as cut and dried as that, and the fact it isn’t is an awful indictment of the politics.

12

mpowell 07.06.15 at 3:55 am


The sooner this delusion is abandoned, the sooner it will be possible to address the real source of the problem: the unsound and unsustainable growth of the financial sector.

What??!! This is a massive non-sequitor to throw in at the end there. Greece has had a lot of trouble paying its debts over the years. For Greece, specifically, it seems that being part of a currency union with partners unwilling to engage in unlimited fiscal transfers is the real source of the problem.

13

Soullite 07.06.15 at 3:58 am

You’re all failing to see the forest for the trees. China, in the end, will ride to Greece’s rescue. They have a long history of lending out money they never expect to see again, but intend to use to exert political influence. They will lend Greek whatever money they need, if for no other reason than to destabilize Europe. They don’t really need a stable Europe. A clusterfuck Europe, however, is something that offers many opportunities.

Russia would do this if they could, but the history between the two countries will prevent that from happened (I think). But unlike the US, the EU has the potential to impact Chinas sphere of influence on a constant basis, and gutting them is very much in China’s interest. After all, if they destabilize the EU, most countries don’t become true problems, they simply revert back to their nationalist governments.

China is the future, like or not, and they damned well know it.

14

politicalfootball 07.06.15 at 4:05 am

The key here is to see that Greece is a financial liability to the creditors.

Greece within the Euro is not a financial liability to its creditors compared with Greece outside the Euro. This situation is not going to result in minimizing the liability to Greece’s creditors.

if the EU had spare capacity to make transfers, Romania is a more needy candidate

Which, again, makes a sort of superficial sense only if you ignore the fact that that the EU is forcing Greece to default. If it doesn’t wise up, the Troika will have chosen a massive transfer to Greece.

It was quite an achievement on the part of the last couple of governments to bring this into doubt and make a credible case that losing a member could make the EU stronger but they did it.

The Troika got the Greek leadership that it demanded. It turns out you can enforce a Depression on a polity for a surprisingly long time, but not forever.

15

politicalfootball 07.06.15 at 4:12 am

It was quite an achievement on the part of the last couple of governments to bring this into doubt and make a credible case that losing a member could make the EU stronger but they did it.

Given Greece’s sincere, deep devotion to Europe, and the genuine disaster that awaits the country if it separates from the Euro and the EU, it’s astounding that Europe was able to make a credible case that Greece would be better off risking separation. But the EU did it.

16

Sandwichman 07.06.15 at 4:38 am

mpowell @2:

the real source of the problem: the unsound and unsustainable growth of the financial sector.

What??!! This is a massive non-sequitor to throw in at the end there.

Yeah, it is kind of a non sequitur. I do like it though. What does the unsustainable growth of the financial sector have to do with anything and everything? If you don’t already know, it probably wouldn’t be possible to explain it to you, either.

We go along pretending that this system is sustainable if only the authorities would manage it properly. Whooops! Shit breaks out! Somebody fucked up!

Relax. If this was the best of all possible worlds, with the best of all possible technocrats serving institutional aims rather than personal advantage… then the crisis tendencies of the system would not be eliminated. That is the beauty of the system! (Or rather: that is the secret concealed behind the superficial beauty.)

17

Zamfir 07.06.15 at 4:44 am

When people say the Troika shoukd not have pushed austerity on Greece, what exactly does that? After all, the Troika did loan Greece the money to run deficits for years, at very easy terms, and it wasn’t enough.

So, what should have done to avoid austerity? Cover the deficits at higher levels to avoid cuts, running up even more debt? Or explicit donate money to Greece for that purpose, year after year?

18

js. 07.06.15 at 4:52 am

19

js. 07.06.15 at 4:54 am

Note to self: remember to close the fucking tag.

20

js. 07.06.15 at 5:15 am

JQ’s post makes a lot of sense, and I really hope he’s right, and that Europe acts sensibly (on the assumption that this is the right reading)—but being a pessimist by constitution, I think the implications of dsquared @11 may well prove decisive.

In any case, I wanted to make a slightly tangential point. Which is: Tsipras, wow! For someone who didn’t have a hand to play, he’s played it astonishingly well. It’s really quite remarkable. If you had asked me four or five days ago, I’d have said that Yes would win comfortably, and that Syriza would be more or less done by now. Now obviously, the fact that things didn’t go down that way is thanks to the Greek electorate and not Tsipras or even Syriza. Still, even calling the referendum was something that seemed vaguely catastrophic a week ago, and is suddenly seeming rather different now.

21

A H 07.06.15 at 5:17 am

What could have been done to avoid the worst peace time economic collapse of a developed country? It’s a real mystery!

But if you think it has anything to do with Germany or the european finacial system , you are clearly an anti euro troll who just wants to play games with the Greek people to score some political cheap points.

And don’t forget that varoufakis has a major tone problem and thus all the institutions were unable to negotiate, such a pity he was so impolite.

22

Sebastian H 07.06.15 at 5:26 am

“The Troika got the Greek leadership that it demanded. It turns out you can enforce a Depression on a polity for a surprisingly long time, but not forever.”

This is such an important point that I don’t know how it constantly escapes analysis. There is constant talk about the political constraints on Germany but never ever talk from very serious people about how long you should expect a polity to accept an enforced Depression. The troika was lucky they didn’t get Golden Dawn.

23

MPAVictoria 07.06.15 at 5:40 am

Dsquared’s comment here is truly incredible. I feel like he has demonstrated a blind spot on this issue that brings everything he says regarding Greece into question.

The Trokia forced all of this every step of the way. Against, I must add, the advice of the qualified experts who have been proven 100% correct. And yet somehow D2 believes the blame rests with the Greek government.

24

Collin Street 07.06.15 at 6:22 am

I think this leaves out the fact that if Greece stays in the Euro, it is likely to need constant transfers forever.

Level of transfers required depends on level of domestic consumption demanded: I think the greek population has shown a willingness to make tough sacrifices. We’ll see.

25

dsquared 07.06.15 at 6:56 am

Given Greece’s sincere, deep devotion to Europe,

???? Way before EMU, there was a well known problem with Greece and Europe. For example, they have far and away the worst record fort implement Directives.

26

Zamfir 07.06.15 at 7:02 am

@js, it’s a good piece, btu Idon;t think it’s quite the answer I was looking for. At the moment, debt service is a noticable but not outsized part of Greece’s budget – on the order of 2 to 3% of GDP. The European loans in particular have long maturities, low interest rates, and even deferred interest for EFSF loans. Lowering the total debt load would not have given Greece that much more headroom in the previous years.

Every little helps, as Tesco’s says. Perhaps Wren-Lewis is right. But it would still have meant most of the austerity. Anyone who considers the situation an imposed evil, would still have considered Wren-Lewis’s scenario an imposed evil, just marginally less so.

There is a great difference between Wren-Lewis’s scenario and the actual events, but that difference lies mostly in the future. There are currently EFSF loans scheduled to be repaid by Greece in the 2040s, 2050s,. In his scenario, those loans would not be on the books. That’s a serious change in outlook (though I suspect the EFSF loans were always supposed to be fudged away in the long term), but it wouldn’t have changed much about the present situation.

AFAICT, there

27

Chris Bertram 07.06.15 at 7:19 am

Unfortunately (from the perspective of this issue now) Europe is not a unified actor, and there are strong reputational reasons for German and Dutch politicians to pull the plug. I suspect that what we’ll learn today is whether France still has the clout within the EU that it used to. I suspect not, and that tells us a lot about where the European project has got to.

28

reason 07.06.15 at 7:40 am

DD @11
“It would be much less of a blow than, say, Australia losing Tasmania.”

Seriously? Who would notice? At least most Europeans have been to Greece on holiday.

29

Luis Enrique 07.06.15 at 7:41 am

If Greeks leave then do OK will not be clear if austerity or EU membership is what matters. Could be that Greeks have austerity either way, because how will they balance books outside euro? Default won’t help them much, debt servicing costs already low. So I am not sure exit then prosper will discredit austerity, may be interpreted as meaning countries in Greek position need to leave currency unions

30

Nick 07.06.15 at 8:24 am

Personally, I think that the Euro is in an incredibly weak state at the moment — it faces at least two different dynamics that contain positive feedback that could destroy it. The first of these is the obvious one. Greece leaves, the ‘irrevocable’ part of the currency union is now so much fading ink, and the borrowing costs of the other weak links go up. This is exacerbated as anti-Euro political parties gain ground, more austerity is demanded, etc. etc.

I don’t know if the second is true or not — but if Greece leaves, then the EU will basically have embarked on a currency version of Survivor. The weakest link will be gone — so the currency should strengthen somewhat, no longer dragged down by improvident Hellas — but then this will put pressure on the next weakest link, say Portugal. Portugal will know better than to expect any mercy; will they prepare an exit in secret if economic trends don’t improve? Will Italy suspect that Portugal is preparing an exit in secret and make their own plans? It seems to me that in a currency union, increasing costs are born as members fall away. And this dynamic will be exacerbated if Greece and its Neo-Drachma manage to make a go of it in the middle-term period . . .

I guess I can’t help but think that the brutal approach the Troika has taken might have had some benefits for them in the short term, but that in the long term it holds gigantic costs. What would have happened if an EU leader had flown into Athens and given a speech talking about how Europe understood what had happened to Greece, that some of it was because of terribly misguided policies and some of it was because of technical faults in the currency union, but that Greece was a valued member of the EU and people would sit down to negotiate a way forward that benefited all sides? Was this ever contemplated? Were there any attempts to solve this in the political sphere first, instead of simply approaching it as a matter of technical finance which required the austerity-driven dictates of a committee?

31

Sasha Clarkson 07.06.15 at 8:30 am

Yes there is no guarantee that the EU will be rational. The key players have believed their own fairytales for too long, but the facade of unity is cracking. Even Spiegel, a supporter of financial orthodoxy has an article entitled Angela’s Ashes: How Merkel Failed Greece and Europe” Other European leaders are calling for “a humanitarian solution” (Martin Schultz).

What we have now is an asymmetrical game of ‘Chicken’. Greece has had enough suffering already: the worst that can happen to her is nowhere near as bad as the worst that could now happen to the EU. Merkel has the choice: rebuild Europe, or go down in history as the one who broke the Union.

32

The Raven 07.06.15 at 8:40 am

Chris Bertram@27: As far as I can tell Merkel, and probably Schäuble and others in her government, believe they are doing the best thing; it is not simply a matter of saving face for them. In a sane world, the German ruling coalition would now lose power, to be replaced by a more competent ruling coalition. In reality, who can even imagine what will come?

33

Ravi 07.06.15 at 8:57 am

Why is the Troika lucky they didn’t get Golden Dawn? Revealed preference suggests that’s exactly who they want. What else could a policy of toppling Syriza and getting Greece to agree to even more austerity (aka the referendum result they were campaigning for) be reasonably expected to achieve in a few years?

34

Pete 07.06.15 at 9:21 am

Indeed, it’s interesting to compare all the “Golden Dawn” rhetoric with the lack of coverage of Hungary (neo-Nazi Jobbik, substantial forex mortgage problem – what happened to that?). Or Puerto Rico (possible default, not expected to leave the dollarzone).

Seemingly everyone on the radical left cheering a “NO” has done so in the belief that they’re striking a blow against centralised right-wing institutions. I think this has done a lot of damage to popular pro-Europeanism.

Given this, if the UK were to hold an EU in-out referendum next week, would you be confident in “IN” winning? I wouldn’t.

35

JPL 07.06.15 at 9:32 am

OP:

Your describing of the “safe” or “least bad” option in terms of “backing down”, “caving in” or “losing face”, although it may be an accurate description of the emotional undercurrents, is probably not helpful wrt arriving at an equitable solution. Let’s hope that there aren’t any fans of Johnny Cash among the creditors. Alternatively, these emotional elements could be minimized and separated off, and the technical fixes emphasized in conceptualizing the situation. It’s easier to make a practical response to adverse developments than to deal with the perceived emotional “personal status” issues.

36

kidneystones 07.06.15 at 10:03 am

Varoufakis Out!! Put him on the new drachma!
“Announcing…he will ‘wear the creditors’ loathing with pride’, he [Varoufakis ] revealed that Greece’s Prime Minister Alexis Tsipras had judged that his leaving the job ‘might help achieve a deal.”

Nuts as this sounds, this sort of sacrifice just might make swallowing the debt-forgiveness go down a little easier. Varoufakis will have to gloat from the sidelines now. Will he remain silent, I wonder. Not much point in going if he doesn’t.

37

reason 07.06.15 at 10:09 am

Pete, @34
“Given this, if the UK were to hold an EU in-out referendum next week, would you be confident in “IN” winning? I wouldn’t.”
If you were confident of “IN” winning last week, I’d question your judgement. I don’t see how it makes any difference to be honest (not to mention that the referendum was NOT about EU membership).

38

reason 07.06.15 at 10:11 am

Luis Enrique @29
“Could be that Greeks have austerity either way, because how will they balance books outside euro?”

They don’t have to balance the books – they can print money. (And defaulting on Euro debt – or rewriting it in Drachma will help).

39

kidneystones 07.06.15 at 10:15 am

The Telegraph provided Farage a platform and, as usual, Nigel puts his finger right in the eye of the blinkered class: “A huge generational dynamic exists, running through all of this. One poll from Antenna News in Greece found that 67 per cent of Greeks under the age of 35 voted No which shows just how much the seismic plates are shifting within European politics.”

And with youth unemployment in Greece ranging from 25% to 50% for the last few years under EU austerity why on earth would any young person mortgage her or his future on more cuts? The majority of Telegraph readers who clicked the poll at the end of the Farage piece want to see Greece out and rebuilt with UK aid. Doesn’t quite fit the narrative, does it?

Meanwhile UK Labour leaders have their feet nailed to the floor waiting for the next focus group to tell them what to say. Had Labour made their pro-EU referendum switch a year or so before their devastating defeat, Labour might be articulating Britain’s public response instead of Farage.

No link, I’m afraid. Wouldn’t want the faint of heart to keel over.

40

Ronan(rf) 07.06.15 at 10:24 am

Oh, hang on. There’s a Telegraph poll promising British aid to rebuild Greece? That changes everything.

41

kidneystones 07.06.15 at 10:42 am

@40 Gotcha!

You are soo easy!! Did you see Burnham on Question Time last week trying to be all things to all women and men. Hilarious!

All Labour needed to do was offer British working people a chance to vote on the EU referendum (which suddenly seems like a spectacularly fine idea, and thus avoid offering voters austerity-lite. Couldn’t allow the lower orders the same rights the Greeks have seized for themselves, could we?

42

Ronan(rf) 07.06.15 at 10:48 am

I think you’re buying into the Bruce Wilder theory of politics, that there is a large group of ‘working class white male racist closet social democrats’ who if only we (the entire western world, apparently) could entice into a political alliance then some magical populist anti elite Utopia would flourish. I think you misunderstand the basic demographics of modern western countries, and (indeed) UKIP.
Anyway, I wasnt responding to that part. I was responding to

“Doesn’t quite fit the narrative, does it? “

I dont know what narrative you mean ? The narrative that people will vote any old nonsense at the end of a stirring online article about their favourite hobby horse ?

43

magari 07.06.15 at 10:48 am

Didn’t see that one coming, re Varoufakis.

44

kidneystones 07.06.15 at 11:25 am

@42 No need to explain. Thanks, though!

My own point is that there’s something remarkable about listening to “let the Greek people choose” from the same folks who worked as fervently as possible to deny Brits a similar freedom. My favorite image of Labour hypocrisy is that of Alastair Campbell being publicly eviscerated on QT just after the historic Labour defeat. (Before all four leadership candidates had their road to Damascus moments simultaneously.)

Towards the end of the program, Alastair delivered to the young audience a stern lecture on the need to ‘always’ be part of the political debate. Moments later he was asked whether the public should be allowed to vote on an EU referendum. Without a moment’s reflection, Campbell promptly pronounced the public should not. Perfect.

Tis the stuff of dreams, much like this! Which UK Labour leader does Varoufakis most remind you of? I mean, of those who are alive today.

45

Ronan(rf) 07.06.15 at 11:29 am

A more intelligent Ed Miliband post lobotomy.

46

kidneystones 07.06.15 at 11:43 am

@43 and @45

On the evidence, I’d take off the humor cap for a bit.

Re: Bruce Wilder. I’m certain he’ll be deeply unhappy to have my persona linked with his. Re: the working class, white and otherwise. I’ve made it quite clear in the past that I do not see racism as a function of class. Chris Bertram fell into that trap and suspect he’s more than bright enough to see the error of his ways.

I can’t recall a single post you’ve offered that would indicate you have any understanding of the world outside your bubble. You seem quite unaware, for example, that I’ve planted the hypocrisy hat squarely on your melon and it’s still in place.

Chores attend.

47

Ronan(rf) 07.06.15 at 11:46 am

I dont see it as a function of class either, though that seems to be the impliction around here at times. My apologees for putting you in that category. Anyway, we are getting off topic.

48

Barry 07.06.15 at 11:58 am

Marshall 07.06.15 at 2:39 am
“Recall Cuba is still getting through a period of intense economic isolation since the ’50s. Assuredly parts of that were not fun at all, but it was an interesting place to visit and some beneficial social reorganization occurred. And for Greece, I don’t suppose there will be an actual embargo?”

It’s pretty clear that the best outcome at this point for the elites nad leadership of the EU is the total collapse of the Greek economy.

It’s also pretty clear that those people have their propaganda ready to go.

49

KahMue 07.06.15 at 11:59 am

@reason 38:
Printing (increasingly worthless) money is not what greeks voted for yesterday.
Greeks want help with no conditions (maybe other conditions, who knows) attached and overwhelming 75% want to keep the euro.

The overall problem with greece is not austerity.
There is little doubt that cutting expenses is only half the answer.
The true problem is greece being a failed state.
Greece has, e. g. failed to collect and use EU-money reserved for greece
due to administrative inability. Over the last 34 years this amounts to some 70bn € I guess (right now I’ve no sources at hand).

This problem won’t go away by leaving the euro or the EU.
It won’t go away by cutting off some of the debt.

Restructuring the greek debt might help but
without a restructuring of the greek state it is pointless.

Eurogroup knows that, greece knows that and unfortunately even potential
future lenders know that.

50

Barry 07.06.15 at 12:21 pm

MPAVictoria 07.06.15 at 5:40 am

” Dsquared’s comment here is truly incredible. I feel like he has demonstrated a blind spot on this issue that brings everything he says regarding Greece into question.”

His post earlier, where he talked about two quarters in recovery, shot his credibility in my mind, after I saw the Interfluidity graph, which showed how feeble that was.

51

Trader Joe 07.06.15 at 12:25 pm

Until Syriza and the Troika come to at least preliminary terms, the Greek economy will continue to be in tatters. No imports, No exports, No trade credit of any kind….in some ways worse than a cash economy since there is no cash and no prospects of getting any.

The first think that needs to be negotiated is not the debt or repayment thereof, but backing for the banking system which at this moment is probably insolvent on an actual basis, not just a functional basis. There is no economy without banks which have been closed one week and counting. . This is the greatest leverage point for the Troika now, they can tell Greece they will conceed on debt, in exchange for support to open the banks. The basis of the Cypriot bank bailout was a substantial haircut (25%) to balances – watch for the same here, futher damaging the economy and businesses

Varoufakis may be right that a “No” doesn’t = exit, but if no bank or trade partner will extend credit to businesses and every citizen has incentive to take their Euros out of country, being a ‘defacto’ Euro country won’t have much meaning except for foreigners vacationing there.

52

Barry 07.06.15 at 12:30 pm

dsquared: “It was quite an achievement on the part of the last couple of governments the Troika to bring this into doubt and make a credible case that losing a member could make the EU stronger but they did it.”

Fixed it for you. Please, for all of our sakes, go read Krugman, and inform yourself. He’s done a far more credible job than any financial people have.

53

Barry 07.06.15 at 12:32 pm

I’m seconding MPA Victoria’s comment for a second time. This comment by dsquared is nothing but Troika propaganda. They’ve had years where the Greek government bent to their will, and the result was an unmitigated disaster.

54

Sasha Clarkson 07.06.15 at 12:56 pm

The slight recovery in 2014 in Greece coincided with a slight pause in further Austerity. Being retweeted by Simon Wren-Lewis, I presume it’s kosher.

https://twitter.com/MESandbu/status/617301374146101248/photo/1

55

Nepos 07.06.15 at 1:04 pm

Y’all are so mean to dsquared, just because he consistently supports the interests of Euro elites over those of the Greek lower classes.

Don’t you know that the lower classes are there to be exploited?

56

Pete 07.06.15 at 1:10 pm

I think describing dsquared (or any other of our blog hosts) as either ignorant or a propagandist is out of line. Can we have anything other than a shouting match in the comments please?

There are a lot of us outside Greece or even outside the EU willing to cheer on the defiance as a means of inflicting damage on the European centralizing project. This seems to now include a lot of the young modern left. But we need to remember that it’s going to be painful for ordinary Greek people in the short term. This is turning into the miner’s strike of the 21st century: a debtor’s strike.

57

Pete 07.06.15 at 1:12 pm

(in other words, while it feels fantastic to be cheering someone else’s heroic charge into the machine guns, remember that the people talking about possibly running out of food, fuel, insulin, etc should not be assumed to be lying or exaggerating)

58

Barry 07.06.15 at 1:17 pm

Pete: ” But we need to remember that it’s going to be painful for ordinary Greek people in the short term. This is turning into the miner’s strike of the 21st century: a debtor’s strike.”

Please, go to interfluidity, and see the chart of Greek GDP under Troika management for the past several years. They’ve suffered horribly. The reason that they’re revolting is that they’ve suffered horribly, and I’m glad that I’m not them.

Go read Krugman.

BTW, if we want to swap insults, there is also a side which delights at the crushing of people. Also, the reason that people are getting down on dsquared is that he’s said some bad things.

59

ifthethunderdontgetya™³²®© 07.06.15 at 1:20 pm

If they didn’t want to be exploited, they wouldn’t be lower class. Q.E.D.

P.S. I do not expect the Euro elite to do the smart thing. For all their talk of “making the pie bigger, so everyone gets more,” the powers that be on both sides of the Atlantic tend to grab the most they can in the short term. In the long run we’re all dead, I suppose.
~

60

Rich Puchalsky 07.06.15 at 1:28 pm

Pete: “Seemingly everyone on the radical left cheering a “NO” has done so in the belief that they’re striking a blow against centralised right-wing institutions. I think this has done a lot of damage to popular pro-Europeanism.”

I don’t really know whether anyone is cheering the possible demise of technocracy in this area as a defeat of the right that will lead to a victory of the left. What most people seem to be cheering for is a defeat of the towering arrogance and self-dealing of the people who claim that they are the only ones who know how to run an economy but manifestly do not know how.

Helplessness is a cost. After years of misery compounded by helplessness, people will look around for anyone on the left or right who provides some possible way out of it. The entire economically most successful period of the U.S., from FDR through the 70s, was based on the realization of technocrats that they had to take this seriously, stop making excuses for why nothing else could be done, and change their theories to fit the circumstances.

61

ifthethunderdontgetya™³²®© 07.06.15 at 1:34 pm

“but manifestly do not know how”

Cue Dean Baker:

It may be true that, “German leaders genuinely believe that a new deal along those lines would be bad economic policy for Greece.” German leaders do show considerable evidence of having no understanding of economics. This is why they are taking positions that put them at odds with economists at the I.M.F. and just about everywhere else. The evidence of the last five years contradicts their claims about the economy as completely as possible, but it appears that many people in top positions in Germany are genuinely flat earthers who simply can’t accept that the world is round and that the euro zone economy is suffering from a shortfall of demand and need not worry about debt.
——
~

62

kent 07.06.15 at 1:35 pm

If Alabama stays on the dollar, it is likely to need constant transfers forever.

63

Layman 07.06.15 at 1:41 pm

“I think describing dsquared (or any other of our blog hosts) as either ignorant or a propagandist is out of line.”

dsquared has a point of view, to which he is entitled. He’s clearly a smart guy, but like most people, he is sometimes wrong. Unfortunately, he can’t abide disagreement. His reaction to disagreement is to ban posters when he can, and insult them when he can’t ban them. He is effectively a monologist now.

64

JW Mason 07.06.15 at 1:41 pm

Pre 2009, financial markets were happy to hold Greek sovereign debt at rates not much above German. Either (1) financial markets reliably aggregate all available information, in which case the Greek government was correct to trust their judgement that its borrowing was cheap and sustainable, and was subsequently the victim of an unforeseeable shock. Or else (2) financial markets do not send reliable signals about social costs and the probabilities of future states of the world. In which case, the commitment of the euro system to maximum freedom of financial flows is fundamentally flawed and will inevitably produce crises.

I don’t think there’s any way, even in principle, to tell a story in which the Greek debt crisis is mainly attributable to the actions of the Greek government.

65

JW Mason 07.06.15 at 1:45 pm

Also, it is generally the case that standing up against injustice is seldom personally advantageous, and often very costly. Some people conclude from this that you should never stand up against injustice, or encourage anyone else to do so. I don’t.

66

Layman 07.06.15 at 1:47 pm

“If Alabama stays on the dollar, it is likely to need constant transfers forever.”

I had the exact same reaction. I think the Eurozone is doomed without both mechanisms and voter appetite for such transfers. In practice, this means that social services and taxes have to be standardized across the zone; budgets must be closely coordinated if not actually created at the EZ level; and the citizens of wealthier states have to accept that they’ll pay the pensions of citizens in poorer states. There’s no workable currency union without greater political union.

67

Zamfir 07.06.15 at 1:50 pm

@Thunder, the problem there is that Germans have been running their own country on the flat-earth principles for decades. And they are reasonably happy with the results. Every decade or so, economists explain to them that their country might work in practice, but it cannot possibly work in theory.

68

Map Maker 07.06.15 at 1:52 pm

Anyone on this page want to push for a ballot in Germany about transferring another 50b EUR to support Greece?

69

JW Mason 07.06.15 at 1:59 pm

Layman-

I used to think this too but I’ve changed my mind. Current account imbalances can be offset by financial flows indefinitely, without the need for transfers. All that’s needed is for the authorities to buffer shifts in private flows through mechanisms like TARGET2 and QE. As long as the relevant interest rates stay below nominal growth rates, the resulting net debt positions will converge to some finite share of GDP. And they’ll be invisible, as far as daily economic life goes. What is the net external creditor or debtor position of Alabama? I’m not sure you can even answer this question with existing data.

An advantage of this approach is that it is possible with the existing institutions of the eurosystem. In fact all it requires is that the ecb go back to doing the job of a central bank, instead of being the enforcer-in-chief of austerity.

70

Clare Stucki 07.06.15 at 1:59 pm

The Greeks have in essence voted in favor of the right to early retirement forever, generous government retirement pensions in perpetuity, perpetual government employment of hundreds of thousands of non-productive ‘workers’, and most importantly, in favor of their northern European neighbors footing the bill for all these freebies forever.

Hey, I’d vote for that myself, if I thought my neighbors were that dumb!~

71

JW Mason 07.06.15 at 2:00 pm

Map Maker-

In absolute terms, transfers to Italy, Spain, Ireland and perhaps even Portugal have been larger than to Greece. And no one in Germany cares.

72

Goldcap 07.06.15 at 2:01 pm

If Greece leaves the euro and recovers, the whole austerity project will be shown up as the failure it is.

I think we tend to underestimate the huge chance that Grexit does massive damage to the Greek economy, read decades of unemployment, structural decay, political stagnation. Noting that just switching this economy from Euro to Drachma would kill in-country production and supply chains. I think a lot of the “DOOM NOW!” hyperbole from the EU is laughable, but I think Varoufakis and Tsipras fear Grexit for very good reason.

So while I would love JQ’s optimistic view to be a viable option, I couldn’t see it happening without massive amounts of planning, and a heroic logistical effort from Syriza, which at this point, has shown zero capacity or willingness in either area.

73

William Timberman 07.06.15 at 2:05 pm

A smiling cannon blast from Piketty in die Zeit today. Something the Germans, and perhaps dsquared, need to hear again and again. I particularly liked this bit, near the end:

Diejenigen, die Griechenland heute aus der Euro-Zone vertreiben wollen, werden in der Mülltonne der Geschichte enden.

Englished: Those who want to drive Greece out of the Eurozone today will end up on the rubbish heap of history.

74

Z 07.06.15 at 2:07 pm

Considering Angela Merkel’s speech person declaration before the beginning of the negotiation, I think it extremely unlikely that she will accept the safe option. It does seem that part of the leadership of the European Union has decided to push Greece out (“A good European does not seek unity at all cost. A good European respects treaty as well as national laws and thereby contributes to the stability of the Eurozone” what a great definition of a good European).

I am very pessimistic for Greece, which will keep suffering horribly, and for the European Union.

75

ifthethunderdontgetya™³²®© 07.06.15 at 2:08 pm

@Zamfir, Germany is the world’s poster child for not repaying your debts when it’s inconceivable that you could do so.
~

76

William Timberman 07.06.15 at 2:10 pm

I probably should also have linked to the English translation of Piketty’s entire article, here (hat tip to Brad Delong.)

77

ifthethunderdontgetya™³²®© 07.06.15 at 2:16 pm

@W.T. I think this covers it:

Piketty: My book recounts the history of income and wealth, including that of nations. What struck me while I was writing is that Germany is really the single best example of a country that, throughout its history, has never repaid its external debt. Neither after the First nor the Second World War.

However, it has frequently made other nations pay up, such as after the Franco-Prussian War of 1870, when it demanded massive reparations from France and indeed received them. The French state suffered for decades under this debt. The history of public debt is full of irony. It rarely follows our ideas of order and justice.
——
~

78

dsquared 07.06.15 at 2:19 pm

In absolute terms, transfers to Italy, Spain, Ireland and perhaps even Portugal have been larger than to Greece.

What definition of “transfers” are you using here, Josh? I don’t recognise this statement. Italy hasn’t had a program at all

79

Z 07.06.15 at 2:20 pm

ZEIT: Glauben Sie, dass wir Deutschen nicht großzügig genug sind?

Piketty: Was reden Sie da? Großzügig? Deutschland verdient bisher an Griechenland, indem es zu vergleichsweise hohen Zinsen Kredite an das Land vergibt.

This is funny, but unfortunately I believe that the scenario outlined just above the exchange is unfortunately quite likely (both Die Zeit’s proposal and Piety’s answer).

ZEIT: Der deutsche Finanzminister scheint dagegen zu glauben, dass ein Austritt Griechenlands aus der Euro-Zone Europa sogar schneller zusammenschweißen könnte.

Piketty: Wenn wir damit anfangen, ein Land auszustoßen, kann die gravierende Vertrauenskrise, in der sich die Euro-Zone heute befindet, nur größer werden. Die Finanzmärkte würden sich sofort dem nächsten Land zuwenden. Das wäre der Beginn einer langen Agonie, in deren Zuge wir riskieren, Europas Sozialmodell, seine Demokratie, ja seine Zivilisation auf dem Altar einer konservativen, irrationalen Schuldenpolitik zu opfern.

80

Rich Puchalsky 07.06.15 at 2:22 pm

JW Mason: “In absolute terms, transfers to Italy, Spain, Ireland and perhaps even Portugal have been larger than to Greece. And no one in Germany cares.”

Since this is about “morality” apparently, maybe what people really want is a kind of moral transfer as a payback for the financial transfer. I suggest that Greeks pay back those other Europeans who care about this like so: individual Greeks will make videos of themselves doing stereotypically immoral activities in this context: lying about in the sun, complaining ineffectually about the bribe that they had to pay to their doctor, talking about how they managed to cheat on their taxes. They will send these videos to other Europeans who particularly care about not supporting Greece, and those other Europeans can watch the videos and feel disgust mixed with a warm glow of self-pride that they themselves are better people than that. Since that is a major component of what they want out of life, surely the recipients of videos would be fine with sending let’s say 1/3 of their income the other way.

81

Sebastian H 07.06.15 at 2:27 pm

We saw all sorts of complaints about the failure of Greek diplomacy that led us here. (And while I think on balance the no vote was a good thing I definitely realize that it is a risky thing).

how is this seen as anything but a huge diplomatic failure on the troika’s part? One week ago they had won everything. They’d had backed Syriza into a corner–winning concessions from a party elected on not giving concessions. They had 99% of what they demanded. They may not have ‘liked’ the Greek negotiating partners, but surely technocrats don’t basis their decisions to wring a little harder on that….

They’ve gone from a position where they have 99% control and virtually zero chance of bad outcomes for anyone but Greece, to a position where worse outcomes for everyone seem likely. All because they coveted that last 1%.

Maybe we need to remember that this is a world where Donald Trump is successful.

82

JW Mason 07.06.15 at 2:33 pm

DD-

I’m thinking of net TARGET2 balances, which reached 400 billion for Spain and 300 billion for Italy. Also QE, which must represent a substantial net transfer from Germany to Italy.

83

Ronan(rf) 07.06.15 at 2:34 pm

There are genuine problems with the Greek political economy. The concerns arent merely aesthetic

http://pseudoerasmus.com/2015/02/23/greece-orthodoxy-peronism/

other European publics (counterproductively, IMO) have objections

http://blogs.lse.ac.uk/europpblog/2015/07/06/why-debt-relief-could-save-greece-but-would-destroy-the-eurozone/

that arent merely aesthetic

84

Sebastian H 07.06.15 at 2:35 pm

” It does seem that part of the leadership of the European Union has decided to push Greece out”

It should be noticed that their actions suggested this course at least five years ago. The real tragedy for Greek poor people is if pushing toward Grexit has been part of the plan all along, they will have suffered all of the terrible economic effects of Grexit (and we shouldn’t kid ourselves, they are going to be terrible) PLUS five years of the horrible Depression enforced by the troika.

85

Trader Joe 07.06.15 at 2:37 pm

@78
Your comment would be correct if you are of the view that the Troika had not already anticipated default. If you have a debt you don’t expect to collect, why settle for less than 100% and encourage others to think they can do the same thing.

If the Troika had already assumed default than from their perspective the situation remains unchanged at worst and has possibly improved- they still have an unpaid debt and Greece’s ability to negotiate is actually weaker, not stronger since a) they have already defaulted b) their banks are on the verge of failure and c) the people took away Syriza’s negotiating capacity for anything that even vaguely resembles the last deal on the table.

86

William Timberman 07.06.15 at 2:38 pm

Rich Puchalsky @ 77

Piketty mentions irony. You make poetry out of it. That second paragraph made my day.

87

Anderson 07.06.15 at 3:11 pm

83: yeah, Puchalsky FTW here.

88

crygdyllyn 07.06.15 at 3:15 pm

First, I am amazed at the high level of intelligence and civility exhibited in the comments.

Regarding the Greek vote – the overwhelming rejection of austerity has removed it as an option for all of the EU, I think. I doubt the troika will be so demanding in the future of Spain, Italy, etc. For what if referendums are done in other countries with similar results?

Also, does the referendum reduce the legitimacy of the Troika? How damaged is the ECB now – a lot, or not at all?

I think the most likely outcome now is that Greece will be forced out of the EU.
BUT, Greece will fare much better than the Troika would like, thus removing the fear that it uses to impose its demands.

89

MPAVictoria 07.06.15 at 3:20 pm

Piketty is just some ignorant blog commenter don’t ya know…..

90

Tiny Tim 07.06.15 at 3:45 pm

The ECB can bail out banks without making Greece suffer. It has chosen not to. (No I don’t know precisely what the ECB can do legally, nor, as far as I can tell, does the ECB).

91

Ronan(rf) 07.06.15 at 3:57 pm

Obviously there are distributional concerns that exist independently of facile implications of puritanism. This is something that’s acknowledged on many a thread (ie immigration) when there is a more direct distributional effect on the politics of north america.
There are clearly genuine electoral and parliamentary political constraints in Northern Europe.
As an example. I’ve discussed this with people from a country that needed a bailout, who were extremely angry about that bailout, but who still didnt believe their country should cancel it’s relatively meager (320million) loan to Greece. This was because they believed (probably wrongly) that it could be put to better use at home, ie it was a distributional concern.
A political constraint. The main party who implemented the (very unpopular) bailout package is now challenged by a new party who opposed it. Politically, acknowledging there were better terms available is very difficult, for a political party whose main goal is to get re-elected. Now multiply this by 100 and imagine the context of German politics.
People can, of course, put the emphasis wherever they like (it’s mainly guesswork, tbh) but if you’re imagining solely a technocratic elite insulated from domestic politics then you’re really not thinking very hard. And if you think these domestic constituencies are pathological, then more power to you.

92

Layman 07.06.15 at 3:59 pm

The question has already been asked, but if the ECB has the authority to extend liquidity to banks in non-Eurozone countries (e.g. Bulgaria), how can it not have the authority to extend liquidity to Greece? So, it’s not a question of authority.

93

Trader Joe 07.06.15 at 4:03 pm

@88 and @86
The ECB has all the authority they need to extend liquidity to Greek banks…what they lack is a will to lend money to someone who is implicitly saying whatever amount is lent will not be returned in full. At that point it ceases to become a loan and is somewhere between a gift and aid. The ECB lacks authority to give gifts or aid.

94

Sasha Clarkson 07.06.15 at 4:07 pm

I believe that the Troika have committed crimes against humanity by economic means: I would chip in to help sponsor a test case.

95

Glen Tomkins 07.06.15 at 4:09 pm

They’ve got to shoot the elephant

“So, the only case that could conceivably counted as a win is the one when the Greek economy fails, but Greece stays in the EU and there is no immediate financial crisis. I’d argue that, even here, the damage to confidence in the euro and to the European project would be greater than the costs of a backdown.”

The way these people think, the central issue here is the moral hazard created if Greece gets away with not paying its debts. They view the world differently than sane, sober, rational people such as ourselves, therefore they assign different values to outcomes than you or I might, and different probabilities. For them, any outcome in which Greece “gets away with it”, doesn’t pay every penny in full, has a 1 probability of the worst value.

Even those among them who understand that shooting the elephant is both unnecessary and futile are as trapped in their situation as Eric Blair. I guess there is some probability that we will get another George Orwell as an outcome, but I wouldn’t put it anywhere near 1.

96

Sebastian H 07.06.15 at 4:14 pm

Trader, I dont understand your comment. How can this vote have made the Greek negotiating position weaker? The only thing more than what was offered two weeks ago is complete capitulation. So you seem to be saying that they got even weaker than the complete capitulation case?

The problem with Tsipras isn’t that he was a bad negotiating partner. He was a bad capitulation partner, or a bad recipient of ultimatums.

I realize some of my comments haven’t been clear because I’ve been extending interpretive charity to d-squared. My current, though not deeply held, understanding is that the actions of the ECB et al strongly suggest that they have been willing or at least permissive about pushing Greece toward a long term exit. They just wanted to make sure the banking system could survive it before pushing them out. This had the unfortunate side effect of hitting poor Greek people with an extra five or six years of depression on top of the intense pain of Grexit but from the point of view of the bankers their suffering is the price to be paid for the security of the rest of Europe (I.e. Not letting Spain and Portugal and Italy get any ideas).

D-squared’s position seems to be that the troika REALLY wanted all along for Greece to do fine, that the forced austerity programs were expected by policy makers to work, etc. what I’m saying is that *if his position is correct* this is an enormous failure of diplomacy, and an enormous failure of technocratic decision making by all the members of the troika. (Note the current attempt to blame it all on the IMF is still a ghastly diplomatic failure even if true. Were they not talking to each other?).

As much as I can tell from his current position (which may be misinterpreting because it is hard to understand) he is saying something like “these aren’t decision making failures, they are institutional failures forced by the structure of each institution”. This seems much like his defense of robosigning (banks that had handled the recording process of 50 states for generations couldn’t handle it anymore because of global institutional pressures) and LIBOR.

For non bankers and slightly more humble technocrats that raises the question “why do bankers keep getting so many institutional failures with such bright people” but I think that is firmly off the table.

97

Layman 07.06.15 at 4:14 pm

Are banks in Greece saying, implicitly or otherwise, that they’re insolvent? I’m confused over the distinction between Greece (which is saying implicitly that they won’t pay back everything they owe), and banks in Greece, which I think are not saying that.

That aside, if everyone believes some Greek debts will never be paid back, and everyone has believed that for some time, then hasn’t the ECB already decided to extend liquidity to Greek banks while knowing that? I get that the ECB is in a tough spot, but it seems they’re taking sides against Greece in order to force a particular outcome – making a political choice.

98

JW Mason 07.06.15 at 4:17 pm

The ECB can bail out banks without making Greece suffer. It has chosen not to.

That’s right. The ECB’s response to incipient sovereign-debt/banking crises in other deficit crises was the diametric opposite as in Greece.

what they lack is a will to lend money to someone who is implicitly saying whatever amount is lent will not be returned in full.

But the thing is, if the ECB were more willing to lend, it would probably end up lending less. Since they expressed an open-ended willingness to buy the sovereign debt of other euro-area countries, that debt is regarded as safe by market participants and willingly held, so there is no need for official bailouts o Spain, Portugal, etc. On the other hand, because of the ECB’s reluctance to hold Greek sovereign debt, that debt is (quite reasonably) regarded as risky by market participants. If the ECB made the same “whatever it takes” commitment to stabilizing the Greek sovereign debt market that it has made for the rest of the euro area, Greece could easily issue new private debt to pay off the official creditors. It’s precisely the fact that the ECB is unwilling to lend to Greece freely, that keeps Greece dependent on continued ECB lending. Sounds funny, but well, the world can be a funny place.

99

c 07.06.15 at 4:20 pm

Like Colin Street mentioned, don’t forget the principal-agent component. Another thing to keep in mind: it takes three to troika. Is it entirely sure that the three will react the same and in concert? If I put my most optimistic (naive?) hat on I can see a possible path for IMF to now start to make the shift in policy that its research branch has already made.

100

Nepos 07.06.15 at 4:31 pm

It’s been mentioned in passing, but all of the economic analysis fails if it doesn’t take racism (or, technically, ethnic bigotry) into account. The Germans have looked down on the Greeks (and other Southern Europeans) for a long time. I doubt they’d take quite such a hard line with another Germanic or Scandinavian country.

101

Peter K. 07.06.15 at 4:31 pm

The ECB is just following marching orders from its member states and the Euro commission. If they continue to choke the Greek Banks with the complicity of the Greek Central Bank then they’ll push Greece out of the Eurozone.

I think this is what’s going to happen. The Troika aren’t playing game theory with the goal of getting paid back and punishing the profligate Greeks while helping them grow again as the business press keeps telling us. They’re just punishing the Greeks with an economic theory that doesn’t work. They’re just following the dictates of the conservative members of Merkel’s coalition government.

As Waldman writes: “Throughout the crisis, European elites have faced a simple choice: Acknowledge and explain to electorates their own mistakes, which do not line up along national borders of virtue and vice, or revert to a much older playbook and manufacture scapegoats.

Such tiny, tiny people.”

The OXI vote has to be a huge morale booster for Podemos and the like. Syriza has to play the long game now. And that means getting your economy growing again per Krugman: http://www.nytimes.com/2015/07/06/opinion/paul-krugman-ending-greeces-bleeding.html

I guess there’s a chance the ECB will compromise a little with Syriza and allow a deal, but I think it’s unlikely. I don’t think it really matters to the Troika that Varoufakis was being rude and so his resignation doesn’t really change anything. It was just a red herring. The Troika and finance ministers really, really don’t like far left Syriza types. Their goal is to get Syriza tossed from power and put Greece back on its never-ending austerity treadmill. If they can’t accomplish that, then they’ll pull the plug, damn the consequences. They don’t care about the consequences of their austerity policies after all.

If there’s no deal than the Greeks need to get their banking system working again.

102

Peter K. 07.06.15 at 4:41 pm

@55 Pete

“(in other words, while it feels fantastic to be cheering someone else’s heroic charge into the machine guns, remember that the people talking about possibly running out of food, fuel, insulin, etc should not be assumed to be lying or exaggerating)”

Have you read the economic and social statistics for Greece over the past 5 years under austerity??? The economy has shrunk by a quarter. Suicides are way up. Poverty and illness are way up. It’s the first time an advanced nation which is not at war or has suffered a natural disaster has faced this level of economic depression since the Great Depression.

How callous do you have to be to simply ignore those facts? The Troika is doing nothing but promising more of the same for decades on end.

What is you problem? How can someone ignore those economic facts and prescribe more of the same policywise?

103

Peter K. 07.06.15 at 4:48 pm

“Map Maker” @ 66

“Anyone on this page want to push for a ballot in Germany about transferring another 50b EUR to support Greece?”

I would have supported a referendum on the ECB’s QE program in Germany and the ECB’s “whatever it takes” statements. They would have voted NO and the Eurozone would collapse and Germany would be back on the Deutschmark and would no longer enjoy the benefits of an undervalued currency.

The European idea would be dead, but that was never a priority for the Map Maker types.

104

Glen Tomkins 07.06.15 at 5:00 pm

I blame the US constitution

I’m afraid that my country has provided a terrible example to the world. We’ve done quite well for the past 250 years, despite the fact that at the founding we fudged on actually creating a Union out of 13 independent states.

This was perhaps unavoidable, as those 13 state governments would presumably not all have passed an Act of Union abolishing themselves in favor of the new United States government. What was done instead was to create a central govt that all assumed would evolve into the de facto one govt of the Union, but to leave the separate states with all sorts of de jure sovereignty. That is in fact what happened, but along the way, the mendacity of divided sovereignty led to a civil war, and could very well do so again, as the theoretical state sovereignty hangs on unchanged.

The constitution never evolved to get rid of the vestigial state sovereignty because that never seems a pressing matter until those vestiges are used to create a crisis. Our wreckers, not content to use whatever elements of the US govt they control to create veto points, are once again turning to the states, to use their powers of independent legislation as veto points.

The European project has involved even less initial cession of national sovereignty to the EU. It has been assumed that introducing the new union govt with “only” supposedly merely technocratic functions such as a common currency, would lead in time to the new central govt eventually evolving into the one govt of Europe, much as the US govt evolved into a (largely) effective central govt. Now we discover, to what should have been no one’s surprise, that a common currency is far from a purely technical issue that can safely be left to technocrats. Having a common currency without a common social insurance is a recipe for disaster and disunion.

If most Europeans want a Union govt, and Lord knows their history is full powerful reasons for them to want that, they have to face up to the need for all their separate national govts to sign an Act of Union that puts those govts out of business. Go all the way, or don’t go at all. Some half-way pseudo-union is the absolute last thing you should do if avoiding national conflict and war is your aim. We did that, and it gave us our Civil War, the worst we have ever experienced. And even that war did not finally kill off states’ rights.

105

Robespierre 07.06.15 at 5:05 pm

+1

106

Zamfir 07.06.15 at 5:09 pm

@JW Mason, In that ‘whatever it takes’ scenario, what happens on the Greek side? I don’t suppose you mean that Greece can run any deficit that it wants with the ECB backing it? If not, what mechanism do you have in mind?

107

Bruce Wilder 07.06.15 at 5:11 pm

The bailout was great political theatre, producing large headline amounts of “aid” to Greece, but the Greeks barely got to touch the bulk of the funds. Over 3 years, by my rough calculation, the Greeks may have netted something on the order of 1000 Euro per capita per year — not nothing certainly, but not much against the loss of potential output from depression conditions. Meanwhile, the Troika pursued a right-wing (aka neoliberal) agenda of detailed “institutional reforms” in alliance with a center-right government, not just in Greece, but across the periphery. And, if they didn’t like the government, they replaced it. The previous prime minister who proposed a referendum in Greece, was sacked in a nonce, which is why this prime minister put his on, on a short schedule. The government in Italy was replaced, when it didn’t suit.

My objection to the “mistakes were made” narrative is that it encourages people to overlook the extent to which none of this has been a mistake — it has been power politics played for keeps. Sebastian H has done a remarkably good analysis in these threads, imho, laying out the observable strategic dynamics, but I thought Z had the most intriguing observations, about how the defects of the Euro design were part of a deliberate attempt to patch over the existing political and economic faultlines of countries in the late stages of recovery from fascism and civil war.

A number of commenters have pointed to the authority of Krugman, and though Krugman, as usual picks the liberal side (my side, too, I admit!) as far as the immediate politics is concerned — in accord with his brand as a liberal with a conscience — he remains a deeply conservative economist, who has been pushing the line that the Troika were making an elementary macroeconomic mistake for years. Which, I think, has served to cover up the sometimes vicious political and microeconomic agenda. Ditto for Simon Wren-Lewis, who has been lending his prestige as an Oxford don (is he actually a “don” — I’ve never been clear on what that means?) to the making of sympathetic noises, but, as an economist, he’s never been worth more than a bucket of warm spit.

It is really hard to get a clear, well-informed view of what has been going in the Eurozone. I thought Steve Randy Waldman’s piece was outstanding, as far as it went, and the bit about writing from his family’s reclaimed property in Romania indicates that he has deep personal awareness of the shadows that lie over Europe. But, I am not sure that we are yet coming to grips with the extent to which the reactionary forces that drove Europe into the Great Depression, totalitarianism and two world wars, are back and in charge, and this is what it looks like.

I haven’t responded to dsquared’s provocations, but I do feel like we are seeing the mask fall away in his persona, in a way that illustrates the problem in a very microscopic way, just as the ECB’s decision to break Greece’s banking and payments system shows the mask falling away, institutionally. It’s been educational in a way that I find disturbing.

Sorry to ramble.

108

JW Mason 07.06.15 at 5:15 pm

I don’t suppose you mean that Greece can run any deficit that it wants with the ECB backing it?

I think that Greece, like other countries, should set tax and spending levels based on the needs of the real economy, and the central bank should facilitate this. So yes — that is the normal condition of sovereign governments.

109

Bruce Wilder 07.06.15 at 5:19 pm

Technically, if the issue is simply how to structure things so that Greece can reliably service its debt, it can be accomplished by jiggering the VAT to collect an effective tariff on imports, even imports from the EU. This puts a thumb on the scale, so that a full-employment Greek economy doesn’t fall into a current account deficit spiral. Incidence would fall as much on euro-corporate profits of exporters to Greece as on the Greeks. Easy peasy.

But, that doesn’t require a depression or political dictation to the state on pensions, rent control or breaking labor unions. So, no go.

110

Trader Joe 07.06.15 at 5:27 pm

@92 Sebastian

The reason I think Greece’s negotiating position is worse is because the referendum effectively forces them to succeed in gaining concessions, particularly in the area of austerity relief, but also in the area of debt reduction. A week ago, they could agree to a deal and continue to blame the troika for the hardship that would follow. Now, all of the hardship that 100% certainly will still follow, will by Syriza’s fault unless they are able to secure a deal so lucrative that the economy actually revives – I rate that as having always been unlikely.

Additionally, as I noted, you presupposes that the Troika actually cared whether Greece failed or not. If they’ve already effectively written off the debt, the Troika have never had a need to accept a proposal that doesn’t get them fully repaid. Greece has now defaulted, their banks are failing for lack of deposits and liquidity and their facility has expired – none of that can be repaired quickly especially with demands for “more” on top of what’s already been extended.

Had the referendum been held a month before the default and expiration it would carry a different authority. Now, its a mandate to build a new house after the last one has alredy been burnt down.

Layman – None of the banks has actually declared they are insolvent, but most had said previously that they didn’t think they had liquidity for more than about a week of withdrawals. Deposits are capital for a bank – every dollar taken out to be put under a mattress is that much less backing customer loans which of course aren’t being paid because the customers don’t have access to funds with which to repay. No doubt some banks are in technical default – at a minimum they require immediate liquidity, longer term they will require recapitalization unless Greeks can be persuaded to repatriate +50B euro of deposits taken out over the last 6 weeks.

111

Sasha Clarkson 07.06.15 at 5:33 pm

This article by Nick Cohen mirrors my own changing feelings towards the EU over the last couple of decades.

“the old, vague leftish assumption that the EU is a benign institution is dying … Nothing I believe has been more shocking to left-wing opinion that the failure of the EU’s leaders to stop and say: ‘We are good Europeans who believe in solidarity and common decency. The levels of misery our policies are inflicting on southern Europe are intolerable. We cannot carry on like this.’ …

… As Europeans’ hopes of escape from a terrible past are replaced by fears of an unconscionable present, the EU will be portrayed, with some truth, as a cruel, fanatical and stupid institution. Unless, that is, it changes and changes fast.”

http://blogs.spectator.co.uk/coffeehouse/2015/07/does-anybody-still-believe-that-the-eu-is-a-benign-institution/

If Greece gets neither justice nor mercy in the next few months, I will vote for Brexit!

112

Sebastian H 07.06.15 at 5:36 pm

I don’t think we need to attribute ‘mask falling away’ or some such to d-squared. He is part of gigantic financial edifice. He is very smart, and very knowledgeable in his area. I strongly suspect that he understands banking and finance very well even compared to many other banking and finance people.

I suspect, however, that even the very best banking and finance people don’t understand it all as well as they think they do. They also seem very good at setting up incentives such that they don’t really have to bear the brunt of things when they make bad decisions. (It is a very human thing to want to avoid the down side of your bad decisions, but bankers seem unusually adept at passing off the pain of their bad decisions to others).

If you translate everything he says to “the best financial thinking about it is….” with the understanding that the best financial thinking may be totally bonkered and that banker-types always have enormous egos about how right they clearly are about everything, reading his stuff can be very useful. Honestly banker-types really do have lots of power, so it behooves us to know what they are thinking. Unlike many banker-types, he at least sometimes notices that there is evidence to contradict the best financial thinking and that there is a whole other world out there.

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Z 07.06.15 at 5:58 pm

I haven’t responded to dsquared’s provocations

Well, about that, I think it is good to remember once in a while that we are commenting on a blog that is, actually, his, that he can consequently do everything he damn pleases (including summarily banning commenters or qualifying them anyway he likes) and that if we don’t like it, nothing makes us coming back.

As I’m more a glass half full kind of guy, I’ll note that about 10 years ago, I remember having heated arguments with Sebastian H, whereas in this thread (and many recent ones), I find myself only grateful to read his many insightful and eloquent comments (his 92, among many others).

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MPAVictoria 07.06.15 at 6:06 pm

Yep Sebastian H has been great here and we have definitely had our differences in the past.

115

T 07.06.15 at 6:11 pm

OP RP@4 Soullite@13
The biggest beneficiary of neoliberalism other than the oligarchs, bankers and CEOs has been China. Its exports to the US and Europe has kept that country growing near 10%/y. So there are a billion or so Chinese people that benefited from the neoliberal policies that screwed Western labor. And given that history, the last thing China wants is a failing customer.

I think JQ underestimates how far Greece is willing to go to stay in the Euro. Most of the polls have Greek support for remaining the the Euro at upwards of 70%. Now the polls were fabulously wrong on calling the referendum so I take the 70% with a grain of salt. But that support, if true, considerably weakens the hand of the Greek negotiators.

116

Layman 07.06.15 at 6:11 pm

“None of the banks has actually declared they are insolvent, but most had said previously that they didn’t think they had liquidity for more than about a week of withdrawals. Deposits are capital for a bank – every dollar taken out to be put under a mattress is that much less backing customer loans which of course aren’t being paid because the customers don’t have access to funds with which to repay.”

Yes, I do understand this much – the banks are facing a run – but am under the impression that this is what central banks are for, to provide liquidity in the face of a bank run.

117

politicalfootball 07.06.15 at 6:16 pm

In the spirit of the original post’s discussion of game theory, are we ready to consider the possibility that Tsipras is something of a genius.

To arrive at that conclusion, we have to start with the assumption that the EU program for Greece, which included projections of large primary surpluses starting in 2016, was a fantasy. This strikes me as a pretty safe assumption, given the EU’s unbroken record of bullshit projections.

In that scenario, Tsipras has to be looking for one of two outcomes:

1. Negotiate debt relief of sufficiently significant size that it would lead to actual Greek recovery or,
2. Get Greece out of the Euro.

Given the politics of Greece, whose people emphatically want to stay in the Euro, and the politics of the EU North, which was no-way no-how going to offer sufficient debt relief, things looked pretty bleak for Tsipras.

Moreover, the two goals are somewhat contradictory. An inadequate but somewhat plausible offer from the Troika would nonetheless sway enough Greeks that they’d bring down the government if Tsipras refuses. Tsipras must appear to bend over backwards to work with the North in order to mollify his own constituents (and would-be constituents), but must not actually receive that plausible offer.

And what are the criticisms of Tsipras? That he made unrealistic demands, and was confrontational to the point of being gratuitously insulting to his negotiating partners.

Worse still, he ultimately showed he was willing to accept offers that he had previously deemed unacceptable – offers that a more conciliatory negotiator would have signed off on while they were still on the table.

I’d argue that he played it perfectly. His team needed to make “unreasonable” demands because “reasonable” concessions by the Troika would keep Greece in a Depression. Superficially, it was impolitic to remind Germany of its own unsavory history and lack of fiscal probity, but this had two benefits. If Tsipras’ critics are to be believed, it helped keep Germany from supporting modest concessions whose rejection would have made Tsipras look bad. And the reminders of Germany’s history played well in Greece.

Tsipras was also very careful to not accept a deal until he was certain it had been removed from the table. What was he thinking when, after calling the referendum and recommending a “no” vote, he said he was prepared to cut a deal anyway? I propose that he was thinking he needed Merkel et al to reject his offer to demonstrate Troika intransigence to the Greek people.

And now Varoufakis resigns in the wake of victory in order to spare the tender feelings of the EU negotiators. Surely Tsipras is going too far in his efforts to accommodate these irrational Northerners! Tsipras can make concession after concession as long as none of them is substantive.

I suppose it will all still end in tears, but Tsipras seems to have taken a terrible hand and played it well.

118

Zamfir 07.06.15 at 6:33 pm

So yes — that is the normal condition of sovereign governments.
Sorry, I don’t buy this. Your proposal is that every eurozone country can run any deficit they want, and the ECB will cover results unconditionally?

I can buy BW’s argument that the deficit should be filled in through different means. I can buy that Europe should finance higher, but still limited deficits in Greece. That it should cancel more Greeks debts, and leaders should explain that to their electorates and accept the consequences. I can buy that the ECB should support expansionary policy all over Europe, and run up more inflation.

But only as part of some common policy, not as a free-for-all.

119

Trader Joe 07.06.15 at 6:45 pm

@112 Layman
“the banks are facing a run – but am under the impression that this is what central banks are for, to provide liquidity in the face of a bank run”

That’s true and Greece’s central bank is providing as much liquidity as they can, which is where the Greek debt/liquidity crisis interacts with the banking sector’s problems, the GCB is also running out of liquidity with which to supply the banks, normally they would look to the European Central Bank to address their liquidity needs – unfortunately for Greek Central bankers, the ruling government chose to hold a referndum rather than put in place measures to insure the Greek CB (GCB) had a borrowing facility in place with the ECB (its called the ELA for those who enjoy acryonyms).

What’s unclear is if the ECB has authority to extend the ELA on its own, which amounts to a loan to the GCB while Greece has no borrowing programme in place (because it expired on June 30th) – they are only 1/3 of the Troika. The ECB has chosen to take the view that they don’t have that authority to lend out of their left pocket while being asked to haircut existing borrowings on their right.

We may disagree with that stance for a variety of humanitarian reasons but “not throwing good money after bad” is also a reason which, when also bound up in legalities and technicalities that the ECB has demurred (so far).

Appologies if you thought I was talking down in my initial response, it was not my intent. I never know how much people know and don’t know about the way banks work and didn’t want to presume any understanding in a situation complicated enough as it is.

120

Lee A. Arnold 07.06.15 at 6:46 pm

I think Syriza has done a very good job at playing a bad hand. This is the only way in which I disagree with Dsquared, who understands the finance but I think misreads what the EU needs. The provenance of the European project is psychological idealism, not economic realism. The formulation was attended with class interests and individual ambitions, but all that is secondary. In this sense it is very much like the US, as I pointed out under Belle’s post and Glen Tomkins alludes to, above. If the EU doesn’t hang together, there will be a psychological price to pay including for the creditors, and they will not like it because they will have killed their own ideal, and after you have done that, nobody else will believe you about anything. Beware the clown without ideals! There is also a real security issue, as the White House has been pointing out. Tsipras keeps saying they want to stay in the Euro. But the ground rules are going to have to change to compensate in some way for the lack of strong political union as well as the more universal inability of either Right or Left to understand why the system of money is not working correctly anywhere in the world. This puts a hitch into the game theory approach, because the game is different than the players have fathomed.

121

Layman 07.06.15 at 6:59 pm

“Apologies if you thought I was talking down in my initial response, it was not my intent.”

No, not at all.

122

Barry 07.06.15 at 7:18 pm

Bruce Wilder: “… but I thought Z had the most intriguing observations, about how the defects of the Euro design were part of a deliberate attempt to patch over the existing political and economic fault lines of countries in the late stages of recovery from fascism and civil war.”

I’ve seen that as an explanation which IMHO is at least moderately true – the EEC/EU was founded by politician (and financial/business leaders) who deeply knew what war was. They had the scars, memories and missing body parts. The second generation of leaders was composed of people who had played in the rubble, and who had likely lost fathers, uncles, older brother/cousins.

And they all lived in fear of the USSR deciding that it was a good time to Drang Nach Westen, so to speak.

The EU leaders now are people who assume 100% that there will be no bad consequences for themselves, no matter how bad things get.

123

Glen Tomkins 07.06.15 at 7:51 pm

@113,

One possibility is that they put in Varoufakis as their negotiator with the Troika to make absolutely sure that the Troika would on no account ever offer anything halfway reasonable and acceptable. They could have turned to me — I can be as off-putting as anyone, and especially to technocrat types — but I guess Varoufakis had an inside line on the job, and was quite good enough for the task at hand.

124

hix 07.06.15 at 8:56 pm

Not buying into all the reputational stuff. If Greece would leave the EU, maybe the UK too, that would make many things easier. Its not like there has been no tendency towards favouring a smaller slow enlargement Europe with deaper integration. Dont think any of the two will leave.

125

D.C.W. 07.06.15 at 10:02 pm

Fascinating to be in the position of someone who wanted the same referendum outcome as J.Q. (no) but for entirely different ends (I hope that it leads to the Troika abandoning Greece and he hopes that it will induce the Troika to give Greece better terms). Some observations from this vantage point:

1. The fact that it did not give clear set of choices among end-states was a real problem withe referendum. It was less a democratic decision-making procedure than a political stunt, or a crazy (and maybe ingenious) negotiating tactic.

2. J.Q.’s analysis here is persuasive enough to cause me some worry about getting what I want.

3. On the other hand, it’s not clear there really is any one person or institution that can repeat his analysis then make the decision that J.Q. wants. Several different players have to cooperate to achieve what J.Q. wants, and I get what I want if pretty much any of them defect. For example, the first post-referendum move was the EZB’s (whether to support the Greek banks) and their move went my way (no increase in support; bank re-opening already delayed from Tuesday to Thursday).

4. I’m perfectly happy for Greece to go its own way and succeed. I just would like to establish a precedent that it will succeed or fail on its own fiscal terms.

5. Technically, Greece should be able to default and stay in the Euro. This is my ideal outcome, and also the one envisioned bye Euro treaty. It appears that the EZB is determined not to allow this outcome by linking its support of Greek banks to their acceptance of the bailout terms. (There is no technical reason that the EZB couldn’t continue to support Greek banks while the Toika withdraws support for the Greek government.) I feel bad about this.

5. If I were Greek, I would have voted yes, because even though I would prefer Greece to default, and even though the EZB’s monetary policy is bad for Greece, the most important thing for me would be to ensure that under no circumstances does the Greek government control my currency. I suspect many Greeks feel this way, and the referendum result would have been different if it were clear that no meant leaving the Euro.

126

PaulB 07.06.15 at 10:39 pm

Some clarification on ELA: it is not, at least not directly, lending by the ECB to Greece. All the ECB does is given the Bank of Greece permission to create money to lend to Greek banks.

Indirectly, the money will add to Bank of Greece indebtedness to the ECB, either to the Eurosystem for banknote issuance, or through its Target2 deficit (if bank depositors transfer money overseas). But this is a special sort of debt, with infinite maturity and carrying a very low interest rate. There’s no financial reason for it ever to default.

However, ELA rules say unambiguously that ELA loans must not be made to insolvent banks. Since Greek banks have substantial holdings of Greek government bonds and count as capital deferred tax assets which are in effect more Greek government bonds, and the Greek government is in default, there’s little doubt that the banks are insolvent. The ECB has refused permission for further ELA because its rules, already overstretched, do not allow it to do anything else.

127

D.C.W. 07.06.15 at 10:49 pm

PaulB @122: Do you have any source on Greek bank holdings of Greek government debt? I have seen different assertions on this point. It’s not clear to me why a Greek bank would be any more willing to hold Greek government debt than any other creditor, and thus I would have assumed that they would have reduced their exposure to near-nil over the past five years. Is there some law in Greece that forces Greek banks to hold Greek government bonds? (If there is, that sounds like a terrible law that should really violate some EU directive.)

128

PaulB 07.07.15 at 12:12 am

The Greek government has issued about 15bn euros in T-bills (ie short-dated debt; it was slightly careless of me to write ‘bonds’), mostly in the hands of Greek banks (no one else has been buying them). They’ll be rolling 2bn of them in an auction this week.

The Greek banks bought the T-bills in the first place (and have rolled them ever since) because not to do so might have caused the government to default, whereas the cost of buying them was small or zero since they could be used as collateral to borrow money from the Bank of Greece.

(Google something like *Greek banks t-bills 15bn* to find any number of sources.)

129

floopmeister 07.07.15 at 12:48 am

Zamfir #17:

So, what should have done to avoid austerity? Cover the deficits at higher levels to avoid cuts, running up even more debt? Or explicit donate money to Greece for that purpose, year after year?

How about this?

https://twitter.com/ValaAfshar/status/616951520546959360/photo/1

130

JW Mason 07.07.15 at 2:00 am

Greek banks have substantial holdings of Greek government bonds

Everybody says this. Does anyone ever look at the numbers? According to the ECB, Greek government liabilities account for less than 6% of the assets of Greek banks, the lowest share of any major euro-area country. Compare that with 9% in Germany, 13% in Spain, 18% in Italy. The idea that Greek banks are especially exposed to the Greek government is absurd — especially when you consider that Greece has remained current on the bills actually held by Greek banks.

The ECB has refused permission for further ELA because its rules, already overstretched, do not allow it to do anything else.

Nonsense. The ECB has almost total discretion over what banks get ELA and on what terms. And in fact, the ECB rewrites the conditions all the time. Remember back in 2011, when Portugal’s sovereign debt was downgraded? Rather than withdraw support from Portugues banks, the ECB simply got rid of the rating requirement for ELA collateral. This idea that the ECB’s hands are tied is such a transparent pretext, I doubt anyone really believes it.

Zamfir at least is honest that he wants the ECB to enforce his preferred policies since he knows they won’t get support in democratic elections. But these crocodile tears over how the ECB would love to help but the Rules won’t allow it, are really too much.

131

MPAVictoria 07.07.15 at 2:19 am

Atrios has a bit on this JW

http://www.eschatonblog.com/2015/07/whats-it-all-about-then_4.html

“Bloomberg reports that Bulgaria, which is not a Euro member but backs its currency with Euro reserves, has just been allowed to borrow from the ECB at the same rate as Euro members, thus enabling it to firewall its banks from Greek contagion. This is a privilege normally only accorded to Euro members – and it has been WITHDRAWN from Greece. If this is true, then Bulgaria (non-Euro member) can obtain Euros from the ECB while Greece (Euro member) cannot. It is hard to see what benefit Greece’s Euro membership confers, apart from redistribution of seigniorage receipts.”

132

Roland Stone 07.07.15 at 2:19 am

@122: “The ECB has refused permission for further ELA because its rules, already overstretched, do not allow it to do anything else.”

PRESS RELEASE
6 July 2015 – ELA to Greek banks maintained at 26 June 2015 level

http://www.ecb.europa.eu/press/pr/date/2015/html/pr150706.en.html

133

JW Mason 07.07.15 at 2:29 am

Roland-

But what they have actually done is set a ceiling on overall ELA for Greece as a whole, NOT reevaluate collateral for individual banks. And, again, the response to the crisis elsewhere has been to loosen standards for ECB emergency lending, as in MPAVictoria’s example.

134

Bruce Wilder 07.07.15 at 2:37 am

They increased the haircut, which is a dick move, in any banker’s book.

135

Sandwichman 07.07.15 at 3:31 am

“They increased the haircut, which is a dick move, in any banker’s book.”

Bankers will be bankers.

136

dsquared 07.07.15 at 3:43 am

79: I just don’t agree with the idea that TARGET2 balances are transfers. The only other person I know who claims this is Hans-Werner Sinn. Karl Whelan has written a lot of good stuff about this issue, as has Olaf Storbeck.

Since Greek banks have substantial holdings of Greek government bonds and count as capital deferred tax assets which are in effect more Greek government bonds, and the Greek government is in default, there’s little doubt that the banks are insolvent.

There is doubt. I’m not sure of it, for example, and without wanting to boast unduly, I’m very good at knowing if banks are insolvent. You could knock out all the tax credits (about 8% of assets) and the direct GGB and T-bill holdings (which Josh correctly notes aren’t really ask that large in the scheme of things) and they would still pass a regulatory test.

The thing which is the problem is that literally nobody knows the true value of the loan losses. Insolvency in Greece is a horribly messy process which can take five years – sorting it out was a key piece of conditionality which successive governments have failed to deliver. In the meantime, the banks have to estimate what their eventual loss is going to be.

Obviously, that’s a moving target. Equally obviously, it looked like it was moving in the right direction in 2014 and has been moving in the wrong direction in 2015 – the uncertainty created has had the same effect on payment culture that it has had on tax collection.

Also more or less equally obviously, a government default or exit would be a further shock to the loan book. So the solvency of the banking system is linked to the sovereign, but not in a straightforward way. Before the referendum, I’d have said that they were fine – they have huge problems, but an equally huge amount of capital was pumped into them. Now – I think it’s highly likely their underlying business has got a lot worse and will continue to get worse at an accelerating rate for as long as the government continues to hold a massive risk of currency crisis over them.

I do not at all envy the job of the ECB guy who had to assess the risk of the Greek exposures they are holding, particularly as the collateral is mainly the loan book – ie, exactly the opaque risks that are getting worse. I think they’ve gone out much further on a limb than they ever wanted to and in my opinion (which is, frankly, pretty well informed) I think the idea that this risk is at all comparable to the Portuguese case is way off.

137

dsquared 07.07.15 at 3:46 am

They increased the haircut, which is a dick move, in any banker’s book.

As far as I can tell (and their press office was very reluctant to go into detail – I was one of a group giving Michael Steen of the ECB a hard time on twitter this morning), they have put the haircut back to where it was before they reduced it in November last year. Which is hardly a “dick move” – I don’t think that it can be seriously argued that the collateral is riskier. In any case, the haircut doesn’t affect the amount of liquidity they’re supplying in total, as the cap on ELA is currently binding.

138

Sandwichman 07.07.15 at 4:14 am

“I don’t think that it can be seriously argued that the collateral is riskier”

Don’t you mean isn’t?

139

Eli Rabett 07.07.15 at 4:15 am

As said earlier view the last six months as a game playing exercise. Economically it was obvious that a) the Greeks needed out of the Euro and b) the Greeks needed debt relief and c) that the Greeks were not prepared to abandon the Euro.

Given those three it was perfectly sensible for Syriza to drive the institutions and the Germans to the point where they made the conditions for c) so onerous that Syriza could get past c and achieve a and b. They get to b) by playing Iceland.

So, as politicalfootball put it, Tsipras played a weak hand well, and Vanofoukis resigning was probably planned well ahead of the vote (of course if yes had won everyone would have resigned)

140

dsquared 07.07.15 at 4:23 am

Economically it was obvious that a) the Greeks needed out of the Euro and b) the Greeks needed debt relief and c) that the Greeks were not prepared to abandon the Euro.

Leaving aside a), which if nothing else, c) ought to make you at least doubt it was obvious, b) isn’t true either. Greece has a very low debt service cost. The debt burden isn’t a meaningful constraint on the Greek economy – the conditionality is. Syriza’s determination to make a totem out of face value debt reduction, rather than concentrating on the primary surplus, was a big strategic error (in fact, it was so big that it probably makes all the tactical errors I discussed irrelevant).

Keeping the cheap fiscal deficit funding and reducing the conditionality is so much better than debt relief (for any amount of debt relief less than 80%) that the strategy you outlined seems crazy to me – you’re taking on huge short term pain to get yourself in no better a position than you were anyway. Particularly as defaulting countries have to run big primary surpluses – Argentina is nearly 5%, structurally.

141

dsquared 07.07.15 at 4:35 am

138: or mean “argued” as “argued with”, yes

142

JW Mason 07.07.15 at 4:51 am

I just don’t agree with the idea that TARGET2 balances are transfers.

There are always different ways to look at these things, but it seems to me that if we are using nations as our unit of analysis and focus on balance sheets, TARGET2 balances and the Greek bailouts look pretty equivalent. In both cases, countries accumulated large net liabilities, which were willingly held by banks in the surplus countries. (External liabilities were mainly interbank loans for Spain etc. and sovereign debt for Greece, but with nations as our unit of analysis that doesn’t matter.) Then, after 2008, the banks were no longer willing to roll over those liabilities. To some extent this sudden stop of financial flows from North to South was offset by a closing of the trade deficits, thanks to sharp falls in income; but mainly it was offset by official financing. We use different acronyms but in both cases external debt held by private creditors is replaced by external debt held by the ECB. If one is a transfer, the other is.

Now if your point is that Greece also has not received any transfers, then ok.

In any case, the haircut doesn’t affect the amount of liquidity they’re supplying in total, as the cap on ELA is currently binding.

Right. Which seems to undermine the argument that the ELA freeze is about a reassessment of the balance sheets of Greek banks, as opposed to a political tactic.

The debt burden isn’t a meaningful constraint on the Greek economy – the conditionality is.

Right. This is a key point which a lot of people have trouble with for some reason.

defaulting countries have to run big primary surpluses

I’ve seen you write this before and I don’t understand it. By definition, a country that repudiates its existing debt is not making interest payments. So why would it need a primary surplus?

(It is true that defaulting is most likely to be beneficial when the budget is already in primary surplus, but that is a different claim.)

143

Zamfir 07.07.15 at 4:51 am

Zamfir at least is honest that he wants the ECB to enforce his preferred policies since he knows they won’t get support in democratic elections.
Your or reading too much in my words. I am deeply unhappy with the current position of the ECB, where discretionary, supposedly technocratic decisions have such impact. Democratic control of the ECB is nowhere near the level required for such power.

I just don’t see how your proposal would work. On the face of it, you’re saying that countries should run any deficit they want. Stop tax collections, just hand the bill to the ECB. Perhaps that’s indeed your intention, which sounds like rather a gamble.

If that’s not your intention, what do you think will halt a movement in that direction? I find that an important question, exactly because the ECB now has so much power. Any other mechanism will potentially be just as powerful. If we don’t make that explict, it will become implicit. Countries will use their behind the scenes power games to control each other’s budgets, and I suspect it will look at least as ugly as the ECB.

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dsquared 07.07.15 at 4:56 am

In both cases, countries accumulated large net liabilities,

The mistake here (and I really think it is a mistake) is to regard T2 balances as a liability of a country. They’re not. They’re liabilities of one part of the ESCB to another part. The NCBs aren’t part of the fiscal system, any more than the equivalent balances in the Federal Reserve represent a liability from Minnesota to Richmond.

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dsquared 07.07.15 at 4:59 am

By definition, a country that repudiates its existing debt is not making interest payments.

How many countries have ever done that? They more usually make a tender offer to creditors, which reduces their service bill but doesn’t eliminate it.

146

JW Mason 07.07.15 at 4:59 am

Zamfir, do you really look at Europe and see a danger of excessively expansionary fiscal policy, overfull employment, runaway inflation?

As matter of fact, every country in Europe except Greece (and quite a few outside of Europe, like the US, Japan, etc.) can in fact finance fiscal deficits freely, thanks to the commitment of the central bank to support the markets for sovereign debt (which is, after all, the central bank’s original function.) And yet fiscal policy is almost everywhere too tight, not too loose.

As a matter of logic, you’re not wrong, but the old line about crying fire, fire in Noah’s flood comes to mind…

147

Collin Street 07.07.15 at 5:01 am

Syriza’s determination to make a totem out of face value debt reduction, rather than concentrating on the primary surplus, was a big strategic error

If term extensions are more-or-less interchangeable with face-value write-downs, then face-value write-downs are more-or-less interchangeable with term extensions; if the greeks should have had no problem with term extensions then ipso-facto the europeans should have been OK with write-downs.

It’s a signal. From my perspective, and I think the greek perspective, the european institutions were asked by the greeks to make a token gesture — one that you claim is ultimately meaningless to the financial bottom line — and the europeans refused. I don’t think there’s any reason to believe that asking for any different token gesture would have gotten a different result.

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JW Mason 07.07.15 at 5:02 am

The mistake here (and I really think it is a mistake) is to regard T2 balances as a liability of a country.

But then they really must be a transfer, no? Because they are replacing liabilities of the banks, which presumably are of the country.

149

dsquared 07.07.15 at 5:17 am

If term extensions are more-or-less interchangeable with face-value write-downs, then face-value write-downs are more-or-less interchangeable with term extensions;

Politically they aren’t, as you know, and it was really obvious from early on that a face value reduction wasn’t going to pass the Bundestag.

150

Collin Street 07.07.15 at 5:30 am

Exactly: the europeans signalled their unwillingness to make any sacrifices or drop any claims. Which would have been fine if their initial negotiating position had been sound, but independent reports suggest it wasn’t.

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dsquared 07.07.15 at 5:41 am

I don’t demand everyone reads every word I ever write, but I’ve said this so many times that it’s a bit disheartening to keep meeting people who don’t know it. Europe had given very large debt relief, in the form of below-market interest rates and long term extensions. Saying they were “unwilling to do any claims” is very wrong. It kind of makes you look bad to make claims like these without checking them.

152

MPAVictoria 07.07.15 at 5:46 am

Please keep going! This is informative and appreciated

153

Pete 07.07.15 at 5:55 am

@102 PeterK

I’m not ignoring those facts about the current situation. But the no vote does not solve them immediately or of itself – only a better deal would, which may not be forthcoming despite the suffering. And Euro exit brings the balance of payments problem to the front, resulting in immediate import shortages.

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Collin Street 07.07.15 at 6:10 am

> Saying they were “unwilling to do any claims” is very wrong

My miscommunication: I meant, in the context of the then-current negotiations.

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dsquared 07.07.15 at 6:35 am

OK thanks. But in that context, they had already given a lot up in NPV terms, and they were signaling a lot of potential (and indeed, relative to the original proposals, actual) movement on surplus. Why then make a big deal out of the one thing we know they can’t give, when it’s basically irrelevant anyway? Massive tactical mistake, driven by massive strategic mistake.

Not to say that if not for this it would have been hunky dory – there were the pension issues, the VAT harmonisation and the IMF’s rejection of the tax driven plan. But it wasted time and goodwill at a point when both were in short supply.

156

Sebastian H 07.07.15 at 6:54 am

“Europe had given very large debt relief, in the form of below-market interest rates and long term extensions. “

Which according to you was never supposed to be repaid, right? But the reason it was given in the form of extensions and below market interest rates, is that the debt was being used as leverage to force Greece to continue Depression causing policies and to submit to more and more of them every six months or so.

The essential problem with that is that it has become obvious to everyone except the troika technocrats that the technocratic prescriptions were making things worse. For at least five years. This is where the banker pride is actively causing political problems. They didn’t say “we fucked it up”. They didn’t say “additionally we’ve missed the inflation target which could have helped for the last 12 quarters in a row”. They didn’t say “yes we threw you into the deepest depression in recent history, did essentially nothing to reverse it, and here is what we are doing differently”. They said “keep doing the same thing, or eat it”.

Politically you can’t really get away with that forever. They squandered huge amounts of goodwill about the European Union project by either lying about their intentions, or being grossly incompetent, or maybe both. They had a very compliant Greek government doing their bidding, and it really really sucked for the common person in Greece. So eventually the troika were going to get a less compliant government.

And the optics on the history of the bailouts is horrendous. Time and time again the banks in Europe and the rich in Greece get bailed out while the rest of the country gets ground down. Time and time again the ‘relief’ ends up just being recycled through the banks without ever actually doing anything to relieve the average inhabitant of Greece.

The troika wants debt instead of debt forgiveness because it allows them to force their technocratic program on Greece. This would be more defensible if their technocratic program hadn’t been making things actively worse.

157

dsquared 07.07.15 at 7:11 am

to force Greece to continue Depression causing policies and to submit to more and more of them every six months or so.

Can I ask a favour? (Not picking on you, everyone else too) If you mean the conditionality, just say “the conditionality” and skip the commercial break. If we have to do the “the failed conditionality which resulted in 25% unemployment, blotted out the sun, caused the Great Depression” every time, then I am never going to resist the temptation to say “actually it didn’t blot out the sun”, then ten people will go ” Oh God He Defended The Troika That Bastard Why Can’t He Stick To Saying That Thing About Liars And Good Ideas In 2003″, and we are sidetracked to hell. There are some things I agree with and some I don’t agree with in your view of the policy conditions but we’re not going to get them done here and now.

Yes, the conditionality. But I don’t recognise what you’re saying here. There was a lot of recognition that things weren’t working and the approach needed to be changed. The problem (well, a problem) was, the IMF and Tsipras, working together, managed to divert a lot of this energy into pointless wrangling about debt reductions.

I think “banker’s arrogance” is also a blind alley here. The constraint on changing the program was that the first one had slipped through the Bundestag by the skin of its teeth, and for most of the period, the constitutionality of the whole thing was a live debate in Karlsruhe. There was no grand figure, not even Merkel herself, who could have just changed the course of the program by a sheer act of will.

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Val 07.07.15 at 7:31 am

Well I guess I’m about to be dismissed as one of those stupid commenters who keeps saying stupid things, (and indeed I freely confess my ignorance of the technical issues that are being talked about here) but I still can’t see how this conversation engages with the central issue, and the presumable reason why Greeks voted no.

Isn’t it true that Austerity in general, but specifically Austerity in Greece, penalises the young and the poor for the sins (or corruption, or even just mistakes, if you prefer) of the rich and the old? And how do the things that are being said here address that?

Genuine questions (which I have in fact recently discussed with someone who used to work in finance in Germany, without that person telling me I was an idiot).

159

dsquared 07.07.15 at 7:35 am

This would be more defensible if their technocratic program hadn’t been making things actively worse.

This is true, but their hundred billion Euros made things actively better, and the two came as a package. There wasn’t any way of getting the money without the conditionality, and there wasn’t any way of getting a larger sum of money which would allow for a program either with bigger up front deficits, or a slower return to surpluses. 2014 was pretty much the first year that there was a genuine debate to be had over surpluses – before that, it was largely determined by the budget constraint. So it’s all very well for someone like Simon Wren-Lewis to give us his considered opinion that it ought to have been €200bn of stimulus in 2012, but he never tells us where the money might have come from other than to occasionally say that “the Germans should” have provided it. So I think that criticisms of the technocratic program are much more valid in the context of Ireland.

160

Val 07.07.15 at 7:42 am

Or I should qualify my questions above – I think I can see how Sebastian H is engaging with those questions, I just don’t see how dsquared is.

Or is dsquared saying they are off the table, or no-one could have done anything about them, or what?

161

Sebastian H 07.07.15 at 7:43 am

Well you are probably the only one who will understand it but:

The political problem is that the conditionality required deeply flawed conditions that were making things worse instead of better.

I think the bankers arrogance isn’t a blind alley at all. The first step to changing a flawed course of action is admitting it was wrong. You are suggesting that they couldn’t unilaterally change the course of action. That may be true. But they could unilaterally admit that it was doing harm to the Greek economy. They could unilaterally admit it wasn’t helping Greece out at all. You are saying that they didn’t have the power to change course. Maybe so, though they certainly aren’t so deferential to public opinion in other contexts. But they certainly had the power to move to a truthful discourse which perhaps could have then been used to change course.

You seem to be suggesting that because the current state of political opinion in Germany was against Greece, that they couldn’t even tell the truth about what was happening. But how will the political opinion ever change if the technocratic experts won’t tell the public that the plans were failing?

You seem to see this point clearly with respect to Greek negotiations but it vanishes from your analysis of troika positioning. You see the German political constraints (informed by banking technocrats who won’t admit their error) but you dont seem to see the mirror image political constraints of a Greek populace which is hurt by the errors and the lies about the errors.

The essential problem is that the conditionality presupposes technocratic competence about the conditions. That presupposition should be questioned considering the recent results of troika plans and the recent and enormous failures of all its (even short term) projections. The German political constraints are still operating as if the troika should be assumed to have technocratic competence. Maybe they still wouldn’t care even if they knew the truth. But they haven’t even been given the chance to modify their priors.

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dsquared 07.07.15 at 7:44 am

158: not really, or at least no more than every economic decision is shaped by the history that led up to it, and affects the future. Young people would have a lot of costs to bear in the event of exit, and the most controversial part of the rejected proposal was a cut in pensions.

That’s the young/old dimension. I’m afraid any discussion of the rich/poor dimension takes place without me, as there are too many people who I don’t trust to treat me fairly if I start taking about distributional consequences with any nuance at all.

163

Val 07.07.15 at 7:49 am

According to my German source (I’m interpreting what he said, not quoting him, btw) it sounds like this is politico-cultural, and Greece is being demonised to some extent.

Like on the question of 200 billion vs 200 billion Euros: opponents of Greece in Germany are probably saying things to the effect that that amounts to x thousand Euros that each hard working German has to pay individually for those lazy corrupt Greeks.

Whereas in fact it probably wouldn’t really make any difference to most people.

164

Val 07.07.15 at 7:51 am

sorry 200 vs 100 billion Euros! (how typos can reduce one’s arguments to gibberish)

165

Sebastian H 07.07.15 at 7:51 am

“This is true, but their hundred billion Euros made things actively better, and the two came as a package. “

I’m not clear about exactly what part of the deal you’re talking about here. “made things actively better” for whom? To the extent that it just gets recycled into debt payments that begins to look like an inflated number.

166

dsquared 07.07.15 at 7:54 am

160: could you try being a bit more polite and open minded please? If you want an answer to a question, it’s really not fair to start putting words in someone’s mouth literally ten minutes after you asked it.

167

Peter T 07.07.15 at 7:56 am

If dsquared is right about the finances (and he surely knows more about this than I do), then it is clear – as he acknowledges – that the conditionality is the issue. The conditionality is not, however, a technical problem, but a set of political demands. There is no reason dsquared or anyone else can point to that says the financial issues cannot be solved under some different set of conditions. I would take some convincing that the German public would care that Greece raises taxes on the rich, re-jigs VAT to tax imports or similar measures, rather than cut pensions. So it comes back to – what legitimacy has the troika to impose these demands (precious little: “you owe us money and we will take your kids, not your furniture”, is an expression of naked power, not of any kind of right)? And why should Greece accede to these politics? There’s not much point to democracy if elections do not change policies. Who needs democracy? is, increasingly visibly, the stance of much anti-Greece commentary. And if you don’t need it in Greece, then you don’t need it elsewhere either.

In the longer run, this is a recipe for civil war.

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dsquared 07.07.15 at 7:56 am

165: “recycled into debt payments” means that Greece avoided default, financial collapse and a whole host of massively more serious problems

169

Val 07.07.15 at 7:57 am

@ 162
Well I guess some of the pensioners are the poor to a degree. And to acknowledge nuance, I thought about what I would do if I was in that sort of situation (being an Australian with a reasonable amount of super) and I realised that my social justice principles would be sorely tested by the possibility of losing my lump sum super. I might be tempted to move it out of the country – and I’m someone who acquired that by perfectly legit means, no corruption involved. So yes there are nuances in this stuff, but I don’t think you have fully answered the basic question about Austerity as a program, even in regard to the young. However I will leave it at that.

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Val 07.07.15 at 8:02 am

@ 166
I wasn’t trying to put words in your mouth, I was asking if that’s what you were saying. You can see it’s a question. And I asked it impersonally because at that stage I thought you probably wouldn’t answer me direct.

I’m not trying to be rude or get into fights, apologies that it sounded that way to you.

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dsquared 07.07.15 at 8:09 am

(precious little: “you owe us money and we will take your kids, not your furniture”, is an expression of naked power, not of any kind of right)?

Seriously, can we stop it with these commercial breaks? I don’t know what this is meant to refer to. The troika’s actual threat had always been “we will not lend you any more money at sub market rates”. Which is a powerful lever, because their funding had been a big part of Greece’s economic plan, but it’s got nothing to do with this.

I would take some convincing that the German public would care that Greece raises taxes on the rich, re-jigs VAT to tax imports or similar measures, rather than cut pensions

Well, the generosity of the early retirement system in Greece was hugely salient in the politics of the issue in Germany, but the real problem here is that given Greece’s track record on tax collection, people tend to be sceptical about plans which are so heavily based on them collecting more taxes. And taxing imports? In the EU? That’s the Treaty of Rome!

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dbk 07.07.15 at 8:27 am

Reading the comments on this and (far too many) other blogs, I feel, well, dizzied by confusion. Accordingly, I’ll refrain from commenting on matters finance-related and leave those to the financiers.

On a purely local and political note from the battle zone: Yesterday, the President of the Hellenic Republic (Pavlopoulos) at the request of the PM called an extraordinary Council of Party Leaders. They met for seven hours, and issued a joint statement essentially empowering the PM to negotiate for the entire voting base (or at least 90%; KKE didn’t sign, but then, they never sign anything anyway, and GD politely but regretfully turned down the President’s invitation to the conclave for “political and ideological reasons”). This achieved two things imho: (1) it ensures the PM’s major points were agreed upon by all parties [refinancing/reforms/debt restructuring or its equivalent/development – investment program] and therefore ensures that if he returns to Athens with anything remotely acceptable to present to Parliament, it will pass hands-down, and (2) it essentially united the entire political spectrum behind him and his government, leaving no opposition until a deal is done (or not done), and therefore, no one for TPTB to turn to as replacement in the interim.

I consider this (domestic) political move more important than V’s resignation. His replacement, the Rotterdam-born, English-raised and educated (Oxford PPE) E. Tsakalotas, is lower-key and speaks beautiful RP, but the Troika isn’t going to like what he has to say any better – in fact, they’ll like it worse. Somewhere I saw a tweet that noted “Thanks, Troika – you replaced a Keynesian with a Trotskyite”. I wouldn’t go that far, but he’s certainly harder-line than V.

One thing that has struck me forcibly over the past five+ months in reading the Anglophone financial/political blogs-press about the Greek crisis is the absence of historical and political understanding among the EU power brokers of the Greek left’s origins, history, and modus operandi, as well as a distaste for taking into even minimal consideration the history of Greece and Germany’s bilateral relationship. Or the history of Greece and GB’s relationship, or that of Greece and Russia, for that matter.

The one politician who seems to me to have a geopolitical grasp of what’s transpiring here isn’t sitting in Brussels or Berlin or Frankfurt – he’s sitting in Moscow, watching and waiting. And no, I don’t think it’s about “Turkish (sic) Stream” or warm-water Eastern Med ports – I think he’s eying the vast natural gas reserves lying below Cypriot-Greek waters. That’s a prize worth waiting for.

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Tabasco 07.07.15 at 8:50 am

the generosity of the early retirement system in Greece

Is there an authoritative source on this that can answer questions like what is the average retirement age and what percentage of final salary people get in their pensions? Because while Michael-Lewis like anecdotes on these questions are easy to find, the facts are not.

174

Peter T 07.07.15 at 9:15 am

dsquared

You keep pointing to the politics as the reason behind various moves, but seem reluctant to ask “what kind of politics?” Politics is always, as Lenin remarked, “who, whom” – who gets the carrot and who the stick. The troika’s threat was “we will not lend you money at sub-market rates unless you do exactly these things.” And “these things” were the troika’s political agenda, not the Greeks. The Greeks at least had an election; it’s worth remark that the troika’s program had not, and did not seek, any broad validation.

Taxing imports directly is out of court. Varying VAT rates to fall more heavily on imports is not, I think. And are you really saying that the details of the program are laid down so specifically by German opinion as to be unalterable? If so, the Germans must be employing a very inferior class of spin-doctor.

The history of Europe 1870-1945 was driven by class conflict, sometimes subterranean, sometimes civil, sometimes national, but always there. Does it really want to go back there?

175

Pete 07.07.15 at 9:24 am

@dbk Thanks for the political note. It does seem to me that the EU side of crisis resolution has operated in pure technocrat mode: the belief that solutions must be negotiated on purely economic grounds, not political grounds. The left is trying to remind everyone that apolitical economic prescription is an oxymoron.

@173 Confusing matters further, I hear that the generosity of the pensions makes up for failures of the rest of the out-of-work benefit system. Pensioners end up supporting their grandchildren. I’ve no idea how true that really is though, but it would explain why outsiders find the system bizarre and why it’s broadly defended by the Greek population.

176

bob mcmanus 07.07.15 at 9:24 am

Contesting Greek Exceptionalism …pdf, Euclid Tsakalotos 2010

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Eimear Ní Mhéalóid 07.07.15 at 9:37 am

dsquared at 159 So I think that criticisms of the technocratic program are much more valid in the context of Ireland.

Can you unpack that a little bit? Do you mean comparing the technocratic programme with measures carried out in Ireland, or something else? Thanks.

178

Pete 07.07.15 at 9:49 am

Re: taxing of imports, we’re starting to see that free movement of goods, capital, people and services across the continent not only creates winners and losers but can do so at very high speed. There’s an argument for barriers for the same reason that ships have bulkheads.

(I keep trying to draw some sort of analogy with MV Herald of Free Enterprise, which sank due to sloshing water on the car deck after the doors were left open, but I’ve not really made it work yet)

179

bob mcmanus 07.07.15 at 9:50 am

Well, working paper at 176 asks not to be quoted, but appears to be in part, as a Marxist would be, a discussion of political economy, and specifically about the tools of legitimation of reforms, neoliberal reforms in particular.

Interesting right at the beginning Tsakalotos mentions finance and financial discourse as the most common means of legitimating neoliberal restructuring.

Not he, but I might characterize financialism as a priestly discourse, particularly alienating and imtimidating, backed by intricate and complicated “science and mathematics,” secretive with hidden rituals and incomprehensible protocols, etc.

That I can’t authoritatively discuss the differences between Arianism and Nestorianism doesn’t force me to passively accept the public burnings.

180

Val 07.07.15 at 10:20 am

Bob McManus @ 179
I agree with you (could be a first).

181

JW Mason 07.07.15 at 11:18 am

The troika’s threat was “we will not lend you money at sub-market rates unless you do exactly these things

So it’s your view that the freezing of ELA, and more generally, ECB support for the Greek banking system, is unconnected to the debt negotiations? And you would say it is definitely false that the ECB/Bank of Greece were encouraging a bank run, to put pressure on the Greek government? When the Bank of Greece issued that report in mid-June warning of “uncontrollable crisis” and ejection from the euro without a deal with the creditors, that doesn’t strike you as rather different from the usual communications of a central bank?

182

kidneystones 07.07.15 at 11:18 am

@173 “Is there an authoritative source on this that can answer questions like what is the average retirement age and what percentage of final salary people get in their pensions? Because while Michael-Lewis like anecdotes on these questions are easy to find, the facts are not.”

Try this Finnish Government link:
http://www.etk.fi/en/service/retirement_ages/1601/retirement_ages

There’s a useful set of links on the left hand side of the page. Doesn’t answer all your question, but does allow for some comparisons.

183

kidneystones 07.07.15 at 11:44 am

Reading the Telegraph live feed I find myself dealing with the uncomfortable sensation that we’re all spectators watching the Austrian shelling of the Serb capital in 1914.

Check this ghastly quote:
12.17 Latvian LOLs:
Latvian finance minister Jānis Reirs has said that “Latvian people do not understand the Greek people”. When asked if he thinks Tsipras is trustworthy, he says, coyly: “It’s difficult for me to answer this question… But however Mr Varoufakis I would have difficulties trusting.” He then giggles when told by a journalist “you got rid of him”.

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PaulB 07.07.15 at 11:47 am

There is doubt. I’m not sure of it, for example, and without wanting to boast unduly, I’m very good at knowing if banks are insolvent.

I’ll defer to dsquared on this one: there is doubt. But ELA rules require “a positive
conclusion with respect to solvency”, not just doubt about a negative conclusion. Central bankers are supposed to behave prudently – if you wouldn’t bet your own money on the solvency of a Greek bank you shouldn’t expect a central banker to bet any more of the Eurosystem’s money on it.

Lots of things have been done which shouldn’t have been done, and not just with the benefit of hindsight. Greece should not have joined the Euro, it should not have borrowed so much, and the Greek debt crisis should not have been addressed by kicking the can down the road. Both sides are to blame for all these things.

Appeals to democracy don’t tell us what to do. Greece is entitled to vote to repudiate debts, or to use any currency it chooses. But it cannot usefully vote for other countries to give it money, or allow it to print their currency. And the Eurozone ought to have some regard for the wishes of its members’ electorates: I don’t think it can plausibly be argued that those electorates want Greece to be treated more generously.

Greece could have made a powerful argument against austerity five, or even three years ago. It could have proposed that it would fix the unsustainable elements of its economy – it would collect taxes, reform pensions, cut military procurement – but retain much of the savings to invest in productive activity. Did it?

Now the tragedy is playing out. It’s pointless to assign blame to either side for acting as it’s fated to act. But the one thing which might just have made a difference starting this year is that Syriza need not have been gratuitously provocative. If it hadn’t, its proposals, even at or beyond the last minute, to do some of the things which ought already to have been done might possibly have carried enough credibility. dsquared should not be condemned for saying so.

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Peter T 07.07.15 at 12:11 pm

PaulB

What is this “Greece” you speak of? If it’s political, it’s not Greece as a geographic expression – it’s particular factions or parties in Greece. Ditto, of course, “the Eurozone”. Unpack, ask who benefits, who loses, who believes what, on what basis, and you may have an explanation. Otherwise you just have obscuring waffle.

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dbk 07.07.15 at 12:27 pm

Bob Mcmanus@176
Thanks very much for the link to Tsakalotos’s paper, I just read it. If nothing else (and actually, there is a lot “else”), it gives the reader a fair idea of where he’s coming from in terms of a political economy perspective (that’s what he is, viz. a pol economist). Hint: it’s not neo-liberalism.

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K. Williams 07.07.15 at 12:46 pm

@140 ” The debt burden isn’t a meaningful constraint on the Greek economy – the conditionality is. Syriza’s determination to make a totem out of face value debt reduction, rather than concentrating on the primary surplus, was a big strategic error (in fact, it was so big that it probably makes all the tactical errors I discussed irrelevant).”

Daniel, isn’t the problem with this argument that the debt overhang was the fundamental reason the troika was insisting, earlier this year, that Greece would eventually have to run primary surpluses of 4% of GDP? The troika’s conditions didn’t take the form of austerity simply out of concern about Greece’s current and future budget deficits. They took that form because of the troika’s obsessive concern with debt/GDP ratios (and relative indifference to debt-servicing costs). You’re obviously right that on an NPV basis Greece has gotten debt relief. But that debt relief has done nothing to improve its debt/GDP ratio (now or in the future), and therefore hasn’t reduced, in the troika’s eyes, the need for it to run massive primary surpluses.

Even if you look at the IMF’s most recent report — the one calling for massive debt relief — it’s all predicated on the idea that Greece has to bring its debt/GDP ratio down by the end of the decade. And if that’s the troika’s underlying assumption, then, given the troika’s conviction that austerity is the way to improve fiscal balances, I don’t see how Greece had any hope of getting improved conditionality without getting debt relief.

188

Eli Rabett 07.07.15 at 12:50 pm

dsq2 @ 140 “Leaving aside a), ” is the classic, Mr. Lincoln other than your assassination what did you think of the play>

189

politicalfootball 07.07.15 at 1:03 pm

Collin:

If term extensions are more-or-less interchangeable with face-value write-downs, then face-value write-downs are more-or-less interchangeable with term extensions;

dsquared:

Politically they aren’t, as you know, and it was really obvious from early on that a face value reduction wasn’t going to pass the Bundestag.

In any negotiation of any difficulty at all, the parties are going to push for things that they ultimately aren’t going to get. Greece wasn’t alone at the negotiating table, and if a plausible package of term reductions or other relief had been offered, I haven’t heard about it.

I know of at least one well-regarded expert who has a lot of sympathy for the EU negotiating position who argues that face-value writedowns are, in the long run, not merely politically possible, but are inevitable. That’s wrong, of course, but such writedowns could happen, and for the Greeks to stake that out as a negotiating position today doesn’t seem inherently unreasonable.

190

dsquared 07.07.15 at 1:09 pm

So it’s your view that the freezing of ELA, and more generally, ECB support for the Greek banking system, is unconnected to the debt negotiations? And you would say it is definitely false that the ECB/Bank of Greece were encouraging a bank run, to put pressure on the Greek government? When the Bank of Greece issued that report in mid-June warning of “uncontrollable crisis” and ejection from the euro without a deal with the creditors, that doesn’t strike you as rather different from the usual communications of a central bank?

I wrote a pretty long comment explaining the connection between ELA and the debt negotiations, to which I don’t really want to add, except maybe a request to limit the rhetorical questions, they get tedious. The central bank comment in June was unusual, but it was an unusual situation! Maybe other central banks would have acted differently and maybe not. There aren’t many data points where governments have been refusing to agree IMF programs while in a currency union with complicated rules on the use of collateral in liquidity support.

I do think the idea that the Greek bank run was in some way created by the ECB as a political tool is very speculative in terms of evidence, to put it politely. When something is, in fact, the rational thing to do, people often do it. There were excellent reasons to take your money out of Greece, which is why all the oligarchs have. I lost a lot of respect fit Varoufakis when, after all the chaos he’d helped to create (and according to Tsakalotos it was an intentional strategy) he started to blame other people for the deposit outflows.

191

engels 07.07.15 at 1:09 pm

[Greece] cannot usefully vote for other countries to… allow it to print their currency.

Well said. The Greek government has NO right to print deutschmarks.

192

dsquared 07.07.15 at 1:13 pm

Taxing imports directly is out of court. Varying VAT rates to fall more heavily on imports is not, I think.

I despair, I really do. No, you can’t create tariff barriers within the Single Market by funny fiscal engineering means either. Who told you this?

193

politicalfootball 07.07.15 at 1:17 pm

My comment at 189 is pretty much redundant after Sebastian’s at 156. Sorry about that.

194

William Timberman 07.07.15 at 1:31 pm

bob mcmanus @ 179

The public burnings are only for those who are incorrigible, who cannot accommodate themselves to the benign central administration of their consciousness. Until their atavisms are better understood and therefore controllable, they leave us little choice. And I ask you, what do they want from us, anyway — aren’t iPhones, shrink-wrapped steaks, and budget flights to Majorca enough for them? We wish for a moment that they would stop to consider how much less they spend on food than a twelfth-century serf did.

Besides, this stuff is hard. It takes a priesthood, after all, to make the trains run on time. Do any of these beer-swilling populist carpers really have any idea what it takes out of you to get a PhD in economics and slave away under some boor of a political appointee in the Ministry of Applied Scarcity 12 hours a day, only to have someone who can’t even speak a complete sentence throw rotten eggs at you every time you drive out of the ministry garage? At the end of the day, if you can’t look out for themselves, someone has to look out for them, and like it or not, that someone is us. They should consider themselves blessed.

195

Pete 07.07.15 at 1:42 pm

@dsquared 192 So we can have capital controls but not tariff barriers?

196

Layman 07.07.15 at 1:47 pm

“I despair, I really do.”

After reading the series of exchanges above, so do I. If I read you correctly, the debt is the leverage by which the Troika impose The Conditions; but restructuring the debt is irrelevant to Greece’s efforts to escape The Conditions. Really?

(And this insistence on ‘The Conditions’ is silly. ‘The Conditions’ are depression-producing austerity measures, can we just agree on that?)

197

Nepos 07.07.15 at 2:06 pm

As I’ve mentioned before, treating this situation as though it were simply an economic problem overlooks the historical and ethnic tensions underlying relations between Germany and Greece (and more broadly, between north and south Europe).

Economic policy isn’t determined in a vacuum. Certainly Greek frustration at being lectured by the Germans on not paying debts, when Germany never did pay off their debts from the two world wars they started, plays an important role in these discussions. And German scorn for the Greeks likewise (you’d think that the Germans would remember the heavy price they paid in WWII for underestimating the Greeks, but apparently not).

198

Pete 07.07.15 at 2:34 pm

Following today’s non-proposal, I’m starting to think that this really is an orthodox Marxist “heighten the contradictions” Trojan horse. You couldn’t get elected on a promise to abolish money (or give depositors near-total haircuts), but you can get elected on a plan that has the effect of forcing your creditors to abolish it for you. It’s not just the right that can capitalise on crises to implement an ideological programme.

(This is a pretty extreme idea, and I’m normally wary of people throwing the “Marxist” label around, but it does seem to be consistent with events so far).

199

Alex 07.07.15 at 2:39 pm

dsquared, seems like a livelier thread, so may I point your head in the direction of a question I asked that you probably didn’t see as it got stuck in moderation for a time. It was in response to this comment of yours from a previous thread:

Also, there is a point which I have a lot of sympathy with, which is that starting the clock in 2008 or 2009 is a bit misleading, as it implies that the 2007 level of GDP is a realistic aspiration for Greece (I had a set-to with Brad DeLong over this – if you project trend lines incautiously, you can convince yourself that there was some set of policies which could have Greece with *higher* GDP than 2007 this year). In fact, 2007 GDP was way above capacity

I appreciate that you have more economics knowledge than me, and I wouldn’t be surprised if 2007 had some over-capacity in the GDP figures, however I’m confused by one thing – Greek unemployment is, what, 25%? But you’re suggesting that Greece is operating only 10-15% below capacity. Isn’t the more orthodox Keynesian point, as the man himself said “there is work to do; there are men to do it. Why not bring them together?” Obviously that’s a bit tricky to achieve (understatement), but are you really suggesting that those 25% unemployed might only be capable of making up 10% of the difference if they were in work?

200

Ronan(rf) 07.07.15 at 2:48 pm

“As I’ve mentioned before, treating this situation as though it were simply an economic problem overlooks the historical and ethnic tensions underlying relations between Germany and Greece (and more broadly, between north and south Europe”

The ethnic tensions (so much as they exist) are a consequence of the economic problem (and the rhetoric and action of political demagogues on both sides) Imo there isn’t a meaningful ethnic conflict outside of these specific circumstances (or even within them, unless political actors want to create ethnic based tensions)
Deep ethnic tensions between north and south ? I would say more plausibly structural economic fault lines. There are all sorts of ethnic divisions within and between European countries, but most of them are dormant most of the time.

201

politicalfootball 07.07.15 at 3:13 pm

they have put the haircut back to where it was before they reduced it in November last year. Which is hardly a “dick move” – I don’t think that it can be seriously argued that the collateral is[n’t] riskier.

D2 has argued that the issue of Greek debt is correctly thought of first as a political issue rather than a financial one, but rightly recognizes that some of these political behaviors have to be discussed in financial terms.

It’s possible that the core of my disagreement with D2 is when we should be talking about politics and where we should be talking about finance. The haircut, to D2, is a financial issue and as such, the ECB’s logic is unassailable – indeed, even generous to the Greeks.

I, however, think the ECB has made a political move that is reasonably described as a “dick move.”

202

JW Mason 07.07.15 at 3:14 pm

Central bankers are supposed to behave prudently – if you wouldn’t bet your own money on the solvency of a Greek bank you shouldn’t expect a central banker to bet any more of the Eurosystem’s money on it.

This is true in pretty much the exact sense that prudent firefighters should stay away from burning buildings.

203

JW Mason 07.07.15 at 3:16 pm

a request to limit the rhetorical questions, they get tedious.

You are right. And in general, I appreciate your willingness to engage here.

204

Rich Puchalsky 07.07.15 at 3:57 pm

What we’re talking about isn’t precisely priestly: priesthood involves occupation of a social position that confers authority, and the vast majority of the elite who support these kinds of policies don’t occupy such positions. It’s theological.

No one questions that theology can be an arbitrarily difficult subject, intellectually. Major theologies have many centuries of thought and commentary behind them, and continued power networks that recruit contemporary intellectuals into their defense. No one can just jump in and say that they are going to argue about theology, not without the kind of scorn evidenced at blog commenters here. And, of course, anyone who does put in the years of study necessary to argue theology tends to end of thinking like a theologian after that.

But look at what happens when people talk about basic things that they can observe. “It looks like the Greek people are suffering severely. Why is that?” You get three types of answers. One of them has to do with class struggle or neoliberalism and that’s right out because it’s Unserious Comment Box Warriorship (UCBW). So let’s take the two allowable answers. One of them is “There are complicated reasons that you can’t possibly understand.” But somehow “We hired technocrats to deal with that, and if they can’t, they should all be fired and replaced” is not allowable as a reply because it’s UCBW. The other is “The Greeks did bad things and this will keep happening to them as long as they do bad things.” But somehow “Other countries did bad things and this didn’t happen to them — so isn’t the rest of Europe just interested in punishing them?” is not allowable as a reply because it’s UCBW.

All answers are UCBW.

205

MPAVictoria 07.07.15 at 4:34 pm

204 is brilliant.

206

MPAVictoria 07.07.15 at 4:39 pm

I know that a lot of people here don’t like Atrios but he has been spot on all week:

“I get annoyed when people talk about the legal constraints that central banks face because “do whatever the fuck they want just call it an emergency” seems to govern their actual behavior when necessary. Greece is a tiny part of the Eurozone. The ECB could have taken over their debts without causing inflation. They could’ve mailed giant checks to every citizen of Greece without causing inflation. They could have made the lives of actual people infinitely better at essentially no cost.

But Teh Moral Hazard!!! The only moral hazard issue we see these days is that big banks lend without fear of default, knowing well that they – not the people – will be bailed out. Both could be bailed out, of course, but apparently that’s not an option. Because serving the people is not what these institutions are for.”

http://www.eschatonblog.com/2015/07/success-stories.html

The EU had options. It may have chosen not to consider them but they existed.

207

Bruce Wilder 07.07.15 at 4:58 pm

Rich Puchalsky @ 204

Very good.

208

Tom Bach 07.07.15 at 5:03 pm

I am old enough to remember when the idea that marriage equality would, could, or should be won through the courts was considered both stupidly impossible and impossibly stupid. And yet, here we are.

The idea that this or that solution to this or that problem is impossible has a long history of being wrong.

I mean, to be clear, the idea that subtantive debt write downs for the Greeks are politically impossible are more effective as assertions then as accurate predictions.

Also, tariffs in a common market do seem idiotic, but some crafty Greek or another, much like Ulysses, could come up with a rule that isn’t a tariff but works like one and, as these things go, it could be years before the regulatory agencies and other interested institutions force the rule’s appeal. To argue otherwise, is to insist that because some thing is technically against the rules no one would ever try it.

209

Layman 07.07.15 at 5:12 pm

“Rich Puchalsky @ 204

Very good.”

Thirded. Well done indeed!

210

William Timberman 07.07.15 at 5:24 pm

I agree — a comment warrior’s medal of honor (and a purple heart or two) to Rich. He’s done a lot of the heavy work lately, and deserves to be honored for it.

211

Trader Joe 07.07.15 at 5:31 pm

@208
Why do they need to come up with some complicated back-door tarriff? They have plain old ordinary income and property taxation systems like most of the rest of the world and they don’t bother to enforce or collect and naturally any oligarch with a lawyer can contrive a scheme to never pay taxes ever. The problem isn’t establishing taxing systems and revenue streams, its getting compliance with them in a system that has been corrupt for decades.

The trade off that Syriza is making is to gain popular support to use other people’s money to solve local problems rather than use the money of the indigenous wealthy who did a fair bit to cause the problems in the first place. Politically its wise since it captures the largest voting base and doesn’t upset local elites, if it works. Plan B would be the opposite (as practiced by the last government) and it didn’t work.

212

Donald johnson 07.07.15 at 5:32 pm

I haven’t read the comments yet, so someone may have already referenced blogger Jon Schwarz’s iron law of institutions. Basically, you should expect bureaucrats and politicians to do what strengthens their power within an institution and not what strengthens the institution, unless those happen to be the same thing. Which ties in with what JQ mentions towards the end of his post.

http://rationalwiki.org/wiki/Iron_law_of_institutions

213

Sasha Clarkson 07.07.15 at 5:40 pm

I suppose this is USBW too.

I wish that Tsipras would go to Brussels and remind everyone of the first article of the German constitution, introduced post-WWII for obvious reasons. It states “Die Würde des Menschen ist unantastbar (Human dignity is inviolable) Does this apply to the Greeks too? After all, the fabric of their society is being deliberately strafed by financial weapons of mass destruction. The casualties are real, even if they generally take longer to die.

If , unlike Germans post WWII, ordinary Greeks are not to be allowed dignity, then the inevitable result will be Eurodämmerung: the whole point of the EU will have gone!

214

The Temporary Name 07.07.15 at 5:41 pm

Maybe that should be the kleenex law of institutions.

215

Sebastian H 07.07.15 at 5:55 pm

Trader joe. You’re wrong on that. Three weeks ago, the IMF explicitly rejected Greece’s proposal along those lines

D-squared, I must not be understanding you. You seem to be saying that the debt isn’t important to talk about, because it isn’t ‘real’ in some sense and everyone knows it can’t be repaidand that really it is about (non Greek)political considerations. When I say that the ‘aid’ essentially never goes to poor Greek people, but instead is recycled to rich outside creditors you suddenly want to focus on how it is a real debt and how nasty a default is. I understand how nasty default is, which is why structuring the bailout to let off the hook the private creditors who made horrific decisions as further debt to Greece looks like a slimy choice.

I understand why the troika decided to bail out the private bankers (they were afraid of triggering a zone wide collapse). What I don’t understand is why it had to invert the meaning of moral hazard and continue to stick it to Greece and then get all huffy about it as if they hadn’t just bailed out an enormous number of private creditors. That is where the ‘fake’ debt was introduced. Trying to invoke a moral principle of paying back debts without the similar moral problem of “take your losses when you write bad loans” seems odd. Systemically the moral hazard lesson appears to have been learned–witness debt issuance to Spain. The interest rates there clearly suggest that private creditors expect a backstop.

I’m pretty sure there must be some timing issue I’m not understanding in the discussion of when debt is and is not serious, but I’m really not getting it.

216

Richard Cottrell 07.07.15 at 6:04 pm

This is not about politics, or even money. Its about the EUvirate slapping down the awkward squad, which Tsipras superbly represents. The deal, in the end, is the Greeks get more money shovelled at them, and the old greybeards who now sit around his Cabinet table, will serve their purpose by nodding through ‘promises’ that will never be kept. The EUvirate has demonstrated its attachment to ‘European values’ and ‘Solidarity’ by dismissing the referendum as though it never happened.. That puts Tsipras in charge of the baited mousetrap. Tsipras, the Nureyev of Euro-politics, has performed another startling spin, seemingly flying in mid air. We cannot expect such arts of levitation from Frau Merkel.
First the ‘never surrender’ defiance, then the referendum, now the government of the Round Table. Do we have any other politician of such artistic beauty on the European scene?
What is dying here is the vision of ever-wider Europe. It frayed, as I expected, at the edges, and now the rot will spread to the centre.
Richard Cottrell, Member of the European Parliament (Conservative) 1979-89.

217

Sandwichman 07.07.15 at 6:11 pm

Trader Joe @211: “use other people’s money”

Is there any other kind?

No, seriously. Money doesn’t grow on trees. It originates in debt obligations. No debt, no money. If this is to be regarded as original sin — well, it takes two to tango.

218

Barry 07.07.15 at 6:29 pm

dsquared 07.07.15 at 1:13 pm

“I despair, I really do. No, you can’t create tariff barriers within the Single Market by funny fiscal engineering means either. Who told you this?”

Let’s see. France has broken the rules, Germany has broken the rules, Cyprus now has an – interesting situation regarding the Euro. And that’s just what I know of.

219

Bruce Wilder 07.07.15 at 6:32 pm

Do we have any other politician of such artistic beauty on the European scene?

No. (I like to answer the easy ones. ;-)

220

robotslave 07.07.15 at 6:47 pm

I’m sure all the experts are correct when they say everyone involved in all of this knows perfectly well that Greece’s debt can never be repaid, and will never be repaid, but if that is the case, then it seems like it might be helpful to write it down on paper somewhere and have everyone involved indicate that they believe it to be true.

It may well be a Very Stupid Strategy and Tragic Tactical Error, but the reason the Greek government has been trying to get face value debt reduction out of these talks instead of just mitigating The Conditions is not (or is not just) that their negotiators are idiots, but because the country doesn’t have access to anything resembling a bankruptcy court.

221

Trader Joe 07.07.15 at 6:52 pm

@217 Sandwichman
By other peoples money I mean non-Greeks who will take the charge off for any debt reduction rather than Greeks (particularly the oilgarchs).

@215 Sebastain
I agree it was rejected, and why shouldn’t it be? Is there something about this governement that will collect taxes that hasn’t been common to the prior several? If a budget doesn’t balance and a governement refuses to take the steps within its control to raise revenues there are three solutions: cut costs (austerity), sell assets (privatization) and reductions/repudiation….why is the last one the only one that should be on the table?

222

MPAVictoria 07.07.15 at 7:00 pm

Trader Joe Greece has collected more taxes and cut spending (drastically) over the last 6 years. And the ECB could simply have printed the money owed.

223

MPAVictoria 07.07.15 at 7:02 pm

224

Alex 07.07.15 at 7:03 pm

I think on the issue of Greece’s debt and that it won’t be repaid regardless and so isn’t that important economically – sure, it’s probably true it won’t be repaid. But the creditors (or perhaps more precisely, the taxpayers in the creditor countries) aren’t saying that. They want their money back eventually. So Syriza asking for a debt write-off is simply getting the creditors to recognize the reality that it won’t be repaid. The question they are putting is – will the debt write-off happen in an orderly way, with an understanding with the creditors? Or will it occur amidst chaos and possible Grexit? That seems to be an important question the creditors should have to answer.

225

infovore 07.07.15 at 7:24 pm

Following up on @Alex, Brad de Long followed up on the idea that starting the clock at 2008 or 2009 is misleading. His conclusion is that even discarding the in-retrospect bubble, the “pre-Syriza growth” was too small to compensate for the losses incurred after the crises.

Following Krugman’s math, a 1% of GDP primary surplus requires a 2% of GDP spending reduction and implies a 3% decrease of GDP. If Greece is ordered to go from a 1% primary surplus to a 4% primary surplus, that implies a 9% reduction of GDP. To obtain actual economic growth in the face of such a headwind looks like an impossible task. So I doubt the “pre-Syriza growth” could have survived the Troika’s proposals. Or any realistic growth, for that matter.

And there is IMHO a potential problem in assuming that the “pre-Syriza growth” was real. If anything, David Cameron seems to have demonstrated that a growing the economy in an election year is a good way to be elected, regardless of what you did before. So if the growth was real, why did the incumbent government lose? Did the previous government manage to goose the numbers without producing actual growth? (That is, something that would be experienced as growth be ordinary Greeks.)

226

Sandwichman 07.07.15 at 7:29 pm

Trader Joe @221

Yes, I understand that is what you meant. Last I looked, the Greek oligarchs were not the only oligarchs in the world with a penchant for tax evasion avoidance.

The oligarchy is trans-national. Neoliberal globalization has been all about promoting the mobility of capital. It’s very upright of the European neoliberal technocratic constabulary to be shocked, shocked! that tax evasion is going on in here.

227

Trader Joe 07.07.15 at 7:33 pm

@222 and 223
I completely agree, and I believe that’s what D2 was saying as well, they had done a good job reducing spending and collecting taxes, they were on the right track despite it being a quite difficult track…they had even managed to issue new public debt last summer, all good signs. Then Syriza was elected and, whether rhetoric or real, interest seemed to turn away from these steps and towards “debt reduction only” as a way of moving forward.

The ‘ECB printing money’ solves nothing…that money comes from somewhere, at least it has ever since double entry bookkeeping has been invented. It would make as much sense as saying ask the U.S. to pay for it since we have a bigger economy and can afford it…the debt doesn’t go away its just shifted to a new debtor.

228

Eli Rabett 07.07.15 at 7:38 pm

If teh Moral Hazard is your thing, how much beating do the Greeks have to take to satisfy you? Anyone looking at what Greece has gone through in the past five years who would volunteer for the same is the guy that de Sade would like to meet.

229

Rich Puchalsky 07.07.15 at 7:47 pm

Trader Joe: “I completely agree, and I believe that’s what D2 was saying as well, they had done a good job reducing spending and collecting taxes, they were on the right track despite it being a quite difficult track…they had even managed to issue new public debt last summer, all good signs. Then Syriza was elected and, whether rhetoric or real, interest seemed to turn away from these steps and towards “debt reduction only” as a way of moving forward.”

If only they could have just kept trying harder. Everyone knows that if you’ve been doing something for years, and even though you’ve been doing it nothing seems to be changing, you should do it some more. It could start to work!

That is why Boxer from _Animal Farm_ is such a widely respected and emulated figure.

230

Sandwichman 07.07.15 at 7:48 pm

Jennifer Hinton at the Guardian:

The issue of austerity versus stimulus is often framed as the entire debate – if you don’t support one, you must support the other, because there are no alternatives. This is the same binary debate that has been going on for more than 100 years between the state versus the market. Yet, these dichotomies distract people from thinking about what’s really important – the goal of these policies, which is to grow the economy.

No analysis I’ve read thus far has questioned the damaging role that the endless quest for economic growth plays. Neither austerity nor government stimulus will ever be able to address the debt crises and recessions of the twenty-first century because what we’re dealing with here is an inherent contradiction of capitalism.

Elephant? What elephant?

http://www.theguardian.com/sustainable-business/2015/jul/07/this-endless-quest-for-growth-will-see-greece-self-destruct

231

Sandwichman 07.07.15 at 7:50 pm

232

Trader Joe 07.07.15 at 7:58 pm

@229
It may be that Napolean is not always right, but it doesn’t mean he’s aways wrong either. Deals happen in the middle.

Can any of the Greek supporters even possibly explain why Tsipras showed up to the summit today with no plan whatsoever? He promised he’d have signed a deal with Brussells within 48 hours and doesn’t even bring a plan? Guess that’s another promise that shouldn’t have been believed.

233

Layman 07.07.15 at 8:15 pm

“Can any of the Greek supporters even possibly explain why Tsipras showed up to the summit today with no plan whatsoever?”

Don’t fall for the nonsense posturing. The Greeks submitted a proposal last week. The Eurogroup said they wouldn’t consider it until after the referendum. It’s now after the referendum. The Greeks arrive prepared to talk through that proposal, and the Eurogroup asks where the new proposal is. The Greeks say ‘we sent it to you last week’, and the Eurogroup professes shock at the perfidy of those unreliable Greeks.

234

Ronan(rf) 07.07.15 at 8:20 pm

You’re all being played.

235

Rich Puchalsky 07.07.15 at 8:21 pm

Trader Joe: “Deals happen in the middle.”

Sure. OK, we have to have a deal that happens in the middle. Where is the middle of “Keep working!” and “I’ll keep working as you say but can’t we do something different?” Is that any different than the middle of “Keep working!” and “No I’m not going to keep working”?

But if I had to guess why Tsipras showed up without a plan if that’s what happened, I’d guess what is obvious: he doesn’t want a deal. There were 6 years for a deal under condition 1 above, 6 months under condition 2. At some point you just admit the obvious: that the predators you’re negotiating with are never going to give you a deal that you can live with, and that you’d be better off without one.

236

MPAVictoria 07.07.15 at 8:54 pm

“The ‘ECB printing money’ solves nothing…that money comes from somewhere, at least it has ever since double entry bookkeeping has been invented. It would make as much sense as saying ask the U.S. to pay for it since we have a bigger economy and can afford it…the debt doesn’t go away its just shifted to a new debtor.”

No in fact it doesn’t have to come from anywhere. They can just print it and give it to creditors.

237

Trader Joe 07.07.15 at 9:06 pm

@233
I’m just going by a variety of reports which collectively quote a fair number of different finance ministers who had different ways of saying, “we showed up to review the plan, they said they’d put in a plan tomorrow”…after the meeting adjuourned the famed “unnamed” Greek official said the plan was really last week’s plan. I don’t discount it could all be posturing, but it sure seems like if the goal was to discuss last week’s plan Tsipras should have made that clear.

@235
I doubt “keep working” is solely the right answer, but “No” surely isn’t the right answer either when you’re asking someone else to support you. Collectivism got them the first 200 B euros, definition of terms for the next 100B needn’t be the same. It seems like there should have been some middle ground since nearly all of the ends were in agreement (i.e., a need for funds, a willingness to advance funds, maintaining monetary union) apparently that wasn’t the case. I think Syriza played their a poor hand poorly, others think they played it well – at the end of the day, it was poor hand and that’s really the problem.

238

Trader Joe 07.07.15 at 9:10 pm

“No in fact it doesn’t have to come from anywhere. They can just print it and give it to creditors.”

Please read up on the situation and rethink this. The ECB is the creditor for the largest portion of the debt. Debt forgiveness is not permitted under their charter. Please dazzle us with your understanding of how they can solve this by “printing money.”

239

MPAVictoria 07.07.15 at 9:50 pm

See my post at 206 for a response. The ECB should have simply printed the money and handed it out. It is not like the EU is facing a problem with excess inflation. You are thinking too small Trader.

240

Layman 07.07.15 at 10:03 pm

“I’m just going by a variety of reports which collectively quote a fair number of different finance ministers”

Yes, that’s what I was warning you about.

241

kidneystones 07.07.15 at 10:06 pm

@216 Re: Tsipras as Nureyev. If plunging Greece even deeper into a state of misery is his intent, you might be right. To others, Tsipras appears an utter incompetent, an amateur flopping about the stage, barging into other dancers and knocking over scenery. All hopes of choreography have evaporated, much of the audience is heading for the exits, the orchestra is a cacaphony, and the riot on stage threatens to close the theatre. Daniel’s critique of the current Greek government’s policies appears now to have been far too mild.

@204. Agreed, and thanks for driving the irony needle to its extremity. Rich and Bruce are nothing if not the high priests of the CT perpetual victim theology. This theology in its current iteration has been to paint the Greeks as victims of everyone and everything but their own greed. As someone who once made a good/evil living helping the hapless locate and press their very own greed buttons, I’ll agree that it does indeed take two to tango: the predatory lender and those eager to bury themselves in debt. Both, not one, are to blame.

My own view is that Syriza did what the electors asked Syriza to do. And to that extent, Tsipras, Varoufakis, and Tsakalotos have done what they can. Which, as is it turns out, has been to drive a wedge between Euro members with the majority lining up to punish Greece, as Daniel implicitly warned might happen. It’s one thing to threaten to leave an unhappy marriage, it’s another to discover your spouse had your bags packed and set at the door long before the threat was uttered.

Tsakalotos looked distinctly uncomfortable and nervous in his new role of finance minister. I didn’t think much of it at the time. However, there are a number of stories emerging that the Tsipras-Syriza strategy was to lose the referendum and use the defeat as the foundation for building a broader coalition of southern debt-forgiveness seeking governments. In this telling, the results of July 5th stunned Syriza, who had no plan B. Hence, the lack of new proposals and Tsakalotos’ nervousness.

The theology of the CT comment ‘warriors’ (an odious and repellent term worthy of John Podhoretz, perhaps) is to presume genius and infallible perceptive powers on their saints, and to discover the worst malefactions in those they seek to cast and keep in the pit.

Tsipras and company are looking more mortal and fallible by the hour, I’m afraid. My read is that they’re utterly unprepared to ward off the savaging the punitive are about to unleash upon Greece next weekend. I doubt they even see where the first blows are to fall.

As for the punitive, my guess is that this gang has been waiting for a long time to write off Greece and pull up the drawbridge. Not a week goes by without the right praising John Howard for effectively letting the refugees drown rather than admit them to Australia. This gang already regards Greece as a failed state. Syriza has made their job of dumping Greece out of Europe all the easier, damn the short-term economic costs. The Mediterranean will be patrolled by navies dedicated to turning back refugees and destroying the people-smuggling networks. Africans and others hoping to enter Europe either will be confined to the slave-labour continent of Africa and the theo-fascist states of the Middle East. Or, so they imagine.

It’s a fucking disaster and only looks to get much worse.

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Sandwichman 07.07.15 at 10:14 pm

kidneystones #241

A lot you know about choreography.

https://youtu.be/Imyqnop6grY

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Rich Puchalsky 07.07.15 at 10:18 pm

kidneystones: “Rich and Bruce are nothing if not the high priests of the CT perpetual victim theology.”

I’m rude, too. And just when other people were being so polite.

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Bruce Baugh 07.07.15 at 10:37 pm

I’d certainly feel a lot more comfortable harshly dumping on Greece if there were a bunch of examples of the troika’s demanded policy working out well – matching anywhere close to projections and delivering a sound, healthy economy and reasonable stable society.

There must be such examples, of course, or it would be ridiculous tending toward evil to act as though all this stuff is Greece’s fault. Right?

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kidneystones 07.07.15 at 10:56 pm

@243 True, and that’s a real virtue!

@242 I’m about to barge into some scenery myself. Thx for the Eugene Levy!

246

Sandwichman 07.07.15 at 11:04 pm

“things can’t go on like this”?

Walter Benjamin:

Imperial Panorama
A Tour of German Inflation

“1. In the stock of phraseology that lays bare the amalgam of stupidity and cowardice constituting the mode of life of the German bourgeois, the locution referring to the impending catastrophe — that “things can’t go on like this” — is particularly noteworthy. The helpless fixation on notions of security and property deriving from past decades keeps the average citizen from perceiving the quite remarkable stabilities of an entirely new kind that underlie the present situation….”

“14. The earliest customs of peoples seem to send us a warning that in accepting what we receive so abundantly from nature we should guard against a gesture of avarice. For we are able to make Mother Earth no gift of our own. It is therefore fitting to show respect in taking, by returning a part of all we receive before laying hands on our share. This respect is expressed in the ancient custom of the libation. Indeed, it is perhaps this immemorial practice that has survived, transformed, in the prohibition on gathering forgotten ears of corn or fallen grapes, these reverting to the soil or to the ancestral dispensers of blessings. An Athenian custom forbade the picking up of crumbs at the table, since they belonged to the heroes. If society has so degenerated through necessity and greed that it can now receive the gifts of nature only rapaciously, that it snatches the fruit unripe from the trees in order to sell it most profitably, and is compelled to empty each dish in its determination to have enough, the earth will be impoverished and the land yield bad harvests”

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Collin Street 07.07.15 at 11:51 pm

How does free trade in services impact the ability of eurozone states to regulate banking? I’m concerned because the euro mechanism leaves states responsible for banking guarantees without giving them the infinite backstop that a central bank has; are member states meaningfully able to regulate banks so they can avoid the problem arising?

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Lee A. Arnold 07.07.15 at 11:51 pm

Trader Joe #227: “…that money comes from somewhere, at least it has ever since double entry bookkeeping has been invented.”

It doesn’t have to come from anywhere except the entry on the other side of the same ledger. Money is and was always printed, even when it came out of the ground as gold. Not to say that printing money would be appropriate in this case, because another psychological problem has to be solved, first. On both sides of the issue.

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Collin Street 07.08.15 at 12:24 am

I’d certainly feel a lot more comfortable harshly dumping on Greece if there were a bunch of examples of the troika’s demanded policy working out well – matching anywhere close to projections and delivering a sound, healthy economy and reasonable stable society.

It’s probably important to note that the value of a policy is the value of the model that supports it: if the projections aren’t met, then the model — and thus the policy — doesn’t work. “Things are improving!” isn’t good enough: for the model and the policy to be correct, things have to be improving as fast as was initially projected.

Which is why “things were improving!” is irrelevant: the projections weren’t met, and thus the model doesn’t work and policy recommendations insofar as they’re drawn from that model worthless. Missing your growth projections is, or should be, as bad for your credibility as making a loss: certainly it would be for private debtors.

[obviously there’s error bars here, but error bars are themselves part of the model, so…]

250

john c. halasz 07.08.15 at 12:26 am

So Daniel Davies harps upon the Pigou or real balances effect, the idea that eventually deflation will lead to a rising real value of remaining assets, and thus restart the process of investment, consolidation and restructuring. We’ll leave aside the distributive consequences and the time-frame. Here’s Krugman to the contrary:

http://krugman.blogs.nytimes.com/2015/07/07/milton-friedman-irving-fisher-and-greece/?_r=0

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Peter T 07.08.15 at 12:59 am

D2 @192

I understand that the Greek VAT rate varies between locations (lower in the islands) and between various commodities. And has done since its inception. Surely some of these variations discriminate between imports and locally-produced goods? They have, until now, been legal. Ditto for the tax system.

Happy to be corrected.

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Bruce Wilder 07.08.15 at 1:48 am

Collin Street @ 249

Among the clear indications that the economic model employed is theological and not mechanical is the early resort to a diffuse and all-purpose “uncertainty” as an explanation for any deviation from the expectations of the faithful.

A professional with her hand on an actual throttle or steering mechanism, expects deviations and is ready to adjust appropriately, almost minutely. Indeed, the mechanism chosen by a competent professional will have been designed for exactly that feature, that capacity for control. If we want a particular result we don’t preach automaticity as an article of faith, to be reinforced by true belief — “clap louder if you believe in the confidence fairy”; we drive toward it, based on the best information available, modifying course as more and better information becomes available.

kidneystones accuses me of “CT perpetual victim theology”, whatever that may be — I have no idea.

It has never been my intention to absolve the Greeks of anything. Their suffering does not justify anything, any more than the pretensions of European officials to good intentions do. Failure is failure, and its fatherhood is manifold, though it is hard in good faith to lay it all on latecomer SYRIZA or even Greece, long-suffering in its dependence.

I have looked in vain for a sustained economic analysis that had any credibility. Krugman is fond of sometimes claiming that economics is not a morality play, but this, what is happening to Greece, is a morality play, and apparently no one participating on the side of the institutions, or looking on from neutral ground, can see it as anything else. They just want to sort out the moral dynamics as if this were a domestic drama, lecture us all on the importance of discipline, the problem of moral hazard, the importance of honoring commitments. Declare the punishment is something the Greeks brought on themselves. It looks to me like nothing so much as the attitude of an abusive and irresponsible parent to an immature and recalcitrant child.

I have not offered any appreciation of the SYRIZA political strategy or tactics. Their position, of wanting Greece to remain in the Euro, required somehow convincing Europe that the Euro, as much as Greece, should be reformed. But, I don’t know what they proposed, that might have induced such a re-framing away from the neoliberal orthodoxy. I frankly have not inquired deeply, discouraged by the confusion in what I have found easily in journalism, and simply do not know. Whatever they may have brought to the table, they seem to have met a wall of intransigence.

Possibly, SYRIZA never had a clue about how to fight the propaganda war, maybe they just did not have the resources. They appear to be about to win that propaganda war despite themselves, by becoming the main victims of a humanitarian crisis. The role of the ECB in bringing about that humanitarian crisis is shocking to me.

SYRIZA was never anything but a supplicant. People, who would blame the Greeks, at this late hour, seem surprisingly cruel, but the habit of blaming the least powerful in any situation . . . .

As a technical discipline, economics leaves a lot to be desired, and ethics and morality figure centrally — no matter what nonsense Krugman spouts — in the political economy of mediating social cooperation toward material ends. But, economics should not be about blame and moral panic. A country of 10 million is not a recalcitrant child and multinational institutions are not disciplinarian father-figures. Money is just a social instrumentality, a means of coordinating a loosely-coupled system of economic and political cooperation. A money economy has to be managed by public authority, because (the institution of) money (and finance) is a public good (or should be).

The big lie, the father of all the lies of neoclassical economics is that the economy is a self-regulating system tending toward an optimal equilibrium. The experience of Greece under neoliberal tutelage proves the lie is a lie. But, I don’t see any consciousness emerging that someone has to take responsibility for managing the economy of Greece: it cannot be the case that the EU exists to disable democracy and the nation-state (because nationalism is racist and icky or just a threat to corporate profits), tie Greece to some socio-economic bondage apparatus, and torture it pour encourager les autres and then wash its hands, as if it bears no responsibility for the situation of a member state. After five years, it seems to be at least arch, to note that the situation has not developed to Greece’s advantage despite the best efforts of the European institutions. I suppose we will have to endure self-congratulation on their generosity in inadequately responding to the humanitarian crisis they’ve worked so diligently to create, as well as hand-wringing over the military junta, which I am sure will be treated as regrettable, but at least “serious” in the important ways.

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MPAVictoria 07.08.15 at 2:06 am

Bruce our pundit press is indeed already speculating (somewhat positively I might add) on the prospect of a military coup.

http://www.balloon-juice.com/2015/07/06/its-got-a-groove-its-got-a-meaning/

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Tabasco 07.08.15 at 2:48 am

From the Wash Po, in explaining the attitude of Germans to the Greeks:
Germans use the same word for “debt” and for “guilt.”

It’s true, according to Google translate. The word is Schuld.

255

Sandwichman 07.08.15 at 3:35 am

“…the unsound and unsustainable growth of the financial sector.”

The CSI300 index slumped more than 7% at the open and was down 4.8% at 3,739.18 points by 2.08am GMT.

The Shanghai Composite Index dropped 8% and was down 4.7% at 3,551.13 points by mid-morning.

China stock futures pointed to further losses.

Losses on the mainland also weighed heavily on Hong Kong shares, with the Hang Seng Index down 3.3% and shares of Chinese companies listed in the city falling 4.2%.

As the markets opened, only 11% of companies on the two key mainland markets were still trading.

Christopher Balding, a professor of economics at Peking University said that while it was not possible to know exactly why so many companies had suspended trading, a large number were doing so because they had used their own stock as collateral for loans and they want to “lock in the value for the collateral”.

“Today is all about China, with Greece in the background now that it’s been given a new deadline,” said Ayako Sera, a senior market economist at Sumitomo Mitsui Trust Bank in Tokyo.

“Shanghai’s early losses were like a cliff-dive, which had a huge impact on investor sentiment.”

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Collin Street 07.08.15 at 3:39 am

A professional with her hand on an actual throttle or steering mechanism, expects deviations and is ready to adjust appropriately, almost minutely.

I’ve mentioned before that feedback systems are in-general unstable and need either an active control system or careful design including very, very heavy damping. Both are antithetical to “Free markets”.

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Sandwichman 07.08.15 at 3:43 am

“…either an active control system or careful design including very, very heavy damping…”

No built-in, self-adjusting economic system mechanism?

Breaks my heart.

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Tabasco 07.08.15 at 4:10 am

used their own stock as collateral for loans

The creditors would have been better off accepting sh*t as collateral. At least that can be used as fertilizer.

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Sandwichman 07.08.15 at 4:21 am

“The creditors would have been better off accepting sh*t as collateral.”

So much for “locking in the value for the collateral.”

“The money seeping its way out through stock portfolios more intricate than any genealogy: what stayed at home in Berkshire went into timberland whose diminishing green reaches were converted acres at a clip into paper — toilet paper, banknote stock, newsprint — a medium or ground for shit, money, and the Word. […] Shit, money, and the Word, the three American truths, powering the American mobility, claimed the Slothrops, clasped them for good to the country’s fate.”

260

Rich Puchalsky 07.08.15 at 4:26 am

Perhaps the various economics experts here can educate me. I remember once falling for the “lump-of-labor fallacy” — the idea that an economy has a certain amount of labor it needs done, and when that’s done there’s no labor left to do. This situation seems to have a “lump-of-debt fallacy”.

I’ve seen asserted on this and other recent threads that:
* no one really knows how much the Greeks owe
* no one really expects the most recent “loans” to be repaid
* the Greeks were very foolish to negotiate for debt reduction as if that meant anything
* (from jch’s link to Krugman above) “The more debtors pay, the more they owe”, so it could well be impossible for them to ever repay the debt even in theory
* despite all this the debt is very important and they have to keep trying to pay it.

Clearly there is no lump of debt that exists even as an accounting fiction. So what is it? A moral imbalance? A metaphysical condition? Help me out here.

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Sandwichman 07.08.15 at 5:47 am

@260 “Perhaps the various economics experts here can educate me. I remember once falling for the ‘lump-of-labor fallacy’… This situation seems to have a ‘lump-of-debt fallacy’.”

You mean mercantilism? Germany pursues a mercantilist trade surplus policy and insists that everyone in the Euro zone must do the same.

I have thought quite a bit about the relationship between the alleged lump of labor and emergence of modern credit. The “fallacy” can be considered a version of the mercantilist “fallacy,” which wasn’t so much of a fallacy under the conditions that prevailed in, say, 16th or early 17th century England. By the end of the 17th century that was changing because a cure to the “fixed amount of money” problem was emerging.

“Of all Beings that have Existence only in the Minds of Men,” wrote Charles Davenant toward the end of the 17th century, “nothing is more fantastical than Credit: it is never to be forced: it hangs upon opinion, it depends upon our passions of hope and fear: it comes many times unsought for, and often goes away without reason, and when once lost, is hardly to be quite recovered.”

Wennerlind, Carl. “Credit-Money as the Philosopher’s Stone: Alchemy and the Coinage Problem in Seventeenth-Century England.” History of Political Economy, Volume 35, Annual Supplement, 2003, pp. 234-261.

While serious financial strains affected most emerging nation-states in seventeenth-century Europe, England was particularly hard hit. In the 1620s an outflow of money and a rapid decline in England’s traditional export trades exacerbated an already precarious fiscal situation. Numerous attempts were made to ameliorate the fiscal and economic problems, but all measures proved inadequate. Reduced flows of gold and silver from the Americas, coupled with the rapid falloff in output from central European silver mines kept coin scarce, while debasements, though sporadically used on the Continent, had been effectively eliminated as an option in England by the failure of the Great Tudor Debasement of 1544–51.

Desperate for a solution to the economic and fiscal crisis, European rulers looked to alchemy as an alternative to debasement; in fact, most of the European courts patronized alchemists throughout the seventeenth century. While the reasons for coveting the magic tincture were many— agricultural improvements, medicines, perfumes, and so forth—the idea of turning base metals into gold and thus gaining the ability to relieve the pressure on the state’s finances and revive commerce was a strong incentive. … In Britain, the support of alchemists dates back at least to the reign of Edward IV (1461–83), who was the dedicatee of one of the period’s most famous alchemical tracts by George Ripley. Edward VI (1547–53) and Elizabeth I (1558– 1603) continued the support of alchemists, the latter by patronizing John Dee, who contributed greatly to the spread of alchemical studies in England. Dee’s successor, Kenelm Digby, gained the support of James I (1603–25) and Charles I (1625–49). James II (1685–88) and Charles II (1660–85) not only patronized alchemists, but were also known to have personally pursued alchemical experiments, the latter building a clandestine alchemical lab under his bedroom with exclusive access via a private staircase.

Although the efforts to find the philosopher’s stone were mostly unsuccessful [TW: the “mostly” is deadpan, in a footnote Wennerlind cites claims of witnessing transmutation by otherwise credible sources], regents continued to patronize alchemists until the end of the seventeenth century and, in France, even beyond that time. Royal support thereafter declined, even though some leading scientists such as Isaac Newton and Robert Boyle continued to believe in the possibility of transmutation. I will argue that the loss of interest by crowned heads was due in part to the emergence of plausible credit-money schemes. Credit-money is paper secured by an asset such as land or, as in the case of the Bank of England, designated tax and customs receipts. Previous credit instruments, such as bills of exchange and promissory notes, had served as means of exchange, which meant that they mediated transactions, but a subsequent transaction was required to clear the credit extended. These instruments required a great deal of trust and confidence to be functional, and therefore they could only circulate within close-knit groups, such as a merchant community. Credit-money, on the other hand, served as means of payment and had the capacity to circulate widely. These paper notes were wholly or partially convertible into assets or income streams designated as security. As such, they could fully complete a transaction and serve as a store of value, and not just as a temporary credit. Nevertheless, even though credit-money was backed by a security, uncertainties remained. For example, promised tax streams might be diverted, or, as in John Law’s scheme, the public’s notion of the value of the security might become unrealistically high (or low). Although suggestions for a public bank and credit-money began circulating in England as early as the 1650s, it was not until the 1690s, during the financial revolution, that the first developed system of credit-money became operational. This system was based on the idea that the newly formed Bank of England would take over state debt on advantageous terms and issue new notes against promised interest payments from parliament. The scheme was limited but worked well—a success, I suggest, that may go far toward accounting for the rapid decline in the support for alchemy in European courts. This transition from alchemy to credit was swift and complete, perhaps nowhere more dramatically evidenced than in the Duke of Orleans’s dismissal of his court alchemists in favor of John Law’s land-backed paper currency.

What we observe here might be interpreted as a temporal displacement: paper money superseded the search for alchemical gold. Whether this was a necessary switch is not my concern here. What I do wish to explore is whether the alchemical tradition conditioned the way early credit-money proposals were viewed and discussed.

In his conclusion, Wennerlind wrote,

The promise of alchemy appealed to many of the period’s political economists, who theorized that an increase in the money stock would translate into expanded commerce and thus provide a solution to the underemployment problem. On direct or indirect advice from these political economists, most European regents continued their patronage of alchemists. However, as the practice of transmutation proved insurmountably difficult, an interest developed in credit-money as an alternative method of expanding the money stock…. In the 1690s, the Bank of England finally engineered a system of credit-money. The success of this system coincided with (or caused) a rapid decline in royal support for alchemy, elevating credit-money to the status of sole tried and reasonably successful mechanism for the expansion of the money stock. Hence, while the prospect of expanding the money stock at will might have been conceived initially in alchemical terms, it only materialized in the form of credit-money.

see also: Wennerlind, C. 2011. Casualties of Credit: the English Financial Revolution, 1620-1720. Cambridge, Mass.: Harvard University Press.

Modern credit never fully escapes from the mercantilist fallacy that it because John Locke’s ethical justification of private property is grounded in a strictly mercantilist notion of wealth:

“when any man snatches for himself as much as he can, he takes away from another man’s heap the amount he adds to his own, and it is impossible for anyone to grow rich except at the expense of someone else.”

http://econospeak.blogspot.ca/2013/04/of-property-and-mercantilist-fallacy.html

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Sandwichman 07.08.15 at 5:51 am

ignore the superfluous “that it” in the penultimate paragraph of my last comment.
#261.

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Val 07.08.15 at 6:17 am

A public health perspective on this is interesting. I just happened to come across in my reading this article by Ruckert and Labonte on the health consequences of the IMF’s response to the GFC.

In the article they note that, following the consequences of SAPs in the 90s in particular, the IMF in theory reduced the conditionality of financial assistance somewhat, but that this has been limited in practice, and go on to say:

“Ultimately, the biggest concern for international health promoters might well be that,
while the neoliberal macro-economic framework has become slightly more poverty oriented and flexible, the overall support of the IMF for neoliberal and monetarist macroeconomic policies, combined with a strong resolve for free markets and free trade, has not been greatly diminished by the global financial crisis.”

Most of the article is about the impact on the IMF’s policies in low income countries, particularly in Africa, but they do include some comment on Greece:

“The IMF-driven effort to restore balanced budgets through fiscal austerity arguably represents an immediate threat to global health, especially if public assets sales and the privatization of core state service are proposed as solutions to countries’ debt problems, as can currently be observed in the case of Greece. A recent analysis
of the health impacts of the fiscal austerity drive in Greece has already revealed health effects beyond fluctuations in suicides and road-traffic fatalities (Kentikelenis et al., 2011). It suggests that healthcare access has already declined in Greece, as hospital budgets have been cut by 40%, and it is estimated that 26 000 public health workers, including 9100 doctors, will lose their job. It also notes that there was about a
15% increase in the likelihood of people reporting that they did not go to a doctor or dentist despite feeling that it was necessary [(Kentikelenis et al., 2011), p. 1457]. This suggests that there are grave risks to health from budget cuts, which in developing countries will pose an even greater danger to people’s health. But challenges to health outcomes are also related to the ways in which austerity measure are undermining the wider social determinants of health, especially proper employment.

The biggest obstacle to achieving beneficial global health outcomes arguably lies in the unwillingness to question the narrow (economistic) rationale of neoliberal macro-economic policies and to assess such policies from a broader perspective of social stability (Elson and Cagatay, 2000).”

I will follow up on the cited articles when I can also.

(Just on a personal note here, I hope that both Bruce and Rich [both of whose views in this thread I largely agree with] might read this and perhaps have the grace to acknowledge that when a person talks about health in the context of issues such as this [or climate change as in the previous thread], she is not necessarily advocating some individualised neoliberal regime of fitness and personal virtue – in fact, it may very well be the reverse. I may be beating my head against brick walls and being very boring here, but it would be nice to get some acknowledgement of having been previously misunderstood and maligned.)

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jkay 07.08.15 at 7:15 am

Andrea Merkel has resurrected the evil German Empire using the (rightly) debt-laden eurosouth as excuse for empire. She gave ireland better deal than Greece. Even though she added debt after the crisis. That’s why she doesn’t want Eurobonds – they’d let her empire off the hook .

.Greeks, stupidly, don’t want out of the Euro. Even though Krugman’s right that it’s the best way for them, and best escape.

Oppressive empire’s back in the worst way everywhere Gilded Age is, including the US.
link: articles.chicagotribune.com/2013-07-24/news/sns-rt-germany-electionssoutherneurope-analysis-20130723_1_euro-zone-joerg-asmussen-german-election

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Roger Gathmann 07.08.15 at 7:57 am

Since it is necessary to drag out a Greek to blame, I would nominate Karolos Papoulias, who, as head of the Greek government of 2010, signed onto the deal to take Greek’s debts to private entities and socialize them. Obviously, this was an excellent deal for rich Greeks, whose money was mixed up with the money of many banks and hedge funds who benefited from that deal. But it was not really difficult to see that making the Dutch and French taxpayer the lender of last resort was going to evaporate any sympathy with Greece – or any questioning of how it was that the Greeks were loaned so much money. If we take D2’s point that the pre-2008 GDP of Greece was a fiction, than the construction of that fiction was very much the responsibility of the lenders. The situation is not that different from the mortgage packaging that made life so golden for the financial sector in the Bush years.
The problem with Syriza, or the problem it has to deal with, is that it came to power too late. The EU’s stooges had created, in Greece, the perfect swindle. And they required government after government of stooges to cool out the mark. No wonder the EU-ocrats and their ancillaries in the financial world find Greece so infuriating – which is always iintroduced, of course, with the claim that we all “sympathized” so much with Syriza when it was elected and are oh so disappointed by the disastrous course it has chosen.

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notsneaky 07.08.15 at 8:06 am

“From the Wash Po, in explaining the attitude of Germans to the Greeks:
Germans use the same word for “debt” and for “guilt.””

No, they use the same word for “guilt” and for “obligation”. Lots of languages do. Including some languages of countries which Greeks owe no money to,. Hell, I wouldn’t be surprised if Greeks used the same word for “guilt” and for “obligation” too (it probably has to do with some Indo-European ancestor). And there may be some European countries that Greece owes money to which don’t use the same word for “guilt” and “obligation”, but which still would like to get paid back.

In other words, this is just an irrelevant stupidity.

267

The Raven 07.08.15 at 8:33 am

dsquared@11: seems to me that the problems of Greece being pressed out of the Eurozone and, probably, the EU are political rather than economic. All the peripheral states will have to wonder if they are next. And the whole practice of treating an entire state like a recalcitrant child is likely to lead to widespread resentment: voters outside of Germany and France are likely to swing against the Eurocrats, despite all rationalization. It could, possibly, split the entire EU.

(I’ve posted a version of the following elsenet. It may eventually end up in a Grisis post on my own blog)

Tsipras reminds me of Obama, trying to negotiate with the Republicans. And Merkel reminds me of Bush II. I wonder if the rest of the European leadership will stick with Merkel. They aren’t all fanatics like her; she may be the only one. I expect some of them have doubts, especially since their own experts are telling them this is crazy.

Europe badly needs a Lincoln, a leader who values the European Union over loan payments. I wonder if there is one, somewhere, who we are overlooking.

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PaulB 07.08.15 at 9:23 am

…this, what is happening to Greece, is a morality play, and apparently no one participating on the side of the institutions, or looking on from neutral ground, can see it as anything else. They just want to sort out the moral dynamics as if this were a domestic drama, lecture us all on the importance of discipline, the problem of moral hazard, the importance of honoring commitments. Declare the punishment is something the Greeks brought on themselves…

I think I’m on neutral ground, and no, I don’t agree with any of that. What I see is practical problems which no one here on what they might call the pro-Greek side has attempted to address. The suggestion that Greece should impose import tariffs within the European single market makes about as much sense as proposing that it should grow its economy by farming unicorns.

It’s a bit rude of me to say that. But so is telling me what I want.

269

Hidari 07.08.15 at 10:13 am

What does everyone think about this article? It certainly puts the ‘Syriza are brilliant masterminds’ meme in a new light. From the Torygraph, so caveat lector.

“Greek premier Alexis Tsipras never expected to win Sunday’s referendum on EMU bail-out terms, let alone to preside over a blazing national revolt against foreign control.
He called the snap vote with the expectation – and intention – of losing it. The plan was to put up a good fight, accept honourable defeat, and hand over the keys of the Maximos Mansion, leaving it to others to implement the June 25 “ultimatum” and suffer the opprobrium.
This ultimatum came as a shock to the Greek cabinet. They thought they were on the cusp of a deal, bad though it was. Mr Tsipras had already made the decision to acquiesce to austerity demands, recognizing that Syriza had failed to bring about a debtors’ cartel of southern EMU states and had seriously misjudged the mood across the eurozone.
Instead they were confronted with a text from the creditors that upped the ante, demanding a rise in VAT on tourist hotels from 7pc (de facto) to 23pc at a single stroke.
Creditors insisted on further pension cuts of 1pc of GDP by next year and a phase out of welfare assistance (EKAS) for poorer pensioners, even though pensions have already been cut by 44pc.
They insisted on fiscal tightening equal to 2pc of GDP in an economy reeling from six years of depression and devastating hysteresis. They offered no debt relief. The Europeans intervened behind the scenes to suppress a report by the International Monetary Fund validating Greece’s claim that its debt is “unsustainable”. The IMF concluded that the country not only needs a 30pc haircut to restore viability, but also €52bn of fresh money to claw its way out of crisis.
They rejected Greek plans to work with the OECD on market reforms, and with the International Labour Organisation on collective bargaining laws. They stuck rigidly to their script, refusing to recognise in any way that their own Dickensian prescriptions have been discredited by economists from across the world.
“They just didn’t want us to sign. They had already decided to push us out,” said the now-departed finance minister Yanis Varoufakis.
So Syriza called the referendum. To their consternation, they won, igniting the great Greek revolt of 2015, the moment when the people finally issued a primal scream, daubed their war paint, and formed the hoplite phalanx.
Mr Tsipras is now trapped by his success. “The referendum has its own dynamic. People will revolt if he comes back from Brussels with a shoddy compromise,” said Costas Lapavitsas, a Syriza MP.
“Tsipras doesn’t want to take the path of Grexit, but I think he realizes that this is now what lies straight ahead of him,” he said.”

http://www.telegraph.co.uk/finance/economics/11724924/Europe-is-blowing-itself-apart-over-Greece-and-nobody-can-stop-it.html

.

270

Hidari 07.08.15 at 10:30 am

Interesting to note that Paul Mason (who has contacts in Syriza) on Twitter, denies certain aspects of the Telegraph story but not the main thrust of it.

271

Peter T 07.08.15 at 11:18 am

At a slight tangent, I am reading Geoffrey Ingham’s History of Money. His central thesis (well-supported historically) is that the ability to maintain a stable modern credit money is dependent on the parallel maintenance of a stable relationship between the state, the creditor classes and the debtor (tax-paying) classes. Greece’s serial defaults would, in this view, witness its inability to construct and maintain such a relationship. The current crisis would be then the outcome of this failure projected onto the European scene coupled, unfortunately for the Greeks, with a marked shift in power towards the creditors in Germany, France and Holland. The historical outcomes of this sort of exercise do not make for comfortable reading.

272

kidneystones 07.08.15 at 11:51 am

@270 You get an extra-brave, double eagle CT comment warrior badge for venturing out of the bubble and actually reading an account written in by the ‘evils’ in the Telegraph. There are several problems with your analysis, and I apologize in advance if you’ve recognized these points simply chose to ignore them. I read the Telegraph story, too, about 12 hours ago, btw.

The key issue, IMHO, is not whether Tsipras expected validation in the referendum, but whether he had a plan for both possible outcomes. There’s a strong case to be made that he did not, unless we’re now going to argue that we’ve now entered the realm of 11 dimensional chess, a world in which Tsipras actually foresees all unfolding events and he’s going to whip a pony out of this pile o’ crap and rescue everybody.

The second problem with your analysis is that makes no mention of the fact that the far-right in Greece and France, by which I mean Golden Dawn and the FN, strongly supported giving the EU the finger. That shouldn’t come as news to anyone, and I suspect that moral minority here think that dissing the oligarchs is ‘their’ issue. A very poorly written analysis in the Guardian yesterday offered a breakdown of the Greek vote as an alliance of the hard-left and the fascist right (why bother with ‘neo’ when there’s nothing remotely new about them) over the moderate left and the moderate center. Marine Le Pen explicitly claimed the vote as a victory for self-determination and the rights of the nation state – http://www.reuters.com/article/2015/07/05/eurozone-greece-france-lepen-idUSL8N0ZL0TX20150705

Third, (but very much related to the point about the far-right) is the discovery that a very large majority of EU voters have lined up to all but force Greece out of the EU. Italy is evidently wavering at the moment. And for this reason it really doesn’t make any difference whether Tsipras is a genius, or not. Greece is now left with two extremely bad choices, pretty much vindicating Daniel’s critique and making his piece one of the most astute to appear in any media anywhere, from what I can tell. We should all be so clever.

What’s to come? Both Putin and President Drone Strike have weighed in, but it’s pretty hard to imagine the US Congress proving money to prop up Syriza. Stranger things have happened. I don’t see Golden Dawn winning over the moderate left/right, or the hard left. So were temporarily free of that menace. Something almost as unpleasant is quite possible in the short term, and something far worse is possible in the long term.

Marine Le Pen is very much the face of ‘respectable’ fascists and the FN polled as high as 27 percent, I believe. The Greeks currently do not posses a politician of her stature, but you bet your bottom drachma that talent-spotters are scouring the universities and businesses for someone to be the acceptable face of the next iteration of Golden Dawn. A couple of years of abject misery, failure to deal with the influx of refugees, and a sense of aggrievement, and we could see fascist governments from Portugal to the Black Sea.

And that’s when things could start to get truly ugly.

273

Sasha Clarkson 07.08.15 at 11:51 am

In the meantime, Jean-Claude Juncker has called the Greek referendum “an irrelevant circus”. Steve Bell’s brilliant cartoon response is below:

http://www.theguardian.com/commentisfree/picture/2015/jul/07/steve-bell-on-the-greek-referendum-reaction-cartoon

274

Daragh 07.08.15 at 12:16 pm

@Sasha –

Given that a) the referendum was on acceptance or rejection of a set of proposals that had expired by the time the referendum was held b) the referendum itself was held under conditions that could most charitably be described as barely democratic (one week to debate incredibly complex macroeconomic policies – no problem!) and with Tsipras assuring the Greek population that there would be no fiscal downside to voting no, and Varoufakis hinting about secret plans that unsurprisingly turned out to be wholly fictitious c) the colossal financial damage caused by the referendum itself due to uncertainty and the need to impose capital controls, I’m comfortable siding with Juncker on this one.

There’s a firehose full of sewage’s worth of blame to be assigned for the sorry state of Greece and the eurozone, and it goes in 360 degrees, but there seems to be a degree of willful ignorance in parts of the left over Syriza’s culpability (to whit, Paul Mason who has become Dennis Hopper to Tsipras’ Marlon Brando in this particular apocalypse, being cited as a reliable source while the Telegraph, which for all it’s flaws has reported this crisis well being treated as if it was inherently untrustworthy).

275

Sandwichman 07.08.15 at 12:23 pm

Steve Bell @ the Guardian.

Sandwihman @231..

276

Christ, Uhren, und Schmuck 07.08.15 at 12:29 pm

What’s the issue? Creditors have the right to demand full repayment, and attach whatever conditions their hearts desire to any new loans they offer. Greece has the right to default and to start circulating its own currency. Default/drachma certainly seems like the best option, by far.

“He called the snap vote with the expectation – and intention – of losing it.”

Beautiful. Note also all the “opinion polls” predicting Yes by a small margin – all of them. I don’t think I’ll ever believe any opinion poll. Ever. They create their own reality – until it blows up in their faces.

277

kidneystones 07.08.15 at 1:07 pm

Yves Smith, who has her critics here I know, discovers limited grounds for optimism. From: http://www.nakedcapitalism.com/2015/07/greece-told-to-submit-proposal-by-thursday-complete-deal-by-sunday-or-ecb-shoots-its-banks-and-forces-grexit.html

Given the unpleasant developments of the last 48 hours I suggest that the onus is now on the ‘Tipris is a genius brigade’ to make their case. Smith has been consistently hostile to Syriza, which may give some extra weight to her optimism.

Lest there be no confusion, however, about the proposals by Syriza, as Smith describes them. They represent a complete capitulation by Syriza to the EU. The key point from what I can see is that Greece will begin implementing the required changes as early as next week, which may allow for bridge financing – debt restructuring, rather than debt-forgiveness, and very possibly the heads of Varoufakis, et al on spikes. Just kidding.

The abject public humiliation of Syriza and the continued suffering of the delinquent Greeks until all the debt is repaid (never) will suffice. At least until the next crisis, that is.

278

JW Mason 07.08.15 at 1:16 pm

This has been an interesting discussion. From my point of view, the key question is whether the ECB is constrained by, or at least acting in accordance with, the normal principles of central banking, or if it is deliberately withholding support from the Greek banking system in order to advance a political agenda.

Obviously, I think it’s the second. (And I think this is really the only leverage the creditors have — there is no reason that a default in itself should be particularly costly to Greece.) On whether it is plausible that the ECB would (ab)use its authority this way, I think that is unequivocally demonstrated by the letters sent to the governments of Italy, Spain and Ireland during those countries’ sovereign debt crises in 2011. In return for support of those countries’ sovereign debt markets, the ECB demanded a long list of unrelated reforms, mainly focused on labor-market liberalization. There is no credible case that many of these reforms (for instance banning cost-of-living clauses in private employment contracts) were connected with the immediate crisis or even with public budgets at all. I think the case that the EC has, in the past, deliberately refused to perform its function of stabilizing the financial system, in order to put pressure on elected governments, can be taken as proven.

We can debate how exactly this precedent fits Greece. But I don’t think a central bank that allows its country’s banking system to collapse can ever be said to be doing its job. Every modern central bank — including the ECB with respect to every euro-area country except Greece — will go to heroic lengths, bending or ignoring rules as need be, to keep the payments system operating.

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kidneystones 07.08.15 at 1:21 pm

And one final unhappy thought on the Syriza capitulation, if it in fact takes place.

The public humiliation of Greece and of Syriza, thanks to the ‘genius’ Tipris and company, will be a huge win for the fascists of Europe. The EU is confirmed as the enemy, unable and unwilling to prevent the influx of the unclean elements polluting and freeloading off the unjustly punished Greeks, Italians, etc. Democracy is confirmed as a farce. Socialists/Communists are confirmed as well-meaning idiots, at best, and witting, or unwitting agents of the Evil EU Jewish-Controlled super-state. Cue in the national songs, uniforms, need for order and, crucially, obedience, and we’re halfway there. Factor in some riots, boycotts, strikes, and JQ’s military dictatorship starts to look like the least bad option.

Or, perhaps I just need my nap. Time to find out.

280

Pete 07.08.15 at 1:29 pm

From what I can tell on social media, the left of Europe also now think of the EU (or at least its undemocratic technocrat core) as the enemy. This isn’t a workable coalition but is going to make the Brexit referendum in 2017 very interesting. Especially if Greece is either a ruin or still in crisis talks at that time.

281

Rich Puchalsky 07.08.15 at 1:36 pm

PaulB: “What I see is practical problems which no one here on what they might call the pro-Greek side has attempted to address. “

“pro-Greek side”, Year 1: “The barn door is unlocked. Someone had better lock it before all the horses escape.”
“pro-Greek side”, Year 2: “”The barn door is unlocked. Someone had better lock it before all the horses escape. Umm, that’s a bad thing.”
“pro-Greek side”, Years 3-5: “Barn door. Unlocked. Better do something.”
PaulB, Year 6: “Look at that, the horses are running all over the place. All right, what’s your plan?”

282

politicalfootball 07.08.15 at 1:51 pm

Greece is now left with two extremely bad choices

I think you’re overcounting Greece’s bad choices by one. Grexit is all that’s left. Any other option is out of Tsipras’ hands.

Tsipras, as nobody denies, was dealt a terrible hand, but he’s managed to take the worst option – the status quo – off the table.

And look at where he started: Not only was the Eurogroup more-or-less unanimously in favor of continuing to deny Greece the opportunity to work its way out of Depression, but his own people had a strong bias toward more of the same.

The outcome will certainly be dismal, but a dismal outcome for Greece was always inevitable — really from the day it joined the Euro, but obviously from the moment Germany rejected expansionary economic policies after the financial crisis.

Will the Euro survive in something like its current form in the decades ahead? It might, but only if it takes the lesson from the current situation. Personally, my guess is Piketty is wrong in the short term about Euro contagion, but in the long term, absent structural changes, the Euro doesn’t work. And there’s nothing Tsipras can do about that, except what he’s done.

283

Trader Joe 07.08.15 at 1:52 pm

From the WSJ
“Greece formally requested a three-year bailout from the eurozone’s rescue fund Wednesday and pledged to start implementing some of the overhauls demanded by creditors by early next week, according to a copy of the request seen by The Wall Street Journal.

Crucially for Greece’s creditors, the letter says the government would start implementing some measures, including on taxation and pensions, by the beginning of next week, though it doesn’t go into details.”

Looks like Boxer carries the day afterall. If the rest of the horses would stop running around and start working harder they just might be able to avert a financial and social collapse by Sunday.

284

politicalfootball 07.08.15 at 2:18 pm

276: In my reading, it’s all over. The remaining task for both sides is finger-pointing, which is utterly necessary for political reasons. The remaining negotiations are Kabuki.

Greece is going to work very hard to make everyone believe it has conceded everything and then some; The Euro folks will say the Greek offer contains a poison pill and will reject it. Both sides will probably have pretty strong cases.

Anyway, that’s where I’m putting down my marker. It’s always edifying to have a predictive theory and to be able to test it. We’ll find out soon enough.

285

Tabasco 07.08.15 at 2:18 pm

@281

The referendum on Sunday overwhelmingly supports Syriza’s rejection of the Troika’s demands and not 72 hours later Syriza capitulates to those demands.

You can’t make this stuff up.

I have a feeling that Yanis “clean hands” Varoufakis saw this coming.

286

William Timberman 07.08.15 at 2:21 pm

So….Tsipras is an idiot is to be the new meme. I’d say that the Euro crisis has made idiots out of a lot of us, from Joschka Fischer to Bernard-Henri-Lévy, from Paul Krugman to Hans-Werner Sinn. I most emphatically do not exempt those of us who’d hoped against hope to see realized, in the good, gray bureaucrats of the EU, an emerging antidote to the casual savagery of the U.S. imperium. Nope. Power is power after all.

Time for humility. Time for a re-think.

287

reason 07.08.15 at 2:33 pm

@281
Well I guess der Spiegel is closer to the action than the WSJ, and I think the story doesn’t sound like that to me.
http://www.spiegel.de/politik/ausland/griechenland-krise-tsipras-raeumt-fehler-frueherer-regierungen-ein-a-1042590.html

Key sentences (in German – with rough translation)

Tsipras
Wir sind fest entschlossen, keine Konfrontation mit Europa zu betreiben, sondern mit dem Establishment in unserem Land.
(We are determined, not to have a confrontation with Europe, but with establishment in our land.)
….

“Gleichzeitig kritisierte der Premier die Programmpolitik der Europartner in seinem Land. “Ich kann Ihnen versichern, dass sich das griechische Volk bemüht hat, sich den Anforderungen anzupassen, aber jetzt sind wir am Ende der Belastbarkeit angelangt”, sagte Tsipras in Straßburg.”

I can assure you, that the greek people have tried to fulful the requirements, but have rest reached the end of their breaking point

Nirgendwo seien die Sparprogramme so lang und streng gewesen wie in Griechenland. “Ich denke, es ist keine Übertreibung, wenn ich sage, dass mein Heimatland zum Versuchslabor für die Sparpolitik in den letzten fünfeinhalb Jahren geworden ist.” Die notwendigen Reformen müssten in seinem Land zwar durchgeführt werden, sie seien in den vergangenen Jahren aber nicht gerecht über die Gesellschaft verteilt gewesen.”

I think it is no exaggeration to say that my country has been made into a guinea pig for austerity policies in the last five and half years. Greece must carry out reforms, but in previous they have not been justly distributed over the society.

Response from Merkel
“Die Lage sei so schlecht, dass Griechenland ein “drittes Programm” mit einer Laufzeit über mehrere Jahre und einem “Mehr an Verpflichtungen” erhalten müsse. Einen Schuldenschnitt schloss die Kanzlerin weiterhin aus – auch wenn Ökonomen dringend dazu raten.”

The situation is so bad that Greece must accept a third programme over several years with increased commitments. The Chancellor continued to reject debt reduction, even though economists recommended it.

Doesn’t sound so promising.

288

reason 07.08.15 at 2:35 pm

To put it more simply
Tsipris
Yes, but
Merkel
My way or nothing.

289

Tabasco 07.08.15 at 2:37 pm

@284

Yes, power is power.

Politicians on the Left usually understand this very well, but the Left’s latest hero, Varoufakis, said last week that the Troika would be so overwhelmed by the democratic legitimacy of a No vote that a favourable deal would be reached within 24 hours and the banks re-opened on Tuesday.

Has any politician, anywhere, any time, been more naive?

290

Marc 07.08.15 at 2:43 pm

It seems pretty obvious to me that the Greeks are being expelled from the Euro and that the Greek proposals are simply designed to place blame on the other side when – not if – they are rejected. Nothing will satisfy the EU hardliners at this point.

291

The Raven 07.08.15 at 3:01 pm

The expulsions will not, cannot, end with Greece. If Germany continues in its neo-mercantilist policies—and I do not see how the current ruling coalition can stop without losing power—, these will ultimately beggar most of its trading partners in Europe.

So, now what, Europhiles?

292

reason 07.08.15 at 3:10 pm

The Raven, @289
One thing may well stop Germany’s mercantilism – age.

293

Richard Cottrell 07.08.15 at 3:11 pm

Tsipras has a mandate. Without it he would be the emperor with no clothes. His subtle decision to include the opposition parties who were most responsible for the critical state of the Greek economy, and Greece in general, was a masterstroke. He who takes prisoners has won the war.(Sun Tzu) No doubt he enjoys the abuse poured on his head by those who waffle on about ‘European democracy’ (what is that precisely?) and European values ( Napoleon, WWI, WWII, the holocaust, the Cold War, enslavement to the imperial diktat by any chance?).
I sat in the European Parliament for ten years and found myself force fed with this rich diet like a Strasbourg goose. I led a campaign against Greece joining the EU on the grounds that her economy and economic structure in general were unfit to take the strain, like a jet engine fitted to a child’s perambulator. There beginneth the first lesson.
The logic of a two speed Europe was always obvious. Instead we have core Europe and her subject colonies. Cameron’s intended referendum will sharpen the issue to an extent that like Greece, the English (if not the Scots or the Welsh) will advance the issue and opt for OUT.
Then the solids will encounter the fan. It will take more than a few ouzos to sort that out.

Richard Cottrell

Richard Cottrell

294

Sandwichman 07.08.15 at 7:23 pm

kidneystones @277,

One ALWAYS wants to evaluate the credibility, affiliations and possible motives of sources. Googling is not hard to do.

http://www.politicalresearch.org/1999/04/01/clinton-conspiracism-and-the-continuing-culture-war-what-is-past-is-prologue/#sthash.0tBgoPhE.dpbs

Chip Berlet on A. E-P 1999:

AMBROSE EVANS-PRITCHARD

The work of British journalist Ambrose Evans-Pritchard is a mix of industrious investigative reporting and irresponsible rumor-mongering. His book, The Secret Life of Bill Clinton: The Unreported Stories, is an example of material that should remain unreported by the general media until it is corroborated with further documentation. A significant number of footnotes track back to rightist anti-Clinton sources, especially to the American Spectator, a neo conservative magazine that ran articles on Clinton with allegations that often lacked adequate corroboration.

The Secret Life of Bill Clinton

One chapter in The Secret Life of Bill Clinton alleges official misconduct and a cover-up in the death of Vincent Foster, tracing the conspiracy all the way to special prosecutor Kenneth Starr. Other assertions in Evans-Pritchard’s book include the claimed assassination of two teenagers who, Evans-Pritchard says, stumbled across a major drug delivery tied to Clinton. Other deaths attributed to Clinton or his operatives are discussed: “Already, people associated with the case were beginning to die in what amounted to a reign of terror among young people in…Arkansas.” Evans-Pritchard tells the story of one parent who “joined up with a California film producer named Pat Matrisciana to make a documentary on the deaths.” Matrisciana runs Jeremiah Films, which produces hard right Christian apocalyptic videos riddled with conspiracy theories, and made a widely circulated anti-Clinton video,The Clinton Chronicles.

Evans-Pritchard uses James Davidson of the rightist newsletter Strategic Investment to introduce the idea that Clinton’s actions mirror those of Nazi totalitarians. In his role as a far right prophet of financial doom, Davidson has written a book, The Story of a One-Term President, which forecasts a vast economic collapse and “bloodbath in US stocks and bonds” under Clinton. Davidson’s in-house “muckraker” for Strategic Investment is Jack Wheeler, described in his bio as a “veteran of six anticommunist guerilla wars [and] anti-Soviet insurgencies, including those in Nicaragua, Angola, Mozambique, Cambodia, and Laos.”

Evans-Pritchard cites Davidson’s Strategic Investment several more times, noting that Davidson financed examinations by several handwriting experts of the Foster suicide note. Claims that the suicide note was a forgery were later debunked, and one “expert” was later revealed as having misrepresented his credentials. Hard-right ideologue Joe Farah from the Western Journalism Center is introduced as a dispassionate media ethics expert.

According to the 1995 White House memo, Evans-Pritchard was a crucial link in taking hard right conspiracism and publishing it in the Sunday Telegraph of London where it was picked up and reported on by mainstream US media. Another British journalist who played a similar role was William Rees- Mogg of The Times of London.

295

kidneystones 07.08.15 at 9:21 pm

@294 Agreed! You’ll note, careful reader that you are, that I made no reference to Pierce. I do read the Telegraph, the Guardian, etc and therefore encounter a great deal of rightwing and leftwing nuttery. I arrived at my own conclusions, such as they are, by sifting through rather a lot of coverage and through discussions with friends an colleagues. The first time I heard Syriza, disaster, and amateur in the same sentence was from a senior bank analyst. I’m flip, I’ll allow. But I’m generally confident my methods. Stepping outside of one bubble normally necessitates stepping into others. Danger only arises when one mistakes one of these artificual constructs and its theologies for reality.

And we can always turn to comedy to help us separate the one from the other. Very much enjoy your comments and links, but felt you badly overstate the value monarchs attached to alchemists. But I’m sure you’re much better read on the topic of debt than I.

Henry’s post seems very reasonable. Hence the shrieks!

296

Sandwichman 07.08.15 at 9:56 pm

“You’ll note, careful reader that you are, that I made no reference to Pierce…”

You mean Evans-Pritchard, presumably. I was responding to another post, elsewhere (Economist’s View) that featured Yves Smith’s Evans-Pritchard post and I carelessly assumed that was the post you were referencing. My caveat was directed at the Yves Smith’s use of sources not yours.

“felt you badly overstate the value monarchs attached to alchemists”

That would be Wennerlind who I was quoting at length. It would be hard for me to judge how much value monarchs attached to alchemy because I haven’t read the primary sources. Considering the value that our current crop of …archs attach to whack-doodle superstitions such as general equilibrium, GDP growth and potential Pareto improvement, I would not be surprised if monarchs held out high hopes for alchemy.

297

kidneystones 07.09.15 at 12:48 am

@296 Well put. Apologies for the lack of precision. An apology is due Hikari, too, for doing more than most seem to willing, or able to manage: namely check for corroboration.
Re: sources. I assume Wennerland stands up rather well on balance. Like you, I’ve read no references to alchemy, which I find rather encouraging. I doubt there are many. I do work with lots of primary sources on trade, monopolies, and administration. These are all almost entirely free of philosophy of any kind and are normally written in the kant of notaries and clerks. Biases are very welcome, as they reveal personal or group values that might inform or shade accounts. The early European and American press was vibrant and vitriolic, as I’m sure you know.

Re: modern sources. I’m familiar with Farah et al and draw the line there, and with Alex Jones. Were we to toss out every mouthpiece, liar, and plagiarist we’d have to dispense entirely with TPM, Eschaton, along with Red State and the Telegraph. And perhaps start with Krugman who gave the economists’ seal of approval to Enron for 50 k per, lest we forget.

Re. Magic. The specific case I was thinking of re: alchemy is the development of hard-paste porcelain in Europe. I’m extremely pleased, btw, to see you very rightly identify the current crop of aristocrats as such, and list a few of their loopier notions.

298

dsquared 07.09.15 at 6:39 am

Obviously that’s a bit tricky to achieve (understatement), but are you really suggesting that those 25% unemployed might only be capable of making up 10% of the difference if they were in work?

This is an interesting question and in my opinion the answer is “you’d be surprised”. You’re right that the actual negative output gap in 08 could only have been a few per cent, but there were two other big factors to consider.

1) the extent to which the 07 GDP includes investment in overvalued real estate and construction. Greece had a real estate boom almost as big as Ireland’s. When the workers who were building those projects are back to work, they won’t be adding as much value, as they will be building things at real values, not fictitious ones.

2) the 08 GDP also contained a lot of “transfer payments to cronies disguised as employment”, in the sense of people recorded in the national accounts as being civil servants, but who weren’t actually producing goods and services.

The second group is actually a big opportunity, if they can find jobs in the real economy some day. But it’s not realistic to count them as part of potential output in the short term.

299

reason 07.09.15 at 8:30 am

dsquared @298
I would have thought if a block of land was valued at X and I spent Y on building on it, then I could sell the result at roughly X + Y + p (where p is some normal profit). The main issue is not that Y is overvalued, but the inflation in X. Sure there are people whose income is driven mainly by inflation in X – but they are not the builders.

300

reason 07.09.15 at 8:34 am

Or to put it another way – I don’t think capital gains are part of GDP, except to the extent that people convert capital gains into income. It is not the building that is the waste, it is the debt that goes with acquiring the land at an inflated price that is.

301

robotslave 07.09.15 at 3:14 pm

@299 @300

Sale of new residential construction is counted toward GDP, while sale of existing homes is not.

During a housing bubble there is a lot of new construction, and afterwards there is not.

302

reason 07.09.15 at 3:28 pm

robotslave
That is not the question, when you say sale of new construction – is the land counted in the value or not? It is definitely not value added, so it shouldn’t be (not to say that it couldn’t be just another poor definition in the national accounts). I’m of a view that the extra construction is a result of the bubble not the cause of the bubble (because the inflating land price, makes building on new and cheaper land more attractive than buying properties in older developments).

303

Sandwichman 07.09.15 at 5:33 pm

“Sale of new residential construction is counted toward GDP, while sale of existing homes is not.”

It’s more complicated than that. Residential construction is counted as investment. Real GDP adjusts for the inflation of land prices. “Net Domestic Product” subtracts consumption of fixed capital from GDP. Owner-occupied housing is counted as a personal consumption expenditure with “rent” imputed as if the owner rented to self at a rate comparable to that of comparable rental dwellings.

So although sales of existing homes is not counted in GDP, imputed rent is counted.

That’s the overview description from U.S Commerce. How they actually put that complicated sausage together is another matter.

304

JW Mason 07.09.15 at 10:39 pm

298 sounds disturbingly close to the liquidationist/Hayekian line in the 1930s, to me.

305

Alex 07.10.15 at 4:12 am

Thank you for the response dsquared, much appreciated. However, I’m minded to agree with JW Mason, that it sounds a little too Austrian for my liking. Perhaps this is just a visceral, gut reaction but I just can’t get past the fact that 25% unemployment (with no inflation) must mean an awful lot of lost output, even if perhaps the people unemployed may need a bit of training etc. Now perhaps you’re right that the gain in output would still put Greece still significantly below 2008, but I’m skeptical.

I had a look at some numbers to make a rough calculation. I have no idea if this is a reasonable way of looking at this, so help me out if I’m misinterpreted numbers of assumed too much. Anyway from Eurostat I get Greece GDP in 2008 of €242bn, and €179bn for 2014. Now, clearly however many unemployed were back in work, they may not be as productive as the already employed, so say their output is worth 1/6 of current output, rather than 1/4. That’s about €30bn. Assume a multiplier of 1.5, and we have €45bn. If you add that to current output, you get something only 7.5% below 2008 output, not 10-15%. Are these generous assumptions or conservative assumptions?

Now obviously there are severe practical and political realities that stand in the way of Greece ever implementing policies to produce the above result. But as a moral and intellectual case, in theory perhaps Greece has more potential than you might think?

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Alex 07.10.15 at 4:14 am

Oops, obviously with 25% unemployed, then 25%/75% is 1/3 not 1/4. But this makes my back of the envelope thing more in Greece’s favour, given I use a 1/6 figure.

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john c. halasz 07.10.15 at 4:45 am

“Greece had a real estate boom almost as big as Ireland’s.”

O.K. I haven’t look into the Irish figures granularly, but why then wouldn’t this claim show up on the Greek private indebtedness figures? Certainly there was no RE bubble on the level of Spain and RE “froth” accompanying a more general boom should come as no surprise, though it wouldn’t be a prime determinant of the bust.

Could you please provide some evidence for your claim, sir? Like the equivalent of abandoned projects in Galway.

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dsquared 07.10.15 at 5:02 am

298 sounds disturbingly close to the liquidationist/Hayekian line in the 1930s, to me.

I don’t see why it does. It’s just the clear truth that the Greek economy pre 08 had a lot of non productive wage takers [1], and that it will take time to get them into productive jobs (particularly if they still hold out hope of getting sinecures back again). And the contribution of overvalued real estate to GDP is just a mismeasurement issue – in principle, only the value added by construction should be counted but in practice, it sneaks in there, even in countries with really good statistical agencies which do a good job of updating land valuations.

Alex – your calculations are right for estimating a long term or fundamental potential output for Greece – that’s what I meant by saying there was underlying good news in the proportion of 08 employment that wasn’t creating value, because if those guys were in real jobs they could produce much more. But for purposes of evaluating the damage done by the troika program, I don’t think it makes much sense to use a counterfactual in which all the surplus civil servants are assumed to have found jobs at economy wide average productivity.

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dsquared 07.10.15 at 6:15 am

The footnote [1] above was of course meant to be a safe space where everyone could insert their own preferred hilarious joke about bankers! being the real non productive wage takers! and so on. Basically a place holder until I could bother Kieran into letting me upload a sound file of a bowstring going “zingggg!”

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Alex 07.10.15 at 3:51 pm

Right, so one positive I can take from all this terrible news is at least my maths and ballpark reasoning skills aren’t terrible! So anyway it seems from what you’re saying, dsquared, that the fundamental issue is time – that Greece has a lot of potential, but even under a big theoretical stimulus of some kind, it would take far too long to make up the lost ground relative to 2008. First, I’ll just say that whatever our thoughts on this, I agree that that drop wouldn’t be simply “the damage done by the troika program”, for me it would be “the damage done by the troika program after joining a monetary union without any fail-safes” since it has been the choice of Grexit versus Troika austerity that has boxed Greece into a corner.

Anyway, I’d like to elucidate exactly what it is about the time frame that is the real issue on potential Greek output for you. Imagine if you will a Krugmanian-style Alien Invasion. Now let’s say for whatever reason the powers that be (whether that’s America, Germany, China, whoever) decide that Greece is an extremely important geopolitical (galaxopolitical?) asset in the fight against the invaders. Perhaps they’re especially vulnerable to ouzo, in the same way the aliens in the 2001 film Evolution are poisoned by Head & Shoulders. Whatever the reason, the Allied Powers see a huge need to invest in Greek production and infrastructure to end the alien threat. So they propose a big stimulus package, that aims to hire vast numbers of the 25% unemployed in Greece and put them to work.

Now clearly this is a fantasy, and some of it would take time (I note in Krugman’s original “Space Alien” comments on the US economy, he said it would take 18 months tops), but are we really talking years and years and years? Is it that their skill set is so low or what? Or that the economy is too corrupt such that any attempt to (say) ramp up ouzo production would lead to lower output than expected through siphoning and laziness and so forth? I get that there was some dodginess about the boom to 2008, but what is it about that bubble that means the future growth can only be slow? Surely we should take the unemployed as they are? I just don’t really understand why the past bubble would sort of overhang into the future and weigh down on output making my calculations above take longer than one might think.

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Alex 07.10.15 at 3:56 pm

I guess what I’m saying is I’m looking for some numbers or something that point in the direction that there’s no way the Greek economy would be able to absorb big increases in employment in a shortish time frame at decentish wages. More detail in other words.

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Alex 07.10.15 at 3:57 pm

Sorry, that should be *More of the economic/financial detail about sectors of the Greek economy or something that underlie your position on this.

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