Greece, decision theory, and the sure-thing principle

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?

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.

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.

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.

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.

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.

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.

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?

Note to self: remember to close the fucking tag.

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.

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.

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.

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.

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

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.

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?

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.

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).

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 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?

Didn’t see that one coming, re Varoufakis.

A more intelligent Ed Miliband post lobotomy.

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.

@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.

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.

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.

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?

(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)

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.
~

“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.
——
~

“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.

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.

@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.

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.

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.

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.

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

@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.
——
~

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.

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.

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

@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.

83: yeah, Puchalsky FTW here.

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

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.

@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.

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.

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.

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.

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.

“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.

+1

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.

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.

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!

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).

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.

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.

@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.

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

No, not at all.

@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.

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.

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.)

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

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.”

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.

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

Bankers will be bankers.

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.

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)

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

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.

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.

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.

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.

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.

@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.

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.

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.

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.

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.

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.

“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.

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.

@ 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.

(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!

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.

@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.

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.

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.

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?

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”.

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.

@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.

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.

[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.

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

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

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).

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?

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.”

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

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

204 is brilliant.

Rich Puchalsky @ 204

Very good.

“Rich Puchalsky @ 204

Very good.”

Thirded. Well done indeed!

@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.

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!

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.

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.

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

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

@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?

See this for source:
http://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZS

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.)

@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.

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.

https://youtu.be/Ddhrz0XKySQ

“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.

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.

@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.

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.

@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.

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.

@243 True, and that’s a real virtue!

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

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?

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…]

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.

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/

“…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.”

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

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

Breaks my heart.

“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 “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

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.)

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.

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.

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

.

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.

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

Steve Bell @ the Guardian.

Sandwihman @231..

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.

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.

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?”

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.

@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.

@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 Ãœbertreibung, 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.

@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?

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?

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 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 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.

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.

@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.

“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.

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?

“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.

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!”

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.