excellent narrative. concluding paragraph rings so true. french and german banks were bailed out by the IMF and ECB. were there any penalties or repercussions toward the management/owners of those banks? why are spain, portugal, ireland, … not upset at the political bailout of those banks? it seems fascinating to see the narrative of poor financial decision making of greece completely overshadowing the poor financial decision making of german banks! why did germany deserve a financial bailout and greece no bailout? greece was pushed further down the rabbit hole by the flawed IMF analysis of the situation, and the IMF response is basically we were wrong but its still your fault? baffling events playing out across the pond.
BC
baffling, the Anglo-American, German, Dutch, Swiss, and Milanese Rockefeller-Rothschild int’l banking syndicate owns the TBTE banks that effectively own the Fed, ECB, and BOE and the respective govt’s. What the owners of the banks want they usually get. Whenever there is a financial, economic, or political crisis, war, or diplomatic dispute, one should ask oneself what the banksters want.
But the top 0.001% (more like 0.00001%) owners of the syndicate are virtually untouchable, accountable only to themselves.
The hyper-financialization of much of the developed world’s economies has resulted in the US becoming the model for a kind of a militarist-imperialist, rentier-socialist corporate-state.
Ulenspiegel
baffling,
while I have no problem with the last paragraph it would have been a better paper, if the exposure of various countries in 2010 to a Greek default were listed, It would also be helpful to list the banks which suffered losses in the haircut. How much was this BTW? Then some arguments may not be that strong.
The main issue with the presented narrative by Kashyaponly is of course his assumption that a Greek default was managable in 2010, however, this is disputed or at least debatable.
IIRC the highest exposure of German banks was 45 billion in 2010, a rescue of the banks would have increased the Germn national debt in worst case by 2% and was under discussion. After the rescue of the HRE et al. (>160 billion EUR) not a huge political risc for Merkel and from an econiomic POV peanuts for Germany.
Not to pay this relatively small sum (compared to around 90 billion EUR in 2015) was caused by the fear that a Greek default would cause a chain reaction, here German banks were very likely not the problem. There must have been more. What? Who opposed the default in 2010?
It would be helpful if you brought some arguments and data.
in 2010-2011 years, this was most definitely a european problem. were there characters in deeper than germany, sure. but make no mistake, the german banks were in deep. “here German banks were very likely not the problem” is an inaccurate statement.
” a rescue of the banks would have increased the Germn national debt in worst case by 2% and was under discussion. ” why didn’t germany bail out its banks on its own? they were bailed out, but by the rest of the EU. germany was bailed out by the rest of europe, but then has the gall to chastise greece for improper financial behavior. it just seems hypocritical to me. but don’t misunderstand me, i am not pointing my finger only at germany. many other EU members are similarly guilty, it is just that germany has been the one shouting the loudest-hence they are the target of my ire.
Ulenspiegel
Baffling,
The exposure of German banks was on a per capita base quite moderate and at the same time the German government was financially and politically perfectly able to handle 25-45 billion additional debt (1-2% of GDP). Therefore, a Greek default in 2010 would have been the cheapest solution for the German taxpayer. This was discussed in 2010, again in 2012 in Germany. And it was clear that more payments within the Euro framework mean a (much) higher exposure of German government than a bail out in the long run.
Therefore, the interesting question is: Why did the German government agree to more payments? IIRC it was feared in 2010 and 2012 again by proponents of more support that a Greek default would trigger a chain reaction which may destroy a lot by the combination of dead banks and the limited economic ability of some governments to handle the fall-out. However, I still have to find a serious paper with hard data which shows that this was a GERMAN problem, i.e. the German government would not have been able to pay for the exposure of German banks as worst case with ease. Even your source claims an absolute exposure of Portuguese banks in the same range as German banks, that with a much lower GDP. Where do we find the real problems?
We still have the interesting but unanswered question: Cui bono?
Could it actually have been that southern European countries were (2010 and 2012) in a much more problermatic situation than Germany and the prolonged “support” for Greece was much more a life line for these economies?
Could it actually be that Anil Kashyap provides only a telegenic villain, which can easily be sold to his US audience, but fails to provide hard evidence?
Or more serious: A useful paper, i.e. a paper that delivers more than a time-line which BTW is found in more detailed form on (the German) Wikipedia, should at least make the honest attempt to provide interesting hard numbers, which were the base of political decisions in 2010 (and 2012); and as least as important, should be able to shed some light on the (for me a German) obvious contradiction between Germany’s exposure and political decisions.
Discalimer: There is no dispute that the EUROPEAN financial sector used the years after 2010 very efficiently to convert commercial risks into governmental.
P.S. Your “they were bailed out, but by the rest of the EU. germany was bailed out by the rest of europe, but then has the gall to chastise greece for improper financial behavior.” is weak, check the contributions of the German government in 2010 and 2012, then check the worst case of a direct bail out of German banks, the numbers contradict you.
Steven Kopits
Germany did the bailing. There is little question of that. Of the Euro 320 bn-ish of Greek debt, perhaps Euro 200 bn can be allocated to Germany. This equals 40% of German government spending for any given year. It would be equal to a $1 trillion loan from the US government to Argentina, for purposes of comparison. It’s a big sum.
Now, Merkel and Germany don’t have any particular attachment to Greece, but rather to the European Project, which is central to Germany’s political, economic and security vision. Earlier (but not now), financial systemic considerations dominated. Saving Greece was not about saving Greece, but about saving the Euro and Europe as it exists in the German imagination.
Merkel, who may be the best leader in Europe today (let’s be more categorical: she is the best leader of the G7 countries), is well aware that any decision Germany makes has systemic implications, in the sense of setting precedent and meting out unequal treatment on Euro nations (Slovakia, Lithuania), for example. Decisions made with respect to Greece are not being made in a vacuum, but rather in the broader European financial, economic and political context. The German desire for a Greater European Project constrains German options, both in assisting Greece and punishing it.
The need to hold together Europe exposes Germany to extortion from bit players. Indeed, Merkel is facing a two-bit hustler from Greece who is trying to extort more money from Germany and the EU, when it has not lived up to its earlier promises and seems to completely disregard its obligations to a Greater Europe. It is not particularly difficult to paint the Greeks as ungrateful cheats completely abdicating their responsibilities to a common good. For Merkel, it has become personal, and Tsipras’ and the Greek’s failures are failures of character and integrity, not merely a matter of business negotiations.
When we speak of morality and duty, we are using the words of agency, that is, socially conservative concepts. The Greeks should do their duty because it is their duty. In other words, Merkel is operating under the presumption that there is a Smithian carve-out for public service. When a Smithian self-interested individual is elected to office, Merkel assumes that they abandon self-interest and assume a pure agency role, acting on behalf of the common good in some disinterested way. If one spends just a few minutes thinking about this notion, the whole presumption is ridiculous, but there you have it.
On the other hand, I believe there is no public service exception to self-interest. I have no expectation of the Greeks to behave in any other way than as dictated by Greek domestic incentives–that is, by the incumbent political system. Therefore, my primary intent, as a Troika negotiator, would not be to obtain favorable policies, but rather to gain control over the incentive system. That’s the place to start. And we use a (classically) liberal, rather than a socially conservative, system of motivation. I don’t give a damn about the Greek’s morality or sense of duty. Indeed, the weaker the sense of duty, the better for me, for that implies that pecuniary interests will dominate decision-making. Appeal to the principal, not the agent. Any hopes placed on the Greek agent will meet with disillusion, disappointment and estrangement, that is, exactly what we’re seeing now. Merkel and Germany would see far greater success if they focused instead on the incentive system.
pubsky
I don’t think that the issue of German bank bailouts is one of whether Germany could afford to bail out its own banks, or even whether it would have been cheaper to do so rather than using Greece as a bailout proxy.
In fact, it is difficult to imagine a scenario where an indirect bailout through aid to another nation could ever be a cheaper way to bailout a bank than simply handing cash to that bank.
Your open question is why would Germany bail out its banks through aid to Greece rather than simply bail out its banks.
Your implication is that southern EU bank exposure was also great and that there would be a high contagion risk that a Greek failure would not harm Germany (they have the means to bailout their own banks) but rather take down the other southern nations (because their banks, despite lower overall exposure to Greece, had similarly struggling governments that would not have been able to afford a bailout).
I think your implication is right. The uncertainty in 2010 was great and there was a huge contagion risk for all of the southern nations, but it also misses the point.
The suggestion by Kashyap and others is that the Greek bailout was a political move as much as it was an economic move. The politics of a German and French bank bailout would make their finance industry villains and change the politics of the EU recession significantly. By making this a Greek bailout issue (whether that is a stealth German bank bailout or EU-wide bank bailout) allows the banks to avoid scrutiny while directing all political and moral blame to the Greeks.
Germany was happy to use Greece as a conduit and overspend to bailout EU banks, if it means that the banking system and Germany is able to claim the political moral high ground and shield itself from difficult political discussions at home about the culpability of the domestic banking system in the crisis.
baffling
Ulenspiegel
” IIRC it was feared in 2010 and 2012 again by proponents of more support that a Greek default would trigger a chain reaction which may destroy a lot by the combination of dead banks and the limited economic ability of some governments to handle the fall-out. However, I still have to find a serious paper with hard data which shows that this was a GERMAN problem, i.e. the German government would not have been able to pay for the exposure of German banks as worst case with ease. ”
it was for the same reason the US government bailed out many european banks during the initial financial crisis. a fair amount of money from our financial rescue programs did go across the pond to europe. why? because you have a systemic problem, and you cannot provide a bailout for only one entity in a systemic situation. you argue it was not a german problem-it was. it was also a french, italian, spanish, etc problem. point is, germany could not escape the systemic issues by simply bailing out only german entities. german banks had exposure to greek debt at the time, and as you state (correctly) it was of a magnitude which was manageable. but german banks also had exposure to other european entities which were directly tied to greek debt. in a systemic environment, the german exposure is actually much larger than its measured direct exposure. it is this secondary exposure, which essentially becomes a primary exposure in a systemic meltdown, which germany could not control on its own. the german banking system was very much bailed out by the rest of europe. you want to imply germany could have chosen a path where it isolated its risks, paid that fair risk premium, and would have been fine whatever the rest of europe did. germany is not an island as an economy.
i believe our primary disagreement involves the ability of germany to resolve its financial issues on its own. i argue it is part of the systemic risk of europe, so it cannot operate in a vacuum. you argue germany can be a part of europe, but defend itself financially without regard to the performance of its neighbors, with whom it shares a monetary system. i don’t think you could have segregated the risk on the fly in 2010, in a manner which it has been segregated today.
baffling
steven,
“Saving Greece was not about saving Greece, but about saving the Euro and Europe as it exists in the German imagination.”
spot on. and if the greeks had realized this several years ago, they would have left the euro at that time. but if i were spain, portugal or italy, i now need to consider very closely the future actions of germany in the name of the euro. germany wants a euro, but with a vision that may not be shared by all its members. this will create continued conflict into the future, i am afraid.
Steven Kopits
It’s important to note, Baffs, that Europe also exists in the Greek imagination. The EU, Europe and the Euro are particularly important for low-agency countries because they offer the hope that domestic politics may be made to do the bidding of greater public good. So this is not just a German enterprise.
Three years ago, I probably would have defaulted and exited if I were Greece, and I think I said so at the time.
This is unnecessary today. Internal devaluation is complete, the budget, with a little modification, could be in balance. The current account is in order. Now is emphatically not the time to give up, given that the price of adjustment has already been paid.
Before the Tsipras government came to power, Greece (and Ireland) were the fastest growing economies in Europe. If we could align the incentives and get Greece to some oxygen, there’s no reason to believe it could not grow at near 10% for the next several years–even as a Euro member.
So, now is the time to think outside the box. Trust me, I am a very good strategic management consultant. The advice I have given here is sound, and it should be accepted.
baffling
steven,
“It’s important to note, Baffs, that Europe also exists in the Greek imagination.”
completely agree. but i guess people forget that greece has already implemented a tremendous amount of austerity. and the results have been dismal. i can forgive them a bit if they feel their imagination of europe is better than the german version. i learned long ago not to take advice from my seniors who had no skin in my game, since i am the one to pay the price for failure.
i agree with you that the best time to default was several years ago, before internal devaluations began in earnest. however, unless the troika resolves to further debt relief, the future will simply repeat the past. how much more is europe going to kick greece while they are down? greece is only showing recovery because they have probably been beaten down as far as possible while still a part of the euro-once you are at the bottom the only direction is up.
at this point, if europe is truly interested in a greece recovery, they will say the tough medicine is done and now provide debt relief. if they are not interested in greece in the euro, they will not offer significant debt relief and see how much more of a beating greece can take before it fails. but what happens when the greeks say enough, leave the euro, stay in the EU, and as a NATO member side with russia for economical reasons?
Ulenspiegel
Pubsky,
I have some issues with your interpretation “The politics of a German and French bank bailout would make their finance industry villains and change the politics of the EU recession significantly.”
The point is, that the Sündenfall (fall of mankind) had already happened before the Greek default was the issue. The German government had socialized banks (e.g. HRE, Commerzbank) with costs of about 160 billion EUR for the tax payer, therefore the political damage of some additional bailouts, which would have been “only” 45 billion EUR in worst case was no political risk. Secondly, the banks were already villains, you could not have done more damage to their reputation.
genauer
Given that
a) the exposure of all 9 listed countries , but the non-Euro UK was larger than Germany, taking population / GDP into account, and especially
b) the German fraction in 2010 was 36 / 390 billion = 9%, whereas our exposure through the AID programs is at 27% of the total (3 times higher)
it is just FALSE to say “germany was bailed out by the rest of europe”
Greece negotiates with a Troika of IMF, ECB, EU (EFSF) , not with Germany,
but somehow many folks always try to turn this into a Greece vs Germany story.
The idea that the rest of Europe should finance early retirement much more generous than in other countries forever, leading to pension costs of 16 % GDP in Greece vs Germany 10%, is just unsocial
with the usual, often not even thinly veiled, racist untertones
baffling
“Greece negotiates with a Troika of IMF, ECB, EU (EFSF) , not with Germany,”
really?
perhaps look at a slightly different problem. the ECB sets economic monetary policy. why has that policy been extremely beneficial to the german economic situation, but the antithesis of the needs of many euro states, including greece, spain, italy, portugal, etc? it is naive, or simply dishonest, to insist germany does not significantly influence EU policy to its benefit, at the expense of others. now i have no problem looking out for your best interest why you go it alone. but when you want to form a european shared dream, you need to play well with others on your team.
“the German fraction in 2010 was 36 / 390 billion = 9%, whereas our exposure through the AID programs is at 27% of the total (3 times higher)”
what were your indirect exposure risks? you fail to acknowledge the systemic risks. here in the US, this is why AIG was taken over. it was not for the primary risk, it was for the secondary risk-the systemic risk. we learned that lesson from lehman.
BC
Financialization as war by the rentier elites and bankster oligarchs:
Actually I blame the former Prime Minister Antonis Samaras for the collapse of Greece. Samaras was elected in 2012. In 1993 he had broken with his New Democracy party over their handling of the economy. He formed his own party and constantly criticized the Greek governments. His criticisms were spot on.
He rejoined the New Democracy party and in 2009 was elected as leader. He continued to criticize and even fought rhetorical battles with German and French leadership.
But then he was elected Prime Minister and he caved on everything. There was no tax relief, there was no reduction in government regulation, there was no invitation to foreign investment. Samaras became the same Prime Minister as all of those preceding him.
Because of the failure of Samaras, his hypocrisy and cowardice, the socialists were elected. We are now seeing the inevitable, but it did not have to be so.
Steven Kopits
Great summary.
Steven Kopits
As I am all-in on Greece, let me comment on the summary:
“Greece from the mid-1990s until last year was constantly spending more than it was collecting in tax revenues.”
Greece is not unique in this. Since 1980, the US, bar a couple of years under the Clinton administration, has also borrowed more–and in some years, very much more–than it brought in in revenues. I have on numerous occasions commented on a specific non-market failure, due to the three ideology model, which leads democracies to have a deficit bias. An incentive plan, first and foremost, counteracts this bias.
“In the fall of 2009, a then newly elected government reported that the deficit for that year was going to be 13.6 percent of economic output and that the deficits in 2007 and 2006 were also larger than had been reported.”
A central aspect of an incentive plan is that bonuses are not paid until the IMF signs off on the national audit. (Yes, it’s not your uncle’s IMF, or more precisely, my uncle’s IMF.) This creates a demand for good statistics in the host country. In other words, not only does the country have to produce growth, the IMF has to recognize that growth. In Greece, this would lead to a headlong rush to improve reporting of national accounts, both in timeliness and quality. Again, we are creating demand for information, as for growth.
After 2010, “many of the reforms that were supposed to support growth did not occur and the economy contracted substantially.” “The Greek government was supposed to sell some assets to retire some of the debt. That never happened.” “Once again [in 2012], the cornerstones of the plan continued to be steps to make tax collection more efficient, to reduce spending promises, and to undertake reforms to encourage hiring and business expansion that would support growth. It was not clear why this plan would be more successful than the first one.”
Why didn’t Greek politicians deliver of pro-growth policies which they themselves had accepted? Didn’t Greek politicians want growth? So why didn’t they implement the proposed–and accepted–reforms? Were they operating under a different incentive structure? Sure seems that way.
“Second, the economy contracted for two more years as the reforms failed to deliver higher growth.”
Readers will recall that I commented in April 2011 that the oil price spike of the Arab Spring was sufficient to put the global economy into recession, which it did. These effects were profoundly felt by poorly managed countries with large oil import bills, for example, Greece. The Argentine downturn also stems from the period, and all of Europe was essentially in recession until late 2013 to mid-2014. So let’s not ignore the huge effects of exogenous shocks. They play a central role in the second phase of the narrative.
“Reintroducing the drachma would be totally illegal under European law and form the basis for a law suit to force Greece out of the European Union (EU).”
From a legal perspective, this may be true. From a political one, I think it has no reality. Europeans know who the Greeks are and how they behave. They are just being Greek, which may be a sin in terms of macroeconomics, but not in terms of being human. I could not conceive of an appetite to resort to such vindictive policies purely to punish Greece for its inability to live up to Euro expectations. After all, Hungary, an EU member, still uses the forint, and not the Euro. Should Hungary be kicked out because of that? While I understand the professor, I strongly disagree from a political point of view. If the Greeks want to issue a new drachma, they should do so without fear of repercussion. Everyone is entitled to try to find a way to survive, and that includes Greece.
If the event of default, “then the next big unknown is how long before the economy stabilizes. At some point Greece will be a very attractive tourist destination, and its goods that are no longer priced in euros will be more competitive, so at some point the economy will begin to turn around.”
The Argentine example, as I commented yesterday, suggests that Greece would have a short but sharp recession followed by five years of GDP growth in the high single digits. Governance, however, would not improve, and would more likely deteriorate. Risks of Portugal or Spain leaving the Euro would increase. The concept of “Europe” as an integrated entity would suffer possibly irreparable damage. Greece would sit on the outside for a very long time, twenty years or more, I think.
Once again, I highlight the importance of installing an incentive structure as key to insuring growth and providing a source of debt repayment, but most of all, for providing the incentive for Greece to install best-of-class governance. Install it, and all the current problems will be adequately resolved.
genauer
What especially americna people tend to forget is that people in many European countries are richer than Germans.
Part of that is the low home ownership in Germany, but just take a look at
Greece will default. It’s just a matter of when. As the paper concludes, they should have done it in 2010. In 2020, the paper will conclude they should have done it in 2015.
Steven Kopits
But what do you mean by ‘default’? Greece is already in default to the IMF.
If you mean, ‘not repay all the monies owed,’ I believe Ulen and Genauer, two Germans (I believe they are both German), would already have conceded and accepted that point. On the other hand, I think they might contend that Greece should make a good faith effort to reform its economy and repay loans to the extent practicable. These latter conditions have not been met, and I dare say, there doesn’t seem to be much effort by the Tsipras government to move in that direction.
Anonymous
Full default on everything, pay nothing back. Leave the euro and reintroduce the drachma. Implement extreme economic policy changes so Greece is closer to Singapore.
Sure it would be a chaotic 5-6 years, but the kicking the can plan will never resolve itself and Greece will struggle for generations.
Steven Kopits
So how do you think Genauer and Ulen would feel if Germany got literally nothing back for its Euro 200 bn of support for Greece? How do you think that might affect public opinion? Do you think the German public would demand retaliation? How might that be accomplished? (Hint: read Genauer’s comments.)
Let me put it to you this way. If Germans like Genauer and Ulen are not willing to at least acquiesce in a proposed solution for Greece, then Greece is going to have a very hard time in Europe.
Thus, there is some middle ground which the German–and broader European–public is likely to accept, and that’s a debt reduction to somewhere in the 60-90% of GDP range, representing a write-off of 50-65% of Troika principal. If the Greeks can’t accommodate debt at 60% of GDP (ie, Troika debt reduced from Euro 320 bn to Euro 120 bn), then Germany and the other Euro Zone nations will come after the Greeks with pitchforks and burning torches.
Let’s be clear: Greece is a small and weak country enmeshed in a larger Europe. The Greeks can no more ignore Europe than Pennsylvania could pretend to ignore the rest of the United States. There will be an accommodation.
genauer
@ baffling
July 1, 2015 at 8:04 am
THe ECB targets EuroArea wide targets, of which of course Germany is some 27% GDP but has also only one out of 19 central bank governors, a massive under representation.
The NYT reference contains all 3 types of financials, in
contagion would have / had hit ALL others harder. Germany is the european bond benchmark (“Bunds”).
Merkel gets along with the others very well, especially because many others like to throw a tantrum every then and now. And that leads to :
“BBC: Germany is the most popular country in the world” and
The ECB bailed out a bunch of German bankers then insists that Greece pay for the bailout.
It would be as if when the U.S. Treasury bailed out the Wall Street banks on their bad mortgages, it then insisted that Florida and Nevada raise their taxes to pay for the bailout.
Steven Kopits
Or indeed, when the Treasury bailed out General Motors, and asked the taxpayers to foot the bill.
Tom Warner
This is a lot blander than it should be in some parts:
Through 2009 – buyers of Greek debt were well informed about how much debt Greece was issuing. The numbers were in Greece’s debt bulletins published at the time and at the fingertips of everyone with a Bloomberg terminal. The buyers knew the deficit numbers were phony, because the debt growth was so obviously so much bigger. What caused the crisis was that the EU started seriously cracking down. This did indeed happen when Papandreou came to power in autumn 2009 and tattled on his predecessor Karamanlis. The Karamanlis fudging was made much worse when on top of it came automatic deficit ballooning from the 2009 crisis and safety net spending and revenue collapse. The Eurostat reaction after several light knuckle-raps for previous similar incidents was suddenly very heavy. Papandreou found himself under serious pressure to severely fiscally consolidate. The excessive deficit procedure was invoked and it was clear Brussels wanted to make an example of Greece to warn others and quash the impression that anything goes. The aura of unbreakable EU support for Greece was damaged, and bond markets began to get spooked.
Another crucial aspect of the debt buildup was that Euro Area banks were incentivized to buy periphery EA sovereign bonds by ECB regulations that treated all EA sovereign bonds as equally risky. They received cheap ECB funding to buy Greek bonds on the same terms they received ECB funding to buy German bonds. The former however offered much higher yield, especially with leverage multiples.
2010: What happened in 2010 was not that debt suddenly became unbearable – all the buyers knew exactly where it stood all along – but that the EU crackdown eventually resulted in the IMF getting involved, and once that happened, the private buyers understood quickly that the IMF debt sustainability analysis would likely lead to the conclusion that Greece needed a restructuring. There were buyers still at around 6% in early April but as the rumors were swirled that the IMF was stepping in yields rose and then spiked when that was confirmed. The reason is that buyers understood that official lenders would crowd them out and eventually force a restructuring – in other words, yields spiked in 2010 because bond buyers already saw 2012 coming.
The 2010 bailout of Greece went as much to fund Greek deficits as to assume Greece’s debts to EA banks. And though there’s no doubt the EA banks’ incentives to lend to Greece were warped, I think if you borrow from Bob, spend that money, can’t repay Bob, and I pay Bob and assume your debt to him, I have above all bailed you out. And if you go around blaming Bob and telling everybody you don’t really owe me because I only cared about Bob, you will probably not get much credit in society and deservedly so.
What Tsipras is asking for – Actually he dropped the idea of write-offs very early on, and he purported to push for higher revenues. The arguments were mainly over whether his policies could produce the fiscal results he claimed, much less over what the fiscal results should be. Also, he actually got the fiscal situation in order when he came to power in February much better than anybody expected. His decision to not take the deal frankly makes no logical sense to me. I can only guess that he was afraid of losing his radical aura. But I think he has shoved all in with 7 2 offsuit here, and Europe is going to call his bluff and wait for Greeks to turn against him however long that takes.
Troika/the institutions – The switch to calling them “the institutions” was at Tsipras’ insistence, so he could pretend not to be bowing to the hated Troika. The fact that journalists and academics also switched doesn’t exactly speak of intellectual independence.
Reasons for not introducing the drachma – The simple reason is that Greeks are strongly against it. There is no threat whatsoever of Greece being expelled from the EU. But “IOUs” or any other pseudo-euro currency can easily turn into a de facto new floating currency. That would be far more conducive to recovery than the direction Greece appears more likely to go in the event of a “no” vote: to some kind of pseudo-euro with a dual exchange-rate, of one-for-one for privileged parties and somewhere probably north of 2 to 1 on an informal market for everybody else.
tom
“Through 2009 – buyers of Greek debt were well informed about how much debt Greece was issuing. The numbers were in Greece’s debt bulletins published at the time and at the fingertips of everyone with a Bloomberg terminal. The buyers knew the deficit numbers were phony, because the debt growth was so obviously so much bigger.”
exactly. but why do we not consider the debtors fools as well? why were they bailed out in stealth? the narrative today is simply that greece was irresponsible and should be punished. greece could only be irresponsible if the other side of the trade was made. if creditors knew the truth and still made the deal, i would say they were just as culpable. the banks were not naive.
same issue here in the USA. during the original financial crisis, we had people taking out fraudulent loans. but that only occurred because we had banks on the other side of the trade, in full knowledge of the financial conditions of those debtors. irresponsible. there has been some clawback against those banks, but overall i don’t think there has been sufficient punishment to deter similar outcomes in the future. even today, we see areas with suspicious mortgage behavior once again. we blame the people buying the homes, but the banks are also guilty of this crime as well.
Tom Warner
I think you mean, why don’t we consider the creditors fools? I think we did. Some went under (eg Dexia). And there wasn’t anything stealthy about it. A sovereign bailout is always a case of official creditors assuming debts that are falling due to private creditors.
Lenders in Europe and the US were naive in the sense that they were caught up in the 2004-2007 financial boom and badly mispriced all kinds of risks. Or you could argue they were corruptly managed. I would say the people deciding were more naive than corrupt, convinced they were going to make money, but the agency system was flawed such that it tended to give decision power to short-sighted people.
Sovereign bond markets are a special case as they are closely tied to public policy. Governments everywhere incentivize their domestic banks to buy government debt. The Euro Area is actually unusual – it formally recognized that such practices are a problem. (It’s the sort of thing that everyone criticizes of their neighbors, so when the euro club was set up, they agreed to limit it.) EA banks are capped in their ability to buy their own government’s debt, by a secret treaty called ANFA. But EA banks are strongly encouraged to buy EA sovereign bonds from any EA country’s government other than their own. Hence French and German banks piled up EA periphery sovereigns.
Another point I left out is that the EU crackdown in late 2009 to early 2010 on Greek deficit numbers was so serious because it had the potential to lead to a change of the privileged terms under which EA banks could obtain ECB funding to buy Greek sovereigns. A change to the risk weighting or haircut would totally throw the market. Buyers became wary of being out in front of a regulatory-induced fire sale, and that’s really why yields started rising. Bond markets were not misled by the phony deficit numbers. Those were purely for the EU’s sake, to skirt the excessive deficit procedure rules.
genauer
@ Steven Kopits, all
To illustrate the „Debt sustainability Analysis“ a little bit, since nearly nobody in the US gets it
1. German rates are currently 1.8% lower than the US, even over 30 years ! (look at e.g. Bloomberg)
2. Given the AAA construction of the EFSF, it can borrow at the same rate as Germany, e.g. http://www.reuters.com/article/2015/02/13/efsf-eurobonds-idUSL5N0VL20C20150213)
with some inconvenience adder of about 20 bp (=0.2% for non-financials), a little lower than for the AAA countries Austria, Finland, Netherlands (e.g. http://www.investing.com/rates-bonds/government-bond-spreads “Vs. Bund”)
3. The EFSF (now ESM) lends out to the IMF cases, like Greece at their cost + 0.5% service fee. That means a 1.1 – 1.3 % lower rate as the US has to pay, and below Inflation!
4. Interest payments are already deferred until 2022, and the maturity is already at 32 years
5. That makes the NPV (net present value) of the 150% GDP official loans already something between 0.4 – 0.5 , dependent in what relations you caclculate that, and effective 50% debt forgivenesss, just not in name. Formally the “no bail out” rule is kept intact
6. To ensure people that I am not alone with that, and some more explanation here : http://opedspace.com/2015/01/23/greek-elections-its-not-just-the-debt/
7. Greece gets a 2.3 % GDP subsidy from the EU, in future times probably more like 3%, which would be cancelled, if Greece would drop out, or go seriously delinquent.
8. The former “primary surplus” target of 4.24% is now already lowered to 3%, meaning that Greece in total pays NOTHING taking the subsidy into account, and does not even have to have a Current Account Surplus of truly gigantic 1% as planned previously (See IMF April 2015 WEO)
9. If effectively paying nothing is not good enough for Greece, than the Rest of the EU is better off with letting them crash out.
Steven Kopits
I appreciate that, Genaur. I don’t disagree with you.
I am merely making the case that the imperatives of Greek political culture dictate that Greek politicians will always prefer to increase domestic spending rather than repay Troika debt.
So let’s add a new Condition 8a: Members of the Greek parliament will collectively receive 0.8% of any real increase in GDP and 0.6% of any debt repaid to the Troika. Thus, 1% of real GDP growth equals approximately E 2 bn, and the related bonus would be Euro 16 million, or approximately E 55,000 per member. A repayment of E 1 bn of debt would represent a collective bonus of E 6 bn, or E 20,000 per member.
If you add that clause, I’m all in.
baffling
genaur,
1. the low german rates are a function of low growth/deflation over the longer term horizon, not fiscal responsibility. you are proud of no growth???
4. interest rates deferred, maturity at 32 years. you may as well make that 100 years. greece cannot pay off the loan. it is bankrupt, why introduce a debtors prison?
9. “If effectively paying nothing is not good enough for Greece, than the Rest of the EU is better off with letting them crash out.” Actually i agree. But the troika proposed significant austerity and produced a depression. i don’t think greece could have done any worse left to their own devices. the troika and europe should at least acknowledge their responsibility in the damage. but they wont, because similar treatment may be in store for portugal and spain, and the troika needs to maintain its seriousness to solving the problem.
Ulenspiegel
Where does Germany has “no growth” over the long term horizon, sorry that is a stupid argument, you still work with assumptions in respect to immigration etc. from 2009 which are dead as dead can be. It only tooks a bit longer when the message has to reach the people on the other side of the pond. Nothing new. Works in both directions.
Most German Bunds have 10 year maturity, and it is a save bet that in this time German economy will very likely grow per capita at least at fast as the US economy, this with reduction of 2-5% of debt/GDP, i.e. we are talking about something like 2.5% in a fair comparison.
You should deliver a better explanation.
baffling
ulen,
i didn’t work with immigration from a few years ago. i simply look at interest rates, inflation and gdp growth. they are consistent with “low growth/deflation” environment. i did not say “no growth” as you quoted. look, germany is barely breaking above 1% gdp growth. and if the euro policy continues the past years of inept governance, the euro area will continue to be low growth/deflation. germany embedded in this environment over the long term will struggle significantly to produce positive outcomes, particularly in comparison to the USA.
“Most German Bunds have 10 year maturity, and it is a save bet that in this time German economy will very likely grow per capita at least at fast as the US economy”
again, the data does not appear to imply german economy will grow at least as fast as the us economy. current rates imply the opposite.
you should deliver a better explanation.
Ulenspiegel
Baffling,
a change of 1.5% of GDP with a change of 3% debt/GDP in Germany means, that Germany has with balanced budget a growth of 3%, it is a pure political decision to spend the saved money. Therfore, to compare the 1.5% with GDP that is fueld by debt increase is a little bit funny, and it do not improve your bond argument, when this situation will persist the next 5-10 years. 🙂
baffling
ulen,
the latest data i have for 10 year yields is 2.383% for US and 0.795% for Germany, a spread of nearly 159 basis points. Japan is closer to germany at 0.484%. In addition, the german currency is down nearly 20% in the past year. the euro area is flirting with deflation at this point. this is what i would call a “low growth/deflation” environment (not the “no growth” you quoted incorrectly). german 2 years are -0.26% yield according to bloomberg. MINUS 0.25% over 2 YEARS! this is how you grow at approximately 1-1.5% gdp annually. now you could be correct, and germany could outperform over the next 10 years. i just don’t see it in the data right now.
Anonymous
baffling is a 95 IQ Kool-Aid drinking American liberal; it’s best not to respond to him
Ulenspiegel
Correction:
Most German Bunds have 10 year maturity and it is a save bet that in this time German economy will very likely grow per capita at least at fast as the US economy, this number includes of course the additional 1.5% reduction of debt/GDP, i.e. we are talking about something like 2.5-3.0% in a fair comparison.
Steven Kopits
As I predicted earlier this week, and frankly, in January.
So, in the last six months we have had perhaps 30 posts on Wisconsin and 2 on Greece. I think we would agree that Greece has brought us to a critical turning point and touches on many important points in macroeconomics. I think we might agree that a blog named Econbrowser might have a bit more on Greece and a bit less on Wisconsin proportionally. Or perhaps we should rename it “Wisconsinbrowser”?
Steven Kopits: I regret that you find too much Wisconsin in the Econbrowser posts; however you are free to click through. In any event, since 1/1/2015, there have been 31 posts related to Wisconsin, 121 posts by me in total. Since Wisconsin is a laboratory for measures certain elements in the political system would like to implement throughout the nation, including the idea of expansionary fiscal contraction, it seems to me even the Wisconsin topics are germane to economics broadly understood.
Steven Kopits
Menzie –
A blog is a soapbox. It provides an opportunity to express views on matters the posters deem of interest.
However, since January we have had 31 posts on Wisconsin, which by and large is not a macroeconomic issue, and two on Greece. In January and February, on I believe at least four occasions, I stated that I thought the election of Syriza would lead to a Grexit and asked for a post. On last Monday, I stated that I thought a ‘no’ vote would be likely. I was right on both accounts. And we have two meager posts on Greece which, forgive me, seems a bit more relevant to global macroeconomics than tenure practices in Wisconsin.
And we have one modest post on China, that it’s more important than Greece. Well, you bet. But do we have a view? Is China going to melt down? Or is this just a modest correction? How should we view this? There’s no serious engagement with the topic.
And then there’s the oil price collapse of the last few days, just as the global overhang has cleared. Is that important?
So, yes, by all means, vent on Wisconsin. But right now, I’m feeling like Econbrowser is a little weak on the ‘econ’ side.
baffling
steven, considering wisconsin is governed by somebody with aspirations for the presidency, the recent track record in wisconsin could have enormous implications for the US economy in a couple of years. in light of this, “I’m feeling like Econbrowser is a little weak on the ‘econ’ side” is incorrect. the leaders of greece are not going to run europe. the leader of wisconsin has the potential to run the USA.
Steven Kopits
I am not calling for Menzie to stop posting on Wisconsin.
But goodness, we have momentous changes in Greece and a major stock meltdown in China compared to 1929, and we have pretty much zippo from Econbrowser.
genauer
Steven,
There are some more problems. A lot of things are different in Europe than in the US. While US people can judge more easily things within their own environment, institutions, rules, history, applying the same to Europe is often misleading or even comical.
The second thing is the US , the area, government, economy, national identy, history is a pretty stable setup with few changes.
Europe is in constant change, new members, new institutions and rules change.
Just 12 years ago a common currency was introduced, in 2012 additional financial safety mechanisms (stability pact, EFSF/ESM) , and just since last summer common banking supervision (SSM) , but not yet a common banking resolution mechanism (SRM).
This leads to the requirement that somebody from Europe brings a lot of expertise into the discussion, what I try sometimes, but that gets easily very lengthy, see above, it costs effort, and I am not sure how many read it.
Just one example, that seemingly same variables , like unemployment, mean totally different things about the state of the economy. 9% Unemployment was the maximum at the height of the crash in the US, considered intolerably high, while in Greece even at the height of a red hot total boom, fueled by a full 25% public and private deficits (!), unemployment was below 8% only for one single year since 1992.
In Germany, when comparable unemployment numbers went over 9% (our internal numbers are typically 2% higher) and deficits aboe 3% begin of 2003, we adressed this with a disciplined, strategic long term Agenda 2010, turning the economy around without panic or resorting to run up debt (59 -> 64%) , like the US after 2008, with 1.5% inflation, very successful , as we see today, average German growth exceeding the rest, incl. the US by a substantial 1%,
while maintaining a robust social system (universal health care, some de facto minimum income, especially for families)
Maybe this helps understanding why Germans are also not particularly inclined to yield to cheap wrong advice from many US & UK professors, especially from the left side (Krugman, Stiglitz, Simon-Wren Lewis, etc)
German growth is now labor constrained (IMF unemployment at 4.8%, the lowest value since 1981 !), with the government debt on track to be down to the target 60% GDP in 2018 (the US just stabilizing at 105%). We have a healthy current account surplus of 7% stabilizing the rest of the EuroGroup. Betting against the ECB is a losing proposition. With the exception of Greece and Portugal all Euro countries pay lower interest than the US.
German politics is working.
lots of details, I know, and repeated against the common US wisdom (low inflation = low growth), Americans know best
Steven Kopits
Genauer –
I worked for 15 years in Hungary, including as a Director of Financial Advisory Services at Deloitte. I represented German investors on some seven company boards, there or four of them public. I have some feel for Germans, good and bad.
I also have some feel for Greeks, because I was born in Argentina and my family lived there for 17 years. In addition, I had an opportunity to deal with all kinds of apparatchiks in the Hungarian government. The proposals I am making are derived from years of thought in these environments. Just to note one: I noticed in Hungary, when dealing with the Finance Ministry and State Holding Company (which owned the SOE’s), as well as with many state-owned enterprises, including hospitals, that no one was interested in economic growth or overall prosperity. Now, if you have studied economics in the US, this comes as something of a shock, particularly if you have taken courses with professors like Jim Hamilton. (Jagdish Bhagwati was a personal favorite of mine: Regarding India, he famously stated: “The invisible hand–it is nowhere to be seen.”) Now, if we take a course with a prof like Jim, the material and underlying assumptions all seem so reasonable. Of course resources are scarce, and of course we want to use them efficiently for the best social outcomes. This is exactly Merkel’s attitude with respect to Greece. Of course Greek politicians should want to see their country prosper.
Well, let me assure you, it’s not true in practice. It took me a long time to figure out what the objective function of bureaucratic and political decision-makers in Hungary was, and it’s this: to be politically acceptable (however currently defined) subject to budget constraints. I saw this time and again, particularly in the strategy and capex decisions regarding SOEs. I saw entire cities die not for lack of funds, but for lack of willingness to challenge local political practices.
For example, I was asked to looked at the steel mill in Miskolc, Hungary’s second largest city at the time, and it’s Pittsburgh. The mill–it’s enormous–sits literally in the middle of downtown. That is, the city grew up literally at the walls of the mill. So I sat down with the mill’s CEO, and he told me this: “Steven, to have a competitive mill, you need three things: cheap coal, cheap ore, and cheap logistics. And we don’t have any of those. We exist because the people of Miskolc want the mill to survive and the government is willing to fund it. At some point, the mill will die, but that could be many years into the future.” It was a short meeting.
Government support to the mill, once you added it up, was on the order of $100 million per year, on a GDP at that time of something like $10 bn. It was real money, and it was going down the drain every year. I suggested that the government should take the money and, rather than pour it down the black hole of the mill, give the workers a really ripping severance payment (they would have taken it in a flash) and redirect the rest towards improving Miskolc and investing in activities with a future. For example, Miskolc has a prominent heavy industries university, and it seemed to me that this could be upgraded and expanded to have be a European, not just Hungarian, center. In any event, the government continued to pour money into the mill. It was privatized and changed hands several times thereafter. The city has lost 17% of its population, and best I can tell the mill is mostly shut down today.
This and similar experiences in Hungary left a deep mark on me. It illustrated very clearly that there was absolutely no interest in growth or long term prosperity in either the political or bureaucratic class (as a whole). Rather, percents of GDP were being flushed down a black hole because it was politically expedient. It was not about ‘tomorrow’, it was about ‘today’. If you go to Greece, I guarantee you that you will find this behavior in spades.
Now, Merkel is telling that Greek politicians should disavow local political pressures and incentives, and instead adopt the priorities of the Troika. This is utter nonsense, Genauer. If you want Greek behavior to change, you must change the incentive system. And your only real opportunity to do that is to appeal to the principal, not the agent.
And one more thing–another lesson from Hungary. It is very important to let the Greeks determine the nature and timing of reform. Local politics can hinge on nuances. Laws which cannot be passed in April may be possible in July. You may not be able to pass legislation in the sequence of A, B, C, but you may be able to pass it in the sequence of B (wait for summer vacation), C and then A. The problem with an externally forced agenda is that it fails to take into account domestic political realities which can–and most likely will–be central in the success or failure of specific initiatives. That’s why it’s far preferable to have a “pull” rather than “push” system.
And finally, with Latins, being optimistic and sunny can really matter. If I were the Troika, I would prohibit the wearing of jackets and ties at negotiations. And I would say this, “We insist on better governance and we insist on creating growth. We believe if we have achieved these goals, then we will have a source of repayment of funds, and we will find a middle ground on sustainable debt. But our priority–and on which we will not yield–is that the Greek political culture must be modernized to make it more growth-oriented.” I think many Greeks would agree with this view, and it focuses on getting the country going, rather than repressing it.
The place to start is with a proper incentive plan.
baffling
steven, as an incentive you could add guarantees. the troika says you need to commit to X (perhaps austerity, perhaps something else). greece disagrees with the policy, with significant reason as they hold all of the risk. they may view the situation as the troika insists on instituting pure folly, which I know will not work, and when it fails i am the one out on the street and greece is worse off than before. but no harm to the troika, who came up with the solution to begin with. now an incentive of guarantee may be, implement this policy and the result will be X level of gdp in two years. and if this result is not achieved, debt forgiveness. now the greek official is in a win-win situation, the troika had the opportunity to implement its agenda, and if it failed the greeks are not punished so severely. as it is, the troika has been wrong and the greeks are the only ones who have suffered. you are correct, we need a better incentive program.
Steven Kopits
The Greeks may have to commit to earning a minimum bonus. Everything is measured in bonus dollars (euros). It about them, not us.
However, my intent is–other than buying the souls of the Greek politicians (that’s not true, I am attempting to purchase the quality of their relationships with their spouses)–pretty much the intent is to let the Greeks lead. If you’ve ever done development consulting, you know how incredibly important it is to have the client take ownership of a program. I’d rather the Greeks make plenty of mistakes but own the program rather that having a perfect program shoved down their throat that they want to get rid of as soon as possible. Improving governance is a long process, not an event, and not every step will be forward or successful. And that’s OK, as long as the general direction over time is healthy and progress steady.
This is a very big change if the program works as I anticipate. It’s not just economic, it’s fundamentally social. My Hungarian experience suggests that societies have a limited pace at which they can absorb change, so that also has to be factored in. That’s why you want the Greeks–who are in the daily ebb and flow of public opinion–to have control. There will be times when they have to take to foot off the gas and coast for a while. The Greeks, with all their faults, understand this. The Troika doesn’t.
genauer
Originally I wanted to answer already on 3rd of July,
correcting many things, but it got already lenghty, and below is only the first half of the things I wanted to say, so I did let it be, until now.
2. The Greek government fudged the numbers systematically, and that came up only End 2009 /start 2010, long after Greek risk premiums went sky high
Please compare the old IMF number of 93% for 2007 to the present IMF number and the CIA number at that time (in comparison to Germany and some others)
IMF now for 2007, CIA then for 2007, delta , country
60.2% __61%__-0.8% __ Austria
84.0% __86.1%__-2.1% __ Belgium
33.9% __32.9%__1.0% __ Finland
63.2% __66.6%__-3.4% __ France
65.2% __65.3%__-0.1% __ Germany
107.2% __81.7%__25.5% __ Greece
103.3% __105.6%__-2.3% __ Italy
183.0% __182.4%__0.6% __ Japan
42.5% __47.7%__-5.2% __ Netherlands
68.4% __65.8%__2.6% __ Portugal
Greece cheated their statistics then in a gigantic way, even the IMF, and still prosecute the first guy who produced honest statistics.
To blame investors for that , is dishonest, and in an extreme way your claim “all the buyers knew exactly where it stood all along” is totally absurd.
3. Until the start of the rescue programs 2010, Euro states did NOT “receive ECB funding” but sold their national bonds into the market, and it was non of business of the ECB to pass any judgment on the credit worthiness of them.
@ steven kopits
I was just describing referenced facts, not some kind of political program , as your “Condition 8a” would suggest, which I would just consider enrichment of the main culprits
@ baffling
German growth is very good, at the speed limit, just labor power constrained. To put that into numbers , Germany has according to the IMF April 2015 WEO an out put gap of PLUS 0.2% and more overheating predicted in the years ahead.
Just a personal anecdote, in 2007 I could get a cleaning lady in Dresden for 6 Euro/ hour, Now we are at 15. Economics, supply and demand work as expected. With temporal sectors overheating to somewhat more skilled long term sectors like hair dressers .
baffling
genauer
“German politics is working.”
the german economy can work as long as the ECB follows economic policy to the benefit of germany. this entire discussion revolves around this aspect, which you fail to acknowledge. interest rate policy has been very beneficial to germany, but rather harmful to many of the struggling euro nations. why should policy not serve those nations? for example, before austerity blew up the debt/gdp ratio of the struggling nations, such as germany, their ratio was high but manageable. their debt was too high, but why? in the early to mid 2000’s, ECB rates were at lows of 2%-accomodating low inflation in germany. but those low rates allowed the southern euro countries to borrow very cheaply-and the german banks bought that debt. but there was inflation in those southern nations. the correct monetary policy should have been higher ECB rates, to counter the inflation. but germany was in a low inflation environment, and higher interest rates would have been detrimental to their economic miracle. so what policy was adopted? low rates. and the debt bubble in southern europe grew. then the euro members enforced austerity on the southern countries, which resulted in recession/depression types of economies. this is what ballooned the debt/gdp ratio. austerity policies tanked the gdp and tax receipts along with it. result, years of depression in germany. recession in several other euro states.
now one can argue about proper management of the euro area since these financial issues came to a head. but to ignore the poor euro policies which lead to these issues in the first place is rather dishonest. and i am sure you need no reminder, that in 1953 german debt was reduced extensively, to create a future economic environment which allowed for germany to grow without the undue burden of an unpayable debt. what if the rest of the world had taken the same modern german view towards greece, that you must pay for your father’s sins? where would the german miracle be? germany needs to understand its responsibility within the euro zone, instead of constantly looking for fault in other members.
as you said “”German politics is working.” but european politics is not working. are you german, or are you european?
genauer
baffling,
your response is the usual anti-factual nonsense.
in stark contrast to your wild and false claims, without any numbers and references, as usual :
“before austerity blew up the debt/gdp ratio of the struggling nations, such as germany, their ratio was high but manageable. their debt was too high, but why?”
This is in stark contrast to your repeat, wild , unsubstantiated claim “ECB rates were at lows of 2%-accomodating low inflation in germany” of alleged national preference. Please provide evidence if you have such.
baffling
genaur
“before austerity blew up the debt/gdp ratio of the struggling nations, such as germany, their ratio was high but manageable. their debt was too high, but why?”
my fault on the typo. i meant greece as a struggling nation, not germany. you can see the greek debt to gdp ratio here http://www.tradingeconomics.com/greece/government-debt-to-gdp
note in beginning of 2009 it was 113%, and after the first bailout and austerity, the beginning of 2012 saw it grow to 171%. in 2006 the ratio was 100%, a level which held constant for the previous decade. austerity helped to blow up the debt ratio. it was the gdp denominator which blew up the ratio.
“This is in stark contrast to your repeat, wild , unsubstantiated claim “ECB rates were at lows of 2%-accomodating low inflation in germany” of alleged national preference. Please provide evidence if you have such.”
2003 average german inflation (CPI) 1.0%, gdp annual growth rate -0.3%
2003 june ECB refi rates 2.0%
2003 average spain inflation 3.0%
2003 average greece inflation 3.5%, gdp annual growth rate 6.1% july 2003.
feel free to explore the data for the years surrounding 2003 as well. why would ECB rates be at a low in this environment, if eurowide price stability was desired?
perhaps these facts open your eyes to the reality?
genauer
your whole rate vs inflation argument is wrong.
Rates in the US and the EuroArea were low, because both just came out of recession.
The US had 2.3 % inflation in 2003, but fed rates even lower than the ECB.
And just taking 2 other countries and not the Euro averages also doesnt cut your argument that the ECB is somhow not targeting the average.
What blew up the Greek debt was their gross overspending, and that the deficit fuelled artificially inflated GDP was reducing to the real value.
The idea that one can spend forever much more than produced and that somehow other countries have to pay for it, would be clearly desirable for Greece, just not for those who should pay for it, and of which Germany is just 27%.
The constant attempts to blame Germany for the bad economic policies of others, and somehow trying to extract gigantic amounts of money with that, that is the problem here.
Greece has been fighting with the IMF, not Germany, every quarter of the last 5 years, because they never implemented most of the commited changes.
And I am not starting with you here another discusssion of old WWII and 1953 stuff, that is a lot more complex then you think.
baffling
genauer,
“And just taking 2 other countries and not the Euro averages also doesnt cut your argument that the ECB is somhow not targeting the average.”
was the low ECB rate appropriate for the countries i cited? no. the ECB created a problem. this is a flaw in the euro system, and the evidence suggests both past and present that it benefits germany. in the recent past, the rates should have been lower to help greece (and other southern euro countries) at the expense of inflation in germany. but that did not happen. greece has been subject to monetary policy antithesis to its needs for a decade. that is very poor for growth, and has shown itself in the data.
“What blew up the Greek debt was their gross overspending, and that the deficit fuelled artificially inflated GDP was reducing to the real value.”
no. you can argue artificial inflation of gdp all you want-i won’t dispute that-but the crash in gdp was primarily caused by the depression suffered in greece over the past number of years. a depression which was caused by austerity programs in greece. did you really think the reform packages imposed on greece would result in growth? of course you did not believe that-only a fool thinks reducing national spending produces economic growth. these were meant to be punitive packages-to teach greece a lesson. and it did teach them a lesson, as it cratered their economy. now you want to blame the greeks for an outcome which external groups (hint-germany among others) silently desired-which was impose punitive damage. you simply went too far, crossed a line, and people got hurt. the least you can do is acknowledge your contribution to the problem-but silly pride keeps the euro leaders from doing so. really a sorry situation.
Ulenspiegel
baffling wrote: “and i am sure you need no reminder, that in 1953 german debt was reduced extensively, to create a future economic environment which allowed for germany to grow without the undue burden of an unpayable debt. ”
Sorry, that is in the presented form nonsense. The German industry, which determined Germany’s ability to pay, was back on track already in 1950, when industrial production reached the 1937 levels. We saw the essential reforms BEFORE debt reduction in Germany.
The debt of 1953 was only unpayable when Germany had to do both, debt repayment AND creation of large armed forces, therefore, the debt reduction was to a certain extend pure self-interest of USA, UK and France. (Hint: after 1955 Germany provided more than 45% of the NATO ground forces in central Europe, around 35% including France). It would have been much more expensive for the allies to rise the forces themselves. What is the system relevance of today’s Greece?
In conclusion, we have substantioal differences between Germany in 1953 and Greece in 2015 and a good argument would consider them.
You dodge the discussion: Aftwer 1955 West Germany provided by far the highest contribution to NATO in central Europe. The USA/UK/France would not have got this without debt reduction. From a other POV what was the most economic solution for the allies, debt reduction and German contribution to NATO or Germany debt payments and no substantial contribution?
Germany got debt redcution, and it delivered. What is the potentialö Greek contribution? Historic analogies can be minefields. 🙂
baffling
ulen,
it is baffling how the information is staring you in the face, and you look straight through it. of course the allies benefited from the debt reduction. that is the point. the allies were far better off with a german economy which was self sufficient. otherwise the us and others would have continued to bail out the german state, in the form of continued economic and military protection as they attempted to pay off their debts. but that was not a long term prescription for growth. similar situation in greece. a weak greece cannot have the possibility of growth, which is what happens if they continue to be saddled with bailouts which simply increase their debt. they do need a fresh start. if you do not provide support to fellow “union” members, what is the point in having a union at all? in 1955, germany could not have responded to the warsaw pact without the debt relief-or us military technology.
“Germany got debt redcution, and it delivered. What is the potentialö Greek contribution?”
well we are speaking hypotheticals here. but if greece is bailed out and becomes self sustaining, it is a victory for the concept of a european union. if greece is forced out, and it leaves lingering doubt in other, larger, EU members about how they will be treated in the future, then the EU has a problem. you approach greece from the perspective it has no influence on the future behavior of other weak euro members. not sure if that is the appropriate assumption to make. so the greek contribution is not inconsequential.
Ulenspiegel
Baffling,
you still do not get it.
Why was the US governmentable to “convince” the other allies not only to reduce the German debt by 50%, to exclude older interest payments and – as icing of the cake – gave the west German federal states the GDR. If you lack the numbers: Germany had in worst case 40 billion external debt.
Please, do not tell me that the German economy was not selfsustainable in 1952, that the US had to bail out the German state (which BTW did not exist unti 1955) is pure BS.
FYI, Germany did already pay 5 billion DM for the occupation forces in 1952, but would have been able to pay additional 2-3 billion (the budget of Amt Blank/”Police” force etc. ) for debt without real problem, in 1960 without problem >5 billion DM. Germany/the federal states would have been debt free before 1965 in the worst case scenario, with 400.000 Germans more in the workforce.
Why did the US government not choose this scenario?
baffling
ulen,
“Why did the US government not choose this scenario?”
did germany receive a bailout and debt forgiveness, or did it not? germany took the deal because it needed it in order to grow in the future. period. nobody would benefit from a failed german state.
genauer
@ baffling
July 9, 2015 at 7:34 am
you simply lost your argument that the ECB was in any way specificylla accomodative to Germany.
Now you dream up some even more fantasy ECB responsibility to be national specific to countries like Spain or Greece , (“in the recent past, the rates should have been lower to help greece (and other southern euro countries)”)
Greece is the poster case of whath happens if you inflate your GDP by taking on non-asset backed full 25% of GDP in debt PER YEAR and distribute that as goverment wages and bribes and “real estate agents”, fudge the numbers and cheat on the IMF, EU, ECB, private banks giving credit on the judgement of the before.
This is nobody elses fault.
baffling
genauer,
lets try this one last time. in 2003:
2003 average german inflation (CPI) 1.0%, gdp annual growth rate -0.3%
2003 june ECB refi rates 2.0%
2003 average spain inflation 3.0%
2003 average greece inflation 3.5%, gdp annual growth rate 6.1% july 2003.
why are ECB refi rates so low when southern europe already has inflation? i thought the ECB mandate was price stability? its low rates were obviously beneficial for low inflation/deflation in germany to grow. low rates only lead to greater inflation in southern europe-that is not price stability. it is simply baffling how you can deny the beneficial policy of the ECB for germany. ECB policy chose to prioritize the german economy. the rigidity of the euro monetary system without fiscal transfers creates these types of problems.
look, germany dominates the euro economy, i understand this. but this also means any average measure of the euro zone economy is dominated by what happens in germany. when you use this type of measurement, then ECB policy will almost always be accomodative to the german economy. perhaps the ECB needs a better weighting system when evaluating the economic performance of the euro zone? right now it boils down to one size fits germany. i am not trying to pick a fight with you, i am simply telling you the reality of the situation.
genauer
Just read my reply (genauer July 9, 2015 at 12:38 am) above
to your repetition of the same 2-fold false argument for your false claims, that the ECB does Germany any special favors.
Neither is the central bank rate a function of Inflation, I gave you your familiar US example in the Graph as welll for that, nor do Greece and Spain represent the EuroArea average, which is the correct and mandated target for the ECB.
baffling
“nor do Greece and Spain represent the EuroArea average, which is the correct and mandated target for the ECB.”
this is the problem which you do not understand, or refuse to acknowledge. using the euroarea average has obviously not been a good measure for monetary policy. you had a decade of improper distribution of money and economic prosperity due to a “mandated” measure, which according to the data produced a flawed outcome. the mandated measure was biased from day one towards the german economy due to its size. basic statistics, the average value of a parameter loses its importance if you do not have an understanding of the distribution of the parameter. the euro zone has very poor mechanisms for dealing with this variability in distribution.
i am not blaming germany for helping to shape the euro policy in a way that benefits itself, just don’t deny that this is the case. the “mandatory” target is not a law of physics-it is not infallible. it is a choice, and it can be changed. these are simply observations from the outside, which apparently are not obvious to those on the inside.
genauer
you just keep repeating the same debunked false arguments , claiming for the n-th time non existing bias, without providing any evidence.
Be some happy family with ilk like Stiglitz and Krugman, if that helps you.
baffling
apparently modern german economics would argue that 2003 average greece inflation 3.5%, and july 2003 gdp annual growth rate 6.1%, would require an historically low ECB rate of 2.0% to sustain a healthy economy. no problems could come of such conditions?
and current greek unemployment of 25% with no gdp growth in sight will be fixed with continued fiscal austerity. lower pensions and more unemployment will certainly grow the greek economy according to modern german economics, right?
exactly what outcomes did germany expect when “advising” greece of these economic policies? did you really expect success? is this really the state of modern german economic theory? again i reiterate, ECB policy was the antithesis of greece’s needs, and aligned quite well with germany’s needs over the past decade.
genauer
The turn- around plans for Greece, Ireland, Portugal were drawn up by the IMF, because in 2010 the institutions and expertise didnt exist in the EU.
The difference is, that Portugal and Ireland took their medicine and executed the agreements, and a re now growing again, Ireland having a higher GDP per capita than Germany.
Greece accepted the IMF plan and then basically did nothing for a year, making than bankruptcy of the private debt unavoidable. And every quarter the same drama of Greece not doing what it had commited.
They should have finished the secon program end of 2014 with the pension reform, ending early retirement with 51, and just didnt do it, but wanted the aid money.
All this has nothing to do with your favourite scapegoat “modern german economic theory”
baffling
genauer,
apparently you believe that a greece with 3.5% inflation and 6.1% annual gdp growth was served well by the 2% ECB rate monetary policy in 2003.
i would disagree and say this created a very distorted market in greece, one with unintended consequences. we saw the result.
i agree with you that greece needs some reforms and has failed on that front. but your denial that ECB monetary policy, tailored to the benefit of germany, was also a contributor to the crisis we see today is baffling. it is not an either/or scenario. germany and the ECB does have some culpability in the current crisis.
before you repeat your endless lie
“ECB monetary policy, tailored to the benefit of germany,”
baffling
genauer,
apparently you believe that a greece with 3.5% inflation and 6.1% annual gdp growth was served well by the 2% ECB rate monetary policy in 2003?
it is a simple question. the historically low rates certainly served a germany which was contracting in annual gdp at the time.
excellent narrative. concluding paragraph rings so true. french and german banks were bailed out by the IMF and ECB. were there any penalties or repercussions toward the management/owners of those banks? why are spain, portugal, ireland, … not upset at the political bailout of those banks? it seems fascinating to see the narrative of poor financial decision making of greece completely overshadowing the poor financial decision making of german banks! why did germany deserve a financial bailout and greece no bailout? greece was pushed further down the rabbit hole by the flawed IMF analysis of the situation, and the IMF response is basically we were wrong but its still your fault? baffling events playing out across the pond.
baffling, the Anglo-American, German, Dutch, Swiss, and Milanese Rockefeller-Rothschild int’l banking syndicate owns the TBTE banks that effectively own the Fed, ECB, and BOE and the respective govt’s. What the owners of the banks want they usually get. Whenever there is a financial, economic, or political crisis, war, or diplomatic dispute, one should ask oneself what the banksters want.
But the top 0.001% (more like 0.00001%) owners of the syndicate are virtually untouchable, accountable only to themselves.
The hyper-financialization of much of the developed world’s economies has resulted in the US becoming the model for a kind of a militarist-imperialist, rentier-socialist corporate-state.
baffling,
while I have no problem with the last paragraph it would have been a better paper, if the exposure of various countries in 2010 to a Greek default were listed, It would also be helpful to list the banks which suffered losses in the haircut. How much was this BTW? Then some arguments may not be that strong.
The main issue with the presented narrative by Kashyaponly is of course his assumption that a Greek default was managable in 2010, however, this is disputed or at least debatable.
IIRC the highest exposure of German banks was 45 billion in 2010, a rescue of the banks would have increased the Germn national debt in worst case by 2% and was under discussion. After the rescue of the HRE et al. (>160 billion EUR) not a huge political risc for Merkel and from an econiomic POV peanuts for Germany.
Not to pay this relatively small sum (compared to around 90 billion EUR in 2015) was caused by the fear that a Greek default would cause a chain reaction, here German banks were very likely not the problem. There must have been more. What? Who opposed the default in 2010?
It would be helpful if you brought some arguments and data.
Ulenspiegel
greek debt exposure as of late 2011
http://www.businessinsider.com/banks-exposure-to-greek-debt-2011-9?op=1
greek debt holdings in april 2010
http://www.nytimes.com/2010/04/29/business/global/29banks.html
in 2010-2011 years, this was most definitely a european problem. were there characters in deeper than germany, sure. but make no mistake, the german banks were in deep. “here German banks were very likely not the problem” is an inaccurate statement.
” a rescue of the banks would have increased the Germn national debt in worst case by 2% and was under discussion. ” why didn’t germany bail out its banks on its own? they were bailed out, but by the rest of the EU. germany was bailed out by the rest of europe, but then has the gall to chastise greece for improper financial behavior. it just seems hypocritical to me. but don’t misunderstand me, i am not pointing my finger only at germany. many other EU members are similarly guilty, it is just that germany has been the one shouting the loudest-hence they are the target of my ire.
Baffling,
The exposure of German banks was on a per capita base quite moderate and at the same time the German government was financially and politically perfectly able to handle 25-45 billion additional debt (1-2% of GDP). Therefore, a Greek default in 2010 would have been the cheapest solution for the German taxpayer. This was discussed in 2010, again in 2012 in Germany. And it was clear that more payments within the Euro framework mean a (much) higher exposure of German government than a bail out in the long run.
Therefore, the interesting question is: Why did the German government agree to more payments? IIRC it was feared in 2010 and 2012 again by proponents of more support that a Greek default would trigger a chain reaction which may destroy a lot by the combination of dead banks and the limited economic ability of some governments to handle the fall-out. However, I still have to find a serious paper with hard data which shows that this was a GERMAN problem, i.e. the German government would not have been able to pay for the exposure of German banks as worst case with ease. Even your source claims an absolute exposure of Portuguese banks in the same range as German banks, that with a much lower GDP. Where do we find the real problems?
We still have the interesting but unanswered question: Cui bono?
Could it actually have been that southern European countries were (2010 and 2012) in a much more problermatic situation than Germany and the prolonged “support” for Greece was much more a life line for these economies?
Could it actually be that Anil Kashyap provides only a telegenic villain, which can easily be sold to his US audience, but fails to provide hard evidence?
Or more serious: A useful paper, i.e. a paper that delivers more than a time-line which BTW is found in more detailed form on (the German) Wikipedia, should at least make the honest attempt to provide interesting hard numbers, which were the base of political decisions in 2010 (and 2012); and as least as important, should be able to shed some light on the (for me a German) obvious contradiction between Germany’s exposure and political decisions.
Discalimer: There is no dispute that the EUROPEAN financial sector used the years after 2010 very efficiently to convert commercial risks into governmental.
P.S. Your “they were bailed out, but by the rest of the EU. germany was bailed out by the rest of europe, but then has the gall to chastise greece for improper financial behavior.” is weak, check the contributions of the German government in 2010 and 2012, then check the worst case of a direct bail out of German banks, the numbers contradict you.
Germany did the bailing. There is little question of that. Of the Euro 320 bn-ish of Greek debt, perhaps Euro 200 bn can be allocated to Germany. This equals 40% of German government spending for any given year. It would be equal to a $1 trillion loan from the US government to Argentina, for purposes of comparison. It’s a big sum.
Now, Merkel and Germany don’t have any particular attachment to Greece, but rather to the European Project, which is central to Germany’s political, economic and security vision. Earlier (but not now), financial systemic considerations dominated. Saving Greece was not about saving Greece, but about saving the Euro and Europe as it exists in the German imagination.
Merkel, who may be the best leader in Europe today (let’s be more categorical: she is the best leader of the G7 countries), is well aware that any decision Germany makes has systemic implications, in the sense of setting precedent and meting out unequal treatment on Euro nations (Slovakia, Lithuania), for example. Decisions made with respect to Greece are not being made in a vacuum, but rather in the broader European financial, economic and political context. The German desire for a Greater European Project constrains German options, both in assisting Greece and punishing it.
The need to hold together Europe exposes Germany to extortion from bit players. Indeed, Merkel is facing a two-bit hustler from Greece who is trying to extort more money from Germany and the EU, when it has not lived up to its earlier promises and seems to completely disregard its obligations to a Greater Europe. It is not particularly difficult to paint the Greeks as ungrateful cheats completely abdicating their responsibilities to a common good. For Merkel, it has become personal, and Tsipras’ and the Greek’s failures are failures of character and integrity, not merely a matter of business negotiations.
When we speak of morality and duty, we are using the words of agency, that is, socially conservative concepts. The Greeks should do their duty because it is their duty. In other words, Merkel is operating under the presumption that there is a Smithian carve-out for public service. When a Smithian self-interested individual is elected to office, Merkel assumes that they abandon self-interest and assume a pure agency role, acting on behalf of the common good in some disinterested way. If one spends just a few minutes thinking about this notion, the whole presumption is ridiculous, but there you have it.
On the other hand, I believe there is no public service exception to self-interest. I have no expectation of the Greeks to behave in any other way than as dictated by Greek domestic incentives–that is, by the incumbent political system. Therefore, my primary intent, as a Troika negotiator, would not be to obtain favorable policies, but rather to gain control over the incentive system. That’s the place to start. And we use a (classically) liberal, rather than a socially conservative, system of motivation. I don’t give a damn about the Greek’s morality or sense of duty. Indeed, the weaker the sense of duty, the better for me, for that implies that pecuniary interests will dominate decision-making. Appeal to the principal, not the agent. Any hopes placed on the Greek agent will meet with disillusion, disappointment and estrangement, that is, exactly what we’re seeing now. Merkel and Germany would see far greater success if they focused instead on the incentive system.
I don’t think that the issue of German bank bailouts is one of whether Germany could afford to bail out its own banks, or even whether it would have been cheaper to do so rather than using Greece as a bailout proxy.
In fact, it is difficult to imagine a scenario where an indirect bailout through aid to another nation could ever be a cheaper way to bailout a bank than simply handing cash to that bank.
Your open question is why would Germany bail out its banks through aid to Greece rather than simply bail out its banks.
Your implication is that southern EU bank exposure was also great and that there would be a high contagion risk that a Greek failure would not harm Germany (they have the means to bailout their own banks) but rather take down the other southern nations (because their banks, despite lower overall exposure to Greece, had similarly struggling governments that would not have been able to afford a bailout).
I think your implication is right. The uncertainty in 2010 was great and there was a huge contagion risk for all of the southern nations, but it also misses the point.
The suggestion by Kashyap and others is that the Greek bailout was a political move as much as it was an economic move. The politics of a German and French bank bailout would make their finance industry villains and change the politics of the EU recession significantly. By making this a Greek bailout issue (whether that is a stealth German bank bailout or EU-wide bank bailout) allows the banks to avoid scrutiny while directing all political and moral blame to the Greeks.
Germany was happy to use Greece as a conduit and overspend to bailout EU banks, if it means that the banking system and Germany is able to claim the political moral high ground and shield itself from difficult political discussions at home about the culpability of the domestic banking system in the crisis.
Ulenspiegel
” IIRC it was feared in 2010 and 2012 again by proponents of more support that a Greek default would trigger a chain reaction which may destroy a lot by the combination of dead banks and the limited economic ability of some governments to handle the fall-out. However, I still have to find a serious paper with hard data which shows that this was a GERMAN problem, i.e. the German government would not have been able to pay for the exposure of German banks as worst case with ease. ”
it was for the same reason the US government bailed out many european banks during the initial financial crisis. a fair amount of money from our financial rescue programs did go across the pond to europe. why? because you have a systemic problem, and you cannot provide a bailout for only one entity in a systemic situation. you argue it was not a german problem-it was. it was also a french, italian, spanish, etc problem. point is, germany could not escape the systemic issues by simply bailing out only german entities. german banks had exposure to greek debt at the time, and as you state (correctly) it was of a magnitude which was manageable. but german banks also had exposure to other european entities which were directly tied to greek debt. in a systemic environment, the german exposure is actually much larger than its measured direct exposure. it is this secondary exposure, which essentially becomes a primary exposure in a systemic meltdown, which germany could not control on its own. the german banking system was very much bailed out by the rest of europe. you want to imply germany could have chosen a path where it isolated its risks, paid that fair risk premium, and would have been fine whatever the rest of europe did. germany is not an island as an economy.
i believe our primary disagreement involves the ability of germany to resolve its financial issues on its own. i argue it is part of the systemic risk of europe, so it cannot operate in a vacuum. you argue germany can be a part of europe, but defend itself financially without regard to the performance of its neighbors, with whom it shares a monetary system. i don’t think you could have segregated the risk on the fly in 2010, in a manner which it has been segregated today.
steven,
“Saving Greece was not about saving Greece, but about saving the Euro and Europe as it exists in the German imagination.”
spot on. and if the greeks had realized this several years ago, they would have left the euro at that time. but if i were spain, portugal or italy, i now need to consider very closely the future actions of germany in the name of the euro. germany wants a euro, but with a vision that may not be shared by all its members. this will create continued conflict into the future, i am afraid.
It’s important to note, Baffs, that Europe also exists in the Greek imagination. The EU, Europe and the Euro are particularly important for low-agency countries because they offer the hope that domestic politics may be made to do the bidding of greater public good. So this is not just a German enterprise.
Three years ago, I probably would have defaulted and exited if I were Greece, and I think I said so at the time.
This is unnecessary today. Internal devaluation is complete, the budget, with a little modification, could be in balance. The current account is in order. Now is emphatically not the time to give up, given that the price of adjustment has already been paid.
Before the Tsipras government came to power, Greece (and Ireland) were the fastest growing economies in Europe. If we could align the incentives and get Greece to some oxygen, there’s no reason to believe it could not grow at near 10% for the next several years–even as a Euro member.
So, now is the time to think outside the box. Trust me, I am a very good strategic management consultant. The advice I have given here is sound, and it should be accepted.
steven,
“It’s important to note, Baffs, that Europe also exists in the Greek imagination.”
completely agree. but i guess people forget that greece has already implemented a tremendous amount of austerity. and the results have been dismal. i can forgive them a bit if they feel their imagination of europe is better than the german version. i learned long ago not to take advice from my seniors who had no skin in my game, since i am the one to pay the price for failure.
i agree with you that the best time to default was several years ago, before internal devaluations began in earnest. however, unless the troika resolves to further debt relief, the future will simply repeat the past. how much more is europe going to kick greece while they are down? greece is only showing recovery because they have probably been beaten down as far as possible while still a part of the euro-once you are at the bottom the only direction is up.
at this point, if europe is truly interested in a greece recovery, they will say the tough medicine is done and now provide debt relief. if they are not interested in greece in the euro, they will not offer significant debt relief and see how much more of a beating greece can take before it fails. but what happens when the greeks say enough, leave the euro, stay in the EU, and as a NATO member side with russia for economical reasons?
Pubsky,
I have some issues with your interpretation “The politics of a German and French bank bailout would make their finance industry villains and change the politics of the EU recession significantly.”
The point is, that the Sündenfall (fall of mankind) had already happened before the Greek default was the issue. The German government had socialized banks (e.g. HRE, Commerzbank) with costs of about 160 billion EUR for the tax payer, therefore the political damage of some additional bailouts, which would have been “only” 45 billion EUR in worst case was no political risk. Secondly, the banks were already villains, you could not have done more damage to their reputation.
Given that
a) the exposure of all 9 listed countries , but the non-Euro UK was larger than Germany, taking population / GDP into account, and especially
b) the German fraction in 2010 was 36 / 390 billion = 9%, whereas our exposure through the AID programs is at 27% of the total (3 times higher)
it is just FALSE to say “germany was bailed out by the rest of europe”
Greece negotiates with a Troika of IMF, ECB, EU (EFSF) , not with Germany,
but somehow many folks always try to turn this into a Greece vs Germany story.
The idea that the rest of Europe should finance early retirement much more generous than in other countries forever, leading to pension costs of 16 % GDP in Greece vs Germany 10%, is just unsocial
with the usual, often not even thinly veiled, racist untertones
“Greece negotiates with a Troika of IMF, ECB, EU (EFSF) , not with Germany,”
really?
perhaps look at a slightly different problem. the ECB sets economic monetary policy. why has that policy been extremely beneficial to the german economic situation, but the antithesis of the needs of many euro states, including greece, spain, italy, portugal, etc? it is naive, or simply dishonest, to insist germany does not significantly influence EU policy to its benefit, at the expense of others. now i have no problem looking out for your best interest why you go it alone. but when you want to form a european shared dream, you need to play well with others on your team.
“the German fraction in 2010 was 36 / 390 billion = 9%, whereas our exposure through the AID programs is at 27% of the total (3 times higher)”
what were your indirect exposure risks? you fail to acknowledge the systemic risks. here in the US, this is why AIG was taken over. it was not for the primary risk, it was for the secondary risk-the systemic risk. we learned that lesson from lehman.
Financialization as war by the rentier elites and bankster oligarchs:
https://www.youtube.com/watch?v=NNvKGkMunYY
https://www.youtube.com/watch?v=FE_Kr6LTnj8
Hudson at ~22:00.
Actually I blame the former Prime Minister Antonis Samaras for the collapse of Greece. Samaras was elected in 2012. In 1993 he had broken with his New Democracy party over their handling of the economy. He formed his own party and constantly criticized the Greek governments. His criticisms were spot on.
He rejoined the New Democracy party and in 2009 was elected as leader. He continued to criticize and even fought rhetorical battles with German and French leadership.
But then he was elected Prime Minister and he caved on everything. There was no tax relief, there was no reduction in government regulation, there was no invitation to foreign investment. Samaras became the same Prime Minister as all of those preceding him.
Because of the failure of Samaras, his hypocrisy and cowardice, the socialists were elected. We are now seeing the inevitable, but it did not have to be so.
Great summary.
As I am all-in on Greece, let me comment on the summary:
“Greece from the mid-1990s until last year was constantly spending more than it was collecting in tax revenues.”
Greece is not unique in this. Since 1980, the US, bar a couple of years under the Clinton administration, has also borrowed more–and in some years, very much more–than it brought in in revenues. I have on numerous occasions commented on a specific non-market failure, due to the three ideology model, which leads democracies to have a deficit bias. An incentive plan, first and foremost, counteracts this bias.
“In the fall of 2009, a then newly elected government reported that the deficit for that year was going to be 13.6 percent of economic output and that the deficits in 2007 and 2006 were also larger than had been reported.”
A central aspect of an incentive plan is that bonuses are not paid until the IMF signs off on the national audit. (Yes, it’s not your uncle’s IMF, or more precisely, my uncle’s IMF.) This creates a demand for good statistics in the host country. In other words, not only does the country have to produce growth, the IMF has to recognize that growth. In Greece, this would lead to a headlong rush to improve reporting of national accounts, both in timeliness and quality. Again, we are creating demand for information, as for growth.
After 2010, “many of the reforms that were supposed to support growth did not occur and the economy contracted substantially.” “The Greek government was supposed to sell some assets to retire some of the debt. That never happened.” “Once again [in 2012], the cornerstones of the plan continued to be steps to make tax collection more efficient, to reduce spending promises, and to undertake reforms to encourage hiring and business expansion that would support growth. It was not clear why this plan would be more successful than the first one.”
Why didn’t Greek politicians deliver of pro-growth policies which they themselves had accepted? Didn’t Greek politicians want growth? So why didn’t they implement the proposed–and accepted–reforms? Were they operating under a different incentive structure? Sure seems that way.
“Second, the economy contracted for two more years as the reforms failed to deliver higher growth.”
Readers will recall that I commented in April 2011 that the oil price spike of the Arab Spring was sufficient to put the global economy into recession, which it did. These effects were profoundly felt by poorly managed countries with large oil import bills, for example, Greece. The Argentine downturn also stems from the period, and all of Europe was essentially in recession until late 2013 to mid-2014. So let’s not ignore the huge effects of exogenous shocks. They play a central role in the second phase of the narrative.
“Reintroducing the drachma would be totally illegal under European law and form the basis for a law suit to force Greece out of the European Union (EU).”
From a legal perspective, this may be true. From a political one, I think it has no reality. Europeans know who the Greeks are and how they behave. They are just being Greek, which may be a sin in terms of macroeconomics, but not in terms of being human. I could not conceive of an appetite to resort to such vindictive policies purely to punish Greece for its inability to live up to Euro expectations. After all, Hungary, an EU member, still uses the forint, and not the Euro. Should Hungary be kicked out because of that? While I understand the professor, I strongly disagree from a political point of view. If the Greeks want to issue a new drachma, they should do so without fear of repercussion. Everyone is entitled to try to find a way to survive, and that includes Greece.
If the event of default, “then the next big unknown is how long before the economy stabilizes. At some point Greece will be a very attractive tourist destination, and its goods that are no longer priced in euros will be more competitive, so at some point the economy will begin to turn around.”
The Argentine example, as I commented yesterday, suggests that Greece would have a short but sharp recession followed by five years of GDP growth in the high single digits. Governance, however, would not improve, and would more likely deteriorate. Risks of Portugal or Spain leaving the Euro would increase. The concept of “Europe” as an integrated entity would suffer possibly irreparable damage. Greece would sit on the outside for a very long time, twenty years or more, I think.
Once again, I highlight the importance of installing an incentive structure as key to insuring growth and providing a source of debt repayment, but most of all, for providing the incentive for Greece to install best-of-class governance. Install it, and all the current problems will be adequately resolved.
What especially americna people tend to forget is that people in many European countries are richer than Germans.
Part of that is the low home ownership in Germany, but just take a look at
https://en.wikipedia.org/wiki/List_of_countries_by_wealth_per_adult
The median private wealth is higher in Greece than in Germany.
The idea that poor German renters should pay the public debt of richer Greek homeowners , is anti-social.
They have to learn to pay their taxes.
And to give you some idea, how the sequence could play out, take a look at (starting after 1. )
http://www.nakedcapitalism.com/2015/06/what-if-there-is-no-deal-on-greece.html
Greece will default. It’s just a matter of when. As the paper concludes, they should have done it in 2010. In 2020, the paper will conclude they should have done it in 2015.
But what do you mean by ‘default’? Greece is already in default to the IMF.
If you mean, ‘not repay all the monies owed,’ I believe Ulen and Genauer, two Germans (I believe they are both German), would already have conceded and accepted that point. On the other hand, I think they might contend that Greece should make a good faith effort to reform its economy and repay loans to the extent practicable. These latter conditions have not been met, and I dare say, there doesn’t seem to be much effort by the Tsipras government to move in that direction.
Full default on everything, pay nothing back. Leave the euro and reintroduce the drachma. Implement extreme economic policy changes so Greece is closer to Singapore.
Sure it would be a chaotic 5-6 years, but the kicking the can plan will never resolve itself and Greece will struggle for generations.
So how do you think Genauer and Ulen would feel if Germany got literally nothing back for its Euro 200 bn of support for Greece? How do you think that might affect public opinion? Do you think the German public would demand retaliation? How might that be accomplished? (Hint: read Genauer’s comments.)
Let me put it to you this way. If Germans like Genauer and Ulen are not willing to at least acquiesce in a proposed solution for Greece, then Greece is going to have a very hard time in Europe.
Thus, there is some middle ground which the German–and broader European–public is likely to accept, and that’s a debt reduction to somewhere in the 60-90% of GDP range, representing a write-off of 50-65% of Troika principal. If the Greeks can’t accommodate debt at 60% of GDP (ie, Troika debt reduced from Euro 320 bn to Euro 120 bn), then Germany and the other Euro Zone nations will come after the Greeks with pitchforks and burning torches.
Let’s be clear: Greece is a small and weak country enmeshed in a larger Europe. The Greeks can no more ignore Europe than Pennsylvania could pretend to ignore the rest of the United States. There will be an accommodation.
@ baffling
July 1, 2015 at 8:04 am
THe ECB targets EuroArea wide targets, of which of course Germany is some 27% GDP but has also only one out of 19 central bank governors, a massive under representation.
The NYT reference contains all 3 types of financials, in
contagion would have / had hit ALL others harder. Germany is the european bond benchmark (“Bunds”).
Merkel gets along with the others very well, especially because many others like to throw a tantrum every then and now. And that leads to :
“BBC: Germany is the most popular country in the world” and
http://www.theglobeandmail.com/news/world/indispensable-angela-merkel-brings-conviction-to-a-united-europe/article23001580/
“Merkel is one of the most popular and most discussed leaders in Europe,” he said of the German leader, frequently named the world’s most powerful woman.
http://www.telegraph.co.uk/news/worldnews/europe/germany/angela-merkel/11481668/Angela-Merkel-film-set-to-hit-cinema-screens-in-2017.html
The ECB bailed out a bunch of German bankers then insists that Greece pay for the bailout.
It would be as if when the U.S. Treasury bailed out the Wall Street banks on their bad mortgages, it then insisted that Florida and Nevada raise their taxes to pay for the bailout.
Or indeed, when the Treasury bailed out General Motors, and asked the taxpayers to foot the bill.
This is a lot blander than it should be in some parts:
Through 2009 – buyers of Greek debt were well informed about how much debt Greece was issuing. The numbers were in Greece’s debt bulletins published at the time and at the fingertips of everyone with a Bloomberg terminal. The buyers knew the deficit numbers were phony, because the debt growth was so obviously so much bigger. What caused the crisis was that the EU started seriously cracking down. This did indeed happen when Papandreou came to power in autumn 2009 and tattled on his predecessor Karamanlis. The Karamanlis fudging was made much worse when on top of it came automatic deficit ballooning from the 2009 crisis and safety net spending and revenue collapse. The Eurostat reaction after several light knuckle-raps for previous similar incidents was suddenly very heavy. Papandreou found himself under serious pressure to severely fiscally consolidate. The excessive deficit procedure was invoked and it was clear Brussels wanted to make an example of Greece to warn others and quash the impression that anything goes. The aura of unbreakable EU support for Greece was damaged, and bond markets began to get spooked.
Another crucial aspect of the debt buildup was that Euro Area banks were incentivized to buy periphery EA sovereign bonds by ECB regulations that treated all EA sovereign bonds as equally risky. They received cheap ECB funding to buy Greek bonds on the same terms they received ECB funding to buy German bonds. The former however offered much higher yield, especially with leverage multiples.
2010: What happened in 2010 was not that debt suddenly became unbearable – all the buyers knew exactly where it stood all along – but that the EU crackdown eventually resulted in the IMF getting involved, and once that happened, the private buyers understood quickly that the IMF debt sustainability analysis would likely lead to the conclusion that Greece needed a restructuring. There were buyers still at around 6% in early April but as the rumors were swirled that the IMF was stepping in yields rose and then spiked when that was confirmed. The reason is that buyers understood that official lenders would crowd them out and eventually force a restructuring – in other words, yields spiked in 2010 because bond buyers already saw 2012 coming.
The 2010 bailout of Greece went as much to fund Greek deficits as to assume Greece’s debts to EA banks. And though there’s no doubt the EA banks’ incentives to lend to Greece were warped, I think if you borrow from Bob, spend that money, can’t repay Bob, and I pay Bob and assume your debt to him, I have above all bailed you out. And if you go around blaming Bob and telling everybody you don’t really owe me because I only cared about Bob, you will probably not get much credit in society and deservedly so.
What Tsipras is asking for – Actually he dropped the idea of write-offs very early on, and he purported to push for higher revenues. The arguments were mainly over whether his policies could produce the fiscal results he claimed, much less over what the fiscal results should be. Also, he actually got the fiscal situation in order when he came to power in February much better than anybody expected. His decision to not take the deal frankly makes no logical sense to me. I can only guess that he was afraid of losing his radical aura. But I think he has shoved all in with 7 2 offsuit here, and Europe is going to call his bluff and wait for Greeks to turn against him however long that takes.
Troika/the institutions – The switch to calling them “the institutions” was at Tsipras’ insistence, so he could pretend not to be bowing to the hated Troika. The fact that journalists and academics also switched doesn’t exactly speak of intellectual independence.
Reasons for not introducing the drachma – The simple reason is that Greeks are strongly against it. There is no threat whatsoever of Greece being expelled from the EU. But “IOUs” or any other pseudo-euro currency can easily turn into a de facto new floating currency. That would be far more conducive to recovery than the direction Greece appears more likely to go in the event of a “no” vote: to some kind of pseudo-euro with a dual exchange-rate, of one-for-one for privileged parties and somewhere probably north of 2 to 1 on an informal market for everybody else.
My take is here:
http://www.globalizedblog.com/2015/07/tsipras-shoves-all-in.html
tom
“Through 2009 – buyers of Greek debt were well informed about how much debt Greece was issuing. The numbers were in Greece’s debt bulletins published at the time and at the fingertips of everyone with a Bloomberg terminal. The buyers knew the deficit numbers were phony, because the debt growth was so obviously so much bigger.”
exactly. but why do we not consider the debtors fools as well? why were they bailed out in stealth? the narrative today is simply that greece was irresponsible and should be punished. greece could only be irresponsible if the other side of the trade was made. if creditors knew the truth and still made the deal, i would say they were just as culpable. the banks were not naive.
same issue here in the USA. during the original financial crisis, we had people taking out fraudulent loans. but that only occurred because we had banks on the other side of the trade, in full knowledge of the financial conditions of those debtors. irresponsible. there has been some clawback against those banks, but overall i don’t think there has been sufficient punishment to deter similar outcomes in the future. even today, we see areas with suspicious mortgage behavior once again. we blame the people buying the homes, but the banks are also guilty of this crime as well.
I think you mean, why don’t we consider the creditors fools? I think we did. Some went under (eg Dexia). And there wasn’t anything stealthy about it. A sovereign bailout is always a case of official creditors assuming debts that are falling due to private creditors.
Lenders in Europe and the US were naive in the sense that they were caught up in the 2004-2007 financial boom and badly mispriced all kinds of risks. Or you could argue they were corruptly managed. I would say the people deciding were more naive than corrupt, convinced they were going to make money, but the agency system was flawed such that it tended to give decision power to short-sighted people.
Sovereign bond markets are a special case as they are closely tied to public policy. Governments everywhere incentivize their domestic banks to buy government debt. The Euro Area is actually unusual – it formally recognized that such practices are a problem. (It’s the sort of thing that everyone criticizes of their neighbors, so when the euro club was set up, they agreed to limit it.) EA banks are capped in their ability to buy their own government’s debt, by a secret treaty called ANFA. But EA banks are strongly encouraged to buy EA sovereign bonds from any EA country’s government other than their own. Hence French and German banks piled up EA periphery sovereigns.
Another point I left out is that the EU crackdown in late 2009 to early 2010 on Greek deficit numbers was so serious because it had the potential to lead to a change of the privileged terms under which EA banks could obtain ECB funding to buy Greek sovereigns. A change to the risk weighting or haircut would totally throw the market. Buyers became wary of being out in front of a regulatory-induced fire sale, and that’s really why yields started rising. Bond markets were not misled by the phony deficit numbers. Those were purely for the EU’s sake, to skirt the excessive deficit procedure rules.
@ Steven Kopits, all
To illustrate the „Debt sustainability Analysis“ a little bit, since nearly nobody in the US gets it
1. German rates are currently 1.8% lower than the US, even over 30 years ! (look at e.g. Bloomberg)
2. Given the AAA construction of the EFSF, it can borrow at the same rate as Germany, e.g. http://www.reuters.com/article/2015/02/13/efsf-eurobonds-idUSL5N0VL20C20150213)
with some inconvenience adder of about 20 bp (=0.2% for non-financials), a little lower than for the AAA countries Austria, Finland, Netherlands (e.g. http://www.investing.com/rates-bonds/government-bond-spreads “Vs. Bund”)
3. The EFSF (now ESM) lends out to the IMF cases, like Greece at their cost + 0.5% service fee. That means a 1.1 – 1.3 % lower rate as the US has to pay, and below Inflation!
4. Interest payments are already deferred until 2022, and the maturity is already at 32 years
5. That makes the NPV (net present value) of the 150% GDP official loans already something between 0.4 – 0.5 , dependent in what relations you caclculate that, and effective 50% debt forgivenesss, just not in name. Formally the “no bail out” rule is kept intact
6. To ensure people that I am not alone with that, and some more explanation here : http://opedspace.com/2015/01/23/greek-elections-its-not-just-the-debt/
7. Greece gets a 2.3 % GDP subsidy from the EU, in future times probably more like 3%, which would be cancelled, if Greece would drop out, or go seriously delinquent.
8. The former “primary surplus” target of 4.24% is now already lowered to 3%, meaning that Greece in total pays NOTHING taking the subsidy into account, and does not even have to have a Current Account Surplus of truly gigantic 1% as planned previously (See IMF April 2015 WEO)
9. If effectively paying nothing is not good enough for Greece, than the Rest of the EU is better off with letting them crash out.
I appreciate that, Genaur. I don’t disagree with you.
I am merely making the case that the imperatives of Greek political culture dictate that Greek politicians will always prefer to increase domestic spending rather than repay Troika debt.
So let’s add a new Condition 8a: Members of the Greek parliament will collectively receive 0.8% of any real increase in GDP and 0.6% of any debt repaid to the Troika. Thus, 1% of real GDP growth equals approximately E 2 bn, and the related bonus would be Euro 16 million, or approximately E 55,000 per member. A repayment of E 1 bn of debt would represent a collective bonus of E 6 bn, or E 20,000 per member.
If you add that clause, I’m all in.
genaur,
1. the low german rates are a function of low growth/deflation over the longer term horizon, not fiscal responsibility. you are proud of no growth???
4. interest rates deferred, maturity at 32 years. you may as well make that 100 years. greece cannot pay off the loan. it is bankrupt, why introduce a debtors prison?
9. “If effectively paying nothing is not good enough for Greece, than the Rest of the EU is better off with letting them crash out.” Actually i agree. But the troika proposed significant austerity and produced a depression. i don’t think greece could have done any worse left to their own devices. the troika and europe should at least acknowledge their responsibility in the damage. but they wont, because similar treatment may be in store for portugal and spain, and the troika needs to maintain its seriousness to solving the problem.
Where does Germany has “no growth” over the long term horizon, sorry that is a stupid argument, you still work with assumptions in respect to immigration etc. from 2009 which are dead as dead can be. It only tooks a bit longer when the message has to reach the people on the other side of the pond. Nothing new. Works in both directions.
Most German Bunds have 10 year maturity, and it is a save bet that in this time German economy will very likely grow per capita at least at fast as the US economy, this with reduction of 2-5% of debt/GDP, i.e. we are talking about something like 2.5% in a fair comparison.
You should deliver a better explanation.
ulen,
i didn’t work with immigration from a few years ago. i simply look at interest rates, inflation and gdp growth. they are consistent with “low growth/deflation” environment. i did not say “no growth” as you quoted. look, germany is barely breaking above 1% gdp growth. and if the euro policy continues the past years of inept governance, the euro area will continue to be low growth/deflation. germany embedded in this environment over the long term will struggle significantly to produce positive outcomes, particularly in comparison to the USA.
“Most German Bunds have 10 year maturity, and it is a save bet that in this time German economy will very likely grow per capita at least at fast as the US economy”
again, the data does not appear to imply german economy will grow at least as fast as the us economy. current rates imply the opposite.
you should deliver a better explanation.
Baffling,
a change of 1.5% of GDP with a change of 3% debt/GDP in Germany means, that Germany has with balanced budget a growth of 3%, it is a pure political decision to spend the saved money. Therfore, to compare the 1.5% with GDP that is fueld by debt increase is a little bit funny, and it do not improve your bond argument, when this situation will persist the next 5-10 years. 🙂
ulen,
the latest data i have for 10 year yields is 2.383% for US and 0.795% for Germany, a spread of nearly 159 basis points. Japan is closer to germany at 0.484%. In addition, the german currency is down nearly 20% in the past year. the euro area is flirting with deflation at this point. this is what i would call a “low growth/deflation” environment (not the “no growth” you quoted incorrectly). german 2 years are -0.26% yield according to bloomberg. MINUS 0.25% over 2 YEARS! this is how you grow at approximately 1-1.5% gdp annually. now you could be correct, and germany could outperform over the next 10 years. i just don’t see it in the data right now.
baffling is a 95 IQ Kool-Aid drinking American liberal; it’s best not to respond to him
Correction:
Most German Bunds have 10 year maturity and it is a save bet that in this time German economy will very likely grow per capita at least at fast as the US economy, this number includes of course the additional 1.5% reduction of debt/GDP, i.e. we are talking about something like 2.5-3.0% in a fair comparison.
As I predicted earlier this week, and frankly, in January.
http://www.wsj.com/articles/polls-close-in-greek-referendum-1436113280
Really terrible.
So, in the last six months we have had perhaps 30 posts on Wisconsin and 2 on Greece. I think we would agree that Greece has brought us to a critical turning point and touches on many important points in macroeconomics. I think we might agree that a blog named Econbrowser might have a bit more on Greece and a bit less on Wisconsin proportionally. Or perhaps we should rename it “Wisconsinbrowser”?
Steven Kopits: I regret that you find too much Wisconsin in the Econbrowser posts; however you are free to click through. In any event, since 1/1/2015, there have been 31 posts related to Wisconsin, 121 posts by me in total. Since Wisconsin is a laboratory for measures certain elements in the political system would like to implement throughout the nation, including the idea of expansionary fiscal contraction, it seems to me even the Wisconsin topics are germane to economics broadly understood.
Menzie –
A blog is a soapbox. It provides an opportunity to express views on matters the posters deem of interest.
However, since January we have had 31 posts on Wisconsin, which by and large is not a macroeconomic issue, and two on Greece. In January and February, on I believe at least four occasions, I stated that I thought the election of Syriza would lead to a Grexit and asked for a post. On last Monday, I stated that I thought a ‘no’ vote would be likely. I was right on both accounts. And we have two meager posts on Greece which, forgive me, seems a bit more relevant to global macroeconomics than tenure practices in Wisconsin.
And we have one modest post on China, that it’s more important than Greece. Well, you bet. But do we have a view? Is China going to melt down? Or is this just a modest correction? How should we view this? There’s no serious engagement with the topic.
And then there’s the oil price collapse of the last few days, just as the global overhang has cleared. Is that important?
So, yes, by all means, vent on Wisconsin. But right now, I’m feeling like Econbrowser is a little weak on the ‘econ’ side.
steven, considering wisconsin is governed by somebody with aspirations for the presidency, the recent track record in wisconsin could have enormous implications for the US economy in a couple of years. in light of this, “I’m feeling like Econbrowser is a little weak on the ‘econ’ side” is incorrect. the leaders of greece are not going to run europe. the leader of wisconsin has the potential to run the USA.
I am not calling for Menzie to stop posting on Wisconsin.
But goodness, we have momentous changes in Greece and a major stock meltdown in China compared to 1929, and we have pretty much zippo from Econbrowser.
Steven,
There are some more problems. A lot of things are different in Europe than in the US. While US people can judge more easily things within their own environment, institutions, rules, history, applying the same to Europe is often misleading or even comical.
The second thing is the US , the area, government, economy, national identy, history is a pretty stable setup with few changes.
Europe is in constant change, new members, new institutions and rules change.
Just 12 years ago a common currency was introduced, in 2012 additional financial safety mechanisms (stability pact, EFSF/ESM) , and just since last summer common banking supervision (SSM) , but not yet a common banking resolution mechanism (SRM).
This leads to the requirement that somebody from Europe brings a lot of expertise into the discussion, what I try sometimes, but that gets easily very lengthy, see above, it costs effort, and I am not sure how many read it.
Just one example, that seemingly same variables , like unemployment, mean totally different things about the state of the economy. 9% Unemployment was the maximum at the height of the crash in the US, considered intolerably high, while in Greece even at the height of a red hot total boom, fueled by a full 25% public and private deficits (!), unemployment was below 8% only for one single year since 1992.
In Germany, when comparable unemployment numbers went over 9% (our internal numbers are typically 2% higher) and deficits aboe 3% begin of 2003, we adressed this with a disciplined, strategic long term Agenda 2010, turning the economy around without panic or resorting to run up debt (59 -> 64%) , like the US after 2008, with 1.5% inflation, very successful , as we see today, average German growth exceeding the rest, incl. the US by a substantial 1%,
while maintaining a robust social system (universal health care, some de facto minimum income, especially for families)
http://de.slideshare.net/genauer/gd-pper-capita-in-ppp-us-versus-euroarea-germany
Maybe this helps understanding why Germans are also not particularly inclined to yield to cheap wrong advice from many US & UK professors, especially from the left side (Krugman, Stiglitz, Simon-Wren Lewis, etc)
German growth is now labor constrained (IMF unemployment at 4.8%, the lowest value since 1981 !), with the government debt on track to be down to the target 60% GDP in 2018 (the US just stabilizing at 105%). We have a healthy current account surplus of 7% stabilizing the rest of the EuroGroup. Betting against the ECB is a losing proposition. With the exception of Greece and Portugal all Euro countries pay lower interest than the US.
German politics is working.
lots of details, I know, and repeated against the common US wisdom (low inflation = low growth), Americans know best
Genauer –
I worked for 15 years in Hungary, including as a Director of Financial Advisory Services at Deloitte. I represented German investors on some seven company boards, there or four of them public. I have some feel for Germans, good and bad.
I also have some feel for Greeks, because I was born in Argentina and my family lived there for 17 years. In addition, I had an opportunity to deal with all kinds of apparatchiks in the Hungarian government. The proposals I am making are derived from years of thought in these environments. Just to note one: I noticed in Hungary, when dealing with the Finance Ministry and State Holding Company (which owned the SOE’s), as well as with many state-owned enterprises, including hospitals, that no one was interested in economic growth or overall prosperity. Now, if you have studied economics in the US, this comes as something of a shock, particularly if you have taken courses with professors like Jim Hamilton. (Jagdish Bhagwati was a personal favorite of mine: Regarding India, he famously stated: “The invisible hand–it is nowhere to be seen.”) Now, if we take a course with a prof like Jim, the material and underlying assumptions all seem so reasonable. Of course resources are scarce, and of course we want to use them efficiently for the best social outcomes. This is exactly Merkel’s attitude with respect to Greece. Of course Greek politicians should want to see their country prosper.
Well, let me assure you, it’s not true in practice. It took me a long time to figure out what the objective function of bureaucratic and political decision-makers in Hungary was, and it’s this: to be politically acceptable (however currently defined) subject to budget constraints. I saw this time and again, particularly in the strategy and capex decisions regarding SOEs. I saw entire cities die not for lack of funds, but for lack of willingness to challenge local political practices.
For example, I was asked to looked at the steel mill in Miskolc, Hungary’s second largest city at the time, and it’s Pittsburgh. The mill–it’s enormous–sits literally in the middle of downtown. That is, the city grew up literally at the walls of the mill. So I sat down with the mill’s CEO, and he told me this: “Steven, to have a competitive mill, you need three things: cheap coal, cheap ore, and cheap logistics. And we don’t have any of those. We exist because the people of Miskolc want the mill to survive and the government is willing to fund it. At some point, the mill will die, but that could be many years into the future.” It was a short meeting.
Government support to the mill, once you added it up, was on the order of $100 million per year, on a GDP at that time of something like $10 bn. It was real money, and it was going down the drain every year. I suggested that the government should take the money and, rather than pour it down the black hole of the mill, give the workers a really ripping severance payment (they would have taken it in a flash) and redirect the rest towards improving Miskolc and investing in activities with a future. For example, Miskolc has a prominent heavy industries university, and it seemed to me that this could be upgraded and expanded to have be a European, not just Hungarian, center. In any event, the government continued to pour money into the mill. It was privatized and changed hands several times thereafter. The city has lost 17% of its population, and best I can tell the mill is mostly shut down today.
This and similar experiences in Hungary left a deep mark on me. It illustrated very clearly that there was absolutely no interest in growth or long term prosperity in either the political or bureaucratic class (as a whole). Rather, percents of GDP were being flushed down a black hole because it was politically expedient. It was not about ‘tomorrow’, it was about ‘today’. If you go to Greece, I guarantee you that you will find this behavior in spades.
Now, Merkel is telling that Greek politicians should disavow local political pressures and incentives, and instead adopt the priorities of the Troika. This is utter nonsense, Genauer. If you want Greek behavior to change, you must change the incentive system. And your only real opportunity to do that is to appeal to the principal, not the agent.
And one more thing–another lesson from Hungary. It is very important to let the Greeks determine the nature and timing of reform. Local politics can hinge on nuances. Laws which cannot be passed in April may be possible in July. You may not be able to pass legislation in the sequence of A, B, C, but you may be able to pass it in the sequence of B (wait for summer vacation), C and then A. The problem with an externally forced agenda is that it fails to take into account domestic political realities which can–and most likely will–be central in the success or failure of specific initiatives. That’s why it’s far preferable to have a “pull” rather than “push” system.
And finally, with Latins, being optimistic and sunny can really matter. If I were the Troika, I would prohibit the wearing of jackets and ties at negotiations. And I would say this, “We insist on better governance and we insist on creating growth. We believe if we have achieved these goals, then we will have a source of repayment of funds, and we will find a middle ground on sustainable debt. But our priority–and on which we will not yield–is that the Greek political culture must be modernized to make it more growth-oriented.” I think many Greeks would agree with this view, and it focuses on getting the country going, rather than repressing it.
The place to start is with a proper incentive plan.
steven, as an incentive you could add guarantees. the troika says you need to commit to X (perhaps austerity, perhaps something else). greece disagrees with the policy, with significant reason as they hold all of the risk. they may view the situation as the troika insists on instituting pure folly, which I know will not work, and when it fails i am the one out on the street and greece is worse off than before. but no harm to the troika, who came up with the solution to begin with. now an incentive of guarantee may be, implement this policy and the result will be X level of gdp in two years. and if this result is not achieved, debt forgiveness. now the greek official is in a win-win situation, the troika had the opportunity to implement its agenda, and if it failed the greeks are not punished so severely. as it is, the troika has been wrong and the greeks are the only ones who have suffered. you are correct, we need a better incentive program.
The Greeks may have to commit to earning a minimum bonus. Everything is measured in bonus dollars (euros). It about them, not us.
However, my intent is–other than buying the souls of the Greek politicians (that’s not true, I am attempting to purchase the quality of their relationships with their spouses)–pretty much the intent is to let the Greeks lead. If you’ve ever done development consulting, you know how incredibly important it is to have the client take ownership of a program. I’d rather the Greeks make plenty of mistakes but own the program rather that having a perfect program shoved down their throat that they want to get rid of as soon as possible. Improving governance is a long process, not an event, and not every step will be forward or successful. And that’s OK, as long as the general direction over time is healthy and progress steady.
This is a very big change if the program works as I anticipate. It’s not just economic, it’s fundamentally social. My Hungarian experience suggests that societies have a limited pace at which they can absorb change, so that also has to be factored in. That’s why you want the Greeks–who are in the daily ebb and flow of public opinion–to have control. There will be times when they have to take to foot off the gas and coast for a while. The Greeks, with all their faults, understand this. The Troika doesn’t.
Originally I wanted to answer already on 3rd of July,
correcting many things, but it got already lenghty, and below is only the first half of the things I wanted to say, so I did let it be, until now.
@ Tom Warner July 2, 2015 at 12:16 am
You make many patently false statements
1. “The buyers knew the deficit numbers were phony,”
I refer you to
https://www.imf.org/external/pubs/ft/scr/2008/cr08148.pdf , especially page 14, „General Governmt 2005- 2010)
General government debt to reduce by 2% each year
2. The Greek government fudged the numbers systematically, and that came up only End 2009 /start 2010, long after Greek risk premiums went sky high
Please compare the old IMF number of 93% for 2007 to the present IMF number and the CIA number at that time (in comparison to Germany and some others)
IMF now for 2007, CIA then for 2007, delta , country
60.2% __61%__-0.8% __ Austria
84.0% __86.1%__-2.1% __ Belgium
33.9% __32.9%__1.0% __ Finland
63.2% __66.6%__-3.4% __ France
65.2% __65.3%__-0.1% __ Germany
107.2% __81.7%__25.5% __ Greece
103.3% __105.6%__-2.3% __ Italy
183.0% __182.4%__0.6% __ Japan
42.5% __47.7%__-5.2% __ Netherlands
68.4% __65.8%__2.6% __ Portugal
Greece cheated their statistics then in a gigantic way, even the IMF, and still prosecute the first guy who produced honest statistics.
To blame investors for that , is dishonest, and in an extreme way your claim “all the buyers knew exactly where it stood all along” is totally absurd.
3. Until the start of the rescue programs 2010, Euro states did NOT “receive ECB funding” but sold their national bonds into the market, and it was non of business of the ECB to pass any judgment on the credit worthiness of them.
@ steven kopits
I was just describing referenced facts, not some kind of political program , as your “Condition 8a” would suggest, which I would just consider enrichment of the main culprits
@ baffling
German growth is very good, at the speed limit, just labor power constrained. To put that into numbers , Germany has according to the IMF April 2015 WEO an out put gap of PLUS 0.2% and more overheating predicted in the years ahead.
Just a personal anecdote, in 2007 I could get a cleaning lady in Dresden for 6 Euro/ hour, Now we are at 15. Economics, supply and demand work as expected. With temporal sectors overheating to somewhat more skilled long term sectors like hair dressers .
genauer
“German politics is working.”
the german economy can work as long as the ECB follows economic policy to the benefit of germany. this entire discussion revolves around this aspect, which you fail to acknowledge. interest rate policy has been very beneficial to germany, but rather harmful to many of the struggling euro nations. why should policy not serve those nations? for example, before austerity blew up the debt/gdp ratio of the struggling nations, such as germany, their ratio was high but manageable. their debt was too high, but why? in the early to mid 2000’s, ECB rates were at lows of 2%-accomodating low inflation in germany. but those low rates allowed the southern euro countries to borrow very cheaply-and the german banks bought that debt. but there was inflation in those southern nations. the correct monetary policy should have been higher ECB rates, to counter the inflation. but germany was in a low inflation environment, and higher interest rates would have been detrimental to their economic miracle. so what policy was adopted? low rates. and the debt bubble in southern europe grew. then the euro members enforced austerity on the southern countries, which resulted in recession/depression types of economies. this is what ballooned the debt/gdp ratio. austerity policies tanked the gdp and tax receipts along with it. result, years of depression in germany. recession in several other euro states.
now one can argue about proper management of the euro area since these financial issues came to a head. but to ignore the poor euro policies which lead to these issues in the first place is rather dishonest. and i am sure you need no reminder, that in 1953 german debt was reduced extensively, to create a future economic environment which allowed for germany to grow without the undue burden of an unpayable debt. what if the rest of the world had taken the same modern german view towards greece, that you must pay for your father’s sins? where would the german miracle be? germany needs to understand its responsibility within the euro zone, instead of constantly looking for fault in other members.
as you said “”German politics is working.” but european politics is not working. are you german, or are you european?
baffling,
your response is the usual anti-factual nonsense.
in stark contrast to your wild and false claims, without any numbers and references, as usual :
“before austerity blew up the debt/gdp ratio of the struggling nations, such as germany, their ratio was high but manageable. their debt was too high, but why?”
http://de.slideshare.net/genauer/sampler-of-gdp-and-other-data-emphasis-on-russia , page 3
the debt ratio is very favourable for Germany and for the incompetent US worse then for the EuroArea as a whole .
I mentioned that above, with numbers, but you do not seem to listen, or …. what do you say about your latest post ?
I also do not recall you ever presenting ever any data, or even interpret them but maybe you enlighten us here with some examples from the past ?
I mentioned also before that “THe ECB targets EuroArea wide targets” according to its “price stability only” mandate, defined as
https://www.ecb.europa.eu/mopo/strategy/pricestab/html/index.en.html
(comparison to data https://www.ecb.europa.eu/mopo/html/index.en.html)
This is in stark contrast to your repeat, wild , unsubstantiated claim “ECB rates were at lows of 2%-accomodating low inflation in germany” of alleged national preference. Please provide evidence if you have such.
genaur
“before austerity blew up the debt/gdp ratio of the struggling nations, such as germany, their ratio was high but manageable. their debt was too high, but why?”
my fault on the typo. i meant greece as a struggling nation, not germany. you can see the greek debt to gdp ratio here
http://www.tradingeconomics.com/greece/government-debt-to-gdp
note in beginning of 2009 it was 113%, and after the first bailout and austerity, the beginning of 2012 saw it grow to 171%. in 2006 the ratio was 100%, a level which held constant for the previous decade. austerity helped to blow up the debt ratio. it was the gdp denominator which blew up the ratio.
“This is in stark contrast to your repeat, wild , unsubstantiated claim “ECB rates were at lows of 2%-accomodating low inflation in germany” of alleged national preference. Please provide evidence if you have such.”
2003 average german inflation (CPI) 1.0%, gdp annual growth rate -0.3%
2003 june ECB refi rates 2.0%
2003 average spain inflation 3.0%
2003 average greece inflation 3.5%, gdp annual growth rate 6.1% july 2003.
feel free to explore the data for the years surrounding 2003 as well. why would ECB rates be at a low in this environment, if eurowide price stability was desired?
perhaps these facts open your eyes to the reality?
your whole rate vs inflation argument is wrong.
Rates in the US and the EuroArea were low, because both just came out of recession.
https://de.wikipedia.org/wiki/Datei:LeitzinsenDE.svg
The US had 2.3 % inflation in 2003, but fed rates even lower than the ECB.
And just taking 2 other countries and not the Euro averages also doesnt cut your argument that the ECB is somhow not targeting the average.
What blew up the Greek debt was their gross overspending, and that the deficit fuelled artificially inflated GDP was reducing to the real value.
The idea that one can spend forever much more than produced and that somehow other countries have to pay for it, would be clearly desirable for Greece, just not for those who should pay for it, and of which Germany is just 27%.
The constant attempts to blame Germany for the bad economic policies of others, and somehow trying to extract gigantic amounts of money with that, that is the problem here.
Greece has been fighting with the IMF, not Germany, every quarter of the last 5 years, because they never implemented most of the commited changes.
And I am not starting with you here another discusssion of old WWII and 1953 stuff, that is a lot more complex then you think.
genauer,
“And just taking 2 other countries and not the Euro averages also doesnt cut your argument that the ECB is somhow not targeting the average.”
was the low ECB rate appropriate for the countries i cited? no. the ECB created a problem. this is a flaw in the euro system, and the evidence suggests both past and present that it benefits germany. in the recent past, the rates should have been lower to help greece (and other southern euro countries) at the expense of inflation in germany. but that did not happen. greece has been subject to monetary policy antithesis to its needs for a decade. that is very poor for growth, and has shown itself in the data.
“What blew up the Greek debt was their gross overspending, and that the deficit fuelled artificially inflated GDP was reducing to the real value.”
no. you can argue artificial inflation of gdp all you want-i won’t dispute that-but the crash in gdp was primarily caused by the depression suffered in greece over the past number of years. a depression which was caused by austerity programs in greece. did you really think the reform packages imposed on greece would result in growth? of course you did not believe that-only a fool thinks reducing national spending produces economic growth. these were meant to be punitive packages-to teach greece a lesson. and it did teach them a lesson, as it cratered their economy. now you want to blame the greeks for an outcome which external groups (hint-germany among others) silently desired-which was impose punitive damage. you simply went too far, crossed a line, and people got hurt. the least you can do is acknowledge your contribution to the problem-but silly pride keeps the euro leaders from doing so. really a sorry situation.
baffling wrote: “and i am sure you need no reminder, that in 1953 german debt was reduced extensively, to create a future economic environment which allowed for germany to grow without the undue burden of an unpayable debt. ”
Sorry, that is in the presented form nonsense. The German industry, which determined Germany’s ability to pay, was back on track already in 1950, when industrial production reached the 1937 levels. We saw the essential reforms BEFORE debt reduction in Germany.
The debt of 1953 was only unpayable when Germany had to do both, debt repayment AND creation of large armed forces, therefore, the debt reduction was to a certain extend pure self-interest of USA, UK and France. (Hint: after 1955 Germany provided more than 45% of the NATO ground forces in central Europe, around 35% including France). It would have been much more expensive for the allies to rise the forces themselves. What is the system relevance of today’s Greece?
In conclusion, we have substantioal differences between Germany in 1953 and Greece in 2015 and a good argument would consider them.
ulen,
could germany pay off its debt or not? the debt forgiveness was provided because germany could not pay off its debt and grow at the same time. period. you are providing nothing more than excuses.
https://en.wikipedia.org/wiki/London_Agreement_on_German_External_Debts
You dodge the discussion: Aftwer 1955 West Germany provided by far the highest contribution to NATO in central Europe. The USA/UK/France would not have got this without debt reduction. From a other POV what was the most economic solution for the allies, debt reduction and German contribution to NATO or Germany debt payments and no substantial contribution?
Germany got debt redcution, and it delivered. What is the potentialö Greek contribution? Historic analogies can be minefields. 🙂
ulen,
it is baffling how the information is staring you in the face, and you look straight through it. of course the allies benefited from the debt reduction. that is the point. the allies were far better off with a german economy which was self sufficient. otherwise the us and others would have continued to bail out the german state, in the form of continued economic and military protection as they attempted to pay off their debts. but that was not a long term prescription for growth. similar situation in greece. a weak greece cannot have the possibility of growth, which is what happens if they continue to be saddled with bailouts which simply increase their debt. they do need a fresh start. if you do not provide support to fellow “union” members, what is the point in having a union at all? in 1955, germany could not have responded to the warsaw pact without the debt relief-or us military technology.
“Germany got debt redcution, and it delivered. What is the potentialö Greek contribution?”
well we are speaking hypotheticals here. but if greece is bailed out and becomes self sustaining, it is a victory for the concept of a european union. if greece is forced out, and it leaves lingering doubt in other, larger, EU members about how they will be treated in the future, then the EU has a problem. you approach greece from the perspective it has no influence on the future behavior of other weak euro members. not sure if that is the appropriate assumption to make. so the greek contribution is not inconsequential.
Baffling,
you still do not get it.
Why was the US governmentable to “convince” the other allies not only to reduce the German debt by 50%, to exclude older interest payments and – as icing of the cake – gave the west German federal states the GDR. If you lack the numbers: Germany had in worst case 40 billion external debt.
Please, do not tell me that the German economy was not selfsustainable in 1952, that the US had to bail out the German state (which BTW did not exist unti 1955) is pure BS.
FYI, Germany did already pay 5 billion DM for the occupation forces in 1952, but would have been able to pay additional 2-3 billion (the budget of Amt Blank/”Police” force etc. ) for debt without real problem, in 1960 without problem >5 billion DM. Germany/the federal states would have been debt free before 1965 in the worst case scenario, with 400.000 Germans more in the workforce.
Why did the US government not choose this scenario?
ulen,
“Why did the US government not choose this scenario?”
did germany receive a bailout and debt forgiveness, or did it not? germany took the deal because it needed it in order to grow in the future. period. nobody would benefit from a failed german state.
@ baffling
July 9, 2015 at 7:34 am
you simply lost your argument that the ECB was in any way specificylla accomodative to Germany.
Now you dream up some even more fantasy ECB responsibility to be national specific to countries like Spain or Greece , (“in the recent past, the rates should have been lower to help greece (and other southern euro countries)”)
despite ECB rates already being at unprecendented lows (https://www.ecb.europa.eu/stats/monetary/rates/html/index.en.html) of MINUS 0.2%
Greece is the poster case of whath happens if you inflate your GDP by taking on non-asset backed full 25% of GDP in debt PER YEAR and distribute that as goverment wages and bribes and “real estate agents”, fudge the numbers and cheat on the IMF, EU, ECB, private banks giving credit on the judgement of the before.
This is nobody elses fault.
genauer,
lets try this one last time. in 2003:
2003 average german inflation (CPI) 1.0%, gdp annual growth rate -0.3%
2003 june ECB refi rates 2.0%
2003 average spain inflation 3.0%
2003 average greece inflation 3.5%, gdp annual growth rate 6.1% july 2003.
why are ECB refi rates so low when southern europe already has inflation? i thought the ECB mandate was price stability? its low rates were obviously beneficial for low inflation/deflation in germany to grow. low rates only lead to greater inflation in southern europe-that is not price stability. it is simply baffling how you can deny the beneficial policy of the ECB for germany. ECB policy chose to prioritize the german economy. the rigidity of the euro monetary system without fiscal transfers creates these types of problems.
look, germany dominates the euro economy, i understand this. but this also means any average measure of the euro zone economy is dominated by what happens in germany. when you use this type of measurement, then ECB policy will almost always be accomodative to the german economy. perhaps the ECB needs a better weighting system when evaluating the economic performance of the euro zone? right now it boils down to one size fits germany. i am not trying to pick a fight with you, i am simply telling you the reality of the situation.
Just read my reply (genauer July 9, 2015 at 12:38 am) above
to your repetition of the same 2-fold false argument for your false claims, that the ECB does Germany any special favors.
Neither is the central bank rate a function of Inflation, I gave you your familiar US example in the Graph as welll for that, nor do Greece and Spain represent the EuroArea average, which is the correct and mandated target for the ECB.
“nor do Greece and Spain represent the EuroArea average, which is the correct and mandated target for the ECB.”
this is the problem which you do not understand, or refuse to acknowledge. using the euroarea average has obviously not been a good measure for monetary policy. you had a decade of improper distribution of money and economic prosperity due to a “mandated” measure, which according to the data produced a flawed outcome. the mandated measure was biased from day one towards the german economy due to its size. basic statistics, the average value of a parameter loses its importance if you do not have an understanding of the distribution of the parameter. the euro zone has very poor mechanisms for dealing with this variability in distribution.
i am not blaming germany for helping to shape the euro policy in a way that benefits itself, just don’t deny that this is the case. the “mandatory” target is not a law of physics-it is not infallible. it is a choice, and it can be changed. these are simply observations from the outside, which apparently are not obvious to those on the inside.
you just keep repeating the same debunked false arguments , claiming for the n-th time non existing bias, without providing any evidence.
Be some happy family with ilk like Stiglitz and Krugman, if that helps you.
apparently modern german economics would argue that 2003 average greece inflation 3.5%, and july 2003 gdp annual growth rate 6.1%, would require an historically low ECB rate of 2.0% to sustain a healthy economy. no problems could come of such conditions?
and current greek unemployment of 25% with no gdp growth in sight will be fixed with continued fiscal austerity. lower pensions and more unemployment will certainly grow the greek economy according to modern german economics, right?
exactly what outcomes did germany expect when “advising” greece of these economic policies? did you really expect success? is this really the state of modern german economic theory? again i reiterate, ECB policy was the antithesis of greece’s needs, and aligned quite well with germany’s needs over the past decade.
The turn- around plans for Greece, Ireland, Portugal were drawn up by the IMF, because in 2010 the institutions and expertise didnt exist in the EU.
The difference is, that Portugal and Ireland took their medicine and executed the agreements, and a re now growing again, Ireland having a higher GDP per capita than Germany.
Greece accepted the IMF plan and then basically did nothing for a year, making than bankruptcy of the private debt unavoidable. And every quarter the same drama of Greece not doing what it had commited.
They should have finished the secon program end of 2014 with the pension reform, ending early retirement with 51, and just didnt do it, but wanted the aid money.
All this has nothing to do with your favourite scapegoat “modern german economic theory”
genauer,
apparently you believe that a greece with 3.5% inflation and 6.1% annual gdp growth was served well by the 2% ECB rate monetary policy in 2003.
i would disagree and say this created a very distorted market in greece, one with unintended consequences. we saw the result.
i agree with you that greece needs some reforms and has failed on that front. but your denial that ECB monetary policy, tailored to the benefit of germany, was also a contributor to the crisis we see today is baffling. it is not an either/or scenario. germany and the ECB does have some culpability in the current crisis.
just look at the graph in https://econbrowser.com/archives/2015/06/anil-kashyap-on-the-greek-crisis#comment-190887
and explain your repeated fantansies about a rate / inflation link for the US
before you repeat your endless lie
“ECB monetary policy, tailored to the benefit of germany,”
genauer,
apparently you believe that a greece with 3.5% inflation and 6.1% annual gdp growth was served well by the 2% ECB rate monetary policy in 2003?
it is a simple question. the historically low rates certainly served a germany which was contracting in annual gdp at the time.