NOTE: I have no idea why the text color and background color got cocked up!
Europe has been on tenderhooks over the recent Greek election. The week prior to the election, Frau Merkel warned Greeks about the risks of "not living up to their agreements", in an oblique attempt to sway the voters from Radical Left Party, Syriza, led by charismatic Alex Tsipras. Tsipras has been very clear in that the "Bailout" agreement was not working, was based on flawed assumptions by its austerity theory authors, was causing untold human suffering, and in plain words, would not solve Greece's debt issues during this generation, if at all.
In the run up to the election, numerous respected economists had begun to question whether the bailout's austerity would ever work, not just for Greece, but all of Europe. Guys like Paul Krugman, the Bank of England Governor and Reza Moghadam, one of the IMF officials involved in the original deal. Moghadam admits that both Greek bailout programs (of 2010 and 2012) were based on overly optimistic assumptions on growth, inflation, fiscal efforts and social cohesion.
In short, while Merkel, the politician, along with some of her fellow austerity proponents, not only stood unquestioning behind what was seen, both in theory and application to be a seriously flawed package, intellectuals and practitioners were vocal in opposition. How Frau Merkle thought her implied ultimatum could sway an electorate that was seriously suffering, and receiving respected voices opposing austerity, not only in Greece, but anywhere, makes no sense. Indeed, I had several friends swayed from long term party loyalties in order to "vote against Frau Merkel". And thus, Syriza, led by young, charismatic Alex Tsipras, changed the face of Greek (and possibly European) politics, rising from a minor coalition of left wing groups to the ruling party.
Now for the Grand Strategy part. It has been clear that the backers of blind adherence to the bailout provisions had no strategic plan for dealing with a Syriza victory, other than to stick blindly to the bailout. Nor had they done a reasonable recon of the party beyond it's leader, Tsipras, and his campaign pledges. But Tsipras was light years ahead of the austerity crowd. Early the next morning, he had formed a coalition government with the Right Wing Independent Greeks Party, who shared Syriza's anti-austerity position, and ensured that certain "sacred" Greek institutions would not be threatened. Tsipras' austerity opponents reeled and sputtered. Even more amazing was that Tsipras formed a cabinet immediately and had a government ready to hit the ground running. A totally unexpected feat for a parliamentary coalition. Austerity proponents reeled and sputtered even more, openly expressing that they were confused, and warning Greece not to be "too hasty".
While Merkel et. al. were trying to convince Tsipras to back off from his anti-austerity stance, Greece's foreign minister dealt Merkel a huge setback. Following Merkel's lead, the EU announced increased sanctions against Russia, calling them "unanimously adopted". Within hours of taking office, Greece's new government complained it was not consulted before the European Union moved to threaten tighter sanctions on Russia, and thus the proposed sanctions were not legitimate and were an affront to Greece's sovereignty.
Rather than admit the oversight, and fearing that Greece wanted no sanctions at all, a shocked European Parliament President, Martin Schulz, told Greek newspapers, "Greece should not undermine EU policy on Russia at a time when it is seeking support from its partners over its economic problems." Schulz had foolishly suggested that Greece no longer was sovereign in external affairs, and when the Greek foreign minister arrived in Brussels for discussions of the matter, Schulz had no option but to backpedal and offer lame explanations for his ill chosen words. The end result, the EU, with Greece's concurrence, settled on only extending the expiring sanctions another six months, and the austerity gang remains confused. So within 72 hours of the new government's start in office, the score was Greece 1, Merkel maybe 0.5, and Greece has established a modicum of recognition for its sovereignty, despite its economic subordination via the bailout.
But that wasn't the biggest shock to the system. Syriza selected respected left wing economist and academician, Yianis Varoufakis as Finance Minister. A totally non-political player, Varoufakis has been an opponent of austerity as well as the terms of the bailout from day one, and his reasons why have come to pass. Now you have Varoufakis, who called it correctly, versus Merkel and her Finance Minister, Schauble, who called it incorrectly. And, Merkel et. al. still have no idea exactly what Varoufakis has in mind, other than expecting the worst case scenario. Why? Because Merkel et. al. have war-gamed only continuing their failing austerity scenario, which is gaining opposition from more quarters than just Greece, versus nothing. Thus, Varoufakis could very well have the upper hand. Sooner than Merkel would like, the EU and Greece must meet to discuss the standoff they perceive, and so far, all that Merkel has in her quiver of arrows is the notion that "agreements must be fulfilled", ignoring that they are not working as projected, and probably never will. So Merkel et. al. are seen as confused, and Varoufakis is described as not only a brilliant economist, but a "Rock Star". As one local portrayed him:
Yup, Mr. Spock has logic on his side, and Merkel only has obstinacy. Oh yeah, Spock has a growing body of economists agreeing with the folly of austerity, many of whom find the terms of the Greek bailout the pinnacle of such folly.
BTW, Varoufakis is considered one of the leading masters of game theory. You know, If we do this, they will do that, to which we can capitalize on this, etc. In short, is the confusion that some players are suffering because Syriza hasn't a plan, but rather, because Syriza wants to ensure weakness in the opposition to give Syriza the advantage, and thus have not really revealed their plan. Thus, when one of the lenders warned that Syriza had to be less confrontational, lest the next loan be taken off the table, Varoufakis responded that the next loan was not wanted, as increased debt does nothing but exacerbate the downward spiral caused by the bailout. In short, Spock nullified the ultimatum.
Speaking of ultimatums, very often, they can be the worst strategic blunders imaginable. There is no shortage of reputable military historians who hold that "Total and Unconditional Surrender" only served to prolong WWII and increase the cost of treasure to all sides. There is a reasonable number of cases where labor unions have issued a "cave to our demands or be put out of business", and management has simply given the union one of the two offered courses of action and liquidated the company. And, of course, the harm to employees far out weighted the harm to the owners. As one of my grad school profs said many years ago, keep in mind that when you issue an ultimatum, you very well surrender control of the situation to the person you are trying to intimidate.
So, Merkel et. al. have issued a veiled ultimatum. Greece must comply with the original terms, "or else". Does Frau Merkel, or her choir director, Herr Shauble, realize that the "or else" ultimatum is usually, in both tactical and strategic terms, the weakest of all? What if Mr Spock has already war-games all the potential "or elses" and has plans to overcome them? Consider an EU expulsion. Greece currently has sufficient resources, if debt service is ended, to not only pay their other bills, but use the billions in debt service avoidance to provide better social services. Expulsion from the EU would enable Greece to gain increased revenues via the ability to impose higher tax rates on all foreign owned companies, something prohibited by EU regulation. Take the Athens airport, run under contract by a foreign firm, resulting in high user fees to insure certain levels of pre-tax profit. The contract would not have to be broken, but the taxation of profits leaving the country could make the current operator desire to get out. In short, a "Grexit" would have more ramifications than has been in the public discourse.
Of course Greece will suffer pain via a Grexit, but that pain will not be exclusively Greek. The Austerity folks have boxed themselves into a situation where there is no painless way out for the lenders, and many less painless ways out for the people of Greece. Varoufakis knows this and knows a variety of ways of minimizing Europe's pain. Merkel's intractability now has her and the Austerity crowd far behind in formulating both tactics and strategy. Varoufakis has been war-gaming other approached to the crisis than that in place for a long, long time. Merkel et. al. have not.
Has Syriza gained a strategic advantage? We will see. Right now, I'm betting that Tsipras, Varoufalis and Co are leagues ahead of the Austerity crew. Perhaps even light years. And, much to Merkel; et. al.'s concern, the austerity movement in all of Europe may be on the ropes. It's hard to take on facts on the ground and Mr Spock's logic with, "So what if it isn't working. You agreed to it."
Its not that much about "austerity".
ReplyDeleteThe required reforms in Greece were a lot about actually enforcing taxation, selling some real estates and cutting actual fat.
Greece had a disproportionately high military spending because of its imaginary cold war with Turkey, for example. In case of Turkish aggression against Greece NATO would sit idle and the EU would act as alliance against Turkey based on the Lisbon Treaty. So there's no reason to spend 4+ % GDP on the military while having huge fiscal and trade problems.
The Greeks had such a devastating effect of the reforms not only because "austerity", but especially because their deeply corrupt political class exploited the reforms to enrich itself and its actual clients even more. Real estates were sold much under value to friends and family of politicians, fat was cut only by hurting the little people, taxation of the rich was still not enforced properly etc.
"Austerity" doesn't work well in a crisis, but the Greek problems cannot be traced to "austerity" only.
Moreover, they would have had much more of that "austerity" if they hadn't received dozens of billions of support from European countries, for a post-bankruptcy budget would have been much smaller. The Maastricht treaty actually explicitly forbids transfers to sustain the currency union, so even what conditional support was given was at least at the limits of legality.
That being said, Merkel has no economic or fiscal policy theory expertise at all. Her one and only competence is in gaining and sustaining power in the German political landscape. She learned this from her mentor, Kohl.
Schäuble is no fiscal policy expert either, he merely learned on the job. He was a horrible, Orwellian minister of interior affairs previously - also known as "STASI 2.0".
Sven
ReplyDeleteYou have the stock in trade German talking points about Greece down pat, except you forgot to mention that we stop working at 2:00 PM and sit around drinking coffee and ouzo.. Greece was subjected to an extreme level of austerity while being expected to service a huge debt burden. Numerous economists said the expectations had no connection to reality. The so called "troika" predicted 15% unemployment for four years, followed by a recovery. The actual figure was 28%, with very little recovery. They predicted a 10% GDP shrinkage, not the 25% that was actually experienced. All the minor factors you claim had very little to do with the outcome. Your own Frau Merkel recently complemented the Greeks for doing such a fine job in trying to comply with "the program", albeit in an effort to sway the electorate from voting for Syriza, a clear foreign intrusion into another sovereign's affairs. Little wonder that Tsipras' first official act was to place roses on the memorial.
As Yanis Varoulakis described it, the bailout package relies on the equivalent of using a credit card to pay off a mortgage one cannot afford. All of the structural changes demanded were recessionary in nature. And the speed at which they were to be accomplished was not only reckless and harmful, but based on myth. Note the time frame and rate of repayment of the unforgiven debt established by the 1953 London Conference. The Greek program included no "ability to pay" provisions, but rather made debt servicing superior to all other economic actions.
But all that aside, my point was the strategic thinking of Syriza and its primary actors, versus the disjointed response of the rest of Europe. Basically, the austerity crowd either act shellshocked, make ill-conceived remarks or mindlessly repeat the party line, "must meet your commitments or else." The fact that they have no idea of what kind of an "or else" would have in terms of their own country, their political survival and the best interests of all Europe is very telling. They just fear being euchred into admitting they were wrong. Merkel and Schauble are, in a way, getting a dose of their own medicine, someone who does not wish to be browbeaten. Except in this case, I offer that Syriza has brought much greater intellect into the game. It is not just Syriza's position that "meeting the commitments" is a fool's journey, but an ever growing number of economists and political scientists around the globe. If the two most vociferous proponents do not, as you say, have the expertise to back their demands, how will they fare against those who have the expertise to refute these demands. Is it any wonder several key austerity proponents do not want the matter debated in official and public forum?
I know that austerity doesn't work, that nobody is competent at making economic predictions, Schäuble and Merkel have no clue about econ policy, Greece cannot repay (and I knew that all along), the supporters (guarantee-givers) have become prisoners of their own design and were blackmailed accordingly with the threat of bankruptcy all the time etc.
DeleteI did want to point out that it's not the foreigners who offered help under harsh conditions who messed Greece up. Greece messed Greece up, and the harsh conditions are Greece's fault, since its democratically legitimated government accepted them. The foreigners were giving guarantees without demanding to be paid for it like banks would, so they actually gave gifts to Greece.
The mess is all Greek. They have zero legitimacy to complain about Germany and the Troika. The foreigners were delusional, but their offer was still accepted because a democratically legitimated Greek government believed that the conditional help was still better than going through what Greece brought onto itself all alone.*
And I suppose we both know that the Greeks were aware that their political class was all shit, and they knew so for decades without using their power to change this. They rather accepted the bribes by the politicians.
*: Admittedly, German wage stagnation created an environment in which Greece messed itself up quicker than without. Germans didn't force them to have wage growth much beyond nominal productivity growth, though.
This Greek crisis is going to reveal an awful lot about power structures in the EU.
ReplyDeleteI am going to fetch the popcorn and watch closely.
Read somewhere today that Merkel is definitely against a Greek exit from the EU. Can't recall the source though.
ReplyDeletethe article also stated that Greek debt was 175% of GDP. Not being an economist I do not know what that means for the future. I note that US debt compared to GDP is stated as 101% for 2014. Highest year was 1945 at 116%. Per this link anyway: National-Debt-by-Year
The debt/GDP ratio means little IF Greece gets a strong economic recovery.
Delete175% could become 140% real quick that way.
There's not terribly much that could rebound strongly other than tourism, though.
The problem of an overvalued (for Greece) currency persists as long as there's not Greek exit from the Euro currency (DON'T mess that up with the EU!).
I was in favour of Greek leaving the currency and declaring bankruptcy all along. The foreign efforts to save Greece fiscally were in reality a racket to save the investors who were stupid enough to lend Greece in the first place.
It happened that many of said investors were institutional investors such as life insurances who were pushed into lending countries like Greece by Basel treaty rules etc. and were in deep trouble due to the 2007/2008 financial crisis already.
These stupid institutional investors could have been saved by our governments by purchasing newly emitted shares instead. This way the country would at least get something for the expense - some future dividends. Other stupid investors of no relevance simply deserved their losses.
This comment has been removed by the author.
ReplyDeleteMike - the debt as a percent of GDP ballooned because the GDP shrunk by 25%, while the total debt remained basically level. While some critics of Greece point to the "failure to reduce the debt/GDP" to make Greece appear to have not cleaned up its act, that is not the case. On a simplistic household budget level, think of GDP as income, as the state's income is closely tied to a % of GDP. Thus, less income = more debt than can be afforded.
ReplyDeleteSven- Are you addressing a morality play or an economic issue. When a person illegally jaywalks and gets hit by a car, do we not render immediate care? If a hit and run driver flees the scene, do we chase the driver to punish him, or give aid to the victim?
You indirectly point out that it took "two to tango", and, yes, a fair part of the responsibility for the situation rests in the laps of the holders of wealth looking for investments without due diligence. No one can get into debt without someone wanting to sell them that debt. The instruments that obfuscated the debt were of Goldman Sach's design, not Greece's. Goldman reps called upon many nations to sell their product. No one knows which nations took part in the scheme, as Goldman has never been forced to reveal their confidential client accounts. Could even be that Germany boosted their image by temporarily hiding some debt via Goldman. Or maybe that bastion of questionable ethics, Duetsche Bank, created similar instruments to help their political patrons cover debt? The Blame Game only serves to emotionally cloud the economic problem that needs solution.
All the "what should have been done" scenarios in the world do not change the current situation on the ground. The point is that the course of action imposed was seriously flawed. If you wish to make this a morality play, then yes, by all means, the situation in 2010 was primarily Greece's fault. The unworkable solution that has been effectively imposed by the Austerity Gang is not Greece's fault. No one knows what a default and Grexit would have looked like 5 years on. We do know what the results of the Austerity package look like, and it is horrid. So who do we select to punish at this point? Stupid Greece of Stupid Austerity Proponents? Is punishment a strategic objective?
But, again, my objective has been to discuss strategy. Merkel et. al. are claiming the strategic objective is a process. Syriza is demanding that the strategic objective be an outcome. Strategically, who's got their head up their ass?
The theory of optimum currency area predicted the troubles as they happened, and the key was the fixation of the exchange rates (1:1 between Germany and Greece - it doesn't matter whether same or different currencies).
DeleteThis prediction led to successful demands to forbid transfers, for economic theory further predicted that transfers would be necessary to compensate for the troubles. 5/6th of Germans were fed up with subsidizing East Germany, and they certainly didn't want to begin subsidizing countries like Greece or Italy forever.
So transfers were forbidden in the Maastricht treaty and the expectation or hope was that this was believable enough and the member countries would steer their economies to stay in line with the currency.
Instead, Greece had a party gladly sucking in foreign cash from stupid investors. It did basically everything it could to crash the system and become dependent on transfers.
The analogy would thus be rather a man who jumps in front of the car while traffic lights show him red, expecting good food in the hospital.
"The unworkable solution that has been effectively imposed by the Austerity Gang is not Greece's fault. No one knows what a default and Grexit would have looked like 5 years on."
They accepted it because they believed it to be the better choice. They can stop cooperating at will, but complaining about those who rendered conditional help is poisoning relations in Europe.
It's actually quite easy to guesstimate what would have happened after a bankruptcy:
(1) Assuming no Grexit, they would have been worse off than they were and are. Much worse.
(2) Assuming a Grexit, they would have been worse off initially, but would typically have a strong recovery by now.
There were enough state bankruptcies to support this. The Greek government chose the path that allowed its corrupt elite to rip off Europe and Greece some more. They should focus their ire on their corrupt politicians, not blame Germany for having insisted on conditions in exchange for its voluntary efforts.
The solution to the problem is to punish the bad politicians in all countries involved by casting them out. Furthermore, at least either Greece or Germany need to leave the currency union.
Europeans need to understand that the ideology of European unification has overshot. The more unifying currency regime is not a common currency that forces economies to diverge, but a flexible exchange rate system which allows economies to converge.
"
DeleteThe solution to the problem is to punish the bad politicians in all countries involved by casting them out."
Will this lift my retired farmer neighbors out of poverty? Will this reduce the Greek national debt? The US removed all the bad politicians in Germany following WWII. Jailed many, and even executed some. Still required the Marshall Plan and the 1993 London Conference's massive debt forgiveness to enable Germany to climb out of the economic abyss.
Or are you saying that punishing all those evil politicians and just sticking with the Morganthau Plan would have worked just fine.
Drop the obsession with vengeance and turn to on solving the problem with a minimum of human suffering, Sven.
The Marshall Plan was little more than a morale boost for West Germany. Its actual influence on economic recovery was marginal and vastly overshadowed by the annual transfers that paid for the occupation as well as other transfers.
DeleteWest Germany recovered economically because the occupier-mandated planning economy* of the late 40's was removed, the inflation of the 40's had devalued the domestic public debt and the disparity between workforce competence and crashed capital stock cried out loud for a recovery according to the Solow-Swan exogeneous growth model.
West Germany had already recovered from 1949-1952 towards the GDP per capita of 1936 despite many crippled workers, huge migration costs and decimated male population. 1936 was the year when all the damage of the Great Recession was overcome. Germany had recovered to its previous zeniths before the 1953 conference!
As I wrote before, a Greece with bankruptcy AND Grexit would be better off now or in the very near future than the real Greece. There were enough historical analogies to this.
Your "Morgenthau Plan" remark was a crappy strawman.
And your talk about "vengeance" shows that you didn't pay attention what I wrote:
"The solution to the problem is to punish the bad politicians in all countries involved by casting them out."
includes the idiots in charge in Germany and the other dumb governments which did set up the stupid creditors-saving gazillion Euro racket.
This is important, for else they will do additional harm in the future. They don't stop being crappy at monetary, fiscal and economic policy. And yes, this is essential for Greece as well.
*: Those generals were bureaucrats and only knew to give orders, so they perpetuated the wartime planning economy. This includes the Americans who weren't all that capitalistic-minded in 1945-1949 as legend has it. Planning economy mechanisms such as price controls and fuel quality mandates (UK had 57 octane gasoline during much of the 50's) fell out of favour in the West only during the 1950's.
Sven- are you suggesting that Germany could have accomplished their recovery without the 50% debt write off and 30+ year payment schedule on the remainder. That's thirty years based upon ability to pay, not a rigid payment schedule. Nary a single economist in the world would agree.
DeleteAs to throwing out the bad politicians, I'm all for that, but then what do you do? What's your recovery program? Abandon those who screwed up? Economic Darwinism? Blame and punishment alone has never solved anything.
Sven: "There were enough state bankruptcies to support this." How many state bankruptcies can you cite where the state had to change currencies immediately following the bankruptcy? Fallacious example.
ReplyDeleteIf all players in the EU were without sin, yes, a case, however spurious, can be made for "punishing the offenders. However, along with offenders, there were enablers, Germany chief among them. Germany was more than happy to "look the other way" and not exercise due diligence in their mutual oversight and compliance commitment. Alloowed them to exploit markets. Yet I hear no clamor for Germany to bear risk for failing in that commitment.
Nor has there been a clamor over Germany being the first state to exceed the deficit limit in 2003. The first blatant violation of the Maastricht Treaty was by Germany and France, not the PIIGS. Should every other country that violated debt limits be thrashed for following the German example.
Yup lots of corrupt politicians. More Greek politicians have been convicted for bribes by German firms than bribes originating in any other country. Indeed, bribery was business as usual at Siemens, wasn't it. Has Germany sanctioned any German banks for mortgage securities fraud, or LIBOR fixing? Rather, Germany has recently tried to get EU support to prevent the US from fining European banks for illegal activity involving transactions in US dollars. Interesting that the bulk of the offenses have been by German banks.
In short, no one's hands are clean, so stop miring us in blame and address solutions.
What Syriza (as well as a growing chorus of voices in other countries) is saying is this: In 2010, you gave us an austerity package that you represented as THE solution to the debt crisis. We implemented that package. You were dead wrong, yet refuse to admit it. More and more respected economists agree that the package will solve nothing. So, we simply ask that you admit that you were profoundly wrong and then we will discuss the proper solution, be it debt reduction or a rendering of the EU. Yet something as simple as that has frightened the crap out of the Austerity Gang.
But then, you drag us OT again. It's the grand strategy of the parties that I placed on the table, not blame nor economic theory.
"How many state bankruptcies can you cite where the state had to change currencies immediately following the bankruptcy?"
DeleteYou don't seem to be aware that this combination was rather common in economic history, not unusual.
One example was Argentina, which had a bankruptcy in 1998 and finally switched from fixed to flexible exchange rates in 2002. Growth in 2003 and 2004 was about 9 % each. A Grexit would be exactly this; a switch from fixed to flexible exchange rates. The look and name of the paper doesn't matter in this regard, the exchange rate does.
"Germany was more than happy to "look the other way" and not exercise due diligence in their mutual oversight and compliance commitment."
Let me remind you that Greece manipulated its statistics and outright lied to its European partners repeatedly:
http://www.forbes.com/sites/timworstall/2011/09/12/greece-was-lying-about-its-budget-numbers/
The stupid preference for huge exports in Germany is a much better lever for criticism. The boosting of exports is actually illegal, but the German governments ignored the stability law routinely for decades because it's impossible to follow by design. There's no justification for de facto export subsidies (Hermes guarantees) in face of an existing huge trade balance surplus, though.
"In short, no one's hands are clean, so (...) address solutions."
Those who don't want to hear the message won't hear the message.
"(...) rendering of the EU"
I don't understand what this means, but it sounds as if you mistake EU and Maastricht treaty/Euro zone. The Euro currency is not linked to the EU.
"It's the grand strategy of the parties that I placed on the table, not blame nor economic theory."
Except that you wrote A LOT about econ theory in the blog text itself. Yet now that you discuss with an economist who specialised on exactly the right fields at the university during the 90's (fiscal, growth, econ policy) you suddenly don't want to discuss econ theory.
And half of your blog text was about blaming foreigners ("austerity") for Greece's woes. Explain how it would have been better off on its without a bankruptcy and Grexit (the two things which I was hoping for all along).
Speaking about blame: Greece spent about 3% p.a. GDP more on its military during the 2000's than necessary. This and the overspending on the military during the 90's makes up a large share of its government debt. What does the new Greek government does in its first days? Provoke Turkey, re-heat the pseudo border conflict. How intellectual is that?
"The first blatant violation of the Maastricht Treaty was by Germany and France, not the PIIGS. Should every other country that violated debt limits be thrashed for following the German example. "
DeleteThe German and French deficits didn't cause major troubles, and the German deficits were temporary.
http://www.financialsense.com/sites/default/files/users/u496/images/2012/france-twin-deficits-make-history.jpg
http://newsimg.bbc.co.uk/media/images/39399000/gif/_39399555_german_budget_gra203.gif
Greece ran bigger deficits and lied about it. The Greek government must have known that this was unsustainable and a quick path into bankruptcy.
http://tinyurl.com/m6f92hf
It was never better in regard to its deficit than Germany. So much about Germany setting a bad example.
So when it comes to violating a treaty, you ascribe virtue amongst whores?
DeleteSomething got lost in translation again.
DeleteThe other treaty members nodded to the few and slight deficit excesses of Germany IIRC.
More importantly, said excesses didn't cause ANY major trouble to treaty partners, EVER.
Germany changed its constitution in 2009 to force almost balanced budgets on its federal state and its 16 states and it entered in effect gradually since 2011. The rule has some exceptions for exceptional circumstances. The aggregate of public budgets in Germany was almost balanced in 2014.
This constitution change was discussed and in the making before the financial crisis 2008 already.
Sven-
DeleteIf it makes you feel better, I will stand in absolute awe of your education in economics and make no mention of my studies in the field to allow you bragging rights.
I did not say that I do not wish to discuss economics. What I said is that competing theories and blame have nothing to do with the grand strategy of either party to the issue. However, one cannot discuss the strategic objectives without at least a primer on the economic issues involved. It is quite possible for an actor to set and achieve a strategic objective that is ultimately not optimal. "Complete and Unconditional Surrender" is a good example. It extended WWII and cost hundreds of thousands of unnecessary casualties on all sides. For example, when Japan attacked Pearl Harbor, it was to open the door to southern expansion of their empire, with the expectation of subsequently reaching an "peaceful settlement" with the US. Dumb on their part, but equally dumb on FDR's part to rule out what had originally been on Japan's agenda. Some say that many Nazi leaders decided to continue to fight on because there was nothing to gain by an early surrender.
Argentina maintained their currency, and simply devalued it. The same currency was circulating before and after. No way to hold onto the old as a hedge over the new. No incentive to ship your old Pesos somewhere safe. As an economist, did you pay attention to what the Euro Zone did to institute the Euro? Exchange rates were frozen for what, 3 years before the currency came into circulation. It was called the "virtual Euro" and while the old currencies were in circulation, international transfers and interbank transfers were in electronic Euros.
What, might I ask is the strategic objective of the Austerity proponents? Right now, they appear more concerned with process than outcome. Syriza appears to have a readily sustainable debt at a lower human cost as their objective. Sure we can wargame a variety of options, theories and people to blame, but what I offered for discussion are the options, theories and objectives of the actual players on 1 Feb 2015. Let's not muddle that with extraneous crap. It's the actual game being played, with the actual players on the field that is being analyzed for strategic thought and action, not anyone pet economic or sociological theories.
I apologize for letting you drag me of that topic.
I don't understand our 3rd paragraph. You are aware that the fixation of currency exchange rates is the important part of the Euro, but at the same time you don't realize that Argentina switching from fixed to flexible exchange rate did essentially the same.
DeleteWhether the currency was renamed or not doesn't really matter. The key is the fixation of the exchange rate. That's why the Argentina example is very relevant.
"What, might I ask is the strategic objective of the Austerity proponents?"
They have the long-term perspective and believe that Greece won't clean up its mess if it didn't under the pressure of a quasi bankruptcy. To them, Greece has the choice between intense short term suffering and long term prosperity OR reduced short term suffering and long-term poverty compared to Central, North and NW Europe.
Their strategic objectives are thus maintaining the ideology-driven Euro currency area, preventing a financial collapse and pushing Greece onto the long-term path.
The big question is how much long-term damage the short-term suffering does to society and economic growth path. The Austerians certainly succeeded in protecting the currency, the banks and the life insurance corporations so far.
Studies show a huge individual-level impact of crisis, early unemployment, early entry salary etc., but macro shows all the time that pushing mature economies below their long term growth rate (technological progress rate) isn't easily done save for the general and incremental slowdown of annual technological progress in the OECD.
About short term suffering and ethics: Shit happens to stupid. Greece didn't pay into an insurance against the consequences of its stupidity before it crashed.
Why should others suffer to alleviate the suffering of those who brought it onto themselves with irresponsibility? There's no free lunch. 50 no more unemployed Greek workers getting paid to repair a street in Athens mean 50 more unemployed Germans and a pothole street in Berlin.
You're probably not aware of the domestic problems of Germany. Two of 16 German states are quasi-bankrupt like Greece (Bremen, Berlin).
(And I knew about the centrality of the fixed exchange rates to the Euro all along:
http://defense-and-freedom.blogspot.de/2012/01/euro-crisis-and-defence.html
http://defense-and-freedom.blogspot.de/2010/02/risk-of-european-civil-war-in-distant.html )
Al-
ReplyDeleteNice thread. Like the inclusion of grand strategy in the mix and preferring Star Trek over Star Wars like the Spock connection as well. Portugal is watching these events very closely.
I do have to question the assumption that Germany/the EU are actually in control of their own policies though. Russian sanctions are a case in point. What exactly are these based on? It is obviously not in Germany's interest to provoke the Russians, in fact Germany's interest is the opposite, but these sanctions (based on what again?) continue . . . The Transatlantic Trade Agreement is another case in point, how exactly is this in Europe's interest? Rather it is in the interest of the politically dominate multi-national corporations and has full backing of the Cheneyites . . . We have witnessed in effect a silent revolution. The state is no longer the actual political actor in world affairs, at least not in the West . . . The Corporate/state nexus rules and the so-called "leaders" of the West simply read their scripts. There is a strong feeling among my family in Germany today (and I have extensive family there that we visited over Christmas) that the state no longer represents the interests of the German people and that the corporate media cannot be trusted. They are farther along this path of thought than my US friends and family by far . . .
Seydlitz-
ReplyDeleteFirst off, forgive me for not making it clear that I'm not trying to debate who is right or wrong here. I am just trying to stimulate a discussion of strategic and tactical style, so to speak. So far, Syriza has the, for lack of a better term, "opposition" reeling and confused. That Merkel publicly advised Greeks, albeit obtusely, to not vote for Syriza hints at a significant tactical advantage for Syriza.
I mentioned the Russian sanctions as an example of Syriza's gaining an upper hand on a single issue, within mere hours after coming into power. A tactical move to tilt the field a bit towards their strategic objective. Since Frau Merkel is a lead voice in punitive actions towards Russia vis a vis Ukraine, calling the EU's hand on falsely claiming "unanimity" in setting greater sanctions (backed by Frau Merkel) established Greece's fledgling government as no pushover. Totally misreading Syriza, Norbert Roettgen, chairman of the German parliament's foreign policy committee immediately said, "Any attempt to connect these two policy fields has to be stopped before its starts." He had no idea of what Syriza's actual objective was, or whether they desired to link the two, but the result was not greater sanctions, but merely a six month extension of existing sanctions. And no mention of the "connecting" that rattled Berlin. So who won that round? I really am not interested in the merits of sanctions within the context of this discussion.
I am trying to focus on political grand strategy and tactics to achieve same, which is a political issue, not one of economics. I tend to doubt that Russia was anywhere near as high on the list of Syriza's strategic objectives as curing the suffering of Greeks. Yes, the sanctions have hurt Greece's agricultural exports, and probably far more, in relative terms, than Germany. But I suspect that damaging Merkel's credibility provides more advantage towards Syriza's main strategic objective than anything else. Schulz was dead wrong in claiming unanimity, as that was not the case, and since Schulz is a German rep to the EU, and Merkel is a vocal proponent of harsher sanctions, again, Syriza scored points in the political stage at Merkel's expense. Perhaps Syriza wants Merkel to be a bit edgy in bailout discussions? Beats me, but if you said two weeks ago that Greece could cause Germany to bend its will on anything, I would have laughed my head off. And if, as you say she does not have the trust of her people, her position becomes weaker.
Tsipras and Varoufakis only want to deal with heads of state, not Troika technocrats. In short, no one can hide behind the Troika. Heads of state will have to defend the failed austerity program personally to someone far more versed in economic than they. How this tactical move plays out will be interesting. And the trips to national capitals has begun. Berlin has not yet made the schedule, probably to heighten tensions there. And we cannot forget that similar movements are rising in other beleaguered Southern European countries upon which austerity has been imposed.
To be frank, I had originally considered Syriza to be a one man, charismatic, ideologically driven populist show. Right now, I sense a clear vision and a clear plan. I am willing to bet that Tsipras/Varoufakis have gamed this out some 15 or 20 moves into the future. That is Varoufakis' profession. Merkel may suffer surprises, but I'm not too sure these two guys will. The speed at which they are moving means they are either out of control, or know exactly what they are doing. I smell the latter. How about you?
So I return to my original question. Who's strategic objectives and tactical plan appear to be on the more sound footing. Defenders of a failed process who are still off balance or Syriza? Who's "right" ain't gonna determine the outcome as much as who knows what he is doing.
Gentlemen, I am sorry to come late to this discussion.
ReplyDeleteAl, my heart has gone out to the Greek people. I cannot imagine what they are suffering right now, never having been in a situation that was even half as bad. I've read a lot of accounts of the Great Depression but there is a profound difference between reading about something and being there.
Sven, first, I want to say that you are basically right about everything. I have been saying for years that a tight fiscal union without a similarly tight political union would lead to something like the current circumstances. I understand your need to identify what went wrong so that we can avoid this happening again. But the situation has, for the moment, gotten beyond that and any attempt to analyze what went wrong will only add to the fire you are trying to put out. We can discuss this later when things have cooled down.
Al has identified the likely Greek plan (oversimplified: ease up on us or we make your life miserable, if you push us too far we will leave). He finds it a bit surreal that he cannot identify a response other than "stick with the original plan or [unspecified threat]."
Sven's response so far has been to confirm Al's theory that the German leadership at least probably has no fallback position. Since I generally agree with Sven's analysis about the past and the present, I am curious about how his analysis of the near future and why.
Speaking from my poorly informed very distant seat in North America (relatively near AEL also eating popcorn and watching the unfolding drama), it appears to me that the Troika must either give concessions (which seems impossible) or risk losing the entire principal of their loan amount (which seems unthinkable). So, to return to Al's original question, what happens when the impossible encounters the unthinkable? Does one win (if so, which one?) or is there a third option?
Pluto- " So, to return to Al's original question, what happens when the impossible encounters the unthinkable? Does one win (if so, which one?) or is there a third option?"
ReplyDeleteNot so sure this is my question, as I'm not so sure this one will be decided on the "merits", which are products of different economic theories being supported in a significant degree by domestic considerations. Rather, I'm encouraging a discussion of the tactical and strategic elements of both sides of the controversy. Syriza's position is sort of, "I know what you know, and you know I know what you know. I also know what I know, but you don't know all that I know, you know that you don't know all that I know, and you know that I know that you don't know all that I know." Work through that slowly and see how it impacts the Troika's ability to either defend their position or launch an offense against Syriza's position.
On "Engagement One" Syriza was expected to demand no sanctions against Russia, or a link between sanctions and debt relief. So the European Parliament and Merkel immediately went on the defensive for the wrong objective, a "compromise" was offered before anyone even knew Syriza's objective. Point is, there is no way to tell exactly what Syriza's bailout objectives really are, but already, in an effort to save face (not openly admit the program was ill advised and structured and the loans cannot really ever be expected to be retired), "test balloon" compromises are being floated. Is it really wise to pre-compromise before even knowing the other side's objective? But then, even though this is a now known Syriza tactic, the element of the unknown still exists and is under Syriza's control. Kinda like the Trioka is playing with 5 cards up against Syriza's 5 cards down, and there is no way to turn Syriza's cards until they choose to do so.
Al-
ReplyDeleteAgree that Greek politics are of particular interest today. But what it took to get to this point . . . will it be worth the price? Outcome very uncertain. Good luck to the Greeks in getting control of the apparatus of state and influence over the "system".
Nietzsche wrote about the eventual triumph of the private over the public sphere and how this world of individual profit could be expected to provide much food for thought . . . entertainment even. But with a heartless core, or rather a certain determinism . . . We've seen this in the past.
Al: "I'm not so sure this one will be decided on the "merits"
ReplyDeleteI'm pretty sure that it won't be decided on measurable merits for the reason you stated, that Syriza is working from a very different value system than the Troika. Your analysis seems good to me in general and I was completely unaware of the pre-compromise offers. It does sound like the Troika is wrestling with itself, very similar to Obama's first year in office where he twisted himself in knots trying to get the Republicans in Congress to agree to anything he said. Obama failed, by the way.
There is one important difference, Syriza was elected based on debt relief and has moved with early vigor. This has changed the tempo and they will need to produce results for the Greek people sooner than later.
As Al has noted, it appears to be in Syriza's best short-term interests to keep the Troika in the dark on their goals and watch while the Troika ties themselves in knots but I do not think that the Troika will continue to fence with themselves for much longer. That is when the effort of crafting some sort of new deal becomes much more difficult and I hope that Syriza recognizes when they have gotten the best possible deal and accept it otherwise things could get VERY interesting.
Does Sven have any idea of when that might occur?
@Pluto:
ReplyDeleteMerkel is 100% about retaining power, and the risks she accepted are high enough that a 50% debt cut for Greece would end her chancellorship with the next election in disgrace. She's now awaiting what the Greek government does and lets others grind the sharp edges of Syriza off (other European governments are at political risk as well). I suppose she'll seek some solution which avoids Germany paying billions because of its guarantees. She'll try to find a solution that camouflages the disaster to the German public by delaying losses into the future.
This solution wouldn't necessarily be in anyone else's best interest.
I'm not sure what are the specific problems for Greece, but I do know that it takes two for one to get in debt up to the point where the one couldn't bail itself out if two more outsiders joined in to relieve the debt.
ReplyDeleteOn one level, Greece did this to themselves...on the other hand, Germany kept throwing money at the problem...now it's to the point where the US, and I seriously doubt the IMF could do squat to undo whatever Greece did to get themselves in this hole.
But Greece is going to have to figure it out...because as they sink into that hole the likelihood that any amount of money that could possibly help would be similar to standing on the beach, spitting in the ocean, and seriously thinking you actually had an effect on the sea level.
sheerahkahn
Very simple recap:
ReplyDelete2010 -
* Greece is on the verge of bankruptcy and default.
* The EU, ECB and IMF (so called "Troika") diagnose the problem and come up with a solution ("the bailout") - Massive loans, a write down of a significant portion of debt to private borrowers and strict austerity. Debt to foreign governments not impacted.
* Among the champions of austerity are Frau Merkel and Herr Schauble of Germany, who go on the record not wanting a Grexit.
2010 - 2014-
* The Troika plan is a humanitarian and economic disaster, but Troika and Frau Merkel insist it must be kept in place
* Anti-austerity sentiment rises throughout Europe
* Radical Left party Syriza gains traction in Greece, calling for end to "bailout" as a program
Frau Merkel stands her ground, not only for no debt write off, but defends the failed austerity program
Merkel still says she does not want a Grexit
* As a result of austerity policy, the Eurozone, second only to the U.S. in gross domestic product, remains the laggard of world economic recovery and is still struggling with the legacies of the global financial crisis.
*Late 2014- 2015
* Greek centrist government falls. Syriza predicted to win and does.
* More and more respected voices, internationally, reject austerity as a viable solution
* Syriza forms government with lightning speed and knocks the austerity forces off balance
* Merkel continues to defend failed austerity program and refuses debt write off, but does not want a Grexit
* Syriza rejects the legitimacy of the "Troika", which is, as such, a legally questionable body to begin with. They will only deal with heads of sovereign institutions and states.
Now, it appears that Syriza's real objective is to end the human and economic disaster of the ill conceived bailout terms, not just a particular process. Without discussion nor request for clarification, it was assumed by the austerity crowd that he will only accept massive debt forgiveness, which Sven correctly identifies as a domestic political suicide act for Markel.
The head of the European Council of Finance Ministers came to Athens to meet with Varoufakis. He was set back by Varoufakis rejecting the terms of the bailout without hesitation.
Varoufakis meets with the French Finance Minister, Sapin, and butter will not melt in Sapin's mouth. While not supportive of debt write off, Sapin admitted that the bailout was an abject failure, promising every effort possible to help create a needed "new contract", short of debt write off. France has just undermined Merkel's stance that "all commitments must be kept".
Varoufakis is now in London, where a Euro-skeptic government may very well also admit to the program’s failure. Next stop for him is Rome. Meanwhile, PM Tsipras is scheduled to see the French President, Italian PM and the EU Commission President. Berlin is not on the schedule.
To be continued:
continued:
ReplyDeleteEffectively, Syriza continues to employ the same operational tactics as they did with the Russia sanctions. Let the “opposition” assume Syriza will only accept the most radical and unpalatable solution and they immediately move in the direction of Syriza's favor with an alternative. They really have no other choice.
It would appear as if Syriza is "island hopping and isolating" Frau Merkel. As international opinion, both popular and academic turns against austerity, Syriza is rapidly meeting head on with European heads of state and Finance Ministers to get them to admit that austerity has failed. Frau Merkel and Herr Schauble are not on the schedule, perhaps simply to build a formidable block in favor of crafting a more enlightened plan while Germany is sidelined. There is no way Merkel can object to the meetings with other heads of state and FinMins, and Merkel would appear weak if she requested a meeting. By not going to Berlin, Syriza has marginalized Merkel. Perhaps Syriza wants the Germans to be seen as inflexible pariahs, insensitive to fact and human suffering? After all, Herr Schauble, who Sven described as "Stasi 2.0", has gone on the record that the people of Greece "must accept suffering".
If Syriza succeed in getting a significant number of major European governments to go on the record that the bailout has failed and a new contract is necessary, where will Merkel/Schauble stand in the public eye? France, Spain and Italy have an incentive not to be as rigid as Germany, as they are facing emerging anti-austerity parties that could grab the reins as Syriza did. Thus, they have a domestic political incentive to back away from austerity as applied to the most bloodied victim. Keep in mind that time is running short, as Syriza has dropped hints that it does not want the next loan tranche (end of Feb) under the present contract, so what can Merkel threaten to withhold?
But, as Sven says, the people of Germany have no desire to see their tax dollars flow to nations that did not have their houses in order. Interestingly, after lying in the library as an asterisk to history, the London Conference of 1953 is again being taken out on loan and read. Could this not be a model for part of a fresh approach? The relief granted Germany was in two parts. Massive debt forgiveness and terms on the remaining debt that reduced it to a pimple on their budget's ass over the next 30-40 years. Already, commentators are suggesting that extremely long term loans, with flexible payment schedules and minute or zero interests rate, ala the London Conference, are a politically possible alternative to debt write off. As long as a loan is on the books, it is not seen as new money out of the people's pockets.
So, let’s forecast a bit. Suppose Syriza gets a significant amount of both European and world official consensus that :
1. Austerity is a failed approach
2. The debt package, as structured, is weighing Greece down excessively and can never be retired as it stands
3. A new approach, not just to Greece’s problems, but Europe’s needs to be adopted
4. Greece and the Eurozone can reach a mutually constructive accord
Where will Frau Merkel and the advocates of austerity stand? Will they continue to claim the bailout is a work of genius, even though all the data says otherwise? Will the Syriza and anti-austerity parties offer a new contract that will let Frau Merkel gracefully get on board as if that was her idea all along, but no one ever asked?
Perhaps the targeted center of gravity is Frau Merkel? A hell of a lot has been going on to neutralize her.
You see, it’s really politics, not economics. Economic policies are a political decision, not visa versa. And politics require strategic thinking. ;-)
You blame "austerity" a lot, and it's not a successful economic policy.
ReplyDeleteYet much of what you seem to blame "austerity" for was already preordained before the "austerity" fashion.
Europe took the 2008 financial crisis hit and then the 2010 Euro currency blowup hit - that's why its aggregate recovery was so poor. "Austerity" likely worsened the economy even more, but particularly Greece and Portugal wouldn't have been much better off without the bailouts and linked "austerity".
The British have a much better case for despising "austerity", for they could and should have done without, exploiting the Bank of England's "lender of last resort" service. Cameron's economic policy was and is stupid.
To expect the loan and guarantee givers to give to Greece without reform ("austerity") requirements would have been delusional. That would not have happened. It wasn't politically feasible. The ONLY alternative to the reform requirements was a thorough bankruptcy and that would have hurt Greece even more in the short term and also more by now without a Grexit.
Greece had maneuvered itself into a choice between the devil and the deep blue sea, with the deep blue sea option offered by foreigners - and that's the one it took.
Greece did hurt itself. It wasn't the evil foreigners who did hurt Greece.
---------------------
Mr. Reese was poor, joined a club to get a credit card, threw parties with credit card debt, almost went bankrupt, got money lent from the neighbour next door under the condition that he stops the partying and smoking and has been bitching about the cruelty of his neighbour ever since.
Guess who gets increasingly pissed by this behaviour.
Sven- Yes austerity is not the initial vampire, but it has exacerbated things significantly, and no matter who you blame for Greece's initial problem, it is inescapable that the bailout's conditions were based on bad assumptions and forecasts by the "benefactors", resulting in a disaster of depression proportions. The question is if austerity economics, which has now taken center stage, is a politically viable position. You can offer all the anecdotal pictures of fat cats, crooks and the like, but a vast section of the population across Europe, and significantly in Greece, that were not fat cats, big spenders, etc, etc, are suffering, and that causes political backlash. Why should my village postman be punished? He only joined Pasok to get his job, not because he embraced their ideology? Why should my retired farmer neighbor's modest pension be reduced to a poverty level. He didn't know that politicians in Athens were getting bribes from Siemans and kickbacks on defense contracts? Sound familiar?
ReplyDeleteI'm not debating economic theory nor getting wrapped up in ascribing blame. I'm addressing political reality, and politics drives economic choices. Right now, the political tide is not flowing in support of austerity, and consequestly, victims of austerity are going to be granted some leeway for having suffered from austerity.
You seem to be wrapped up in who deserves help versus who needs help. Need is an objective standard, while deserves is very subjective. If the severity of sins committed are taken into account, the multi decade help given in 1948 and 1953 were indeed far less deserved that that being sought in 2015. It's a door you never should have opened.
And if you don't want to drag in the issue of punishing-the-blameless there's the ugly example of history to consider; the rise of fascism in Germany in the Twenties and Thirties as well as the success of communism in the Soviet Union and China, among other places.
DeleteThe bottom line is that if you push people's backs to the wall they are very unlikely to obligingly lie down and die. They will typically choose to fight, and in so doing ally themselves with whoever they see as willing to help them. That was the great appeal of communism in the late 19th and early 20th centuries as well as fascism between the wars; that regardless of their means of governance they offered people who saw themselves as being crushed by indifferent elites and foreign powers (regardless of the circumstances of this "crushing"...) an ally and a standard around which to rally.
The U.S. of FDR's time didn't suddenly offer people pensions and minimum wages and unions because FDR was Santa Claus, but because of the horrible counterexamples of the success of fascism and communism appealing to people who saw themselves as ground under the heel of uncaring capital or foreign brutality.
So "helping the needy" might well turn out to be politically pragmatic as well as morally sound...
"the multi decade help given in 1948 and 1953"
ReplyDeleteI don't care about dead people - and almost everyone who was an adult then is already dead.
"Why should my retired farmer neighbor's modest pension be reduced to a poverty level."
Because Greece is poor. That neighbour is poor. Poverty is what poor people experience.
Greece is in GDP per capita in PPP ranked 63rd in the CIA World Factbook.
Its poorer than Equatorial Guinea (sub-saharan Africa!), the Seychelles or New Caledonia.
Look at this POS of an industrial sector structure:
https://en.wikipedia.org/wiki/Economy_of_Greece#Secondary_sector
Four of the ten biggest industry sectors are about beverages, one is tobacco, three about construction...
Germany: Automobiles, machinery, electrical products, chemicals. And I still know piss-poor retirees almost next door despite national prosperity, social market economy and all.
Greece has a primary surplus (government budget before interest payments) now. It could take a chance and see what Grexit and defaulting on debt will feel like in a few years.
Sven, about 25% of the current German population was born before 1953. Your arguments are specious and illogical.
ReplyDeleteYet with all your "facts", you did not answer the question of which group was more deserving. Difficult question?
The decisions of the Allies and the rest of the industrial world in 1948 and 1953 are why Germany is able to produce all that stuff you identify. Had JCS 1067 been left in force, Germany would be producing potatoes.
But again, the intent of the thread is political strategy, so why do you insist in taking it OT to tout your economic theories, prejudices and personal vendettas?
"born before 1953"
Deleteyou might find this irrelevant as counter to
"almost everyone who was an adult then is already dead"
if only you paid attention to the choice of words.
"Had JCS 1067 been left in force, Germany would be producing potatoes."
And that's totally not of relevance in regard to Greece.
Btw, the Western powers changed their policy regarding West Germany out of self-interest.
A tomato producer wouldn't have provided half of NATO's land power in Central Europe for the decades to come.
To get back to the political strategy focus, I'm surprised jim (r.a.w) hasn't chimed in yet. This is a Psy Operator's dream come true. Surely they were teaching that when you went through Bragg, jim. They were in 63 when I did as a USMC exchange student. ;-)
ReplyDelete"I have been saying for years that a tight fiscal union without a similarly tight political union would lead to something like the current circumstances."
ReplyDeleteI think Pluto brings up a good point here; that this crisis - regardless of who is better at 12th dimension chess than whom - brings up a significant failure in "strategic thinking" behind the entire eurozone project.
That being the problem inherent in trying to produce a single currency from functionally disparate polities.
My understanding is that the idea behind the euro was as much political as economic. The idea was to meld Europe into a single integrated community to prevent recurrence of the bad "old" political dissentions that produced such undesirable side-effects as world wars.
I'm not sure to what degree sedlitz's elites played in this, but certainly you'd have to be pretty cynical NOT to suspect that a transnational financial and political oligarchy would delight in removing the unseemly vagarities of the national canailles and their unruly pretensions of national sovereignty from the smooth transfer of wealth and power upwards...
But the unavoidable reality is that while Europe's southern tier cannot escape the consequences of the rapacious inrush of capital pre-bubble that has left them in such straits they also cannot take the sorts of actions that nations with sovereign currencies could, or that the reality is that both companies and their labor are not really fungible; a Spanish or Greek outfit (or individual Spaniards or Greeks) can't realistically try and expand (or move) into Norway or Poland to try and take advantage of better economic conditions the way a U.S. company or individual might try and move from Texas to California to get a better job or a job at all...
So ISTM that the "strategy" of the eurozone was based on a fundamental flaw in assessing the overall political/economic/social integration of Europe, and that the Greeks are slapping not just the austerians but the Euro-hopefuls in the face with the problems the Euro-skeptics were on about - that a currency union is fraught without true social and political integration...
Spot on, Chief. In fact, Varoufakis has addressed this on numerous occasions in the past. Note that Varoufakis and others now chanting for the end of austerity are also saying their concern is ALL Europe. The political overtones of that are quite clear. Pretty much, "Oppose solving the Greek problem and you oppose solving a Europe problem."
DeleteAgain, though, what this suggests is that this isn't a Greek problem or even a strictly economic/austerity related problem but a European problem - that the problem is that the eurozone "strategy" (of binding the EU together using a single currency) is based on a mistaken assumption, that the various peoples, cultures, languages, and old national "identities" are as fungible as folding money.
DeleteWe've seen in the U.S. how difficult it is for a nation with 200-odd years of commonalities to even out problems stemming from the impact of economic collapse. Some parts of the U.S. are recovering faster than others, but it is proving difficult to shift people from the places that are still mired to the places where they can find work. They're trapped, by underwater mortgages, by ties to places and people, by the sheer difficulty of pulling up stakes and moving.
Multiply this by several orders of magnitude and you have the EU. It has taken generations for the Turkish gastarbeiter to work their way into German society and even now I understand that the fit is...less than perfect. Try and imagine the unelplyed kids in Spain trying to migrate across Europe to find work in Germany, the Netherlands, or Sweden? It's be hell on wheels.
So the issue of austerity is one part of this. But the other is that a Grexit would take a big hammer to the entire concept of "Europe", and get the other southern tier nations thinking that this whole "Europe" business seems to mean "austerity for me but not for thee"...and that they might be better off back on their own. And I think there's a big panic in Brussels and at the ECB and the other Euro-centric organizations thinking about that possibility...
Actually, Italians, Spanish and Portuguese have close to zero difficulties integrating into society and economy of Germany or the Netherlands.
DeleteIt's primarily the Turks and Albanians who insist on living in a capsuled-of sub culture.
Hard to apply the trap of underwater mortgages on the labor force to the German perception, where home ownership is significantly lower than the US, and much less of a cultural goal. Second, there is an undertone of national or racial superiority in a notion that all one has to do to live a better life is to abandon their home country and come to our welcoming utopia, especially when the country making the invitation claims to be in a union of equality with the nations from which they are recruiting.
DeleteRather than typing more, here's a link to how The Globe and Mail of Canada sees it.
ReplyDeleteWhat is building is political pressure. And that pressure is for a change in the balance of political power over economic decisions in Europe.
Varoufakis: "It takes a very cynical disposition to believe that the Central Bank, whose purpose is to keep the Eurozone together, will do anything to undermine it, especially when faced with a Greek government which is absolutely determined and committed to finding a jointly beneficial agreement for the whole of Europe."
British FinMin George Osborne: "In Europe as in UK now is time for competence over chaos.Urged all involved to act responsibly & Eurozone to have better plan for jobs & growth"
Meanwhile, Herr Schauble expresses dislike of perceived Greek closeness with Russia, saying aid from Moscow was not a viable alternative to European assistance. Asked how much the new closeness between Greece and Russia was a concern, he said: " We don’t like that. I don’t believe Russia can replace European solidarity." Funny, but Syriza has said nothing about seeking aid from Russia. However, European solidarity with Germany seems to be faltering due to spread of opposition to austerity, which is not seen as "assistance", but the cause of Europe's prolonged recession.
If this ain't politics, then I'm not an old git. Is Germany losing control of the dialog?
The Brits have their own extreme and stupid form of austerity. Osborne certainly didn't mean to promote non-austerity.
DeleteVaroufakis' take on the ECB as so much else ignores that the problem with the ECB is that it's increasingly violating the rules on which it is founded. It's turning towards illegal operations, and may sooner or later get into real trouble. The German constitutional court has delayed to rule the ECB actions illegal in early 2014, but it would be pretty much forced to do so if the ECB did even more. A ruling declaring the illegality of state financing by the ECB could not be ignored. The German central bank would be forced to fight the ECB course.
"If this ain't politics, then I'm not an old git. Is Germany losing control of the dialog?"
These days German newspapers rather highlight how little love Syriza finds even in Spain and Italy, because other countries close to a cliff would be pushed a lot by a Greek debt cut.
Here's something else to chew on:
ReplyDeletehttp://www.huffingtonpost.com/julia-meszaros/beyond-fascism-and-auster_b_4776089.html
"Indeed, many aspects of the EU expansion into Eastern European countries can be seen as a new form of financial imperialism, spearheaded by Germany and Western Europe. Many Hungarian homeowners were encouraged by the Hungarian state and banks to finance their home loans in Swiss Francs. Unfortunately, with the recent devaluation of the Forint, many Hungarians can no longer afford to make payments on their homes or apartments (New York Times). Many local businesses and agricultural producers have been put out of business by the EU's import requirements for Hungary. Numerous Hungarians complained about the fact that most local businesses were destroyed by the EU and lamented the fact that Hungary was no longer a self sustainable country or economy.
The new financial imperialism of the EU is glaringly evident in the Hungarian state's macro-economic decisions. The state was on the verge of insolvency and the current Prime Minister, Orban, had to eventually acquiesce to Brussel's demands in order to borrow an emergency loan package of 25 million Euros to save Hungary from bankruptcy. Before he did, however, Orban (leader of the center right party Fidesz) utilized very similar anti-EU and anti-Western rhetoric to challenge the EU's austerity requirements in Hungary. Orban compared the EU's treatment of Hungary to the Soviet's treatment of the country and vowed that Hungary would no longer be a colony.
The rhetoric of colonialism resonates with a large cross section of the population. Many young people view their economic prospects within Hungary as abysmal. Large numbers of young doctors are headed to Western Europe, where they can make four times the salary paid to a doctor in Hungary (BBC). Significant amounts of young people are migrating to the UK, Germany, and other areas of Western Europe in order to find higher paying job opportunities. Typically, these young people end up working within the service and care sectors, which are some of the lowest paid sectors of the economy. Hungarians and other Eastern European people are performing the jobs that many Western Europeans no longer want to do."
Unrest in the southeastern Europe. Hmmm...where have we seen THAT before..?
"Indeed, many aspects of the EU expansion into Eastern European countries can be seen as a new form of financial imperialism, spearheaded by Germany and Western Europe."
DeleteActually, the Austrian economy spearheaded the economic exploration of Eastern Europe.
The German economy did little more than buying Skoda and setting up sales subsidiaries.
https://de.wikipedia.org/wiki/%C3%96sterreichisches_Bankwesen#Expansion_nach_Ost-_und_Zentraleuropa_.28seit_1990er.29
16.1% of credit to Eastern Europe from Austria
13.5% from Italy
10% approx from Germany
The author neglected Austria, which immediately raises a question about his ignorance or bias.
As Al keeps pointoing out, Sven, the point here isn't whether Germany did the specific things that Germany is being accused of. The point is that...
Delete1. Lots of people elsewhere in Europe see the Euro project as a German priority.
2. Lots of people elsewhere in Europe see Germany as behind the "austerians" and the purveyors of fiscal pain, and
3. Lots of people elsewhere in Europe see Germany as a dog in the manger, keeping its own fiscal house in order by hammering down the nations in trouble.
And, I suspect, lots of people see Austria as "Little Germany", so they figure that whatever the Austrian banks and the Austrian government are doing they're doing it at the behest of the German authorities.
Hate to be blunt, but you in Germany are always going to be the victims of the "at your feet or at your throat" syndrome, and simply advising people to "look at the facts" isn't going to change that. These right- and left-wing parties are going to pound on y'all, and it doesn't help that the perception is that Germany cares more about its internal welfare than the welfare of the EU or these nations in trouble. The people in these nations aren't to blame, by and large, but they're suffering, and Germany is seen as saying airily "Suck it up."
The last time the haves did that the have-nots responded by making some horrific political choices. We can either tut-tut about that or accept that as human nature and work to prevent it happening again. Given that choice I know which way I'd go.
Spot on, Chief, painfully spot on. Perception, Perception, Perception.
DeleteThe "facts" are that the original "recovery program" was tragically off in predicted negative impact on GDP and unemployment, no less human suffering. Now, when Schauble says, without admitting to, no less taking responsibility for, the significant error in projections, "the program is a contract, and a contract must be adhered to", the perception is that the program is more important than the outcome, no matter how disastrous that outcome might be. Since the outcomes to date have included significant human suffering, the program is seen as the root of that suffering, and the program shows no sign of improved conditions, is it any wonder the people impacted perceive Herr Schauble and Frau Merkel as villains? Had Merkel/Schable never have claimed to have had a solution, and Greece was left to it's own devices, then blame could be placed solely on the Greek people and/or government. But Merkel/Schuable's "solution" is what the people are experiencing in their deepening agony. One can hypothesize today's circumstances in Greece without the bailout, but that still is not fact, just hypothesis. Since the hypothesis of austerity as a cure has been proven woefully lacking, how would you expect the Greek people to perceive in any other "austerian" hypothesis. "Screw me once, shame on you. Screw me twice, shame on me", is a commonly held principle.
Maybe Syriza's real strategic objective is Grexit, with Germany being the villian? Can Merkel/Schauble get the world, no less the Greeks to believe that they absolutely had no other choice? Neither has even hinted at the point at which they find human suffering not worth the cost, have they?
Perception, Perception, Perception.
Chief- Austerity isn't going well in the Czech Republic, either.
ReplyDeleteThere is a classic piece of wisdom in Rogers and Hammerstein's "Oklahoma". In order to get a fellow to come to her line of thinking, crafty old Aunt Eller has this exchange with him:
Aunt Eller: You know, Andrew, your wife ain't gonna like it if she hears you've been seen with another woman.
Andrew: Aunt Eller! You know I ain't never, ever, been with no other woman.
Aunt Eller: I know you ain't been with no other woman, Andrew, but she still won't like it if she hears you have.
It is a long acknowledged principal in real estate that the three most important determinants of value are Location, Location, Location. In politics, the three most important determinants of political capital are Perception, Perception, Perception. You can argue economic theories until The Second Coming, but if a given theory is perceived to be the cause of unnecessary suffering, all the charts, graphs and statistics in the world are simply perceived as the proponents saying, “How wrong you are. You just think you are suffering .” Or a current line, “The cure is slowly working. The pain is just a necessary side effect.” As Varoufakis described the latter claim, “We are being given a fatally toxic medicine.”
One of my grad school economics profs said that economics in no way a science, as it is both ethically and scientifically impossible to conduct a controlled experiment. Rather, it is ex post facto research, elevated to science status because a lot of math is involved. Add the ability to do “computer modeling”, and it gains even more undue stature. The value of economic forecasts are no better that the precision with which each and every causal variable has been and accounted for, and the ability of the forecaster to not only predict, but control those variables in the forecasted future. Thus, the term, “Two handed economists” whose stock in trade is, Well, xxx will result in yyy, but then, on the other hand, xxx might result in yyz.”
Whether or not austerity is the Bogey Man, the correlation between austerity and economic stagnation, contraction and resultant human suffering is strong enough to make more and more people “hear it is the Bogey Man”. Thus, my previous comments of the total lack of value in debating politics based on the merits of competing economic policies without regard to societal perceptions.
Therefore, my offering this opportunity to discuss Syriza and their stirring all sorts of well credentialed people to come into the light of day to refute austerity as a change to look at political grand strategy. As the brilliant scientist and social commentator, the late Jacob Bronowski, says at the conclusion of Chapter 11 of his magnificent “the Ascent of Man”, science does not reduce people to numbers, arrogance and power reduces people to numbers. “We have to touch people.” (The entire Chapter, if not the whole series, should be mandatory viewing in our schools, but the last 3 mins linked above are powerful)
Perception, Perception, Perception
Correction to above:
ReplyDeleteno better that the precision with which each and every causal variable has been and accounted for
should read:
no better that the precision with which each and every causal variable has been identified and accounted for
Sven, your analysis seems very realistic, thank you.
ReplyDeleteIt seems that all sides are now seeking to hide their goals in order to get the best possible deal. While that is logical on an individual basis, it also seems to me to maximize the odds that somebody will make a major mistake. Looks like we should all buckle in because the ride from here is going to be increasingly bumpy.
I wish the best for all of our friends in the Euro zone.
Pluto- Sun Szu said, "“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”
ReplyDeleteThe key is making sure the enemy doesn't know you, or as you say "hide your goals", or lead him to erroneously assume what your goals are.
Meanwhile, on the home front, an unprecedented major demonstration in Syntagma square supporting the government.
ReplyDeletehttp://www.keeptalkinggreece.com/2015/02/05/unprecedented-in-athens-pro-govt-rally-to-protest-ecb-decision/
Pluto: Not sure if this has really become 12-dimension chess. ISTM that both sides are still pretty clear on their objectives: the Troika wants Greece to just bend over and take it, the new Greek government is saying that that ain't gonna happen and that the debt gets written down one way or the other; by arrangement within the eurozone or by Grexit and default.
ReplyDeleteWhat does seem to be happening is that now that both sides are dancing close to the latter some of the players are trying to figure out ways to keep dancing without falling in. Here's Krugman today on the ECB declaring that it will no longer accept Greek government bonds as collateral when lending to Greek banks:
"What’s the point, then? Well, it’s posturing and signaling. But to whom, and to what end?
Maybe it’s an effort to push the Greeks into reaching a deal, but my guess — and it’s only that — is that it’s actually aimed more at the Germans than at the Greeks. On one side, it’s the ECB making tough noises, which might keep Germany off their backs for a little while. On the other, it’s a wake-up call: dear Chancellor Merkel, we are *this* close to watching a Greek banking collapse and euro exit, and are you really sure you want to go down this route? Really, really?
So this wasn’t brinksmanship; it was sort of pre-brinksmanship, a warning shot to all sides about what will happen next.
Does Draghi know what he’s doing? Of course not — nobody in this situation knows what he or she is doing, because it’s structurally a mess. But don’t panic — yet."
But I think that my main point still stands; the problem with the Troika/EU "strategy" on this is that I thnk it's based on a fatally flawed analysis of the physical/economic conditions within the eurozone. The way Europe exists in reality isn't compatable with a single currency. Labor and physical plant are not really fungible in teh way capital is. So massive cash-flow imbalances of the sort the inflated the southern European bubble aren't "fixable", and Greece is no more than the canary in that mine. If confronted with the physical reality of human misery, hatred, and outrage - and, inevitably, violence and social furor - the national governments of any nation will be hard-pressed to pursue punitive fiscal policies, regardless of the pressures from their EU compatriots. For Athens, Berlin is far away but Golden Dawn is right next door, and staying within the eurozone becomes a secondary priority if it looks like that will empower the barbarians.
And the prospect of Grexit brings up another question; how willing will the remainder of the EU be to die on the hill of "once in, never out"?
ReplyDeleteI mean, IMO the entire eurozone project is a massive triumph of wishful thinking. But there are a lot of people - particularly people with considerable political and financial power - who are deeply vested in it's success.
So the question, to me, becomes "What happens if Greece DOES decide that it's better off with its own currency again?"
Seeing as that the Italians and Spanish might agree, as might the Czechs and Hungarians...and then what?
I can't see the EU fighting to "maintain the Union"...but short of war, what? How savagely can you punish the fiscal "traitors"? What happens if you do? How far could/should/would the EU go to hold itself together..?
Chief, I read Krugman's comments after I wrote my own and agree in principal with him.
ReplyDeleteAl's comment is closer to my view of the situation. There are multiple parties here, they are all hiding their true positions behind a smokescreen of lies and barbed points playing to the home team, not to the people sitting on the opposite side of the table. By doing so, they are setting up conflicting expectations within their alliances (especially the Troika) and within their home countries. By playing their cards so close to the vest, the players in the Troika appear to not know their enemy or themselves and they are willingly putting themselves into positions from which it will be hard to retreat.
I've taken a brief look at the Grexit strategy and by itself the direct consequences are not a terrible blow to the Euro zone. Greece is SMALL and the amounts of money involved are large but not yet overwhelming. The Troika can financially take the hit but not without severe political consequences, as Sven has noted. Will Frau Merkel sacrifice her government for the good of Germany and the Eurozone? I think not but I cannot find any valid options for her personally short of waiting for the Syriza to fall apart and that does not seem like a good choice, just the least bad choice.
The indirect consequences are vastly larger and harder to predict. For example Spain and Italy are also taking it in the shorts. They are much larger countries and there are large political groups within them hungrily eyeing the Greek situation, waiting to see whether the Troika will make a deal or the Greeks will exit. Either way looks good to them. It gets progressively easier for each country to leave after the first and the benefits of fiscal union would shrink with the departure of each country, stirring ever more discontent. I say this with tongue thoroughly in cheek but it almost becomes logical to start a bunch of wars to prevent the depression that follows the departure of the Euro.
The consequences for the US of the Euro zone unravelling are large and unpredictable. The most obvious thing is that it is likely that the Eurozone would at least go into severe recession, perhaps Depression if anybody leaves the union in addition to Greece. This would likely trigger a recession in the US and China as well. Things get too hazy in my crystal ball to predict beyond that.
And I would place the blame for this mess on the leaders of the Troika who were more concerned with posturing for their followers and lying to each other about themselves and the Greek options than they were settling the matter.
Getting mired in the reasons the EU wouldn't have worked to begin with is not going to generate a solution to the current mess. The EU and Euro are a reality, and while any workable political-economic solutions may have to be suboptimal under the current treaties, there are paths to explore.
ReplyDeleteGreeks are suspicious of Schauble for a variety of reasons, not the least of which are his remarks some years back about a "greater political union" in which he envisioned a sort of two tier level of membership. I'll let you guys speculate over which nation would be a Platinum Plus member and which would be coach.
At the press conference following yesterday's meeting between Varoufakis and Schauble, Schauble opened by saying that the two "had agreed to disagree". Varoufakis immediately stated that he perceived no such thing. Schauble spoke about the status quo as if it were an immutable truth. Varoufakis spoke of the bailout as a tragic mistake from day one, and some reasons why. It's worth watching.
Meanwhile, that wonderful champion of human dignity, Putin, has invited Tsipras to Moscow to see where and how Russia can help. A Greek bank manager friend of mine jokingly said, "What if the Russian Oligarchs demanded that their frozen assets be gifted to Greece for philanthropic reasons - no strings attached? They could afford it, and it would really create a political quagmire for Frau Merkel."
Even more enlightening that Krugman is Coppola's analysis of the ECB's abrupt withdraw of access to bank loans. And, she even mentions something along the lines of what I said about the hazard of ultimatums:
ReplyDeleteThis explains Varoufakis's "Do ahead" (he probably meant "Go ahead"). He stands at the edge of the cliff, and the ECB says "Do what we want or we will push you over". His response: "Go on then, push".
Aviator wrote: "Greeks are suspicious of Schauble for a variety of reasons, not the least of which are his remarks some years back about a "greater political union" in which he envisioned a sort of two tier level of membership. I'll let you guys speculate over which nation would be a Platinum Plus member and which would be coach."
ReplyDeleteSorry, you should very carefully distinguish EU and Euro zone. The two-tier model was IIRC suggested for the EU, i.e. members which prefer a deeper integration should do it at a higher rate compared to others who do not wish more integration.
Euro zone: The Greeks had the choice between following the original rules which may have worked for not integrated economies but would have required an approach that Austria adopted in 1970: use the same currency -the schilling had the same exchange ratio with the mark for decades- to force your industry into a direct competition with the German, or to stay out. It was a Greek decision.
The combination of political freedom, i.e. persue your accustomed life style in a Euro zone, and having low German interest rates does not work.
Ulenspiegel
Ulenspiegel - First of all, I am aware of the differences between EU and Eurozone, as well as Schengen Area. My comment about how Greeks feel about Herr Schauble and 'two tier" pertain to Perception, Perception, Perception.
ReplyDeleteHerr Schauble has proven himself to be quite the political/economic prophet. In Nov 2011 he predicted:
Mr Schauble said the euro would emerge stronger from the current crisis – leaving Britain on the sidelines unless it signed up. He said Britain would be forced to join ‘faster than some people on the British island think’ – despite a pledge by Mr Cameron never to do so.
His failed predictions, aided by his statements that the Greek people "will have to suffer" before a recovery can take place, leave him with no credibility in Greek eyes.
Equally damaging to Greek perception of Herr Schauble was the bit about him comparing Putin to Hitler in terms of Crimea, saying, "That's something that we all know from history." Of course, when his comments were challenged, his office had no difficulty rewriting history:
"Minister Schäuble made clear in an event with students that Russia's actions in Ukraine violate international laws and he warned of the consequences of a breakdown in state order," a spokesperson for the finance minister said.
"He clearly rejected any comparison at all between Russia and the Third Reich."
To date, I am not aware of a single comment by Herr Schauble that the bailout program has no gone according to the projections he supported, nor a suggestion from him that an adjustment might be necessary to lessen human suffering. Rather, he appears to only accept his version of reality, even if, as was demonstrated in the Crimea remarks, that reality is clearly refuted by the written and recorded record.
Perception, Perception, Perception.
OK, when you use predictions as bar, then other like P. Krugman would also be considered incompetent. :-)
DeleteThe point you do not want to see is that Germans do not believe that the Greek dept will be paid back, actually even Schäubles guys discuss the possibility for a soft default (long maturity, very low interest).
Some aspects are pure (bad) politics. German politicians would shoot themselves into their feet when letting Greece from the hook before there are significant changes. And Schäubles reaction was a political answer to the Greek attemps to play divide and impera. He is a lousy economist but a veteran politician.
The charade is, that Greece wants concessions before they deliver, despite the fact, that interest rate is low and some payments could be handled without real issue if tax collecion is in normal range. Germans in contrast want to see results befor the allow an hair cut.
Ulenspiegel
Pluto: My question would be - why would depression be inevitable if X nations left the eurozone?
ReplyDeleteI mean, the single largest reason that the probably quitters would WANT to leave is that they now have no fiscal or monetary leverage to solve their problems (regardless of why they HAVE those problems...) unless the EU powers-that-be help them out. And those powers have made it very clear that they have little or no interest in helping those nations out?
ISTM that leaving the eurozone would simply restore the status-quo-ante...with the bonus that the leavers would then be able to stimulate their economies through their governments. You can argue whether such governmental actions are "good" or "bad", but the recent data pretty thoroughly shows that forcing governments to NOT do anything during economic downturns when there is no private spending (i.e. "austerity") does nothing but drive the ship of state further on the rocks.
Chief, there are multiple reasons. Let’s say the Greeks leave the Euro zone without paying a dime of the debt and establish their own currency. They are locked out of the gobal banking network because nobody really knows how to value the new currency compared to their own currencies. This means that the Greeks need to pay as they go, in cash (preferably Euros and dollars) or in services and goods. This, in turn, has the following side-effects:
ReplyDelete1. The new Greek currency will predictably drop like a rock against the Euro and the dollar. This is both good and bad for the Greeks. It makes their exports extremely competitive but makes the cost of imports (especially fuel and raw materials) very expensive. This delays purchases and makes the people vastly less willing to purchase imports. This is going to be VERY rough on the Greek people until the currency stabilizes.
2. One of the big advantages of joining the Euro zone was standardization. Prior to joining the Euro, countries could set whatever tariffs and/or product regulations they wanted. There were a LOT of protectionist regulations in place to help local industries and exchange rates were an absolute nightmare. I assume that countries that leave the Euro would re-implement those regulations and would potentially face Euro-country regulations against them, especially because the ex-Euro country exports are going to be a lot cheaper than Euro country products.
3. If the Greeks leave without paying their debts, the holders of Greek debt are going to have a gaping hole in their pockets. The primary holders of Greek debt are governments that will face considerable balance sheet and political shocks and institutional investors (pension funds, insurance companies, and mutual funds) that were parking their money in Greek debt because of its higher than normal interest rates.
The political shock of losing the debt will predictably cause some of the governments of the larger economies in the Euro zone to fall and cause very considerable concerns about sudden changes in government policy.
Traditionally there are two ways governments can respond to this situation, more austerity or creating more debt. The Euro countries, by design, can only respond with more austerity, which will further slow their economies, many of which are already in recession.
4. External faith in the future value of the Euro will be reduced and it will fall against other currencies. As noted in point 1, this increases the cost of fuel and raw materials and makes things rough on people who have already suffered a lot, which leads to point 5.
5. The big kicker to the Euro zone occurs when the Greeks finally stabilize their currency and things start looking up for them. There are going to be groups, potentially very large groups, within the Euro zone that think to themselves, regardless of how bad it actually got for the Greeks (remember, perception is everything here), “That wasn’t so bad for the Greeks. Why don’t we do the same thing?”
The Euro zone leaders MUST act to prevent this long before the Greek currency stabilizes. Otherwise the Euro zone will start shrinking one country at a time and die the death of a thousand cuts. My problem with this is that I cannot see a way for the Euro zone leaders to apply a carrot, unless they are more creative than I, all they can do is apply the stick.
Which is fundamentally the wrong way to persuade people to stay with the union. I will not say that the Euro is doomed because it has already lasted far longer than I expected, but everything is turning negative for the Euro leaders at the same time. Those leaders have shown far too much resolve and not enough creativity in dealing with past problems and I do not expect for this to change.
P.S. - As Sven says, he's got a better education than I do on this so he may have additional comments.
Hmmm...
DeleteOK, well, I don't have any sort of way to argue against all this, so I'm willing to accept that "exit = bad" in economic terms. I guess my thought, again, is that if anything this points out the foolishness of the entire euro project. Nations have single currencies because they have the political and social structures that can act and react to events that effect those currencies. To try and bash a group of highly disparate polities into a single economic unit - without the social and political unity - seemed difficult at best to me at the time and the course of this mess hasb't really changed my mind.
So I guess my thought would be that I'm still not sure whether this is a case of issues with creativity (and rigidity) in the various leaders as a problem that's just not really "solveable" with the tools those leaders have to use, regardless how creative they might be with them...
You are joining the ranks of the Euro-skeptics, Chief. These are all valid arguments and questions that have yet to be completely answered by the Euro leaders.
DeleteThis whole arrangement reminds me of the old Articles of Confederation. We had very similar problems and had to write the Constitution to bring sufficient political unity to solve the fiscal problems. The South re-adopted the Articles as their form of government and had the same problems again. I'm pretty sure the South would have fallen to economic chaos even if they had won the war.
Interestingly enough, I have only seen one competent writer (retired ECB excutive who was intimately involved in converting to the Euro) address the currency side of a Grexit, and he said that it could be done with minimum turmoil due to the vested interests of the rest of the world, particularly Europe, should one happen.
ReplyDelete1. Drachma is pegged at parity to the Euro for an indefinite period long enough to dissuade speculation
2. Deposits accounts immediately denominated in Euros at parity, and a very short time limit for Greeks to convert their physical Euros to Drachma. Conversions over a given threshhold must be explained.
3. Physical Euros not recognized in Greece, other than for visiting non-Greeks to buy Drachma at a licensed exchange or bank. Maximum denomination exchangeable not more than 100 Euro note (see 4 & 5)
4. Border controls on physical Euro entrance/exit similar to what Russia did when they first allowed the ruble to float in the early 90s. Since Euros have a metalic strip, the PWOT has made them spotable by the x-ray machines abundant in airports. Limiting negotiable notes to 100 Euro makes transporting large amounts more easily identified.
5. Again, using the Russian model, visitor must declare foreign currency being brought in. On exit, total of foreign currency and receipts for licensed exchanges must equal that brought in, or foreign currency confiscated and possible fine.
6. Bank wires above a certain threshhold to foreign banks (Drachma to Euro conversion) can only be applied against a proper pre-registered invoice for goods or services. Personal wealth cannot be wired abroad. Since payments would be in Euro, payee has no risk. (on a humorous note, yesterday, I had to wire 400 GBP to a firm in the UK pay for some custom emblems they make for our Vespa society. The bank teller, a good friend, said, "Ah. Another fat cat Greek hiding his money abroad! I've finally met one.")
7. Once the Greek economy and financial system is flushed of Euros, allow the currency to float.
In short, the transition would remove all physical Euros from circulation in Greece and seriously hinder a flight of assets. The author estimated it could be accomplished in 6 months or less. Lots of work? Of course, but the mechanisms already exist.
First thing I am going to address is the basic process described by Al. Except for #1, it would technically work. But #1 is the killer and it fails to address the debt issue, which is the other core problem.
DeleteThe problem the Greek economy faces is that it is tied to the same Euro that the Germans use. The Germans have done a lot of things to ensure that the Euro has a very low inflation rate and retains its value. Nothing wrong with that and the Germans benefit from it. But the Greek economy is not the same as the German economy.
The Greek economy needs to have the currency float (or in this case, sink) immediately so the cost of its products are relatively similar to highly automated Germany when valued in Euros. The only way it can do this is through having a currency that is not pegged to the Euro. There is NO benefit to having your own currency if it cannot serve your needs. A Drachma pegged to the Euro is a Euro and currently the Euro is bad news for the Greeks.
The second part of the problem, the debt, is just as bad or possibly worse. If I recall correctly (and I'm probably wrong but I hope I'm in the ballpark) the Greeks are paying about 5% of GDP in debt repayment. The Greeks have had to completely restructure their economy in order to make these payments and this has led to thousands of lost jobs, many more than the Greek economy can sustain without shrinking. Let's do a little thought experiment here to illustrate the point. Al, try not to gnash your teeth too hard because the Greeks know this math all too well.
If 5% of the people in a country have no job then the ratio of employed to unemployed peoples is 19:1. Unemployment benefits can help carry the unemployed without raising taxes too high on the employed and new jobs can be made/found relatively quickly. At 10% unemployment the ratio is 9:1. This is hard, so many people are unemployed and too few employed people are left to support them. Overall spending shrinks which stresses businesses and causes more job losses. The Greeks are at 28% unemployment, a ratio of less than 3:1. At this point non-essential spending has completely dried up, homelessness is a major problem, and the economy is near complete collapse. This is where the US economy was in 1933 when FDR took office except that Hoover made some good moves in his last year in office so the Greeks are actually somewhat worse off than the US was at the height of the Great Depression. Without aid or relief from debt payments the situation will get worse, because the vicious cycle is now self-sustaining.
If the new Drachma is allowed to sink vs. the Euro, the cost of paying back the loan (valued in Euros) will grow substantially in Drachmas. This means that the Greeks will soon have major difficulties in paying back the loan and will quickly get to the stage where the only logical recourse is to default on the loan with the resulting backlash on themselves and the Euro countries. As I jokingly said before, all of the options are so bad that it almost makes sense for the Troika to start a shooting war to take people’s minds off the situation and to generate new jobs.
The only good economic move for the Euro leaders is to forgive a large part of the debt (50-75%) and to keep Greece in the Euro but that political cost is too high which makes the thought more of a pipedream than a plan of action.
Pluto
ReplyDeleteLet me clarify Point 1. It is one thing to devalue an existing currency, and another to create a totally new one while the previous currency is still in circulation. That's why he recommends that a parity peg would simply be for an unannounced short period, while the Euro is flushed from the country. Otherwise, people within Greece would be hoarding Euros to speculate on how far the Drachma would drop. It would also tamp down currency flight as Greek actors would want to pay external debts in advance or more rapidly than "normal" to lower the effective cost of payment at a higher exchange rate, and external actors would delay payment to Greeks to capitalize on the higher value of their foreign currency against a falling Drachma. In short, the immediate time of conversion and exit from the Euro is no time to have a serious motive for receivables to fall behind payables. "Float Day" would not be pre-announced, for if it were, actors would just sit on their Euros until that day, and then begin to capitalize on the dropping Drachma.
The above is predicated on Greece defaulting on all that debt as part of its exit, Pluto. There would be no other sane reason to return to the Drachma. According to the author, the above would not lessen the impact of the default on all parties, but it would lessen the follow on currency turmoil and the typical attendant financial damages.
After all is said and done, it has to be recognized that the current Greek debt package, as structured, ain't never gonna be paid off in full. Sadly, that is the fault of the lenders who designed the package. However, they were definitely motivated by doing something quick, to seem proactive AND take attention off the fact that the debt they were also being gracious enough to provide to Ireland and Spain was actually a bank bail out, covering those nations huge coverage of reckless banking loan bubbles that burst. So by making a big deal out of covering Greek public debt, no one really made a big deal out of billions being committed to cover what was really Spanish and Irish private debt, using the governments as an intermediary. The political backlash of that would have been???????
The bailout package was wrong from day one. Other options were available and not considered. A growing body of informed voices have stepped forward to say this. Yet, the architects of the plan have not, and simply demand more of the same. Solutions cannot even be begun to be discussed until each and every member of the original gang designing the plan says those three magic words, "I fucked up". That's the political barrier currently in place. Those who truly believe that an admission of a mistake is a sign of weakness, rather than a sign of an ability to learn.
Thanks for clarifying point #1, Al. That makes more sense although I will note that there are likely to be some leaks in the concept but it will be better than nothing.
DeleteYour comments on the cause of the mess start only part way through the process. The first cause was people and organizations deciding that they wanted to invest it in Greece without proper oversight. Oversight of the deployment of invested money in a foreign country tends to be really hard. There are a lot of language and cultural issues that make it hard to understand where your hard-earned money is going and even harder to understand whether or not it is a good idea. What works great in one country is a disaster in another country. That said, the foreign investors in Greece needed to do far more than they did to understand how their money was being used.
But the blame does not stop there, as in so many other disasters, it takes multiple groups to cause a disaster of this magnitude. Greek leaders have admitted that they lied about the profits and benefits generated with all those loans. I don't know where that money went but sometime soon somebody is going to have do some forensic accounting and put the people who were responsible for the greatest misallocation of funds on trial to help Europe get some sort of sense of closure on this mess.
In 2008, in the moment of crisis, when people rarely think clearly, the general agreement among the world's leading politicians was that the governments needed to step in and make sure that their investors did not lose money. The theory was that the investors had learned a great lesson and would make the world a better place if the government helped them out this once. This was profoundly naïve, wrong and stupid and might cause more trouble in the future than any other idea in the history of the world.
All of the best economists, Krugman, Roubini, and Schiller among others warned against this but were drowned out by a tidal wave of less capable economists with theories they wanted to try out and the politicians wanted to hear the more radical ideas than the more historically-based theories. As we all now know, what the investors learned was that the could safely invest in anything they wanted, regardless of risk, because the politicians would swoop to the rescue regardless of the risk to the taxpayer. Needless to say, this has not made the world a better place.
Now the politicians are trying to get their own legs out of the bear trap and they are discovering it is much easier to get in than it is to get out. We do not yet know the final price but it is likely to be very high.
Pluto-
DeleteMany years ago, while I was a young teen, my uncle impressed upon me a very important lesson. When, after the fact, I admitted that I erred in ignoring advice he had given, saying, "You were right", my uncle said to me, "No. What I said was right. There is no 'who' to right, just 'what'." Over the years, I witnessed many occasions where he gave that same corrective advice to me (slow learner) and others, and it finally stuck. Good people can make "wrong decisions" and still be good people. Bad people can do what's "right" and still be bad. What is "right" has no relationship whatsoever to who might have said or done it. Personifying "right" is a dangerous path, as it leads to great egos and cult followers.
Energy spent identifying who was wrong, while a population is suffering from what is wrong is just plain stupidity. There will be plenty of time to identify, apprehend adjudicate and, if convicted, punish the offenders. Had such logic been applied to post war Germany, the change in allied treatment of the German people would not have begin until long after 1948, and the German population would have collapsed. Instead, the German society was propped up and supported for a long run, while the apprehension and trial of German and German Ally war criminals continued for decades.
The Greek people are suffering from an ill conceived bailout package. What is economically "right" for Greece and concurrently all Europe is the task at hand, and sadly, it ain't as simple as it would have been 5 years ago. Some irreparable damage has been done in human terms, and will continue to be done unless a correction is made. Don't turn it into a morality play.
***Rant alert***
You may wonder why I say "German" and not "Nazi". Well, current German leaders, by their own example, have convinced me to drop the long nurtured and politically nice practice of only blaming it on the "Nazis" and granting forgiveness to all the millions of nice, kind Germans who never "really were Nazis in any manner and really didn't know what was going on". Had current German leaders limited their blame laying on only the Greek oligarchs, industrialists, finance magnates and politicians who drove the country into bankruptcy, rather than just blaming it on "Greeks" or "The Greeks", I may have continued in my former politically correct ways. However, Frau Merkel, Herr Schauble and others in the German government, as well as the German press continue to deliver a blanket indictment to every last Greek. I live amongst the Greeks and with the Greeks, and believe me, a much higher percentage of the Greeks were neither responsible for nor aware of the abuses that caused the bankruptcy than Nazi era Germans were not responsible for nor aware of the crimes against the Jews, no less the many other crimes of their people.
In a twist of ironic history, one of main the reasons for reversal of JCS 1067 was the fear that the suffering Germans would turn against the Allies that were imposing the suffering, and lead them to accept help from Stalin. Now, Frau Merkel has her panties in a twist over the thought that the suffering Greeks may turn to Vlad Putin for relief. Is she even slightly aware that the rescue of her country, its people and economy was in no way primarily due to any perceived merit or virtue inherent in the German people, nor due to humanitarian concern for the German people, who were seen as barbaric subhumans. Rather, it was primarily to avoid either European's economy perpetually being dragged down by a poor, agrarian Germany (Churchill), or the German people turning east for their salvation (Truman)?
***End of Rant***
Al, your uncle was basically correct and I live by a very similar rule (which has driven certain nit-picky supervisors nuts over the years). BUT the general details of this sorry episode MUST come to light some day in order for governments to learn from their mistakes and for millions (perhaps hundreds of millions) of suffering people to have some closure.
DeleteI'm not interested in holding witch trials. I'm not even interested in holding Nurnberg-style trials (unless the situation gets as far as war and concentration camps, and it could). I AM interested in holding the actions of all parties up the to light and saying, "What were the results of their actions? Could things have been better if they had acted differently?" You are correct that this scrutiny can wait but it must occur in the next decade or two (which is a short period of time to my way of thinking, this comes from being an amateur historian and working with too many Geologists).
One reason for this scrutiny is a question my father occasionally asked when he thought I was being acting stupidly. The question was, "Why are you so sure that your role in God's plan is not to set a bad example for others not to follow?" As I get more experienced in life, I find myself doing a quick double-check to make sure that I'm not doing something profoundly stupid more and more frequently. This has saved me more pain than I can ever identify. It is pretty obvious that a lot of people failed to exercise similar restraint and history needs a better understanding of how (to paraphrase Churchill) so few caused so many to owe so much so quickly.
Pluto,
DeleteWe are on the same sheet of music. We all have to learn from the current fiasco, take appropriate and available corrective action and do it without pride of authorship. And yes, the miscreants must be identified and brought to swift, objective justice. However, the numbers crunchers and policy wonks need to also keep in mind that a whole lot of people are suffering.
I remember, back before the bailout was being drafted, and Frau Merkel was stalling in order to boost her party's chances at the polls, a Belgian member of the EP passionately saying something along the following lines at a EU Parliamentary session:
How dare you, Frau Merkel, let the coming polls keep you from acting? How dare you delay on this important matter. Every day you force us to delay finding a solution, the situation in Greece and Europe worsens. This honorable man (Greek PM) has admitted to his governments failures and has turned to us for help, and every day you dally you willfully make his job harder and the suffering deeper, only to cater to your political ambitions.
Now, IIRC, his castigation lasted a lot longer than the above, but that's the gist.
Blind adherence to the current bailout conditions is similar in logic to debtor's prison. It may extract vengeance, but it ensures that the person to whom that person is indebted will not get the money he or she may need to put food on their table. I won't even begin to address the strong overtones of "The beatings must continue until morale improves".
And Krugman's column today makes a similar point - that a big part of the problem here is that the firces in the EU appear to be basing their position on mistaken assumptions about the new Greek government:
ReplyDeletehttp://krugman.blogs.nytimes.com/2015/02/09/greece-the-tie-that-doesnt-bind/?module=BlogPost-ReadMore&version=Blog%20Main&action=Click&contentCollection=Opinion&pgtype=Blogs®ion=Body#more-38108
"Why, then, are things boiling over? Partly because what “everyone knows” has never been explained to northern European electorates, so that the time to recognize reality is always at some future date. Partly also, I suspect, because creditors have come to expect the symbolism of debtor governments abjectly abandoning their campaign promises in the name of responsibility, and are waiting for the new Greek government to pay the usual tribute of humiliation.
But a genuine government of the left, as opposed to the center-left, is very different — not because its policy ideas are wild and crazy, which they aren’t, but because its officials are never going to be held in high esteem by the Davos set. Alexis Tsipras is not going to be on bank boards of directors, president of the BIS, or, probably, an EU commissioner. Varoufakis doesn’t even like wearing ties — which, consciously or not, is a way of declaring visually that he is not going to play the usual game. The new Greek leaders will succeed or fail, personally, based on what happens to Greece; there will be no consolation prizes for failing conventionally.
Do Berlin and Brussels understand this? If not, they are operating under a dangerous misconception."
Interesting news is that the German newspaper, Zeit, reported that a poll following Syriza's victory and public exposure found a majority of Germans sympathetic towards Greece, the exact opposite of the findings two years ago.
ReplyDeleteI doubt that the new Greek government will cave. Frau Merkel would thus be faced with two possible choices. 1) Do an Alan Greenspan as say how shocked she is that austerity had some minor flaws, and thus get on board with some "course corrections" to prevent a Grexit or 2) Keep digging in her heels and be the German Chancellor who presided over a major EU weakening disaster. Either way, her 5 years of intransigent blind backing of a failed package is going to hurt her legacy, because, as Krugman says, "everybody knows" the bailout was ill designed to begin with. Do you think that voices that have been generally silent aren't going to jump on the bandwagon and be counted amongst the "everybody" that knew? It's just a matter of which option the good Frau thinks will do the least damage to her legacy. Either way, she's sure to throw Herr Schauble under a bus.
What you say makes sense, Al, but I do not know. The Troika and common sense have not been in communication these last few years and I cannot yet see a reason for that to change now.
DeleteTheir public comments seem to indicate that they think they are in full control of the situation and that the Greek government is nuts. I cannot understand their reasoning but I never could.
Pluto-
DeleteYes, in light of the facts on the ground, the actions of the proponents of the bailout program, or "Austerians", as Chief so aptly named them (little levity - We don't use the T-word in Greece any more, but we do use the N**i-word), make no sense in real terms. I am not sure they think they are in control of the situation, as clearly they are not. What they are in control of is the doling out of scheduled loans, which the previous government believed were vital to Greece's survival. For the past 4 years, the Austerians have said that the next loan tranche was predicated on meeting program standards on the lenders set. The next loan tranche date would approach, the Austerian examiners would arrive and check our homework and the government held its breath to hear if they got a passing grade. Not a passing grade on recovery, growth, or lessening human misery, but program compliance.
Note that the Austerians no longer predict any real benefit from the program, but rather are simply saying, "A deal is a deal, and to get February's 7 billion, you have to be on program." Suddenly, Varoufakis and Tsipras say, "What 7 billion? We don't want no 7 billion. The loans have been the problem, not a solution." The Austerians came ready and equipped to play baseball, and the Greeks had reconfigured the stadium to football and showed up in full home team gear, with heavyweights like Krugman providing the game commentary in the broadcast box, other respected voices in Greek Cowboys' Cheerleader outfits, and more and more people in the stands painting their faces Blue and White. Perception, Perception, Perception.
The UK, however austerely it runs its affairs, has not fully backed the Austerians re Greece, The other day their PM held a cabinet meeting to discuss how the UK would defend themselves from the serious economic consequences of a Grexit being forced. That is not pressure on Greece, that's pressure on the rest of the EU not to force the issue. Perception, Perception, Perception.
Syriza didn't just change Greece's "stance", they changed the game and the playing field. Even the issue of whether or not Greece belonged in the Eurozone in the first place has taken back seat to the damage forcing them out could cause. All that is left for the Austerians to do is decide whether they wish to force a Grexit or find a way to have an "Alan Greenspan moment" and blame it all on absolutely unforeseeable factors.
If the Austerians had simply let Greece collapse and exit in 2010, Frau Merkel's legacy would only suffer a debate over whether or not that was prudent. Her defenders could easily say that Greece didn't belong in the Eurozone to begin with, and joined via subterfuge. However, once committed to "preserving the Union" via the bailout, a Grexit will be a simple fact of history on her record. All that can be debated is why she wasn't able to hear the many respected voices who supported the Greek alternative.
If you don't think Frau Merkel's attention is not on her reputation and legacy, you are sadly mistaken. And to make Frau Merkel's situation even more politically dicey, her point man/attack dog, Herr Schauble, has a long history of never making an admission of the slightest error, not even as weak and oblique as that made by Greenspan. No way in hell she's going to get him to have a new "awakening".
So back to grand strategy. Syriza has, in just two short weeks, changed the playing field, changed the game and changed the dialog, continuously gaining allies at the same time. Anyone want to speculate what is the Austerian center of gravity that they are attacking? That's the real question, not competing economic theories.
"Interesting news is that the German newspaper, Zeit, reported that a poll following Syriza's victory and public exposure found a majority of Germans sympathetic towards Greece, the exact opposite of the findings two years ago."
DeleteI looked this up and cannot find any confirmation for this, even though I found the articles about the poll.
What i found was the figure of 68% of Germans rejecting a debt cut.
Al: "If you don't think Frau Merkel's attention is not on her reputation and legacy, you are sadly mistaken"
DeleteSven: "What I found was the figure of 68% of Germans rejecting a debt cut"
I agree with both of you and agree with Sven that Merkel will play for her home crowd. This is what I find so troubling. The Greeks, with the last election, have changed the game. The Troika leaders, because of past and recent statements cannot adjust to this; they can only reinforce their current position or admit that they were foolish. The nasty thing about all of this is that the longer the Troika refuses to cooperate with reality, the more they burn the credibility of the Euro as a whole, which has mostly served Europe well.
The Austerian center of gravity is not on the offensive at all. Their center of gravity is that Greece will come to realize what a hellish situation they will unleash upon themselves if they continue with their plan and default on the debt and will come to heel at the last moment. Everything the Austerians will do and say for the next few weeks will be to emphasize this, becoming increasingly tone-deaf about how the rest of the world will hear their message.
What the Austerians fail to realize is that the Greeks have already been through one Hell and have come to realize that they are in charge of their own destiny, and are even in control, to a certain extent of the destiny of the Euro.
I imagine that discussions between the Troika leaders and the Greek governments run along the lines of:
Troika leader: "You must do what we say or you are doomed."
Greek leader: "Based on past experience, we will be doomed if we do what you say"
TL: "You don't understand, we will not give you any more loans unless you follow the plan"
GL: "We don't want any more loans, they are killing us"
TL: "The loans are our gift to you and cost us dearly. You cannot stay in the Euro zone without them."
GL: "That is true but increasingly irrelevant because staying in the Euro zone will destroy us."
TL: "You can't default on the debt, that would destroy my personal reputation and rip a hole in the Euro."
GL: "That is right. What will you give us to keep us in the Euro."
TL: "You threaten the Euro! You're a mad terrorist, we will not submit to terrorism!"
And then it goes downhill from there.
Sinclair Lewis once wrote that it is impossible to explain something to a man whose job depends on him not understanding it. That is the situation here and the Greek government has only a month before they run out of money. The Troika leaders and the Greek leaders both see that as the advantage that they can use to force the other side to come to reasonable terms.
I will make a prediction, lots of meaningless words (to the other side) will be exchanged. Solemn vows on all sides will be made to stay the course. Then, about a week before the deadline, somebody is going to realize how serious this is. But both sides will have painted themselves into corners. I cannot predict what will happen after that.
Sven - according to a reputable Greek language paper's coverage, the Emnid Poll reported that 62 percent of Germans want Greece to remain in the Euro, a significant difference from 2 years ago, when the majority would have been happy with a Grexit. At the same time, 68% do not want a "haircut" to be allowed. In short, Frau Merkel could sell a different program to her constituents if she wraps it in reasonably pretty paper,
DeletePluto - Greece only "runs out of money" if it attempts to pay its debt without further loans. Part and parcel to a Grexit, as Syriza sees it, is a default, and the debts that would no longer be paid would no longer drain Greek accounts.
A Grexit is far more complex than what has made the news. It is not your "normal" default. When Argentina and Iceland defaulted, it had no affect on their international treaties. Bilateral and multilateral treaties are what keeps international relations, commerce and movements of people on an even keel. Because Greece is a signatory to the multilateral treaties that create the EU and Eurozone, rather than multiple bilateral treaties with the member states, a Grexit would result in no treaty provisions between Greece and the EU/EZ states. However, treaties between Greece and the remaining sovereigns of the world would be unaffected. Such treaties address more than economic issues. Under the treaties between the US and Greece, my resident status would be unaffected by a Grexit. However, every citizen of another EU country residing/working in Greece could instantly become a transient, requiring appropriate resident/work permits to remain in the country longer than 90 days.
Your hypothetical dialog is spot on. Greece is challenging those who had once wielded what they thought were effectively dictatorial powers. The question is whether or not the Austerians will come to grips with the fact that they have imposed so much suffering, with no end in sight, that the Greeks may just be willing to endure a bit more intensity, simply to know there could be an end in sight. To the people of Greece, as well as a growing body of people in other nations, the Austerians meet the definition of insanity - demanding we do the same thing over and over in the expectation that different results will finally occur.
A Brit on our island, who has lived here 20 years, wrote: One British news outlet called it a "game of chicken", and someone must swerve to avoid a mutually catastrophic collision. However, if one of the players truly thinks it's seat belts, shoulder harness, air bags and roll bars with withstand the collision, it is no longer "chicken". It's an invitation to the opponent to self destruct. Perception, Perception, Perception.
"the Greeks (...) have come to realize that they are in charge of their own destiny, and are even in control, to a certain extent of the destiny of the Euro."
DeleteOwe the bank money and you're in trouble. Owe the bank very much money and the bank is in trouble.
The Greek governments have understood this trap for years and it's the reason why no matter how drastic the conditions set by the Troika were, Greece didn't come close to meet them fully. These past Greek governments exploited the trap to get additional money.
The current government has a different plan; it wants to exploit the trap to cut on obligations to pay back what the previous ones have taken in.
There may be a tipping point at which the other governments are fed up or replaced by other parties, and imply turn against Greece.
The current Greek government may have ignored an important problem:
It's offering the worst case scenario (de facto default) as its offer to European partners.Why would they be motivated to agree? Aversion against austerity or not, nobody has to fear any consequences for opposing Syriza et al if the alternative to it is just as bad.
Again; I thought from the very beginning, that they should exit the Euro currency area and then de facto default by converting the bonds into the new national currency. Three years of economic crisis and very high inflation and then catch-up to long-term econ growth path.
What I feared ever since all these 'rescue packages' were made is that the Greek government merely lends more money to repair economy and state to the point where it needs no net influx of capital any more. This point has actually been surpassed a while ago. Now they get brazen, aggressive, ungrateful, insulting - and risk default. Quel surprise!
Al, you are correct about what I meant when I said "runs out of money." That is when the negotiations stop and the knives come out. I am not at all sure that you are correct about Frau Merkel's options. As a matter of fact, I'm pretty sure you're dead wrong but have no facts to support my opinions.
ReplyDeleteNon-US members may find it interesting that the press in the US is confused and confusing on the topic.
The business press reports that "Greece is putting a brave face on their stance in the negotiations" but expects the Greeks to see reason and agree to more loans, preferably as quickly as possible. The Euro zone is too important to US businesses for them to be able to understand that things have changed. There is absolutely no understanding of what the Greek people have endured because of this bias and no interest in understanding the Greek perspective. I find these articles to be entertaining but not informative, what the US business press thinks about this crisis is useless unless you want to better understand the US business community.
The political press is somewhat less biased in favor of the Euro zone but still cannot see why Greece would not benefit from staying in the Euro zone. From their perspective, it looks like Vermont threatening to leave the US. Again, there is absolutely no understanding of what the Greek people have endured because the US political press fundamentally does not understand the difference between the EU and the US and sees no reason to learn. These articles are more interesting but just as useless and a continuing cause for concern because the readers of these articles set formal US policy.
Most general news sources limit themselves to "the two sides are talking." Which is not factually wrong, for a change, but not very accurate either.
Fox News, of course, is in a world of its own that bears no resemblance to reality but 26% of the US is hooked on them, especially the US military, and another 20% find them influential.
Krugman and a few other sources are offering interesting and accurate descriptions of what is going on but they are mostly Euro-skeptics and are being ignored or shouted down by other news sources that prefer pretty propaganda to actually understanding the situation.
According to the BBC:
ReplyDeleteEU officials have so far rejected his efforts to renegotiate bailout terms, although German Chancellor Angela Merkel has said she will wait to see if Greece puts forward "a sustainable proposal" on Wednesday.
And:
The BBC article also quotes the Greek Defense Minister (a member of the junior party in the coalition)
"But if there is no deal, and if we see that Germany remains rigid and wants to blow apart Europe, then we have the obligation to go to plan B.
"Plan B is to get funding from another source. It could be the United States at best, it could be Russia, it could be China or other countries."
Frau Merkel shows some willingness to listen, and the Greek Defense Minister suggests the outcome of not listening and accepting?
The problem with the threat to get financing from another sources is where? As things currently stand, the US will not loan the money. The business community has bought completely into the Euro zone leadership position because they need and want the Euro zone leaders for their own reasons. The US political leadership also favors the Euro zone leaders; they will probably think of rejecting financing as "forcing the interested parties to come to an agreement."
ReplyDeleteRussia is not a good source either, two major reasons:
1) The Russians are hurting financially, they would need to borrow the money to loan to Greece
2) NATO is going to be extremely harsh if they hear even a whisper of a possible deal. I am not sure that Greece is ready for that kind of pain, I think defaulting on the debt would be less painful.
China has the assets to offer a loan to Greece if they see enough benefit, but it probably isn't a good choice either, also for 2 reasons:
1. What little information is escaping the Bamboo Curtain suggests that they may be in an enormous amount of financial trouble themselves. The most recent tidbit is that last month Chines imports dropped 20% and exports dropped 3.2%. They may be experiencing a recession, which is reasonable for a country that has relentlessly grown for the last 25 years
2. The Chinese are very shrewd businessmen and will reliably extract an arm and a leg for their help. They don't do favors they collect debts with nasty interest rates and riders
The Japanese could also do the loan but are unlikely to do so to keep good relations with the US and the EU
No argument with you on the Defense Minister's off the wall remarks. He's not a key player in the dealing. However, they do fit into the general thrust of the narrative you posted above. ;-)
ReplyDeleteThere has been one common theme on both side of the debate in the last 24 hours or so. Greece has said it would take time to properly put an alternative plan, once approved, in place. Thus the "bridge loan". Various key players amongst the EU/EC/EZ leadership are now saying that they will not accept nor reject Greece's plan in the next several days, as they will need time to consider it. That's a far cry from the previous line that any Greek proposed departure from the original bailout terms will be turned down out of hand this week and next, as the various bodies meet. They may not have moved towards each other yet, but they seem to have moved away from brinkmanship a bit.
I hate to bust bubbles, but just slightly less than I hate to see people form unrealistic expectations that will get shattered. The more reasonable situation is that the EC/EU/EZ leadership have learned that the bull rush isn't going to work. Next tactic is to stall for time and let their "secret" weapon, the need for more capital infusions, work their magic.
DeleteThis mess could straighten itself out if the Greek government can actually come up with a viable alternate plan which is highly unlikely given the positions of the people on the other side of the table. The more likely result (based on watching the Republicans here in the US) is that the plan will be rejected in favor of a "balanced" approach, which will be identical to the original Troika position. Both sides will then be able to say that they tried to compromise but could not because of the intransigent people on the other side of the table and can safely move on to the next level of the conflict.
In case you were wondering, the best part of being a deeply pessimistic person is that all of your surprises are pleasant.
Pluto- I am more intrigued than optimistic.
DeleteThere are basically three possible outcomes. A new, less painful program. More of the same. Grexit. Two involve more social and economic pain and social upheaval. The question is, if the Greek people are to be required to bear more suffering, do they have the will to make it suffering of their own volition or just accept that which is imposed. That is, a political question, not an economic theory one.
It is interesting that Frau Merkel said she will wait to see if Greece puts forward "a sustainable proposal" on Wednesday, while at the G20 in Constantinople, we heard this from Herr Schauble: "We are not negotiating a new program. We already have a program,” As to Greece refusing the offered 7.2 billion loan and the attached program extension, he simply said, "Then that's it."
So Frau Merkel alludes to a willingness to listen, and Herr Schauble says "my way or the highway". What is the German position?
Sven told us the German position over a week ago, I have copied his comments below.
Delete"Merkel is 100% about retaining power, and the risks she accepted are high enough that a 50% debt cut for Greece would end her chancellorship with the next election in disgrace. She's now awaiting what the Greek government does and lets others grind the sharp edges of Syriza off (other European governments are at political risk as well). I suppose she'll seek some solution which avoids Germany paying billions because of its guarantees. She'll try to find a solution that camouflages the disaster to the German public by delaying losses into the future.
This solution wouldn't necessarily be in anyone else's best interest."
"So Frau Merkel alludes to a willingness to listen, and Herr Schauble says "my way or the highway". What is the German position?"
DeleteFor better understanding: This is how it works in Germany:
The Chancellor isn't in perfect command, but has merely the power to tell a minister guidelines or to ask the federal president to relieve the minister.
Mr. Schäuble is well-anchored in Merkel's own party and quite proofed against being relieved for anything short of a scandal.
The transition from heterogeneous voices to a German policy position requires an unofficial step and an official step:
Unofficial - Merkel, Schäuble, Steinmeier and the two leaders of the CDU/CSU and SPD factions in the parliament would talk behind closed doors.
Official - The topic would be discussed at a cabinet meeting (Merkel, Schäuble, Steinmeier and several other ministers) and a position would be found.
The unofficial step may at times be the more relevant one.
Right now there's no reason to decide anything because there's no proposal up for discussion.
By the way; the members of parliament may become angry if they're being asked to permit some loan guarantees or something similar within a few days. They've had such last-minute legislation efforts before, and may perceive it as a deliberate attempt to suppress their rightful participation, even if their faction leaders are fine with the deal.
I received the following from a retired GOP campaign strategist who exited the playing field long before the Teabaggers made him somewhat ashamed of the party he worked for most of his adult life. He and I were good friends back in WA state.
ReplyDeletePersonally, I think Varoufakis is, indeed, a "rock star" in virtually every way. He's what Sarah P thinks she is in her most deluded dreams, not to mention some other deluded dandies from both sides of the aisle that are on the stage right now.
I wonder. It is not unusual for PMs and senior ministers to aspire to life after local power. The EU/ECB, etc, along with the IMP, World Bank and other supernational institutions are filled with former key players who were able to avoid screwing up. OK, there is that French guiy with the problem with the zipper in his pants, but that all happened after he moved out of national politics to the IMF. The former Luxembourg PM seems to have gotten to the EC Presidency before people started investigating the tax dodge heaven he helped create. Clever sleight of hand, so far.
As long as you are not too old and don't have a visable pidgeon dropping on your record, there are greater glories to chase. Thus, many of the "Austerians", as your friend calls them, have their future supernational aspirations at risk if they don't deliver the goods, or appear to have not delivered the goods. Of course, the two new Greek guys seem to have successfully stirred debate over what the goods really are, no less if they were good to begin with. So, my bet is that a lot of the Austerians (I really love that term) are trying to determine which side of the fence poses the least threat to their own ambitions. I'm sure you remember my saying, way back when, that straddling the fence too long only raises the odds of a picket going up your ass, so once the good old sphincters begin to feel penetration, folks are going to have more and more incentive to pick a side. Not sure sphincteral penetration is the best basis for decision making, but it is definitely a time honored one. So things could get stupid.
Now, what about the Rock Star and the new PM. I read an interesting article about their choices. Fact of life, with which I agree, is that these two are far too Marxist to be acceptable to any supernational body in the Western World, even if they pull off a miracle in budging the Austerians and bringing Greece to a recovery. They may gain world wide respect, but the establishment is never going to invite them to their gentlemen's club. Women, to a certain extent, OK. Untucked shirts, no ties, motorcylcle riding and Marx, especially Marx, are not welcome. They both strike me as smart enough to know this route is out of their future, and probably don’t care.
So, they succeed and become great figures in Greek History, serve in the Greek government as long as they wish and their party stays in power, or, leave for the lecture circuit, or go back to their previous successful professions, academia (Varoufakis) or civil engineering (Tsipras). Both would be very employable.
Now, what if they fail? They tried to take on the entrenched establishment and failed. Not like that doesn't happen on a regular basis, at all level of government and business. At least they didn't bend over and spread their cheeks, so they get high marks for courage. And, they still have the lecture circuit and their home professions. More thoroughly discredited politicians have gone on to successful academic careers, and civil engineering knows no political ideology.
So, who faces the greater personal and professional risk? The Austerians (I even like typing that word) or the Greek Boys. This will make many of my departed GOP colleagues spin in their graves, but I am going to have to admit that I really like these guys. But then, you know that I am, under great duress, capable of trading ideology for objectivity. Especially exciting objectivity. Hope these guys do you and your Greek friends and neighbors well.
ReplyDeleteThis commentary in ekathimerini is an excellent example of the wrong headed and factually false opposition the current Greek government faces. Herr Dr. Görlach is so wrapped up in visions of German superiority and "The Blame Game" that he is oblivious to the actual problem that the current Greek government is trying to address. The "problem" is no longer the state of affairs 5 years ago, no less whether Greece should have entered the EU, or how we "snuck our way in" two decades ago. The PROBLEM today, 15 Feb 2015, is the solution (terms of the bailout) that was imposed upon Greece and the disastrous humanitarian and economic toll it has taken since that solution was imposed. The solution that failed to accurately predict, or chose not to predict, the toll it would take on society.
The blame, if blame for the current situation is important to Herr Dr. Görlach, for the disastrous impact of the solution rests on the authors of the solution, along with those who continue to refuse to admit that even the slightest error in the design of the solution might possibly exist. If you look closely, Herr Dr. Görlach, Germans, very prominent Germans, are numbered amongst those who authored the failed solution, no less amongst those who refuse to admit the slightest error in its design. So German complicity and blame are present all the way back to day one, just in varying degrees. Or are you arguing "honor amongst thieves" to obfuscate the obvious?
There are a fair number of people in this world who would strongly agree with a stereotype of Germans that they refuse to admit that they might ever be wrong. While I am not a proponent of stereotypes, I must say that Herr Dr. Görlach seems to be going out of his way to reinforce such a view. The reality, Herr Dr. Görlach, is that at virtually every step of the way, each and every player in this drama made at least some error. Believe it or not, we are fallible humans, not infallible gods. For example, Greece could not have "snuck" into the EU if Germany had done full due diligence. Or, or you suggesting that Germany was duped, because Germans are dumber than Greeks. And the list could go on.
But the issue at hand is not who fooled who way back when. That's a red herring. The issue at hand is the state of affairs today, and if continuance of those affairs shows any promise of a reasonable outcome. The answer to that is pretty obvious. One would be hard pressed to find anyone of reasonable intellect or credentials that would bet their career, no less the suffering of the Greek people, on the idea that the program in place has any chance of a positive outcome in the foreseeable future. The most vocal supporters of the program defend it only in terms of "a deal being a deal", or words to that effect, not by offering factual evidence that it might be the right solution.
I do not envy the task before our elected representatives in dealing with intellectual dishonesty such as this..
Speaking of intellectual dishonesty, I find it interesting that Herr Dr. Görlach states, " Chancellor Angela Merkel allowed the European Central Bank to flood the market with fresh euro bills". Nowhere in the charter of the ECB has any head of state the authority to "allow" or "prohibit" such actions by the ECB.
Such is the atmosphere in which a rational discussion of what can be done to end a humanitarian and economic quagmire is going to be discussed? Makes ya kind of wonder.
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