Simon Wren-Lewis ruins (for me) what would otherwise be a very good sensible keynesian post about Greece ("sensible keynesian" is a school of thought, to which Simon belongs) by leaving out trust. Or, if you want to be techie about it, the "time-consistency problem".
If you give me one apple today, and I give you one banana tomorrow, we might both be better off. In which case, it would be irrational for us to fail to make the trade, wouldn't it? No, it might not be irrational at all. Because when tomorrow arrives, and I have already eaten your apple, I gain nothing by giving you a banana. So if you don't expect me to fulfill my part of the deal tomorrow (if you don't trust me), you won't give me an apple today.
Nearly all trade, especially intertemporal trade, requires trust. Or some third party enforcement mechanism to substitute for trust. Or a reputation for keeping promises in repeated games. Or something. And in the absence of that trust, or something, we are in the Hobbesian State of Nature, where Pareto Improving exchanges don't get made, and that's why life is nasty brutish and short. Think about drug deals in movies, and all the problems the traders have in making sure they don't get ripped off.
And in the case of Greece, or at least its current, previous, and prospective future governments, trust is a bit of an issue. We wouldn't be in this mess today if Greece had always kept its promises in the past. Debt is a promise. Now sure, sometimes people make promises in good faith, and then unexpected stuff happens, and it becomes a lot harder for them to keep their promises than they thought it would be. So it's never quite as simple as yes/no. But hell, let's just take the most recent little example.
The current government of Greece promised its people that if they voted "no" in the referendum they would have a deal within 48 hours. I remember thinking at the time that it seemed extremely unlikely that that would happen, and it seemed to be a very imprudent promise to make. But I figured that the government of Greece must know something that I didn't know about some secret deal that was just waiting to be signed, or something. After all, even they wouldn't make such a blatant attempt to lie to their own people to sway the vote, if it would be so totally obvious so quickly after the vote that this was just one more broken promise. They must have something up their sleeve. But no. It turned out to be just one more broken promise. And everyone seems to have forgotten it, except Hugo Dixon. After all, what did you expect? Greek government promises blah blah.
A deal in which Germany gives something to Greece today, and Greece gives something to Germany tomorrow, would make both Germany and Greece better off. But it is totally unsurprising that the Germans won't agree to a deal like that, if the Germans, unsurprisingly, don't trust the Greeks to deliver.
Here's Simon:
"To achieve this efficient outcome may well require the government to reduce its primary deficits gradually, because without this fiscal support while competitiveness adjusts output could fall rapidly. This in turn will require more government borrowing, and if the government cannot do this from the markets, the IMF or other governments should step in to ensure this efficient adjustment can take place and avoid the waste and suffering of unnecessary unemployment.
Worthwhile Canadian Initiative 
I have asked this question to Simon on his blog a few times and I never get an answer so I’ll ask it here again…
Your post assumes that there are 2 players in the game. But I don’t really think that’s quite correct. There are really 3 players: Germany, Syriza and the Greek people.
Even assuming a fairly positive multiplier, it will be the Greek people and not the Greek government which will accrue most of the benefits. So you need the Greek people to accept a fairly high level of taxation before Syriza can repay Germany. How much taxation? Since we need to repay the initial loan you need:
(xer * tax rate) > (1 + risk free rate + risk premium)
This implies:
tax rate > ((1 + risk free rate + risk premium) / xer)
I would argue a realistic estimate is 70% ((1 + 0 + 0.05) / 1.5).
So Germany needs to believe 2 things: Syriza will raise taxes massively and the Greek people will accept 70% tax rates…
I think this is a very tall order to be honest… Has any population ever accepted such taxation? I am not convinced…
What do you think?
Obviously the above tax rate is the marginal tax rate on the additional activity, not the actual tax rate… So maybe not as impossible… But still seems pretty high.
acarraro: in a simple Keynesian Cross model, with a unique stable equilibrium, I don’t see any way to get tax cuts to “pay for themselves” (i.e. a Keynesian Laffer curve). You are right. But if you add the real exchange rate into the model, and let the real exchange rate slowly fall to increase net exports while the government slowly increases taxes and cuts spending, the economy can stay at “full employment” while paying back its creditors. If you had a flexible exchange rate (if Greece had its own central bank) the nominal exchange rate could depreciate very quickly. But given the Euro, a depreciation in the real exchange rate requires nominal wages and prices of Greek-produced goods to fall, which will only happen slowly. So if you try to make Greece tighten too much too quickly, the economy collapses.
The UK managed debt/GDP ratios of 200% without default, a couple of times in its history. Greece’s debt/GDP ratio would come down quite a bit below that if its economy were performing properly. Though the demographics and long-run growth potential for Greece maybe look worse. Though the UK tax system in the 19th century was maybe worse than Greek’s today.
Simon Wren-Lewis ruins (for me) what would otherwise be a very good sensible keynesian post about Greece (“sensible keynesian” is a school of thought, to which Simon belongs)
Nick, I know this post is really about something else, but I’m curious whether you actually believe this part about the keynesian argument being “very good sensible?” What do you think the multiplier is on a temporary fiscal (relative) loosening amid an orthogonal monetary policy regime for a country like Greece?
“would have a deal within 48 hours”
beyond hubris and even self-delusion – sheer recklessness and total irresponsibility
not a good back-drop for trust
dlr: Hmmm. Yes I think I believe it. Theory and evidence seem to show a keynesian multiplier under fixed exchange rates (since there’s no monetary offset). How big? If the banking system were sound, maybe not very big, especially for a smallish and rather open economy, with a large import propensity. Ballpark 1.5?? But if the banking/monetary system is fragile, so we are talking about saving the banks as well, it would be bigger. The effect is only temporary of course, but if the economy is on the verge or returning to barter and total collapse, temporary could be quite a few years.
JKH: from the NYT:
“From time to time, however, Mr. Tsipras would push Mr. Varoufakis into these meetings, joking to his aides that he enjoyed seeing Mr. Dijsselbloem and Wolfgang Schäuble, Germany’s finance minister, squirm as the Greek finance minister lectured them on the need for debt relief.”
Hey, wouldn’t it be fun to piss off the bank manager even more, as we try to get one more extension on the loan!
How many Greek lives and jobs did that enjoyment cost? And yes, not a good backdrop for trust.
Some people are good academics but shouldn’t be allowed out unaccompanied by an adult. As Tyler Cowen said when they were first elected: the only thing worse than Very Serious People is Very Unserious People.
As usual, I’m torn between the conspiracy theory and cockup theory. But I think the cockup theory is winning. Clowns.
Totally ignoring current events, at least as first, I’d like to point that the Hobbesian State of Nature is kinda required for the pareto efficient outcomes. Once you throw in social bonds, then deals don’t get made — you can’t price gouge for example, to your neighbor. And you can’t hire your friend for too little. Trust here is just a rarefaction of a whole web of reciprocity that goes much deeper than repaying debts. But at the same time, without the web social mores, you can’t do business.
OK, back to current events. Yes, the Greek Government has been lying from the beginning, with many accomplices throughout the world, first to the EU in saying that it was even ready to join the euro, but more importantly to its own people. But Frankfurt expects — actually, demands — that governments to lie to their own people in order to accomodate unpopular positions demanded by the elite consensus. The demarcation line between the very serious and very unserious is who you lie to, it seems. It’s OK for the ECB to threaten the destruction of the Irish or Greek banking system unless the government institutes a certain unpopular pension or unemployment reforms that the ECB has decided is important for the conduct of monetary policy, and this is not viewed as unprofessional Tom Foolery. Only one side is allowed to take hostages and participate in double speak behind closed doors. At least the Greek government is lying about things that it has some legal authority to speak about. What the ECB has done, IMO, has shredded much more social capital than anything done by the Greeks.
Another way of looking at this is through the lense of costly (and therefore scarce) information. All these reciprocity agreements and implicit modes of behavior allow us to take short cuts over having complete information. Something better might be possible, but instead of spending scarce resources figuring out if your current production plans are the best, use those resources to produce more according to possibly suboptimal plans. Without complete information, there is no such thing as general equilibrium.
None of the pareto optimality results survive because you can no longer argue that if a better trade existed it would have been made. It could be that the better trades exist but no one knows about them. It might be the case that the cost of acquiring the information to make the better trade is really small and the trade itself has a big gain, but if no one knows whether the gain is big or not, then they still might not spend the resources to explore that portion of the space of possibilities.
Here the Greek government doesn’t know enough about its own economy to correctly measure and tax it. It can’t credibly promise anything. Germany, I meant the ECB, for a long time had a hopelessly fantastical view of what the effects of the policies adopted by the Greek government would to that economy. Certainly the voters don’t know what’s going to happen.
So there is lack of information all around, and I think this is a more fundamental description of the problem than a lack of trust. The lack of information is due to intentional blindness on the part of the German government but actual blindness on the part of the Greek government. If tomorrow all the Greek debt were forgiven it would not cost the troika nothing at all in real terms. Really they should forgive Greece the quantity of debt equal to the lost GDP of the Greek nation incurred by following the austerity plans, which would mean that they owe Greece money, on net. If you demand that someone does X, they do it, and then they suffer as a result, then that should put you on the hook for the costs. As the ECB is unelected, perhaps this is one way to hold them accountable — they should be forced to publish a forecast, and if there is deviation, they are on the hook for the discrepancy. Punishment also serves as a second best solution when there is lack of information, but the only punishment so far has been given to the Greeks.
hey Nick, I find your posts entertaining and educational but I’d have to say that on this one I agree with rsj
rsj: “I’d like to point that the Hobbesian State of Nature is kinda required for the pareto efficient outcomes…”
I totally disagree. In the Hobbesian State of Nature there are no property rights to exchange. I take (“steal” is the wrong word) your (but “your” presumes too much) apple, and try to prevent you taking my banana.
rsj: The lender delivers first; the borrower delivers second. It matters more that the lender trusts the borrower than that the borrower trusts the lender.
You may disagree but you haven’t argued the point.
I agree that in the Hobbesian State of Nature an economy, at least as described by voluntary actors maximizing their own individual utility — cannot exist.
Neither can it exist in a world of social norms. Social norms will constrain how much you can charge someone. Social norms will prevent you from collecting a debt that you know the debtor cannot pay, or the collection of which causes more suffering to the debtor than gratification to you.
The conclusion is that the market, at least as idealized by unconstrained trade — doesn’t exist. It cannot exist.
It’s just a ludicrous notion that anyone could organize their affairs by doing whatever they wanted (modulo property rights) and hoping that some emergent optimality would arise. It only works if information is free.
I think over time we are becoming more aware that information is the most expensive thing around, since so many other things we have been able to produce cheaply.
There’s another aspect to this trust/commitment/time consistency problem. It’s going to be hard to give goodies to Greece (positive net transfer of resources) without having Italy, Spain, and Portugal lining up at the same trough.
I’m struck by how one-sided the discussion of “trust” is in the media and even here. Yes, previous Greek governments were mendacious and the current one has been erratic and self-contradictory, and trust is surely a casualty. But for five years the troika has also been mendacious and capricious with horrible consequences. Their “bargaining” strategy since Syriza was elected has been to counter every compromise on the Greek side with an escalation of their own. I can’t see how any rational Greek actor could entertain any trust in them.
Obviously, from a realpolitik perspective creditor distrust is decisive and Greek distrust irrelevant, but when us third parties consider the situation, I think we should strive for a measure of balance.
Steve: Yep, under the implicit “Most Favoured Debtor” clause.
Jevons said that in economics, bygones are bygones. And it gets drilled into us beginning with micro 1000. He was wrong. If he were right, intertemporal trade would not exist.
Nick,
What I don’t understand is why when the Maastricht treaty was agreed to, a provision wasn’t included that allowed for member countries to impose import tariffs whose sole purpose was to service external debt. With government as a pass through mechanism with pre-arranged taxation and spending mechanisms, is trust even as issue?
It seems to me that an imposition like that would put the ball back in Germany’s hands – so to speak.
Ultimately what Greece needs to happen is for the value of the goods that it can export to fall relative to the value of the bonds that it’s government exports. Devaluation lowers the value of Greek goods and Greek bonds simultaneously. Counting on markets to rectify the situation seems absurd, since the markets are pushing Greek bonds in the wrong direction. Their value is falling relative to Greek goods when Greece needs the opposite to happen.
If Greece could levy a tax on German imports and use the proceeds to service Greek debt owned by Germans, then Germany must decide who to protect – German exporters or German bond holders.
Obviously quantities matter, a tariff would shrink the Greek trade deficit but probably reduce overall trade as well. It is unlikely that Greece could retire it’s external debt in any short amount of time using a tariff, but it could bring Germany to the bargaining table.
“What I don’t understand is why when the Maastricht treaty was agreed to, a provision wasn’t included that allowed for member countries to impose import tariffs whose sole purpose was to service external debt. With government as a pass through mechanism with pre-arranged taxation and spending mechanisms, is trust even as issue?”
But why use a tariff to achieve that? Why not impose, say, an automatic supplemental VAT to service the external debt without distorting trade (and violating core tenets of the EU)? If all you need is pre-arranged taxation and spending mechanisms, that would seem like a more obvious mechanism (though one which I’d be hard pressed to see any sovereign nation accepting).
In terms of bringing Germany to the negotiating table, what’s the value of Greek imports from Germany these days? Greece imports, what, $6B from Germany a year (accounting for only 10% of its imports, mostly stuff for which there isn’t likely to be domestic substitutes in the near future). If anything, that would seem to be potentially more disreputive than the VAT increases currently being proposed. Hard to see how such a mechanism, even if otherwise legal in the EU, would bring Germany to the bargaining table
Bob: because import tariffs kill two birds with one stone: they raise revenue (yes, not very efficiently); unlike other taxes they may increase aggregate demand under fixed exchange rates, by diverting demand away from foreign-produced to domestic-produced goods.
Bob,
“But why use a tariff to achieve that? Why not impose, say, an automatic supplemental VAT to service the external debt without distorting trade (and violating core tenets of the EU)?”
This is all about the relative value of goods produced by Greece versus bonds sold by the Greek government.
A Value Added Tax (VAT) will raise the price of goods produced by Greece (assuming that companies can pass the VAT can pass it along to customers) and raise the value of bonds sold by the Greek government (again assuming that companies paying the VAT can pass it along to customers). This is not what Greece needs.
Greece needs to be able to lower the market value of the goods that it sells and raise the value of the bonds that it sells.
Bob,
Also, I was only using Germany as an example. I don’t have Greece’s balance of payments statement in front of me.
Nick,
“by diverting demand away from foreign-produced to domestic-produced goods”
But depending on the productivity of domestic producers, that increase in demand may also increase the prices of domestically produced goods short-circuiting the whole rationale.
Think relative prices – we want price of domestically produced Greek goods to fall relative to bonds produced by Greek government – how does Greece do that?
One way is outright deflation. But since no one wants that, another is import tariffs.
Nick,
I’d think the impact of a tariff on aggregate demand would be ambiguous. More than a third of Greek imports are oil. If Greek exports are energy intensive (I don’t know that they are), the immediate effect could be the undermine exports. Similarly, to the extent Greek imports can’t be readily replaced from domestic sources (after oil, pharmaceuticals and machinery are the 2nd and 3rd largest categories of imports)it’s not clear that a tariff is materially different from a VAT in terms of its impact on aggregate demand (or, at least, it’s not clear to me, but then macro was never my thing).
Frank,
It would depend on its structure, but typically a VAT is designed to allow businesse to recover any tax they pay on inputs and, crucially, exempts exports from final taxation. So a VAT would increase the relative price of goods CONSUMED in Greece (but, then, so would a tariff, at least with respect to imported goods, or import competitive goods), not neccesarily the price of goods produced there.
Bob,
Okay, thanks for the explanation. I did not know about the export exemption on VAT designs.
One other thing. Sovereign debt that is traded across multiple countries is always problematic. The problem lies in that the voting rights associated with a sovereign are not transferred with the debt that is sold. If I have voting equity (or convertible debt) in a company and I sell those shares to Joe from Egypt, that voting stake is transferred with the sale. That is not the case with sovereign debt.
“But depending on the productivity of domestic producers, that increase in demand may also increase the prices of domestically produced goods short-circuiting the whole rationale.”
Yeah, I think that would be a real risk.
I take your point about only using Germany as an example, but a broader category of trading partners raises other issues. For example, would the import tarifs only apply to members of the EU group (who, presumably could agree to them as part of the Maastrich treaty) or would they also apply to imports from the US or China (who wouldn’t have agreed to them ahead of time). If the former, it might just shift imports from German to the US. If the latter, apart from potentially being a breach of Greek’s GATT obligations, that always risks triggering retaliatory trade barriers. Greece might be too small to matter, but if it were, say, France or Italy in that position, I don’t see either the Americans or Chinese being too keen on tariff barriers to their exports.
Bob,
Yes, I agree that with Greece trading with multiple partners inside and outside the EU, things get sticky, and so a Bretton Woods type global arrangement would be needed.
“If the latter, apart from potentially being a breach of Greek’s GATT obligations, that always risks triggering retaliatory trade barriers.”
But the nature of the retaliation will affect the outcome. In my Germany example, suppose Merkel recognizes that trade imbalance is a problem that must be dealt with but does not want to see Greece leave the Euro. And so rather than imposing retaliatory tariffs of her own, she pushes in the same direction as Greece by imposing a domestic tax on interest income from sovereign debt.
The U. S. does this sort of thing with it’s various states. If I am a resident of Pennsylvania and buy Pennsylvania state issued bonds, I pay no federal tax on the interest. If I am a resident of the state of Kentucky and I buy bonds issued by the state of New York, I pay federal tax on the interest.
Suddenly with Greece and Germany levying taxes against each other (Greece on Germany’s exports and Germany on Greece’s bonds) relative prices start moving in the right direction and eventually trade balance is restored.
I thought that’s what collateral was for — reducing the reliance on “trust”. Don’t tell me, collateral is not part of the euro treaty.
The trust issue isn’t just a live issue with respect to Eurozone-Greek negotiations. The Greek economy itself seems to be internally structured so that virtually no party can trust another, from numerous perspectives (contract enforcement, taxation, employment law, etc.).
I was reading the 2014 IMF report on Greece’s progress towards reforms, and it’s really eye-opening. For example, private employers are prohibited from involuntarily laying off more than one employee without prior permission from the Ministry of Employment, and the last time such permission was granted was in 1982. You can imagine the inverted power relationship that creates… it’s a huge risk to hire people you don’t trust, because two or more employees can collude to not work. The IMF report talks about employers being forced to offer huge voluntary severance packages or declare bankruptcy (or presumably keep disruptive employees on the payroll and just tell them not to show up for work). With that kind of legal/regulatory structure, the microeconomic climate in the Greek private sector makes a lot of sense… a lot of very small businesses hiring primarily family members and friends whom presumably form a trust network.
I think all the macroeconomic analysis of the crisis is mostly wasted ink. Bailout or no bailout, tariffs or no tariffs, it’s virtually impossible to get a viable, competitive private sector economy going and expanding under these kinds of legal/regulatory constraints. Trust networks work on a small scale, but have their limits.
Chris,
I wonder if this is an issue with seafaring economies where escape from a contract is just a boat ride away? A small plane isn’t going to get you very far. A small sailboat can get you around the world.
Jeff: yes, I think that is indeed the (main) purpose of collateral. But I don’t know what collateral the Greek government could (realistically) post.
Chris: probably an important point.
Chris,
I think you’ve identified the problem. Andrew Coyne had the flippant (but unfortunately true) line this morning about an economy that prohibits the sale of bread in convenience stores (http://news.nationalpost.com/full-comment/andrew-coyne-greeces-culture-of-victimhood). Michael Lewis had a great piece in Vanity Fair a few years ago about the problems facing Greece which I think deftly illustrated the basic micro problems:
“The editor of one of Greece’s big newspapers had mentioned to me in passing that his reporters had cultivated sources inside the country’s revenue service. They’d done this not so much to expose tax fraud—which was so common in Greece that it wasn’t worth writing about—but to find drug lords, human smugglers, and other, darker sorts. A handful of the tax collectors, however, were outraged by the systematic corruption of their business; it further emerged that two of them were willing to meet with me. The problem was that, for reasons neither wished to discuss, they couldn’t stand the sight of each other. This, I’d be told many times by other Greeks, was very Greek.” (http://www.vanityfair.com/news/2010/10/greeks-bearing-bonds-201010?printable=true)
The sad part of the story isn’t the corruption of the majority of the tax collectors, but the fact that the honest minority were unwilling to work together.
Nick,
Even before Greece achieved a primary surplus a strong argument could be made for restructuring Greek debt.
Greek debts were unsustainable in 2009 and it became clear early on that a fairly sizable default/restructuring would need to occur. This has been the consensus view of both official bodies and private investors. As SWL among others has pointed out, the very harsh austerity actually reduced the amount of money that the country will be able to pay it’s creditors. Their refusal to allow a sufficiently large “early” default means they will face a larger default in the future, the saying you used in another post “a stitch in time saves nine” fits here as well.
This was when Greece was ruled mostly by two goverments: The one led by Papandreou who admitted that greek debts were much larger than the official numbers said and began both austerity and reforms and the second a government led by Samaras who implemented several impopular reforms demanded by the troika (pension payments cut almost by half, large privatisation programmes etc) and also implemented a huge austerity drive. It would be hard to claim that either of these governments was untrustworthy.
So if trust is the problem, why didn’t the creditors make an earlier deal with one of these greek governments?
Mind you, I’m looking at this from the point of view of a profit-maximizing private investor. A real government would be expected to have some concern for the wellbeing of other countries, especially ones that are part of their own club.
Someone has to pull Fance and Germany aside and say, “You know what; this European Union idea is all about you figuring out how to be propserous together and not starting wars. It has worked great for 60 years since the world gave you two enormous debt relief. So here’s how it works: you write Greece a cheque like the rest of the world did to you in the 60’s. You throw a little money towards Spain, Italy and Ireland too. You set up Europe to be peacefully prosperous for the next 70 years.”
Hugo: there’s a difference between what maximises Greece’s ability to pay, and what maximises what Greece actually pays. Not that the creditors did the right thing. Especially with hindsight. But the only way you can hope to understand what’s going on is to recognise that the absence of trust is a really big deal.
If the twitter accounts are to be believed, a key ingredient of the new “agreement” is that Greece moves first.
Chris J: someone has to pull France and Germany aside and say “You know this Euro thing, that was supposed to pull everyone together into peace love and understanding. Well, it isn’t working. Maybe in 70 years it could work, but it would be better to take one step back now, and move forwards much more slowly and organically in future.”
Wow, I wasn’t expecting such a harsh condemnation of the EU and the people running it from you Nick.
As I read it, you’re saying that the Euro is set up so that if any country falls into crisis, it will be placed into endless depression unless the Germans find them sufficiently trustworthy. And if, after a number of years of this deliberate depression, and a structural adjustment that is one of the largest ever imposed on a population in peacetime, the Germans still just don’t think that country is trustworthy, and the country in question turns to more radical politicians, this is just all the more reason to carry on (sorry, escalate) the depression. What could go wrong?
And as for the people in charge at the EU, you seem to be suggesting (in the comments) that they are so mad with dictatorial power that if any of the politicians from the countries long-suffering from their policies dares to treat them with less than total deference and respect, they will in turn punish the people of that country with, as you say, all those lives and jobs lost. I have to assume you only mention your lack of respect for Syrzia (‘clowns’) since your condemnation of the immoral monsters of the EU (who punish and effectively murder innocent citizens because they elected somebody who told the EU leaders the truth about their failed economic dogma) would be in words not fit for print.
P.S. How were trust levels after WWII, I wonder? Obviously higher than they are now, when a government can promise a deal in 48 hours and it turns out to take a week… good thing the EU side didn’t say anything inaccurate about the outcome of a ‘no’ vote 🙂
Hugo, “So if trust is the problem, why didn’t the creditors make an earlier deal with one of these greek governments?”
In fairness, they did. In 2012, they wrote-off 105B Euro in Greek debt (over half of Greek’s private debt) – still the largest debt write-off (at least in nominal terms) in history – with a significant restructuring of the remaining debt (i.e., monkeying around with terms and interest rates), wiping out 74% of the value of that debt.
“You know what; this European Union idea is all about you figuring out how to be propserous together and not starting wars. It has worked great for 60 years since the world gave you two enormous debt relief. So here’s how it works: you write Greece a cheque like the rest of the world did to you in the 60’s. You throw a little money towards Spain, Italy and Ireland too. You set up Europe to be peacefully prosperous for the next 70 years.”
And if the Germans thought that the Greeks (Spaniards, Portugues, Irish, etc.)weren’t going to blow it all on beer and popcorn (or perhaps ouzo and octopus) they’d probably be happy to do it (just as the rest of the world trusted that the Germans weren’t going to start invading their neighbours again – mind you, keeping tens of thousands of allied soldiers in the country for four decades tends to ensure trust on that point). But if they don’t trust the Greeks…
Bob: “In fairness, they did. In 2012, they wrote-off 105B Euro in Greek debt (over half of Greek’s private debt) – still the largest debt write-off (at least in nominal terms) in history – with a significant restructuring of the remaining debt (i.e., monkeying around with terms and interest rates), wiping out 74% of the value of that debt.”
That needs repeating. Because I’ve spent the last week or so reading the news, and reading people say that Greece needs a debt write-down, seeming to forget that it has already had one.
Declan: “Wow, I wasn’t expecting such a harsh condemnation of the EU and the people running it from you Nick.”
Irony, sarcasm, or whatever poncy literary thing you are using, doesn’t work with me. So forget it.
It’s not (primarily) the EU, and it’s not (primarily) the people running it. It’s the Euro itself, and its own internal logic. Yes, the Euro destroys countries. Sure, the Greeks themselves, and their governments, and especially the clowns in the present government, gave the Euro a lot of help in destroying Greece. But if they had not been in the Euro, even those clowns would not have been able to screw it up so badly so quickly.
And it ain’t over yet. This capitulation is not a done deal. I think it will get through the Greek parliament, with the Nazis and communists voting against, but will it get through the other Eurozone parliaments? It’s not just the Germans. A lot of poor little countries are pissed off at the Greeks too, and don’t trust them an inch.
Even if it does go through, it’s going to take time, during which the Greek economy is in limbo.
Tourism is already down this week, and payments are not getting made, and supplies aren’t getting through. The whole “GDP factory” is coming apart at the seams.
It’s going to get worse.
Nick, I was making a political point, not an economic one. Part of Europe is in trouble economically. There is a potential military threat from Russia. It is about bloddy time for Germany and France to pony up some serious cash to help those in need.
Sure ditch the Euro, after giving Greece many tens(hundreds) of billions of them.
Brad Delong said it better than I:
http://www.bradford-delong.com/2015/07/needed-large-greek-devaluation-or-large-scale-transfers-to-greece-with-bonus-godwins-law-violation.html
I was going for humour, but maybe humour is poncy, certainly a lot of great humourists have been pretty poncy. At any rate, you’re right that I should have said the Euro, not the EU, that was just me being sloppy, but my point was simply that taking your words at face value they read as a massive condemnation of the folks on the European side of this negotiation and the Euro itself, yet you seemed to ignore the implications of what you wrote and reserved your criticism for the Greek side which had (has) no good options, given the people they were dealing with. I certainly agree with you about the internal logic of the Euro, although I’m still puzzled why in your mind this means that the Troika and co. are not to blame for their behaviour while the Greeks are ‘clowns’ – especially since the Troika side had many more options at their disposal to resolve the situation.
What is it about the current Greek government that you think is worse than the ones that preceded it? – it seems like the argument is that they should have just capitulated faster and sooner and more politely (correct me if I’m wrong here) but I think this misreads the political dynamics. The previous Greek governments capitulated just fine and I’m sure were exceptionally polite while doing so, but it got them nowhere because the policy they are capitulating to is a failure. After 5 years of this, a change in approach from Greece was inevitable. I think Europe was just lucky that this is the change they got to deal with but they seem determined not to take advantage of this (possibly last) opportunity. Sure Yanis didn’t always wear a suit and had an unfortunate habit of telling the truth but Syriza are still fully invested in the European project and unwilling to really fight dirty.
When the current round of chaos solves nothing and likely makes things worse, I wonder what will come next and think back to the words of Wilfrid Laurier, “Sir, rebellion is always an evil. It is always an offence against the law of a nation. It is not always a moral crime. What is hateful is not rebellion, but is the despotism which induces that rebellion. What is hateful are not rebels, but the men who, having the enjoyment of power, do not discharge the duties of power. They are the men who, having the power to redress wrongs, refuse to listen to the petitions that are sent to them. They are the men who, when they are asked for a loaf, give a stone.”
Ah, sorry Declan, I misread the humour. Thought it was angry sarcasm.
Thinking it over, I have some sympathy for their PM. He found himself in an impossible situation, simply because the Greeks still(!!) want to keep the Euro, so tried to square the circle, and lost badly. I can almost believe the Ambrose Evans Pritchard theory that he wanted to lose the referendum. There are worse sins than thinking you can do the impossible. That academic game theorist though, probably still thinks he is MinisterofAwesome. That works great as a Heartiste strategy, or if you want your face on the T-shirts of idiots, but destroying countries to feed your narcissism is not good.
They should have capitulated sooner, or else politely left the Euro. Above all, they should have understood the problem, and worked to build trust. And if that meant ditching the motorbike and wearing a tie you ditch the damn motorbike and wear a damn tie. Because countries are more important than motorbikes and ties. It’s a signalling equilibrium, and game theorists are supposed to understand signalling equilibria. And when you don’t ditch the motorbike and don’t wear a tie, it signals to the people you are negotiating with that you want them to know that you don’t care if they trust you, and you don’t care about the future of Greece either.
Wilfred Laurier left out the exit option. If exit is an option, then if you fail to persuade the other members to change the rules of the club you either capitulate to those rules or else politely exit the club. Rebellion, especially a failed rebellion, is stupid and wrong. And the other members of the club are democracies too. Schaueble has 70% popular support in Germany. Last night I was reading a Greek insider who was outraged that Schaueble offered to pay Greece to leave the Euro!
The reason the banks entered into those horrible deals with a corrupt Greek government was because they “trusted” they would be bailed out by the European Union
Greece is not a person and due to misbehavior of its government it’s people are in trouble
How is this different than helping rebuild Germany after world war 2 except Germany’s behaviour was much worse
Setting conditions that only strangle the economy serves no useful purpose other than punishing the Greek people
By the way I heard that germany still owes Greece reparations for WW2
Never paid?
How can Greece ever trust Germany?
There is also the issue of Greece not trusting the creditors who “mis-estimated” the decline in employment that the 2010 program was going to cause? Should the banana exchanger expect an apple tomorrow if today’s banana turned out to be poisoned?
If creditors actually wish to receive repayment (as opposed to intimidating the Spanish or pandering to their electorates) they would make make it possible for Greeks to shift resources to exports and restore full employment.
@Nick
That is why I wrote the paragraph about how previous greek governments have shown themselves very willing to make sacrifices and impose unpopular reforms. They proved themselves trustworthy and yet did not receive enough relief from the Troika. Surely keeping a government that thinks of itself as responsible in power is the way to maximize actual payments? Instead they put the more responsible governments in an impossible position combining unpopular reforms with deep austerity.
@Bob
That’s why I used the word ‘sufficiently’. 😉
I remember that commentators (The Economist, for example) at the time wrote that the restructuring you mention would not be enough to deal with the problem.
@Nick, I was being (only somewhat) facetious about “collateral” — public debt doesn’t involve any, which of course is the problem. (Namely, using the same term “debt” for both public and private makes equivocation too easy (for “creditors”).)
Also, are you seriously elevating “signalling” as an economic issue?? If literally “wearing a tie” is a decisive factor, then I’m afraid we’re all lost.
Nick,
I am not convinced that trust is the issue as trust is relatively easy to take out of the transaction in this case.
All Germany would have to do is structure a deal that had Greece earning a reduction in its debts as or after Greece implements the reforms Germany wants.
Indeed, this is how the original bailout (now expired) was structured, and this feature is the reason Greece has a deadline now, and also the reason Syriza won the last election.
ie. Syriza won on the promise NOT to implement the demands and terms of the bailout; and germany (ok we’ll pretend, the troika…) said ok no more tranches of the funds from the bailout, and oh by the way, the loans you have that need to be rolled over (remember we gave them to you on short duration as we didn’t trust you) not going to happen till you do what we want.
The problem is that Greece wants (and by every independent analysis I have seen, needs) debt reduction. They’ll never pay back the debt, and Germany wasn’t going to give them debt reduction whether they trusted them or not. Greece wanted two things, debt restructuring and policy that supported growth in employment.
Indeed absent those things, Greece could not credibly promise to do what Germany wanted as doing so destroyed their economy. The whole point of floating exchange rates is flexibility and adjustment. It is too costly and takes too much time to adjust internally, no country could credibly promise to do so beginning with debt to GDP as high as Greece and an economy as for from potential as Greece.
Or, perhaps you are of the view that Greece can do what Germany wants, AND return to full employment AND stay in the Euro.
Credibility and trust are side shows, the basic dilemma is that Germany is wrong.
Indeed, Greece isn’t all that interesting because in the end the country is too small and its institutions are so weak etc that there is little to compare to the experience of a developed country. Greece’ issue is that they are relatively undeveloped economy that had completely the wrong monetary policy for a decade and then got locked out of using all the normal tools for adjusting their economy to fix the mess that was created after in addition, as mentioned being rather half undeveloped. There is no comparable country to Greece, undeveloped countries don’t have Currency union problems, developed countries, are well, developed. You can’t even compare Portugal to Greece though there are some similarities.
Germany on the other hand is very interesting, German policy is a train wreck and costly, the world can’t support their insane level (and ratio) of exports; and the rest of Europe can’t sustain the inflexibility of having to adjust through very high levels of unemployment and vast under-utilized resources.
German economic policy is both meaningful to the world and has many useful parallels to draw to other developed country economies.
How ’bout a post on Germany?
Nick can I re-post bits of your comment (on the damn tie and damn motorbike) on facebook?
I agree 100% and could not have said it better!
The “(absence of) trust” is certainly part of the story between Greece and the remaining euro block. It seems to me that there is more to the story. There is another significant component.
Macro economics is all about groupings of economic players. What do we have if we place Greece into a group that includes consistent under-performers; a group that consistently receives government aid; a group that consistently receives Keynesian stimulus?
Let’s build the grouping step by step.
We can find examples of chronic under-performers. The welfare roles are full of them.
It is easy to imagine that under-performers can gather in a locality, making them visible as a geographically identifiable grouping.
Give this grouping a cohesive identity with a few of it’s own governmental functions such as police services.
Give this grouping the status of a nation. You have just built a model that MIGHT include Greece.
OK, we have built a descriptive model. Now we can ask if the Greece fits into the model. We can ponder if Keynesian stimulus is the best method of working towards desirable new goals.