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 
First I have to agree with the main point of the blog. But I disagree with very narrow claims like “Euro is destroying countries”. Saying that Euro destroyed Greece is like saying that US Dollar caused bankrupcy and destroyed Detroit. And if it did not then not please explain to my why – using normal language of Optimum Currency Areas and all that. Where were all those people shouting how Euro destroys countries when Detroit, Sicily and thousands of federal states, regions or counties went into trouble? Nick would you say that loonie almost destoyed Newfoundland and Labrador back in 90ties?
Also what I dislike is an approach by many economists to dissect various features of EU and select those that they consider as good (Schengen, Single Market) and those that they consider as bad (agricultural subsidies, Euro etc.) saying that EU should do this or that. If somebody says that Euro is a political project some people use it as a proof – almost in a sense “See, Euro was a political project as opposed to Schengen or Single Market”. Which is of course nonsense. The whole EU is a political project including common market, freedom of movement of capital and workforce as well as Euro.
The way I see it common currency really is a huge political symbol. And I think economists see it that way. If not then why it seems OK to send strong messages how Greece and Germany obviously should not share the common currency because of language, culture, economic structure etc. But then they are surprisingly silent in the topic of Shanghai and Tibet sharing the common currency or Moscow and Astrakhan not to speak about India or almost any country really.
Where is your model of what countries should and should not share common currency?
In the U.S., the poor states get subsidies from the rich states. Those subsidies are perpetual — as long as the poor states remain poor, they will be the recipients of transfers. States like Mississippi, for example, have been poor since they came into existence as states. From the days of FDR there were ongoing transfers. Yet no one is talking about lecturing Mississippi to reform or be kicked out of the union. Wealthy states do not feel put upon to subsidies the poor states, any more than wealthier people feel put upon to pay for services for the poor. Well, a few psychopaths do, but we’ll exclude them from civilized society. Most high income earners view themselves fortunate to have high incomes rather than oppressed for needing to share a portion of their income.
In the EU, the poor states are given loans that must be paid back. If Mississippi had to pay back all the transfers it received, it would be in a much worse state than Greece ever was. Yet we don’t call Mississippi a failed state, but a poor state. Most likely a century from now, it will still be receiving transfers, and there is nothing wrong with that. Last I checked, there was no bill that the poorer provinces in China needed to pay back for all the net transfers flowing to them either.
If Germany ever commits itself to permanent transfers to Greece — as gifts, not loans — with no lecturing or sadism imposed on the Greek people, but merely because the Germans are wealthier than the Greeks and therefore the Greeks deserve transfers from Germany on that basis alone — then we can reasonably say that the Euro makes sense in the same way that the dollar makes sense.
matteo: it’s on the internet, so it’s public, so sure you can!
Jeff: Declan mentioned the suit and tie stuff, so I thought I would add the economic analysis! Sure it’s not the big deal, but it’s symptomatic.
JV: If it’s a long-run supply side problem, it makes little or no difference whether the country/region/city has its own currency and central bank. But there is a lot more to the Greek problem than the long run supply side problem. There’s a great big monetary/demand side problem on top of that.
dan: “Or, perhaps you are of the view that Greece can do what Germany wants, AND return to full employment AND stay in the Euro.”
I am not of that view, unless you allow a long time (too long a time) for the return to full employment (until the next shock).
Nick: Ok, let’s say that. But my real question is something like this: Is there no other state/region/county/city in the world that should think about adopting own currency (while still being integrated into its original political structure) except of Greece of other Eurozone countries? If economists are all so sure about this Optimum Currency Area – where are the economical geography maps? Where are the criteria and steps to take to make non-OCA into OCA?
Or another question – it impossible to imagine any Canadian state/province to have local demand problem akin to Greece in the future all the while federal government will refuse to fully offset such demand shortfall by fiscal transfers? Then is it not dangerous for any Canadian state to be part if irreversible monetary union with rest of the country?
It is not that I do not see answers for these questions. I do not see these questions even acknowledged. And judging by strength of position against Euro I would expect answers for these questions are common knowledge by now.
“But then they are surprisingly silent in the topic of Shanghai and Tibet sharing the common currency or Moscow and Astrakhan not to speak about India or almost any country really”
Not really, the standard OCA model would provide comments on China, India, Russia or any other country. But all those specific examples have traits which make them distinguishable from the EU model – notably federal transfers and subsidies (even if only in the mundane form of stationing soldiers in the outskirts of empire to keep the locals in line – material considerations in both China and Russia). Moreover, in at least two of those examples (China and Russia) their common currency is explained by the fact that the they are not democracies. In point of fact, the Tibetans may well not want to share a currency (or anything else) with China, but don’t have a say in the matter. Ditto some of the outer-portions of the Russian empire. Those currency unions may not make a lot of sense, but their “member” regions don’t have a lot of say in the matter.
I think you’re misreading the situation and misjudging the options that the current Greek government has.
You can actually play the whole thing through without any consideration for the Greek government or its people.
What would the creditors need to do to get as much money back as quickly as possible? And how would they have to change the rules to avoid any such situation in future?
I think it is fairly safe to say that the creditors have failed dismally on both accounts. They’re refusing to change their own policy idiocy and refusing to admit to structural deficits of their own pet project, the Euro. Not because they don’t know they should but because it would be political suicide to do so. And they can always blame Greece for anything bad that happens. So basically they are shooting themselves in the foot because its politically opportune and Greece is the scapegoat that’s trapped underneath that foot.
What can the Greeks do? The current government has a mandate change its own predicament for the better while remaining in the Euro / EU. I don’t think Grexit is an option for them.
In order to do that, the first thing is to get heard. Technocrats politely dealing in back rooms will not achieve that. And if it takes being confrontative and behaving badly, so be it.
I think they have managed to do that. Even Canadian econ blogs are debating Greece…
Second, use those 15 minutes of infimacy to change the debate by sowing as much doubt about the good faith of the creditors as possible and hope this will leave some marks on policy. Bähhhh
Third, scare your opponents form within into believing you’re serious about doing whatever it takes to change the playing field. I think Siryza knows quite well that their biggest enimy is their own corrupt elites. Something has to move, and it isn’t a VAT rate. Who knows.
Also, I think you (Nick) don’t speak mediterranean. I imagine you as Star Trek’s Data (no offense intended) at a Richard Pryor show. You find him offensive, the jokes aren’t computing and you want your money back.
Bottom line: the rules must change, with or without Greece. We must learn to speak mediterranean just as the Greeks must learn German. It’s called integration, it’s a two way thing.
Bob Smith: Federal transfers is very vague word. EU recognizes “federal transfers” (called eurofunds) and Greece recieved considerable ammount of help (around EUR 20 billion a year since 2007 net inflow in an economy of EUR 200 billion). Greece would go bankrupt years ago if not this help. One can argue that it is not “transfer” just loan (at least until there will be haircut negotiated). But from the demand point of view as a stabilization policy against depression there is no difference.
Now there is similar situation in many other countries. Loans to federal states from Federal governments are common – but there are also occurrences of local bankrupcies. In US the latest example is bankrupcy of Detroit – not further transfers for these guys, shame they did not have their own currency when that happened but were part of irreversible monetary union. Of course I did not any notable economist saying so. I wonder why. There are also talks of fiscal crisis in California. I can easily imagine Federal Government to request “structural reforms” from California in exchange for any loans.
As for the dictatorship argument – first, what does it have to do with sound economic advice and analysis? Should we not analyze monetary policy of Russia, India or China just because they are less free than Switzerland? But of course we can talk about other countries as well. There are many federative countries or countries with large variety of languages and cultures. South Africa, United Kingdom, Belgium – we can count many others.
“As for the dictatorship argument – first, what does it have to do with sound economic advice and analysis? Should we not analyze monetary policy of Russia, India or China just because they are less free than Switzerland? But of course we can talk about other countries as well. There are many federative countries or countries with large variety of languages and cultures. South Africa, United Kingdom, Belgium – we can count many others.”
Of course we can assess the monitary policy of a dictatorship, there’s just no reason why we would expect the, say, Chinese government to care about the subptimality of Chinese monetary policy for Tibetans (or any other aspect of Chinese policy vis-a-vis Tibetans) or Russian monetary policy for Chechnians. If you told the Russian or Chinese government that the Chechnians or Tibetans would be better off as an independent contry with their own monetary policy, the likely wouldn’t give a shit. In contrast, in democratic societies, the implications of a given monetary society for disparate regions of those societies (whether it be Greese of PEI) matter.
Moreover, we do assess the monetary policy of other federal countries. But in key areas (real labour mobility, inter-regional transfers, economic integration, common identity) most federal countries score better on the traits of an optimal currency area than do the Euro-zone countries.
An EU “loans” to Greece are not a form of federal transfer, they’re a loan. Contrast that practice with, say, Canada. Where the federal government transfers, directly, billions of dollars a year to provincial governments and local governments (on account of equalization and health and social transfers) – C$62B last year, transfers billions more between individuals in different regions (though EI, OAS, CTB, etc.) – some $70B last year and, provides effective stimulus to different regions through direct spending (i.e., putting tax service centers in PEI to hire the locals – I have in mind the Summerside Tax Services office which is one of the more important GST tax centers in Canada). And I dare say, what is true of Canada would apply to greater or lesser degrees, to the Unites States, to Australia, to South Africa, to Belgium (before the Euro) and most other federations.
You see none of that in the EU. The EU doesn’t, routinely, provide the sort of subsidies to its member states that Canada provides its provinces (indeed, even in a crisis, it’s members are unwilling to provide support of that order of magnitude). It doesn’t provide direct support to individuals in different regions (Greece would be in a very different scenario if its citizens shared an unemployment insurance system with the Germans), nor does it hire Greeks to collect taxes from people in Germany (the way Canada hires Prince Edward Islanders to collect taxes from people in Ontario).
And the reality is that EU simply doesn’t have the fiscal resources to effect those forms of transfers, since revenue raising power laregely resides in its member states (the relies on contributions from member shares, a large portion of import tarriffs and a small portion of nation VATs for revenue). Consider, the EU budget as a whole is E142B – call it C$200B. By contrast, the federal government of Canada, which governs a population that’s one fifteen of the EU’s is closers to C$275B. Not only does the EU not provide material transfers between member states (outside of the common agriculture policy, which alone accounts for almost 40% of the EU budget), but it simply lacks the resources to provide transfers of the magnitude of those routinely provided by, say, Canada or the US to their subnational governments and regional economies.
@Nick, re: (not) wearing a tie. “Sure it’s not the big deal, but it’s symptomatic.” The innuendo is that it’s symptomatic of something that is a “big deal”. Presumably “lack of trust”, given the posts’s thesis? Really? Or something else (deliberately) not mentioned? (IOW please specify.)
Because as several other comments have already noted as well, lack of trust is not that big a deal economically speaking. (In fact, isn’t the whole reason for having an economic system so that more can get done in a lack-of-trust environment?? Forgive me but I see the whole thesis here as quite Orwellian in that sense.)
The one good thing to have come out of the last 6 months’ fiasco, I think, is that after the Greek parliament’s vote last night, and the events leading up to it, the creditors now have much more reason to trust Greece will actually deliver. It might look the same on paper, but the current Greek proposal is very different in that very important respect than if they had made it 6 months ago. But whether they will actually accept it (as they are more likely to under the “trust hypothesis”), or whether they are now too utterly pissed off by Grecian antics, remains to be seen.
The Monty Python “Always look on the bright side of life” is running through my head. Because that doesn’t change the fact that the Greek economy is in worse shape than 6 months ago, and the damned Euro is stronger than 6 months ago.
The trust argument is for the most part a useless tangent.
If the pain and suffering the Greeks endured for that past 5 years to stay in the Euro is not enough to earn some trust, then it’s pointless to try. The other side is crazy.
If trust was actually a concern, then put terms in the agreement that are trust building. The U.S. was able to accomplish it with the Soviet Union. Do you think there was any trust there?
Germany has an unfortunate track record over the past century. The trust issue is with Germany. Germany has shown themselves to be untrustworthy and demonstrated that the union has no real meaning. When a partner is in trouble, you have their back or you don’t – Germany doesn’t. Instead, it’s been a right wing morality play steeped in bad economics.
Not wearing a tie? Dress is important in conveying seriousnesss.
Hey, after all some of the best dressed guys of the 20th century wore a real nice Hugo Boss black outfit. (OMG, can we speak about Germany without running into Godwin’s law?)
While i a agree with your post in principal, this just does not describe the current situation regarding Greece very well. What Greece demands is money from the troika to pay money to the troika. It demands not to be forced into a disastrous default that is in no ones interest. If people were acting as rational agents trying to maximise public welfare, rejecting this offer would be almost unthinkable. You could argue not to provide an extra 25 billion in bank recap and instead haircutting deposits, but i don t see how forcing a Greek default and destroying it s payments system are anything but blackmail which is very likely going to backfire. Greece economy is already plunging and the creditors seem to have the idea that they can isolate themselves from this by applying more of the austerity medicine that will send Greece back to recession. It is irrational, it will destabilize Greece and it will reduce the NPV of creditors assets. But it is more popular at home because blaming the foreigner is always good and people cannot see through the complexities.
Don’t know anything about Nigel Farage, but on this I think he nails it:
Nigel Farage tells Greece: Have the courage to quit the euro
Patrick: I’ve been following Nigel Farage for years. I’m a fan (despite his flaws). But don’t tell anyone I said that, because the left-establishment elite hate him, and call him a fascist racist little Englander. (He isn’t, but he definitely isn’t respectable.)
Seems most of his troubles come from being skeptical of immigration. That’s a tough row to hoe these days, especially when one is motivated by sensible reasons (many of which the left should appreciate – like the negative effects on low-income workers).
After watching the Greek fiasco unfold over the weekend, euro-skepticism is looking more and more like prescience.
The UK, the Danes, and the Swedes really dodged a bullet.
Makro: my apologies for our overly untrusting spam filter. I just found your comment this morning.
OK, but what about the ECB’s ELA (or whatever they call it). That seems to me to be an open-ended loan, which the ECB has no control over how it’s spent. It’s not like lending money that is earmarked to repay an existing loan (which is just like extending the term of the loan).
Patrick: immigration is his big vote-getter. The UK is not like Canada (though if you asked Canadian “natives” what percentage of Canadians were European “immigrants” you might get a very different answer, because “native” and “immigrant” can be understood two different ways). Plus, Canadians, I think, think immigration is mostly under Canadian control. We only let in people we want to let in. In the UK it isn’t under UK control (given free flow of people within the EU), and I think that makes a big difference to how people feel about immigration.
But yes on euro-skepticism. Even if last night’s deal gets through the Greek and other EU parliaments, it ain’t over yet. What’s the betting on a repeat in a few months? Like I said 5 years back, the Euro may destroy the EU. (Would I be immodest if I said that old post still reads pretty good?)
Nick: The euro was a bad idea badly implemented but the euro will not destroy the EU. German handling of the euro will.
Nick, some thoughts on Nigel Farage.
He might not be racist and he might be right about the EU but….. he certainly associates with racists, encourages racism and generally engages in dog whistle politics.
This might not be apparent from your side of the Atlantic, but it is here.
Unless you think that kind of thing is, in itself, okay OR that the ends justify means you should do a bit of research before giving Farage the Rowe stamp of approval, and dismissing his critics crazed left wingers.
ps – the above applies to lots of others ‘ists’ and ‘isms’
Donald: I understand that sensible people across the political spectrum may say that Nigel Farage and his party are not ready for prime time, and may associate with and attract some bad people. All true, in my opinion. Exactly the same would be true of the current Greek government. And doesn’t the Greek government have people who actually are openly Maoists actually in the party? By any half-way objective standards, Maoists are as bad as Nazis. Given the millions that Mao murdered, that would be like UKIP containing people who are openly Nazi. There is a massive double standard here. How come Syriza is respectable but UKIP isn’t? It makes me angry to think about that double standard.
I spent a lot of time reading about Rotherham, and about reactions to Rotherham from UKIP supporters and others. And Rotherham is certainly not alone. The people who call themselves “anti racists” must take responsibility for thousands of underage English girls being raped. Because they twice prosecuted the EDL guy for speaking about it, and tried to jail him for doing so. And threatened that social worker who tried to stop it with being sent off for diversity training. The feminists did not want to know about (and still don’t want to talk about) that very real “rape culture”. Because the people doing the rapes weren’t white frat boys.
Does this mean that immigrants to the UK, and their children, are worse on average, all things considered, than the native-born and their children? Nope. Chav culture, for example, which has always been there, isn’t that great either. But it does mean that people who think “diversity” is all fine and dandy are badly wrong. The intellectuals, once again, are badly out of touch with reality, and the uneducated prejudiced thickies who support UKIP have more sense. (Just like in the past, where if the intelligentsia had been in charge of UK civilisation from the 1930’s to around 1980, the Brits would still be living in a socialist workers’ paradise. Thank God for the stupid people, and the parties they vote for.)
Farage, like LePen, should be minor characters. But it’sthanks to the Brüning of each era that they can from time to time emerge from their caves. Merkel in all her bovine smugness will not be looked kindly in future history books.
Let’s say kindly that the Maoïsts in Syriza never had as much contact with the real Mao and never caused as much damage than the colonels defending Christian capîtalist freedom did under order from the CIA.
As for Britain, each time I feel pity for the “intellectuals”, I reread the letters from Thatcher to Hayek deploring the fact that british parliamentary democracy unfortunately prevent the installation of the Pinochet-type regime that the Hayek wished. I have no sympathy for the stupid voters who allowed themselves to be robbed blind by the kleptocracy currently running Britain.
Nick, thanks for taking the time to reply. It’s great that you do.
Rotherham was a terrible thing and no doubt there’s more. I suspect that the lack of action has more to do with class than race though. The victims weren’t believed or no action was taken because they were “chavs” (your word). Not because the perpetrators weren’t white.* The EDL and UKIP weren’t believed because they have a history of making things up about immigrants. They were the boy that cried wolf. For the police to say we didn’t do anything because “multiculturalism” is, I think, a really bad excuse and I don’t think the “anti-racists” are responsible for rape.
All this is beside the point though. Farage might have been right on Rotherham but when he doesn’t have something real he just makes it up. He encourages racism for political goals. This is, I think, immoral. Not “not quite ready for prime time”. Just plain makes-him-a-bad-person wrong.
I largely agree with you on the rest.
I agree that the left has a tendency to double standards and I expect that this applies (to some extent**) to their views on Syrzia as compared to UKIP. I agree that the intellectual left is out of touch. They’re plain stupid at times. And I agree that “diversity” isn’t all fine and dandy. This has, of course, all contributed to the rise of parties like UKIP. But surely, in the context of a debate about whether Farage is a good bloke or not, it’s all just whataboutery? It makes the left wrong, it doesn’t make lying to encourage racism right (no pun intended).
I hope you’ll reconsider your views on Farage and on where the blame for Rotherham lies.
*If you don’t agree ask yourself this: would changing the victims’ class or the perpetrators’ race more surely have resulted in a different outcome?
** Perhaps not the same extent as you though. Personally I find it unlikely that Maoists in Syrzia are in favour of killing people. They probably just favour stupid economic and social policies that, while well meaning, would do a lot of damage if implemented. (I don’t know though).
Thanks Donald. And a reasonable response from you too.
Thx for manually classifying my comments out of spam, Nick. 🙂
Regarding ELA, I can understand stand that the central bank is not really willing to unconditionally stand behind Greek Banks when ELA is used to replace capital/deposit flight and Greece’s euro membership is not certain. But I feel if a commitment would have been made by political authorities and the ECB that Greece would stay a member of the EZ as Greece undoubtedly wants to be (and treaties don’t forsee and expulsion), then capital/deposit flight would have stopped. I think the Euro leaders have decided to lump together solvency and Euro membership to get more leverage towards Greece to make it repay its loans. This happens to be a bad thing as it allows the creditors to impose too much austerity on the country risking a complete mess.