Some Wednesday snippets. First, I juxtapose the political machinations that the EU President is engaged…
The Greek elite – prefers to eat its children
I am travelling for most of today and so haven’t much time to write a blog. I am typing this on the train to Sydney airport. The press has been increasingly highlighting the on-going Greece situation. What is important to note is that the neo-liberals are no longer honey-coating the fiscal austerity in terms of “fiscal contraction expansion”. The Greek finance minister is now saying that the Greeks have a choice between disaster and total disaster. Other are juxtaposing sacrifice with chaos. I have noted that in recent months that a lot of commentators have been asserting that an exit would be a disaster – far worse than the current “disaster” of 4 years recession and more to come. But rarely do you read any coherent analysis of what might happen should Greece exit the Eurozone. My view is that while the dislocation would be intense and costly it would, in the longer-term, be less costly than the current alternative – which is persistent recession for the foreseeable future and a savage erosion of real living standards, especially for the next generation. As on commentator put it over the weekend (full quote provided later) – the current austerity approach with “deep structural inequalities and its rigid adherence to a failed economic ideology, protects neither democracy nor human rights. Stiff-necked and punitive, it prefers to eat its children
It is ironic that the fiscal austerity argument is often phrased in terms of needing to take the “crippling” debt burden off the future generations. However, the damage that the bailout packages are doing to those generations is highly significant yet that irony is never noted.
The UK Guardian article (February 12, 2012) – As Greece stares into the abyss, Europe must choose – made this point emphatically:
Six inches from the riot policeman’s shield outside the Greek parliament last Friday, a tall, pale boy was shouting at a man who could have been his uncle: “It’s your generation that brought us to this point, but it’s mine that has to pay for it. You have to take responsibility for what’s happening here.”
Please read my blog – The rising future burden on our kids – for a discussion of why fiscal austerity imposes a heavy burden on the future generations.
The Greek Finance Minister was quoted by Bloomberg (February 13, 2012) as saying in relation to the current political impasses in Athens that:
Today at midnight, before markets open, the Greek Parliament must send a message … We must show that Greeks, when they are called on to choose between the bad and the worst, choose the bad to avoid the worst.
Reinforcing the Finance Minister, the Troika-installed Prime Minister told the Greek people via TV that:
We are looking the Greek people straight in the eye with full knowledge of our historical responsibility … The social costs that come with these measures are contained in comparison to the economic and social catastrophe that will follow if we don’t adopt them … We have to sacrifice a lot so as not to sacrifice everything.
The Prime Minister he replaced obeyed the Troika script by saying:
We must speak honestly and tell Greeks what bankruptcy really means. It means chaos.
It should be noted that bankruptcy only applies to the nation’s status as a user of a foreign currency (Euro) and becomes irrelevant once the nation restores its own currency. As I discuss below, under those terms, it can duly re-denominate all foreign-currency obligations in terms of its new currency and solvency then becomes guaranteed.
It is interesting that there is horror expressed by commentators about the possibility that the Greek government could enforce creditors to accept Drachma instead of Euros, the same horror is not expressed when the Troika propose a PSI arrangement that could carve up to 75 per cent off the value of current Greek bond investments (in Euros).
I will come back to the political assessments later but you note that they are no longer making the mainstream macroeconomic argument that has been justifying the imposition of austerity – that growth is just around the corner once the private sector realises that the deficit cutting will reduce future tax burdens and as a consequence they stop saving and start to spend again.
That nonsense – was always nonsense – and its bald-facedness is now being exposed.The future for Greece under current policy is bleak and the private sector know it.
The Troika (EC/IMF/ECB) operating through the agency of the Finance Ministers Summit initially wanted Greece to impose further – huge – cuts in net public spending in return for the next bailout installment that would see that nation pay up on its impending debt commitments.
The ridiculousness of the whole deal was that the Greeks were expected to achieve certain fiscal targets by this time. The progress of the Greek cutbacks is reviewed every three months by the baleful bureaucrats within the EC and the IMF. What they expected to happen each three months is of some confusion. The indications are that they actually expected the fiscal situation to improve.
But it was always obvious that under current conditions – fiscal austerity would lead to an increasing budget deficit and rising public debt ratio – as aggregate demand continued to contract.
All the real GDP estimates of the Troika have been shown by unfolding events to be over-optimistic. The Greek economy is in a severe downward spiral and has been getting worse for the last 4 years.
The recession is now entirely self-imposed by the Troika and its henchmen/women in the Greek polity.
But it is now well-known that the Finance Ministers acting turned nasty on Greece last week and demanded even harsher cuts including a 22 per cent cut in the nominal money wage (a much larger cut in real terms), drastic cuts in pensions and public sector employment cuts of up to 15,000 workers by 2015.
These additional cutbacks are the equivalent of about 7 per cent of GDP over the next three years and under those circumstances the Greek economy will remain in recession at least over that period.
It is inconceivable that a nation would tolerate 7 or 8 years of enforced recession when it is largely unnecessary.
The Germans have been claiming that even with these latest proposed cuts the public debt ratio will remain above 120 per cent of GDP.
The media is also perpetuating the claim that chaos would follow a Greek-exit from the Eurozone.
The UK Guardian article (February 12, 2012) – There’s talk of an exit – but default would have catastrophic consequences – claimed that the “break-up would bring banking chaos”.
The article said that a “Grexit … would send shockwaves throughout the world economy”.
Apparently:
… default and “re-drachmatisation” would be a costly and chaotic process … in the short term banks across the eurozone might have to be closed to prevent a run on the single currency as investors speculated about which country might be next. A new wave of bank nationalisations would be likely to follow as lenders counted their losses on now worthless Greek debt.
Capital controls would have to be imposed and borders shut to stop money flooding out of Greece. Portugal, Italy and Spain would come under intense pressure from investors wary about the risk of another victim. Banks everywhere, already reluctant to lend, would cut back hard, nervous about their exposure to the bonds of all Europe’s crisis-hit states.
For Greece, a drastic devaluation … could at least provide the hope of an export-led recovery. But unlike Argentina, which defaulted on its debts in 2001 after a wrenching political and economic crisis, Greece has neither the advantage of plentiful natural resources nor a boom in the world economy to ride.
So you get the message – chaos – drastic devaluations etc. No mention of the recent ECB initiatives to provide at virtually zero cost massive long-term funding to European banks.
No mention of the growth that the Greek government could engender immediately if it regained currency-sovereignty.
Further, the implication that capital controls are chaotic would not sit with Malaysia during the Asian crisis. The IMF has also released research showing that capital controls are effective and beneficial.
Please read my blog – Are capital controls the answer? – for more discussion on this point.
Also revealed over the weekend was the secret conversation between the German Finance Minister Wolfgang Schaeuble and his counterpart in Portugal Vitor Gaspar recorded before last Thursday’s Eurogroup meeting of Finance Ministers began. The conversation was recorded by the Portuguese station – TVi24.
This meeting upped-the-ante on Greece by demanding an extra €325 million extra in public spending cuts before this coming Wednesday in order to get the latest bailout.
Further, the bailout money would be sequestered and the Greek government would have to prioritise debt repayments over general government spending. It is estimated that 70 per cent of the bailout money will be prioritised in this way. In other words, there’s not much there for the Greek people.
It is clear that “divide and conquer” strategies are being used as the German indicates to the compliant, almost simpering Portuguese finance minister that Germany would “adjust” the Portuguese bailout conditions as long as the decision to enforce even harsher sanctions on Greece went through.
The conversation went like this (with the segments marked … being inaudible):
Wolfgang Schäuble: … we need an adjustment to the programme, after our substantial decision on Greece … Not to [unclear]. If then there will be a necessity for an adjustment for the … programme, we would be ready to do that.
Vítor Gaspar: That’s much appreciated.
Wolfgang Schäuble: As long as my fellow members of the government … that public opinion in Germany don’t believe that our decisions are serious, because they don’t believe in our decision on Greece.
Vítor Gaspar: We have made quite substantial programme on the European framework.
Wolfgang Schäuble: You have, yes.
Vítor Gaspar: That we have. And now we must work today …
This You Tube video presents an interesting analysis of the body language between Vítor Gaspar and Wolfgang Schäuble – “the petitioner and the petitioned”!
The New York Times article (February 10, 2012) – Amid Efforts to Rescue Greece, a Lack of Trust From Allies – interpreted the exchange as an indication that:
The conversation … illustrated a stark fact as the euro zone’s debt crisis enters its third year: While Portugal, Ireland and other countries may be struggling, Greece has found itself in a category of its own – a nation the rest of Europe no longer trusts.
One hypothesis about the behaviour of the Germans and French (and other northern European leaders) over the last few years in relation to Greece it that they have been buying time. The process of grinding Greece into the ground has allowed the rest of the Eurozone to shore up the dykes!
This point is made by the UK Guardian’s economics editor Larry Elliot in his article (February 10, 2012) – European debt crisis pitches Germany against Greece.
He says that “(t)he Germans want the Greeks out. That is the clear message from the decision by Europe’s finance ministers to reject the offer of a fresh package of austerity measures”,
He considers that the time is now ripe to get rid of the Greeks because the Germans now have the view that “the actions taken by the European Central Bank over the past couple of months have been sufficient to ensure no contagion effects from Greece to the other debt-stricken eurozone members and, just as importantly, to the fragile European banking system”,
I tend to agree with that assessment.
It is probable that what has been taken to be bumbling by the political leadership in the Eurozone has also been a process of buying time while the European banks – assisted by the ECB – have been reducing their exposure to the Greek economy.
In that context, are these claims of chaos justified? I think not unless Greek society is so unstable that it is likely to disintegrate anyway.
The Citibank recently released a Report (I cannot link to it because it is subscription only) which introduced the term Grexit into the lexicon. More importantly, the discussion acknowledges that the financial markets are now openly considering the exit of Greece from the Eurozone.
Citigroup estimated that probability as having risen from 25-30 per cent in November 2011 to 50 per cent within 18 months in February 2012.
So what would happen?
First, it is claimed that the bond markets would stop funding the peripheral EMU nations (Portugal, Spain, Italy) for fear that they would also exit. The reality is that if Greece actually got away with wiping off a substantial portion of its public debt (via the so-called PSI arrangement) it is likely that the other beleaguered nations would demand similar relief.
Would a negative bond market reaction become chaotic? Not in the least. Ask yourself – who has the ultimate power in this situation – the markets or the ECB? The answer is obvious.
The ECB can simply shore up the EMU member states and all the private banks should it choose to do so. Its long-term lending program to the banks and the Securities Markets Program (where it is buying significant quanties of government debt in the secondary markets) is already effectively doing that.
Under those circumstances the bond markets are not in a position of power to dictate to anyone.
The Citigroup analysis supports that assessment:
Policymakers in the EA have the technical ability/capacity to respond to exit fear contagion. The heavy lifting would likely mostly be left to the ECB, but the recent 3- year LTRO has highlighted that policymakers have plenty of ammunition left to respond to non-fundamental contagion and hysteria.
So if the Euro leaders really want to preserve a wider Eurozone – beyond a German-centric Deutschmark-zone – then it has the capacity to do something about it.
My assessment is that the financial markets have already been taking into account the likely exit. Currency flows out of Greek banks have already occurred.
The Citigroup analysis also supports this conclusion:
Direct (and some indirect) exposures to Greece of foreign banks, other investors, and non-financial corporates have been reduced substantially and contingency plans have been made by a likely large number of public and private institutions. This process has been going on for the past 18 months, but by now the reduction in direct exposure to Greece and the extent of contingency planning may well have reduced the direct effects of Grexit to a level that could likely be absorbed by most relevant (non-Greek) institutions without major disruption.
In real terms, the fate of the rest of the Eurozone would not seem to depend much on Greece. Its overall impact on trade for the rest of the EMU is small (nations such as Romania and Bulgaria are more exposed).
The Citigroup analysis says:
Given the limited integration of Greece into regional or global supply chains, the supply effects of Grexit on world output or trade would also likely be minor.
So why then have the Eurozone leaders been talking about keeping Greece in the EMU? The UK Guardian article (February 12, 2012) – As Greece stares into the abyss, Europe must choose – asks the same question and provides a speculative answer:
Why, then, have large sections of the Greek elite clung so hard to the fantasy that a new loan deal can “save” the country? The obvious answer is that default is a black hole and an enormous risk. No one can predict what suffering a default might bring. Another is that the current crop of politicians built their careers in the system that is now unravelling, based on oligarchies, clientelism and corruption; they’ve proved unwilling to make the reforms that might, in a different global climate, have revived both Greece’s economy and its democracy.
The author also points to “deeper … cultural and political” reasons relating to “old splits in Greek society”. The European project diverts the Greeks from their militaristic/authoritarian past.
Thus the elites have seemingly more to lose from a Greek exit than the real Eurozone economy, which would not lose very much at all. The latter’s problem is the ridiculous fiscal austerity being imposed by all EMU governments.
Second, what about the Greek economy?
It is clear that the Greek government would have to default on its Euro-denominated obligations which in the language being used in financial markets would prompt a “credit event”. There is a fear that there are very large CDS payouts linked to such an event but they would not be Greece’s problems and central banks in other nations including the ECB could deal with those as above.
It is often claimed that there would be drawn out contract litigation as a result of the default on euro-denominated contracts. As the Citigroup analysis suggests, this could be overcome by the Greek government passing “a currency law” which would:
… stipulate one or more conversion rates between the old and the new Greek currency (which we will call the ‘New Drachma’)…
Besides one or more rate(s) of conversion, the currency law would likely also specify that the new currency is legal tender for payment and settlement of debt in the ‘relevant country’, i.e. Greece, including for the payment of public and private debt obligations (including bank loans, deposits, and securities) and other contracts, including wage and pension contracts.
Short of a military takeover of the country, a sovereign Greek nation could defy all claims against it outside of the conditions that it sets in terms of its own currency.
The Greek government could defy the rest of the world completely (as in the early days of the Argentinean default) or offer re-denomination in terms of the new currency. Once re-domination was accepted then its so-called “sovereign debt” problem vanishes. It becomes a sovereign currency-issuing nation with debts only denominated in its own currency – which means it could always service those debts.
Should the bond markets decide that they do not want to invest in Greek currency financial assets then the Greek central bank – newly legislated to support the national interest could provide funding to the Greek treasury without any fundamental financial problems.
You will not read of this sort of analysis in the general media because while possible it represents the anathema to the neo-liberals. They would hate it to be understood that a nation had these options available to them.
Its new currency would depreciate – by how much is anyone’s guess. The likelihood is that the depreciation would be sharp and large. But its downward spiral would be finite and reversed as trade flows turned in favour of exports and the real cost of imports rose.
While the Greeks do not have large quantities of natural resources like Argentina did when it defaulted and floated in 2001-02 it still has very desirable assets that are exchange rate sensitive – its tourism capacity. I predict that there would be a boom in that sector virtually immediately and investment funds would flow into it.
The change in the current account would put a floor into the currency fall.
But in the meantime there would be a risk of inflation coming through the current account – as import prices rose in domestic-currency terms. As the currency appreciated again (as the Germans flooded into the sunny Greek islands to escape the Berlin winter) the inflation risk would be attenuated.
The Greek government would be advised to “discount” cost of living adjustments in their pension and wages system in this context. The exchange rate will not fall for very long – it would be a sharp, once-off adjustment.
This means that there is a real income loss to the nation (via the higher import prices) and that must be borne. Attempting to adjust nominal returns within the nation for these losses would create the danger of an inflationary spiral.
But as long as real productive capacity can be brought into use via public spending the danger of hyperinflation is low in these circumstances.
Third, would Greece need to impose capital controls?
The Citigroup analysis suggests:
In our view, it is highly likely that Grexit would be accompanied by the imposition of strict capital controls. True, the Treaty (Art. 63) forbids any restrictions on capital or payment flows between EU member states, but we think that an exiting country, facing massive disruptions in its international capital account transactions would need to impose strict capital and foreign exchange controls following exit if some semblance of financial order is to be maintained.
Malaysia gained major benefits from adopting this strategy in 1997. As noted above, the IMF has demonstrated the conditions under which capital controls, previously eschewed by free market ideologues, can be highly beneficial to a nation making large currency adjustments.
Fourth, none of these adjustments would be easy and costless. But once the nation has its currency sovereignty restored the national government would be able to spend, in a strategic way, to increase domestic production and employment and kick-start the growth process.
It will still have to ensure that its nominal pension system (which is relatively generous by world standards) is capable of being maintained in real terms. That is, it is likely that some structural changes to entitlements will be needed (read: cuts) to ensure that the productive capacity of the economy is in line with the nominal demands on it.
Greece’s inflation history in the past indicates that this sort of policy change will be required. But it would be far better to pursue that course of action within a growth environment supported by its own currency.
Trying to impose harsh structural adjustments when there is a major cyclical event (recession) occurring is very difficult (politically) and highly damaging (economically and socially).
Conclusion
No-one is denying that the Greek economy has structural issues which predicate it to imported inflation. Even with the harsh fiscal austerity which has seen its unemployment rate rise to above 18 per cent with no ceiling in sight, the current account deficit has risen.
Its export base is narrow and it imports a wide variety of consumer goods including food.
But those problems are not going to be solved more quickly by impoverishing the nation. A freely floating exchange rate will be a more effective way of attenuating the imbalances that have emerged between northern and southern Europe with respect to trade.
However, the real bonus that an exit would bring is that the Greek government could unambiguously concentrate on a domestic growth strategy and put an end to its recession.
The last four years have brought the need for some reforms – to the taxation and pension system – into relief. Within a growth context, the Greek government would probably have a better change of brokering these changes with its population than under the current conditions which are fermenting total social breakdown and open rebellion.
The UK Guardian article (February 12, 2012) – As Greece stares into the abyss, Europe must choose – brings home the reality of the fiscal austerity:
When you ask people on the street if they would rather Greece went bankrupt than submit to further measures, many now point out that it is already bankrupt, that public sector workers have gone unpaid for months, that hospitals have no supplies, that the poor are being wrung dry in order to pay the banks. “Let’s get it over with,” a woman who works for the education ministry said to me. “Then we’d know we only had €250 a month and we could start again. This is not the people’s Europe we dreamed of.” The fact that Poul Thomsen of the IMF, the eurozone’s poster boy Mario Monti, the markets and countless economists agree that more austerity will deepen Greece’s depression without making the debt sustainable adds weight to her argument … [and the current fiscal austerity] … with its deep structural inequalities and its rigid adherence to a failed economic ideology, protects neither democracy nor human rights. Stiff-necked and punitive, it prefers to eat its children.
On that sobering note I will finish.
I have to catch a flight now. Note that I will not be able to moderate comments for some hours due to a long flight.
That is enough for today!
I’ve thought for some time that there’s no reason that Greece’s economy can’t recover as spectacularly as Argentina’s did if it repudiates the debt and reintroduces the drachma. Those who disagree generally cite soy beans and energy as the difference for the Argentine economy -i.e. Argentina has its own energy resources and the Chinese bought a lot of their soy beans (I know Bill has a post on that topic somewhere). But looking at the Greek economy, I really don’t see a fundamental problem. As far as I can tell 80% of Greek power generation uses local energy sources (lignite, hydro, renewables). Greece is in 1st, 2nd, or 3rd place within the EU for exports of a number of important agricultural commodities (olives, rice, tomatoes, cotton) and they take 1/5 of the total Mediterranean fishing harvest. Doesn’t seem any reason for the Greek population to starve. Net oil imports run 300,000 barrels/day. A substantial drain on the balance of payments true, but Greece has the largest merchant navy in the world and even with an over-valued Euro attracts 16,000,000 tourists a year. Substantial enough sources of foreign exchange I would have thought to stabilize the exchange rate and prevent a balance-of-payments crisis. Am I missing something ? Listening to the “we must tell Greeks that bankruptcy means chaos” elites you’d think we were talking about Chad or the Congo, not an industrialized European country.
Oh, and a question for the professional economists. Inflation always comes up when one mentions the recent success of Argentina. That is to say, the government supposedly cooks the books and inflation is out of control. Real GDP growth is around 10% and the government claims 10% inflation so presumably the measured nominal GDP growth is 20%. Yet private economists claim the inflation rate is really over 20%. Doesn’t this imply that the real growth rate is negative and that the Argentinian people are mysteriously confusing a boom with a recession. The question then is — is it even theoretically possible for a government to systematically misrepresent inflation figures to such an extent ? To a non-economist it seems no.
In Pictures: Greeks protest austerity cuts
(from Al Jazeera, late Sunday)
http://www.aljazeera.com/news/asia/2012/02/201221221456127197.html
Also, the police there are threatening to bolt:
Greek police union wants to arrest EU/IMF officials
http://www.reuters.com/article/2012/02/10/us-greece-police-idUSTRE8190UC20120210
And there is this:
Greek hospital now under workers’ control
http://libcom.org/blog/greek-hospital-now-under-workers-control-05022012
Obviously, this is a country in deep trouble.
I heard a Greek commentator put it this way
“They have given us a choice. We can either commit suicide or they will kill us”
Still every German I talk to denies it is anything to do with them or Germany and the really weird part is I think that is what they honestly believe. How can a nation show such callousness?
” How can a nation show such callousness?”
History shows they are rather good at it. when the mood takes them. It’s part of being German.
“I’ve thought for some time that there’s no reason that Greece’s economy can’t recover as spectacularly as Argentina’s”
I’d go for the more modern example of Iceland.
The problem with Greece is that the default has to be managed, and managed well by somebody who knows what they are doing.
Can you see that person?
If the long-term lending program to the banks and the Securities Markets Program from the ECB can provide stability to the EU bond markets during a Grexit is it not likely then that the rest of the PIGS group will eventually also get into a Greek problem where more austerity gets them into an economic depression? Was is not low rates and stable bond markets 5 years ago that caused the problem in the EU?
The evil German discourse doesn’t help. There were probably about 50 germans, working in banks and their gov supervisors, involved in poor credit control (for the bulk of the loans) and a similar number of Brits, French, whatever doing the exact same. Now their gov is a bit rigid but so is everybody else’s. Neil, do you think the average punter on the English high street thinks the Greek crisis is their fault? English banks surely were part of the game, and the UK gov could today issue sterling to buy euros to pardon the UK banks’ share of the mess (or the whole lot if it wished too).
Argentina took the best part of a decade to recover, devaluation may work a tiny bit better, but is no fun. Also it predated the internet, I think people may over estimate the ability of the Greek gov to impose capital controls. Private greeks can use online eurocore bank accounts to trade with each other in euros and there’s enough paper cash for petty transactions coming from the tourists. Can a gov who can’t collect tax very well really establish a currency that’s not used only by an underclass? Doing a north korea and using raw force is not an option really.
@ neil wilson
Agreed, Iceland is a better example. It’s small and not overly well-endowed with exportable natural resources yet it has returned to growth. Croatia also seems a good example of what a small country can achieve within the EU but outside the Euro. Enormous per capita income growth over the last twenty years. A trade deficit bigger than Greece’s but no balance of payments or debt crises.
It is strange that chaos refers to the banking system and not what is happening to the people in the streets. Also, when the Greeks depart, I wonder what kind of agreements the troika installed government will make with the European banks against the interest of the Greek people.
A Greek engineer on BBC Radio 4’s Today programme pointed out the irony that the leaving the debt is said to lead to becoming poor, yet austerity is making them poor.
If someone takes a look at the Greek current account statistics for Jan – Nov 2011 and makes some conservative projections for December he will come to some interesting results. Goods and services deficit excluding energy is more or less balanced (the deficit is close to 0,5% GDP). The Greek current account deficit is attributed only to energy (5% GDP) and debt interest payments (4% of GDP).
Since debt payments in a new currency will only be made to Bank of Greece accounts in local currency (compared to the current situation where external payments are moved to other accounts in the Eurosystem with the Bank of Greece marking a liability towards the Eurosystem) – as long as debt are redonominated to the new currency – the only demand for foreign currency that will exist is for energy imports close to 5% of GDP. I really cannot think of a scenario where such a deficit can create large exchange rate problems and inflationary bias for the Greek economy.
Bill, tourism depends strongly on imported good including energy. The eventual devaluation of the currency would mean expensive import. Furthermore, Greece is still the member of EU and that means the bullying will continue even after introducing the sovereign currency that means the government still will be restrained in spending. EU membership also restrains political decision making: speaking of tourism, the Greek can’t introduce, for example, a visa free regime for Russians. That makes Greece not much more attractive than Spain. Leaving Euro, would mean leaving the EU that means no chance for Greek people to get a decent job outside the country.
It is likely that the future of Greece is strong nationalism and dictatorship. A similar event happened in Russia in 1999, with Putin – a strong nationalist – taking over confused state.
The potential candidate for winning next Greece elections is LAOS – an ultra right party – which probably scored a lot of points by saying “NO” to the bailout (if the elections will ever come).
I am very sorry for Greek people but they are really in catch 22 situation. The decision is a horrible end or horror without end. Therefore, it is up to people to make a choice and live with it.
The Citigroup Report: http://willembuiter.com/grexit.pdf
Greeks are getting poltiically radicalized – and fast. According to a recent poll, conducted by pollsters Public Issue for the daily newspaper “Kathimerini” :
— 91% of Greeks believe the country is heading in the “wrong direction”
— 79% are “dissatisfied” with the way “democracy functions in Greece”
— 79% are against the terms of the Bailout Agreement
— 70% oppose a return to a national currency (that’s the bad news – though there’s a very slight shift since Jan.12 in favor of the Drachma, from 13% to 15% )
— 41% have a “favorable” opinion of the European Union as a whole (vs 51% in Jan.12), while 54% an “unfavorable” one (vs 44%)
— 61% have a “favorable” opinion of the Euro currency (vs 66% in Jan.12), while 35% an “unfavorable” one (vs 32%)
— 91% are solidly “dissatisfied” with the way the “current government deals with the country’s problems”
— The popularity vote for technocrat PM Mr L. Papademos turns south for the first time, with 48% of votes going negative vs 46% positive
— 27% trust PM Papademos to “handle the economy’s problems” (vs 36% in Jan.12), while 71% do not trust him (vs 62%)
— 58% believe there must be general elections “today” (i.e. soon).
— How respondents would vote today in a general election:
Conservative, center-right “New Democracy” party (“Nea Dimokratia”) 31%
“Democratic Left” 18%
Communists “KKE” 12.5%
“Radical Alliance of the Left” 12%
The previously ruling “Panhellenic Socialist Movement (PASOK)” 8%, a dramatic drop from 43% in 2009
Extreme Right “LAOS” (“Folk”) 5%
“Ecology Party” 3.5%
Conservative, neo-liberal “Democratic Alliance” 2%
Neo-fascists “Golden Dawn” (“Hryssi Avgi”) 3%
And misc. 5%.
So, the combined Left (the 2nd, 3rd and 4th parties) is polling an astonishing 42.5%. We shall have more interesting times ahead.
Hi all,
I’m having a Facebook debate with a friend who’s almost categorically opposed to government spending in any form. In the face of MMT arguments, he has stated the following: “Federal spending does not lead to inflation. It does crowd out private investment, but it is money-printing that leads to inflation. Who is buying our debt and deficits? The Fed, primarily, which is printing dollars and ‘excess reserves’ to keep long rates artificially low. When the deficits are as enormous as they are presently, it takes extraordinary imbalances to keep the ship aright. BTW inflation is 3.6% of late, well above the 2% ‘acceptable’ rate at major central banks.”
He appears to be implying that by maintaining high deficits, the Fed is forced to engage in activities that lead to increased rates of inflation in order to keep “long rates” low. Can anyone shed some MMT light on what he’s talking about? Thanks.
Re: Brian
Ask your friend to see
http://rodgermmitchell.wordpress.com/2012/01/04/myths-about-debtgdp-and-deficitgdp-while-being-24-and-believing-those-myths/
about inflation,
Brian, easy, tell your friend that you wish to buy a Porsche with that newly printed money, so maybe he can tell you where you can get some of it. If people can’t get to it (aka banks sit on it) no inflation is possible.
I am sorry and the following paragraph may offend some people but this is what I think.
The army, Orthodox Church and plutocracy are firmly in control no matter how many banks are torched. The role or the politicians belonging to all these parties is similar to condoms – they are usually replaced once worn out and their supply is infinitely elastic.
If some people living in Greece don’t like the system they can leave the country and forget about the “cultural heritage” and all the unresolvable problems small and big. Sorry about that but something has to give and the real dimension of liberation is not the reform of the oppressive state, the removal of Euro-plutocracy, the Church or the Army from the power but rather the rejection of the predominant culture by these individuals who don’t like it. Therefore the nation cannot be “liberated” only some individuals can choose to sacrifice their illusions and lead a totally pragmatic life free of belonging to something like a nation in the European sense. A geographic isolation usually solves the problem of “the others” trying to impose their views or exercise power on myself. This is the main advantage of capitalism over communism/feudalism – one is always free to leave. I did that 8 years ago, I will never live again in Poland which is another example of very thoroughly screwed up society with deep cultural heritage and believe me or not – I am happy.
The chance of any meaningful reforms are close to zero and all other scenarios (a revolution leading to a civil war) won’t change the paradigm. An emergence of a Greek Kemal Mustafa Ataturk or Vladimir Putin could probably lead to the least worst outcome but Greece is not a breeding ground for Ataturks even if you only need one.
The neocons in control of the Troika are effectively setting about to achieve, using financial weapons of mass destruction, what the 3rd Reich attempted to do using military weapons.
Neil Wilson says:
Monday, February 13, 2012 at 19:18
” How can a nation show such callousness?”
History shows they are rather good at it. when the mood takes them. It’s part of being German.
Neil,
Psychology has shown many times that we are all rather good at it when the “mood” takes us. Its part of being human.
best wishes
Graham Wrightson
Adam (ak) wrote:
“The army, Orthodox Church and plutocracy are firmly in control no matter how many banks are torched.”
I agree that torching banks solves nothing. (Actually, neither does the torching of anything.)
But neither the Greek armed forces nor the Greek Orthodox Church are in “control” of anything in the country’s economic affairs. The Church is the owner of significant wealth, particularly in real estate. But that’s about it. If it plays any role, it’s limited in social affairs, such as lobbying to keep religious studies in the high-school curriculum, limiting religious freedoms for “heretics”, and other such nonsense. There is no religious fundamentalism in Greece. As to the armed forces, there is clearly no interference by them in politics or in economic affairs, either directly or indirectly.
As to the “plutocracy” you are also referring to, I can only say that the whole Greek private sector is also being (severely) hit by the austerity measures. This is what the figures are showing.
The Assosiation of Industry has adopted a position of support for the “reform measures” as well as for the “austerity package”. However, these measures only serve the interests of central and commercial banks. There can be no debt repayment nor deficit reduction, let alone a recovery, with this kind of bloodletting. In the words of Bill Mitchell and Johnny Rotten “there is no future” in this.
If you want to place the blame on someone, try the people in charge of Greek affairs. They are doing the bidding of banks, the institutions whose interests the Eurobosses now openly and exclusively promote.
Cheers.
@Brian : In reference to your friend’s claims.
“Federal spending does not lead to inflation. It does crowd out private investment, but it is money-printing that leads to inflation.”
The terms ‘Fed spending’ and ‘printing money’ denote, in mainstream terminology, the same thing: net deficit spending by the state.
CROWDING OUT: The effect of crowding out is assumed on the basis of higher interest rates caused by the state issuing debt to cover, in at least accounting terms, its deficits. It is assumed that the banks have limited amounts of money to lend out, so the increased competition for these loanable funds will drive up interest rates to the point that the private sector is “crowded out”, i.e. is no longer borrowing or is borrowing less. But the Fed controls the interest rate and can control longer-term interest rates if it desires. The banks are actually not limited in their capacity to lend. There is no crowding out.
INFLATION: When private spending decreases significantly and there is so much spare capacity in the system, as is the case today in the US, government action cannot generate inflation. The scale of every fiscal intervention would be mediated by the extent of the private sector’s withdrawal (for a given external deficit).
You have idling space in employment and productionm capacity. Demand is weak. Barring an outside event, stagflation is extremely improbable. Whence inflation then?
“Psychology has shown many times that we are all rather good at it when the “mood” takes us. Its part of being human.”
Indeed, but particularly when we’re surrounded by people suffering the same groupthink.
@ cig
According to the Center for Economic and Policy Research (Dean Baker, Mark Weisbrot), Argentina had one quarter of contraction … not a decade.
http://www.cepr.net/documents/publications/argentina-success-2011-10.pdf
Vassilis,
Believe me or not but the processes which happen now in Greece are not unique – to some extent they look like a repetition of the “reforms” undertaken in the post-communist countries 20 years ago – obviously with “Greek characteristics”. If you see the analogy you may be able to discover the direction of the processes and make very tentative forecasts about the future. So my prediction is that obviously the default is taking place one way or another but the austerity will be implemented and Greece will remain within the EU structures as a kind-of protectorate. People have no voice because they are divided and confused. Whatever you say or do will most likely not change anything because the historic process is moving in a very well-defined and well-known direction. “TINA” – there is no alternative.
At some point of time probably not too far in the future someone in Brussels or Berlin will quietly say “look guys this is probably enough” and the money will trickle again. And nothing will really change in the society as a result of the “reforms” except for the damaging results of the austerity which will last for 20 years or more.
I disagree with the statement that the army plays no economic role – there is an article on “Zeit Online” “Ruestung-Griechenland” (I provided a link on Warren’s blog) detailing how much money has been wasted and is being wasted on purchasing useless military gear. NB the hysterical attitude towards Turkey presented by the Greek political and military elites can only rival with venomous anti-Russian nationalism peddled by Polish right-wing politicians (temporarily out of power since their president crash-landed in fog in Smolensk killing himself and almost 100 people). It is the Greek army siphoning out 2-3% of the GDP on foreign purchases which helped to blow the hole in the budget over the last 20 years or so. And these issues are not even openly debated in Greece. Is Greece a member of NATO? So the borders are guaranteed by the US and recognised by everyone including Turkey – maybe except for some little stretches of the maritime border. What’s the problem then with sacking all the army and closing the shop if such a useless institution cannot defend the sovereignty against the non-existing threats? Actually they actively contributed to the current shameful loss of sovereignty.
Obviously it is better to blame someone outside – e.g. the Germans or neoclassical economists. Are they innocent? Of course not – but this really doesn’t matter. What I have written barely scratches the surface and I have no time left today to look at the issue of the stifling influence of the old elites in the society (such as the Church) on the decision making progress. Simply there is no homoeostatic process in the society and the aberrations are not corrected. There is even no meaningful debate.
My prediction is that there will be no leader or leadership group or wider social process in Greece who can pull the country out from the mess. The faceless Euro-bureaucrats and the local technocrats will do their job the best they can but they will not change the ways the system works. If there is too much dissent the well-fed army and security apparatus will “democratically” install a new shiny Black Colonels junta – exactly like in Egypt after toppling Mubarak or like in Croatia where Franjo Tudjman “restored” the national pride. Do you think that European Court of Justice will question the legitimacy of any new Greek government?
Expect another 20 years of mess and stagnation in Greece. Welcome to Eastern Europe…
Adam (ak)
I am not familiar with the situation in Greece, but I assume the reason they don’t cut in the military to be the same for which they don’t cut in the military here in Portugal – it’s not because the Army has any active political or economical importance, but because the Army CAN play an active political role. They don’t do it because the Army rules – they do it because they don’t want the Army to rule.
Machiavelli understood this 🙂
@Adam (ak) You wrote
“Greece [is] a member of NATO…So the borders are guaranteed by the US and recognised by everyone including Turkey – maybe except for some little stretches of the maritime border.”
That is incorrect. Greece and Turkey disagree on the whole Aegean Sea status! Greece threatens to extend its islands’ sovereign zone to 12 miles, according to int’l agreements (now laws), but Turkey disagrees and has formally declared that such a move would constitute casus belli! We can discuss the reasons behind them but the disputes are real.
“I disagree with the statement that the [Greek] army plays no economic role…[a lot of] money has been wasted and is being wasted on purchasing useless military gear.”
We agree that most of that money is wasteful. But is is not the armed forces that are driving the spending but, rather, corrupt politicians. If the army had influence, its personel would be paid better! But overall they enjoy a very meagre pay and peanuts as pensions. Only a handful of officers are involved in the decision making process of weapons purchasing – which is where the money is spent and kicked back. The decisions for weapons purchasing are made at the political, government level. (Viz. ex-Defense Secr. A. Tsohatzopoulos affair.)
The Greek armed forces are toothless and have no say in political affairs, for decades now. Gone are the days of heavy-handed military interference in political affairs, gone since the military dictatorship caused Cyprus to be invaded by Turkey.
Of course, History could change course! The Greek government recently and for the first time announced significant cuts in the (already meagre, as I said) pay scale of the oficer corps.
Rebellions often begin because of small grievances.
“The historic process is moving in a very well-defined and well-known direction.”
Completely, totally disagree!
If we have learned anything in the modern age is that historical determinism is a non-starter.
@Adam (ak) also wrote
“Obviously it is better to blame someone outside – e.g. the Germans or neoclassical economists.”
I blame only us Greeks for being in the mess we are in, because it is through our political choices (the choices we made for governmental leaderships on down) that we arrived here. But this does not mean that the cause for the economic emss should not be properly analyzed. The “Germans” (the German government, the Central Bank of Germany, the ECB, etc) have been instrumental in the establishment of neo-liberal economic policies in the EU and it’s those policies that brought about the Maastricht Treaty, the Eurozone and all the other plagues. But in the “German” group not only Germans belong. Same goes for all the Eurobosses who have isntigated those policies, Greeks included. Yet, we agree that the Greek people takes responsibility in voting conduits of Europolicy to power.
Vassilis,
I do not believe in any determinism but when the dust settles after the bankruptcy and possible revolution or whatever happens in the short term, it is quite likely that very little will change because of the inadequate state of the social consciousness. It is so easy to hijack any grass-root social movement. Only a grand-scale destruction like WW1 or WW2 can bring a substantial change to the trajectory. Greece, even bankrupt, is still far richer than the “true” Eastern European countries. When dozens of homeless people die during a winter (I hope that doesn’t happen) then we may agree that the country has crossed the threshold. Just look North at the ruins of Yugoslavia or at Ukraine – have these people found the “third way”? No, they live in EU protectorates or in the outer-zone of the temporarily shrunk Russian Empire. For now the predominant paradigm is “let the rich be rich and we don’t care about the rest”. I may be obviously very wrong – if a significant number of people realise that all the options are exhausted like in Argentina then the change will come. But first “TINA” and neoliberalism have to go.
I am not convinced that the army is toothless – I may remember tanks on the Polish streets (1981/1982) too well… Also – I agree that the Turks are not funny peace-loving guys sipping coffee and smoking water pipes but spending 2-3% of GDP on armaments in the current circumstances is plainly stupid. Instead of the 6 miles wide strip of the sea bottom the country may lose much more.
“I assume the reason they don’t cut in the military to be the same for which they don’t cut in the military here in Portugal”
Here is another reason:
http://www.defensenews.com/article/20100507/DEFSECT04/5070306/France-Germany-Forced-Greece-to-Buy-Arms-MEP
The story in more detail (only in german, sorry):
http://www.heise.de/tp/artikel/32/32961/1.html
Regarding the debate about the callousness of the germans (I’m austrian):
They are just following the neoliberal mainstream.
The dogma of austerity and the fear of inflation is still
They wanna be Exportweltmeister. Modest hard working people (they worked the last 20 year without any increase in income. Their unit labor cost has stayed constant the last 20 years or so
http://de.wikipedia.org/w/index.php?title=Datei:Lohnst%C3%BCckkosten.jpg&filetimestamp=20060625090330 )
And there have been very harsh social reforms (hartz). The picture of the swabian housewife, who is the epitome of some hard working, never demanding robot, is presented as the micro- and macroeconomic ideal. Additionally the media is flooded by supply-side economists who repeat the austerity myth over and over again (with a few exceptions).
Of course this misrepresentations now fuel nationalism (we have to work for the lazy southerners) and there is slight shift in German self perception, since they now can show them how it’s done. The mixture is very unpleasant.
However after WW2 their was a quite thorough Vergangenheitsbewältigung (dealing with the past), far more diligent than in my home country Austria. (I just discovered with awe that there doesn’t seem to be an english word for this, while there are two different ones in german). Still the germans are virtually the only european country with no far-right party in the parliament (although at times the conservatives worked hard not to leave too much space to their right).
Anyway, germans wanna be seen as the industrious ones and not as some grande nation, nowadays. But this is maybe just shifting a little. And one shouldn’t stick to these generalizations anyway.
An emergence of a Greek Kemal Mustafa Ataturk or Vladimir Putin could probably lead to the least worst outcome but Greece is not a breeding ground for Ataturks even if you only need one.
Pericles?
Dear Bill!
Although some of Your thoughts are right (especially the conclusion, that greece have to go bancrupt), most are completely wrong, especially the idea that with their own currency everything will be OK again.
Because of me don’t having so much time at the moment, I’m not going into detail about the greek elite being incompetent in good times (so how should they manage a breakdown of their financial system), or the problem, that there will be no immediate economic recovery, because the greek government isn’t the only debtor – the greek economy has debts as well. This debts are in euro – so if they are paid in drachme in greece again, how will they pay their debts to their sellers in the rest of the eu?
I’m just taking the most obvious mistake in Your conclusion – that financial controls will work as they did in Malaysia in the 90s and in Argentina 2001! One comment just mentioned the internet and the possibilities coming with online-banking. But the there is one important point beyond that:
Even when exiting the euro zone, greece is still a member of the european union. And since the maastricht treaty the EU is a common market. That means the flow of goods – AND MONEY (!) – cannot be hindered by
governments! It is illegal if the greek government impose capital controls. And when Your suggestion is that they than exit the EU as well – then they will suffer even more, because then there is no more money from brussels at all and the people cannot move to other countries to earn money.