This one sentence sums up what I think is the fundamental problem: "An insolvency problem was thus dealt with as if it were a case of illiquidity." That is, the problem isn't some ephemeral panic where people are temporarily unwilling to lend. The problem is there are massive capital losses that have yet to be acknowledged. The problem is that Euro politicians believe that by continuing to bankroll Greece they will stem a wider panic. But as John Mills observed in a speech given to the Manchester Statistical Society in 1867, “panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its
betrayal into hopelessly unproductive works”
The losses must be acknowledged. The only question is by whom? By the people who made the loans? Or will the taxpayers of Europe be called upon, as the taxpayers of America were, to eat the losses?
Why do news reports keep saying that Greece got bailed out?
Let's say you lend $100,000 to my startup. I have to pay you $10,000 a year until the loan is paid off. I hire a thief as a CEO who gives the $100,000 to his friends and family, and my startup has nothing to show for it.
Now my startup is bankrupt. I'm working as a waiter in a restaurant to pay the rent. I can't make my annual payments to you, much less pay back the principal. You've just suffered a $100,000 loss. That's the risk you take as a lender.
Surprise! Now the government steps in and gives you $50,000 to buy this bad loan from you. What a great deal! It would have been a total loss!
Then the government garnishes my wages from my waiter job for the next 50 years to reimburse the government.
Who exactly got bailed out here? Me (the Greek people), or you (foreign banks and bondholders)?
And what happened to the thieving CEO who stole the money in the first place?
The fundamental difference in my opinion is that you can't shut down a government. So, this startup is still going and it's still borrowing to keep itself afloat. Makes it harder to say 'lets move on.'
I agree though, the EU should have a bankruptcy for states. The problem is that introducing that in crisis time raises borrowing costs. France, Italy, and other countries would suffer a lot of immediate pain.
That's not actually true. After the severe austerity, Greece is now running a "primary surplus". Excluding interest payments on the debt, revenues are greater than expenses[1].
The issue is not whether you can shut down a government. The issue is that the debt burden is too large to ever be repaid based on the revenue-generating capacity of the economy.
And austerity only makes that worse. Banks and bondholders freely made loans to Greece that now cannot be repaid. The people of Greece didn't benefit much from these loans, as the vast majority was siphoned off by corrupt officials.
Why were rich banks and bondholders bailed out, while generations of ordinary Greeks must suffer in poverty and unemployment?
My point is that each of these "bailouts", like the latest $7 billion euro "loan", don't benefit any actual Greek people.
It's an ECB "loan" that goes from one ECB account directly to another ECB account as "payment" on debt. Exactly zero euros of these go to Greek people.
If I was Tsipras I'd decline these "loans" as well. They do nothing to help Greek people, and they just obscure who is really getting bailed out.
It seems really hard to sell that. The Guardian Weekly is a good attempt, and it has articles from Le Monde and Washington Post in it regularly as well. Combined with Le Monde Diplomatique (In English), which you could get as hard copy bundled, it gave a much better European view.
Unfortunately they don't sell an electronic copy, which I would certainly subscribe to.
I agree with everything you say up to “panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works”
In todays fractional banking system where banks only hold a fraction of liquid assets to cover their liabilities, a run on a good bank could still put it under. (Lehman, Bear and others were both illiquid and insolvent, but runs can kill good banks too) This is why the FDIC was put up to guarantee commercial banks. Nothing similar existed to protect investment banks.
Not quite. If a bank is solvent but illiquid, they can get a loan from the central bank. This is the central bank's "lender of last resort" function.
So no, a good bank cannot be put under by a bank run.
We will probably never be able to say to which extent the big banks at the time of the financial crisis were still good banks. The problem there was that banks had a massive amount of assets that were indirect (i.e. whose inherent value relied on other assets) and that were structured in such a complicated way that nobody could assess their inherent value.
Before the panic, the inability to measure the inherent value of those assets was ignored because they could be valued according to their market value. With the panic, the market simply stopped doing anything, and there was no market value anymore.
The FDIC is orthogonal - it is an insurance of deposits (up to a limited amount) even at bad banks.
In theory that's the central bank's job. 2 issues, though...
1 - It can be hard to tell the difference between solvency and liquidity. What's a derivative of an MBS really worth? Or a CDO that's made off of other CDOs that are trading at an undetermined liquidity discount? Or a unique plot of real estate?
2 - The bailout decisions are often political, as well as based on imperfect reads of fundamentals.
Yes, the FDIC provides run protection from both bad banks and good. Protecting bad is the price of protecting the good.
And no, FDIC protection intentionally protects deposits at bad banks. This is not an accident. Trying to put the burden of evaluating what a bad bank is onto regular people is not going to end well, so you guarantee deposits at all banks, full stop.
Besides: Deposit insurance for deposits at good banks is pretty pointless, don't you think? It would never be used by definition.
My point is just that a good bank can still have a run in the absence of the FDIC guarantee.
Let's say a bank has $100 million in deposits. They keep $10 million in liquid assets, and lend out $90 million in un-securitized loans to local businesses. There's a false market rumor of something bad happening at the bank, and all of a sudden $20 million in depositors want their money back. The bank isn't able to resell the loans quick enough on the secondary market to make up for the shortfall. This could happen.
The FDIC guarantee protects the bank because there's no longer a need to have the run - everyone will get paid.
I think you're right about our mostly-agreement :)
Just to clarify, I think we have to distinguish between the likeliness of a bank run and the effects of a bank run.
Indeed, the FDIC makes a bank run extremely unlikely. Perhaps this is what you mean by "protecting the bank".
However, even if there were no FDIC, a bank run on a good (solvent) bank would not cause that bank to collapse, due to the central bank's lender of last resort function.
The bank run would "merely" cause a shrinking of the bank's balance sheet, which the bank would have to offset by selling its assets over time.
It is true that a big change in the balance sheet like that could still lead to the eventual death of the bank, e.g. because the bank has high fixed costs (in the form of physical branches, non-fireable employees, and so on) which can no longer be covered by profits from its regular business. However, this eventual death is (a) not certain since the bank has plenty of opportunity to turn things around and (b) a slow death, very much unlike the sudden implosions that people usually think of when they hear "bank run".
Once a run happens, the central bank has to make a choice on who to lend to based on imperfect information, though. The central bank might say, "I don't know about all these local real estate loans, let's let them fail."
Yeah, but unless you have massive disinformation, you can't create a panic on a solvent bank in today's world. The examples you use were ones where capital had been destroyed.
I guess you have to define what a solvent bank is. I don't think any bank can handle a sustained run given their liability duration mismatch. So I am not sure what do you mean that you can't create a panic. Its always possible to have runs just not very easily.
The financial crisis showed that bank liabilities are really liabilities of the country that the bank incorporates in. So in case of Ireland, Greece, Iceland, it is up to the country to step up and backstop their banks. If a country can not, then you will have panic on a bank. And in order for a country to be able to backstop their banks, the debt of the country must be credible.
I'd argue a solvent bank is one whose expected return on assets, adjusted for expected losses, is sufficient to ensure it can repay money lent to it at the discount window rate [for all plausible trajectories of the base interest rate over the lifetime of its outstanding assets]
There's no logical reason why a central bank wouldn't lend to such a bank at the discount window even if some irrational hysteria caused its depositors to withdraw en masse, or why another bank not suffering from depositor hysteria wouldn't buy its loan portfolio.
The problem of national governments' economic policy lacking credibility is largely orthogonal[1]; central banks that underwrite private banks print money rather than borrowing it
[1]except to the extent really inept inflation-boosting fiscal policies compel the central bank to make aggressive and unanticipated interest rate rises that drive banks into insolvency.
The issue is expected loss. No one knew what is the expected loss in a crisis. This is why some of the Lehman debt holders actually made money from the bankruptcy. This is why TARP actually made money. It is because there is a substantial difference in asset price while in crisis and not in crisis. The asset price is what is making the bank solvent.
Of course, the central bank (unless you are locked into a monetary union of course) can lend freely during a crisis. However, it must also be careful as to not trigger inflation or worse yet cause people to lose faith with your currency. There is also moral hazard as well but that's more of a soft issue.
The bigger issue is what happens if your bank liability is many times larger than your countries GDP. This was the case with Iceland or Britain. Then you can't print enough money to make your bank whole.
Well, no. The fundamental problem is that Germany has been treating the rest of the EU as an expedient export market while refusing to allow equivalent imports, and at the same time aggressively insisting that countries in the EU should somehow magically not need debt... to continue buying from Germany.
There's also the minor point that this is yet another excuse to indulge the usual neoliberal hatred of social spending and everything else that improves the condition of ordinary people who work for a living.
Germany has a long post-war history of renegotiating or ignoring debt. So crashing the Greek economy by enforcing murderous austerity - literally murderous in its effects, and not hyperbole - is a new peak in self-serving hypocrisy.
Your statement about Germnay refusing to allow imports is manifestly false. The EU is a free trade area and its member states are not permitted to engage in such activities. The EU has its own courts to enforce such rules.
It's certainly true that Germany is a net exporter: this is because of their ability and competitiveness in engineering and technology, combined with the fact that Germans are not big consumers and prefer to save their money. It would be good for Europe as a whole if Germans spent more money on imports - but the idea that they are deliberately blocking imports is bogus.
Europe doesn't really have neoliberals, so I'm not sure what your point is there. If anything, Europe leans to the left.
If you want to find a country with a long history of ignoring debt, then look no further than Greece, which has defaulted over 20 times. It is a country in deep need of structural reforms in order to have a viable economy. Yet the reforms haven't happened, due to corruption, cronyism and general foot-dragging. This is the real problem and debt-reduction isn't going to solve it.
No, Germans are not more frugal than other people. The main issue behind lacklustre German consumption is that neither their wages nor their investment in infrastructure has kept pace with their productivity growth.
15-20 years ago Germany was the sick man of Europe. Labour market reforms in line with an industrialization boom in Asia restored the competitiveness of her industrial economy.
The real problem with this argument is that they are too short-sighted. Germany cannot artificially reduce its competitiveness to appease other EU countries, because competition happens on a global stage and so the EU would simply lose out further to North America and Asia.
Your are correct that Germany should spend more on infrastructure.
The issue here is that we know Greece is not as competitive in exports as Germany. So what can Greece do to run a trade surplus while in a common currency union with Germany? They are not able to depreciate their currency. They are not allowed to put up tariffs either. Also, where does the German do with their export surplus. They don't just hide it under the mattress. German banks is also looking for a outlet, however, Greece is not allowed to implement capital control to block the inflow. So the only alternative is to out compete Germany or some other Euro-zone countries (but this just substitute Greece for some other PIGS).
The key here is that for everyone in the world, the trade surplus and deficit must sum to zero. So someone has to run a trade deficit if German/Japan/China wants to run a trade surplus. German now wants the entire eurozone to run a trade surplus which means someone else must run a even bigger trade deficit.
BTW, it is in theory possible for Greece to run a government budget surplus but a trade deficit. This would mean that the private sector is loading up on the debt. Even in this case, the private sector is really the banks which has to be backstopped by the government anyway. So bank debt is just another form of government debt.
Yes, that is the core issue: can the Euro sustain both Germany and Greece given how diverse their economies are? I have my doubts, but perhaps what we're seeing is an emerging solution wherein Germany subsidises the weaker members of the Euro indefinitely. That still doesn't absolve Greece of financial responsibility but it would support their position of having a sizeable portion of their debts written off. It's a sort of sovereign welfare state...
Europe doesn't have neoliberals? How else do you explain post 1990 economic policy?
TheOtherHobbes isn't discussing rules or laws, but merely the current and recent economic structure. Germany net exports. Therefore, without floating currencies, only one thing may occur: someone must borrow money. You write about this -- "a country with a long history of ignoring debt" -- as if it were a moral claim, rather than an accounting identity.
Where Greece not in a currency union, they could have gradually restructured, as drachmas depreciated against foreign currency, or they were forced to borrow in a foreign currency. Their problem is that the EU is set up, by design, to actively fuck less productive southern states. States, whether states in a union or independent states, either need their own currency in order to accommodate differing productivity levels, or high productivity net exporters must accept permanent subsidization (as northern / coastal states do for the American south) of less productive states.
The simple fact of the matter is that the ECB has long acted in a way that favors Germany while the German government has carefully avoided explaining to Germany the consequences of running an export economy inside a currency union. Now that they have had 20+ years of economic success as the outcome of the union, they wish to duck the consequences.
That very much is in citation needed territory, please give at least one example of how Germany is refusing intra-European imports in any category. Free trade is one of the cornerstones of the EU, Germany imposing a tariff or blockading goods produced elsewhere in Europe would make some pretty fat headlines.
> That very much is in citation needed territory, please give at least one example of how Germany is refusing intra-European imports in any category.
(Not GP.) You are of course right that Germany has not created import tariffs or other direct and illegal options. OTOH the German government has implemented numerous actions that indirectly had wage-suppressing effects (which per definition lowers imports and raises exports) in the last decade - to a degree that even the IMF(!) felt the urge to demanded actions for more domestic demand on multiple occasions [1][2].
The one notable exception is the implementation of a minimum wage law in 2015.
Except that Greece isn't in a currency union with those other countries. If Greece had their own weak currency then it would make their exports cheaper, which might make them better off (except that leaving the Euro would trigger a financial collapse). China has been trying to keep the Yen cheap against the dollar for this reason, if your goods are cheap then ohers will buy more of them or prefer you over another producer.
Refusing isn't the right word. From my experience there are fewer categories of products where a German consumers gets value add from purchasing non-German products (B2C or B2B) as compared to, say, Greece. First how much could Germany import from Greece at the outset. And, not specific to Greece, there is a general aversion to buying the lowest cost product just to save money; and there is a general preference for predictability, longevity and quality. Others may have the opposite experience, but for me German demand for domestically made products is a sensible and a cultural "refusal" and not an institutional one.
TheOtherHobbes used a bit of an ellipsis here. There is no outright refusal of imports by law, but there is a refusal to allow the kind of economic conditions (such as wage increases in line with productivity increases) that would lead to a balance of imports and exports.
It is evident that of all Eurozone states, Germany is the one that deviates the most from a policy of stability. Unfortunately, the deviation is in a direction that ends up with Germany in a position of power.
Germany deviates from the European norm by having products on offer that are globally competitive. What a crime. Let's make Europe more stable by turning every country into Greece!
Competitiveness is a matter not just of value, but also of price, which is largely a matter of how much you pay your employees. Germany achieves its competitiveness by paying employees badly. That is a not a virtue, it's a vice.
That's the key here, and again I encourage you to read and contemplate the post that I linked to, since it clarifies the issue.
Krugman's article like everything he writes is not insightful. Wages are no per-se too high or too low, but rather relative to wage levels of competitors and desirability of produced goods. Germany competes in a global market and in that global market Germany is a high-wage country. When it had higher averages wages, Germany lost its competitive edge.
Here are more interesting questions: which are the average wages paid in Greece appropriate for the product Greece seeks to sell? Which products from Greece do you buy on a regular basis? Greek smartphones? Greek cars? Greek chemical products?
Please, actually read the article. The numbers in the last diagram are relative unit labor costs. In other words, they are labor costs divided by the (market) value of the produced goods. This division incorporates everything you claim to be missing, which is why I feel confident in the claim that you either haven't read or haven't understood the article.
Krugman claims "Germany, [...] has had much too little wage growth" and offers no argument whatsoever to support this claim. It's pure stipulation!
Indeed, if he were to take his own figures seriously, he would have to argue that e.g. Portugal too does not have enough wage growth vis-a-vis Greece and Italy. But he keeps bashing Germany, as Krugman always does.
Anyway, why should relative unit labour cost be the only relevant measure? Other factors are also important, for example the cost of capital. The more advanced an economy is, the more important cost of capital. Since Greece does not produce capital intensive goods, it should have higher relative unit labor costs. Krugman should know these things ...
Exactly. This needs to stop immediatly. Suicide rates in Germany are 4X (!) as high as in Greece. Germany is living on an extreme austerity program since more than 10 years - the Agenda 2010 implemented by the socialists in 2003. Cuts to unemployed people, cuts to families, cuts to everyone, stagnation of income for over a decade except for the top 1%. Where do they think this should end?
Germany is importing work (which is not measured in the usual import/export KPIs) on massive scale with money going back to the originating countries. This has been going on with Italy and Turkey over decades (60-80), with Poland in the 90s and currently with Spain and Eastern European countries.
Real import/export KPIs would take this into account. Then I would assume Germany is a net importer not exporter.
Nit: in 2008 the US had both insolvency and liquidity problems. The former from the real estate bust, the latter from things like securitizing loans collateralized by said real estate, with the holders of and potential buyers for those securities just not being able to determine what they might actually be worth at the time.
So e.g. TARP was explicitly sold as program to buy up those securities, wait for the dust to settle, and then sell them for what they turned out to be worth (that that sales job was a lie is another matter).
There are no obligations, just necessities. Without the bailout, Greece would have defaulted and (it was feared) the French/German/Spanish banks that had financed the Greek debt would have fallen as well.
It's worse than simply "no obligations". EU and ECB bailouts of EU member states were specifically forbidden under the Treaty of Lisbon http://euwiki.org/TFEU#Article_123http://euwiki.org/TFEU#Article_125 . Instead, not only did both the EU and the ECB prop up Greece's borrowing, they moved to block Greece's access to a normal IMF program, which would have involved losses for non-IMF creditors.
The solvency problem is ongoing, even regardless of current debts.
Greece cannot raise more taxes. It's trying, but taxes are declining. A government system can't be reformed in a few years and achieve 40% savings without (a) causing mass unemployment and knock on effects, further reduction in tax base, etc and (b) massive reduction in government services, including those necessary for economic activity that is necessary in order to "put those resources to their highest value use" to borrow some vocabulary from the more free market side of the debate.
Think of the US' Detroit. Decline breeds decline. Once the Government cannot keep the roads or pay the cops people leave and tax declines further and on it goes.
I realize that Keynsian economics is unpopular here and I am pretty sympathetic to free market ideas myself. Greece is in a bing that we don't know how to solve. Unless creative destruction of Sovereign States is on the table (easy to say when you're far enough away) what real options other than inflation are there?
If Greece defaulted tomorrow, and all the banks and lenders took the loss without collapsing the financial system again, what then? Greece would not be able to pay salaries the following day without borrowing money.
I have the same reaction as I assume you do when I see Greeks demanding government jobs when that is what caused this. But, that doesn't mean "austerity" is working. We have seen pretty much no cases of countries rapidly slashing their spending and managing to stabilize their budgets. Inflation (AKA monetary easing, printing money..) is the way countries get out of these binds.
I genuinely like a lot of Austrian-inspired ideas for putting losses where they belong, and allowing market feedback to do its job. But nothing guarantees that a government will not run into insolvency at some point. At EU scale, its practically guaranteed once a decade (once every 300 years per country).
We still need to answer the question "What happens when a State is insolvent?" Printing money carries risks and costs, but it works. What else works?
You make some good points. I think the solution has to be one that looks at the state as a service provider. Until the issues have been depoliticised, decisions will be made for political reasons rather than good business reasons.
As a service provider, the state has 2 sources of revenue, primarily: private customers i.e. people, and corporate customers i.e. companies. Both those customer groups pay for services in the form of taxes. Now, those customer groups must be, by and large, wealth creators for there to be any wealth that can be taxed or even redistributed (if that is your political inclination).
So, it simply won't do to just reform the state, to spend less, etc. A system has to be put in place rapidly that boosts wealth creation. This includes: minimal bureaucratic lag in the creation of new companies (Chile, for example, enables new company creation within 2 days), very low taxes, easy interaction with regulation bodies, a business-friendly environment, etc.
If the state is too sclerotic to reform, it can be set up through free-trade zones in isolated parts of the country. This was China's route, when they essentially replicated Hong Kong in Shanghai, Shengzen, and all the other FTZs. It allows to you to be ultra-reformist in small experimental areas without putting at risk the power structures that exist in the state at large.
All well and good. There are lots and lots of ideas for making states work better, be me effective, responsible and everything else.
That all has nothing to do with this. This is about what happens when governments fail financially. Financial commitments that exceed tax revenues and no way to balance them. European austerity measures can work (as they sort of are in Ireland) when the political situation is relatively stable and the underlying financials are not too severe. But, Greece is a case where it cannot work.
Printing money (aka monetary easing) is not just an alternative to what you suggest, it's what you do when the state's financials collapse.
Depends on quite a lot of details. But just by itself? Of course not. Though I wouldn't say it's the pinnacle of a voluntary transaction on both sides.
I'd also say that other business lose, in an indirect way. As well as the individuals that are now lured into transacting with a business that has failed or is more likely to fail in the future due to past performance.
Sure. I agree that (morally) the EU shouldn't have bailed out Greece. Greece cooked its books and Greek debt holders at the time of the bail out were suffering the consequences of lending to a fiscally irresponsible state.
That being said, the world was uncertain as to how much economic damage had yet to be done, and by shoring up Greece it assuaged investor confidence across the western world. Personally I think that the level of debt in the developed world is completely unsustainable because it relies on population growth and productivity growth in a manner that will one day lead to a massive global failure / inflation, but my opinion isn't really the majority opinion on economics. Essentially Germany shored up Greece for Germany's own interests: stabilize the Euro and investor confidence in Europe.
That being said, Greece can afford to pay back its debts. The current debt to GDP of Greece is 175%. Before the populist clowns looked like they were about to win the government, the interest rate on Greek debt was around 5 or 6%, which is affordable, and the longer it is paid, the lower that rate will go. Look at Canada during the 90s, the interest rates plummeted as soon as the government paid off 10 points of the debt to GDP ratio, just because the government gained investor confidence.
Greek pensions and benefits are unsustainable. Greek tax rates, while nominally high, are not uniformly paid due to corruption. That is the real real reason Greece can't afford this debt burden. And frankly, if they are going to default, they should do so soon, since the world is at a high mark financially right now.
What I don't understand about this type of logic is the refusal to acknowledge the damage being done by the forced depression. It's like a 19th century leech therapy, keep sucking out blood until they get better. If Greece's economy is allowed to recover everybody will be better off, the banks, the politics, the people living in Greece and even the German taxpayer.
Nothing about Greece's current situation was forced on them. Sure, lots of politicking went on and the current situation was definitely engineered to benefit others, but Greece was effectively bankrupt and in default prior to the bailout. You just can't tolerate the level of corruption [1], tax avoidance, and union greed that Greece tolerated for so long. A normal sovereign default would have been just as painful, but in different ways. Greece as a country decided it wanted to stay in the Eurozone, thus picking its poison.
Comments like this remind me of people like Cristina Fernandez of Argentina, obsessed about the pain of their economic situation to the extent that awareness of how they got there in the first place is lost.
Greece got itself into a very deep shithole with only two main ways out. People look at the hardship of the current path out and see that it's obviously painful, then make the classic fallacy of the-grass-is-greener-on-the-other-side.
> Nothing about Greece's current situation was forced on them.
What would you call the fact that the Troika has forced the Greek government to implement brutal and deadly austerity measures?
I mean, sure, technically Greece could have avoided this. If they had left the Eurozone in 2009 or 2010, they would now be in a much stronger position (after a brutal but short period of even more chaos). But that wouldn't have made the European elite happy, either.
Fire some of the public servants. In fact, change the constitution to make that possible without passing laws for each and every case. That's the absolute minimum required for it be called "brutal", "deadly", and "austerity".
What is the cost of the Greek railways per passenger kilometer again compared to paying for similar cab rides?
What does the Greek constitution say about firing public servants? How early can they retire, still, after the "austerity"?
Greece elected Papandreou who is to be largely to blame for initiating this regime. However, I don't agree that was not forced upon Greece... Greece was exploited from day one[1].
Exactly. It's about controlling the politics of Greece, because the EU/Germany don't trust them to change and use this to put pressure on Spain and Italy. Tsipras hinted at this fear himself ("returning to the bad old ways").
Still, the price being payed for this by Greece is too high. There has to be a better way. For example: Better contracts, better checks, and active support by investing in parts of Europe that are struggling. Or by creating a Fiscal Union, effectively admitting that permanent transfers are needed. This would be more honest, but German politicians are too afraid that this will be unpopular with voters.
Calling a dissenting party clowns is not helpful. It's also wrong, since they argue their points well and their economics are backed by such people as Paul Krugman. Now you might disagree with him, but would you call him a clown, too?
Paul Krugman is overrated, and you're drastically simplifying to say he's backing their economics. I'm mostly calling them clowns for the disservice they do their own cause by calling debt repayment economic waterboarding.
Yeah I found that to be a very poor part of an otherwise compelling argument. It eliminated their benefit of the doubt in my mind and made me think a lot harder about everything else they were saying. I still think the main points of the article make a lot of sense, and find the idea that they attempted to treat insolvency as if it were illiquidity particularly difficult to counter.
Economic waterboarding was leaving just enough air to the economy to think it can breathe. Forcing a 4.5% budget surplus which evem countries in better financial position can support is meaningless.
You might consifer him overrated but regarding the European crisis his predictions were pretty much accurate although against most financial institutions' predictions
German pension system is also unsustainable [0] and [1]. Form [1] "State pension obligations in France and Germany are three times the size of their economies, according to data compiled by Mercer. It’s more sustainable in France than Germany because of France’s higher birthrate. "
It is just that during the Greek system villification, equivalent problems in German economy are suppressed in German media.
>> That being said, Greece can afford to pay back its debts. The current debt to GDP of Greece is 175%.
Not relevant. The only way Greece can pay back the debt is to have a trade surplus - more money coming in than going out. End of story. GDP is an interesting number but money circulating within the Greek economy increases GDP without helping the debt in the slightest. OK, taxes on the circulating money can be used to pay the debt, but if they took 100 percent of the GDP they still could not repay the debt.
> Greece cooked its books and Greek debt holders at the time of the bail out were suffering the consequences of lending to a fiscally irresponsible state.
You (and many others) are doing again the same mistake: Everyone KNEW that the books were cooked. When Germany had to choose a pm for Greece after Papandreou's resignation, he choose the guy (Papademos) who acted as a bridge between Greece and Goldman Sachs in 2001. Do you that it is a coincidence? It's propaganda, politics to justify what was about to happen in Greece!
I'm not saying Greece had no fault. It sure as hell Greece has it's own false, but don't for a moment believe that at some point in time Germany (or other major EU partners) were deceived by a Greece.
Greece may have cooked the books but the rest of the EU is complicit in not doing their due-diligence in their haste to include Greece in their attempts to declare 'largest economy in the world'. It was a stupid pissing-match and the EU definitely carries a fair chunk of the blame here.
Absolutely. The project was doomed from the start, and the ECB and it's fondness for excessively tight monetary policy (given the situation) and utter refusal to consider the sort of debt-reduction-through-monetary-expansion any sane national government would consider even when faced with widespread deflation is a bigger deadweight on Euro area economic growth than Greece (which for all its staggering fiscal ineptitude, isn't particularly significant to Eurozone growth figures overall)
To be fair, the ECB has largely come around. They're even going to do a form of quantitative easing now. Unfortunately, monetary policy cannot do very much when the interest rates are essentially zero. You'd really need fiscal policy, and so far, the German elite[0] is pretty closed-minded about that.
[0] There are other countries that tend in this direction, but Germany is the real problem due to its power.
Slowly coming around really isn't good enough; they really should have already started unusually aggressive forms of QE (like buying sovereign debt with a view to retiring it; and I'm not even suggesting specifically privileging the Greeks with this) rather than focusing on driving down corporate bond yields further and acting like they're worried about running out of Euros.
I'm not saying I'd expect an institution where economic puritanism is so pervasive they thought interest rate rises in 2011 were a good idea would rush to try that experiment. But I am saying that if ever there was a time to contemplate trying exceptional measures, it was probably last year...
I'm really not sure how the accession of Greece in 1981 has anything to do with being the "largest economy in the world", and "the EU" today has little to do with the EEC at the time (especially since about 2/3 of the EU countries today were not part of the EEC then).
Greece was among the first countries to join the EU (the fourth one if I count correctly) and at the time, the EU (actually, the EEC) was still rather far from being the largest economy in the world.
It was actually more based on the historical and cultural place of Greece in Europe than economical grounds, as well as a way to help them recover from the previous dictatorship.
Greece did not become part of the Euro zone in 1981 because at the time the Euro was a distant dream in the heads of some politicians and bankers.
Please refer to the introduction of the Euro, not Greece joining the EU, those two have absolutely nothing to do with each other. You can be part of the EU but not part of the Euro zone just fine.
The GDP is not exactly a good economic indicator because in its expenditure-based determination it includes government spending which can be increased by increasing the debt.
Add to that the EU habit of making up numbers for the output of black markets like drug traffic and prostitution and adding it to the GDP and you'll see why it's useless when trying to decide the solvency of a state.
It's perhaps prudent to distinguish between the German people and the German politicians. It's my feeling that the average German would have suggested NOT to extend large loans to Greece. It is the EU (and German, French, Italian and so on) politicians that believed that in the grand scheme of the Euro, it would be the best cause of action.
The sad part is that the loans to Greece perhaps wasn't so much about Greece, as it was about Spain, Ireland and perhaps even Italy. If we ignored everything else, then letting Greece leave the Euro, rather than offering large loans and unrealistic terms, most likely would have hurt neither the Euro, nor the EU. In the real world, letting Greece leave would mean that investors and speculators would start to question the dedication to the Euro, given that Spain or Italy (much larger economies) might be forced to leave the EU next.
I'm not an economist, so I might be totally wrong, but for a regular person an investment (of this scale) in Greece was obviously a bad move, at least in hindsight. It's sad for Greece, but they where just casualties of their own politicians and a Euro they should never have been allowed to be part of in the first place.
I'm not so sure of that. Greece might be a special case. Its a tourist economy with heavy social services and a retirement age of 58 with overly generous pensions; about 80% of one's salary. Its fraudulent on practically all levels of government. Its recent cozying to Putin is just more spit in the eye of the EU partners who tried working with Greece's debt issues.
While Italy and Spain aren't the shining stars of fiscal responsibility and anti-corruption, they're bush league compared to Greece's MLB financial shenanigans. An Italian exit would be a huge event, considering Italy's economy is bigger than Russia's. Greece is just a bottom feeder.
As a Greek-American is pains me to say these things, but Greece is just on the wrong side of history here. Its incredible how corrupt that country is. Its a clusterfuck of far-leftist nonsense that has no place in the EU. I could see a re-entry in a few decades after they've cleaned up their act, assuming that's possible. Expecting everyone else to bankroll Greece's generous pensions seems unfair to working Europeans.
This should also be a wake-up call for EU expansion. Taking on these corrupt countries is a major risk. I'm very glad they never got Turkey, considering its deep into a spiral of Islamic autocracy and has also lost its major economic growth around Q1 2014.
> I'm not an economist, so I might be totally wrong, but for a regular person an investment (of this scale) in Greece was obviously a bad move, at least in hindsight. It's sad for Greece, but they where just casualties of their own politicians and a Euro they should never have been allowed to be part of in the first place.
Well you have to understand that what happened was an indirect financing of German-French private banks via Greece. Germany was never really interested into helping. They are just ripping a dead body with the permission of Greek corrupted political parties who ruled the country for ~40 years.
I don't know what the rate of tax evasion is in other western countries, but I'm willing to wager the situation in Greece is dramatically worse.
I remember reading a NYT article from the same year that provided further insight:
Various studies, including one by the Federation of Greek Industries last year, have estimated that the government may be losing as much as $30 billion a year to tax evasion — a figure that would have gone a long way to solving its debt problems.
The cheating is often quite bold. When tax authorities recently surveyed the returns of 150 doctors with offices in the trendy Athens neighborhood of Kolonaki, where Prada and Chanel stores can be found, more than half had claimed an income of less than $40,000. Thirty-four of them claimed less than $13,300, a figure that exempted them from paying any taxes at all.
source:
http://www.nytimes.com/2010/05/02/world/europe/02evasion.htm...
I haven't seen more recent numbers, but it makes me wonder about citizens' culpability in the government's debt crisis.
Maybe I'm overestimating the role of taxation in this debt fiasco, but it does seem as if the attitude of a lot of Greek citizens needs to change, if it hasn't already.
Here is something that maybe I am not understanding.. but saying that 6/10 greeks pay no income tax does not tell us how much tax evasion there is, right?
43% of Americans do not pay federal income tax (and some % of those get a net gain of federal income tax). Sure 60% is > 40%... but that could be due to a ratio of more people really poor, compared to more tax evasion.
(Not doubting Greece has a tax evasion problem, but 6/10 not paying taxes seems bad evidence).
saying that 6/10 greeks pay no income tax does not tell us how much tax evasion there is, right?
You're right, the 6 in 10 figure seems rather misleading. Those people shouldn't be characterized as tax evaders as I suggested. That said, it probably points to an issue of not enough tax contributors.
The numbers for America are interesting, I wouldn't have guessed the rates were that high.
Anyway, as far as tax evasion goes, I wonder how much a lack of enforcement allows well compensated workers to get away with claiming they're below the tax exempt mark.
I mean that is the trick right? You have a doctor making 100k claiming he makes 10k and paying no tax. I have seen individual stories of it, but is that really the common case? Or is it more like rich business owner making 300k claims he made 200k because of the cash heavy economy in Greece?
Fiscal austerity one form or another has been a decade long process in Greece. After that the employment ratio in Greek population is the third lowest in OECD countries [0]. This ofcourse is hidden in plain view since discussion is usually about the UNemployment ratio [1], which hides long term unemployed due to the economic downturn.
The Federation of Greek Industries is not a credible speaker and they had published that report to justify lowering their request to lower their taxes. It was affiliated with the right wing Government.
Kolonaki is a doctors area, old and young doctors try to set upo shop there. If half of them are young doctors 40000 is too much. The authorities that wanted to collect taxes figured that out and measured a minimal squarea area of the doctors office and location and imposed arbitrary fines. Same arbitrary taxes were imposed in most professions to show a long term ability to collect taxes, in collaboration with their foreign creditors, Of course it did not work out their creditors could hide the inefficiency of their program to chating Greeks. It also worked as a Trojan Horse in the Greek socity, when various groups where singled out
in rotation as not having produced the taxes that were expeced of them. The troika and the Greek Government would probably be able to expose some of them, but it was apparent that it would be small sums that would expose the greater inablility of their program.
[0] https://en.wikipedia.org/wiki/Employment-to-population_ratio
What isn't addressed in this letter and most people don't realize is that the Greek debt as an absolute number isn't that big.
The real problem is that Greece needs more money to continue operation than it produces, and this fact hasn't changed nor will in the near future. Effectively this makes Greece a black hole for incoming money where incoming money have no actual benefit for anyone other than just keep a near-corpse alive for a little more.
If there was a surplus generated every year, the debt amount wouldn't matter as it would be paid off eventually.
The whole point is to get to the state where the economy is healthy as a yearly in/out amount. If that's done there is no reason to get any bigger loans...
Edit: Forgot to add: it's in the greater interest of the eurozone to keep Greece from bankruptcy though, and it's twofold: one is the interconnection of markets, ie Greece IS a buyer, and the second is the geography as Greece is a central node for shipments from the east, has natural gas reserves etc..
Actually greece has a primary budget surplus, so at this point they are paying back the "loans", the problem is that they are miserable while doing so.
If people are unemployed you are squandering resources.
While being miserable they are better of than let's say Slovaks who paid 660 mil Euro to bail out Greece. Think about it, they are not really living in poverty, they just lost the luxury standard they were used to.
Oh come on, have you been to Athens? Everyone drives a Porsche and wears a Rolex, but all the buildings are unfinished, because if they were they'd be taxed. Greece is a poor country weirdly full of rich people.
Everyone? Really? Because half of my friends are unemployed, and every single one has a university degree. And who starts building and then doesn't finish it because they don't want it to be taxed?
That's how it is in Mexico, too. They leave some unfinished faux-second-story attached to their building and never pay full property tax on the value of property-with-one-completed-story. Re: "who starts ..." why don't you search before you post?
That's actually not true, you are referring to a very bad "cooking" that Samaras presented to Merkel at the fall of '14 which was proved to be too stupid to talk about ever again...
Actually that is true. He was referring to Greece having a budget surplus, not a plan. They missed their target surplus but still had a budget surplus for 2014 of near 2 billion euros.
The current finance minister says they cooked the books: yanisvaroufakis.eu/2014/04/24/greek-statistics-are-back-primary-deficit-presented-as-surplus-with-eurostats-seal-of-approval/
Your link is about a 2013 budget surplus and not 2014. The reason eurostat did those adjustment was too eliminate one off expenditures that would not continue. And they didn't continue in 2014.
As I understand it, they converted their currency to the Euro, which means unlike the US who can simply print more money to get out of a bad economic situation, the Greeks can't.
The real problem is that Greece - especially under it's new leadership - will very soon generate new astronomical debt if the current one is forgiven (paid by someone else). Lenders would be silly not to lend if they know the debtor will be certainly bailed out and actually Tsipras would be silly too not to finance his communist utopia from debt if he too knows Greece will be bailed out no matter what.
It doesn't seem like Tsipras is trying to get debt forgiveness paid for by the Germans, though. He wants to use the threat of default to force Greek's creditors to give them a haircut -- reduce principal or interest or both. That will reduce the amount of Greek debt repayment but it wouldn't increase the ability of Greece to incur more debtedness.
Here is how the trick worked: Private creditors were haircutted and the CDS (credit default swaps) were activated for the largerst organizations that could afford having them in the first place.
Smaller creditors were stiffed. Foreign Goverment entities were exempt and foreign institutions (pension funds etc) could buy at 30-40% percent the defaulted bonds. Said foreign Governments had ofcourse the inside information that they would give the Greeks the money to repay in full price their debt. That was hidden from the other investors during the start of the program.
I will preface this by saying that I am totally not sure, but my impression was that the EU and IMF loans were to enable Greece to repay creditors in full or close to.
Forgiven debt is not "paid by someone else". It's a write-off by the creditor. Creditors would likely not write off a bunch of debt and then lend Greece more money.
Now, if the bailout actually paid off the creditors and Greece now only owes money to, e.g., Germany (the IMF, etc), then sure, the original creditors might extend new loans to Greece if Germany forgives the Greek debt. But then, that could happen anyway, because the bailout already happened.
It's enough that old loans are repaid faster than new ones are taken up. Given that the surplus would otherwise have to be enormous, this is standard procedure for most indebted countries.
The Greek state is such a mess that bankruptcy would be a good thing, in some ways. Greece needs to keep their budget balanced, and it's unclear whether the government is able to implement the necessary changes even if they wanted to and shame or embarrassment has shown itself a poor motivator for the shadow state. In fact, in my opinion default should have happened sooner, while there was still some private debt to default on. Now it's a bit too late, as 80% of Greek debt is held by governments/IMF/ECB.
The thing that seems to be often missed about the 'Greek bailout'is it wasn't about bailing out Greece, it was more about bailing out the German bankers who'd lent Greece more money than they should have.
The Greek people were shafted by the EU, IMF etc. because they didn't want to see the German bankers take the pain.
We see a similar problem with the current round of Quantitive Easing that the ECB are undertaking - they're giving the money to the bankers in the hope they'll lend it to others.
Instead they should be giving it to people, so they can save, spend or pay off debt as they wish - it'll all end up in the banking system anyway but will actually do some benefit first.
"Give the money to the people". The US did this in the form of tax credits for housing. Germany did something similar in the form of credits for car purchases. This form of giving goes directly toward an industry in need. I'm not sure how giving a blanket check helps. If the problem is consumer spending and IF this is an important driver for your economy it may have some impact but I think the problems the EU were facing were not this. So giving money to the people just sounds like dangerous populism and an action that makes little attempt to rebalance some ailment in the economic system.
But at the moment we end up subsidising the banks with our money so they can make more money at our expense
If you want to kickstart economies then expecting banks that are up shit creek due to their past lending and investment practices isn't the way to do it.
The way to do it is give people money to use as they wish and not pick favourite industries.
If people save the money it increases banks capital ratios, if they pay off debt it reduces the banks loan book, if they spend it it may increase inflation through consumer prices.
Some people might even use it as capital to create a new business.
Our current bank focused model of QE does none of these things.
It doesn't help at all. We did that in the US with George Bush's 2008 tax rebates. Getting a check was nice, but I'm pretty sure the economic boost was smaller than the cost to the government.
Most of the bailout money has gone to Greece's external creditors:
"Since May 2010, Greece has been sent about $177 billion in European taxpayer money to keep the country afloat and ward off a bigger crisis that might threaten the entire currency union. Of that amount, a full two-thirds has gone to pay off bondholders and the troika."
The piece was more persuasive than I thought it would be, and Tsipras' diagnosis of the cause of the problem is dead-on: this is a crisis of insolvency, not illiquidity.
The problem with what Tsipras is asking for is that markets get a vote, too, and the outright forgiveness of Greek debt would cause massive upheaval -- potentially to the point of making the EU itself unsustainable.
I think the only way the Germans will agree to debt forgiveness at meaningful quantums is if Greece leaves the Euro currency union and goes back to the drachma. That would send a powerful message to the financial markets -- "you get one mulligan, and the price of that mulligan is leaving the Eurozone".
Of course, Tsipras doesn't want that. He wants a "European New Deal", the details of which he provides rather sparingly. My guess is that if he were to flesh out these details, Germans would find them not only unreasonable but laughable.
The "wild card" scenario is if SYRIZA undertakes a project of massive wealth confiscation from the Greek elite. That actually might move the needle of German public opinion--one of the biggest points of outrage among the German people over the last 5 years has been the juxtaposition of media coverage of the excesses of wealthy Greeks (and their creative non-payment of taxes) with the math of how much each German family was being asked to give to rescue Greece. Start levying massive one-time luxury taxes on Greek-domiciled assets of Greek citizens (with asset seizures as penalty of non-payment) and maybe you get enough schadenfreude flowing in Germany to meaningfully alter public opinion.
Most of you, dear Handesblatt readers, will have formed a preconception of what this article is about before you actually read it. [...] Prejudice was never a good guide, [...]
How does he not hear himself? Also, "Handelsblatt" is missing a letter. Anyway ...
I reject the premise of his letter. He seems to think the purpose of the money was to help the greek people, and offers a more productive way of doing so. That's all fine, but I'm pretty sure the sole purpose of the money was to save the Euro. Whether that's ethical is debatable, but I think it's important to remember that Greece has messed up quite a lot of things without considering how that might effect other EU member states; ignoring at least some of their responsibilities. But that's a different story entirely.
His tone is utterly disrespectful, if you ask me. I'm really not sure who he thinks he is or what he thinks he's doing, but I know for a fact that a lot of my fellow germans aren't gonna like being spoken to in this tone of voice. He mentions fear and anxiety a lot. I don't know what he means by that. We're quite calm, as far as I can tell, and I can imagine that scares him a little.
Germany is one of the riches countries on this planet. We will do almost anything to keep it that way. I appreciate that he needs to sell his own agency to his people, but if he actually believes he can control the fate of his country even so slightly, I'm afraid he's delusional.
Just for the record: I'm neither proud of nor happy about how we treated the greek people, but I'm tired of pretending this is about anything but money.
> That's all fine, but I'm pretty sure the sole purpose of the money was to save the Euro.
It actually hurt the Euro. What it did do is save/prop up some very large French and German banks. Nothing like gambling with other people's money to see if you can come out ahead and ask for a hand-out if your plan fails.
The cynic in me says that no single politician that supported the bail out ever expected that money to be paid back. Greece would have to completely change its culture in order to be able to pay those loans back.
What I was trying to say is that most politicians at the time (this applies to the US as well, I guess) were willing do to almost anything to stop the collapse, even if that meant hurting the Euro in the long term. The (somewhat hypothetical) alternative could have been a lot worse.
> Germany is one of the riches countries on this planet.
A lot of that riches comes from the fact that EUR is a common currency both of economically successful countries like Germany and of economically weak countries like Greece. That makes the currency artificially undervalued, which boosts German exports and hurts Greek imports, making Germany more competitive and Greece less competitive (longer comment: https://news.ycombinator.com/item?id=8954377).
I think it's time Germany admits to that and pays its dues, by which I mean help finance the rest of EU (via a fiscal union).
I'm not entirely sure what it is you're suggesting. The EU is designed to make us (Germany, France, etc.) more competitive. That unfortunately also means that countries like Greece don't profit as much (or at all, for that matter), but then again, nobody was forced to join to EU.
> I think it's time Germany admits to that and pays its dues, by which I mean help finance the rest of EU (via a fiscal union).
Do you really think we don't know what we're doing? You say we need to "pay our dues". You do realize we're talking about the fact that Greece can't pay it's dues, yes? As far as help financing the rest of the EU goes, keep on dreaming. There is no way any german is going to vote for that given that we have plenty of kids growing up below the poverty line.
> I'm not entirely sure what it is you're suggesting. The EU is designed to make us (Germany, France, etc.) more competitive. That unfortunately also means that countries like Greece don't profit as much (or at all, for that matter), but then again, nobody was forced to join to EU.
I'm suggesting that Euro (this has nothing to do with EU directly) can't survive if PIGS countries keep on loosing while Germany keeps on winning. Personally, I think it would be beneficial to keep the Euro and instantiate a fiscal union (like the US), but it's not up to me to decide. If Germany thinks it's in their interest to keep the Euro (and not have current Euro members exit the currency), it will have to think about other's interests as well. Ultimately, it's not a question if EU/Euro makes some countries more competitive (edit: relative to others) on this continent, but rather, if we stick together as a major global player.
> You do realize we're talking about the fact that Greece can't pay it's dues,
That's just because it doesn't control it's own currency. Otherwise, it could just devalue it, reduce the real value of its debt, and export more, i.e. normal monetary policy.
> There is no way any german is going to vote for that
The politicians will have to convince them, or do without the popular vote. It's not like the Greeks voted for austerity either...
Just out of curiosity, how would Greece having control of it's own currency reduce the real value of it's debt at this point? Considering 90%+ (to my knowledge but I could be wrong) of it's debt is to foreign countries and currently in Euro, even if it left the Euro and returned to the Drachma, wouldn't printing more money just reduce the debt's real value to it's internal creditors (pensions)?
Wouldn't that also be against what the current government is trying to achieve?
Yes. My answer was assuming that Greece never took up Euro in the first place. In that case, it would probably issue debt in Drachmas (although not all countries do - e.g. Argentina issued it's debt in USD under NY jurisdiction, because having defaulted so many times, it couldn't sell bonds in Pesos under its own jurisdiction).
You're assuming that the D-Mark would be as strong (or possibly even stronger) as it was back then today. Which is a bold assumption. As a matter of fact, nobody (apart from some utterly ridiculous right-wing politicians) even considerers this an option.
If you literally mean that Germany was richer in the time before the introduction of the Euro, then simple GDP statistics show otherwise - not surprisingly, as it was a long time ago. If you mean the Euro was bad for the German economy, I wonder why you think that? By removing exchange rate risk, the Euro has made it easier for German businesses to sell to other Eurozone countries.
I expected that Germans might be sympathetic to a country whose economically struggling population are turning, in electorally significant numbers, to Fascism.
> if he actually believes he can control the fate of his country even so slightly, I'm afraid he's delusional
He's the elected leader of sovereign nation. If you don't think repudiating the debt is an option (good or bad), I'm afraid he's not the delusional one. If that's not "control" of the fate of the country, I don't know what is.
Oh come on. "Elected leader of a sovereign nation". You gotta be kidding me. Merkel is the elected leader of a sovereign nation significantly more powerful than Greece will ever be, and yet, Obama is listening to her phone calls and she can't do anything about it.
One of the first things he did was meet with officials from other EU countries, no? Concluding that he's not gonna do anything for the time being. Go figure.
You're cynical. The tone of the open letter is nothing compared to the tone of your comment. If you truely believe that we Europeans aren't living in a democracy anymore and that politics shouldn't be about the peoples wellbeing in the first place then stop worrying about PEGIDA or Dschungelcamp and do something about that. You stance of "this is how the world works and I'm lucky to be on the winning team" is both short sighted and highly egoistic. I would be ashamed if many of our "fellow germans" would agree with your point of view.
Because the "anti"-fascists are fascists and PEGIDA are anti-fascists. Their anti-fascism is one of the reasons why they are against Islam -- anyone who is against suppresion, violence, and fascism ought to be against Islam, just as they should be against Communism and Nazism.
I don't think you can call PEGIDA antifascists, since they're, well, far-right nationalists who hate immigrants and have violent tendencies. Just because the Antifa organization holds an intellectually inconsistent position doesn't mean the reverse position from Antifa is actually correct.
> Germany is one of the riches countries on this planet. We will do almost anything to keep it that way.
If the only practical effect of European union will be to enrich Germany at the expense of its neighbors, European union will fail, and rightly so.
> I appreciate that he needs to sell his own agency to his people, but if he actually believes he can control the fate of his country even so slightly, I'm afraid he's delusional.
Just a suggestion: before Germans start telling other people to get over the idea of having any control over their own affairs, it would probably be wise to reflect on how well that message went over the last two times they tried it.
> Just a suggestion: before Germans start telling other people to get over the idea of having any control over their own affairs, it would probably be wise to reflect on how well that message went over the last two times they tried it.
You should have gone with how we suck up the the US all the time; that would have been a way better put down. Given what went on in Greece over the last couple of years, I'd recommend you drop the nazi references for the time being.
I am German and have had a very negative opinion of Tsipras. He makes some very good points in this letter and his view seems to be consistent. I can understand his position and my opinion of him has improved a bit after reading the letter.
Nevertheless I see no solution, only 3 possible bad outcomes:
1. Europe loans more money to Greece and we can be pretty certain that they can't pay it back.
2. Europe gifts money to Greece (forgive some of the debt) to temporarily reduce their debt and after a few years we are in the same situation again
3. Greece defaults on its debt (and maybe exits the Euro) and can't borrow money for the foreseeable future.
None of these options looks particularly desirable and imo Tsipras doesn't help the situation when he says to hell with it; let's rehire all these public servant. We don't have the money for that but it wont matter much regardless which possible outcome becomes reality
There could still be favourable trade agreements and some currency stabilizing etc. so it's not the end of the world, but it would be a wakeup call for everyone to treat their finances a little more seriously.
German yellow press also mentioned various social programs in Greece that can only be described as frivolous even by social state standards. It's harder to be sympathetic with the Greek cause if we're paying for higher welfare abroad than we enjoy ourselves.
> German yellow press also mentioned various social programs in Greece that can only be described as frivolous even by social state standards. It's harder to be sympathetic with the Greek cause if we're paying for higher welfare abroad than we enjoy ourselves.
- I wouldn't be eligible to most of these purported benefits in Greece
- My standards of living would likely be lower even with funny welfare
- Moving there would theoretically make it worse since theoretically I'm currently helping/paying
So, why not write another open letter that discusses reasonable ways to save some money, OR debunk myths that discourage peope from helping?
4. All south European people stop buying german products until the end of the actual bullying.
This is a no-no win for all.
The fact that the german people are not the same as the german government can not be ignored. Germans are suffering also this trap, carefully placed by a few. People at the South were increasedly thinging that a percentage of the debt is simply faked by banksters and not our responsability at all.
4b. Northern Europeans stop visiting and spending money in Athens, Rome, Algarve, Canary Islands, and buying Mediterranean produce until the end of Northern-sponsored dolce vita.
This cuts both ways, and the ultimate end is economic war and possibly real war.
Greece, Portugal, Italy, Spain, Ireland (...and oh-la-la... your turn, France?) are in fact more or less in a post-war scenery. Why? Because much of the money either did never changed of hands or either ended in the wrong hands with the bleesings of all surveillance organs and agencies.
So whe have a curious crime here, millions of money vanishing and, big surprise, nobody wanted to see this and nobody wants to investigate now where the money goes.
Much better find a fool to pay for our disaster.
So they sell us some bright recipes poisoned from the start. All benefits that they predict crashed loudly and became chains and viper pits, but, hey!, those smart guys that were taking money from you germans, to "give the money" to you Greeks, are richer than ever... How could this happen?. And everybody feels cheated and angry now.
The Irish and the British are Northern Europeans? Because I'm not getting the feeling the majority in either of these countries would like to join the Germans (in any kind of game...).
A state couldn't benefit from the Marshal plan without reforms, including collecting proper, truthful national statistics (through the forerunner institution to the OECD). The US didn't just hand out money willy-nilly. In the case of (West) Germany, they had lots of troops stationed in Germany who could accidentally break something if the country didn't happily reform practically everything.
No one is against reform in Greece. Literally no one (except maybe the far-left which is less than 5% of the population).
The thing is that all the reforms proposed by the Troika as of today were absolutely against boosting any form of healthy growth. The troika actively supported the governments which are responsible for Greece's troubles and extra-ordinary debt. That says a lot IMHO. I didn't get the feeling that the EU+ECB+IMF was interested in actually helping at any point of this negotiation.
So, I'm sorry but I'd rather for Greece to exit the Euro and let hell broke loose than continue down the road we've been for 6 years. After all the country is already in ruins.
I, as a German, feel good about the Marshall Plan. Do you suggest to implement something similar for Greece? I don't think a lot of Greeks will be in favor for it.
The austerity measures was the only rational thing that Greece did and even then they complained.
There's really no out for Greece on this one: their economy seems to be dependent on tourism, they have little to no manufacturing, probably little exports, and imports many of their goods. Greece's economy was never stable to begin with and I do think that they ought to exit the Euro not for Greece's sake but for the Euro's sake.
No, the "austerity" was very half-hearted and almost exclusively hurt the little people, i.e. those who relied on state pensions, health care, or unemployment benefits.
Still, I hope Greece suffers hard and suffers long.
Portugal, Italy, Spain, and France need all the encouragement they can get...
As other comments have pointed out, and Tsipras pretty much says himself in this article, good money was thrown at bad but was done so not to prevent a productivity fallout in Greece but to prevent one in the rest of the EU or world. And now Tsipras is arguing bluntly that Greece's economic system will not rebound as expected because it's productivity problems are deeper than liquidity.
It is worth looking at Detroit here. Not because of where they are similar but where they are not.
Detroit could not repay debts and required restructuring (aka hair cuts). Importantly they decided the type of hair cuts on their own. They had to do this because there was no Federal bailout. Michigan agreed to pay 194 mil for pensions as a lump some (aka a gift) but Detroit had to sell off assets, renegotiate with creditors on their own and reform where they could. But again, they did this because they knew they had to. It wasn't directly dictated by "The Union" (Fed).
Importantly they were given some breathing room because at least some portions of social services providing stability are Federal (social security, medicare, medicaid). And though they just exited bankruptcy it's likely without investment from overloads (state and federal) a full recovery will not happen. Or at least, investment will certainly help that become more possible.
What is missing in the EU are these social safe guards. And it seems a good time to build them. Rather than dictate to Greece how to alot retirement or social welfare or other social services, they should provide a baseline EU wide option for entities that default. This option makes it easier to let them get at least as close to default as is required for them to be in a place to consider what changes they could make to provide future stability. And when it comes to bailouts it should come in the form of investment. Both seem to be a rather obvious steps in maintaining the Union and providing greater trust and integration. Anything else should be decided in negotiations only after Greece begins the hard negotiations with its creditors after all accept imminent default.
1. Greece is talking about Germany because it helps mobilize masses. Germany does not decide on it's on on this nor is the most agressive player. Most northern and eastern countries are more agressive in their opinion against Greece. But it helps to mobilize Greek masses with a simple enemy.
2. Greece has defaulted have a dozen times in modern times. This is the Greek way of doing things and will continue, whatever the EU, Germany or the IWF thinks and does.
3. People in Greece don't think of taxes as something you have to pay. Many Greeks stopped paying taxes the last months in anticipation of a new government. This will not change and is the main driver for Greek defaults.
1. That's b*shit. It's Germany all way. The Fins and Dutch are easy to bend.
2. Germany has defaulted 3 times in the last 100 years. The Marshall plan was issued in 1948, otherwise now Germany would be worse than you date to imagine + wars damages to Greece were never paid.
3. Why don't you come live in Greece and find out. Try to deal with the state, then run a business WITHOUT tax-evading in this environment. Then share your knowledge, show us how you did it.
1. The Baltic states, Poland, everyone except the southern countries (and I assume Spain with a thriving economy in 2014/2015 will join the club when unemployment drops) is on the same page. But as an excellent demagogue Tsipras knows he needs a simple enemy (Germany) to rally the mob.
2. Yes Germany defaulted, but did not make it it's modus operandi.
Excellent that you've brought up the Marshall plan:
The Marshall plan was essentially the same as what the EU imposes on Greece: "The Marshall Plan required a lessening of interstate barriers, a dropping of many petty regulations constraining business, and encouraged increase productivity, labour union membership, and the adoption of modern business procedures."
http://en.wikipedia.org/wiki/Marshall_Plan
Where it differed: Beside that the Marshall Plan required European countries (beside Germany e.g. France, Britain, essentially everyone else) to buy from US companies: "Much of the Marshall Plan aid would be used by the Europeans to buy manufactured goods and raw materials from the United States and Canada. [...] The Marshall Plan aid was mostly used for the purchase of goods from the United States" (Same source)
Last interesting tidbit from the Marshall plan "The first substantial aid went to Greece and Turkey in January 1947".
(Same source)
Indeed Greece got nearly twice the money from the Marhsall plan per person compared to Germany.
(For comparision Germany got 1.5B, Greece 0.4B, UK 3.3B, France 2.3B)
2. On war damages: I agree they were not paid and I agree with you on moral grounds, but I'm not sure it is economically relevant. The billions from the EU and the (2015 Euro) Marshall plan did not help, so I would not assume paying war damages would put Greece in a different situation. Except perhaps this makes Germany (see 1) a nice enemy.
While we're at war damages, I don't think Greece has paid war damages for any of the wars it started over the last 2500 years. The invasion of Turkey, the baltic war or going back to the support of Alexander the Great - I wonder if Greece paid war damages to Iran for that. Or to Italy for the occupation and exploitation of Sicily (or the other colonies when Greece was an imperialistic colonial power house). So while I agree that Germany should have paid damages on moral grounds, this is a very slippery slope.
3. Tax cheaters always find moral explainations for their behaviour.
Germany defaulted 3 times in 100 years, you can find the dates on Google (if you can't let me know, I'll help you). Greece has defaulted 3 times (actually 4 counting 2010).
I'd say it's a modus operandi. One even might assume that making world wars is a modus operandi given the fact that it happened twice the last century.
> 3. Tax cheaters always find moral explainations for their behaviour.
So does anyone else[1] [2] [3] (there are least another 4 well known cases).
The Marshall plan in Greece included a huge sum to buying weapons to fend off communism which were not useful and did not go to any Greek. There was no industrial development in Greece. That was not the case in Germany, it got the funds and more importantly the new technology for steel production that helped the Germany. Germans were needed as strong stopping force against the Communists. I dont know if at that early stages it benefited the German people.
1. From the payment date of 1947 it looks more like it went into the Greek civil war - fought by Greeks against Greeks (1946-1949). Tough decision to have another war after devastating WWII.
2. Germany bought weapons for the newly built "Bundeswehr" - most of them from the US.
It was actually Greeks fighting Nazi collaborators who had changed allegiance and had become britsh friendly. That government was not elected and was flown in from the british hq in cairo. A forced colonial debt.
On the other hand, most of the German war reparations after WWI should probably be repaid. The exception is whatever Germany paid to Belgium, which should be augmented with reparations from France and Great Britain.
(And I assume you meant Balkan instead of Baltic.)
I agree Germany should pay war reperations. As should Greece to Turkey and the Balkan for their invasions there, as should France to Germany for the napoleonic wars, Sweden to my hometown where they've killed nearly everyone and razed the city, the US for Vietnam to Laos. All the colonial powers should pay what they stole from their colonies, the UK to India, France to Africa. The US to the Philipines. France and the UK should pay and clean up the mess they've created in the middle east. I totally agree.
@atmosx: So your point is, only WW reperations need to be paid, if you invade a neighbour and massacre the people there, you needn't? Looks a little too specialized to be a general moral rule.
There is a reason the WW is called like that but you choose to bypass that. I understand, after all you created an account just to comment on the topic didn't you?
Anyway, I've had enough feeding trolls. Won't comment on the topic anymore, it's hot enough as it is.
If Greece was to finally capitulate to the markets and declare bankruptcy, how different is that to the 2001 Argentina default?
It seems crazy to me that banks are allowed to deal with corrupt inept politicians who accept debts that are not repayable on the behalf of a country's people. Countries should be allowed to declare themselves bankrupt and after should follow a period of distrust not unlike personal bankruptcy. As a result banks would think twice before lending to poor debtors. Or is this a completely niavie viewpoint? I'm not in any way an economist so I'm genuinely interested to hear people's thoughts
tldr; Instead of taking new loans and servicing our existing debt, we'd like new loans and NOT have to service our existing debt.
EDIT: To those responding "he didn't ask for loans" in the last line he's asking for a "European New Deal"... what else could that be besides new loans or a straight-on gifting of more money?
I am having a hard time getting that from this message:
>My party, and I personally, disagreed fiercely with the May 2010 loan agreement not because you, the citizens of Germany, did not give us enough money but because you gave us much, much more than you should have and our government accepted far, far more than it had a right to.
>Our task is not to confront our partners. It is not to secure larger loans or, equivalently, the right to higher deficits.
There will have to be some money injected somewhere in Greece, but not in the same way, and the point is to get away from loans.
Money doesn't have to go directly to the government. Their plan to fund things is more along the lines of making the many, many tax-evaders actually pay. Businesses that need loans can take them out on an individual basis, injecting money into the economy, but the government can get money from its own people rather than other countries.
BTW- I'm not disagreeing that giving Greece more money one way or another doesn't make sense, I'm just pointing out that I see nothing in OP where Greece is saying "let us go our own scrappy way without your money, we can fend for ourselves". Instead they want debt forgiveness, followed by more money.
Yes, I know what the "New Deal" was. If you don't think the "New Deal" involved giving out money (and this probably isn't the place to have that discussion) then certainly you could come to different conclusions about OP.
Here is what I want to know. What role does the Greek central bank play? What is the fractional reserve rate in Greece? What is the interest rate set by the central bank? How is the money generated in the first place and what are the return rates and restrictions on that method (eg: in US it's treasury bonds)?
I'm increasingly convinced that central banks operate only marginally on the interest of the country they serve, enough so they don't ruin everything, but instead are primarily (and counter to what many economists will say) working for their own profit. Keep in mind that profit is actually usually in the form of political and economic power, but not money directly. Of course I'm coming from the American perspective where I think the Federal Reserve Act was passed on suspicious circumstances by suspicious men for suspicious reasons and that congress should stick to the constitution and control coin itself and not allow some outside potentially foreign entity to control our money system, but hey, every economist I know just says trust the Fed so they must be right.
The situation bears a certain resemblance to a period of history in the USA between the successful bid for independence and the ratification of its constitution. During that period, the articles of confederation was the document in force and among its many disasters was economic chaos. It was a monetary union (actually not even that as each state printed its own money but efficient currency exchanges were still a century or two in the future) without a political union.
I didn't invent that phrase - Der Speigel mentioned it several years ago in reference to the Greek crisis.
And while I lack the expertise to prescribe the form of a "more perfect union" in Europe, the USA can at least address competitive imbalances bewteen states through a process of income redistribution. Take for example West Virginia. It perennially ranks in the top of USA states that receive more federal money than it generates in federal taxes. Some people complain about this, but most accept it if for no other reason than the knowledge that WV is DC's fallout shelter.
Last time I checked, only two or three German Laender (sorry for not using umlauts) generated net positive federal revenues. Certainly some Germans complain about it, but it's not realistic to expect every political jurisdiction to break even on the tax / revenue ledger.
Both Germans and Greeks (and everyone else in the EU as well) should be willing to bear some of the blame and some of the burden as well.
The Germans are smart enough to know one cannot maintain a competitive advantage forever without bankrupting one's customers. If beggaring the Greeks was part of the plan, then EU rests upon a foundation of bad faith and does not deserve to exist.
The Greeks are smart enough to know that remaining uncompetitive is also not sustainable. If mooching off the Germans was part of the plan, then the EU rests upon a foundations of bad faith, you know the rest.
Main point is: Poland got a lot of money from the EU and worked hard and today is a prospering country. Greece got billions from the Marshall plan, billions from the EU through many programs, cheap credit based on the Euro and squandered all of it.
Tsirpas article is as shallow as it is boring. His statement "Greece's debt is currently unsustainable and will never be serviced" is a typical, bold, populist statement, twisting reality. Greece's debt would indeed be sustainable, if it wasn't for Tsipras' recent claims that they would rehire some recently laid of government workers and stop the privatization process. The debt is serviceable, it just isn't repayable. But that's no problem since the ECB can always take over these bad loans, once the Greece government has fulfilled all the requirements for reform. When he says in his last paragraph:
I understand that, behind your 'demand' that our government fulfills all of its 'contractual obligations' hides the fear that, if you let us Greeks some breathing space, we shall return to our bad, old ways.
Then this is exactly the reason why the debt needs to be retained. Tsipras has already proven with his recent actions that he's very tempted to return to the "bad, old ways" of Greece government spending. European solidarity means helping out equal partners in the union, it does not mean funding dysfunctional governments at the expense of others.
The "rehiring" refers actually to only a relatively small number of employees (~3500) that were unlawfully fired. They went to court and won their case but the previous government still refused to take them back.
And because most of them were actually suspended and not really fired they were still receiving 75% of their wages. This means that financially speaking the extra cost is a drop in the ocean.
I do not know if Syriza's politics/policies will be successful but keep in mind that most of what is circulating in media, both in Greece and abroad, are usually half-truths and sensationalist journalism.
When the crisis started a lot was written about Greece's big government and its spending. After the dust settled down and more dispassionate voices were heard, a good look at the data showed that Greece's government and spending was more or less around the EU average. But by then no one was paying attention.
As Tsipras and his party compared Mrs. Merkel to Hitler, what is happening to Greece to the Holocaust (implying fired state employees have the same fate as victims in concentration camps) and calling the German finance minister 'Gauleiter' this is a tough sell.
Can I say that it is quite refreshing to see a politician talking straight & frankly with the stakeholders publicly about what the issues are and the way forward no matter how bitter the medicine.
Poor Greece. Exports so low. Wages and local prices so high. But nobody will hire anybody. They voted for the impossible. Better inject some more capital; they're expecting it.
Excellent. I fervently hope he can help call time on the "fiscal waterboarding". Here's the truth: the EU bailouts of Greece, Ireland, Portugal and Spain were mainly about protecting private creditors from taking losses on their investments. In fact this week the IMF had this to say about the Irish bailout:
"The failure of policy makers to impose losses on some bank creditors at the height of Ireland’s financial crisis was a mistake that forced Irish taxpayers to foot a bill that should have been borne by the wider eurozone, according to the International Monetary Fund.
The failure to 'bail-in' unsecured creditors to a bank rescue that cost Irish taxpayers €64bn and bankrupted the country was based on the view that doing so would have serious adverse 'spillover' effects in other eurozone countries, even though such risks were 'not obvious'."[1]
All of the developed world bailouts have benefited the most well-connected, the most wealthy, entrenched interests, i.e. banks and investors. And in the case of the U.S. banks this has not led to an end to Too Big To Fail, in fact, they've just gotten bigger and the relatively modest reforms that were passed are now even in danger of being rolled back.[2]
All of these extraordinary measures have led to paltry growth at best. And this includes quantitative easing which has not worked in Japan, has not worked in the U.S. and is not likely to work in Europe...unless you are wealthy or a bank, in which case it has worked just fine.[3][4]
No wonder we have Davos-man plotting his escape.[5] Any fool can see this kind of economic leadership is not sustainable.
Europe had and has a fundamental problem in its dealing with sovereign bankruptcy, or insolvency as Alexis Tsipras puts it. The reality is that the government of a state cannot go out of business and make way for a new one. But, it's not uncommon for states to become insolvent. State collapse is not an option.
The way it is normally dealt with is inflation, which is kind of treated as default by economists but not really by financial markets and law. The print money which (A) can be used to continue operating and (B) reduces the value of the debt (sovereign and private) as the currency devalues. The 'C' is one that Greece really needs. It's also one of the hated (or loved) mystery components of "Keynsian" economics.
Inflation lowers salaries, and other pre-agreed contracts. It allows (for example) houses to sell at a lower (real) price without the "animal spirit" responses involved when someone sells a house 5 years later at a 15% nominal loss. There's debate in pedantic circles about whether this effect is indeed emotional or if it's related to mortgages being denominated nominally and other "rational" reasons.
Whatever the theoretically best way of understanding it (the two most vocal sides are Austrian vs Keynsian economists with actual politicians usually adopting a confusing mix of both vocabularies), it remains the case that the tried and tested (though certainly not free) solution is printing money.
The German solution is just to stay solvent. They manage to do it and they want other EU countries to do it too. This is a combination of strange optimism, stubbornness, fear of inflation and belief in Beaurocratic controls (which work better in German than in Greece).
This is the core of the issue. A State that runs its own budget (a fundamental EU principle) that does not control its own currency (a fundamental EU principle) cannot make it through insolvency.
One option that I quite like is letting states go into a sort of "bankruptcy." The banks would have to take the hit. This means the system must be robust against bank failure (which is easier to swing than state failure, but we're not there at this point. Too big to fail, Systemic risk, etc.) But, that doesn't prevent the problem overall. It prevents states from digging quite as deep as their interest rates rise sharply, but it doesn't completely block off the risk of failure.
I don't really have a solution. I don't like the Keynsian approach, but it is popular because it offers a solution to recession and state solvency at the same time.
We can see similar things happen in sub-state governments. US cities & States (provinces elsewhere) can go bankrupt. They are locked into spending on salaries, physical maintenance and such which require future revenues that were never realistic or haven't been achieved for some other reason (eg migration). They control a budget, they don't control a currency.
The EU needs to solve this in a way that doesn't make it happen again. bailing out Greece with an actual cash transfer would not achieve this. It would (A) make it easier for other EU states to get into the same trouble and (B) take the pressure off Greece to do what they need to do, become solvent.
Greece's governmental spending is unsustainable. Not of the currently declining tax revenues. Not on the pre-austerity revenues. Not even in a best case scenario. Inflation causing a (quite but extensive) reduction in government salaries, contracts, pensions, etc. is not an option in the EU context, but it may not have been enough anyway.
It's actually quite scary. I have no idea how they solve this. I have no idea how the EU gets "fixed."
I use Keynsian quite loosely. It's only tangentially and perhaps spiritually related to John Maynard Keynes the person.
Printing money doesn't always work either. Hyperinflation can destroy the State. Borrowing in foreign currency (as the poorest countries must do) takes away the option.
>So, let me be frank: Greece's debt is currently unsustainable and will never be serviced, especially while Greece is being subjected to continuous fiscal waterboarding.
Despite the rhetoric this is the problem of not just Greece but many other developed governments, notably Japan. Central banks have been goosing the time value of money in an effort to spur 'growth' because if an entity can become richer faster than their debt will grow then it's a win-win situation.
Japan is doing just fine. Most economists accept that it will keep on like that for a long, long time.
Since their debt is in yen, in the far future they can still reset their currency. Germany has done this twice in the 20th century and while it was certainly a disaster for people who has saved some money, the economy always recovered quickly.
It's the same for everyone predicting doom for the US. Let's not forget that even a currency reform does not wipe out a country. It merely wipes out all wealth stored in banks.
It's bad, but it's not worth keeping everyone worried for decades, when it might just happen once in a century.
I don't think you can compare Japan and Greece. Japan can afford to service their debt (for the forseeable future). The problem with Japan is long term demographics, not an economy unable to service debt.
The article also says it was published in "a leading German language business newspaper", so it's likely it was translated into German as well as English.
Still, I think it's fair to say he wrote it himself, so long as it's been accurately translated on his behalf.
Yeah, it's reasonable that a leader should do all his writing in his native language and have it professionally translated. Why would it be any other way?
No politician ever writes their own Op-Eds, for any publication. That's what their staff, freelance ghostwriters, and political think tanks are there for.
Indeed they do (and far better than most English-speakers speak any foreign language). My point was that this has been professionally translated from Greek into many languages, beginning with German on January 13 (paywall, sadly). So there is no point in criticising the English of the original Greek author or authors.
Hm, not the feeling I got. Scandinavian countries (and Cypriots but that's a special case) are way more fluent in English with a way better accent (better == clearer) than Germans I've met. And I've met a lot of both actually.
Hm, we had a PM (Papandreou) who spoke very good English indeed. He didn't know how to speak Greek properly though and to tel you the truth, it bothered me a lot.
The losses must be acknowledged. The only question is by whom? By the people who made the loans? Or will the taxpayers of Europe be called upon, as the taxpayers of America were, to eat the losses?