Tuesday, January 27, 2015

EU neoliberals bracing for a confrontation with pragmatic Keynesian economics

SYRIZA, the name of Greece's now-ruling party, is an abbreviation for "Coalition of the Radical Left." The most immediate kind of "radicalism" they are proposing has the EU's One Percent seriously worried: it's called basic Keynesian countercyclical policy, New Deal economics that in at least a mild form was accepted and practiced even by the Nixon Administration.

Compared to Angela Merkel's dominant Herbert Hoover/Heinrich Brüning policies, it is radical. New Keynesian Paul Krugman even says, "If anything, the problem with Syriza’s plans may be that they’re not radical enough. Debt relief and an easing of austerity would reduce the economic pain, but it’s doubtful whether they are sufficient to produce a strong recovery. On the other hand, it’s not clear what more any Greek government can do unless it’s prepared to abandon the euro, and the Greek public isn’t ready for that." (Ending Greece’s Nightmare New York Times 01/25/2015)

A sign of where Tsipras intends to go is his appointment of economist Yanis Varoufakis as Finance Minister. He has been making his views of Greece's economy and the EU's policy well known for years, including at his own blog: http://yanisvaroufakis.eu/ And in a post today, he says he will keep blogging there occasionally, "even though it is normally considered irresponsible for a Finance Minister to indulge in such crass forms of communication." He is the author of the excellent book, The Global Minotaur: America, Europe and the Future of the Global Economy (2013, 2nd edition) and co-author of the textbook, Modern Political Economics: Making Sense of the Post-2008 World (2011). It's reasonable to guess that Angela Merkel is not happy about this development. Not like the good old days of 2011 where she could just install her own government in Greece.

Euronews reports, New Greek government unveiled with radical economists in top posts 01/27/2015:

That report ends with a comment about "who will blink first," which sounds like the kind of metaphorical framing for a negotiation that our American Pod Pundits love. And, of course, it turns a complicated process into cheap personal melodrama.

Obviously, Merkel and other supporters of Hoover/Brüning economics hope that Alexis Tsipras' new government will just knuckle under to Merkel's orders. Christos Katsioulis in Ein demokratischer Weckruf für Europa Die Zeit 26.01.2015 phrases this hope as calming advice to the Hoover/Brüning dogmatists:

Alexis Tsipras wäre nicht der erste Politiker, der eine Wahl mit großen Versprechen gewinnt und danach erst prüft, welche davon er einhalten kann: Ein ausgeglichener Haushalt und gleichzeitig ein effektives Sozialprogramm für die Ärmsten des Landes? Das Ende der Zusammenarbeit mit der Troika und gleichzeitig der Verbleib Griechenlands in der Eurozone? Eine substanzielle Reduktion des griechischen Schuldenberges, ohne dass dabei den anderen Euro-Staaten, die 80 Prozent davon halten, Verluste entstehen?

[Alexis Tsipras would not be the first politician who won an election with big promises and only afterwards considers which of them he can fulfill: A balanced budget and at the same time and effective social program for the poorest of the country? The end of working with the Troika and at the same time Greece remaining in the eurozone? A substantial reduction of Greece's mountain of debt, without other euro states, who hold 80% of it, to take losses?]

Presumably we readers are supposed to cynically smirk at the impossibility of it all. It should be a clue about to whom he's pitching this when he describes critical measures to combat a devastating depression as a "social program for the poorest of the country." A good conservative will read that as "welfare for undeserving lazy people."

But the questions themselves make SYRIZA's program look ridiculous only if the reader ignores basic macroeconomics. There's no good reason that Greece should be running with a balanced budget, much less the primary surplus that they currently have, during the severe depression that has been going on there for years. On the contrary, it's a sign of how irresponsible the Merkel/Hoover/Brüning policies have been. Oh, and they've caused the country's GDP to keep shrinking rather than produce the recovery their advocates claimed they would. If anything, it was the advocates of Angie-nomics that were coldly cynical about those claims.

As the Shrill One (Krugman) points out in Greece: Think Flows, Not Stocks 01/26/2015, what Greece itself needs is not deficit spending as such, but the ability to use their primary surplus for economic stimulus instead of transferring it to creditors. It's the eurozone as a whole, especially Germany, that should be running national budget deficits to provide stimulus to the eurozone economy.

As Krugman puts it, "issues of debt relief" in the case of Greece right now "are in large part arguments about accounting fiction, the question of how large a primary surplus Greece runs is real and has powerful implications for the economic outlook. Keep your eyes on that ball."

Greece can certainly remain in the eurozone and work with the Troika (EU, ECB, IMF) if the Troika agrees to reasonable policies that don't condemn Greece (and, not incidentally, the eurozone as a whole) to depression and deflation indefinitely. And this is actually a major element in Greece's bargaining power. They are not trying to leave the eurozone. And if Merkel winds up in the position of forcing them out, the eurozone and the EU could fall apart quickly. Merkel's supporters and the Angiebots of the German press like to picture here as ruling with calm and prudence. But she has really been running high-risk policies that have Germany riding a tiger. It's a testimony to the power of the appeal of "Europe" and to the brutally constraining effects of a common currency in a poorly-constructed currency zone that she's been able to pull it off for this long.

And whoever suggested that Greece could achieve the kind of debt haircut required without other public holders of Greek bonds (which includes the ECB) without other states and/or the ECB taking losses? Certainly not SYRIZA. On the contrary, Tsipras has suggested that the ECB should take the bulk of the losses.

Florian Diekmann spins out a version of this hope in Griechenland und der Euro: Tsipras und die drei Szenarien Spiegel Online 26.01.2015. He sees one option, that Tsipras' plans go well, as "extrem unwahrscheinlich" ("extermely unlikely"). Apparently because an economist from Barenberg Bank told him so. Awesome.

Diekmann regards a "Grexit" (Greek exit out of the eurozone) as a "horror scenario." He sees it as mainly a problem for Greece, which it would no doubt be in the short run. He does note, though, that Germany could be on the hook in losing €65 billion on Greek bonds it holds.

Diekmann sees further muddling along, i.e., Greece continuing with the austericide policies, as the most likely option. It will be too bad for Tsipras, he notes, but what can they do? The implication is that Merkel has Greece trapped and they have no choice but to do what Merkel dictates.

Severin Weiland, apparently doing simple stenography for Merkel's government, writes in Nach Griechenland-Wahl: Neuer Schuldenschnitt? Nicht mit Merkel Spiegel Online 27.01.2015, "Athen hat keine wirklichen Druckmittel" ("Athens has no real means of pressure") to bring against Merkel (bold in original). This is negotiating bluff. According to Weiland's stenography, Merkel will not allow a further debt haircut. Not least of the reasons, is that pro-austerity governments are up for election this year in Portugal and Spain. Frau Fritz doesn't want those silly voters in Portugal and Spain to get the idea they can defy her mighty will. And, as he notes, her loyal junior coalition partners in the SPD are backing her up. Vice Chancellor and SPD leader Sigmar "Sigi Pop" Gabriel says Greece has to stick with its debt and with the austericide program. (Syriza-Sieg: Eurostaaten warnen Griechenland Spiegel Online 26.01.2015)

Since I'm quoting so much from Spiegel Online here, I might as well throw in that their regular conservative-twit columnist Jan Fleischhauer sniffs that Greece is obviously a big Kindergarten, because their voters foolishly defied Frau Fritz and the mighty Germans last Sunday. They live in a "childish imaginary world" with "imaginary friends and enemies." He dismisses the new Greek government as Communist, apparently not having checked the news in Spiegel that the Communist Party is not part of the government. But he means Communist as in FOXSpeak, where it simply means "something we don't like." SYRIZA is just a bunch of "Trotzkisten, orthodoxen Stalinisten und versprengten Anarchisten" ("Trotskyists, orthodox Stalinists and scattered anarchists").

That is how basic, bonehead Keynesian macroeconomics looks to a professional German conservative twit. Going to Dr. Krugman again (The Greek Stand-By Arrangement 01/25/2015):

In the spring of 2010 both the ECB and the European Commission bought fully into expansionary austerity; slashing spending wasn’t going to hurt the Greek economy, because the confidence fairy would come to the rescue. The IMF never went all the way there, but it used an unrealistically low multiplier, which it arrived at by looking at historical examples of austerity while ignoring the difference in monetary conditions.

The thing is, we now have essentially the same people who so totally misjudged the impacts of austerity lecturing the Greeks on the need to be realistic.
But Jänchen Fleischhauer thinks it's the people trying to apply basic depression macroeconomics, as opposed to the demonstrably failed Merkel/Hoover/Brüning approach.

No comments: