Sunday, February 22, 2015

Greece, Germany and the struggle to save the euro

Paul Krugman thinks that Greece came out better in the Eurogroup agreement last Friday (Greece Did OK 02/22/2015): "Now that the dust has settled a bit, we can look calmly at the deal — if it really is a deal that survives through tomorrow, which some people doubt. And it’s increasingly clear that Greece came out in significantly better shape, at least for now."

He stresses that Greece's primary surplus as a percent of GDP is the key issue in the ongoing negotiations:

The next step will come four months from now, when Greece makes its serious pitch for lower surpluses in future years. We don’t know how that will go. But nothing that just happened weakens the Greek position in that future round. Suppose that the Germans claim that some ambiguously worded clause should be interpreted to mean that Greece must achieve a 4.5 percent of GDP surplus, after all. Greece will say no, it doesn’t — and then what? A couple of years ago, when all the VSPs [Very Serious People] of Europe believed utterly in austerity, Greece might have faced retaliation thanks to wording issues; not now.

So Greece has won relaxed conditions for this year, and breathing room in the run-up to the bigger fight ahead. [my emphasis]

The print edition of Bloomberg Businessweek 02/23-03/01/2015 has a good explanation of the primary surplus issue in Greece's case in :

A measure of austerity, it's what a government earns in taxes each year, minus what it spends on everything else except interest payments on its own debt. It's usually expressed as a share of gross domestic product [GDP].

Under its four-year-old bailout program, Greece has dragged itself from a primary deficit of 10 percent to a 3 percent surplus, at great cost in jobs lost. The terms of the bailout demand that Greece reach a surplus of 4.5 percent and hold it for the length of the program. There's little reason to believe that's possible. ...

And 4.5 percent is not all that Greece's lenders are asking. In theory, the country will pay off its debt through thrift and economic growth until it can reduce its debt to the euro zone standard of 60 percent of GDP. To do that, says the International Monetary Fund, Greece must sustain a primary surplus of 7.2 percent from 2020 to 2030. Only Norway has maintained a surplus that high for that long.
And Norway is in the unusual position of being a petrostate with substantial income to the national government from oil.

This is another way of saying that Greece's debt load - and the repayment schedule that Germany/the EU has been demanding - are clearly unsustainable.

Krugman also links to this analysis by Norbert Häring of Friday's agreement, Was it worth it? Concessions to Greece relative to the rejected draft of 16 February Geld und mehr 21.02.2015.

Rudolf Burger did an interview with German economist Heiner Flassbeck, «Deutschland hat quantitativ mehr gesündigt als Griechenland» Der Bund 21.02.2015, in which Flassbeck explains how Germany's trade surpluses have been irresponsible in the context of the euro currency zone.

Clive Crook asks of this situation Who Made Germany Europe's Boss? Bloomberg Businessweek 02/22/2015:

Whatever the outcome, Germany's role in the stand-off [with Greece] has been striking. The struggle between Greece and the euro-zone finance ministers has been reported as though it were a battle between Greece and Germany, with the rest looking on. This was an impression that German officials went out of their way to reinforce. ...

When I thought I couldn't be any more perplexed or disappointed, I saw Schaeuble's response to the agreement on Friday. Bear in mind, he's a co-author of the final document, which obliges the Greek leaders to walk back many of the promises that won them the election. Rather than commending the compromise, he said:

The Greeks certainly will have a difficult time to explain the deal to their voters.
How helpful.

On the merits, I think Germany's wrong, because the current program has failed and Greece's economic plight isn't entirely its own fault. But set this aside. A different and even more important question arises: Who put Germany in command?
This is a significant political question. I think the arrogance in the German government approach to the euro crisis has to do in significant part with Merkel's nationalistic perspective developed in her East German past. German unity is one thing. The kind of broader European perspective of previous German leaders is something else.

As Crook puts it, "Europe needs stronger leadership -- but Germany, at the moment, looks poorly qualified. Its policy makers are unenlightened on the macroeconomics of debt and deflation, and its officials seem unable to exercise influence with restraint or respect for all EU citizens."

The editors of Bloomberg View chime in on the same note as Crook (Europe's Crisis Averted (Until Monday) 02/20/2015): "the European Union needs to study the shambles of the past few weeks and resolve never to repeat it."

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