Monday, June 29, 2015

Greece in the new stage of the euro crisis

"I can think of no depression, ever, that has been so deliberate and had such catastrophic consequences: Greece’s rate of youth unemployment, for example, now exceeds 60%." - Joseph Stiglitz

Angela Merkel is a talented politician. It's not for nothing that she's referred to in the press as the most powerful woman in the world. The daughter of a Protestant pastor om East Germany, starting in professional politics in her mid-30s with the fall of Communist rule there, she rose quickly in the Christian Democratic Union (CDU) through luck, talent, ambition and sticking the metaphorical shiv in the backs of important patrons of hers like Helmut Kohl and her current Finance Minister Wolfgang Schäuble. She is in her third term as the first female Chancellor of Germany and her converted the once-formidable Social Democratic Party (SPD) into an obedient junior partner fully supporting her radical, Herbert Hoover/Heinrich Brüning austerity policies.

She also has achieved notable success in a surface depoliticization, primarily through neutralizing the SPD as an opposition party. The SPD did much of it themselves; Merkel didn't drag them kicking and screaming into it. As Paul Krugman writes, "As a political matter, the big losers from this process have been the parties of the center-left, whose acquiescence in harsh austerity — and hence abandonment of whatever they supposedly stood for — does them far more damage than similar policies do to the center-right." (Europe’s Moment of Truth 06/27/2015)

The image that Merkel and her media fans like Dirk Kurbjuweit of Der Spiegel have promoted is that of the Second Biedermeier age, one in which German voters are and should be apathetically happy.

But the half-truth of the Second Biedermeier was in fact built on very high-stakes gambling by Merkel in the euro crisis. The euro currency zone was unmistakably showing its structural weaknesses in 2010 when the first so-called "bailout" by the Troika took place. Solving the euro crisis did not, and even at this late date does not, require immediately fixing all the structural problems of the currency zone. (See A Modest Proposal for Resolving the Eurozone Crisis – Version 4.0 by Yanis Varoufakis, Stuart Holland and Jamie Galbraith (July 2013). The first version appear in November 2010.)

But Merkel was fixed on her economic doctrine of ordoliberalism and resistant to further political and economic integration of the eurozone. So she went for solutions that averted the immediate crisis but prolonged the chronic crisis. The consequences for Greece were devastating (Joseph Stiglitz, Europe’s Attack on Greek Democracy Project Syndicate 06/29/2015):

... the economics behind the program that the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund) foisted on Greece five years ago has been abysmal, resulting in a 25% decline in the country’s GDP. I can think of no depression, ever, that has been so deliberate and had such catastrophic consequences: Greece’s rate of youth unemployment, for example, now exceeds 60%.

It is startling that the troika has refused to accept responsibility for any of this or admit how bad its forecasts and models have been. But what is even more surprising is that Europe’s leaders have not even learned. The troika is still demanding that Greece achieve a primary budget surplus (excluding interest payments) of 3.5% of GDP by 2018.

Economists around the world have condemned that target as punitive, because aiming for it will inevitably result in a deeper downturn. Indeed, even if Greece’s debt is restructured beyond anything imaginable, the country will remain in depression if voters there commit to the troika’s target in the snap referendum to be held this weekend. [my emphasis in bold]
In an interview with Time, the Nobel laureate says the Troika has "criminal responsibility" for the current state of Greece. (Joseph Stiglitz to Greece’s Creditors: Abandon Austerity Or Face Global Fallout Time 06/29/2015; link at this writing has a redirect loop; Fortune has a wire version with the same title). From the Fortune version:

Stiglitz, who served as the chief economist of the World Bank from 1997 to 2000, says no such firewall of protection can exist in a globalized economy, where the connections between events and institutions are often impossible to predict. “We don’t know all the linkings,” he says.

Many countries in Eastern Europe, for instance, are still heavily reliant on Greek banks, and if those banks collapse the European Union faces the risk of a chain reaction of financial turmoil that could easily spread to the rest of the global economy. “There is a lack of transparency in financial markets that makes it impossible to know exactly what the consequences are,” says Stiglitz. “Anybody who says they do obviously doesn’t know what they’re talking about.”

Stiglitz sees two possible outcomes to that scenario – neither of them pleasant for the European Union. If the Greek economy recovers after abandoning the euro, it would “certainly increase the impetus for anti-euro politics,” encouraging other struggling economies to drop the common currency and go it alone. If the Greek economy collapses without the euro, “you have on the edge of Europe a failed state,” Stiglitz says. “That’s when the geopolitics become very ugly.” [my emphasis]
This was always a high risk approach on Merkel's part. The Greek government of Prime Minister Alexis Tsipras and Finance Minister Yanis Varoufakis has finally called her bluff. Her response was to blame the Greeks. (Bundesregierung zur Griechenlandkrise: Merkel schiebt die Schuld auf Tsipras Spiegel Online 29.06.2015)

Tsipras called a referendum for next Sunday, July 5, for the Greek public to vote on the Troika's most recent proposal. His government is recommending a No vote. Tsipras is suggesting that he will resign as Prime Minister if the public votes to accept the Troika's austericide proposals. (Referendum über Sparpolitik: Tsipras droht mit Rücktritt Spiegel Online 29.05.2015)

The Troika, not surprisingly - at least the EU Commission leg of it - is openly encouraging a Yes vote against the Greek government.

Paul Krugman writes, "The troika clearly did a reverse Corleone — they made Tsipras an offer he can’t accept, and presumably did this knowingly. So the ultimatum was, in effect, a move to replace the Greek government. And even if you don’t like Syriza, that has to be disturbing for anyone who believes in European ideals." (Grisis 06/28/2015)

Krugman may be giving Merkel and her collaborators too much credit here. They've been able to bully previous governments into submission, and not only Greece's. They may really have thought that Tsipras and Varoufakis would knuckle under at the last minute. It's always worked before!

A couple of economists writing on the subject recently make what strike me as gratuitous whacks at Greece's SYRIZA government over the current impasse. But both make clear that the Troika is far more to blame. Robert Reich writes on Facebook 06/29/2015:

The Greek tragedy of its debt crisis seems about to end, and if it ends badly it could go badly for your savings and even your job. Greek Prime Minister Alexis Tsipras ... has called for a referendum next Sunday for Greeks to choose between (1) accepting the demands of European creditors that will worsen Greeks’ suffering and do little to improve their long-term prospects, or else (2) immediate defaulting on Greece’s debt, resulting in almost certain ejection from the euro system, and likely contagion to Spain and even Italy as creditors pull out of their banks as well. Wall Street is implicated in all this, and will be affected either way given the integration of our financial systems. But if Greece chooses to default, the value of the dollar will rise further as world money rushes into the safe haven of America, causing our exports to further decline. And Europe’s economy will teeter, possibly pulling us and much of the fragile global economy with it. Who will be to blame? Tsipras and his defiant government haven’t helped. Upper-income Greeks who haven't paid taxes bear some responsibility. But the immediate culprits will be Europe’s leaders, especially German Chancellor Angela Merkel, the International Monetary Fund, and the European Central Bank. All have deepened the crisis by their unwillingness to bend.

Last night Tsipras quoted Franklin D. Roosevelt in telling the Greek people “the only thing we have to fear is fear itself.” Not quite right. We all have reason to fear another Great Recession. [my emphasis]
Barry Eichengreen, the guy who "wrote the book" on the gold standard, Golden Fetters: The Gold Standard and the Great Depression, 1919-1939 (1995), writes in Path to Grexit tragedy paved by political incompetence The Conversation 06/28/2015:

... Syriza had run on a platform of no more spending cuts or tax increases but also of keeping the euro. It should have anticipated that some compromise would be needed to square this circle. In the event, that realization was strangely late in coming. ...

Still, this incompetence pales in comparison with that of the European Commission, the ECB and the IMF.

The three institutions opposed debt restructuring in 2010 when the crisis still could have been resolved at low cost. They continued to resist it in 2015, when a debt write-down was the obvious concession to Mr Tsipras & Company. The cost would have been small. Pretending instead that Greece’s debts could be repaid hardly enhanced their credibility.

Instead, the creditors first calculated the size of the primary budget surpluses that Greece would have to run in order to hypothetically repay its debt. They then required the government to raise taxes and cut spending sufficiently to produce those surpluses.

They ignored the fact that, in so doing, they consigned the country to an even deeper depression. By privileging their own balance sheets, they got the Greek government and the outcome they deserved. [my emphasis]
This is a partially helpful timeline from Kein Geld mehr: Griechische Banken bleiben geschlossen Oberösterreichische Nachrichten 29. Juni 2015. But it's also notable for the framing, which recounts it as a tale of sins of the Greeks.

Die Griechen-Krise

[The Greek Crisis]

2001: Geschafft? Griechenland tritt mit etwas Verspätung der Eurozone bei. Das Land erfüllt angeblich die Kriterien.

[2001: Greece enters the the eurozone with some delay. The country alleged fulfills the criteria.]

2004: Geschummelt: 2004 fliegt auf: Griechenland hat bei den Budgetdaten für den Euro-Beitritt geschummelt. Die Neuverschuldung war stets höher als angegeben.

[2004: Cheated: 2004 it leaks out: Greece had cheated on the budget data for the entry to the euro. The new indebtedness was always higher than alleged.]

2009: Geschockt: 350 Milliarden Euro Schulden, ein Budgetdefizit von 12,5 Prozent: Die neu gewählte Regierung Papandreou legt im Oktober die Budgetzahlen der konservativen Vorgänger offen - und schockt Europa.

[2009: Shocked: 350 billion euros of debt, a budget deficit of 12.5%: The newly elected government of Papandreou in October reveals the budget numbmer of its conservative predecessor - and shocks Europe.]

2010: Gesperrt: Athen bekommt im April an den Finanzmärkten praktisch keine Kredite mehr. Die Eurostaaten und der Internationale Währungsfonds (IWF) gewähren im Mai im Gegenzug für rigorose Sparmaßnahmen Notkredite.

[2010: Shut out: Athens in April can no longer get credit in the financial markets. The euro states and the International Monetary Fund {IMF} in May grant emergency credit in exchange for rigorous savings measures.]

2011: Gescheitert: Im Juli wird klar: Griechenland erreicht die Sparziele nicht - es folgen ein Schuldenschnitt bei privaten Gläubigern (30 Milliarden Euro) sowie weitere Hilfskredite von EU und IWF. Gesamtvolumen: 240 Milliarden Euro.

[2011: Failed: In July it becomes clear: Greece does not achieve the savings goals - a debt reduction follows for private creditors (30 billion euros) as well as further credit assistance by the EU and the IMF. Total volume: 240 billion euros.]

2012: Verzichtet: Griechenlands Geldgeber verzichten vorläufig auf Zinszahlungen. Nach Doppelwahlen (im Mai und im Juni) wird der konservative Antonis Samaras Regierungschef.

[2012: Deferred: Greece's lenders temporarily forgo interest payments. After two elecctions (in May and in June) the conservative Antonis Samaras becomes head of government.]

2015: Gewählt: Das Linksbündnis Syriza von Alexis Tsipras gewinnt im Jänner Neuwahlen mit dem Versprechen, die Sparpolitik Samaras’ zu beenden – zwischen Athen und den Gläubigern - beginnt ein monatelanges Tauziehen um Spar- und Reformmaßnahmen

[2015: Elected: The left alliance SYRIZA of Alexis Tsipras wins in new elections in January with the promise to end Samaras' austerity policy - between Athens and the lenders - months-long gub-of-war begins over austerity and reform policies]
That's it for the readers of this timeline. The crisis is about deceitful, deadbeat Greeks. The savage effects of the Greek depression escape mention. Greece's generous European partners give economic assistance to the Greeks. That they required it to be in the form of additional debt that had to be repaid didn't rise to even an allusion. And this is too often the way the German and Austrian quality press have reported the Greek crisis. Including, in this case, the Oberösterreichische Nachrichten.

Krugman explains that the debt level Greece had prior to the world financial crisis of 2007-8 was a relatively easily manageable problem (The Awesome Gratuitousness of the Greek Crisis 06/29/2015):

In 2007, Greece had public debt of slightly more than 100 percent of GDP — high, but not out of line with levels that many countries including, for example, the UK have carried for decades and even generations at a stretch. It had a budget deficit of about 7 percent of GDP. If we think that normal times involve 2 percent growth and 2 percent inflation, a deficit of 4 percent of GDP would be consistent with a stable debt/GDP ratio; so the fiscal gap was around 3 points, not trivial but hardly something that should have been impossible to close.
That the Troika under Angela Merkel's leadership took that problem and made it an historic (world-historic?) nightmare says to Krugman, "If Europe as currently organized can turn medium-sized fiscal failings into this kind of nightmare, the system is fundamentally unworkable."

Krugman is also back the Tsipras government's position on the referendum next Sunday (Greece Over the Brink New York Times 06/29/2015):

... the situation in Greece has now reached what looks like a point of no return. Banks are temporarily closed and the government has imposed capital controls — limits on the movement of funds out of the country. It seems highly likely that the government will soon have to start paying pensions and wages in scrip, in effect creating a parallel currency. And next week the country will hold a referendum on whether to accept the demands of the “troika” — the institutions representing creditor interests — for yet more austerity.

Greece should vote “no,” and the Greek government should be ready, if necessary, to leave the euro.
Neil Irwin summarizes the way the current situation developed (The Next Few Days Have the Potential to Transform Greece and Europe New York Times 06/28/2015):

The immediate headlines that got us to this point are these: After an intractable series of negotiations over a bailout extension with Greece’s creditors, the nation’s left-wing government left the table Friday and said it would hold a referendum on July 5. Greek leaders think the offer on the table from European governments and the International Monetary Fund is lousy, requiring still more pension cuts and tax increases in a depressed economy, and intend to throw to voters the question of whether to accept it.

Whatever the exact phrasing of the question (and assuming the referendum goes forward as planned), it really boils down to this simple choice:

A “Yes” vote means that Greece will continue the grinding era of austerity that has caused so much pain to its citizens over the last five years, in exchange for keeping the euro currency and the monetary stability it provides.

A “No” vote almost certainly means that the country will walk away from the euro and create its own currency (which will surely devalue sharply), bringing financial chaos in the near term but creating the possibility of a rebound in the medium term as the country becomes more competitive with its devalued currency.
Additional articles, a few among many right now:

Andrew Higgins, European Leaders Insist Greek Deal Is Still Possible New York Times 06/29/2015

Juncker ruft Griechen zu "Ja" für Europa auf Oberösterreichische Nachrichten 29.Juni.2015

Entscheidende Termine für Hellas Oberösterreichische Nachrichten 29. Juni 2015

Cerstin Gammelin, Diesen Deal wollte Tsipras nicht Süddeutsche Zeitung 29.Juni.2015

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