Tuesday, July 7, 2015

Disappointment Thus Far

The other day I said it was time for Hollande to step up. Thus far he has not done so. No surprise there. Of course he is constrained by the proprieties of the "Franco-German couple." Public differences must be muted at all cost, lest there be "embarrassment." Of course there is a glimmer of difference: Sapin, Macron, and Valls have all repeatedly said that negotiations should be resumed immediately, but beyond that--nothing. Debt reduction is dangled implicitly, as before, but first there has to be agreement on continued austerity, or else the embarrassing thought of Grexit nastily intrudes upon the tranquil routine of yet another Eurozone summit.

To be sure, considerable embarrassment is evident among Euro-elites, but I have seen little discussion of what should embarrass them most, namely, the IMF's admission that its staff regards the debt as unsustainable. The report has been reinforced by DSK's suggestion that they frankly acknowledge this and by the leak of the NSA taps on Merkel and Schäuble, showing that they, too, knew that the debt was unsustainable and austerity could not yield the desired results as long as 4 years ago. Instead, they are embarrassed mainly by the imminence of what they have been saying until now was unthinkable and potentially catastrophic, namely, Grexit. They should be explaining why they cling to a fiction rather than trying to scramble back to reality. Instead, they're devoting their energies to blame-shifting, failing to recognize that they will all be blamed in the end if things go badly wrong, as they very well could if the ECB cuts off the Greek banks and the Grexit process becomes "disorderly." People who think Syriza has not managed things well thus far should not be relying on them to manage things going forward. "Humanitarian aid" offers are a poor substitute for authentic humanitarian feelings toward fellow Europeans.

And so we stumble on. Of course Greece did not help matters by showing up for today's Eurogroup meeting without a plan. Mañana there will be one, the say, reinforcing the stereotype of the lazy Mediterranean, although the true reason for their tardiness is undoubtedly not laziness but sheer lack of the staff necessary to pull together a proposal after the turbulent weekend and the sacking of former Fin Min Varoufakis (who in my view richly deserved to go: I am not a fan of negotiators who gratuitously insult their interlocutors by calling them "terrorists"). Still, on the substance, Varoufakis has always been correct: debt reduction is indispensable. If only Europe's leaders can come to that realization.


Mitch Guthman said...

Art, very well said! I have one small quibble about whether the Greeks should have bought a new proposal with them. During the election, Merkel was clear that nothing less than unconditional surrender would be acceptable and this position was reaffirmed by several German and EU officials after the election---the recent actions of the ECB are particularly telling in this regard. So I don't see what the Greeks could have brought as a basis for compromise when the other side has already demonstrated that there can be no compromise.

At this point, I think everyone is just trying to avoid the blame for Greece exiting the euro. Greece should reintroduce the Drachma but leave alone bank account holding euros to minimize the loss to businesses and savers. Everyone should stop posturing and just get on with it.

FrédéricLN said...

I fully agree on Varoufakis. Also on all the post. But on the blame on the "lack of plan" from the Greek part: the Greek point is precisely that they needn't any help (as they have a budget surplus) as soon as the creditors agree to proceed to some Club de Paris and write off 30% of their debt. What is exactly what the Europeans don't want to hear and discuss. I can't see any exit way but the classical one, i.e. debt restructuring under IMF lead, and the € States will just have to follow and undersign. Crying that if they knew in 2010, they would not have gone there — but they knew.

Mitch Guthman said...

Frédéric reminds us of a very important fact that everyone seems to be losing sight of, namely, that before the Troika ratcheted up the pressure, Greece was running a primary surplus. I think that Frédéric is also right to say that they probably would be again if Merkel and the Troika would agree to the 30% debt reduction and let Greece reopen for business. None of the suffering in Greece today is necessary; it was inflicted to crush the Greeks during the negotiations and force them to submit and it’s being maintained today to punish them for their refusal to surrender unconditionally as demanded by Germany.

But there’s something for Germany to consider: There’s a real downside for Germany if Merkel and the hardliners push the Greeks too far. Greece may technically owe everybody in the world more money than there is in the word, but it’s Germany that’s guaranteed many of these loans and is on the hook for truly vast sums of money. Even the German central bank has admitted that the damage to their economy of even a partial default would be huge; the damage inflicted by a total default might be catastrophic.

On the other hand, the Greeks, who have been left with nothing, now have nothing to lose. They are already experiencing the “mother of all financial crises” that Barry Eichengreen very reasonably thought made membership in the euro irreversible. Every centime that could be sent someplace else has already been sent; the banks are already closed; the bond market is already wreaked; food and medicine are becoming scarce. Germany and the Troika have already inflicted such colossal damage that defaulting and leaving the euro would cost the Greeks very little by way of increased suffering.

My thinking is that once the new Drachmas have been printed and distributed, the cost to Greece (economically and in terms of human suffering) of leaving the euro would probably be marginal and quite possibly indistinguishable from daily life staying in the euro with a 30% debt reduction but continuing austerity that would leave generations of Greeks improvised. Defaulting on everything and leaving the euro would be much better for Greece in the long run. Plus, they'd have the satisfaction of blowing a gaping, bloody hole in the German economy. Greece should stop screwing around with the German hard-cases and the feckless French and just give itself a fresh start.

Anonymous said...

On the button Mitch the hegemonic German economy would be deeply holed by a total Greek default (which is one reason why they should pull out of euro) and DBank with derivatives exposure said to be greater than global GDP, would explode. All hell would hit global finance once again. Yet the loons in Brussels insist everything is "under control" and "there will be no contagion".

bernard said...

At this point, I have to conclude that the habitual behaviour of the Tsipras representatives - himself included - to come to these meetings with empty hands is not the result of not having enough competent people to cobble together some proposal. It has to be part of a deliberate strategy and planned ahead. What the point of this strategy is, I don't quite know (shock, confuse?), more cognisant minds may exercise their intellect and tell us about it at some point.

Just as an aside, Greece is not, repeat, not in lack of decent even stellar economists of all persuasions or competent bankers, I could name quite a few apart from Varoufakis.

Another aside, quite relevant to the situation. Greece is not in a primary surplus. Greece was in a primary surplus in 2014. In the runup to the elections, and ever since Syriza won, the primary surplus has vanished amongst other things because many people simply stopped paying their taxes, including on property, and the government administration proved incapable or unwilling to enforce existing tax legislation. Furthermore of course, the serious decline in GDP which occurred during the first half of 2015 amplified seriously the return to government deficit. Please note that I am talking about the first half of 2015, which ends on 30th June, not about the collapse in GDP which took place after the 30th of June. As a result, it is now incorrect to think that Greece can survive leaving the Euro without experiencing suffering on a scale that will leave all of us commentators speechless in hindsight. This has to be said.

Unknown said...

Yes, quite right, Bernard. There is an unfortunate tendency of those who dislike the policies of the EU, including myself, to hasten to exonerate the Greek side of its many shortcomings. We shouldn't do this.

Mitch Guthman said...


I think we see the world differently. For me, negotiations are neither a morality play or nor a tea party. There’s only winning and losing. The Greeks are under no obligation to be good little center-leftists and fold like a cheap suit. You may look down on Syriza as being “not the right kind of people”, but if you were a Greek, wouldn’t you want to be represented by negotiators who aren’t worried about what kind of invitations they’ll get for next years parties in Davos. I know I would.

Germany and the Troika have repeatedly demonstrated that they will never negotiate with the Greeks in good faith. Merkel’s putting Michael Corleone’s “my offer is nothing” statement on the table is declaring that negotiations are impossible. Only a fool would make a substantial counteroffer under such circumstances.

There are no negotiations. There can be no negotiations. All that remains for Greece is choosing between life as a German debt colony or defaulting and leaving the euro. I believe what we’re seeing is a pantomime in which Syriza allows Wolfgang Schaüble to eliminate any lingering doubts among the Greek people that there’s really nothing in-between.

As to whether leaving is a viable option. I believe so, as do many extremely capable economists. More importantly, I would direct your attention to the fact that Barry Eichengreen has said that Grexit is now a realistic possibility because all of the consequences that he argued made it unthinkable for a country to withdraw from the euro have already happened to Greece.

You say that the consequences of leaving would be even more horrific than what’s happening today but I think you need to show your work. What else could happen to Greece that isn’t already happening right now? We’ve seen massive bank runs, the banks are shuttered, capital controls have been instituted and there’s an actual shortage of currency; the economy is grinding to a halt because people have no money; there’s shortages of food, medicine and all imported goods. The fabric of civil society is fraying. Short of sending in the Panzer divisions, what else do you think Germany could still do these people to break them?

bernard said...

I read here and there that VALLS & HOLLANDE have dispatched a team of experts who are very actively and effectively helping Tsipras devise his package. Class traitors are everywhere.

I predict with a high level of confidence that you will find that Tsipras is not left enough in a few days or weeks. As for me, I'm presented with black and white and can't help but see shades of grey. It's a personal failing.

Having spent about ten years helping out African countries, I can assure you that the situation of the Greek can get much worse before it gets any better.

A small example of how leads and lags matter to the average suffering family. Greece basically only exports two things: tourism services and shipping. Let's say Greece leaves the Euro. It will have to leave the European Union to do that, international treaty legal niceties being what they are, and reapply to join the EU, which will take some time. In the meantime, a new drachma currency will likely devalue seriously against the Euro, 50%, 80%, it's anybody's guess, and this will undoubtedly stimulate Greek exports and restrain imports, EVENTUALLY. Tourism exports will likely boom in the summer of 2016, which is 12 months from now. In the meantime, imports will have to be curtailed as they will be too expensive to pay for - no commercial trade credit available following a default, cash on order - and unaffordable to the average household which was already suffering greatly before the exit. Let me quote an African example from a country that is not even plagued by civil war or disorder. Every year, Malawi, whose export resource is tobacco leafs (talk about a booming export market...) has a choice. It can afford to import fuel or it can afford to import fertiliser, but not both, and thus the Malawi economy suffers every year. That is what a current account constraint does.

Greece does not produce fish to speak of (they were wiped out during the civil war of the late 1940s, grenade fishing you see). It does not produce meat to speak of (most of it is imported). There goes your source of protein for 12 months. Pharmaceutical products are another obvious case. I could go on and on. Facts actually matter more than ideology, and there is a reason why humanitarian aid packages are presently being drafted in Europe. Things can and will get much worse in Greece for a not negligible period of time if it exits the Euro.

Mitch Guthman said...


I agree that we should expect some very bad things to happen if there is Grexit but the disaster you’re describing is already happening now because of the financial panic deliberately triggered by Germany and the Troika. More specifically, the problems you describe won’t be averted by a deal that kicks the can down the road because because imports must be paid for with scarce foreign currency reserves whether Greece is part of the euro or not. The euro is as much a foreign currency to them as is the dollar, sterling or gold. Greece must earn, borrow or be given euros. It can’t make more on its own, so unless it can improve its overall economic situation, Greece can’t avoid horrible things related to its inability to pay for imports with foreign currency reserves.

Frances Coppola has a good blog post on the subject that I would recommend. http://tinyurl.com/nucl263

The problem of the center-left governments to which I alluded is related to a particularly sage observation by the American blogger Matt Yglesias about how small-country politicians have personal incentives that tend to align more closely with the global elites than with their nation’s interests:

"Normally you would think that a national prime minister’s best option is to try to do the stuff that’s likely to get him re-elected. No matter how bleak the outlook, this is your dominant strategy. But in the era of globalization and EU-ification, I think the leaders of small countries are actually in a somewhat different situation. If you leave office held in high esteem by the Davos set, there are any number of European Commission or IMF or whatnot gigs that you might be eligible for even if you’re absolutely despised by your fellow countrymen. Indeed, in some ways being absolutely despised would be a plus. The ultimate demonstration of solidarity to the “international community” would be to do what the international community wants even in the face of massive resistance from your domestic political constituency".

Paul Krugman relates this directly to the Greek crisis:

"[A] genuine government of the left, as opposed to the center-left, is very different — not because its policy ideas are wild and crazy, which they aren’t, but because its officials are never going to be held in high esteem by the Davos set. Alexis Tsipras is not going to be on bank boards of directors, president of the BIS, or, probably, an EU commissioner. Varoufakis doesn’t even like wearing ties — which, consciously or not, is a way of declaring visually that he is not going to play the usual game. The new Greek leaders will succeed or fail, personally, based on what happens to Greece; there will be no consolation prizes for failing conventionally.

Do Berlin and Brussels understand this? If not, they are operating under a dangerous misconception."

It doesn’t matter to me whether Tsipras is left enough or not. What I admire is that he’s doing his best for his country because that’s where his loyalties are; what I dislike about the politicians of the center-left who embraced austerity is that their loyalties and personal incentives are with the global elite who annually pleasure themselves at Davos instead of with their own people.

By the way, if Valls and Hollande actually have teams of experts who are capable of actively and effectively doing anything, I think we’d all be grateful if they could be sent to Paris, where the need for such people seems particularly acute at the moment.

FrédéricLN said...

(Back from some holidays,) thanks for the discussion esp. to Bernard and Mitch Guthman. I think I agree with all your points even if quick reading suggests some disagreements between you :-)

Creating "IoUs", i.e. national debt bonds without ECB signature, would not have been the same as returning to drachma: the private sector, esp. tourism, would have went on collecting and spending euros.

Since then, Mr Varoufakis' interview suggests he supported this solution, but had only appointed 5 people to prepare it instead of the "500" required, because confidentiality would not have been possible.

Before June 30th, my guess was the exact opposite: I supposed they had appointed enough people to prepare for independence, I supposed EU leaders knew that and feared a Grexit, and I supposed that was the reason why Syriza could call to a referendum — because they had forged the alternative option, and had some cards to play.

But no. All the fighting army was a shakespearian haze.