[UPDATE: This provides more detail and context than I do. Read it instead of, or at least in addition to, my post.]
Thomas Piketty has decided that because Germany was the beneficiary of debt relief in 1953 that they should extend the same privilege to Greece today:
When I hear the Germans say that they maintain a very moral stance about debt and strongly believe that debts must be repaid, then I think: What a huge joke! Germany is the country that has never repaid its debts. It has no standing to lecture other nations.
Before explaining why this is both normatively and positively misguided I would like to clear some brush by mentioning two things. First, everyone (including me!) agrees that Greece’s debt must be written down. In fact, a gradual disposal of Greece’s debt has been a part of bailout program since 2010 and more of it will be discharged in the future. Greece has not paid back a single cent on net. In the meantime the debt is being financed through rollovers whose interest is mostly being paid by the rest of Europe while Greece has received fiscal transfers equivalent to more than 100% of GDP. So it is not an accurate characterization of the situation to say that the Greek economy is being squeezed in order to pay back debt; it is being squeezed because its level of spending was not matched by its level of productivity. And in some ways it still is not, although it is now quite close.
Second, while it would be very nice to have an international bankruptcy mechanism that would allow us to discharge debt and reorganize national economies in an orderly fashion, governments are unlikely to cede sovereignty over this issue for understandable reasons. So ad hoc bargaining is what we’re stuck with for the foreseeable future.
Still, Piketty’s claims have gotten a lot of attention so they are worth addressing. Unfortunately, Piketty both misunderstands the situation of Germany in the 1950s, misunderstands the situation of Greece today, and contains a ridiculous logic: must it be the case that all debts must be forgiven everywhere if they were ever forgiven anywhere? Of course not. There is a clear equilibrium there: no one lends to anyone without exceptional credit. The first country left out in the cold in such a scenario would be Greece. Greece is going to need financing from the rest of the world — lots of it — before it returns to steady growth. That financing will not come so long as Greece’s attitude is that it should repudiate the debt because it feels morally justified in so doing. So as a matter of simple logic Piketty’s appeal falls short. But beyond that the statement contains enough untruths and confusions as to be wholly inane and unproductive.
For example, in linking the current situation to Germany’s mid-century behavior Piketty echoes Syriza and its supporters, who have spent the past 6 months linking contemporary Germans to Nazis and insinuating or outright saying that Germany still owes penance for the war. For example, shortly after being elected Tsipras said:
We are going to demand debt reduction, and the money Germany owes us from World War II, including reparations [of at least €200 billion].
Believe me, those statements and others like them were noted in Berlin and Frankfurt. This is the context of the last 6 months of negotiations, which surely is relevant. In Syriza’s words the reduction of Greece’s debt is explicitly linked to continued German genuflection over the War. In addition to being unbelievably offensive, this does not seem to have the desired effect on Germans or the rest of Europe, which was as damaged by World War II as Greece was, so doubling-down on this strategy is unlikely to have any positive impression on anyone.
Before you interject that it isn’t clear that Piketty meant, you know, that read these words from later in the same interview:
We cannot demand that new generations must pay for decades for the mistakes of their parents. The Greeks have, without a doubt, made big mistakes. Until 2009, the government in Athens forged its books. But despite this, the younger generation of Greeks carries no more responsibility for the mistakes of its elders than the younger generation of Germans did in the 1950s and 1960s.
Piketty also fails to note the situation under which German debt was forgiven at the London conference in 1953. Germany had spent the preceding eight years under military occupation that enforced top-to-bottom political and institutional reforms. Or, as Daniel Davies put it in January when this stuff was already coming up:
There’s more than a couple of Germans I’ve spoken to over the last few years who have pointed out that although Germany got massive debt relief in the twentieth century, it got it in the context of an equally massive national admission that the entire political system was rotten and needed to be totally restructured with foreign help; this was also the basis on which the integration of Eastern Germany was managed in the 1990s.
I suspect the same terms would not be accepted in Athens today. In fact, a lesser form of them is precisely what Syriza stands against.
The conditions for Germany’s debt forgiveness in 1953 also included an insistence that Germany continue to maintain a trade surplus and primary budget surplus, which guaranteed highly-subsidized exports to a Europe that was still lacking industrial capacity right after the war. This, too, is what Greece is now being asked to do and is resisting. The Troika has already indicated that if Greece does now what Germany did from 1945-1953 that debt forgiveness would be on the table. In fact, the past five years have been motivated by getting them to that point. But due to failed implementation, frequent renegotiation, and sufficiently poor governance at the local level not nearly enough of this has yet been achieved. As a result, debt forgiveness is also not yet feasible. So it is not that Greece has suffered as Germany suffered and thus deserves jubilee; it is that Greece refuses to take the path that Germany took but insists on debt forgiveness anyway. Reciprocity cuts more than one way.
Moreover, the debt Germany was forgiven in 1953 largely came from the Treaty of Versailles, and so was easy to repudiate. Others came from direct lending to the National Socialists in the 1930s, which was also easy to repudiate. Other debt was delayed until Reunification, and so payments resumed post-1990. None of this has any parallel to the current situation.
So I believe Piketty’s normative point is logically questionable and historically inappropriate. But even if it were not there are strong positive reasons why this program is a non-starter. Contemporary Greece is not a pivot-point in an emerging Cold War. I.e., an economically-healthy Greece today is not nearly so important to, well, anyone as an economically-healthy Germany was then. And the German writedowns in 1953 were pushed — hard — by the same Americans who were providing counter-cyclical finance and security guarantees to the European continent. Thus it was not out of the goodwill and kind spirit that Europe forgave Germany; it was the result of power politics.
Greece’s debt was being gradually discharged under the old terms, via ELA. It had already been written down several times prior, including a 75% haircut on private bondholders in 2012. Greece has received more than 100% in direct fiscal aid in the past 5 years, and several multiples of that through low-interest financing and emergency liquidity. This despite failing to fully implement any of the terms of these programs. But because Greece is still unable to run a primary surplus, during a time when government expenditure is 60% of GDP (!), it continues to accrue debt rather than establishing the baselines conditions necessary for further growth. This rhetoric of “squeezing blood from a stone” really needs to end, or at least wait until they begin paying any of this back.
When Germany’s debt was forgiven it was not linked in a political and monetary union with anyone else. Thus, forgiving its debt had no real consequences for Germany’s interactions with others. Simply forgiving Greece’s debt would shatter the entire basis of the Common Market and monetary union. (As many have noted, it would provide clear incentives for Italy, Portugal, Spain — at minimum — to renegotiate their standing within the EMU.) The lesson of this for the European Union are clear: it will destroy it. The Union cannot stand on the principle that some members get to borrow and renege while others stand by. This was the entire purpose of the rules-based fiscal limits that were put into place at the very origin of the monetary union, and even stronger rules are likely to be necessary in the future to save the project.
In closing, I want to reiterate that moralizing about this as Piketty does adds no value. None at all. What needs to happen now is for credible plans for putting Greece on a sustainable growth trajectory — that understands that its true level of income should likely not be where it was in 2007 — that is complemented by a true counter-cyclical fiscal policy. Commitment to such a plan has to come firstly from Greece’s political class. But they’ve done no such thing. In 1953 Germany had. And that’s the difference.
(After several hundred words of moralizing about the media tactics of Syriza and about Greek debtors) “Picketty should stop moralizing!”
Every debtor implies a saver. The capital it is said should be “written off” came from someone’s savings account orension plan.
Why don’t we ask that guy?
You should read a paper on how modern banks work, like https://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf
Fractional banking goes reciproke now: they only have 5% of what they lend. The rest is “trust”.
How about the fact that Greek Government spending was known to be well out of hand before they were allowed in to the euro, where then German Banks were more than happy to lend to them, with no structural reforms.
People are actually suffering because of this economic morass that the lenders are just as culpable for creating as the borrowers were, except for that the borowers are out of power and the people on whose behalf they brorrowed now have to pay for the mistakes.
Germany got what it wanted, it controls Europe now its important for them to do whats right, own up to its part and stop its banks from forcing a country through a Post WWI style depression.
You are right but you also do not see how sick the Greek state is.. Gov exp 60%? This is a crime.. The depression many people (without considering all the available data) are talking about is a lie. Greeks doubled their income in the period 2000-2009 while not improving their productivity.. This country is a cancer that needs to be bobmed. I can say that because i’m Greek :(
This readily available data was around and reviewed before Greece was let into the Euro.
If the Bankers aren’t expected to be fiscally responsible, you cant expect Borrowers to be either.
The data from 2008 was available before Greece joined the euro? Come off it.
Yes, the bankers were also responsible. And they’ve taken their losses: 75% writedown in 2012, get up to speed please! We’re well past that.
Πόσο χρονών είσαι και σε ποια χώρα μένεις αν επιτρέπεται;
The OWL of Minerva spreads its wings at midnight. ~ Marx. Hindsight = 100%
~ Hegel, Elements of the Philosophy of Right
I’m thinking that Marx also used it in The German Ideology. I could be wrong, of course.
Hmm, maybe he got it from Hegel. In any case, was interesting trying to track down the source for the quote.
Marx attributes this to Hegel.
Shall we get back to the topic at hand?
“What needs to happen now is for credible plans for putting Greece on a sustainable growth trajectory — that understands that its true level of income should likely not be where it was in 2007 — that is complemented by a true counter-cyclical fiscal policy.”
So then, the obvious conclusion of this statement is that the Greeks were right to reject the latest “rescue” package, which would have explicitly prevented a counter-cyclical fiscal policy by slashing government programs and would have simply continued the debt spiral. You seem to have included an unnecessary amount of words just to say “the Greeks are rude, but they’re right”.
“Moreover, the debt Germany was forgiven in 1953 largely came from the
Treaty of Versailles, and so was easy to repudiate.”
Agreed.
“Others came from
direct lending to the National Socialists in the 1930s, which was also
easy to repudiate.”
Why?
Because National Socialists were a political party , and did not represent all Germans? Nazi Germany was not a democracy?
Before taking over they were elected I believe. There’s a difference in forgiving war reparations and paying back what was stolen from others…
” must it be the case that all debts must be forgiven everywhere if they were ever forgiven anywhere?”
Where did Piketty say this? Oh, right, he didn’t. If you want people to listen to your argument, start with honesty about other people’s arguments.
Piketty is not “moralizing” at all. He’s saying that if the morality of always paying one’s debts is the issue, then Germany had best drop out of the conversation. In other words *stop* moralizing about the Greek situation, and *start* looking at the issue pragmatically.
But to get that, one has to read his interview for what he’s saying, not as an assistant professor on the make.
Reductio ad absurdem, clearly. The point was to question the logical framework. I say that this is a logical argument quite clearly, in the same paragraph.
As to the pragmatic I agree completely, which is why I dedicated much of my post to it, and wrote an entire other post discussing that part of it. The pragmatic case is even worse for Piketty: is it pragmatic to effectively ignore EU law and establish a precedent of debt forgiveness + fiscal transfers? No. It would destroy the Union entirely and throw the entire S (and perhaps E) of Europe into horrible uncertainty. So it is reckless to suggest, as Piketty does (more clearly in today’s letter to Merkel), that the answer to these problems is simply to eschew the entire basis for the monetary union.
You need to look up how a reductio works.
Yes, it would be pragmatic to effectively ignore EU law and establish a precedent of debt forgiveness and fiscal transfers. I’m not kidding. OMT, which saved the euro, was already effectively ignoring EU law and was a form of transfer itself.
Your pragmatic argument is literally Wolfgang Schauble’s: it would be more of a disaster to save Greece (because moral hazard) than it would be to actually put in place a policy for recovery. I have a few problems with this argument.
1) Financially and geopolitically, Grexit will cost far more than bailout. For starters, the creditors will have to eat a larger loss on the Greek debt owed to them than if they just gave Greece a haircut allowed it to grow. From there it’s a lose-lose situation. If Greece’s devaluation actually starts to show results, then this will tempt other countries to drop out of the Euro in future debt-deflation crises. If Grexit is a catastrophe and Greece becomes a failed state then it will cost the EU even more in humanitarian aid and/or military intervention. If it’s somewhere in between and Greece scrapes by as a client state for Russia or China, well… I’m not an IR guy, but I can’t imagine this is an appealing option, and would certainly gum up the works of EU foreign policy something fierce.
2) Sticking rigidly to the rules guarantees the breakdown of European party systems. There is already, and will continue to be lots of opposition to the austerity/structural reform agenda for many reasons (its’ failure to create growth being one of them). What Schauble misses is that using TINA politics to crush dissent is more likely to kill the Eurozone in the long-run than is allowing some scope for democratic/national control of economic policy. We learned this from the collapse of the gold standard.
I don’t think I’m on the same page as Schauble for a few reasons, corresponding to your points:
1. I fully support (and expect) another round of debt writedowns. As you say this will happen no matter what (& even Schauble acknowledges it). Nowhere in this one or my previous one have I suggested that full debt repayment is possible, much less advisable. It’s in my very first full paragraph in this post, in fact.
The question is how and when it happens. The best way for it to happen is as incentive for Greece to obliterate its kleptocratic and overly-populist political economy (I refer you to Takis Pappis’ Journal of Democracy article on this point). If this doesn’t happen then Greece cannot take its place amongst Europe’s Old Powers anyway. The worst way for it to happen is through devolution into parochialism, chauvinism, and (worst case) even revanchism. Now, which of these does Syriza most represent?
Anyway, if Greece thinks becoming a client state of Russia is a better outcome than dealing with Brussels/Frankfurt, well then we’re dealing with a weirder group than I thought.
2. There is no party system in Greece anymore. Indeed, the EU/EMU has transformed traditional party systems in many (most?) member countries. This is probably a Good Thing on balance, although there are definitely side effects. But the main point is: the only EU-wide consensus for economic union is based on austerity, because supranational tax+transfer authority is not acceptable. To anyone, *including* Greece, who have just rejected that very thing. That may change but not any time soon. So if you’re in that’s the deal, as it always has been. Take your choice. And if you don’t want that — i.e. if you want Germany’s money — then you’ll have to play by their rules anyway.
Personally I think Greece is far better in than out, even given the hardships that entails. None of the problems they presently have will be solved outside of the Union, and many more would be introduced. But it’s up to Greeks to decide, once they’re given a real choice and not the bullshit false choice Syriza has offered them.
PS, I think the applicability of Polanyi to the present circumstance is very much overstated.
1. If the Troika was concerned about corruption and institution building, then we would not have much of a conflict. The vast majority of Greek people are fed up of living in a corrupt, oligarchical country. But of course, governance is demonstrably not at the top of the EU’s priority list. As ever, ‘structural reforms’ have much more to do with a radical neoliberal restructuring than with addressing the actual problems of the Greek economy (of course, the big hint is that the prescriptions are the same in every country, no matter whether their problems came from public borrowing or real estate bubbles).
The Troika has been concerned with, in no particular order, crushing collective bargaining in Greece, massively increasing regressive indirect taxation, cutting pensions as regressively as possible, and the fire-sale of Greek assets. Here’s a list of things that EU leaders almost never talk about, much less posit as red lines: the shipping industry and orthodox church’s tax exemptions, high-end tax evasion (see the Lagarde List), the unhealthy balance of state spending towards consumption rather than investment, and incredibly high military spending (mostly on German and French arms imports).
2. You (and Schauble) are remarkably relaxed about the recent development of EU party systems. To take it from Schauble’s perspective as an EU insider defending the status quo (I don’t want to put words in your mouth), I still cannot understand what Europe he’s seeing today.
The status quo relies on a consensus between dominant center-left and center-right parties who can shut out any challengers. The consensus between elites of those parties has shifted in a more neoliberal direction (they agree more or less on the need to reduce state spending and liberalize labor markets), but the electoral power of those parties is eroding incredibly fast. Greece is not the only country in which those elites are going to be thrown out of power, and Syriza and Podemos are the most pro-EU of those anti-establishment parties (they want to make EMU more moderately Keynesian, not blow up the Union altogether). What happens if the Front National wins an election, or even just a disruptive number of seats? Or 5-Star in Italy? Or Golden Dawn?
In short, you say that the only EU-wide consensus for EMU is based on austerity. But there is only an elite, not a popular, consensus for austerity (similarly to the interwar period). That’s why I think Polanyi is prescient. As Mark Blyth puts it: “you can’t run a gold standard in a democracy.”
PS good talking to you! I just saw that you did your PhD at UNC. I’m about to start there next year. Glad to see its grads are doing well!
Happy to hear you’re going to UNC. E-mail me (wkwineco @ indiana dot edu) if you’d like an insider’s perspective or any other advice. I’ll help in anyway I can. Everybody in my cohort that went on the market got a pretty good job, so you can definitely do well there if you work hard and play smart.
1. I actually don’t think that’s an adequate representation of the Troika’s preferences. They want a competent state that is capable of living up to its commitments to its citizens and to its international partners. The precise form that takes is, I think, totally negotiable so long as it’s credible (which has been Syriza’s whole problem). But yes, the government should likely not consume 60% of GDP. If you want to call that neoliberalism (imposed by the Dutch, French, and Italians!) be my guest, but we’re really stretching an already quite-stretched word at that point.
2. I see the moderate consensus as being quite durable, actually. And if the National Front takes over in France it won’t be because Hollande is too much of a neoliberal, FFS.
And Mark Blyth may have coined the phrase but Beth Simmons did the research: see her book on domestic politics during the interwar years. Anyway, this isn’t analogous… Greece is being given tens of billions per year to hang around. Nobody did that in the 1930s. And if they leave they’ll face immediate fiscal discipline anyway, particularly since they are a relatively closed economy. Which is why they don’t want to leave…
About Greece being given tens of billions per year: It intrigued me that a subject which has been widely circulated and discussed in Brazil during the last two weeks related to Greece is interely absent from this discussion: the recent Preliminary Report on the Auditing of the Greek Debt, prepared as a joint collaboration of several foreign auditors and their Greek counterparts. The Report was presented before the Greek Parliament less than a month ago, and I have seen the issue mentioned and confirmed by Joseph Stiglitz and in other analysis as well. I wonder if you could say something about this and give us your opinion about the relevance of the topic (the publication of the results and the deepening of this kind of auditing) for the overall discussion of alternative political and economic scenarios for Greece – and Europe, for that matter. You can see the presentation googling “Maria Lucia Fattorelli , Greek Parliament”.
1. I don’t think the Troika is completely indifferent to the tax-collecting capacity of Greece. But I think it’s quite easy to show that this is not one of their absolute priorities, which I listed above. Again if the Troika’s primary interest was rooting out corruption and creating sustainable institutions, it wouldn’t have aroused so much resistance.
I know that the word neoliberal gets thrown around a lot, but I’m not just using it as a casual signifier for everything I don’t like. The program (indeed all of the bailout programs, whether responding to housing bubbles or excessive public spending) had very obvious intellectual roots. It wasn’t just that there were cuts. On the macreconomic front, the cuts’ front-loading was assumed to be expansionary (à la Alesina), and there was a strong emphasis on wage cuts and rollback of collective bargaining as the means to an export-led recovery. The micro-economic emphasis on deregulation and liberalization regardless of the broader macroeconomic conditions is also straight out of the Washington Consensus.
2. Again, I agree that the elite consensus among parties of the center is remarkably durable. But the parties themselves are not. This is particularly true on the center-left, although major parties vote shares are dropping in general. For example, the French Parti Socialiste is very likely to split following the next election because Hollande has dropped his opposition to austerity, a mainstay of his 2012 campaign, and has just railroaded through a liberalization package through parliament. (To maintain party discipline, he had to use arcane parliamentary procedure turn the bill into a vote of confidence for the government). The PS’ embrace of the austerity consensus, like other parties’ of the center-left, will mean it sheds votes, particularly to the far right, who very cleverly have shifted to welfare chauvinism (we believe in social protection, just not for immigrants).
3. I don’t think that the comparison of the Eurozone to the gold standard is an exact parallel, but its not a red herring either. I really liked Barry Eichengreen’s new book Hall of Mirrors, which compared the two at length. The key similarity is that both the euro and the gold standard took away the options of external devaluation and fiscal expansion and forced countries to make huge economic adjustments entirely through deflation. Deflation creates huge electoral backlashes (nobody likes wage cuts and unemployment), and political instability results. But as long as national economies are fixed to those rigid, external standards, elections don’t matter: parties of the left and right are forced into the same policies. That is a really dangerous message to send in a democracy. So i’d be curious as to why you think Polanyi’s work is misapplied to the current situation.
Totally agree with you. Piketty is smarter than claiming all debts should be forgiven, his statements are narrowed into one punch and it lands on the face of Germany: if Germany never repaid debt then Germany shouldn’t be vocal about having others pay debts. But Piketty is not saying the rest of EU cannot claim debts. I cannot suggest the same level of intelligence for those to squeeze words into Piketty’s mouth just to make a point that didn’t exist in the first place.
Interesting. But don’t you have the impression that it is…Germany that is moralizing, lecturing everybody and particularly the Greeks about this ? Calling even on the poor Slovaks (nice PR campaign) ? This explains Piketty’s (among other’s) reaction.
Your last point is the right one: power politics. And thus the right way to address the Greek debt is “how much are we ready to pay for Greece to stay fully in”, taking into account potential impact on the eurozone stability – if Greece leaves, who’s next ?, the political impact on the European project, the benefit for “anti-system” political parties, the more global issue of the debt problem on European growth (compared to US…), and finaly strategic issues such as the Balkans, the Eastern border of Europe facing the Muslim world, the Russians, etc.
Not moralyzing. Making hard choices as to what you want to gain or are ready to lose.
PS: Mr Obama, based on some of the criteria listed above has made his choice it seems, and is currently informing some members of the Eurozone about it…. :-)
Oh my, it certainly seems economics should be left to economists (at least those with good track records), not poly sci profs (at least not judgmental cherry-picking ones).
“…moralizing about this as Piketty does adds no value.” Yes, and moralizing about this as the Germans do adds no value, and is hypocritical. As Piketty (and Larry Elliot in the Guardian) points out, the Germans have never paid back much of anything, while demanding payments from everyone else. Morality and discipline…right.
All the rest of this hyperventilated ramble about this, that, and the other treaty, and a number here and there, reeks, appropriately, of justification. It amuses, but it does not convince.
“but because Greece is still unable to run a primary surplus, during a time when government expenditure is 60% of GDP ”
Greece had primary surplus in 2013 and 2014. And still has primary surplus now.
https://blogs.wsj.com/brussels/2014/04/23/greek-primary-surplus-statistics-troika-edition/
Not so fast: “But take a step back, and look more closely: something isn’t quite right. Indeed, the European Union’s statistics arm, Eurostat, reported Wednesday that Greece had a government deficit in 2013 of €23 billion, and spent €7.2 billion on interest payments. That makes the primary balance—under the definition widely used by economists and Eurostat itself—a deficit of €16 billion, or 8.7% of Greece’s gross domestic product.”
I don’t think there’s any more I could add to this.
This piece says Greece needs debt relief, but it’s not going to get it unless it shows its creditors that it’s serious about institutional reform. But it also argues that Greece has to commit to a counter-cyclical fiscal policy to achieve sustainable growth. A few points: (1) Greece would gladly run counter-cyclical deficits if it got a bailout
package that would support it; (2) there’s no indication that creditors would support such a package, though they have suggested that they would be open to further debt restructuring if Greece undertakes further austerity; and (3) and if you think, as Winecoff does, that counter-cyclical policy is part of the solution, then how does Greece
escape this lack of credibility trap? The creditors say further austerity is the key to gaining credibility, but austerity undermines the economy and makes Greece look even more incompetent.
Hi Kyle, thanks for the comment. I’ll respond to your points in kind:
1. I said “true counter-cyclical policy” shortly after linking to this by Farrell and Quiggin (who are far from being austerian neoliberals!): https://crookedtimber.org/2011/04/26/hard-keynesianism-in-the-european-union/. Greece was pro-cyclical in the boom and thus was forced to be pro-cyclical in the bust. A true counter-cyclical policy would be contractionary during the boom so it could be expansionary during the bust. In making the reference to Farrell/Quiggin I thought I was being clear that plans for a *future* sustainable growth trajectory “that is complemented by a true counter-cyclical fiscal policy” should be not be taken as a reference to the immediate short run but to the longer run. I apologize if that was not clear.
You are absolutely correct that Syriza would love to have external financing for the short run without any concessions. In fact they have already received quite a lot of that, which is why the Troika is quite hesitant to provide more.
2. I think the creditors would happily agree to a long-run plan for counter-cyclical fiscal management so long as the precursors to that were agreed to and implemented now, and would be willing to grant quite a lot of debt forgiveness if they were. But Syriza has been opposing *precisely this* all along. Meanwhile, Syriza is asking for more external financing — as they have not yet managed a consistent primary surplus — and substantial debt writedowns without any such plan. Even with a plan it would make sense for the Troika to insist on gradual disbursements of finance and gradual discharges of debt, because there is a major time inconsistency problem here. I wrote about this more in my previous post: https://www.duckofminerva.com/2015/06/you-never-give-me-your-money-you-only-give-me-your-funny-paper.html
3. You are correct: credibility is a major problem for the Greek government. Not because of austerity, mind you; because it consumes 60% of Greece’s GDP, cannot collect taxes, is understood to have a significant corruption problem, and has failed to implement key pieces of previous agreements. These will have to be corrected by the Greek political class.
I continue to think that a deal is out there to be had. But it will require Syriza and the Troika agreeing on the problem, first, so that they may then agree on the solution. So far this looks unlikely.
https://www.thenation.com/article/austerity-has-failed-an-open-letter-from-thomas-piketty-to-angela-merkel/
Austerity Has Failed: An Open Letter From Thomas Piketty to Angela Merkel
signed by Piketty, Jeffrey Sachs, Heiner Flassbeck, Dani Rodrik, Simon Wren-Lewis
Yes, I read it. There are no new ideas, no proposals, no solutions, no courage. No substance of any kind. It’s pablum, using the most generalistic language possible.
I’ll be more clear: “No More Austerity” = “Germany Pays For Everything”. Right? There is no other possibility. So why not just say that. I’m sure you can answer for yourself.
LOL @ you think Germany is paying for everything.
Just go away with your nonsense thoughts on this. You really think you are up to debating this with Piketty? Hilarious.
Germany is not paying for everything, not even half of the bailout for instance. Piketty’s home country France is also paying quite a bit. Together the rest of the eurozone pay more than twice of the Germans. And let’s not forget austerity was initially fueled by a study from two Harvard professors, which turned out to contain methodological(Excel-) errors that unjustly put Greece under measures that did more harm than good to their economical potential for recovery.
From what I’ve read (correct me if I’m wrong), France has paid more towards Greece’s debt relief than Germany. The Germans’ share actually makes up a small proportion of the total. The reason why the whole debate is focused on Greece vs. Germany is (a) the latter is the most economically powerful state in the Eurozone and (b) their utterly unshakeable adherence to ordoliberal economic ideology precludes any serious pragmatism or compromise.
Finally getting around to responding to this, Kindred. Yeah, Greek fiscal policy was pro-cyclical pre-crisis but it is still pro-cyclical by any definition. Greece is in depression and ran a cyclically adjusted primary budget surplus of over 5.2% in 2014 (IMF figures), which was easily the highest of any Eurozone country. It’s tough to say they haven’t tried. But if you insist on doing so, you ought to be specific about what Greece can do to gain credibility, because austerity of this magnitude won’t do it. It will only undermine the economy and the semblance of any Greek competence along with it. I actually took a lot from your piece, but not for the reasons you intended. If Germany’s post-WWII experience is so telling, what does it imply? Does it imply that Greece has to subject itself to foreign occupation (or something similarly transformative) to get a standard debt restructuring package and foreign sympathy and trust? I know that’s not what you were suggesting, but it’s the question your historical analogy raises.
Quick note on previous post: that surplus was over 5%, not sure whether it was exactly 5.2%; would have to verify
Benjamin Friedman referred forcefully to the 1953 agreement more than a year ago, drawing attention to the Calvinist “moralzing” of Germans and others; Gillian Tett pointed out in January that Germans revealed or feigned outrage; Brad DeLong has also mentioned it. The focus on Piketty is misleading.
The role of German and French banks and business also requires more exposure. Many of the problems were systemic: Greeks took bribes, Germans offered them, etc. French & German banks had piled in pre-2007 (Is it fair, or merely sophistic, to mention the 2012 haircut while omitting the IMF and German govt opposition to default in 2010, when some good might have resulted?).
It’s definitely fair to mention 2010 in the context of discussing 2012. And I’m on record as saying that if Grexit was going to happen it should’ve happened then, and I leaned in that direction at the time (although I wasn’t absolutely certain it was the right call). Doing it now would have far less of a positive effect.
Since “moralizing” has been mentioned, here’s Friedman, a year ago:
“Although Jews and Christians and Muslims long regarded lending with suspicion (and Muslims still do), by the beginning of the 19th
century evangelical Protestants had mostly come to regard
borrowing as sinful, even when the debt was serviced and repaid on a timely basis. Non -payment, of course, elevated the negative
moral connotation to a whole different plane…. Today a
reversion to the “retributive philosophy” of the 19th century … is
clearly in evidence in Europe’s approach to its sovereign debt crisis…”
Well they didn’t have any problem with the lending, did they? Sorry, but I’m always skeptical of this sort of generalization.
there is a problem with this argument: the Greek economy has a no. of growth sectors, in particular tourism and shipping. these are the two sectors that the non-plan of the ‘institutions’ determined to hit hardest with tax rises. their incentive was clear: this is where the money is, but the result would have been disastrous for growth. shipping can go off shore at a moment’s notice, and tourism would be bought up by foreign competitors in particular Germany’s TUI. This explain why some of the richest regions of Greece, such as Corfu and Crete and Chios, voted with such large majorities for ‘No’, something noone has commented on. though this does not invalidate your arguments, it means that if you want a plan that can help reduce unemployment in Greece it has to be growth orientated (rather than the opposite through an increase in taxation). the blame for the lack of growth orientated plans must rest both with Greece and the Institutions.
Personally, I agree. But the plan is first budget-oriented and then growth-oriented. If you cannot raise taxes “where the money is,” as you say, then that leaves cuts. And Syriza refuses cuts. So we’re right back where we started.
Fine. But it is possible to take this argument a step further. No two historical situations are the same, after all. Even if Germany has no specific obligation to give Greece a debt haircut now (though it might chose to do so for reasons of self-interest), it does have an overall obligation to prevent violence in Europe and particularly in the EU, an obligation that stems from its own past actions. That obligation is perhaps the main reason why other EU countries are willing to follow Germany’s leadership today, and constitutes a large part of Germany’s soft power.
Therefore, if it were considered that Greece could not repay its debts without further depressing its economy leading to civil unrest and being engulfed in violence (a big if, depending on Greece’s capacity to grow and create jobs in the immediate short term) then Germany would in fact have an obligation to write off a part of Greece’s debt. This would become particularly relevant if Greece were to exit the Euro, for example, when, with a big further increase in unemployment, violence would be likely. The obligation would not of course be particular to Germany, but would weigh particularly heavily on Germany because of its own past. After all, the one thing a German cannot do is point a condemning fingure at anyone else. The degree of obligation depends on the degree to which debt repayment would depress the economy and lead to violence. I would be very surprised indeed if anyone would disagree.
Twaddle, interminable nonsense.
Bad loans give bad returns. That is capitalism or liberalism. The “investors” that gambled and filled the Greek economy with a sixfold of PRIVATE debt, were bailed out by the European citizens tax money by OUR DEAR politicians, making it all public debt. The Greeks are only partly responsible.
Did anyone mention that in the news?
No. Because the trias politica these days consists of politics, the financial sector and the media.
If Greece exits the EU, they will be buying capital from anyone under any conditions. I wonder what the Russians would pay to lease a major naval base in Greek waters?
Was/is the greek government corrupt, YES, is the attitude of Germany duplicitous, YES, does the sollution lay within writing of debts of Greece, NO. To point out some other facts, it is mentionend that Greece is still demanding war repayments fro Germany and this is said to be fallacious. The debt of Germany to Greece was absolved by the USA, USSR, UK and France, without any real consultation of Greece (first in 1954 and finaly in the 1990 Treaty on final settlement) So under international law there is still a matter to contend, the standing that Germany surrendered to the Allied Forces and not to a single country does not stand. The parameters of German debt resolution were harsh but Germany was in a better position in a bigger market to actually compy and supersede these demands. Greece was and is and always will be limited in its capacity to produce (lacking the German industial complex’ strength for instance) Should the Greek political layout be reformed, drastically, yes, should the current push for Greece to further ecomic reforms be directed in a wholely different way, yes. This will not go well, for Greece, Euro and the Union, except Germany, they still hold the “Get Out” ticket, the only one mind you.
I didn’t understand Piketty to be suggesting that the situations are exactly the same, only that *German* sanctimonious moralising is absurd — which it is. Dangerous, too.
Great post! So hard to find this kind of careful analysis and inght i all the opinion-swapping, and dogma bashing.
The battle remains as it ever was, between spendthrift European
governments, led by France, and those who make the Euro work – led by
Germany. And the billion euro question for the Eurozone remains not
what the proposals say, but the willingness to implement them. That is
clearly… nil.
( visit, if you like more on this , https://www.philosophical-investigations.org/2015/06/breaking-news-three-ignominious-greek.html )
I am not sure where you got the 100% of GDP fiscal transfer figures. Even Kenneth Rogoff (see CEPR’ Vox) no friend of Piketty or Syriza line has some figures that show that bailout funds that are shown asset inflow to Greece actually include “adjustments ” which are repayments not inflow. I have not heard anyone claim such huge fiscal transfer. Moreover, Greece endured 5 years of austerity and achieved primary surplus even though it lost 26% GDP and ended up with 180% debt.
Add it up: https://ec.europa.eu/economy_finance/assistance_eu_ms/greek_loan_facility/index_en.htm.
And while I’ve many times said that Greece’s austerity would have been *far* more severe without the Troika’s packages, I’ll just out-source to Oliver Blanchard this time: https://blog-imfdirect.imf.org/2015/07/09/greece-past-critiques-and-the-path-forward/.
Well, now this article has shown itself not only to be anti-Greek and offensive, but factually full of BS. There was no debt reduction! Go f*** yourself.
Does anyone have a link that supports the Troika as having said that debt forgiveness was on the table for Greece? I’m in a running debate on this.