By Ashoka Mody, Professor of Economics at Princeton. Cross posted from Bruegel; originally published at Handelsblatt
In November 2003, former German Finance Minister Hans Eichel explained why the “deal” between Greece and its creditors is virtually certain to fail. Fending off the pressure then on Germany for more fiscal austerity in an economic recession, Eichel wrote in a Financial Times op-ed: “A policy geared solely to attaining quantitative consolidation targets in the short term runs the risk not only of curbing growth but also of increasing debt.”
Eichel’s theorem says that the latest Greek government, even if stable, will not overcome the illogic of the creditors’ program. Growth will be slower and deflation stronger than anticipated. The debt burden will continue to increase.In November 2003, former German Finance Minister Hans Eichel explained why the “deal” between Greece and its creditors is virtually certain to fail. Fending off the pressure then on Germany for more fiscal austerity in an economic recession, Eichel wrote in a Financial Times op-ed: “A policy geared solely to attaining quantitative consolidation targets in the short term runs the risk not only of curbing growth but also of increasing debt.”
Eichel’s theorem has proven stunningly durable through the Great Recession: persistent austerity is counterproductive, the more so the weaker the economy is. Everywhere, austerity has dragged down growth. Greece, which has undertaken the most severe austerity, has experienced the deepest economic contraction. Even the glimmer of Greek economic growth in 2014 came during a pause in austerity.
By most estimates, Greece is running a small primary fiscal deficit: government expenditures (not counting interest payments) exceed receipts. Achieving the creditors’ primary surplus target of 3.5% of GDP in three years will cause the economy to contract. But the projections claim that Greece will resume growth.
The projections have a deeper disdain for economic relationships. In 1933, economist Irving Fisher explained that when debt levels are high, the repayment of debt increases the debt burden. In the effort to repay debt, consumption and investment are reduced, which causes prices and wages to fall. But because the debt obligations do not decrease, the burden of repayment increases. Greece has been in a debt-deflation cycle for the past two years. Greek prices and wages are declining—and while that may help in the long-run—for now, the debt-to-income ratios are being pushed up. The additional austerity will reinforce that tendency. Yet, the projections assume that prices will increase and help reduce the private and public debt burdens.
It gets worse. When, in 2003, Germany was freed of the shackles of fiscal austerity, world trade also zoomed up. For the four years, 2004-7, world trade growth averaged 9% a year. The claim to a German “miracle” is based on two years of 3.5% annual growth in 2006-7 amidst that buoyant world economy. Today, Greece is embarking on another round of austerity with world trade growth under 3% a year. The U.S. Federal Reserve, in its decision to not raise interest rates last week, emphasized how fragile the global economy is. The IMF has lowered its forecasts of world GDP growth and trade three times since the start of the year.
With the drag from austerity, the debt-deflation spiral, and a weak international economy, where does the projected Greek rebound come from? The magic is said to lie in the elixir of structural reforms. That may be so, but make no mistake, there is no evidence that structural reforms deliver with the strength and speed assumed in the Greek projections.
The euro area has lived off one economic myth after another, first the virtues of a single currency for disparate European nations, then the redeeming powers of fiscal austerity, and now structural reforms as the solution of all economic ills. These myths are sustained by a deep groupthink among European “elites,” who validate each other’s strongly held beliefs.
When, in 2003, Germany strong-armed other euro area members into suspending the fiscal rules that would have gratuitously shamed a struggling Germany, Chancellor Gerhard Schroeder cynically, but correctly, called that a “wise” decision. But such is pressure to conform to group norms that Schroeder has since apologized for breaking the unreasonable rules. Another convert is the IMF’s former chief economist, Olivier Blanchard. Having won the intellectual battle on the costs of austerity, he walked away from his research findings and called, instead, for more structural reforms in Greece.
The “deal” only postponed the hard questions. For Germany and other creditors, debt relief creates intolerable risks. But for Greece, driblets of debt relief cannot be merely a prize for more counterproductive austerity. Debt relief is required up front to lower the primary surplus goal to 0.5% of GDP.
If Greece is ultimately forced to leave the eurozone, the creditors will bear larger losses than if they provide relief now. And Grexit will irretrievably crack the fractured union. Lessons not learned must be relived. The Greeks will bear more pain, the creditors will see less of their money. That ultimately is the Greek tragedy.
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If we accept that it is quite certain that austerity will be detrimental to the Greek balance of payments and to its ability to pay its creditors, then either the architects of the bailout program are ignorant / stupid, or they have ‘higher’ priorities. ‘Groupthink’ may explain the former but it seems insufficient given the historical evidence of the economic effects of austerity.
The architects of the program are part of a transnational elite who are benefitting from the consequences of the program (real assets obtained at knockdown prices for corporations and cronies who will reward helpers). In addition, they are not accountable democratically. So, the consequences at ground-level are of no concern to them.
For more of the same, see the headline for this report (http://www.thepressproject.gr/details_en.php?aid=81734) on Mario Draghi’s speech to the European Parliament “If Greece realises the program, it will return to economic growth”.
Was it fear, or envy, that drove the European elites to this idiocy? Was the postwar welfare state really that scary? Was it just so awful to have generally high standards of living with very few people living in abject poverty the way many do in rural and urban areas of the USA? Or were they just too envious of the American (and emerging Chinese) billionaires with their wealth and lifestyles unfettered to any notion of a common good? Did they imagine that all those super-rich Americans and Chinese and their docile workers were going to so outperform them that Europe would be “driven out of business”, so they had to strike first, destroy the security and well-being of their own citizens, in a preemptive drive for competitiveness?
What a sad bunch of little men and women they are.
There is no limit to Greed.
It is considered the worst of the seven deadly sins.
and the ring of hell always under construction…
“Well first of all, tell me: Is there some society you know that doesn’t run on greed? You think Russia doesn’t run on greed? You think China doesn’t run on greed? What is greed? Of course, none of us are greedy, it’s only the other fellow who’s greedy. The world runs on individuals pursuing their separate interests. The great achievements of civilization have not come from government bureaus. Einstein didn’t construct his theory under order from a bureaucrat. Henry Ford didn’t revolutionize the automobile industry that way. In the only cases in which the masses have escaped from the kind of grinding poverty you’re talking about, the only cases in recorded history, are where they have had capitalism and largely free trade. If you want to know where the masses are worse off, worst off, it’s exactly in the kinds of societies that depart from that. So that the record of history is absolutely crystal clear, that there is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by the free-enterprise system.”
Milton (project manager) Friedman
Let’s not forget that Friedman was an economist. Only an economist would be shocked to hear about the man who drowned in a lake that averaged only 2 feet deep. Yes, the Robber Barons were free to created an un-Godly amount of wealth here in the good old USA. But they did not share much of it with “civilization” willingly. The Walmart family is a present day reminder of those “good old days”. Today we have the highest per capita income in the world…and the highest level of poverty in the developed world. We are all free to take our place in the numbers game that averages out to a success story, as long as we are careful to stay in the shallow part of that lake.
Yep, and Einstein not only went to a Swiss government school but was being paid as a Swiss government employee when he did his best work, and then that work was turned into an atomic bomb by government fiat! I can never tell if a man like Friedman was just a lying sack of shit or he just made up these stories and then drowned out any evidence (the Pyramids, St. Peter’s in Rome, St. Paul’s in London, the Panama Canal, the Great Wall of China, the landing on the Moon) that didn’t fit the dogma by repeating endlessly his own propaganda to himself.
blasphemy… all those creations were intended for individual use. sarc/off
“The world runs on individuals pursuing their separate interests.”
“Arnold Harberger, Milton Friedman & Co. Inc., your modest proposal of partial equilibrium for the general good is not without its own internal contradictions. Moreover, you cannot take complete credit for this program of equilibriation. Although you and your colleagues and disciples at the Department of Economics of the University of Chicago may have dedicated two decades to the design of the program and the technical training of its executors, it took the approach of another major economic and political crisis of capitalism, analogous to that of the 1930’s, to mobilize the political support and the military force to install a government prepared to put your program of equilibration and your equilibrating experts to work in Chile – and you, Milton Friedman, are still waiting to put your part of the same program, complete with Brazilian style indexing, into practice at home for the glory and benefit of the bourgeoisie in the USA, whom you so faithfully serve as paid executors and executioners.” (we’re all Chileans now)
André Gunder Frank, Economic Genocide In Chile: Monetarist Theory Versus Humanity: Two Open Letters To Arnold Harberger And Milton Friedman
wow ckout what i backed into:
“Letter to the Editor”
by Milton Friedman, Arnold Harberger and George Stigler
The Chicago Maroon
4 November 1975
The Chicago Maroon
(with reply from editor)
http://0055d26.netsolhost.com/friedman/pdfs/other_commentary/Maroon.11.04.1975.pdf
Really? I thought Pride topped the list?
But if greed is so bad then why have banks been given a license to steal? Because of pride that the theft can be regulated to serve the common good?
Euro elites know it’s not sustainable, but they don’t care. It’s not groupthink or faulty analysis, or any of the other absurd explanations that have been offered. The debts not the point, nor is the future of the Eurozone much of a consideration.
The sheer joy of shredding the social contract and running a full time class war just outweighs any other concerns. If it means economic suicide, then that’s a price worth paying. British elites consciously made the same decision – even if the war against organised labour trashes the economy it’s a price worth paying.
This does seem to be true.
I’d add systemic moral hazard: when you reward sociopathy on a grand scale, you create more — and more ardent — sociopaths.
What’s really twisted is that the sociopaths have convinced most of their victims (i.e. the 99.99%) that this sociopathy grinding the 99.99% into dust is virtuous, necessary, and inevitable: TINA.
As aussie F says, its about pure hatred.
These moral freeloaders don’t mind the price of their principles as they aren’t paying.
Until people stop believing people who hate and wish to harm them, they will continue.
I keep thinking we need a re-do of the Enlightenment, when the best minds started recognizing there may be links between cause and effect.
Oh, look, [Effect], we have millions of refugees streaming into Europe. maybe we can stop and interview a few of them, ask where they came from, and why: Iraq, Afghanistan, Libya, Syria. Now let me see, what do those countries have in common? [Cause]. Oh, maybe we should stop smashing countries to smithereens if we don’t want to create refugees.
Once this new “science” takes hold, we could then apply it to all sorts of areas. [Effect]: everybody’s getting poorer except the 1%. [Cause] maybe it’s something to do with the way money is created and distributed. Or this: [Effect] People all over the world hate Americans and the military expenditure to keep them obeying us is bankrupting us [Cause] The military expenditure to keep people obeying us is actually making people hate us more.
This could really catch on and would be useful in all sorts of areas. [Effect] Greece is broke and falling apart at the seams. [Cause] Just maybe what you’re doing to “fix” it is having the opposite effect.
For central banks to maintain their credibility I think they need to do some helicopter drops in the right places.
“Mitchell observes that OMF has actually been put on the table by the European Parliament. According to a Draft Report by the Committee on Economic and Monetary Affairs on the European Central Bank Annual report for 2012, the European Parliament:
—9. Considers that the monetary policy tools that the ECB has used since the beginning of the crisis . . . have revealed their limits as regards stimulating growth and improving the situation on the labour market; considers, therefore, that the ECB could investigate the possibilities of implementing new unconventional measures . . . including the use of the Emergency Liquidity Assistance facility to undertake an ‘overt money financing’ of government debt . . . .—
These provisions were amended out of the report, says Prof. Mitchell, largely due to German hyperinflation paranoia. But he maintains that Overt Money Financing is the most effective way to solve the Eurozone crisis without tearing down the monetary union:
It amounts to the ECB telling member states that they will provide the Euros to permit sufficient deficit spending aimed at increasing employment and production.
No public debt is issued.
No taxes are raised.
Interest rates would not rise.
A Job Guarantee could be introduced immediately.
The Troika can retire – no more bailouts.
As growth returns, structural changes – better public services, better schools, better health care etc. can be implemented. Growth allows structural changes to occur more quickly because people are happy to move between jobs if there are jobs to move between.“”
nuclear option
For central banks to maintain their credibility I think they need to do some helicopter drops in the right places.
“”Overt Monetary Financing (OMF) has actually been put on the table by the European Parliament. According to a Draft Report by the Committee on Economic and Monetary Affairs on the European Central Bank Annual report for 2012, the European Parliament:
—9. Considers that the monetary policy tools that the ECB has used since the beginning of the crisis . . . have revealed their limits as regards stimulating growth and improving the situation on the labour market; considers, therefore, that the ECB could investigate the possibilities of implementing new unconventional measures . . . including the use of the Emergency Liquidity Assistance facility to undertake an ‘overt money financing’ of government debt . . . .—
These provisions were amended out of the report, says Prof. Mitchell, largely due to German hyperinflation paranoia. But he maintains that Overt Money Financing is the most effective way to solve the Eurozone crisis without tearing down the monetary union:
It amounts to the ECB telling member states that they will provide the Euros to permit sufficient deficit spending aimed at increasing employment and production.“”
No public debt is issued.
No taxes are raised.
Interest rates would not rise.
A Job Guarantee could be introduced immediately.
The Troika can retire – no more bailouts.
As growth returns, structural changes – better public services, better schools, better health care etc. can be implemented. Growth allows structural changes to occur more quickly because people are happy to move between jobs if there are jobs to move between.””
nuclear option
Whether the gov’t surplus required is 3% or .5%, I don’t see that it matters much. The math remains the same. If the gov’t of Greece, or any other country wants to run continual surpluses (i.e. take more money out of the economy than they put back in) then someone else is going to have to run continual deficits. It can’t work for everybody simultaneously, and it can’t go on forever.
Obviously, if every Euro gov’t starts hoarding a percentage of it’s GDP, taking out more financial resources than they put back in, then eventually gov’ts will amass so many euros that there won’t be enough left to run the economy. But never fear, the ECB will replenish that stock of currency by buying paper from banks, who will then lend it out into the economy. Of course, that new currency will have to be returned to the banks, plus interest, so that’s not actually a solution. Also, who will want to take a loan out when the economy is in the sh*tter because gov’ts are hoovering up all the liquidity?
How can it be that the “serious people” are almost never called out on their ridiculous “logic”? They encourage everyone to do what is technically impossible, and then shame them for failing at it. We need a revolution–one where we all start ignoring/laughing at these bozos.
There is a solution to the whole Greek situation. They need to hire Donald Trump as their negotiator. He seems adept at getting creditors to accept 10 cents on the dollar when things get dicey. He’ll even have them lining up to loan more money to Greece after the restructuring. They may have to change the name of their country to Trump though.
In a nutshell, to make a very long story short, let’s all repeat loud and clear :
“It’s the debt bubble, stupid”
The crisis in Greece will continue to destroy its society. Corporate fascism reigns supreme while the world burns. All of this will end soon, as mass deprivation and accelerated ecosystem degradation impacts bring about more unmanageable crises. The existing power structure, which is self serving and inflexible, is not immune. Their regime will collapse and there will be grave consequences for the viability of life on earth.
Absolutely. Greek debt is just another dodgy asset in the AngloAmerican financial basket.
Another bit of GS’s desperate attempts to keep a failed system going.
We would do better to plan for a new departure, so the transition from debt-based finance to sustainable finance, when it inevitably comes, is not too chaotic.
came across this 2 months ago. what’s changed for the better since then for the former sovereign country known as greece???
http://news.jornal.us/article-681199.Go-Greece-Gone-Greece.html
The lesson is that there is a huge need for turn-key, open-source money systems that non-monetarily sovereign nations may use to reclaim their sovereignty? And once such systems exist, that non-monetarily sovereign nations should practice using them with token (pun intended) requirements for their own fiat for non-essential services (eg. national park tickets) at first. Later, as confidence is acquired, more and more use of their fiat could be required until complete sovereignty is achieved, at least with regard to government taxation and expenditures?