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Greece is the Word

Like many people, I’ve been watching the situation in Greece with increasing concern. They are now officially in default with the IMF (the last country to default on an IMF loan was Zimbabwe), and while that by itself isn’t that big of a deal, the flow-on consequences for Greece are very damaging. The Greek government can no longer receive new money from the ECB, and to prevent all the money from flowing out of the country, the Greek government has instituted capital controls (severely impeding international trade) and have prevented people with Greek bank accounts from withdrawing cash – effectively freezing the assets of every Greek person.

While this emergency rages on, no one in charge seem to be doing anything about it – or at least doing anything useful. The Greek government called a referendum on accepting the bailout offer (and the Greek people rejected an offer that was no longer on the table), and despite the demands by the Greek government for more latitude Chancellor Merkel has utterly refused to offer any.

A lot pixels have been darkened arguing over who should take the blame for this Grade A Clusterfish, and while there is a lot of blame to go around that’s not what I want to write about. As Keynes put it, economics is a series of technical challenges, not a morality play; and in any case assigning blame to Greek fecklessness or European imperialism won’t make this problem any easier to solve. Instead I want discuss why the negotiations have fallen apart, and how Game Theory concepts (including the beloved / despised Signaling) can help explain why this situation has gone so horribly wrong.

First off, we need to understand how we got here. Greece has always been a country that spends significantly more than its taxes permit (or, if you prefer, taxes significantly less than its spending requires). This led its creditors to charge high rates of interest for its sovereign debt for fear they would devalue their currency as a way to escape high debt levels. Then Greece was accepted into the Euro. This eliminated devaluation risk, and since there were financial requirements for entering the Euro, the bond markets decided that default risk mustn’t be as big as they had initially thought.

With their newly-lowered interest rate, the Greek government ran larger deficits. This didn’t cause any immediate problems, but it is inevitable that any country running a structural deficit will eventually reach a point of fiscal crisis where it can longer use borrowing to meet its deficit. This will most likely happen in economic conditions that are hardest on a government’s budget – such as a recession when taxes revenues fall and benefit payments rise.

That recession came in 2008, as we all know. And the added stress from this unusually long and deep recession proved too much for Greece’s government, given its fiscal condition at the time. And so a group of European governments (led by Chancellor Merkel) and the IMF offered The Greek government a loan to pay their existing creditors, both to protect those creditors (which were mainly European banks) and to safeguard the idea of the Euro as an enduring economic and political union. But those loans came with tough conditions – including an austerity programme that was unpopular enough to unseat 2 governments and put Syriza, which was a fringe party on the left in control of Greece’s government after it campaigned specifically against austerity.

This leaves us with two questions that we need to answer in order to explain why this situation persists – why are the Europeans demanding austerity, and why won’t the Greek government accept it?

In the field of Game Theory, when a person or group states an intention to do a thing, this is referred to as a a Commitment. Importantly, and unlike common English, players in a game are not necessarily expected to follow-through on their commitments. In The Prisoners Dilemma, each player may commit to cooperate, but still defect without having violated the game’s rules. This represent one of the most basic problems with coordination between people who do not have an ongoing relationship – how do I trust the other party will keep up their end of the bargain? They may state a willingness to cooperate, but as the saying goes, talk is cheap.

There are two main technique for allowing strangers to cooperate. The most powerful is Binding Commitments – unlike the regular kind binding commitments are enforceable by some external party that ensures breaking a commitment is costly. If the players in a Prisoners Dilemma can sign a legally-enforceable contract to cooperate, they need not worry about defection, leading to both of them being better off. This is why contract law is one of the foundations of a functional civilization – without it society tends to fragment into little villages where people only do business with those they have stable relationships with.

But contract law is not all-encompassing. Some areas don’t have contracts due to a cultural aversion (such as friendships or romantic relationships), or the law refusing to enforce them (like criminal contracts) or, and this is important for our purposes, contacts where there is no external party with the power to enforce compliance. By their very nature it is very difficult to force a sovereign government to do anything it doesn’t want to do (war is the traditional method). While a treaty or other contract with a sovereign government is a commitment, it cannot be binding – one of the ironies of Game Theory is that the power of a sovereign prevents them from using one of the most useful cooperation tools ever devised, a tool any random person can make use of.

So if binding commitments are unavailable, what else is there? The lesser, but still useful alternative is the Credible Commitment. A commitment is credible if it is only in your best interests to make the commitment if you intend to keep it. Credible commitments are a form of Signal – an action that it only makes sense for you to perform if you possess some characteristic that is otherwise difficult to detect. For example, if you’re a seller of no particular reputation it may be hard to convince people to trust your product (in the absence of consumer protection laws). But if you offer a money back guarantee, well that’s something that is much more expensive for a seller of bad products than a seller of good ones.

So how does this relate to the Greek situation? The German government and the IMF want to keep Greece in the Euro, but aren’t prepared to finance a Greek deficit indefinitely. So they need the Greek government to accept structural reforms (including either tax increases or spending cuts). On the other hand, it is quite clear that the Greek people aren’t interested in austerity – Syriza was elected as an anti-austerity party, and there is a good chance that they would refuse to engage in austerity after getting what they want. What the IMF and the rest of Europe needs is a credible commitment from Greece, a signal that they are willing to accept political pain to reform their Budget. And that is why they are demanding austerity now, even if austerity later would be better for Greece’s economy.

And it would appear that their demands have in some sense worked, the Greek government’s inability / unwillingness to agree to the bailout terms has provided the IMF and Chancellor Merkel with the information they needed, even if it isn’t the result they wanted.

Image: Flag of Greece, released into the Public Domain

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210 thoughts on “Greece is the Word

  1. I’m not sure the second to last paragraph is correct. Greece has had a double dump truck helping of austerity. As i remember they, aside from debt service, don’t have a budget deficit. Of course the debt service matters but it seems like the Greeks don’t see where more austerity is going to get them for the next decade or three. They want a road map to when they can start to see light at the end of the tunnel. Which isn’t in any way to say they deserve plenty of blame for the mega hole they are in. But like you said, this isn’t morality. They are fished and the banks got their bailout so they want to know when they can have some hope of better things.

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    • Greece has had a double dump truck helping of austerity

      This.

      Austerity hurts on the state revenue end, which requires more austerity, which spirals. In other words, the Troika are acting like thugs because they can (and with no shortage of hypocrisy). And, it isn’t at all clear that Grexit won’t help Greece. Devaluation seems like the least-bad way out in a world where Europe won’t do for Greece what the US routinely does for its less-successful states.

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    • Yes. Greece has accepted a ton of austerity already, and it’s hurt their economy and devastated their people, and it’s counterproductive because it shrinks their economy, rendering Greece even less able to pay back its debts.

      The creditors demanding austerity are trying to force actions that hurt Greece and themselves. The Greeks were right to reject the conditions.

      Things like this are why everyone hates the IMF and the international banks: because they demand you shoot your economy in the head and immiserate your people and call it “responsibility”.

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      • The magnitudes don’t work out. It would seem that Greece has achieved a primary surplus, which means their ability to service their debt is getting better, not worse. In any case, the de-stimulatory effect of austerity is temporary, but the only way to ever pay down debt is to run surpluses.

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        • And the only way for Greece to make enough to pay down their debt is to have a growing economy that can produce surpluses. They simply don’t have enough money in the budget to cut funds enough to pay off the debt – and even if they did, it’s not worth doing so if the cost is cutting services to the point where you have pensioners starving in the streets.

          They need economic expansion, and they need a decent standard of living for their people. For that, they need spending.

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            • I think that joining the Eurozone was a bad call for Greece and other comparatively poorer European countries: a relatively lower income country needs a weaker currency in order to have more exports and fewer imports. And Greece’s problems are certainly a major warning to any other countries, like Poland, that might previously have been wanting to join the Euro.

              The issue with Greece leaving now is that if their currency drops, a lot of people lose their life savings. Especially given that most European countries have a high proportion of older people, that’s a major problem. Aside from that, I’d agree that Greece is better off outside the Eurozone.

              I suspect you’re wrong about all the hotels being full, though. Serious economic and social instability tends to deter tourists.

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        • It’s not as though we haven’t been here before. The IMF forced massive slashing of government spending, layoffs, and cuts to social services on Latin American countries, throughout the ’80s and ’90s. It devastated their economies, increased poverty, and destroyed people’s lives. The region only started to recover in the 2000s when increasing numbers of countries started to ignore those prescriptions and instead focus on improving people’s lives and decreasing inequality; amazingly, when more than a small fraction of the population start having money with which to purchase things, the economy tends to improve.

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          • No, its definitely temporary, just as the stimulus from deficit spending is temporary. It took a chunk of the 20th Century to figure out, but the stagflation of the 1970s could not have happened if stimulus had permanent effect.

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    • Seconding this.

      If anybody hasn’t read Krugman, read him now (on any subject).

      The EU/IMF took a bad situation, and drove it into he ground.

      Hard.

      And has kept doing so for five years.

      BTW, for any talking about ‘moral hazard’ or suchlike, remember that the EU bailed out the *bankers*.

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  2. “the bond markets decided that default risk mustn’t be as big as they had initially thought.”

    Or, the lenders figured that they’d get a bailout. Which they did.

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  3. James, this is an awesome post. Is it okay if I make a few editing corrections? Double neg. in the 2nd graph, a few commas missing, and a couple of minor spelling errors?

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  4. It does seem to be a cultural issue, since the Greeks don’t seem to see the conflict between generous benefits & a cultural aversion to paying taxes.

    PS Excellent post!

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        • Still, the US is running a structural deficit, so there are important similarities between Greece and the US. The US has a lot longer to go before it hits trouble though, and since it has its own currency, it will have better options for dealing with it when the time comes.

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          • True enough.

            Although the point about taxes still stands. The wealthy in the US may make a sport of dodging taxes but the general population still has enough fear of the IRS to be more diligent in paying. Greece seems to have no fear of the taxman at all.

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          • The US’s is currently under 3% of GDP. That’s sustainable for…forever, actually. It’s under the nominal 3% inflation target, which means it’s not there or all intents and purposes.

            Moreover, the US’s is entirely fixable even if we decided that “adjusted for inflation, it doesn’t exist” was somehow untenable. A modest tax hike, a slash to defense spending, or simply waiting for the Boomers to die would all do it.

            We also print our own money. Having your deficit in someone ELSE’s money is a much larger problem.

            The US debt is pretty similar. It’s a nice huge number, but we could helicopter drop it away without noticeable effect on our economy, credit rating, or ability to do business. I mean if we kept running it up into the trillions and doing it every 10 years, that’d be different.

            But we’re struggling to reach our 2% inflation target as it is.

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            • The relevant statistic is % of government revenue vs. inflation, not % of GDP. You’re right that having the debt in your own currency makes things a lot easier, but lenders will stop offer you that deal if you try to inflate your debt away, so it works better as a complement to closing the deficit than as a substitute.

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  5. “As Keynes put it, economics is a series of technical challenges, not a morality play”

    But the EU is a political commitment without the necessary economic one.

    And I think Keynes is wrong. A lot of economics is about the allocation of income and wealth. Was Obamacare about economics or morality? Is that even a useful question? What about the infamous 1%ers? Watching from the sidelines since 2007, I’d say that a lot of what passes for ‘economics’ is, in fact, a series of morality plays (which mostly boil down to the rich and lucky telling the rest of the world that the only path to wealth and happiness is low taxes, on them).

    So Greece acceded to the EU in 1981 and got more than 25 years of low interest rates, corrupt governments and unsustainable debts. (I note that it takes two parties to make a bad loan.) Now what?

    The Troika apparently thought that the Greek populace was so desirous of remaining in the EU that it could promise nothing but years of grinding poverty. It turns out that there is a limit to everyone’s political loyalties.

    By the way, this bit: “On the other hand, it is quite clear that the Greek people aren’t interested in austerity” appears to me to be quite wrong. Greece has stayed in the EU for years despite a Great Depression of truly staggering proportions. But that was premised on a better future. When a major IMF report leaks just before the election showing that the technocrats believe that the promised turn-around is still years away, that might have an impact on how people vote.

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    • In the USA, the Great Depression bottomed out in 1933, with the election of FDR (note that by the standard economists use for recessions, they would say that the Great Depression *ended* in 1933.

      Imagine if the US economy had still been going down in 1935, and it was clear to anybody not a fool/paid liar that the economy was going to continue to go down.

      We’d have had at least one revolution.

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  6. Excellent post, James!

    I largely agree with Greg and Nevermoor about the double dump truck of austerity and how it spirals but I imagine that there will always be a war between the pro and anti-austerity economists and politicians and this is an unwinnable debate. The pendulum will always swing. Perhaps the next 2008 level crisis will have people being more pro-spending to end a recession or depression. These events seem to happen decades if not centuries apart and the next generation will see Greece as a cautionary tale against austerity.

    The issue is not really about austerity but the size and scope of government. I imagine that people who are pro-austerity are generally more keen on the government doing less in terms of social services and other issues. People who are anti-austerity (like myself) are more amiable to government providing social services. In short, austerity or not is a way of getting to the ultimate goal. A minarchist state or a robust welfare-state.

    My big concern is suffering. I don’t think the people of Greece (or any other country) should suffer because of mistakes done by those at top. Yet they always do.

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    • The issue is not really about austerity but the size and scope of government.

      It really isn’t, not anymore.

      I’m quite happy to accept that the austerity Greece has already experienced has hurt their economy in the short run, there are valid reasons for thinking that would be the case. The right time to do austerity is at the peak of the economic cycle, when its easiest for the people affected to find new jobs and the government has plenty of resources to help with transitional assistance.

      The problem is that governments hit crisis under conditions when they are under the most stress – and that’s recessions. The merits of deficit spending for Greece are academic at this point, because they are no longer capable of deficit spending. If I wanted to fix that, I’d need a time machine, because at this point there’s no way to deal with the crisis without a lot of pain.

      My big concern is suffering. I don’t think the people of Greece (or any other country) should suffer because of mistakes done by those at top. Yet they always do.

      I agree, the problem is that the loss has already happened, and someone has to pay it. Should it be the Germans? Why should their people suffer because of a decision their leaders made? It’s not fair when people die in car crashes either, but that doesn’t mean we have the power to stop people dying.

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      • I don’t think the people of Greece (or any other country) should suffer because of mistakes done by those at top. Yet they always do.

        Here I want to say that the people of Greece have been the beneficiaries of all those decisions made by people at the top. That’ why it’s in the situation it’s in.

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        • Exactly. This is why saul’s pity poor greek masses rings hollow. That wanted a robust welfare state but didnt want to pay for it. Eberytime i heard the greek pm talk about the dignity of the greeks i laugh. Their dignity didnt object to taking the loans, only to paying them back.

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          • Citation needed.

            Another explanation is that the country is a victim of a global recession it had no part in causing, and was unable to survive because (1) it didn’t print the currency it owed debts in; (2) it didn’t have enough big industry, so its small businesses couldn’t adapt; and (3) didn’t have enough of value to export.

            But sure, cling to your “welfare queen” story. It’s as untrue about Greece as America, so I’m sure it’s unchangeable.

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            • Never:

              If you’ve been paying attention to this drama for any length of time time you would have heard about greek dignity, blah blah. Also greek tax collection is well known for being nonexistant, another thing you might know. If they want a welfare state fine then collect the taxes to support it but don’t take out loans to support your life style and then whine about paying them back.

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                • Which statements are you alledging are “wild?” Is “wild” liberal speak for not accurate or unfair. Or was it that you just couldn’t come up with a substantive response so you thought you would attack?

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                    • I guess we have our answer. I thought I might be wrong but you really couldn’t come up with a substantive response. It really is sad when folks use vague terms like “wild” and then when asked to clarify they run and hide.

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                      • Ok, I’m baited on this one. By “wild” I mean completely untrue and contrary to all available evidence. Which is why every time you make more crap up, I’m asking for the source.

                        Specific untrue statements:
                        greek tax collection is well known for being nonexistant
                        If they want a welfare state fine then collect the taxes to support it
                        don’t take out loans to support your life style and then whine about paying them back

                        So far you’ve cited none, and I’m not going to engage further with your desire to fit everything in the world into a narrow ideological narrative with or without any relationship to facts other than that you had a bad vacation in the 80s until you bring some.

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      • How do you feel about the point this article is making?

        http://www.businessinsider.com/greece-referendum-result-and-the-meaning-of-debt-2015-7

        The basic idea is that a loan is not a guarantee. You get interest if you succeed in making a good loan but default if you make a bad loan.

        I get your point. I find it interesting that so much of government and finance essentially operates on blind trust and one bad decision can have serious effects around the world.

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      • “I’m quite happy to accept that the austerity Greece has already experienced has hurt their economy in the short run, …”

        Where ‘in the short run’ is now far, far longer than has been *repeatedly* forecast by the austerians to be.

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  7. “As Keynes put it, economics is a series of technical challenges, not a morality play”

    I have to agree with Francis here. What is the end goal of a policy as I wrote above? I image that all people including technocrats have some moral lesson or lecture in mind. Mine is anti-suffering. Another person might want to lecture people on not managing their budgets or living within their means.

    I think most of humanity is about making moral points and then disguising them in neutral sounding terms from time to time.

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  8. So the interesting question is, of course, what next?

    Either the Greek economy really freezes up, some other nation or group of nations comes to some sort of rescue, or the EU comes up with a better deal that isn’t based on austerity. (If anything, hasn’t austerity been shown to not work well for ending recessions, with the US vs. EU as labs?)

    Personally, I blame the Olympics.

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  9. Returning to the theme of the post, one major problem with applying game theory to sovereign actors is that they so rarely speak with a single voice. Merkel speaks for Germany; what about her finance minister? or a leading member of parliament? Even in a large corporation lines of command exist (or can be conclusively presumed to do so). Democracies have a much harder time sending a definitive Signal.

    For example, what was Signalled by the Sunday vote? What message should Merkel take, or Obama?

    ———–
    On a somewhat unrelated point, I find the US govt’s silence on this issue to be very interesting. On the one hand, Obama can’t undercut the major US allies Germany and France. On the other, there comes a time when the most powerful nation in the world can do something to alleviate the misery attributable to a complete breakdown in the economic system of a historically important nation, like making short-term financing available. What Signal should the US send?

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      • Please recall what was done in the darkest days of the credit crunch. Extending lines of credit to Greek banks would allow them to open. The Fed’s statutory authority empowers it to be a global lender of last resort.

        (edited to remove uncalled-for rudeness.)

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          • I’d also point out that when you ask the average American how much we give out in foreign aid, they give answers that are orders of magnitude too large.

            When you think we give out 10 or 100 times more than we do, it’s a good candidate for slashing. When faced with the actual numbers? Probably not so much.

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            • For what it’s worth, I’ve met people that consider “foreign aid” to encompass a lot more stuff than merely cash transfers from the Federal Gummint.

              Military bases in Europe? Foreign aid. Hosting the UN? Foreign aid. Church-sponsored missionaries giving vaccinations to the heathen? Foreign aid. The Red Cross doing something in another country? Foreign aid.

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        • Possible responses to this comment:

          1. Christ, you’re an asshole.
          2. OMG, the President is exercising his executive authority to change the lives of millions of people for the better! Quick, be outraged!
          3. Do you know anything at all about the Federal Reserve Act?
          4. Calling improving the lives of millions of our allies a ‘rat hole’ is a perfect example of modern conservatism. Please continue; HRC isn’t yet President.
          5. [Responding to James K]: It’s not foreign aid if we get paid back. The Federal Reserve makes loans, not gifts.

          There’s more, but I’m sure you get the idea.

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          • Francis:

            Have you ever been to Greece? I went there in the late 80’s and wouldn’t go back. Just b/c the the Pres and the Fed can make a loan doesn’t mean they should. What makes you think we’d get our money back any more than the EU has? Sadly I think Hill might be smarter and say no.

            There’s more, but I’m sure you get the idea.

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            • The idea that your unpleasant vacation has any relevance is both hilarious and evidence of the fuzzy thinking causing a meaningful part of Greece’s suffering

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              • As I said before, If you want a generous welfare state fine collect the taxes to pay for it. Don’t borrow money and then whine when you have to pay it back. I don’t have any sympathy for that. I’d suggest you go to greece and experience the reality for yourself.

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                • I’ve been lucky. I’ve traveled more than most, although less than I would have liked, including to Greece. However, I try not to let my personal travel experiences color my views about larger issues.

                  You have a fraction of a fair point; sovereign societies should be self-sustaining. Greece was not; now it is.

                  As to the whining, the new Greek govt is pointing out that its debts are unsustainable and the current collective European position leaves it in crushing poverty essentially in perpetuity. Any borrower in such a position would and should default. Even the Bible notes the need for the occasional Jubilee to wipe out bad debt.

                  The money was freely lent and is now gone. So as between the foolish debtor and foolish lender, I see no party with the moral high ground. In fact, given that the European governments turned the private debt of institutional banks into public debt, I think the Europeans are in the weaker position. When you buy non-performing debt, you take the risk that the value of the debt is zero.

                  Furthermore, because the banks were way too large to fail, the states (France & Germany primarily) would have had to bail them out anyway. So the governments may have saved themselves money, time and hassle by socializing that debt. On the other hand, the stockholders and bondholders of those banks — ie the selfsame European elite — gave themselves a huge gift. Their whining that the now publicly-owned debt is non-performing is pretty galling considering they got their own taxpayers to bail them out from enormous losses.

                  Or, put very simply, when one of the Trump entities defaulted on its casino loan, who did you root for? Was it an outrage that a (alleged) billionaire managed to stick it to a bunch of banks, or just good business practices?

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          • It’s a loan if they pay it back, if they don’t pay it back, its a gift. As noted upthread, a loan is a risk, not a guarantee. Especially if you’re lending to a country with Greece’s credit rating.

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    • I hope Krugman has this one right. He sees this signalled:

      we have just witnessed Greece stand up to a truly vile campaign of bullying and intimidation, an attempt to scare the Greek public, not just into accepting creditor demands, but into getting rid of their government. It was a shameful moment in modern European history, and would have set a truly ugly precedent if it had succeeded.

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      • I think Krugman is leaning too heavily on the “moustache-twirling villainy” argument here. The German government has intelligible reasons for being reluctant to lend further money to Greece. The less likely it is that Greece and get through this without defaulting, the less sense it makes to keep lending them money. Don’t forget that Merkel is accountable to voters as well, and she can’t lend more money to Greece than they will let her.

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        • Privatize the Profits and Publicize the Risks, eh?
          Yeah, that’s intelligent all right.

          Betcha you wish you were getting rich on South Carolina right now, dontcha?
          That’s intelligent, too…

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        • While I’ll happily concede they have theoretical justifications, I don’t see any practical justifications to continue something that has been causing UNPRODUCTIVE pain since 2009. http://mobile.nytimes.com/blogs/krugman/2015/07/07/debt-deflation-in-greece/?_r=0&referrer=

          The macro is pretty simple: Greece needs to stop paying its debts or devalue them. It can’t do the latter without Grexit. It can’t do the former without a bunch of help.

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          • I believe the Troika were hoping Greece would be prepared to accept the pain needed to stay in the Euro. In either case they needed to be sure, which is why they demanded austerity as a condition. And, based on several comments here, Greece is no longer running a primary deficit, that’s a significant achievement, which will make default easier for them now.

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            • I believe the Troika were hoping Greece would be prepared to accept the pain needed to stay in the Euro.

              I think this sentence gets to the very core of the problem I’m railing against. Greece spent five years taking on all the austerity programs the troika could dream up, causing significant economic pain at both the macro and micro levels. Even though that successfully implemented austerity, it wrecked the GDP making debt a far higher percentage of GDP.

              Now the only reason that pain was “needed” is that the troika says so. It would be no skin off of Europe’s back to require far less pain, allowing GDP to recover and pointing a path to stability. They just refuse to do so.

              The primary surplus only matters if Greece exits the EU and defaults (which at this point they probably should), but the whole situation arises because of choices made by other EU countries, and those choices were not “needed” in any sense.

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              • But it would be skin off their nose, it would increase the risk they wouldn’t get their money back at all. The longer the time horizon the Troika offers to Greece, the more they have to trust the Greek government.

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                • The amounts of money at issue aren’t so huge that they couldn’t be restructured without any meaningful effect on the EU’s finances. That’s what I mean by “needed”

                  For example, you don’t see us Californians heading down to New Mexico or Mississippi and talking about how they’d better damn well pay us for having relatively terrible economies. Instead we (and others) collectively transfer significant amounts of dollars to somewhat level the playing field. Europe could do that too, but instead they see an unsustainable situation and want to make it worse. That simply isn’t “needed” for any definition of the term that makes any sense.

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                • “But it would be skin off their nose, it would increase the risk they wouldn’t get their money back at all. The longer the time horizon the Troika offers to Greece, the more they have to trust the Greek government.”

                  No, austerity increased that risk.

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                  • You keep using the word austerity as if it were some semi-magical gotcha that can wipe away years of economic mismanagement on behalf of the Greek government.

                    I suppose it is a nice ideological point, but a terrible economic one.

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            • James, I’d say that Greece having a primary surplus probably flips the script a bit. Before it was very evident that leaving the EU would hurt the Greeks a lot and the rest of them a little. If the Greeks can say “If we default we can see how it’d help us out” puts them in a much more credible position to demand that the EU offer a better deal.

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    • Saul:

      If you are waiting for the Greeks to take responsibilty for their situation you will be wating. They rather remember themselves as victims of the Turks, WW2 and how greece used to be great back in the golden age.

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  10. I understand this post is more narrowly focused on the question of what-the-hell-should-happen-now? but it seems clear that the E.U. is just really poorly structured in fundamental ways. I can’t help but wonder if we would have experienced something similar here, sometime in the early 19th century, to what we’re seeing there now if the original Articles of Confederation had held rather than being replaced with the Constitution that we actually have.

    Take the current situation in Kansas for instance. Albeit for entirely different reasons, our powers that be have apparently decided to reproduce the Greek experience in miniature. Tax collections were slashed and spending, mostly on education and social services, were cut, but not enough to cover the difference. Even holding the Governor’s mansion and both houses of the legislature the Republicans couldn’t stomach the cuts necessary to balance the budget. As a consequence our bond rating has been downgraded which will only make things even more fun going forward.

    But unlike the situation in Greece there’s a soft upper limit to the resultant misery. That’s because while Brownback runs out his failing experiment there’s a fair amount of money that continues to come into the state. Retirees continue to get their Social Security checks, doctors and hospitals get Medicaid and Medicare dollars, farmers get their crop insurance and subsidy checks, colleges and universities get their Pell Grant and guaranteed student loan money and research grants, soldiers at Forts Riley and Leavenworth get paychecks, housing subsidies, AFDC, TANF, etc all continue to function.

    And that’s leaving aside the fact that even conceptually defining a “Kansas economy” as distinct from the larger U.S. economy is pretty arbitrary. Just consider all the folks in the Kansas City metro that live on one side and work on the other (and do business in both). What about people like me that live and pay taxes here but are paid by a corporation based in another state based on revenues collected from customers in all the lower 48 plus Canada and Mexico? Just how the hell do you even sensibly delineate borders around something like that?

    My point (it’s good to get to one eventually, huh?) is that the half-assed nature of the European economic union was bound to produce this result. If not Greece and not this particular way then somewhere else and in some other way. Eventually.

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    • Yep. Currencies not tied to firm political groupings that are willing to cover for each other are inherently problematic. The Euro looked fine right up until something went wrong the first time. Now a lot of people got screwed.

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      • It also diffuses the responsibility for responding to crisis by diffusing the ability to respond. A standard feature of being a sovereign nation is having a sovereign currency. Greece has zero ability to exercise monetary policy regardless of whether it would actually be a good idea or not. Even absent a deliberate attempt to inflate the currency the international exchange rate would fall, which should boost the export market, somewhat alleviating the pain regardless of fiscal policy.

        Ought implies can. What and how much Greece should be expected to do would seem to be severely constrained by what it actually can do.

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      • The bare problem is the EU lacks transfer mechanisms.

        When California is booming and Florida busting, California doesn’t loan Florida the money to pay it’s SS checks. It gives it, automatically.

        Greece is facing both contrary fiscal policy (given Greece’s situation, it’s currency needs to be allowed to devalue — which would increase it’s exports and tourism income, helping it out) and demands for contrary fiscal policy (which is also constrained by it’s inability to devalue it’s own currency). In short, however morally flawed the people of Greece are, right now it’s curled up on the ground and the EU is kicking it over and over and demanding it feel better.

        Like above — Florida might suffer contrary monetary and fiscal policy in a year where it’s out-of-step with the US economy (or say Kansas right now), but the rest of the US shoves money into Florida to help keep it afloat.

        The EU…I can’t decide if they never thought about it or just never thought it could get this bad.

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          • Either the Greeks will get some massive loan forgiveness or eventually end up exiting. I think it very unlikely that they’ll continue suffering for the next decade or so — the demand to do SOMETHING will just build up.

            If the Greeks exit, things will suck mightily for Greece, but they’ll probably revive the drachma, it’ll be valued super low against the EU or the dollar (due to their incredibly crappy economy, high debt, etc) and that’ll slowly leverage them out of the hole. They’ll probably flip the bird to their debt holders, though, anyways.

            In the interim, the usual suspects will scream that it’s Germany in the 1930s (hyperinflation!) despite the fact that hyperinflation is really, really hard to make happen. Although Greece actually has a small shot at it — but only if they insist on paying off their debt after going back to their own currency. The low value of the new drachma means the debt is bigger — the drachma/Euro rate would be really bad. The more they print to pay off the debt, the worse the ratio. THAT is the sort of feedback cycle Germany got into. But Germany was, in some respects, at something of gun point to pay that back. And eventually started WWII rather than finish doing it.

            OTOH, the drop in value would increase Greece’s exports and tourism — which would help the whole situation and free up more money (as a % of GDP) to pay the debt back, which would offset that.

            Which is why I suspect Greece will simple negotiate some haircuts under threat of total default, because really how much worse could it get for Greece?

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            • Morat, I expect the Germans et all will come back with something incrementally more palatable and the Greeks will accept it. Separating and floating a drachma will be utterly miserable for them for the immediate future, especially since their sovereign debt would be at junk bond status. Austerity sucks majorly but the purchasing power of those pensions paid out in devalued drachmas will likely be even less than cut pensions paid in Euros would be.

              My ideal solution would be for Germany to face up to the fact that they need to help the periphery if they want to be able to keep/sell to it. That suggests some kind of public austere deal (to discourage more defaults) and then privately loosening the screws on Greece significantly on the down low.

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        • I think one problem with the European Union was that it’s intellectual architects were people who were very distrustful of popular patriotism. There was good reason for this considering recent European history at the time but it made them form an EU that was a half-assed in-between the Articles of Confederation and the United States Constitution. They didn’t create an institution that could foster popular patriotism. The men who wrote the United States Constitution distrusted majority rule but they were fine with popular patriotism. This led them to actually create a national government that people could feel loyalty to and function.

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          • Honestly, America only escaped this trap through an accident. The New Deal wasn’t designed with the purpose of fixing exactly this sort of problem. It just happened to do so. Prior to that, you had the unhampered booms and busts that, if nothing else, were only accidentally screwed with by monetary policy (which itself was a function of whatever gold was worth on any given day).

            But you’d think the EU would have at least studied the US, it being the only roughly comparable example of what they wanted to do.

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            • I don’t think that it’s that it never occurred to them. I think it’s that such a unification was never remotely feasible. Not without an extremely, extremely gradual process.

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              • For something inevitable, they certainly didn’t plan well for it. Then again, the mid-90s through until the Great Recession there was a certain smug….certainty, amongst central bankers.

                The belief that they could control the economy entirely via interest rates.

                I’d say it’s more likely they convinced themselves it could never happen. That a little interest rate magic, some austerity, and prosperity would boom for whatever poor country was behind the 8-ball.

                I think Greenspan, confused and uncertain as the Great Recession kicked all his favorite economic models in the nuts, is probably the poster boy for this general ‘We control the economy’ viewpoint.

                Watching him as the Great Recession unfolded — you could practically see his confusion. It wasn’t something that could possibly happen.

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                • Studying economics during the early 2000s, I can confirm that a belief in the permanence of The Great Moderation was real, among economists as well as Central Bankers. As is stands, I think macroeconomics did make progress on stabilisation policy, but nowhere near as much as they believed.

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                  • Believing yourself master of all you survey is a common problem. And with successes under your belt, I can see why you’d come to believe the problem had been solved.

                    Ah, to be a fly on the wall when certain economists realized their models claimed reality wasn’t happening — but Keynes’ were spot on.

                    Last I checked at least some were still adding tons of complexity, trying to make their models account for reality while denying the New Keynesians had any useful insights at all.

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                    • You are mistaken about the current consensus on stabilisation policy. The policy framework that produced the Great Moderation is a product of the New Keynesian Synthesis. When I think of the economists who picked the problem in advance, I think of people like John Taylor, who was not making a Keynesian critique of the mainstream.

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                        • Taylor had been criticising Greenspan for years for keeping interest rates too low. He argues that not only did this contribute to the housing bubble forming (this is an Austrian idea, but there is some empirical support for it), but that it also meant the Fed had less scope to lower interest rates when the crisis hit.

                          Taylor’s argument that Central Bank discretion makes it too easy to make mistakes or be influenced by political forces (politicians will almost always want interest rates lower because it makes them look good in the short run). He proposes requiring the Fed to formulate and publish a mathematical rule that will describe how they will conduct monetary policy.

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                      • I may be completely confusing the schools, but aren’t the Austrians the ones who were completely flummoxed by the Great Recession?

                        And were resistant to using the simplistic NK solutions (fiscal stimulus in this particular case, as you had a clear bubble pop followed by a prolonged recession with a huge lack of demand, as everyone was broke and in debt)?

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                        • The Austrians aren’t considered mainstream, and the Great Moderation was the product of the New Keynesian Synthesis (basically Keynes in the short run, classical in the long run, with some dynamic math explaining how you move from one to the other).

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                          • Ah. I see where we went off the rails. I was thinking the Great Recession (whereas the Great Moderation would be a really big feather in the cap of anyone thinking monetary policy had solved the boom/bust cycle and negated the need for a lot of other tools) and Greenspan, in particular.

                            The Austrians may not be considered mainstream, but a surprising number of them were holding levers of economic power in the US when the manure hit the proverbial fan — or advising those who held said levers. Or showing up on my TV. They showed up on my TV a LOT.

                            For a minority, they have a heck of an outreach and PR firm.

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                            • People gravitate to the school of economics that prescribes what they want to do anyway. So people who want to spend lots of money suddenly discoverer Keynesianism when a recession hits. Equally, the Austrians get popular with people whose ideological preferences are reinforced by Austrian thinking.

                              And Greenspan’s actions as Governor of the Fed were not especially Austrian. In particular, the Austrians are for more hawkish about interest rates than Greenspan was.

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    • “I understand this post is more narrowly focused on the question of what-the-hell-should-happen-now? but it seems clear that the E.U. is just really poorly structured in fundamental ways. I can’t help but wonder if we would have experienced something similar here, sometime in the early 19th century, to what we’re seeing there now if the original Articles of Confederation had held rather than being replaced with the Constitution that we actually have.”

      This is the heart of it, and old-fashioned orthodox economists pointed that out way back in the day.

      Krugman’s latest example was Texas in the 1980’s.

      It was ground zero for both the S&L crisis (due to corrupt state governments) and for the Oil Bust.

      Imagine if Texas was responsible for it’s banking system, received no fiscal transfers from the Federal Government, *and* was locked into the US dollar.

      Northern states would have put up fences to keep ‘Texbacks’ out :)

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  11. 3 Years later it ain’t an emergency anymore.
    Seriously, 2% fall in stock market? Pish, that’s called priced in.
    You say nothing’s been done? Plenty’s been done to fix the issue…
    just not the issue you’d expect. Italy, Spain, and some of the rest
    of the European South have gotten their economies in gear — making
    it far less likely they’ll exit. Greece leaving isn’t the end of the world for the Eurozone.

    Folks in “the know” seem more worried about China than Greece.

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  12. I see a game of chicken going on. The Germans don’t want a Grexit- it will begin unraveling the EU which endangers their export market (and thus employment numbers) but they also don’t want to just dump money into Greece with no prospect of getting it back. The Greeks don’t want a Grexit either- they’ve tasted developed world living, they like it, going onto the drachma will mean years of privation and poverty but they also are reluctant to give up their government pork and austerity has been absolutely ravaging their economy.
    The Germans would like the Greeks to do anything to remain in the EU- slash spending to the bone and then spend the few Euros they have left buying German cars and toasters. The Greeks would like to remain in the EU but ideally via borrowing like Germans and buying everything they want while under collecting taxes and handing out patronage government jobs like candy.

    The possible outcomes are either the Germans/EU blinking and offering a gentler deal, the Greeks folding and accepting a tight austerity deal or a Grexit. With this referendum the Greek politicians have basically just thrown their steering wheel out the window. Now we have to see what the Germans/EU do. Do they say “fish those fishers, let em go off the cliff.” or do they fold and offer a sweeter deal?

    If I were a betting man I’d predict that there’ll be a new deal offered; slightly sweeter than before but only incrementally so and that the Greeks accept it and both sides declare victory.

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    • North,
      “it will begin unraveling the EU which endangers their export market”
      You get that from 2%? Nah… you’re talking as if this was three years ago.

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    • This (and indeed much of the game theory in the OP) treats “Germany” and “Greece” as two unitary actors with single aggregate preferences. The fly in the ointment of these types of deals, as with settlements to civil wars or other major multi-level political dilemmas, is the countless number of potential spoilers and potential veto points where people might, perfectly soundly, pursue their own particular interest – based on their perspective of what’s best for Germans/Greeks, or for their political party, or their home town, or their business – in ways that prevent “Germany” and “Greece” from acting as unitary actors.

      In other words, the danger zone has always been that in the process of negotiations over who will bear how much of the pain, some group will come along whose preferred future diverges far enough from the general (say, Syriza or some extremist anti-EU party in Germany) who is able to prevent the state from doing what is optimal from a broader perspective. There are multiple nested negotiations within the troika-Greece negotiations and rational outcomes in those games may undercut the higher-order games despite what game theory would tell us should happen if it was just two autonomous individuals. In some ways, I suspect that Syriza calling for this referendum is more an action in the arena of domestic Greek politics than something they are doing to influence negotiations with the EU. This political margin for error is what the EU has always skirted thanks to how valuable EU membership was seen to be by most current/aspiring EU-member-state citizens, and may be the most lasting harm of the whole crisis – if wide majorities are not default in favor of the EU even at real cost, many more spoilers can prevent European states from coordinated action even where it could clearly be overall welfare increasing.

      As a thought experiment, if you had run a similar game theory simulation over the dissolution of the former Yugoslavia – or more concretely its faltering existence after Tito’s death – it would not have made much sense for the rump states to go to war, considering the potential gains and likely losses. But it made a lot of sense for Arkan and a lot of other folks, and played usefully enough into the pathways of the Tudjmans and Milosevics, and so conflict spread (and was very rapidly beyond the meaningful control of a few central actors in important ways). This is my biggest critique of the way game theory tends to be applied – though this is a very good post – the possible ways in which it will not work out as predicted are usually embedded in the assumptions, not in the logical application of the theory to the situation.

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      • I will confess I was being a bit lazy in terminology. Germany refers mainly to the culturally northern states and the austerity motivated faction within the EU which is led by Germany but certainly isn’t encompassed by them. The Greeks are more uniform but you can be sure Italy, Spain and Portugal are watching with great interest.

        Undoubtedly the Greek actions are principally domestically oriented. The referendum wasn’t thrown as a bargaining chip but rather as a cop-out/clever maneuver (depending on your sympathies). The current Greek Administration doesn’t want to follow their predecessors paths nor do they want to try and exit the EU (which they recognize as something that will most likely wreck their political fortunes in the midfuture instead of the immediate future).

        The Greek people are, of course, embarrassed and enormously sick of austerity. Like most masses of voters they’d very much like to have their cake and eat it too.

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      • This (and indeed much of the game theory in the OP) treats “Germany” and “Greece” as two unitary actors with single aggregate preferences.

        This is a good point, I had considered discussing this extra layer of complication, but was worried the post was getting too long as it was.

        This actually make the credibility problem worse, as even if the negotiators for each party are negotiating in good faith, they cannot guarantee the other parts of their institution will accept the deal.

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  13. We’re still in the “validating everybody’s prejudices” phase.

    We need to get into “holy crap, this didn’t fit the model” phase before we can even attempt a fix.

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    • “We need to get into “holy crap, this didn’t fit the model” phase before we can even attempt a fix.”

      As I never get tired of pointing out, Krugman and many others pointed out the basic problem long ago.

      In fact, it seems that Mudell (sp?) father of the theory in question, *wanted* the flaws, because he figured that the masses would be impoverished by the necessary changes.

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  14. I am tempted to fall into the “lets not turn this into a morality play” camp, but in the end, that’s exactly what it is, and what it has to be.

    This is like most bankruptcies, where Greece has made promises which can’t be kept; they have promised to their lenders, to their citizens, pensioners, taxpayers, and so forth.

    So the question becomes, who among this list of promisees will have to accept a broken promise, and why?

    In this sense, its exactly like those Ethics 101 lifeboat scenarios, that force us to examine our priorities.

    Why should pensioners for example, be turned away empty-handed, while the banks get made whole? Or vice versa?

    I think the best argument behind not wanting to turn this into a morality play isn’t a call to avoid our moral reasoning, but instead a call not to fall into the trap of turning this into a search and destroy mission of blame.

    Justice suggests we find the guilty culprits and make them pay. But in this case that doesn’t appear possible. The guilty culprits may be both Greek and German, but not German citizens or Greek citizens; it would be the government and banking officials whose specific job it was to avoid a calamity like this.

    Yet they are almost certain to walk away without a scratch, while German citizens and Greek citizens are left to bear the brunt.

    So if we can’t assign blame, how to de resolve the lifeboat situation? Who gets thrown overboard?

    Maybe the better course is to examine how the best outcome broadly speaking could be brought about. Since Greece is part of the EU, what would be the best solution long term for the EU?

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    • The lifeboat metaphor seems like a good one to me, at this point it is certain that someone’s going to lose out, the question is who?

      As for the EU, I think this clearly demonstrates that they need to be more careful about who they let in to the Euro Zone, and they need to develop processes for allowing a graceful exit for countries that cannot sustain being in the Euro.

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    • “Justice suggests we find the guilty culprits and make them pay. ”

      Note that the EU leadership has already decided that the people running the banks are not to be found as culprits, and to be paid for their decisions (regulatory arbitrage [fraud] for profit).

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  15. I would say the problem with this analysis is that it presumes rationality on both sides and instead, you have irrationality combined with the necessity of survival for the Greeks.

    The banks aren’t demanding austerity as a signal; they demand it because they have an ideological commitment to austerity as long as it is for other people. Modern banking tends to be run by people who refuse to take any responsibility for their bad decisions but demand others be held to the grindstone. So borrowers must be shoved into the meatgrinder, while they get bailed out.

    The Greeks also don’t want to take responsibility but more importantly, the level of austerity demanded would basically destroy Greece, so they have rejected it.

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    • The problem with using irrationality as an explanation is that it can be used to explain anything, and can be used ot write-off behaviour you disapprove of. My purpose here was to point out there is a perfectly rational explanation for the way Merkel and the IMF are behaving.

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    • “The banks aren’t demanding austerity as a signal; they demand it because they have an ideological commitment to austerity as long as it is for other people. Modern banking tends to be run by people who refuse to take any responsibility for their bad decisions but demand others be held to the grindstone. So borrowers must be shoved into the meatgrinder, while they get bailed out.”

      This is very important. The same people who talk about moral hazard, responsibility and suchlike are the ones who either bailed the bankers out, or are defending this.

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    • What banks are you guys talking about?

      Greece’s private debt is fairly manageable at this point and Greece will likely continue to service it. Right now Greece is negotiating with their official creditors, the troika: the EU, ECB and the IMF.

      You can try to spin this into a tale of bankers trying to squeeze the citizens of Greece for their last Euro dimes, but that’s not it at all. The question at this point is who is going to take the hit, the citizens of Greece or the citizens of the other EU countries, and how much.

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    • If they wanted failure, they could let Greece just walk away.

      Seems odd to give them another loan that they won’t be able to pay back in 2 years (and go through this again) if failure is the goal.

      They could get failure for free.

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      • Depends on how much you value blame shifting. When/if this stuff blows up in Greece, then it’s their fault and all the Germans can tut-tut sadly.

        Also, it’s clear that Greece wasn’t walking away, so “let” is doing a lot of unjustified work in your analysis.

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        • Given that this is the 3rd bailout in 5 years, I think that the case can easily be made that the things that went wrong were the fault of Greece without getting the Germans involved at this point.

          The first bailout? Sure.
          The second? Maybe.

          At this point? I don’t see it.

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          • I think that the case can easily be made that the things that went wrong were the fault of Greece without getting the Germans involved at this point

            Yes, if one ignores that Greece is failing to recover because it can’t devalue its currency and has been forced into crushing austerity by (for example) the Germans.

            That’s a lot to ignore to reach the conclusion that this is all Greece’s fault.

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                  • Well if Germany is being insanely over the top onerous Greece can always walk out of the currency union. That’s the basic Scyllia/Charbordys the Germans are trying to navigate: be stringent enough to keep Greece from becoming an example to emulate but not harsh enough that a Grexit becomes the lesser pain.

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                    • Two thoughts:

                      1. That’s a tough dance since no one knows how Grexit would play out, so the “pain” calculus has pretty big error bars.

                      2. While I don’t disagree that you’re describing Germany’s actions fairly well, why the hell is that acceptable behavior? Aren’t they supposed to be members of a political union?

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                      • #1 Hell yes, you ain’t whistling Dixie. In fact the Germans miscalculated their stage one challenge which was basically “be draconian enough to prevent emulation but not so draconian that the electorate throws the adults out of power and votes in a wing nut party.” so yeah it’s a tough call. This gap is slightly wider of course but yes calculating it is hard especially since emotions and nationalism also play into this.

                        2. It bears noting that when we say Germany we’re basically being a bit lazy. Germany is merely the leader if you will of a group of paying nations, the Scandinavians, Finland, Germany, etc… while Greece is kind of the worst of the periphery borrower countries. When you ask why it’s acceptable the crude answer is that “The money going to Greece is coming from those payer nations, so since they’re footing the bill they’re dictating the terms”. The more accurate answer is they are members of a currency union but as far as political unions go they’re not very unified. There’s a European Parliament in Brussels but it doesn’t have much power compared to a genuinely unified country like Canada or the US.

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                  • The one does not indicate the other.

                    Germany is signing because it gets a huge number of concessions, including sequestered assets, and can stay in the drivers seat when Greece fails to recover.

                    Greece is signing because Grexit is scarier (though at this point probably not objectively worse).

                    What the Greek parliament does I have no idea.

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                    • They’ll do what every politician has done since the first politicians crawled out from under our collective toenails: they’ll franticly try to do the minimum necessary to avert disaster while trying to keep it sweet enough to convince the electorate not to throw them out of their jobs.

                      And note that the German politicians et all are doing the absolute exact same thing.

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        • Well yes, but the reason Greece isn’t willing to walk away is the problem. They revved up that referendum, got their mandate and then did the math. The sources are a bit differing but it looks like Greece got to a primary surplus, then slid back and now is probably a bit short of it. When you’re spending more than you’re collecting an exit from the Euro is basically gonna hurt like hell (because exiting itself has costs).

          It isn’t really anywhere near cut and dry. Yes what the creditor countries are demanding is harsh but they do have to convince their own legislatures to agree to fund further bailouts. So the Germans, fins etc.. politicians are worrying about keeping their jobs too.

          Also, the current Greek government hasn’t really given any observer much reason to believe that they will implement the reforms necessary to get Greece on even keel. Neither further austerity nor more tax collecting is popular and Athens current position is basically “give me cake and then I’ll eat my broccoli” whereas the Europeans position is more akin to the other way around.

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          • the current Greek government hasn’t really given any observer much reason to believe that they will implement the reforms necessary to get Greece on even keel.

            Other than implementing a TON of austerity over the last few years, despite its self-destructive effect?

            Athens current position is basically “give me cake and then I’ll eat my broccoli” whereas the Europeans position is more akin to the other way around.

            This is the core of our disagreement. I don’t think it’s about eating broccoli. I think its more like bloodletting. Athens just wants to try a different remedy, others are insisting that MOAR BLOODLETTING will definitely work. Or, at least, get them paid.

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            • Emphasis, nevermoor, on -current- government. Syriza specifically; not the previous ruling parties that implemented those cuts and reforms and then got thrown out by their voters. Note that Syriza is in of itself a failure on the German blocks party. Correctly managed the German block should have rewarded one of the previous administrations with relief after they administered the austerity and before their electorate drove them out of office and replaced them with Syriza.

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              • Fair enough. I get the distinction.

                It will certainly be interesting to see whether Greece accepts the “deal” and then actually acts on it. Or uses it as time for an orderly exit.

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    • 1) Germany can’t bully Greece into failure, Greece has been in a state of failure for years.

      2) Selling off assets to pay back your creditors is a standard part of bankruptcy, so it’s not that surprising that Germany would require it as part of further bailouts.

      3) Germany is clearly concerned about setting a precedent. The Greek government just threw a North Korea level tantrum, and if Germany offers more favourable terms to them after doing that, what will that say to the next country that lands itself in a mess like this one? What Germany is trying to do is ensure that the Eurozone countries see the fiscal requirements as actual requirements and not mere guidelines. If anything is surprising about this, it’s that it’s anomalously prudent for a government, but then I suppose if anyone was going to exceed my expectations, it would be the Germans.

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      • Re 1: You don’t think this is different? Or you just couldn’t resist being cute?

        Re 2: Micro != Macro. What government has this been done to?

        Re 3: So a referendum (i.e. democratic vote) is a “North Korea level tantrum”? Why? Also, why does that justify harsher requirements than pre-vote for any non-personal reasons?

        What Germany is trying to do is ensure that the Eurozone countries see the fiscal requirements as actual requirements

        “requirements” is doing a lot of work in your analysis. They are only “requirements” because Germany dreamed them up last week. Unless you mean austery itself, which is both self-defeating in theory and in fact.

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        • It’s not quite that simple Nevermoor. There are a lot of other countries like Italy, Portugal and Spain that are also laboring under a bad fiscal position. If Greece demonstrates that electing Syriza parties and voting no to the bailout terms produces greater concessions from the lending bloc then that would be enormous incentive on those other nations and their electorates to follow suit.
          I dare say that if preserving the union is what Germany et all are after they could probably rationally preemptively reward those countries that are playing along with further relief while throwing the book at Greece.

          But it’s a messy complicated balancing act on all sides.

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          • None of those countries have it anywhere near as bad (and none want to make their situations worse just to create a parallel). But I do think your point highlights the problem with the Euro currency being broader than any political union.

            And, of course, I think the lenders should be making concessions because that will improve Greece’s macro position, hasten a healthy Greek economy, and benefit the european project. Not because of the referendum vote. I also think ratcheting down because Greece held a referendum is nothing more than petty spite and unworthy of any high-minded defense.

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            • I agree entirely, but that big question is also the hard question so everyone keeps tiptoeing past it.

              I can see the angle you’re coming at it from but the alternative argument is that Syriza has not demonstrated a willingness or ability to govern Greece or tell hard truths to their voters. The improvements in Greeces fiscal position is a consequence of now unelected administrations and the referendum is a data point that suggests that if Greece is given more comfortable terms that there’s a serious risk that Syriza will simply piss it away while not enacting any of the painful reforms necessary to reform the badly corrupt and dysfunctional Greek government.

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  16. This is telling with regard to the deeper issues that plague Greece.

    So hopeless was the state of Greek finances that, even as they routinely hung with piano wire prominent citizens and officials on the thinnest of provocations, and even given three years to do it, the Nazi’s were somehow unable to compel what amounted to a totally subservient collaborator government to put its fiscal house in order.

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