I’ve been following the news from Greece with horrified fascination. A few quick thoughts:
1) I don’t think there’s any legitimate argument in favor of austerity anymore – even the IMF admits that austerity is incredibly harmful.
2) And yet, the IMF is one of the entities forcing austerity down Greece’s throat. Because the IMF is about helping the wealthiest countries, not about doing what’s best for the economies it’s “helping.”
3) It’s also obvious that using the Euro, rather than having an independent currency, has been incredibly harmful to Greece’s ability to recover.
4) But, given that they are in the Euro, I don’t have an opinion on what Greece should ideally do. There’s an theory that they should leave the Euro, suffer through a couple of years of economic collapse, and then use their devalued currency to leverage a recovery fueled by tourism and manufacturing. As bad as it is, it’s better than the alternative, which is an unending depression fueled by imposed austerity policies.
That theory sounds appealing to me, and to many other progressives. The trouble is, the theory might not work out in practice. I definitely don’t feel certain enough to feel comfortable advocating for this outcome or that outcome, when all these outcomes will be associated with so much suffering.
5) I do feel very strongly, however, that the decision should be made by Greek citizens, through Democratic procedures. And it’s obvious that is not being allowed to happen. Instead, the decisions are being made by people with absolutely no democratic accountability:
Days before Varoufakis’s resignation on 6 July, when Tsipras called the referendum on the Eurogroup’s belated and effectively unchanged offer, the Eurogroup issued a communiqué without Greek consent. This was against Eurozone convention. […] After a handful of calls, a lawyer turned to him and said, “Well, the Eurogroup does not exist in law, there is no treaty which has convened this group.”
“So,” Varoufakis said, “What we have is a non-existent group that has the greatest power to determine the lives of Europeans. It’s not answerable to anyone, given it doesn’t exist in law; no minutes are kept; and it’s confidential. No citizen ever knows what is said within . . . These are decisions of almost life and death, and no member has to answer to anybody.”
This isn’t just a matter of the “unelected judges” US conservatives often complain about. Judges in the US, even when they’re not elected, are appointed by elected officials who are accountable to voters. Plus, the judges making the decisions, and the politicians appointing them, are themselves Americans.
But in Greece, the most essential decisions are being made by people with absolutely no accountability to Greek voters. That’s a travesty, and not compatible with any real commitment to democracy.
I largely agree with you, Amp. However, the central problem at play — the destruction of democracy by unelected, unaccountable elites serving monied interests — is by no means confined to Greece or the Eurozone generally. It is, IMHO, precisely the real driving force behind “free” trade deals like the Trans-Pacific Partnership. (To be clear, I’m not saying you’ve claimed otherwise; my point here is to supplement what you’ve said.)
That’s always been the problem with agencies like the IMF and WTO–they supersede local government and impose destructive rules with zero accountability.
But then, what would Greeks (of all people) know about democracy anyway? /sarc
Typo:
I wrote a Facebook post on austerity, which I’m reproducing here:
It has happened. Austerity is now so politicized that people are opposing austerity in *Greece*.
The appropriate response to a run-of-the-mill recession is stimulus – increase govt spending, lower taxes, run a deficit, reverse when times get better. The US basically got this right.
But Greece wasn’t hit by a vanilla business cycle bust. It was hit by a public debt crisis. Every year, countries have to rollover massive debts, issuing fresh bonds to pay off the ones that mature. Suppose creditors think that a government is going to default; they will only buy these bonds if they offer a high interest rate. If these rates are too high, interest payments become overwhelming and the government actually *does* have to default. It’s a self-fulfilling prophecy.
You want to avoid such a crisis. How do you do so? Austerity – reduce your debt now to prove that you can fulfill your promises in the future. The appropriate response to a recession is stimulus. The appropriate response to a public debt crisis is austerity.
For years, the Greek government ran huge deficits and then lied about it. When they were eventually discovered and tallied, Greek debt was 130% of GDP. What would have happened if Greece had defaulted? Sudden and massive austerity. Abruptly cut off from credit, the government would’ve had to reduce their deficit to zero overnight.
Instead, the troika (IMF, ECB, EC) stepped in, bought all the fresh Greek debt, allowing the government to run a deficit for another five years, averaging ~11% of GDP. In other words, the austerity being imposed by these people is significantly lighter and more orderly than that which would’ve been imposed by a default.
(And no, the reason that Greece is in so much trouble isn’t because of government spending in health or education or any of the things that Amartya Sen loves so much; it’s because of a bloated and corrupt public sector in a country where politics means exchanging jobs for votes. 1 in 5 workers worked directly for the government and their wages were a quarter of the budget.)
This deficit spending has been funded by the citizens of Germany, France etc. So no, the Europeans don’t want to impose austerity because they hate Greece, or democracy, or welfare, or health, or education. It’s because they don’t want to *keep paying for Greek spending*. What a bunch of assholes.
All of this is obvious, but some people are so caught up in the general austerity vs anti-austerity debate they end up mindlessly applying the arguments to GREECE, where it just doesn’t fly. Non-austerity was not even an option for them. The only options were austerity by default or austerity by troika. And austerity by troika was better.
– end of Facebook post –
Re: democracy – once you understand that austerity was inevitable, and that it could only be avoided if the rest of Europe were willing to pay for Greek spending, the “democracy” argument seems hollow. The Greek voters demanded an end to austerity. So what? This demand is effectively a demand that the taxpayers of Europe keep funding it’s deficit. Why should they?
And if we’re talking about democracy, what about German voters who don’t want to fund this deficit. Or does democracy only count when it’s Greek voters?
There’s an interesting summary of some of Thomas Piketty’s comments on the crisis at the Washington Post. (The original Medium translation, which I read before it was taken down, also included some compare and contrast between nations whose debt was forgiven vs nations who underwent long-term austerity to pay back debts.)
Typo corrected, thanks to Nobody!
Navin, it’s not likely to be worth my time to respond to someone who implies that anyone who disagrees with them is responding “mindlessly.” Maybe you should reread this post on your blog.
Harlequin, thanks very much for that link – I hadn’t seen that. I don’t know if it’s the same translation you read, but I think an English translation of that interview with Piketty is here.
From that link:
The IMF opposes the austerity deal and is arguing for debt relief.
http://www.telegraph.co.uk/finance/economics/11739985/IMF-stuns-Europe-with-call-for-massive-Greek-debt-relief.html
Eurogroup members are all Eurozone ministers. Yes, they’re not accountable to Greece but other countries are on the Euro and their voters deserve representation. It’s not undemocratic, it’s an inevitable product of the widened franchise of a currency union. If you don’t like it you’re against currency unions.
“For years, the Greek government ran huge deficits and then lied about it. When they were eventually discovered and tallied, Greek debt was 130% of GDP. What would have happened if Greece had defaulted? Sudden and massive austerity. Abruptly cut off from credit, the government would’ve had to reduce their deficit to zero overnight.
Instead, the troika (IMF, ECB, EC) stepped in, bought all the fresh Greek debt, allowing the government to run a deficit for another five years, averaging ~11% of GDP. In other words, the austerity being imposed by these people is significantly lighter and more orderly than that which would’ve been imposed by a default.”
Nope. The reason the troika stepped in, was because French and German banks would have been toppled by the default. These banks gave years of known bad loans, hoping to make money off of them before the default, and to be bailed out in the event of default. This encourages making profit off of known bad loans, and is horrible for the economy in the long term. There is a term for the economic problem of bailing out foolish lenders: moral hazard. Germany encouraged the moral hazard throughout the run up to the crisis, and then paid out at the end.
You argument about the level of the austerity is what was proffered to Greece at the time of the bank bailouts. They believed at the time that leaving the euro might cause a 10-15% reduction in their GDP. Staying cost them 25% of their GDP, and they still have all the debt they would have gotten rid of by leaving. So it isn’t at all clear that they got a better deal by staying in than they would have by leaving.
Strangely, I’m posting this as one of the more conservative people you’re likely to find here. But being pro-market doesn’t mean I have to buy into anti-market bank bailouts.
Amp @7:
Bad attitude, Amp. Navin Kumar’s argument seems to make sense. I have not really followed this issue but your post piqued my interest. Ideologically, I expect I agree with Navin Kumar, but I don’t know if his facts are accurate or not. I don’t know what the response to him is.
But, if there IS a response, your decision not to respond to him means you pass up an opportunity to persuade others.
-Jut
While the European finance ministers aren’t accountable to Greek voters, they are accountable to their own voters, and given it’s their own voters’ money that would go to Greece – and, perhaps equally importantly, their own voters’ money that already went to Greece on a promise, to their own voters, that Greece would one day pay it back – it seems like that’s the more important accountability.
@Ampersand Apologies, mate. Like I said, it was originally a Facebook post, and I’m comfortable insulting my FB friends. I would never have used that phrase writing here, and I didn’t spot the “mindless” jab until you pointed it out. Sorry.
Here is a cleaned up version of that that I hope you can/will engage with:
The appropriate response to a run-of-the-mill recession is stimulus – increase govt spending, lower taxes, run a deficit, reverse when times get better. The US basically got this right.
But Greece wasn’t hit by a vanilla business cycle bust. It was hit by a public debt crisis. Every year, countries have to rollover massive debts, issuing fresh bonds to pay off the ones that mature. Suppose creditors think that a government is going to default; they will only buy these bonds if they offer a high interest rate. If these rates are too high, interest payments become overwhelming and the government actually *does* have to default. It’s a self-fulfilling prophecy.
You want to avoid such a crisis. How do you do so? Austerity – reduce your debt now to prove that you can fulfill your promises in the future. The appropriate response to a recession is stimulus. The appropriate response to a public debt crisis is austerity.
For years, the Greek government ran huge deficits and then lied about it. When they were eventually discovered and tallied, Greek debt was 130% of GDP. What would have happened if Greece had defaulted? Sudden and massive austerity. Abruptly cut off from credit, the government would’ve had to reduce their deficit to zero overnight.
Instead, the troika (IMF, ECB, EC) stepped in, bought all the fresh Greek debt, allowing the government to run a deficit for another five years, averaging ~11% of GDP. In other words, the austerity being imposed by these people is significantly lighter and more orderly than that which would’ve been imposed by a default.
(And no, the reason that Greece is in so much trouble isn’t because of government spending in health or education or any of the things that Amartya Sen loves so much; it’s because of a bloated and corrupt public sector in a country where politics means exchanging jobs for votes. 1 in 5 workers worked directly for the government and their wages were a quarter of the budget.)
This deficit spending has been funded by the citizens of Germany, France etc. So no, the Europeans don’t want to impose austerity because they hate Greece, or democracy, or welfare, or health, or education. It’s because they don’t want to *keep paying for Greek spending*. What a bunch of bullies.
You can’t apply the standard anti-austerity arguments to Greece. Non-austerity was never an option for them. The only options were austerity by default or austerity by troika. And austerity by troika was better.
Re: democracy – once you understand that austerity was inevitable, and that it could only be avoided if the rest of Europe were willing to pay for Greek spending, the “democracy” argument seems hollow. The Greek voters demanded an end to austerity. So what? This demand is effectively a demand that the taxpayers of Europe keep funding its deficit. Why should they?
And if we’re talking about democracy, what about German voters who don’t want to fund this deficit. Or does democracy only count when it’s Greek voters?
@Sebastian
Clearly their initially estimates were wrong, because they suffered a 25% GDP cut despite having to do less austerity than they would’ve had to if they left. Or do you think that deeper austerity would’ve caused growth?
I don’t understand your argument here, but here are my responses to the ideas in this passage:
1. The banks didn’t knowingly make bad loans to Greece. They thought they were lending money to a EU member with a moderate debt-to-GDP ratio. The kind of fraud that Greece did is unprecedented in the history of contemporary debt. I don’t doubt that moral hazard problems exist in finance; this just isn’t one of them.
2. If Germany and France were worried about a bank run, they could’ve just lent money to their own banks. No need to engage with Greece and bailout non-German, non-French banks. The reason they did what they did was to prevent a public debt crisis from spreading across the EU, taking down important members like Spain and Portugal.
3. I’m not sure what the intended point of this passage is? That Germany and France behaved irresponsibly and so should take their medicine i.e. let Greece default and take their losses? Greece can unilaterally default whenever it wants. All it loses is EU membership. The troika are ready to take their losses. This isn’t 1902. Nobody is sending gunboats to collect debts.
Or do you think that Greece should be allowed to stay in the EU despite defaulting? That Europe should be the one paying for a decade of Greek deficits for some reason?
@Navin: Bear in mind that Greece leaving the EU is not on the cards. The worst case scenario is it leaving the Eurozone. Some people have argued that current EU treaties oblige a country to leave the EU if it’s leaving the Eurozone, but even i that were the case, an exception could easily be made for Greece. Unless the Greeks actually wanted to leave the EU, which they don’t seem prepared to do at this point.
I think Greece should default and let the banks take their haircut. What – nobody knew that Greece is incredibly corrupt? There was no way for the banks to connect the dots on the debts that Greece was racking up? I find that hard to believe. Think about the history of Greece over the last, say, 50 years. For people to claim that “We’re not at fault, Greece lied to us” belies the fact that the default presumption should have been that the Greek government was lying. If I was a German taxpayer I’d be up in arms about this.
Hypothesis:
Yes, initially the Eurozone nations were concerned about setting a precedent for Italy and Spain. In addition, they were worried about the health of their nation’s banks. But just as in the US, they knew that their taxpayers would be furious to be seen bailing out rich bankers. So the Eurozone leaders figured that they’d have to find circuitous routes to shovel taxpayer money into private coffers. Structuring the transfers as a bailout of Greece, rather than the banks, would focus public ire abroad.
Greece knew it was heading for a fall, and just looked around for the softest landing. Thus Greece was happy to take the loans – not because it intends to honor them, but because it’s a slower way to default.
Knowledgeable parties, including the IMF, know that Greece will never be able to pay its debts; bondholder such as Germany and France will have to take a haircut. But this will be fabulously unpopular among German and French voters. So German and French officials are putting up a charade of opposing any debt write-down, delaying public acknowledgement of the inevitable for as long as possible. Eventually Hollande and Merkel will retire from government and go sit on bank boards, and their successors will get to deliver the bad news.
@tamme – That’s theoretically possible, but it’s unlikely that the EU will allow Greece to remain a part of it after it defaults. Kicking Greece out is pretty much the only disciplinary tool it has.
@RonF – the problem isn’t that the EU & banks will lose money but rather that Greece will be kicked out of the EU soon after, causing a lot of economic problems.
Navin,
I don’t see anything to support the claim that defaulting would result in Greece being kicked out of the EU. If Greece defaulted, it would certainly be forced out of the Euro area, but there are plenty of non-Euro EU states. Indeed, the Germans are currently suggesting that Greece should leave the Euro temporarily in order to have their loans decreased without violating the Euro agreement, but I haven’t read anyone suggesting that that would result in them being kicked out of the EU. It seem like you are confusing the European Union and the Euro area.