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June 29, 2015


I've yet to read or hear an economist not take the "on the one hand, but on the other hand" approach to discussing their subject. There might be graduate courses devoted to it. Too bad Krugman didn't mention that the "creditors" that he mentions are international banks that in many cases are supported by taxpayers. Chipping in to let Greece apply Keynesian remedies wouldn't be any worse an investment than chipping in to save Merrill Lynch and AIG.

Not anymore Bob. Letting Greece go a few years ago might have imperiled the whole banking system of Europe but Greek sovereign debt is now largely held by Governments and the Troika. Greece has no leverage whatsoever in insisting it be kept in the lifestyle to which it would like to become accustomed. they haven't a friend in Europe. Even the governments of Ireland and Portugal and Spain don't want to reward Greek foolishness. If they did they too would be turfed out and replaced by equally demanding far left parties. I quite agree that the banks were stupid to lend Greece money they very evidently had no plan or desire to repay. They should have cut them off a decade ago. But banks don't lend their money they lend other peoples money, depositors money and money borrowed from other banks and central banks. Would you keep your money in a bank that would lend it to Greece? I sure as hell wouldn't.

I will forgo the desire to wish that Krugman "break a leg" while setting out on his adventure. That seems remarkably easy to do.

Economists are about choice; that's why they talk so much about it. Krugman and Stiglitz are now writing "if I were voting" notes saying that they would vote to leave the Euro. Stiglitz:

"It is hard to advise Greeks how to vote on 5 July. Neither alternative – approval or rejection of the troika’s terms – will be easy, and both carry huge risks. A yes vote would mean depression almost without end. Perhaps a depleted country – one that has sold off all of its assets, and whose bright young people have emigrated – might finally get debt forgiveness; perhaps, having shrivelled into a middle-income economy, Greece might finally be able to get assistance from the World Bank. All of this might happen in the next decade, or perhaps in the decade after that.

"By contrast, a no vote would at least open the possibility that Greece, with its strong democratic tradition, might grasp its destiny in its own hands. Greeks might gain the opportunity to shape a future that, though perhaps not as prosperous as the past, is far more hopeful than the unconscionable torture of the present."

In the bad old days, this would have led to war. I wonder if the EU still has the stomach for it. Perhaps the UK does.

I'm gathering links at my own blog:

The Guardian is liveblogging, but so far as I can see it is more heat than light:

Krugman, today ( "But doesn’t the ultimate cause lie in wild irresponsibility on the part of the Greek government? I’ve been looking back at the numbers, readily available from the IMF, and what strikes me is how relatively mild Greek fiscal problems looked on the eve of crisis."

And the sobering: "If Europe as currently organized can turn medium-sized fiscal failings into this kind of nightmare, the system is fundamentally unworkable."

Myself, I am coming round the the view that a unified currency is fundamentally unsuited to a multi-national, multi-cultural federation. In this I am following the currency-region economists by about 20 years.

And, of course, what could possibly go wrong:

Yglesias has a pretty good chart that shows the problem. In the immediate time before their crisis the Greeks had a wonderful bubble economy going but the foundation was every bit as solid as the US housing market in the same time period. They would like that back. Europe says no. And I agree with you that the Greeks had no business being in the Eurozone anyway. They should go back to their own currency which will be largely useless for international trade and start over. Ultimately that will solve their problems. Their essential problem is that the Greeks don't make much that anybody wants. You can pour as many loans as you want in the top but the money all flows out the bottom back to where it came from, the places where Greeks buy what they consume. Or as it is popularly called everything from everywhere else. And all it leaves behind is debt that they don't want to repay. In fairness they can't. But that doesn't mean they should get away with it either.

Imagine if you would that the State of Missippippi enacted generous pension schemes for their civil servants. Added great and noble benefit plans and excellent social protections for wages and jobs in the private sector. Good solid lefty programs. But also decided not to collect taxes but to send the bill for their noble efforts to their neighboring states. What do you think those neighboring states would say? Now you know how Europe feels.

Your second paragraph is quite striking. Ask yourself what an American might do if local economic conditions were terrible? I suspect they would move someplace else in the US. And so they should. And so should Greeks for that is the big advantage of being part of the EU. And the bad part of narrow nationalism. If Greece is to earn and get assistance it must be something that will improve the situation and not merely defer another disastrous default which is what their current government insists on. Keynesian stimulus only works if you have something to stimulate besides other country's production.

Almost forgot:

Actually, Greece does pretty well in tourism and dollar-denominated oil. They're running a surplus these days.

The chart reflects a bubble. Never heard of that before, except, well, all over the place in the same period. Greece is being beat up for being a bit worse, that's all. I'm pretty sure that the parental response to a teenager who doesn't clean up their room ought not be a severe beating (and who decided that Germany was their daddy, anyway?)

Have you noticed the way "the grownups in the room" usually turn out to be teenagers on stilts?

That's the way matters work in a currency zone, but it erases cultural difference, and I think that's a loss. Hence my remark that I doubt that a unified currency is unsuited a multi-national, multi-cultural federation.

When I wrote about this, back in January, I commented, "The best compromise would be something like: the troika makes concessions, the Greek debt is reduced, some sort of stimulus measures are offered to the Greeks, and the Syriza government commits to and implements long-term measures to reduce the real corruption of the Greek system." (

Tsipras offered a pretty good compromise, and he went far in doing so; seemingly right to the limit of his party's mandate. At that point calling for a referendum made sense, and from the troika's reaction, it's clear that the Greek people were not to be consulted in the matter, which just wasn't going to fly in what is, after all, the birthplace of Western democracy.

If the ECB hadn't decided to act like this was a damn morality play instead of real-world economics, matters would be much better now.

I like your blog. Nice collection of links. Bookmarked for future reference. I particularly like your headline quote from our Bruce. The grisis piece quoting Krugman and Stiglitz is very interesting for it displays intimate knowledge of economics and terrible lack of knowledge about politics by the gentlemen quoted. Greece is not a big economy and Europe certainly could afford to indulgently put it on a permanent dole. That's not the problem though. The problem is all the other EU countries that would want to immediately join Greece on this permanent dole. That they can't afford.

Alexis Tsipras fucked up big time. He counted on support from the ministers of countries like Portugal and Ireland and and Spain and Italy. The only problem with that is that they aren't governed by far left parties and the parties in power are not anxious to get thrown out of power. Which might happen if Greece succeeds in getting their dream. In effect Tsipras tried to do exactly what he accuses the other European nations of doing. And it blew up in his face.
The up shot is that this is about political power. And the power is about to demonstrate to Greece, and everyone else watching, what happens when you try to hold the European economy and banking system hostage to ridiculous and unsustainable demands.

That would be the smart play both economically and politically for both sides. But that isn't what Tsipras offered. His tax increases are heavy on businesses (which is counter productive) and not on actual collection from Greece's huge black economy. The big debate is about how big a surplus the Greek government must run in order to service debt. But no one believes Tsipras will meet those obligations no matter what he offers. If you want to vote to make yourself Europe's kept mistress you have to be a lot prettier than Greece.

Correct and absolutely key to any Greek economic recovery. They, unlike many other nations, can and do earn hard currency to purchase what they must have. Euros, dollars, pounds whatever. Emphasis on the must have. Domestically they need to retune their economy to a drachma and so take control of their destiny. I'd say Greece is being hammered but they aren't teenagers and Dad is getting a little tired of his forty year old son demanding access to the checking account. All those bad people who keep saying no to Greece are all elected too and answerable to their constituents. And they aren't very sympathetic to Greece at all.

"Would you keep your money in a bank that would lend it to Greece? I sure as hell wouldn't."

If you're living in a wealthy country you're probably already having some of your taxes go toward bailing out Greece. The IMF and lender governments orchestrate financial bailouts that are underwritten by the taxpayers of wealthier countries including the US. Greece has an obligation to fix its broken tax system and stop having the government be the employer of not-necessarily-last resort, but I agree with The Raven it's being treated too sternly all things considered. If Greece dumps the Euro will the banks have any recourse to make the loans they've already made good? If not taxpayers will cover the bill.

You might be surprised to learn that I agree with you. And there is still a slim chance that something might be salvaged here that would allow the IMF to stop a complete economic collapse. As the quotes the Raven had show, economists are of two minds about which way the Greeks should go on their referendum. I'm not. Europe should help them to leave the Eurozone properly and establish their own currency. And I do mean help before and after. The political will right now seems to be to hammer them and demonstrate the consequences to other shaky members. That's a bad idea even if it is political popular. I would help them build an economy that could re-accede to the Eurozone when they are economically viable. Frankly this should not be left in the hands of the Greeks. Call it a Reconstruction or a Receivership, I don't care. But first they need a currency that can properly price both labor and goods domestically. And, as you say, fix their horribly corrupt and inefficient government.

The entire euro currency was a fantasy and the first chunks of reality are crashing in like lumps of space debris hitting earth. You cannot have a common currency without a central political and fiscal structure so that money can be collected from the wealthy areas and redistributed to the poor ones. That entails a Federal Government of Europe. The Germans, for one, would never stand for that. As the late, great Lord Ridley put it, "The euro is a German racket". The Germans knew that it would always be a cheapened currency and therefore make life very much easier for them to sell their Mercs and BMWs.

In the meantime, watch Italy!

OMG! You're almost right for once. The Euro is fine. But only for countries with the fiscal discipline to manage their own economies. And you are also right that proper monetary policy administered over such a diverse group of states requires a federal government with the power to enforce both wealth transfers and exert fiscal discipline over all their members. Basically all they have is a customs union with a central bank. As Krugman noted this presents some serious problems for countries like Greece that seem incapable of doing math. Lack of control over their currency means they can't devalue it consistent with the need to remain competitive.

The flip side of this is that countries that do operate with their own currency must have their own disciplined central bank. And that means keeping politicians far away from the control levers of monetary policy.

The problem with your analysis is that the Euro Zone has a lot to lose if Greece dumps the Euro. Germany fears the whole single currency system could unravel. Also, even the creditors agree that the austerity measures imposed on Greece and southern Europe have stifled growth and are counter-productive. I suggest you look at DW news for stories on the subject.

This I know. On the other hand Greece cannot be allowed to endlessly borrow money that it can never ever repay. They have to run a primary budget surplus at some point or this will never be possible. It doesn't matter if their economy grows if it doesn't yield the tax revenue to cover operating and borrowing costs. All that will do is reinflate their debt bubble. Greek sovereign debt is now mostly in the hands of other sovereign countries and international institutions. When they default, as seems inevitable now, most of it will be written off anyway. Which is exactly what Greece wants. But they are also essentially demanding the right to incur more debt without fundamentally addressing why they don't have the resources the Greek government needs to meet the obligations they have put on themselves. All the previous bailouts to Greece did was transfer those sovereign obligations from the banking system to entities prepared to take the hit. Which insulated the rest of Europe from Greek default. They knew this was coming.

This is a political problem. As I said before, Europe can afford to keep Greece in their chosen lifestyle but they can't afford to keep all the other countries that will insist on similarly mismanaging their economies. Europe isn't a country. It is a bunch of countries with conflicting interests. Taking the long view it might well become a country like Canada or the US which know how to transfer wealth to economically disadvantaged states or provinces (we actually call these transfer payments and they are a large percentage of our federal budget) but they need to mix it up. Essentially Greeks need to move where there is economic opportunity. Everyone in Europe needs to do that. Then maybe they will see what it means to be a citizen of something called Europe. This nationalism shit is killing them. Again.

According to last evening's DW news default is not yet inevitable. Nothing is sure at this point. The Troika is demanding Greece vote on a bailout package which is largely an unknown commodity. Prime Minister Tsipras is demanding the creditors take a haircut. Germany doesn't want to give up its de facto leadership position and has been backing down. We'll know more after this weekend and the vote on the referendum.

I don't believe it is inevitable but I'm pretty sure Tsipras is going to lose. That would be a shame. Only if he wins can Greece take the proper step which is an orderly exit from the Euro. The rest of Europe and especially the Germans, will need to assist that and, for a change their self interest demands it.

I should have mentioned DW is on the web too at

American and British news sources aren't very good at reporting on "Old Europe." In fact American news is terrible at almost everything. TV news is so bad it's not even wrong. AP, which I used to rely on heavily, has also been ruined by a concerted effort of our wonderful conservatives exactly because it was so widely trusted.

You've probably seen Ken Burns Civil war documentary. There is a scene in it where historian Shelby Foote describes how the civil war actually gave Americans an understanding of what that was. Prior to the civil war vast numbers of people had never been farther than a horse ride away from their place of birth. Their loyalty was often to their state and that was their source of pride. But the war sent them far afield where they fought with other men from other states and even fought against men they perceived as misguided but nevertheless heroic. And when they went home they took a larger vision of America with them. I believe Foote was right about this.

Now I do not recommend civil war as the best way to create a United States of Europe. But I do recommend social and physical mobility in Europe as key to giving Europeans the sense of what being part of a larger polity means. That with a lingua franca (ironically likely to be English) and you have something that begins to resemble a real country that can do what real countries do.

You're probably on to something. For now the EU is just a confederation of states, but in time it will likely more resemble a country. From my POV the progress has already been impressive.

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