I'm not usually an Ambrose Evans-Pritchard fan, but he nails this one. I've excerpted some of the key point, but I suggest reading the whole post. He concludes with a link to Keynes's "The Economic Consequences of the Peace".
Rarely in modern times have we witnessed such a display of petulance and bad judgment by those supposed to be in charge of global financial stability, and by those who set the tone for the Western world.
The spectacle is astonishing. The European Central Bank, the EMU bail-out fund, and the International Monetary Fund, among others, are lashing out in fury against an elected government that refuses to do what it is told. They entirely duck their own responsibility for five years of policy blunders that have led to this impasse.
They want to see these rebel Klephts hanged from the columns of the Parthenon – or impaled as Ottoman forces preferred, deeming them bandits - even if they degrade their own institutions in the process.
If we want to date the moment when the Atlantic liberal order lost its authority – and when the European Project ceased to be a motivating historic force – this may well be it. In a sense, the Greek crisis is the financial equivalent of the Iraq War, totemic for the Left, and for Souverainistes on the Right, and replete with its own “sexed up” dossiers.
Does anybody dispute that the ECB – via the Bank of Greece - is actively inciting a bank run in a country where it is also the banking regulator. In this it has succeeded. The latest data suggests that deposit flight from Greek banks has jumped from €400m a day to nearer €1.5bn.
The guardian of financial stability is consciously and deliberately accelerating a financial crisis in an EMU member - with possible risks of pan-EMU and broader global contagion – as a negotiating tactic to force Greece to the table....This post is a severe smackdown. Read the whole thing. Evans-Pritchard points out that it has standard operating procedure based on precedent.
That makes two coups d’etat. Now they are angling for a third.
The creditor power structure has lost its way...The Telegraph
Greek debt crisis is the Iraq War of finance
Ambrose Evans-Pritchard
It is so popular to blame the stronger side and I agree. But the differences what troika demanded and Greece was willing to do were so tiny really if you consider the whole picture. Syriza never had a meaningful plan to end austerity. Arguing to have few % points of smaller primary surplus is not ending austerity. That is just continuing with It. Both sides are utopists stuck in their federal dream.
ReplyDeletePossible bad outcome out of this might be the far right advancing in Europe since the left cannot do it, and people have no choice.
The main question in Greece is where is the spending going to come from?
ReplyDeleteNobody has asked that and nobody has answered it - other than to suggest wholesale asset stripping.
Why are bankruptcy and default such totems that inject such fear into governments? The Eurozone is setup to *require* default as a way of informing creditors that they have over lent.
The failure here is the failure to include the resolution process for sovereign debt in the agreements. If states are to be turned into mere corporations then you need a Chapter 11 process for those corporations.
Neil,
ReplyDeleteRe your question “where is the spending going to come from?” my answer is that when Greece regains competitiveness, money will flow into it from exported goods and services. But to become competititve it just has to continue enduring austerity so as to get its costs down. Of course that’s brutal, but that’s common currencies for you.
Also things would have been slightly better with a full reserve bank system (or at least vastly higher bank capital ratios). In the latter scenario, bank insolvency is unlikely or near impossible, depending on how high the capital ratio is. In that scenario, Greece could have just said to private banks: “we’re effectively bust and we aren’t paying you”.
Bank shareholders would have taken a hit instead of the ECB and IMF being drawn into the mess. Greece would still have suffered austerity (in the form of paying astronomic interest rates for any money it borrowed). But at least we wouldn’t have had the spectre of Greeks (the world’s experts at cadging money off other people) trying to get money off public bodies like the IMF and ECB.
"Re your question “where is the spending going to come from?” my answer is that when Greece regains competitiveness, money will flow into it from exported goods and services. But to become competititve it just has to continue enduring austerity so as to get its costs down. Of course that’s brutal, but that’s common currencies for you."
ReplyDeleteBut this is a fallacy of composition Ralph. Not every nation can export itself to life.
Plus, if you want to persue a Road To Bangladesh strategy of low wages, why not just float the currency? Then you get competitiveness. If you are going to persue a Road to Bangladesh strategy, at least persue the best strategy rather than the second or third best way of doing it!
So really the EU powers that be should be supporting Grexit.
Random, If Greece exports more to other Euro countries, I agree the initial effect is to drain money and demand from other countries. So that’s just beggar my neighbor. But the resulting lack of demand throughout the Eurozone is easily dealt with by standard stimulatory measures, i.e. boosting demand THROUGHOUT the Eurozone. The measure which seems to be favored by most MMTers, i.e. simply creating fiat and spending it (and/or cutting taxes) would achieve the desired level of stimulus.
ReplyDeleteRe Grexit, seems to me the Euro authorities are now tired of Greece and are pushing it towards Grexit.
"my answer is that when Greece regains competitiveness, money will flow into it from exported goods and services."
ReplyDeleteThat's a fallacy of composition. There simply isn't a greenfield of export goodies waiting for somebody to pick them up - within the Eurozone or without it.
One of the major exports of the Greek nation is the sun on the islands. People don't fly to a country in turmoil no matter how cheap the trip is. They'll go to the dozens of other competitors regardless of the price.
That's the failing of marginal supply side nonsense. It doesn't work because it is not a closed system and people don't behave like the theory suggests. Somebody without risk has to operate the starter motor or the risk gap never closes. And that job falls to government which needs to have to tools to reboot things.
"Also things would have been slightly better with a full reserve bank system"
ReplyDeleteExcept the central bank would have had to issue more of its liabilities up front to ensure that enough was invested in the banks to make them viable.
So the ECB wouldn't then have had the option to decide on the level of ELA, because the entries would already be circulating in the system.
That's the bit you keep missing. In an insured system the central bank has a much smaller balance sheet than it does in a full reserve system - because the insurance is the contingent asset and liability that equates the two.
The ELA process is just changing the contingency into reality - slowly over time.
As I've demonstrated before there is no difference between an insured or in specie banking system and no magic in full reserve. It's just a different set of numbers representing the same thing.
to become competititve it just has to continue enduring austerity so as to get its costs down (Ralph Musgrave)
ReplyDeleteWell, not even neoclassical economists agree with that proposition.
Here's what a former IMF official has to say:
...the second set of IMF analyses:
Austerity in a weak economy is self-defeating (Blanchard and Leigh 2013). As the budget deficit is reduced, the economy slows down, and the ability to repay debt is undermined. Indeed, austerity can be self-defeating (Eyraud and Weber 2013).
Here is how this principle applies today to Greece. Recall that prices in Greece have been falling for about two years now. Since debt repayment obligations do not change when businesses sell at lower prices or when wages fall, businesses and households struggle to repay their debt in a deflationary environment. Investment and consumption are held back, the government receives less revenue, making its debt repayment harder. If austerity is imposed in this deflationary setting, the weaker demand forces prices and wages down faster, making debt repayment even harder. This is the so-called debt-deflation cycle. Greece is in a debt-deflation cycle.
For this reason, increasing the VAT tax burden, for example, is a terrible idea. Japan—which, despite its troubles, is an infinitely stronger economy than Greece—only recently got its wind knocked out by a premature increase in VAT rates. To be sure, the VAT rates will eventually need to be raised, and pensions and wages will need to be scaled back. But setting a demanding timeline now—before growth is firmly established—will keep Greece trapped in a debt-deflation cycle. The debt-to-GDP ratio, which was about 130% of GDP when the Greek crisis began in 2009 has risen to about 180%, and will keep rising.
Link here: http://www.voxeu.org/article/programme-greece-follow-imf-s-research