[Marxism] [UCE] views from status quo: 'unnecessary Greek disaster is mainly Germany/Eurogroup's fault'

Dayne Goodwin daynegoodwin at gmail.com
Wed Apr 22 17:34:12 MDT 2015


Greece Is Still a Disaster? Thought So
by Roger Arnold
The Street, April 22
<http://realmoney.thestreet.com/articles/04/22/2015/greece-still-disaster-thought-so>

. . .
Greece is broke, can't service its sovereign debt, and there is
nothing that can be done, other than debt forgiveness, to change that.
The math is absolute. The creditors, however, are not willing to offer
the debt forgiveness necessary to allow labor and capital to be freed
up for productive purposes so the country can grow into an ability to
manage its debt. Nothing about this situation has substantively
changed in the past five years.
. . .
I don't know what the final solution and resolution will be. Maybe the
Germans capitulate and offer a substantive debt restructuring. Maybe
the Greeks default and stay in the Eurozone and the common currency,
or maybe they default and leave.

The most important issue, in my opinion, is the damage the Germans
have caused to themselves by refusing to accept some blame for the
situation to have gotten to this stage, and as a result offer a debt
restructuring that will allow the Greeks to stay.

Greece should not have been allowed to enter the EZ and use the euro.
It didn't meet the entry qualifications. It was the Germans that
pursued a Greek entrance, and after that made debt capital available
to Greece largely used to purchase German goods.

This is similar to subprime residential mortgage lenders pursuing
making loans to people who clearly did not have the financial capacity
to service the loans and then refusing to accept responsibility for
the situation when the mortgagor defaulted.

More importantly, if Greece leaves the EZ, the Germans are going to be
in a bind. If they try to prevent a recovery of the Greek economy by
way of legal maneuvering as a means of setting an example for other
countries considering the same, it could give rise to the nationalist
tendencies that have been an integral part of the continent forever
and help push other countries to leave.

If, however, the Germans are too lenient with respect to a Greek
recovery, other countries could be encouraged to pursue the same for
that reason.

Further, if Greece succeeds in re-establishing itself economically
after leaving the EZ, regardless of what the Germans do, other
countries could become convinced that leaving the zone is not fraught
with pitfalls, as is the common current belief.

The bottom line is that a Greek default is inevitable in order for
Greece to recover. There are multiple ways a default and restructuring
could be accomplished allowing Greece to stay...  For whatever reason,
and I cannot explain why, those avenues have not been pursued.
. . .


The Greek Stand-off: A Proper Sense Of Perspective Is Urgently Needed
by Andrew Watt
Social Europe, April 16
<http://www.socialeurope.eu/2015/04/greek-stand-off-proper-sense-perspective-urgently-needed>

Media reports indicate that the stand-off between the new Greek
government and its creditors is going to the wire. At stake is
Greece’s continued membership of the euro area. Much has been written
on the lack of progress and understanding between the two sides. In
many cases reports are based on little more than gossip, often
launched, one can safely surmise, with an explicit view to influencing
the outcome of the negotiations. Seemingly every conceivable argument
has been dragged into the debate, no matter how far back in history.

What is needed is a focus on mutually beneficial solutions. And as a
precursor to that policymakers urgently need to get a proper sense of
perspective, and this with regard to three dimensions in particular.
First, the risks of Greek exit. Second, the size of financial
transactions at stake. And third the different time horizons of the
different policies under discussion.

The risks attached to Grexit are incalculable. They are subject to
what economists call “fundamental uncertainty”: we cannot draw up a
remotely plausible schedule of costs and their likely probabilities as
we can only guess how “Grexit” would play out. What is fairly certain
is that the short-run costs for the already battered Greek population
would be substantial. The remainder of the euro area might now be in a
stronger position to initially weather the immediate economic and
financial fall-out of exit and default (although this is by no means
certain).

The fact remains that the nature of the monetary union will have
fundamentally changed. With exit and default established as policy
options, every incipient crisis will immediately lead to a wave of
destabilising speculation. With a devalued currency and restored
monetary autonomy it is conceivable that Greece, after a further
economic contraction, enjoys a strong recovery. This, too, would
strengthen the centrifugal forces in the remainder of EMU. Under these
circumstances nobody would countenance painful adjustment and
austerity followed by default and exit. The rational thing for an
indebted member state to do in future would be to exit early. For
these reasons there is an unquantifiable but certainly very
substantial risk that Grexit would be merely a prelude to the
unravelling of the currency union as a whole. (On top of these
considerations come a range of geopolitical issues relating to Russia
and the Balkans that I will not dwell on here.)

The question is: what could possibly justify – if we assume a
reasonably high degree of rationality on the part of the actors
involved – taking such risks, either on the Greek side or that of its
European “partners”? The implication must surely be that the cost of
reaching agreement is extremely high. Except that on any rational
basis it is not.

Consider. At immediate stake is the disbursement of aid totalling EUR
7.2 billion. This support had already been agreed, but is being
withheld because the new Greek government has rejected adhering to the
conditions of the agreement. Almost certainly additional funds will be
required subsequently. However, past debt rescheduling agreements mean
that Greece’s repayment schedule is very light after a spike in the
next few months. Moreover, it needs to be recalled that, prior to the
recent exacerbation of Greece’s economic problems, which was caused by
the political stand-off, the country was posting a small primary
surplus and had returned to modest economic growth. Given extremely
low interest rates, the basic conditions would therefore be in place
for a steady reduction in debt-GDP ratios.

For the sake of argument, let us almost treble the immediate lending
volume so that we are talking about a round number: EUR 20 billion.
That is a very large number, right? No it is not. The claim that it is
reveals the disastrous failure of politicians and the media to get a
sense of perspective. First of all it ought to be obvious that it
pales into insignificance compared with the risks identified above. It
is akin to a householder refusing to pay, say, EUR 200 in insurance
premiums although s/he knows their EUR 350,000 domicile is at high
risk of being hit by a tornado.

Secondly, we need to evaluate the loan requirement against the
background of what is happening in parallel to the Greek stand-off. In
a desperate attempt to avoid deflation and kick-start recovery, the
European Central Bank is purchasing EUR 60 billion worth of government
securities every month. It intends to do so for a period of at least
18 months. In other words, what would be necessary to tide Greece over
for the next few months and put in place the minimal conditions for
economic recovery is being “spent” by the ECB every ten days. (By the
way Greek bonds are excluded from such central bank purchases.) Or the
EUR20 billion represents less than 2% of the envisaged volume of QE.

More generally, the euro area as a whole and the periphery in
particular are in dire need of higher nominal spending and investment.
Meanwhile solvent sovereign governments can borrow long-term in real
terms for nothing. Indeed investors are even paying to park their
money with safe-harbour governments. Under such conditions it is a
no-brainer – at least in macroeconomic terms – to provide funding to
support spending and investment in Greece and indeed elsewhere in the
euro area. Yet politicians and the media are claiming that providing
further support for the Greek government and the people who elected it
constitutes an unbearable burden. This is cognitive dissonance on a
massive scale – or if not it is something more sinister and nefarious.

The last element on which a sense of perspective urgently needs to be
gained relates to the differing time scales of bailouts, so-called
structural reforms and their (posited) economic benefits. Greece has
long-standing supply-side weaknesses. And it has a short-term
liquidity problem. (Contrary to what is widely claimed it does not
have a fundamental insolvency problem, provided something like normal
economic conditions can be re-attained, which requires actions by
other actors and not just Greece.) Economic reforms, if they are to be
effective, need to be carefully designed. They need time to be
implemented and, above all, they need time to make their effects felt.
A considerable literature suggests, plausibly, that in depressed
economic conditions, even reforms that make sense long-term can have
negative short-run effects (because they weaken demand). Somewhat
similar considerations apply to the issue of privatisations (which may
make sense long-term, but not as a fire-sale). Lastly, in recent years
– and again contrary to much media commentary – Greece has undoubtedly
carried out many so-called structural reforms (see also here:
<http://www.socialeurope.eu/2015/04/excessive-austerity-not-a-lack-of-structural-reform-is-holding-back-investment-in-greece>
)

Given all this, the seemingly common-sense deal “money for reforms” is
actually very hard to implement in practice and can be highly
problematic. In purely economic terms at least, the whole furore about
“lists” of reforms makes little sense as a way to ensure fiscal
sustainability. Such demands are driven by political, not economic
considerations. The way to achieve sustainability in the timescale we
are considering – namely weeks and months – is by removing the
Damocles Sword of default and exit and boosting aggregate demand. This
is not hard to understand: it is exactly the same
enlightened-self-interest thinking that underpinned the post-1945
Marshall plan.

On structural reforms themselves, sensibly, Greece has turned to the
ILO and the OECD to seek advice on a reform program that is
longer-term in orientation and, hopefully, less driven by ideological
preconceptions about effective supply-side structures than at least
some of the measures imposed in the last few years. A very good
starting point would be the 200-page ILO report “Productive Jobs for
Greece”, which goes out of its way to emphasise the
medium-to-longer-run nature of the reform process and the need for
action by European partners, not just within Greece itself.

Critical decisions need to be taken by policymakers in Greece and the
EU in the coming days and weeks. It is vital that these decisions are
based on a realistic assessment of the various costs/risks and
benefits of the different courses of action. Currently, alas, the
debate appears to be dominated by a poisonous mix of moralising,
grandstanding, macroeconomic illiteracy and (self-)deception. This
will have to change very quickly, otherwise we are, entirely
unnecessarily, in entirely uncharted waters. The history books will
not be kind to those responsible. Think for a moment about how history
regards those responsible for international negotiations after the
First and after the Second World War. What is needed is simply a deal
that gets Greece back on its feet again. The costs of such a deal are
minimal, the benefits huge, not just for Greek citizens but for those
of all EMU countries.
   _   _   _   _   _   _
Andrew Watt is Head of the department Macroeconomic Policy Institute
(IMK – Institut für Makroökonomie und Konjunkturforschung) in the
Hans-Böckler Foundation. He was previously senior researcher at the
European Trade Union Institute, where he coordinated research on
economic, employment and social policies. For many years he has
focused on European economic and employment policies and conducted
European-comparative socio-economic research. Special interest:
economic governance in the euro area and the coordination of
macroeconomic policies and wage setting. He has served as an advisor
to a considerable number of European and national institutions, think
tanks, foundations and political parties.




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