Tuesday, July 7, 2015


Greece!  Greece!  Everyone is commenting on Greece, including many of my favorite bloggers: Paul Krugman, Jared Bernstein, Brad DeLong---but as brilliant as they are, they are not the right place to go on this.  With respect to Greece, read Steve Randy Waldman.   He says many of the things I meant to say, but didn’t, and several things I never thought of, or didn’t know.   Here’s a quote from Waldman to tantalize you before I move on:

It is difficult to overstate how deeply Europe’s leaders betrayed the ideals of European integration in their handling of the Greek crisis. The first and most fundamental goal of European integration was to blur the lines of national feeling and interest through commerce and interdependence, in order to prevent the fractures along ethnonational lines that made a charnel house of the continent, twice. That is the first thing, the main rule, that anyone who claims to represent the European project must abide: We solve problems as Europeans together, not as nations in conflict.”

Read his whole post, which is full of detail and insight. 

There are a couple of things I want to add to what Waldman said in his post. 

My first point to add: there are leaders in Europe who complain that the European taxpayers should not be expected to pay Greek debt.  The problem with this complaint is that the European taxpayers will not need to pay the Greek debt any more than they already have.  At this point acquiring Greek debt by other European taxpayers is a sunk cost; the question is how to best protect those taxpayers’ future interests.  The choice before them now is to accept reduced and extended loan repayments with Greece inside the Euro, or accept those same reductions and extensions with Greece outside the Euro. 

Yes, much of the Greek debt is now owned by other European governments or the European Central Bank rather than by private banks, although whether that first “bailout” was to aid the Greeks or the banks is a matter of interpretation.  Here’s what Waldman says about that (echoing many others from 2010 onward, but I think Waldman says it better):

With respect to Greece, the precise thing that European elites did to set the current chain of events in motion was to replace private debt with public during the 2010 first ‘bailout of Greece’.  Prior to that event, it was obvious that blame was multipolar. Here are the banks, in France, in Germany, that foolishly lent. Not just to Greece, but to Goldman’s synthetic CDOs and every other piece of idiot paper they could carry with low risk-weights. In 2010, the EU, ECB, and IMF laundered a bailout of mostly French and German banks through the Greek fisc.”

 And to bail out “mostly French and German banks”, the French and the German governments put up the largest chunks of the bailout money, so they now own the largest chunks of the Greek debt.   But does anyone really think that tax rates in Germany or France will rise if Greece delays repayment of its debts to those governments?  Or even if the debts are completely written off?  The governments of those countries might experience some frustration, but their taxpayers would not notice any change in their lives at all.

A chunk of the Greek debt is still privately owned.  So to the private banks and the wealthy private creditors who still own Greek bonds, I would say: you bought Greek bonds because they offered the highest yield you could find.   The reason the yield was that high was that the bonds were risky, of course.  You knew they were risky.  But for whatever reason, whether you rationally believed the risk was less than the interest rate implied or you were irrationally reaching for yield out of desperation, you bought them.  Well, sometimes taking those high-yield risks works out for you.   But the meaning of the word “risk” is that sometimes it doesn’t.  Suck it up.

 On to my second point: everyone is saying that Greece will face some kind of disaster if they leave the Euro.  My question is: compared to what??? 

Economically, Greece is a massive disaster right now, and with the deals offered by the rest of Europe, will remain a disaster far, far into the future.   Europe is offering Greece a future without hope.  A separation from the Euro and a return to the Drachma might be harsh, chaotic, at times possibly miserable, but at least it has a long-run positive buried in it somewhere: that the Drachma could devalue and make Greece’s exports cheaper and more attractive in the rest of the world, so there could be the long-run hope, at least, of an export-led recovery. 

But continue on the current path?  The Greek banks are already closed, or nearly so.  And here’s a graph that’s been wandering the internet, comparing Greece in the last few years (blue line) to America during the Great Depression (red line).  (I found it here, chart 4): 

If there is another turn of the screws of austerity, as Europe has until now demanded, that blue line will very likely turn even further down, or stay down even longer, or both, with no distant clear prospect that looks like hope.   What is going to create a recovery in that scenario?  Yes, I know, nothing lasts forever, so I assume that eventually things would change, possibly even for the better.  But there’s no obvious process that improves anything anytime soon.

Here’s another graph that I found here:

This charts the downturns during the recent recession in other European countries against the downturn in Greece; the dark blue line at the very bottom, of course, is Greece.  In each case, the GDP is plotted as a percent of that country’s GDP in 2008, which is the white dot on the 100% line.

The Greeks are exhausted by depression, sensibly fed up with austerity, and definitely fed up with haughty condescension from the rest of Europe.  Yes, the various Greek governments since the late nineteen seventies have helped create their own problems, with decades of corruption, political nepotism, and even cooking the books.  But the Greek people didn’t do that, and it’s the Greek people who are now living through a depression with no end. 

What is happening now, to Greece, seems to me to be exactly the opposite of what the financial system is supposed to do.  It’s supposed to allocate money from those who have it to those who can best use it, who can use it, that is, for the best interest of the general economy.  It’s supposed to help the economy, improve the economy.  What is happening now is that the European financial system is sabotaging the nation of Greece, systematically destroying the Greek economy, and crippling generations of Greek people. 

What should happen now?  I don’t know, precisely: but whatever is done should offer hope to the people of Greece.  Not the harsh Austerian hope that says someday, if you only believe, things will get better by magic.  And not the moralizing threat that if they don’t pay up the European austerity enforcer, the Confidence Fairy, will smite them in her terrible wrath.  No, it has to offer real hope, in a reasonable time.  

This is what has to be understood by Greece’s European creditors: any deal they offer has to contain more hope, and better long run prospects for Greece, than Grexit does.  Otherwise why should Greece accept it?


  1. The Greek question has been like an onion: always another layer to discover. And, didn't we already figure out that austerity isn't always the answer?

  2. I wish I could say that everyone understood that.

    I like your analogy...like an onion. There will be other layers.

  3. Just testing a new comments format...