Surowiecki on Greece

Greece’s Next Move by James Surowiecki

March 9, 2015

As soon as the battle between Greece and its creditors ended, with the two sides agreeing to a four-month extension of Greece’s financial bailout, the battle over who had won began. Wolfgang Schäuble, the hard-line German finance minister, declared that the new Greek government, led by the leftist party Syriza, had been forced into a “date with reality.” Greece’s Prime Minister, Alexis Tsipras, called the agreement a “decisive step” that would help end austerity and lift the Greek economy from its deep depression, and the Greek public seemed largely pleased with the deal.

At first glance, Tsipras’s positive comments look like spin. Syriza came to power vowing to win a reduction in Greece’s enormous debt burden, to reject the budget commitments that the previous Greek government had made, and to liberate Greece from supervision by the so-called Troika—the European Central Bank, the International Monetary Fund, and the European Commission—that has been vetting all the country’s fiscal decisions in recent years. Yet the new agreement makes no provision for debt reduction. It says that the extension will take place only within “the framework of the existing arrangement.” And Greece’s plans will still be evaluated by the same three institutions. From that angle, the Greeks went 0 for 3.

If you look a little harder, though, you can see that Greece won important breathing room. Heading into the negotiations, the country faced budgetary targets for 2015 and 2016 that would have kept the economy stuck in recession—it has shrunk by thirty per cent since 2008—and prevented the government from doing anything about poverty levels that many observers say constitute a humanitarian crisis. The targets are now up for revision in future talks—a significant concession. According to Mark Weisbrot, the co-director of the Center for Economic Policy Research, “European officials were telling Greece it was their way or the highway. That’s changed. I think Europe blinked.” James Galbraith, an economics professor at the University of Texas at Austin who was in Athens and Brussels to assist the Greek team during the negotiations, told me, “Victory may be too strong a word. But you can certainly call it a successful skirmish. This has given Greece some room to maneuver. Not a lot, but more than it had before.”

In essence, the agreement kicked the can down the road for four months—which suits Greece fine. In recent weeks, money had been pouring out of the country, leaving the banking system on the verge of collapse. And Syriza officials inherited an administrative state that was barely functioning. As Galbraith said, “When they went to the Ministry of Finance for the first time, there was not a document, not a computer. The Wi-Fi was not turned on.” Now Syriza has a little time to deliver on the promises it’s made, both to voters and to Europe.

The real challenge is satisfying those two constituencies, which want very different things. And though there’s space for negotiations, Greece is still in thrall to European institutions: both the E.C.B. and the I.M.F. have already voiced concerns about the reform plans that Greece submitted last Monday. If you owe three hundred billion euros and need Europe to save your banking system, you’re bound to be supervised, but Greece has so far negotiated without its most powerful weapon—the threat of leaving the euro and defaulting on its debts. Such a move, known as the Grexit, was off the table, because Syriza had campaigned on staying in the eurozone, and polls show that this is what most Greeks want. But they may soon need to reconsider.

The conventional wisdom is that returning to the drachma would be a catastrophe for Greece. Certainly, it would be traumatic: there would be an immediate devaluation; the value of savings would tumble; the price of imported goods would soar. But Greek exports would become cheaper and labor costs even more competitive. Tourism would likely boom. And regaining control of its monetary and fiscal policy for the first time since 2001 would give Greece the chance to deal with its economic woes. Other countries that have endured sudden devaluations have often found that long-term gain outweighs short-term pain. When Argentina defaulted and devalued the peso, in 2001, months of economic chaos were followed by years of rapid growth. Iceland had a similar experience after the financial crisis. The Greek situation would entail an entirely new currency rather than just a devaluation. Weisbrot says, “It could work. You have to go through a crisis, but then the economy would recover, and probably more quickly than people expect.” Although Europe is much better equipped to deal with the economic consequences of a Grexit than it was three years ago, the political consequences would be devastating to the European project. That’s why, even if Greece wants to stay in the euro, a credible Grexit threat could help keep Europe from pulling the leash tight again.

For now, Syriza will try to change Europe from within. The fight over Greece’s budget isn’t just a fight about finances; it’s a fight about the ideology of austerity and about whether smaller countries will have a meaningful say in their own economic fate. As Weisbrot told me, “Countries like Greece have lost sovereign and democratic control over the most important macroeconomic policies that any country has. Greece is trying to take some of that control back.” The skirmish may have been successful. The real battles are yet to come. ♦

Greek Deal - Monday and four months

Naked Capitalism is pessimistic

Yves Smith:

"“Moreover, Syriza has already shown a propensity to overpromise and underdeliver.”"

They've been in office three weeks!!!

Say Greece caved. We'll see if they're wrong again.

Greek Deal by Robert Waldmann

I am trying to understand what, if anything, was agreed by Greece and the rest of the EU yesterday. I’m not sure they even agreed to kick the can down the road.

I think Matt O’Brien wrote a very good explainer for wonkblog at the Washington Post (as usual — he is well worth following). His bottom line seems to be that, while the agreement presents itself as a Greek surrender, they haven’t conceded the key point.

Greece got Europe to concede that it “will, for the 2015 primary surplus target, take the economic circumstances of 2015 into account.” In other words, Greece won’t have to do the austerity it was supposed to this year.

However, the rest of Europe hasn’t conceded yet either, since they have not agreed to rollover any loans Liz Aderman and James Kanter report for the New York Times

On Monday, Greece must send its creditors a list of all the policy measures it plans to take over the next four months. If the measures are acceptable, European finance ministers could sign off on an extension of the bailout agreement on Tuesday.

So the result of the dramatic agreement is that Greece hasn’t promised further austerity in exchange for a bailout and the rest of Europe hasn’t promised a bailout. They have delayed for four more days deciding whether to delay for four more months the inevitable concession that Greece will not pay its foreign debts.

So all in all the best that could be hoped.

Frances Coppola:
Greece and the EU: a question of trust

http://coppolacomment.blogspot.co.uk/2015/02/greece-and-eu-question-of-trust.html

"I have been mulling over the terms of the agreement between Greece and the Eurogoup. Initially, I thought that Greece had ended up with an appalling deal, getting almost none of its aims and losing control of EFSF funding for its banks. The retention of future primary surplus targets under the November 2012 agreement - only the target for this year is under review - seemed particularly harsh.

"But then I listened to Pierre Moscovici explaining the thinking behind the deal, and suddenly the penny dropped. We've all been missing the point. Holger Schmieding of Berenberg Bank was on the right lines - he commented recently that the real problem in the Greek negotiations was that trust had broken down. Indeed it has. But not recently. Trust in Greece broke down a long time ago."

While this deal isn't the best one, or the most moral one, it was likely the best political deal to be had. Syriza will need the four months to attempt a restructuring of its fiscal management - no government could implement a fiscal plan in a few weeks. And the apparent Schaueble plan was an implicit ultimatum: Syriza U-turn to the status quo, or deal with the capital flight that would start in earnest next week.

So all in all, given the political reality, this was likely the best possible outcome. I hope Syriza will find a way to build on this moment.

Carthaginian Peace

Athenae Delenda Est by Krugman

OK, this is amazing, and not in a good way. Greek talks with finance ministers have broken up over this draft statement, which the Greeks have described as “absurd.” It’s certainly remarkable. On my reading, here’s the key sentence:

The Greek authorities committed to ensure appropriate primary fiscal surpluses and financing in order to guarantee debt sustainability in line with the targets agreed in the November 2012 Eurogroup statement. Moreover, any new measures should be funded, and not endanger financial stability.

Translation (if you look back at that Eurogroup statement): no give whatsoever on the primary surplus of 4.5 percent of GDP. 

There was absolutely no way Tsipras and company could sign on to such a statement, which makes you wonder what the Eurogroup ministers think they’re doing. 

I guess it’s possible that they’re just fools — that they don’t understand that Greece 2015 is not Ireland 2010, and that this kind of bullying won’t work. 

Alternatively, and I guess more likely, they’ve decided to push Greece over the edge. Rather than give any ground, they prefer to see Greece forced into default and probably out of the euro, with the presumed economic wreckage as an object lesson to anyone else thinking of asking for relief. That is, they’re setting out to impose the economic equivalent of the “Carthaginian peace” France sought to impose on Germany after World War I. 

Either way, the lack of wisdom is astonishing and appalling.

It was pointed out that Varoufakis alluded to the Melian dialogue.

Greece

Yanis Varoufakis: No Time for Games in Europe

Greece

Greece’s Excess Burden by Krugman

What’s the state of the Greek crisis? I have no idea, or at any rate no idea beyond what any diligent reader of press reports might glean. I do, however, have a pretty good idea of what Greece is asking for on the fiscal side, and it might be useful to talk about the arithmetic behind that position.

Here’s the basic point: Greece has, through incredible sacrifice, managed to achieve a primary budget surplus — a surplus excluding interest payments — despite a depression-level slump. That surplus is believed to be currently running at about 1.5 percent of GDP. The Greek government is not calling for a return to primary deficits; as I understand it, it is merely proposing that it be allowed to stabilize the surplus at that level, as opposed to raising it to 4.5 percent of GDP, a number that has few precedents in history.

Now, you might think that 3 percent of GDP is not that big a deal (although try finding $500 billion a year of spending cuts in the United States!) Given the macroeconomics, however, it is much bigger than it looks. Much like the reparations the Allies tried to extract from Germany after World War I — although for somewhat different reasons — forcing Greece to run huge primary surpluses at this point would impose a very large “excess burden” over and above the direct cost of the surpluses themselves.

First, austerity has a very negative effect on output in a country that does not have its own currency, and therefore cannot offset the fall in demand with monetary policy. The attached figure shows what was supposed to happen to Greek GDP according to the original 2010 request for a stand-by arrangement – that is, the original austerity-and-internal-devaluation plan — compared with what actually happened. There’s little question that the huge shortfall reflects the adverse effects of austerity, which the IMF admits it greatly understated. At this point a reasonable estimate for the Greek multiplier is on the order of 1.3.

This multiplier effect has immediate fiscal implications. Suppose that Greece were to spend somewhat more than contemplated under the current agreement; the primary surplus would surely be less than would otherwise be the case, but the effect would be much less than one-for-one. We can summarize the actual effect of higher government spending (ΔG) on the primary surplus (ΔPS) as follows:

ΔPS = -ΔG*(1-μτ)

where μ is the multiplier and τ is the marginal effect of a one-euro rise in GDP on revenues and/or cyclically linked spending like unemployment benefits. Say μ = 1.3 and τ=0.4, both more or less in the middle of the evidence; then higher spending would reduce the primary surplus by less than half the initial spending rise.

Or to turn this around, to achieve the extra three points of surplus the troika is demanding, Greece would actually have to find more than 6 points of GDP in spending cuts or tax hikes. And note that the multiplier is almost surely greater than one; this means that the fall in government spending would induce a fall in private spending too, which is an additional excess burden from the austerity.

The point, then, is that by demanding that Greece run even bigger primary surpluses, the troika is in effect demanding that Greece make sacrifices on the order of an additional 7.5 or 8 percent of GDP as compared with the standstill the Greek government proposes.

Greece

Greece agrees to negotiate with the Troika on Friday.

The procedural step forward came after the ECB's Governing Council extended a cash lifeline for Greek banks for another week, authorizing an extra 5 billion euros in emergency lending assistance (ELA) by the Greek central bank. The council decided in a telephone conference to review the program on Feb. 18.

Monday was the deadline for the bridge deal, but apparently that's pushed until Wednesday. Euro zone finance ministers will meet Monday.

Davies on Greece

Greece: looking on the bright side … by Daniel Davies