Greece's Debt Crisis

[Jezza]

The news of Greece's debt crisis has escalated in the last few days with the Greek government announcing that it would be shutting down banks for at least ten days last weekend and this Sunday a referendum will take place in Greece to decide whether or not Greece is to accept the bailout conditions proposed by the EU, IMF and the ECB. The Greek Prime Minister has encouraged citizens to vote 'no' this Sunday.

With the Greek debt crisis still lingering and impacting other nations a part of the EU and possibly global markets what's everyone's take on the current situation here and what would be be the best response to the ongoing crisis?

Here's a good rundown from the ABC news website underpinning the five key points in understanding the crisis.

http://www.abc.net.au/news/2015-06-29/five-things-you-need-to-know-about-the-greek-debt-crisis/6581818

[Mugwump]

It�s a pretty good summary of a terrible situation, Jezza. Some other things that the article might have said but did not :

1. Once again Europe has shown its preference for grand ideas and intellectual hubris over prosaic reality. We are lucky to belong to a tradition that (usually) resists that.

2. Nobody knows what repercussions a default has, but it�s unlikely to be like Lehmann brothers. That happened quickly. This has been far more predictable, and most banks have been able to hedge away their risks (often transferring them to the ECB). No-one can predict markets with certainty, but the decline in share values across the world as a result of the Greek default seems an over-reaction.

3. The Greek situation should be a reminder to all of us that market economics, important as they are, do not alone make prosperity. Strong, incorruptible state institutions are the other half of prosperity. Poor Greece has been horribly failed by its institutions. We are lucky, despite our whingeing.

4. Ultimately, the Euro is a centrifuge, throwing countries and lives apart. Monetary union requires several things, but critical among them are common fiscal decision-making, a common legal framework, a common banking system, and a permanent preparedness to transfer funds from one part of the union to another. That requires a sense of national identity. The Euro has none of these things to support it, though highly-intelligent people (educated fools) designed it and defend it. We should remember that. Having intelligent people running things is better than the alternative. But it is not enough.

5. Greece is falling into penury and civil disintegration because its economy and institutions cannot compete with Germany. Time is the great examiner. Examine a little more closely, and neither can those of Portugal, Spain, or even France. When one of these falls, then the abyss will surely open.

6. There will be usual blame game played using austerity economics, the banks (especially Goldman), the Greek people and their useless government, heartless Germans, Greek oligarchs, etc. They all bear some responsibility � especially the Greek government, which has failed in the most strategic respects. But they are the gears of destruction, not the engine. The engine is the Euro, and the bloated, remote, undemocratic mass that the EU � that noble project � has become.

[watt price tully]

I liked the Greek treasurers comments a few days ago along the lines of:

Why does it cost 3 times as much to build a kilometre of road in Greece than it does in Germany?

Greece is still very much a developing country - it is a mistake to consider Greece a modern industrial country.

[stui magpie]

I read an article that i can't find now that said Greece should never have joined the EU, the Austerity measures were basically what drove them into the current depression (they were in the shit already, but the Austerity capped their economy) and their only economic hope is to bite the bullet and leave the EU because more austerity will keep the country in depression indefinitely.

Hope it all works out for the best.

[Tannin]

My thoughts are much along the same lines as Mugwamp's. To his excellent post I'd add just a couple of points - both points I suspect he would not disagree with:

(1) The fault here lies as much with Germany as with Greece. Germany has powered to huge success on the back of (among other things) the massive under-valuation of the German currency. Bosch power tools and BMW cars sell like crazy partly because they are good products, and partly because they are so cheap - and the reason they are so cheap is because the Euro is much lower than it should be because Greece and Spain drag it down. Germany loves it!

(1) (b) The Greek economy is a basket case because its products are too dear to compete on export markets or even compete with the flood of cheap imports coming into the country - and the reason they are so dear is because the Euro is much higher than it should be because Germany and the Netherlands drag it up.

Greece desperately needs a weaker currency. A weaker currency would dry up imports (they get too dear) and make exports boom (a week in a Greek resort suddenly costs half what the same week in a Dutch resort costs; a Greek olive costs half as much as that same olive grown in Italy. This is the whole point of floating currencies: they auto-stabilse economies and promote health, efficient operation.

In other words, my Point 1 is largely a restatement of Mugwamp's Point 4.)

(2) We should not forget the role of gross corruption and greed on the part of wealthy Greeks. Greece was only recently a very nasty military dictatorship, remember, and the power of wealthy Greeks over the government doesn't seem to have changed since those days. The Greek billionaires have carved themselves out a wonderful existence where for all practical purposes they contribute nothing to the country (or to any other country). The tax rorts for the very wealthy are simply insane. For example, the entire shipping industry pays no tax. None. See http://www.spiegel.de/international/europe/the-crisis-has-yet-to-hit-the-wealthiest-greeks-a-866693.html

Historically, the ultra-wealthy in Greece have been nothing more than parasites on their not-too-wealthy nation. Over the last few decades, however, this notion of taking everything and paying nothing has spread like a cancer through Greek society to the point where now practically every man, rich or poor, thinks that he is and rightfully should be exempt from his obligations and some other poor bastard should pay for it all.

[Tannin]

[Mugwump]

^ Tannin, I do broadly agree with your two points, but with a few nuances on point 1 (point 2 is unarguable - though in a way, it's just another aspect of the ineffective, clientelist government) :

1. I'm not sure that Germany is "at fault" as much as Greece, though they are absolutely not innocent, either. The Greeks bought German stuff - from Siemens trains to BMWs - because they were lent money by European banks. These were not necessarily German banks, but French, Dutch, etc. The Germans just happen to be the most successful player in a game that everyone was playing, and they didn't ask Greece to join this particular poker game, lose, then not pay up. Nobody comes out of this well. But mainly, it is a Greek problem.

2. Greece sure needs a responsive currency, but that is only a mechanism, not a solution. The drachma was a pretty lousy instrument as well, because currency devaluation without reforming competitiveness is a little like a failing company allowing its share price to devalue rather than dealing with poor products and cost structure. That analogy is not perfect, but it's a useful way to think about it. The Euro is forcing Greece to change things that must change if it is to become the type of country it aspires to be. It's just too much, too fast, because it cannot be "managed" within the Euro political-monetary construct.

[pietillidie]

[Tannin]

I concur with all of the points above - excellent posting gentlemen! - I'm just picking up on a point of emphasis here, not disputing any of that.

My theme was not the Siemens trains and BMWs Germany sold to Greece, it was the trains and BMWs they sold to China and Australia and the US and everywhere else on highly advantageous terms, which only existed because the Euro was undervalued relative to the German economy. (This because of Greece and other under-performing parts of Europe bringing the unified currency down below its natural level relative to the economy of Germany.) Similarly, this very success of the German (and Dutch) economy pushed the Euro up relative to the Greek economy, making it virtually impossible for Greece (or Spain) to trade its way out of difficulty.

Now in a proper country - not the half-arsed not-quite-a-country that is Europe - there tends to be a balancing between regions, both through market forces and through explicit cross subsidies, so over time, these regional imbalances tend to even out again.

(Here in Australia, for example, the south-eastern states (Vic and NSW) subsidised Queensland for decades, but Queensland now pulls its weight. Western Australia was heavily subsidised by Victoria and NSW for almost 100 years (assisted by Queensland more recently), looked like pulling its weight for a short time at the peak of the mining boom, and is now crying poor again. But the West Australians are serial whingers and it's Sydney to a brick that they will never repay a tiny fraction of all the money we sent their way - they will secede before they'll return a penny to the hated eastern states. Similarly, the three tiny basket-case economies (SA, Tas & NT) continue to get substantial hand-outs every year to keep them afloat. And barriers to movement of both people and money between the states barely exist, so the market tends towards evening things out all else being equal.)

None of this applies in Europe. As I think it was Mugwump mentioned earlier, they have a currency union but no economic union. And that has been as much a magic lottery win for Germany as it has been a killer disease for Greece.

Mind you, as I think we all agree, the quality of Greek government has been such that no imaginable improvement to the way Europe implemented the Euro could have saved them. To put Mugwump's point another way, currency devaluation is like a laxative: it can make the world of difference to a moderate case, but if you've spent the last 30 years stuffing house bricks up your rectum sideways, no amount of laxative is going to cure you.

[pietillidie]

^Yes, totally agree with that point, too. Krugman was criticised for attacking the convenient German position, but I'm yet to hear any sensible argument against it.

I think the more we post on this, the more obvious it is that the usual trite dualisms are conveniently structured to help groups get what they want, rather than help the region progress.

Plenty of groups, including banks, don't want to take responsibility for the bad financial decisions they've made. Others don't want the EU project to evolve, but instead want it to ossify into an arrangement which benefits them now they have the seat of power. Some want to pile on the EU because they still haven't gotten over its refusal to kowtow to Anglo-American self-entitlement. Some are too conveniently cosy with Russian wealth; still others are clinging to dated Cold War ideological nonsense, while some are conveniently pushing for division for the sake of military contracts.

And on and on goes the motivated self interest.

On a related note, I have been trying to narrow my interests down to general stability and access. I have no near-term view on what Greece should do because it's beyond my comprehension, but broadly the stability of the EU needs to be strengthened (monetary and fiscal policy alignment, for example), and the whims of elite banking capital, elite landed wealth, elite natural resources wealth, unproductive intellectuals and angry mobs alike need to be constrained and then contained. At the same time, dumb pseudo-socialist talk needs to be exposed as every bit as irrational as the talk of the money grabbers, as does dumb Cold War talk.

There are multiple punching bags here that should be lined up and kicked in turn by us, just to keep things duly competitive. I have been trying to develop the same approach for Northeast Asia; all states concerned have their nonsense, and it should be exposed accordingly, rather than ignored and rolled into some convenient story that serves my interests. The same applies to external relationships with Asia.

In the big picture, it boils down to us all taking responsibility for our investments, and helping folks move on from bad investments in a productive manner. If I tool myself up for a dying industry, I have to accept the sunk costs. If I have over-invested in old energy, I have to accept the sunk costs, rather than distort the political process and hold everyone else back.

Call it the new existential agility if you will; life is a lot better if you ride the bumps and the ups and downs, rather than trying to smooth them over with an iron fist. Unfortunately, plenty are still addicted to the immature emotional defence of bludgeoning everything into line with their visceral reactions, fueled by fairy tales of yore when it was possible to build a dysfunctional ego around crushing the villages and dells.

Well, that sort of control is not possible anymore, so a new emotional and practical agility is needed; the lie that everyone else is evil and we deserve our own set of rules above and beyond others is becoming pitiful and cringeworthy.

[Mugwump]

^ PTID, I agree with you on the (investment) banks, which I regard in much the same way as you regard oil companies, albeit with less competence at their core business.

I don't really think the EU is in thrall to conservative economic fundamentalists as I understand that term. Most of the EU is running high national debts, has very rigid employment practices (often protecting those in work at the expense of the young), and generous social welfare systems. Those don't seem like conservative economic fundamentalism to me.

If you mean the application of "austerity economics" to Greece, well, I half-agree. But when your debt to GDP ratio is ca 180% and the debt markets won't lend to you, more borrowing is unlikely to help you. What is needed is debt relief, and then later a tax-gathering system that works. But that raises the question which is presently at hand - how much debt relief, in what form, who pays, and with what assurance that the party won't start all over again in Greece, and encourage others such as Portugal and Spain to do the same.

It's really a no-win situation. And yes, Tannin, I aree with your point about the benefits to Germany of a low exchange rate - certainly right.

[Tannin]

[pietillidie]

[David]

Illuminating posting, thanks guys.

Im curious about the Tsipras government and the direction it's been taking. The leftists on my newsfeed bang on like Syriza is God's gift to humanity, but I was wondering about their economic credentials. Given the pretty dire situation they've inherited, have they been doing a decent job?

[Jezza]