Current / Economics / History

Unacknowledged Damage

So, Europe has entered its endgame with regards to Greece, namely it appears to be strangling the Hellenic Republic:

The European Central Bank’s governing council is expected to turn off Emergency Liquidity Assistance (ELA) for Greek banks at its meeting later today, according to well-placed sources.

So unless Greek savers miraculously decide to cease withdrawing cash from their accounts, Greek banks would find themselves in serious straits as soon as Monday – because the banks have become dependent on ELA, approved by the ECB but supplied by the Bank of Greece, to provide the cash to depositors who want their money back.

“We think the Greek government will have no choice but to announce a bank holiday on Monday, pending the introduction of capital controls,” said a source.

Capital controls are restrictions on how much customers can withdraw from banks. Until now, the Greek government has been signalling that it does not want to introduce this restriction on the way banks can operate.

The expected decision by the ECB to terminate emergency lending to Greek banks stems from yesterday’s decision by the eurogroup of finance ministers that there is no way now of preventing Greece tumbling out of the current bailout programme on Tuesday and also of defaulting on a €1.5bn (£1.1bn) due payment to the IMF on the same day.

Rather than consider that destroying what remains of the Greek financial system in response to an IMF default only makes total nonpayment on the entire Greek debt almost inevitable, the Troika went ahead a implemented this demented response.  Demanding more austerity to resume financing (and declaring any debt forgiveness would be illegal), the Greek government put the EU “plan” up for a vote that was struck down by 61% of the angry populace.  Naturally when Matt Yglesias surveys the carnage his #1 perpetrator is:

1) The current Greek government

Alexis Tsipras and his Syriza party took office in January and were greeted with a good amount of optimism in international circles. After all, their basic critique of the status quo in Greece had a lot of merit. To improve on it, they needed to do two things:

  1. Persuade Greece-skeptical foreigners that an outsider political party that had no role in creating the mess in Greece was going to be able to deliver on reform in a massive way — so much reform that Greece should be allowed to engage in less austerity
  2. Form a broad front with the Social Democratic politicians who lead the governments of France and Italy and play key roles in coalitions in Germany and the Netherlands to shift Europe’s overall strategy to one more focused on creating adequate aggregate demand rather than cutting wages

They delivered on neither of these things, instead alienating all potential partners with irresponsible rhetoric about Nazis and unreasonable demands that the main left-of-center parties elsewhere in Europe wouldn’t endorse.

Are you daft, Mr. Yglesias?  Europe shows no signs of questioning austerity and wage cutting, and that’s Greece’s fault?  The Troika act as if is still 2010, before they forced Europe (and the rest of the world by extension) into austerity-mania.  As for Godwin’s Law, it doesn’t apply when this is part of your nation’s past:

Nazis on the Acropolis.

Moreover, Mike Godwin appears to be siding with the Greeks on this one:

<blockquote class=”twitter-tweet” lang=”en”><p lang=”en” dir=”ltr”>Germans Forget Postwar History Lesson on Debt Relief in Greece Crisis <a href=””></a&gt; <a href=”″></a></p>&mdash; Mike Godwin (@sfmnemonic) <a href=”″>July 9, 2015</a></blockquote>
<script async src=”//” charset=”utf-8″></script>

The Damage

Worse than forgetting 70-year old lessons, the German government seems singularly unable to recognize that the 2010s austerity smashing 33% of a nation’s GDP<br />source: <a href=’’></a&gt;

…putting 27% of its people out of work<br />source: <a href=’’></a&gt;

…along with 60% of its youth<br />source: <a href=’’></a&gt;

…and inducing crushing deflation<br />source: <a href=’’></a&gt;

…isn’t a recipe for anything other than Great Depression misery.  In fact, the Greek “experiment” seems to have only the hallmarks of daftness and stupidity:

However things play out from here — I find it hard to see a path other than Grexit — the troika’s program for Greece represents one of history’s epic policy failures. Even if you ignore the economic and human toll, it was an utter failure in terms of restoring solvency. In 2009, before the program, Greek debt was 126 percent of GDP. After five years, debt was … 177 percent of GDP.

How did that happen? Did the Greeks continue massive borrowing? As the chart shows, the answer is a definite no. Greek debt at the end of 2014 was only 6 percent higher than it was at the end of 2009. Admittedly, that number reflects a significant haircut on private debt along the way, but it was still nothing like the continued borrowing binge some imagine.

What happened instead was, of course, the collapse of GDP — itself largely the result of the austerity program.

What this suggests is that the troika program was simply infeasible, and would have been infeasible no matter how willing the Greeks had been to make sacrifices. The more they cut, the worse things got, because of Fisherian debt deflation.

I suppose you can argue that structural reforms might have delivered a boost in competitiveness, but the truth is that there’s very little evidence supporting the conventional faith in such reforms.

Some of my more conventional contacts like to insist that Greek austerity was unavoidable, and it’s true that one way or another Greece was going to have to achieve a primary surplus. If currency devaluation had been an option, this would have required much less austerity, because of the boost from easier monetary policy; but within the euro a lot of austerity was indeed something that had to happen. But the key point is that the austerity ended up being not just incredibly painful but completely futile, because it wasn’t accompanied by massive debt relief.

Is this kind of futility always the case? Not necessarily; if you try to do the arithmetic here, it becomes clear that a lot depends on the initial level of debt. If Greece had received major debt forgiveness, it would still have gone through hell, but with at least some hint of an eventual exit. Instead it was pushed into a cycle of ever-worse pain without hope.

The devastation wrought by the ill-advised turn to austerity has created a full-blown demand-side crisis in Greece as pensioners have become the breadwinners:

According to a study last year by an employer’s association, pensions are now the main – and often only – source of income for just under 49% of Greek families, compared to 36% who rely mainly on salaries.

With a jobless rate of about 26% – youth unemployment is at 50% – and out-of-work benefits of €360 a month generally paid for no longer than a year, pensions have become “a vital part of the social security net for many, many people,” said Vovou. “Retired parents are having to help their adult children everywhere. And now they’re demanding we cut them even more? It’s just so very wrong.”

Pensions have become arguably the biggest hurdle in the tortuous, on-off negotiations between the leftwing government of the prime minister, Alexis Tsipras, and Greece’s creditors: its eurozone partners, the European Central Bank and the International Monetary Fund.

Before they will release €7.2bn in aid that Greece needs to pay public-sector salaries and pensions and repay €1.6bn in IMF loans, those lenders want further reforms to the pensions system, including penalties to put people off taking early retirement and more cuts to even the lowest pensions.

Tsipras is so far refusing to implement the measures, aimed at shaving the equivalent of 1% of GDP off the country’s pension bill, arguing they will do nothing to help Greece emerge from a slump that has seen the country’s economy shrink by 25%, and may only deepen its humanitarian crisis.

There is little doubt Greece’s pensions system needed reform. The EU’s most expensive, at about 17.5% of GDP, it was made up of more than 130 different pension funds and hid widespread abuse: a pension census ordered in 2012 as part of the country’s bailout conditions turned up more than 90,000 entirely bogus claimants – mostly the relatives of long-dead pensioners – and 350,000 more inconsistent claims.

Greece also had a remarkable 580 professions deemed hazardous or strenuous enough to qualify for early retirement: firemen and construction workers, certainly, but also hairdressers (because of the chemicals), wind instrument players (gastric reflux) and radio presenters (microbes in microphones).

But some reforms are under way: those 130 funds have shrunk to 13, the standard retirement age for men has been lifted to 67, and, above all, since 2010 public and private sector pensions have been severely pruned, on a scale ranging from a 15%-cut for the very lowest (under €500 a month) to as much as 44% for highest (more than €3,000).

Greek pensions are now, on the whole, far from exorbitant: social security ministry figures show the average main pension is €713 a month, and the average top-up pension – typically funded by an industry retirement scheme – €169 per month. Some 60% of pensioners get less than €800 gross a month, and 45% live on less than the monthly poverty limit of €665.

The problems the system faces now are closely related to the country’s particular plight – and Athens is not alone in arguing that further flat, across-the-board pension cuts of the kind envisaged by its creditors are unlikely to accomplish much beyond hurting pensioners even more.

The record-high unemployment rate, for example, means the pensions system is running a big deficit: contributions coming in are forecast, this year, to be roughly €2bn less than benefits going out.

That shortfall has widened further because of the large number of older Greek workers seeking early retirement: demand is up 14% in the private sector and 48% in the public sector since 2009.

With unemployment among the over-55s at about 20%, compared to just 6% five years ago, “I felt it was the wisest thing to do,” said Ioannis Konstatinidis, who retired four years early from a large, now privatised bank in 2012.

“People were losing their jobs, salaries were being cut, and there was so much uncertainty I just thought it was better to be sure of getting at least something.” Konstatinidis has ended up getting nearly 40% less than he had counted on, however. “Our retirement will not be quite as comfortable as we’d thought. But we’re luckier than lots of people.”

They are. Among the pension cuts being proposed is the abolition of the EKAS, a variable supplementary payment made to nearly 200,000 Greek pensioners to bring their monthly income up to €700 a month. (Other suggestions made by Greece’s creditors would hit people like that particularly hard: a hike in the tax on electricity, for example, from 13% to 23%).

So, creditors are proposing the abolition of EKAS, which brings pensions up to the monthly poverty floor ( €665)?  You stay classy there, Europe.  Of course, Matthew Yglesias has already “addressed” the Europsychosis:

If you want to understand why Greece and the rest of Europe are at such loggerheads, you could do worse than check out this chart I made by running a digital paintbrush over World Bank data on Greek GDP per capita.

 World Bank data / Google finance

The magenta line is more or less how things look to Greek people. Since 2008 or so, under the watchful eye of European Union elites (the central bank, the European Commission, the International Monetary Fund, the government of Germany, etc.), the Greek economy has completely collapsed. And the Greek population has been thrown into a state of dire immiseration.

The yellow line reflects more how things look to European officialdom. Greece is about on track for where you would expect it to be if you extrapolated forward from the pre-euro era.

Okay, I’m tired of this.  The “pent up demand for wage cutsbull$&*@ is ever-present in the Greece crisis, despite the fact that wage reductions are demonstrably linked to higher rates of unemployment:

CENTRAL bankers once used to inveigh against wage inflation. Guarding against a return to the ruinous price-wage spirals of the 1970s was a constant preoccupation. Since the financial crisis, however, they have started to fret about the opposite concern: stagnant wages and the growing risk of deflation.

There has been a squeeze on pay in the rich world for several years now. Between 2010 and 2013 real (inflation-adjusted) wages were flat across the OECD, according to its annual “Employment Outlook”, published on September 3rd. Real wages have barely grown at all in America over that period and have fallen in the euro area and Japan (see chart). Declines have been particularly sharp in the troubled peripheral economies of the euro zone, such as Portugal and Spain, but real wages have also tumbled in Britain.

Who are these wage reductions supposed to favor?  The Portuguese youth whose unemployment rate had risen almost seven percentage points since the Euro was adopted before the 2008 crash that doubled unemployment  to 40% and still sits at 33% now?<br />source: <a href=’’></a&gt;

Spanish youth, whose plight has only been outstripped by the young people of Greece?<br />source: <a href=’’></a&gt;

These conditions do not lead to prosperity, merely diaspora and further economic shocks to those that remain behind (see Puerto Rico).



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