I am back in Greece, but have been otherwise engaged. And now I seem to be in the epicentre of a major international crisis. You would hardly notice in this part of the country if it hadn't been for the queues at the ATMs as I drove back from Volos a week ago.
Even though I am here, I am an outsider to both the country and the language. As are most newspaper columnists - and many economists - and that hasn't stopped any of them from pontificating. I am swamped by commentary and by recommended articles. Many boil down to a morality play. Either the innocent Greeks are fighting back against their evil oppressors or the lazy, corrupt Greeks are robbing industrious Northern Europeans. Some columns have both happening at the same time. The majority are based on fleeting trips to Athens. Most cherry pick and by doing so miss out the details that make this crisis far from simple.
To repeat, I am an outsider. I am not even an economist. I am an historian though, and much of this has resonance with past crises. We have been here before and this colours my views. All I can really offer as a form of analysis are links and an overview of what I see are the main elements, all of which contribute to this particular crisis. Taking a deep breath, here we go.
1. Ideology.
Austerity/economic orthodoxy is the dominant ideology at the moment. It has a long pedigree, including amongst its antecedents; the gold standard, the economics of Hoover and Brüning, the May Report and the fall of the 1931 Labour Government. It isn't a happy history. It ended up with the Second World War. The Keynesian opposition to orthodoxy, piloted by Roosevelt through the New Deal, became dominant after the war. Keynes' approach to government budgets was that they should be balanced over a business cycle, rather than over a calendar year. Government should always act counter cyclically, investing during a downturn and retrenching in times of growth. In dealing with debt, Keynes prioritised increasing income (growth) over reducing spending. A Keynesian approach would see it as madness to cut spending and suck demand out of an economy at a time of recession. It would risk turning it into a slump, causing immense hardship and reducing government income, thereby cancelling out any gains made through savings. Orthodoxy always kept some adherents, most notably in the IMF, but regained its dominance through a renewed challenge to Keynes from a resurgent classic liberalism, adapted into a doctrine of neoliberalism (a specific term now used loosely by the left as a 'boo word') and entrenched by the Thatcher and Regan governments.
Amartya Sen published an excellent essay defending Keynes, explaining the neglect of his insights and placing his approach in a historical context here.
Syriza promised a Keynesian approach to the Greek debt crisis and an end to austerity. The problem was that it was impossible to deliver when the institutions were ideologically convinced of the correctness of the opposite. Syriza failed to change the world. It was if they had gone to the Vatican and came out surprised that the Pope was still a Catholic. Vacillating between accusation and compromise, they weren't good diplomats. They had three cards to play, but all were trumped - see Duncan Weldon here. They were right about the economics of austerity, but had no way of delivering an alternative. So what happens next?
2. Illusions.
There is a narrative doing the rounds that the emergence of other indebted countries like Spain, Ireland and Portugal from recession is a sign that austerity worked (conveniently forgetting the fiscal expansion of quantitative easing). I fail to see the return of growth two or three years after you would have normally expected it, in countries with degraded capacities, after the mass emigration of some of its most talented young people, and with increased inequality and poverty, as a conspicuous success. Rather, it is a tribute to the resilience of those societies. But even if austerity can work, was it worth the cost and the destruction of ordinary people's lives?
There is also the sense on the left that Syriza in Greece and Podemos in Spain are the vanguard of a new mass movement of radical social change, rather than an expression of populist and traditional resentment against the elites by people who have had enough and just want to return to normal. Historically, this has been a resentment that has been exploited in times of crisis as much by the right as by the left. And the Greek government is a coalition between Syriza and ANEL, a far right bunch of ultra nationalist conspiracy theorists (which is why the government's minister of defence believes in chemtrails!). There has always been a question mark about whether Syriza is a leftist or nationalist project and at the moment, rather like the referendum on Scottish independence, the rhetoric on the 'no' side is assuming an unpleasant nationalist tone. Is Tsipras really Greece's Alex Salmond?
The final illusion is that referendums are somehow a pure form of direct democracy, rather than an expedient political tool for a party facing difficulties. Syriza has admitted as much. So we have the curious spectacle of a referendum on whether or not to accept terms that are no longer on offer for a bailout that has expired. The choice thrown down is to accept austerity or to negotiate a bit less austerity. The EU is insisting it is about Euro membership, Syriza say it isn't, but then, if it was, Greeks would vote overwhelmingly to stay in the Euro. The left-wing historian, Mark Mazower, who, unlike many commenters, has written on modern Greek history, knows Greece well and speaks Greek, denounces Sunday's referendum here. Catherine Fieschi places it in the context of a populist challenge to representative democracy where "we seem to be leaving the agora and headed toward a new coliseum."
3. German strength.
This is part of the problem, paradoxically. The whole point of the EU was to cement Franco/German relations and constrain German power. This is a constraint that Germany wanted eagerly. It is haunted by its history. Germany does not want to dominate Europe. That is why it insists on rules, rather than the exercise of power. Ironically, German obduracy leads to accusations of the very thing it is trying to avoid.
German savings, wage restraint and surpluses, the product of its ordoliberalism, may be a virtue in a state with its own currency, but are a weakness in a currency union without corrective mechanisms. They produced the flood of credit that financed their exports to deficit nations at the periphery. Low interest rates, again a product of German economic strength, produced credit booms elsewhere. The crisis was made in Germany, even if it was implemented by the debtor nations, especially in the case of Greek sovereign debt.
4. Greek weakness
I have read many fantasies about how well the Greeks would do if they defaulted and left the Euro. And it may yet happen. But they all discount how badly Greece would be placed. It would be locked out of currency markets and would have a soft, depreciating currency from which they could not benefit. Exports may become cheaper, but they don't have many. Imports would become far more expensive and most energy is imported. The poor will suffer most. There would have to be a major restructure of the economy for Greece to benefit - and boy do they need one - but it will not be an easy answer. It may well have been better if they hadn't joined. They still would have had a crisis, though not this one. But they did and leaving is another matter altogether, although, as Frances Coppola writes, the process may have started already.
Anyone who has had any dealings with the Greek state knows that it is, well, different. Just how different is made clear here by one of the most trenchant opponents of austerity, David Blanchflower.
The responsibility for the Greek sovereign debt lies with the Greek state. Arguably, the starting point for resolving it should have been reform linked to investment and debt relief. Instead, Greece got cuts - internal devaluation - with little change. Combine this with fear of the consequences of a banking failure post-Lehman and you have the recipe for socialising the losses of private investors' bad investments by compensating them with the wages, pensions and savings of ordinary people.
5. The Euro.
Throughout the current phase of the crisis, there has been little talk about reforming the structural failings of the Euro. Monetary union without fiscal union has meant that there is no mechanism for transfers between surplus and deficit areas. Differences in competitiveness can no longer be managed through currency exchange rates or interest rates, so the only alternative is through internal devaluation, a competitive lowering of living standards - a race to the bottom as the cliché has it. The Euro was supposed to bring convergence, instead it resulted in polarisation. This report from Stephen Fiddler is an excellent summary.
This is not new either. It is a more comprehensive version of the 19th century experiment, the Latin Monetary Union. It was a failure that was finally killed off in 1927.
There is more, much more, but an explanation that omits any of these elements will be incomplete. Macro economic policy may be wrong, but a change of direction would do little without micro economic change. The flaws in monetary union need rectifying. Looked at today, the whole situation is a pretty potent cocktail and a complete mess. The problems are getting worse too. Under Syriza, the economy has tanked. It is also a story of incompetence, intransigence, and a narrowness of vision. There is much uncertainty. Martin Wolf explains the dilemmas well.
Looking back at the links in this post, most are from trenchant opponents of austerity. Yet many also support a yes vote. It wasn't a deliberate choice on my part, but it does illustrate how this referendum has divided allies. They share a similar analysis, but differ on the consequences. I have Greek friends who will vote both yes and no, but there is no one I know who isn't voting on the basis of a choice between bad and worse. So I am going to finish with links to two posts. The first is from Yiannis Mouzakis, a very regretful yes voter. The second is from a very angry, Irate Greek (Theodora Oikonomides) who will vote no.
The crisis is rooted in a profound ideological clash between orthodoxy and a revived Keynesianism. It has been taking place in a setting of flawed and failing institutions. It has been handled ineptly and, at times, stupidly. When the history of the crisis comes to be written, not many will come out with any credit, but then we still don't know how that book will end.
Even though I am here, I am an outsider to both the country and the language. As are most newspaper columnists - and many economists - and that hasn't stopped any of them from pontificating. I am swamped by commentary and by recommended articles. Many boil down to a morality play. Either the innocent Greeks are fighting back against their evil oppressors or the lazy, corrupt Greeks are robbing industrious Northern Europeans. Some columns have both happening at the same time. The majority are based on fleeting trips to Athens. Most cherry pick and by doing so miss out the details that make this crisis far from simple.
To repeat, I am an outsider. I am not even an economist. I am an historian though, and much of this has resonance with past crises. We have been here before and this colours my views. All I can really offer as a form of analysis are links and an overview of what I see are the main elements, all of which contribute to this particular crisis. Taking a deep breath, here we go.
1. Ideology.
Austerity/economic orthodoxy is the dominant ideology at the moment. It has a long pedigree, including amongst its antecedents; the gold standard, the economics of Hoover and Brüning, the May Report and the fall of the 1931 Labour Government. It isn't a happy history. It ended up with the Second World War. The Keynesian opposition to orthodoxy, piloted by Roosevelt through the New Deal, became dominant after the war. Keynes' approach to government budgets was that they should be balanced over a business cycle, rather than over a calendar year. Government should always act counter cyclically, investing during a downturn and retrenching in times of growth. In dealing with debt, Keynes prioritised increasing income (growth) over reducing spending. A Keynesian approach would see it as madness to cut spending and suck demand out of an economy at a time of recession. It would risk turning it into a slump, causing immense hardship and reducing government income, thereby cancelling out any gains made through savings. Orthodoxy always kept some adherents, most notably in the IMF, but regained its dominance through a renewed challenge to Keynes from a resurgent classic liberalism, adapted into a doctrine of neoliberalism (a specific term now used loosely by the left as a 'boo word') and entrenched by the Thatcher and Regan governments.
Amartya Sen published an excellent essay defending Keynes, explaining the neglect of his insights and placing his approach in a historical context here.
Syriza promised a Keynesian approach to the Greek debt crisis and an end to austerity. The problem was that it was impossible to deliver when the institutions were ideologically convinced of the correctness of the opposite. Syriza failed to change the world. It was if they had gone to the Vatican and came out surprised that the Pope was still a Catholic. Vacillating between accusation and compromise, they weren't good diplomats. They had three cards to play, but all were trumped - see Duncan Weldon here. They were right about the economics of austerity, but had no way of delivering an alternative. So what happens next?
2. Illusions.
There is a narrative doing the rounds that the emergence of other indebted countries like Spain, Ireland and Portugal from recession is a sign that austerity worked (conveniently forgetting the fiscal expansion of quantitative easing). I fail to see the return of growth two or three years after you would have normally expected it, in countries with degraded capacities, after the mass emigration of some of its most talented young people, and with increased inequality and poverty, as a conspicuous success. Rather, it is a tribute to the resilience of those societies. But even if austerity can work, was it worth the cost and the destruction of ordinary people's lives?
There is also the sense on the left that Syriza in Greece and Podemos in Spain are the vanguard of a new mass movement of radical social change, rather than an expression of populist and traditional resentment against the elites by people who have had enough and just want to return to normal. Historically, this has been a resentment that has been exploited in times of crisis as much by the right as by the left. And the Greek government is a coalition between Syriza and ANEL, a far right bunch of ultra nationalist conspiracy theorists (which is why the government's minister of defence believes in chemtrails!). There has always been a question mark about whether Syriza is a leftist or nationalist project and at the moment, rather like the referendum on Scottish independence, the rhetoric on the 'no' side is assuming an unpleasant nationalist tone. Is Tsipras really Greece's Alex Salmond?
The final illusion is that referendums are somehow a pure form of direct democracy, rather than an expedient political tool for a party facing difficulties. Syriza has admitted as much. So we have the curious spectacle of a referendum on whether or not to accept terms that are no longer on offer for a bailout that has expired. The choice thrown down is to accept austerity or to negotiate a bit less austerity. The EU is insisting it is about Euro membership, Syriza say it isn't, but then, if it was, Greeks would vote overwhelmingly to stay in the Euro. The left-wing historian, Mark Mazower, who, unlike many commenters, has written on modern Greek history, knows Greece well and speaks Greek, denounces Sunday's referendum here. Catherine Fieschi places it in the context of a populist challenge to representative democracy where "we seem to be leaving the agora and headed toward a new coliseum."
3. German strength.
This is part of the problem, paradoxically. The whole point of the EU was to cement Franco/German relations and constrain German power. This is a constraint that Germany wanted eagerly. It is haunted by its history. Germany does not want to dominate Europe. That is why it insists on rules, rather than the exercise of power. Ironically, German obduracy leads to accusations of the very thing it is trying to avoid.
German savings, wage restraint and surpluses, the product of its ordoliberalism, may be a virtue in a state with its own currency, but are a weakness in a currency union without corrective mechanisms. They produced the flood of credit that financed their exports to deficit nations at the periphery. Low interest rates, again a product of German economic strength, produced credit booms elsewhere. The crisis was made in Germany, even if it was implemented by the debtor nations, especially in the case of Greek sovereign debt.
4. Greek weakness
I have read many fantasies about how well the Greeks would do if they defaulted and left the Euro. And it may yet happen. But they all discount how badly Greece would be placed. It would be locked out of currency markets and would have a soft, depreciating currency from which they could not benefit. Exports may become cheaper, but they don't have many. Imports would become far more expensive and most energy is imported. The poor will suffer most. There would have to be a major restructure of the economy for Greece to benefit - and boy do they need one - but it will not be an easy answer. It may well have been better if they hadn't joined. They still would have had a crisis, though not this one. But they did and leaving is another matter altogether, although, as Frances Coppola writes, the process may have started already.
Anyone who has had any dealings with the Greek state knows that it is, well, different. Just how different is made clear here by one of the most trenchant opponents of austerity, David Blanchflower.
"The reality is that Greece has a highly uncompetitive economy and no credible tax collection system. The problems mostly are in the product, capital and housing markets that remain unaddressed. According to the World Bank’s Doing Business rankings, Greece ranks 61st, just behind Tunisia. Greece is 155th in the ability to enforce contracts, just ahead of Laos and Botswana. There has been no reform to speak of. Greece is characterised by endemic tax evasion, a poor tax collection infrastructure, parochial patronage policies, corruption and huge delays in the administrative courts dealing with tax disputes. Greece also has deep structural problems, mostly in product markets with oligopolies in almost every industry, closed professions, administrative and bureaucratic impediments to entrepreneurship alongside barriers to trade and exporting, none of which have been addressed. This baby certainly isn’t over. The worry is if the inevitable Greek default spreads."The Greek state is slowly improving, especially now it is beginning to develop online access, but still needs major reforms. The bureaucracy is labyrinthine and obstructive. The Greek people would welcome change. But why haven't they had it? In the article I linked to earlier, Armartya Sen makes an important point.
But the real (and strong) case for institutional reform has to be distinguished from an imagined case for indiscriminate austerity, which does not do anything to change a system while hugely inflicting pain. Through the bundling of the two together as a kind of chemical compound, it became very difficult to advocate reform without simultaneously cutting public expenditure all around. And this did not serve the cause of reform at all...He is right, but the opposite is true too. Determined opponents of austerity also linked the two and opposed reform as well as the cuts.
The compounding of the two – not least in the demands made on Greece – has made it much harder to pursue institutional reforms. And the shrinking of the Greek economy under the influence mainly of austerity has created the most unfavourable circumstances possible for bold institutional reforms.
The responsibility for the Greek sovereign debt lies with the Greek state. Arguably, the starting point for resolving it should have been reform linked to investment and debt relief. Instead, Greece got cuts - internal devaluation - with little change. Combine this with fear of the consequences of a banking failure post-Lehman and you have the recipe for socialising the losses of private investors' bad investments by compensating them with the wages, pensions and savings of ordinary people.
5. The Euro.
Throughout the current phase of the crisis, there has been little talk about reforming the structural failings of the Euro. Monetary union without fiscal union has meant that there is no mechanism for transfers between surplus and deficit areas. Differences in competitiveness can no longer be managed through currency exchange rates or interest rates, so the only alternative is through internal devaluation, a competitive lowering of living standards - a race to the bottom as the cliché has it. The Euro was supposed to bring convergence, instead it resulted in polarisation. This report from Stephen Fiddler is an excellent summary.
This is not new either. It is a more comprehensive version of the 19th century experiment, the Latin Monetary Union. It was a failure that was finally killed off in 1927.
There is more, much more, but an explanation that omits any of these elements will be incomplete. Macro economic policy may be wrong, but a change of direction would do little without micro economic change. The flaws in monetary union need rectifying. Looked at today, the whole situation is a pretty potent cocktail and a complete mess. The problems are getting worse too. Under Syriza, the economy has tanked. It is also a story of incompetence, intransigence, and a narrowness of vision. There is much uncertainty. Martin Wolf explains the dilemmas well.
Looking back at the links in this post, most are from trenchant opponents of austerity. Yet many also support a yes vote. It wasn't a deliberate choice on my part, but it does illustrate how this referendum has divided allies. They share a similar analysis, but differ on the consequences. I have Greek friends who will vote both yes and no, but there is no one I know who isn't voting on the basis of a choice between bad and worse. So I am going to finish with links to two posts. The first is from Yiannis Mouzakis, a very regretful yes voter. The second is from a very angry, Irate Greek (Theodora Oikonomides) who will vote no.
The crisis is rooted in a profound ideological clash between orthodoxy and a revived Keynesianism. It has been taking place in a setting of flawed and failing institutions. It has been handled ineptly and, at times, stupidly. When the history of the crisis comes to be written, not many will come out with any credit, but then we still don't know how that book will end.
1 comment:
Good post Peter - Greece has had any number of left and right wing fantasise projected upon it. For those of us who live in the Greek speaking world (15 years in Cyprus in my case) The development of the state and the forms which this has taken, in part shaped by clientalism, is a significant part of the story.
What the austerity measures in Cyprus have been targeted at has not been state reform but the reduction in the deficit, thus perpetuating the very conditions within which the crisis was, in part, incubated.
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