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Monday 14 May 2012

Greece, Catharsis and the ECB Moneylenders

Viciously Circular

In the depths of the Great Depression US unemployment hovered around the 25% mark, with 30% of the youth unemployed.  Today in Greece the comparable numbers are 22% and a scarcely believable 54% (see: Greek Labour Force Study). Meanwhile another €4.2 billion has been pumped into Greece by the European Central Bank (ECB) via the European Financial Stability Facility, despite the vast protest vote against the externally imposed austerity measures delivered in their recent elections.  

Unfortunately this money isn't being used to reflate the economy and maintain the social fabric of the county,  it's actually allocated to a “segregated debt service account” which, in effect, is used to repay the debt that the Greeks owe to … the European Central Bank.  It’s little wonder that voters have exhibited a longing for catharsis: emotional cleansing awaits.

Injecting Optimism

Much ink has been spilt pointing out that the mess Greece is in is largely of its own making, a combination of fiscal ineptitude and plain fraud.  However, most of the Greek populace is guilty of nothing more than an all-too-human tendency to vote for the people who promise them the best futures, and they're the ones who are suffering the most at the hands of the austerity measures. Not only is unemployment raging but there's very little in the way of a safety net: there's limited social security for a year after you lose your job.  If you’re a kid who’s never had one, there’s nothing.

The lesson of the Great Depression was that financial policy needs be directed at spending, because as Herbert Hoover discovered, leaving the market to sort itself out doesn't necessarily lead to good results because the downward spiral of the economy all too easily feeds back into peoples’ psychology and exacerbates the situation (see: Time for Shiva and Schumpeter). To drag an economy out of its depths you have to find a way of injecting optimism and confidence into peoples’ outlooks – which is usually translated into injecting money into the economy, hence the ultra-low interest rates and quantitative easing seen in the US, where the lessons of the 1930's still linger. 

Austerity Rules

The reaction of the rest of the Eurozone to Greek economic implosion has been to crank up their demands for austerity and destroy any chance of optimism.  The current expectation is that to meet basic competitiveness criteria Greek public servants will see another 15% cut in their salaries, on top of significant previous cuts.  Of course, this is rational – if exchange rates are fixed and you can’t improve competitiveness then wages must fall.

Well, rationality be damned.  What about the human cost? This is economics with the people taken out, and replaced by the ethics of backstreet moneylenders.  Increasingly it looks like European leaders are suffering from a bad case of moral disengagement (see: Euphemisms for Morally Disengaged Managers).

Fictional Banking

The problem is that all of the human misery and strife that the fiscal retrenchment is creating is completely pointless because the entire aim of the bailout process is not to rescue Greece but to maintain the fiction that the Greek debt can ever be repaid, thus avoiding the nasty necessity of accepting the eventual inevitability of default.  The mere fact that the bailout funds are being laundered in bizarre circular fashion is evidence enough of this. 

Meanwhile it appears that the Greek people themselves are an incidental and inconsequential issue in this scheme, which owes more to the money lending tactics of dubious backstreet spivs than it does to the international financial community.  Although there’s an argument that there’s not a lot of difference between the two. 

Where the Sun Shines

The imposition of increasingly draconian austerity measures, most of which are being borne by the people least able to bear them, has led to a predictable reaction.  Let’s face it, if you’re an unemployed 20 year old with no prospects of work – ever – what are you going to do come election time?  Are you going to vote for the party that says you have to put up with a lifetime of misery, aka austerity, or are you going to take a chance on a bunch of unknowns whose entire manifesto consists of a single policy – namely, to tell the money lenders to take their money and stuff it where the sun don’t shine?

Of course, the euro-politicians’ response to the democratic wishes of the voters has been to insist that Greece continues to fulfil its obligations, namely to continue to aid and abet them in the gigantic fiction that Greek debt can ever be repaid.  In-between times, in order to fulfil this objective, the eurocrats have replaced democratically elected governments in Greece and Italy with compliant technocrats – economists trained in the principles of fiscal rectitude according to the high priests of the economic religion (see: Religion in Econoland).   

Democratic Deficits

Fortunately the wonder of democracies is that eventually the voters have their say.  Since the start of the 2008 economic crisis we’ve seen governments overturned in Spain, Portugal, Britain and Ireland.  In Finland and Belgium nationalist parties have made significant gains, and even Germany faces the rise of the disaffected with the successes of the Pirate party on a manifesto of open source government.  The recent election results in France and Greece are simply the latest examples of a dissatisfied electorate making their feelings known.  The overwhelming expectation that economic growth can continue indefinitely has been baked into peoples’ expectations, and politicians are feeling the effects of their failure to meet these.

Greece is now a test case: a collision between democratic rights and economic orthodoxy.  History dictates that realpolitik will eventually win out: practical considerations of material circumstances will triumph over political and economic orthodoxy, because the alternative is worse.  As Alan de Bromhead, Barry Eichengreen and Kevin O’Rourke have demonstrated in Right Wing Political Extremism in the Great Depression:
“Our analysis thus suggests that the danger of political polarization and extremism is greater in some national circumstances than others.  It is greatest in countries with relatively recent histories of democracy, with existing right wing extremist parties, and with electoral systems that create low hurdles to parliamentary representation of new parties.  
Above all, it is greatest where depressed economic conditions are allowed  to persist. “

What Greece needs now is what Aristotle called “catharsis”, an emotional cleansing and a fresh start:
“Catharsis calls for bringing to account those responsible for the crisis’ origins and its consequences. … Catharsis requires greater visibility, efficiency and accountability in a state governed by the rule of law. It also demands a better communication strategy that the sacrifices will pay off, are worth the effort and can indeed lead to ‘resetting Greece’ in the future. Greece needs a new growth agenda and a job creation perspective around which members of society can rally. Catharsis requires a shared sense that everyone can benefit in the long run from short-term sacrifices. This is particularly important for the young, access to education, which pays off, employment opportunities and trust by the new generations in the institutional geography of Greek politics.”
(The Path to Democratically Sustainable Reform in Greece, Jens Bastien and Kalypso Nicolaidis)

Europe’s leaders now appear to paving the way for Greece to exit the euro and the Eurozone, in what looks like a deliberate ratcheting up of the pressure on Greek voters.  However, with no alternative, Greeks are likely to reach for catharsis in the only way they have left.  The people running Europe need to be careful what they wish for, because where Greece leads others may soon follow.  

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  1. Great blog.

    Re growth. I see the continued failure of the negotiation circus between EU/Greece/IMF etc as evidence that the ultimate negotiating partner, reality, is coming into the game. Politicians are playing for time, with fingers crossed, as usual. Waiting for something...war, natural disasters, scandals or perhaps even more wishfully, a happy return to business as usual. What else can they do?

  2. Roosevelt was in a position to take aggressive Keynesian steps because the federal debt at the time was less than 30% of GDP.

    Not the situation in Greece, Spain or other places descending into depression. Pump priming - Keynes style - has become ineffective because governments, especially in Greece, never turned the priming mechanism OFF.

  3. On the circularity of the bail out, unless I'm mistaken the actual net cash flow is positive for Greece, that is they get more money from the EU than they pay back. In other words, they would be worse off with an outright default where they pay zero to creditors but also get zero from them, as they would be forced into an instant primary budget balance, which they are some way off.

    Of course some of what they get now is put on their tab as theoretical (not real!) future repayments. But you can always cancel debts later. To some extent it's best for everybody to do it slowly and cancel 10-50 billions every year for 10 years than cancel the lot now in one go: internally for Greece, it gives European authorities a lever to help steer reform, and externally, it's more acceptable to ultimate creditors, which after all are other eurozone citizens whose implication in Greece predicament's is pretty minimal.

    As for "the eurocrats have replaced democratically elected governments in Greece and Italy with compliant technocrats", hello? Is this the Daily Mail? Democratic institutions have not been suspended anywhere, and the local parliaments have themselves chosen said technocrats, and given where they were coming from (Berlusconi...) having a technocrat for a while seems actually quite appropriate, to leave time for a new generation of more political leaders to emerge and replace the discredited incumbents. The non-suspended parliaments can change their mind and fire the technocrats at any time, and the people can change the parliamentarians at the next elections if they are displeased with their performance.

  4. Pump priming is possible in Europe, but only if the Germans prime the pump. Unlikely.

    And yes, Greece is still running a primary account deficit, so if the ECB payments stopped then they’d be in an even worse position. Unfortunately the European aim of forcing them into surplus through austerity is failing. For Greece the only "rational" option is for them to squeeze even harder, get into a surplus and then default on their external debt. Allegedly it’s been discussed, but the people have already had enough – many of them they can’t imagine it getting worse. As for technocrats, this is from the BBC tonight:

    “Greece's wait goes on. One proposal under discussion is that of the president to form a government of technocrats, made up of what are described as "distinguished and non-political figures". That has received a mixed reaction from some parties, aware that many Greeks resent the country's outgoing prime minister for being an appointed technocrat rather than an elected leader.“

  5. This is brazen misrepresentation: "the entire aim of the bailout process is not to rescue Greece but to maintain the fiction that the Greek debt can ever be repaid..."

    Uh, hello, you must have dozed off when there was a 75% haircut on Greece's debt!!! (That's in NPV terms)

    Greece has, net net, received enormous largesse despite years of profligacy and fraud, and is still incapable of showing the slightest progress on structural reforms. The austerity complaints have very little merit; Greece is almost an iron curtain economy and it's the entrenched interests that are fighting change.

  6. very nice article and well-written

  7. As Greece was occupied during the Crimean and Cold wars, we must displace the current residents with Albanian Pelasgian aborigines (Kosovar Style) to keep them from giving the soviets access to the straits