Tuesday, April 18, 2017


A reader asked me to comment on the latest with Greece, which has dropped out of the news of late, replaced by Brexit and whatnot.  It's worth touching base with this modern day Morality Tale of Indebtedness.

As you may recall, Greece was hit hard following the global economic crisis of 2007-2008.  Investors feared that due to its relatively profligate spending, Greece would never be able to honor its existing debt.  This led to a debt crisis for poor Greece, which subsequently launched a program of "austerity," i.e., cuts to spending (especially social spending such as pensions, etc.) and increases in taxes.

You'd think that this "belt tightening" would resolve the economic crisis, but you'd be wrong.  It made the debt crisis far, far worse.  It's a funny thing - when you take away people's pensions and raise their taxes, they have less money to spend! When they have less money to spend, the economy contracts! When the economy contracts, less tax revenue is generated to repay creditors!

This isn't rocket science, but "belt tightening" just sounds so "responsible" that people continue to insist, all evidence to the contrary, that it works.
In the case of Greece, belt tightening d/b/a austerity hasn't worked in the slightest.  Greece has required three separate bailouts just to continue paying back existing loans.  Unemployment is above 25%.  The country's birthrate is in rapid decline as people decide they simply can't afford to take time off from work (if they have work) to have children, and perhaps can't afford to raise children at all. 

A German operator, Fraport, just took over 14 regional airports in Greece pursuant to the privatization terms imposed by the bailouts.  If Greece is selling off its airports just to pay off creditors in the short term, how will it generate the economic growth in the long term to allow it to pay off all that accrued debt?  Greece is also selling off stakes in its petroleum and telecom companies.  The more Greek assets sold now, of course, the fewer sources of income Greece will have in the future.

The leftist Syriza government has left its leftist credentials at the door, doing its best to sell bailout terms to the Greek people.  Growth forecasts are being projected downwards.  Greece is so depressed, only the communists bother to show up and protest these days.

Despite the intense austerity of this past decade, Greek debt hovers at around 180% of Greece's GDP.  For a country that issues its own currency and can radically devalue that currency, attracting international investors, that might not be the end of the world.  For a country married to the unnaturally strong (for Greece if not for Germany) Euro, it's an unbearable burden.

It's been a decade of this nonsense now, and yet, "Grexit" does not seem to be contemplated only vaguely, despite the fact that "Brexit" makes clear that you can part ways with Europe and do more or less fine economically.  Donald Trump has suggested that Greece should skedaddle from Europe, though it's hard to take anything he says seriously on account of his flip-flopping.

And, sadly, that's the latest from Greece.  I wish I had better, more interesting news; that a corner had been turned, that things were looking up.  But they're not.  Just more suffering for the Greeks, with no guarantee Greece's creditors even get their money back in the end.  And yet people continue to insist that just a few more pro market tweaks will get Greece back on the right track.  (Will people ever get the memo that privatizations, by and large, sound great and have a terrible track record?  They will if they read The Shock Doctrine but I worry that most folks will simply never smell this particular coffee.)

If I have a drinking problem and you take the bottle away from me, kudos to you.  If I have a drinking problem and you take the bottle away from me, and then kick me out of my house and get me fired from my job to teach me some kind of lesson about responsibility, you are a sadist.  

If Europe wants to keep Greece on the Euro, they really have no option but to totally forgive Greece's debt.  But, of course, if they're doing that, they're essentially saying to investors "your money is not guaranteed by Europe."  That doesn't seem unreasonable to me - business is business, and not every investment works out.  Sometimes you lose money.  But it seems unreasonable to the powers that be in Europe, and even to the ostensibly leftist leaders in Greece.  It is funny, since the 21st century dawned, how creditors always seem to get their money back, come hell or high water, though, while those in debt get the strong-arm.  You wonder what the world would look like if this were not necessarily the case.

As he typically does, Dean Baker says it best (emphases added mine):

Less spending in an economy means less demand. When the government reduces its spending, as it has in a big way in Greece, this means less money going to hire workers, pay contractors, or to pay for pensions. The same story applies with taxes. When the Greek government increased its taxes, it pulled money out of consumers' pockets leaving them with less money to spend.

Due to the shrinking of Greece's economy, even though the government hugely cut spending and raised taxes, the country still faces the budget deficit. This is because unemployed people are not paying taxes, nor are businesses that are losing money. Similarly, the inability to get a job causes formerly employed people to get unemployment benefits and for many older workers to retire early and start drawing their pensions.

This backdrop is important. Germany and other countries are not lending money to the Greeks to support their profligate lifestyles, they are lending money to Greece to allow the country to get through the austerity that its creditors have imposed on the country. If Greece's economy was allowed to grow, then it would not be facing a budget deficit.

This gets to the heart of both the economics and the morality of the situation. Germans and others in northern Europe may hate the idea of their hard-earned euros going to "lazy" Greeks and other southern Europeans. But it is only because of the economic policies of the northern Europeans that the southerners are running deficits.

Oh, meanwhile, given the border shutdowns in northern Europe, which is composed of well-off countries that could actually afford to house a large number of migrants, where do you think migrants fleeing Syria and elsewhere are piling up?  

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