All 7 entries tagged Greece
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March 23, 2015
Writing about web page http://dx.doi.org/10.1098/rsif.2014.0719
I've been thinking: What is it that enables a bad idea suddenly to spread across millions of people? Here are some of the things I have in mind:
- In France the National Front is reported as leading all other parties in current opinion polls, having won barely 10 percent of the vote in the 2007 presidential election.
- In January's general election, nearly 40 percent of Greek voters supported Syriza, compared wtih fewer than 5 percent as recently as 2009.
- Since narrowly rejecting indendence in last year's referendum, Scotland's voters have rallied to the Scottish National Party, support for which is now reported at over than 40 percent compared with less than 20 percent at the last general election.
- Most spectacularly, more than 80 per cent of Russians are regularly reported as thinking Vladimir Putin is doing a great job as their president, compared with around 60 percent two years ago.
I am hardly the first to ask this question. There is plenty of research (e.g. de Bromhead et al. 2013) on the economic conditions that foster political extremism, for example. But how do we get from economic conditions to wrong persuasion, exactly? There is the famous Goebbels quote about the "big lie," which is fine as far as it goes but always makes me think: surely there's more to it than this?
If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State.
But it can't be true of all lies. Don't some lies work better than others? What is it that defines the ones that work? My best answer so far to this question is an analogy, which I know is less than proof. But it's a thought-provoking analogy; see what you think.
Last year some behavioural scientists (Strõmbom et al. 2014) finally explained how to herd sheep. There is a sheepdog, instructed by a shepherd, that does the running around. It turns out that there are just two stages. First, the dog must gather the sheep in a single compact group. Once that is done, the second step is to threaten the group from one side; as a group, the sheep will move away from the threat in the opposite direction. That's all there is to it.
The reason why the first step must come first is also of interest: If the dog threatens the sheep without first gathering them in a group, they will scatter in all directions, and that's not what the shepherd wants.
Anyway, there's the answer: Group, then threaten.
People are not sheep, and this is only an analogy. Nonetheless you probably already worked out how I would read this. The shepherds are the political leaders. The dogs that run around for them are the campaign managers and activists. The human equivalent of gathering sheep in a group is to polarize people around an identity that defines an in-group and an out-group. So Scots (as opposed to the English), Greeks (as opposed to the Germans), Russian speakers (as opposed to the rest). Group them, then threaten them, and they will move.
To see how the threat sets the group in motion we need one more thing, an insight from Ed Glaeser. Glaeser (2005) wanted to explain the conditions under which politicians become merchants of hate. He began with a community that has suffered some kind of collective setback. When that happens, people demand an explanation: Who has done this to us? "Us" means the in-group. Political entrepreneurs, he argued, will compete to supply satisfying stories. Often the most satisfying account is one that blames the in-group's misfortune on the alleged past crimes of some out-group: the English, the bankers, the Muslims, the Jews, or the West.
Not only past crimes, however; Glaeser uses the phrase "past and future crimes." In other words, he maintains, politicians often transform these stories into powerful threats by giving them a predictive slant: This is what they, the enemy, have done to us in the past and this is what they will do again if we don't mobilize to stop them first.
Remember: Group, then threaten. The result is mobilization.
- de Bromhead, Alan, Barry Eichengreen, and Kevin H. O'Rourke. 2013. Political Extremism in the 1920s and 1930s: Do German Lessons Generalize? Journal of Economic History 73/2, pp. 371-406. URL https://ideas.repec.org/a/cup/jechis/v73y2013i02p371-406_00.html.
- Glaeser, Edward L. 2005. The Political Economy of Hatred. Quarterly Journal of Economics 120/1, pp. 45-86. URL: https://ideas.repec.org/a/tpr/qjecon/v120y2005i1p45-86.html
- Strömbom, Daniel. Richard P. Mann, Alan M. Wilson, Stephen Hailes, A. Jennifer Morton, David J. T. Sumpter, and Andrew J. King. 2014. Solving the shepherding problem: heuristics for herding autonomous, interacting agents. J. R. Soc. Interface 11: 20140719. URL: http://dx.doi.org/10.1098/rsif.2014.0719.
September 19, 2012
A thought experiment: Imagine what would happen to the Greek economy if a European trade union managed to secure the same salaries for Greece’s public employees as for their German counterparts. If that sounds like a bad idea to you, then consider the fact that in Britain we already have this arrangement across our country's regions.
Nationwide pay bargaining imposes a limited salary range for all public sector jobs of a given type across our country, so that local pay cannot vary to reflect local conditions. Think about the North East. This is our "Greece," a region where house prices and private-sector wages are lower than elsewhere. The national bargain means that in the North East public employees will be relatively overpaid. In contrast, the South East is our "Germany." There, house prices and private-sector wages are relatively high, so the same job for the same nominal pay will be underpaid. It sounds like the effects should balance out across the country as a whole, but the available research shows that they don’t. On balance, we lose.
In the North East the public sector can easily attract employees. At the same time the private sector is blighted: on the evidence of Giulia Faggio and Henry Overman, firms that could sell to the national or international market and would otherwise have the potential to grow are squeezed because they cannot attract workers away from high-wage public employment. On average, Jack Britton, Carol Propper, and John van Reenan have shown, the residents of the North East get good schools and good health care. But the average does not apply to everyone; as Alison Wolf has argued, the gains go primarily to the pockets of affluence; schools and hospitals in particularly deprived areas within the region still struggle to recruit competent staff.
In the South East, the same research shows, hospitals and schools have struggled to recruit because public employees are relatively underpaid. They rely excessively on agency staff and teaching assistants. The education of children and the health of residents have suffered. Within the South East the losses bear more heavily on more deprived communities, because better-off families can turn to private education and health care.
Do the gains balance the losses? No. Carol Propper and her co-authors have shown that the health and educational losses in regions where public employees are relatively underpaid exceed the gains where the converse applies. It doesn’t all balance out. As a result, our country as a whole is left worse off.
Who gains? Apparently, two minorities. One minority is the public employees in the low house-price, low private-wage regions, who gain real income. Another minority is the national trade union officials who have gained status and power from national bargaining. They achieve this by siphoning influence away from their own grass roots – and money out of the Treasury.
National pay bargaining in the public sector is a mechanism that benefits a few and leaves the community worse off. It demands reform. Individual wage bargaining in the public sector would move the public and private sectors towards a level footing in each region. The overwhelming majority of our citizens would gain. Proposals for individual bargaining are sensible, and this is why I support them.
- Britton, Jack, and Carol Propper. 2012. “Centralized Pay Regulation of Teachers and School Performance.” University of Bristol, Imperial College London, and the Centre for Economic Policy Research. Working Paper. Abstract: “Teacher wages are commonly subject to centralised wage bargaining resulting in flat teacher wages across heterogenous labour markets. Consequently teacher wages will be relatively worse in areas where local labour market wages are high. The implications are that teacher output will be lower in high outside wage areas. This paper investigates whether this relationship between local labour market wages and school performance exists. We exploit the centralised wage regulation of teachers in the England and use data on over 3000 schools containing around 200,000 teachers who educate around half a million children per year. We find that regulation decreases educational output. Schools add less value to their pupils in areas where the outside option for teachers is higher and this is not offset by gains in lower outside wage areas.” Available at: http://www.bristol.ac.uk/cmpo/events/2012/doctoralconference/britton.pdf.
- Faggio, Giulia, and Henry G. Overman. 2012. “The Effect of Public Sector Employment on Local Labour Markets.” London School of Economics, Spatial Economics Research Centre Discussion Paper no. 111. Abstract: “This paper considers the impact of public sector employment on local labour markets. Using English data at the Local Authority level for 2003 to 2007 we find that public sector employment has no identifiable effect on total private sector employment. However, public sector employment does affect the sectoral composition of the private sector. Specifically, each additional public sector job creates 0.5 jobs in the nontradable sector (construction and services) while crowding out 0.4 jobs in the tradable sector (manufacturing). When using data for a longer time period (1999 to 2007) we find no multiplier effect for nontradables, stronger crowding out for tradables and, consistent with this, crowding out for total private sector employment.” Available at http://www.spatialeconomics.ac.uk/textonly/serc/publications/download/sercdp0111.pdf.
- Giordano, Raffaela, Domenico Depalo, Manuel Coutinho Pereira, Bruno Eugène, Evangelia Papapetrou, Javier J. Perez, Lukas Reiss, and Mojca Roter. 2011. The Public Sector Pay Gap in a Selection of Euro Area Countries. European Central bank Working Paper no. 1406. Abstract: Abstract: “We investigate the public/private wage differentials in ten euro area countries (Austria, Belgium, France, Germany, Greece, Ireland, Italy, Portugal, Slovenia and Spain). To account for differences in employment characteristics between the two sectors, we focus on micro data taken from EU-SILC. The results point to a conditional pay differential in favour of the public sector that is generally higher for women, at the low tail of the wage distribution, in the Education and the Public administration sectors rather than in the Health sector. Notable differences emerge across countries, with Greece, Ireland, Italy, Portugal and Spain exhibiting higher public sector premia than other countries. Available at http://www.ecb.int/pub/pdf/scpwps/ecbwp1406.pdf.
- Propper, Carol, and John Van Reenan. 2010. “Can Pay Regulation Kill? Panel Data Evidence on the Effect of Labor Markets on Hospital Performance.” Journal of Political Economy 118:2, pp. 222-273. Abstract: “In many sectors, pay is regulated to be equal across heterogeneous geographical labor markets. When the competitive outside wage is higher than the regulated wage, there are likely to be falls in quality. We exploit panel data from the population of English hospitals in which regulated pay for nurses is essentially flat across the country. Higher outside wages significantly worsen hospital quality as measured by hospital deaths for emergency heart attacks. A 10 percent increase in the outside wage is associated with a 7 percent increase in death rates. Furthermore, the regulation increases aggregate death rates in the public health care system.” Repec handle: http://ideas.repec.org/a/ucp/jpolec/v118y2010i2p222-273.html.
- Wolf, Alison. 2010. More than We Bargained For: The Social and Economic Costs of National Wage Bargaining. CentreForum: London. Executive summary: “Britain’s centralised wage bargaining systems are bad for the country and getting more so. They create enormous barriers to the improvement of public services, and to rational decision making at a time of fiscal crisis. They penalise our poorest regions, by distorting their labour markets and standing in the way of economic growth. They do not need to be the way they are; and they do need to be changed. […] Britain needs to rid itself of rigid centralised wage bargaining. These systems are economically harmful, undermine quality in the public services, and perpetuate disadvantage. Swedish experience shows that individual contracts are popular and successful and Britain, too, should make that change.” Available at http://www.centreforum.org/assets/pubs/more-than-we-bargained-for.pdf.
June 29, 2012
Writing about web page http://www2.warwick.ac.uk/knowledge/business/eurodead
It is widely thought that Europe has a democratic deficit (Follesdal and Hix 2006; The Economist 2012). This means that the European Commission and European Parliament exercise powers in the name of a European community and identity that do not really exist. In reality, these bodies are accountable only to national electorates. There are no true European parties, and national electorates make their choices on national, not European calculations. As a result, European institutions hold powers that are neither accountable nor legitimate. This is one source of the current crisis.
Since the Euro is unworkable in its current form, it must change. An interesting question is what will happen then to the existing democratic deficit. Whatever changes, the democratic deficit will not go away. Instead, it will be redistributed across the terrain of the Eurozone. Different upheavals will pass it around in different ways. Two scenarios illustrate the point.
- Scenario 1
If current proposals for a fiscal union across the present Eurozone are adopted, member states will lose much of their already limited sovereignty over public spending and taxes. Their remaining sovereignty will be pooled in Brussels and Strasbourg. Thus, the democratic deficit will continue to be Europe-wide.
Many citizens will get the feeling that the democratic deficit has widened, but this will be more apparent than real. The democratic deficit will be felt more, because its true scale will have been formalized in new unaccountable powers, whereas in the past the deficit was merely implicit in powers that were often deployed ineffectively. This feeling, however, will be particularly acute in the two poles of the Eurozone, Germany and Greece. This is because German voters will contribute most to the new fiscal transfers against their will, and because Greek voters will lose most sovereignty to new fiscal controls.
- Scenario 2
Suppose instead that one or more Club Med countries are ejected from the Eurozone, as may still happen. Provided the Euro itself survives, in the Eurozone core the democratic deficit should then shrink for two reasons. First, the required severity of new fiscal controls and the scale of new fiscal transfers within the Eurozone will be less, so Brussels and Strasbourg will acquire fewer new powers. Second, the sense of a shared European identity among the core countries may well be greater than at present, because the national electorates that remain will be those that feel more affinity with Germany.
Under this scenario the democratic deficit may shrink in the core of the Eurozone but expand in the countries that exit. Again there are several reasons. In theory, the exiting countries will regain sovereignty over their own affairs. In practice they will have less sovereignty even than now, because their financial systems and their international credit will have been wrecked in the process. As a result, their voters will face few, if any, good choices. In the face of national humiliation, the voters may well turn to anti-system, anti-democratic parties that will steal power first from the discredited democratic leaders, and then from the voters themselves.
In short, there do not seem to be any easy ways to make good the democratic deficit that has been built into European institutions. At best, all we can do is pass it round.
Economist, The. 2012. The Euro Crisis: An Ever Deeper Democratic Deficit. The Economist, May 26. Weblink: http://www.economist.com/node/21555927.
Follesdal, Andreas, and Simon Hix. 2006. Why There is a Democratic Deﬁcit in the EU: A Response to Majone and Moravcsik. Journal of Common Market Studies 44:3. pp. 533-562. Repec handle: http://ideas.repec.org/p/erp/eurogo/p0002.html.
May 23, 2012
How much can one country squeeze out of another? I was prompted to think about this on Monday, when I spoke in Rotterdam at the launch of a major new book: Occupied Economies: An Economic History of Nazi-Occupied Europe, 1939-1945, by Hein Klemann (a Dutch historian) and Sergei Kudryashov (a Russian historian).
The main story of the book is how Germany extracted resources from occupied Europe that paid for one third of its war costs – and the consequences for the countries that paid. When you read history, it’s natural also to think about the present: what has changed, and what is the same. So, I thought about Greece.
Seventy years ago, Greece was under German occupation. Between 1942 and 1944, according to Klemann and Kudryashov, Germany took from Greece goods and services worth 3.5 billion Reichsmarks. Per head of the Greek population, this was between RM500 and RM600 per head, which was about the average for Germany’s occupied territories.
That sounds like a lot, but what did it mean to Greece? The back of my envelope shows the following calculation. In 1942, Germany imported external resources worth about 15 per cent of its national income. Klemann and Kudryashov show that Greeks were average contributors. Before the war, Greece’s national income per head of its population was about half Germany’s. So, a sum that in wartime was worth 15 per cent to Germans was worth at least 30 per cent to Greeks. Given Germany's wartime economic expansion, and the likely economic decline of Greece, I guess the upper limit could easily have been half of Greece’s national income in 1942 and 1943.
The point is that Germany’s wartime exploitation of occupied Europe was a very big deal, and Greece was no exception.
Now roll the clock forward seven decades. Look how the scenery has changed. The world is relatively peaceful and world markets are open for business. In Greece, average real incomes are six times the level of 1938. But Greeks are smarting under the national humiliation of being expected to pay for their public debt. Eighty per cent of that debt is held abroad, a large share of it by Germany. But the debt is an obligation that Greece assumed completely voluntarily. The Greeks are not under duress of any kind; the creditors have placed no landing craft on Greek beaches; in Kefalonia, no villagers are held hostage, and no Athenian commuters must show their papers at military checkpoints.
Still, the Greek sense of victimhood is so strong that they are not actually repaying anything at all. Instead, their government is continuing to borrow on the basis of being granted partial forgiveness. The fact that eighty per cent of Greek debt is held abroad implies that Greece should be exporting more than it imports if it wants just to cover the interest on the debt that remains. This year Greece's current account deficit is expected to be 5 per cent of its GDP, so that Greek foreign liabilities are rising, not falling. Meanwhile there is a political stalemate, and the anti-bailout parties (which together form a majority) argue they can slow or reverse the fiscal consolidation required to reduce the rate of new borrowing while keeping the creditors and the European Commission on board and disagreeing with each other about everything else.
Economic history suggests that it is exceptionally difficult to persuade a country to hand over a significant fraction of its national income to foreigners over any sustained period of time. Naked force will do the trick, but nothing less will do.
Today Germany is Europe's creditor. Writing in the Financial Times, my Warwick colleagues Marcus Miller and Robert Skidelsky recently (2012) drew a parallel with Germany's own experience after the 1919 Treaty of Versailles. Victorious in the Great War, the Allies imposed a large war indemnity upon Germany. This was mainly counterproductive, arousing German national feeling and resistance to the peace with regrettable consequences.
How much did the Allies actually extract from the German economy under the reparations imposed at Versailles? The accounting comes from a classic paper by Sally Marks (1978). The treaty’s headline figure was 132 billion gold marks, around two and a half times Germany's prewar national income. Of the 132 billion total the Allies themselves never expected to get more than 50 billion (the so-called A and B bonds). Germany paid a first instalment right away by handing over state properties valued at 8 billion; today's analogue might be the transfer of a few Greek islands. Germany paid the next billion in 1921 to get the Allies out of customs posts and an area around Dusseldorf that they continued to occupy. Then, the repayments stopped. In response the French occupied the Ruhr valley in 1923, netting another billion in compulsory deliveries of coal and other stocks. When the French moved out, payments fell away again and were repeatedly rescheduled. At their termination by the Lausanne Convention in 1932, Germany had paid barely 20 billion marks in total. In practice, most of that sum was borrowed from the United States, creating new debts on which Hitler later defaulted. Marks concluded:
The tangled history of reparations remains to confound the historian and also to demonstrate the futility of imposing large payments on nations which are either destitute or resentful and sufficiently powerful to translate that resentment into effective resistance.
Note the terminology, which we'll come back to. "Destitute" = "Can't pay." "Resentful and ... powerful" = "Won't pay."
By modern standards, the Allied occupation of Germany's revenue offices and valuable territories after the Great War looks like an intolerable infringement of national sovereignty. In fact there were many precedents for this, which the Allies merely followed. A recent paper by Kris Mitchener and Marc Weidenmier (2010) analyses 43 such cases from the nineteenth century. Today Greek opinion is inflamed by the idea of a European Commission representative in its budget office; Athens last came under foreign financial supervision in 1898, having defaulted on an indemnity arising from war with Turkey the previous year.
Based on this and other cases, Mitchener and Weidenmeier show that "supersanctions," when the creditor countries applied direct military pressure or directly supervised the debtor's fiscal offices, generally sufficed to restore the debtor's credit by enough to reduce bond yields and allow access to fresh borrowing.
What creates the power of sovereigns to resist their creditors, if direct force is not applied? Writing during the last major international debt crisis, Simon Bulow and Ken Rogoff (1989) argued that sovereign debtors are able to play on their creditors' impatience and desire to rescue something from the situation; faced with the threat of complete default and the need to apply draconian penalties, the creditors will be satisfied with partial compliance. The debtors will pay just enough to keep open their access to fresh borrowing.
The result is the phenomenon of continual rescheduling clearly visible in recent renegotiation of the Greek debt. Indeed it would seem that no one has read Bulow and Rogoff more carefully than Alexis Tsipras, leader of Greece's largest anti-bailout faction, the left-wing Syriza Party.
Despite partial default and bailout, Greece remains insolvent. Strictly interpreted, insolvency means that the debtor cannot pay. But the history of sovereign debt and default tells us that “Won’t pay” and “Can’t pay” are hard to tell apart, and it is in the debtor’s interest to make them look the same.
Allied failure to predict and manage this after World War I helped to poison Germany’s international relations and domestic politics in the 1920s. Miller and Skidelsky argue that Germany, which suffered so much after 1919, should not do the same to Greece today. I agree. But a far sighted reconciliation does not look likely, and might not even by welcomed by those Greek politicians who are now happily reinventing the tradition of Greece as a victim of foreign exploiters.
- Bulow, Jeremy and Kenneth Rogoff. 1989. A Constant Recontracting Model of Sovereign Debt. Journal of Political Economy 97:1, pp 155-178. RePEc handle: http://ideas.repec.org/a/ucp/jpolec/v97y1989i1p155-78.html
- Klemann, Hein, and Sergei Kudryashov. 2012. Occupied Economies: An Economic History of Nazi-Occupied Europe, 1939-1945. London: Berg. Weblink: http://www.bergpublishers.com/?TabId=15036
- Marks, Sally. 1978. The Myths of Reparations. Central European History 11:3, pp. 231-255.
- Miller, Marcus, and Robert Skidelsky. 2012. How Keynes Would Solve the Eurozone Crisis. The Financial Times, May 15. Weblink: http://www.ft.com/cms/s/2/55d094cc-9e74-11e1-a24e-00144feabdc0.html#axzz1vF2uhjh4
- Mitchener, Kris, and Marc Weidenmier. 2010. Supersanctions and Sovereign Debt Repayment. Journal of International Money and Finance 29:1, pp. 19-36. RePEc handle: http://ideas.repec.org/a/eee/jimfin/v29y2010i1p19-36.html
December 08, 2011
Writing about web page http://blogs.ft.com/the-world/2011/12/eurozone-crisis-live-blog-19/#axzz1fweCvEJB
What if the Euro collapses? There's already more than enough speculation about that. I'm wondering what will happen if the Euro survives.
Since survival is always conditional, let's ask: What happens if the Euro survives the next three years, which should be enough to take us into the next upswing. Also, we know for sure that the Euro cannot survive in its present form, but let's say there is just enough peripheral shake-out (say, a Greek exit), enough extra liquidity (a "wall of money" to shield the other vulnerable countries from contagion), and enough institutional reform (movement towards a fiscal union) that in 2014 a currency union is still in place with most of its current members.
What then? With all eyes focused on financial and fiscal turmoil, the underlying problem is being forgotten: The Eurozone is still not an optimum currency area.
Robert Mundell (1961) first set out the conditions for a group of countries to benefit from monetary integration: He argued that, to make an optimum currency area, the member states must be convergent in at least one of the following:
- They should experience similar shocks, and respond similarly to them.
- Or. they should have flexible (high-mobility) labour markets.
- Or, they should have competitive (flexible-price) product markets.
If these conditions were met, the real exchange rates of the different member states of a currency union would remain aligned. Without them, a structural mismatch would inevitably evolve. Full employment with low, stable inflation in all parts would be impossible. Unless some parts of the currency union would accept rising inflation, other parts would risk permanent depression.
Using forecast bilateral exchange rate volatility with Germany to measure convergence, Bayoumi and Eichengreen (1997) showed that, from the start, many current Eurozone member states did not not "fit" the Eurozone. Encouragingly, they did find a pre-existing trend towards convergence on the part of countries like Greece, Italy, Spain, and Portugal (but not France or the UK).
There was then a short debate about whether the Eurozone might experience continued convergence so that, although not an optimal currency area at the outset, it might become one. Frankel and Rose (1997, 1998) were for. Feldstein (1997) was against. Then, the Euro was launched. For a while everything seemed fine. But we know now that Feldstein was right.
Behind the scenes, with the Euro in place, previous efforts towards convergence stopped. Greece, Italy, Spain, and Portugal moved further and further away from Germany, not towards Germany. This is shown by statistical series from productivity growth to real exchange rates, trade integration, and fiscal imbalances.
In other words, the Eurozone today is no more of an optimal currency area than it was in 1999 when the Euro was launched. The peripheral countries have not made their markets more competitive. With rare exceptions, labour is unwilling to move across frontiers. The economies of the Eurozone remain "otherwise different" in fundamental ways.
Behind current efforts to save the Euro is still the theory that Greece and Italy can eventually be made more like Germany. If fiscal union is not to commit Germany to subsidize the periphery forever, then it can only mean the application of ever more pressure. German prices must be allowed to bear down cruelly on Mediterranean costs. Their public finances must be topped and tailed to fit the Procrustean bed of German frugality. In the face of ever increasing pressure, the culture of the periphery must surely give way.
But this is almost exactly the same theory that was applied from 1999 to the present, and was found wanting. Pressure was tried before; the only difference in current efforts is the addition to "pressure" of the words "ever increasing."
In other words, whatever their short run expedients, in the long run, Merkel and Sarkozy plan to hold the Eurozone together by the exercise of pure will. Just as Europe's leaders ignored the Mundell criteria in 1999, they will continue to do so. They believe politics can trump economics.
Leadership matters. The price tag of a disorderly collapse of the Euro looks large enough that its leaders should try to avoid our having to pay it. But what can one say of leadership into a cul de sac? The willpower required to hold the Euro together in anything like the form currently envisaged is completely lacking in any Europe-wide popular mandate. The belief that Europe's leaders can look each others' national cultures in the face and remake them arbitrarily goes against all evidence.
In short: What if the Euro survives its present stage? Current efforts will buy time, at best. When time has been bought and paid for, the original flaw will still be there. A Eurozone that is sustainable indefinitely will be limited perhaps to Germany, Austria, and Benelux. It might not even include France, however hard that is to imagine. It will not include the UK.
- Bayoumi, Tamim, and Barry Eichengreen. 1997. Ever Closer to Heaven? An Optimum-Currency-Area Index for European Countries. European Economic Review 41:3-5, pp. 761-770.
- Feldstein, Martin. 1997. The Political Economy of the European Economic and Monetary Union: Political Sources of an Economic Liability. Journal of Economic Perspectives 11:4, pp. 23-42.
- Frankel, Jeffrey A., and Andrew K. Rose. 1997. Is EMU More Justifiable Ex Post Than Ex Ante? European Economic Review 41:3-5, pp. 753-760.
- Frankel, Jeffrey A., and Andrew K. Rose. 1998. The Endogeneity of the Optimum Currency Area Criteria. Economic Journal 108:449, pp. 1009-1025.
- Mundell, Robert. 1961. A Theory of Optimum Currency Areas. American Economic Review 51:4, pp. 657-665.
June 24, 2011
Writing about web page http://www.ft.com/cms/s/0/4dfcca24-9e46-11e0-8e61-00144feabdc0.html
On the plane back from Moscow, I read Martin Gilman's No Precedent, No Plan: Inside Russia's 1998 Default (MIT Press, 2010). Gilman was the IMF's man on the spot during the Russian debt crisis of August 1998.
I flew into Moscow a few days after that crisis broke. Business life seemed to be paralysed. Many people that I met were panicked or in despair. But in retrospect, Gilman points out, this was the start of Russia's sustained recovery from the economic collapse that accompanied the breakup of the Soviet Union.
The crisis itself was very ugly. The disarray in Russia's public finances had built up over years, with persistent overspending, repeated failures to generate taxes, and the high inflation and high interest rates that resulted. In the private sector, Russian banks borrowed in dollars at low interest rates and bought up high-interest ruble bonds. In the crisis, the exchange rate plunged by a third, resulting in widespread bank insolvencies.
Gilman recounts the fear that Russia would turn away from a market economy and economic integration to ultra-nationalism and autarkic controls. In fact, there was no tragedy. At a lower exchange rate, the Russian economy regained international competitiveness and embarked on a decade of rapid growth that just about doubled real incomes.
As I read the story of Russia's crisis thirteen years ago, I was caught up in the parallels with Greece today. There are very important differences, of course. Greece is much smaller, with 11 million people to Russia's 140 million. Greeks are far richer on average, with $16,000 per head (at 1990 prices) compared with $5,000 per head for Russians in 1994. (And Greece doesn't have huge armed forces armed with nuclear weapons.) Surely, Greece's problems today should be more manageable than Russia's then.
In fact, Greece's crisis is similar to Russia's -- at best. When you add up all the political and financial claims on the economy, they exceed the resources available by an unsustainable margin. In Greece, people expected the public sector to guarantee jobs. They expected free services and benefits. They expected to retire early on fat pensions. They expected all this without paying taxes. The result was a growing debt, which had to be serviced. The government expected to be able to service the debt by borrowing more, so debt rose more rapidly. This was fine as long as interest rates were low, and as long as they could get away with misreporting what they were up to.
Now the only solution is to cut back on some or all claims on the economy. But whose, specifically? If Greece is not to default on the public debt at some point, there must be a huge fiscal adjustment. Back in February, the Financial Times put the tightening at somewhere between 8 and 22 percent of GDP -- and that was just to stabilize the debt, not reduce it. Greek living standards must fall by an unrealistically large amount. in fact, as Mervyn King reiterated today, Greece is insolvent. Default would at least allow Greece to transfer some pain to bondholders -- but domestic reform and retrenchment are still necessary, because who will lend to a defaulting government to cover its deficit?
In Greece now, as in Russia then, pain is inevitable but there is no prospect of agreement on how the pain should be distributed. Every group in the population -- the rich, the poor, the farmers, the business sector, the bankers, the public employees, the students, the pensioners -- looks for a way to pass the parcel onto others. The government does not have the authority to stop the game.
Moreover, much Greek debt is held abroad, so European bondholders, many of them French and German bankers, and increasingly the European Central Bank, are in the game too. The French and Germans are playing pass the parcel with the ECB; the British certainly don't want the parcel; as fast as the others pass it back to Greece, the Greeks hand it over again.
It is in everybody's interest to solve the Greek crisis quickly, but it is in nobody's interest to accept the role of victim. This must go on as long as at least one special interest inside or outside the country expects to gain by blocking a solution. Resistance will stop only when things are so bad that no one can any longer hope to derive a one-sided benefit from further delay.
In another respect, Greece's problem is worse than Russia's. The Russians could devalue. Devaluation of the ruble restored competitiveness and also cut incomes -- everyone's incomes -- by pushing up import prices. This put an end to argument over who should suffer the pain. Moreover, the pain was short-lived because recovery followed. Greece cannot copy this while it remains in the Euro zone. In fact, the only way of restoring Greek competitiveness is to wait while Greek wages and prices fall -- but this will not only take years; it would have the further highly unwanted side effect of further increasing the real burden of Greek debt.
Much good advice is being dispensed in the financial media about how to handle Greece's problems in an orderly, even optimal way. An orderly solution would mean several things at once: an agreed recheduling or restructuring of Greek obligations that decides how the pain is shared between Greece and external debtors; a fiscal programme that decides how the domestic adjustment is shared between taxes and spending, and between the various claimants on the Greek government; and a long term programme to liberalize Greek wages and prices and restore competitiveness.
There is nothing in the economic history of Russia or any other country to suggest that there can be an orderly solution for Greece. If an orderly solution was possible now, the problem would never have reached this point. Rather, it is more or less certain that the Greek crisis will break while everyone is unprepared, and it will work out in a chaotic, unplanned way, with unforeseeable consequences for Europe. For, without an exit from the Euro, the Greeks have no prospect of the rapid recovery that Russia made. An orderly exit from the Euro: what are the chances of that?
The Russian financial crisis came to a head in August 1998, unexpectedly, when many government officials, bankers, and IMF staffers were on vacation. As you pack your bags this summer, think about it.
P.S. I sincerely hope to be wrong.
April 30, 2010
Greece at the mercy of "the markets." Hundreds of thousands faced with job cuts, lower salaries, and longer to work until retirement. It's hard not to feel sorry.
Equally, it's easy to understand the wrath of many Greeks: why should foreign bond holders have such power over the domestic policies of a sovereign state? Why should they accept the diktats of the IMF?
There is a simple answer. For many years, the Greek government spent far more than it raised in taxes. Why? It was the easiest way to buy votes. The problem was that the Greek government could not do it without the cooperation of others: those willing and able to lend it it.
Some of these were Greek financial institutions such as pension funds. But 80% of the Greek debt is held abroad, much of it with German and French banks. But these have walked away, taking the ball with them.
Now that the markets have called an end to the game, those who want to stand up for the entitlements of the Greek workers have to ask where the money will come from. Here are the options:
- Continue to borrow on the market -- but who will lend? The Greek debt is already at or beyond the margin of sustainability (on which more below). It is not an attractive prospect.
- If not borrow, then take. One option for the Greek government is to take from the lenders that previously enabled the years of pleasure and are now causing the pain. Taking without permision is normally called taxation. In this case it is called default. For Greece, default is all the easier because most of the lenders are abroad; they do not vote and are unlikely to throw rocks. Unilateral default has one problem: you can only do it once. After that, there is the same problem as before: if the voters want the Greek government to spend more than it raises in taxes, they must borrow. But who will lend?
- If neither borrow nor default, then print money. For most sovereign states, printing money would fix several things at once. The new money would cover the budget deficit. Then there would be inflation, but inflation would erode the real value of the debt. After that there would be a disaster, but hey ... But Greece cannot go down this road, even if it wants to. When it joined the euro, Greece gave away the right to print its own money.
- If neither borrow, nor default, nor print money, then ... raise taxes and cut spending, because there is nothing else that can be done.
These are Greece's options. In fact, the conditions that the EU and the IMF are "imposing" on Greece -- to raise taxes and cut spending -- are just what Greece must to do anyway, because there are no other choices that don't end in disaster.
Even that might not be enough. Government revenues are currently around one third Greece's GDP. If the debt heads for 140% of GDP and then stops, and must be refinanced at 10%, it follows that in future taxation must transfer 14% of GDP annually to bondholders in interest payments, and these alone will use up around 40% of Greece's limited tax capacity. Moreover, around 80% of Greek debt is held abroad, so those interest payments must shift more than a tenth of Greek GDP abroad each year -- just to cover the service on the debt, not to reduce it. The currrent EU-IMF bailout assumes that Greece's problem is liquidity. But what if it is solvency?
In that case, the future still holds the possibility of default. Given more time there will perhaps be an organized, agreed default. A rescheduling of repayments agreed with Greece's creditors will not kill Greece's credit ratings for ever, provided Greece adheres to the conditions imposed upon it.
One way of thinking about the Greek government yesterday, if not today, is that it stood at the centre of a web of obligations: legal obligations to bondholders, moral obligations to public sector employees and pensioners, and political obligations to voters. What the world has found, adding these up, is that they total far more than Greece's available resources. Something must give.
Greece holds one card, and it is an important one. If Greece goes down, so do its foreign bondholders. The German government has faced the choice between bailing out Greece and bailing out its own banks. It is interesting, and not inevitable, that the German administration has chosen in favour of Greece rather than to let Greece go and pick up its own pieces afterwards. This illustrates two things: the importance of politics, and the well known saying widely attributed to Keynes: "If I owe you a pound, I have a problem, but if I owe you a million, the problem is yours."
In all modesty, how far from Greece are we? Expectations of the British government, and what it can do for lenders, employees, the young, the old, the sick, and voters at large, have also become overstretched. Like Greece, the UK has a government that overspends, with a budget deficit of similar size relative to GDP. As in Greece, public spending is much more important to the UK economy than it should be. Even before the crisis, its importance was rising steadily; public spending accounted for nearly half of the entire increase in GDP over the period of the Blair-Brown government from 1997 to 2007. Since the start of the crisis, the growth of public spending has accelerated. Right now, public spending amounts to more than half of the UK's GDP.
In some other important ways, we are much better placed than Greece. Our aggregate debt is smaller relative to GDP, with less need for near-term refinancing. More significantly, the UK has a much greater fiscal capacity than Greece, with better coverage of tax raising institutions and less avoidance. We will be able to raise the taxes we need to finance the debt we have. And we will raise them, for another important reason: more of our debt is held at home, so lenders are also voters.
Finally, and crucially, we are not part of the eurozone. That matters, not because it will let us print money, but because it will let us recover from fiscal adjustment. The coming squeeze on spending and tax increases will put a cramp on jobs and demand from the public sector, but further depreciation against the euro and dollar will eventually rebalance the economy, allowing exports and private spending to take its place.
If there is a parallel with Greece it is not in the national picture but the regional one. For the UK as a whole, the ratio of government spending to GDP is currently a little over one half. For Ireland, Wales, and the Northeast it is between 60 and 70 percent. These regions are not only hugely dependent on public subsidies but they have no chance of renewed competitiveness through currency depreciation because, like Greece, they belong to a currency union -- in their case, the United Kingdom. What keeps them going is an unconditional year-on-year bailout from central government revenues.
My vote is not yet decided, but these are some of the reasons why I am taking seriously what the conservatives have to say about the economy today. Darling called the first phase of the crisis far more astutely than Osborne, and labour deserves credit for that. I am not convinced that more of the same will take us into a recovery.