Wednesday 1 July 2015

Greece should vote "NO."

At some time back in the nineteenth century most of Europe realised that putting debtors into prison was not an effective  method of enabling them to pay off creditors.  Unfortunately today's  European politicians have not, with respect to Greece, yet learned the lesson.

In a post in January this year I argued that the Greeks Greece should be allowed to adopt a Keynesian solution to their economic problems:
  • granted a moratorium on debt repayments for, say, five years;
  • allowed to borrow further at market rates; 
  • revive their economy and tax take, initially by growth stimulated by public infrastructure projects;
  • sort out their tax-evasion and other endemic problems;
and then be in a position to pay off their debts.

Instead, the cart is put before the horse.  Rather than prioritising growth, this will be stifled by further government austerity, along with demands that large tranches of debt should be paid off now.

The reverse, Keynesian, policy is not "pie in the sky" theory, but can be illustrated from history.

The Greek government's Debt/GDP ratio is currently 180%.

In 1945 the UK's Debt/GDP ratio was 215% and it rose to 238% by 1947. But thereafter it fell steadily until the 1990s ( figures from  )

The reason was  economic growth, at least in part facilitated by loans from the US which have now all been repaid.

Other post war European economies, including  Germany, recovered from similar levels of debt, facilitated by some debt forgiveness and by massive Marshall Aid from the US

Greece is such a small  proportion, about 2%,  of the  EU economy that an experiment in similar Keynesian expansion is perfectly feasible.  In the unlikely event of its failing the consequences will be far less than the misery certain to be engendered by the  present policy,  which is doomed to fail.

So on Sunday the common sense thing for the Greeks to do is vote "NO."


  1. allowed to borrow further at market rates

    But who would lend at market rates to a creditor who was already in arrears? When setting rates you have to factor in the risk that you won't ever get your money back, which in this scenario would be quite high, so the rates would be high too.

    sort out their tax-evasion and other endemic problems

    Haven't they been trying to do this for years — since the first bail-out, in fact? But it turns out to be easier said than done (especially when they elect a government that doesn't even seem sure it wants to, and proposes to, for example, re-hire a bunch of useless public sector workers).

    Do you think that voting 'No' will inevitably lead to Greece leaving the Euro? I can't decide whether the threats to that effect by the various EU-crats are real, or just bluff and bluster.

    However I think that with the referendum, Tsipras has gone for all-or-nothing: his biggest advantage was that none of the others wanted to be seen as the one who (a) pushed Greece out of the Euro, or (b) crystallised the loss of the bail-out loans on Germany's balance sheet. But if the vote is 'No', then they can commence to do what they can to drive Greece out of the Euro, while washing their hands and saying, 'This isn't us, the Greeks people voted to leave.'

    I think a lot will come down to whether the Greeks believe their PM that they can vote 'No' without leaving the Euro; that all it will do is give him a stronger hand in negotiations to resist reforms. And even I don't know if that's true, so only God knows what the Greeks will think on the day.

    1. Thanks for your detailed comment. In response:

      1. Someone was prepared to lend to the highly indebted European governments in the post-war years, so I can’t see that it would be impossible for the Greek government today to obtain loans, provided there was a sufficient period of time to enable it to put a “growth” plan into operation.

      2. I know the Greeks have been “trying” for years to “sort out their tax-evasion and other endemic problems” but I wonder if they’ve been trying hard enough. I’m not an expert on Greek politics but I suspect that until the present one, most Greek governments have been quite right wing, and as such “in hock” to the rich and comfortable. The present government is not dependent on such support so could have the political will to push though the necessary reforms.

      I gather that today the IMF has recognised the Greek’s need for a “breathing space.” That at least is a step in the right direction, but regrettably only a timid one. Boldness is needed, along with hope, and there doesn’t seem to be much of either about.

  2. Someone was prepared to lend to the highly indebted European governments in the post-war years

    Yes, but that was a very different situation. The basic creditworthiness of the European powers wasn't in question, it was just that they had had a devastating war fought on their territory that made them need help. The US could be pretty sure that once they got back on their feet, they would start paying the Marshall Plan money back (as indeed happened).

    By contrast, the Greeks have zero economic credibility. They joined the Euro on the basis of, basically, lies facilitated by Goldman-Sachs. Various efforts to reform have proved unsuccessful. There is a real risk that even if they were given a default, and then lent to at market rates, they would just do exactly the same thing again: not reform, run a barely-growing economy, continue to pile up the debt, and eventually just devalue to effectively write it off (if they aren't in the Euro at that point) or be right back where we are now (if they are).

    Basically, the Marshall Plan was lending to someone who had been a general good and upright citizen, reliably paid their debts, but had then had their house blown up by a gas leak. They could then be lent to at low interest rates in the expectation that the debt would be repaid. By contrast, Greece is a feckless drunken gambling addict who has repeatedly squandered anything they can get their hands on, has promised many times to change their ways, but each time has simply ended up back in the bookies or the pub. There is a very real chance of any money lent to Greece never being repaid, so while certainly someone would be wiling to lend to them after a default, that risk would have to be priced into the interest and so they would be significantly above market rates.

    The present government is not dependent on such support so could have the political will to push though the necessary reforms

    But it's the present government which has been reversing the few reforms the previous governments actually managed to push through — re-hiring the useless workers, re-lowering the pension age, etc etc.

    No, the Greeks have not been trying hard enough to reform. Then they elected a government which is not only not trying hard enough, but is actively resisting reform. So what reason is there to think that this time, this time, things will be different? You might as well believe your husband when he tells you that this affair was definitely the last one.

    1. At one time I thought all Marshall Aid was a gift. I'm not entirely sure about this, but recently I've picked up the idea that the gift was to the rest of Europe, but the UK was required to repay. (I think the Americans were worried about our using it to reinforce the Empire). But on top of this were lots of loans as well which were repaid (though I believe Germany was forgiven some).

      I agree that Greece has been feckless in the past, though with the connivance of some feckless lenders. Nevertheless I believe there is a chance (though not a certainty) that, given the opportunity, the present government could reverse the process, and, in particular, greatly reduce the amount of tax evasion and avoidance, not just among the super-rich, but also among the comfortable (all those "unfinished" houses and office blocks, because they don’t pay tax until the roof is complete - or is that a myth?)

    2. Nevertheless I believe there is a chance (though not a certainty) that, given the opportunity, the present government could reverse the process

      Of course there is such a chance. But there is also a chance that they wouldn't. That's the point of the risk component of interest rates: to take into account the chance that the debt won't be repaid.

      (That's why the implicit promise of the government to bail out banks which are too big to fail is effectively a public subsidy to them because it allows them to borrow at lower rates than otherwise… but that's a topic for another day).

      Greece might reform, but a lender cannot assume that they will: a lender must price their loan according to their best estimates about the chances of the debtor being able to repay, not by simply assuming the best. Panglossians don't last long in the money markets (or in any field of business).

      The chance of Greece failing to reform and so ending up defaulting on a new loan is significantly higher than, say, that of the Us or the UK defaulting. So the rates will be commensurately higher.

      I mean, technically, it's perfectly true that Greece will be 'allowed to borrow further at market rates'; it's just that nobody will lend to them at those rates, and rightly so, because of the risks of default. The IMF and ECB have been lending to Greece for the last few years at too-low interest rates, and look where it's got them: holes in their balance sheets to the tune of billions. Who, having seen what happens to people who lend to Greece, could afford to take such a risk, without a decent interest rate to compensate for it?

    3. You're a tough cookie: I'm glad I don't owe you money!

      Look back to where this discussion began - a reference to the absurdity of putting debtors in prison as a means of getting them to pay up.

      You are right of course - there are risks to further lending to the Greeks, just as there were risks to lending to the UK Government - Labour(!!), and with a majority (!!!), in the post war period. But somebody took the risk and we all benefited with a health service, universal secondary education, slum clearance, social housing, and a social security system which enabled those who for one reason or another were disabled, to avoid destitution.

      I'm sure the chances of a successful outcome for Greece are far greater with a policy of expansion than the alternative of the present policy, yet more austerity, which has failed for the last seven years or so and, regrettably, is doomed to continue to fail.

  3. Look back to where this discussion began - a reference to the absurdity of putting debtors in prison as a means of getting them to pay up

    Right. But equally absurd is lending them more, which is what we used to call when I was a kid 'throwing good money after bad'.

    Clearly the current plan of action with regard to Greece is failing, and will continue to fail. But any alternative has to be based in economic reality, not the fantasy that Greece, having either defaulted completely or the effective partial default that an interest-free moratorium on repayments would amount to, could then expect to immediately start borrowing again at anything less than a punitive rate of interest. Who, as I keep asking, is going to lend them the amount they need, at 'market rates'? I suggest the answer is, 'Nobody sane.'

    It's going to take something dramatic to get Greece into a viable state again, but whatever it is it can't be conjured up out of fantasy economics where it's possible to simply stop paying your creditors, and then borrow more as if nothing has happened. That's just not reality. (And it oughtn't to be reality: the moral hazard, both going forward in terms of showing other countries that they can get away with it, and extending into the past, where the Irish, for example, could legitimately claim that they were unjustly treated and that they want some of their money back, is tremendous).

    I suspect what it will take is a Greek default, a devaluation, and a decade or more of intense pain (including very high borrowing costs) for Greece as it gradually makes its reforms and works its way back to good creditor status. That's not a process that can be short-circuited or ameliorated, much — it will just have to be endured — if nothing else, because the current government there, I fear, would, if they defaulted, actively try then to avoid reforms to, for example, the public sector and the pension system: instead they'd try printing money to pay pensions and public sector workers.

    If they do that, the only thing that will stop them and get them back onto the road of reform is the pain of the ensuring hyperinflation. If that pain is eased, say by well-meaning but misguided other governments helping them out with loans at maddeningly low interest rates, t will just let them kick the can of reforms farther down the road, and end up delaying the pain; thus making it al the greater when it arrives.

    To go right back to the original question of which way the Greeks should vote: I don't know. To be honest, I don't think it makes a huge amount of difference. 'No' means they default. 'Yes' means the government falls, is replaced by a more pliant one, and a deal is made that doesn't address the fundamental issues but allows the whole thing to limp on for a little more, and in six months, or next year, or two years form now, everything is back exactly where it is now and, eventually, the default happens.

    The vote might change the timing; it's not going to change the outcome, is it?

  4. Two clichés:

    1. People do not exist to serve the economy: the economy exists to serve the people.

    2. (From a Scottish MEP [SNP of course] whose name for the moment escapes me): We do not live in an economy, we live in a society.

    I believe the most constructive way forward is for the Troika to accept shared responsibility for the mess Greece is in (Greece should never have been allowed to join the Euro in the first place and - counter-factual history - I suspect that had the UK been a member we'd have blocked it and a lot of this trouble would have been avoided) and adopt a growth led rather than an austerity led solution. Governments have spent billions supporting banks which have made foolish loans but been regarded as "too big to fail." I think the Greek people similarly are too important to be condemned to further misery in support of a failed economic policy..

    I go away on holiday today so I'm afraid this will have to be my last contribution. Thanks for a stimulation "conversation" and do feel free to have the last word.

  5. I have received this comment from Michael Meadowcroft, who tried to put it on the blog but was frustrated by barriers to entry. (I wasn't aware there were any, such as deciphering funny codes)

    Here's what he says:

    Neither "yes" nor "no" can necessarily lead to a viable solution but, alas, it would be madness to vote "no" as, with the ludicrous over-emphasis on economics currently within the EU and the volatility of the banks, it could well lead to such financial instability as to threaten the whole European project. Remember that Liberals are not in charge of the institutions.

    Greece, and any country, can, of course, vote against austerity, as it has, but it is not enough to vote for the ends - it has also to vote the means, and it cannot do so. The underlying problem is that a currency has to have a single government. For instance, California is essentially bankrupt and the electricity supply fails from time to time but it does not affect the dollar because it is federal. Greece "fiddled" the stress tests to enter the Euro (as others did) and those planning it turned a blind eye because [a] they wanted as many countries in as possible and [b] they never imagined that a country qua country would exploit it as Greece did.

    If the lenders want their money back they have to assist the Greek economy to grow. It is a purely pragmatic situation and there is no point in screwing the economy so that it can never create the surplus from which to repay the loans. The problem with agreeing debt relief is that it, rightly, offends those countries that have tackled the problem with some success. The Greek debt to the IMF etc needs to be "parked" for the longer term and measures to assist growth encouraged.

    1. Re the Greek "fiddling," even I knew that Greece was nowhere near the convergence criteria (current borrowing below 3% of GDP, Debt:GDP ratio below 60%) so those in charge must also have known. Thus allowing them to join was as much the result of hubris on the part of the leading lights so of the Euro as of duplicity on the part of the Greeks. Hence there is joint responsibility for the current mess.

      The key problem is, however, not who caused the mess, but how to get out of it. As you rightly say:"If the lenders want their money back they have to assist the Greek economy to grow." The current (as at 15/07/15) package, by raising taxes and cutting expenditure, will have the reverse effect. Even the IMF has said the package is unsustainable and I believe Krugman has described it as ridiculous.

      If I were in the Greek parliament today I should vote "No" and plead for a breathing space to give a Keynesian expansion programme, as outlined above, to work