Where Greece went wrong

Here is another useful paper on Greek economic history.  Here is one excerpt:

Rather than adopting policies to correct the macroeconomic imbalances of the Greek economy in order to restore macroeconomic stability and growth, the newly elected Socialist government further promoted policies for income redistribution and the expansion of the public sector. These policies reflected two aspects of the political and economic system of that period. First, they reflected the political priorities of the newly elected government, which was elected under a promise to the public for a radical change in the socioeconomic system. The expansion of the welfare state in the late 1970s had increased the public’s appetite for additional state transfers and for further measures to lower the gap between low- and high-income groups in the society. Second, they reflected the lack of any constraint, internal or external, in the conduct of economic policy. The debt-to-GDP ratio in 1981 was only 34.5%, despite the fiscal expansion that took place during that year. The debt-to-GDP ratio was the highest of the previous 30 years, but still at a relatively low level by world standards. Thus, the Greek government did not face any difficulties borrowing from the domestic and international markets in the early 1980s. This allowed the government to continue pursuing its expansionary policies. Moreover, the central bank lacked independence, a factor that Alesina (1988) and Cukierman, et. al., (1992) find to be inversely related to inflation. Even though the Currency Committee was officially abolished in 1982, the government continued to set the broad outlines of monetary and exchange rate policies during the 1980s. This meant that monetary policy was dominated by the need to finance fiscal expansion.

Although I still favor Greece leaving the Eurozone, we should remember they joined the currency union for a plausible reason, namely that their own monetary policy was a disaster in the making.  Here's a very good post on how deeply structural the Greek problems run.  


Here is a detailed account of the dynamic of the collapse of convertibility in Argentina:

Tyler, let me make some points that are often missed by economists that ignore lessons drawn from experiences of crises and emergencies.

First, data matter. You may remember how much noise was made about the deceptive accounting and counting practices of private enterprises and banks when they were accused of fraud or negligence. Unfortunately, we hear too little or nothing about the terrible statistics underlying fiscal crises. In the case of Greece, this is a serious problem as pointed out in the last IMF Article IV Consultation Report (see in particular the note in page 49) and it must be a concern for all lenders that trusted the Greek government.

Second, leaders matter. You may remember how much noise partisan economists made about some of elected politicians and government officials responsible for not supervising private enterprises and banks, to the point of accusing the owners and managers of these enterprises and banks of capturing and corrupting those politicians and officials. Unfortunately, we hear little about the Papandreous that in the past 50 years have been the main political force in Greece’s socialist party and the three of them that have been primer ministers (and remember that the current PM George Papandreou was born in St. Paul, Minn.).

Third, escape clauses matter. You may remember how much economists like to talk about “a lender of last resort† and other government actions that are urged as “last resort† to justify a "solution" to a “crisis† or an “emergency†. Unfortunately, we hear nothing about the escape clauses that most agreements include. When facing a “crisis† or an “emergency†, it’s easier to ignore agreements and escape clauses in order to urge discretionary actions that usually amount to abuses of government powers. I remember a conversation with Charles Goodhart in 1997 about the draft framework for the Eurozone and his concern about the lack of escape clauses for situations like the one Greece is facing today. I don’t know the details of the relevant agreements for the Eurosystem and the ECB to deal with Greece’s fiscal crisis, but given the serious weaknesses of EU’s institutional framework, I’d be very reluctant to ignore any clause that may help to resolve it as well as to propose actions that amount to abuses of power (like Greece’s expulsion from the Eurosystem so it can issue its own devalued currency).

I think that everyone knew that the richer countries were going to have to subsidize the poorer countries. What the Greek Govt did was to be expected. People just hoped for the best. Then things blew up. It's not really that odd of a story.

Given Europe's history, it's also not odd that they would try and form bonds that would preclude armed conflict, especially economic ones. In reality, for the plan to work, the bonds needed to be stronger. That's the choice now.

"Moreover, the central bank lacked independence, a factor that Alesina (1988) and Cukierman, et. al., (1992) find to be inversely related to inflation."

Wait, I thought central bank independence correlated negatively with inflation? Or maybe I'm just reading the quote wrong, and it's saying what I'm saying.

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