An awkward question about Greece and the eurozone

“How can the Spanish or Italian prime minister tell voters that Greece has a lower interest burden than we have, but we still need to give them debt forgiveness?” said Mr Darvas.

That is from Ferdinando Giugliano at the FT, who is referring to the possibility that the Greek debt load might be sustainable.  Don’t focus on the debt to gdp ratio of 175 percent, consider that the interest rates are low and the term structure of the debt is long.  Here is your Greece fact of the day:

Mr Darvas calculates that total interest expenditure in 2014 [for Greece] was 2.6 per cent, only marginally above France’s 2.2 per cent.

Yet I do not find the Greek position to be sustainable.  As has been the case from the beginning, the real problem in the eurozone is in the politics, not the raw numbers of the economics.  It is worth noting that there are Maoist and Trotskyite factions in Syriza, so if we are going to moralize about the National Front in France, or other disreputable groups, let’s be a little more consistent here…


It's quite disreputable to compare Syriza to National Front.

Here is an actual moral question: why ought Greece hand over 1/20 of its economy to creditors when 1/4 of its people are unemployed?

Why, because communists 'care'?

Likely, the creditors are not responsible for Greece's economic problems. And, because "Greece" took the (borrowed) money and promised to repay at interest. What is disreputable is borrowing money and then refusing to repay, not comparing a set of tyrant wannabes (mass brigandage/dictatorship of the proles) with a far right-wing political party in a nation that actually pays its obligations.

And not realizing that lending money to a country without its own currency makes the loan especially risky is worse than a crime, it's a mistake. ECB needs to inflate away PIGS debts as penance for years of incredible stupid monetary policy.

So Grexit is the solution? Greece does not have economic structure to leave the Euro.

Does it have the "structure" to remain?

Greece does not have economic structure to leave the Euro.

1. Institute a bank holiday.

2. Institute exchange controls for a period of 15 months, with possible extensions. Tranches of foreign currency are auctioned off each months and the official exchange rate is adjusted each month according to auction results.

3. Sort the vault cash during the bank holiday, shipping the coin minted elsewhere and the notes printed elsewhere to the central bank in return for reserves on deposit. Have the bank staff rubber stamp all the Euro notes minted locally as a mnemonic aid (see the alphabetic code on the back). After the banks open, you can exchange any coin or notes which come in at the official exchange rate and stamp any domestically produced notes.

4. Make use of the old designs for drachma notes and get them in circulation as soon as you can get the plates made and the presses running. Ditto the coin. Until then, the stamped Euro-notes and locally minted Euro coins will have to do as drachma-tokens.

This is OT, but why is FN described as "far right-wing?" They are secularists; they aren't talking about dismantling the welfare state. The idea that France is the ancestral homeland of the French, and the French reserve the right to say who gets to be in their own country does not strike me as "far right-wing." I don't see anybody complaining about "far right-wing" Israel keeping out Palestinians, or about "far right-wing" Palestinians asking that Israel not take over more of the West Bank.

IT zillionaires, for all their public pronouncements, seem to like taking up lots of land that more people could occupy and I bet they have some heavily armed men on their payroll to keep it that way. They clearly have no problem with the government extending vague, open-ended privileges to their legally fictitious companies; the conditions a nation-state sets for crossing its borders seem a lot more tangible and organic.

In sum, the idea that a group of people can draw a line around themselves and reserve the right to determine who gets to step across does not seem like some fringe concept. Also, don't about a third of French voters support FN? The French don't strike me as caught up in any mass delusions; is a whole third of the country "far right-wing?"

The NF and BNP in the UK are socialist parties that generally favor protectionism and nationalizing of major industries.

They are called right wing because only right wingers can be racist, and to be racist is to be right wing.

That these parties receive much support from disaffected socialist voters simply means these formerly left wing voters have magically transformed into right wing voters withiut having to change their left wing views.

In France, yes these ideas are far-right wing. Are you French?

This xenophobic lunatic believes that the French "ancestral homeland" and "nation-state" are objective realities, but that Microsoft is fictitious.

"Be glorious, our free motherland,
A reliable stronghold of the peoples' friendship!"

That allusion to the ancestral homeland is from the USSR's national anthem.

Was Stalin and his anti Jewish pogroms right wing?

No. These nationalist parties are mostly left wing in policy, and the fact they're ignorant racists does not magically make them right wing.

Find a party that supports free trade and economic liberty while also expressing xenophobic attitudes to minorities, and they will be right wing.

Not too many of those around though.

One does not typically just average all of a political party's priorities to determine where they lie on the spectrum. You take their policies in the context of other groups in their country and see what distinguishes them.

Also, I don't know about NF, but I am almost positive BNP would not be considered socialist by anyone who really looks at their policies. Their manifesto includes budget cuts and a bit about UK industries, but really it's all about security, fighting Islamism, nationalism and breaking with the EU. Read more closely and you'll see even more right wing sentiments where you would not expect them. Environment: the main problem is overpopulation, caused by immigration. Education: need to bring back corporal punishment. What?

"This xenophobic lunatic believes that the French “ancestral homeland” and “nation-state” are objective realities, .."

What? Are you saying that the French nation-state is not an objective reality?

The only difference between FN and the mainstream parties is deciding which decade the Islamic Republic of France will be founded next century. Marine Le Pen might delay the inevitable for a generation or so.

Most of the canaries will fly away, while the miners will unfortunately choke on sharia.

The only difference between FN and the mainstream parties is deciding which decade the Islamic Republic of France will be founded next century.

About 7% of the population of France is Muslim. The source countries of Muslim immigration (Tunisia, Algeria, and Morocco) have total fertility rates which average to replacement levels. The total fertility rate for non-immigrants is about 10% below national means and the country's tfr is only about 5% below replacement rates. Given that they are outnumbered 13 to 1, it will take a loooong time for the Muslim population to outnumber the native French.

Art Deco:

Realistic estimates are over 10% and growing steadily, not 7%. You're also not taking into account the age of the populations. It's nice that French people live so long, but octogenarians aren't going to be able prevent the inevitable, unless you've discovered some miracle drug. It will take a long time (which is why I said "next century"), but you can write France's obituary whether or not Le Pen wins.

Realistic estimates are over 10% and growing steadily,

Your informants are not 'realistic'. They are wrong, as are you.

Also, don’t about a third of French voters support FN?

No. More like 15%. The FN scores well in European elections, but not so well in domestic parliamentary elections. To be sure, their support therein is partially suppressed by the characteristics of the French electoral system, which has a bias toward parties that can conclude partnerships with peer parties or patron parties. That tendency in French electoral politics destroys most parties who do not ally with the Socialists or the Gaullist/Giscardian omnibus. National Front is the vast exception.

Yes, but I'm saying there must be a threshold of human suffering that constitutes cruel punishment for the offense of reneging on a promise. 25% unemployment is a punishment, and it's morally odious. How do you justify it?

Additionally, Syriza's stance on NATO and remaining in the Euro shows themselves to be champions of democracy. They tone down their message to reflect popular opinion (for which they won an election). It's the former regime that acted like tyrants.

Germany did not make those people unemployed. The Greeks simply want an inconsistent policy set, full of nice-thing contradictions. Yes over-stimulated demand a la 2004, yes tax cuts, yes public spending, yes euro membership.

Saying "we will not give you more free goodies for nothing" is not "punishment"

The fact that people think it is is horrifying.

Oh my god, the mere thought of it is pure HORROR.

You are 100% free to buy all of the Greek debt that you can afford and then to inform them that they no longer have to repay.

Wait, what? You don't want to do that? You only want to tell other people what they should do? Oh my mistake.

The pain for having lent/borrowed for projects that yielded less than interest costs or even negative yields should have been distributed in 2008 by negotiations between the lenders and Greece. Yes this would have required a credible commitment after the default to better policies and Greece should have considered if the amount of internal deflation and consequent loss of output was worth maintaining parity with the Euro.

What the hell is stopping them from employing themselves?

How the heck is unemployment a punishment, unless someone (other than the Greek government itself), is somehow making it illegal to hire people?

The real culprit here is Greece's labor market regulations that force so many people to work grey market jobs or go without work, rather than work on whatever terms are agreeable between the parties.

Aye. Though I think it can take decades for labor markets injured in this way to heal.

"Though I think it can take decades for labor markets injured in this way to heal."

It might take decades, but it won't even start without some serious regulatory reform. Greece ranks 130th out of 178 on the Economic Freedom Index. You can always question the exact rankings on such a metric. However, it's pretty clear that by any metric, Greece is a fairly restrictive economic environment.

It's not disreputable, it is pointing out that some in SYRIZA idolise men who immanentised actually-existing genocides.

Why ought creditors to give Greece, for, what, the second or third time, simultaneous forgiveness and permission?

It is disreputable. For all it's faults the FN is able to criticise the enormous failings of past governments/policies on its side of the ledger unlike Syriza. Moreover Syriza has just entered into a coalition with a party similar to Fn.

Because they borrowed more than that?

Agreed, the Syriza scum are much worse.

"why ought Greece hand over 1/20 of its economy to creditors when 1/4 of its people are unemployed?"

They don't have to, they can always default and lose access to credit markets entirely, but that may make Greece worse off. Unfortunately Europe is desperate enough to avoid a failed state in their midst that Greece maximizes its advantages by brinkmanship. That's why the writeoffs, amidst promises from all sides they will never happen again, keep happening. They'll let the ECB print the Greek budget before the worst can happen.

Of course the moral question really should have entered in for the Greeks back while they were inexorably building this scenario to inevitability with overspending, but I don't feel sorry for the ECB. Their monetary policy has needlessly made a bad situation worse, all over Europe. At this point most of the EU would be better off outside the euro, where they could target a sane NGDP trend.

"consider that the interest rates are low and the term structure of the debt is long." That's all debt today.

how bad are Trotskyites, compared to other branches of communism? and is there any evidence, other propaganda, since the Trotskyites haven't run a country?

According to Stalin Trotskyites are pretty bad, the scum of the earth.

+1 Ice Pick assassination

Heh, I had a similar thought. I didn't realize that the few remaining communists still broke out into the old sects. Nowadays it has a very Judean People's Front/People's Front of Judea feel to it.

I'm a child of the post-Cold War period, so the vagaries of communism are something I only get through osmosis when I read Brad DeLong's blog. To be honest I probably couldn't clearly explain the "official" differences between Stalinism, Leninism, Troskyism, Maoism, and so on.

Nowadays? They've been split up like that since before your parents were born.

A communist is a communist. And they all deserve the same fate.

Of all the finger pointing about the Eurozone, I still think the most basic failure is the Europe needs more freedom of movement for labor to control imbalances of a currency zone. I would rather Germany open its border to Greece and let migration lower the 20% of unemployment versus the situation today.


Um, Collin, um...

I have always accepted the US comeback from 2008 was than Europe post-2008 has been three reasons: TARP and Stimulus fast, early, and stopped, Oil & Gas drilling "Creating animal instincts" and the freedom of labor to move to jobs. So during good times Texas and Oklahoma have state migration from Alabama or Nevada which helps control the unemployment rate in worse states. (In Cali. my neighbor did jobs in North Dakota in 2011 - 2013.) So I think the Euro is a problem partially because workers and businesses can not move as freely. The right currency zone requires labor to freely move not just capital and products.

Fracking has indeed added about 150,000 or so jobs thereby helping the recovery. Yet that barely touches the fact that several million jobs have been added during the recovery. Also what has been good for natural gas has been horrible for coal mining, which I suspect is much more labor intensive.

Either you're trolling or you've never been to Germany. Last time I checked, the borders where completely open, for the last 30 years, and there was at least one Greek restaurant in every small town...

My wife's cousin owns of the biggest and best Greek restaurants in London. He's been there for 30+ years. And he's a communist!

He hates Israel and America, and worries about the CIA because it never "helped" when he Turks took half of Cyprus.

German Wikipedia says 284k Greeks live in Germany. Considering that the total Greek population is about 7m, I think that's quite a lot.

The population of Greece is 10.8 million.

You don't seem to know how the EU works.

Germany has had substantial immigration from Southern Europe, but Germans are smart, and practical and they've managed to limit the inflow. They don't want their economy flooded with cheap labor. So within Germany,workers, even manual laborers, are often required to speak German. Germany also has many semi-skilled jobs which don't require very high intelligence but can't be easily replaced by foreigners as the workers have to know German and have a degree from a German trade school. Another method is a higher minimum wage and more "worker's rights."(which are actually enforced) This would prevent Greek workers from underbidding German workers. Strong unions also prevent replacement of German workers by foreigners.

Sounds plausible...and brings up an interesting question. The two topics that get most folks here the most agitated are liberals/socialists/leftists taking over and Hispanic immigration. Could it be that you need the first to prevent the second? The German model is quite far to the left of the American one, with strong unions who run companies right next to management.

Well, it would be pretty easy to prevent immigration, all it would require is enforcing the laws. However, in an environment of free immigration I'd imagine that raising of the minimum wage would eliminate some of those Jobs American's Won't Do, which is one reason I'd support it.

The politics of socialism and multiculturalism are closely linked in America, but needn't be. Many countries, like Israel and Japan are socialist and nationalist.

I guess my point is, which of the two does the median MR poster despise more? Socialism or brown immigrants?

The brown immigrants tend to favor redistributive policies and clannish, low-trust practices for taking care of their own in-group. Immigration is cultural and political suicide for people who favor limited government. Or, as the saying goes: Diversity, Liberty or Equality; choose one.

But we're discussing how the large government/socialist society of Germany keeps immigration down. Would the typical MR poster be ok with that tradeoff?

I'm coming around to the view we either pay our lower-g citizens at the cash register or we pay them welfare. The former seems a lot less socially destructive.

"socialist society of Germany keeps immigration down. " Keeping socialism at bay is the main reason to oppose immigration. You have things backwards.

"Socialism or brown immigrants?"

Socialism, by a mile. Reduce the welfare state and you've eliminated the primary problem with high amounts of low skilled immigration.

Brown immigrants. And brown immigrants inevitably bring socialism with them, as long as we believe in their "rights."

All of the things you mention are reasonable, but even in the US there are plenty of people who don't are can't relocate. Why is there anyone still living in Detroit? Family ties are the most obvious reason. And low incomes.

And then there's culture and the general quality of life. Germany might have higher wages, but it's a very different culture to Spain—and not one that many Spaniards admire. It's also freezing cold.

Finally, language is a real barrier. Not many Spaniards speak German, which immediately limits the available jobs. (The UK, on the other hand, benefits from being English-speaking.)

These factors all contribute to natural barriers to the free movement of labour in the EU. The solution is obvious: Everyone in Europe should speak English.

The solution is obvious: Everyone in Europe should speak English.

No, the solution is that European countries deregulate their labor markets and re-establish floating national currencies. Have a moratorium on the distribution of settler's visas for some years and (when these resume) tag the annual distribution to the country's fertility deficit.

I should add that Spain's massive pool of unemployed young people isn't necessarily interested in unskilled labour. Many are graduates. Laying bricks in Düsseldorf or building cars in Bavaria is hardly the kind of thing they're looking for. Without the language, it's unlikely they could find graduate-type jobs in Germany.

On the contrary, assuming these highly skilled Spaniards speak English, they can probably do better in the high-end job market than in the medium to low. My German's not as good as I'd like, but in software engineering, most (but not all) employers feel English is required while German is a nice-to-have. Factory work will be quite a different kettle of fish.

It is not that hard to learn German on passable level, especially if you know English already. The two languages are more similar than meets the eye. The deep structures and roots of words are obviously of the same origin.

Well...grammar is a bit different. Also, for an office job, it is not enough to speak a-bit-of the language, you need to speak/write GOOD german, no foreigner would be able to achieve that in a short time...

Moreno is right. For example I could probably get by as a bricklayer or a computer programmer, but not as a salesman or secretary.

Of course, office job which needs perfect knowledge of the language will not be open to a recent migrant, but they aren't probably that good in English either.

Most of the white-collar jobs that migrants in Germany fill are either in industry or in healthcare, where perfect knowledge of grammar isn't necessary.

In practice, the Goethe Institute, which conducts testing and awards certificates, is obviously content with "non-perfect" knowledge even for C1 and C2 levels.

Such a policy is not only politically unpalatable but also not practical, Europe is not the US...

What exactly would be the problem with a moratorium on troika repayment until unemployment fell below, say 10 percent?

Wouldn't all the other countries with high unemployment demand the same treatment?

Assumes Greek unemployment can get below 10 per cent. That's been true for basically four of the last ever years.

Dearieme, right now there are only two countries with Great Depression-level unemployment, Greece and Spain. And I'm not sure what the harm would be if there were a moratorium on debt repayment for Spain and for Ireland and Portugal as well. I don't see moral hazard here. What country is going to say, gee -- wouldn't it be great if our unemployment soared, then we could postpone debt payments for a few years!

Millian, that's true. Maybe 15%. Basically stop shipping money out of the country in the midst of an economic calamity until there's some real recovery in the labor market.

"And I’m not sure what the harm would be if there were a moratorium on debt repayment for Spain and for Ireland and Portugal as well."

Well there's obviously harm to the Lenders. You might attempt to make the case that the harm the moratorium causes on the Lenders is worth it given the circumstances. However, to write as if the harm is insignificant smacks of delusional thinking.

Wonderful, that just gives the Greek government leeway to expand the definition of unemployment to guarantee that it never drops below 10%. :)

This is the obvious consequence. People who don't understand Greece still like to assume (contrary to all evidence) that Greek politicians are negotiating in good faith, or that they're actually interested in fixing their country. Nothing could be further from the truth.

"2.6 per cent, only marginally above France’s 2.2 per cent. " Or 18% above, as the more numerate might observe.

Our master of English is unfamiliar with the difference between "more numerate" and "less pedantic"?

I think it's the absolute difference that matters. What's the difference between -0.01% and +0.01%? Not infinite.

Is 18% sufficiently high for a total serial defaulter like Greece? Compare 'This Time Is Different' by Reinhart and Rogoff.

Collin, every Greek citizen is free to pack up their bags and move anywhere within the Schengen Area. France, Germany, Italy, Greece, migration between all of them.

The reason that Greeks don't move is that they don't speak German or French or Italian. Less than 10% of Greeks have any German language skills. Italian and French are known by only about 8% of the locals in Greece. English skills are a little better, maybe half of Greeks know some passable English.

Now realize that some of those foreign language speakers are actually sun-seeking expat retirees, not native Greeks.

Many of those who can leave, are leaving. The resulting population is getting less and less competitive.

The long term trends are disastrous and no one seems to want to acknowledge it.

@Cooper - "The reason that Greeks don’t move is that they don’t speak German or French or Italian." - don't be absurd. You need to speak English to move out of Greece, since most educated people speak English nowadays, even and especially in Germany. You are referring to factory workers, and as Clover says you need to speak German to do that (they have German language schools in Athens). But the real question is, why move out of Greece at all for economic reasons (I moved to the Philippines for social reasons)? The biggest export industry in Greece is tourism, and just the other day it was reported that Greece hit a record for the number of units built to accommodate the 19M tourists that visit Greece every year. Nothing like the 60-80M that visit Spain, France, Italy but for Greece it's something like 20% of their exports. Yes, tourism is an export, as foreigners bring their currency and spend it in Greece, hence, it's like an export. Going off the Euro will help this industry, which is something like 20% of GNP it is said, since you can rip off tourists more easily with a drachma to euro/dollar exchange rate than a 'hard' euro rate. And Greece has a lot of nice places that can benefit from more money to develop tourism. Just to mention one, the remote tip of south Greece has a place called Monemvasia but it's hard to get there (they used to have a sea plane, but it was discontinued) hence it's not that visited. If you get there, check out the church on the top of the island, which features, akin to I think (from photos I've seen) the white cliffs of Dover in England. At the very top of this mountain that rises like a cylinder you get a straight drop down, NO GUARDRAILS, and the church is RIGHT ON THE FREAKING EDGE OF THIS CLIFF!!! And NO SIGNS. And no guides either. I swear, if some 'free spirit' saw the beautiful blue sky behind this church, after a long hike up to the top, and innocently wanted to go running to the 'back' of the church, and take a dive in what they think is green grass or a meadow in the back, thinking perhaps there's a back yard... watch out below! It's a 300 meter drop I think, but it looks like a mile. One of the scariest drops I've ever seen, and I've been to Tibet and the Andes. I myself, tired, stumbled with the girl I was with towards the back of the church and just before the edge I saw the drop. OMG. We got on our bellies and just looked down, without a word, quivering, since what do you say to that? It's like here in the Philippines when I struck my head on a loose electrical wire that turned out to be a live high-power line from the city--they don't put stuff up high but it hangs at head level and you're not supposed to touch it--and the wire was patched with electrical break in the tape and I would have been lobotomized. Folks, be careful when you're a tourist outside the US. There are no US style product liability laws to save you, it's caveat emptor and if anything bad happens to you it will hardly make the press since it's bad for'll be quietly zipped into a body bag and sent home...happens every year, dozens of times. Bedtime now...

can you buy a younger girlfriend in Greece or the Philippines?

I think he has implicitly answered your question already.

Before or after they finish devaluing?

"...when I struck my head on a loose electrical wire that turned out to be a live high-power line from the city..."

This explains so much.

"You need to speak English to move out of Greece, since most educated people speak English nowadays, even and especially in Germany."

You are obviously not from Europe. There is always an additional requirements that you must speak German. Not to mention protected occupations which you can't do if you are foreigner.

If you try to show up in a country without any basic local language skills, you're going to be working at the very bottom of the ladder, living at the fringes of society. It's not an easy life.

An educated Greek who speaks English and a little German/French/Italian has got to be thinking about getting out while he still can.

Emigration levels from Greece are similar to those in the Baltic countries. Net migration out of the country is around 50,000/year. The only reason it isn't higher is that desperate people from the Middle East/North Africa/Albania are still coming in.

The "true" migration rate of native born Greeks out of their home country is undoubtedly much higher.

Even with illegal immigration, the population of 15-29 year olds (aka, the future labor force) has been shrinking by 2%/year every year since 2001. O_O

@Cooper, you first two sentences contradict each other. Yes I live in Europe, I have a Greek passport to prove it. And at one time I worked in a multinational firm that had offices all over Europe, so it would have easy to work in Germany, speaking just English, once the firm got necessary permits, which I'm sure they could do. You don't expect anybody to learn German just to work in Germany do you? Unless you're part of a firm, however, it's tough to do for an individual unless they are part of a multinational firm.

The end of the game is writing down some debt and extending terms, as well as selling off some assets and taxing otherwise de facto exempt sectors of the economy.

It will just take time to get there.

Nicolas Economides from NYU is the econ prof to follow on this.

Monemvasia sounds nice, but if the prices in euros are too high to attract tourists, couldn't they lower the prices?

It is worth noting that there are Maoist and Trotskyite factions in Syriza, so if we are going to moralize about the National Front in France, or other disreputable groups, let’s be a little more consistent here…

Greece has a parliamentary system. Do you not know how parliamentary systems work? Syriza has formed a coalition with ANEL, a Greek nationalist party that is pro-Russia.

Maoist and Trotskyite factions in Syriza? wow!

Marine Le Pen, leader of the National Front in France, supports Syriza:

Wagers its a bank shot. The name of the game is dismantle the EU. Greek departure brings that goal closer.

It is worth noting that there are Maoist and Trotskyite factions in Syriza, so if we are going to moralize about the National Front in France, or other disreputable groups, let’s be a little more consistent here

You've worked in academe for 20 years and you haven't mastered the wordy excuses your 'colleagues' will offer for their frauds?

It is not the debt that is the problem in Greece, it is the excessively tight monetary policy, or if you prefer, it is that Greek wages are currently too high for their productivity compared with Germany and therefore need to fall significantly. Prior to the Euro this could be achieved pretty painlessly by devaluing the drachma, now it needs to occur by cuts in nominal wages. For whatever reasons this is hard to get people to accept, especially government workers. So lots of strife and high unemployment. Even if Germany agreed to halve the Greek debt this would still be true. So the answer is for a reflation policy for the Euro so that Greek wages can be cut in real terms through inflation, rather having to go through the pain of nominal cuts. The issue for Germany is that they suspect that the Greek economy is not actually really being reformed, and the reflation would just "paper over the cracks" and the issue resurfaces a few years later. I think it would be helpful therefore for Germany (or Angela Merkel) to be explicit about what reforms Germany requires in Greece in order for them to agree to a significant reflation policy. Would it require say all future Greek budgets to be approved by the Bundestag? Then Greece can decide if that price is worth paying.

The country has just barely-working legal and taxation systems, widespread corruption, a kafkaesque bureaucracy and a catastrophic political culture. The problems go far beyond wages.

I didn't say that Greece does not have structural issues, that's why they have low productivity and can only pay low wages. The point I am making is that Germany needs to be clearer about their demands on structural reform before allowing reflation.

Accelerating inflation (unanticipated) hurts creditors and helps debtors so it is not so different from debt forgiveness.never the it is the way to go.

True inflation can reduce real debt, but the effect compared with impact on wages is small. Consider 10% inflation reduces real debt crudely by that amount only reduces /reek debt to something like 115% rather than 125%, still a very high debtload and does not take into account increased interest rates on renewed debt. However a 10% fall in real wages would have a huge impact on employment.

For whatever reasons this is hard to get people to accept, especially government workers.

I'm baffled as to why that would be ... just baffled ...

So lots of strife and high unemployment.

Now this part actually is baffling. What's stopping people from offering jobs with lower wages? Hmmmm?

It is people we are talking about, not robots...

Which one is more expensive to operate? The robot or the Greek?

Guess I shall continue with my pollyanna role here in the face of all these freakouts. Since the victory of Syriza (not total, two seats short of forming a government by themselves, must make a coalition with another party), we have seen:

1) the Greek stock market rise substantially today;

2) the US stock market up today;

3) Greek 10-year bond did see a pretty good 64 basis points spike to 8.82%, but it was at 11% about two weeks ago;

4) no evidence of any bank runs so far.

Why are the markets so blase while so many commentators are so hysterical or nearly so? I think they see a deal coming. Claiming that Syriza will fall apart if they do not get their whole platform is silly. No party gets its whole platform in a democracy, and Greece is still a democracy (and they will have a coalition government). Deals are likely tol be struck whose general outlines are already obvious. There is a high probability of muddling through despite a lot of chicken game rhetoric right now.

Note that the likely Finance Minister is University of Athens Economic Theory Professor Yanis Valoufakis, an old game theorist gone International Political Economy guru who has written not entirely insane columns in The Economist, and also that former Reagan adviser, Krugman, is arguing that their platform is "not radical enough." It is highly likely a deal will be cut, despite possible grumbling in Spain and Italy.

Oh and as for those commies in the Syriza coalition, well there are 13 factions in Syriza. The Maoists and Trotskyists are a small minority. Heck, when Maoists came to power in Nepal, they were pretty reasonable, and although in China they still put protestors in prison in their one-party state,they are quite pro-free market in policy (I'll start worrying about them in Greece when they call for all people with glasses to be sent to the countryside for "reeducation" a la Pol Pot in Cambodia). And as for the Trots, well, it was the Stalinists who called them "Trotskyites." We do not speak of "Marxites," "Leninites," "Stalinites," or even "Maoites." And, heck, former French Premier LIonel Jospin was a former Trotskyist, and he was pretty blah.

So, folks, this does not at all look like the apocalypse yet. All the folks beating the drum that the euro is on the verge of a fatal crisis (just as some of them have been doing since well before it was ever established) may find themselves beating them for quite some time longer.

Our host is kind of into scary predictions. Most don't happen but it's fun to think about...

Two options:

1) Everyone assumes there will be a deal because the alternative is too horrifying to contemplate.

2) The market has already assumed that Greece will exit the Euro and priced that in.

1) Neo-Nazis 2) The only feasible solution

Of course there will be a deal. The first act of the alternative (GD, Junta 2.0, or a combination thereof) would be to liquidate Syriza. Tsipras is many things. Suicidal ain't one of them.

also that former Reagan adviser, Krugman,

He had a staff job for about a year on the Council of Economic Advisers when Murray Weidenbaum was the chair thereof. He was likely never in the same room with Reagan and it's a wager that no one employed in the rest of the White House could have picked him out of a police line-up.

Gosh, Art Deco, I must publicly thank you for the enormous public service you have provided here. Prior to your post here, I had been under the impression that not only was Paul Krugman Ronald Reagan's absolutely closest adviser whom even Nancy Reagan kowtowed to, but that since then he has been the most rock-ribbed, partisan, hardline Republican economiist in the entire world. Thank you for straightening me out on all this.

Krugman has explained in his columns precisely why he took the position when he did, and those reasons did not include an affinity for the administration.

You brought it up, Barkley, to make a point you now disavow intending to make. The games people play...

You did put this line in your post.

"and also that former Reagan adviser, Krugman, "

It's ridiculously misleading to refer to Krugman as a former "Reagan" advisor.

February 15, 2009 at 11:55 am
The important point of Evans-Pritchard’s post is that he sees the social disruptions and dislocations that can arise from this crisis. Oddly, many people are assuming that this crisis is business as usual. Had the government’s actions been better, that might have been the case, and we still might avert massive unemployment. But we are getting dangerously close to the point in Debt-Deflation that the cure will be nearly as awful as the malady. Employment in that scenario will be much worse than it is now. Then ,all bets are off.

Don the libetarian Democrat and follower of Edmund Burke"

Do I get any kind of credit for pointing out the real possibility of long-term unemployment being the most serious issue of not responding immediately with a generous dose of the Chicago Plan of 1933, and a serious anti-capitalist political movement developing out of the the EU's also not following such a plan,with the better off countries sucking it up and bailing out the worse off countries? As I said elsewhere, that response is going to seem cheap someday.

Also here:


"This is the sort of level that stokes popular revolt."

I've been saying that we need to read Edmund Burke more than economists. I don't think it has sunk in that if we allow Debt-Deflation to spiral downward, unemployment will be dramatically higher, and will lead to serious social dislocations and disruptions.

As well, people just don't find deflation easy to deal with. It causes serious social problems because people find acting in a deflationary environment disorienting. It never occurred to me that this crisis would be dealt with so poorly and with so little understanding. What a shock.

Could Open Borders be a solution for Greece?

I mean, most countries south/east of Greece have plenty of people who could move to Greece and work as dog-walkers and then Greeks could be dog-walkers-managers. Or something like that. It would be a sure win-win according to most economist.

Huh... loool ... You know Greece is in the EU and euro right? (or are writting 5 years from now and used a time machine???

An interest rate of 2.6% on a debt 175% of GDP is 4.55% of GDP going to interest. France's debt is about 94% of GDP so 2.2% would be 2.068% of GDP going to interest. I suspect also a lot of French debt is held by French people making the actual burden even less while Greece owes more to other countries.

This is a serious burden for Greece and IMO the most obvious answer is to eliminate the unemployment. If instead of 25% unemployment Greece had 10%, it would have GDP roughly 20% higher. That would reduce the interest burden to maybe 3.8% of GDP. That would still be higher than France (which, of course, is fitting for a country that has spent more relatively speaking) but would be much more manageable.

"An interest rate of 2.6% on a debt 175% of GDP is 4.55% of GDP going to interest."

I believe that the Greek government is paying quite a bit more than 2.6% on it's debt. Indeed, as far as I can tell the average is closer to 8%.

So 8% on 175% of GDP is 14% of GDP going to interest payments.

This all seems a bit of an absurd theater. Greece is not going to be able to pay off it's debts, so why are other European's still loaning them the money? Wouldn't direct cash transfers be a lot less likely to cause long term financial uproars?

Maybe because German banks are holding lots of Greek debt.

That only explains the situation if all of the "new" loans coming in are tax payer monies. Are the new loans all taxpayer money?

If not, then the banks are staving off default, by sending even more money, which will make the inevitable default even worse from their perspective. Of course, it's always possible that politically powerful banks have a lot of Greek debt, but aren't personally contributing to new loans.

The default only gets worse if it is new net debt. If these are just loans to refinance old debt that is coming due then you can't even really say you are using taxpayer money. Why not refinance the entire debt at a special rate of 1%? Payments can then go to drawing down the balance over time. Bond holders get paid and Greece gets relief.

From I'm guessing Greece's gov't revenue is about 40% of GDP. seems to be saying about 18% of tax revenue covers interest payments. So that means about 7.2% of GDP is covering interest.

Glancing around at the US and UK, it seems 4% is more normal and Greece is still high despite the 'special' deals they've been getting.

I think we are getting different figures because the debt is not a single loan but a series of bonds issued at different times and rolled over and over at different rates.

Funny, how virtually no commentator touched the issue of how the hell will Greece start owing again (structurally, not just one year because the year before was particullary horrible) ( and no you can not live by from tzatziki and tourism...that will deliver Neo-Nazis in power, next round of elections). Also no German / Northern European politician(s) took any responsability for accepting Greece in the euro zone (i mean this outcome is not a surprise...). Also it seems very few economists/bankers/ politicians know history (how many times did Greece default in the last 100 years?)....

My prediction is that SYRIZA will get its way and the rest of Europe will foot the bill for their refusal to continue austerity. The European elites still believe in their "European project," and the ones who don't anymore would never admit to having been wrong. It won't be popular with the European people but elites usually get their way. Notably in Germany there is no serious nationalist opposition party like the UKIP or the National Front, so Merkel won't feel much heat.

That might be viable as long as you can keep Spain, Italy, etc from following the same path. But I wouldn't expect that to be the case. Why should other Euro countries feel even slightly bound by the deficit rules if Greece is openly flaunting them?

What is the point of deficit rules? The US does not have 'deficit rules' telling the states how much they can borrow every year (and no, state budgets are not 'balanced'). Perhaps deficit limits made sense when the EU was forming as countries like Germany probably did not want to give up the money printing press if it became a tool for other countries to be reckless with the money supply. We know now that is not the problem with the EU.

So why not drop deficit rules. The ECB can adopt a policy that whenever it has to purchase assets to increase the money supply, it will do so in proportion to each countries real-GDP. This would reward countries that run smaller deficits by reducing the number of bonds they have outstanding in the market, and punish those who are debt heavy and default would mean the member country's bonds will not be purchased by the ECB for 20 years. Beyond that the market can decide whether or not a country is being reckless.

Beware of Greeks bearing debts.

I'm rather late to this post, but I believe the actual Greek net debt service in 2014 was only 1.7% of GDP. I explain with links to sources in this blog post:

I honestly don’t find anything awkward when it comes to EURO as I have lost enough with this. Now whenever there is talk of EURO I just hold my heart tightly as I know I can get emotional any time but still things are under control now all thanks to my broker OctaFX as they have given me great guide due to their highly qualified team of experts which I follow as they give daily analysis on currencies, commodities or even indices.

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