Greece cannot fix Greece. Europe will have to accept Growth (and inflation)

[cthulu2016]

Germany wants low inflation in Europe, even at the cost of low growth in Europe. (The American RW and super rich want the same over here. Low inflation at any cost and to hell with growth.)

Low inflation and low growth are deeply destructive of economies with a lot of debt. By restraining inflation (past all reason) Europe has flat-lined the overall eurozone economy and mandated disaster for the peripheral debt-crisis nations. If you borrow money and then enter flat growth/inflation you are screwed. The REAL cost of your debts keeps increasing.

When debt crises are solved they are solved by growth and inflation. You grow and inflate your way out of debt. (That's how we balanced the budget in the 1990s. Some of it was policy, like higher tax rates, but most of it was pure GDP... increasing taxable profits increased government revenues.)

Europe tried to stick the debtor nations with the check for Germany's low inflation. It didn't work. The people rebelled.

So now establishment Europe faces a choice between 1) stimulating growth throughout Europe (anti-austerity) or seeing the Euro fall apart. And if that choice if forced they will eventually see the former as the lesser of two evils. Or not, with bad results.

As professor Krugman said this morning: there is no way out for the troubled countries if Europe as a whole is marked by low growth and low inflation

elleng's post is a good read:
Softening, Merkel Says She Is Open to Stimulus for Greece.
http://www.nytimes.com/2012/05/17/world/europe/greek-stimulus-is-an-option-merkel-says.html?_r=1&hp
http://www.democraticunderground.com/1002697325

Krugman from this morning:

Not a Greek Problem

Tim Duy has some harsh words for the European Central Bank among others, with which I agree completely. What strikes me is that even now there seems to be no willingness to accept the fact that this isn’t a Greek problem, or even a Spain/Italy problem; it’s a European problem.

The morality play the Germans like to tell about how the crisis countries got into trouble isn’t true, but even aside from that, the question is what you do NOW. And the key point is that there is no way out for the troubled countries if Europe as a whole is marked by low growth and low inflation.

Given that reality, lecturing Greek voters on responsibility, while hinting that maybe we’ll ease the terms a bit — oh, and it’s almost time for summer vacation! — just won’t cut it.

We need a conversion experience here, not in Athens, but in Berlin and Frankfurt. Otherwise, the game is almost over.

http://krugman.blogs.nytimes.com/2012/05/17/not-a-greek-problem/

[badtoworse]

1. "Europe tried to stick the debtor nations with the check for Germany's low inflation"

What does that mean?

It seems more accurate to say that Germany is refusing to pick up the check for southern Europe's profligate spending.

[HiPointDem]

2. like hell it does.

[Vincardog]

3. It means that Germany wants to export its' lack of inflation to everyone at the expense

of everyone else's economic loss.
Germany wants Greece to suffer high unemployment and decreasing stand of living so that Germany's money men can enjoy low inflation.

[cthulu2016]

4. Central bank policy has winners and losers

It is easy to say, "Look how much Greece owes."

It is subtler to say, "Why the hell did the ECB raise rates in major economic downturn, and who benefited from that?"

Germany prefers economic conditions that happen to make it impossible for certain nations to get a handle on their problematic debt.

Until today it appeared certain that the eurozone would enter a technical recession (2 quarters of neagative GDP growth) but that didn't happen because of Germany's surprising GDP growth last quarter.

Germany is doing well. Most other euro nations are in recession. Germany has the biggest say in Euro monetary policy. It's not all a coincidence.

[badtoworse]

7. So Germans should be happy to lend out expensive euros and get paid back with cheaper ones.

If that's not bad enough, they would be diluting the buying power of their own euros.

Isn't that what it comes down to? Why would Germans want to do that? Maybe their experience with the Weimar Republic?

[cthulu2016]

9. We need an economic Goodwin's Law for the Wiemar Republic

What's Germany's concern? Hyperinflation in the Euro? How does that work, exactly?

Devalue the Euro by every penny Greece owes and how much inflation would it create?

[badtoworse]

12. A Godwins Law for the Weimar Republic wouldn't change the German view of inflation

Hyperinflation did happen in Germany and they probably didn't like it very much. I doubt they would accept the 4% target you mentioned in Post 11 because the value of existing euro denominated debt (of which they hold a lot) would drop like a rock. Anyone on a euro denominated fixed income would also get shafted. The Germans are not stupid.

[girl gone mad]

5. You are listing symptoms, not causes.

The cause of Greece's ongoing troubles is having to write and owe debts in a foreign currency while being locked in to an uncompetitive exchange rate. With no true link between the government and its currency, no strong central bank from which to write checks, Greece can't run a public sector deficits as needed (which is how we were able to avoid depression).

It's important to realize that Greece was not in bad shape before the global financial crisis hit.

You also should understand that this exact scenario was predicted from the start of the Euro project.

Here's what Wynne Godley said in 1992:

“If a government does not have its own central bank on which it can draw cheques freely, its expenditures can be financed only by borrowing in the open market in competition with businesses, and this may prove excessively expensive or even impossible, particularly under conditions of extreme emergency….The danger then, is that the budgetary restraint to which governments are individually committed will impart a disinflationary bias that locks Europe as a whole into a depression it is powerless to lift.”

I would encourage you to read Godley's entire piece at the above link.

[cthulu2016]

6. The euro was a bad idea

It does not follow that its dissolution in catastrophic fashion is a good idea.

Greece should never have been taken into the euro.

It does not follow that it is best for Greece to leave the euro at this point in time.


I happen to not share your tolerance for the pain of other people in the service of ideology.

[girl gone mad]

10. "I happen to not share your tolerance for the pain of other people in the service of ideology."

How can you rectify the statement above with the solutions you promote? The austerian satus quo isn't working and you don't seem to have any realistic alternatives.

Frankfurt and Brussels demand austerity for Greece, the ECB will never take appropriate actions, and the Greeks cannot function under austerity any longer. There is no possibility of an orderly "Grexit" because no one thought that far ahead at Maastricht. The troika would simply decide one day to stop the flow of Euro to Greek banks and on that day Greeks who tried to make a withdrawal would be in for an ugly surprise.

You criticize me, but I've actually thought this through for many, many years. I'm at the same place I was 4 years ago when people told me I was crazy to even suggest Greece would eventually have to default and likely exit the Euro. I don't see many of those people around today. If Greece had taken these actions early on, they would be in a far better position already.


http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=8285328&mesg_id=8287220

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=439&topic_id=2072448&mesg_id=2073532

http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=439&topic_id=1238199

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=8288105&mesg_id=8289750

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=439&topic_id=1215110&mesg_id=1217937

http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=114&topic_id=78388

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=8288105&mesg_id=8288288

http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=114&topic_id=78210

http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=439&topic_id=1358223


etc...

[cthulu2016]

11. "If Greece had taken these actions early on"

Yes, it would have been better if the had done some things where it would not be in the context of catastrophic disruption.

They should never have been admitted to the EU in the first place.

And perhaps it would have been better if the US had set a no automobile policy in 1962 with all cars to be gone by 2012. But that wouldn't mean that eliminating cars tomorrow would be helpful.

As for rectifying my comment with the solutions I promote... I favor an EU-wide policy of constructive fiscal and monetary stimulus with an EU-wide inflation target of 4%, seeking full employment throughout the zone. Hell, maybe cut the VAT to 15% for two years, though I'd want to see a lot of numbers first.

It do not favor the status quo. I think the whole EU is nuts and is being run by RW quacks.

I do not, however, happen to think that the traumatic return of Greece to the drachma would be very helpful.

[girl gone mad]

14. The EU has no plans to adopt the policies you promote.

It isn't going to happen.

So once again, you have no alternative solutions.

[BzaDem]

13. Who said there is a better solution, just because the status quo is "not working?"

Usually, anyone who uses that logic is wrong in whatever they are talking about. Something may very well be "not working" compared to one baseline (that is not at all feasible), and be working quite well compared to another (such as the set of actually feasible options).

You are of course correct that if Greece had a time machine, the ideal solution for Greece would be to never join the euro. (The real ideal solution is to not construct a monetary union at all, in the absence of a true fiscal union with fiscal automatic stabilizers that reduce regional inequities.) Of course Greece would be better off with its own currency, allowing it to deficit spend to fill in shortfalls in aggregate demand.

You are also correct that the current policy Germany is forcing on the periphery is insane. Wealth transfers to the south are absolutely required to maintain the euro (given the lack of floating exchange rates), and unless Germany wants to write Athens a check, they have to allow inflation (and other measures, such as Eurobonds or an ECB guarantee on sovereign debt with newly printed Euros).

But that does not AT ALL say that a Greek exit (with the ensuing massive bank runs in Greece and other European nations, and the ensuing continent-wide depression) would somehow be better.

There are really two economics principles at play here. The first is your argument about the destructiveness of locking Greece (and other countries) into a currency they have no control over. That is an argument that most people with any sense agree with.

But the other principle is that massive bank runs and collapsed banking systems (and in particular the contagion effects from such events) cause long, massive depressions unlike anything any European country is currently experiencing. Greece is not an island. It is not remotely comparable to Iceland or Argentina. Argentina defaulting had no chance of causing all of its neighbors to default. They were not linked in a common currency that would require a massive economic calamity to break. A Greek default could very well cause collapses in Spain and Italy (which are also quite unlike Iceland or Argentina). That would cause a world-wide depression, but even ignoring the rest of the world, there is no way Greece (or Europe) would be better off in that scenario.

You are looking at the first principle, and ignoring the second. But this his type of magical "it will work itself out, as long as we go back to first principles" (paraphrase) thinking (without even considering that other factors may dominate) is almost always wrong, on any topic -- even if the first principles are correct. It is especially wrong here.

Could everything work out, in theory? Perhaps. But is there any evidence that this will be the case -- that we should take all of humanity's collective knowledge about financial crises (and their effects, given the circumstances), and throw it out the window? If not, is that a risk that is really worth taking?

[girl gone mad]

15. I think there is a better solution.

I think it's best for Greece to do what Iceland has done. it will be more complicated since they will have to take the additional steps of re-implementing a currency.

I don't know why you're talking about time machines and Greece not joining the EMU. That ship sailed long ago. The ECB may have had a chance to step in up until very recently, but I think it's even too late for that now.

This isn't "magical thinking" or ignorance of historical financial crises. The "Grexit" has been very thoroughly hashed out over the past few years. MMTers, Post-Keynesian, etc. have written extensively on the topic, with a good eye toward historical crises and detailed analysis of every aspect of such an event. It isn't as if I just woke up this morning with a bright idea that Greece should exit the Euro based on a whim that it might all "magically" work itself out.

If you're really interested in this subject, these articles might be a good start:

Warren Moslers Big Fat Greek MMT Exit Strategy

Why Greece will look back at the other euro nations and laugh

A tale of two economies: Greece and Iceland

Greece exit may become the euros envy

ODDS OF A GREEK EXIT SPIKING

Will the Greek exit be voluntary or involuntary?

Here is a piece which covers your concern over bank runs and discusses how they can be mitigated:

Bank runs intensifying in the Euro zone

[BzaDem]

16. Most of your pieces do not address the concern. The one that does

says that the solution is for the ECB (and by extension, Germany) to completely repudiate everything they have done so far, and go in completely the opposite direction.

If they do use overwhelming financial force and guarantee everything (and convince everyone that the guarantee is permanent), that at least has a chance of convincing the people in the rest of the periphery that they wouldn't be crazy to leave their money in a non-German bank.

But if they do this, doesn't that completely change the assumptions underlying our entire discussion? I thought we were assuming that the ECB would not do anything like this (at least, not within the next several months), which is why we are talking about whether Greece will leave the euro.

Greece is not Iceland. Iceland had its own currency. Iceland was not going to have contagion to its neighbors and elsewhere. There was not the same kind of massive incentive to get one's money the hell out of the country, with the same kind of spreading contagion to several other massive economies.

It would be like the FDIC (and all other similar forms of insurance) disappearing overnight. Followed by the president telling everyone that a good portion of the banks in the country are insolvent, and people with such banks might get at most 50 cents on the dollar. Followed by a speech by Mexico and Canada and Japan's leaders, telling their citizens that if the US economy contracts below a certain amount, they will kill their own FDIC equivalent and drastically reduce the balance of all savings accounts. And on and on.

Furthermore, either I'm not understanding Randall Wray's proposal, or it makes no sense. He is proposing that the government switch to the drachma for taxing and spending, but to leave all Euro balances in Greek banks as is. Does he realize that the second the ECB stops funneling money directly to Greek banks (or to Greek banks through the bank of Greece), all banks in Greece will immediately be insolvent? They are relying on massive loans from Europe just for daily liquidity! There wouldn't be any euro balances left (beyond the tiny fraction the banks kept in reserve, which would have been long pulled out). Greek banks cannot print/keystroke euros.

That's why any Greek exit would involve converting all bank balances to drachmas (which means all contracts have to somehow be immediately redenominated in drachmas). Furthermore, private international contracts with counterparties in other European nations would end up redenominated in... what? Drachmas (resulting in counterparties being paid massively less than they thought, causing many of them to go insolvent)? Left in Euros (causing the Greek party in the contract to be unable to pay, causing a private default, with essentially the same effect)?

Not only would this destroy Greece's economy far more than it is now. And not only would this cause massive economic damange to anyone economically connected to Greece. It is exactly these effects that will be convincing everyone else to get their euros into German banks while they still can (absent a 180 turnaround by Germany, with a convincing ECB financial bazooka and a complete pivot from right wing austerity policy). Absent that bazooka, everything above happens in some of Europe's biggest economies, and the contagion continues.

[girl gone mad]

17. Enough with the fear card.

The defenders of the status quo resort to this cheap tactic every single time. Let's try to have a rational discussion sans talk of Eurozone collapse, total chaos, Armageddon and zombies.

Greece should stop listening to the neoliberals, who have never been right about anything. Just because the solution requires some sacrifice and difficulty does not mean it should be forever avoided in favor of these increasingly bad "fixes".

Most of your pieces do not address the concern. The one that does says that the solution is for the ECB (and by extension, Germany) to completely repudiate everything they have done so far, and go in completely the opposite direction. If they do use overwhelming financial force and guarantee everything (and convince everyone that the guarantee is permanent), that at least has a chance of convincing the people in the rest of the periphery that they wouldn't be crazy to leave their money in a non-German bank.

I think you're referring to Marshall Auerback's article? He proposes that the ECB guarantee Greek depositors to prevent a bank run. By no means would this be repudiating everything the ECB and Germany have done so far and going in the opposite direction.

But if they do this, doesn't that completely change the assumptions underlying our entire discussion? I thought we were assuming that the ECB would not do anything like this (at least, not within the next several months), which is why we are talking about whether Greece will leave the euro.

No, because when I say the ECB could have taken steps to avoid the Grexit, I mean they should have monetized much more of the sovereign debts throughout the periphery and adopted Keynes generalized banking principle as a central element of its monetary integration arrangement. These options still look as far out of reach today as they did five years ago.

Greece is not Iceland. Iceland had its own currency. Iceland was not going to have contagion to its neighbors and elsewhere. There was not the same kind of massive incentive to get one's money the hell out of the country, with the same kind of spreading contagion to several other massive economies.

Actually, the same dire warnings you given here were provided by Europe when Iceland threatened to repudiate its debts and devalue. There are obvious differences between the countries. Some of these would work in Greece's favor.

Furthermore, either I'm not understanding Randall Wray's proposal, or it makes no sense. He is proposing that the government switch to the drachma for taxing and spending, but to leave all Euro balances in Greek banks as is. Does he realize that the second the ECB stops funneling money directly to Greek banks (or to Greek banks through the bank of Greece), all banks in Greece will immediately be insolvent? They are relying on massive loans from Europe just for daily liquidity! There wouldn't be any euro balances left (beyond the tiny fraction the banks kept in reserve, which would have been long pulled out). Greek banks cannot print/keystroke euros.

I think you're referring to Warren Mosler's proposal. Yes, the banks would become insolvent if the ECB shut off the spigot. Some depositors might lose money, but these losses would be limited. The EU could choose to make them whole or Greece could replace these losses with drachma. The sun will still rise and life will go on.

[BzaDem]

18. Since when is fear of real problems always a bad thing?

I'm not saying we should be fearful of non-existent or made up problems. I'm saying we should be afraid of problems we know will exist, and will have devastating consequences. Maybe other "defenders of the status quo" are using irrational fear of made up problems, but I am not.

To stop a bank run, the ECB would have to guarantee the deposits of not just Greece, but of Spain and Italy (and others). The mechanism of enforcing this guarantee would initially involve massive transfers of wealth to these countries (likely with newly created euros). They would literally have to guarantee to print as many Euros as necessary to make every depositor in these countries whole. This is exactly what the ECB has not been willing to do so far (whether through the banking system or sovereign debt), so I don't see how those advocating leaving the Euro can simply assume it will happen. It would be odd for the ECB to say "we're turning off one spigot so we can turn on another." Obviously, we hope they do, and perhaps they will eventually, but it seems them not doing so is at least partly the reason we are having this conversation at all.

I don't get why you say "the same dire warnings" we're used in the case of Iceland. I have no doubt there were dire warnings, but I don't see how the same warnings would have made any sense. I was talking about the differences between Iceland and Greece -- in particular the contagion to other countries in the same currency union (who will now see that the irreversible currency union is quite reversible, and move money accordingly).

I'm not arguing that the losses would be 100%. Nor am I arguing that the sun won't come up, or that life wouldn't go on. I'm arguing that the situation (absent a complete reversal in German/ECB policy) would be far worse for not just the entire eurozone, but specifically for Greece. The "sacrifice and difficulty" in question may be far worse than the "increasingly bad fixes." Saying "your policy is associated with group X and group X is always wrong" is a cop-out, and is often used to justify arbitrarily horrendous policy.

[girl gone mad]

19. I think you are making really bad arguments..

based on a continued failure to understand modern global macroeconomics.

I would like to see you evolve more in your thinking, stop promoting neoliberal policies (intentionally or not) and actually listen to the people who have been right for the last 30 years. Professer Mitchell has made a strong case for a Greek exit, as has professor Roubini. Even Krugman has been calm and reasonable in his assessments of Greece's likely exit.

The world needs to move forward at some point and start to actually put this crisis behind us. Let's stop pretending that the solution involves continued mass sacrifice at the altar of the international banking cabal, because this prescription is very clearly killing the patient.

[badtoworse]

8. About as good a summary of the problem as I've ever read.