Lessons from the Greek Crisis

The deal, obviously it looks bad. No sense in spinning: It’s unconditional surrender. It is bad.

There’s no shortage of writing about how we got here. I do think that we — in the US and elsewhere — should resist the urge to criticize the Syriza government, even for what may seem, to us, like obvious mistakes. The difficulty of taking a position in opposition to “Europe” should not be underestimated. It’s one of the ironies of history that the prestige of social democracy, earned through genuine victories by and for working people, is now one of the most powerful weapons in the hands of those who would destroy it. For a sense of the constraints the Syriza government has operated under, I particularly recommend this interview with an unnamed senior advisor to Syriza, and this interview with Varoufakis.

Personally I don’t think I can be a useful contributor to the debate about Syriza’s strategy. I think those of us in the US should show solidarity with Greece but refrain from second-guessing the choices made by the government there. But we can try to better understand the situation, in support of those working to change it. So, 13 theses on the Greek crisis and the crisis next time.

These points are meant as starting points for further discussion.  I will try to write about each of them in more detail, as I have time.

1. The euro system today is an instrument in the hands of European capital to roll back the gains of social democracy. On twitter, Marshall Steinbaum says, “That is why everyone supports the euro: as a route around their domestic political difficulties, ie, voting.” I think that’s right, I think the overriding goal of the system today is to create a set of apparently objective constraints that allow elected governments to take unpopular measures while saying “we had no choice, the markets require it.” I’ve written about this here and here.

2. A great myth of the euro is that it’s been good for Germans. It’s a puzzle, the kind of story that calls for dialectics, that Germany has both Europe’s strongest working class and most advanced social democracy, and its most rigidly conservative elite. For a while those forces were roughly balanced, but over the past generation German workers have done the worst, absolutely and relatively, of any country in Europe. The north-south divide in Europe perhaps analogizes to the racial divide in the US, so perhaps the same slogans apply: Black and white, unite and fight!

3. The euro is not a new gold standard. This is a tricky one — I feel a clear vision here requires one to first see how the euro is a new gold standard, and only then seeing how it isn’t one after all. Despite the dreams of its supporters (and fears of its opponents) the euro system does not provide an automatic constraint on the choices of elected governments. In the abstract, it looks more like Keynes’ proposals at Bretton Woods. Its actual functioning as the enforcement mechanism of neoliberalism, requires the active intervention of the authorities.

4. The European Central Bank is a political actor. You may think that the ECB has violated the norms of independent central banks, or you may think it has revealed their true content. But either way it is actively intervening in the political process to reshape society in fundamental ways, not just following a set of objective rules to fulfill a narrow technical function. It was already evident several years ago that the ECB was selectively withholding support from financial markets to put pressure on elected officials, and now it is undeniable.

5. Within the eurosystem, the national central banks are a key terrain of conflict. Before the crisis no one even knew that national central banks still existed — I certainly didn’t. But  now it’s clear that the creditors’ unchallenged control of this commanding high ground was decisive to the outcome in Greece. Next time an elected government challenges the EU authorities, their first order of business must be getting control or cooperation of their national central bank.

6. There is no sharp line between “in the euro” and “out of the euro.” The idea that “leaving the euro” was some enormous, no going back, all or nothing leap was was a powerful weapon for the authorities. But it’s not the case — just look at Cyprus, Andorra, Montenegro, Denmark. The common currency is shorthand for a bunch of different linkages between banking systems, and it’s perfectly possible to maintain some of them while severing others.

7. There will be more crises in the future. Crises are how the system works. If the goal is to compel elected governments to follow policies they would not otherwise, they must have clearly in front of them evidence of the costs of failure to comply. This, I think, was the main interest in Greece — not any direct gains to capital in Germany or elsewhere, but setting an example pour encourager les autres. 

8. Defaults don’t punish themselves. Another ideological weapon of the creditors is the idea that financial markets will automatically punish countries that default. But neither historical evidence nor logic support that claim – if anything, a country that has removed a pile of unserviceable debt is a much better credit risk going forward. Debt is only a constraint on governments because there are political agencies enforcing it, either local elites who want the debt-servicing-required outcome anyway, or embargo, or gunboats.

9. The existing state apparatus serves the existing interests. This is one of the great challenges for left governments, the hope or belief that having assumed office, the bureaucracy will simply execute their instructions. It doesn’t work that way. The left cannot use the existing levers of power, nor can we rely on the law.

10. “Money” means bank deposits. I’ve spent a big chunk of my intellectual life immersed in these old debates, the law of reflux, money vs banking view, endogenous money, horizontalists an verticalists. But it turns out — perhaps no surprise — that you can’t talk about the mechanics of the ingle currency in a meaningful way, without getting this stuff clear. You can’t think through what exit from the euro would concretely require, or even know what “exit” means, unless you have clearly in mind a network of bank-mediated money contracts, as opposed to money as a kind of homogenous fluid.

11. Relative prices are not what drive trade flows. I already believed this, and I can’t say the euro crisis has provided any particular new evidence. But it’s important because so many liberal observers, especially in the US, took it for granted that a flexible exchange rate would allow Greece to painlessly achieve payments balance. I think the historical evidence shows that floating exchange rates do not reliably remove balance of payments difficulties — which is a genuine argument in favor of the euro system in the abstract, if not in its current form.

12. Free financial flows serves no social function. The EU’s founding documents refer to the free movement of people, goods and finance, yet it’s precisely those financial flows that were the proximate cause of the crisis. You simply can’t have perfect capital mobility if you also expect any kind of payments constraint on individual countries.  Let us maximize the freedom of money-wealth owners to shift their assets between countries, and then require that real trade flows adjust to compensate — why would we want that?

13. We can’t separate the real from the financial. Whether debt is “sustainable,” whether banks are “solvent” — answers to questions like these are always contingent on interest rates and more broadly on liquidity. We can’t understand the growth of Geek debt, or the non-growth of debt elsewhere in the euro area, except in terms of the financing decisions of the ECB. The financial crisis is the crisis; it is not (necessarily) a reflection of some underlying “real” disorder.

32 thoughts on “Lessons from the Greek Crisis

  1. Thanks for this. But what is thesis 10? The second and last section of the explanation makes no sense to me and seems to be a non-sequitur from the previous sentence. Is something missing?

    1. I rewrote it a bit, hopefully it’s a bit clearer now. But these points aren’t intended to stand on their own, this post is more a to-do list of things I want to write about Europe in the future.

  2. Related to number 6 – which I don’t have a full grasp of – is the fact that most Greeks don’t want to leave the Eurozone even to the extent that they’ll suffer neverending austerity and lose their sovereighty and right to elections.

    It’s like some kind of ideology but I write that with some sympathy and understanding.

    From the Varoufakis interview it seems like even Syriza (or 4 of the 6 cabinet members) were terrified of Greece becoming a failed state and didn’t really even attempt to get a contingency plan up and running.

    Another consideration is that Syriza has never been in power before. I hate to make excuses for Syriza’s failure but I feel like that’s the proper way to look at it. I don’t think I could have done any better. Instead I read of these leftwing critics who insist they could have and it sounds like empty boasting.

    And then I wonder what Podemos must be thinking. They should consider your list of points. If these far left populist parties can’t accomplish anything – all they are is a sign the system is failing – than it’s up to the center-left parties in the core, parties who have been failing for two decades or more.

    1. most Greeks don’t want to leave the Eurozone even to the extent that they’ll suffer neverending austerity and lose their sovereighty and right to elections. It’s like some kind of ideology but I write that with some sympathy and understanding.

      Yes, and really, it’s completely understandable. Postwar European social democracy is the best. I want to be part of Europe too! That’s the irony here — the power of the European elite comes from the real accomplishments of the system they’re trying to dismantle.

      Another consideration is that Syriza has never been in power before. I hate to make excuses for Syriza’s failure but I feel like that’s the proper way to look at it. I don’t think I could have done any better. Instead I read of these leftwing critics who insist they could have and it sounds like empty boasting.

      I feel the same way.

    2. 3am here, and following the incredible pantomine that is happening in Greece right now is rendering me tired, but stumbled across this post, read the comments, and thought I’d make myself available for comment. Be advised of my speaking in a second language, of my being quite tired, and my not being an economist when reading this short form reply, and I’ll make myself available for further comments or clarifications to anyone.

      To answer your question on the fear of leaving the Euro lies in its strong psychological impact. I am a 37 year old portuguese, born merely 4 years after a semi fascist dictatorship that furthered our already geographical periheric position to one of political isolation. we joined the EEC 10 years after that, while still trying to recover from the aftermath of the democratic transition on the promise of cooperation, solidarity, prosperity, and a helping hand in developing our economy to the european standards of living.

      Now, let’s forget for a while the fact that such a thing never happend. Instead of modernizing and improving our competitiveness, the EEC brought in fact production quotas to our industries and agriculture, and effected a great many deals that turned out to be unilateral. One example out of many would be our milk and dairy production, which is capable of producing in vast quantities, but due to said quotas are, to this day, often destroyed and wasted so that we don’t outperform.

      We didn’t readily see that, however. Along with our joining in 1986 came communitary funds which were generously abundant, almost trickle down. Why would we think about our lack of competitiveness when Europe paid our producers subsidies to cut down excedent? Who could really complain when great and bloated artistic endeavours, ambitious new infrastructures were being developed via communitary funds? Or with the tearing down of the old borders, the freedom to move within anywhere in the Schengen space? After the years of dictatorship and extreme poverty, after all that crippling isolation, it seemed like the dawn of a new age. And there are striking paralels to Greece here as well, what with their being a peripheric country who survived a period of dictatorship.

      Add to that the promise of the €. Now, that one was harder to sell, since it actually doubled down on a lot of the prices, but hey, all seemed to be going so well, surely it would all adjust soon, and this is just another step to an unified Europe of progress.

      That’s what we’ve been pretty much conditioned to believe, and that is the mindset that made people equate the european project with prosperity. For the Greeks, it’s very likely that any Greek between 50 and 60 grew up in a dictatorship, and same goes to every portuguese between 40 and 90. Adults like myself grew up with the European Union and its promise of a better world and barely know any world outside of it. And communitary funds, even if they’re all almost universally badly applied worked like a Skinner’s box of sorts.

      And now, they threaten us, the adults who barely know a world outside EEC/EU, the young adults who grew up on the possibilities given by Erasmus projects, of the older people who grew up or lived through actual overt dictatorships, that all this can go away. And that with it comes fire and brimstone, that we HAD to join the € because our currency was too weak (and what better argument to NOT join the Euro?) and would be even more worthless if we were to readopt it. They throw the ghosts of market anathema at us, “leaving the Euro would be catastrophic, the markets react just from your mere mention of it, you really want to go back to those bad old days? Do you really want to be out of the cool kids’ club, and have no EU funding for your arts association anymore?”

      That is why we fear the alternative, even as we begin to see the bars that hold our gilded cage.

      1. Thanks for reading, and for your comment.

        I’ve been wondering recently about the political landscape in Portugal, because on paper it looks like a good candidate for the next acute crisis. Is there any kind of organized challenge to austerity there? Is there any kind of left opposition party?

        To answer your question on the fear of leaving the Euro lies in its strong psychological impact. I am a 37 year old portuguese, born merely 4 years after a semi fascist dictatorship that furthered our already geographical periheric position to one of political isolation. we joined the EEC 10 years after that, while still trying to recover from the aftermath of the democratic transition on the promise of cooperation, solidarity, prosperity, and a helping hand in developing our economy to the european standards of living.

        Yes, I’m struck by how consistently people from peripheral European countries say this. I think Americans — American economists especially — need to make more of an effort to take this attachment to the European idea seriously.

        the EEC brought in fact production quotas to our industries and agriculture, and effected a great many deals that turned out to be unilateral. One example out of many would be our milk and dairy production

        This is interesting. Dairy has been an issue in Greece too, it’s specifically mentioned in the new agreement. It seems as tho the crude mercantilist arguments, which I think mostly miss the larger picture, really may be the story in agriculture.

        They throw the ghosts of market anathema at us, “leaving the Euro would be catastrophic, the markets react just from your mere mention of it, you really want to go back to those bad old days? Do you really want to be out of the cool kids’ club, and have no EU funding for your arts association anymore?”

        Yes, this is how ideology works, the alternative is literally unimaginable.

        One thing I’m wondering — has there been significant liberalization in Portugal over the past five years? Rolling back of labor laws, weakening of unions, cutting back pensions, etc.? In other words, has the crisis worked?

        1. I am an American following the Greek “pantomime” from Italy, and while I have insufficient background in economics to participate in the conversation (I am trying to learn!), I think you might be right that agriculture is a bigger part of the story than is generally recognized, and that this is a very important aspect of why the euro is troublesome for Italy (where it is far less popular than it is in Greece — only a thin majority supports it).

          However, In Italy, it appears to me it is also the case that not only does the euro and European Union provide a way around elections to achieve anti-labor/pro-capital results, it also holds out the promise of modernizing Italy in ways many progressives would like but their domestic political weakness (or laziness!) makes difficult. EU standards on the environment, women’s rights, for instance, I suspect hold a lot of appeal given the nature of the Italian state. I am not sure people would believe that these benefits of the European Union are available to them if they leave the euro.

          As you probably know, the anti-politician political movement of Beppe Grillo, “Cinque Stelle”, is calling for an in-out referendum on the euro in Italy, and has been very much animated by the goings on in Greece — which may be why you see Renzi now more publicly embracing Syriza than he was willing to do before.

          But despite living in Italy, an extraordinarily diverse nation, I make no pretense of truly understanding its politics! And like I said, I am really very unschooled about economics, so I add these observations with all those caveats. I have learned a great deal from reading your blog entry, and the response from Portugal — which, like Greece, is one of my very favorite countries in Europe. If I didn’t live in Italy, I would happily live in either of them (or Spain), and I do not want to see them lose their character and integrity for the sake of a fictional European Union.

          1. If you don’t mind, I would like to add an amendment to my own post, which is simply that I regret using the world “laziness”, since it seemingly echoes the destructive narrative that has been deployed against debtor countries. I only meant to suggest that — like all other countries — the political work required to effect change for the better is harder and than most people are willing to undertake and stick with.

  3. A minor point on #3 – By gold standard you seem to mean the idealized “rules of the game” gold standard that worked through the Humean price specie flow mechanism.

    This never really existed in practice and under the gold standard countries arguably had more monetary independence than in the EZ.

    1. Well, yes and no.

      On the one hand you are right, the gold standard was never really the gold standard either. Because of the great growth in bank money over the 19th century, and because, as you say, central banks did not generally follow “the rules of the game,” there was never the tight link between the balance of payments and the domestic money supply, let alone the price level, that people imagined (and continue to imagine). By far the best thing I’ve read on this is Triffin’s Myths and Realities of the So-Called Gold Standard. Have you read it?

      But. On the other hand, it is really the case that preserving convertibility did constrain central banks. Central banks did not follow the rules of the game in the sense that they did not seek to contract domestic credit whenever there was a payments deficit. But, outside of total war situations (the Napoleonic wars, the US civil war) they did honor the commitment to provide specie for legal-tender currency at the prescribed rate. And there really were situations when this commitment limited central banks’ ability to act as lender of last resort in a crisis. Crudely, every unit of gold that is made available to a private bank to honor its liabilities, is a unit not available to the central bank to defend convertibility.

      But in the euro system, this problem can never arise. It’s really important to understand this — I’m sometimes tempted to start calling the euro system the “TARGET system” instead, just to focus attention on this point. When a payment is made from country X to country Y in the euro area, with no offsetting private payment, the effect on central bank balance sheets is NOT a decrease in the assets of the central bank of X (and increase in the assets of the central bank of Y) but an increase in the liabilities of the central bank of X. This distinction is critical because assets are finite and can be exhausted, but new liabilities can be issued indefinitely. The automatic financing of payments imbalances through the TARGET2 system seems like an obscure technical detail but it really transforms the functioning of the system. Every national central bank in the euro area is in effect in the situation of the Fed. It can never be financially constrained because all its obligations can be satisfied with its own liabilities.

      1. I see, that is interesting. A round about way of thinking about it might be a gold standard system with unlimited rehypothecation of gold reserves.

        I am reading the Triffin paper, which is quite good. I have mostly read about the gold standard from Sameul Knafo, who covers similar ground from a more leftist persepctive.

        He has a new book out on the emergence of modern finance in the gold standard era which will probably be excellent, and directly applicable to masking of politics by finance in the EZ.

        http://www.amazon.com/The-Making-Modern-Finance-Governance/dp/0415633486

          1. The main one that I haven’t read elsewhere is that the establishment of the gold standard was actually the result of a response by the state to increase control over domestic finance, and that the resulting international gold standard system was a secondary effect of this.

            He’s also a marxist that has a good grasp of the technical details of finance. Always a plus.

          2. Knafo, Samuel (2013) The politics of liberal financial governance and the gold standard.

            Knafo, Samuel (2008) The state and the rise of speculative finance in England.

            These are the papers I have read, seems his book is an expansion on the same subject.

  4. I’ve thought a lot about what I could write in response to all of these points.

    However, all of what I can think generally boils down to that you think I should be terrified. Is that true? Or is there a good reason why I shouldn’t be terrified?

    1. You shouldn’t be terrified. These are problems to be solved. Let’s contribute as we can to solving them.

      1. Well, from my vantage point, you’ve basically said that it’s impossible to change anything without violence (points 4,5,6,7,9), and that people will be highly motivated from the depressed economy to realize this.

  5. Josh,

    Superb work you are doing, thank you.

    My question relates to lesson #9 about the existing state apparatus. I agree with your point it serves the current class interests, thus did Lenin arrive at smashing the existing state apparatus, etc.

    Ok, so what is to be done about that?

    Yanis Varoufakis has said in recent interviews that he feared the Greek state did not have “the capacity” to manage the default and transition option.

    Capacity of course means the loyalty and skills of the personnel, but also the nature of the tasks at hand.

    We assume the worst of the Greek bureaucrats but what exactly are the tasks involved in the type of Bank Bum-Rush you advocate?

    What would this really involve at a practical level? What are all these technical hurdles that Yanis has alluded to in recent interviews?

    I did not find his analogy to Iraq’s new currency introduction convincing. He mentioned how Greece was forced to destroy the drachma presses. But Greece has a euro press, which would be useful in your scenario of default and seizing the banks but not leaving the euro. And anyway currency is a small part of the bank question.

    A related question: Is this issue of financial and managerial capacity to deal with a Grexit-like event being discussed anywhere else? If so am not finding it. Any translations on the topic coming out of Greece?

    Given the IMF’s recent wet blanket of doubt cast upon the deal from hell, me thinks this question of “capacity” could soon loom large.

    Thank you. I’ll take may answer off the air.

    In solidarity,

    Christian

  6. My take away from this latest Banking Crisis is the same as I always take away from all these Banking Crisis: No More Bank Welfare.

    If Bank Sugar Daddy, i.e. The Central Bank, cannot bailout, i.e. give welfare, to the banks then the banks suddenly become very careful with their money and do not make unrepayable loans. Crisis averted and we are spared the shear hypocrisy of Banks prattling on about Austerity and Personal Responsibility when they are the biggest Welfare Queens in the world.

    The only action a central bank should be allow to take with a failing bank is Buy Low Sell High. Give those slave drivers a dose of their own medicine, if they have any redeeming value. Buy it low, kick the looser management and owners out on their asses, turn the bank around, then sell for a profit. It’s just good business. Certainly, bank are not immune from good business practices. They should be happy that their theories work so well.

    Oh, and separation between investment and savings banks would be a great boon to society.

    1. In every crisis there are people who say the problem was that the system was too rigid, and people who say the problem was that it was too flexible, it wasn’t rigid enough.

      No surprise there but it’s striking to me how many people in the second group — like you I imagine — also have some kind of left/progressive/reformist politics.

      I might return to this later but I’ll just say for now that I respectfully disagree. I don’t think that profit-seeking banks would make credit decisions in anything like a socially optimal way if only their decisions weren’t distorted by government bailouts.

      I agree with you re hypocrisy but I’d rather have austerity for nobody, not for everybody.

      1. The world has a long history of Bank Panics. Some parts of the world had a brief 60 year lull during the period of reforms in response to the Great Depression. Those reforms have been over turned and as a result banks can now rob the world and dictate terms to it. They have access to everyone’s tax money and savings. It’s no surprise they do nothing with it except enrich themselves.

        I don’t think that profit-seeking banks would make credit decisions in anything like a socially optimal way under any circumstances because that’s the opposite of fudiciary responsibility to profit is. It’s not profitable to be socially responsible because it’s a cost.

        Being socially responsible is exactly the reason for government, not business.

  7. Thanks for posting these excellent theses. Very helpful for understanding both the mechanics and the ideologies. But the comment I appreciated most was:
    “You shouldn’t be terrified. These are problems to be solved. Let’s contribute as we can to solving them.”

  8. Two rather unrelated points.

    1) On agricultural quotas in the EU.
    I think that in all EU states there are demostrations against agricultural quotas every some year, generally on the idea that the quota for the nation of the demonstrators should be rised. However, quotas exist because the EU subsidizes agriculture in every member state, so it sets a limit for each state on the quantity of subsidies. I think that if the quota system is removed, all state’s agricultural sectors would suffer, as the susidies would also likely be removed. I’m not so sure wether “core” nations or “periphery” nations would suffer more: portuguese farmers would have to sell their products at very low prices!
    While we use to think of industrialised and less industrialised countries, there are still large agricultural areas in France and Germany.
    (I say this because I’m always pissed off by italian agribusiness that demostrates against “quotas”, as if the EU was limiting their sales, while in reality they are just asking for more subsidies from the EU).

    2) about your points 10 and 13:
    I think that the main point is that “debt” of someone is just the other side of “wealth” of someone else. if I have 100€ in my bank account, this means that the bank has a debt of 100€ with me; said bank will then have a credit of 100€ to someone else (for example someone who got a mortgage for a new house, or a government bond). This means that there is no “real” wealth with the exclusion of the ownership of real (brick and mortar) capital goods.
    But this idea, that is really simple, is very much out of the way that people have to look at economics, so people think that there must be a limit to debt (that is a bad thing), but everyone would be very surprised by the idea of putting a cap on wealth (eg, nobody can have more than 100000€ in their bank account), even if the two things really are the same.

    1. Of course you are right that the quote system is beneficial for European farmers in general. (And that’s a good thing!The commitment to preserving traditional agriculture is one of the positive things about the EU, in my opinion.) But it still can be the case that specific changes to the system are a zero-sum game between producers in different countries. That seems to be what’s going on with the changes being demanded of Greek dairy regulation, rather than the broader commitment to liberalization that guides that larger package. Or at least, I’m guessing it might be.

      On point 2, again, agreed. And even “real” wealth is not entirely real, since ownership claims are distinct bundle of legal rights and should not be treated as equivalent to the means of production itself.

  9. #10 makes me think of credit default swaps, a contract that passes from person to person, inflating until it blows up in everyone’s face. That’s an indefensible system.

    What if money was not one thing? What if there were various kinds of money like there are various kinds of contracts? Then it would be silly to say that money is only debt or money is only a receipt for metals.

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