I’m as thrilled as anyone by Syriza’s first week in government. The European bourgeoisie has declared war on social democracy, with the euro as its weapon to re-subordinate society to the logic of the market. And now — shades of Polanyi’s double movement — society is pushing back. It’s amazing to see Varoufakis declare that the “troika” has no legitimacy and that Greece is done negotiating. (As my friend Harry says, maybe what’s amazing that Dijsselbloem and the rest thought that Syriza would roll over. But I suppose that’s what’s happened before.)
Here’s what I think is the most important point in all this: The debate now is not about claims on real resources, but about power — who decides, and on what basis.
Daniel Davies:
Don’t think of the Greek debt burden, either in cash € terms or as a ratio to GDP, as an economic quantity. It basically isn’t an economically meaningful number any more. The purpose of its existence is as a political quantity; it’s part of the means by which control is exercised over the Greek budget by the Eurosystem. The regular rituals of renegotiation of the bailout package, financing of debt maturity peaks and so on, are the way in which the solvent Euroland nations exercise the kind of political control that they feel they need to have…
It is, therefore, totally inimical to the Eurosystem to hold out any hope of the kind of debt writedown that Syriza wants, as opposed to some smaller, cosmetic face value reduction or maturity extension. The entire reason why Syriza wants to get a major up-front reduction in the debt number is to create political space to execute the rest of their program. The debt issue and the political issue are the same issue. Syriza understands this, and so does the Eurosystem. The people who don’t understand it are the ones writing editorials in the business press which support the debt reduction but don’t think that Syriza should be given carte blanche to do everything it wants.
One man’s “carte blanche to do everything it wants” is another man’s “freedom to make decisions as a sovereign, democratically elected government.” But this gets the stakes of the negotiations just right.
Krugman is also very good, especially here.
at this point Greek debt, measured as a stock, is not a very meaningful number. After all, the great bulk of the debt is now officially held, the interest rate bears little relationship to market prices, and the interest payments come in part out of funds lent by the creditors. In a sense the debt is an accounting fiction; it’s whatever the governments trying to dictate terms to Greece decide to say it is.
… the aspect of the situation that isn’t a matter of definitions: Greece’s primary surplus, the difference between what it takes in via taxes and what it spends on things other than interest. This surplus … represents the amount Greece is actually paying, in the form of real resources, to its creditors… Greece has been running a primary surplus since 2013, and according to its agreements with the troika it’s supposed to run a surplus of 4.5 percent of GDP for many years to come. What would it mean to relax that target?
… let’s think of a maximalist case, in which Greece stopped running a primary surplus at all (this is not a proposal). You might think that this would let the Greeks spend an additional 4.5 percent of GDP — but the benefits to Greece would actually be much bigger than that. Remember, the main reason austerity has been so harsh is that cutting spending leads to economic contraction, which leads to lower revenues, which forces further cuts to hit the budget target. A relaxation of austerity would run this process in reverse; the extra spending would mean a stronger economy
This makes three important points. First, Greece now has a primary surplus, meaning that the public budget is no longer dependent on foreign borrowing to maintain its current operations; default would allow for a higher level of public spending with no increase in taxes. [1] Second, the size of these transfers is a political decision, no less than the scale of the transfers under, say, the Common Agricultural Program. Third, while these flows are — unlike the notional stock of debt — objective economic facts, they are not the most important thing about the debt payments. The most important thing is the policies the Greek government has to adopt to keep generating those flows. It’s a problem that Greece is making payments to the richer parts of Europe, and will do so indefinitely if the troika gets its way. But the bigger problem is that the overriding need to generate those payments prevents the Greek state from taking any positive action either to end the current depression or to foster longer-term economic development.
One issue where Krugman and Davies disagree is if a default on the Greek debt would automatically lead to a collapse of the Greek banking system (in which case exit from the euro would uncontroversially follow) or if this would require a positive decision of the ECB to withdraw support from Greek banks. [2] I don’t claim any expertise here, but Krugman’s position seems more plausible. And in general, one of the welcome effects of the crisis is that supposedly natural economic constraints are forced to take form as explicit political choices.
Maybe the best short overview I’ve seen is this piece by Mark Weisbrot. The key point he makes is that the big fear of the current of Euroland’s rulers is not that economic catastrophe will follow Greek exit from the euro. It’s that it won’t.
And yes, it’s published in VICE. These are strange days.
[1] There’s a certain slippage in these conversations between “Greece” meaning the country as a whole and “Greece” meaning the government. It is true that the Greek government budget is in primary surplus (if the official numbers can be trusted, which probably shouldn’t be taken for granted — leaving aside questions of fraud, there are non-recurring revenues from privatization.) But if we are talking about Greece the country, the relevant number for real resource flows is the trade balance, which is close to zero. But it’s still true that there is no net flow of real resources into Greece to be financed, which is important in thinking about the consequences of default.
[2] As far as I can understand, the Greek banking system could collapse in two ways. First, if it loses access to the interbank payment system, and second, if it faces a run because it becomes clear that the ECB is no longer willing to offer Greek banks liquidity support. Both of these events can happen just as easily if Greece is current on its debt as if it defaults.
I hope Weisbrot is correct and the European leaders are smart enough to understand that a post-Euro Greece could avoid catastrophe and that would be bad for their project.
The fact that Draghi just did their first QE could be a sign. However I fear these people are too stupid, moralizing and suffer from groupthink.
Varoufakis is quoted as saying he'll ask for 1.5 to 1 percent as primary surplus.
What's special about VICE? I understand it's a millennial media project and they have and HBO show.
A lot of us still think of Vice as a glossy sex-drugs-and-tattoos magazine with vaguely right-wing libertarian, South Park-style politics.
Okay I get it. It's emblematic of a "safer" more acceptable kind of rebellion.
A few points:
The IMF puts the Greek multiplier at 1.3. Ordinarily, with such a severely depressed economy, I would think it would be much high that that, say 2+. What is behind that multiplier estimate? Is it that the Greek banking system and the trade credit it would ordinarily supply is so badly damaged that that even fiscal easing and the balanced-budget multiplier, (i.e. shifting burdens from the poor to the rich), can't undo the damage?
Greece is now collecting 44% of GDP in taxes. So if the primary surplus were relaxed by 3% of GDP that would amount to about 1.3% "stimulus" spending. Welcome, but not huge. But Greece's CA balance is almost entirely due to the cutting off of imports, rather than any ability demonstrated to increase exports, (though the declining oil price should help). But if any fiscal expansion should occur, even if slight, wouldn't that then just suck in imports, resulting in a return of the endemic problem?
One of the things I've always wondered about is the role of VAT. The troika has been pushing for "tax devaluation", which has been implemented on Portugal, if not Greece. The idea is to lower employer taxes on labor, (and thus obviously cut public benefits to labor, which they finance), in order to reduce that great fetish "unit labor costs", as part of deflationary "internal devaluation". But what about the idea of doubling VAT and counter-balancing that with a progressive negative income tax system? Since VAT is imposed on imports and rebated for exports, wouldn't that help to contain the effects of any domestic stimulus on the CA balance, while also, since VAT is effectively self-enforcing at low transaction costs, improving tax compliance and collections, (provided one finds some way to rebate it to foreign tourists and enforce it on the large self-employed sector in Greece)?
At least in Italy, the Monti government actually did increase the VAT, though not as much as doubling it, IMHO exactly for the reason you say.
However a doubling of the VAT is impossible: on many goods in Italy the VAT is already 20% of sale price, so doubling it means an extreme increase on prices.
I think in most of Europe the VAT is also already very high.
Incidentially, increases in the VAT directly translate in increases on sale prices, so the already low level of inflation in Europe is probably overstated by the increase in the VAT (and other taxations). The result is that "labour costs" increase faster than inflation, but "buying power" of workers fall, a really nasty anti-stimulus.
Also note that the idea is to cut labour costs in order to boost profits, so cutting labour costs while increasing taxes on employers with a more progressive tax system is not what the EU wants.
The increase in VAT would be rebated, but with a downward redistribution. Thus it would just be a way to better ensure tax collection on the upper income level, where most of the evasion and manipulation occurs, while protecting the lower incomes and providing some modest stimulus in the manner of a balanced budget multiplier. But the main point is that it would amount to a preferential tariff within the Euro, discouraging import consumption and CA deficits without affecting any export capacity.
From a rapid google search:
http://www.vatlive.com/country-guides/greece/greek-vat-compliance-and-rates/
"The current rates are:
– Greece standard VAT rate: 23%
– Greek reduced VAT rate: 13% (pharmaceuticals, foodstuffs)
– Greek reduced VAT rate: 6.5% (books newspapers, magazines, restaurants)
– Exempt from Greek VAT: insurance, financial services, postal, property, medical, health
"
I think that this is in line or slightly higer than other european nations.
It seems to me that 23% VAT is already high, so that to increase it as a tariff you would have to take it to 30-35% to have a meaningful effect.
It sounds really high! Though I agree that, if the Greeks have to rise taxes, the VAT would be a smart choice.
JCH's point about the trade balance is important. Higher income growth in Greece will certainly lead to an adverse movement of the trade balance. If the resulting current account deficits can't be financed, then the multiplier on government spending is irrelevant.
That said, to the extent that there are interest payments on the public debt actually flowing to foreign creditors, default will open space in the external balance as well as the fiscal balance. Also, assuming the ECB continues providing liquidity to Greek banks, the financial inflow to finance the increased current account deficit might happen automatically through the banking system. I'm not quite clear on either of these points.
"One issue where Krugman and Davies disagree is if a default on the Greek debt would automatically lead to a collapse of the Greek banking system (in which case exit from the euro would uncontroversially follow) or if this would require a positive decision of the ECB to withdraw support from Greek banks."
The main problem is the 'events of default' in the EFSF financing agreement. Any default by Greece on its debts (even on the Greek law ECB SMP government bonds) can trigger cross default on the EFSF loans. Obviously that's a nuclear option that is hard to exercise.
http://www.efsf.europa.eu/attachments/efsf_financial_assistance_facility_agreement_greece_bond_interest.pdf
In case Europe actually did exercise it that would mean that the EFSF notes held by Greek banks (which were handed out during their recapitalization after the PSI) would be in default and Greek banks with negative capital. At that point the ECB would have every excuse to cut them off ELA financing and Greece would have effectively exited the Eurozone.
Thanks, this helpful. That said, it's not clear to me how much difference this make in practice.
Is it the case that the ECB wants to support Greek banks and is able to do so now, but in the event of an EFSF event it would be unable to?
Or, is it the case that the ECB wants to cut off Greek banks now, but can't do so legally, and EFSF would give it the required legal basis?
Neither of those seems to be the case to me. It seems to me that the ECB has the choice of supporting or cutting of Greek banks today, and will have the choice of supporting or cutting off Greek banks after a default. The only thing that might change is its desire to do so. But that's a political question that has nothing much to do with the legal conditions attached to various past financing arrangements.
The main point is that the options available to the current government are very limited even though the threat of its Eurozone members is actually that 'we will not give you loans in order for you to repay us our maturing debt'. Although it might have a fiscal (primary) and external surplus this still does not provide it with room to sit and wait, even on maturing Greek law securities such as the bonds of the ECB SMP portfolio.
The ECB has already done a clearly political move of not accepting Greek government guaranteed collateral on its regular refinancing operations (and we all remember the Cyprus ELA standoff as well as its 'reform demanding' letters to Spain and Italy). It does not act as a central bank that seeks to safeguard the Euro but more as another troika member who uses all the leverage it can in order to maintain discipline and not change anything in the previous refinancing agreements.
The ECB (and the Euro North members) might feel that they can actually pull another 'Cyprus event' with ELA refinancing capped and capital controls imposed in the Greek banking system until the Greek government agrees to back down from its previous demands (such as to maintain much lower primary surpluses).
"…Though I agree that, if the Greeks have to rise taxes, the VAT would be a smart choice…"
VAT is a regressive tax , hitting the working class the most. Smart chocie would be taxing the assets, real estate etc.
The Greek have to start dipping into the tax evading oligarchy's pockets.
Euro QE makes sure there is demand for governmentt bonds so Tsipras needs to keep throwing Greek T-bonds on the local ECB branch in Athens. Start a massive fiscal expansion so what if imports grow? All that means is more real stuff comes to Greece, you only export to be able to import.
Well, one problem is you then are dependent on the ECB to finance your real production and consumption, and not just your debt service. Which makes you vulnerable to any interruption in financing in a way that Greece currently is not. It seems to me it's precisely the fact that Greece does not currently have a primary government deficit or a trade deficit, that makes its negotiating position so strong.
It seems to me that Greece is better off with the policy Syriza is actually pursuing: use the bargaining power they've gained through austerity to push for a more permanent form of public financial flows (like the modest proposal), and/or build up the institutions for broader-based industrial development so that they are no longer faced with chronic trade deficits on the same scale. But you're never going to have a democratic alternative in a country where real productive activity depends on financial inflows that can be turned off at any moment by the ECB.
Mr. Mason,
Thank you for your reply
"…But you're never going to have a democratic alternative in a country where real productive activity depends on financial inflows that can be turned off at any moment by the ECB…"
Exactly. Greece must regain monetary sovereignty or force more internal devaluation on its population ( Vietnam's cost level should do ). Hard choice 🙂
Another alternative is readjusting Maastrricht limits to say 8% of GDP budget deficit
I'm not sure I agree with this:
"The European bourgeoisie has declared war on social democracy, with the euro as its weapon to re-subordinate society to the logic of the market."
Why are the interests of creditors (and beyond that, the interests of employers, since as you've documented, this was always in large part about keeping labor costs down) necessarily the "logic of the market?" .
This varoufakis interview is very good. It's strange to see someone talking sense on the EU crisis on mainstream TV. The interviewer can't even follow his answers (like when he says germany needs to be a hegemon.
http://yanisvaroufakis.eu/2015/01/31/on-bbc-tv-newsnight/
It's also insane how many people think that letting Greece have a financial crisis is an acceptble outcome. With attitudes like this, there is no question in my mind that the Euro will eventually collapse.
Yes, the interview is very good.
With attitudes like this, there is no question in my mind that the Euro will eventually collapse.
Or attitudes will change. That happens too, sometimes surprisingly quickly.
Greece must regain monetary sovereignty or force more internal devaluation on its population
Well, this raises an interesting question. What exactly does "monetary sovereignty" mean in this context?
Suppose Greece had its own currency, in the usual sense. Now if private incomes increase, for instance as a result of a fiscal expansion, then some of the new spending will fall on goods and services produced outside of Greece. (And some of the new saving will take the form of foreign assets.) This will imply the creation of new foreign-currency liabilities, in the first instance within the Greek banking system. The faster Greek income grows relative to its trading partners, the more the net liability position will grow. (But even if there is no net liability position, there will still be foreign liabilities, and the offsetting private assets may not be easily mobilizable by the government.) This means that the government can no longer guarantee that private contracts will be fulfilled, i.e. a financial crisis is possible. So in this sense a country that participates in an international economic system at all never has complete monetary sovereignty (unless it operates strict exchange controls, or its currency is the international reserve currency.)
Now, the mainstream answer, which seems to be adopted at least sometimes by MMT people, is that a floating currency guarantees that there will always be sufficient foreign currency inflows to meet foreign currency obligations, thanks to the boost to net exports from depreciation of the currency. But I don't think there is any reason to believe this.
"This will imply the creation of new foreign-currency liabilities, in the first instance within the Greek banking system"
An increase in net liabilities to the RoW does not necessarily imply an increase in foreign currency liabilities. The liabilities might be in the form of deposits/repos in the banking system denominated in the national currency or government securities. Greece might also seek (and achieve for geopolitical reasons) foreign currency swaps with major central banks such as China, Russia and even the Fed.
Also bear in mind that currently Greece has a combined current account and capital transfers balance close to €5bn which means that it will be exporting capital (and acquiring FX reserves) for the immediate future.
Also bear in mind that Greece with its own currency might participate in ERM II and have access to liquidity in order to maintain its exchange rate inside the 15% bands around the central exchange rate.
Thanks, your comments here are very helpful. I'll be curious if you have thoughts on my new post.
"….This will imply the creation of new foreign-currency liabilities…"
Forgive me to be saying this for I am just a layman but you seem to be stuck in a "balance of payments crisis" false paradigm .
Some private agents in Greece will have this kind of foreign currency liabilities but what does it prove anyways ? Why's this unsustainable ? Please do not go to "inability to import oil, technology" and other such arguments 🙂
NO PUBLIC SHORT FOREIGN EXCHANGE SPECULATIVE POSITIONS. period. This way Greece will be in full control of interest rates it pays on its debt. Just like Japan, UK, Switzerland etc.
You are an American. Why don't you apply the same rationale to USA? You know very well that the deciding factor is military power.
"….currency guarantees that there will always be sufficient foreign currency inflows to meet foreign currency obligations, thanks to the boost to net exports from depreciation of the currency. But I don't think there is any reason to believe this…."
Unless the sanctions are imposed ( act of war ) there is no reason to doubt it.
p.s.
even Zimbabwe managed to import oil 🙂
NO PUBLIC SHORT FOREIGN EXCHANGE SPECULATIVE POSITIONS
That ensures that the public sector won't be constrained by lack of access to foreign exchange, but it doesn't protect the private sector. And what we've seen in Europe — Greece excepted — is precisely a crisis brought on by PRIVATE foreign-currency liabilities. If the pattern of trade and financial flows results in your country's private banks ending up with large foreign exchange short positions, what do you do when they can't honor them?
"….is precisely a crisis brought on by PRIVATE foreign-currency liabilities…"
Again, does US have this kind of problem? or UK?
In Euro Zone all liabilities are de facto foreign for member countries but it's another story. What brought this crisis is the same mechanics that bankrupted Weimar , my native Poland in the 80s , Venezuela, Argentina etc. Anglo-American financial oligarchy ( it includes France, the Netherlands, Germany as well ) advanced massive FOREIGN loans to corrupt or inept ( or both ) governments . It's only a matter of time before "the markets" ( the same Anglo-American oligarchy 🙂 ) realizes that the situation is unsustainable driving up interest charges and causing deflation. Than they offer "solutions" ( Hegellian dialectics )Rinse and repeat. This is how the states are invaded today.
"…If the pattern of trade and financial flows results in your country's private banks ending up with large foreign exchange short positions, what do you do when they can't honor them?…"
They go bankrupt? 🙂 What do I care? In case if the same private banks loaned to domestic firms in FX ( like it's done in presumably sovereign Russia where local economy is de facto dolllarized ) CB offers administration proposals.
Professor Mason you are a Marxist , we are only talking about finance , a "fictitious capital" . Sovereign government can create its own. I assume computers are still going to work 🙂
JWM:
Have you read Daniel Davies latest at CT? Can you make any sense of it? (Specifically, why interest payments on public debt would significantly be returned to Greece, thereby increasing fiscal space/stimulus, when most of it is of it is owed to official creditors and how much of the rest is actually owned by resident Greeks, and likely that part owned by Greek banks has already been pledged for liquidity support). I tried to post that question, but was put in "moderation", having been previously "banned", presumably as one of the "angry".
From the White House:
http://coppolacomment.blogspot.com/2015/02/what-on-earth-is-ecb-up-to.html
"The US President, Barack Obama,* has openly sided with the Greeks, warning that "You cannot keep on squeezing countries that are in the midst of a depression. At some point there has to be a growth strategy in order for them to pay off their debts and eliminate some of their deficits". "
*http://news.yahoo.com/obama-joins-ally-list-greek-austerity-relief-033040983.html