Friday, April 24, 2015

Greece: Enough is Enough

In Alexis Tsipras’ shoes I would apply immediately for Greece to leave the EU, as envisaged by Art. 50 of the TEU (Consolidated Version of the Treaty on European Union, Official Journal of the European Union, C 115/15, 9/5/2008).

Since Greece’s 2010 crisis the Troika (sorry, the “international institutions”) have sunk about €245bn into its rescue, i.e. more than would have been sufficient at that time to pay off the entire Greek debt. It is well known that these funds did not benefit the Greeks but went almost entirely to save French, Swiss and German banks from their exposure to Greek government bonds. And in the FT or 21 April Martin Wolf debunks Greek “mythology” including the myth that “Greece has done nothing”: 

“Greece has undergone a huge adjustment of its fiscal and external positions. Between 2009 and 2014, the primary fiscal balance (before interest) tightened by 12 per cent of gross domestic product, the structural fiscal deficit by 20 per cent of GDP and the current account balance by 12 per cent of GDP.”
“Between the first quarter of 2008 and the last of 2013, real spending in the Greek economy fell by 35 per cent and GDP by 27 per cent, while unemployment peaked at 28 per cent of the labour force. These are huge adjustments. Indeed, one of the tragedies of the impasse over the conditions for support is that the adjustment has happened. Greece does not need additional resources.”

The cost of such adjustments to the Greek people were immense. Unemployment reached 28% (48% for youth unemployment), the dismantling of collective bargaining lowered real hourly wages by 25% by 2014. The minimum wage fell to its level of the 1970s. The minimum pension fell below the poverty threshold. As many as 35.7% of the population and 44.1% of children aged 11 to 15 are now at risk of poverty or social exclusion. And Gechert and Rannenberg (of the German Hans Böckler Foundation) show that without austerity the Greek economy would only have stagnated, avoiding the deep recession, while tax increases without spending cuts would have been much more effective in lowering the Debt/GDP ratio.

Another myth debunked by Martin Wolf is that Greece will pay its debt in full. As a a result of fiscal consolidation and the bailout its debt has gone from about 120% of GDP in 2010 to over 177% today. Thus Greece needs either further debt relief or, in order to continue to service the debt, it needs the €7.2bn bail-out funds due last year that were not disbursed on the ground of alleged delays in Greek implementation of “structural reforms” agreed in the Memorandum of Understanding negotiated by the previous right-wing government with the “institutions”.

After the 25 January elections the new government, democratically elected on a specific anti-austerity campaign, and reported by post-election polls to consistently command the support of 80% of the population, an agreement with the “institutions” was reached in principle on 20 February for the release of the €7.2bn on condition of somewhat different but yet unspecified structural reforms. However there have been continuous wrangles about whether or not the Greek reform proposals were or were not sufficient to warrant the release of the residual bail-out funds.

Up to now Greece has paid punctually interest and debt instalments as they became due, such as $450mn owed the IMF on 9 April and a batch of Treasury Bonds that also fell due. But the IMF is still owed €203mn on 1 May and €770mn on 12 May, plus €1.6bn in June, while some of the debt with the ECB is also due for repayment. The Greek government has scraped the bottom of the barrel by requisitioning the liquid balances of state enterprises and local authorities. It has announced that it is not in a position to make these payments, unless it stops payment of pensions and public sector wages and salaries.  Without access to these €7.2bn Greece is likely to default on its payments to the IMF and the ECB.

On 15 April the FT reported that Greek officials had approached the IMF informally proposing to delay the repayment of loans due in May but were told that no rescheduling was possible; indeed they were persuaded not to make that request officially, presumably to avoid an open refusal.

At the same time Germany’s finance minister Wolfgang Schäuble was reported in an interview to have virtually ruled out that at the Eurogroup meeting in Riga on 24 April a deal might release bailout funds to Athens. "You can't pour hundreds of billions... into a bottomless pit."

However Die Zeit reported that Ms Merkel now might support emergency measures that would give Greece continued access to ECB Emergency Financial Assistance even in case of default. The possibility of a Greek default not being followed by Grexit is being discussed more and more widely (see for instance Wolfgang Munchau and Martin Wolf in the FT).  It might be possible, perhaps, but would still be very messy, and if there is sufficient goodwill to make it possible it would be much more effective to disburse the wretched €7.2bn.

The Financial Times on line of 18 April (Breaking News, 6.57 pm) reports that ECB president Mario Draghi told the IMF spring meeting the euro area was better equipped than it had been in the past (in 2010, 2011 and 2012) to deal with a new Greek crisis but warned of “uncharted waters” if the situation were to deteriorate badly.

On 21 April BloombergBusiness reported that “The European Central Bank is studying measures to rein in Emergency Liquidity Assistance to Greek banks, as resistance to further aiding the country’s stricken lenders grows in the Governing Council”. The writing is on the wall.

Grexit costs would be very serious not only for Greece but for the entire Eurozone and beyond, but unilateral withdrawal from the whole of the European Union rather than simply the Eurozone would make more sense. An application to withdraw would only take effect two years later, leaving ample time for a possible change of mind and for re-negotiations, but might be an effective and quick way of sobering up Mr Schäuble and the other Troika hawks that have been bullying Greece, pushing it towards default regardless of consequences. Greece might as well take back the initiative, not least to avoid an internal government crisis.

What is particularly deplorable is the IMF duplicity and bad faith: in Greece and everywhere else on a global scale they have been calling relentlessly for fiscal consolidation and structural reforms (a euphemism for enterprise freedom to dismiss employees and for the systematic destruction of the welfare state) but at the same time they have played a leading role in discrediting consolidation and "reforms" as policy instruments to fight a recession.

The IMF World Economic Outlook of October 2012 (Box 3.1 untypically signed by Chief Economist Olivier J. Blanchard and Senior Economist David Leigh, presumably to suggest that their views are personal and not official) raised previous estimates of fiscal multipliers for several reasons. First, the ineffectiveness of countervailing monetary expansion close to the zero floor of the interest rate'; second, lack of opportunities for exchange rate devaluation especially in the Euroarea; third, the existence of  a large gap between potential and actual income (for fiscal multipliers are higher in a downturn than in a boom) and finally, the simultaneous consolidation across many countries.  Such revision of estimated multipliers implied an upwards revision of the costs of consolidation, to the point of theorizing that tax increases and especially expenditure cuts would actually raise, instead of lowering, the ratio between Debt and GDP, thus setting up a vicious circle. This of course is what happened punctually in Greece and in other highly indebted economies – like Italy – as a result of fiscal consolidations.

Further the IMF World Economic Outlook 2015 (Ch. 3, Box 3.5 on The Effects of Structural Reforms on Total Factor Productivity, pp.104-107) issued on 14 April candidly recognizes, on the basis of available econometric evidence, that total factor productivity can be increased by using more skilled labour and ICT, by investing more in research and development and by lowering the level of regulation in product markets. In contrast, the IMF does not find any statistically significant effects on total factor productivity that result from lowering labour market regulation (See also Ronald Janssen Social Europe).
Such schizophrenic duplicity on the part of the IMF has not even incompetence as a conceivable justification. A Greek unilateral withdrawal from the European Union would sober up lots of people in Washington as well as in Brussels, Frankfurt and Berlin. Go for it Alexis and Yanis on behalf of all of us, not just on behalf of Greece. 

UPDATE (13 May)

Last Monday (11 May) Greece paid the $750mn owed to the IMF, one day before the deadline, ending days of uncertainty over funds availability and whether payment might be withheld in order to put pressure on creditors. 

Where did the money come from? The FT reminds us that “The Greek government ordered hundreds of state entities — among them hospitals, universities and local authorities — to deposit their cash reserves with the central bank. But many such entities, including an overwhelming majority of municipalities, have declined to comply”.

An unmissable piece of news, which appears to have gone largely unreported in the financial press: TSIPRAS TO FIRE [FIRED] BANK OF GREECE BOSS FOR UNDERMINING SYRIZA POSITION: Bank of Greece Governor Yannis Stournaras will be quitting his post today (last Sunday). Alexis Tsipras will ask for his resignation in the light of documentary proof that the former New Democracy Finance Minister personally gave specific briefs to a top journalist about “putting the most negative spin possible on the news” about Greek finances.

Yannis Stournaras was Greek Minister of Finance from 5 July 2012 until he moved to the BoG last year. As a senior consultant to the Bank he was personally involved in the entry of Greece into the euro. As a senior Governor he sits on the Board of the IMF, a position that places him in a serious conflict of interest with the Greek government.  “Meanwhile, the forensic investigation into debt overstatement in 2010 and how much Greek debt can be objectively defined as ‘odious’ continues”. 


D. Mario Nuti said...

“The writing is on the wall”: so much so that William Hill, the U.K. bookmaker, last Wednesday stopped taking bets on Greece leaving the euro zone, saying it is increasingly likely that the country could "begin the process of departing" very shortly.

"Greece had been heavily backed down to 1/5 to be the first to quit the euro zone, and we'd also been shortening the odds for Greece to leave during 2015. They'd come down from 5/1 to 3/1.' William Hill spokesman Graham Sharpe said in a press release.

Hooligan said...

Greece risks to exit not just the single currency, or – as you now suggest – the European Union, but, perhaps more seriously, European Football.

Both FIFA (the International Federation of Football Associations) and UEFA (the Union of European Football Associations) are ferociously opposed to the Syriza government’s planned law against violence in football stadiums, which is particularly virulent in Greece.

The new law, due for discussion in the Greek Parliament at the beginning of May, apart from introducing nominal tickets and surveillance cameras, would give the government the power to fine offending football clubs up to 17mn euro (sic!) for violations, sidestepping both FIFA and UEFA, who have already threatened to expel the Greek Football Federation.

D. Mario Nuti said...

"Seriously", being expelled from European football surely would be a blessing in disguise.

Rosy said...

The 20 February deal gave Greece time until the end of May. Why all the hustle now then?

D. Mario Nuti said...

The case for resisting both accelerated consolidation and the kind of "structural reforms" that have not worked in the past is forcefully made by Yanis Varoufakis in Social Europe at

A few days ago Schauble in person indicated end June as the true deadline for Greece to come up with an agreed set of proposals to release the residual €7.2bn bail out.

But Greek cash is running out, and therefore time is running out faster than cash. Hence the "hustle."

Alberto Chilosi said...

To leave the EU would not be an advantageous move for Greece as the interest on the debt (that has been reduced as a proportion of GDP to a level lower than in other less indebted EU countries such as Italy) is less that the net subsidies that Greece draws from the EU budget.
The recent move to increase some pensions without reducing some other expenditure item does not seem particularly clever for a country where pension expenditure (including that for the unmarried daughters of state employees) is the highest in Europe (17% of National Income).

D. Mario Nuti said...

Sure, Greece remaining in the Eurozone and continuing to service debt on current terms and with current and prospective bailouts is a superior solution for all.

But at the moment the alternative to leaving the EU seems to be that of being effectively kicked out of the Eurozone. In those conditions the debt reduction obtainable on leaving the Union is bound to be greater than the higher interest cost on a smaller debt.

Anonymous said...

The Troika (International Monetary Fund, Central European Bank and European Commission) is killing the European economy with its politics of austerity.
Its objective is just to make Countries pay their debt and interest, without any discussion, and without any respect for the life of European Citizens who suffer the consequence of austerity.

Only one country is standing against this: GREECE.

The Greek government is fighting austerity not only for their interest, but for the interest of all the European people. Every European citizen see her/his money stolen to give it as interest to banks, and see his/her rights violated every day by the austerity politics.

We have to support the effort of Greece, because it is also our fight!
We can do it in a simple and fun way:

Let's make our holidays in Greece! Let's support their economy and people!
Say NO to Austerity!
Say YES to hope! Say YES to Greece!

Sign Online:

D. Mario Nuti said...

Thanks Anon, you are right, there is something punitive and insane about the Troika’s conduct.

Greece is alone in its fight against austerity because France and Spain fear the electoral success of the FN and Podemos respectively, Italy that of the 5StarMovement (and the loss of €40bn Greek bonds). Holidays in Greece sound a good way to support the country, but probably not enough I fear.

D. Mario Nuti said...

Alberto Chilosi sent me the link to a NYT piece on “What Greece faces if it defaults”, i.e. the recession and inflation faced by Argentina.

I always said that Grexit is not a desirable solution to the crisis, but since now this is the most likely outcome of Greek confrontation with the Troika I regard an early move to leave the Union altogether as a better tactics.

D. Mario Nuti said...

See Paul de Grauwe's excellent post of 28 April on "Are Creditors Pushing Greece Deliberately Into Default?", published originally on his Blog "Ivory Tower"

and reprinted in Social Europe on the same date:

D. Mario Nuti said...
This comment has been removed by the author.
Nikos said...

Anybody wishing to endorse the "Appeal to Support the Resisting Greek People and its Truth Commission on Public Debt - For the People’s Right to Audit Public Debt
(4 May)go to

D. Mario Nuti said...

"The cash crunch continues for Greece, which has again threatened to default on International Monetary Fund repayments. Nikos Voutsis, interior minister, says the country cannot meet June pension and wage bills while reimbursing the EUR1.6bn it owes the IMF without a bailout deal.
Although eurozone officials have been braced for default since March, the repeated warnings of imminent bankruptcy mean some have begun to disregard such threats, believing Athens is using them as a negotiating tactic." (FT, 25 May 2015).

"The fate of Greece lies in Tsipras’s hands" (Wolfgang Munchau, FT 25 May). But the article actually says the opposite: "If the deal offered by the country’s creditors is reasonable, the prime minister should accept", i.e. the fate of Greece, of course, lies with the creditors.

D. Mario Nuti said...

See Joseph E. Stiglitz, Europe's Last Act?
"European Union leaders continue to play a game of brinkmanship with the Greek government. Greece has met its creditors’ demands far more than halfway. Yet Germany and Greece’s other creditors continue to demand that the country sign on to a program that has proven to be a failure, and that few economists ever thought could, would, or should be implemented..."

D. Mario Nuti said...

"An eleventh-hour deal between Greece and its bailout creditors has slipped away - it seems the difference between Greek ministers and their bailout creditors is too wide to breach. Talks collapsed on Sunday evening after a new economic reform proposal submitted by Athens was deemed inadequate for negotiations to continue."

"With the government fast running out of money, and depositors pulling cash from banks, Greece is running out of options to avoid capital controls. Then again, given the stakes for Germany and France, Wolfgang Munchau argues that Greece has nothing to lose by saying no to its creditors." (This morning FT).

D. Mario Nuti said...

See Martin Wolf in today’s FT,
“Divorce Greece in haste, repent at leisure”: “Neither Greeks nor their partners should imagine a clean break if they leave the euro”.

Much better than Olivier Blanchard’s “Greece: A Credible Deal Will Require Difficult Decisions By All Sides”, apparently impartial and balanced but in truth very partisan and biassed, oblivious to the recessionary implications of budget cuts and their adverse impact on the Debt/GDP ratio, which he knows very well.

See also, if you have missed it, the worst and least enlightened piece by Francesco Giavazzi (Wolf calls it “strident”, I would say “jaundiced”) “Greeks chose poverty, let them have their way” of 9 June, And most definitely Karl Whelan’s “blistering” (againg Wolf’s label) answer to Giavazzi, “The FT Lets Itself Down Again: Francesco Giavazzi on Greece:Is this Italy’s answer to Hans-Werner Sinn?”. Excellent, unmissable.

Finally, see the excellent piece by John Weeks, “Grexit: When not If”, on the political reasons for the "institutions" behaviour

D. Mario Nuti said...

See Paul Krugman: Killing the European Project, 12 July 2015:

"Suppose you consider Tsipras an incompetent twerp. Suppose you dearly want to see Syriza out of power. Suppose, even, that you welcome the prospect of pushing those annoying Greeks out of the euro.

Even if all of that is true, this Eurogroup list of demands is madness. The trending hashtag ThisIsACoup is exactly right. This goes beyond harsh into pure vindictiveness, complete destruction of national sovereignty, and no hope of relief. It is, presumably, meant to be an offer Greece can’t accept; but even so, it’s a grotesque betrayal of everything the European project was supposed to stand for.

Read on at