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Monday, July 13, 2015

Europe Opts For Can-Kicking Option

The can has been kicked down the road; the only question is how it will go. It is unclear whether the surrender of its national interests by the Greek government officials will survive a parliamentary vote. But if it does, Greece could return to what was considered "normal" last year. The eurocrats would finally be in a good position to take their summer vacations.

Since the Greek economy is being crippled by the "reforms" being forced upon it, the government will be unable to service its debt. At some point, the negotiations will have to be re-opened again, and the process would likely repeat. Furthermore, a global downturn would likely re-open the question of the status of the entire euro periphery.

But until then, the rest of the world can return to things like obsessing over the U.S. labour force participation rate, and leverage in the Chinese stock markets. If global demand somehow increases, the eurozone will benefit from the weaker euro, and there may be less pressure on their economies.

It is a testament to the power of groupthink that the Greek government chose austerity measures (that were obviously designed to be unacceptable) instead of the option of a "temporary" exit.


  1. I am more optimistic than you seem to be but certainly agree that the Greek people can expect a large change in economic balance.

    Year-after-year borrowing will always result in economic patterns that are different from the patterns of a balanced national budget. The winners and losers from each of the two policies will be different. The source of control of new growth may even change (if private borrowing replaces government borrowing as a source of growth).

    I am watching the Greek adventure, wondering if it has lessons on the course of Keynesian stimulus. The Greek deviation seems to be that the source of stimulus was all external to the nation. This seems to me to be the opposite from the Japan experience.

    No matter what, I like to observe and learn from my observations. A quote from others -- "We live in interesting times".

    1. I am unsure whether we can look at fiscal stimulus in isolation. There is no reason for the private sector to believe that such a shutdown will not occur again, so why bother investing in Greece? Even if the "institutions" allowed the Greek government to ramp up spending (which they are not), it might not be enough to overcome private sector weakness at this point.

    2. I have published a new post Three Experiments in Keynesian Stimulus

      I think there are clear lessons about Keynesian stimulus that can be extracted from the three examples of Greece, China and Japan. These examples can be compared to the U.S. and other nations but I did not do that in the post.

  2. Sorry Brian, knowing the Greek economy intimately well, I disagree with you. Greeks are incapable of putting their fiscal house in order. Now, they gave up fiscal sovereignty to remain part of the EZ and can blame the "big bad Germans" for all harsh measures. Also, this government will eventually fall and when it does, debt restructuring will be offered to a new, Eurozone friendly government. Read my updates on my latest comment on the Agreekment.

    1. I am not going to defend the Greek policy makers. But at the same time, the austerity being imposed has caused an unemployment rate of 20%. It will only get worse if they stay on this path. Sure, if the unemployment rate is 30%, 70% of the labour force has jobs, but that is not a sustainable (nor moral) outcome. The deal Tsipras accepted will just have to be renegotiated within a year or two at most.

      Greece is never going to pay back its debt, and is not servicing it properly now. Restructuring is only of political importance at this point (except for creditors, who are even more insolvent).

    2. Looks like the IMF agrees with you:

    3. "Greeks are incapable of putting their fiscal house in order." Unlike you, I do not know the Greek economy intimately well. However, I do keep on reading everywhere from people who claim they do that Greece just does not have what it takes to make it on its own. If that is true - which I don't necessarily believe - , then let's not beat about the bush: the country is toast no matter what it does. It should be clear by now to all and sundry that Greece is not going to get any meaningful help (i.e. transfers) from its European 'partners', au-contraire, it is made to pay a hefty price for saying in the Euro zone. So, in or out, Greece is on its own. Out does not come with such a hefty price tag and gives Greece some more flexibility.
      Anyway, I get the impression Greece is a near certainty. It would appear that Wolfang Schaeuble has concluded - correctly - that the Euro zone in its current form is unworkable. Transfers are out of the question, so the only option is to force out those members that would need such transfers. Hence the excessive, humiliating and counterproductive agreement forced onto Greece.
      Ironically, it would appear that Greece's biggest adversary and the 'bad' guy (my point of view) in this story (Wolfgang S.) has the most realistic and best plan for Greece and its people (managed Grexit, debt-wite down, ...) whereas the 'good' (again my point of view) guy (Tsipras) is empoverishing it further by trying to keep it in the Euro zone. Just my 2 cents. No expert on any of this.

    4. This comment has been removed by the author.

    5. If we think of stimulus as money (whether lovingly or grudgingly) given to an economy to enable it to increase GDP, then Greece has had a lot of stimulus. It has had a lot of stimulus year-after-year.

      This stimulus has not worked to help the Greek economy year-after-year. Instead, it has brought the Greek economy into a failed monetary condition that is dependent upon others for credit.

      There is a second view of the Greek experience. Stimulus can be very unhealthy. Stimulus is the act of one person giving something to another with the expectation of future reward. This expectation is unreal if continued for many year-after-year intervals.

      Instead, Greece is the victim of simple exchange imbalance. Greece simply does not produce the products people wish to buy. As a result, the Greek majority buys from other euro members. Eventually, all the money leaves Greece, leaving Greece with no money.

      Stimulus will never correct this condition. Greece must build it's share of the products desired by the average person or it will never be able to have an economy without need for external financing.

    6. "Greece simply does not produce the products people wish to buy." As evidenced by its trade-deficit, I presume? Like the US, which also doesn't produce the products other people desire, hence its trade deficit? (Prediction: answer with the turn of phrase "world's reserve currency" somewhere in my future.) The trade deficit is only such a big problem because Greece doesn't have its own currency. The Euro countries that suffered a major crisis were the ones with a big trade deficit just before the GFC hit.

      Also, please make up your mind: either stimulus money has been given to Greece or money has left to pay for imports. Alternatively, provide some more clarification on what it is you mean to say.

    7. "Also, please make up your mind: either stimulus money has been given to Greece or money has left to pay for imports"

      Both have happened. The imports could not happen year-after-year unless the money leaving was balanced by money coming in.

      As for clarification, I think we can take lessons from the Greek experience and apply them to our fascination for using stimulus to increase GDP.

      For example, Greece got it's stimulus by borrowing externally through the government vehicle. China and Japan have been getting stimulus by borrowing internally.

      Not only has the source of stimulus been different; the results have been different. An examination of the similarities and differences would be instructive for the future use of stimulation for the purposes of increasing GDP and improving societies.

    8. I propose we agree to disagree.

    9. From the perspective of Functional Finance, we cannot say too much about the level of "stimulus" based on a deficit. An economy can be growing at trend with a balanced budget in one state, while needing to have a deficit of 5% of GDP in order to grow at trend in another.

      Within this framework, the Greek deficits are too small, no matter what their level is.

      One could debate whether fiscal stimulus is the best way forward for the Greek economy, but is is clear that the austerity packages have strangled growth in a predictable fashion. In my opinion, it makes no sense to attempt to reform an economy when it is in a depression art state; you want to reform in an environment where the private sector is willing to invest to drive growth. This is what posturing about the Greek economy misses.

    10. I like to draw a circle around Greece and a circle around all the remaining euro nations. Then look at the product and money flows between the two circles.

      Obviously, the balance must be improved. How can that improvement be made and by what impetus?

      The traditional way is for the euro circle to invest in product production in the Greek circle. This is usually targeted stimulus from the private sector. Governments would not want to do this because increased production from Greece would compete with production from every other nation.

      So what is the solution for Greece, whither the impetus?

    11. At present, there is no solution. The Greek government does not want to float, and nobody in their right mind will finance the Greek governments or banks until there is some significant restructuring. And if the banking system is shut down, private sector investment will not happen.

      The deal they have concluded, assuming it passes, will allow for short-term financing of Greece. It will allow a dead cat bounce to occur, but that will be about it. Confidence in the private sector across Europe will be hostage to global demand trends, which look fairly terrible.

      A Greek exit would cause serious short-term issues (essentially the same ones Greece faces now, so it is actually more of the same). But it would at least allow the banking system and government have guaranteed funding, and attention could turn back to the real economy.

  3. I think the EU (well, German) position (the program imposed on Greece) makes perfect sense if you believe Wolfgang S.'s public statements and accept that the objective is not to help Greece, but to make staying in the Euro zone so painful that it agrees to leave.

    1. Here is a link to a just-published informative overview of the Greek-euro relationship.

      I would certainly agree that the Greek situation is not yet stabilized.

    2. Imho the signal-to-noise ratio of this article is very low.

      "In essence, the euro countries were like teenagers given credit cards and told by their parents (Germany and the European Central Bank) to behave themselves. Some did, but the Greek government threw a big party and left the rest of the euro countries with the bill. Not only that, it has committed itself to more parties in the future (in the form of pension obligations) while not taking steps to earn enough money to pay for them."

      He's joking, right?

      An this guy was a vp of research at the Federal Reserve Bank of New York?


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