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Monday, July 6, 2015

Whither Greece?

Despite the rather excitable headlines, some variant of a can-kicking exercise for Greece still seems like a plausible outcome. The reality is that there is no mechanism to stop Greece from using the euro (but see comment below), and the EU has limited ability to effect a regime change in Greece after the referendum victory. The only plausible durable solution is for Greece to exit, but the Greeks broadly wish to avoid that outcome. The situation will slowly simmer, at least until there is a broader downturn elsewhere. A Chinese stock market crash could be a trigger, but it would need to be validated with effects in the real economy.

Bill Mitchell's Take


The Australian academic Bill Mitchell (who you could describe as one of the "founders" of MMT) gives an analysis which is closest to my views in this article. I am just finishing his book on the eurozone, and I may review it shortly, given its relevance.

He argues that the ECB is failing its mandates by squeezing the Greek banking system. The allegedly independent central bank is acting as an enforcer of a particular partisan brand of politics. If it persists, the Greek government could plausibly take it its case to the European courts, and use its emergency powers in the interim. Given the precedents set by the ECB's treatment of other peripheral countries, the hardliners face the possibility of being utterly defeated in a court ruling.

There is a lot of mistaken "expert" analysis out there that relies on quoting random bits of European treaties. The reality is that international law is a fuzzy concept, and it continuously adapt to the conditions on the ground. This is why the French and Germans were able to avoid the Excessive Deficit Procedures in 2003, even though any common sense application of the rules would have applied to them. At the end of the day, what happens in the euro area will be driven by the political trends between the major powers. Unless the Greek government capitulates, the constellation of diplomatic alignments still appears to favour "muddling through."

In any event, there are limited mechanisms to force Greece to capitulate. The current strategy of strangling the banking system could just lead to them being nationalised by the government. Who know what shenanigans would be unearthed if government auditors went over the banks' books? Although I am hardly an expert on Syriza's politics, such a nationalisation might actually be on the wish list of its hard left faction. Meanwhile, there is no mechanism to eject Greece from the euro. Cutting Greece off from TARGET2 would effectively create a new currency, but at the same time, it is unclear whether that would stand up in court.

A Good Crisis Would Focus Everyone's Minds On Finding A Solution

From the perspective of the unemployed in Greece (and other peripheral nations), the current situation is a disaster which is worse than the experience of the United States in the Great Depression. However, other countries are doing relatively well, and so the sclerotic European diplomacy has no reason to find a solution. This might change if the global economy starts to implode. The euro area would be driven into complete disarray if Germany's trade-driven growth strategy goes into reverse.

The current global expansion is long in the tooth, and a reversal at some point is inevitable. The United States is barely growing, and other countries outside of Europe are also near stall speed (such as Canada). A purging of the bubble excesses in China would do a job of wiping out global demand. As a result, the collapse in the Chinese stock market (which was halted today as a result of government intervention) bears watching, That said, calling the Chinese stock market a casino is an insult to the rationality of the gamblers at most casinos. A stock market crash will only matter if there is a link to investment in the real economy (and not the largely fantastical notion of the "wealth effect").

A collapse in demand emanating out of China will reconvert a lot of hardline austerians into Keynesians, as was the case in 2008. This might allow the eurozone to come up with an economic plan that might actually work.

(c) Brian Romanchuk 2015

8 comments:

  1. "A collapse in demand emanating out of China will reconvert a lot of hardline austerians into Keynesians, as was the case in 2008. This might allow the eurozone to come up with an economic plan that might actually work."
    Don't think this is likely. More likely the Germans will loosen fiscal policy whilst forcing hard line austerity on the rest of the eurozone.
    And the US GOP will want a recession before the 2016 elections, which I think they will likely win in a landslide.
    If there is a recession in the near future, the neoliberals "will not let a good crisis go to waste" and use it to abolish min wage and other supply side "reforms" to "increase jobs."
    Another recession would be a gift to them.

    ReplyDelete
    Replies
    1. My phrasing was possibly too loose, what I should have written was that the conversion is temporary. In the same way that "there are no athiests in foxholes", one can argue that "there are no austerian politicians during recessions". Pretty well everyone was throwing stimulus at the wall in 2008, hoping that it would stick, and I still feel that the reaction would be the same if there was a coordinated downturn. Once it looked like growth would return, I expect that the old habits would come back.

      Although there will be calls for labour market reforms (as always), I would still expect the emphasis to be on tax cuts, and subsidies for investment.

      Delete
  2. "The euro area would be driven into complete disarray if Germany's trade-driven growth strategy goes into reverse."
    It already is in disarray and nobody questions neo liberalism.

    ReplyDelete
    Replies
    1. It may be that I am not following the details of euro economic data closely enough, but it seemed to me that German growth was still "acceptable" (using relatively low modern standards). On the other hand, French data are more worrisome, which could help drive a split in the EU consensus.

      But as Bill Mitchell discusses at length in his book, groupthink is heavily entrenched in the euro area. Even if there are some temporary movements in Keynesian direction from a policy standpoint, the mode of thought will not change any time soon. All I would hope for is less doctrinaire policy for a period of time.

      Delete
    2. "Even if there are some temporary movements in Keynesian direction from a policy standpoint, the mode of thought will not change any time soon. "
      It's just not going to happen Brian. Seriously.
      This whole thing is totally mad. All this for what? Call me pessimistic but the future is going to be really bad.
      Look at the rise of FN in France and similar parties.
      I see no move away from neoliberalism. It is entrenched.

      Delete
  3. "it is unclear whether that would stand up in court."

    Given that nobody is going near a court, much less working out how they would enforce a judgement the point is a moot one.

    It looks to me like nobody thinks they can get an injunction and make it stick before the ECB delivers the killed blow.

    ReplyDelete
    Replies
    1. I believe that Greece could invoke various emergency powers (for example, essentially seize control of the Bank of Greece) and then go to the court to justify the action. The government would be the one taking the actions to avert greetings; the court case would just act as a fig leaf.

      Delete
  4. I have a new post entitled "Greek Loan Repayment" found at

    http://mechanicalmoney.blogspot.com/2015/07/greek-loan-repayment.html

    The post is mostly a comment on a Ralph Musgrave post found at

    http://ralphanomics.blogspot.co.uk/2015/07/varoufakiss-questionable-surplus.html

    I use an example to question whether we really want Greece to repay it's loans. Limiting the punishment to requiring a balanced government budget may be the most desirable paradigm.

    ReplyDelete

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