Backing down on Greece’s debt is the safest, most rational option

I wrote this for The Guardian and Crooked Timber in response to the Greek referendum result.

Lots of people have raised the suggestion of applying game theory to the the Greek debt crisis. I haven’t attempted this, reflecting my general scepticism about game theory in the absence of a well-defined strategy space. But now the Greek government and public have made, what is, in effect, a final move. In view of the No vote, Syriza can’t accept a deal that doesn’t include an explicit debt write-off or one that obviously crosses its stated red lines. Within those parameters, its clearly eager for a face-saving compromise.

For the other side (effectively the Troika and the German government), since Syriza’s move has already been made, the problem has now been reduced to one of decision under uncertainty, which is something I am comfortable with. More precisely, it’s a choice between a “safe” option, with an outcome that is fairly predictable, and a “risky” option where the outcome is uncertain.

The safe option for the European insitutions is to cave in, write off lots of debt and lose a lot of face. (Added in response to comments: the loss of face will particularly affect the elites in peripheral countries that accepted austerity, and will mean a further shift away from austerity in general. But the effect of a non-disastrous Greek repudation would be far greater).

The risky option is to foreclose, and force Greece out of the eurozone, and leading to a repudiation of debt. The possible outcomes involve several interdependent sources of uncertainty
* Whether the Greek economy does so badly that the Greek public regrets their choice and throws the government out at the next opportunity
* Whether exit from the eurozone is followed by exit from the EU
* Whether the process generates a broader financial crisis

From the European viewpoint, all of these outcomes except one would clearly be worse than an immediate backdown. If Greece leaves the euro and recovers, the whole austerity project will be shown up as the failure it is. If Greece leaves the EU (and especially if the UK also does) the European project is done for. And, while the institutions seem to have convinced themselves there won’t be a financial crisis, their past track record gives little ground for confidence.

So, the only case that could conceivably counted as a win is the one when the Greek economy fails, but Greece stays in the EU and there is no immediate financial crisis. I’d argue that, even here, the damage to confidence in the euro and to the European project would be greater than the costs of a backdown. If that’s right, then the “sure thing” principle applies to this decision. Backing down is the best option with probability 1.

Even if least-bad case is regarded as slightly better than a backdown, any reasonable calculation of expected payoffs for the institutions concerned would indicate that backing down is the rational choice. That doesn’t mean that such a choice will be made. People aren’t generally rational after all. Moreover, individual rationality may not be the same as institutional rationality. Quite possibly, failure will be seen as career-ending for key individuals, notably Lagarde, Merkel and perhaps Juncker. So, they may prefer institutional disaster to personal failure.

From the viewpoint of Australia and the world at large, there’s no doubt about the outcome we should prefer. European austerity has been a complete failure and raises the threat of a new global financial crisis. The sooner this delusion is abandoned, the sooner it will be possible to address the real source of the problem: the unsound and unsustainable growth of the financial sector.

160 thoughts on “Backing down on Greece’s debt is the safest, most rational option

  1. @BilB
    “60% of under 25?s unemployed. That is not a working economy.”

    Correct! There are various ways of getting people back to work – tried and proven. But you have to give up the neo-liberal Kool-Aid. Everyone knows about Bill Mitchell’s Job Guarantee, so I won’t link to it.

    All of Greece’s current problems are confected by Alchemists who have not heard about the Periodic Table. I confess the analogy is borrowed, but it is a good one.

  2. The El Mundo interview with Varoufakis was quite long and covers a lot of ground.

    Two extracts from a google translate version worth reproducing in the context of the above discussion:

    But Brussels accuses them of being irresponsible you are playing with fire and are led Greece to suicide …
    R.- To the readers of your newspaper I would like to send them a message: Please, do not be swayed by what others say and decide for yourself. Read our proposals and you judge. Ask yourself if our proposals are a sensible proposals or some radical proposals. If you read our proposals, they will realize that they are very moderate and very sensible proposals. We have even accepted certain fiscal measures and reforms that do not believe, and we have agreed with the intention of reaching an agreement. But the part on debt financing and we can not accept, for the simple reason that it does not hold arithmetically. The precision of mathematics indicates that if we accept what we are asked, in a few weeks the program show that it is absolutely impossible. So, who is the irresponsible here? Do not forget that the Troika has already made terrible mistakes and just five years ago shattered the economy of this country. Just compare what their predictions were saying in 2010, in 2011 and in 2012 with what actually happened. So before you point us the finger and accuse us of being irresponsible they should do a bit of self-criticism and stop pretending that their measures work. Austerity does not work, it is the view.


    What need Europe to have more Keynesian policies instead of these neoliberal policies?
    R.- It is not even against neoliberal Keynesian, but pure common sense. The Eurozone is fatally designed. The Eurogroup, for example, makes all the decisions that affect our lives. Well, does not exist on paper, it is a body that does not exist. The other day I asked if the president of the Eurogroup could ignore the rule that works for 15 years and for which all decisions of this body should be taken unanimously. And they responded by saying that the Eurogroup is not a formally constituted body, in the sense that officially and the role does not exist. We were shocked, because it is amazing. It turns out that in Europe we have a monetary union directed by a body which has no written rules, because the treaties of constitution was not written properly. What the hell have we done? Not to mention that citizens have no right to know what happens in the meetings of the Eurogroup, even 30 years later, when it turns out that in these meetings decisions that determine the lives of Europeans themselves are taken. Is this really how we want Europe to work?
    P. The neoliberals also be accused of taking extreme lengths the theory of games, to be disputing a poker game with Greece over the mat.
    R.- It is not true. You can understand I have no right to play with the lives of people or do you think of me. But what I will not do is accept a solution which I know is not the solution. Those who accuse us of playing games I guess now you may have noticed that it is not a game, it never has been. Last month they put us in front of an absolutely cruel dilemma: firmad or you will have to close banks. And we have not signed, we have refused to initial an agreement that we can not fulfill.
    P Although there are no surveys on the streets of Athens what it feels is that people with each passing day more afraid.
    R.- Yes it is. What they are doing with Greece has a name: terrorism.
    P Do you really think that what they are doing with Greece is terrorism?
    R.- Of course I think, is terrorism. Why they have forced us to close the banks? To instill fear in people. And when it comes to spread terror, this phenomenon is called terrorism. But I trust that fear does not win.

    I’m still with Varoufakis on this, and I think it is simplistic neo-liberal propaganda to reduce it to “he called them terrrsts, they can’t take that lying down”.

    It is clear from the context that he was referring to the ‘Eurogroup’.

  3. It looks as though things are going to go straight past “interesting” and directly on to “spectacular”!

    The fascists, far from heeding the democratically arrived at position of Greece (i.e. ‘No More Austerity! We need debt restructuring, the IMF’s own secret research shows that to be true’), are going to continue to play neo-liberal hardball. Judging from early reports from Brussells.

    Either they really want to crash their imaginary world of wealth or they have forgotten the old saying: If you owe the bank a million dollars, you’ve got a big problem. If you owe the bank a billion dollars, the bank has a big problem.

    In answer to the rhetorical question: They can’t really be that stupid, can they? I’m increasing leading to the conclusion that they can indeed be that stupid. All the evidence is there.

  4. Totoram, what ard the “tried and proven ways of getting people back and working”? and how do these fit into the Greek employment landscape?

  5. @Megan

    I think the neoliberals are that stupid. After all, they have been trashing the planet and arguing for over 20 years that climate change doesn’t exist. Their disconnect from social and even physical reality is quite complete. This is what happens when out of touch elites are permitted to rule everything. This in turns occurs because they are permitted to own everything or at least far too much. In our system owning equals ruling. Until the people own their system they can’t rule their system.

  6. Who planned the EU? One wonders. It could be interesting to go right back to its inception and see who planned it. Who were they, what were their backgrounds and what were their motives? Remember, this was the late 1940s and early 1950s and some of the key drivers were German bankers and industrialists who had already been prominent in the era 1935 to 1945. I wonder, does that era ring any bells?

    “The EU traces its origins from the European Coal and Steel Community (ECSC) and the European Economic Community (EEC), formed by the Inner Six countries in 1951 and 1958…” – Wikipedia.

    Of course, the UK and the USA would not have countenanced the continuation of any excess right-leaning thinking as they faced off the Soviet Union at Checkpoint Charlie now would they? (That’s sarcasm by the way.)

  7. @Tom

    Re #3. I don’t think it is a good idea to allow the proverbial Wall-Street bankers to overrule agreements reached by democratically elected governments. (I say proverbial Wall-Street bankers because not all of them reside on Wall-Street; Goldman-Sachs deserves a particular mention in relation to Greece.) A structured Tobin tax would go toward limiting the financial bubble building technology of these high finance players. It may not be quite enough but it may help a lot to prevent another GFC. I understand the EU is working on or has completed its banking regulation. I don’t see a problem with Article 121 of the M.T. It does allow temporary variations of parameter values for specific events.

    Re #4: The possibiliy has been mooted within the EUROzone members for Greece to temporarily exit the EUROzone and re-enter when she is ready.

    Re #5: Its a nice story you are telling but not as good as Monty Python’s The Philosophers Football Match.

  8. @Ikonoclast

    Who planned the EU? One wonders. It could be interesting to go right back to its inception and see who planned it. Who were they, what were their backgrounds and what were their motives?

    Further from Wikipedia:

    ‘The ECSC was first proposed by French foreign minister Robert Schuman on 9 May 1950 as a way to prevent further war between France and Germany. He declared his aim was to “make war not only unthinkable but materially impossible” which was to be achieved by regional integration, of which the ECSC was the first step. …’

    ‘The Schuman Declaration of 9 May 1950 (later known as Europe Day) occurred after two Cabinet meetings, when the proposal became French government policy. France was thus the first government to agree to share and grow sovereignty in a supranational Community. That decision was based on a text, written and edited by Schuman’s friend and colleague, the Foreign Ministry lawyer, Paul Reuter with the assistance of Jean Monnet and Schuman’s Directeur de Cabinet, Bernard Clappier….’

    ‘In West Germany, Schuman kept the closest contacts with the new generation of democratic politicians. Karl Arnold, the Minister President of North Rhine-Westphalia, the province that included the coal and steel producing Ruhr, was initially spokesman for German foreign affairs. He gave a number of speeches and broadcasts on a supranational coal and steel community at the same time as Robert Schuman began to propose this Community in 1948 and 1949. …’

  9. @J-D

    The notion that the EU is genuinely democratic in any way is risible. It is a front for oligarchic, extreme right-wing capital. It opposes genuine social democracy at every turn.

  10. @Ikonoclast

    I didn’t write that the EU is genuinely democratic; nor did the text I quoted from Wikipedia refer to the EU as genuinely democratic; so I don’t understand how your latest comment is supposed to relate to the preceding discussion.

    You wrote that it could be interesting to go right back to the inception of the EU and see who planned it. So I quoted some text from Wikipedia (the same source you used previously) that names several individuals involved in the planning of the EU. All of those individuals could be looked up in whatever sources you like (we are not limited to Wikipedia). But perhaps you’ve changed your mind about whether it would be interesting to do that?

  11. @Ernestine Gross

    RE #3. “I don’t think it is a good idea to allow the proverbial Wall-Street bankers to overrule agreements reached by democratically elected governments.”

    I don’t see where I mentioned that it is a good idea to allow proverbial Wall-Street bankers to overrule agreements reached by democratically elected governments. As a side issue, sometimes, the agreements reached by democratically elected government may not be democratic, e.g. see TPP, or in the case of the establishment of the Eurozone, none of the countries held a national referendum on whether to give up their currency sovereignty. However I agree the Tobin Tax would help reducing the chances of speculative bubbles. It would be a good step forward, however progress should not be limited to just Tobin Tax.

    RE#4. Whether or not it is possible or not, this suggestion is suggested by many influential economists not only by me personally, and I agree that a Greece exit and never re-joining is the best outcome for Greece out of this crisis.

    RE #5. “Its a nice story you are telling but not as good as Monty Python’s The Philosophers Football Match”

    Exactly, as I said “Whether one perceives he is a good strategist or not depends on how one wants to see the psychology at play”. So is any speculation that it is his personal ego to play at the nation and Eurozone’s expense is also, just a speculation or a story.

  12. @Ikonoclast

    Look at the EU as a system with a set of values that attracts individuals with priors that allow them to accept these values as ‘truth’ and denies them the ability to even consider that this set of values is not Truth but a set of values that has been constructed on a set of assumptions about the universe that one particular personality type prefers, maybe?

  13. @J-D

    It’s very clear that the UK and USA re-enabled certain fascist tendencies in Europe from 1943 onwards.

    “If anyone were to write an honest history of post-WWII period, the first chapter would be devoted to how the British and American forces liberating Europe, one of the first things they did was to destroy the resistance, and to undermine the labor movement, and to try to beat back the efforts to create radical democratic programs. It varied in different countries but happened everywhere. Like in Italy, it started happening in 1943, since they moved in. By the time, the British and American forces reached Northern Italy, it had been pretty well liberated by the resistance, they had driven out the Germans mostly, and they had established their own institutions: worker-managed industrial systems, cooperatives, and so on. The British and Americans were totally appalled, they had to dismantle the whole thing and restore the rights of owners, meaning restore the traditional fascist system. An in fact, in the case of Italy, it’s particularly interesting. It continued at least into the 1970s. Italy was the main center of CIA subversion, well into the 1970s, but it happened everywhere else, too. In Greece, there was a war to destroy the resistance; they killed about a 150,000 people, and ended up restoring something like the traditional fascist structure.” – Noam Chomsky.

    To imagine the above occurred while the Denazification of Germany proceeded perfectly and honestly defies belief. We also know the USA welcomed Nazi scientists into their rocket program.

    Perhaps you need to do a bit of research. Try “The Nazi past of Germany’s post-war political elite” – World S*o*c*i*a*l*i*s*t Website.

    “The West German political system, as it emerged from the occupation, was increasingly opposed to the Allied denazification policy.[76] As denazification was deemed ineffective and counterproductive by the Americans, they did not oppose the plans of the German chancellor Konrad Adenauer to end the denazification efforts. Adenauer’s intention was to switch government policy to reparations and compensation for the victims of NS rule (Wiedergutmachung), stating that the main culprits had been persecuted.[77] In 1951 several laws were passed, ending the denazification. Officials were allowed to retake jobs in the civil service, with the exception of people assigned to Group I (Major Offenders) and II (Offenders) during the denazification review process.[78][79]

    “Several amnesty laws were also passed which affected about 792,176 people. Those pardoned included people with six-month sentences, 35,000 people with sentences of up to one year and include more than 3,000 functionaries of the SA, the SS, and the Nazi Party who participated in dragging victims to jails and camps; 20,000 other Nazis sentenced for “deeds against life” (presumably murder); 30,000 sentenced for causing bodily injury, and 5,200 who committed “crimes and misdemeanors in office.”[80] As a result, several people with a former NS past ended up again in the political apparatus of Western Germany.” – Wikipedia.

    As late as 1977 there was the case of the murder of known former Nazi, Hanns Martin Schleyer.

    “(He) was a German business executive and employer and industry representative, who served as President of two powerful commercial organizations, Confederation of German Employers’ Associations (Bundesvereinigung der Deutschen Arbeitgeberverbände, BDA) and Federation of German Industries (Bundesverband der Deutschen Industrie, BDI). He was targeted as an enemy by radical elements of the German student movement due to his role in those business organisations and his past activities as an officer of the Nazi SS.[1][2][3] He was kidnapped on September 5, 1977 by the far left organisation Red Army Faction (Rote Armee Fraktion, RAF) and subsequently murdered. The abduction and murder are commonly seen as the climax of the RAF campaign in 1977, known as the German Autumn. After his death, Schleyer has been honoured in Germany; the Hanns Martin Schleyer Prize, the Hanns Martin Schleyer Foundation and the Hanns-Martin-Schleyer-Halle are named in his honour.” – Wikipedia.

    “Very early in his life he became a follower of National Socialism. After a stint in the Hitler Youth, the youth organization of the National Socialist Party, he joined the SS on July 1, 1933, gaining SS number (Nr. 221.714) and was an SS Untersturmführer (Second Lieutenant). During his studies, he was engaged in the Nazi student movement. An early mentor of this time was the student leader Gustav Adolf Scheel. In the summer of 1935, Schleyer accused his fraternity of lacking “national socialist spirit”. He left the fraternity when the Kösener SC, an umbrella organization, refused to exclude Jewish members. Schleyer started a career as a leader in the national socialist student movement and, in 1937, he joined the Nazi party. At first he was the president of the student body of the University of Heidelberg. Later, Reichsstudentenführer Scheel sent him to post-Anschluss Austria, where he occupied the same position at the University of Innsbruck.” – Wikipedia.

    So we see how German high economic and political society was still riddled with (former) Nazis up until the 1970s. Then they re-write hisotry and turn some of them like Hanns Martin Schleyer into heroes.

    A lot of the history you (obviously) believe is false propaganda of the UK, US and EU right wings.

  14. @Tom

    It is fascinating how the crisis has been driven by:

    1) ideological commitment to the idea of a united Europe that refuses to give consideration to the potential for a common currency to cause economic chaos, coupled with

    2) obvious loathing of the Greek people and complete disregard for their suffering on the part of politicians, officials, the media and the public in the rest of Europe, especially Germany.

    Their failure to see the conflict between their supposed desires and actual actions demonstrates compartmentalized thinking on a grand scale. What part of the fact that people in different regions of well-functioning countries don’t behave that way towards one another don’t they understand?

  15. @Luke Elford

    In my opinion, the part of the fact that people in different regions of well-function countries don’t behave that way because they are more familiar with the people in those regions by means of family, friends and online conversations etc. Thus also results in making bullshit about those regions difficult.

    When it comes to one country making bullshit about another country, it is a different story. People are made aware of the difference between the two region through even the difference in the name of the countries and thus they are made aware that people in the other region is different to people in their region. Combine that will misinformation coupled with propaganda and you’ll get the current situation about how the public in other EU countries reacts to Greeks.

    One very important thing that people in a well-functioning countries aren’t made aware of is the constant transfers between regions. E.g. the Commonwealth government flood subsidies to Queensland effectively means a transfer of tax revenue collected from all states to Queensland and so is true for other types of transfers such as the difference in the distribution of GST revenue in per capita terms between the different states.

    The above does not happen in Eurozone; not only so, people are even reminded that they are lending money to Greece who may not be able to pay it back. It is sad, however that they also don’t seem to think about that, ever since the start of the so called Greece government debt problem a few years ago, the same lenders are still lending them money up until the last week. I guess logic does only work one way not the other now, it is always the borrower’s fault, the people with money are ALWAYS FORCED to lend their money without any risk assessment to borrowers.

  16. @Tom
    Re #3: True, you did not mention it is a good idea to let the proverbial Wall-Street bankers overrule the agreements of democratically elected governments. But it is also true that I did not claim you did. (I don’t agree with unlimited and sustained deficit financed fiscal policy as a response to the GFC under otherwise ‘normal’ conditions. By all means use taxation to finance expansionary fiscal policy and reduce income and wealth inequality – gently but firmly. A structured Tobin tax is one such measure and one which could claw back a little bit of the wealth syphoned off from the public by the said players.) As for what you call ‘side-issue’, except for more or less continuous referenda, ‘democracy’ entails delegation to elected representatives. It is going to be interesting to see how much more pressure the populations of various EURO-zone countries are going to exert against the TTP and how successful they are going to be.

    Re #4: Assuming Greece will leave the EURO-zone, I would like to leave it up to the Greek people if they wish to join later at a time when they are ready. I am encouraged to hear the EU (EURO-zone) has already committed to humanitarian assistance in the case of a Grexit. Do something for Greece, take a holiday and pay cash in Euros to small business and give plenty of tips. My Greek friend tells me much of the economic activity is already on barter (as predicted by Bennasy), which works reasonably in country areas but not for city folks.

    Re #5: Well, as a game theoretic strategist, Janis V. has failed (outcome of the ECB’s decision on the provision of liquidity and series of meetings in Brussel). If, however, you have ‘communications strategies’ in mind, as seems to be the case, then this is a total waste of time, IMO. I am sure my latter comment does not surprise you. If my conclusions have nothing to do with Janis V’s ego, as you suggest, then this is fine with me.

  17. @Ernestine Gross

    Agreed on #3. With a little addition at the TTP with regards to how much pressure the populations of various EURO-zone countries are going to exert against it. If there are information blackout or little to no mentions of it in the MSM, I do not think it’ll create much resistance from the population. See e.g. asylum seeker issues here, as well as TPP itself, is not seen at the moment as a worrying issues (as compared to ‘terrorism’) despite the secrecy and the worrying leaks, those who are worrying are mostly informed in the field.

    RE #4. (rhetoric switch on) In principle, I support a more united Europe (rhetoric switch off). However I’m still against the idea of Eurozone at its current form as the common currency is one of the sole cause of the current regional adjustments crisis.

    RE #5. As his goal of the game is unknown besides speculation, a discussion about his success or failure is indeed a waste of time.

  18. @BilB
    Very briefly, run fiscal deficits, and act as the employer of last resort. There are lots of jobs that need to be done, but no one wants to pay for them right now because of austerity.

    You can read about employment guarantee schemes of various kinds run successfully in Argentina, India etc. Google is your friend.

  19. @Tom

    As for blog conversations between strangers I would say our exchange has been quite successful. I suppose unless you and I would be invited to some EU or EURO-zone meeting a resolution of the remaining differences in opinion between us is of no consequence. My probability assessment of such an event is zero. I don’t know what your assessment is.

  20. @paul walter

    ” the same as Europe vetoed the Greeks making up payments from cutting defence spending,earlier.”

    This is interesting because the Sueddeutsche Zeitung reports exactly the opposite. That is, the EURO-group had proposed cutting defence spending and this was rejected by Greece.

  21. @Ernestine Gross

    the EURO-group had proposed cutting defence spending and this was rejected by Greece.

    The Defence Minister is from the Independent Greeks, a far-right party. Presumably Tsipiras would like to keep his majority in the parliament.

    And besides, Greece’s traditional enemies, the Turks, haven’t gone anywhere.

  22. Putting up some figures.

    The problem for Greece is, Totaram, from what I can gather, that is precisely what Greece was doing for some years running into the GFC. It was not a healthy economy that was gutted by the GFC, but Greece is not without resources. They do produce reasonable quantities of a variety of mined resources but here is the problem

    “Greece is a developed country with an economy based on the service sector (81%) and industry (16%). Agriculture contributed 3.4% of the national economic output as estimated in 2012.[2] Important Greek industries include tourism and shipping. With 18 million international tourists in 2013, Greece was the 7th most visited country in the European Union and 16th in the world”


    “After fourteen consecutive years of economic growth, Greece went into recession in 2008.[69] By the end of 2009, the Greek economy faced the highest budget deficit and government debt-to-GDP ratios in the EU. After several upward revisions, the 2009 budget deficit is now estimated at 15.7% of GDP. This, combined with rapidly rising debt levels (127.9% of GDP in 2009) led to a precipitous increase in borrowing costs, effectively shutting Greece out of the global financial markets and resulting in a severe economic crisis.”

    To my thinking the services sector was Greece’s Achiles heel as building into the GFC, and contributed most to the huge unemployment. Further compounding the problem many of those service providers that did not loose their jobs did less to help the economy

    “Greece suffers from very high levels of tax evasion. In the last quarter of 2005, tax evasion reached 49%,[183] while in January 2006 it fell to 41.6%.[183] A study by researchers from the University of Chicago concluded that tax evasion in 2009 by self-employed professionals alone in Greece (accountants, dentists, lawyers, doctors, personal tutors and independent financial advisers) was €28 billion or 31% of the budget deficit that year.”

    Furthermore corruption may be one of the reasons why Greece has one of the largest merchant fleets (floating assets) in the world. Is this an asset or a liability?

    Greece has 1.2 hectares per person, not enough land to feed its population without industrial style agriculture. It does have a large coastline though.

  23. @Ernestine Gross

    A resolution of the remaining differences in opinion between us will indeed be of no consequence for the event in Europe. However I agree that our exchange has been quite successful and have certainly gave useful insights to me.

    Just to have my final word in our exchange, I understand that to be a good economist (or an academic for that matter), emotions, feelings and speculations in analysing events may be something to avoid; but to what point should economist separate these from pure arithmetic and theoretical analysis when economic is so closely related to politic is a question which leads to no clear answer. Hypothetically, if economically speaking, the best way forward for Greece is to exit Eurozone but the political situations are difficult to reach such result; then does by creating the current economic and political mess which has perhaps increased the likelihood of Greece exit justify the consequences the current situation has caused? My answer to this question creates complex feelings as I am against the idea that the end justifies the means, however in my economic analysis, the exit end result is likely to be the best result.

  24. Tsipras is there and gave the opening address and for the last few hours they have been taking it in turns to stick it up him or support the Greek peoples’ ‘No’ decision. Most are repeating neo-liberal talking points and getting up him.

    He is taking notes.

  25. @Ikonoclast

    I do not see any relationship between this comment and the ones from which it follows on.

    If I wrote ‘there were no Nazis in Germany after 1945’, I would be making a false assertion, and it would be relevant for you to point out to me how I was wrong about that. But I did not write and have never thought that there were no Nazis in Germany after 1945. If you want to indicate a statement I actually made that you think is incorrect, it would be different. But your remarks have nothing to do with what I actually wrote. As far as I can make out, instead of discussing what I actually wrote, you are conjuring up an imaginary version of me out of nowhere and then going to some lengths to contradict its imaginary statements. Why you are so interested in arguing against something that is not there I do not understand.

  26. The new Finance Minister of Greece has submitted a letter of request for emergency funds to the Eurogroup. The letter, written in English, is available on the following web-site. By scrolling down a little you will see a block in smaller print, which is the letter, and an enlargement icon.

    As everybody probably knows by now, the Greek government has to provide a detailed reform agenda by 10/7/15, then there will be a hierarchy of meetings over the week-end culminating in a meeting on Sunday with all 28 EU members.

    There are reports that EU member countries from the North-East (Finland, and Baltic countries) are least inclined to assist Greece on the grounds that their circumstances in terms of living standards are below those of Greece (not since last Monday, I assume).

  27. Andrian Kreye, SZ published an open letter to Angela Merkel by Thomas Piketty (Paris), Jeffrey Sachs (N.Y. Columbia) Dani Rodrik (Harvard’s Kennedy School), Simon Wren-Lewis (Oxford), Heiner Flassbeck (former State Secretary in the German Federal Ministry of Finance, economist, now public advocate against ideological ossification in his field), together with a description of the publication channel and a comment.

    The open letter was published via the US organisation Avaaz, which according to Kreye is a controversial activist organisation (involved in channelling journalists into Syria with some tragic endings, among other ventures.) Kreye also discusses the importance of separating media and scientific research from activism.

    Comment. I am a little surprised about Prof Piketty and Flassbeck because, being French and German respectively, they probably know the decision making structure of the EURO member countries and, at least Flassbeck could know Merkel plays by the rules (and by doing so, represents a large segment of her constituency). There are plenty of articles in the German press, which discuss the difference in leadership style between Merkel (PhD in physics) and Kohl (a historian), both CDU, and Schroeder (Law) SPD. Furthermore, Piketty probably knows that France was the initiator of the common currency. The letter is written in English. This makes it particularly awkward because it is essentially addressed to the English speaking world and not to the German Chancellor. She might feel obliged to ignore it so as not to be accused of responding or being influenced by letters ostensibly designed to deceive her constituency. Who knows.

  28. @Ernestine Gross

    1. It’s an open letter.

    2. How is the letter “designed to deceive her constituency”? Something “designed to deceive” must be intentionally dishonest. To sustain such a charge it must be conclusively demonstrated what lies, deceits or misconstructions Piketty et. el. are deliberately employing.

    3. It’s interesting to note that Krugman, Stiglitz, Sachs and Piketty are all highly critical of “the troika”, the I.M.F., the European Central Bank and the European Commission, in their policies towards Greece. I am strongly encouraged that my views on this matter are supported by economists of the stature Krugman, Stiglitz, Sachs and Piketty.

    4. The claim that Merkel plays by the rules of the EU is refutable as it is clear that northern European nations including Germany under Merkel have repeatedly flouted EU rules. It might be worth looking at the article ” The Ticking Euro Bomb: How the Euro Zone Ignored Its Own Rules – After they joined the euro zone, the countries of southern Europe suddenly discovered they could borrow money at German-style rates, and any hope of sorting out their dodgy finances vanished. But it was France and Germany who set the worst example, when they broke the euro-zone rules they had forced on others.” – Spiegel Online. It might also be worth considering Bill Mitchell’s claims in this case. Mitchell’s claimed example of how France and Germany broke the rules can be researched and proven or disproven as the case may be. You don’t have to take Bill Mitchell’s word for it.

    5. In any case, the claim that rule-based behaviour is ipso facto always morally acceptable is completely untenable. If a rule, command or order requires you to do something morally wrong then it is a moral requirement that you NOT follow the rule, command or order. I hear Nuremberg is lovely this time of year and a wonderful place for reflection on the lessons of history.

  29. It looks like Tsipiras and his government have decided that backing dine in Greece’s debt is the safest, most rational option. They are going to agree to a worse deal than was on the table before the referendum, let alone in February.

    The problem is, they have no negotiating power, nothing to threaten the Troika with, no cards to play. Everybody knows that a Grexit, whatever the theoretical benefits of Greece having its own currency, would most likely destroy the Greek economy, Zimbabwe style, with little fall out on the rest of Europe. The prospect is more austerity is appalling but still better than the Armageddon of no economy at all. Varoufakis’ promises that No would lead to an immediate better deal have been shown to be empty. He and Tsipiras seriously misled the Greek people. They will be judged harshly.

    But it might be a Pyrrhic victory for Merkel and her cronies. The British have got their own Brexit decision coming, and they might well ask whether they want to stay in this Europe. There are also fascists throughout the continent – real fascists, not the ones in Megan’s imagination – who will stir up ugly nationalist sentiment. But when the Eiropean solidarity rhetoric is shown to be so much fake posturing, that’s what you’ve got to expect.

  30. Listening to the BBC I was surprised that most businesses in Athens use only cash which meant that once banks restricted withdrawals trade stopped. If they used eftpos surely all this would have been avoided?

    Greeks that I know are a deeply suspicious lot and hard to do business with – perhaps this distrust extends to card and electronic transactions. Tax avoidance and backhanders (gifts) are also a national sport. You would think that cash would allow these activities to continue unchecked.

    I guess behind this all is the left/right struggle that has been Greek history.

  31. @rog

    I have heard and read more than once that Australia as a country has a track record of early adoption of a range of advanced technological systems — I can’t remember the examples given, but something like EFTPOS would definitely be within the range.

    I have not verified these reports, but they do suggest that we should consider the possibility that it’s not Greece that’s exceptional in lack of use of EFTPOS but Australia that’s exceptional in widespread use of it.

  32. @Uncle Milton

    I haven’t seem any news confirming that Tsipiras is going to back down and take a worse deal than possible earlier. Do you have a link to such news?

    It is not correct that Greece has no negotiating power. They have some. Greece could for example ban imports of arms from Germany and France. (France and Germany still account for the vast majority of arms sales to Greece.) No doubt the French and German arms dealers (dealers in death whom one could justly call a “death cult”) would run squealing to their government if they lost all their Greek arms deals.

    It is not correct that exiting the Euro, running its own currency and defaulting on debt “would most likely destroy the Greek economy”. That outcome is possible but actually rather unlikely if such policies are implemented correctly. There are successful precedents for it. There would be adjustment pain in that path for Greece but actually less pain than the austerity-generated Greek Great Depression which they are in right now.

    There are real fascists in Europe and among them are the ones Megan identifies for example in Ukraine. These are not in Megan’s imagination.

    It is true that European solidarity rhetoric is “so much fake posturing”. I agree with that. The core does not care one iota for the periphery. I know I will appear anti-German and maybe anti-French to some but my perspective is that of Great Power politics in this matter and Germany and France are the Great Powers of western Continental Europe. Great Powers never care for minor powers. They never have and they never will.

    It was to be hoped that Europe could rise above nationalism but clearly it can’t yet. What is really behind the severe and cruel punishment of Greece is greed, selfishness, stupidity, parochial blindness and plain bad economics. Clearly the German and French peoples feel no solidarity with Greeks. Pan-Europeanism is dead for the foreseeable future.

    Europe faces a lot of problems from now and going into the future. The EU is failing. Their economies are failing or at best stagnating (including GB, France and Germany). Their continent (sans European Russia) is overpopulated and in many ways resource depleted. The flight of capital and manufacturing to Asia proceeds apace. Europe is under stress and in long term decline. These stresses and pressures are more likely to fracture it than bring it together. We are seeing the proof in the lack of solidarity with a suffering member actually made to suffer far more tan necessary by the EU’s most powerful and most selfish nations.

  33. @Ikonoclast

    You can’t have your own currency, which means running your own monetary policy and payments system, if all your banks are insolvent. This is what will happen with a Grexit. There are precedents for countries successfully breaking away from a currency union, most recently the Czech Republic and Slovakia in 1993, but they did not do this in the midst of an economic crisis, and they had functioning banks. This makes all the difference.

    The Greeks know this, which is why they are so desperate to stay in the Euro. The Troika know that the Greeks know this, which is why they feel so free to dictate terms.

    Some time ago, on his blog, before he entered politics, Varoufakis said “Greece is finished”. He knew then there was no good outcome for Greece. He and Tsipiras played poker and bluffed, but you can’t win by bluffing if the other player knows what cards you’ve got, and those cards are nothing. The whole song and dance that Syriza has engaged in for the last 6 months has been a farce. Varoufakis and Tsipiras told the Greek people they could get them a better deal, but that was never going to happen.

  34. @rog

    Under current conditions in the banking sector in Greece (introduced by Y. Varoufakis with the agreement of the Greek government) eftpost transactions work satisfactorily for all parties only between a Greek merchant with a banking account outside Greece and a buyer with a banking account outside Greece (say a transaction involving foreign currency accounts held in in Switzerland and Germany or the UK or Australia) otherwise personal IOUs are just as good because the merchant would not know what he will receive after the current crisis come to an end. An IOU written in physical goods (barter) may be preferred.

  35. @Uncle Milton

    Even in this interview Y. Varoufakis is not honest because he does not tell the Australian audience that by 2012 the Greek economy had been running on false data for more than 10 years (they entered the EURO presenting falsified national accounts data in 2001 and the difference between random errors and estimation errors and false data was not revealed in 2010) and that the Greek government spent money on advice from Goldman-Sachs. (Papandreo, a previous socialist Prime Minister of Australia, told Australians in A TV interview the truth about corruption, tax evasion and a few other problems.)

    I do not recall the exact number of times the EUROgroup had to ask for further clarification and corrections of the national accounting data since 2010. Eventually Greece agreed to have technically competent people from the EUROgroup to supervise the national accounting in Athens.

    I understand, technically, Y. Varoufakis did not lie because L. Sales didn’t ask him whether the Greek economy had been running on false data for 10 years.

    Y. Varoufakis conveniently ignores the global financial crisis and he fails to state that there was no national accounting problem in Spain and Portugal. What about the miserably poor and sick without health insurance in the USA at the time?

    To be clear, this is not the fault of the Greek people who now have to suffer. It is the fault of the political elite. No apparent change in sight. The holiday season has started. There are already reports that tourists have cancelled Greek holidays and booked in Spain instead.

  36. Important correction in my post #89.

    (Papandreo, a previous socialist Prime Minister of Australia,…), line 7, para 1, must be replaced by Papandreo, a previous socialist Prime Minister of Greece.


  37. @Ernestine Gross

    Fun fact: His father, Andreas, was also a socialist PM of Greece. He had been a professor of economics at Berkeley. Was arrested by the colonel’s military junta, nearly shot on the advice of the local CIA operative, but released after Lyndon Johnson applied pressure, at the behest of John Kenneth Galbraith.

  38. @Uncle Milton

    “You can’t have your own currency, which means running your own monetary policy and payments system, if all your banks are insolvent.”

    Do you mean if all the country’s private banks are insolvent? Do you mean if all the country’s public banks are insolvent? Do you mean if all the country’s public and private banks are insolvent? Do you mean if the state, national or reserve bank is insolvent? If you ask yourself what you mean precisely you might start discovering problems. If you ask what a fiat currency is you might also start discovering problems with your statement.

    The fact is that the state, national or reserve bank (whatever it is called precisely) cannot ever be insolvent because it can issue its own currency. Of course, Greece cannot do that while it is part of the Euro. If it left the Euro and printed New Drachmas it would have no problem with insolvency. It might have other problems, real and financial, but it would have no problem with insolvency as such.

    Leaving the Euro and reneging on all its debt would mean Greece owed nobody anything. It’s that simple. Money is an invented notional construct. It is not real in the sense that real resources or goods are real. Money can be created ex nihilo (out of nothing) and destroyed ad nihilum (into nothing). Thus Greece can destroy all the (debt) money it owes (by reneging on the debt) and it can create its own new money. Nobody can stop the Greeks doing that with impunity unless they declare war on Greece.

    Greece would face real problems if it did that but all those real problems are solvable in time. These problems would be less onerous than the Great Depression imposed on Greece by EU austerity.

    Ernestine makes a great deal of Greece’s “dishonesty” with the EU and with foreign creditors. The Greeks, or rather their elites, may well have been dishonest. I will let you all into a little secret. All nations are dishonest with all other nations all the time. Gee, who’d have thought it? Maybe anyone who had read even a modicum of history. What should any country, any business or any lender do when it enters into a deal? It should do due diligence. Clearly the EU and other financiers who lent Greece money did not do their due diligence. The fools deserve to lose their money in that case.

    Currently, they are meting out the kind of retribution on Greece that all cowards mete out. The retribution of picking on the weak people, the poor people, the people who had nothing to do with these high-flying international deals.

    The Greek people are now twice betrayed. Betrayed by their own government and business elites and also betrayed by the rest of the EU. If Syriza betray them as well they will be thrice betrayed. Does Europe want to have on its periphery a nation of 11 million people with a big military and nothing but desperation on their hands? Greece could erupt, probably internally, but these things have a habit of spilling over borders.

  39. Footnote: There is a guide paper Syriza could use to leave the Euro. It won the Wolfson Prize in economics in 2012. It’s called;

    “Leaving the euro: A practical guide”

    Click to access wolfson-prize-submission.pdf

    I haven’t read it myself yet so I do not know which side of the argument would get comfort from it.

  40. @Ikonoclast

    Leaving the Euro and reneging on all its debt would mean Greece owed nobody anything

    Greek private companies, whose liabilities to foreigners are in Euros and who assets would be in drachmas, would be bankrupted instantly, and subject to EU bankruptcy proceedings in EU courts.

  41. 2nd Footnote:

    An elegant and apposite quote from the above paper:-

    “Nominal disequilibrium requires a nominal solution.”

  42. @Uncle Milton

    The paper I am now reading (and which I posted in a link above, comment 95,) seems to recommend a half default on national debt not a full default (but I am still reading).

    This paper begins to discuss private debt and systemic bankruptcies on page 59. No doubt, preceding and following pages contain much more of the necessary information and alternatives with costs and benefits mentioned, contrasts between laissez-faire approach and government directed approach and the various bankruptcy and legal issues. Re-denomination of debt plays a role.

    Maybe instead of making hand-waving objections like,

    – “You can’t have your own currency, which means running your own monetary policy and payments system, if all your banks are insolvent.” ;

    – ” Greek private companies, whose liabilities to foreigners are in Euros and who assets would be in drachmas, would be bankrupted instantly, and subject to EU bankruptcy proceedings in EU courts.);

    you need to read and consider what is actually possible well within economic orthodoxy as laid out in this paper.

    Sure it would be tough medicine (and not just for Greeks). But if you don’t support a Grexit you need to explain, at least for the purposes of debate here, how to prevent a Grexit AND how to solve Greece’s current national great depression within the Euro context.

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