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 :
    Here is a good site for figures to compare country’s economic positions….
    http://www.tradingeconomics.com/greece/indicators
    Go to the bottom of the page to change countries. Greece’s government debt is 177% of GDP. What ever were they thinking.

    Take a look at the graph that can be seen if one clicks on the “Government Debt to GDP” link. in 2006 debt-to-GDP ratio was about 100% (not sure if those are the corrected figures or not though).
    This is quite a neat little gadget. For example, as far as Finland somehow being worse off than Greece, take a look at the comparison of GDP per capita between the two countries.

  2. “1. It’s an open letter.”

    Yes, this is what I wrote and it is consistent with the documentation supplied. What is your point?

    “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.”

    I suppose the editorial change you introduced in your first sentence justifies your second sentence. (You are already in a hypothetical case.) Your third sentence seems to be due to you not distinguishing between content of a letter and adressee as well as delivery mode.

    At present, I don’t even know whether Piketty knew about the channel through which the letter was published. All I know is that, according to the author of the article I linked to, the S.Z. interviewed Flassbeck and he talked about an interview he had with some communications manager and this started the process.

    This information was available to you too, if you are fluent in German and opened the link.

    The official language in Germany is German. I do know the current Chanellor of Germany is fluent in English (like Schroeder and Schmidt) but the great majority of older Germans, who know about European history, either have no English at all or it is so limited that it is just enough to visit the UK on a holiday. Among the younger ones it is only a segment of university educated people who may be assumed to understand the content of the English open letter.

    How would you like to find out from the Sydney Morning Herald that a Prime Minister of Australia has received an open letter in say Italian from an activist web-site in say Argentina?

    The foregoing might give you a hint why I wrote:

    ‘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?’

    3. —

    4. “The claim that Merkel plays by the rules of the EU is refutable ”

    Have you checked on your understanding of ‘the rules of the EU’?

    For your convenience, I provide a link to the wiki web-site on the institutional framework of the EU. It is in English (I could send you one in Spanish or French, or any arbitrarily chosen EU member country’s language if you prefer.) May I draw your attention to the voting rights in the EU, particularly the “degressive proportionality” rule. This rule is not consistent with your beliefs about how ‘peripheral countries’ are treated, They are being given a disproportionately high weight in the ultimate decision making process.

    https://en.wikipedia.org/wiki/European_Parliament

    Writing an open letter to Angela Merkel refers to a hypothetical position, a position of power which she does not have in the EU. Furthermore, she as well as other member states’ heads of government is constrained by the respective national constitutions. I assume there is lobbying going on. Whom is the open letter to Angela Merkel lobbying?

    Your reference to ‘rules’ refers to something else, namely the EURO currency membership rules.

    It is known to all EU member countries (governments and people), including the UK, that Germany and France broke the EUROgroup rule regarding deficits. This is nothing new. The difference is that they applied to the EU for permission under the exceptional circumstances rule, not 10 years after the event but at the time of the event. In the case of Germany, it was on the occasion of the unification and the UK voted for permission. There was a time limit specified and Germany complied with it. (It doesn’t take much brain for various EU economists and technocrats to figure out that everybody would be better off if all other trade relations among the member countries would be affected as little as possible. Furthermore, they are not ignorant of Keynesian deficit financing, particularly about the size of the G-multiplier when it comes to the reconstruction (modernisation of production plants, infrastructure, etc) of physical assets. Finland, for example, had its own mini crisis when the ‘iron curtain’ came down because she had a lot of trade with the former USSR. ‘Austerity’ was a word also used in Germany at the time, but it did not have the same meaning as in the article by A…, which Prof Q pulled to pieces. It meant savings measures here and there all over the budget and it meant a special tax.

    There is only one opinion I am prepared to offer on the grounds of my own expertise and this is: By all means reintroduce Keynesian aggregate demand management in the sense of Prof Q’s treatment but only after the international financial system has been brought under control (“financial repression”). The reason is that on theoretical and empirical grounds, the only limit on growth in private and public debt (profitable for financial institutions) in ‘the global economy’ is a crash. (And who benefits from such events even after losing a few billions in private wealth and who gets squeezed?)

    5. Indeed Nurnberg (and Moscow, Chile and a few other places over time) is a good place to reflect regarding the morality of lying, propaganda involving honour and humiliation, stirring nationalistic emotions on racial grounds or on whatever grounds to divide and rule and war (as the intellectually lazy way of settling complex problems).

    But, Ikonoclast, you seem to be an amateur in abstracting from the features of the ‘real world’ in comparison to solution concept contained in the following:

    http://www.spiegel.de/international/world/greece-essay-by-barry-eichengreen-a-1042609.html
    What about periphery countries in this case?

  3. Ikonoclast: “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.

    You have to stop rewriting what I said. First of all I explicitly excluded the Greek population. So why to you ignore this?

    Second, I wrote about running an economy for about 10 years on false national accounting data (more carefully expressed in my post; shortened here ). For your information, this is not a ‘moral issue’ per se this is a technical question in economics because making decisions of false data means a lot of problems all over the place. I am talking about prices, quantities and elementary stuff like that.

    May I suggest you read at least a little bit about chaotic systems.

  4. @BilB

    I couldn’t agree more. The Troika take a debt that’s 126% of GDP in 2009, impose austerity and tank the economy, and turn it into a debt of 177% of GDP today. What ever were they thinking, indeed!

  5. I just noticed a long reply to Ikonoclat’s email addressed to me from page 1 is in moderation.

  6. Ernestine Gross :
    Second, I wrote about running an economy for about 10 years on false national accounting data (more carefully expressed in my post; shortened here ). For your information, this is not a ‘moral issue’ per se this is a technical question in economics because making decisions of false data means a lot of problems all over the place. I am talking about prices, quantities and elementary stuff like that.

    Its entirely true that Greek debt figures were manipulated before the crisis. But you said yourself since 2012, the figures have been investigated thoroughly by outside experts-the Greeks were obliged to accept this and this will presumably be part of any deal done from this point on-since as you point out, it would be otherwise impossible to monitor Greek adherence to any accord.

    So is this historic deceit (which incidentally had nothing to do with Syriza, which was a marginal political force at best at the time) really relevant to the present discussion, except to a) imply that the Greeks are still engaged in deceit about this data (for which a source would be appreciated); b) imply that this historic deceit requires an ongoing punishment, at which point we move from the technical to the moral sphere.

  7. Only about 8% of the “bailout” went to Greeks, the rest was handed directly over to “Wall St” types and the bill was handed to the Greek people with the usual demands for “reforms” and austerity.

    It reminds of the joke about the two guys in the bank during an armed hold up. As everyone is told to lie on the floor and empty their pockets one guy hands the other guy some cash and says “here’s that $100 I owe you”.

  8. @BilB

    Less flippantly: Greek profligacy in the lead up to the GFC was foolish, but its debt level (about 100% of GDP in 2007) was nothing extraordinary in terms of the history of developed economies:

    It became a crisis because of the common currency and the crisis became a depression because European and global governance was worse than useless.

  9. @Ernestine Gross

    I apologise. I agree I misrepresented the tenor of what you said.

    The germane points remain the same however. If you look at the full history of the EU you will see other countries including France and Germany have broken EU rules and other countries have also falsified data e.g. Italy. That’s point one.

    Point two is that clearly the ECB and/or the “Troika” and/or the EU are all grossly incompetent if they can’t control their own house. It’s just another strike against the egregiously bungling EU and all its subsidiaries. The existence of the crisis (in the form it has taken) is the proof of the mistakes.

  10. DC, Ikonoclast and others. I am not taking sides and, if you would have read my previous posts on this topic, you would know this. I also don’t care about the outcome because it won’t have far reaching implications for us here down-under or in most of Europe except of course for the Greek people. I am a bit frustrated with all these discussions. It seems to lead to more misunderstandings and errors and no help for the Greek people. The latest example:

    DC in reply to EG: “Its entirely true that Greek debt figures were manipulated before the crisis. But you said yourself since 2012, the figures have been investigated thoroughly by outside experts-the Greeks were obliged to accept this and this will presumably be part of any deal done from this point on-since as you point out, it would be otherwise impossible to monitor Greek adherence to any accord”

    Wrong, DC. The national accounting data was wrong (and Goldman-Sachs was involved)) before Greece entered the EUROgroup in 2001 and clarification wasn’t reached until about 2012. I didn’t say the latter part of what you wrote. But if you want to point out an implication then this is fine with me, particularly if you get the dates right.

    Goldman-Sachs at the input stage of its services:
    http://www.spiegel.de/international/europe/greek-debt-crisis-how-goldman-sachs-helped-greece-to-mask-its-true-debt-a-676634.html

    Goldman-Sachs at the output stage: In 2015, Goldman-Sachs tells the world that Greece may need to default: http://www.afr.com/news/world/europe/goldman-sachs-says-greece-may-need-to-default-to-break-its-debt-impasse-20150602-ghej33#

    (In another place I coined the word ‘production technology of the proverbial Wall-Street bankers to give it a name.)

    There are other methods, which are less demanding on emotions, error generation, and blame assignment but more helpful in understanding, IMO. Consider the following statement by Alf van der Poorten, Professor of pure mathematics:

    “I used to think it was University policy to annoy me, but then I realised that the process was so successful that it could only be a series of accidents.”
    Source: Alf van der Poorten’s home page at Macquarie University in 2001 (Professor van der Poorten is no longer with us; he is still relevant though, IMO.

    The false national data right at the beginning of the process in 2001 is not the only technically interesting item in the development of the ‘Greek national debt crisis’. This process has been loosely described by some as chaotic. What if the conditions of a chaotic process (in the mathematical sense) are actually fulfilled? Stuff like this interests me. Another observation in this regard is the exchange rate of the Drachma and the Euro from 2001. This data can be googled. Enter: https://en.wikipedia.org/wiki/Greek_drachma . Ask yourself how, at that time, people would have paid for a cup of Greek coffee (30Drachma in Athens prior to the introduction of the Euro) in Euros, given the exchange rate information and noting the smallest unit is 1 Euro cent). By 2006 a cup of coffee was about 2.5 Euro and in 2014 3 Euro. Wages in 2001 were converted using 4 decimal points not 2. What about a bunch of spinach, which cost 15D before the conversion? A small error in initial conditions can lead to vastly different outcomes in a chaotic system. I know this is boring for some in comparison to grand narrative discussions. But it matters for having food on the table. Interestingly an Australien of Greek origin English language teacher pointed this one out to me. She suggested Greece should have had an internal devaluation (say 100 old for 1 new Drachma) one or two years prior to joining the Euro. This makes sense to me. Whom should the then Greek government have consulted, an Australian English language teacher who knows local conditions in Greece or a Wall-Street banker? Internal devaluation is no longer almost costless after businesses have taken on debt in Euros (Uncle Milton’s point). This means the sequence of events is important. So far I have found a small change in initial conditions and a change in the value of a variable (national account data). This leaves establishing non-linearity of the system to fulfil the conditions of a chaotic system – not sure yet if the going back in time through data revisions is enough. Anyway this is my problem and I should not bore anybody any longer.

  11. Try putting this in the local context.

    Half of Queensland’s tax payers have refused to pay their taxes for years and the state government has run up a deficit of 500 billion dollars and Campbell Newman, after selling off the power assets and squandering the proceeds, is calling on the other states to cough up the money to clear their debt, while at the same time taking no action to make the Gold Coast good timers to pay their taxes.

    How well would that go down?

  12. And now the “pincer” movement by the US on the hapless fools of the EU.

    Having been paid 100 cents in the dollar for the dud loans, and then having the troika do “Shock Doctrine” on Ireland, Greece, Spain etc…. the US/IMF has decided that the Greek debt is in fact unsustainable after all – and therefore debt reduction must be part of the deal.

    The hate propaganda is still telling everyone it’s the Greeks’ fault, “Wall St”/IMF/US get off scot-free and the rest of the EU takes a haircut.

    Neat.

  13. @BilB

    There is no way that other Australians would allow people in Queensland to suffer in the way that other Europeans have allowed Greeks to suffer. At any rate, since Australia is an actual country rather than a mishmash of dysfunctional institutional arrangements, the necessary transfers to avert the suffering and prevent economic collapse—the provision of unemployment insurance, federal funding of health and education, etc.—would happen automatically. People would find it much easier to migrate in search of economic opportunities. The implications of a crisis in state finances in Australia are simply incomparable to those of a crisis in national finances in a Eurozone country.

    The irony is that, at base, this is a story about international financial flows and one of the key functions that these flows are supposed to perform is to help people share risk. If the Eurozone public understood the economic implications of the institutional arrangements they’ve adopted, they would understand that they desperately need a system that can provide them with insurance against the new reality that a moderate level of government incompetence [1] can now create an existential threat. But pointing this out is obviously the last thing that politicians who have acquiesced to austerity want to do. And Merkel et al live in a fantasy world in which moral hazard trumps sanity as well as compassion.

    [1] As I pointed out in my previous comment, there’s nothing extraordinary about governments running up the sorts of debt levels that Greece did.

  14. Luke Elford,

    you seem to be totally forgiving of a goverment that fails to collect taxes to a huge degree expecting other countries to make up the short fall, and totally condemning of those who say fix your problems then come ask for help.

    This is less about austerity and more about massive incompetence. The Greek elite are using the general populous as a human shield to cover for their crimes, as I see it.

  15. An insight into the negation process

    ..a rare and disturbing insight into the process which has led up to this week’s make-or-break deadline for reaching a bailout deal between Greece and international lenders, without which the country faces crashing out of the euro and complete bankruptcy. He describes the extraordinary bullying of Greece’s radical-left government by the creditors, including Eurogroup president Jeroen Dijsselbloem’s direct threat to cause the collapse of the Hellenic banks if it failed to sign-up to a drastic austerity programme. “We went into a war thinking we had the same weapons as them”, he says. “We underestimated their power”.

  16. The Greek crisis is about the massive incompetence and dishonesty of the “Troika”. The Troika is the European Central Bank (ECB), the European Commission (EC), and the International Monetary Fund (IMF). These are the people who have accidentally, incidentally and then deliberately destroyed the Greek economy. The first mistakes were accidental albeit extraordinarily stupid. These derived from the basic unsound design of the Euro system due to fundamental misunderstandings of basic macroeconomics inherent in monetarist and neoliberal ideology.

    Next, the mistakes in relation to Greece became incidental. The health of Greece’s economy became incidental to the real task of the troika which was making sure international creditors got paid first. Finally, when the Greek people had the temerity to elect a left wing government, the “mistakes” became deliberate. The process turned into deliberate sabotage of the Greek economy.

    It is clear the Greeks have to exit the common currency. There is a way to do it.

    https://www.capitaleconomics.com/data/pdf/wolfson-prize-submission.pdf

    The author of the above paper, Roger Bootle, also says essentially:

    “The eurozone is a complete disaster and Britain needs to leave the EU” – Oscar Williams-Grut

    The latter article is in Business Insider Australia. For obvious reasons I do not post it as a link.

  17. @Uncle Milton

    The Troika has won, Serena Williams style, with ruthless, awesome brute force. Tsipiras is now dead meat. His party will split and he’ll be gone within days.

    Any other waverers or rebels in the EU have been shown what will happen to them if they try it on. (Podemos, that means you.)

    It was all so avoidable. This really is a tragedy in the true sense of the word.

  18. The arguments around the issue of Greece in this post has been changed from how to solve Greece’s depression and public debt denominated in Euro, to finger pointing whether troika or Greek governments is more morally wrong. I guess by pointing out all preceding and current Greek governments faults will mean that Greek’s public wellbeing a great concern.

    If only Greek government can still demand the debts owed by German government from the WWs which it forgiven a long time ago to be paid back to them with interest as well that would solve the issue at hand. Since, following the logic of the arguments presented here, the German government’s crime in the WWs makes them morally wrong and thus they (both governments and the public) must be punished right?

  19. @Tom

    “will mean that Greek’s public wellbeing a great concern.”

    Should be – will mean that Greek’s public wellbeing is not a great concern.

    I should proofread more.

  20. @Uncle Milton

    You may well be right. Do you have a link to any latest news which shows that Tsipiras has definitively lost?

    If what you say is the case, then Europe is in for a lot of trouble. The poor will get poorer. Inequality will intensify. The potential for serious unrest will rise. It would represent in the first instance a further consolidation and triumph of neoliberalism or, if you can accept this terminology, of late-stage capitalism. It will represent as a consequence, serious economic problems ahead for Europe, popular unrest and eventually open class war.

  21. I keep offering papers I have not yet read myself.

    http://www.academia.edu/10713101/THE_GREEK_SAGA_COMPETING_EXPLANATIONS_OF_THE_GREEK_CRISIS

    I don’t say I agree with this paper’s conclusions. In fact I probably won’t as it finally leans on Marxist TRPF (Tendency of Rate of Profit to Fall) theory which I do not agree with. Yet I would accept other broadly Critical Marxist or Marxian explanations of the crisis.

    However, the idea of doing a comparative analysis of competing explanations has merit and maybe would allow many mono-focus people (like me) to entertain a wider selection of candidate contributory causes to the Greek crisis than we currently do. The table of p. 3 is of interest in this regard.

  22. Three of my posts (2 long and 1 short) remain in moderation. This is fine with me. In a sense it would be interesting to see what happens if they appear later on because then one would get a small scale example of what happens if information is not made available in chronological time. (This is one element in the development of the Greek drama.)

    Neither rhetoric nor the discussion of grand narratives will help the Greek people. Technical knowledge of finance could help to undo the services of Goldman-Sachs and co. But, without having detailed knowledge of the accounting system used by the ECB and the EU Commission, it is essentially useless to talk about debt restructure because the debt restructure has to be done in such a way that the rules of the EU are met, both, in terms of each EURO-member’s accounts and in aggregate. And, moreover, to get a non-Grexit (the solution reportedly preferred by the Greek population who wish to retain the EURO), Greece has to submit plausible (from the ground up) reform plans and these plans have to be judged as such by the relevant EU bodies. Such a solution cannot be excluded a priori. Mr Tsipras is in a position nobody envies, I would say. If a non-Grexit solution exists on the said technical grounds and he survives at home, he will be remembered as a statesman who demonstrated his goal goes beyond party politics (IMHO, as always when I make comments in areas without having a recognised driver’s licence to venture into.)

    Assuming a non-Grexit solution emerges, then the outcome will be reported to the various member countries in their respective languages (all equally weighted in the EU) in the most sophisticated diplomatic language imaginable such that people like us could spend a life time each to discover the complete set of contradictions with a strictly positive probability but less than 1 and assuming the entire range of languages involved is covered by the commenters on this blog-site and we coorperate.

    Assuming a Grexit emerges, then see above.

    Such is my prediction regarding ‘communication strategies’. Its all a waste of time for the purpose of finding solutions but nevertheless crucial for politics in practice if others have found a solution.

  23. @BilB

    “This is less about austerity and more about massive incompetence. The Greek elite are using the general populous as a human shield to cover for their crimes, as I see it.”

    Then you still don’t understand the relevant macroeconomics. The obstacle to Greece paying off its debts itself without further loans has not been Greek intransigence but the common currency. It makes a spiral of declining GDP and rising debt-to-GDP as cuts are made in the deficit virtually inevitable. The only possibility of averting this would have been if government spending had been maintained and only tax increases had been used to cut the deficit, as the paper I linked to in the previous comments thread discussed.

    I would rather a set up where governments are able to take their own responsibility for reducing debt without creating Armageddon, but it doesn’t exist here.

    And you still can’t accept the reality that there was nothing extraordinary about Greece’s debt, pre-GFC.

    I despair.

  24. @Ernestine Gross

    “Neither rhetoric nor the discussion of grand narratives will help the Greek people.” – E.G.

    While not entirely agreeing with this statement I do understand why you say it and various ways in which this statement is valid. It is important to remember however that “unifying theories” are not the same thing as “grand narratives”. Unifying theories can have empirical validity. As an example;

    “Evolutionary theory’s seamlessly coherent explanatory power for the phenomena that biology investigates at every level of complexity, in the myriad fields that biology encompasses, and in the interrelationships between and among those fields, is unrivaled and presents evolutionary theory as the grand unifying theory of biology.” – Saint Louis University Dept. of Biology – Statement on the teaching of evolutionary biology.

    It is not impossible that certain theories in political economy are unifying theories (or progressing empirically towards same) and are not “grand narratives”. I would not throw the possibility of unifying theory out the window but that’s just my position I guess. This is not to suggest the you are in fact confusing attempts at unifying theory with grand narrative.

    A second consideration is this. People of nations like Australia who not directly involved are still rehearsing and exploring their views in relation to these issues. If membership of a wider currency union of any kind is proposed for Australia at any time ij the future, unlikely as this might seem now, we would want to have already begun thinking about possibilities and pitfalls. It might also make us begin to think more critically about supra-national unions or agreement of any kind (like the TPP) which involve loss of national sovereignty of any kind.

    I for one am obsessed with sovereignty not as a nationalist but as a social democrat. The people need to be in charge, not elites and not transnational finance and corporations. Whatever aggregated unit is still basically democratic (even if it is still only imperfect representative democracy and not full worker democracy) that is the unit (currently the nation) which needs to retain sovereignty, people’s sovereignty that is, and not hand its power over to supranational technocratic, oligarchic or corporate bodies which are not, as a minimum condition, directly democratically representative.

    Of course, these issues are debatable with respect to the EU. See Wikipedia article “Democratic deficit in the European Union.” It might be argued that the EU is progressing towards a greater degree of democracy as time goes on.

    With respect to Greece, I have come around to the opinion that the EU ought to use Greece as a test case for a country exiting the currency union (with assistance), getting its house in order (with assistance) and re-entering the currency union at a later date. At the same time, the EU needs to review what it did wrong, what institutional, structural and systemic faults it may have, as well as what Greece (and other parties) did wrong. The first step to correcting the problems that were the result of human errors and human institutional errors is admitting that such errors were made and probably on all sides. If the EU has the equivalent of a Royal Commission process it needs such a full and independent commission investigation into the causes of the crisis and the reasons for the failures to deal with the crisis in an effective and timely manner.

  25. Footnote: I do remain highly suspicious of the deep motives of Great Nations. In the EU, Germany (especially) and France are the Great Nations. UK less so, not because it is more virtuous (a laughable proposition) but because it seems to have a foot in and a foot out of the situation when it comes to the EU.

    What will appear to be, on my part, an anti-German bias, is essentially an anti- Great Nation bias. Great Nations beat on and batten upon small nations. It’s what they do. It’s natural in a sense though both deplorable and fully to be expected. Power corrupts. The powerful are (to some extent) insensible to the misery they inflict on others. The descriptive geopolitical theory of Offensive Realism explains these phenomena in my opinion.

  26. LukeE,

    The primary responsibility of the Greek government is to govern according to the rules laid out in their constitution and ensure that every one carries their weight.

    This has not been happening in Greece.

    Repeated bailouts have not triggered fully responsible government.

    Do you seriously think that an exit from the EU is going to lead to a miraculous recovery if there is no change in the performance of the government decision makers? Do you seriously believe , at this stage, that an easy annulment of Greece’s debt will lead to responsible government?

    What has to happen here, and almost certainly will happen, is, while the country slips into collapse and the people feel the desperation, a rapid rotation of political leaders until someone puts up a proposal that people as a nation are prepared to make work. It takes desperation to get to that point. Fortunately for Greece there is no politically aspirational religion ready to step into the void.

    Those who have been milking Greece through their corruption are the winners in an exit from the EU. They have their property, they have their cash out of the country, the desperation to come will collapse values and it is those with money and who are geared up for operating on the cash economy stand to scoop up more property and consolidate their power in what ever comes next. The losers are the lower end of the services sector, the ones without reserves and are the ones who lose (have lost) their livelyhoods first.

    What is being experienced in Greece is the end game of what happens when a country fails to respond to cash injections and the stimulus loses its positive effect and becomes oppressive as debt servicing costs overpower the fiscal balance, which in Greece’s case was exacerbated by massive corruption and an imbalanced employment landscape ie overheads (services) top heavy.

    You guys are on a capitalist bashing roll here and don’t want to see it any other way. But I put it to you that the Greek crisis is if anything an example of insufficient capitalism. I’ve had the business experience of the psychopathic business partner who drained the bank account, stole all of the wip product, and did his best to have the bank call in my loans. It might seem like the best option to take the easy path, accept bankruptcy and fade away, but that is not at all the easiest path to take. In Greece’s case the people are not going to all drop dead, they need to carry on. So the best way to “carry on” is to power on. Greece needs to motivate their economy, they do still have an economy…it may be down but it is not out. In my case several years down the track I am in a position to, almost certainly, eliminate my debts in the next year and move onto developing products that have been stalled for a decade.

    Greece has everything going for it to succeed, awesome location, proximity, history, resourceful people, and they exist in a time of ideas and technology. The only thing else they need is a new plan and solid leadership, that is all.

  27. @BilB
    I think you are right that long-term, Greece has to pay its own way. But we should be careful of the fallacy of treating a national budget as it it were as straightforward as that of a household. Greece has many natural advantages-the climate, the geographic location (with the Balkans as a huge natural hinterland-assuming the various contentious issues with immediate neighbours, cf Macedonia, can be solved). It constantly amazes me for example that a country that has such enormous solar potential has only about 6% of the solar capacity (if one compares PV mwh) than Germany. How on earth is that possible?

    https://en.wikipedia.org/wiki/Solar_energy_in_the_European_Union
    (Yes, from wiki, but it looks solid enough. Mind-boggling. Would the Germans have been better off investing in solar power in Greece and hooking them up to the European grid that in trying to expensively eke out the sunshine in Hamburg? ;-))

    Where I think you are wrong however in who benefited from the previous mismanagement. The tax-avoiding upper middle class (the liberal professions are apparently a particular problem) voted yes en masse in the referendum-the map of the neighbourhoods of Athens and how they voted makes it quite clear, for that city at least.

    Its in their interest to keep the Euro come what may, whatever the cost, and for austerity to be spread around as widely as possible. Instead of relying on capital markets and EU subsidies they plan instead on being subsidised by the rest of the population by a massive further reduction in social programmes and living standards. That’s the people Syriza were elected against, as much as the Eurogroup or the Germans.

  28. @BilB

    I am very sorry about your personal business and financial difficulties, but I think they are clouding your interpretation of events in Greece.

    I haven’t made any predictions about what would happen under Grexit. I’m happy to admit that I don’t know, especially since I don’t think anybody else knows either.

    As for the effects of debt forgiveness, the sensible thing is to learn from history: http://www.nber.org/papers/w20577.

    “You guys are on a capitalist bashing roll here and don’t want to see it any other way. But I put it to you that the Greek crisis is if anything an example of insufficient capitalism.”

    I think you seriously overestimate how left-wing I am. My position on this stuff is one of utter economic orthodoxy. It’s the austerity folks who made crap up on the fly.

  29. @Tom

    Your reply to me has recently come through.

    I completely agree with you about the importance of family and friend contacts. In fact, in response to BilB’s hypothetical scenario I was thinking about the number of states in which I have such contacts.

    And you’re right, of course, about the importance of automatic transfers and the hypocrisy of focusing only on moral hazard for debtors and not creditors.

  30. Thanks LukeE, for being prepared to think things through in different ways. In my experience it is the fastest way to find new and unanticipated solutions.

  31. I’ve seen the “leaked” Greek ‘proposals’ and, assuming it’s the real thing, I can’t believe it.

    There is absolutely nothing about debt restructuring – apparently that will be a ‘side deal’ in another document – and pretty much everything 62% of the Greek population just voted against.

    This is madness. Whoever is behind that idea (Tsipras and….?) has just sold out the Greek people hugely and is g*mbling that a desperately impoverished and angry nation is just going to cop it.

    Of course they won’t. But the police state is all set up and ready for them.

    After a brief period of bloodshed we can expect regime change, asset fire sales and another US puppet (Yats style).

  32. So the best way to “carry on” is to power on.

    This is an empirical statement that can be tested empirically.

    What evidence we do have — and we actually have a decent amount — is that it’s wrong, that “powering on” in preference to stocktaking, examining your options, and evaluating the practicalities of a massive course change is usually a less-than-ideal choice.

    Best option is not to “fail”, but if you’re going to fail it’s better to do it as soon as possible. I mean, in your specific situation I’m going to go out on a limb and tell you that you’d have been much better off to have pulled the pin once the initial reports of your psychotic business partner’s problems had surfaced, rather than “powering on” for the months or years it took to shift from “initial reports” to “why are the sheriffs knocking on my door”. “Powering on” is almost always a mistake.

    Or as the proverbs of my people say, “when you’re in a hole, stop digging”.

  33. @Megan

    The sell out comes courtesy of the finance minister, Euclid Tsakalotos, who is, by reputation, a doctrinaire Marxist, from Syriza’s (even more) left faction.

  34. Fortunately, Collin, I don’t give up when things turn bad. New partner, vastly improved electronic circuit, and we are filling $300 thousand in export orders this month. The psychopath actually did me a favour. It was a little serendipitous that I found the new partner, but I had other options if that had not happened. As it has panned out two beyond employment age old guys are building a great and complex product that is well received in other countries.

    As for cutting and running, I have done that when there was no prospect of capturing new business. It is indeed far better to be in charge of an orderly shut down rather than have one imposed by others. And this is exactly Greece’s situation. The government was in denial for the last five years, wasting their period of restructuring lying to all and sundry about the nature of their problem. All the way exacerbating the problem of insufficient productivity to support an inflated service sector.

  35. People are hypnotised by money. They seem to think it’s real. It isn’t real of course it’s just way of counting the real. When money is treated as if it is real then the situation rapidly becomes surreal, which is what is happening in Europe.

  36. @Megan

    I keep your assumption about the authenticity of the document you say you have seen.

    “There is absolutely nothing about debt restructuring – apparently that will be a ‘side deal’ in another document – and pretty much everything 62% of the Greek population just voted against.”

    The procedures agreed to earlier this week was for the Greek government to provide a proposal for reforms by Thursday. The request for debt relieve had been submitted earlier. (The sequence of events matters.)

    I don’t know what the Greek population voted against (I don’t read Greek). According to media reports, my information is that
    a) the referendum was on accepting or rejecting the reaction of the EURO-group (ie counter proposal) of the then existing Greek proposal (and there are conflicting stories about who actually rejected a reduction in military expenditure. I am confident Paul Walter didn’t make up what he wrote on this thread and I am equally confident that the Sueddeutsche Zeitung didn’t make up what they wrote)
    AND
    b) there were reports that the Greek people wished to retain EURO-membership. (Again, I cannot even form an opinion if these reported wishes were due to Tsipras und Varoufakis and others having told the public this is possible because I don’t understand Greek in the spoken word either.)

    On the face of it, given the EU rules (a) and (b) above are contradictory – mutually exclusive. (A Grexit would be the only possible solution.)

    The two objectives (a) and (b) are not automatically contradictory if something can be done about the debt such that conditions in Greece improve and the EURO-group rules are not violated.

    Greece was in no negotiation position to force the EURO-group to consider the reconcilliation of the two ostensibly contradictory objectives on part of the Greek population. So, the first move in this regard had to come from the EURO-group and the second one from the Greek government.

    The first move was a signal from several officials and heads of governments in the EUROgroup that they are prepared to consider the reconcilliation of the two apparently contradictory objectives. It came in the form of statements to the effect that ‘the door for further discussions is open irrespective of the outcome of the Greek referencum’. (I am very confident about the content of this signal because it was the same in three languages in which members of my household are fluent – English, German and French – and it was reported in reputable newspapers in three countries, including Australia.)

    The timing of this signalling (before the referendum) was important in deducing what the Greek government wants (given the information exchange between it and the public). The second move had to come from the Greek government in the form of moving through the open door and requesting debt relief. This happened (first meeting). The EURO-group signalled they are prepared to consider (the resolution between objective (a) and (b)) by asking the Greek government to submit a reform proposal. The Greek government signalled they wish to continue by submitting a reform proposal. This happend on Thursday.

    Note, the EURO-group is not dictating anything to Greece but they do not allow Greece to dictate to 28-1 member countries what to do only because Varoufakis made a lot of noise and wasted a lot of time and, I read, he still spreads a bit of fog in interviws. Both ‘players’ (at least the new set in Greece) know that.

    By next Monday we may find out whether a finace-technical solution to the debt relief request is possible AND the reform proposal or some very close version thereof is considered credible by the EU. Before that, however, we have to wait how the Greek parliament voted.

    I literally don’t understand the remainder of your post.

  37. @Ernestine Gross

    No, there was no earlier “request for debt relief” – the earlier request was for an extension of the emergency liquidity to allow the Greek banks to re-open.

    That is completely different from “debt restructuring” – the sequence of events does indeed matter.

    There was only one question on the referendum: i.e. “Yes” or “No” to the Troika’s ‘ultimatum’ from 25 June, and the people overwhelmingly voted “No” to that. There was no question about staying within the control of the Eurogroup.

    Maybe I can try to clarify the remainder of my post:

    1. If Syriza tries to, or does, do a deal which has no real easing of austerity for the suffering masses of Greece – there will be trouble on the streets;

    2. When that happens, it will be violently suppressed by militarised “riot” police – and/or the military;

    3. When that happens, there will be a change of “regime” (i.e. Syriza will be driven out of office one way or another) – “regime change”;

    4. Then, there will be a swift return to “order” courtesy of perhaps an interim government made up of ND/PASOK and probably the neo-Nazi Golden Dawn (although they are ostensibly anti-EU??), or some other “interim” measure;

    5. “Bailout” funds will flow, the banks will be swimming in liquidity, privatisations and asset sales will proceed in an obscenely fast and opaque fashion, “order” will be restored and the poor suffering masses of Greece will be subjected to the style of policing that brooks no side-ways glancing.

  38. When I say I have seen the “proposals”, I’m not suggesting that I have some secret inside knowledge.

    I would have thought that everyone taking an interest in this situation, and with an internet connection, would be aware that it was “leaked” to naftemporiki.gr, the reason for circumspection is that the Greek media is notoriously fascist (and incidentally owes hundreds of millions of unpaid taxes to the Greek government – hello News Corp!).

  39. @Megan

    During the past 2 weeks I spent more time on reading up on the EU, the EUROgroup, EZB, than during the past 10 years and I followied newspaper reports in two languages. I wrote how I interpret what is going on against the background of the information I have. You can ignore it and this is fine with me.

    I don’t like writing for the sake of writing. So I’d like to be excused from further writing.

  40. @Ernestine Gross

    I wouldn’t say I ignored it. I engaged with it.

    Some people write with an agenda, arguably everyone does, but some people engage because they want to flesh out the facts and ascertain the “truth” of our situation.

    To beat the old saying to death: Some people use an argument the way a drunk uses a lamp pole. For support rather than for illumination.

  41. The Guardian Australia says;

    “Athens has submitted a package of tough spending cuts and tax rises in an attempt to reach a €53.5bn bailout and avoid Grexit.”

    I guess now the EU would have to accept it and Greece’s Parliament would have to pass it for this to come into force.

    I wonder how spending cuts and tax rises will help a nation in a deep economic depression, and help restore demand and economic activity? This would be more austerity for an economy already pummeled into depression by austerity. I don’t see how it can do anything but make Greece’s economy even worse. But this apparently is what the EU and Greece’s government want: further destruction of the Greek economy.

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