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The case for Austerity

by Frank Schnittger Sat Jul 4th, 2015 at 08:10:54 AM EST

Former Irish Taoiseach and EU Ambassador to the US John Bruton lays out the case against the Greek Government fairly succinctly in his article in the Irish Times today (4/7/15). In it he criticises US Nobel prizewinning economists Paul Krugman and Joseph Stiglitz for advocating a NO vote in the Greek referendum.

His arguments may be summarized as follows:

1. "Krugman says the euro was a "terrible mistake" because he claims it failed to insulate the public finances of the states of the euro zone from bubbles in particular countries, like he says the US system does. In fact, the US only does this to a limited extent and, unlike the EU, it has no general bailout fund for states".

In fact Krugman never claimed the US system could prevent housing bubbles and criticized neo-liberal de-regulation "reforms" for making such bubbles more likely. Furthermore, the US Federal budget is 20% of GDP compared to an EU budget of only 1% of GDP and thus Federally funded programmes like Social Welfare, Medicare and Medicaid can do a lot to alleviate the worst effects of (say) a burst housing bubble in Florida on the poorer people in Florida. How much better off would the Greek people be today if they had a social welfare and healthcare system funded by the EU?

2. Bruton continues: "He [Krugman] fails to outline what the Greeks might have used for money since 2010 if, as he seems to advocate, they had continued with their previous "non-austere" spending policies. They would not have been able to borrow the difference on commercial markets. Where would they have got the money?"

The answer is quite simple: If Greece had remained outside the Eurozone, as Krugman advocated, they could do what every Sovereign state with their own currency does: they could print it. Should currency markets deem this to be excessive, they would devalue the currency thus making the Greek economy more competitive and facilitating its recovery. That is how monetary policy normally works in states with their own currencies.

3. What Bruton also ignores is what almost every economist and most political leaders (including Merkel) have known since 2010:  That Greece is basically insolvent and its accumulated debt burden is unsustainable. A default or radical "restructuring" of the debt is unavoidable, and this is not because of anything that Syriza or the present Government have done, but because of the unsustainable borrowing conducting by successive conservative Greek Governments who were and are political allies of Bruton's Fine Gael and European People's party.

4. Bruton goes on the justify the bailing out of European banks exposed to Greek debt in 2010 by turning private bank debt into public sovereign debt on the grounds that protecting the European Banking system was a "public good". So why aren't the Greek banks being provided with adequate liquidity by the ECB, and, if insolvent, being bailed out or restructured by the EU ESM and EFSF facilities set up for that very purpose?

5. Bruton concedes that a debt conference will be necessary: "But the convening of any such conference, and eligibility for any help from it, should be something that might happen five years from now. It should be conditional on growth-promoting reforms and budget-balancing, already having been fully implemented by governments seeking debt relief from it."

The Greek crisis is happening now, and any possible debt relief or restructuring in five years time will do nothing to alleviate it now. We wouldn't be having this crisis now if it had been done adequately 5 years ago in 2010 when the private banking loans were being converted into sovereign debt. This is just one more instance of European leaders trying to avoid their responsibilities and 'kicking the can down the road'. Ireland was promised something similar, and those promises have now been quietly forgotten by the Irish Government as much as anybody else.  

And in the meantime the Greeks are supposed to continuing an austerity plan which, as Brian Lucey noted in his excellent article in yesterdays Irish Times, everybody, including the IMF, knows cannot succeed. Just as they knew the past 5 years would be as disastrous as they have turned out to be. All the evidence is that austerity policies are the very opposite of the "growth promoting policies" Bruton claims to favour and which the current Greek government are actually trying to implement.

The indifference of John Bruton and his political allies to the ongoing suffering of the Greek people and the abject failure of the policies he himself has advocated is absolutely stunning to behold. Blaming the messengers - Krugman and Stiglitz - who have consistently provided the evidence of that failure is no solution whatsoever. Trying to claim that they are only making those criticisms because they have no stake in the game is just plain ignorant.

Brian Lucey: Athens asked to implement a plan doomed to failure

The Greek mess is one in which there is plenty of blame for all sides. Greece has been mismanaged, grievously, over the decades, with the result that is is a country in dire need of structural change.

The troika, on the other hand, has blundered and bumbled and blustered, hagridden by Dr Schaüble's Hoover complex, and is now unable to countenance change.

Herbert Hoover, let us recall, was the US president who oversaw the descent into the Great Depression, a strict believer in budgetary rectitude regardless and who was at best insouciant about tight money policy.

Mind you, unlike Dr Schaüble, he was an early proponent of debt write-off, for German debt in the first World War.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Jul 4th, 2015 at 08:23:12 AM EST
This is very good as well.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Sat Jul 4th, 2015 at 08:34:04 AM EST
[ Parent ]
I have sent the above Diary to the Irish Times for publication as an opinion piece, but there is probably zero chance of them publishing it as I am not a well known economist or public figure. However if a group of us were to sign it (or something similar) using our real names and addresses around Europe and calling ourselves something like "The Independent European Economists network" there would be a much better chance of it being published.  The problem is time:  The referendum is tomorrow and the next edition of the Irish Times is published on Monday.  To remain relevant we really needs to be submitted today. Anybody think this is a good idea?

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Jul 4th, 2015 at 09:37:41 AM EST
  1. At what point does Bruton know he's lying?
  2. If this is what passes for analysis among those who run the EU,....

Greece has been a kleptocracy for years, with the 1% looting the country at every opportunity and throwing just enough back in to keep people from taking to the streets.  The EU knew this when it let Greece in.  The banks knew this when they financed Greece's habits.  Everyone stood back and watched the looting because they were raking a nice percentage of it, and now they expect the ordinary people left behind in Greece with effectively nothing to cover the losses.

It's easy to see why Bruton doesn't understand any of this: He's paid not to.

by rifek on Sat Jul 4th, 2015 at 12:08:26 PM EST
I think Bruton probably fairly accurately reflects the received wisdom of the EU elite on this issue, and had probably been given his talking points at various gatherings of the elite. He receives a substantial pension from the Irish state and presumably also chairmanship and speakers fees...

John Bruton - Wikipedia, the free encyclopedia

On 29 October 2009 it was announced that he had written to the ambassadors to the United States of the 27 members of the European Union expressing his interest in applying for the position of president of the European Council following implementation of the Lisbon Treaty.[15] Bruton was very much an outside shot for the position as EU leaders firmly indicated they want a chairman-style president rather than a high-profile figurehead to fill the post.[16] Herman Van Rompuy, the then Belgian Prime Minister, was appointed President on 19 November 2009 and took office on 1 December 2009.

On 21 May 2010, it was announced that he would be the chairman of the newly formed financial services body, IFSC Ireland.[17] His main role will be to promote the Republic of Ireland as a location of choice for international financial services.

Ai this stage in his career he can probably say whatever he wants, so I doubt he is anything but sincere in his beliefs.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Jul 4th, 2015 at 12:37:40 PM EST
[ Parent ]
AND Krugman is right about the euro having been a mistake.  As I've said before and shall keep saying, if you depend on a pseudo-sovereign currency issued by a non-sovereign, you're on a collision course with yourself.
by rifek on Sat Jul 4th, 2015 at 12:14:50 PM EST
Tea with FT: Europe, you want the truth? It was not the euro but bank regulators who did Greece in.

Sir, Gideon Rachman writes: "the link between the EU and prosperity will have been ruptured... it is not just that the EU has failed to deliver on its promises of prosperity and unity. By locking Greece and other EU countries into a failed economic experiment -- the euro -- it is now actively destroying wealth, stability and European solidarity". "Europe's dream is dying in Greece" June 30.
With my Op-Ed of November 1998 "Burning the Bridges in Europe" I can evidence having warned as clearly and as much as anyone about the euro... and so I could be writing here "I told you so".
But no, I assure you that the real failed economic experiment that has created the current crisis was not the euro; it is the current bank regulations.
Basel II regulations of June 2004, because of how Greece was rated A+ to A- between November 2004 and January 2009, allowed banks to lend to Greece leveraging their equity more than 60 to 1. The capital (equity) requirement was a meager 1.6 percent (the basic 8% times a 20% risk-weight).
And so of course the Greek government was doomed to take on too much public debt. What Greek politician/bureaucrat would have been able to resists the offers of loans; and what banks would resist the temptation to offer loans to Greece, in order to earn fabulous expected risk-adjusted returns on their equity?
And let us be sincere, any bank lending to a Greek government of those of lately, has de facto waived his right to be repaid... even if he was tricked into doing so by its own regulator.
What would then have happened if there had been no Euro, and Greece had borrowed Dollars, Pounds or Deutsche Marks? The ensuing haircuts would be direct, or indirect by means of Drachma devaluations. Yes the crisis resolutions could perhaps been less traumatic but the crisis would still have happened.
Get any European country to use its own currency, but keep current distortions of bank credit in place, and they are still all doomed! If somebody needs to apologize to Europe, well that is the Basel Committee for Banking Supervision.

PS. European citizens, beware of the Basel Committee's bank regulators bearing gifts to your government bureaucrats

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Sun Jul 5th, 2015 at 06:33:00 AM EST
What Greece Could Do | J. W. Mason

On the one hand, the direct economic consequences of default are probably nil. (Recall that Greece in some sense already defaulted, less than five years ago.) Even if default resulted in a complete loss of access to foreign credit, Greece today has neither a trade deficit nor a primary fiscal deficit to be financed. And with respect to the fiscal deficit, if the Greek central bank behaved like central banks in other developed countries, financing a deficit domestically would not be a problem. And with respect to the external balance, the evidence, both historical and contemporary, suggests that financial markets do not in fact punish defaulters. (And why should they? -- the extinction of unserviceable debt almost by definition makes a government a better credit risk post-default, and capitalists are no more capable of putting principle ahead of profit in this case than in others). The costs of default, rather, are the punishment imposed by the creditors, in this case by the ECB. The actual cost of default is being paid already -- in the form of shuttered Greek banks, the result of the refusal of the Bank of Greece to extend them the liquidity they need to honor depositors' withdrawal requests. [1]

(2) On the other hand, Greece's dependence on its official creditors is not, as most people imagine, simply the result of an unwillingness of the private sector to hold Greek government debt, but also of the ECB's decision to forbid -- on what authority, I don't know -- the Greek government from issuing more short-term debt. [2] This although Greek T-bills, held in large part by the private sector, currently carry interest rates between 2 and 3 percent -- half what Greece is being charged by the ECB. And of course, it's not so many years since other European countries were facing fiscal crises -- in 2011-2012 rates on Portugal's sovereign debt hit 14 percent, Ireland's 12, and Spain and Italy were over 7 percent and headed upwards. At these rates these countries' debt ratios -- not much lower than Greece's -- would have ballooned out of control and they also would have faced default. Why didn't that happen? Not because of fiscal surpluses, delivered through brutal austerity -- fiscal adjustments in those countries were all much milder than in Greece. Rather, because the ECB intervened to support their sovereign debt markets, and announced an open-ended willingness to do "whatever it takes" to preserve their ability to borrow within the euro system. This public commitment was sufficient to convince private investors to hold these countries' debt, at rates not much above Germany's. Needless to say, no similar commitment has been made for Greek sovereign debt. Quite the opposite.

So to both questions -- why is failure to reach agreement with its official creditors so devastating for Greece; and why is the Greek government in hock to those creditors in the first place? -- the answer is, the policies of the central bank. And specifically its refusal to fulfill the normally overriding duties of a central bank, stabilization of the banking system and of the market for government debt, a refusal in the service of a political agenda. The problem so posed, the solution is clear: Greece must regain control of its central bank.

Now, most people assume this means it must leave the euro and (re)introduce its own currency. I don't think this is necessarily the case. It's not widely realized, but the old national central banks did not cease to exist when the euro was created.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Sun Jul 5th, 2015 at 06:39:01 AM EST
Here is what I don't get: why do the real decision-makers in Europe want to ramp up Euroskepticism? What do they gain from it?
by Upstate NY on Sun Jul 5th, 2015 at 10:37:51 AM EST
Perhaps they are responding to it in their own back yard.  I can understand why (say) a Bulgarian leader wouldn't want to fund debt forgiveness for Greeks when the Bulgarian standard of living is even lower.  

In the case of Bruton and Fine Gael, they are angry that Syriza has forged links with Sinn Fein, with a senior Syriza Minister speaking at Sinn Fein's Ard Feis (Annual conference).  All politics is local.  

Fine Gael are hugely invested in Syriza (and Sinn Fein) style politics and economics failing, and failing as spectacularly as possible.  Their performance in Government and supine obedience to the Troika would be fatally undermined if an alternative approach can be shown to work.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Jul 5th, 2015 at 10:53:09 AM EST
[ Parent ]
Same thing they got from ramping up xenophobia.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jul 5th, 2015 at 01:15:00 PM EST
[ Parent ]
In fairness, most of the xenophobia is being ramped up by tabloid/commercial interests who have a good nose for a market, and who know that blaming the other sells newspapers. The sad thing is that most political "leaders" are taking their lead from the tabloids... Have we heard one prominent EU leader offer an even mildly alternative analysis of the Greek Crisis? Hollande just looks weak with his occasional squeaks that maybe someone should talk to the Greeks...

It is beginning to look depressingly similar to the Tea party movement in the USA. The less one knows about anything the more prominent one seems to become.

The Second Coming (poem) - Wikipedia, the free encyclopedia

Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned.
The best lack all conviction, while the worst
Are full of passionate intensity
WB Yeats

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Jul 5th, 2015 at 01:25:16 PM EST
[ Parent ]
that until just a few years ago, american conservatives were trying hard to force the same sort of austerity onto california, and openly predicting, rooting for, and trying to force a default. i can't count how many times they claimed "california is the new greece." i hope the greeks find a way out of the horrible trap they've been placed within, and find a way to stick it to those sadists.
by wu ming on Sun Jul 5th, 2015 at 02:19:12 PM EST
Just how do they think Greece could repay loans early with money it does not have?  And why on earth should Greece do so even if it had the money?  These guys have lost all credibility...

Greece told it may have to repay loans early

The euro zone's rescue fund has warned Greece it could demand the repayment of bailout loans early following the country's non-payment of an International Monetary Fund (IMF) loan instalment on Tuesday, increasing pressure on the struggling economy ahead of Sunday's key referendum.

The EFSF fund, which lent most of the bailout loans to Greece on behalf of euro zone member states during its first and second bailouts, said Greece's non-payment of an IMF loan instalment on Tuesday constituted a default, warning Greece it "reserves the right to act" at any time. In total, about €131 billion in loans are owed to the EFSF, a precursor to the euro zone's current rescue fund, the European Stability Mechanism (ESM).

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Jul 5th, 2015 at 03:25:01 PM EST

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