Sunday morning in Kifissia, one of the leafy northern suburbs of Athens, and the view from my bedroom balcony is blue sky with dark clouds looming – a fitting scene for this very important Greek Election Day.
A product of the oil industry in Aberdeen, I am one of many Scottish expats supporting the oil and gas industry around the world (and lets not mention oil prices!). I have been working in Greece for a little over a year and after commuting between the Athens of the North and the real Athens for a year, I have been resident (and paying tax!) in Greece since November.
Greece has been going through a tough time in the last five years, unemployment is high and wages are low. Though there are few signs of austerity in the posh northern suburbs, my Greek colleagues (I am a lawyer) have lost faith in their politicians and their economy. Much though they love their country, pessimism is rife.
The election came about early due to the inability of the Greek Parliament to elect a President between Christmas and New Year. The Greeks I know feared what an election would bring without appearing to have much faith in the status quo.
The election campaign has been low key. All the parties have little wooden huts in the Main Street in Kifissia from where they seek to engage with those passing by. Maybe this would suit electioneering in the UK with our unreliable weather?
As I’m not Greek, I understandably have no vote but I have tried to follow things the best I can (without speaking Greek). The main choice is between SYRIZA (an alliance of hard left Greek political parties) and the centre right New Democracy party – the party for the current Prime Minister. The smaller parties include Pasok (the old, now largely discredited, socialist party), Golden Dawn (the ugly neofascist party) and the KKE (the Stalinist side of communism – the rest being in SYRIZA).
Of the smaller parties, the most interesting to us liberals is the newly formed party To Potami (The Bridge). Though the two MEPs they elected last year sit within the socialist group in the European Parliament (although explicitly not as part of the Party of European Socialists), they are a centrist liberal force, avowedly pro-European, wanting to ease the austerity without ruining the economy, advocating the rule of law and challenging the clientelism that bedevils Greece. These are messages that will attract any British Liberal Democrat and are very similar to the stall we will set out in May. ALDE have endorsed To Potami.
SYRIZA has run the most high profile campaign with the slogan “Hope is Coming”. The Greek people need hope at the moment and I can understand the attraction of SYRIZA – although their wishful thinking, everything for everyone, politics reminds me of the Yes Campaign during the Scottish Referendum last year. SYRIZA will win and whether they get 151 seats in the 300 seat Parliament remains to be seen. Much depends on the vagaries of the electoral system (and like any good Lib Dem I can bore you about that on request).
I’m writing this on Sunday afternoon as the Greeks continue to vote. Whatever the result, we all are nervous about the future. Like my expat colleagues, I am making sure I have as little as possible in my Greek bank account. Grexit is very much in the air – well, at least the fear of it. What will happen? Watch this space!
Photo credit: Stephen Harte
* Stephen lives in Edinburgh, works in the oil industry in Aberdeen and has been a party member since he was 17.
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27 Comments
To Potami means “The River”, though they did announce an electoral alliance with Drasi (“Action”), which was a member of the former Gefyres (“Bridges”) liberal electoral alliance for the 2014 European elections. Phew.
As a philhellene, Hellenophone and former resident of Thessaloniki, it is distressing to see what has happened to Greece, but equally fearful to consider the prospect of a SYRIZA victory. Majority or largest party by far (with the winner’s bonus), it is hard to see anything other than chaos ensuing. Κλαίω για την αγαπημένη μου Ελλάδα.
Syriza has simply proposed holding an international Debt Conference along the lines of the one held in 1953, with a view to cancelling much of Greece’s debt.
What’s wrong with that? In 1953, the Allies cancelled 50% of Germany’s debt and the west German economy began to grow, to the benefit of everybody.
The essence of capitalism is that businesses are allowed to fail but that doesn’t seem to apply to any of the banks. if they made stupid loans – and I am being generous to them here because many debts were imposed on Greece through corporations like Goldman Sachs – then why shouldn’t the banks go bust? Why do we tolerate too-big-to-fail?
It seems that in the Liberal Democrats these days, anything that the ECB or the European Commission has a hand in is automatically given a free pass, no matter how bad it is.
Michael – and if ND wins, what will happen? Nothing. They’re responsible for many of the country’s problems and simply pander to their rich friends. The biggest problem if Syriza wins is that it’s a coalition of parties which will probably splinter. Let’s hope that To Potami does well. Interesting article on them in the Telegraph: http://www.telegraph.co.uk/news/worldnews/europe/greece/11365901/Greece-election-Syriza-not-to-be-trusted.html
I got back from Greece yesterday after having visited family and friends in Athens and Saloniki.
All well & good but essentially people are sick to death of austerity, externally imposed which make it more bitter, and one that’s been in place since 2009. Moreover they are heartily fed up with the two established parties, Nea Democratia & PASOK who are viewed as the architects of Greece’s bankruptcy. People will vote Syriza to make the point, because they have little left to lose, because they feel betrayed by mainstream politics and because it appeals to and connects with young people. Almost everyone I spoke to recognised that Syriza have no chance of delivering on everything promised, have no experience of government, will probably be part of a flotsam & jetsam coalition – but they don’t care.
People in the UK do not appreciate the depth and the extent & reach of the economic austerity in Greece, the cuts, the hardship, the poverty and despair.
Our collective standard of living in the UK continues to be higher than is economically feasible in the long-term, boosted as it has been over the decades by tax cuts funded by North Sea oil receipts and privatisations, by a seemingly never ending growth in property values, and by government borrowing. But at least most of us pay our taxes, corruption is rare in the public sector, and the patronage available to the main political parties is a great deal more limited than in Greece. Understandably there is a pervasive feeling of victimhood in Greece, just as there would be in similar circumstances in this country, but electing Syriza is a step away from accepting their share of the responsibility for the situation they are in. (Say hello to Ekali for me Stephen if you find yourself in that direction!)
Even I, as a deficit hawk, believe you can have too much of a good (necessary) thing. The policies that Greece has had to implement are, by themselves, incompatible with a prosperous future and risk a deflationary spiral that will make the task of reducing its epic debts ever more Herculean.
Worse, deflation, tax rises and wage cuts have in some respects been a substitute for the structural reforms that are needed to improve fiscal sustainability and competitiveness in the long run. So we have an excessive fiscal squeeze coupled with inadequate structural (supply-side) reform, and all the while the fiction that Greece will be able to hack it inside the euro long-term is maintained.
The tragedy for the Greek people is that a major devaluation against its main trading partners is the only way of restoring competitiveness – by no means a panacea, since it would not tackle the domestic obstacles to growth and employment, but the only alternative to driving down unit costs and improving export competitiveness through ongoing deflation and wage cuts. Yet plainly a devaluation requires leaving the euro and returning to an independent currency, and the transitional impact of doing this threatens to be so destabilising that even Syriza doesn’t dare propose it.
Meanwhile Syriza’s proposal simply to renege on the commitments Greece has entered into in exchange for two successive bail-out packages is bound to lead to a stand-off with the troika – a ‘showdown or climbdown’ scenario that can only be destabilising for a eurozone that is already the laggard of the global recovery.
Countries that depend on financial lifelines from foreign creditors should not be surprised if those transfusions have strings attached. As I see Joe Otten has pithily tweeted: “Confused – is Greece voting that it doesn’t like austerity or that someone should exist who is willing to lend it more?”
It seems that Syriza is willing to play this game of chicken with Greece’s creditors on the basis that, after the years of grinding austerity that it has opposed at every turn, the government budget is now in primary surplus – ie excluding its massive interest payments the Greek government is now running a surplus. in theory, then, it could risk repudiating its debts and ratting on its creditors, since it is no longer depending on capital inflows. But this would be not only dishonourable but highly reckless, and would ensure a massive risk premium would attach to any future borrowing by the Greek government. So the irony is that a Syriza government would have to keep an iron grip on the public finances.
Moreover, the rest of Syriza’s policy prospectus threatens to undo the limited but hard-won gains in competitiveness that Greece has achieved so far – thus making it even more implausible that the Greek economy can survive and prosper in a one-size-fits-all currency zone dominated by the German export machine. To call for debt repudiation and an end to policies designd to achieve an ‘internal devaluation’ , while remaining committed to euro membership, is a totally incoherent agenda – and all the more seductive for that. But you can hardly blame the Greeks for falling for it when the status quo offers so little light at the end of the tunnel.
Well I hope is coming, but we will have to see.
Alex Sabine – could I just say that although you are unfortunately no longer a party member, I hope that you continue to post here because your well informed comments and reasoned arguments are very welcome.
I too am an Hellonophile. I am not in the least surprised at the success of Syriza and the continued vote for the fascist Golden Dawn,. Ordinary people cannot tolerate year upon year of unemployment, hunger and hardship with no hope. Anybody who knows Greece also will know that corruption runs very deep and both ND and PASOK are smeared with it. So many Greeks say “all the other Greeks are corrupt except for me”.
What a start it would be if the Greeks started to pay their taxes, whether it’s ship owners or their workers. I am sure that a Syriza government will lead to Grexit, whatever they say. It is also inevitable that a grouping of hard line communists, trots, Greens and random radicals will fall apart. Then what happens. Golden Dawn beckons. Good luck Greece !
Whilst the media will talk about the rise of the left, the truth is that Syriza are also a nationalist party and their manifesto doesn’t mention overseas aid once.
Greece is like a man who faces a hungry tiger. New Democracy advocate sitting down and negotiating an agreement on what parts of the body the tiger should eat. Syriza advocate trying to fight off the tiger. Amongst other things, Syriza’s approach is – marginally – more realist than that of their defeated opponents.
Good luck Syriza! Play your cards with great care, and you could herald a better future for the whole of Europe. But it won’t be easy.
As for this new party To Potami, which positions itself as the moderate liberal opposition to austerity – Well, that’s just the sort of approach which I would have been keen to sign up to in the old days, before Cleggism taught me a bit about who joins liberal parties these days. Why, I wonder, does the Daily Telegraph seek to big up these guys? Could it be that the Telegraph think that they might help the Right, by allying with but then weakening Syriza, and by seeking to concilate and make concessions to the tiger?
@ tonyhill
Thanks, I appreciate the kind words.
The election results are not even finalised and already David Cameron has tweeted that this “increases uncertainty” and shows that we “must stick to our plan, delivering security at home”. The Tories clearly see the upcoming confusion, manoeuvring and smoke-filled rooms of Brussels as an opportunity to secure a clear majority in May. I think their analysis is sound.
Meanwhile Greece must surely be ground zero for cognitive dissonance today as the voters have returned a government committed to reconciling the seemingly impossible: continued Euro membership and an end to austerity. If something gives then I suspect it has to be the Euro – ending austerity and writing down the debt is the raison d’etre for the new government.
Frankfurt seems to have convinced itself that Grexit would now be just a little local difficulty. But what if Greece leaves, writes off its debt and starts to recover?
Alex Sabine,
“As I see Joe Otten has pithily tweeted: “Confused – is Greece voting that it doesn’t like austerity or that someone should exist who is willing to lend it more?””
This illustrates the confusion of the Orange Bookers more than anything else.
Greece did not need the bailouts to continue its current expenditure – it only “needed” them to repay the debts imposed on it. The bailouts benefited Greece’s creditors in that they supposedly provided the means to repay debt plus interest.
As for Eddie Sammon’s comment that Syriza’s programme did not mention international aid, you are surely having a laugh Eddie? Do you think about helping other countries when your own people are dying of hunger and austerity?
Paul in Wokingham:
“Meanwhile Greece must surely be ground zero for cognitive dissonance today as the voters have returned a government committed to reconciling the seemingly impossible: continued Euro membership and an end to austerity.
That is a great way of putting it. My only quibble would be that I’m not sure Syriza intend to reconcile these two objectives exactly, since that would imply that they recognise the inherent tension.
This has its roots in the structural uncompetitiveness of Greece and other southern European economies (their tendency over time to increase unit labour and other costs much more quickly than their northern European trading patners, and their lower productivity) – but also in Germany’s quasi-mercantilist policy of building up large export surpluses.
The adoption of the euro disastrously amplified these two trends. It enabled the Greeks to ‘piggyback’ on low interest rates underpinned by German fiscal and monetary credibility, which they used to finance a borrowing and spending spree in both the public and private sectors; and it put rocket boosters under the German export model by giving them what was in effect an undervalued currency (compared to the likely parity had they still been using D-mark).
Roger Bootle explained this point particularly clearly in his most recent Telegraph column: “The deficiency of aggregate demand in the eurozone that is at the root of its problems has not one source, but two. First, the southern economies are suffering from a lack of price competitiveness and the weight of spending and borrowing past that inhibits spending now. Second, the Germanic core is focused on improving its already strong financial position still more, partly because it is ‘the right thing’ and partly ‘pour encourager les autres’.
“At bottom, what was wrong with monetary union from the start was not only a discrepancy in costs and prices between north and south, but also a profound difference in economic philosophy. The Germans do not get aggregate demand. They do not do Keynes.
“Because they have tended to react to both good times and bad by improving their competitiveness, they have been able to overcome (and obscure) their own lack of demand by making use of somebody else’s (by running an export surplus). The Europe that existed before the euro was neatly designed – admittedly by accident – to keep these tendencies in check.
“The Germans worked hard, saved hard and exported hard – but then the deutschmark would go up against the currencies of countries that did not do these things well, including Italy, Spain, France and, dare I say it, the UK. This safety valve enabled the Germans to continue being the Germans without impoverishing the rest of us.
“All along, the euro was a misguided project foisted upon both the technocratic central bankers and the public at large by the politicians – for political reasons.”
Sorry to quote as such length, but Bootle puts his finger on it. The crisis in Greece is not just a Greek crisis; they are victims as much as perpetrators in this sorry saga. It is an existential crisis of a monetary union that was hubristic folly and a fatally flawed project from the start. It lacked the essential preconditions of successful monetary unions, in terms of both politics (a single polity and democratic legitimacy) and economics (structural similarities, labour market flexibility/mobility, fiscal transfers from richer to poorer regions etc).
Some might ask, if the euro is such a bad thing, why aren’t even the desperate Greeks gagging to leave it and restore the drachma? Well, as the Irishman said, if I was going to Balbriggan I wouldn’t start from here… In part, the Greeks doubtless realise that the likes of the EU and the IMF would be much less bothered about rescuing them in future if they were going it alone and the fate of the whole euro project wasn’t on the line. Then there are the likely transitional costs of a messy ‘Grexit’, though personally I think other eurozone members (especially Germany) have more to fear from the – political and economic – contagion effect than Greece itself does.
Precisely because there is even more at stake for Merkel and co than there is for Greece, I expect her to invest yet more political capital in trying to broker some sort of compromise – though there is already a strong backlash in Germany not only over bankrolling what they see as profligate southern Europeans, but also over the ECB’s belated move into QE, which has gone down like the proverbial lead balloon.
If anything I think a compromise on debt write-offs will be easier for Merkel to accept than back-pedalling on austerity. She knows that if she concedes that, heads of government and finance ministers from Spain, Italy and Portugal will be queuing up to be released from their own undertakings.
In any event, if this showdown is finessed by a typical euro fudge, Greece will only have secured a stay of execution. As Bootle says: “In the coming days, we will see whether Greece and Germany can settle their differences. But even if they can, that will not settle the matter. Only when umpteen million of Europe’s unemployed and dispossessed find hope and jobs will the issue be over.”
I’ve enjoyed much the discussion about the “moral hazard” about this election result in Greece, and how it is bad to reward ‘profligacy’. Obviously such concerns were trivial when the current and the last government basically removed ‘moral hazard’ as a concept for the City.
We have over the last few years seen the result of that, where The City has basically been one criminal conspiracy after another. If it wasn’t LIBOR it was fixing currency transfers. How many times have US authorities imposed massive fines on British banks now?
Neoliberals will wax lyrical about the need for most people to pay them back what most people owe. However, they are also very keen to socialize risk and loss at the same time, foisting upon the tax payer anything that might smell a little like a dip in the balance sheet.
Tsar Nicolas, no I am not having a laugh. If the far left in Greece, Spain and Italy start asking for more and more money then the UK and Germany will pull the plug on the EU. It’s not fair to build people’s hopes up so much.
@ Tsar Nicholas
“This illustrates the confusion of the Orange Bookers more than anything else. Greece did not need the bailouts to continue its current expenditure – it only ‘needed’ them to repay the debts imposed on it.”
I’m sorry, but this statement is factually incorrect, conceptually confused and simply naive.
– In 2009 the Greek government was running an overall deficit of 15% of national income. The primary deficit – ie stripping out interest payments – was a whopping 10.7% of GDP. There was a vast gap between revenue and expenditure, quite apart from the heavy burden of interest payments.
– The bailouts weren’t designed to repay creditors, but to help keep Greece afloat while it was all but shut out from the international capital markets due to its previous profligacy and high credit risk (reflected in sky-high yields on its government bonds). It needed the bailouts not to repay debt, but merely to service its huge debts and bridge the gap between its revenues and spending. Given that Greece has continued to run a deficit throughout the subsequent period, it has not yet repaid a single euro of net debt.
– To describe Greece’s debts as being ‘imposed on it’ misconstrues the relationship between governments and their creditors. The Greek government willingly ‘imposed’ debts on itself, as do other governments that borrow money in the markets to pay for spending that they are unable or unwilling to finance through tax revenue. Remember that it amassed the majority of its debts before the financial crisis: it went into the crisis with public debt well above 100% of GDP.
Free-spending governments may eventually find that they to abandon their policies a a result of the way the markets (their creditors) judge the value of their debt in the light of those policies – as indeed the British government found in 1976 – but this is not a negation of ‘sovereignty’; there are obviously many more examples of governments which have increased their freedom of action by borrowing more wisely. It is a pretty safe bet that governments that blame foreign creditors for their plight would be prepared to deny normal contractual rights to their own citizens too. Governments that do not wish to be constrained by the markets or by official creditors should not get into the position where they need to borrow large sums of money, which Greece was doing well before the sovereign debt crisis hit.
My point was not about the inescapable reality that creditors attach conditions which borrowers dislike, but about the increasingly self-defeating nature of those conditions in the context of Greece’s continued euro membership; and the way the Germans’ export-oriented economic model contributes to the dysfunctionality of this currency zone that they seem determined to preserve in its current form.
– Finally, I would just point out that, while austerity has been miserable for the Greek people, it has not been fruitless. That is why it is now true to say that the Greek budget is in primary surplus, ie if you strip out those pesky interest payments revenues now exceed outgoings. This is a massive turnaround since 2009: from a primary deficit of 10.7% of GDP to a primary surplus of 2.7% last year – and the move into the black was achieved ahead of the target date.
This primary surplus is the only reason Syriza can contemplate, in extremis, repudiating Greece’s debts – yet it was achieved, albeit at an unnecessarily high cost, in the teeth of their opposition over the past few years. And the more populist measures they have promised risk throwing away the hard-won improvement in Greece’s competitive position, reflected in the move to current account surplus this year (its first since 1948!).
The task now is surely to build on the very modest signs of a recovery in GDP so that living standards can begin to recover and the horrendous unemployment total can be reduced. Only through a sustained period of GDP growth will Greece escape its debt-deflation trap and the debt ratio start to come down. But will Angela Merkel find Alexis Tsipras someone she can do business with…?
Woah, sorry, obviously I didn’t close the bold type there! That’s where an edit tool would come in handy 😉
Eds: Please feel free to remove the comment of mine directly above that has all the unintended bold type! Resubmitting it here.
@ Tsar Nicholas
“This illustrates the confusion of the Orange Bookers more than anything else. Greece did not need the bailouts to continue its current expenditure – it only ‘needed’ them to repay the debts imposed on it.”
I’m sorry, but this statement is factually incorrect, conceptually confused and simply naive.
– In 2009 the Greek government was running an overall deficit of 15% of national income. The primary deficit – ie stripping out interest payments – was a whopping 10.7% of GDP. There was a vast gap between revenue and expenditure, quite apart from the heavy burden of interest payments.
– The bailouts weren’t designed to repay creditors, but to help keep Greece afloat while it was all but shut out from the international capital markets due to its previous profligacy and high credit risk (reflected in sky-high yields on its government bonds). It needed the bailouts not to repay debt, but merely to service its huge debts and bridge the gap between its revenues and spending. Given that Greece has continued to run a deficit throughout the subsequent period, it has not yet repaid a single euro of net debt.
– To describe Greece’s debts as being ‘imposed on it’ misconstrues the relationship between governments and their creditors. The Greek government willingly ‘imposed’ debts on itself, as do other governments that borrow money in the markets to pay for spending that they are unable or unwilling to finance through tax revenue. Remember that it amassed the majority of its debts before the financial crisis: it went into the crisis with public debt well above 100% of GDP.
Profligate governments may eventually find that they to abandon their policies a a result of the way the markets (their creditors) judge the value of their debt in the light of those policies – as indeed the British government found in 1976 – but this is not a negation of ‘sovereignty’; there are obviously many more examples of governments which have increased their freedom of action by borrowing more wisely. It is a pretty safe bet that governments that blame foreign creditors for their plight would be prepared to deny normal contractual rights to their own citizens too. Governments that do not wish to be constrained by the markets or by official creditors should not get into the position where they need to borrow large sums of money, which Greece was doing well before the sovereign debt crisis hit.
My point was not about the inescapable reality that creditors attach conditions which borrowers dislike, but about the increasingly self-defeating nature of those conditions in the context of Greece’s continued euro membership; and the way the Germans’ export-oriented economic model contributes to the dysfunctionality of this currency zone that they seem determined to preserve in its current form.
– Finally, I would just point out that, while austerity has been miserable for the Greek people, it has not been fruitless. That is why it is now true to say that the Greek budget is in primary surplus, ie if you strip out those pesky interest payments revenues now exceed outgoings. This is a massive turnaround since 2009: from a primary deficit of 10.7% of GDP to a primary surplus of 2.7% last year – and the move into the black was achieved ahead of the target date.
This primary surplus is the only reason Syriza can contemplate, in extremis, repudiating Greece’s debts – yet it was achieved, albeit at an unnecessarily high cost, in the teeth of their opposition over the past few years. And the more populist measures they have promised risk throwing away the hard-won improvement in Greece’s competitive position, reflected in the move to current account surplus this year (its first since 1948!).
The task now is surely to build on the very modest signs of a recovery in GDP so that living standards can begin to recover and the horrendous unemployment total can be reduced. Only through a sustained period of GDP growth will Greece escape its debt-deflation trap and the debt ratio start to come down. But will Angela Merkel find Alexis Tsipras someone she can do business with…?
Alex Sabine,
Your argument rests on the faulty premise that money and debt is somehow real, when it is not, except at the level of the individual. Banks lend money because they create it through debt. What matters at a societal level is real production. You can have all the money in the world but if you cannot purchase any goods because none exist then amassing all that money is a pointless exercise.
If you don’t accept this, consider the fact that the ECB, like the Federal Reserve and the Bank of England, is now going to engage in quantitative easing. Where does the money for QE come from? It is simple – it is just created in a ledger book or on a computer screen.
I am well aware that many people will read what I have written and ask what I am talking about, but any economics textbook will state clearly that money is created by the banking system. Where economic education has failed is in failing to get people to relate this fact to what goes on in the real world.
Tsar Nicholas:
You raise an interesting theoretical point about the nature of fiat money and fractional reserve banking; unfortunately it is of little practical relevance to Greece’s predicament. But I will address it anyway.
First, let me acknowledge where you are right: fiat money (currency and deposits created by the banking system that are not linked to any real commodity) is intrinsically worthless. Indeed, all money (including commodity-based money) is a means of payment and therefore, by definition, a method of settling a debt. The replacement of commodity money by fiat money enables the commodities themselves to be used productively.
What your textbook will almost certainly explain is that money has three functions: it is a medium of exchange, a unit of account and a store of value.
An increase in the quantity of money increases aggregate demand and – in the short run at least – has two effects: it increases both real GDP and the price level. In the long run, when the economy’s actual output reaches its productive potential at a given time (‘potential GDP’), an increase in the quantity of money increases the price level only, and real GDP fluctuates around its ‘trend’ level.
So the policy aims of QE and other stimulus measures are to ensure that there is sufficient aggregate demand that the economy is running at its full productive/supply-side capacity (which at present there clearly isn’t throughout southern Europe, hence QE); and to stabilise the price level and prevent a slide into deflation by expanding the central bank balance sheet to offset the contraction in private sector balance sheets.
The policy aim of QE is not – at least not openly – for the central bank to finance government expenditure on an indefinite basis. It may have this effect for quite some time; indeed, the Bank of England’s bond-buying programme is a key reason why the UK has been able to borrow so much money at such low rates of interest since the financial crisis.
The fact that central banks buy government bonds on the secondary market, not directly from the Treasury or finance ministry, is important legally but in practice it is a distinction without a difference.
The important difference is that the purchase of these assets entails a corresponding liability. Central banks plan to shrink their balance sheets again once they deem it safe to do so. The extra liquidity will be ‘sterilised’ or mopped up once the economy has fully recovered, if there is a danger of inflation taking off (which at present there plainly isn’t), or if the boost to asset prices that is one of the principal effects of QE seems to be have created dangerous new bubbles (which it may well have done, this is the main danger of QE in my view).
QE does not directly affect the stock of government debt one way or another. There is no change to the amount of debt on the Treasury’s books.
The government needs to issue gilts because it is in deficit and it is a decision of fiscal policy. The central bank’s decision to purchase them rather than leave them in the market is a decision of monetary policy. It has the helpful effect for the government of pushing down the yields on new debt (ie the interest rate the government has to pay when it issues bonds); indeed this is one of the channels through which QE is designed to boost aggregate demand.
But making it easier to finance a deficit when the central bank is in stimulus mode and fighting a deflationary risk does not release governments from the need ultimately to bring their budgets into some semblance of balance. That is wishful thinking worthy of inclusion in the Green Party’s economic policy platform, I’m afraid.
The reason all this monetary theory of little practical relevance to Greece is that it is in the eurozone, its new government has pledged to stay in the eurozone, and it therefore does not have an independent monetary policy or the ability to issue sovereign currency.
The Germans and even the less hard-line members of the ECB do not share your enthusiasm for the use of QE to simply monetise Greek government debt with no strings attached.
Indeed, as you will be aware, the Germans don’t really believe in QE at all – which is why it has taken the ECB so long to launch its version of what the Bank of England and US Federal Reserve did at the onset of the crisis.
In 2012, ECB president Mario Draghi pulled off a masterstroke with his announcement of Outright Monetary Transactions (OMTs), which calmed the markets without a single bond having to be bought. That suited the Germans nicely, but Draghi has not been able to pull off the same trick again.
So the Bundesbank has – temporarily, one suspects – retreated from the battlefield and we finally have a fully-fledged eurozone QE programme, though it has been greeted with extraordinary opprobrium in the German press and financial circles.
Even now, as Roger Bootle points out: “As it is, [the Bundesbank] has undoubtedly restricted QE. The ECB has laid down limits on the percentage of a country’s debt that it may hold, thereby cleverly preventing it from buying Greek debt, without explicitly singling out Greece. Moreover, for 80% of assets to be purchased, the credit risk will reside with national central banks.
“The amount announced – one trillion euros – sounds huge, but in fact all that purchases of this amount would do is to restore the size of the ECB’s balance sheet to where it was in 2012.”
The main channel through which the policy could have a useful effect is by causing the euro to depreciate, raising import prices (thus helping to ward off deflation) and and giving a boost to exports. But it does nothing to address the eurozone’s fundamental design flaw: the internal strains and imbalances between its members which are at the heart of the whole continent’s problems and the root cause of the mass unemployment across southern Europe.
Bootle, again, nails this point: “In so far as the exchange rate is the main tool of macroeconomic adjustment for the eurozone, this is deeply ironic, because it is, of course, precisely this tool that the members of the eurozone have given up between themselves. If the euro did not exist, then the market would have long ago sent the currencies of the weaker southern bloc sharply lower and the currencies of the northern bloc sharply higher.”
As I’ve made abundantly clear, I sympathise with Greece’s plight. I can well understand why Syriza appealed: the status quo is not working, and many in Greece feel they have nothing to lose by triggering a showdown with the country’s creditors. The pity is that any concessions Syriza is able to win will only kick the can down the road: it won’t be long before the straitjacket of the euro will strangle Greece again.
Tsar Nicholas has this charming, if delusional, idea that governments can simply wave away the need to pay for their spending in perpetuity by using the QE magic money tree (in which case, presumably they can simply dispense with taxes then?). I’m sure that even Syriza realises that this is a fantasy; instead what they will be after is simply the best deal they can broker with Frau Merkel that will ease their pace of retrenchment while allowing them to stay in the euro.
Bootle likens Greece’s continued commitment to the euro to our own experiences with the Gold Standard and the ERM: “It is not unusual for governments to cling on to what is the source and origin of a painful economic predicament. This is a version of what is known in the psychological world as Stockholm Syndrome, when prisoners become emotionally dependent upon their captors and do not want to escape.”
To understand the mess that Greece is in you have, as always, to follow the money.
As Alex Sabine points out, Germany has long run a large balance of payments surplus while Greece with its famously dysfunctional tax and governance (I’m being polite here!) systems is the opposite. The only way this can continue for any length of time is if someone provides huge amounts of vendor financing.
That ‘someone’ was of course the banks, especially (but not only) those in Germany. Before the euro was established the obvious risk was that the Greek drachma would devalue leaving them out of pocket. The arrival of the euro abolished this exchange rate risk so German and other banks were happy to take in the savings of solid Germans and lend it to the Greeks (and also the rest of the PIIGS). Many in southern Europe (just like us in the UK) were happy to take it – that’s what people do when offered cheap money.
What the bankers should have known (they are after all the ‘smartest guys in the room’ and earn fabulous amounts) was that artificially linking currencies does not abolish exchange rate risk but merely makes it morph into a different form, specifically in this case default risk. There was never any means of paying all that money back unless Germany was prepared to start running huge balance of payments deficits -and that was never going to happen.
So when the crisis erupted, the problem suddenly came home to roost with the big banks in northern Europe; they faced multi-billions in write-offs. Add in the rest of the periphery and it would have sunk the banks and Merkel et al would have had to go to their electorates and say in effect, “Umm, sorry about this but between us and the banks we seem to have lost your savings. In retrospect it was all very obvious and very silly but our heads were turned by all this talk of the infallibility of markets and light touch regulation.” In the real world that was never going to happen so the creditor nations led by Germany ganged up on the Greeks and blamed them for all the trouble and bullied them into paying with the help of the local political establishment. Loans were extended but almost all flowed straight back to northern Europe in what amounted to a backdoor bail out of the German, French etc. banking systems. Hence Yanis Varoufakis speaking on Radio 4’s ‘Today’ this morning said that of the 240 billion euros extended over the last five years less than 10% has stayed in Greece. It’s 7 minutes long and well worth listening to.
http://www.bbc.co.uk/programmes/p02hp632
Meanwhile Greece’s public debt (and remember, this started mainly as a private debt between banks that was ‘nationalised’) has risen from an already far too high 126% of GDP in 2010 to 175% today.
Of course the German, French and other taxpayers are still on the hook for the bad debt but now the water is sufficiently muddied that it’s difficult to follow the sequence of events and mainstream politicians certainly don’t want to help explain it all!
At the root of all this is one very simple principle, namely that debt that can’t be repaid won’t be. Right across Europe (including the UK) there is now a huge overhang of debt that can’t be repaid because it’s gone to fund current consumption or been spent in the financial casino rather than ploughed into productive assets. So Greece is just one part of a much wider debate about who should stand the losses. So far the banks are winning and taxpayers are loosing but enough people are beginning to understand that some sort of deception is being practised – even if they don’t understand all the details – that the worm is beginning to turn.
Lindley French on Greece and Germany:
http://lindleyfrench.blogspot.co.uk/2015/01/beware-greeks-seeking-gifts.html
1
what greece needs is an invasion of retired german tax inspectors to gee up tax compliance–greece is lost until tax collection is improved .
a kind of germanic VSO
2 if greece had its own currency it could devalue and price itself into work. As an opponent of the euro i reiterate it doesnt work unless
countries have similar inflation rates , similar budget deficits etc. With respect to southern european economies the euro is grossly over
valued and undervalued by 15-20% wrt germany
3 germany stole greeces gold reserves in the war– justice demands some repayment
We are only a few days into the new administration and, already there are signs that Greece is beginning to swing away from the EU and towards Russia.
http://www.zerohedge.com/news/2015-01-27/greece-begins-great-pivot-toward-russia