Will financial leaders find the courage to admit they were wrong?
Greek voters have overwhelmingly rejected the conditions Europe had imposed on them. Rightly so.
As I wrote before the referendum, "I can think of no depression, ever, that has been so deliberate and had such catastrophic consequences." Those conditions had led to a 25% decline in gross domestic product, a 28% unemployment rate and a youth unemployment rate almost twice that.
I don't believe Europe's leaders were seeking to punish Greece. They were just using bad models — evidenced by the enormous gap between what they thought would happen and what did happen. Europe and the International Monetary Fund predicted a fairly quick turnaround. The reality was deepening recession.
And it wasn't because Greece didn't do what it was supposed to; it was because it did. On the all-important macroeconomic front, Greece had the biggest and fastest fiscal consolidation among the advanced European economies in the aftermath of the global financial crisis, ruthlessly cutting back expenditures and raising new revenues.
The Greeks did not do all of the structural reforms that were asked of them. Some it should have done, such as doing a better job of collecting taxes from the rich. Others might make sense when the economy is on the road to recovery — but not now, in the middle of a great depression.
If Greece had done all of them, the situation today would be little if any different in terms of GDP. In fact, more people would be unemployed, and there would have been far more suffering. It is not these "structural impediments" that are holding Greece back. After all, without any of these reforms, Greece grew at a faster rate than the European Union beginning in the mid-1990s until the global crisis (4.0% vs. 2.6%).
The ball is now in the court of European leaders. The question is, will they stick with a policy that has proved a disaster? Or will they combine a desire to preserve the euro with good economic policies and a respect of democracy? Can they reform the reform package sufficiently?
This is the moment to stand up against unthinking austerity. Four years ago, as the first signs of the failure of this policy emerged, Europe's leaders recognized that what was needed was a growth strategy. They promised Greece that. They didn't deliver. There was just more of the same.
Eventually, some of Greece's debt was restructured. But it was too little and not done well. When the crisis began, Greece's debt was about 117% of its GDP. Today, after restructuring, after a program allegedly designed to increase the sustainability of debt, it stands at 177%.
Though the conditions Europe imposed on Greece caused its depression, Greece saw little of this money — about 90% went to the creditors, including German and French banks.
This is typical: Most bailouts (for instance, the Mexican bailout) are not bailouts of the country but of the Western banks who didn't do adequate due diligence. It could be nice that the German and other European governments bailed out their banks (though whether that is good policy is another matter); but the Greeks rightly asked, why it should be done so much on their backs.
Now, even the IMF is calling for deep debt restructuring. There are many ways this can be done: lengthening the time over which loans have to be paid back, lowering interest rates, or even writing off some of the debt or converting some of the debt into GDP-linked bonds, which would pay more if Greece recovered. This would align the interests of Greece and its creditors in getting a quick return to growth. Supposedly, the IMF report detailing the need for this was suppressed by Europe: Europe's leaders didn't want an open and full discussion of what would work. Some wanted regime change — to get rid of the government that had been elected to end the devastating austerity.
An agreement that would keep Greece in the eurozone is clearly possible: Deep debt restructuring (simply recognizing that money that can't be repaid won't be repaid), more reasonable budget goals, such as a "primary surplus" of 1% — not 3.5% as Europe demanded before Sunday's referendum — and reasonable structural reforms focused on the central issues facing the economy today are the key. I know of no country that has been able to sustain the kind of surplus Europe demands. It is a sure recipe for a continued depression and ever greater economic, social and political chaos.
And the European Central Bank must provide liquidity immediately. What does it mean to be a currency union if the central bank doesn't act as lender of last resort? Not to provide the euros the banks need to pay out to depositors would be tantamount to pushing Greece out of the eurozone.
If Greece's partners in the eurozone continue in the same direction they were on before the crisis, I am afraid the game is over. It will be bad for Greece, bad for Europe, bad for the world economy, including the United States. Even if the euro survives for the moment, it is the beginning of the end. At the next crisis — and there will be more crises — some other country will be forced out. The eurozone was supposed to be not a marriage of convenience, but a new economic and political reality. With Greece's departure, the eurozone will begin to fray. Even those of us who think the euro was a mistake don't want to see this tragic ending.
Greek voters have overwhelmingly rejected the conditions Europe had imposed on them. Rightly so.
As I wrote before the referendum, "I can think of no depression, ever, that has been so deliberate and had such catastrophic consequences." Those conditions had led to a 25% decline in gross domestic product, a 28% unemployment rate and a youth unemployment rate almost twice that.
I don't believe Europe's leaders were seeking to punish Greece. They were just using bad models — evidenced by the enormous gap between what they thought would happen and what did happen. Europe and the International Monetary Fund predicted a fairly quick turnaround. The reality was deepening recession.
And it wasn't because Greece didn't do what it was supposed to; it was because it did. On the all-important macroeconomic front, Greece had the biggest and fastest fiscal consolidation among the advanced European economies in the aftermath of the global financial crisis, ruthlessly cutting back expenditures and raising new revenues.
The Greeks did not do all of the structural reforms that were asked of them. Some it should have done, such as doing a better job of collecting taxes from the rich. Others might make sense when the economy is on the road to recovery — but not now, in the middle of a great depression.
If Greece had done all of them, the situation today would be little if any different in terms of GDP. In fact, more people would be unemployed, and there would have been far more suffering. It is not these "structural impediments" that are holding Greece back. After all, without any of these reforms, Greece grew at a faster rate than the European Union beginning in the mid-1990s until the global crisis (4.0% vs. 2.6%).
The ball is now in the court of European leaders. The question is, will they stick with a policy that has proved a disaster? Or will they combine a desire to preserve the euro with good economic policies and a respect of democracy? Can they reform the reform package sufficiently?
This is the moment to stand up against unthinking austerity. Four years ago, as the first signs of the failure of this policy emerged, Europe's leaders recognized that what was needed was a growth strategy. They promised Greece that. They didn't deliver. There was just more of the same.
Eventually, some of Greece's debt was restructured. But it was too little and not done well. When the crisis began, Greece's debt was about 117% of its GDP. Today, after restructuring, after a program allegedly designed to increase the sustainability of debt, it stands at 177%.
Though the conditions Europe imposed on Greece caused its depression, Greece saw little of this money — about 90% went to the creditors, including German and French banks.
This is typical: Most bailouts (for instance, the Mexican bailout) are not bailouts of the country but of the Western banks who didn't do adequate due diligence. It could be nice that the German and other European governments bailed out their banks (though whether that is good policy is another matter); but the Greeks rightly asked, why it should be done so much on their backs.
Now, even the IMF is calling for deep debt restructuring. There are many ways this can be done: lengthening the time over which loans have to be paid back, lowering interest rates, or even writing off some of the debt or converting some of the debt into GDP-linked bonds, which would pay more if Greece recovered. This would align the interests of Greece and its creditors in getting a quick return to growth. Supposedly, the IMF report detailing the need for this was suppressed by Europe: Europe's leaders didn't want an open and full discussion of what would work. Some wanted regime change — to get rid of the government that had been elected to end the devastating austerity.
An agreement that would keep Greece in the eurozone is clearly possible: Deep debt restructuring (simply recognizing that money that can't be repaid won't be repaid), more reasonable budget goals, such as a "primary surplus" of 1% — not 3.5% as Europe demanded before Sunday's referendum — and reasonable structural reforms focused on the central issues facing the economy today are the key. I know of no country that has been able to sustain the kind of surplus Europe demands. It is a sure recipe for a continued depression and ever greater economic, social and political chaos.
And the European Central Bank must provide liquidity immediately. What does it mean to be a currency union if the central bank doesn't act as lender of last resort? Not to provide the euros the banks need to pay out to depositors would be tantamount to pushing Greece out of the eurozone.
If Greece's partners in the eurozone continue in the same direction they were on before the crisis, I am afraid the game is over. It will be bad for Greece, bad for Europe, bad for the world economy, including the United States. Even if the euro survives for the moment, it is the beginning of the end. At the next crisis — and there will be more crises — some other country will be forced out. The eurozone was supposed to be not a marriage of convenience, but a new economic and political reality. With Greece's departure, the eurozone will begin to fray. Even those of us who think the euro was a mistake don't want to see this tragic ending.
No comments:
Post a Comment