Every time I bring this up I get down-voted, but I cannot resist.
No one argues that the Greek economy was in good shape. It clearly had severe problems with corruption and inefficiencies, which were brutally exposed when the global financial crisis hit. Everyone suffered, but because of the problems in the fundamentals of the economy, Greece suffered disproportionately more. However, the European Central Bank lent the "bailout" money demanding cuts to public spending that, in the current economic situation, would have very likely worsened the Greek economic situation. Greeks realized this and protested, but were (understandably) dismissed as spoiled brats, demanding an unsustainable, comfortable lifestyle.
Now that the likely, predictable outcome is looking even more likely (namely, default), journalists are still omitting that crucial part of the analysis. Many economists warned that in a crisis of demand, which is what we're experiencing now, cutting government spending is a bad idea. In a situation of such great uncertainty in the market, the government is the only source of demand big enough to make a dent. It must, of course, borrow the money and therefore increase its deficit by doing so, but that's a worthwhile thing to do when the alternative is default. After the economy has stabilized, the deficit problem can be overcome by growth. Moreover, even if deficit reduction is your priority, if the economy is shrinking you're always going to be fighting a losing battle no matter how many spending cuts you make.
To summarize my point, the Greek economic turmoils are less of a cautionary tale of the perils of uncontrolled spending (although they clearly are also that), and more an illustration of the negative effect the austerity measures recommended by the ECB are having on the economies they are imposed on. It should give leading European nations pause when considering what to do with the rest of the troubled economies in the eurozone.
I think the element you are missing is that the Greek government spending is very inefficient; they're not investing in some kind of economy-growing infrastructure revolution, they're spending money on totally unreasonable union contracts and extraordinarily early retirement for large classes of pensioners. The cuts they agreed to are something like 78 billion euros over more than 10 years, which is quite moderate, for all the screaming. The European central banks are lending money to Greece well below market rates, and they're quite within their rights to demand a reasonable budget which might actually result in this money being repaid.
If Greece wants to increase government spending on infrastructure and investments, they can do that after getting their budget in order and convincing their own population to part with some money for the sake of these programs.
P.S. I don't think downvoting/upvoting should be a poll on whether someone agrees with a message; it's a decision of interesting/unhelpful.
I think I openly admitted that the way the Greek government was spending money was terrible. Yes, I agree with you. The Greek economy was a joke and it definitely needs to change, but let's talk about the situation as of the initial collapse.
The fact was (and remains now) that they need(ed) money just to keep afloat. The CEB could have put any provision it wanted on the money lent. They chose to force the Greeks to cut spending. My argument, informed by what I've read on the topic, would be that it would have been better for them to force the Greeks to spend the money as a stimulus, making the sort of investments that you talk about. Instead, the CEB likely worsened an already pretty dire situation.
I think you'll agree that the interesting part of this argument isn't Greece at all, but the case study Greece is becoming. It's clear more austerity measures are coming in more European countries and the US. I think it's a bad idea and I'm curious to find out what this community thinks.
Suppose you have a friend who screws up and gets fired from menial jobs, spends his money on booze and gambling, and ends up in heavy debt. Now you want to help him out, so you can do one of two things:
1. I'll lend you the money if you get a steady minimum wage job and cut off the spending.
2. Look, I believe in you. I'll lend you a whole bunch of money so that you can go to college, retrain, get a much better job, and then repay me with plenty left over for yourself.
Now I understand that (2.) sounds much better than (1.), but it's just not realistic. He will waste the money again, because he knows he didn't earn it. You have to be tough and force him to get his house in order. Then he can save and borrow to retrain. If Greece is spending its own money on infrastructure and investments, there is at least a chance it will be spent well. If it's spending other people's money - no chance at all.
EDIT: I didn't mean this to sound like I am calling Greeks in general wastrels and boozers. It's more about how other people's money tends to get spent. See the message below.
It would take too much work to transform your hypothesis into something analogous to what's happening with Greece, so I'll just point out the major leak in the abstraction.
In your example my friend and I are two economically independent entities. Yes, I care about him on an emotional level, but not lending him money will not affect my income. This isn't so when you talk about Greece and the EU. Also, as any developed economy, Greece has a large economic capacity - it has advanced industry, technology, tourism, education, etc. In short, it has a lot of assets, so lending money to it would be more like lending money to my gambling friend who just happens to be an immortal Stu Ungar - yes, he's wildly dysfunctional, but the potential ROI is almost always worth it.
OK, and I think I was exaggerating and being unfair to the Greeks - they are not gambling drunks, although I am annoyed at many of them throwing a tantrum because they have to repay money that was spent by their government in their country, and not in some foreign adventure.
The main point I was trying to make, though, is that other people's money doesn't get spent efficiently. I've been involved in some EU-financed programs, and the productivity of those compared to private sector or even regular government contracts is in the pits. Taxpayer money doesn't always get spent efficiently, either, but at least there is some kind of accountability of the government to the citizens. The idea that Greece would take money that comes from other countries, and spend it on these really great stimulus programs, doesn't pass the skepticism barrier for me.
I wildly disagree with the way my country is borrowing and spending money. Do I not get to complain about that because the money is being spent by my government in my country?
Few people even understand the issues associated with economics at that level, much less what is right or wrong. It is also pretty safe that, around the world, nobody cares until it affects their wallets directly, which is when e Greeks started complaining.
Expecting decades of mismanagement to get sucked up overnight and not have anybody complain probably isn't reasonable.
Point taken. I agree that there is a lot of waste of EU funds. I could tell you stories about my native Bulgaria that would surely make you very angry.
I still think this is a separate problem. I think right now it would be more efficient to stimulate the Greek economy than it would be to just bail it out with austerity provisions. The analogy would be to finance your friend to go to school for a year or two and earn a degree to get a better job and pay you back - he wins (gets money in both the short and long-term) and you win (get your money back and a functional friend).
the Bulgarian state nearly went bankrupt in 78 as a result of stupid state-planned 'investment'. The debts which were repaid with the strategic gold reserve which were basically the savings tucked away for about a hundred years.
The Communist government continued to spend unsustainably in IT (it was unsustainable because it was based on non-marked agreements with COMECON countries) and other sectors. Salaries were raised, people bought more Lada cars, times were good.. for a while. The USSR which gave us petrol to resell collapsed and we were unable to find markets for our goods (which apart from weapons were greatly inferior on the open market).
So we had to pay back the debts with even crueler austerity measures. But it wasn't the worst thing. The economy was unproductive. The living levels collapsed in and they reached 89 levels again in 03. Oh and 1 million mostly young Bulgarians left the country.
So instead of getting its act together the government just ignored the problems, made things comfortable for the populace and even worse problems came.
Had the Communists liberalized the economy and be sure to pay debts in the 80s it wouldn't happen.
But we didn't learn the lessons of fiscal responsibility. The Socialist government of Jean Videnov undid the austerity measures and got into an even huger mess (never mind that enterprises continued to fail). Yes, he also yet huge money printing to begin which, the Greeks don't have to deal with, so we can leave this out.
Our governments have more or less learned their lesson, even the former Communist, but the temptation is huge.
The Greeks don't have such recent history and if they don't restructure only a much bigger mess will come.
What if you've been lending the money to him that he's spent on booze and gambling? And what if you're very well paid to make good decisions about lending money?
Shouldn't you then be forced to take a very serious, if not complete, loss on the money you lent to him? It's your own fault you lent it to a wastrel. Why should you be bailed out, exactly?
Exactly. I will put a little more PF (political fiction) to make it a little bit more interesting:
How about if your "friend" is a drinker and gambler, but happens to have a big fortune, say islands, nature, ancient temples. So you find his girlfriend and start lending her drinking money out of your heart's "goodness" without managing your loan when it is small, just let it grow... Of course your friend gets drinking money and thanks his lucky stars and all his friends for lending him just to have the pleasure of his charm.... Of course you politely ask him to spend half of that money to buy submarines and fighter aircrafts from your shop. Then one day you go and tell him, "you know your debt is so big, me and everybody else were so surprised by the size of your debt, and really you have been only drinking and womanizing, haven't you... So we decided we will not lend you anymore. From now on you are not allowed to drink, but neither to eat, unless of course you sell to us your telecommunication industry at the amount of the next round of drinks, so what do you say?"
It works like a charm, your friend starts getting depressed, and gives in...
But then maybe he says, "Look I am grateful for all these drinks and all but you can't in your good sense expect me to sell my property so cheaply just because you were giving gifts to my girlfriend right. I will stop drinking, please stop giving gifts to my girlfriend and wait for a while I will give them back to you. Also I noticed you borrow money for 1% and you lend it to me for 5.2%, that is too much for "friends" isn't it, please be a sport and let me repay it to you with 1.5%."
What then?
[EDIT] Disclaimer, I am Greek, I have no illusions about the management abilities of my country (sometimes I think we are born without the part of brain responsible for financial planning ;-), but I have strong opinions about the economy of debt, the way it is manipulated by the "market" and it's implications on the life of people. My opinion is biased, of course.
No market "manipulated" Greek dept. The Greek government took more money than they could pay back and mostly spend it on creating fake jobs in the government. The submarine deal is only 1 billion euros, this is not the reason for the hundred of billions of dept. To my knowledge this has not been payed yet. The F-16 deal is 1,5 billion euros, also not the reason for the billions of dept. Especially not"half the money."
It's plain simple, the Greek people voted for a government that took more money than they could pay back and lived great with this. I know it's easier to explain the Greek guilt away in this than face reality.
Thanks for the reply. To be honest I am not sure about the exact amounts that went to weapons(, nor "Siemens", nor the companies participating in the "Olympic miracle") but I am sure, like you say that they only account for only one part of the debt.
I also do not have the slightest intend to justify or excuse us one bit, we get what we deserve. At the very end, people are responsible for what their governments do, if they are not, they do not deserve to be called citizens and nobody will ever treat them as such.
On the other hand, I see debt used as a way to extort resources all around the world, and they look strikingly similar. Look what happened in Brazil, in Argentine, in Hungary, in Turkey, in Indonesia...
For sure there are reckless governments, but I believe there are institutions that capitalize on their recklessness.
You make a good point, and if it wasn't for the panic that's been gripping everyone for the last 3 years any time there is any kind of talk of bad debt, I'd say "stand back and let whoever lent money to them do due diligence next time." Get it over with, get the bad paper out of the system. It's not enough money to cause collapse, it's a small fraction of, say, the US housing crisis. The problem is that the panics in the market make this into a very expensive proposition.
Ok, but what doesn't work? It seems kind of reasonable to use such analogies. Most people would understand how transactions work between themselves and others, just from experience, but view of us here were in government, in position to borrows, spend and repay back from another government.
It seems that basic things like "you need to pay back money we lent you" are still the same? Sure details are different, well, I don't know how different, that is why I am asking ...
A household is an open system. It is possible for a household to increase its net revenue without incurring costs. For example, if I get a new job with higher pay, the amount of money in my household has increased.
Countries (even countries in economically integrated Europe) are closed systems. Increasing the revenue to one sector results in losses to another. In this case, the Greek government can increase its revenue by increasing enforcement and raising the tax rate. However, that results in a cost to the private sector. People paying more in taxes have less to spend on other things, which lower economic activity and lengthens the recession.
As an aside, this is why I get very irritated when politicians use household/business analogies to model national economies. The two are different in kind, not just in size, and trying to compare an open system to a closed system leads to serious errors of judgement.
I don't think countries are closed systems, since they interact with the rest of the world. Countries can increase revenues without increasing costs. Suppose a country figures out how to get fusion to work: decreases electricity cost, increases revenues from sales of fusion plants. Or they talk to other countries about how to grow more/better crops; assuming they weren't at 1st world yields, there are many things that are cheap to implement that produce more money.
But isn't this a problem exactly because countries are not closed systems. They trade, borrow and lend money to each other. There is an interest rate involved. That seems like an typical debtor-creditor relationship that one might have with someone.
Greece has huge international debts due now. If these new loans were used as a stimulus instead of debt repayment they would default now and escalate the crisis the lenders are trying to contain.
If you managed your house well in the good times then large deficit spending is an option in the bad times. However if you end the good times with debt at 100%+ of GDP you have no options.
The first sentence could either be parsed two ways which yield opposite meanings or is grammatically incorrect. I can't decide which, but in any case you have a point. The first sentence was supposed to mean that the Greek economy was in bad shape and everyone knew.
FYI, almost all of this new loan is going straight to bondholders, there will be very little spending. And no, it's not enough to prevent a default or some other kind of "restructuring", "reprofiling", you-name-it.
Well, at least after they default, they get the thing they've been trying so hard to reach: a balanced budget. For the simple reason that nobody will lend them a cent any longer. "There, fixed that for you guys."
That may not be true if the default is done carefully with assistance from the EU. Greece could borrow from some special institution or the EU for some years (as it does now). The exit from the euro, though, would help to restart the economy faster and less painfully.
Really? You are from Greece, and you're serious about this? I didn't expect that this would be a serious alternative. OK, suppose that government debt gets defaulted as Greece leaves the Euro. What about private external debt, which I think is also pretty significant? Will businesses struggle to pay this in a strong currency as their own currency depreciates, or does the private sector default, too? I just thinks this sounds like almost a pure loss.
Businesses will be called to pay in either case, either through higher taxes and emergency taxation (as is now), or through a devalued currency. Besides, private debt is actually low in greece.
So isn't this just rescuing European and US investors that invested in Greece and nor really doing anything to help or increase the likely-hood of Greece paying back their debts.
> In a situation of such great uncertainty in the market, the government is the only source of demand big enough to make a dent. It must, of course, borrow the money and therefore increase its deficit by doing so, but that's a worthwhile thing to do when the alternative is default.
So I don't totally understand what you're saying, but I think it's that they need to borrow a bunch more money, spend it to grow their economy, and then pay off their debt once their economy is doing better.
The problem with that is that their finances are already terrible and no one really believes that they can pay back their debt. They're already paying very high rates on their new debt. If they tried to borrow even more, those rates would have to go even higher. So somehow they'll have to borrow enough that they can spend a lot to grow their economy and pay all the debt that's coming due, and then quickly recoup all the money they invested in their economy as even more debt comes due.
So I guess you're arguing that the ECB should give them the cheap loans without them trying to balance their budget in the short term, and trusting that in the long term their economy will grow and they'll pay it back. The ECB doesn't seem to think that would be effective, and a lot of countries are not too happy about the bailouts even with austerity provisions.
You're right about what I'm arguing and you're right in your analysis.
I think the political situation is very unfortunate and that the large European economies which effectively control the ECB are screwing up. Partly I think the problem is that the media analysis has ignored the possibility the austerity measures could be the cause the complications. The facts of this article at least seem to lend credence to the "stimulus hypothesis" and to take credibility away from austerity. It is the media's job to point that out in order to inform public opinion so that the political problems you mentioned are overcome.
There's an Australian economist called "Steve Keen", who uses mathematics (stuff like dynamic PDEs, not the crap econometricians use) to model this kind of stuff.
I think he tends to agree with Keynes, in broad terms - austerity measures are a crock, because they come at a time when the government would otherwise be the only bastion of stability. But we didn't think about this when we subjected African (and other third world) economies to the IMF's demands.
What is needed is long-term measures. Gradually raising the pension age, gradually cutting pensions, freezing spending, and so on.
Also, government reform (i.e. better transparency, whistle-blower protection, ombudsmen and auditors) is needed, not just "cutting costs".
Long term measures are impossible in government. You cannot bind the actions of future legislators. Legislators will agree to austerity measures which harm the constituents of future legislators, and then future legislators will undo it.
The only reliable way of binding the actions of future legislators is to create a politically powerful class of dependents (e.g. old people, government unions) who will fight to protect their cash cow. Unfortunately, that's what got Greece into this mess to begin with.
There's an Australian economist called "Steve Keen", who uses mathematics (stuff like dynamic PDEs, not the crap econometricians use) to model this kind of stuff.
It is probably worth noting that he's been predicting the Australian Property Bubble to pop any time for quite a while.
He already had to walk to Mt. Kosciuszko (highest mountain in Australia, like 2000m or so) because he had lost a bet on a housing prices to another economist, but all his predictions still point out that house price bubble pops any day (I'm subscribed to his blog and I admire the way he uses mathematics btw).
Is the situation dramatically different in the EU than in the US?
Here in the US, we are not suffering from a crisis of demand at all. We are suffering from structural unemployment - demand and production have both recovered, but people remain unemployed.
Your thesis is surprising, so I'll have to look more into your data.
For now I will say that (1) because of the tight correlation between employment and demand, you'd need a very solid argument that demand has recovered but employment hasn't and why and (2) the data you have in your comment doesn't show that conclusively. The only measure of demand you site is Manufacturer's New Orders, which does show an increase. However, most of it is due to airplanes, which are volatile by nature (and is partly fueled by public defense spending). Also, the best predictor of future growth in that category (Core capital goods), while growing, isn't back to 2007 levels yet. [1]
I think it's too early to say demand is back, and it's lack also explains unemployment well.
...because of the tight correlation between employment and demand...
This "tight correlation" is a conclusion of Keynesian economics, and is strongly dependent on an assumed correlation between production and employment.
The logic goes: production and employment are highly correlated (i.e., you can't increase production much without increasing employment). Weak AD reduces production, therefore stimulating AD can increase production and employment.
As my data shows, the correlation between production and employment is quite weak, and we can therefore not use employment as a proxy for demand.
I don't think what you are saying is the full story - demand hasn't recovered completely. For example, I believe real estate demand is very low (and real estate sales has major flow on effects)[1].
If you believe in Keynesian economics, it doesn't matter that real estate hasn't recovered. The only quantity that matters is aggregate demand and aggregate supply. (Employment should be slaved to AS.) Taking the Keynesian assumption that AD and production are monotonically related to each other, we can conclude that AD has recovered.
If you push theories in which you you treat real estate separately from the rest of the economy (i.e., you assume construction workers don't immediately go out and become nurses), you are a structuralist rather than a Keynesian.
In any case, the Keynesian assumption that employment increases with production is simply not true of the modern economy. This is quite easy to establish empirically - just compare graphs of production to graphs of employment.
By the way, here is more data on employment across the economy.
Taking the Keynesian assumption that AD and production are monotonically related to each other, we can conclude that AD has recovered.
I think most Keynesian have moved on from that simplistic view. Stagflation in the 1970s showed that the inflation/unemployment relationship could move, and few would argue against structural change having a similar effect.
In any case, the Keynesian assumption that employment increases with production is simply not true of the modern economy.
That's an effect, not a cause. Traditionally it has happened like that, but anyone who argued it had to be that way would be stupid.
I think we are strongly agreeing about the importance of structural change? (And hence I agree with you about the lack of a strong relationship between production and employment). I don't agree with you that demand has recovered though. Your data (http://research.stlouisfed.org/fred2/series/DGORDER) shows it still at levels around that in 2004/05.
You shouldn't look to real estate to evaluate demand. The housing bubble is the primary cause of the crisis. By most estimates prices have to dip another 10% in order for the market to return to its historical trend (which is to grow at the rate of inflation). There is no demand now because everyone knows housing is overpriced. That's a good thing.
We've resumed normal growth, but we haven't had any of the faster than normal catch-up growth that usually happens at the end of a depression and returns unemployment to normal. So by that measure the current high unemployment is to be expected.
But how was the government to avoid cutting spending? Even if we include the recent austerity measures and ignore the interest payments on the debt Greece is still spending more money than its taking in. Greece can't keep borrowing money from the market if the market doesn't think Greece'll be able to pay its loans back. Greece can't just borrow money from Germany with no string attached because German voters want Greek austerity. Greece cant' default without more austerity to bring its expenses under its income, like Argentina successfully did. And it can't just inflate away its debt because its part of the Euro. Austerity does really suck in bad economic times and its probably worse than inflation, but Greece doesn't have any other options.
Every time I bring this up I get down-voted, but...
Every time someone begins a comment or blog post with text that says absolutely nothing about what they are trying to say, they weaken their point. If you cannot resist including meta-commentary, I suggest putting it after your rhetoric, like this:
p.s. I apologize for meta-commentary, obviously this has nothing to do with the Greek Economy.
The current crisis was not a problem caused by the global economic downturn, in fact the drops in tourism were no more than 10% and shipping, well, eventhough it was hit during the recession, but shipping accounts for only 4.5% of our GDP. It had little to do with the global economic crisis because a) greek banks were not exposed to failed institutions and b) greece does not export much anyway.
The problem with the economy of Greece is that it is not diversified, it was heavily de-industrialized in the 90s, with rampant corruption, protectionism and an third-world-level tax collection policies. The governments are mainly at fault for these excesses. As things proved out to be, the growth rates of the 00s (the largest in EU) were fake, based on lending that was not reported (and, guess what, nobody has yet gone to jail for that). The current crisis emerged because they were no longer able to hide the fact that the country is insolvent.
At the current point, I think it's too late to save the Greek economy anyway. The best options we have are either a) the EU guarantees a large part of our debt (like 50% or so, via something like eurobonds that basically amounts to a bailout) or b) we default and leave the eurozone to rebuild the economy from the start.
It's silly to say it had little to do with the global economic crisis. Economic production following the initial global downturn went down 8% [1], construction 73% [2], and retail 9% [3].
What's interesting to me is why you think what you think about the Greek economy or the reasons for its collapse? (A sincere question)
The data you point to are for 2010, when greece entered the EU/IMF mechanism and govt spending stopped. This does not have to do with the global economic recession that started in 2008.
I am Greek, and know that Greek banks were very little exposed to the international toxic assets. None of them collapsed, in fact they chose not to take govt-offered support money they were offered (28 bil. euro or so) in 2008. There are structural problems here, and although measures are being taken to rationalize the market, it's gonna take years to see the results.
To your first point - point taken. A better reference would have been the fact that the World Economic Outlook Database reported Greece had entered a recession in 2009.
I'm Bulgarian and none of the Bulgarian banks had any problems, but the Bulgarian economy has definitely suffered, for the same reasons as Greece. Both are relatively small European economies, so any dip in the European market has a pronounced effect (easiest to see in tourism). So, you're not proving anything by saying your banks had no problems.
I 'm saying that the crisis would have emerged even if there was no global recession. It's a solvency crisis caused by rampant government lending for more than 15 years before 2010.
No one argues that the Greek economy was in good shape. It clearly had severe problems with corruption and inefficiencies, which were brutally exposed when the global financial crisis hit. Everyone suffered, but because of the problems in the fundamentals of the economy, Greece suffered disproportionately more. However, the European Central Bank lent the "bailout" money demanding cuts to public spending that, in the current economic situation, would have very likely worsened the Greek economic situation. Greeks realized this and protested, but were (understandably) dismissed as spoiled brats, demanding an unsustainable, comfortable lifestyle.
Now that the likely, predictable outcome is looking even more likely (namely, default), journalists are still omitting that crucial part of the analysis. Many economists warned that in a crisis of demand, which is what we're experiencing now, cutting government spending is a bad idea. In a situation of such great uncertainty in the market, the government is the only source of demand big enough to make a dent. It must, of course, borrow the money and therefore increase its deficit by doing so, but that's a worthwhile thing to do when the alternative is default. After the economy has stabilized, the deficit problem can be overcome by growth. Moreover, even if deficit reduction is your priority, if the economy is shrinking you're always going to be fighting a losing battle no matter how many spending cuts you make.
To summarize my point, the Greek economic turmoils are less of a cautionary tale of the perils of uncontrolled spending (although they clearly are also that), and more an illustration of the negative effect the austerity measures recommended by the ECB are having on the economies they are imposed on. It should give leading European nations pause when considering what to do with the rest of the troubled economies in the eurozone.