Nearly 4 years ago I authored a post on MB titled “Greece’s inevitable default” in which I outlined why I suspected that Greece would continue to stumble from bailout to bailout while the economy slowly imploded.
… I am simply going to explain what has happened so that I can explain why under the current economic environment it must default on its debt at some point.
The main points are:
- Germany continues to pursue a policy of aggressive wage restraint.
- Austerity is lowering industrial output in Greece.
- The common currency binds European countries of differing productive capacity, leaving labour markets as the single point of economic response flexibility
- Financial liberalisation and centralised monetary policy means there is no national credit control mechanisms.
- Weak taxation collection and foreign-friendly fiscal policy did not allow Greece to effectively re-capture recycled trade surpluses from foreign nations.
Since I wrote that we have seen default, more bailouts, a number of Central Bank monetary tricks and of course, the inevitable implosion of the ruling Greek political class of the time. The latest round of elections all came to a head on 29th December 2014 when the Greek parliament couldn’t manage to elect a leader forcing the country back, once again, to the polls. As we saw on the weekend Syriza, and its leader Alexis Tsipras, who threatened last time around, swept to victory and has now formed government with the Independent Greeks party under an “anti-austerity” banner.
Yanis Varoufakis, who many of you may know if you have read naked capitalism over the last few years, is Tsipras’s economic adviser and likely to become Finance Minister in the next few days. If you want to understand what you are likely to see from Syriza in the coming months I advise you to watch this:
In the interview Yanis discusses the delusion of the current EU model and what his party will be offering as a path forward including yet another haircut, GDP link bonds and various other ideas, none of which include a Grexit.
I’ve followed Mr Varoufakis for a number of years, his ideas aren’t far from my own and in terms of describing the inevitability of failure within Europe’s current macro-economic settings, and it isn’t hard to find articles of him talking about far better approaches to dealing with the issues. For example:
Ideally, bond purchases should be proportional to a member-state’s debt overhang and its output gap or investment shortfall. Of course, one understands that the ECB faces political and legal constraints that prevent it from pursuing a sovereign-bond-purchase programme that would work well in practice. For this reason a different type of asset-purchase programme would be preferable, one that bypasses the legal and political constraints that the ECB is currently facing and one that is potentially far more effective in tackling deflation and the chronic underinvestment that has caused it.
…European Central Bank should purchase a single asset in the secondary markets: European Investment Bank bonds. To make this programme macroeconomically significant, the European Investment Bank should at the same time embark upon a large-scale, pan-euro-zone investment-led recovery programme, safe in the knowledge that the ECB is standing by to keep EIB-bond yields ultra-low. Such a partnership between Europe’s two significant institutions, the ECB and the EIB, would:
- promote monetary stability and an investment-led recovery
- overcome the ECB’s legal difficulties regarding member-state debt-financing (since no sovereign debt would be involved)
- avoid inflating asset prices (as the ECB’s intervention would be channeled directly into investments in the real economy, rather than inflating paper values)
- signal to markets and citizens Europe’s determination to defeat deflation, bolster investment without new government debt, and crowd in private investment
All fair ideas but, as you may have noticed if you watched the interview, it is all a little politically innocent. If I have learned anything from following Europe for the last half decade it is that just because it makes sense in no way means it will occur. There have been a long line of economists telling Brussels they were creating a macroeconomic disaster even before the first euro was minted, but it has made little difference to the outcome. As Europe enters a new era of deflation, the macroeconomic settings aren’t far from where they were five years ago. Portugal and Ireland are better, Italy and France are sicker , Spain much the same, the imbalances may have shifted around but they are still present and German-led core have done little to nothing to adjust their own policies which are half the problem. (See here for more on this )
Obviously the big question now is what next ? With political leaders like Front National leader Marine Le Pen in France looking on in delight and the ever-crazy Italian political system watching on avidly in the corner, Brussels and Berlin are sure to be concerned about this latest development. Germany, through the Troika, has always been hard-line with the Greeks , even in the face of evidence that it knew its plans were faulty; but this is a new beast. Sure Syriza isn’t running an anti-Euro campaign like Le Pen, but this is a very clear political shift in that direction from the Greeks . If Syriza fails on its own anti-austerity mandate because of what is seen as bullying from the rest of Europe the next step is surely Grexit via a party even further disconnected from the EU. Europe may believe it has it’s firewalls in place to deal with such a thing, maybe it does, but it’s a very slippery slope , especially if the Greeks took it in their stride and came out the other end better off. What then for the likes of Italy ?
But alas, that’s all hypothetical at this point. In the meantime the clock ticks down to the inevitable next “last bailout Greece will need”:
Greece will likely have to ask for a fresh extension to its bailout programme because it expires on Feb. 28, a senior euro zone official said on Friday, stressing that a new government must first be in place to do so.
“I could construct some constellations where it would be possible to finalise the fifth review (of the programme) in February … but I would consider this on the outer fringers probability,” the official told reporters on condition of anonymity.