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Monday, June 29, 2015

Washington Post and New York Times on the Greek Crisis

The crisis so far. Negotiations at the Eurogroup of finance ministers between Greek finance minister Yanis Varoufakis and the other 18 broke down when the Greek government announced a referendum next Sunday on whether to accept the June 25th proposal of the institutions formerly known as the Troika. The European Central Bank (ECB) decided to take the radical step of not changing the emergency liquidity assistance (ELA) program. This means sticking with the ceiling on emergency liquidity set Friday June 26th which was about 1.2 billion Euros of bank withdrawals ago. As a result, the Greek government declared a week long bank holiday with ATM withdrawals limited to 60 Euros a day. The radical non expansion of ELA shows that Greece can't really use the Euro as a normal currency unless it reaches agreement with the ECB (one of the institutions formerly known as the Troika). The Tsipras government will advise Greeks to vote no on the referendum, but polls suggest Greeks will vote yes, and the bank holiday will not make them less desperately eager to make any promise necessary to get a temporary bailout.

There are a number of very good explainers at The Washington Post and The New York Times. I do think that they all leave out one key point. The Greek government made an alternative proposal for austerity in exchange for a loan. The other 18 rejected this proposal saying that the deficit reduction (which excluding interest is a surplus increase) had to be based on pension cuts not higher taxes on employers. Their argument was based on dynamic scoring/supply side economics/right wing ideology. Some might suspect that the true motivation was a desire to not reach agreement, cause a crisis and show Greeks and especially Spaniards that it is unwise to elect leftists.

update:[don't miss the very shocking update at the end of the post] OK starting at the top, Neil Irwin's post at The Upshot is excellent. I question only the following passage

Greek leaders think the offer on the table from European governments and the International Monetary Fund is lousy, requiring still more pension cuts and tax increases in a depressed economy, and intend to throw to voters the question of whether to accept it.
The statement is true, but it leaves out the fact that Greek leaders offered a different plan including smaller pension cuts and different and larger tax increases which was rejected by the other 18 European governments. The dead lock is no longer over the question of whether there shall be additional Greek austerity but over the form of that austerity. Now it may be odd that a radical leftist government proposed inflicting further grinding austerity on a depressed economy when that approach has utterly failed so far. But this is what happened. In practice the Greek authorities caved and declared their willingness to do the opposite of what they promised to do during the election campaign. Given where we are now, the Greek proposal is irrelevant. But it is worth mentioning how we got here.

Still at the Times Jim Yardley wrote a front page news article. Again I think it is very clear and much more worth reading than this blog post. An amazing amount of information is packed into the article. I do think a mention of the Greek proposal could have been added roughly here

The referendum was a surprise move by Mr. Tsipras, announced early Saturday, as he declared that voters should decide whether to accept the terms of the creditors’ latest aid proposal — terms he considers onerous.

Greece’s creditors — the other 18 eurozone countries, the European Central Bank and the International Monetary Fund — in effect cut off negotiations with Mr. Tsipras after he called for the referendum,

Now Michael Birnbaum at the Washington Post

Negotiations over Greece’s future have been dragging for months. The disagreements are about the extent of the painful reforms it must make to continue receiving the rescue funds that keep the nation’s finances afloat. But talks came to a halt Saturday after Tsipras announced he would hold a referendum on July 5 to ask Greeks whether they would accede to the austerity demands of the nation’s creditors. Greek leaders have urged their citizens to vote no.

This is not exactly accurate -- the extent of austerity in the Greek proposal and in the Institutions proposal is roughly the same. the deadlock is over tax increases versus pension cuts. Also "reforms" is a charged word -- there is an automatic guess that reforms are improvements. Since the agreed type of further reforms is more of the policy which has been followed by a 25% decline in GDP, this presumption should not be encouraged. In particular "painful reforms" suggests short term pain for long term gain. This is the sincere belief of the heads of the institutions formerly known as the troika. However it is not supported by evidence and is hard to reconcile with either recent data or data from the 30s and 40s. I almost typed of "experts" at the institutions, but I think it is fairly clear that head IMF economist O J Blanchard disagrees. (so, by the way, does Neil Irwin see above).

I think the three articles suffer to different extents from the fact that Greek leaders did not stick with their role as radical leftist rejectors of austerity. The nature of the Eurogroup debate changed radically last week when the Greeks attempted to surrender.

This is history now, but I think there is some value in remembering the distant past of last week. The evidence that European leaders who together have a veto are unwilling to compromise at all with Greece is useful to anyone trying to predict the medium run future.

very shocking update: Paul Krugman too

That’s why successive Greek governments have acceded to austerity demands, and why even Syriza, the ruling leftist coalition, was willing to accept the austerity that has already been imposed. All it asked for was, in effect, a standstill on further austerity.

Krugman also advises Greeks to vote no. He is certainly opposed to further austerity and he is not inclined to Ballance. In fact, I learned of the outrageous antics of the Troika from him here "the creditors keep rejecting Greek proposals on the grounds that they rely too much on taxes and not enough on spending cuts."

Forgetting where I first read that and considering DeLong's two rules regarding Krugman, I checked to make sure that Greece had indeed proposed further austerity. Greece definitely proposed further tax increases and pension cuts.

Among the key sticking points

Athens has stuck with its demand for a one-time 12 per cent tax on all corporate profits above €500,000, a measure the government estimates will raise nearly €1.4bn by the end of next year

In addition, it would raise employer contributions to Greece’s main pension fund by 3.9 per cent


Greece’s bailout creditors – the International Monetary Fund, European Central Bank and European Commission – eliminated the one-time profits tax and the increase in employer contributions to the pension system in their offer to Athens yesterday, arguing that such heavy levies on companies would severely hit economic growth.

So a debtor country was (and maybe still is) insisting on raising taxes and its creditors won't let it. I think the institutions formerly known as the Troika might as well have said that they must reject the proposal because they are "but a committee for managing the common affairs of the whole bourgeoisie."


Anonymous said...

" The Tsipras government will advise Greeks to vote no on the referendum, but polls suggest Greeks will vote yes...."

I'd question the validity of an early poll or two - the first ones to hit the press after the referendum announcement are also the ones most likely to have been the workings of TPTB.

A Greek twitterer mentioned that he'd been contacted by a pollster that was obviously trying to steer his reply to the poll question about his vote on the referendum , to the point where he hung up on the pollster.

My guess is that the vote will be close. I'm hoping the "oxi" vote carries the day.


Luis Enrique said...

"Greece’s bailout creditors ... [argued] that such heavy levies on companies would severely hit economic growth."


yes because we wouldn't want to impose austerity that damages the economy now would we

reason said...

I'm a bit puzzled by the reporting on this. Here in Germany, the general picture that is given is that the Greeks abandoned the talks. There never seems to be any discussion of just how much blood it is possible to extract from a stone. Somehow, that is all irrelevant, all that matters is one side or the other is seen as capitulating. The level of understanding of the general public of exactly what the issues are (or of understanding that "the Greeks" are somehow a diverse group with different interests and personal histories) is generally very low, as the level of emotional arousal (they want to take OUR money) is very high.

Only the much misunderstood (in Germany) Wolfgang M√ľnchau speaks any sense:

Anonymous said...

It seems that the wealthy in Greece may have some representation among the Troika, as evidenced by it's refusal of tax increases. I'd think the creditors should leave Greece's internal policies up to the Greeks, especially given the mess they've been made of the Greek economy so far.

Dimitris Papagiannopoulos said...

"that approach has utterly failed so far"
I am inclined to agree as my pension has been reduced by 45% since 2010.
But a programme fails,or not, with reference to its stated objectives, which were:(1)achievement of fiscal sustainability and return to the markets,(2) supply side reforms to increase competitiveness and, (3) reform of the state bureaucracy.
As concerns #1 Greece was almost there twelve months ago.
Now, if you agree with P.K. and advise me to vote "No" on Sunday, will that end austerity and I will start seeing my pension being increased?

Peter said...

Excellent post. I'm guessing they vote "no" in the birthplace of democracy. A yes vote is for neverending austerity and debt peonage.

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