Harmonization vs. Centralization: How the Euro Failed Greece


credit: lorenzog. / Foter / CC BY-NC-ND

When the Euro was introduced, it was pitched as a tool of cross-border harmonization. No longer would EU member states and their citizens have to juggle competing currencies. With the euro in place, money could move more easily across borders, and so, in theory could, goods and services; it was a vehicle for making trade simpler, and reducing the barriers to labor mobility that had arisen from the patchwork of individual currencies across the continent. It was a way toward more Europe, not less.

But with Greece's overwhelming "no" vote on this weekend's referendum, it seems that may no longer be the case. The vote was a rejection of the EU's bailout terms, and a victory for—well, it's not entirely clear yet. But while the eventual outcome is still highly uncertain, it is distinctly possible that it will lead to the long foretold "Grexit," in which Greece leaves the joint currency behind, and, most probably, returns to the drachma. Less Europe, in other words, rather than more.

Greece has been through a lot in recent years, but even still, the transition, which would essentially place the economy on hold while new drachma notes were printed, would be confusing and painful—a problem as much because of the cascade of uncertainty it would unleash as any particular, knowable economic effect. Greeks may have voted "no" in part because they believe the situation cannot get any worse. (As the FT's Wolfgang Munchau writes, "If you have been unemployed for five years, with no prospect of a job, it makes no difference whether the money you do not get is denominated in euros, or in drachma.") Nevertheless, an exit from the Euro would be a new and uniquely complex form of economic frustration.

At the root of all this is that the euro was ultimately a tool not of harmonization, but of centralization. It handed vast power over to the European Central Bank (ECB)—which now controlled the currency—that would previously have been held by local authorities. And that authority, in turn, was divorced from meaningful accountability and responsibility.

As a recent paper on the monetary origins of the the Eurozone crisis by Western Kentucky University economics professor David Beckworth suggests, the ECB badly mishandled its authority, tightening the continent's money supply starting in 2008 and again starting in 2010. (Via Jim Pethokoukis.) The run-up in public debt in Greece and other struggling countries had already begun when the recession hit, but much of it followed the recession. Beckworth argues that the build up in debt was in significant part a response to the ECB's monetary controls. 

Greece's creditors, meanwhile, were given false confidence that made agreeing to the loans easier. They weren't dealing with the economically shaky Greece. They were dealing with Europe. The debts would be repaid. 

The Greek government, of course, played a substantial role in all this too, running up spectacular debts that the, as a recent International Monetary Fund report indicates, the country may now never be able to repay. But that debt build-up was in large part enabled by the relatively recent transition to the euro, which helped put the nation on better credit footing, and was preceded by ECB's monetary tightening; if the ECB had acted differently, it likely would have softened the recession's blow.

This is what Milton Friedman was referring to in 1997, when he argued that Europe was a poor case for a common currency. The value of a common currency, he wrote…

Depends primarily on the adjustment mechanisms that are available to absorb the economic shocks and dislocations that impinge on the various entities that are considering a common currency. Flexible exchange rates are a powerful adjustment mechanism for shocks that affect the entities differently. It is worth dispensing with this mechanism to gain the advantage of lower transaction costs and external discipline only if there are adequate alternative adjustment mechanisms.

In this case, the ECB was the alternative adjustment mechanism. It failed. And it failed in part because it was a centralized decision maker, out of tune with local interests and out of the loop on crucial local fiscal decisions. It considered itself a protector of Europe's interests more than Greece's. Greek authorities, not surprisingly, felt differently. 

The euro, then, made it easier for Greece to run up its public debts, and at the same time made it possible for the ECB to act indifferently in response. Each party had authority, but neither, ultimately, had responsibility. The incentives were misaligned. The euro had centralized—but not harmonized. And now we are witnessing the consequences of that misalignment.

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  1. It will be fun watching the Euro crash and burn.

    1. Think about how much more of a powerhouse Germany could be if they didn’t have to support the dead weight.

      1. Actually, the EU policy of overextending credit to debtor nations benefits them in that it provides an export market for their goods that would not have existed otherwise. Just imagine it as one big Ex-Im bank for the Eurozone.

        1. yeah, but that doesn’t work when the borrower defaults.

          1. No, it doesn’t, but since when has that stopped central bankers?

        2. The Euro is undervalued for the German economy. This is a tremendous benefit for an export country.

          1. So basically it’s just Germany’s way of doing what everybody always accuses China of doing with their currency?

      2. Having a large trade imbalance means that people work hard and don’t get their money’s worth, not that they are a “powerhouse”. Germany achieves its trade imbalance through trade barriers, high and sharply progressive income taxation, and discouraging consumption.

        1. This is a pretty good analysis.

          1. Yeah, win bear is a smart bear.

        2. I think all trade is a win-win situation, and as such, there are no “trade imbalances,” strictly speaking. I certainly buy more meat from my butcher than he buys from me, but he’s not complaining, with my dollars in his register; I bought meat with dollars, he bought dollars with meat—everyone’s happy and better off.

  2. When the Euro was introduced, it was pitched as a tool of cross-border harmonization.

    Mark my words: That is what the Pacific trade deal that Congress just gave Obama a blank check for will be about. And it will be used as a tool to end-run all sorts of regulatory horseshit around Congress and even the most minimal notice-and-comment rulemaking. Up to and including “climate change” (probably a carbon market) and gun control.

    1. The question is who will the trade deal be with? China is about to financially implode and take the emerging markets with it.

    2. I’m really unclear on how all of this works. Does this mean that the final deal will not have to be ratified by the Senate? How is that remotely legal? I know it wouldn’t be the first time that’s happened, but the question still remains.

      1. I could tell you but then I’d be on double secret probation.

        1. Of course, if it isn’t ratified the way it’s supposed to be, there will be a court challenge, then the Supreme Court will say the practice is okay, because it’s a penaltax that the people crave and Congress and the Founders and God himself intended.

          1. Hey, it’s not their job to protect the people.

            1. It’s nobody’s job but ours. We should never trust government to protect or advance anything but government.

              1. Careful, that sounds like militia talk. The kind of thing that gets you on a list.

      2. I’m really unclear on how all of this works.

        It comes back for a single up-or-down vote. They may have also waived the filibuster for it, not sure.

        So, its negotiated in secret, and then a massive, steaming multi-thousand page pile of cronyism is put before Congress, but is kept in a locked room where nobody can read it, and is brought up for as many votes as it takes to pass it.

        So we can find out what’s in it! Yay, democracy!

        1. Huh. Doesn’t seem like the Senate as currently constituted would pass such a thing, though I don’t make the mistake of assuming government won’t screw us at every opportunity.

          1. Doesn’t seem like the Senate as currently constituted would pass such a thing,

            Why not? They gave him the fast-track authority to negotiate the thing and gave up their prerogatives as far as debate, amendments, etc.

        2. “So, its negotiated in secret, and then a massive, steaming multi-thousand page pile of cronyism is put before Congress, but is kept in a locked room where nobody can read it, and is brought up for as many votes as it takes to pass it.”

          You have to pass it to see what’s in it.

          Aint that the way it works now?

          1. Close. You have to pass it to see what’s in it, then have SCOTUS say that what’s in it isn’t really what Congress meant, and then pull hidden meaning out of its collective ass that just so happens to support the government’s position.

      3. The final deal will be ratified. But as in fast-track, no one will be allowed to publicly talk about whats in the legislation

        1. “… no one will be allowed to publicly talk about whats in the legislation”

          Where did you get that idea? That’s part of the negotiation process, not the approval process.

          1. Whatever was in that deal at the time of fast-track (and it has been worked on now for 6+ years) was not allowed to be discussed publicly as part of the fast-track approval. What makes you think things will be any different in three months?

            As long as the legislation has a snappy title, there will be no debate about the content. The title itself will determine the agenda of the discussion. See Patriot Act (supported by all patriots, opposed by traitors/AlQaeda and surrender monkeys like the French). Same will happen here.

  3. . . . it was pitched as a tool of cross-border harmonization.

    Unfortunately (and something Greece should have known, given the Eu’s history) – for the EU, ‘harmonization’ *means* ‘centralization.

    The EU wants ‘tax harmony’ and ‘regulatory harmony’ and both mean ever increasing devolution of sovereignty to the EU parliament and a single regulatory and tax regime.

    1. The first go-round of the euro (the proposed ECU I think) was what prompted Hayek to write the Denationalisation of Money in 1976.

      Unfortunately it was ignored then. Is ignored now. And Hayek himself – like most Austrians – never paid any attention to any consequence of it other than the ‘ooh ooh inflation’ broken-clock one. When the reality is that what has happened is the debt/deflation and crony-banker one and that was also reasonably predictable even then – and certainly has been 100% known since 2008.

      A shame really. The solution is known. And we ignore it anyway cuz it involves short-term pain. Easier to be a frog in tepid water.

  4. Simply put, the EU enabled Greece to entertain the idea that it could live beyond its means for a longer period than it would have been able to otherwise. As with most lending situations where the lender continues to extend credit even when the borrower cannot pay, the real loser is the lender’s backers (the taxpayers who aren’t going getting much say in matters).

    1. The idea of consuming far more than they produce as a country precedes the Euro by at least a century. If they were still printing up drachmas, they would just steadily inflate themselves out of debt and into poverty.

      What the Euro did was postpone the inflation they should have been feeling all along. Now it’s going to come all at once.

    2. “Simply put, the EU enabled Greece to entertain the idea that it could live beyond its means for a longer period than it would have been able to otherwise.”

      “The state is that great fiction by which everyone tries to live at the expense of everyone else.”
      ? Fr?d?ric Bastiat

      1. Do you really think they give a shit about Bastiat? These people want to rob and steal from people and future generations all they can.

  5. To be sure, Greece failed Greece more than anyone else did. Sure, Europe enabled Greece’s insanity, but it didn’t cause it.

    1. but is it the Greek people or the Greek leaders? Are the people, then, responsible for enabling the leaders?

      Were they all thieves in the night?

      1. I’m afraid it’s mostly all of the above. And the same will be said of the United States one of these days, he hinted darkly.

        1. Of course, Americans are doing very well economically (and relatively to Europe) in terms of freedom. So, while we may have lots of theoretical grievances, in practice, the US gets the government it wants, and most people are doing pretty well with it.

          1. Relatively, yes, but sustainably, no. We can’t continue on this way any more than Europe can.

            1. Nothing in this life is sustainable. But we can go on a lot longer. The US has three big advantages over Europe: we are actually a single market, we have a much better tradition of free markets, and our debt is largely denoted in our own currency.

      2. but is it the Greek people or the Greek leaders? Are the people, then, responsible for enabling the leaders?

        Yes, that’s what “democracy” means.

        1. Yes, especially a ‘democracy’ with strong socialist/communist leanings. TANSTAFL!

  6. So, here’s what’s going to happen now:

    1. Greece isn’t going to get another offer. France, Germany and the ECB have pretty much been told by the Greeks to bugger off. At this point, any more support or bailouts will be obviously throwing good money after bad. And the gains from making an example of Greece to the rest of the PIIGS will outweigh the damage done.
    2. Without any more bailouts, the Greek banking and financial system will implode. The current bank closures are going to be permanent for a number of the institutions.
    3. Greece will re-introduce the drachma. The currency will not be the sort of controlled devaluation that might have given the Greeks room to maneuver. It will be a perennially weak currency.
    4. The collapse of the financial system will have a severe effect on the real sector. The Greek government will try to respond with additional spending. This will have little effect.
    5. Those applauding Greece’s stance against the “banksters” will be the loudest in whining about the “humanitarian crisis” that Greece’s imploding economy represents. The problem, they will insist, is that those evil bankers won’t give the poor Greeks a chance.

    1. 6. Any Greek with any skill and ability to work who’s left in the country will swallow their pride and leave for greener (if colder) pastures. Greek restaurants will open all over Europe and the US. Greece will be left with people who can’t or don’t want to work.

      1. This process is already about half complete.

      2. 7. Turks will move into a depopulated Greece, kill all the Christians and any Armenians they might happen to find roaming around, rename Athens Turkanbul, rename the country New Turkey, and request membership in NATO.

    2. Point #5 – Good ol’ Bernie “I love Socialism” Sanders is already there: “the pensions of the people in Greece should not be cut even further to pay back some of the largest banks and wealthiest financiers in the world”.

      1. the pensions of the people in Greece should not be cut even further to pay back some of the largest banks and wealthiest financiers in the world

        A little bit of accidental honesty? Apparently, those banks should be punished for propping up the pensions in the first place.

        1. This. Bernie would has everyone throwing good money after bad.

          1. would have….

          2. If I’m the lender, and I lend money to someone tomorrow who didn’t pay the last loan back, then the money I give isn’t “Good Money”, it’s “Lost Money”.

            And the original money? That wasn’t “Bad Money”. It was also “Lost Money”.

        2. Being that Greek debt is primarily held by NOT private banks, but Eurozone government banks, these “wealthy financiers” are the fleeced taxpayers of productive countries in Europe.

      2. Oh, right now it’s how the Greeks shouldn’t have to pay back their debts.

        Give it a year, maybe, and Bernie will be ranting about how those mean old banks won’t lend the poor Greeks any money.

        1. A year?

          Give it a week, month tops.

      3. Good ol’ Bernie is missing the point. The bailout talks are not about Europe getting its money back; people are under no illusion that they won’t. It’s about saving face so the Greece can continue borrowing, as opposed to going cold turkey on borrowing.

    3. “1. Greece isn’t going to get another offer. ”

      That’s the right answer. But ‘m not sure it happens.

      Are the banks willing to write down the loans? Wouldn’t they all rather pretend the loans are fine? Pretend and extend!

      More importantly, is the EU willing to let Greece out of it’s clutches? I doubt they like subsidizing Greece, but does that dislike overwhelm their love of power?

      I think they like power more than money, and like the banks, Pretend and Extend will prove more palatable.

      I don’t think the Grexit is a done deal.

      1. My understanding was that most or all of Greece’s debt is owed to the ECB, European governments and the IMF at this point. If so, then the banks wouldn’t have a say; the EU countries and the IMF would.

        That being said, I agree that a Grexit is not a done deal at this point. I think it comes down to whether Europe is willing to write off a huge chunk of Greece’s debt, which would be expensive and would look like a cave-in. Maybe they’ll swallow all that as the price of keeping up the appearance of an irreversible euro.

        I think it’s a coin flip at this point.

      2. I would be truly surprised if there isn’t a deal more to the Greek marxists’ liking. If Greece defaults and leaves, the effects will push the rest of the PIIGS into danger. If they don’t pay up now, they’ll have a much bigger hand in their pocket later (Spain).

        Of course, if they pay up now, they’ll soon have the same much bigger hand in their pocket wanting a similar deal for themselves. Either way, the EU is toast, we’re just watching the corpse twitch.

        I think it actually ends with Germany and France leaving the Euro zone.

        1. To add, I think they’ll take the devil they know (paying off Greece) because if Greece falls, it will put the cushy jobs and fat penions of all the IMF and ECB bureuacrats at risk.

    4. Spare me. The only thing the bankers are offering (and have offered for the last few years) is to bailout the bondholders and offer a bit of cocaine to the Greek government to buy off the annoyed and keep the debt game going. They don’t give one whit about any multi-generational depression as long as they can avoid writing off debt. Banks have a VERY long history of threatening everyone once they get a government-granted monopoly over the money supply and they do so every time their business model (borrow short, lend long) screws up.

      The real source of the problem is that there is no process for a sovereign bankruptcy. Historically, the solution was war and conquest. If that’s no longer a solution; then there needs to be some peaceful way of consolidating and writing down debt; some way of separating out ‘debt due to democracy’ from ‘debt due to cronyism/repugnance’; and ensuring that ‘public debt crisis’ is not simply a way for the state to expand and control everything in its realm even more tightly.

      1. some way of separating out ‘debt due to democracy’ from ‘debt due to cronyism/repugnance’; and ensuring that ‘public debt crisis’ is not simply a way for the state to expand and control everything in its realm even more tightly.

        I like this distinction, but I don’t think the line is going to be so easy to draw in practice, and I don’t think it does anything to address the entitlement mentality that is fueling all of this in the first place. Cronyism and tax evasion are endemic; the long-term solution will always come from spending cuts whether by choice, necessity, or catastrophe.

  7. I think we can all agree that Europe needs a little harmonization under Germany’s benevolent leadership. Unification enreiches everyone.

    1. I sie what you did there.

        1. Reunification with Greece can only come after reunification with Austria, the Czech Republic, Poland, France, Denmark, the Netherlands, Belgium, parts of Russia, etc.

          1. A little piece of Poland, a little piece of France….a little slice of Turkey, a little spot of Greece…a little hunk of Hungary…?

            1. Yes, but in a totally not-Nazi way. In fact, in the new version of Greater Germany, the von Trapps will smuggle themselves into the Reich.

              1. “Ve are really Turkish Gastarbeiter! Wirklich!”

            2. Now you’re talking a real empire!

            3. Mambo No 5

              A little bit of Monica in my life
              A little bit of Erica by my side
              A little bit of Rita is all I need
              A little bit of Tina is what I see
              A little bit of Sandra in the sun
              A little bit of Mary all night long
              A little bit of Jessica here I am
              A little bit of you makes me your man

              1. BOOOOOOO!!!

              2. BOOOOOOO!!!

  8. I wonder if Greece shut itself down and turned inward for a time if that could help things. If people would go back to fishing and farming, etc., to support themselves. If trade could begin again from the ground up…

    1. All they really need is fiscal reality, which they are about to get in spades. Stop retiring bakers early because breathing flour makes their job dangerous. Stop handing out do-nothing jobs with paychecks for no work as patronage. Start collecting taxes.

      That’s all it would take, it’s very simple.

      1. A wonderful libertarian solution. Collect more and more taxes so the state can keep doing more and more things.

        1. Exactly. It only perpetuates the zero-sum thinking that ‘we’re poor, cuz someone else is rich’.

      2. Start collecting taxes.

        WTF? Greece’s, and indeed Europe’s, problem is not a lack of taxation. Tax rates are really high which tends to result in low tax compliance. Lower the rates, have more compliance, get more revenue. Laffer Curve 101.

        1. Actually part of Greece’s problem is a lack of tax collections. Taxes are MUCH too high for the people who pay them, but tax evasion is rampant.

          You could have a much more efficient business climate if taxation were lighter and compliance were greater.

          1. That is exactly what I said.

    2. The average Greek is far less capable of supporting himself by “fishing and farming” than the average American.

      No, the economically reasonable thing to do in a common market is for people to leave Greece and work elsewhere in Europe. There are only two problems with that. First, Greece is left with all the unproductive people (actually, that largely already has happened), and second, the rest of Europe doesn’t want people who don’t speak their native languages and don’t know their culture.

      The fundamental problem with Europe is that it tried to introduce free movement of capital and goods while not actually having free movement of people in real life; giving people passports and taking down borders is not enough.

      1. Oh spare me. The average Greek already owns their own home – totally free of mortgage. They have a much stronger ‘family’ support network. And they can quite easily leave the city if need be and have a place that ‘family’ owns in the country that is already being used to grow truck farm type stuff.

        The average American thinks cows grow in supermarkets and can only work up a sweat if they have run from the couch to the fridge in between tv commercials.

        1. “With over a third of households unable to meet tax obligations, four out of 10 Greeks recently told a Kapa Research poll they would willingly hand over properties to the state to fulfil future payments; one in three, unable to keep up mortgage repayments, feared their homes would be confiscated in 2014.”

          I don’t think so

        2. My Big Fat Greek Lie?

        3. The average American thinks cows grow in supermarkets and can only work up a sweat if they have run from the couch to the fridge in between tv commercials.

          Just after I promised the wife I’d give up dangling modifier jokes…

  9. This clusterfuck all happened because of the desire of left-wing utopian socialists all around the world to prove that Europe is superior to America.

    Now that this has been exposed as the laughable delusion that it always was and everyone realizes that Europe can never elevate itself to our level, the backup plan is for Obama and his successors to push us down to their level. A plan which is sadly working all too well.

    1. but, can jet fuel melt steel beams?

  10. Venezuela faces beer shortage.…..trike.html

    Death squads imminent.

    1. If THIS doesn’t start a revolution, nothing will.

    2. The Bolivarian Beerivarian Revolution will begin….

      1. Beervaria? Is that like where it’s Oktoberfest year round?

        1. “Oktoberfest year round”

          *sighs wistfully*

          1. G’suffa for realz.

    3. Venezuela faces STUPID surplus.

  11. “Beckworth argues that the build up in debt was in significant part a response to the ECB’s monetary controls”

    Greece had run up 200bn in external debt before the recession even started

    The ‘build up’ began in 2002, not just before the ECB raised rates. The country was running ~100% debt to GDP all through the 1990s and 2000s

    While the spending levels may not impress many fans of European big govt, the reality is that Greece was trying to run itself like a North European welfare state, but with a tourism & consumption based economy.

    I don’t see how monetary policy was somehow more significant and influential to their crisis than that basic fact.

    1. Beckworth argues that the build up in debt was in significant part a response to the ECB’s monetary controls

      So Greece ran up more debt because it couldn’t get enough debt? WTF kind of circular nonsense is this?

      1. I think that’s a mis-statement of what Beckworth actually says

        He said the ECB monetary policy triggered the recession

        From the quote at AEI=

        “The standard view attributes [the EU debt crisis] to a pre-crisis buildup of public and private debt augmented by the imposition of austerity during the crisis.

        While there is evidence of a relationship between these developments and economic growth during the crisis, this evidence upon closer examination points to the common monetary policy shared by these countries as the real culprit for the sharp decline in economic activity

        The implication is that the sudden drop in economic activity *necessitated more debt* because…. duh! no one ever cuts spending, particularly in a recession. Its unstated.

        But it seems his only claim is that monetary policy was the Chicken and the Recession was the Egg.

        Debt levels were still high well before any of this happened, which in my view is the real underlying issue – that Greece could not afford a Benelux-style welfare state.

        Progs argue that “greece’s levels of Govt spending were not unusual for developed nations!”. Well there’s your problem right there = Greece is not a major developed Economy that has the carrying capacity for that sort of thing. Just like Newark and Detroit and Puerto Rico don’t either.

        1. Indeed, Greece’s problems began before 2008. They were over-leveraged before the recession hit. If you take on a lot of debt in good times then you are going to be royally fucked in bad times. Any economic activity that is entirely dependent on debt is completely artificial. Debt is a tool to use under certain circumstances. It is not a sop to be handed down to delinquents so that they might enjoy unearned comforts.

    2. The US is also at over 100% public debt to GDP. And much higher even than Greece if you include financial sector debt of both (which always ends up getting transferred to the taxpayer – see Iceland, Ireland, Spain, Greece, TARP, etc).

      If you define ‘monetary policy’ more broadly than mere interest rate manipulation, then it had a huge impact. Once Greece entered the euro, they couldn’t legally stop inflows of capital that jacked up mostly non-productive – ie vacation homes and such – asset prices. And since that balance of payments deficit couldn’t result in currency devaluation either, it simply resulted in increased euro-denominated debt in Greece. After 2008, the inflows stopped, the market price of those assets declined – but the debt was still there and Greek banks balance sheets had both a potential solvency problem and an increasing liquidity problem. And now Greek taxpayers are stuck with the bill because their government (like every other govt in the world) granted a money-supply monopoly to banks.

      1. Foreign investment in non-productive assets (like vacation homes)…. created Greek private debt?

        You’re saying prices were rising due to foreign investment, and Greeks were taking on lots of private (consumer) debt which banks gladly supplied…?

        That’s all well and good = but still says nothing about the 200bn in external debt that Greece had accrued before any of this “financial crisis'” hoo-ha

        1. shorter = i fail to see how the ‘capital flows’ and asset-bubble issues would have contributed to any kind of fiscal crisis but for the simple fact that the government was operating for decades way beyond its means.

          The largesse of the Greek govt is the sine qua non of the ‘crisis’. It created entitlements that no one could afford.

          1. The largesse of the Greek govt is the sine qua non of the ‘crisis’. It created entitlements that no one could afford.

            So many people seem to want to make this about the banks, the EU, monetary policy, whatever, but this fundamental fact remains. The Greek government has returned to its spending levels ca. 2008 or so, but the problem is that even those levels were unsustainable. And they’ve had a private sector contraction since then to boot. They’ve gone from spending far too much to spending way too much.

            1. Greek govt spending is now at 2001 levels. And Greece now has a primary surplus (taxes minus non-interest spending) – NOT a deficit.

              1. Greek govt spending is now at 2001 levels

                Cite? I’m being serious, not challenging you (per se), as it’s been a little hard to come by recent numbers.

                And Greece now has a primary surplus (taxes minus non-interest spending) – NOT a deficit.

                The problem is that they are not just on the hook for the “non-interest spending”, although I will concede that your claim (if true) is a positive sign. My understanding of the situation might be out of date.

                1. The data I can find from the IMF shows government expenditures and revenue approaching parity at about ?80 billion. So Greece has found some fiscal sanity. The problem is that they should have found it a lot sooner. And they’re going to have to run large surpluses for a while to pay off the largesse of prior years. My analysis was more accurate for circa 2010-2012, but GILMORE’s point remains; spending created this problem.

                2. There’s a chart of quarterly govt spending here:…..t-spending

        2. Moreover, the real estate market is (slowly) rebounding. Right or wrong, those places are going to be desirable at high prices again. Unless the Greeks burn their country down first.

        3. Foreigners bought real estate. They took out some loans from Greek banks. The Greeks who sold deposited in Greek banks. So both sides of Greek bank balance sheets rose fast starting in 2000. Which meant banks needed more reserves (ie Greek government debt – by the BIS rules) and Greek pols found ways to use underpriced overdemanded debt (helped by swaps fraud from Goldman/Morgan and voters who never refuse a free lunch).

          Some Greeks themselves also started chasing the bubble via mortgage money – but fewer than you might think. When those initial deposits in Greek banks (by the original sellers – but after the banks had already re-lent) started being withdrawn and transferred to Switzerland(?) in about 2007 or so, then Greek banks found themselves with a balance sheet mismatch. So they started clamping down on loans to everything else and the Greek private sector went into recession. That in turn made all the old Keynesian countercyclical side of Greek govt spending rise.

          And the Greek government bailed out and recapitalized the banks – timed/disguised with the various bailout tranches – and thus took bank debt onto the government’s balance sheet. What is left on Greek banks is probably semi-ok-for-now mortgages (that won’t get paid off for 10+ more years). And a recession-now-crisis that is draining their demand deposits as people survive on their savings and now panic.

          Not many ways out now and no one wants to do the right thing anyway.

      2. The US is also at over 100% public debt to GDP.

        So? Greece’s problem is external public debt, not public debt.

        Furthermore, US external debt is denoted in dollars, the currency we control; Greek external debt is denoted in Euros, hence all those mentions of the “Eurozone” etc.

  12. Reading this article reminds me of why I hate most economists (Milton Friedman notwithstanding). It is always blah blah blah failure of exchange rate blah blah blah trade deficit blah blah blah quantitative easing blah blah blah failure of TOP MEN to forsee blah blah blah.

    Everyone with just a lick of common sense could see what would happen when you have very few producers, a lot of takers and govt borrowing to pay for it.

    And yes the people of Greece are responsible for it. They elected the people who engaged in these activities. But of course, that is what democracy does (hell Athens invented the damn word).

    1. Reading this article reminds me of why I hate most economists (Milton Friedman notwithstanding). It is always blah blah blah failure of exchange rate blah blah blah trade deficit blah blah blah quantitative easing blah blah blah failure of TOP MEN to forsee blah blah blah.

      Yep. Like most economists, Suderman is a Keynesian (though he’ll never just come out and admit it in a million years), and like all Keynesians, he believes that every problem is technocratic in nature, and can be fixed with the right laws and tweaks implemented by the right group of “Top Men”.

      1. keynsianism is, pound for pound, less harmful than communism, but given how much more of it the world has been forced to endure, i wonder which has done more damage overall…

      2. “Like most economists, Suderman is a Keynesian (though he’ll never just come out and admit it in a million years)”

        When did Peter become an economist?

        And I don’t recall him ever talking about smoothing the effects the business cycle through interest rate manipulation.

    2. Yes, freedom includes the freedom to behave stupidly…

      1. … and to suffer the consequences accordingly.

  13. When the Euro was introduced, it was pitched as a tool of cross-border harmonization.

    As in “Greece, you vill live in harmony viz Chermany!”

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    1. Maybe someone should tell the Greeks about this amazing opportunity!

        1. refresh is your friend!

          1. That’ll teach me to read the thread before posting….*grumble*.

            1. I wish I’d learn, but it seems I don’t…

    2. You bots need to start posting on Greek sites – they need the $!

  15. Varoufakis manages to piss of the Greeks:

    “Just three-and-a-half hours after controversial Greek finance minister Yanis Varoufakis resigned, his London-based book agents sent around a public-relations email offering excerpts from his updated book, the Global Minotaur, and other pieces of information.
    The communications director at Zed Books, the publisher of Mr. Varoufakis’s book, sent your correspondent an email describing Mr. Varoufakis as the “possibly the coolest, charismatic and most intelligent Finance minister ever” and even suggested a hashtag: #MinisterofAwesome.
    Greeks on social media responded angrily to what they saw as aggressive self-promotion by Mr. Varoufakis, an architect of the country’s current negotiating conundrum with its creditors.”…..ndum-live/

    I’m sure this plays really well with those standing in the ATM line, hoping there’s still some left in there when they get to the front.

    1. “”I can assure you that Varoufakis has nothing to do with this ‘communication’ and would certainly not condone the style or the language which probably reflects the publisher’s emotional overreaction to the news of the resignation.”

      “my publisher is an emotional child who worships me. Which, while i do not condone it, is of course understandable”

      So cool, so composed, so charismatic so intelligent!

      WTF did this guy ever really do other than pose for a few congratulatory news-magazine articles?

      ‘he worked for video game companies! he’s *with it*’

      1. I think WSJ editors had some fun.
        Under the headline that he was resigning, there was a photo of him on his bike.
        Caption: “Mr. Varoufakis riding his motorcycle”.
        Hint: Please leave and don’t let the door hit you in the butt.

  16. I’d like to buy the buildings on the Acropolis, please. I’ll pay in U.S. dollars, but I do expect the buildings to be shipped and re-erected here in the U.S., which I’ll throw in an additional 10%. Let’s say $1,100 for the whole transaction?

    1. Take That! Nashville!

  17. “Beckworth argues that the build up in debt was in significant part a response to the ECB’s monetary controls”

    this argument does not make even the rudiments of sense. so, rates are HIGHER so you run up MORE debt? debt is a veblen good? give me a break.

    the run up in debt came from a collapsing economy run into the ground by a bloated public sector with no means of funding itself, rampant corruption, and over-regulation.

    the monetary policy did not make greece live beyond it’s means. they just took advantage of the implicit EU backstop to their profligacy. now they want to cry about it because they are no longer subsidized?

    good luck. greece is going to lose access to capital markets, steal the money of those foolish enough to still have a greek bank account, and then have to find a way to go it alone. they are going to find that even more austere, at least for a time, but at least the bandaid will, at long last, be torn off.

    1. Pretty sure the new Drachma will be valued at least as highly as the Cuban Peso.

  18. The talk of Venezuela and the new drachma that’s coming reminded me…

    Does anyone think SYRIZA and the Greek electorate is smart enough to know they can’t just set fixed prices?

    Greece is going to be Venezuela on steroids. It’s going to be ugly.

    1. I don’t wish hardship on anyone partucularly knowing that not all Greeks are socialist. But eventually the shear number of Socialist countries that have gone down the toilet has to get noticed by the sheep. Of course the mass murders perpetrated by the communist regimes haven’t seemed to penetrate many a dense skull and tiny brain.

      1. Enough propaganda will allow the powers that be to overcome almost any level of failure.

      2. The blindness of hope

    2. That’s the thing – it doesn’t. I’m reading the thoughts of Greeks on this subject matter, and they are living in a fantasy world. Even when all of this goes tits up, they are just going to blame the bankers.

      It is *always* someone else’s fault.

      What’s even funnier is watching Greeks quote Krugman to defend their positions. Alls we need to do is pay Greeks to dig ditches and then fill them back up, and it will stimulate everything!

      Then you have the UK press which is blaming the banks and negotiators for not having sympathy. Comparing this to Versailles.

      The West is fucked. Not just Greece. All of us.

      1. Losers are basically the same everywhere.

      2. Wow, I thought Europe had this remarkable government funded education system.

        They don’t realize that the ‘bankers’ and the governments are in a symbiotic relationship?

        Partners in Plunder, if you will. (trademark pending (chuckle)).

        1. Especially in this relationship in which the bankers all work for government banks.

  19. At the root of all this is that the euro was ultimately a tool not of harmonization, but of centralization.

    OMG! Puerto Rico also handed over control to an outside central bank!

    Seems to me that Suderman has been reading too much of the financial lewinsky press. The present Greek debt problem is no more the use of the euro than the problem of Puerto Rico or Illinois debt is the use of the dollar. Sure flexible exchange rates allow for quick inflation-tax grabs and across-the-board payment cuts due to sticky contracts denominated in nominal currencies. That was Friedman’s (very Keyesian) point – and the probability of that temptation is what adopting the euro or the gold standard or some other credible commitment is meant to minimize.

    Greek politicians got their people into trouble and creditors got nervous as a consequence of the bailout expectations of all parties – everyone eventually relying on the taxpayer and euro debasement. It’s a gross simplification to say that “the euro, then, made it easier for Greece to run up its public debts.” It was not the euro but the state guarantees, implicit and explicit, to use other people’s money to bailout the creditors of sovereign debts run up by unsurprising sociopaths. Euro or drachma, politicians would have had to go into debt denominated in some currency outside of their control. The only difference is that outside of the euro-zone’s bailout scam, they would have had to pay a higher risk premium. Think Argentina.

  20. Serious question: Lots of progressive economists blame the euro for Greece’s woes and argue that they’d be better off with their own, weaker currency. Which makes some sense to me, if Greece had something of value to export. But aside from some specialty foods and beverages (olive oil, wine, yogurt, etc.), what would they sell the outside world? Do they manufacture anything? Could they?

    And if they have anything to sell, would the increased exports be worth the big jump in the cost of imported goods? They import virtually all their oil and gas, for instance. A cheap drachma that no one wants is going to make those imports very expensive. Seems like going off the euro just sets them up for massive inflation in the cost of basic necessities, all so they can sell more olive oil and maybe attract more tourists. How does that not impoverish them further?

    1. There’s some noise about their shipping industry, but I can’t imagine the people in charge of that letting any of the revenues get within taxable distance of the Greek shoreline.
      So it’s specialty foods and tourism. And who wants to holiday where you might not be able to get a plane ride home?

      1. Yeah, or holiday in a country where public transit or garbage pick-up or police service may or may not exist depending on whether the drachma presses are rolling fast enough. No doubt it’s a beautiful country with a rich history, lots of good food, etc. But is it worth getting mugged by hungry pensioners?

        So, failing a deal that writes off a lot of their debt, I don’t see what the Plan B is. Maybe let Putin lease a few naval bases?

        1. But is it worth getting mugged by hungry pensioners?

          Or killed. That bank that was torched, killing a couple of their staff? Torched by pensioners.

          1. Yeah, I remember that, and how it didn’t get much attention in the media at the time. I wonder if we’ll see more of that, now that the ATMs are reportedly running low on cash. Not hard to imagine things turning ugly when people can’t buy food or pay the rent.

          2. Jesus Christ, what (murderous) short-sightedness. How the fuck is the bank ever supposed to pay you if you burn it down?

    2. Tourism is an important export and will expand, as long as there is no blood in the streets.

      Anyway, what the progs likely won’t tell you, and maybe they don’t understand, is that going on the drachma merely would be a brutal but fast way of cutting real wages, especially good at cutting real minimum wages, and more generally cutting the cost of non-tradables, the biggest after labour services in Greece I suppose would be real estate, housing. (Of course, it doesn’t eliminate the commitments in foreign currencies.) The Greek government would have to cut fiscal payouts (pensions, etc.) in real terms in any case, euro or drachma. Going to the drachma at parity with the euro (all contracts translated one-to-one) and then letting it float would be a huge inflation tax on the domestic population, letting the rubes who still work get stuck with a good part of the burden that would otherwise fall on recipients of government checks.

      Road map: Not long ago Argentina had a one-to-one peso-dollar policy that worked until the sociopath mafiosi running the place couldn’t help themselves, yet again, and ran up the sovereign debt on a fraud, defaulted on foreign loans, and then debased the currency, the last effectively to default on domestic commitments. Not only that, but the thugs confiscated dollar savings of the masses and let the peso float. It’s 8 pesos to the dollar officially, now; about 12 to the dollar on the street.

    3. You have well described the basics – they are going to have to live from their own productivity and what outsiders will pay them. But they have so many pensioners and non-productive government employees, the actual creation of goods and services in Greece might be nearly Zero. If things get much worse, you will find young Greeks looking for a better place to live, not just the refugees from Syria and Libya.

      It is absolutely true a new “drachma” introduced at par with euro would depreciate vastly in a few days, if not instantly. But the government could pay pensions and most government wages in that “money.” Perhaps the police and military should still be paid in euro.

  21. Oh, and it was #MinisterofAwesome who predicted that the Euros not rescuing Greece would lead to domino market crashes:

    “U.S. Stocks Nearly Flat as Investors Shrug Off Greek News
    Traders taking advantage of earlier dip in markets to buy stocks at lower prices”
    “Stocks and bonds in Europe fell on Monday, but the decline was fairly subdued. The Stoxx Europe 600 lost 0.9%, while Germany’s DAX fell 1.1% and France’s CAC-40 dropped 1.5%. The euro initially tumbled before paring losses, recently trading 0.8% lower against the dollar at $1.1048.”…..&mg=id-wsj

    ‘Hey, did you see the soccer match yesterday?’

    1. The funny part of the article is that the investors, per the WSJ, expected a yes vote. These people just elected SYRIZA a few months ago. They truly believe that they can force an end to austerity. Even if they default, they think at least that means it will be an end to austerity. None of them know whose money it will be, but they are just so sure that they will have it to spend their way out of this austerity.

      Investors think the Greeks will make the rational choice? They clearly don’t know any Greeks.

      1. Good perspective from ECB Chief Economist and EU co-founder Issing – including some harsh words for France/Germany breaking EU rules in 2003.…..v-18564234

      2. I don’t know; they’ve been bailed out and paid off so far. It seems pretty rational to me that they would assume the tough talk from the Euros is just that….talk; and the spigots will keep flowing.

      3. “Investors think the Greeks will make the rational choice? They clearly don’t know any Greeks.”

        I’m no economist but I have the cursed tendency to try and wrap my head around points of view I can’t seem to understand. In one of the links above, Beckworth cites Paul Krugman to move his point along. Krugman’s point of view, if I’m not mistaken, is that Greece should devalue its currency, increase government spending, and maintain artificially low interest rates, none of which are possible so long as Greece is tied to the EU and the Euro. I wonder what the president of Estonia would have to say on the topic.

        Going back to the quote above, how would Americans react to austerity measures? My guess: not very well.

  22. “Things allowed to move freely across borders might be a good idea”

    Peter Suderman is a nativist!

  23. Friedman was correct — the Euro needed an adjustment mechanism. Said another way – it needed a transfer/redistribution mechanism. Greece certainly spends too much money and produces too little — but putting the corruption and spendthrift habits aside, ANY of the European countries with significant trade deficits have to export Euros and then run up debt. The same would happen in the USA if not for a federal government that shoulders debt and transfers/redistributes money. Texas (for example) is far more productive — it has a trade surplus — than Mississippi. If not for our federal transfer mechanisms, Mississippi would surely have run out of money many times in the past 197 (or whatever) years. The only way for the Euro to be viable long term is to move to more unified system (fiscally) — to become the United States of Europe.

    1. Yes, yes. All well and good, until someone tries to do what Greece just did – refuse to play along with what the central authority deems to be the proper course. Only in this case the response is more gibber jabber.

      Historically speaking when it has been Mississippi telling the central authority to go piss up a rope the response has been to send in Federal troops. Most recently with no shots fired, but that was not always the case.

      The Europeans know this, some if only subconsciously, which might explain their recalcitrance at trying to go, much less enforce, the full unification.

  24. Can’t they just let Greece host the Olympic Games again? Big sporting events always help stimulate the economy. If the U.S. didn’t have the NFL, MLB and NBA as beacons to attract Government Investment, it’d probably be in serious trouble too.

    1. Good, but better: Lend Greece $bil to buy an NFL franchise and build a stadium in Athens with gigantic TV screens and luxury boxes etc. Think of all the great team names from mythology: The Kraakens. Then before the kickoff they could cheer: “RELEASE THE KRAAKENS!”

  25. Unless both people and governments begin to start living within their means which exist as a result of their production, Greece will serve as an example of what the future will bring eventually to most if not all countries. Governments need to move from welfare to workfare, recognizing that the right to living is a personal responsibility, and eliminate voting as a means of producing income.

  26. Peter Suderman cited David Beckwith and Milton Friedman. No doubt the ECB mismanaged, because that is what central banks do. Friedman would be the first to tell you. But Friedman has always disagreed with a “common currency” because (1) it is another name for a gold standard; and (2) it makes “economic nationalism” more costly. That is, it makes “monetary policy” by a national government impossible. It establishes international finance and capital markets on a common price level.

    Friedman’s argument in favor of “adjustment mechanisms” is similar to Robert Mundell’s argument for currency zones that may or may not be coterminous with a government line. Greece should have a lower exchange rate to pay its labor and pensioners, but its capital markets would benefit by access and legal status in euro. There is no reason these need to be consolidated under a local government.

    Indeed, the world today looks already more like Hayek’s competing currencies system than Bretton Woods (and our current system breaks down less frequently than Bretton Woods did).

    1. The euro is a poor source of monopolized money supply for any country like Greece that has erratic currency flows (outflows 9 months of year, inflows during summer tourism, overall outflows for the next decade or two). Same problem the US had in 19th century under gold standard. Creates unstable interest rates, foreign-driven money shortages, pointless volatility/runs, incentives for insider manipulation, and ultimately cartelization of the economy. US would have been better served then with bimetallism cuz silver coins would have stayed in US and circulated where gold was used for intl settlement. Greece needs an olive-oil or maybe hotel-room-night backed drachma. That could be the stable local currency. That same currency could also be a useful supplemental currency for Italy/Spain/Portugal when they have their next round of crisis.

  27. A choice of competing currencies is preferable to a single fiat currency.

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