Category: Paul Krugman
Paul Krugman, in the “New York Times”, urges the Greeks to vote “No” in the referendum next Sunday. So does Joe Stiglitz, in another article in the “Guardian”. Is this serious advice, or an unhelpful extension to Europe of an ongoing American polemic?
Paul Krugman says the Euro was a “terrible mistake” because he claims it failed to insulate the public finances of the states of the euro zone from bubbles in particular countries, like he says the US system does. In fact, the US only does this to a limited extent, and, unlike the EU, it has no general bailout fund for states.
If I recall things correctly, our present collapse in confidence originated in the United States, in a housing bubble in a small number of US states, that eventually engulfed the whole world! The US system did not prevent that.
Puerto Rico, a US dependency which is in the dollar zone, has got itself into a Greek style debt trap, without the US monetary union, which is much older and stronger than the EU one, being able to prevent it.
Krugman says that “most of what you hear about Greek profligacy is false”.
He makes this bizarre claim on the basis that Greece has made cuts and tax increases since 2010. He completely ignores the profligacy, poor tax collection, and the debt accumulation, that went on for decades before that, when Greece erected a completely unsustainable pension regime, on the strength of borrowed money.
He says that, since 2010, the Greek economy has collapsed because of “austerity”.
He fails to outline what the Greeks might have used for money since 2010 if, as he seems to advocate, they had continued with their previous “non austere” spending policies. They would not have been able to borrow the difference on commercial markets. Where would they have got the money? Just because a country is in the euro zone it does not mean it can have an unlimited call on the taxes or loans of other euro members.
While there is more to do, like euro area wide deposit insurance, the EU has remedied many of the initial design flaws in the euro, something Paul Krugman does not acknowledge.
He says that “even harsher austerity is a dead end”, as if cuts and tax increases were all that the EU has been urging unsuccessfully on the Greeks.
Product and labour market reforms, opening up the professions, better tax collection, and privatisations, have been an important part of the recipe urged on Greece by the EU, and these would greatly improve the allocative efficiency of the Greek economy, and promote growth. Greece needs to move its human resources out of unproductive activities, into areas that will earn money from abroad and the EU reforms will assist that.
Another Nobel Prize winning economist, Joe Stiglitz, in his article in “Guardian” also calls for a “No” vote, but is more extreme.
He claims the euro zone was ”never a democratic project”. He seems to have completely forgotten that the Maastricht Treaty, which created the legal basis for the euro, was approved by the elected parliaments of every state that is currently a member. It was approved in referenda in several countries, including France and Ireland.
Furthermore each of the Eurogroup of Finance Ministers, who make all the key decisions, represent democratically elected governments.
Greece was not forced to join the euro, in the conditions, and at the time, that it did. This was a free choice of the Greek government. Now, governments everywhere would sometimes like to repudiate some decisions of their predecessors, but if that luxury is to be afforded it would destroy the basis for credit and inter state relations.
He makes a more substantial point when he says that a good deal of the money, lent to Greece by the taxpayers of other EU countries and the IMF, has gone to help them pay debts they owe to private creditors. But he fails to point out that, unlike those of Ireland and Portugal, Greece’s private creditors have been obliged to take a haircut.
It is true that the money from the EU has been used in part to repay banks money they had put into Greek government bonds. Some of these banks were indeed French and German. But some were from outside the euro zone altogether, including from Professor Stiglitz’s own country and from the UK, in one of whose newspapers he is writing.
Back in the 2010/2012 period, thanks the crisis which started after Lehman Brothers went south, there was a legitimate public interest, a public good, in preventing a run on ANY of these banks.
There remains a justifiable argument, however, that it was unfair that the taxpayers of a few countries should now be bearing a disproportionate share of the cost of this public good, which the whole world has enjoyed.
Yes, the taxpayers of the rest of the euro zone should, in moral terms, bear more of the burden.
But if that is so, so also should the taxpayers of non euro zone countries like the US and the UK, whose banks were also saved when Ireland, Greece and Portugal got help.
Why should German taxpayers, whose personal incomes have grown more slowly than elsewhere in Europe, and who face substantial extra costs in the near future due to ageing, be the focus of all the wrath?
But then neither Professor Krugman, nor Professor Stiglitz are writing for German, Slovak, Latvian public opinion.
They are writing in journals, published in countries, whose governments are not being asked to write more and more cheques for a Greek Government, that seems to blame everyone else for home grown problems.
There is, I believe, an argument for a comprehensive debt conference to consider whether the burdens of dealing with the aftermath of the Lehman collapse, have been fairly distributed between the governments of the world.
But the convening of any such conference, and eligibility for any help from it, should be something that might happen five years from now, and be conditional on growth promoting reforms, and budget balancing, already having been fully implemented by governments seeking debt relief from it. Perhaps a Third Party might put such a proposal forward, as a way of getting out of the terrible situation Greece is bringing upon itself.
Because of its Classical past as the founder of democracy, Greece was treated more tolerantly, than other countries would have been, when, during the nineteenth century, it defaulted several times on its commercial creditors.
That history created bad habits of mind. Now its creditors are the taxpayers of other countries, who are less tolerant, and less conscious of their intellectual debt to Plato and Socrates.
The present Greek debacle is the result of a clash of political cultures.
On the one hand is the culture of the European Union, where every decision has to be mediated through complex institutions representing 28 different countries, each with its own political culture, and then often has to win the assent of the European Parliament and of an independent European Central Bank.
Theatrical gestures and moments of brilliant eloquence count for little in this world. Building a good track record, with good civil service staff work to back it up, is what counts in the EU political culture.
EU bailout decisions also have to be approved by the IMF, a global body, most of whose members and clients are far poorer than the Greeks. This creates an additional layer of interests which Greece must try to satisfy, as well as its EU partners.
In this setting, credibility and patience are vital to success. The new Greek government did not have patience, and soon it lost credibility as well.
In stark contrast with what was needed, it seems to me that the Greek Government is made up of people who come from a revolutionary tradition, where it believed that progress will come from a harsh rupture with the past, and whose proponents envisage a nationalist or socialist utopia, once that rupture is complete.
The Greek government are also people who have little or no previous experience of government, and who have thrived politically by agitating against the existing order, without the necessity of explaining how things would work after they had obtained power, and they had to survive and govern in the complex interconnected reality, that is the global economy of today.
That the Greek electorate would elect such people to office is explained by the desperation in to which they had been led by the irresponsible policies pursued by successive Greek governments since the 1980’s, who tried to win the votes of Greeks by promising them a standard of living that was not matched by their productive capacity, and by the mistaken decision to take Greece into the euro before the results of these bad policies had been properly rectified.
The problem is that the activities of the new government made things much worse than they were when they took office.
By creating doubt about whether they would honour the debts incurred by their predecessors, the new government created a crisis of confidence, and this loss of confidence led to a suspension of normal commercial activity. By looking for debt relief, before reforms were implemented they put the cart before the horse.
The underlying problem of Greece is a lack of productivity and export potential, but the Greek government, and to a great extent the EU authorities too, continue to ignore this. Greece’s productivity problem will take years to solve, not least because Greece is an elderly society. The structural reforms urged by the EU will help, because they will clear the clogged arteries of the Greek economy and allow talent to be reallocated to where it can do something productive. But the ageing of Greek society will remain an intractable problem.
As a result of the drama generated by their new Government, Greeks, instead of focussing on ways to invest to make more money, became in recent months obsessed instead with protecting what they already had. Whereas the economy was on a path towards modest growth, when the old government left office, it quickly plunged back into recession as money was withdrawn from the Greek banks, thereby further weakening Greece’s ability to meet its ongoing expenses, and to pay its debts as they fell due.
The timing of the Referendum, AFTER Greece has already run out of money, and on a proposal that has already been withdrawn, could not be worse. It compounds the panic and uncertainty. It is probably in breach of the Greek constitution. Apparently the Greek constitution does not allow referenda on fiscal issues, and the bailout offer contains many elements that are fiscal.
If ever there was a case study that shows how important it is to have political leaders who understand and face up to their responsibilities, and who deal with the world as it is rather than as they might wish it to be, it is to be found in Greece today. The lessons for Ireland are too obvious to require to be spelt out.
I wonder how Paul Krugman and others, who were so free with their advice to the Greeks in the early months of the crisis, are advising the Greeks to vote in the referendum on the 5 July.