Monday, July 06, 2015

Krugman - Europe Also Won in Yesterday's Greek Bailout Referendum

From my years practicing insolvency law, I was left stunned at the illogic in the demands that the creditors sought to impose on Greece.  The approach made no sense.  They demanded Greece accept a debt load it could never hope to pay off. They essentially wanted the Greek government to mortgage the very future of Greek youth, even those yet unborn.

It doesn't make any difference whether it's an individual, a corporation or a country - when it falls insolvent the best deal for creditors is always a workable deal and that means debt forgiveness, taking a haircut.  If Joe owes you a million dollars but he can only repay it at a hundred dollars a month, you have no more hope of recouping your money than Joe has of paying it.  Sometimes there is no deal.  Companies go under, their assets sold for pennies on the dollar of value. Countries can go in all sorts of predictable and unpredictable ways.

Nobel laureate economist Paul Krugman writes that yesterday's No vote in Greece was a win not only for the Greek people but also for Europe itself.

...Europe’s self-styled technocrats are like medieval doctors who insisted on bleeding their patients — and when their treatment made the patients sicker, demanded even more bleeding. A “yes” vote in Greece would have condemned the country to years more of suffering under policies that haven’t worked and in fact, given the arithmetic, can’t work: austerity probably shrinks the economy faster than it reduces debt, so that all the suffering serves no purpose. The landslide victory of the “no” side offers at least a chance for an escape from this trap.

...In advance of the referendum, the European Central Bank cut off their access to additional funds, helping to precipitate panic and force the government to impose a bank holiday and capital controls. The central bank now faces an awkward choice: if it resumes normal financing it will as much as admit that the previous freeze was political, but if it doesn’t it will effectively force Greece into introducing a new currency.

...In the failed negotiations that led up to Sunday’s referendum, the central sticking point was Greece’s demand for permanent debt relief, to remove the cloud hanging over its economy. The troika — the institutions representing creditor interests — refused, even though we now know that one member of the troika, the International Monetary Fund, had concluded independently that Greece’s debt cannot be paid. But will they reconsider now that the attempt to drive the governing leftist coalition from office has failed?

...Unless Greece receives really major debt relief, and possibly even then, leaving the euro offers the only plausible escape route from its endless economic nightmare.

And let’s be clear: if Greece ends up leaving the euro, it won’t mean that the Greeks are bad Europeans. Greece’s debt problem reflected irresponsible lending as well as irresponsible borrowing, and in any case the Greeks have paid for their government’s sins many times over. If they can’t make a go of Europe’s common currency, it’s because that common currency offers no respite for countries in trouble. The important thing now is to do whatever it takes to end the bleeding.


Owen Gray said...

Krugman has written before that the common currency was a bad idea, Mound. I wonder if that thought is crossing the minds of the powers that be.

Purple library guy said...

The austerity approach taken by the troika makes even less economic sense than Krugman suggests. It's really not about debt repayment at all, it's about savage class warfare. What makes it blindingly obvious is that the troika actually vetoed proposed policies that would get them more money. Yes, you read that right.

The IMF vetoed a proposed reduction in military spending, and the troika vetoed Syriza's intent to increase taxes on, and crack down on tax evasion by, the rich. Both measures would have given the government more room to pay off debt, through reduced spending or increased revenue. But they would have inconvenienced military contractors or real (that is, rich) people rather than hosing the peons, so they were out. The point of austerity clearly is all about restructuring society to make sure the lower classes are poor and powerless and to redistribute their money upwards, not about debt repayment. The debt is nothing, the ECB quantitatively eases more money in a month or two than the whole amount at issue.

The Mound of Sound said...

Owen, I don't think those who might reform the European currency structure have anywhere near enough clout to overcome the forces of inertia. For all its failings, the Euro has created a clear control hierarchy in Europe, something once only achieved by Panzers.

The Mound of Sound said...

PLG - can you source that information about the IMF blocking proposals for major cuts in Greek defence spending and taxing the rich to made good their years of blatant tax dodging?

Purple library guy said...

I got it here:
Third paragraph.
With a quick search I also find this:

It's not the first time I've run across such claims, particularly about the troika being unhappy (despite occasional rhetoric to the contrary) about Syriza planning to actually pursue wealthy tax evaders.

The Mound of Sound said...

Thanks, PLG, I just incorporated those reports along with Krugman's remarks into a new post.

I recall one aspect of this. The Greeks were under contract to purchase a number of Type 212 U-boats. Syrzia tried to halt payment and cancel the order. Frau Merkel wouldn't hear of it and insisted the debt be paid, presumably out of bail out money. At the time I thought Canada should help Greece out and take over those contracts, allowing us to get rid of those awful Brit castoffs that have cost us so much.