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Sunday, June 28, 2015

Paul Krugman: Syriza should ignore calls to be responsible

The troika was peddling an economic fantasy: Greeks have paid the price

Incoming Greek prime minister Alexis Tsipras is being far more realistic about austerity and growth than European officials who want the beatings to continue until morale improves. Photograph: Michael Kappeler/EPA

Paul Krugman

Tue, Jan 27, 2015, 16:06

Alexis Tsipras, leader of the left-wing Syriza coalition, has become prime minister of Greece. He is the first European leader elected on an explicit promise to challenge the austerity policies that have prevailed since 2010. And there will be many people warning him to abandon that promise, to behave “responsibly”.

So how has that responsibility thing worked out so far?

To understand the political earthquake in Greece, it helps to look at Greece’s May 2010 “standby arrangement” with the International Monetary Fund, under which the so-called troika – the IMF, the European Central Bank and the European Commission – extended loans to the country in return for a combination of austerity and reform. It’s a remarkable document, in the worst way. The troika, while pretending to be hardheaded and realistic, was peddling an economic fantasy. And the Greek people have been paying the price for those elite delusions.

False assumptions

The economic projections that accompanied the standby arrangement assumed that Greece could impose harsh austerity with little effect on growth and employment. Greece was in recession when the deal was reached, but the projections assumed this downturn would end soon – that there would be only a small contraction in 2011, and that, by 2012, Greece would be recovering. Unemployment, the projections conceded, would rise substantially, from 9.4 per cent in 2009 to almost 15 per cent in 2012, but would then begin coming down fairly quickly.

What actually transpired was an economic and human nightmare. Far from ending in 2011, the Greek recession gathered momentum. Greece didn’t hit the bottom until 2014 and, by that point, it had experienced a full-fledged depression, with overall unemployment rising to 28 per cent and youth unemployment rising to almost 60 per cent. And the recovery now under way is barely visible, offering no prospect of pre-crisis living standards.

What went wrong? I fairly often encounter assertions to the effect that Greece didn’t carry through on its promises, that it failed to deliver promised spending cuts. Nothing could be further from the truth. In reality, Greece imposed savage cuts in public services, wages of government workers and social benefits. Public spending was cut much more than the programme envisaged, and it’s about 20 per cent lower than it was in 2010.

Yet Greek debt troubles are if anything worse than before the programme. One reason is the economic plunge has reduced revenues: the Greek government is collecting a substantially higher share of gross domestic product in taxes, but GDP has fallen so quickly that overall tax take is down. Furthermore, the plunge in GDP has caused a key fiscal indicator, the ratio of debt to GDP, to keep rising even though debt growth has slowed and Greece received some modest debt relief in 2012.

Why were the original projections so wildly over-optimistic? As I said, because supposedly hardheaded officials were in reality engaged in fantasy economics. Both the European Commission and the European Central Bank decided to believe in the confidence fairy – that is, to claim that the direct job-destroying effects of spending cuts would be more than made up for by a surge in private-sector optimism. The IMF was more cautious, but it underestimated the damage of austerity.

And here’s the thing: if the troika had been truly realistic, it would have acknowledged it was demanding the impossible. Two years after the programme began, the IMF looked for historical examples where Greek-type programmes, attempts to pay down debt through austerity without major debt relief or inflation, had been successful. It didn’t find any.

Unable to lecture

So now that Tsipras has won, European officials would be well advised to skip the lectures calling on him to act responsibly and to go along with their programme. The fact is they have no credibility; the programme they imposed on Greece never made sense. It had no chance of working.

If anything, the problem with Syriza’s plans may be that they’re not radical enough. But it’s not clear what more any Greek government can do unless it’s prepared to abandon the euro, and the Greek public isn’t ready for that.

Still, in calling for a major change, Tsipras is being far more realistic than officials who want the beatings to continue until morale improves. The rest of Europe should give him a chance to end his country’s nightmare. – (New York Times)

Tue, Jan 27, 2015, 16:06

Greece: The Tie That Doesn’t Bind

Paul Krugman

http://krugman.blogs.nytimes.com/2015/02/09/greece-the-tie-that-doesnt-bind/

Relations between Greece and its creditors are not improving. Was this bad diplomacy on the part of Tsipras/Varoufakis? Maybe, but my guess is that there was nothing they could do to avoid a bitter confrontation short of immediate betrayal of the voters who put them in office. And creditor-country officials are acting as if they still expect that to happen, just as it has repeatedly over the past five years.

But they’re almost surely wrong. The dynamics are very different this time, and failing to understand them could all too easily lead to unnecessary disaster.

Actually, let me stress the “unnecessary” aspect. What Greece is asking for — although German voters probably don’t know this — is not a fresh infusion of money. All that’s on the table is a reduction in the primary surplus — that is, a reduction in Greek payments on existing debt. And we have often been told that everyone understands that the official target surplus, 4.5 percent of GDP, is unreasonable and unattainable. So Greece is, in effect, only asking that it get to recognize the reality everyone supposedly already understands.

Why, then, are things boiling over? Partly because what “everyone knows” has never been explained to northern European electorates, so that the time to recognize reality is always at some future date. Partly also, I suspect, because creditors have come to expect the symbolism of debtor governments abjectly abandoning their campaign promises in the name of responsibility, and are waiting for the new Greek government to pay the usual tribute of humiliation.

But as I said, the dynamic is very different this time.

I’ve long believed that Matthew Yglesias hit on something really important when he noted that small-country politicians generally have personal incentives to go along with troika demands even if they are against their nation’s interests:

Normally you would think that a national prime minister’s best option is to try to do the stuff that’s likely to get him re-elected. No matter how bleak the outlook, this is your dominant strategy. But in the era of globalization and EU-ification, I think the leaders of small countries are actually in a somewhat different situation. If you leave office held in high esteem by the Davos set, there are any number of European Commission or IMF or whatnot gigs that you might be eligible for even if you’re absolutely despised by your fellow countrymen. Indeed, in some ways being absolutely despised would be a plus. The ultimate demonstration of solidarity to the “international community” would be to do what the international community wants even in the face of massive resistance from your domestic political constituency.

But a genuine government of the left, as opposed to the center-left, is very different — not because its policy ideas are wild and crazy, which they aren’t, but because its officials are never going to be held in high esteem by the Davos set. Alexis Tsipras is not going to be on bank boards of directors, president of the BIS, or, probably, an EU commissioner. Varoufakis doesn’t even like wearing ties — which, consciously or not, is a way of declaring visually that he is not going to play the usual game. The new Greek leaders will succeed or fail, personally, based on what happens to Greece; there will be no consolation prizes for failing conventionally.

Do Berlin and Brussels understand this? If not, they are operating under a dangerous misconception.