Archive for the ‘Eurozone Crisis’ Category

How Greece Has Been “Helped”

Gennaro Zezza | April 10, 2015

How has the Greek government used international loans?

Using the data available from the flow of funds published by the Bank of Greece and the sectoral accounts published by the Hellenic Statistical Institute (ElStat), we have the following:

Table 1. Greece. Use of international loans (billion euro)
2010 2011 2012 2013 2014* Sum
Sources of funds
1. Long-term loans from abroad 24.3 30.0 110.0 30.8 5.3 200.5
Uses of funds
2. Purchases of securities held abroad 19.9 24.4 44.3 8.0 10.7 107.4
3. Purchases of financial sector equities 0.2 0.9 0.0 19.0 0.0 20.2
4. Capital transfers 3.6 3.7 8.6 23.3 1.4 40.7
5. Interest payments 13.2 15.1 9.7 7.3 5.3 50.6
6. Residual = 1 – (2+3+4+5) -12.7 -14.2 47.3 -26.8 -12.1 -18.4
NB: * First three quarters for 2014

We start by estimating the funds received, using the table on “Financial liabilities broken down by holding sector,” and taking the line “Long-term loans received from abroad.” The largest part of these funds has been used to reduce the existing stock of debt held abroad: line 2 in Table 1 is obtained by the change in government long-term debt securities held abroad, which has been negative from 2010 onwards. A negative change in liabilities amounts to purchasing back the existing stock of debt(1). Another large part has been transferred to the domestic financial sector, either by purchasing equities (line 3 in Table 1, obtained from the data on flows of financial assets purchased by the government and issued by the domestic financial sector) or through capital transfers (line 4 in Table 1, which reports total capital transfers of the government).

If we add the total expenditure of the government on interest payments (line 5), we get that, overall, the international loans have not been sufficient to meet these expenses.

It could be argued that, had the Greek government not recapitalized Greek banks, a major banking crisis would have had even harsher consequences for the population of Greece. On the other hand, since these funds have not reached the Greek population, all debtors (households with mortgages, non-financial firms) who have experienced a severe drop in their income (for households) or sales (for firms) may be unable to meet their financial obligations, and this will imply a new, possibly large, fall in the value of the assets of the Greek financial sector, requiring more government intervention.

The only way to have addressed the Greek public debt problem, which was indeed a problem of foreign debt, in a sustainable way should have been to strengthen the Greek economy in its ability to produce and sell abroad enough to cover for its imports. Greece needed an investment plan; as Joseph Stiglitz just said at the ongoing INET conference in Paris, the “EU addresses the imbalances by making deficit countries starve instead of increasing their exports” (as tweeted by INET).

(1) In 2010 and 2011 a large negative value in the flow of government securities held abroad was matched, for a total of roughly 20 billion euros, by an increase in the flow held by the Greek financial sector.


Modern Money, Financial Reform, and the Euro Experiment—an Interview with Randall Wray

Michael Stephens | March 28, 2015

Below is the wide-ranging interview L. Randall Wray gave to EKO – Público TV in Spain as part of the launch of the Spanish edition of his Modern Money Primer (questions in Spanish):


Greek Debt, German History, and the Moral High Ground

Michael Stephens | March 19, 2015

Dimitri Papadimitriou takes on the assumption that European leaders demanding the continuation of large fiscal surpluses from Greece can claim the moral high ground. The economics behind these demands are unrealistic, and the insistence on full debt repayment is both immoral and imprudent—not to mention deaf to the lessons of history:

“Greece’s government and people have indulged in excesses and corruption; now it is time to pay the price.” The argument for full repayment of Greece’s debt is well known, easily understood, and widely accepted, particularly in Germany. Sacrifice, austerity and repayment are righteous, fair, and just.

That view is coloring this and next week’s coming meetings between Greece and its international lenders, and with European leaders. A revision of Greece’s debt terms has not been on the agenda.

European leadership insists that repayment is possible, and that Greece’s economy will take off, if only Greeks are willing to bite the bullet and economize. The quasi-religious ground under the wishful thinking on economic growth is that with deep financial pain comes high moral ground.

Exactly the opposite case makes far more sense …


In the aftermath of [World War II], Germany was the beneficiary of the largest debt restructuring deal in history. Today, German leaders have positioned themselves as the moral gatekeepers of justice in Europe, with a firm stance against any debt forgiveness. …

Continue reading: “Greek Debt: Do the Right Thing” (HuffPo)

Related: The Greek Public Debt Problem


The Plunging Euro and Its Muddled Cheerleaders

Jörg Bibow | March 16, 2015

Greg Ip had a couple of pieces on currency wars and gyrations in the Wall Street Journal last week (here and here), essentially arguing that talk about currency warfare is much beside the point and that exchange rate gyrations are merely benevolent side-effects of monetary policies that will inevitably make the whole world better off. The Financial Times had an editorial on the ECB’s QE and the euro plunge that ran along the same lines, bluntly declaring that “any criticism from outside the eurozone that the fall in the single currency will kick off a global currency war [was] misplaced.” And Bloomberg summed it all up by proclaiming that the whole currency war talk is a “load of baloney,” fearing that the currency war nonsense talk might lead to trade restrictions, which would do real harm.

While the Financial Times sees no cause for alarm at all it seems, Greg Ip’s alarm bells would only go off if China were to retaliate by weakening the renminbi.

So there appears to be a consensus that all is currently for the best in all possible currency worlds. As ever so often, the consensus may be seriously off track here.

Consider Greg Ip’s main point, which is that monetary easing cannot do any harm by weakening a currency because it simply forces other central banks to follow suit, which eases the global monetary stance, which is all for the good. Well, the argument fails to distinguish situations in which all countries share common monetary policy requirements from situations in which that is not the case. The former kind of situation prevailed right after the Lehman bankruptcy, when the Federal Reserve’s easing provided the scope for a global monetary easing. This benevolent alignment didn’t last very long, however, as the U.S. monetary stance proved to be excessively easy for numerous countries in the emerging world — countries that may today be held back by the financial fragilities that were created at that time. Fast forward, recovery in the U.S. appears to be leading the world economy today, creating the opposite kind of challenges. So is the Federal Reserve prodding everyone else to tighten too, to the benefit of the world? Or are the ECB’s QE adventures prodding the Federal Reserve to change course, to the benefit of the world and the U.S.? If neither is the case, will the resulting exchange rate gyrations really benefit the wider world — unless China devalues its currency, that is?

The new consensus overlooks that it matters to the global economy whether important countries are mainly driven by domestic demand growth or mainly freeload on net exports.

The evolution of current account imbalances and contributions of net exports to GDP growth in the key countries featured in talks about currency wars is revealing.

The U.S. had persistent negative net exports GDP growth contributions and a rising current account deficit prior to the crisis of 2008-09. The crisis then halved the U.S. current account deficit. And post-crisis QE and dollar depreciation saw U.S. domestic demand growth stimulate (disappointingly meager) U.S. GDP growth while net exports made a broadly neutral contribution as the U.S. current account deficit was contained overall. Suffice to mention that U.S. energy production was an important swing factor in this outcome. The U.S. non-energy external balance has deteriorated with the U.S. recovery.

Japan ran huge current account surpluses prior to the crisis. As the favored carry-trade currency, the yen was cheap at the time. When crisis struck, the yen appreciated sharply at first, and Japan’s current account imbalance has since disappeared as net exports made negative GDP growth contributions in the last four years. More recently, the yen’s appreciation was partly reversed by means of QE starting in 2013 when the Japanese authorities also initiated a program to stimulate domestic demand.

The eurozone had a broadly balanced external position prior to the global crisis. Internally, however, diverging competitiveness positions led to huge imbalances, which then imploded. As the eurozone authorities’ policy response suffocated domestic demand, positive GDP growth contributions from net exports were the currency union’s only lifeline. The eurozone has a surging current account surplus, the biggest in the world today, with Germany and the Netherlands as the lead stars.

It is true that China had by far the biggest current account surplus prior to the global crisis. But China has also gone through by far the biggest rebalancing since. China’s current account surplus halved in absolute terms; in relative terms it plunged from 10 percent of GDP to roughly 2 percent within a short period of time. In fact, the country has experienced quite persistent negative GDP growth contributions from net exports since the crisis.

In essence, in the years since the global crisis, China was the number one global growth engine, while the eurozone was the world’s outstanding drag on growth, undermining a proper recovery. Germany’s bilateral trade and current account balances vis-à-vis China are in surplus today.

The latest monetary policy initiatives and currency gyrations should be read against this background. The consensus suggests that euro devaluation through the ECB’s belated QE is just fine, a measure for the general good of the world. Apparently the plunging euro is not designed to augment and sustain the eurozone’s freeloading on external growth; it is not the mechanism by which the eurozone exports its homemade mess to innocent bystanders. By contrast, as Greg Ip states explicitly, if the Chinese authorities were to devalue the renminbi, that could be seen as beggar-they-neighbor policy, an attempt to steal demand from their trading partners. Apparently, China is obliged to provide positive growth stimuli to the global economy and must not try to contain the damage that eurozone freeloading has on its development.

Surely Dr. Schäuble and Germany’s export industry can only applaud the new consensus. Never mind the shallow double standards on which it rests. Or do we all begin to adopt the kind of logic that prevails in Dr. Schäubles “parallel universe”* — making it yet another German export success?


* Back in September 2013, Dr. Schäuble famously suggested (see my comment) that critics of the brilliant eurozone crisis management undertaken under his stewardship were living in a “parallel universe where well-established economic principles no longer apply.” Eurozone crisis management has been so brilliant that the world now enjoys its fruits at a super-competitive euro exchange rate. Bravo! More cheerleading please.


Beyond the Debt Negotiations: Greece’s New Deal?

Michael Stephens | March 10, 2015

The negotiations over Greece’s public debt and the terms of its bailout agreement have understandably taken center stage. Behind all the twists and turns, the key consideration is that even if the public debt could be repaid through continuing with austerity policies — and there is little reason to believe it can — it would still be a mistake, for both moral and pragmatic reasons. But dealing with Greek debt and the impossible terms of the agreement signed by the previous government is just the first step in dealing with Greece’s needless humanitarian crisis.

As noted, our own Rania Antonopoulos, senior scholar and director of the Levy Institute’s Gender Equality and the Economy program, has joined the new Syriza government as Deputy Minister of Labor. Particularly germane to her new role in helping to combat unemployment, Antonopoulos has done extensive research on direct job creation policies for Greece, featuring estimates of the macroeconomic and employment payoffs and the fiscal impact, as well as work on setting up systems of monitoring and evaluation.

At the last Minsky conference in Athens, she spoke about the necessity for a targeted job guarantee or employer-of-last-resort proposal in the context of the perilous state of the Greek labor market, including discussion of the scale of the program, estimated macroeconomic outcomes, and potential financing:

Antonopoulos was also recently interviewed by Deutsche Welle on the subject of this targeted direct job creation policy (the whole interview can be found here):

Have Greece’s existing job support programs been successful?

The problem with the existing programs is that they focus on reskilling. They offer a maximum of two months or 80 hours of pay support, with the intention of helping people get some initial work experience.

But the main problem in Greece is lack of aggregate demand and consequent lack of jobs, not lack of skills. In fact, large numbers of highly qualified professionals have been leaving the country. And 80 hours isn’t enough to learn a new professional skill anyway. Also, the agencies managing the retraining programs ate up 75 percent of the available budget. Only 25 percent went to the unemployed as wages.

What kind of jobs do you envision creating?

We’ll work with local communities and initiatives to identify socially useful jobs. A key aim is to match people’s existing skills with socially needed tasks. We also want to stimulate economic activities that move in the direction of the new government’s development priorities.

Those priorities include renewable energy and sustainable fisheries, cooperative structures for locally produced food, organic farming… Plenty of initiatives have sprung up, but they need some support. The unemployed people trying to make them happen would be very happy to have wage support until they become sustainable independent businesses.


Wray: What’s Wrong with the Euro Setup?

Michael Stephens |

In this March 7th presentation, L. Randall Wray argues that the central problem in the EMU is not profligate peripheral nations, trade imbalances, or insufficient “structural reform.” The fundamental issue, which can best be framed through an understanding of money, is a flawed setup — the EMU is designed to fail.

La Asociación de Economía Crítica, ATTAC, Econonuestra y FUHEM Ecosocial le invitan a la sesión “Teoría monetaria moderna: ¿Austeridad presupuestaria frente a déficits públicos?”:

See also “Euroland’s Original Sin


Galbraith and Krugman on the Greek Deal

Michael Stephens | February 28, 2015

If you haven’t read it already, Senior Scholar James Galbraith shared his take on the four-month Greek deal in Social Europe:

there was never any chance for a loan agreement that would have wholly freed Greece’s hands. Loan agreements come with conditions. The only choices were an agreement with conditions, or no agreement and no conditions. The choice had to be made by February 28, beyond which date ECB support for the Greek banks would end. No agreement would have meant capital controls, or else bank failures, debt default, and early exit from the Euro. SYRIZA was not elected to take Greece out of Europe. Hence, in order to meet electoral commitments, the relationship between Athens and Europe had to be “extended” in some way acceptable to both.

But extend what, exactly? There were two phrases at play, and neither was the vague “extend the bailout.” The phrase “extend the current programme” appeared in troika documents, implying acceptance of the existing terms and conditions. To the Greeks this was unacceptable, but the technically-more-correct “extend the loan agreement” was less problematic. The final document extends the “Master Financial Assistance Facility Agreement” which was better still. The MFFA is “underpinned by a set of commitments” but these are – technically – distinct. In short, the MFFA is extended but the commitments are to be reviewed.


If you think you can find an unwavering commitment to the exact terms and conditions of the “current programme” in that language, good luck to you. It isn’t there. So, no, the troika can’t come to Athens and complain about the rehiring of cleaning ladies.


Greece won a battle – perhaps a skirmish – and the war continues. But the political sea-change that SYRIZA’s victory has sparked goes on.

Galbraith was recently interviewed by RNN’s Sharmini Peries on the same topic:



continue reading…


The Greek Debt Problem and Selective Historical Memory

Michael Stephens | February 27, 2015

Michalis Nikiforos, Dimitri Papadimitriou, and Gennaro Zezza, who put together the Levy Institute’s stock-flow consistent macroeconomic model and simulations for Greece, have just released a new policy note, the upshot of which is that restructuring Greece’s unsustainable public debt is a necessary but not sufficient condition for a sustained economic recovery in that country. They also point to an interesting historical precedent that ought to inform the ongoing discussion of Greece’s debt and the conditions imposed by its official creditors.

The troika’s official story—about how Greece’s debt-to-GDP ratio will be brought down from its current 175 percent to 120 percent by 2022—is, as the authors put it, “wildly implausible.” The official forecasts depend upon large primary surpluses (in excess of 4 percent of GDP beginning in 2016) being accompanied by robust economic growth rates (based on, according to the official story, expanding net export surpluses and dazzling growth in private investment)—which is, the authors point out, virtually unprecedented.

But even if it were possible for Greece to pay down its public debt through continuing austerity, Nikiforos, Papadimitriou, and Zezza argue that this should be opposed on both moral (with respect to consequentialist considerations and principles of fairness) and prudential grounds. In this context, they quote Keynes’s dissent regarding the terms imposed on Germany by the Treaty of Versailles; a quotation which could just as effectively be deployed today in defense of Greece:

The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable,—abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilized life of Europe. Some preach it in the name of Justice. In the great events of man’s history, in the unwinding of the complex fates of nations Justice is not so simple. And if it were, nations are not authorized, by religion or by natural morals, to visit on the children of their enemies the misdoings of parents or of rulers. (Economic Consequences of the Peace [1919])

In yet another twist, precedent for how the Greek debt situation ought to be handled can also be found in German history—in the aftermath of its next war. According to Nikiforos, Papadimitriou, and Zezza, Germany’s post-WW2 experience provides us with a template for a bold Greek debt restructuring and recovery plan. The authors calculate that Germany was the beneficiary of debt cancellation amounting to more than four times the country’s 1938 GDP (or West German GDP in 1950). And these calculations don’t include foregone war reparations or foregone interest payments:

around DM3 billion in annual income transfers to foreign countries was avoided. This is a very significant amount given that West German exports totaled no more than DM8 billion in 1950. For Germany to find DM3 billion without a contraction of its GDP and imports would have required a 40 percent increase in exports.

We are often told how the trauma of Weimar hyperinflation shapes the German approach to policy to this very day (here’s a NYTimes headline from 2011: “Haunted by ’20s Hyperinflation, Germans Balk at Euro Aid”). In the context of the renegotiation of the terms of Greece’s bailout, Germany’s post-WW2 experience, in which it was the beneficiary of “the largest debt restructuring deal in history,” seems not to have left so indelible a mark on its national memory (at least as measured by the stance of current leadership toward the Greek plight).

As pointed out by Nikiforos, Papadimitriou, and Zezza, the debt cancellation and subsequent extensive reconstruction efforts orchestrated for Germany and other European economies played a significant role in shaping German economic history: “the postwar German economic miracle and the robust development of the rest of the European economies was not the result of abstract market forces. Instead, they were based on very specific and detailed planning.”

Selective amnesia aside, the key lesson to be drawn from the historical experience is that restructuring Greece’s public debt is only the very first step in what would be required to put the country back on its feet. The restructuring needs to be accompanied by a comprehensive policy program designed around fixing the eurozone’s structural defects and rebuilding a Greek economy that has suffered damage comparable to that inflicted by a protracted war.


Papadimitriou on Greece’s Four-Month Extension

Michael Stephens | February 25, 2015

Levy Institute President Dimitri Papadimitriou discusses the four-month extension of Greece’s bailout agreement with its eurozone partners and the mood in Athens in this interview with Kathleen Hays and Vonnie Quinn.


Video: James Galbraith on the Latest Eurogroup Meeting

Michael Stephens | February 19, 2015

In the interview below, James Galbraith provides a behind-the-scenes account of the latest rebuff of Greece’s offer by German Finance Minister Wolfgang Schäuble and talks about what lies ahead (in English and Greek):