I have recently signed the “Economists’ Warning” on the situation in the eurozone, which states that

It is essential to realise that if the European authorities continue with policies of austerity and rely on structural reforms alone to restore balance, the fate of the euro will be sealed.

The Economists’ Warning was published by the Financial Times (“European governments repeat mistakes of the Treaty of Versailles,” September 23), and a reply by Professor Gilbert of the University of Trento appeared in the Letters section on September 25.

Professor Gilbert seemed to imply that the Economists’ Warning was advocating external support for Southern European countries in trouble — a position that is not apparent in the original document, which only advocated “concerted action” among eurozone members.

My reply to Professor Gilbert was published late last week in the Letters section of the Financial Times. I argue that structural reforms have already been implemented in Italy: such reforms aimed at cutting pension payments to generate a structural reduction in the government deficit (matched of course by a reduction in the purchasing power of people in retirement) and increasing flexibility in the labor market. The chart below documents the dramatic drop in employment since 2007 — almost one million jobs, with a fall in full-time positions of 1.77 million partially compensated by 813,000 new part-time positions.

In a recent report on Greece we have argued along similar lines: structural reforms and austerity have pushed the unemployment rate to unprecedented levels, and increased competitiveness achieved through lower labor costs has done (and will do) little to improve the external balance, while it has contributed to a dramatic drop in domestic demand.

Professor Gilbert responded to my letter in the Comments section of the Financial Times, and since I hope this discussion could be of interest to others (the Letters section of the FT is only open to subscribers), I would suggest continuing it on this blog.

First of all, what strikes me in Professor Gilbert’s reply is his view of economists as a group of scientists who share the same beliefs: continue reading…

(first appeared in Social Europe)

Never miss a party – especially one you’ve been desperately waiting for for so long. This much the authorities in Europe’s currency union clearly understand. As soon as Eurostat had released its first estimate for GDP growth in the spring quarter in mid August (1^st estimate here), which was missing the by now customary negative sign, the champagne began to flow, it seems, accompanying all-round self-congratulatory shoulder slapping.

For instance, Spain’s economy minister Luis de Guindos confidently noted that “Spain will show clearly the quality of the policies implemented in the eurozone” (FT.com 4 September 2013). And European Commission President José Manuel Barroso declared in his State of the Union Address on 11 September 2013 that “the facts tell us that our efforts have started to convince.” Germany’s finance minister Wolfgang Schäuble also joined the chorus, just in time for the federal election, proudly announcing in The Financial Times that “while the crisis continues to reverberate, the eurozone is clearly on the mend both structurally and cyclically.” Dr Schäuble declared with poise that “what is happening turns out to be pretty much what the proponents of Europe’s cool-headed crisis management predicted. The fiscal and structural repair work is paying off, laying the foundations for sustainable growth,” and then went on to boast that “despite what the critics of the European crisis management would have us believe, we live in the real world, not in a parallel universe where well-established economic principles no longer apply” (“Ignore the doomsayers: Europe is being fixed,” FT.com 16 September 2013; see comment by this author: “The euro crisis is not even close to being over, Mr Schäuble”).

Apparently Germany’s “stability-oriented” prescriptions for the land of the euro are now doing their magic just as Dr Schäuble had always promised they would. Fiscal contractions are now proving expansionary after all, just with a little bit of a delay, while growth-enhancing structural reforms are beginning to bear fruit too, it seems. The euro authorities are making sure though not to miss any chance at emphasizing that more of the same medicine will be needed to do even more good going forward.

Perhaps this is a good time then for a reality check. continue reading…

As a member of the eurozone, Greece does not control its own currency and therefore cannot devalue said currency in an effort to promote an export-led recovery. Instead, Greece is stuck with the troika’s strategy of internal devaluation: seeking export growth through reducing unit labor costs (wages). As Dimitri Papadimitriou, Michalis Nikiforos, and Gennaro Zezza have pointed out, however, that strategy isn’t working (pdf).

Two interesting pieces by J. W. Mason suggest that the option of leaving the eurozone, which would allow Greece to revert to and subsequently devalue the drachma, may not look much more promising, at least in terms of the prospects of generating an export-led expansion. Mason examines the experience of a number of countries following the 1997 Asian crisis and sees little evidence for the currency devaluation/export-led growth story:

You can argue, I suppose, that without the devaluations export performance would have been even worse. But you cannot claim that faster export growth following the devaluations boosted demand, because no such faster growth occurred.

It’s really remarkable how much the devaluation-export growth link is taken for granted in discussions of foreign trade. But in the real world, for whatever reason, the link is often weak or nonexistent.

If that’s the case, Greece may truly be stuck — that is, without a major, and wildly unlikely, intellectual conversion within the ranks of troika and core country leadership; one that leads to an abandonment of austerity and more imaginative thinking about how to use funds from European institutions to stimulate growth and employment in the periphery.

In case you missed it, what with all the celebrating going on in the eurozone over the incredible success of austerity policies, the unemployment rate in Greece is now at 27.9 percent and the country is likely on its way to a third bailout.

C. J. Polychroniou argues in a new one-pager that offering Greece another bailout package like the first two makes no sense, and he provides some much-needed (and daunting) perspective on how far Greece would need to climb — assuming its economy started growing, and wasn’t still contracting (Greek output shrank by “only” 3.8 percent in the second quarter of 2013) — just to get its economy back to where it was before its version of the Great Depression set in:

“At this stage, in order for Greece to be able to service its debt and recapture its lost GDP and employment levels, one would have to rely on an outrageously optimistic scenario of economic growth: probably somewhere in the range of a long-term nominal GDP growth rate of 7–8 percent.

While Greece may soon end up with wages comparable to those of China, the odds of its experiencing growth rates close to those of China are probably the same as achieving time travel.”

C. J. Polychroniou, Fiscal Sadism and the Farce of Deficit Reduction in Greece

The policy strategy being imposed on Greece by its international lenders depends on the success of something called “internal devaluation”: in the absence of being able to devalue its own currency, Greek wages have been cut in the hopes that this generates an export-led economic recovery. So, how is this going? As Dimitri Papadimitriou, Michalis Nikiforos, and Gennaro Zezza explain in a new One-Pager, not very well.

The authors observe that Greece has succeeded in increasing the sort of “competitiveness” required by this strategy: it has lowered its relative labor costs more than any other country in the eurozone except for Germany. Furthermore, Greece’s net exports have expanded since 2009.

Mission accomplished? Not quite. One problem, the authors point out, is that 71 percent of Greek export growth since 2009 has come in the form of an increase in the value of trade related to its oil refineries — which is to say, in an area that has little to do with internal devaluation (and depends on volatile factors like changes in oil prices). Most of the increase in net exports came from a decline in imports (a result of the neverending recession).

But most important of all, the gains from net exports have not come close to offsetting the dramatic plunge in domestic demand, as you can see here (this figure comes from their July strategic analysis):

Now, perhaps we just need to give the troika’s (EC/IMF/ECB) strategy more time. Perhaps exports will eventually pick up across the board (beyond refined petroleum products) and on such a scale as to generate a recovery. As this recent headline from Ekathimerini indicates, we shouldn’t be holding our breath: “Greek exports post worst performance in three years.” And the model developed by Papadimitriou, Zezza, and Nikiforos — based on the stock-flow approach of Wynne Godley recently featured in the New York Times, and tailored specifically to the Greek economy — suggests that it would take a very long time just to discover whether there’s anything to this theory of internal devaluation.

Meanwhile, the costs of sticking with the troika’s program look (socially and politically) unsustainable: the authors project that if Greece continues with current policies, it may be looking at an unemployment rate around 34 percent by 2016. (By comparison, the EC/IMF predict that if everything goes according to plan — and it is notable that, year after year, the Greek economy has consistently performed worse than their projections — unemployment will be “only” 20 percent in that year.)

Dimitri Papadimitriou, Michalis Nikiforos, and Gennaro Zezza’s new One-Pager: “Waiting for Export-led Growth: Why the Troika’s Greek Strategy Is Failing” (pdf).

See also “The Greek Economic Crisis and the Experience of Austerity,” a Strategic Analysis.

For more details on their model, see this technical paper: “A Levy Institute Model for Greece.”

It is almost conventional wisdom today to view Germany as the winner of the euro crisis. Reisenbichler and Morgan recently argued this case in Foreign Affairs, although cautiously adding that Germany’s supposed gains may not last. The miserable truth is, however, that the euro has yet to produce any real winner, while Germany’s apparent gains from the euro crisis in particular are largely an illusion about to unravel. Ultimately only a fundamental re-design of institutions and policies in the Euro-zone would open up the prospect of creating a union of true euro winners. Misled by ill-conceived ideas and beliefs – and against its own national interest – Germany is adamantly blocking such a move. Actual policies pursued and regime reforms undertaken since 2009 under German dictate have made Europe progressively more vulnerable, and ever more of a threat to global stability as well. As of now, the euro remains firmly on track for eventual breakup – an event which would see Germany among the biggest losers.

The view of Germany as the winner of the euro crisis points as evidence at Germany’s current low unemployment rate, balanced public budget, and low borrowing costs. The contrast with the situation elsewhere in the Euro-zone is so crass that Germany currently also enjoys an influx of skilled immigrants, providing further support to its economy and housing market. Yet the state of Germany’s economy is far from stellar and the fact that Germany’s current superior performance in relative terms has come largely at the expense of its euro partners should prompt alarm rather than awe. The euro’s life expectancy was always dependent on convergence within the currency union. Instead, persistent divergences and the corresponding buildup of intra-zone imbalances have not only created the ongoing crisis, but also the illusion that Germany – its apparent winner – must have done everything right and should now be the unchallenged model for others to follow.

But to view Germany as the euro paragon is a grave misinterpretation of events. Not only should Germany’s current performance be viewed in a broader perspective: Germany has grown at an average rate of little over one percent per year under the euro; hardly impressive. It must also be understood that Germany cannot be the model for others to follow, precisely because the workability of the German model depends on others behaving differently. It is in the essence of Germany’s export-led growth model that it presupposes willing importers. The trouble is that the German authorities remain at a terrible loss when it comes to properly understanding the country’s economic model and the sources of its success under specific historical conditions. continue reading…

Dimitri Papadimitriou in Bloomberg View yesterday:

In December 2010, the so-called troika of lenders — the European Commission, the European Central Bank and the International Monetary Fund — predicted that their measures would move Greece’s unemployment rate to just under 15 percent by 2014. A year later, it changed the forecast to almost 20 percent.

This month, the Hellenic Statistical Authority reported that unemployment rose to a record in May, with a seasonally adjusted jobless rate of 27.6 percent. The rate was 64.9 percent for people 15 to 24.

Bold declarations that belt-tightening would produce growth have been pared back, too. Since 2010, the troika has gradually dropped its forecast for 2014 gross domestic product (in money terms) by almost 40 percent. IMF staff reported last week that GDP contracted 6.4 percent in 2012 and will drop 4.2 percent this year before expanding only a little in 2014.

Yet, despite admissions that mistakes were certainly made, no consideration is being given to ending austerity measures. Nor has there been effort to devise a renewal agenda for Greece. The Marshall Plan offers a spectacularly successful model that could easily be adapted.

… Here is how an EU-funded plan for recovery could succeed. Although past bailout funds benefited banks and financial institutions, with a large portion devoted to interest payments for creditors, the new program would focus on debt forgiveness, and then turn to reconstruction projects to rebuild national infrastructure and create public projects at the local level.

Read it all here.

This is what the troika’s constantly-downgraded predictions look like, compared to the actual paths of growth and unemployment and projections based on the Levy Institute’s stock-flow model for Greece (from “The Greek Economic Crisis and the Experience of Austerity“):

One of the theories that motivates the policies the troika (EC/IMF/ECB) is imposing on Greece is that reducing Greek wages will make Greek exports more attractive, helping to contribute, so the theory goes, to growth in GDP and employment.

And in an interview that appeared yesterday at Truthout, Dimitri Papadimitriou points out that Greek competitiveness, at least in terms of relative unit labor costs, has indeed increased, more so than in any other eurozone country save Germany. But despite the fact that exports have also risen some, Greece is still stuck — and likely hasn’t even seen the worst of its social and economic deterioration.

This graph from the Levy Institute’s recent stock-flow analysis (pdf) of the Greek economy illustrates the point (N.B. in this figure, an increase in value, i.e., moving to the right, implies a decrease in competitiveness). Although relative unit labor costs (in orange) have declined in Greece, Papadimitriou points out in the interview that “the declining fortunes do not affect consumer prices [in green] that are continuously rising, pushing more and more people into deeper poverty”:

Papadimitriou goes on to lay out an alternative negotiating strategy for Greece, based on exploiting what he calls a “division in the house of troika.” If this strategy fails, the options become more “unthinkable”: continue reading…

On the face of it, the troika’s (ECB/IMF/EU) bailouts of Greece, with their attendant demands for budget austerity, privatization, and labor market reforms, have failed and failed again — whether we’re talking about basic material well-being or debt ratios:

Currently, the official unemployment rate stands at 27 percent, while youth unemployment is above 62 percent and more than 30 percent of the population lives near or below the poverty line. In a nation of less than 11 million people, more than half a million children live in poverty—that’s one out of three—with nearly 60 percent of them living in households that experience “severe material deprivation.” The debt-to-GDP ratio declined from 170 percent at the end of 2011 to 156 percent at the end of 2012 (following a rather sizable “haircut” among private holders of Greek bonds) and will remain at unsustainable levels for the unforeseeable future. In fact, the best scenario envisioned by Greece’s international lenders is that the country’s debt-to-GDP ratio will be reduced to 120 percent by 2020 — only 6.8 percent less than what it was when the debt crisis began in late 2009.

When the same policies are tried over and over again, with the same dismal results, there are plenty of potential reasons for an unwillingness to change course. As frequently noted, the allure of fashionable economic theories can long outlast the nuisance of uncooperative empirical results.

Along with ideology and pet economic theories, C. J. Polychroniou suggests another (far more cynical) interpretation. The bailout programs, he says, are succeeding in some respects; the problem is that we may be incorrectly assuming what the main priorities are:

Amazingly enough, in the face of this ongoing and uncontrolled catastrophe, and despite the IMF’s admission that it misjudged the impact of austerity on Greece’s economy and its people, IMF and EU officials remain as committed as ever to the policies responsible for Greece’s collapse. But while many seem surprised by this apparently contradictory posture, they shouldn’t be. The austerity “shock treatments” administered by the IMF and the EU have two explicit goals: (1) to ensure that the loans are paid back no matter what the cost, and (2) to roll back the average standard of living in order to create highly favorable conditions for international business-investment opportunities and to increase the rate of profit for the corporate and financial elite at home. It is an avowedly class-warfare approach, cloaked in the organization’s holier-than-thou rhetoric about the overall benefits of a neoliberal economic order and the economic drag created by organized labor and workers’ rights, social welfare provisions, and decent wages.

He makes the rest of his case in a new policy note.

Dimitri Papadimitriou, Levy Institute president and one of the coauthors of a new macroeconomic report on the Greek economy, appeared on Skai TV to discuss the new austerity measures passed by that country’s parliament last week. Segment (in Greek) begins at 36:00.