C. J. Polychroniou refers here to the fact that private sector salary cuts are part of the “rescue package” recently approved by the Greek Parliament. Asked to comment at the Foreign Policy blog, Dimitri Papadimitriou explains why this attempt at internal devaluation won’t work.
In an interview for Bloomberg Radio Papadimitriou also stresses that these measures are politically untenable (although approved by the Parliament, whether they will actually be implemented is another question). In the interview Papadimitriou goes on to say that European policymakers are merely trying to shield the rest of the eurozone from Greece so that the beleaguered country can eventually be shown the door. While policymakers’ rhetoric suggests they are unequivocally committed to ensuring that Greece remains in the Union, Papadimitriou argues that their actions suggest otherwise. Without any serious investment in kickstarting Greek growth—Papadimitriou references what was done with East Germany following reunification—what we’re looking at here are not serious attempts to keep the eurozone intact.
Listen to or download the Bloomberg interview here.
C. J. Polychroniou has a new one-pager that starts off by noting the asymmetries in the approaches taken by governments in the US and Europe to the 2007-08 crash and its aftermath: featuring bold public interventions to save the banking and financial systems but relatively limited measures for the millions of unemployed. He then turns his sights to the latest 130 billion euro Greek “rescue” package and, in the context of a series of such packages and their accompanying austerity demands, Polychroniou suggests that Greece is being pushed too far:
It is high time for Greece to put an end to the EU farce that has now turned into a real tragedy. The nation should refuse to accept another lethal injection and threaten immediate default. At this juncture, there is no other way out.
From a peak of 4.5 million workers in 2008, Greece has already lost 500,000 jobs. Our first chart shows that the country is already in its worst condition since the beginning of the century in terms of the share of the working age population who have a job (our projections are based on the last monthly data for 2011).
In the next chart we compare government tax revenues to employment, where tax data are from the sectoral accounts of Greece. Although the recent data revision to sectoral accounts are less pessimistic than the former release, we should expect the fall in employment to produce a corresponding fall in government revenues, with adverse effects on government deficits and debt.
What Greece needs are policies to create jobs.
No matter what happens on Sunday, when the Greek parliament is scheduled to vote on the latest bailout package, on Monday Greece will wake up in the grip of an employment crisis (20 percent unemployment, with a near 40 percent youth unemployment rate). In the Huffington Post Dimitri Papadimitriou tells us what we can (and can’t) do about it.
Depending on the Greek private sector alone to produce enough jobs to stave off these socially corrosive levels of unemployment is unrealistic. Drawing from a report on the Greek labor market recently produced by the Levy Institute, Papadimitriou lays out the case for direct public service job creation. As Papadimitriou points out, Greece is currently experimenting with a similar, small-scale version of the idea:
… a better option is being tried on a small scale: A labor department direct public service job creation program with an initial target of 55,000 jobs. Participants are entitled to up to five months of work per year, in projects — implemented by non-governmental organizations — that benefit their communities. A similar, streamlined, Interior department program, this one without NGO participation, will generate up to 120,000 openings.
This approach is the Greek government’s best shot at slowing the nosedive in employment, and at circumventing further catastrophe. The plans have been designed to specifically address and avoid the nepotism, corruption, and favoritism that plague poorly conceived ‘workfare’ schemes. With proper targeting, monitoring, and evaluation as the projects move along, the outcomes should be impressive
To provide a little more perspective on the news of the just-announced Greek bailout agreement, I point you to this CNN Money piece from yesterday in which Dimitri Papadimitriou notes how abysmal the underlying economic growth trends remain (Greek employment depends a lot on shipping, which is faring poorly) and reminds us that the package, containing some brutal measures like a 25 percent cut in the minimum wage, would still need to be approved by the Greek parliament:
“It’s a cautious euphoria because investors are only looking at the short-term. Of course, there should be an agreement between the troika and the Greek government,” Papadimitriou said. “But you can’t assume that a Parliament that is in disarray will approve more austerity measures.”
Voting on the package in the Greek parliament is scheduled for Sunday. Stay tuned.
“…while Europe’s leaders haven’t hit upon a way to forestall a years-long span of catastrophically high unemployment and falling living standards, they do appear to be really really really really committed to saving banks.” That’s Slate‘s Matthew Yglesias, who notes that this (seemingly exclusive) focus among European elites on saving their banks likely ends up protecting the US economy from eurozone contagion more effectively than would policies focused on growth and easing the plight of those whose wellbeing depends on the “real” economy.
The reason is that, as Gennaro Zezza points out here, the US economy is not overly exposed to a slowdown in European growth; not overly exposed, that is, compared to the fallout from a European financial panic. As Dimitri Papadimitriou and Randall Wray indicate, US finance is still entwined with the fate of European finance; at least in part due to the roughly $1.5 trillion invested in European banks by US money market mutual funds.
In other words, comparatively speaking, the US economy will not suffer much from European policy elites’ apparent relative disinterest toward the fate of their people, but may dodge a bullet if current efforts to save the European banking system work out. (At least in the short run. In the longer run, Ryan Avent is probably right to worry that this LTRO stuff may just amount to sweeping serious problems under the rug: “…when failure is never allowed the system becomes more brittle and the cost of a blow-up, which probably isn’t avoidable for ever, rises.”)
Dimitri Papadimitriou and Randall Wray deliver a second installment of their joint assessment of the risks that a renewed global financial crisis might be triggered by events in Europe or the United States. In their latest one-pager they move past disputes over etiology and lay out their solutions for both sides of the pond: addressing the basic flaws in the setup of the European Monetary Union (“the EMU is like a United States without a Treasury or a fully functioning Federal Reserve”) and outlining how to place the US financial system and “real” economy on more solid foundations.
Their first one-pager focused on the reasons it is unhelpful to label the turbulence in Europe a “sovereign debt crisis.” This way of framing the situation obscures more than it enlightens. To recap: prior to the crisis only a couple of countries had debt ratios that significantly exceeded Maastricht limits. For most, the economic crisis was the cause of rising public debt ratios, rather than the other way round. What we really need to look at, Papadimitriou and Wray suggest, are private debt ratios and current account imbalances within the eurozone. And as for current public insolvency concerns, this has far more to do with the flaws in the institutional setup of the European Monetary Union than the particular size of a country’s debt ratio: countries that control their own currencies aren’t experiencing comparable difficulties.
(For a more detailed investigation, Papadimitriou and Wray will be releasing a new public policy brief: “Fiddling in Euroland as the Global Meltdown Nears.”)
Marshall Auerback appeared on the Business News Network to give his take on the latest developments in the eurozone crisis; specifically with respect to the ongoing negotiations over the proposed (now 70 percent) haircut on Greek debt. Auerback also addressed the LTRO (noting the rather dramatic increase in the ECB’s balance sheet) and the credit default swaps on Greek debt (on this, see also Micah Hauptman’s take on the process for determining when these CDS payments are triggered: “murky, unregulated, and replete with conflicts of interest“).
You can watch a clip of Auerback’s interview here.
As a counterpoint to the last post on the curious dominance of conservative macro policy ideas in Europe, here is Matías Vernengo getting into the political economy of who benefits from these failed policies and why there seems to be no sense of urgency around the fact that the real economy is broken:
(This is from a Real News Network interview from December, originally highlighted at TripleCrisis)
Also check out Vernengo’s recently released working paper. Vernengo and his coauthor, Pérez-Caldentey, give a post-Keynesian interpretation of the eurozone crisis that places financial deregulation and the core-periphery imbalances that are inherent in the euro model at center stage.
Marshall Auerback compares the job numbers in the US to those in Europe and asks why the US is doing so much better (or failing less miserably). One of the differences he highlights is the zealous dedication to fiscal austerity in Europe, compared to the relatively half-hearted, passive observance of doctrine in the US.
For people operating on the basis of loose stereotypes about the differences between the US and Europe, this has perhaps turned out to be surprising. You might have assumed that Europe’s more expansive social welfare systems would be accompanied by more progressive approaches to fiscal or monetary policy. But as Matt Yglesias observes, Europe is awash in some pretty conservative ideas about macroeconomic policy:
… the American right has lately fallen out of love with both J.M. Keynes’ fiscal stimulus ideas and Milton Friedman’s monetary stimulus ideas. Tussle between these two has dominated practical policymaking for decades in the United States, but if conservatives were to cast their eyes toward Europe they’ll find a continent where these ideas about demand-side management get short shrift.
(To muddy the waters a bit, due in part to the strength of the aforementioned social welfare supports the default fiscal policy stance in Europe is actually more expansionary than in the US. More robust automatic stabilizers in Europe make a “do nothing” policy more fiscally expansionary, even while official or discretionary European policy is dedicated to deficit reduction and tight money. In the US you have almost the reverse: automatic stabilizers play less of a role in counteracting recessions, while official policy—in the White House, if not Congress—continues to feature calls for more discretionary stimulus.)
To add a cute little twist to this tale, the dismal failure of these contractionary policies in Europe could, perversely, help entrench the American right and its ideas for some time. If Europe collapses outright or even continues to limp along, the US recovery is likely to get bogged down, which in turn makes the election of a Republican President in 2012 more likely. And as Ezra Klein points out, if more robust catch-up growth emerges in the US some time in the next five years, the person sitting in the Oval Office, and his policy message, will get most of the credit. So the abysmal practical failure of a set of policy ideas in Europe could actually end up entrenching those same ideas on this side of the pond.
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