Archive for the ‘Eurozone Crisis’ Category

How Long Until Greece Recovers?

Michael Stephens | February 5, 2016

The Levy Institute has completed its most recent medium-term projections for the Greek economy. The outlook, unsurprisingly, isn’t reassuring.

The baseline simulation, which assumes the continuation of current policy, shows the GDP growth rate turning positive in 2017 and reaching 2 percent in 2018. Yet, in a reflection of how much damage has been done by the crisis, even if Greece managed a growth rate around that pace (2.1 percent per year), it would take until 2030 for real GDP to return to its 2006 level. It’s fair to wonder whether such a delayed recovery — with little relief on the horizon for the elevated numbers of poor and unemployed in Greece — is politically and socially sustainable.

And there’s worse news in the report. The baseline generated by the authors’ model for Greece reflects a scenario in which future growth would be export-driven. But this increase in Greek exports would not be generated primarily by price competitiveness (“the price elasticity of Greek exports is low while the income elasticity is high”). That is, the decline of Greek wages — the centerpiece of the official “internal devaluation” strategy — isn’t projected to produce much of a payoff in terms of net exports.

Instead, the rise of exports in this scenario is almost entirely due to assumptions about the economic health of Greece’s trading partners; assumptions taken from the IMF. And as the authors caution, the IMF is likely overstating European growth prospects. So this lost decade-and-a-half for Greece (more, if you’re counting from the onset of the crisis) is actually the “optimistic” scenario.

What can be done? Some of the plans being considered are simply too tame. The authors run a second simulation based on the implementation of a “Juncker Plan”: an increase in public investment for Greece, funded by European institutions, of €1 billion in 2016, €2 billion in 2017, and €3 billion in 2018. The results suggest such a program could help raise GDP growth rates (to -0.4 percent in 2016, 2.9 percent in 2017, and 2.8 percent in 2018), but according to the authors the lag between output and jobs would still leave unemployment too high for too long. Something better targeted, and less reliant on the good will of European institutions, is required. More on that soon.

Read the full Strategic Analysis here and the One-Pager version here.


Stormy Fantasies about Labor Cost Competitiveness

Jörg Bibow | January 27, 2016

Lamenting that intellectual inertia is responsible for slow progress in economics, Servaas Storm sets out to teach a lesson to everyone who may still be foolish enough to believe that relative labor costs matter for international competitiveness and that diverging unit labor cost trends – specifically persistent wage moderation in Europe’s largest economy, Germany – may have played a rather critical role in sinking Europe’s monetary union. It is a dangerous myth, Storm proclaims, that labor costs drive competitiveness. He suggests that the eurozone crisis originated from a different set of causes altogether; German wages are little more than trivia.

I fear that Servaas Storm will further add to existing confusions about both German wages and the widely misdiagnosed and never-ending eurozone crisis more generally. His blog of January 8, 2016 titled “German wage moderation and the eurozone crisis: a critical analysis” (see here) is hardly a masterpiece in analytical coherence. I will focus on some key issues.

Storm appears to be making three big points. First, German wage moderation is a mere fiction. If Germany’s competitiveness improved at all under the euro, that was the result of nothing else but its engineering ingenuity: “It was German engineering ingenuity, not nominal wage restraint or the Hartz ‘reforms’, which reduced its unit labor costs. Any talk of Germany deliberately undercutting its Eurozone neighbors is therefore beside the point.” Second, Storm essentially agrees with the “consensus narrative” recently proposed by a group of CEPR-associated researchers (see here) which sees the origin of the eurozone crisis in rampant capital flows causing massive intra-eurozone current account imbalances. German wage moderation does not feature at all in the consensus narrative, a conspicuous neglect that prompted Peter Bofinger’s recent critical response (see here; and also here). Storm’s attack therefore reserves some special venom for Bofinger (amongst various other proponents of the wage moderation hypothesis, including this author). Third, the eurozone’s real underlying problem, according to Storm, is that the euro has “not led to a convergence of member countries’ production, employment, and trade structures, but rather to a centrifugal process of structural divergence in production.” Somehow – but other than through wage moderation! – Germany got even stronger in high value-added, higher-tech manufacturing under the euro, while the eurozone South remained stuck with low value-added, lower-tech manufacturing.

In the course of presenting these three points (or hypotheses) Storm not only thoroughly misrepresents the “wage moderation hypothesis,” he also fails to shed any new light on the supposed role of capital flows, while ending up with the rather disheartening proposition that the euro is essentially nonviable until the eurozone’s production structures converge to the German standard.

Regarding the first point, the idea that German wage moderation may be fiction rather than fact, I am simply baffled. The wage moderation hypothesis (at least as I have presented it; see here, here, and here, for instance), starts from the following facts (data courtesy of Eurostat and the OECD). First, Germany’s unit labor cost trend stayed persistently below the common stability norm as set by the ECB; reneging on the golden rule of currency union. Second, German wage inflation was the clear outlier in the downward direction. Third, German productivity growth barely met the euro area average. continue reading…


That Puzzling “Revelation” Politely Called “German Wage Moderation”

Jörg Bibow | December 6, 2015

A few days ago Peter Bofinger, one of Germany’s “wise men,” published an astonishing post titled “German wage moderation and the Eurozone crisis” that appeared on (see here) and Social Europe (see here). The post was astonishing in more than one way. First of all, it seems astonishing that, in late 2015, and not 10 years earlier or so, a wise man from Germany should feel the need to draw attention to the role of German wage moderation in the eurozone crisis. Persistent German wage moderation under the euro is an undeniable fact. How can there be any controversy about it some 20 years after it started?

No less astonishing was the particular occasion that triggered Bofinger’s post. Bofinger responds to a recently published CEPR Policy Insight titled “Rebooting the Eurozone: Step I – agreeing a crisis narrative.” This is an essay by a group of CEPR-related economists attempting to establish what they see as a “crisis narrative” that may be more in accordance with the basic facts about the eurozone crisis (rather than being based on myth or political convenience). In particular, these economists reject the official narrative that is still popular today among some key eurozone authorities, especially Germany’s finance ministry: namely, the “sovereign debt crisis” myth. Their alternative crisis narrative highlights large intra-eurozone capital flows and imbalances and the “sudden stop” event that featured their eventual implosion. Bofinger generally agrees with the proposed alternative crisis narrative but makes the point that something rather important is missing in it: the alternative CEPR crisis narrative pays zero attention to the role of German wage moderation and is therefore “incomplete.” It is indeed astonishing that one of the supposedly leading European economic policy think tanks proposes a crisis narrative, and one supposedly based on the basic facts, but misses the most basic fact of all: that German wages stopped rising under the euro. continue reading…


Is a “Bad Bank” Model the Solution to Greece’s Credit Crunch?

Michael Stephens | October 30, 2015

Dimitri Papadimitriou and new Levy Institute Research Associate Emilios Avgouleas write about one of the obstacles to recovery of the Greek economy: the absence of credit expansion in connection with still-troubled Greek banks.

Beyond deposit flight and the ongoing recession, Papadimitriou and Avgouleas argue that the botched recapitalization of Greek banks can also be blamed for the failure to alleviate this liquidity crunch. As the next round approaches, they warn that past recapitalization efforts did not follow internationally-tested best practices:

The decision by creditors to allow the old, now minority, shareholders and incumbent management to retain effective control of Greek banks is highly questionable. This rather unusual governance approach in a post-rescue period meant that the Greek banking system did not benefit from any cleanup efforts, especially in light of the interlocking and privileged relationships some bankers enjoy with Greek political, media, and economic interests.

In addition, they stress that effective recapitalization requires some attempt to restructure loan portfolios: an attempt to deal with the significant — and still growing — share of loans falling into the “nonperforming” category (NPLs). This chart showing the growth of NPLs (from a strategic analysis by Papadimitriou, Michalis Nikiforos, and Gennaro Zezza), gives you a sense of the debt-deflation trap in which Greece is stuck:

Greece_Nonperforming Loans

In order to clear the way for Greek banks to return to making loans, Avgouleas and Papadimitriou propose the creation of a “bad bank” that would take on the NPLs, with government guarantees currently extended to Greek banks withdrawn and applied instead to the bad bank fund.

Under this scheme, Greek borrowers would be offered an effective way to restructure their borderline loans while banks could avoid writing off all NPLs, with significant consequences for their balance sheets, and instead have the loans objectively valued and transferred to the bad bank. In addition, creditors would not have to face an unduly inflated Greek bank rescue bill, and the investment that Greek taxpayers have made and will make in the banking sector would not be entirely wiped out. Sound bank recapitalization with concurrent avoidance of any creditor bail-in—which under the current circumstances would prove catastrophic—and implementation of robust and sensible corporate governance changes could help the Greek banking sector return to financial health.

The complete analysis can be found in their newly released policy note (pdf).


Euroland Has No Plan B: It Needs an Urgent Recovery Plan

Jörg Bibow | September 8, 2015

At last, the eurozone economy appears to be experiencing some kind of recovery. GDP started growing again in the spring of 2013, following seven quarters of decline, with domestic demand shrinking for even nine consecutive quarters between 2011 and 2013. Today, it is conceivable that within a year or so the eurozone might recoup its pre-crisis level of GDP, perhaps marking the end of a “lost decade.”

But it is too soon to declare victory and become complacent. The eurozone remains fragile and the recovery uneven. Having primarily relied on export demand for its meagre growth since 2010, developments in China and elsewhere in the emerging world are posing an acute threat. More recently home-grown demand benefited from peculiar tailwinds that are temporary in nature. It is unclear at this point whether these forces will merge into a stronger self-sustaining recovery, while the likelihood of renewed and spreading political instability along the way keeps rising. It seems unwise, in fact hazardous, not to have a plan B ready at hand should growth falter once again.

Bibow_Plan B_Fig 1

Figure 1 shows index values for GDP, gross capital formation, final consumption, exports, and imports, all relative to their respective levels in the first quarter of 2008. Remarkably, only exports have seen some real recovery. Gross capital formation, on the other hand, remains stuck at a severely depressed level to this day, while final consumption is only slightly ahead of its pre-crisis peak. Clearly, the eurozone owes it largely to the rest of the world that it has not sunk into even deeper depression.

The gaping external imbalance that has built up since the crisis quantifies the extent to which the eurozone has weakened and undermined the global recovery in recent years. Its soaring external surplus has required other countries to “over-spend” accordingly. As numerous over-spenders appear overstretched at this point, the eurozone’s external imbalance also signifies its own vulnerability to a deteriorating global environment. In a way, the ongoing deterioration in the global environment also reflects the fact that the driving forces of global growth have come full circle, and seem exhausted and spent today – unlikely to fire up again any time soon. continue reading…


Crystal Balls, or Robust Economic Research?

Gennaro Zezza | July 16, 2015

An article from Bloomberg listed nine people who saw the Greek crisis coming years ago. The list may be narrowly confined to Anglo-Saxon economists, but I am quite happy that most of the people listed worked at, or were/are affiliated with, the Levy Institute.


Wynne Godley is the first on the list, given his prescient words in the London Review of Books in October 1992. I am happy I contributed to spreading his thoughts in Italy.


Mat Forstater is a friend I regularly meet at the annual Minsky Summer Seminar at Levy.


Stephanie Kelton, now chief economist on the U.S. Senate Budget Committee, was often at the Minsky Seminar, before her latest appointment.


Stephanie worked with Randy Wray, who is among the most prolific and influential economists at Levy.

If so many economists doing research together got it right on Greece (as well as on the 2007 recession) maybe it is not by the power of crystal balls, but because of robust, consistent economic thinking?


Deflation Über Alles

Michael Stephens | July 15, 2015

The “negotiations” that surrounded the latest Greek deal do not reflect well on the system (such as it is) of EMU governance. And there are no silver linings to be found in the outcome of this process. It is a testament to how far we are from “normal” that even the best-case scenario would have left little room for optimism. Even if Greece had received a sensible package — one involving debt restructuring and a pause in austerity — this would still have meant an intolerably long period of high unemployment. (“Even if the Greek economy were to miraculously bounce back to its precrisis growth rate, it would take almost a decade and a half to return to precrisis employment levels.” p. 3 [pdf])

Moreover, the particulars of the Greek situation aside, it is important to recall how far we are from a resolution of the broader eurozone crisis, which will arguably not end until the fundamentally flawed euro setup — of which the Greek crisis is a symptom — is addressed. In this vein, Pavlina Tcherneva recently spoke to Richard Aldous of The American Interest about the latest Greek deal and the “stateless currency” that is the euro (listen to the podcast here).

Tcherneva also touched on an aspect of this broader theme in her recent RT interview. In the clip below she links the “deflationary environment” in the eurozone to the absence of a central fiscal authority:



(See here for a proposal for Greece that aims to [temporarily] relieve the constraints rooted in the divorce of fiscal policy from monetary sovereignty: by funding a direct job creation program through the creation of a parallel currency.)

National animosities and idiosyncratic personalities aside, the blame for the underlying crisis ultimately falls on the very structure of the EMU. This is why it was possible for figures like Wynne Godley to have seen this coming decades ago.


Papadimitriou on Making an Example of Greece (Audio)

Michael Stephens | July 8, 2015

From Athens, Dimitri Papadimitriou spoke with Ian Masters about Tuesday’s emergency meeting in Brussels (attended by Greece’s new finance minister)  and the country’s prospects going forward.

Papadimitriou touched on both the economic and political facets of the crisis, and discussed the idea that Greece is being “taught a lesson” as a demonstration to the rest of the eurozone (think Spain and Podemos) that the “wrong type of government” will not be allowed to succeed. Listen/download here.


Euro Union – Quo Vadis?

Jörg Bibow | July 3, 2015

This week a slow-motion train wreck hit the wall in Europe. Greece’s Syriza government came to power earlier this year on a mandate to keep Greece in the euro but end austerity. It was clear from the start that this project could only work out if Greece’s euro partners finally acknowledged that their austerity policies of the past five years had failed and that it was about time to change course and actually start helping Greece to recover.

This was not such an outrageous proposition. Any sane and economically literate person would consider a 25-percent decline in GDP and a youth unemployment rate north of 50 percent as evidence that the utterly brutal troika-imposed austerity experiment had backfired badly. Any European of normal emotional disposition would look at the humanitarian crisis in Greece with horror and shame. Yes, this is really happening in Europe, inside the European Union, in the 21stcentury! There was a time when Europeans appealed to their common destiny and spelled solidarity in capital letters. There was a time when Europe felt strongly that its future place in the world would only be one of peace and prosperity if the nations and peoples of Europe respected each other and joined forces to act constructively and in unison – “united in diversity.”

Not so anymore. In Berlin, Germany, in Dr. Schäuble’s “parallel universe,” austerity works always and everywhere, and the more the better – no matter what the facts might say on this planet. If anything went wrong in Greece, it must be the Greeks’ own fault, 100 percent. Because the Greeks are lazy, corrupt, and untrustworthy – as Germany’s rotten media, plagued by inhumanly stupid economic journalism, have been preaching to the German public for many years now. So the Germans believe what “Mama” Merkel tells them. And the Germans even believe that their finance minister represents unquestionable economic wisdom and rectitude: the only finance minister on earth who understands how to “balance the budget” year after year so as to protect their grandchildren from the evils of debt. These profound illusions and delusions are proving a catastrophe for Europe (and beyond). Once again, the collective folly of the German people risks exposing Europe to the naked forces of barbarism.

What went wrong? continue reading…


Why Greece’s Budget and Debt Restructuring Discussions Need to Be Tied Together

Michael Stephens | July 2, 2015

Pavlina Tcherneva spoke to RT’s Erin Ade yesterday on Greece’s impossible situation: