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.

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.

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):

Most analysis of the Greek debt crisis ignores an important reality: While Greece may be the villain du jour, every eurozone nation is profoundly short of cash. That’s because of a well-acknowledged, but not fully appreciated, flaw at the heart of eurozone financial architecture that converted a historically unprecedented number of nations from issuers of their own currency to users of a common currency.

Greece is simply the first country to experience the extreme consequences of that loss of monetary sovereignty. With no independent source of funding, no currency of its own, no central bank to guarantee its government liabilities, it has had to ask others for help. And as a condition for securing that help, Greece has until now been forced to consent to radical austerity policies.

As an analogy, consider a United States with a common currency but no Treasury to conduct macroeconomic policy, stabilization or stimulus spending. Imagine also that the Federal Reserve was banned by law from guaranteeing U.S. government debt. And imagine that one state, say, Illinois (think Germany) was the major net exporter, accumulating dollars (euros) while most other states (as is the case in the eurozone) were net importers, thereby bleeding dollars (or euros). Finally, imagine Illinois providing a loan to cash-strapped Georgia (think Greece), dictating that it implement slash-and-burn privatization of public assets and drastic cuts to state payrolls, pensions and other essential programs. This, in essence, is the situation in the eurozone today.

But Greek voters last month rejected continuation of an austerity program that has plunged their economy into depression, voting in a government determined to break out of the current terms on which Greece gets help from the Troika.

(Read the rest here at Al Jazeera America)

As deflation sets in in the economies of Europe and Japan, Robert Kuttner’s words in Debtor’s Prison: The Politics of Austerity versus Possibility—an interesting, readable new volume—complement those of many of the Levy Institute’s scholars. The book argues that during the financial crisis and its aftermath, policymakers continually relied on excessively optimistic projections of economic growth. Hence, stimulus plans adopted by Congress were not up to the task. Meanwhile, monetary policy could do little more than keep the crisis from worsening. As a result, the recovery remained exceedingly weak, and deficits overshot estimates to boot. Kuttner notes that in spite of the end of the recession, US growth rates on the order of 1.7 percent in 2011 and 2.2 percent in 2012 have not been high enough “to blast out of the deflationary trap.”

The more recently released annual growth rate of 2.4 percent for 2014, as well as the 2.2 percent final figure for the year before, indicate that he is right when he argues against the political “consensus” that “borrowing money is the last thing the government should do.” In fact, fiscal policy still needs to be made more stimulative, perhaps through increased infrastructure spending. Kuttner decries a situation in which an “austerity lobby” is set to bat down such efforts in Washington.

Also notably, Kuttner uses a detailed historical argument to challenge the notion that fiscal austerity is the answer to foreign debt problems in highly indebted economies such as Greece. In essence, keeping economies in a debtor’s prison is not in anyone’s interest.

Kuttner’s book, published just last year, addresses many other big policy issues, including health care, all in relation to deflationary fiscal austerity and the problems and non-problems posed by high levels of different types of debt. His lucid argument brings home the sometimes counterintuitive insight from John Maynard Keynes that an increase in government borrowing is actually desirable in a world facing a huge unemployment problem. This situation, faced by policymakers, in fact differs completely from that of a household that is heavily indebted and finding itself with inadequate disposable income. “Austerity economics,” Kuttner points out, “conflates several kinds of debt, each with its own causes, consequences, and remedies. The reality is that public debt, financial industry debt, consumer debt, and debt owed to foreign creditors are entirely different creatures.”

The recent 40 percent jump in the value of the Swiss Franc will have some effects similar to those of deflation where it seems to be taking hold, including Japan and much of Europe. When a currency increases in value, foreign debts in those currencies become more of a burden. The New York Times brings it home with the story of households in Poland and other European countries who have some foreign debt of their own—mortgages whose payments are suddenly much higher in their own currency, after the Swiss National Bank (the Swiss counterpart to the ECB and the Fed) stopped using foreign-currency operations to peg its currency against the Euro. In fact, the FT reports that mortgages in the Swiss currency make up 37 percent of Polish home loans. The Swiss decision was encouraged by a European Central Bank that is getting ready to push long-term interest rates down further through its own program of quantitative easing (QE). Instead of printing more Francs to buy Euro and other currency, the Swiss National Bank (SNB) allowed the Franc to rise in one big move, abandoning its peg to the depreciating Euro. This move will increase import demand in Switzerland from Poland and other European producers. But as always with a sudden devaluation, foreign-currency debtors suffer from a so-called currency mismatch problem as the amount of debt rises in terms of the things that they sell to make a living, including hours of labor.

Exchange rate pegs are difficult to maintain for an extended period, especially in relatively poor countries, as changing economic conditions cause misalignments in exchange rates. One reason not to institute a peg is the instability that can ensue when it is abandoned, and this instability can cause penury for debtors, including governments. A second bad policy is interest rates that that need to be reduced generally by the monetary policy authorities where possible. One policy approach is to target help at the debtors themselves, particularly households and countries that must be helped up to maintain autonomy. The latter include Greece, for which our Greek macro team recently suggested an interest-payment moratorium. Sometimes, a reduction in the amount owed, or principal, is in order, as it was —and probably still is—for many subprime and Alt-A (mid-range credit rating) borrowers affected by the US mortgage crisis. Eastern European countries debated converting Swiss mortgages into domestic-currency debts at a higher-than-market domestic exchange rate. A slightly less-targeted form of help is to implement jobs programs of various types and to hold the line on public-sector wages. But when unemployment and other economic indicators suggest stagnation if anything, such targeted policy stimulus helps, yet it has only an indirect impact on private investment, overall economic growth, and unmet infrastructure, poverty-reduction, and pension needs.

The ECB is smart to implement QE, given high rates of unemployment in almost every country in the Eurozone. The SNB may even be smart to allow its currency to rise, given strong economic performance. And by the same token, if the Polish government can broadly raise spending, increasing resources for budget items that encourage economic growth and inflation is under control (2 percent—one common benchmark—is rather low for a target, especially given high unemployment), it should do so. Monetary stimulus might also form part of the picture. With such a move, the government would take steps in the same direction as the ECB and the Japanese government, recognizing the threat of  debt deflation.

Generally, the a combination of the three types of policy outlined here would work effectively in many countries with high unemployment, weak growth, and large amounts of bad private-sector debt. Targeted help for borrowers can take many forms, but writing off a portion of the principal, with the central bank’s help, if necessary, is often the only way to avert widespread private-sector bankruptcies. In contrast, broad measures might include, for example, devaluations of the domestic currency, investments in infrastructure and R&D, wide-ranging open-market purchases, tax cuts, and other available measures to spur all sectors of the economy. Third, universal measures—programs available to all who meet eligibility criteria—would include Social Security and its counterparts in affected countries. (An employer-of-last resort, or ELR, program would fit within both universal and targeted categories.) It is more risky rather than less not to maintain such programs during a crisis.

If one were asked to describe the formal economic and political processes that have shaped the condition of the eurozone since the eruption of the euro crisis in late 2009 in a terse and peremptory way, he or she might boldly and truly say this: “German Chancellor Angela Merkel’s policies spearhead the unraveling of the European project while European Central Bank (ECB) President Mario Draghi seeks to keep the (neoliberal) game going.”

Indeed, there is little doubt that Germany’s neo-mercantilism is the driving force leading a sizable segment of the eurozone’s economy on the path to stagnation and decline, while the ECB has been trying hard to carry out the role of a traditional central bank by fulfilling its duty as a lender of last resort in order to save the euro and preserve the eurozone.

The ECB intervened in the euro crisis in May 2010 by buying up government bonds from Greece (even when a 110 billion euros bailout package had been approved for Greece), Spain, Portugal, and Ireland under its Securities Market Program. By 2011, the ECB was buying up Spanish and Italian bonds by the bucketload in order to force a drop in the bond yields of the two largest peripheral economies of the eurozone. With the end of the crisis in the periphery nowhere in sight, but Mario Draghi having already pledged in July 2012 to do “whatever it takes” to preserve the euro, in early September of that year the ECB introduced a new government bond purchasing program, known as the Outright Monetary Transactions (OTM) program.

Leaving aside the question as to whether or not ECB’s OTM program is legal (Advocate General Pedro Cruz Villalón opined in mid-January 2015 that while “the OTM programme is an unconventional monetary policy measure . . . it is compatible with the TFEU [Treaty on the Functioning of the European Union]”), the condition was that OTM would be attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) macroeconomic adjustment program. In other words, the imposition of austerity, privatization, and market liberalization was a conditionality in the event of the implementation of the OTM program, which raises an important question: Is the ECB seeking to enforce an economic policy measure rather than just a monetary policy measure? continue reading…

With Syriza in the driver’s seat, Greece now has some hope for the end to austerity imposed by Germany and the troika.

Here’s a good short piece in the New York Times by C. J. Polychroniou, a research associate and policy fellow at the Levy Economics Institute. As he explains, what Syriza wants is no more—and no less—radical than what the USA did in the 1930s to deal with its Great Depression: “the bulk of Syriza’s economic program for addressing the catastrophic crisis in Greece, which has evolved into a humanitarian crisis, is inspired by President Franklin D. Roosevelt’s New Deal programs.”

The official press is reacting in horror! Oh the horror of bringing Democracy and Pinko policies into the Officially Neoliberal EMU regime! C.J. continues:

“Interestingly, the task for the implementation of the employment program has been assigned to a colleague of mine at the Levy Institute, Rania Antonopoulos, who has been appointed deputy minister of Labor and Social Solidarity under a Syriza-led government.”

Yes, Senior Scholar Rania Antonopoulos is director of the Gender Equality and the Economy program at the Levy Institute, specializing in macro-micro linkages of gender and economics, international competition, and globalization; job guarantee policies and their macroeconomic and employment impacts; social protection and poverty reduction; and the implications of paid and unpaid work on poverty indicators. She was one of the founders of “Economists for Full Employment” and has been a long-time supporter of the job guarantee.

And so, two Levy scholars have moved into government this month—Rania in Greece and Stephanie Kelton in Washington. What will the world come to?

After a record-setting 23 straight quarters of shrinking GDP, the Greek economy was less awful in 2014, and an economic recovery of sorts might finally be under way. However, the Levy Institute’s latest projections (which are generated using a stock-flow consistent macroeconomic model tailored to Greece) indicate that Greece still faces years of anemic growth if it continues its current policies. Given the severity of the economic wounds inflicted on that country, a recovery led by market forces alone — that is, without any fiscal stimulus — likely means another decade or more before Greece climbs back to its precrisis levels of output and employment.

In their latest report, Dimitri Papadimitriou, Michalis Nikiforos, and Gennaro Zezza observe that median income in Greece fell by 30 percent between 2010 and 2013, real GDP is now down to where it was in 2001, and the largest share of the unemployed have been out of work for a year or more. Carrying on with the status quo is no longer tenable — and looks very likely to be overturned in the next election.

Using their stock-flow model for Greece, Papadimitriou, Nikiforos, and Zezza put together projections for three alternative policy scenarios: (1) a “New Deal” program of public investment and direct job creation funded by EU transfers; (2) a suspension of interest payments on debt held by public sector institutions (debt held by the private sector would continue to be serviced), with the amount of the suspended payments redirected to targeted public investments or direct job creation; (3) a combination of (1) and (2). Here’s what those alternative policy routes would do for real GDP growth in the next few years, compared to the baseline (status quo):

(A more detailed breakdown of the results can be found below the fold.)

As the authors point out, these ideas aren’t exactly without precedent (as the leaders of one particular country with loud objections should know very well):

These policies are not new. They are identical to those implemented in Germany after Word War II, which included a Marshall Plan loan that was never repaid, the suspension of interest payments on the country’s enormous sovereign debt, and, finally, a significant write-down of public debt.

Read the rest here: “Is Greece Heading for a Recovery?” (pdf)

continue reading…

The ECB is to be congratulated on finally defying its German masters, who have long kept the euro’s guardian of stability in captivity. For a number of years, Germany’s unholy triangle of power over the land of the euro – Berlin, Frankfurt, Karlsruhe – has enforced a diktat that undermined both the euro economy and democracy, causing a deep socioeconomic crisis, the rise of nationalism, and anti-EU sentiments across the continent. At last, the ECB has liberated itself from the scourge of hyperinflation scaremongering that is the self-serving conviction – and declaration of intellectual bankruptcy – of the Germany political elite. It is fitting that the chance for a revival of democratic values and European solidarity is knocking on Athens’ door this weekend.

In the markets’ perception, Mario Draghi over-delivered yesterday on his famous “whatever-it-takes” promise made at the height of the euro crisis in the summer of 2012. The euro and bond yields are down, stocks are up, party time is here. Things are going according to plan and everyone financial is in high spirits.

The question is what Mario’s QE bazooka will really do beyond the markets – for the real economy, that is. The markets are not worried about that issue at this point. Or perhaps some are thinking ahead like this: if growth stays weak, there will be even more QE coming, so all is good in any case. In case you didn’t follow the Q&A carefully yesterday, there was another important course change – or return to hardcore German dogma – on exhibit in what Mario Draghi had to say. continue reading…