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Sunday, April 19, 2015

Confused By Populist Rhetoric?

This article by Bulow/Rogoff in today's WSJ is, in my opinion, a more convincing narrative than anything I have seen coming out of the minds of Krugman, Stieglitz & Co. Below are some excerpts: 

"In the court of world opinion, a large majority seems to believe that even if the Greeks may have been a tad fiscally irresponsible, it is the Germans who have driven Greece into depression through cruel insistence on austerity and debt repayments. This populist narrative misses the essence of the problem: The Greeks are experiencing an emerging-market debt crisis, albeit one on steroids.

Let’s first dispense with the “it’s all German-led austerity” nonsense. In 2009, fueled by a three-year jump in government spending to 54% of gross domestic product from 45%, the Greek government was running a primary deficit equal to 10% of its GDP, according to IMF estimates. In other words, new borrowing equaled all principal and interest due, plus an extra 10% of GDP. Yet the bailouts could not begin to substitute for both the lost lending and the collapse in tax revenues caused by a deep recession. By 2014, Greece supposedly ran a 0.3% surplus with government spending at 47% of GDP plus continuing “cohesion” transfers from the EU of about 3% of GDP and ECB support for the Greek central bank.

But don’t blame today’s austerity on tough repayment terms that have never been, and probably never will be, implemented. Already the EU’s current bailout terms include no principal or net interest until 2020. Greece has enjoyed a much smoother cushion than say, the Asian financial crisis countries in the late 1990s. 

Greece would have experienced far greater austerity had it been forgiven all its external debts in 2009—with all foreign sources then refusing to lend the country more money. Solutions to Greece’s woes ultimately require structural reforms at both the national and pan-European level. Its debts will eventually need to be further written down, and the country will need aid beyond that. Greece may yet someday suffer the yoke of heavy repayments; we hope not. But so far austerity in Greece is due to having maxed out its credit-card limits. Let’s not be confused by populist rhetoric".

Ok, so if this is the right narrative, which I have said that I believe, it still doesn't answer the question of what could have been done and/or could still be done in order to alleviate the economic pains of Greeks.

My point has been a very simple one from the beginning: total GDP is the sum of the public and private sectors. When the public sector tanks and loses its ability to grow fast again, and if one wants to get GDP up, then that impulse can only come from --- the private sector. As I once suggested in an article: "Germany, don't send money. Send machinery & equipment, instead!"

Those dependent on the public sector are still doing reasonably ok, as far as I can tell. Salaries and pensions may have been reduced but the critical issue in a depression is to have income in the first place (or not). The private sector, on the other hand, seems to be in shambles after having carried the load of adjustments todate. 

In a private market economy, money flows from the spender to the receiver voluntarily ("in exchange for value received"). In the last years, I have read innumerable articles/studies about the theoretical potential of the Greek economy. I have written quite a few on the subject myself. The trick is to turn that theoretical potential into practical results. It's not the location of Greece and not a possibly insufficient work ethic of Greeks which limits the realization of this potential. Instead, it's the lack of effective institutions and the lack of an appropriate economic framework which does that job. In my opinion.


  1. "Germany, don't send money. Send machinery & equipment, instead!"
    Though this sounds excellent, also this solution will have to find the Greek cooperation and willingness to build up something. This needs an educational program on TV in which all is explained and supported, otherwise the Greek mentality will kill this wonderful plan as well.

    Progress needs time, patience, but most of all leadership with insight, knowledge, psychology, that, what goes much further and deeper than even the most wonderful ideas.

  2. Imho these famous American experts publish whatever suits their agenda and therefore I do no longer care about it.

    >"The trick is to turn that theoretical potential into practical results. ... it's the lack of effective institutions and the lack of an appropriate economic framework which does that job."

    Fully correct, but said in too correct and too abbreviated words, so that these who might profit from your advice most often won't understand it.


  3. Good Article,

    Truth be said the privat sctor is pulling the whole country foward and the only sector that will save us. Unfortunately investment is mullying through this new crisis but investment is hard when banks do not give out loans and ESPA program from the EU is dried up and frozen due to the political problems of today.

    I am quite hopeful if the agreement is achieved in the coming months the privat sector will flourish but not until 2016 as this year is alreay quite too late. Even on a personal level the amount of investment i make is quite deminished due to huge taxes and new tax hikes that i will need to pay out.

    Larger corporation thankfully do indeed have the necessary cash flows to pull in investment but it still is not enough.


  4. Just end the uncertainty.

    Uncertainty about the dept, Fix the dept problem in a believable, sustainable way.

    Uncertainty about tax law, uncertainty about legal framework. Just stop changing things every 6 months.

    Nobody is going to start a new firm or make an investment if the above uncertainties continue, even with good German machinery as bonus .

    Structural reforms, good Institutions help and could perhaps reduce the second type of uncertainties but won't end the Greek crisis alone. Europe focuses too much on structural reform while denying a resolution of the dept.

  5. @AnonymousApril 20, 2015 at 9:20 AM:

    Yes, uncertainty kills all initiatives.

    >"Europe focuses too much on structural reform while denying a resolution of the dept."

    Imho this is not the fault of Europe, but solely of the past Greek government, because only the Greek population can achieve the necessary reforms!