Tuesday, June 24, 2014

Without Austerity, Greece Would Be in an Obvious Recovery By Now?

"The EU-imposed austerity program is the reason that Greece and Spain are experiencing a Great Depression now, rather than the obvious (if fragile) recovery that is well underway in the US. It is a classic own goal by the mainstream-economics-obsessed bureaucrats in Brussels".

This is the conclusion which Steve Keen draws in this article in the BusinessSpectator. It is a keen conclusion because it suggests, by implication, that Greece would be today in an obvious (if fragile) recovery if there had not been the EU-imposed austerity.

The debate about austerity is as old as the crisis and, to me, it is a bit of a futile debate because a member of the Eurozone can only avoid austerity if someone else lends it the money for it. As long as the EU was not prepared to provide Greece with more bail-out money than they did, the debate becomes academic. The academics may be right but the real world does not give a damn.

Clearly, anyone who argues that all that's needed in a country like Greece to achieve an economic turn-around is government austerity is somewhat single-minded. There has to be a strategic recovery plan and government austerity can be part of that. If the overall plan is good, the negative consequences of government austerity can be alleviated.

I will revert to an oversimplified narrative to illustrate my point. That narrative, which is unrealistically extreme, would suggest that the Greek economy had ceased to generate value on its own account. There was decent growth and employment until about 2008 because staggering amounts of capital flowed into the economy which allowed the economy to import all the products it desired. When the capital flows decelerated, that recycling process (borrowing money offshore to spend it offshore) decelarated even more rapidly. Collapsing growth and rising unemployment are the obvious consequences.

Obviously, the Greek economy had not ceased to generate any value on its own account. However, one decade of the Euro had taken a lot of value generation capacity, never large to begin with, out of the economy. Had one avoided government austerity and had the capital flows been kept alive, the only thing which would have been kept alive would have been the above-mentioned recycling process.

My sense is that government austerity had such terrible consequences for Greeks because no capital was directed towards the rebuilding of the economy's value generation capacity. And, above all, if that value generation capacity is not re-built (or rather: built up) any time soon, Greeks are in for many, many years of economic suffering.

Any national economy has something which, for lack of a better expression, I will call the national economic value generation capacity. I cannot explain how exactly one measures it but common sense tells me it's there. Common sense also tells me that, over time, the country's living standards will be a function of that economic value generation capacity. Excessive capital inflows or excessive austerity can distort the living standards temporarily (whereby 'temporarily' can be quite a long time). The living standards may, temporarily, be far higher or far lower than what the economic value generation capacity would suggest but, at the end of the day, one cannot fool reality. And reality says that if you don't generate any economic value, you won't get any, either. At least over time.


  1. "Economic consequences of Peace" lol.

    The issue is how political and economic elites are thinking in terms of value generation capacity.

    Even in Hellinikon project, the approach could give back bil of euros at no time.

    HELLINIKON Project


    and presentation in Greek



  2. Mr. Kastner, it is not a matter of whether an obese must lose weight or not, but rather, how much in how much time. Austerity from austerity has differences. Greece put itself in this mess alone, but the "helping" hand from the "partners" was more a gun at the head from a loan shark. How many countries in the world do you know that must maintain a primary surplus of 4.5% GDP, for a decade? Greece is a german vassal right now. In 1854, the great powers of Great Britain and France came with their navies, bombarded Piraeus and blockaded the harbour and established practically their own economic goverment to make sure Greece would pay its Independence loans that King Otto was telling them he couldn't pay at the time, due to the weak economy of the neoformed state. Today, the ships are called "troika", but the bottom line is the same. Only now you use diplomatic language to describe the situation.

  3. And to follow a brief historical summary, mr. Kastner, of what happens when the "partners" help you at gunpoint. In 1854, as i said, the "guarantors" of the independence treaty of Greece, bombarded Pireaus, landed 15.000 marines and King Otto accepted economic governance from them, with more or less the same austerity measures as today. Mind you, King Otto, was the result of the compromise between the same powers of the time. They appointed them, as friendly king. This though, had a very negative impact on the view of Otto by the people, together with his refusal to make good his promice for a Constitution. This led in 1862 to popular uprising, which eventually led Otto away from the throne, as well as the dismantling of the various "pro-british, pro-french, pro-russian" parties in Greece. The whole political turmoil moreover, led to lack of stable governance, leading in opposite effects that those desired by the lenders. A new default in 1894, as Greece was preparing for new war (which happened in 1897). The creditors, again, with the help of the new appointed foreign king, enforced international economic governance in 1898, with the king being pressured and accepting to mint "the golden drachma" (a drachma in gold, so that creditors' debt would be paid in gold and lose value with inflated drachma). However, this "hard currency", combined with a new very protacted war period (unofficially, Greece was in war since 1904 το 1908, followed by 2 official balkan wars, WWI, and 1919-1922) , led again to bankruptcy. Bottom line, at the end, the independence loans were finished being paid in the 1990s.

    Bottom line: Creditors (who most of the time were also military allies) have a long history of "helping" Greece, in a way that at the end, backfires to their own interests. Elections are close, SYRIZA will win, but will have a very tough decision to make, after cultivating high expectations of a policy change. But don't be surprised, if the plan of the creditor backfires again.

  4. As a final thought, Mr. Kastner, the greek problems are one thing, but are the minor thing and one can choose to ignore the political situation in Greece, but it is more concerning to look at the political situation elsewhere. In France, where the "austerity" is very mild, Le Pen is threatening to become the next french president. In Italy, that was very much praised by the german press, the debt has risen to an unprecedented 132% of GDP in May and the economic recovery is very feeble. Schauble's economic theory on austerity, may be sound on paper. But ignoring political realities may just as well cancel it.

  5. Το give a practical example. When you are diabetical, you risk coma, from the excessive carbohydrates.


    The german solution to this is: "you will cut any carbohydrates. You will become diabetic-free in a month, i guarantee you, that with a small effort of a decade at 4.5% primary surplus and a couple of more decades to bring down your debt to Maastricht leve, you will be fine.".

    There is though, a small risk. To fall into hypoglycemic coma:


    At a point, the patient starts doubting the doctor.

    1. I suggest you try to avoid being romantic. Every borrower loses, to some extent, freedom when he gets into financial trouble. Every country which gets into financial trouble loses, to some extent, sovereignty (even though I would suggest that the greatest loss of sovereignty Greece and others experienced was when they assumed the Euro as a currency).

      A 'good' borrower never loses sovereignty. Instead, all banks are chasing 'good' borrowers. So if Greece wants to regain sovereignty, it needs to become a ‘good’ borrower again.

      From everything which I have heard about the Greek public sector, I am inclined to say that government austerity was not strong enough. That sector seems to be an animal which needs to be stopped in its tracks. The problem in Greece was not the (necessary) government austerity. Instead, the problem was that such austerity was not compensated, at least partially, with growth measures in the private sector. At least in my opinion.

      FDR embarked on the celebrated ‘New Deal’. From 1933-37, nominal GDP rose 63% and inflation-adjusted GP rose 43%. Unemployment declined from 25% to 14%. The government’s share of the economy – contrary to all myths – remained flat during this time (revenues, expenses, budget deficit). Public spending on consumption even declined from 59% to 56% of total public expenditures. What really prompted the turn-around was private sector investment which grew by 140% during the period in real terms. Obviously, government policy and FDRs fireside chats had a lot to do with the optimism which prompted the private sector to invest, but psychology is half the game in the economy.

      Given the above, you might understand why I am a bit tired of this tale that ‘Germany killed the Greek patient’. First of all, it’s the EU and not Germany. And, secondly, the EU should have done a lot more than they did, in my opinion. They should have made all rescue financings subject to drastic measures to clean out Greek cronyism, corruption and tax cheating. Obviously, had they done that, Greece would have blamed them for interfering with its sovereignty…

    2. Mr. Kastner,
      i don't think i am romatic, if anything i am all too cynical, because, unlike what politicians today want to present pubblically, the interest of the countries throughout the history, never changes, it's only the means used that are more or less blatant, according to the circumstances (see Iraq, Ukraine).

      Another point here, is the abuse of the word "austerity". Austerity is a greek word, meaning being "severe" or "simple". It has no relation whatsoever with "reform". Reform has a meaning as "change for the better". Austerity is one thing, reform is another.

      Since the troika set foot on Greece, their main concern was austerity, not reform. They had all the means to push more for reforms rather than austerity. I remind you that when George Papandreou was still PM and in the summer Venizelos was finance minister, Venizelos tried to "oppose" the troika, which only led the troika to leave unexpectedly Greece and Venizelos to cower in fear, making him enact the "real estate tax", which a few days before was saying he wouldn't do. So i don't think the troika would have risked being accused for anything more than that, when the goverment is humiliated repeatedly already.

      Similarly, in the public sector, the salary cost was reduced 35%, with 40% reduction in structures and the number of personnel was reduced by 250.000.


      What has not changed as much as it should, is the efficiency of the pubblic sector... It wasn't a troika priority.

      The taxation again, was geared towards "getting the money". In case you haven't noticed, the responsible for the tax office in the finance ministry, Theoharis, was forced recently to give his resignation, after he took the initiative to tax the foreign bond holders, while Samaras was trying to make a bond sell, which made the bond cost spike and Samaras was infuriated with him. Oddly enough, there were german newspaper articles in defence of the "Theoharis who was licenced because he wanted to tax the rich" (i think Spiegel or Frankfurter Zeitung, you know german, you can find them), Bloomber also having an article on "brave Theoharis" and Thomsen (of the troika), allegedly, calling Theoharis saying "tell me what happened, i can contact Merkel to solve this":


      End part 1

    3. There was also official expression of "deep concern" from the EU Commission about the "forced redignation" of Theoharis.


      About the same man, that you complain he doesn't gather taxes. Which leaves 2 possibilities. a) he was doing well his job, b) he wasn't. At any rate, Samaras can't even license a contract hired technocrat, without apologizing to the troika.

      About the EU. Yes, Mr. Kastner, it is not just Germany, i understand your feeling about this. However, if you observe the foreign press, you will notice that it is always Merkel and Schauble making statements about everything. In the past, they were called "spheres of influence". You may say, with your way of thinking, that it's not USA not doing something in Ukraine, it's the entire NATO. True, but, by pure coincidence, the NATO commands in Europe, have always an American in 1st or 2nd position. If you get my drift. In Italy, France and Spain, you don't see any grand austerity defenders, do you? Who are supposed to be the other big countries and thus with big political weight. But they follow, unwillingly, the german recipe. So, maybe i am blind with "antigermanism", but i don't see this "united" EU , for austerity. If anything, i have lived most of my life outside Greece and am more familiar with "EU" in particular countries that one would think. The "german recipe" didn't kill the greek patient, the greek patient drank the venom himself, but the german doctor, is no doctor, just a lender and a german at that.

      Have you ever read statemets of Prodi and Berlusconi on Greece in the past years? They weren't anything like the german ones.

      Have you ever read the recent statement by Mario Monti, saying "we wanted to avoid at all costs external supervision, because we 'd loose sovereignty like Greece"?

      No you haven't. I have, because i live in Italy... Mr. Kastner, you can't do "drastic" reforms and at the same time "drastic" internal devaluation (which didn't work in Greece by the way, except for the services prices. In the supermarket the prices are the same) in 4 years. Valery Giscard D' Estaing, at the beginning of the crisis, wrote that only a dictatorship would make the troika program. The "non-greek lover" Hans Werner Sinn, had also said that "no country can accect socially such internal devaluation and thus Greece must go to the drachma".

      End of part 2

    4. Your example of Germany is i think a bit different situation, as are very different countries and Greece has 177% debt. Investors don't approach heavily indebted countries, unless the scenery clears out. The same applies to the greek left, that compares Greece to USA and asking "Obama policy". What does Greece have in common with USA?

      The whole austerity formula, doesn't seem to work very well in countries with much more easy recovery due to different economic structure, like France, Italy and Spain. Italy in particularly, is traditionally exporting country, but the Monti recipe didn't work. Frankly, if you want my humble opinion, Italy, leaving aside austerity (there was no internal devaluation attempt in Italy practically, leaving aside isolated cases of very high public wages and a small VAT increase in the higher VAT), has done much less reforms than Greece has. You may say, "it needs less", yes, but has very similar problems in tax evasion, corruption (the mafia runs its own economy in the south). These few reforms done, caused the 1) the collapse of the center-right, 2) the failure of Monti as politician, 3) the rise of 5 Stars Movement (which is a populist, anti-european party) to 22%.

      Imagine if they had decreased the income of the Italians by 35%.

      Hollande, in France, doing mild "austerity", is a collapsing president.

      What i mean. Many wars have been won, economies have been saved, countries reformed, from the safety of a living room somewhere far away. Something different is "living the problem" and having tight political room to manouver.

      Greece needs room "to breathe" (i.e. invest part of the primary surplus, instead of giving it to the debt for a few years) and a permanent, once and for all solution for the debt. Otherwise, it will destabilize. Which isn't something to worry about. If Italy, Spain or France derail into anti-european policies, then you should worry about.

      Best regards and excuse me for tiring you.

      (End of part 3 and final).

  6. You may also use google translator to read Renzi's speech yesterday in the parliament, speaking about the upcoming italian presidency semester:

    O l'Europa cambia direzione di marcia o non esistono possibilità di sviluppo e crescita"

    "Either Europe will change its marching direction or there is no possibility for growth". About immigration: "Either Europe helps or she can keep her euro".

    This as to how "EU" wants something and not Germany. Renzi is the supposedly pro-european socialist, who is fighting the anti-european Grillo.

  7. And since a picture is worth a thousand words, this is from the recent Portugal summit, where Samaras was seeking confirmation about a date for a debt relief:


    Curiously, you never see this with Hollande, Renzi, Zapatero. When it comes to debt, you always see a greek official goingo to Schauble or Merkel. Why? Because Germany, by her economic virtue, dictates what happens in Europe. If Germany says "A", her immediate lesser allies of the north, will also say "A", the rest will also say the same. Or to put it as Berlusconi and Monti always said: "Germany has her way, because at every summit, has a weapon that waves in front of us, that she can leave the euro".

    This how the "EU" has 1 opinion.

  8. This is an index that may interest you. Doing business ranking. 3 years ago, Greece was below rank 100. Now it's 72.


    Foreign Investment has decreased in Greece.

    If you lookup the reforms tables in OSCE, you will find Greece in the 1st place, every year, for the past 3 years.

    In Greece there is a saying: "either the shore is pending or we are sailing pending".

    To my poor, non expert opinion, this indicates that something else, has caused the drop (not saying increase) in foreign investment. My guess:
    1) Some austerity measures, caused even greek companies to leave.
    2) The amount of debt.

    Because, if a greek company could survive in the pre-2010 era, with more bureaucracy, higher wages and more hostile enviroment, why would it leave Greece in an era where salaries dropped 35%, letting staff go has been simplified, hiring your personnel at discounted salary is now an option and the business enviroment is friendlier?

    Maybe i am thinking naively, but i seek a logical explanation.

  9. Austerity never made anybody generate value. So, yes, it was a stupid idea.

    I agree that the debate is futile though.

  10. The endless vacillating between bravado and whining depresses me sometimes. Freedom or Death, and what did the Greek choose? Money.
    He who chooses security over freedom deserves neither, and will lose both. (B. Franklin).