Adam Posen is president of the Peterson Institute for International Economics and, like every international economist right now, he's glued to the drama in Greece. There is, he says, a simple solution to the crisis: the Northern European countries should write a check and end it. But they won't, and in a conversation on Monday, he told me why. The interview has been lightly edited for length and clarity.
Ezra Klein: Imagine I haven’t been following this at all. What’s the simplest explanation for why the world is so concerned about Greece today?
Adam Posen: The simplest explanation is that for the euro to remain together, and therefore to remain a stable currency, you have to believe the membership pays their debts. Right now, the Greeks are not going to pay back what they owe the rest of Europe. Right now, there literally aren’t enough euros in the Greek financial system, public and private, to pay back what they owe.
So Greece will have to issue IOUs to their creditors and their businesses. And that will mean you have a currency in Greece that is not the euro. It will be a kind of scrip. And so the Greek people have been pulling their money out of the Greek financial system because they don’t believe this scrip will be worth as much as the euro.
The way we deal with this kind of problem in the US is we have fiscal transfers. Mississippi and Alabama never really pay back what they owe California and New York, and that's okay. So you can see the crisis in Greece two ways: you can believe it’s a failure because the Greeks are reneging on their debts or because Germany is not treating Greece like the US treats Mississippi, as a state they have to look after.
EK: Why is this happening right now though? What's changed from, say, six months ago?
AP: What has changed since a year ago is a breakdown in trust and a change in politics. The economic fundamentals really haven’t changed. But you have this new government in Greece that is taking a harder line with its creditors. They’re saying, basically, we can’t pay all this back, you need to be more realistic. And the European leadership has reacted to this first by saying, sorry, that deal is not on the table, and second, by saying, we basically just don’t trust you. You’ll tell us one thing and then go do something else.
So that’s the key: the economics didn’t change. It was a change in the Greek government, and then a change in the relationship between that government and the rest of Europe.
EK: One thing that makes this hard to follow from the US is it's not entirely clear which outcome to be rooting for. Greece can stay in the euro and try to endure grinding depression for years and years or they can leave the euro and endure a financial crisis. Which outcome is better?
AP: It’s easy to say what people should want to happen in Greece. It’s just impossible to get there. The Northern Europeans should write a check and make this go away. They should accept the fact that Greece is not going to pay most of its debts. They also need to accept that these debts are partly their fault. These loans were made by Northern European financial institutions, and the Northern Europeans should suffer for making stupid loans, too.
But that won’t happen. Northern European governments like Germany, Finland, Austria, the Netherlands, and Sweden don’t want their banks to lose money and they don’t want to tell their voters that they’re handing money to the Greeks.
EK: You often hear about how the Greek government is barely able to collect taxes. How big a contributor is that to this crisis?
AP: There is no question that the Greek system has done a terrible job of collecting taxes, and especially collecting taxes on the richest people. For instance, shipping is constitutionally protected from being taxed, and that’s where many of Greece’s great fortunes are. Taxation on real estate is also poorly collected. But in terms of Greece racking up all its debt, that isn’t the fundamental issue. The fundamental issue was the surge in capital from Northern Europe to Greece during the early and mid-2000s. Even if the Greeks hadn’t been able to collect much tax revenue they couldn’t have gotten into so much debt if people weren’t giving them all these loans.
EK: What do you think the financial consequences of Greece leaving the eurozone would be?
AP: I think the short-term consequences are going to be much smaller than people fear, with the huge, horrible exception of the Greek people themselves. It will be awful for them. But pretty much all the Greek debt is now in government hands. The total amount of debt, which is about $200 billion euros, is real money, but it’s really just about 1-2 percent of total euro area GDP. And every bank and every investor has known this has been coming for months.
But that’s the short term. The long-term is the IMF will be out billions of dollars which they need to pay back to their poorer members. The euro will be seen as less safe a currency than it once was and that will permanently raise interest rates in many European countries. It will permanently reduce the appetite for euro assets. And it will mean that the so-called periphery countries in Europe — notably Portugal — will be looked at with suspicion going forward. And that will make it harder for them to get investment and funding.
EK: What about the political side of it? Do you think this raises the possibility of dangerous political backlash in Europe?
AP: Absolutely. Branko Milanovic had a nice essay about how bad the politics of Europe could get in the aftermath of this. It’s a bit extreme but it’s a good point. Basically what you’ve had is the undermining of European solidarity. There is this level of distrust and resentment. The Greek people feel the Northern Europeans are trying to get blood from a stone and the Germans feel they’re being exploited.
First, permanent nothing. Memories are short. Interest rates on European debt will rise, funding and investment will drop off, but once the ship is steadied, capital will flow again, primarily because it must. Europe is no mere fiscal blip on the map.
Second, did the Northern European banks that provided all these loans have access to honest information about Greek finances? We all know Goldman fudged the books at one point. Do we have reason to believe that NEs could have known just how irresponsible Greece was? The answer to this may alter my thinking about how this should be resolved.
Third, I agree that the U.S. Isn't really going to feel much pain from this, recent stock market moves notwithstanding. China is a far bigger threat to us and we should be keeping an eye on its crashing economy.
Post by secretlyevil on Jun 30, 2015 9:24:03 GMT -5
All these financial issues make my eyes cross. I wish I had a better understanding of it. China too?!? Yikes, considering the U.S.'s financial ties to China, that's not scary at all.
Post by downtoearth on Jun 30, 2015 15:29:54 GMT -5
I am just now getting into this more. I also seem to have a lot of questions as to how a country can carry so much debt. I do feel bad for Greek leaders - they are stuck between overtaxing their citizens who already are feeling the recession hard and trying to stay afloat. I don't know what is right, but this situation must have been avoidable somehow, right?
So when they say that the greek government had trouble collecting taxes do they mean that they weren't taxing on things they could/should have or that people were being taxed appropriately but weren't paying and the government was just letting it slide?
I don't think you can really divorce the loans from the atmosphere in which they were made. At the time there was a real fear that if Greece went over it would take the rest of the Eurozone with it.
I just don't know how that leaves me feeling about all of this.
First, permanent nothing. Memories are short. Interest rates on European debt will rise, funding and investment will drop off, but once the ship is steadied, capital will flow again, primarily because it must. Europe is no mere fiscal blip on the map.
Second, did the Northern European banks that provided all these loans have access to honest information about Greek finances? We all know Goldman fudged the books at one point. Do we have reason to believe that NEs could have known just how irresponsible Greece was? The answer to this may alter my thinking about how this should be resolved.
Third, I agree that the U.S. Isn't really going to feel much pain from this, recent stock market moves notwithstanding. China is a far bigger threat to us and we should be keeping an eye on its crashing economy.
I remember running a lot of analyses on Greek instability back in 2006 and 2007. "Everyone" back then already knew how irresponsible Greece was, so I am not sure why people are acting brand new today. Then again, Greece's issues back then were drowned out by the implosion of the SIVs (Special Investment Vehicles) in Europe (2007 especially) as a result of the subprime meltdown in the U.S. So those NEers who loaned the money to Greece were pretty distracted by other, seemingly bigger concerns.
The article specifically mentions loans made in the early aughts, which is what triggered my question. IIRC, Greece was admitted to the Euro in... 2001? So Goldman's shenanigans could have played a role in the banks' decisions to make these loans.
I agree things are probably different by the time we get to 2007, 2008, 2009.
Jane Kramer's profile of Italian prime minister Matteo Renzi in last week's New Yorker only mentions Greece by name once. But toward the end, there's a paragraph that perfectly sums up why Germany has been pushing policies on Greece that look clearly unsustainable to most outside observers:
[Former Italian prime minister Mario] Monti told me that, when he was Prime Minister and visited Barack Obama at the White House, Obama admitted to being at a loss to know "how to engage Merkel on matters of economic policy." Obama asked his advice, and Monti replied, "For Germans, economics is still part of moral philosophy, so don’t even try to suggest that the way to help Europe grow is through public spending. In Germany, growth is the reward for virtuous economics, and the word for ‘guilt’ and ‘debt’ is the same."
Even since World War II, German economic thinking has been dominated by "ordoliberalism," a philosophy developed by Chancellor Konrad Adenauer and other policymakers as West Germany recovered in the late 1940s. Ordoliberalism isn't purely laissez-faire, and maintains a role for state intervention in the economy, but it strongly emphasizes keeping debt to a minimum. This anti-debt economic dogma is very deeply held. University of Helsinki researchers Timo Harjuniemi and Markus Ojala analyzed German newspaper coverage of the eurozone crisis and found that the coverage overwhelmingly blames Greece and other indebted countries: "their fiscal policies have been too lax, social spending has been too generous, and the public sector has become overblown. As a result of countries living beyond their means, the public debt burden has become too heavy, thus causing the debt crisis." Harjuniemi and Ojala find that this consensus is held by both center-left and center-right German newspapers.
And because Germany is by far the most powerful actor in Europe, European policy toward Greece has reflected the ordoliberal consensus within Germany. The whole approach is premised on the idea that Greece needs to pay back what it owes, both to private investors who bought the country's bonds and to the European Commission, European Central Bank, and International Monetary Fund, the "Troika" that has been funding Greece's bailouts. The Europeans — led by Germany — have also insisted that Greece not take on any more debt and pass austerity budgets.
Those budgets have, in turn, prevented Greece from growing, raising the prospect that growth requires letting Greece deficit-spend. But as Monti notes, Germans' ordoliberalism is so deep as to be more of a moral principle than an economic theory. That — and the fact that German taxpayers want their bailout money paid back — eliminates any chance of chancellor Angela Merkel and other European policymakers letting Greece spend more.
I remember running a lot of analyses on Greek instability back in 2006 and 2007. "Everyone" back then already knew how irresponsible Greece was, so I am not sure why people are acting brand new today. Then again, Greece's issues back then were drowned out by the implosion of the SIVs (Special Investment Vehicles) in Europe (2007 especially) as a result of the subprime meltdown in the U.S. So those NEers who loaned the money to Greece were pretty distracted by other, seemingly bigger concerns.
The article specifically mentions loans made in the early aughts, which is what triggered my question. IIRC, Greece was admitted to the Euro in... 2001?
Which raises another issue in that Greece never met all the economic conditions for ascension to the Euro. The Eurozone knew this at the time and let them in anyway. To a large extent they did bring it upon themselves.
So, does this mean that it's too late for the EU to write the Big Check To Make It All Better or is this a continuation of the game of chicken?
If Greece puts together another proposal the ECB is obligated to consider it. That will at least buy time for the Greek referendum this weekend where they'll vote on the ECB's terms. Either they can approve the ECB's terms or most likely will be exiting the Euro.
I'm curious about papie's thoughts on this; I believe she's an economist (?) and probably personally close to this issue.
Not an economist, just an accountant
I am not used to this board and haven't read all the replies. But I do think Grexit is the only viable option for Greece at this point. Austerity is suffocating the economy and things have steadily taken a downturn since it started a few years ago. At least if they get out, they get a chance at stimulating their economy by devaluing their currency which they can't do with the euro. But it will inevitably lead to crazy inflation. Basically they are fucked either way but I think the exit is the best long term solution. #notanexpert
Every year in the US, richer states pay more in federal taxes than they get back in federal spending, and poorer states get more in federal spending than they paid in federal taxes. South Carolina, for example, gets $5.38 back in federal spending for every dollar it gets in taxes, according to a WalletHub analysis. Last year, it was $7.87. But we don't consider that money a bailout and we don't demand that South Carolina impose crushing austerity measures. The arrangement is quite stable; it's been well over 150 years since South Carolina last formally considered an exit from the union.
I do hope the countries tread carefully because this can look eerily like the events leading up to WWII (not the Hitler part but the inflation/economic crash of Germany since it was still repaying its debts for WWI and other nations refused to budge on that). Someone correct me if I am wrong in remembering WWII events.
A friend brought up the same point. I'm so ignorant of history I can't confirm or deny the facts, but you both came up with the idea so it can't be too far off the mark.
I do hope the countries tread carefully because this can look eerily like the events leading up to WWII (not the Hitler part but the inflation/economic crash of Germany since it was still repaying its debts for WWI and other nations refused to budge on that). Someone correct me if I am wrong in remembering WWII events.
A friend brought up the same point. I'm so ignorant of history I can't confirm or deny the facts, but you both came up with the idea so it can't be too far off the mark.
Which is ironic (or maybe just sad) because the whole point of the EU was to prevent another devastating war in Europe, under the principle that countries that are economically intertwined with each other won't go to war with each other.
Hello, I'm new to this forum. I found it by googling information about the Grexit situation. I think this is an overly facile analogy to what is going on. Only an extreme idealist would compare the states in the US to the individual countries in the EZ. They might use one currency but they are still very tightly connected to their own separate histories and cultures. The average German does not feel much solidarity or sympathy for the average Greek and do not in any way feel that the northern countries should just write a blank check to make this go away. That is only something Americans might want to protect their own stock market. Can you really blame them when Greece was still refusing to raise taxes and retirement ages after 5 years of negotiation?
If you read the original article you'll see that it actually says that Europe is *not* like this but it's a mindset that they might perhaps consider. In context this excerpt makes much more sense.
I don't think that article's conclusion makes sense logically. It says "nobody disagrees that Greece needs major reforms. But major reforms don't need to go side by side with destructive, economy-wrecking austerity measures. They also don't need to go alongside a European Central Bank that hasn't been willing to do what it takes to grow the economies of Greece and other struggling European nations."
If they don't impose conditions as part of the bailout, how can they realistically expect them to make necessary changes once the worst is over and they no longer have any leverage? From my reading, it seems that the EZ was fine with Greece until about six months ago when this recent left wing government was put into power and used up all their goodwill by irresponsibly letting their voters think they could have their cake (bailout money) and eat it too (no reforms). It seems that no one really expects Greece to pay back ALL of the money. What they do expect is that they change their ways and start collecting more in taxes than they spend so that they don't end up in this position, yet again, two years from now, four years from now, six years from now, etc. etc. This author believes that the northern Europeans are selfishly acting in their own interests by refusing to write down the debt further and imposing conditions of future reform but I don't really think they are. They're trying to force an irresponsible government to behave more rationally. Put it this way. Say you had an continuously insolvent relative. Would you keep lending him money with the certain knowledge that you would never get it back, that you will inevitably need to lend him more money in two years time, *and* that by lending him the money it's mostly your own fault that you're in this situation in the first place because you are literally enabling his poor spending habits? Fool me once, shame on you. Fool me twice, shame on me. The idea that the northern Europeans should write a blank check (after *already* writing down the debt by 50% five years ago) is absurd to me.
This bit in particular is ridiculously sensationalized:
"Greece could cope if the Germans agreed to compensate for this destructive policy regime by giving the Greek people cash to boost their economy and get back on their feet. But Germans and their allies won't do that, both because it's domestically unpopular (German voters don't care about suffering abroad any more than voters anywhere do), and because of a strong moralistic streak that insists that the Greeks have sinned and have to atone."
Actions have consequences. When you borrow money, you typically agree in advance to pay it back with interest. If you spend more than you make, you won't have enough left over to pay back your creditors. This is a mess of their own making. They could remedy the situation by agreeing to terms that really aren't that insensible. But they think they are special because they've lived this way for decades. Why should Germans agree to pay more in taxes so that Greeks can continue to evade taxes and retire at 56? What makes the Greeks think they are so special they deserve this?
I agree with you that Greece needs to crack down and collect taxes. But that costs money - hiring inspectors and analysts and all of that. Where does that money come from? Spending cuts sound great but what happens to the people who lose their jobs as a result, and the money they no longer spend at their local grocery store or clothing store? Practically speaking, how does this work and what happens to the ordinary people of Greece in the meantime?
I don't think that article's conclusion makes sense logically. It says "nobody disagrees that Greece needs major reforms. But major reforms don't need to go side by side with destructive, economy-wrecking austerity measures. They also don't need to go alongside a European Central Bank that hasn't been willing to do what it takes to grow the economies of Greece and other struggling European nations."
If they don't impose conditions as part of the bailout, how can they realistically expect them to make necessary changes once the worst is over and they no longer have any leverage? From my reading, it seems that the EZ was fine with Greece until about six months ago when this recent left wing government was put into power and used up all their goodwill by irresponsibly letting their voters think they could have their cake (bailout money) and eat it too (no reforms). It seems that no one really expects Greece to pay back ALL of the money. What they do expect is that they change their ways and start collecting more in taxes than they spend so that they don't end up in this position, yet again, two years from now, four years from now, six years from now, etc. etc. This author believes that the northern Europeans are selfishly acting in their own interests by refusing to write down the debt further and imposing conditions of future reform but I don't really think they are. They're trying to force an irresponsible government to behave more rationally. Put it this way. Say you had an continuously insolvent relative. Would you keep lending him money with the certain knowledge that you would never get it back, that you will inevitably need to lend him more money in two years time, *and* that by lending him the money it's mostly your own fault that you're in this situation in the first place because you are literally enabling his poor spending habits? Fool me once, shame on you. Fool me twice, shame on me. The idea that the northern Europeans should write a blank check (after *already* writing down the debt by 50% five years ago) is absurd to me.
This bit in particular is ridiculously sensationalized:
"Greece could cope if the Germans agreed to compensate for this destructive policy regime by giving the Greek people cash to boost their economy and get back on their feet. But Germans and their allies won't do that, both because it's domestically unpopular (German voters don't care about suffering abroad any more than voters anywhere do), and because of a strong moralistic streak that insists that the Greeks have sinned and have to atone."
Actions have consequences. When you borrow money, you typically agree in advance to pay it back with interest. If you spend more than you make, you won't have enough left over to pay back your creditors. This is a mess of their own making. They could remedy the situation by agreeing to terms that really aren't that insensible. But they think they are special because they've lived this way for decades. Why should Germans agree to pay more in taxes so that Greeks can continue to evade taxes and retire at 56? What makes the Greeks think they are so special they deserve this?
I agree with the sentiment behind everything you've said here. If I were German, I would have been ready to cut Greece off 5 years go. However, practically speaking, Greece needs financial assistance in order to reform, because in the absence of same, they would have crashed and burned long ago, and reform would be a mere footnote to the larger story of Greece trying to get back to being a basic, functioning economy, and the rest of Europe trying to deal with the political fallout.
Another way to look at this is that Greeks are angry about austerity, but the fact is that they would have suffered even more austerity, and more quickly, had the rest of Europe not given them money. From this perspective, Greece ought to be grateful.
At the end of the day, Europe needs to decide what outcome it wants. If it doesn't care about Greece's inclusion in the Euro, then it needs to just sit back, make demands, and see what happens. If it wants Greece in + reform, then it needs to do what's necessary to make it happen, even if it means unpalatable actions in the short term. We are well past the time of moralizing and anger, and need to get down to brass tacks because this needs to be resolved.