Last week, James Galbraith was supposed to be interviewed by ERT, the public broadcaster in Greece. Events intervened when the Greek government ordered that ERT be shut down, and so instead of sitting for the interview, Galbraith delivered this speech in Thessaloniki in front of a large gathering assembled in response to the closure (ERT defied the directive and continued broadcasting on the internet; yesterday, a Greek court ordered that ERT be put temporarily back on the air). After noting that the Greek crisis has been going on for five years now, with no sign of progress, Galbraith suggested that it might be time to start reconsidering the policy approach: “After a certain amount of time, even an economist ought to reconsider their ideas. Most other people would so much more quickly, but we are a very patient and stubborn profession.”
Archive for the ‘Eurozone Crisis’ Category
In the context of the IMF’s latest release in its mea culpa series, this time on the problems with the Greek bailout plan (pdf), Dimitri Papadimitriou appeared on Skai TV to discuss the worsening crisis in Greece, the failure of austerity, and the need to renegotiate the bailout deal. Segment (in Greek) begins at 9:35 mark:
The formation of the eurozone represents “the wildest experiment in financial history,” according to C. J. Polychroniou:
the eurozone was to involve the inclusion of independent states, with highly diverse economic systems and cultural settings, that were required to give up national currency sovereignty in exchange for a “foreign” currency without the backing of a treasury or a central bank ready to act as lender of last resort in the event of a financial crisis.
And with the eurozone mired in recession (the latest numbers from Eurostat are here) and a deep depression in Greece, it might look like a failed experiment. But it only looks this way, Polychroniou suggests, if you think of economic growth and the wellbeing of the average worker as among the primary goals of the project. The setup of the EMU is not the result of some set of technical errors or oversights. It is consistent with a long-developing attempt, culminating in the Maastricht Treaty, at transforming a social market economy into a laissez-faire market economy: “it stemmed,” Polychroniou writes, “from the very premises of the fundamentally neoliberal economic thinking that had begun to take hold of the mindset of European policymakers in the 1980s.” If anything, he argues, the struggles in the eurozone, particularly on the periphery, are being seized on as an opportunity to accelerate this transformation, with Germany playing the role of “neocolonialist” in the process:
Germany has adopted toward the indebted eurozone member-states the same policy it carried out with regard to East Germany after unification: the destruction of its industrial base and the conversion of the former communist nation into a satellite of Berlin. The bank rescues masquerade as the rescue of nations, and are followed by the enforcement of unbearable austerity measures to ensure repayment of the “rescue” loans. Then comes the implementation of strategic economic policies aimed at reducing the standard of living for the working population and the shrinking of the welfare state, complete labor flexibility, and the sale of public assets, including state-controlled energy companies and ports. This constitutes the German strategy for pillaging the debt-laden economies of the Mediterranean region.
Read it here.
In economics, there is a remarkable “stickiness” in bad ideas and confusions. In fact, some bad ideas and confusions never seem to go away. For instance, last summer Martin Feldstein bravely suggested that euro weakening would help solve the euro crisis and rescue Europe (WSJ: “A weaker euro could rescue Europe”). Similarly, in a Bruegel Institute Policy Brief also published last summer and titled “Intra-euro rebalancing is inevitable but insufficient,” Zsolt Darvas argued that euro weakening was badly needed to restore competitiveness of euro crisis countries whose perceived inability to rebalance their external positions was a major root of the euro crisis. More recently, these two issues, euro external competitiveness and intra-euro competitiveness imbalances, were also bundled together in a piece by David Keohane titled “Why strength could be the single currency’s undoing” (FT.com 17 April 2013). Mr. Keohane seemed to identify a “euro paradox,” or even two paradoxes actually. One apparent paradox is that policy measures by the euro authorities that boost confidence in the euro run the risk of doing damage to it by undermining its long-term existence through enticing euro strength, which would postpone an export-led recovery. The other seeming paradox is that the single currency cannot exist at different levels for different countries and that it will therefore always be expensive for some and cheap for others.
Unfortunately, euro weakness as the supposed solution to the euro crisis is a thoroughly misguided piece of advice. The idea about the euro being expensive for some but cheap for others at its current level is nothing else but the external mirror image to the fact that competitiveness positions inside Europe’s currency union are utterly unbalanced – which led to corresponding intra-area current account imbalances and debt overhangs. While this is a correct diagnosis of intra-euro imbalances, implying a need for rebalancing, it must be stressed that there was absolutely nothing inevitable about this outcome. It was just that, contrary to the requirements of a currency union, Euroland simply failed to keep unit-labor cost trends within the union aligned with the commonly agreed two-percent inflation norm. In particular, as Germany stabilized its nominal unit labor cost trend at zero under the euro, the country turned űber-competitive in due course as a result. This resulted in the buildup of excessive current account surpluses – with corresponding German exposure to debts issued by its euro partner countries and exuberantly gobbled up by German banks and investors.
Perversely rewarded by the markets, Germany is imposing competitive austerity on its uncompetitive partners as the cure-all that is supposed to restore stability as well as growth. Quite predictably, the result of allegedly “growth-friendly” continent-wide austerity is catastrophic. Domestic demand in the eurozone has been shrinking for over a year now, at an annual rate of around 2 percent. The decline in GDP has been contained to less than one percent only due to a very sizable positive growth contribution from net exports. continue reading…
France and Germany held largely contradicting hopes and aspirations for Europe’s common currency. To France the key issue in establishing a European monetary union was to end monetary dependence, both from the vagaries of the U.S. dollar and from regional deutschmark hegemony, and to establish a global reserve currency that could actually stand up to the dollar as part of a new international monetary order. By contrast, the main German concern was to forestall the threat of deutschmark strength as undermining German competitiveness within Europe. Reserve currency status and currency overvaluation stand in conflict with Germany’s export-led growth model.
In light of the euro crisis both nations are bound to reassess the euro’s viability. No doubt France has seen all its hopes for the euro disappointed. France is facing the prospect of a lost generation today, a prospect shared with other debtor nations in the union, and a prospect that undermines the Franco-German axis and may soon turn it into the ultimate euro battleground.
(see this working paper for more background)
From Mariana Mazzucato’s “Rethinking the State” series.
Earlier this month the Athens Development and Governance Institute and the Levy Economics Institute held a forum on the eurozone crisis: “Exiting the Crisis: The Challenge of an Alternative Policy Roadmap.” Below are the remarks delivered by senior scholars Jan Kregel and James Galbraith.
Yesterday, Dimitri Papadimitriou joined Ian Masters to discuss the response to the banking crisis in Cyprus. The plan on the table, in which Cypriot banks would impose a deposit tax (9.9 percent on deposits above €100,000, and 6.75 on deposits below that) in order to gain access to a €10 billion bailout from the troika, unconscionably makes small depositors pay for someone else’s regulatory blunders — and is likely to be ineffective anyway, said Papadimitriou.
The entire episode once again points to the fundamentally unworkable setup of the eurozone, in which each member-nation is (ostensibly) responsible for its own banking system. For more on these deeper structural problems, see this policy note: “Euroland’s Original Sin.”
Listen to the interview here.
The evident failure of the ongoing austerity and “structural adjustment” experiments in Greece and the rest of the eurozone might have prompted some reconsideration of the intellectual foundations of those policies. Instead, as C. J. Polychroniou observes in his latest policy note, one notable reaction seems to have been to blame the test subjects:
In drafting the document for the so-called “Second Economic Adjustment Programme for Greece,” the EU’s neoliberal lackeys contended that “Greece made mixed progress towards the ambitious objectives of the first adjustment program.” On the positive side, it is noted, the general government deficit was reduced “from 15.75 percent of GDP in 2009 to 9.25 percent in 2011.” On the negative side, the recession “was much deeper than previously projected” because, it is claimed, factors such as “social unrest” and “administrative incapacity” (including a lack of effectiveness in combating tax evasion) “hampered implementation.”
The antigrowth “fiscal and structural adjustment” program was perfectly designed and would have produced all the anticipated results if the government were better fit to carry out the policies … and if the citizenry did not on occasion make some fuss about them by staging demonstrations here and there or by occupying the square outside the Greek parliament building. In essence, this is what the above statement says.
The puny excuses of the EU bureaucrats for the fiscal consolidation program’s causing a much sharper economic decline than “previously projected” fly in the face of the recent partial concessions made by the IMF: that the policies carried out in Greece ended up having much more adverse effects on the economy because the Fund miscalculated the impact of the fiscal multiplier. Indeed, the executive summary of the “Second Economic Adjustment Programme for Greece” goes on to state unequivocally that, insofar as the prospects of the success of the second adjustment program are concerned, “the implementation risks . . . remain very high” but the success of the program “depends chiefly on Greece.”
The neoliberal economics applied to Greece by Germany, the EU, and the IMF did not simply cause a greater decline in Greek GDP than “originally projected” or make the debt grow substantially bigger in the course of the last two years (from 126.8 percent in 2010 to 180 percent in 2012). It also produced an economic and social catastrophe of proportions unparalleled in peacetime Europe.
Read Polychroniou’s policy note here.
A forum organized by the Athens Development and Governance Institute and the Levy Economics Institute — “Exiting the Crisis: The Challenge of an Alternative Policy Roadmap” — will take place in Athens, Greece on March 8–9. The Levy Institute’s Dimitri Papadimitriou, James Galbraith, Jan Kregel, and Rania Antonopoulos are among the academics, journalists, politicians, and organizers participating in the two-day forum at the Athinais Cultural Centre (Kastorias 34–36, Votanikos). Simultaneous translation (Greek / English) will be provided.
- Major Challenges and Policy Choices
- European Union: Toward Which Way and for Whom?
- National Strategic and Security Challenges in S.E. Europe and the Eastern Mediterranean
- Empowering Democracy: Legitimization, Accountability, Effectiveness, and Social Oversight
- Productive Restructuring and Sustainable Development
- Social Cohesion
- Fairness and Democracy
- Toward a Social Front for Change: Prerequisites and Priorities
For more information and a full list of participants, see here.