Greece should default, refuse to leave the Euro
There’s a game of chicken going on in Europe, whereby the moneylenders (the European Central Bank, the IMF, and the European Commission) are trying to get Greece to pay back money they previously borrowed, but Greece doesn’t have any extra cash to do it. Clive Crook gave a good summary of the situation at Bloomberg View yesterday.
I sometimes like to imagine that Europe is a family, and Greece is a member of that family who really isn’t doing well. Greece owes the other family members money, but is also really ill and spends most of its time on the couch, coughing and feverish. The other family members want their money back, of course, but seeing how sick Greece is, are reluctant to actually kick a family member out on the street.
It’s not a perfect metaphor, since Greece is actually a country, and the people making big decisions about how debt payments will work in Greece are not the same people that suffer when they run out of jobs, medicine, and pension payments. But it’s gotten a bit more like that recently with the actual election of its Prime Minister, whereas before it was being run by an appointed technocrat from the central bank.
On the other hand, it is a pretty good metaphor, mostly because the grand European vision is very much one of a family, and pushing Greece out because of failure to pay money it doesn’t really have would be shameful to many who still believe in that vision.
So, going with the metaphor for the moment, I’d like to suggest an idea that came up in my Occupy meeting last Sunday when we were talking about how actual families would solve this problem. Namely, they wouldn’t. The sick person would be allowed to stay, even though they didn’t pay back the money. And everyone would be annoyed, but family is family.
mathbabe 
At least you didn’t use the term shylock. In any case, Europe seems to be a typical dysfunctional family where most of the siblings are industrious and Greece is a moocher. Of course, as you point out these are countries, not siblings. If this leads to the dissolution of the European Community, so be it.
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…except that in family one assumes a certain amount of visceral love between all parties that I don’t think is felt betwixt all the European players. I just don’t see this ending well, and American markets will be affected when it does end (the stock market seems to be waiting for some excuse to crash anyway). But hey, bankers have a way of wriggling out of things and kicking the can down the road, so maybe it’ll happen again.
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The problem is that, as the Germans (say) see it, Greece is not so much ill as in trouble because it spent huge fortunes on gambling, mansions, expensive vacations in Greece, and so on. In that case, family members tend to be less generous. I’m not at all saying that the EU is being reasonable, only that your metaphor is a little one-sided.
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OK, but even if Greece is sick from the gambling and the coke at the casino (which I think is going too far but for the sake of argument…), it was still there on the family’s dime, and nobody intervened earlier when the money was coming in quick.
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Sorry, that was a reply to Ernie.
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No, the problem is that the German banks aren’t willing to take the hit for their bad behaviour and they have the clout to see that they don’t. The German people know this very well, and are determined that the bailout at least not be on their own dime. They’re more than willing to let Greece take the hit.
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A key difference here is that Greece actually isn’t quite so sick as one would think, except for the need to pay back a huge debt. Ignoring their debt payments, this year they’re on track to have a more-or-less balanced budget. If their debt were forgiven, they wouldn’t even be the metaphorical sick person on the couch, they’d actually be more or less okay. Not great, but way better than now…
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This is not quite the correct metaphor in my opinion. The type of austerity that creditors want leads to disinvestment. It is like forcing a person to sell his or her tools and equipment to make this year’s debt payments. No longer being able to work productively anymore without tools, how is that person supposed to make next year’s payments?
The ECB has prevented Greece and all economically disadvantaged regions of Europe from getting the investment they need to work and get out of their morass. At this point a considerable part of the debt is a direct result of perennial austerity and not caused by the indebted themselves.
Some people may be afraid that allowing sufficient funds for investment into Greece may result in the money being diverted into short term spending instead of into long term sustainable investment. To reuse the metaphor, the lender is afraid the borrower will not buy tools with the money and work but instead buy a vacation in Santorini. It is somewhat a valid concern but then if there is this much distrust from other members of the eurozone that people in Greece are not even given the means to work, there is zero reason to continue the relationship and Greece should default and break off.
The fact that unemployment is widespread in Europe, not just in Greece tells us that the main source of problems is the damaging monetary situation caused by the ECB, not greek laziness. Greece has already achieved a primary surplus, they went through a huge amount of pain to correct their finances. And they did it while the ECB was continuously throwing sand in their gears, keeping inflation too low and real interest rates above a rate that gets Europe to an acceptable level of employment. This disproportionately affects economically disadvantaged regions.
Monetary policy in Europe is run so that only the areas that have natural economic advantages can prosper while investment is sucked out of weaker regions and turned into idle excess fiat. If Greece, through gargantuan efforts managed to be so productive as to offset their natural disadvantage and the European economy started heating up, the ECB would tighten yet again and vacuum investment out of the next weakest region causing a similar crisis there.
Only when the ECB will have produced an acceptable level of unemployment in the eurozone will you really be able to start blaming individual countries for their economic woes. After the recent reforms in Greece, if the ECB did an half decent job, Greece might well have been able to pay the entirety of their debt without too much pain, and if they still didn’t, then you would have had a case for corrective austerity there. But you cannot have government austerity at the same time as monetary over tightness (read private sector suffocation). That is just mathematical nonsense.
To make another darker metaphor, if there is so much distrust and resentment toward the Greeks that people think they should be made into slaves to pay for their debt, even then, it would make no sense to refuse to provide the tools and infrastructure to enable them to work. What good are non-working slaves? Of course, the relationship should break off well before we get to this extreme. Sometimes it seems like Germany doesn’t mind moving towards this nonsensical non-working slaves scenario.
The only real solution will have to start with the ECB moving to a higher or better inflation target that doesn’t choke their continent’s economy and that allows weaker members to labor towards recovery.
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Interesting, thanks for your thoughts.
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Here’s the overall problem.
In the past, the 1% needed everyone else. It was impossible to live a life of luxury (within the technological capabilities of the world at the time) without a huge amount of labor by other people.
With automation (on top of industrialization), that is no longer the case. There’s still some need for labor, but it’s much less. If the 1% can have as much luxury with robot servants as with human servants, then the only reasons for them to care about other humans are personal and ethical ones, and personal and ethical concerns don’t scale.
That’s why inequality has suddenly popped up as an issue. It’s not as big a deal to be on the bottom when the bottom is still needed; it’s a bigger deal when the bottom is irrelevant. If we have a natural resources crunch in the future and it only makes sense for a few million people to survive on Earth, it will be an even bigger deal.
The market is basically telling Greece that it doesn’t care if the whole country jumped off a cliff. An unemployment rate of 25% is the natural state of things with the technology we have, and we’d better learn to deal with it, because that number only gets bigger as technology advances.
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The apt Metaphor is more like an Episode from The Sopranos. Greece is the hapless gambler Tony ‘allows’ to play at the ‘big boys table.’ Before long the gambler, Davey Scatino is so far in debt he can’t see daylight. Since Davey can’t pay, the Soprano crew take ownership of his store and start racking up debt, further destroying Davey financially in order to get their money back. But the crux is, Tony never expected to get his money back, the scam was only to get the necessary leverage to bleed the mark dry.
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The family analogy is an interesting way to look at it. I see Greece as my neighbor across the pond who was beaten and robbed by the same group of fellows who beat and robbed my family members, Detroit, Nevada, and Atlanta. I also see that gang stalking my nephews Springfield and Glendale now. We all saw what they did to our neighbor Ireland too. I am hearing rumors the Asia’s might have been taken for a ride too. I know Greece and her cousins Spain, Portugal and Latvia are all pretty upset right now, and my brother Vermont has been talking about taking a stand. I think I a lot of us are going to go with him.
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What if the sick person has an infectious disease that will kill everyone in the family if they keep living in the same house?
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This isn’t quite the right metaphor. German (and other) banks unwisely lent to Greece despite the structural problems of the Greek economy (massive tax evasion; too much bureaucracy; overgenerous pensions and benefits). After the economic downturn, Greece could not service its debt and should have defaulted on those loans, with the banks paying for the risks they took (they would have kept the profits had the loans succeeded, after all). Instead, the Eurozone governments decided to indirectly bail out their banks by forcing further loans on Greece (to be partly used to repay the bad loans to the banks). The end result is a much greater debt load, and at the same time a transfer of the debt from private banks to taxpayers of Europe.
The reforms thus far have put Greece in a primary surplus, but there is no way it can repay its debts in a reasonable schedule. Rolling the debt in return for “austerity” would be unfair to both the Greek people themselves (who don’t need capital sucked from their economy) and to the people of Europe (who shouldn’t have to extend further loans just because private banks didn’t want to take a loss several years ago). Rolling the debt while letting Varoufakis conduct reforms is probably best, but I’m not sure. It partly depends on whether the European taxpayers would rather to take their haircut now, or slowly over many years.
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Highly recommended: http://yanisvaroufakis.eu/2015/06/09/greeces-future-in-the-eurozone-keynote-at-the-hans-bockler-stiftung-berlin-8th-june-2015/
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Greece will be better off if they leave the Euro. It makes no sense to have a common currency without having a common central government that has primary taxation, infrastructure, and social services responsibility. The Germans have benefited for 15 years now from having a weaker currency than they would have had naturally. If they aren’t willing to pay the price for that, than the economically weaker countries should leave the Euro and redenominate all of their debt in their own currencies. Nobody will lend to them for the next 10-15 years, but their budget surplus requirements if they stay in the Euro are equivalent to not being allowed to borrow money anyway.
Greece is in a position where they have nothing left to lose. It is never a good idea to force someone into that position, because they no longer have a reason to cooperate. If Greece defaults on their debt and/or leaves the Euro, it won’t make things worse for most people in Greece. The only questions left at this point are how is Greece going to default and will there be a bloody revolution? Having Greece pay off the debt is not feasible and therefore won’t happen.
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Great points, by… (please pardon my paraphrasing)
Benoit: “don’t force the workers to sell off the tools they need to work”
Quasihuman: “technology makes the 99% less important to the 1%”
Lior: “the problem is that the EU already bailed out the banks & now it’s a fight between Greek & German taxpayers”
I’ve got little to add, except that I hope the Europeans work it out, becuase I think the EU can/could have stong positive effect on the the rest of the world.
Mathbabe, your Commenters are are sigma 3, at least, in the good way!
-elkern
long time/first time
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Elkern,
I agree, my commenters are the best.
Cathy
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The family analogy may have some merit if it’s allowed to have some of the complexities of familial structures. Say a family member was seduced and financially destroyed, while in deep debt to family members, by an affiliated semi-member who avoided legal accountability by a technicality. The bondage of the family would likely allow a brother’s-keeper forgiveness and inclusion to get the prodigal back on his feet, rather than demand permanent impoverishment or alienation. When colluding TBTJ banksters commit financial fraud on honest Greek taxpayers and conspire with tax-dodging elites and crooked politicians to offshore their ill-gotten gains in the billions of Euros (see “Lagarde’s list”), the analogy seems appropriate. Just because the world financial institutions have accepted the idiotic Ivy League economists’ opinion that market dynamics and doubly-derivative mathematics have made the concept of financial fraud “quaint and obsolete”, millions of honest people are suffering the unjust degradation of “austerity” and privatization of public commons in order to accommodate the full payment for bankster criminality.
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In your metaphor, I think you have to add that to give Greece some strength, Mom and Dad are feeding it chicken soup — with a dash of arsenic in it. The current weakness of the Greek economy, which is keeping it from meeting its obligations, is in no small part the fault of the Troika. The IMF itself has said that what it is forcing on Greece does not work (!). The lesson of Greece is one that Germany should have learned, first in a negative way after WWI, and in a positive way after WWII. The EU needs a Marshall plan for Greece.
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