Greece and the EU: a question of trust

I have been mulling over the terms of the agreement between Greece and the Eurogoup. Initially, I thought that Greece had ended up with an appalling deal, getting almost none of its aims and losing control of EFSF funding for its banks. The retention of future primary surplus targets under the November 2012 agreement - only the target for this year is under review - seemed particularly harsh.

But then I listened to Pierre Moscovici explaining the thinking behind the deal, and suddenly the penny dropped. We've all been missing the point. Holger Schmieding of Berenberg Bank was on the right lines - he commented recently that the real problem in the Greek negotiations was that trust had broken down. Indeed it has. But not recently. Trust in Greece broke down a long time ago.

The most obvious breakdown in trust happened in 2010 when the extent of Greece's indebtedness was revealed - and the lengths to which it had gone to conceal its true position. With the help of Goldman Sachs, it had lied about its finances to gain admission to the Euro in 2001, and had been living a lie ever since.  

Since then, successive Greek governments have failed to deliver agreed reforms or have chosen to implement so-called "reforms" that wrecked small businesses and bankrupted households without addressing the deep structural problems in the Greek economy. Greece has made an immense reform effort, but all it has to show for it is a tiny primary surplus, some illusory exports and a growth mirage. It remains deeply depressed: the Economist observes that its depression is now nearly as deep as that of the US in the 1930s and more prolonged. And its debt/gdp is now a shocking 181% of GDP. However well-intentioned these reforms are, they are not working.

But in fact Greece has a long history of fiscal mismanagement. It has had recurrent defaults: some estimate that it has spent half of the last 200 years in default. It has also had episodes of high inflation and even hyperinflation, which is one reason why restoring the drachma is unpopular.

The long history of mismanagement, coupled with Greece's underhand behaviour when joining the Euro, are the reason for the breakdown in trust. Other countries simply do not trust Greece to do what is necessary to restore its economy and repay its debts.

Syriza appears to have assumed that it would automatically be trusted by other governments. After all, it is a new government with no connection to the previous ones. It doesn't have a record of financial and economic mismanagement.  It does have some lefty ideas, such as raising pensions and minimum wages and restoring collective bargaining, but these could be accommodated within a fiscally austere budget. And that is exactly what it has proposed. Its rock-star economist finance minister Yanis Varoufakis planned to run fiscal surpluses of 1.5% indefinitely, which is hardly profligate, and make structural reforms to encourage business, remove distortions and improve tax revenues. He complained that the reforms imposed by previous governments under the aegis of the IMF, ECB and European Commission were not good enough and he wanted to see far more extensive and radical reforms. And he wanted to "bail in" creditors by replacing existing debt with nominal GDP linked bonds, which would not pay out until growth improved and would therefore give creditors a direct interest in ensuring Greece recovered. To those of us watching on the sidelines, this did not appear unreasonable.

But it did to EU member state governments, particularly in creditor countries and - perhaps surprisingly - in some other periphery countries. They rejected his ideas out of hand and insisted that he had to stick to the terms of the existing agreement. This seemed harsh, and I - like many others - thought that these governments should give his ideas consideration. But the governments were not objecting to the economics. No, their real problem was that this government is Greek, and they don't trust the Greeks.

In effect, Syriza said to the other EU governments, "We aren't like the others: just let us do what we want and we will deliver growth and debt reduction". To which the others responded, "We've heard it all before. Why should we believe you are any more capable of doing this than your predecessors?"

This, in a nutshell, was the obstacle. Syriza wanted a new arrangement in which the rest of the EU would trust it to deliver on its promises. The rest of the EU wanted Syriza to prove its trustworthiness by completing the current programme. Deadlock.

It is to the considerable credit of the three institutions involved in the negotiation that this deadlock was eventually broken and an agreement established that gave Syriza some freedom of action while reassuring governments that existing commitments would be met. Indeed it appears to me that the IMF, EC and ECB have been broadly supportive of the Greek argument that the present programme is not deliverable in its entirety and needs to be renegotiated, and because of this more has been conceded than might have been expected. In short, the eventual agreement gives Syriza as much as it could realistically hope for and more than it had any right to expect.

The agreement essentially wipes out the current reform programme for the next four months, replacing it with a programme of reforms that the Greek government will specify and the EC, ECB and IMF will collectively approve. In parallel with this, and subject to institutional approval of the Greek government's proposed reforms, the national governments will extend Greece's bailout program until June 2015 to enable it to meet essential commitments. Funding to Greek banks will continue to be provided by the Hellenic Central Bank under the ELA facility, and there will be no imposition of capital controls. The initial list of reforms has to be submitted for institutional approval on Monday 23rd February. It will probably go through several iterations before being approved,  and there will be a lot of chewed fingernails, but once it is approved national parliaments will be asked to approve the bailout extension.

There will then be further work to specify the agreed reforms in detail. The details, including implementation plans, must be agreed by the end of April. This will then give time for further negotiation of what could be a completely new programme. And then we will play the cliff edge game all over again in June when the bailout extension runs out and the new programme must be approved in time for Greece to meet its debt obligations in July and August.

So although the Greek government didn't get debt relief, and it didn't get a commitment to reducing primary surpluses from 2016 onwards (this will have to be negotiated on the basis of revised forecasts taking into account the effect of the new reforms), it got something much more important - the opportunity to prove that it can be trusted.

I can't emphasise too strongly how important this is. I've observed before that the value of currencies depends on the credibility of their sovereigns. But Greece is a Euro member. It is essential that ALL Euro member states are credible. If one is not, then the rest are also undermined because of the risk to the currency that they all use, and indeed to the institutions, the banks, the trade links and the information channels that they all share. No wonder the other states needed reassurance that Greece would meet its commitments. It is not just a moral argument about obligations. Their own economic stability is on the line.

This chimes very well with a key demand of the Syriza government - the call for Greece's "dignity" to be restored. People who aren't trusted have no dignity. They cannot be left to do things for themselves, unsupervised, or to make decisions for themselves if those decisions will affect the welfare of others. So it is with countries, too. Syriza cannot have the trust of other EU members just because it says it should have it. It must earn it. This agreement, rather than treating it as a basket case that must be told what to do and supervised closely, offers it the opportunity to earn that trust by doing the following:
  • creating a programme of credible and achievable reforms that will deliver the growth that Greece desperately needs
  • delivering the reforms agreed with the supervising institutions
  • meeting all of its existing commitments 
If it can do this, then it will be trusted by others to deliver more - possibly including a complete programme of its own design. And in this way it will restore the dignity of Greece.

That's the challenge to Syriza. I hope it is big enough to accept it. But there is also a challenge to the rest of the EU.

The approval and supervision of Greece's programme has been given to the three institutions involved, the European Commission, the ECB and the IMF. It is fair to say that none of these has handled Greece's difficult situation well in the last few years. The IMF was the first to recognise its failings, producing several pieces of research that identified deficiencies in its handling of the Eurozone crisis in general and Greece in particular. As time has gone on, it has looked increasingly uncomfortable with the harsh austerity imposed on Greece. The ECB, too, worried about the severe demand squeeze in much of the periphery, has been trying to find ways of reflating the Eurozone economy without breaking fiscal rules. And the latest to the party is the European Commission, which under the leadership of Jean-Claude Juncker appears to wish to soften the fiscal stance and increase investment. All three institutions are quietly supportive of Greece's argument that austerity is too severe and needs to be relaxed.

But some key member states are not so supportive. For them, austerity is something to be endured in the expectation that reforms will pay off and growth resume. Germany's Wolfgang Schaueble was criticised by many people, including me, for his uncompromising attitude. And there are features of the agreement that do seem to be particularly aimed at soothing frayed German nerves: at the press conference, Jeroen Dijsselbloem said the reason for transferring HFSF funds back to the EFSF was to ensure that they could only be used for recapitalising banks and not to shore up the sovereign finances, which was a key worry of the German delegation. The insistence that the November 2012 agreement must remain in place for the four months is also a concession to member states worried that removing the existing framework completely would give Greece carte blanche to reverse all the reforms it has made. Evidently the supervising institutions still have some work to do to win the trust of member states, too.

It is therefore a considerable concession for member states to relinquish their power of veto over Greece's reforms to three institutions that have a chequered history and now appear to have a somewhat softer approach than some member states would really like. And it subtly shifts the power balance within the EU, away from Germany-hegemon and towards institutions. Taken in conjunction with President Juncker's ideas about creating a Eurozone-level elected body, this seems to move the Eurozone further down the road towards fiscal and political union.

Both Greece and the EU institutions should therefore appreciate the sacrifice of sovereignty made by Germany and others in this agreement. And both Greece and the EU institutions bear responsibility for making sure that it works. The IMF does, too, but its involvement will be short-term: Christine Lagarde explicitly stated in the press conference that the IMF programme ends in March 2016, which is long before any new EU programme for Greece would complete. As the IMF steps back, the maturing EU institutions must pick up the reins.

As Schaueble put it in his post-agreement press conference, "in the end this is not about a particular country, it is about the EU". And it is the whole EU which will gain if this all turns out well.



  1. Francis, The reforms are killing Greece, it's people, the country, etc. they are faulty. Why would anyone in Greece be happy with this outcome?

    1. Reforms aren't killing Greece. What is killing Greece is the continued lack of reforms over the past 20 years, the Greek eurozone career and preparation to it.

      As a citizen of another eurozone country, I'm rather fed up with paying taxes at a level of 44 % to GDP, and being told to bail out Greece, when the Greeks pay considerably less (somewhere between 30 and 36 %, but how much exactly, no one really knows because the numbers are so unreliable). And then our powers-that-be seem to think we should enter a fiscal, political and transfer union.

      As Frances said, I simply do not trust Greece to do what is necessary to restore its economy. Don't mention it would repay its debts; it seems it wants more debt which I as a taxpayer should give, and then waive out as "unfair" once more.

    2. No disrespect @pjt, but this is not a sensible comment by you:

      > I'm rather fed up with paying taxes at a levels of 44% of GDP [ ... ] when the Greeks pay considerably less [of GDP in tax] (somewhere between 30 and 36 %, ...

      The Greeks are running a primary surplus now. If you think they're paying too little tax, then logically it follows that they are spending even less. Surely you like that?

      Anyway, I shouldn't be feeding the trolls....

      The word "reform" is weird. The assumption is that "reforms" are good. Really, these are just "changes", and they must be judged on their merits. Stupid policies don't become good policies just because you slap the label "reform" on them. You wouldn't like the policies I would use in Greece, but you can't stop me calling them reforms.

      It has been established time and time again that "structural reforms", in the context of a shrinking economy, can do more harm than good. Once growth starts, the structural "reforms" might help a little, by accelerating growth. But they cannot kickstart growth on their own.

      If you make it easier to fire people, on the grounds that it's easier to hire people if you can fire them easily, then guess what happens in a shrinking economy? Companies just fire people, without replacing them. Unemployment goes up faster, tax receipts come down and everybody, including creditors, is worse off.

    3. I don't want to give a populist reply to what you said and I will try to be as objective as possible. First of all, most of the taxes you pay are contriburatory, while the taxes that Greek citizens pay are directed to a black hole. That is why I am in complete agreement with you when you say that 'real' reforms are needed for the Greek economy. And secondly, you are not bailing out the Greeks, you are bailing out some financial institutions (mainly from Germany and France) who were heavily exposed to the Greek national debt.

    4. Pjt, a couple of points:

      - top rate of tax in Greece is 45%. That's the same as the UK.
      - corporation tax is 25%, which is fairly high
      - Greece has far too many tax bands and concessions. System needs simplifying. But envy is poisonous, especially when ill-founded: Greece is not a rich country by European standards....if most people are paying less tax than you it might be because they are poorer than you.
      - the new Greek government has specifically said it does NOT want more debt. It plans to run primary surpluses so it does not need to borrow any more.

    5. I was not talking about income taxes only; the figures mentioned are the ratio of total national tax revenue to GDP which is an indication of the total tax burden.

      For income tax, the top tax where I live is ~55 % (depends a bit on locality) of gross earned income. On top of gross salaries there are of course various employment taxes/contributions like a ~25 % what you'd call employer's NI. And then we have 25 % VAT (14 % on food), etc etc. That total outcome meaning that the taxation is substantially higher than in Greece (or UK).

      As you say, the actual differences of course come not just from rates as such but also from tax bands and concessions and all the variants of horse-trading. What I mean is that the total revenues in relation to official GDP are substantially lower in Greece, not to mention the difference between unofficial economy and official bookkeeping that produces the GDP figure. When Greeks talk about high taxes, it infuriates us who actually pay a lot more.

      That the Greek governments may be allocating their tax burden unfairly is something that only Greeks can and should solve.

      If the Greek government is able to handle its debt and does not want or need new debt, then fine, what are we negotiating about? If no new loans are needed, then let's just not negotiate about what is not needed.

      And to Anonymous, the "black hole" is precisely what I see and what I do not want there to be. Do something about it, that is what I call reform.

    6. You really need to figure out that people are not pure statistics. When you talk about total tax burden per gdp you look at a large group and average it as a percentage. You miss the forest for the trees. The important thing for average Joe Schmoe is how much money is left in his pocket after all the taxes have been deducted and what he can do with that money. A third of a small amount is still a small amount but it leaves behind it an even smaller amount in Joes pocket. When Joe has to pay the same as you when he goes to the supermarket but cant afford to do so because he doesnt have anywhere near as much money left in his pocket as you do, its only natural that Joe will ask for lowered taxation. Come out of the ivory towers and look at what all this is doing to human beings not your numbers. Yes your tax burden is higher but its because you can handle it while maintaining your dignity. This isnt the case in Greece...

    7. So you don't trust Greek governments. Fair enough. You have very good reasons. But please take into account why both Greeks and you shouldn't trust YOUR government (or mine either).

      "That the Greek governments may be allocating their tax burden unfairly is something that only Greeks can and should solve." Well, that's not true if your government is asking for a set of certain reforms. The programme had two goals: get money to return the loan, and fix the economy. Fact is, those two goals are not always compatible. As OECD reports have proved, some of the measures in the memorandum have made the economy less competitive, not more: for example, slashing wages has been offset by increasing taxes, so that prices didn't get lower and exports didn't surge.

      That's a conflict inside the memorandum. And, in every damn case, your government and mine have pushed Greece for the quick money grab, not for the meaningful reform. Up until January they were supporting one party who had created the disfunctional economy, with the expectation that it would reform that economy. That's utter bollocks. They supported that party to get money fast.

      So, your government and mine (as well and you and me) bear some responsibility in the situation.

    8. People are not statistics, but in this I think the correct phrase would be that we miss the trees for the forest. There's quite a number of individual Joe Schmoes here (Finland) who have lost their livelihood because the big picture is that tax hikes are killing their jobs and the economy in general is stalling. The social security is not bad - for now. That won't last.

      And indeed, I don't trust Greek governments but I don't trust my own government either. It's not "my" government in the sense that I'd have voted for it, it's just the government that governs over me.

      Yes, I expect that in a few years, my country will also be knocking the door of EZ/EU/IMF to secure emergency funding. It will do that because it's taxing its economy to death, and it is doing that partly because the leaders are hell-bent on going to a fiscal, political and transfer union with Greece and Spain, and at the same time they want to maintain a generous level of social security that keeps people happy even if they are unemployed.

      And why wouldn't our leaders do this; there are some very nice EU positions available for those politicians who play along. We just don't usually call this "corruption", because it all happens completely openly. "Be in the EU core" means "make our taxpayers sign the bill obediently".

    9. Let's compare Finland to another Nordic country, such as Denmark.

      In Finland, tax revenue is 43.6% of the GDP. In Denmark, tax revenue is 49.0% of the GDP.

      In Finland, earnings-related unemployment benefit is approximately 50% to 60% of the previous earnings, for up to two years. In Denmark, earnings-related unemployment benefit is 90% of the previous earnings, for up to two years.

      Last November, unemployment in Finland was 8.9%, up from 8.3% a year earlier. Last November, unemployment in Denmark was 6.4%, down from 6.8% a year earlier.

      So what do angry right-wing middle-aged men blame for Finland's problems in their blog comments (not just here but on hundreds of Finnish blogs too)? High taxes and generous unemployment benefits!

    10. When you need to revert to commenting the personality of someone you disagree with - apparently being a middle-aged man is somehow contemptible? - it tells you that your argument wasn't that strong to begin with.

      Yes, Denmark is perhaps even more an outlier; on the other hand, it is geographically much closer to Central European markets so it has an easier time in many ways. One of them is that even though it has pegged its currency to the euro, it's not in the euro, and it's not in the supposed transfer union.

    11. pjt's point 'If the Greek government is able to handle its debt and does not want or need new debt, then fine, what are we negotiating about? If no new loans are needed, then let's just not negotiate about what is not needed.' needs addressing. There is lots about the primary surplus requirement and a lot about the real NPV and the supposed ease of servicing the Greek debt on the one hand. And lots about the punishing schedule of primary surplus requirements on the other. But nothing I could find about how these two perspectives can be reconciled. (I guess the primary surpluses are earmarked for early repayment of principal but I don't know.) A crucial point would be what levers the institutions would have after the end of the current programme if (I accept this might be a big if) the Greek government does not require further loans/ leeway as payments become due. Would the terms of the current loans become more disadvantageous if Greece was not deemed on track to get its nominal debt/GDP ratio down fast enough? No doubt there would be some such leverage but is this the same in Portugal, Ireland, Cyprus and Spain? And what about Italy? Undoubtedly sustainable economic improvement requires adjustment in the surplus countries but the degrees of freedom the peripheral ones have seems to be a neglected issue.

  2. Thank Heavens for a balanced assessment that doesn't start from procedural ignorance and proprietor agenda.
    Had I been the author I might have put my foot a little harder on the 2001 "who let them in?" pedal: at that time Goldman had net yet worked its Cohenesque magic. And I rather think the answer is...Germany.
    Germany also let Italy in on the basis of similar side-agreements. To be precise, Merkel's boss let them in...then she shafted him. Which is what Little Mutti does.
    I think the loose ends are:
    1.Giving Syriza the freedom to sort itself out for four months is, for me, nowhere near long enough
    2.Whatever Wolfie said at the presser, there will be bitterness in Berlin & Frankfurt.
    I still think the Germans will leave the euro before the Greeks will.
    on verra.
    JW 'The Slog'

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  4. I'm not sure I agree with the reason for the peripheral countries not supporting Greece is that they don't trust the Greeks. The real problem is merely political. Portugal and Spain have centre right governments, whose official discourse is that we've been on the righteous path to recovery for some time, that we left the economic problems and recession behind long ago, and that austerity has worked and should be deepened (all of which obviously false and hiding ulterior motives, but hardly seriously disputed in the local media). If Syriza succeeds, there is no chance in their lifetime of anyone from their political spectrum ever getting elected. This is underlined by the institutional centre left parties, which have been in government (PS in Portugal or PSOE in Spain, which are equivalent to the PASOK in Greece or PS in France), trying to position themselves as close to Syriza. It all boils down to basic self-preservation and short-sightedness.

    1. You say that austerity worked for Portugal. Check out the latest (30 January) report by the IMF. The problems still faced by PT are more or the same as Greece's. Debt in percentage of GDP is different. Portugal has to understand that austerity is an ideological, not a logical prescription to the crisis. Portugal should see light in Greece's rejection of the austerity recipe.

  5. The point about trust is well made and, while the memorandum has contributed to the collapse of the economy, the lack of reform that should have taken place during the period 2009 -2015 is a major contributory factor. The horizontal cuts and non-progressive tax measures introduced by Greece's two previous governments exacerbated the situation. For example, despite significant reductions in labour costs, these cost savings have not been passed on to consumers and have instead increased profit margins. It is almost contradictory to say that a 'left-wing' government would tackle anti-competitiveness in an economy but hopefully SYRIZA will begin the process in Greece.

  6. I don't think the lack of support from other periphery governments should come as any surprise. The current austerity narrative which Syriza has challenged has also been adopted by parties in power in Spain, Portugal and Ireland and their continuing political survival depends on maintaining the idea that sacrifices made are the "only choice" these nations have. A Greek victory would have thrown all of that out of the window and would have damaged electorally even further those ruling parties.

    Even Greece's largest opposition party, New Democracy under the leadership of ex-PM Antonis Samaras has been very publically attacking Syriza's stance in the negotiations. As with so much in the EU politics plays as large a role as economics in financial discussions.

  7. The reforms that Syriza has in mind and wants be able to implement in full sometime in the future are exactly the kind of reforms that are still long overdue in some of the peripheral countries which, supposedly, are dealing well with their debt levels and coming out of the crisis. Spain in particular is, to this day, riddled to the bones with political corruption, endemic tax dodging and a pervasive acceptance of the rotten 'status quo' among the majority of the population. The PP government's strong opposition to Syriza during the negotiations this past week-end had a bad smell about it...Guindos and Rajoy lecturing Tsipras and Varoufakis??? For sure what they must have been thinking was how dare you expose our dare you suggest there can be an honest alternative?

  8. FBI, Teacher Dude and Carmen,

    I completely agree with you. I think Syriza acted prematurely, before anti--austerity movements in other countries had gained enough traction to provide meaningful support. Consequently they did not get anything like as much as they wanted. But this is the EU, not the Soviet Union: populist movements are crushed by pens, not tanks. They've done better than I feared. And this is by no means the end. Buying time was a good strategic move. Spanish elections this year.....

  9. "It is therefore a considerable concession for member states to relinquish their power of veto over Greece's reforms to three institutions ..."

    I'm curious about this. Have the creditors countries agreed, in a legally binding way, to hand over money such that the IMF, ECB and Eurogroup can spend it on their behalf? Do all three of those need to agree? And how does the Eurogroup vote internally? Is a unanimous vote required in the Eurogroup from all euro-using countries? How is this different from what we have had in recent years? I can't see this issue spelled out clearly in the Eurogroup statement. (But I'm no lawyer)

    1. It's not exactly clear. But as I understand it, the reform package proposed by Greece will be approved by the EC, ECB and IMF, not the Eurogroup directly. The Eurogroup is still responsible for authorising the bailout extension, though.

    2. Germany, in it's response to Greece's extension request on Thursday, (i.e. the Trojan Horse response) asked for the 3 institutions to review Greece's debt sustainability and primary surplus. Germany doesn't appear to see it as a concession - rather business as usual from past reviews.

  10. Even if we accept that trust is important (why should a radical left government feel obliged to win the trust of the EU officialdom is not immediately obvious), Varoufakis/Tsipras weakened their bargaining position from the outset by clearly indicating their refusal to even contemplate leaving the Euro. Once Germany knew this, it was only going to demand a total capitulation. We still have to wait until Monday but I very much doubt what would be presented to the "institutions" will be anything but a set measures designed to be acceptable by them.

    This might win you trust in Berlin/Brussels, but would replacing "troika" with "institutions" be enough to keep the trust of their electorate? How does this compare to what Pasok did in 2009?

    The one positive outcome of this agreement is the growing number of people who start to realise that true change is not possible within the EU framework but, with Syriza shooting itself in the foot, all I can hear is muted chuckle from Golden Down. Varoufakis, with his "popular front" strategy for saving Europe from fascism, might have just delivered Greece to them.

    1. I think Varoufakis (like most economists) viewed exit from the euro as a disastrous policy choice, and was not prepared to bluff something that he and Tsipras would not be prepared to go through with. In that sense, they negotiated as honest brokers -- which is not something one can say for the Germans.

      I doubt that the outcome will benefit Golden Dawn in any way: the decisive point with be what can be achieved for a logical eurozone policy that prioritises the area (as opposed to Germany) over the next four months. Much of that responsibility lies with the Commission.

    2. "In that sense, they negotiated as honest brokers -- which is not something one can say for the Germans."
      Can't one? I would have thought the Germans were frank and honest right from the start. There's a lot of Eurozone members who think exactly the same as Berlin but who are happy to fly under Berlin's flag and let Schaeuble take the flak.

    3. @Anonymous. It depends what you think the German position is. If you take it at face value -- that Greece must accept commitments agreed to by previous governments, then perhaps it is honest in a limited sense. It is not in the sense that no government of any country is bound to the policies of its predecessors, since that would invalidate the purpose of democratic elections and of basic principles of democracy itself. The idea that states are bound by previously signed international agreements is only partially true, since any country can denounce an international convention.

      However, reading more deeply in the German position I see other things. Maybe others do not. One, is that the macroeconomic policies that have been forced onto the South are essential and there is no alternative, therefore there is nothing to discuss. Another is that the "reforms" foisted on the South have been effective and have improved their economies: again, there is nothing to discuss. In summary, the German position seems to be that the Troika policies have been very good and nobody has the right to question them. Of course, they have been good for Germany, up till now.

      This latter position is not directly stated, and hides behind the superficial "fiscal rectitude" dogma insisted on by Germany. This is not the conduct of an honest broker.

    4. How in the world were those policies good for Germany? Germans would have been perfectly happy not to have anything to do with Greece.

    5. "How in the world were those policies good for Germany? Germans would have been perfectly happy not to have anything to do with Greece."

      This probably speaks to the dissonance inside Germany. If the German people believe that money is being ripped from their pockets to support a luxuriant Greek lifestyle, then of course they would imagine they'd be otherwise happy. Alas, the vast majority of the funds went to their own banks.

      As well, there is a critique of the entire eurozone edifice by economists who see the German approach as selfishly mercantilist. A beggar-thy-neighbor approach to the economy. Most Germans, who do not receive the benefits of such an approach, are rightly resentful of the dynamics, but in terms of the eurozone as a whole, there is indeed an argument to be made by economists as to the benefits to the German economy of the current situation.

  11. This is a great view of the game being played between the Greek government and external agencies. But of course this is a multi-level game - the new government has presumably earned some political capital from its populace by refusing to perceived as the Troika's lapdog. And of course the domestic political game should also be seen as clearing more political room versus the other parties who have claimed that a Syriza victory would lead to Grexit.

  12. Frances, for a detailed analysis of the Greek crisis, from a Greek perspective, you may want to have a look at this: . Apart from the economic side, as you are very rightly suggesting, there is a huge trust issue on both sides.

  13. The Greeks had a bad hand to play, their only card was "give us money or we blow the whole thing up". Their "moral" logic was that their voters would accept nothing less than complete autonomy to waste/steal more EU money. Plainly, rather than asking for picks and shovels, they demanded more comfortable hammocks....and a condo on the beach.

    Unfortunately German voters also believe their voice counts. And no German government could expect to survive after capitulating to Greek blackmail.

    You say the the problem is a lack of trust. Not quite so: the Germans fully trust the Greeks to steal their money.

  14. I am afraid all these " nations" and parties accept the current monopoly of credit.

    I imagine the Greek national accounts are somewhat like the Irish in so far the depreciation of the banks assets are enormous relative to real income.

    Further "reform" designed to induce growth so as to pay interest will merely increase the amount of assets available to depreciate relative to domestic income.
    Reform will therefore further reduce the standard of living.
    A national dividend that will equalise the prices in the economy with income is the only mechanism that will restore balance in the economy.
    Since this will destroy the monopoly of credit this will not be done.
    I expect the world banking system centered in London is planning the destruction of many billions of people so as to remain on top of the credit compost heap.

  15. I can't understand anyone in a creditor Euro state complaining about net fiscal transfers, this exactly what happens within states. Rich regions will generate more tax revenue than poor regions, poor regions will need net transfer to avoid the state diverging economically to an politically unsustainable extent. This is the reality of a currency union, either accept closer political and fiscal union or split the thing up. Ultimately the creditor states are going to have to accept debt repayments in the form of Olives, Feta and Holidays from the Greeks because they will never be producing enough Euros.

    1. This has been the reality since the creation of the EU - nothing to do with the Eurozone. Greece has received something in the region of €100bn in EU Funds since joining. The issue is, will the richer be happy to fund others without any influence? I suspect not, no-one likes to give blank cheques.

    2. The structural and cohesion funds within EU are quite OK because they are something that was agreed upon. Everyone knew what was due when signing. Not everyone was happy about sending more money to Greece, but it was part of the deal.

      The eurozone bail-outs are a different thing because the conditions of joining the euro were supposed to ensure these are not needed. Now, there's massive cooking of books in Greece and, to a lesser extent, in other countries. The whole point of joining euro was that there are rules to live by.

      Yes, Germany was living on the borders of those rules at a time and was taking flak for it, and that flak was justified. But the surprises in Greek deficits are something else.

    3. Germany did not "live on the borders of the rules". It broke them.

      See the comments below about the "surprises" in Greek deficits. The only surprise was that Papandreou was stupid enough to break the conspiracy of silence that had enabled the rules in effect to be waived for Greece in return for extensive arms purchases from Germany and France - purchases that continued even when it was being bailed out.

    4. Yes, Germany broke the rules, but when the deficit limit is 3 % and Germany goes to 3.5 % or 4 % (I forget which) and then is embarrassed and fixes it, I'll call it a repentant sinner that crossed the border. France was a somewhat more impudent transgressor.

      Greek deficit was in the order of >10 % for many years. That's not something that is explained by Germans forcing them to buy a lot of arms; even if the military budget in Greece is large (twice as big as ours in proportion to GDP) it does not explain a majority of the deficit.

    5. Germany exceeded the Maastricht deficit limit from 2002-2006, as this chart shows:

      It also persistently exceeded the Maastricht debt/gdp limits:

      It was therefore running both a "cyclical" deficit and debt/gdp in excess of the Maastricht limit for almost the whole of the BOOM YEARS before the financial crisis. To be fair, German GDP growth was flat at the time:

      However, by no stretch of the imagination can Germany's stagnant GDP be regarded as a recession severe enough to justify breaching the Maastricht deficit limits. WIth flat GDP, according to current rules Germany should have been running a balanced budget. Therefore Germany's behaviour is not a minor temporary transgression, it is flagrant violation of the rules for several years. Any country that did that now would be in the "excessive deficit" procedure.

      I agree France was even worse, but that doesn't excuse Germany's behaviour.

      Greece's budget deficit was worse than Germany's during that time, but nowhere near 10% of GDP. It only rose to those dizzy heights after the financial crisis. See chart (before you criticise, these figures are restated):

      I did not say the whole of Greece's deficit was caused by its arms purchases. I said that Germany and France tacitly waived the Maastricht rules for Greece in return for arms purchases. A deal, not a deficit.

    6. I think a strong case can be made that the Greek problems are a result of arms purchases. Greeks can't make this case easily (even Syriza hasn't) because of national politics and ever present fear of Turkey. But Greece is the 3rd biggest arms buyer in the world, or was until 2011. And even in 2011, post meltdown, it spent 7 billion on arms, or more than 10% of its budget.

      Read here:

      "Economists estimate that if Greece had cut defense spending over the past decade to levels comparable to other EU nations, it would have saved some 150 billion euros – more than its last IMF bailout."

      One Syriza minister has commented that it only needed quarter of this at most. So subtract 115B from the 280B debt at the start of the crisis in 2010. Greece's finances look different if you do.

      The question has even been raised by MEPs in Europe outside Greece as to the quid pro quo for funding Greece. Remember this article?

    7. Frances, do you have any evidence that G & F waved Maastricht rules for Greece in return for arms purchases? I can think of many other reasons for why they were waved.

  16. Just to remind dear readers.
    Provision for depreciation in the Irish economy is now 23,657 million in 2013
    We have seen a revision recently , in the previous national accounts it was 5 and a half billion less .....
    I expect more surprises in future.
    The current usury based financial system is bankrupt beyond anything we have ever known OE even conceived in our wildest imaginations ......

  17. Imagine living in a economy where the total expenditure both personnel and government is 109;290 million and having depreciation so catastrophic .....
    What's worse the solution given is to built more cars and houses.
    I kid you not.
    This is how the eurozone functions.......the "growth" is actually designed to kill.

  18. There is much misconception concerning Greece, its finances, and the extent of the humanitarian crisis since 2010. I am not even certain that all parties in the EWG have the correct information on these subjects, as since the 3-partite bailout in 2010, Greek governments have excelled in concealing, befuddling, and obfuscating the extent of causes and effects, both in quality and in quantity, making any objective assessment extremely difficult and decision-making by EU institutions at best approximative.
    As this is a mere positive comment to a well-written article, and not the thesis I would wish to have written hoping to throw some light to the Greek 'situation', I will limit myself to the following hard-to-verify but i.m.p.o. facts:
    Greek taxation is not simply high, it is unsustainably high, tax-evasion is a necessity for individuals or any medium-small business to survive against govt-subsidized competition.
    Taxes are not directed into any reform-oriented or unemployment-diminishing measures but into ensuring pensions and benefits for the public sector that 'needs' to remain appeased for number of political reasons.
    Indirect taxation not revealed in the usual figures is beyond imaginable, energy and medical costs are at the forefront, and have contributed to most of the humanitarian crisis.
    Unemployment outside of the public sector is beyond acceptable to any EU-state, no government incl. Syriza has even envisaged dealing with it as the private sector is simply an addendum to the state-centralized economy prevalent in Greek political dogma.

    One may see a pattern emerging here, and this forces the conclusion that without major reforms in Greece's centralized ultra-rigid economy no bail-out or EU-sponsored aid will ever succeed in doing more than kicking the can even further, much to Greece's unending plight.

    1. "Taxes are not directed into any reform-oriented or unemployment-diminishing measures but into ensuring pensions and benefits for the public sector that 'needs' to remain appeased for number of political reasons. "

      I haven't seen Syriza address this at all. Of course, it could be just that the media and/or me are missing it, but how is it? Are they doing something about this?

    2. It is very difficult to audit or verify fiscal implementation when a sovereign entity wishes to demonstrate on the one hand compliance to EU institutions in order to receive desired funding, and on the other hand wishes to reassure the state-embracing clientelle that benefits the most from the impenetrable web of state-backed monopolies so prevalent in Greece.
      Post-election Syriza has rallied Greek popular opinion on a reiteration of the anti-austerity pre-election promises wrapped in nationalist confrontational rhetoric. This has galvanized the public to an extent that even 2 million unemployed Greeks will readily pledge their support for a government that offers them national pride through apparent negotiations, even though their prospects remain as grim as ever.
      Some of Syriza's pre&post election resolutions that one may easily find repeated ad nauseam in the Greek press:
      Re-instatement of all public employees vacated by previous govmts, pay rises for all public employees, abolition of public auditing/appraisal measures that were practically never implemented by previous gvmts as part of the hated troika conditions, roll-back of all privatizations initiated during the past 5 years including the re-nationalization of previously state-owned airlines/marine navigation companies.
      On Monday evening I will be curious to see exactly what the programme of intended reforms will include, the one that Varoufakis will deliver for approval by EU institutions & that will constitute the road map for the next 4 months, and how the inherent conflict with Syriza's electoral promises will play out.

    3. What you say sounds quite right. But just to clarify:

      "Greek taxation is not simply high, it is unsustainably high, tax-evasion is a necessity for individuals or any medium-small business to survive against govt-subsidized competition."

      So I take it that in your view, Syriza is not going to do anything about this? It's just promising that it can do what Pasok and ND no longer could do? I.e. default, write down all debt, and then immediately start accumulating new debt to keep all the old politic-economic structures and avoid any reform? And to get justification for this, there's this nationalist and socialist confrontational rhetoric (about demanding reparations from Germany for what it did during World War II, and so on).

      In my view, there was a bit of hope for Greece, at least in the form of expecting primary budget surplus for this year. I understand Greece actually achieved that in second half of 2014. Now it seems to me that Syriza is working hard to make that not happen, and try to extort the rest of Eurozone into simply providing it with continuous transfers to keep up with the system set up by Pasok and ND, and hopefully insert its own cronies into the system which previously was dominated by just two parties. To do this, it's ready to court Russia, for instance, which is something I consider rather shameful.

      More and more people here up North are also getting the feeling that tax evasion is no longer a real crime and not even something to be frowned upon; in the eurozone, it's becoming a patriotic duty.


    Oliver heydorn ( a published expert on social credit) destroys a classical Belloc distributionist in the comments section.
    Given that social credit theory as been 100 % correct regarding current events the great question of our time is why Oliver heydorn has not been invited on any trendy RT like television programmes.

  20. I'm affraid you're too much comprehensive with what you mean "populism". Syriza and Podemos are not simple populist parties. Podemos is a communists party financed by Venezuela, and I'm not very glad with the probability of a Podemos' government.

    All these parties are not only anti Austerism: they are convinced enemy of democratical institutions. They map is to consolidate a Venezuelan-type government, and I suppose you are informed about the uncountable problem of this mismanaged economy. Perhaps you are not capable of imagine a similar government in United Kindom, because it's absurd.

    On the other hand, in the euro area ins simply impossible a macro managed economy. The euro is a mistake, conceived on the idea that economy return itself to equilibrium. The euro is a very obstacle if a fiscal (as first step towards a political) union is not soon reached. All other thing is to dream.

    But I don't hope that this new "populist" party will arrange the flawed euro, on the contrary. As Isaiah Berlin said, we must know that some problems have no solution.

  21. This fiscal mismanagement thingy is a red herring Francis and is a grossly unscientific observation.

    The fact is the eurozone has destroyed peoples lives on the entire continent and for a very simple reason.
    Like in all capitalistic countries prices and income do not match but is perhaps more extreme in the eurozone with Anglo countries absorbing surplus euro production.

    Oliver Heydorn
    "I am glad to see that more and more people are looking into Social Credit. I am afraid, however, that the Social Credit that you are critiquing here is a straw-man. All of your objections can be answered and have been answered. Regarding the National Dividend, for example, it is indexed to productivity. No production, no dividend. In no way was Douglas advocating a promiscuous or imprudent creation of money (debt-free money) to consumers. Rather, he wanted to bring the financial capacity to consume in line with the financial capacity to produce. Right now we fill the gap between final prices and purchasing power mainly with debt-money, with the necessity for more work duly attached as the condition for its issuance."

  22. Let's just get down to basics.
    Your critique of Greece is based on its refusal or inability to produce surplus production.

    However surplus production is what has destroyed the continent .,..the costs are show up in the massive depreciation of assets relative to income.

  23. I don't think the culprit of the Big Mistake (Euro) is only in one way, from north to south. Greece is responsible of lying on its Nacional account to enter in the euro, thinking wrongly that it would receive unlimited fiscal fund from the rich north. I think also the same for Spain, Portugal, Italy...

  24. I think that I'd buy some notion of trust-building if there wasn't such a strong stench of anti-democratic sensibilities, like telling the PM to ditch his rude FM.

    I also think that trust-building is largely a serious waste of time, in the sense that the earlier effective reforms are instituted, the better. It's like delaying a US Chapter 11 (and not doing Chapter 7 at all), just because you're not inclined to name a leadership you trust or back a workable plan. More to the point, that the Eurogroup is squeamish about being more invested, in terms of manpower on the spot/cash, than an absentee landlord is also a major part of the problem. Nobody really wants to be accountable or transparent about what they are actually doing, and this is a big part of how Greece is "untrustworthy". They had a lot of help in plenty of shadowy locations to play games with the rest of Europe. I think that the true issue is that European banks are waaaaaay underregulated, even at this stage of post-crisis reforms.

    1. This comment has been removed by the author.

  25. This article by Nick Dunbar in from 2003 undercuts the narrative surrounding Greece's entry into the eurozone.

    It shows that the Goldman deal was known, that many countries did similar deals, and despite the disapproval of accountants, the eurozone FinMins insisted that the deals be kept off the books. So everyone knew Greece did this deal, because such deals were in vogue. It was known. Not a surprise.

    Dunbar, furthermore, writes that Greece was under the threshold for entry into the eurozone. Why did they do the swap deal then? To gussy up the debt to GDP ratio which was at 100% at the time. But the deficit was 1.5%.

    The line that Greece deceived everyone serves the eurozone FinMin well when they want to cover for the banks. if the banks say, "We didn't know about the Goldman deal, Greece was lying!" they can ask the eurozone to make them whole. But they knew, everyone knew, because the deal was common. It was a conscious decision by the eurozone to keep it off the books. In fact, other articles show Germany--when it was in trouble with the Maastricht rules--did deal 10x bigger than the Greek one.

    1. Cont'd:

      Nick Malkoutzis in this article basically agrees with Dunbar about the Greek budget upon entry into the euro:

      Mind you, the New Democracy gov't certainly lied about its budget. It was not 6% in deficit as claimed. Oddly, Papandreou's gov't really tried to stick it to ND by elevating the restatement of the deifict in Greece to 13%. This was a controversial figure in Greece. The troika settled on an actual 10% deficit for 2009. Back then, I queried Yanis Varoufakis as to his take on Greek numbers and Eurostat. I had added the gov't expenditures (as reported by Eurostat) at the time of entry year by year and compared them to GDP to get a sense of how much the overall debt was, and the numbers reported by Eurostat agreed with the overall numbers reported at the time the crisis blew up (110% debt to GDP). Greece entered the zone at 100%. Varoufakis replied to me that although the Eurostat numbers tracked with overall debt, the internal numbers were hopelessly fabricated. In other words, no one knew where this money was going. Still, given the fact that creditors know how much they are owed externally, and of course, BIS tracks these amounts, I don't think you could say Greece's numbers were fudged when they entered. If they were, the final numbers that Eurostat reported in 2010 would be well out of kilter, and even Greece's debt to GDP today would be underreported. The numbers were massaged, inside of legal eurozone guidelines. Is this duplicitous? Of course. I would say most of what has happened between 2000-2015 has been duplicitous. Even some of the countries under austerity have had some fancy reengieering of debt (pension obligations moved off the books in Portugal and elsewhere).

      I would ask people to really read what Rogoff reported about Greek defaults (the famous line about Greece being in debt half of its existence). You'd find that Greece hasn't defaulted since 1932, the Great Depression. In fact, until 2012, Germany had defaulted more recently than Greece had. Greece in the past has defaulted on a loan(1820s) given to fund their rebellion against the Ottomans. That loan went bad a decade before Greece was constituted as a nation (1832). It defaulted on a loan it never signed, signed in its name, in the 1830s by the Great Powers, to recompense Turkey for lost Greek possessions. It defaulted on a loan to the Bavarian Prince (new Greek King) in the 1840s (he didn't service the loan). All these loans were eventually paid off in the 1870s. Up until 1892, Greece had never taken a loan from a private bank. All loans were sovereign. In 1892, the loan was taken from the National Bank of Greece, and that loan was defaulted on during the Balkan Wars.

      I think maybe the Greek gov't has a history of lying, but maybe it does just a hair more than all the other gov'ts. In my view, Moscovici's line about trusting Greece is laughable. Didn't Holland and Austria just recently get caught with huge black holes in their budgets?

  26. I love chazzzzy's opening question, and it seems though a dozen replies and replies-to-replies were posted, nobody answered it.

    "Francis, The reforms are killing Greece, it's people, the country, etc. they are faulty. Why would anyone in Greece be happy with this outcome?"

    The root problem is that Greece can't escape austerity without leaving the euro, but Greeks are more afraid of quitting the euro.

    It's also true that, having chosen to stay in the euro, Greece has managed its internal devaluation badly. I don't think that's mainly the fault of the troika. I think that's mainly the fault of Greece.

    But sadly even after all the trauma Greece has endured, its still not competitive enough to expect bounce-back growth. So if it wants to stay in the euro, there's little reason to think the huge numbers of unemployed will be re-employed anytime soon.

    I'm not advocating for quitting the euro. I understand that Greeks don't want their wealth devalued and are afraid to go back to high inflation, which frankly seems a serious threat if Tsipras controlled fiscal policy with an independent currency.

    But currency unions are hard, especially on their poorer members. Nobody ever asked the American South whether the dollar's valuation was right for its productivity. And it clearly hasn't been overall, for a very long time.

  27. How can reforms kill Greeks who are at the same time worry about "their wealth" being devalued? If they are wealthy the reforms shouldn't kill them. If they have nothing why should they fear leaving the euro - or not at least consider it? Can we conclude that majority of Greeks are still wealthy? And that they now have four more months to take their "liquid" wealth abroad? I agree on badly managed "internal devaluation"!!

    1. "The majority of Greeks are still wealthy".

      No they aren't:

    2. Anonymous was probably thinking of Italians, whose average wealth is above OECD average.

      Greece 14k, Finland 20k, Spain 24k, Ireland 28k, Portugal 30k, OECD average 43k, Germany 49k, Italy 54k, Sweden 55k, UK 60k, Netherlands 71k, Belgium 78k.

      I wonder if those figures are really reliable / comparable? But when Finns read those figures, you understand why they are not entirely happy about eurozone transfers to Italy, Spain or Portugal, and not even Greece.

  28. Why the majority of these comments are all related with the moral-blame-kill'emalliftheydon'tconcur game?
    Why economics are being thrown out replaced by this moral game? Oh I know class wars, neoliberalism and all that radical left fear("Here come the commies!"
    Come on, this should be treated as economics. But no talk on "reforms". Please no, that is a preposterous excuse to say nothing while believing you are saying something important.
    The moral games didn't work out, the politics are getting too much in the way and Germany show grow up.Now! Or they prefer Golden Dawn, Le Pen or something else to deal in the Eurogroup? That would be wonderful wouldn't it?


    1. Economics has given a bad result. Economics push theories contrary to reality and data.[1] Thus, it also has lost credibility.

      I think economics has no moral code of conduct.

      Most economists have almost no accountability to the public at all. Unelected people many with the idea to set policy.

      [1] Example insistence on the theory of equilibrium in dynamic economies.

    2. Is that my neighbor's address on the captcha? Should I enter it?

    3. Barbarous Finance23 February 2015 at 09:59

      Doesn't economics seem quite political?

      Did one of the most named dropped economist, Keynes, work in the Colonial Office? Was India drained of Specie? Did England profit from one of the largest gold deposits in South Africa? In that context doesn't calling gold, a barbarous relic, seem political?

    4. Correction, Wikipedia says Keynes was in the India Office.

  29. Legarde in leather and Varoufakis in a smart suit? Something wrong there.

  30. If it was an issue of trust then how did the entire european establishment, openly support the previous goverment (New democracy) before the elections. The previous goverment had a much worse trackrecord. I dont buy the trust issue.

  31. Dear Francis, I have been following your blog for quite a while and I mostly enjoyed reading your posts. This last article you wrote was an exception though. I have two short comments to make.
    Number one is that, there is no such thing as “distrust” in Greece. Corruption, although it exists, was only the excuse, the opportunity that certain groups needed in order to impose harsh austerity and “happy hour” privatizations, on all countries that were not “model prisoners” inside the common hard currency. The headmasters of the EMU use the trust “on – off” button on Greece, whenever it is to their best interest. They trusted the corrupt Greek state fifteen years ago because it suited their purpose of expanding the common currency, they don't trust it now for the exact same reason. The rest is just politics.
    Comment number two is that, the so called “deal” that was reached in the eurogroup is nothing more than another refusal to deal with the debt problem. Which of course was created by the EMU, when they decided to “bail out” certain banks by increasing sovereign debt. Now, the politicians will have a very hard time “selling” a debt restructure to both their voters and, above all, to their financiers. That means they are going to avoid it as long as they can, no matter what it takes.
    What does all this mean? It means that the EMU is proceeding as planned. No stop to cheap privatizations and no less austerity, at least until further notice. The EMU is just using the fresh Greek government to buy some more time. I hope that they will prove me wrong, but they won't.

    1. Yes, I agree with the points made here. I don't think they invalidate the arguments in the article though -- rather, they add to them. For example, I think that the Germans actually are deluded enough not to comprehend exactly what they are doing and thinking in this matter of trust -- and this line of thinking is primarily cultural-religious in origin.

    2. Varoufakis made an important statement: Greece needed the most precious thing, TIME.
      In this context, Tsipras is right when he claims that Greece won a battle. The battle for TIME. Let's wait for chapter two.

  32. As I argue in a separate blog to Tony Yates I hope that your assessment of the deal - that it is about trusting Greece and the Greek people - is correct.

    My view is not that the reforms were too touch but rather that they are the 'wrong kind' of reforms as they have been imposed from above. A set of reforms that respect subsidiarity are more likely to work in my view. And would use the reforms of the German labour market after re-unification - when the Ostmark and the Mark were given the same value - as an example of this.

    Bill Wells

  33. It's great post! Thanks for sharing!

  34. National Bank of Greece (ADR) not the only NYSE listed Greek bank to trade on; exposure to other non-NYSE listed Greek firms is the best way to diversify risks from heavy Greek exposure.


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