Dear Professor Hausmann.....

Professor Hausman has replied to my criticisms of his Project Syndicate post about Greece.

Unfortunately, Professor Hausmann has misrepresented what I said. I did not say that Greece's fiscal position only worsened from 2009 onwards. On the contrary, I said that Greece's debt/gdp remained stable from 1993-2008 DESPITE a sizeable fiscal deficit. The fiscal deficit increased considerably from 2004 onwards. I also pointed out that this was due to the worsening current account deficit. For some reason Professor Hausmann decides to ignore this and give me an economics lesson on how current account deficits drive fiscal deficits. Professor Hausmann, you should retract.

Professor Hausmann points to infrastructure in Spain as evidence of constructive investment in the boom years. Airports where  no plane lands, roads where no cars drive, houses where no-one lives: this is "productive investment", is it? I'm sorry, this is not credible.

Professor Hausmann also criticises the data I use. I used charts from for convenience, but I cross-checked the data with Eurostat before posting. Is Professor Hausmann arguing that Eurostat data is not reliable?

But most importantly, Professor Hausmann says he does not understand what point I am trying to make. So, here is a summary of my argument.

  • The fragility of Greece's fiscal position was of very long standing. Debt/gdp built up during the 1980s and was over 100% by 1993. Despite an attempted fiscal consolidation in the late 1990s, debt/gdp did not fall significantly. Therefore Greece was in a difficult financial position long before it joined the Euro.
  • From 2002 to 2008, Greece's debt/gdp was actually stable, though high. This was of course an illusion, since it was due to rising GDP which we now know was caused by a credit bubble. But since no government in the world understood that rising GDP at that time was illusory, it is unreasonable to expect the Greek government to have exhibited sense that seemingly was absent everywhere else. The big myth of the boom was that it would never end - until it did.
  • Greece's current account was already significantly in deficit when it joined the Euro, because of declining competitiveness in the 1990s. It would have been useful for Professor Hausmann to have offered some explanation for this decline in competitiveness PRIOR to Greece joining the Euro. Unfortunately the only explanation he gives is "Greece produces products no-one wants to buy". Really, that won't do. Is it changing market preferences, relatively high prices, poor quality?
In short, I wish Professor Hausmann had taken a longer view of the historical performance of Greece, rather than focusing only on the post-Euro years and repeating the same old mantras about "fiscal profligacy". Long-term competitiveness decline in Greece is a large part of its problem: joining the Euro intensified, but did not cause, this. That is why I say the fiscal problems that emerged after the financial crisis are a red herring.


  1. I do think Hausmann has a point when comparing investment. "Airports where no plane lands" are not representative of infrastructure investment in Spain. The quality of public transportation (airports, trains, subway and bus systems) in Spain today is on a very different level compared to Greece. Also, compare Barcelona's sensible post-olympic urban projects (widely held as a model) with total decay in Athens. A key differentiating factor which I am missing in both Hausmann and Coppola is the lack of a decent bureaucracy in Greece.

    1. True that Greece lacks a decent bureaucracy, but that again isn't really relevant to the discussion as that didn't create the crisis, and Greece's bureaucracy has been dysfunctional for a long time. I think the point that Francis is making is that while Greece certainly has problems that made difficult to respond to the crisis, and maybe more susceptible to a bad recession, but that the underlying causes of the crisis stem from bank lending that created a credit bubble. Also I think that the numbers certainly tell that the Greece did not behave irresponsibly before the crisis, and had Greece had it's own currency it would have probably had a recession, and probably devalued, but then probably have bounced back. That Greece and then Greek economy could benefit from a functional bureaucracy is beyond question, but not really relavent to what happened -- and there are plenty of countries with poorly functioning bureaucracies that have not had a depression like Greece has had.

    2. I dispute the claim that the Greek bureaucracy did not create the crisis -- at least in the sense that nobody created a crisis that was originally an exogenous shock caused by the global banking system. But the Greek debt (as opposed to other Southern debt) is State debt, and therefore explicitly associated with both political decisions and state management in their intertwined form.

    3. >> "Airports where no plane lands" are not representative of infrastructure investment in Spain.

      Spain is the poster child for improductive investments driven by a housing bubble, cheap credit from reckless banks, and a highly corrupt state captured by construction companies.

      Take the high speed railroad. An impressive infrastructure, seen from a distance. Under a closer look, it turns out to be an electoralist promise with very little sense. It communicates Madrid with medium and small province capitals that don't add up to a million inhabitants (the estimated minimum on both extremes to have a profitable high speed line). Meanwhile, regular railroads remain underdeveloped.

      Add some useless highways, many useless airports, and oh, housing construction that was bigger than the four largest economies in Europe combined, and yes, you have one of the biggest booms in improductive investment in history.

  2. “The fragility of Greece's fiscal position was of very long standing.” You can say that again. When it comes to repaying its debts, Greece has been about the most unreliable countries in the World for about 200 years. Thus even if it had never joined the Euro, it would probably still be in trouble.

  3. The Euro has responded to tame the capital flows with something called the "macro imbalance procedure"

  4. There is a need in economics to sharpen the distinction between the government sector and the private sector. This distinction primarily arises because government has the ability to create money (or borrow and never repay) but the private sector has no such ability.

    From the MMT perspective, government can print money and put people to work. This act would both lower unemployment while the project is underway AND increase the amount of money in the economy permanently until unprinted by government with taxation. The work done may be wise or wasteful.

    Under bank capitalism, the same amount of money may be spent (as in the previous MMT example) but presumably the bank would require that the money be put to productive use with a predictable plan for repayment. Again, people would work during the life of the project and the money would remain in the economy until recovered by following the repayment plan. Again, the final result of the work done may be wise or wasteful.

    Now return to the economic sectors of government and private. Consider the wages paid by government AND the welfare offered by government. Both wages and welfare payments are entitlements that are fulfilled by the private sector. From the perspective of the private sector, wages earned by government workers and welfare payments are merely the source of demand for private sector products.

    The question of the wisdom of job assignment and task assignment for government workers and welfare recipients is not a private sector economic concern. It certainly is a concern of society as a whole.

    1. "Both wages and welfare payments are entitlements that are fulfilled by the private sector."

      I don't know id you were thinking of this?

      But it is of interest?

      “Here is a graph of the difference between cumulative tax revenue and cumulative federal spending in the US since 1789. The US started to run fiscal deficits systematically in 1931 and since then has run deficits 85 per cent of the time. Every time they had tried to run surpluses a recession has followed.
      Note the gap widens after the early 1970s, which of course is when the Bretton Woods system of convertible currencies and fixed exchange rates was abandoned and the US government adopted a fiat currency system.
      It seems that public spending is not paid for by taxes over a long period of time. Funny about that!”

  5. I have now read the 2 Coppola and the 2 Hausmann pieces and I am still not quite sure what they are agreeing/disagreeing about. One question seems to be whether Greece’s troubles began 2004 ff or long before then. I think Prof. Aristidis Hatzis gives an excellent answer to that question:

    Just one quote: “When Greece entered the EC, the country’s public debt stood at 28% of GDP; the budget deficit was less than 3 % of GDP; and the unemployment rate was 2–3 percent”. I guess one could also say: “When Greece entered the EC, Andreas Papandreou and PASOK came to power”.

    Prof. Hatzis does not put all the blame on Andreas Papandreou and PASOK. Instead, he says: “The political legacy of PASOK was even more devastating in the long-term since its political success transformed Greece’s conservative party, Nea Dimokratia, into a poor photocopy of PASOK”.

    Everything I have heard and seen in my 40 years of association with Greece would confirm the above assessment. The EU membership elevated Greece to First World status and this opened the gates for foreign capital flows. The EZ membership added a turbo to this development and the gates turned into floodgates.

    Somewhere I read a comment that the reckless banks were the cause of all this. This reminds of the frequent Greek accusations that the EU agricultural subsidies ruined Greece’s agriculture. Someone is getting confused about cause and effect here. The borrowers of the 283 BEUR which flowed into Greece as foreign debt during the first 10 years of the Euro (2001-10) were the Bank of Greece, the Greek State and the Greek banks (the sum of other borrowers was minimal). Is somebody suggesting that the Bank of Greece, the state’s Public Debt Management Agency or the commercial banks did not know what they were doing? And: 70% of Greece's foreign debt at Y/E 2010 had entered the country only after 2001.

    I think it is utterly irresponsible to say (or to imply) that the bailing out of Greece’s private lenders had any adverse effects on Greece! Instead, it had absolutely terrible effects on the tax payers of those countries which funded the bail-out’s (had they bailed out the banks directly and not via Greece’s balance sheet, they would have gotten equity in return). Greece benefited from it because debt which before was market-priced has now very subsidized rates and very long tenors.

    Greece was fortunate to be a EZ member! Without the Euro, Greece would have had to bring its current account and budget into balance literally overnight (ask Latin American countries how that feels). As it was, Target2 allowed Greece not only to run significant current account deficits for quite a while after May 2010 but also, and that is really the cynical part, it allowed wealthy Greeks to get their money out of Greece only to be replaced with foreign tax payers’ money. Explain that to your grandchildren!

    No one is doing the Greeks a favor by suggesting that today’s misery is really not of their own doing but rather the result of some systemic malaise. Yes, there is a systemic malaise in the Eurozone but please don’t have that cover up the real malaise of the Greek political and economic system since 1980! Only if and when Greeks begin to accept the truth that it is their system and not anyone else’s which got them into trouble can one expect them to agree on strategies which can get them out of this mess.

    Incidentally, in 1993 – only 13 years after Greece’s public debt had stood at 28% of GDP; the budget deficit at less than 3 % of GDP; and the unemployment rate at 2–3 percent” – a young Greek economist by the name of Yanis Varoufakis gave a TV interview in which he stated: “The state of the Greek economy is in terminal decline”.

  6. "Professor Hausmann points to infrastructure in Spain as evidence of constructive investment in the boom years. Airports where no plane lands, roads where no cars drive, houses where no-one lives: this is "productive investment", is it? I'm sorry, this is not credible."

    Believe me, it is totally credible, to the point that Government is bayling out the ruined firms...

  7. "In a letter to eurozone authorities, the cash-strapped Greek government suggested that Athens could fight widespread evasion of value added tax by wiring “non-professional inspectors” with audio and video equipment to track down lawbreakers.

    In addition to students and housekeepers, Yanis Varoufakis, the Greek finance minister, suggested that “even tourists in popular areas ripe with tax evasion” could be part of the scheme. They could be paid an hourly rate “on a strictly short-term, casual basis” for no more than two months."

    But is completely true... It seems that they are laughing yet.

  8. "But since no government in the world understood that rising GDP at that time was illusory, . . . "
    It may have been illusory in Greece, but in the US?

    “Growth in the Naughties
    Yesterday I posted a brief note about how to think about the 2000-2007 expansion, now that we know that there was an unsustainable housing-and-debt bubble. My point was that this doesn’t mean that the growth was somehow fake; real output of goods and services did indeed rise, even if the legacy of that growth was debt that create macroeconomic problems now.
    Charles Steindel emails to remind me that he actually did a quantitative assessment (pdf). In that analysis, he asked how much our estimates of actual growth are affected if we consider the possibility that (a) what Wall Street was doing wasn’t actually productive (b) much of the housing will end up being less useful than expected (e.g. ghost towns at the edge of urban areas).
    What he finds is that even with fairly strong assumptions about phony financials and wasted investment, you can’t make more than a minor dent in growth estimates. On the financial side, the point is that we measure growth by output of final goods and services, and fancy finance is an intermediate good; so if you think Wall Street was wasting resources, that just says that more of the actual growth was created by manufacturers etc., and less by Goldman Sachs, than previously estimated. On the housing side, the point is that residential construction, even though it was at high levels, never got much above 6 percent of GDP. So even if you believe that a large part of the construction taking place late in the housing boom had very low usefulness, it only subtracts slightly from growth over the course of the whole period.”


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