Sunday, February 26, 2012

Not merely a Greek disaster

This report on Greece from the Daily Mail describes a country spiralling down into social collapse; one where a book of recipes from wartime Greece can be a hit. A society under deep stress through economic problems:
What is so shockingly evident as you walk around Athens are the awful parallels between that war-time era and today. The soup kitchens, the beggars, the pensioners picking up discarded vegetables after street markets close, the homeless scavenging for food in bins. These are the signs that can be seen.
Less noticeable is the quiet desperation of dignified people who turn off heating despite the cold and share dwindling savings with jobless relatives. Or the workers unable to afford fares home and the children fainting in school from hunger.
The scale of the economic problems is remarkable:
Greece’s economic freefall is calamitous. Gross domestic product is already down 13 per cent since 2008, and is likely to fall a further seven per cent this year.
By contrast, the fall in national output in Britain during the Great Depression was never more than 10 per cent. Such is the speed of collapse that a quarter of Greek businesses have gone bust since 2009.
One in five people live below the poverty line. Rates of crime, disease, homelessness and suicide are shooting up, while capital spending and property prices plummet.
Jobs are scarce:
The official unemployment rate has hit 20 per cent — though, as one journalist warned me bitterly, never trust an official statistic in Greece.
Nearly half those under 25 are jobless.
A similar report from the Melbourne Weekly indicates the depths of the problem:
University of Athens economist Panagiotis Petrakis ticks off the indicators: standard of living down, by as much as 30 per cent; bank deposits that have not been spirited out of the country are dwindling; almost 70,000 businesses folded in 2010 and bankruptcy is stalking more than 53,000 of the remaining 300,000; unemployment, 25 per cent - but youth joblessness is 47 per cent and rising; a quarter of the population living in poverty; homelessness, up 25 per cent, with well-educated youngsters accounting for much of the rise. Petty crime, doubled.
On top of all that Petrakis detects a slow run on the Greek banks. "It means a slow death for the economy," he forecasts.
As the Daily Mail reports, the economic crisis is becoming a health crisis:
It is worried by the growing numbers unable to access healthcare, and watching with alarm the rise in infectious diseases, the increase in mental health problems and the return of malaria after an absence of nearly 40 years.
The Melbourne Weekly reports a strong sign of supply-side problems:
"Despite all the economic loss to middle and lower class families, no prices have gone down - not for food, not for medicine," Charakidas says. "The theory is that you have an internal devaluation by lowering wages and pensions and prices will fall - they haven't."
The World Bank ranks Greece at 100 out of 183 countries ranked in ease of doing business but 135 out of 183 in ease of starting business, 150 out of 183 in ease of registering property and 155 out of 183 in protecting investors. Attempting to open an online store in Greece is a nightmare:
It took 10 months, a fat bundle of paperwork, countless certificates, long hours of haggling with bureaucrats and overcoming myriad other inconceivable obstacles for one group of young entrepreneurs to open an online store.
Economic activity is about having transactions. Greece pays a lot of bureaucrats with generous pension benefits to make it expensive and difficult to be in the business of engaging in transactions. As the Daily Mail reports:
The crisis has given Greeks an image of being feckless and workshy. But surveys have shown this to be wrong — there are more entrepreneurs per head of population than in any other European country, and they work longer hours, too.
In 2008, the year the financial storm broke, the average Greek worked 2,116 hours throughout the year, compared with the 1,426 hours put in by the average German.
Given the incompetence of the state, people are coming together to sort out their problems — another reminder of that war-time spirit under Nazi occupation.
The crisis comes from a deeply dysfunctional system:
There is no shortage of finger-pointing and name-calling. Greeks mostly blame their politicians for the mess they are in. Their politicians excoriate their European paymasters, especially the Germans, as much for fuelling the Greek addiction to debt as for the ruthless detox regime to rein it in.
The borrowing fed a pact with the devil. The politicians used the money to pay a bloated public sector - one in seven Greeks is on the government teat. The deal was that families and whole communities would support politicians as long as the cheques kept coming. Reporters testing oft-told stories of hospital janitors earning more than doctors because of this system of patronage, known as ''rousfeti'' in Greek, are assured they are not apocryphal.
Or, as the Daily Mail reports:
The crisis was partly caused by politicians hugely increasing the size of the public sector after the country joined the euro.
In 12 years, the wage bill of the Greek state sector doubled — and this excludes ‘fakelaki’, the notorious cash-filled envelopes needed when dealing with officials. It was decreed that those in ‘arduous’ jobs could start receiving pensions from the age of 50 — and hairdressers and waiters were among 600 jobs classified as arduous.
A poor state school system employed four times the number of teachers as Finland, the country with the best education system in Europe.
And, famously, a finance minister complained the railways were costing the country so much money, it would be cheaper to pay taxis to take the travelling public wherever they wanted to go.
As Melbourne Weekly tells us, made worse by a tax system which deeply unfair because it is riddled with evasion:
When privately employed Greeks are not complaining about politicians and the government, they vent about tax. "Taxes are so high because almost everybody else, businessmen, professionals and companies, can evade them - and the schemes introduced to reduce evasion don't work," Dimos Charakidas, a 34-year-old finance and investment consultant told the Herald. 'The injustice then is that the government increases the tax on those who do pay."
Part of a wider culture of evasion:
Despite anxiety about rising homelessness, most Greek families own their homes; the rental rate is one of the lowest in Europe.
The consultant Charakidas explains: "They have loans but they don't pay them and they get renewed protection from bank foreclosure every six months."
And the voters are not blameless:
The more popular, he explains, is for Greeks to curse their politicians for failing to tell them the consequences of their rampant borrowing. But this is something of a cop-out, he says: "The compromise was that these not-so-good politicians would be re-elected as long as they didn't impose the drastic measures needed to address the impact of the national borrowing."
He sits back, indicating that he is more inclined to a less popular, second argument: "I'm in the minority. I believe you get the government you deserve … and here that means this crisis will get much worse before it gets any better.
The stress the Greek political system is under is enormous. As conditions become more extreme, so do politics. As Nick Cohen points out:
Because they oppose the EU, cranks from the left and racists from the right now make more sense to Greeks than their mainstream politicians. The parallels with the 1930s are too obvious to labour.
A crisis on this scale has political repercussions.

A euro crisis
This is a crisis all about the euro. There are many reasons why Greece is suffering worst from the euro-crisis, but Greece is not causing it. In Nick Cohen’s words:
But Greek corruption cannot explain why Portugal is in crisis, any more than Italian corruption can explain why Ireland and Spain are in crisis. All five countries are suffering – and France may soon be suffering – because the euro is a monumental mistake. Rather than rectify it, European leaders attack the welfare states, employment protections and public services that the best of the European centre-left fought for after 1945. In the name of saving the euro, everything must go.
As British Foreign Secretary William Hague has said, the euro is a burning building with no exits.

Poverty levels in Europe—or, at least, those at risk of social exclusion—are high and rising. There is much more at stake than the viability of the European financial system.

As Greece is suffering worst, it becomes the focal point of the crisis. But the Greek austerity measures are cutting so deep, some people may end up paying to have a job. As the Melbourne Weekly reports:
Amid deep humiliation and great uncertainty about what it means to be Greek and, more particularly, European, enraged Athenians are lashing out as the weight of five grinding years of recession and the promise of perhaps decades of crippling reform and restructuring crushes the living breath from them.
And the bailout terms are stark:
The conditions insisted upon by Europe and barely delivered on by Athens, include the axing of 150,000 jobs from an 800,000-strong public sector by 2016 and a 22 per cent slice off the minimum wage - in a country in which average wages have dropped 15 per cent since 2009. The retirement age is to be lifted from 58 to 65 and restrictive closed shops that control the professions and services are to be busted.
Distrust of the Greek political class is poisoning the process:
But such is the mutual distrust and a Greek suspicion, reasonably founded on blunt public comments by German, Dutch, Finish and Luxembourg officials, that the Europeans are manoeuvring to cut Greece adrift from the European monetary union, that there are doubts all the money will be forthcoming - without which Greece would default within weeks on bonds worth $17.8 billion.
European officials are furious that Greek political leaders continue to allude to a need to renegotiate some of the bailout conditions, despite signing undertakings, demanded by the troika, that there would be no walking backwards.
The depth of the naked suspicion was encapsulated in a comment on Wednesday by Wolfram Schrettl, professor of economics at Berlin's Free University, when he told reporters: "Statements and assurances from Greece [that it will abide by loan agreed conditions] are no longer taken at face value. There is a growing belief that Greece is looking for a sucker - and Germany is playing the sucker." …
Apart from anger at Greece's failure to implement earlier agreements there is growing confidence in Berlin and several other capitals that the markets recognise that Greece is beyond redemption and that it could be cast out without a contagion affect in other Euro basket cases - Portugal, Spain, Ireland and Italy.
Nick Cohen makes the striking comparison that the EU is treating Greece worse than the US treated a defeated and war-devastated Germany:
The EU's terms do not begin to match the altruism the United States showed to the defeated Germans after 1945. America did not pauperise West Germans as many in France and indeed Washington wanted. America guaranteed their security, then gave them loans from the Marshall Plan that allowed the West German economic miracle to begin. Greece has invaded no one and committed no crimes against humanity. Yet the EU, which boasts that solidarity is its founding principle, is forcing it into destitution and chaos.
Policy driven by decent, moderate people is driving Greece into disaster and collapse.
Europe does not seem pleasant, prosperous or peaceful today. When historians write about the end of its postmodern utopia, they will note that it was not destroyed by invading armies anxious to plunder Europe's wealth or totalitarian ideologues determined to install a dictatorship, but by politicians and bureaucrats, who appeared to be pillars of respectability, but turned out to be fanatics after all.
What we are seeing is the disastrous effects of closed minds, of massive, entrenched groupthink:
The EU cannot take responsibility for what it has done and be magnanimous for reasons British readers may not grasp. Raised in a Eurosceptic country, we do not understand how an absolute commitment to the European project was a mark of respectability on the continent. Like going to church and saying your prayers for previous generations, a public demonstration of commitment to the EU ensured that the world saw you as a worthy citizen. If you wanted to advance in Europe's governing parties, judiciaries, bureaucracies and culture industries, you had to subscribe to the belief that ever-greater union was self-evidently worthwhile.
What is most striking is that, in three lengthy reports on the spiraling crisis in Greece (all via), not one mentions the ultimate culprit—monetary policy; or, more precisely, the tight money policy of the European Central Bank (ECB).

The ECB did it
It is true that the euro was likely a disaster waiting to happen. As Milton Friedman pointed out (pdf), it imposed a single monetary policy on institutionally disparate countries. Mediterranean countries, whose political economy had been based on regular devaluations to maintain competitiveness, were yoked with Northern European countries, which used periodic institutional reform to maintain competitiveness. Early on, Germany was disadvantaged. It then engaged in major economic reform, and became advantaged by the euro. It was, however, always likely that countries whose political economy had relied on devaluation would, over the longer term, suffer more than countries which used institutional reform. Which is what has happened.

(A friend points out that Protestant countries are handling the euro better than Catholic/Orthodox ones. A similar pattern emerged during the deflationary period of the C19th gold standard [scroll down to English version]. Given the central role of public debt, this is not so surprising given that Protestant and Catholic cultures have different attitudes to time, as the work of psychologist Philip Zimbardo explicates. This likely leads into an ethic of personal responsibility and future-directedness that probably makes institutional reform easier. It turns out that the social consequence differences between being “naked before God” and a Church that takes responsibility for absolving the contrite of responsibility are not trivial.)

Even given all this, however, the question remains why did the crisis happen when it did and in the form it did?

To which the answer is: because of the ECB’s tight money policy. (We can even track it on Google Insights.)

‘Tight money’ being defined not by reference to some monetary aggregates (as the relationship between monetary aggregates and economic outcomes is not stable due to such things as institutional change and shifts in expectations), still less by interest rates (since interest rates are far from the only monetary transmission mechanism and interest rates are the price of credit, not money) but by the relationship between money supply and the demand to hold money.

Since the price of money is what you can buy with it, shifts in money demand are registered in prices and spending. The “stickier” prices are, the more any downward shift in spending will be registered in falls in output. Either way, income falls (since someone’s spending is another person’s income). So, if the demand to hold money shifts upward, but money supply is held steady, then spending, and thus income, falls. With the “stickier” prices are, the more such a fall in spending becomes a fall in output. (So yes, supply side reforms making your economy more flexible are a good thing.)

And if income falls, the ability to service debt worsens. If spending falls enough, one can get a severe debt crisis. So a central bank can create tight money simply by not changing what it has been doing, if demand to hold money rises.

And an asset price bust is a classic reason why people want to hold more money (to use less credit and pay back past debts). But it is not the asset price bust that creates the financial crisis; it is the failure of the central bank to respond to the increased demand for money. (Or, worse, reduces the supply of money, which is what the insane Bank of France and the US Fed did in 1929-32, creating the Great Depression [pdf].)

But to be held accountable for the change you fail to make, particularly when there is a highly visible asset price crash and financial shake-up going on, is hard. It takes some reasoning to see underlying causes, as well as mainstream commentators to notice. Alas, monetary policy is not something that is all well understood. Indeed, there are entire theories of macroeconomics that greatly downplay its importance.

The more invisible a responsible institution is to mainstream commentary, the more unaccountable they are. Nor are central bankers at all likely to publicly accept responsibility. People have an incentive to accept theories that reduce their accountability.

So people look at Greece’s dysfunctional political economy; they look at some countries having major debt problems and others not so much; they look at the difficulties inherent in the euro and they see explanations.

With far too many people not looking any further, so not seeing this is a crisis made by the ECB. Europe does not have a public debt crisis. Europe has an income crisis. An income crisis caused by a collapse in spending caused by the ECB’s tight money policy. Of course the crisis hit the most vulnerable and the most dysfunctional first: that is what crises do. But do not let Greek dysfunction distract you from the reality that the ECB caused Europe’s debt crisis.

Yes, the euro was a bad idea. But this crisis has a specific cause: and that cause is the tight money policies of the European Central Bank.

ADDENDA David Beckworth puts it pithily (with graph).

[Cross-posted at Critical Thinking Applied]

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