Greece and the Historical Record

The umpteenth European meeting to discuss Greece was held and the umpteenth time European finance ministers say no.  No, they will not provide Greece with the funds to service its debt that they hold (the remainder is largely in the IMF and ECB's hands).  

While there is clearly a greater antagonism between this government and its predecessor,  it did not begin with its election. The official creditors have cut Greece off since the middle of 2014.  Indeed, that act may have led to Syriza's election in the first place six months later.  

When the history of this confrontation is written, it will recognize that Greece has made a huge adjustment in recent years.  Indeed, it will have a place among the largest economic adjustments of a developed country in modern times.  

As Martin Wolf of the Financial Times noted, between 2009 and 2014, Greece's primary budget has tightened by 12% of GDP, the structural deficit has been cut by 20% of GDP, and the current account deficit has been reduced by 12% of GDP.  

According to the OECD, unit labor costs in Greece have fallen by 15% since 2011.  On the OECD's Competitiveness Indicator of Unit Labor Costs has improved from 108 in 2011 to 74 at the end of last year.  

When the history of this confrontation is written it will recognize that the blunders of the creditor aggravated the situation.  The creditors themselves have acknowledged this, and yet refuse to change course.  There was a joint assessment by the Troika of the Greek-rescue.  It admitted that it failed to recognize and appreciate the extent to which the austerity it insisted upon would weaken the Greek economy.  

As we have noted the IMF overrode its own rules (and staff objections) in the amount it loaned to Greece,   It is not the first financial institution to over-lend to a particular counter-party.  However, those institutions try to work out of the situation, as opposed to what the IMF has done, which is simply to reject any softer terms.  Developed countries do not ask for such relief from the IMF, was the official response to the unofficial request. 

The IMF wrote:  "The Fund approved an exceptionally large loan to Greece under a stand-by agreement in May 2010 despite having considerable misgivings about Greece's debt sustainability. The decision required the Fund to depart from its established rules on exceptional access."  The IMF tries to soften its self-criticism by blaming Greece:  "However," the report continued, "Greece came late to the Fund and the time available to negotiate the program was short."  

Keynes may have written a best-selling book, Economic Consequences of Peace, which was published in 1919, he failed to alter policy.  And the rest, as they say, is history.    His prescient insight failed to carry the day at Bretton Woods a quarter of a century later.   The bleeding of Greece can come to no good.   Can we not learn from history?

The governor of a European central bank recently explained to me that Greece is a member of a club, and there are certain rules for members.  Greece needs to respect them.  Those rules mean some loss of monetary and fiscal sovereignty.   

The massive adjustment and the small (0.4%) primary budget surplus last year shows that Greece is making substantial efforts.  The key outstanding issue is the Greek government's refusal to cut wages or pensions any further.  Surely this demand does not violate any controlling treaty or agreement.   

Greece is in violation of the Stability and Growth Pact with its high debt levels.  Most EMU members also exceed the 60% debt/GDP threshold.  Given the contraction of the economy and the debt taken on to service its debt, as a percentage of GDP, Greece debt has doubled since the onset of the crisis.   History, though, will recognize that Europe suffered from an excessive debt overhang, throughout this period and that hampered the growth at a time when the demographic conditions were also shifting in a less favorable direction.  

The May 11 Eurogroup meeting is the next window of possibility to reach some kind of agreement. Before that on May 6, the ECB holds a non-policy making meeting and will discuss the haircuts applied to the collateral Greek banks are using to access the ELA funds.   The ELA is by definition an emergency facility,  and the more doctrinaire wing is pushing back against what seems protracted use.  The national central bank, not the Eurosystem bears the risk for ELA borrowing though the authorization comes from the ECB.  Note that although there is not a policy making meeting in May, there are other decision the ECB takes, and under the rotating voting scheme introduced this year, the Bundesbank will not vote next month.