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Monthly Archives: June 2015

Frances Coppola tries to understand why Greece’s creditors are apparently so stuck into recommending policies that are economically irrational for all parties. Her hypothesis is that the main players see the current programme as punishment — on a moral level — for Greece’s past misdeeds. While some people certainly think like this, it seems a far fetched idea that this explains the situation, or that it is the majority view of the main players.

Theoretical Plurality

First, while I broadly agree that a debt reduction and a stimulus programme (or at least no more austerity) would be best in the current circumstances, I don’t think that this view is universally agreed. Macro-economics is the study of complex highly interdependent systems and our analytical toolset, both theoretical and empirical, is extremely inadequate. Nobody knows for sure what works and what doesn’t. Everybody is making educated guesses, often tainted by ideological bias — when competing models are a draw based on facts, it’s only human to choose based on ideology.

So I believe it’s still possible for some to believe fiscal rectitude and austerity work. It’s all a question of degree: every measure under consideration, taken in isolation, works some of the time to some extent. Is it unbelievable that the like of Wolfgang Schäuble still genuinely believe more austerity would produce the best long term outcome for the Greek and European people? A hint is in the whole ‘schwarze Null’ nonsense, which is about applying a similar medicine to Germany itself. The negative effects are less drastic given Germany is doing okay at the moment, but are still negative in what Frances sees as ‘obvious’ economics. How to explain it then? Self punishment? I don’t think so. One can be rational — as much as one can be talking about economics — and accept the Washington Consensus, as one can be rational and reject it.

Institutional Inertia

Still, is this view that of a majority view of European policymakers, or even the insiders in the institutions? It’s not so obvious, many insiders, prominent academics and finance professionals are on record supporting what we could call the Varoufakis View. Still the institutions remain inflexible. My bet here is that the main culprit is institutional inertia. There’s nobody in the IMF, or in the European Commission, who is in charge of Theory.

Weak leaders like Lagarde, Moscovici or Juncker seem to consider it’s above their pay grade to discuss theory or make any change to the orthodox models their institutions have been using for the past few decades. Everybody under them follows — while on official business, despite some being critical in research papers or in op-eds as ex-staffers — and there’s nobody above them. Minister or head of state level meetings, as Varoufakis has reported, are not places where theory is debated. My view is thus institutional inertia is the main culprit here. The IMF is on autopilot, and it will take some grave trouble for someone to look at the settings of the theory autopilot. A little default on June 30 could well be cathartic.

This is also true at the Eurogroup or European Commission level. The orthodox model is embedded in treaties and the rule set underlying the Eurozone. And renegotiating treaties is hard. Still, it will have do be done, or undone, some day. The current setup is extremely fragile, and if it doesn’t fail during this crisis it will fail during the next.

Both the IMF and the Eurozone are in dire need of structural reforms.

Where’s SuperMario?

The ECB has been remarkably neutral. This can be seen when both sides claiming to have it against them. The Greek side complains being on a tight leash, and they are (no short term financing tricks allowed, ELA allowance always kept to a few days’ worth) but then the orthodox side sees an ever increasing ELA liability — that can be defaulted on in case of exit — that they think should have been suspended, and capital controls introduced, long ago. The official ECB position that Greek banks are solvent with a liquidity problem is a bit farcical to be honest. But maintaining that farcical position seems an astute way to spend the minimum political capital required until a deal is made at the political level. My bet is that Mario Draghi may have taken Varoufakis’ side, but his hand depends on everyone — including Varoufakis himself — not realising it.

It’s to note that a Greek IMF default may be considered a positive for the ECB, as it may help push the commission/eurogroup to do the obvious debt swap and move the shortly expiring Greek bonds off its books and onto the EFSF/ESM, giving more room for manoeuvring by eliminating the risk of outright default on the ECB — which would make it possible to do whatever it takes to keep Greece in the euro.

German bonus ball

It’s really a sideshow, as only some of the players in the Greek drama are German, but I think there’s a great cultural misunderstanding when outsiders blame Germans for being moralistic in a punishing way. First, the whole idea of being externally moralistic towards other cultures is quite alien to the whole postwar German culture, for very obvious reasons. Second, there seems to be a weird Germanic view of causality that’s easily mistaken for morality but is really purely functional. In a nutshell, the person who causes damage pays for it, regardless of whether the damage was intentional or accidental. It’s pure causality, free of moral loadings. Third, the bias towards austerity and balance sheet prudence can be observed in many aspects of German life, including people’s sex and love lives. And who could argue that excess savings in the bedroom are directed from the Bundesministerium der Finanzen?

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A sense of humour

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