Marina Corta in Lipari Town (left, my photo) and Joseph Schumpeter (right, Wikimedia).
Recuperating from the very stimulating Growthcom Summer School on Lipari Island (Socio-Economic Complex Systems).
You can download my presentation on “Is Schumpeter Still a Useful Guiding Light for Global Innovation and Growth Research?”
The Guardian last night leaks details of the third Greek bailout agreement:
The Greek government is to surrender powers over vast areas of economic and social policymaking to its eurozone creditors under draconian terms agreed for a new three-year bailout.
The 29 pages of conditions concede ultimate authority over much of Greek policymaking to the eurozone and establish a system of quarterly reviews of the reforms by the troika of institutions – the European commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) – representing the creditors…
The document states: “No unilateral fiscal or other policy actions will be taken by the [Greek] authorities. All measures, legislative or otherwise, taken during the programme period, which may have an impact on banks’ operations, solvency, liquidity or asset quality should be taken in close consultation [with the troika].”
According to the document, external consultants are to be sent in to advise Greece’s national bank on bad debts and asset management, while the board of the Greek authority dealing with banking revival is to be co-appointed by the troika to counter suspected cronyism and “political interference”…
The European commission, which negotiated the new deal over the past fortnight in Athens alongside the ECB, IMF and the European Stability Mechanism (ESM) – the EU bailout fund – is keen to combat German-led scepticism over the package and see it implemented swiftly for fear of a political backlash in Greece.
There’s a ruckus about the latest disclosure of a contingency Plan B during the Greek debt showdown by the Greek Finance Ministry under its flamboyant minister Yanis Varoufakis to introduce a parallel currency in the event that the ECB shut down Greek banks (which of course the latter did but the former did not). While there is some room for debate about whether the Ministry’s hacking into its own online tax system (who knew backward Greece had an online tax system!), which seems to have been under the control of the troika rather than the ministry itself, seems somewhat stealthy, Paul Krugman defends the existence of such a contingency plan, tongue-in-cheek, as “shocking, shocking!”
Who knew that the Greek online tax system was under the control of the troika and not the Greek finance ministry? Film still from Casablanca: Major Strasser (Conrad Veidt) dictating terms to Capt. Renault (Claude Rains). Shocking, shocking!
Quite apart from the fact that this contingency planning had already been initiated by the predecessor Samaras government and revealed by Varoufakis on July 14 in an interview with Phillip Adams, it has long been known that the troika, for its part, had made highly secret contingency plans for Grexit and the introduction of a parallel currency during the 2012 round of the Greek crisis, known as Plan Z.
Here’s an excerpt from Peter Spiegel’s 2014 account in the FT:
Unbeknown to almost the entire Greek political establishment, however, a small group of EU and International Monetary Fund officials had been working clandestinely for months preparing for a collapse of Greece’s banks. Their secret blueprint, known as “Plan Z”, was a detailed script of how to reconstruct Greece’s economic and financial infrastructure if it were to leave the euro.
The plan was drawn up by about two dozen officials in small teams at the European Commission in Brussels, the European Central Bank in Frankfurt and the IMF in Washington. Officials who worked on the previously undisclosed plan insisted it was not a road map to force Greece out of the euro – quite the opposite. “Grexit”, they feared, would wreak havoc in European financial markets, causing bank runs in other teetering eurozone economies and raising questions of which country would be forced out next.
But by early 2012, many of those same officials believed it was irresponsible not to prepare for a Greek exit. “We always said: it’s our aim to keep them inside,” said one participant. “Is the probability zero that they leave? No. If you are on the board of a company and you only have a 10 per cent probability for such an event, you prepare yourself.”
Sounds familiar?
Here at Meltdown Economics we say,
“What’s sauce for the goose is sauce for the gander!”
File under: Eurozone Barnyard Metaphors (see Game of Chicken, Game of Turkey, Cow on the Ice)
The official European Union Anthem is the final choral movement of Beethoven’s Ninth Symphony, based on Schiller’s poem ‘An die Freude’ (‘Ode to Joy’, although the original version apparently had ‘freedom’ instead of ‘joy,’ which Schiller later deleted as too hot a political potato for his day).
Beethoven starts the movement with these words of his own:
After the Eurozone’s marathon reenactment of Buñuel’s film The Exterminating Angel, the Brussels Crucifixion of Greek PM Alexis Tsipras, and the Guns of Navarone, political discourse around the world has taken a sharp turn in the direction of recrimination, vituperation, polarization, slander and hysteria. On the one hand we have the Twitter hasttag #Thisisacoup denouncing the third Greek bailout terms, on the other we have a touchy nationalistic pushback in establishment German circles, media, and public opinion, as reported for instance in Jacob Soll’s recent NYT op-ed (also see previous post). And European Council president Donald Tusk “had been unsettled by the bitter recriminations that have characterised the contentious six-month Greek negotiations, particularly the anti-EU and anti-German sentiment that he believes has become part of mainstream political discourse,” reports the Financial Times.
On July 12, Paul Krugman in his NYT blog came out strongly in support of the #Thisisacoup camp:
This goes beyond harsh into pure vindictiveness, complete destruction of national sovereignty, and no hope of relief…
Who will ever trust Germany’s good intentions after this? …
The European project — a project I have always praised and supported — has just been dealt a terrible, perhaps fatal blow. And whatever you think of Syriza, or Greece, it wasn’t the Greeks who did it.
Official German circles and their lackeys (I hate to use such a loaded word from communist propaganda days, but it really seems appropriate) did not waste any time in riposting with a character assassination, by Nikolaus Piper in the Süddeutsche Zeitung on July 13. Under the section link “Paul Krugman--Economist foaming at the mouth,” Piper describes Krugman as joining the hashtag campaign of “Germany haters” (Germany being only one of his many pet targets, but currently his favorite), a “hyper-Keynesian” who thinks that new debt, low interest rates and government spending are always the answer to all problems, and that austerity is always false. He insinuates that Krugman’s Nobel Prize for his work in trade theory (actually trade and economic geography) is a questionable qualification for him to pontificate about fiscal (actually macroeconomic) policy while he blithely ignores facts, but Piper fails to mention Krugman’s work on exchange rates and currency crises and his publications on macro policy in a liquidity trap (e.g., Japan in the 90s) and, indeed, bailouts vs. write-downs. He ends with a recital of obscure Baltic politicians and playwrights with even lesser economic qualifications who have also felt an urgent need to defame Krugman. In other words, this is a complete hatchet job based on willful ignorance of the background of someone eminently qualified to comment on the Greek debt crisis (whether you agree with him or not), certainly light-years more qualified than Piper himself (who we are told on his SZ profile has written an award-winning children’s book on economics, among other things). The only invectives missing are “Keynesian running dog” and, of course, “spearhead of the world Jewish conspiracy against Germany,” but then, the Süddeutsche Zeitung is an honorable newspaper and has a reputation to uphold as a liberal paper of record that even republishes excerpts from the New York Times once a week. Strangely enough, the very same Nikolaus Piper conducted a rather favorable interview with Krugman in 2010, praising (if somewhat tongue-in-cheek) the very hang to polemic he now so roundly denounces in him. Is he not only a lackey of the German finance ministry but also suffering from unrequited love?
Is the hitherto respectable Süddeutsche Zeitung in danger of becoming the new Der Stürmer?
Now, anyone who follows Krugman’s blog and columns knows that he is
That Piper might be part of an orchestrated campaign here (presumably by the German finance ministry, but of course I’m just speculating), comes out in Friday’s interview with German Finance Minister Wolfgang Schäuble in Der Spiegel:
SPIEGEL: The American economist Paul Krugman has a clear position on that. The new aid program for Greece, he wrote in a recent column [actually in his blog, GS] in the New York Times, is "pure vindictiveness" and a "complete destruction of national sovereignty." Do you share his view?
Schäuble: Krugman is a prominent economist who won a Nobel Prize for his trade theory. But he has no idea about the architecture and foundation of the European currency union. In contrast to the United States, there is no central government in Europe and all 19 members of the euro zone must come to an agreement. It appears Mr. Krugman is unaware of that.
Schäuble thus repeats Piper’s mischaracterization of Krugman’s Nobel award and the insinuation that he is not qualified to judge these issues. Whether Piper is reading from Schäuble’s playbook, or vice versa, is hard to say, but this cannot be a coincidence. Would Schäuble’s perusing Krugman’s seminal 1988 paper “Financing vs. Forgiving a Debt Overhang” (Journal of Development Economics 29: 253-268) change his opinion about Krugman’s qualifications to comment on the Greek debt crisis in any way (on the unlikely assumption that Dr. Schäuble could even make heads or tails of it)?
And that Krugman might be oblivious of the cumbersome governance structure of the Eurozone also seems highly unlikely, besides being largely irrelevant. After all, who in the world today isn’t painfully aware of this deficiency after being subjugated to this excruciating five-year reenactment of The Exterminating Angel?
But we needn't take the word of a benighted American to judge whether there isn’t some justification in the #Thisisacoup accusations. Paul De Grauwe, former member of the Belgian Parliament, emeritus professor at the Catholic University of Leuven, currently professor at the London School of Economics, and one of the world’s leading experts on currency zones, is someone no-one could accuse of being unacquainted with the Eurozone’s architecture (or being a foaming-at-the-mouth “hyper-Keynesian,” for that matter). Yet in his blog on June 17, two weeks before the Guns of Navarone were fired or #Thisisacoup took off, he wrote:
All this teaches us two lessons. First, the objectives of the creditor nations, including the ECB, that today add tough conditions for their liquidity support is not to make Greece solvent but to punish it for misbehavior. … But it is precisely the desire to punish Greece by imposing additional austerity that makes it so difficult for Greece to start growing again and to extricate itself from the bad equilibrium.
A second lesson concerns the credibility of the future use of OMT. It clearly appears from the Greek experience that the willingness of the ECB to use the OMT program is very circumscribed. It is circumscribed by the ECB’s desire to solve a moral hazard problem … Behind the gloves of OMT is hidden a big stick. It is doubtful that future governments that experience payment difficulties will accept to be beaten up first before they can enjoy the OMT liquidity support. [my emphases]
Thus De Grauwe only lends further support to Krugman’s “this goes beyond harsh into pure vindictiveness, complete destruction of national sovereignty, and no hope of relief” critique, well before one could even speak of a “coup.”
Why is the German finance minister so sensitive to these criticisms that he seems almost overeager to resurrect the role of the “ugly German” (in the words of one German opposition parliamentarian)? The Oxford macroeconomist Simon Wren-Lewis has a plausible answer (and it’s not that Dr. Schäuble is a covert Nazi or auditioning for the role of Dr. Strangelove):
What is driving Germany’s desperate need to rid itself of the Greek problem?
One possible answer is that Germany finds the truth about Greece too upsetting, too challenging. This is because since 2010 Greece has done most of what the Troika asked of it. In particular, changes in its government’s underlying primary budget balance (i.e. the degree of austerity enacted) have been greater, by a long distance, than any other European economy. For many outside Germany what has happened to Greece as a result is hardly surprising: austerity is contractionary, and austerity on steroids is ruinous. Yet Germany is a country where the ideas of Keynes, and therefore mainstream macroeconomics in the rest of the world, are considered profoundly wrong and are described as ‘Anglo-Saxon economics’. Greece then becomes a kind of experiment to see which is right: the German view, or ‘Anglo-Saxon economics’.
The results of the experiment are not to Germany’s liking. Just as ‘Anglo-Saxon economics’ would have predicted, the results for Greece under the Troika have been a disaster. After dutifully taking the medicine for years, and seeing the collapse of their economy, finally the Greek people could take no more. Confronting this reality has been too much for Germany. So instead it has created its fantasy, a fantasy that allows it to cast its failed experiment to one side, blaming the character of the patient.
Wren-Lewis fails to mention that the Merkel government is also being very much driven, like the Sorcerer’s Apprentice, by the public opinion it whipped up in the past about “those lazy Greeks,” and by the rise of Germany’s own anti-Euro and xenophobic movements like Alternative für Deutschland and Pegida.
Paul Krugman, as the most visible, vocal and dangerous (what with his flashy Nobel Prize) exponent of this ‘Anglo-Saxon economics’ (read ‘hyper-Keynesianism’), is the obvious policy-wonk Prügelknabe (read ‘whipping boy’) for so many reasons I cannot even begin to enumerate them here. One is perfectly within one’s rights to disagree with him, but then one should marshal legitimate arguments rather than revert to a sorry tradition of character assassination and defamation.
PS: You might be wondering what ‘Die Schonzeit ist vorbei’ is doing in the title of this post. I hesitated to use this very loaded German expression in this context, but will go out on a limb anyway. ‘Die Schonzeit ist vorbei’ (literal translation: ‘the no-hunting-season is over’, or more figuratively, ‘the hunting season has now been reopened’) is an expression attributed to the Frankfurt theater manager Günther Rühle to justify the 1986 staging of film and drama enfant terrible Rainer Werner Fassbinder’s play “Der Müll, die Stadt und der Tod” (although German courts later ruled that it would be inadmissible to attribute it to him, but then, we know how consistently German courts have ruled on touchy historical issues). The Jewish community in Frankfurt claimed that the play revived classical anti-Semitic stereotypes such had been used in the notorious Nazi propaganda film Jüd Süß, and that this transgression overruled the constitutional freedom of artistic expression.
While the campaign against Krugman does seem to have aspects of ‘reopening the hunting season,’ the perpetrators have been very careful to avoid any overt anti-Semitism (it is of course no secret that Krugman is Jewish). However, anyone intimately familiar with German sensitivities cannot help but recognize that Piper’s article is skating dangerously close to this kind of historical stereotyping, particularly by using the term “Hasskampagne gegen Deutschland” (“hate campaign against Germany”). I won’t even speculate on who is responsible for the Stürmer-like “Volkswirt mit Schaum vor dem Mund” (“economist foaming at the mouth”), which was carefully placed outside the body of Piper’s article (and thus cannot be directly attributed to him) but in a prominent position on the webpage, and appears as the article’s actual title—which it is not—in Google searches.
The professor of financial accountability Jacob Soll is just back from a conference in Munich on Greek sovereign debt, and he shares his thoughts on “Germany’s Destructive Anger” with us today in the New York Times.
What are Germans angry about? According to Soll:
But when the German economists spoke at the final session, a completely different tone took over the room. Within the economic theories and numbers came a moral message: The Germans were honest dupes and the Greeks corrupt, unreliable and incompetent. Both parties were reduced to caricatures of themselves. We’ve heard this story throughout the negotiations, but in that room, it was clear how much resentment shapes the views of German economists.
Now flash back to 1919, when economist, founder of the German Workers' Party-DAP (predecessor of the German National Socialist Party) and theoretical mentor to the still-unknown Adolf Hitler Gottfried Feder published his pamphlet Das Manifest zur Brechung der Zinsknechtschaft des Geldes (Manifesto on the Breaking of Debt Enslavement):
Economists sure knew how to make attractive book covers in 1919. Take notice for your next book on the Greek debt crisis, Hans-Werner Sinn!
Feder attributed all the evils of the modern world to the machinations of financial capital (particularly, of course, Jewish financial capital) and the existence of interest on debt. He inspired the Nazi distinction between productive capital (schaffendes Kapital) and parasitic capital (raffendes Kapital, i.e., banking, stock market speculation), and wanted to do away with the latter by replacing traditional money with “Feder-Giro” money (not to be confused with his contemporary Silvio Gesell’s “Freigeld”).
While he was a big influence on Hitler and Goebbels during the 1920s, when the Nazis actually came to power in 1933 after the Machtergreifung, they reappointed former Reichsbank president Hjalmar Schacht (who had resigned in 1929 because he found the American Young Plan to service Germany’s debt unsustainable—sound familiar?) to the central bank presidency and as minister of economics, sidelining Feder completely. And of course the banks were not abolished (only the Jewish bankers).
Schacht writes about Feder in his memoir Magie des Geldes (The Magic of Money), Düsseldorf/Vienna, 1966, p. 66 (my translation):
The National Socialist propaganda under the direction of Gottfried Feder virulently attacked our entire private capitalistic banking and monetary system. Its slogans were nationalization of banks, breaking of debt slavery, and the introduction of “Feder-Giro” money with the intention of completely destroying our system of money and banking. In order to deflect this nonsense, as Reichsbank president I appointed a committee of inquiry to draw up proposals for tighter supervision and regulation of banks [...] During several consultations with Hitler I managed to get him to break with the absurd and dangerous banking and monetary ideas of his party comrade.
Evidently, what one thinks about “Zinsknechtschaft” and the unsustainability of debt very much depends on whether one is a creditor or a debtor. Keynes, of course, thought that both should share in the costs of debt restructuring, in the interests of advancing the common good rather than descending into a negative-sum game of vengeance and counterproductive austerity. During the Bretton Woods negotiations he wanted to penalize equally countries that ran current-account deficits and surpluses. The Americans (at least until the Marshall Plan), who in 1944 were the world’s creditors and the world’s trade surplus champions, would have none of this. Evidently the Germans, who today in their part of the world are in a similar position, seem to share this view. They are in no rush to give up their 10%-of-GDP export surpluses for any corrupt, unreliable and incompetent Greeks.
Soll concludes his German anger article with this recommendation to them:
When the panel split up, German attendees circled me to explain how the Greeks were robbing the Germans. They did not want to be victims anymore. While I certainly accepted their economic points and, indeed, the point that European Union member countries owe Germany so much money that more defaults could sink Germany, it was hard, in Munich at least, to see the Germans as true victims.
Here lies a major cultural disconnect, and also a risk for the Germans. For it seems that their sense of victimization has made them lose their cool, both in negotiations and in their economic assessments. If the Germans are going to lead Europe, they can’t do it as victims.
My recommendation to German economists if they want to get their anger under control (for, as we’ve seen, they seem to have major problems in both roles):
Neither a borrower nor a lender be!
(Hamlet Act 1, scene 3)
And my admonition to Greek Rosencrantz and Guildenstern economists:
The rich ruleth over the poor, and the borrower is slave to the lender.
(Proverbs 22:7)
Would the last person to leave please turn out the lights? (Photo: Reuters/FT)
Barry Eichengreen has a stimulating recent essay at Spiegel Online (English version) on the differences and similarities between the debt crisis in the US Territory of Puerto Rico and the Eurozone Territory (sorry—sovereign state) of Greece.
So Puerto Rico is, in a literal sense, Greece in another guise. But can you imagine the United States putting all other domestic and foreign policies on hold while it attempts to resolve the crisis? The idea is ludicrous. But that is precisely what Europe has done.
Point well taken. Puerto Rico’s problems (like Detroit’s not too long ago) will be resolved in bankruptcy courts. Greece’s, in contrast, have led to a five-month marathon reenactment of Luis Buñuel’s 1961 surrealist film The Exterminating Angel. That there are fundamental governance differences between the Eurozone and the United States is something I examined some time ago.
But there is another, more fundamental, difference between the Greek and the Puerto Rican cases that has become glaringly apparent since the European Central Bank (ECB) unleashed the Guns of Navarone on Greece, that Eichengreen doesn’t address. Can you imagine the Federal Reserve Board cutting off its financial backstop (discount window) to all Puerto Rican banks because their local government was insolvent on its municipal bonds, thus imposing bank holidays and capital controls on the islands? For that is what the ECB, the Eurozone’s equivalent of the Federal Reserve, has done in Greece.
Why is it inconceivable for the Federal Reserve Board to do so but already tough love (though not uncontroversial) between the ECB and Greece? To obtain central banking liquidity, Greek banks have to put up collateral (rediscounting). But what does their collateral consist of? In the US it would be US Treasury Securities, bonds issued by the Federal Government. The Fed has never accepted state or municipal bonds as collateral (although it traditionally, i.e., before the 1930s, and perhaps even today, accepted best commercial paper as collateral, whatever that is), and that’s why banks do not hold them as capital reserves. The corresponding instrument in the Eurozone would be Eurozone central sovereign debt, but, alas, no such thing exists (except for a small amount of European Investment Bank paper). What does exist? National bonds of the 19 constituent member states of the Eurozone, i.e., in American terms, municipal and state bonds, something the Fed would never dream of discounting. Since the EZ banks largely hold bonds of their own country (increasingly so since the 2008 crisis), this has created the famous bank-sovereign debt doom loop. As long as the ECB is unwilling to act as lender of last resort using any of the 19 national sovereign debt instruments equally, we will get the famous “fragility of the Eurozone” centrifugal self-destruction feedback loop described by Paul De Grauwe in 2011. But in doing so, the ECB opens itself up to the objection of the German Bundesbank’s President Jens Weidmann that the ECB would be thereby engaging in illicit monetary financing of governments (to the point where the Bundesbank sued the ECB before the German and European Constitutional Courts). It was probably the threat of more of this Bundesbank blackmail that induced the ECB to deploy the Guns of Navarone against Greece.
This hamstrung construction of the Euro derives from a fundamental misconception of what a currency is. A currency is not merely circulating notes and coins (and central bank deposits)—what economists call the monetary base—issued by a central authority and deemed legal tender. In a system of fractional reserve banking, it must be a whole gamut of debt instruments of a wide spectrum of maturities and (fixed-income) returns guaranteed by this selfsame issuer. Notes and coins, what I call money of order 0, constitute the most liquid component and are also a form of sovereign debt. But banks normally want to keep their reserves in something interest bearing, rather than in cash, which means that they must also be supplied with “risk-free” instruments of maturities of all orders (1, 3, 6, 12 month T-bills, 2-10 year T-notes, 30 year T-bonds, and in the past perpetual bonds like British consols). It is the obligation of the central bank to do this in a way that is non-inflationary and serves the other macroeconomic goals of policy-making (e.g., full employment), by influencing the yield curve with open-market operations, discount rate adjustments, reserve and capital requirements, etc. I call this the Spectral Theory of Money.
From this point of view the national debt is not an evil to be eliminated, but a necessary service the central bank provides to operate a modern economy. Not a subterfuge the profligate government foists on society to finance evil wars and a wasteful welfare state (although it can and historically has indeed done both), but a necessary supply of a range of lubricants to keep a monetary economy running smoothly. And if we examine the history of the longest continuously running modern currency system in the world, the Bank of England, this is exactly what we find. In 1694 a group of merchants bought up the poorly managed debts of the English king and obtained the privilege of issuing pound notes and coins, and bonds and later consols, as the Bank of England (then still a quasi private enterprise). And while the national debt of England subsequently only ballooned while the country gorged on a successful but expensive program of imperial expansion, its financing costs fell radically. Something the French kings, who failed to establish a viable central bank and state finance after the South Sea/Mississippi Bubbles, could only regard with envy.
If Eurobonds had existed, and all Eurozone banks were capitalized by statute with them, this problem could never have arisen, and the Guns of Navarone could never have been fired. Alexander Hamilton, the first American Secretary of the Treasury, understood this clearly in 1791 when he bought up the outstanding debts of the thirteen revolutionary states, and consolidated them into a single national debt serviced by national tariffs and taxes.
Until such time as the Eurozone catches up with Hamilton and begins issuing Eurobonds, and exclusively capitalizing its banks with them, it will never be a viable currency zone, as the Greek debt crisis has amply demonstrated. At best it will degenerate into a German protectorate cowering under the Guns of Navarone.
