Greek debt crisis: “Grexit” fears spread across Greece and the EU

This, from Wonkblog’s Matt O’Brien, is the pithiest summary I’ve seen of the disaster Syriza has visited upon Greece:

That’s exactly right — and it has to count as one of the greatest policymaking failures in recent economic history.

There’s a lot that’s going down in Greek crisis negotiations this weekend, but if you want to understand what’s really happening, then pay close attention to the fairly petty dispute about regulations on Sunday shopping.

Let’s get things started with this paragraph from the German memo of things Greece should do (emphasis added):

The full text of the Greek government’s proposal to its European creditors is now publicly available, and the Financial Times has a helpful rundown showing that the new Greek proposal is extremely similar to the reform package Greek voters rejected so decisively on Sunday.

The Greeks have agreed to virtually all of the European creditors’ major demands. The remaining disagreements are mostly about the timing and details of these reforms. For example, European leaders had demanded that Greeks drop a special tax break for Greek islands and adopt a uniform tax rate across the country. In the past, Greece opposed the proposal. But now, Greece is offering to phase in the higher tax rate over 18 months in all but “the most remote” islands.

Two weeks ago, the big question in the Greek debt crisis was whether the Greek government would capitulate to its creditors’ demands and get the short-term money it needs to stay in the eurozone. Now, after two dramatic weeks of deadlines and red lines and banking emergency and a referendum, the situation is reversed. Greece’s European partners need to decide whether they want to take “yes” for an answer and keep Greece in the eurozone, or whether they want to find a pretext to say “no” and try to force Greece out.

The latest Greek proposal represents an essentially total cave-in by Greece to what its creditors had been demanding. The two main remaining outstanding points of disagreement are essentially trivial:

I lived in the UK during the early, heady years of European Union integration, when the borders were newly opened, the euro just introduced, and the subsidies still merrily flowing. Back then, everyone seemed to envision it as a sort of giant Club Med — a place to have nice vacations and the occasional broadening cultural experience.

To the extent that membership in the EU came with obligations, they were presented as something along the lines of polite social commitments, as if joining the euro were akin to extending a dinner invitation to friends because they had you over last month and it would be rude not to return the favor. There was a distinct lack of acknowledgement that all that togetherness and integration could come with truly burdensome obligations, or with unsettling political or social change.

Since the Greek crisis reappeared in headlines at the end of June, a number of people have somewhat sheepishly asked me if all this means it makes sense to go on vacation in Greece.

The short answer is: yes.

The roots of Greece’s crisis are simple. Before Greece joined the eurozone, investors treated it as a middle-income country with poor governance — which is to say, a credit risk. After Greece joined the eurozone, investors thought that Greece was no longer a credit risk — they figured if push came to shove, other eurozone members like Germany would bail out Greece. They were wrong.

As this chart, via the American Enterprise Institute’s Desmond Lachman, shows, after Greece joined the eurozone, investors began lending to Greece at about the same rates as they lend to Germany. Faced with this sudden availability of cheap money, Greece began borrowing like crazy. And then when it couldn’t pay back its debts, it turned out financial markets were wrong: Germany and other eurozone nations weren’t willing to simply bail out Greece.

If you need a historic example of a European nation that failed to repay huge debts to neighbors, French economist Thomas Piketty suggests in an interview with Die Zeit that you look to Germany — the enraged creditor to a nearly bankrupt Greece.

Without offering specific suggestions about Greece’s current predicament — the country is in a precarious position requiring alternative solutions after rejecting proposed austerity measures — Piketty suggested Greece’s crisis should be approached by creditors with a strong dose of empathy, as “Europe was founded on debt forgiveness and investment in the future.”

Stanley Fischer, vice chairman of the US Federal Reserve, former chief economist of the World Bank and head of the Bank of Israel, isn’t a person whose name will pop up on the top news feed of most Americans. But his straightforward speech on the history of monetary policy deserves your attention, especially if you want insight into how policymakers address crises in, say, Greece or Puerto Rico.

Here’s the one sentence that will catch you up on the state of monetary policy in 2015:

The government of Greece has decided to hold a yes/no referendum on a final proposal from the European governments to whom it owes money with Greece’s prime minister arguing that Greek citizens should vote “no.” It’s not entirely clear what the implications of a no vote would mean, but it seems likely to lead to Greece’s exit from the Eurozone and an uncertain future for both Greece and the single currency.

It’s going to take 10 bullet points:

If you want to understand why Greece and the rest of Europe are at such loggerheads, you could do worse than check out this chart I made by running a digital paintbrush over World Bank data on Greek GDP per capita.

The magenta line is more or less how things look to Greek people. Since 2008 or so, under the watchful eye of European Union elites (the central bank, the European Commission, the International Monetary Fund, the government of Germany, etc.), the Greek economy has completely collapsed. And the Greek population has been thrown into a state of dire immiseration.

As I wrote on Thursday, leaders in the eurozone and elsewhere around the world are no longer terrified that Greece defaulting on its debts would lead to a massive financial crisis. That’s one of the main reasons Greece’s creditors are so comfortable taking a tough line on the Greek government, which, in turn, is one reason a deal is so hard to achieve.

Larry Summers — the economist and former senior policymaker in the Clinton and Obama administrations — says this complacency is dangerous in a scary new op-ed in the Washington Post. He concedes that “there are good reasons to think enough foam has been placed on the runway to prevent financial contagion.” But he reminds us that “this was asserted with respect to LTCM, subprime and the fall of Lehman.” And, indeed, the lead-up to Lehman’s collapse featured things like articles explaining why Lehman Brothers was no Bear Stearns.

Years ago, back when the Greek debt crisis and attendant political machinations in the Eurozone first hit the headlines, the media was full of people screaming at you to pay attention to arcane fiscal disputes in far-off European capitals. And they were right. At the time, there was a serious risk of financial contagion from Greece to other European countries that could have lead to the collapse of the Eurozone and all kinds of wild consequences for global banking, the world economy, and other big, important things.

Now Greece’s debt woes are back in the headlines, and if you want to get caught up, we’ve got you covered. But if you don’t want to get caught up, that’s okay! There’s a big difference between this round of Greek drama and the previous one. This time it’s really not that important. You don’t have to pay attention.

You can read the six page memo for yourself. But the key reforms promised here mostly relate to the tax code and tax administration. Before the financial crisis, Greece was essentially running a European-style level of public spending with an American-style level of tax collection. The area where Greece’s new left-wing government and Greece’s European partners have the most room for common ground is on trying to raise Greek tax revenue. This is where Syriza’s reform promises are most specific and enthusiastic.

Syriza also promises to crack down on several dimensions of corruption, including promises to reduce civil service spending on things other than wages and pensions. For a flavor of what this means, even as the Greek stock exchange boomed on the news of the deal, shares in Greece’s number one office furniture company tanked.

As negotiations between Greece and other Eurozone member states — most of all Germany — continue, there’s growing speculation that Greece will be forced to leave the Eurozone. And if no deal is reached it might. But there is another policy the country can adopt that is in many ways politically and legally more likely: capital controls.

That’s finance jargon for legal restrictions on the ability to move money across national borders. Capital controls are in place in a lot of countries, ranging from China to Argentina. But they are rarely seen in the richest countries, and the idea of imposing capital controls on a country that is in a currency union is a little paradoxical. But capital controls are already in place in the small Eurozone state of Cyprus, and they could provide a solution — or at least a “solution” — to the Greco-German standoff that doesn’t involve Greece leaving the Eurozone.

The backdrop is that on January 25th, a far-left party called Syriza won an election in Greece. Syriza has never served as a member of a coalition before, but suddenly it was running the show. Syriza’s platform called for an end to the austerity budgets forced on Greece years ago, called for the re-hiring of many laid off civil servants, called for the cancellation of privatizations that were promised by earlier Greek governments, and called for a doubling of the minimum wage. But Syriza’s platform also called for Greece to stay inside the Eurozone.

Syriza’s problem is that it has very little leverage with which to make all of those things happen.

The Economist’s data team has put together a great chart collection on Greece that’s so packed with data that this eight-charts-in-one mega-chart is only one piece of it. But this particular graphic shows what is, I think, a key point to understanding the policy realities behind the political wrangling that’s happening right now:

Seven of these charts are showing you that the economic situation in Greece is terrible. But the chart in the top right is showing you something else — Greece’s unit labor costs, a key measure of competitiveness, have gone down a considerable amount. This is key because reducing unit labor costs is supposed to be the key to Greece’s recovery.

On issues ranging from immigration to LGBT rights, Syriza and the Independent Greeks are very far apart. But there is one issue around which far-left and far-right parties in a variety of European countries are converging — the European establishment’s economic policies have failed.

Ever since Greece needed to turn to the European Union and the European Central Bank for a bailout, Greek independence in policymaking has been badly compromised by the need to please actors in Brussels, Frankfurt, and Berlin. Syriza frames its opposition to this situation mostly in terms of rejecting the substantive economic prescriptions, while the Independent Greeks frame it mostly in nationalistic terms. But they are agreed on the need for Greece to stand up for itself and demand more leeway, though it’s not clear either party has a practical strategy for getting it.