27
Feb
12

Still more on Greece and the Euro

Via Tyler Cowen we discover this enlightening, if rather depressing, update:

In addition to the utterly unsurprising observation that Greeks blame the troika (EU/ECB/IMF) for the present austerity measures, Ms. Green offers some other comments on Greek desperation to remain on the Euro rather than flip to a new Drachma:

In addition to concerns about what would happen to their savings and what sort of social unrest would be stoked if Greece exited the EZ, most Greeks are cynical about how a new, independent central bank would operate. They recall that the central bank in Greece before EMU regularly printed money to line politicians’ pockets and encourage favors. If Greece exits the EZ, they expect that kind of cronyism and corruption would flourish once again.

I’ve opined before, in my glibly dilletantish way, that one of Greece’s major problems within the Euro is its inability to inflate its way out of massive short-term debt obligations.  This excerpt contradicts me:

A top official from New Democracy, the most popular party according to recent opinion polls and the party likely to lead a coalition government following upcoming elections in April, waxed at length about how much trouble Greece would be in if it exited the EZ. He highlighted that Greece has few export industries it could rely on to grow its way out of the crisis even if it devalued its currency. He conceded there is tourism, but argued that any profits from shipping are kept out of the country and green energy is still but a mere pipe dream as an export industry for Greece. Given that Greece is not self-sustaining in agriculture, he suggested that a devaluation accompanied by hyperinflation would result in a starving population, and that the resulting civil unrest would destabilize the entire Balkan region.

(“Destabilize the entire Balkan region” sounds like a key phrase aimed directly at the rest of the EU.)

Okay, so a lot of Greece’s problems are structural rather than cyclical, and I concede that if Greek industry is fucked they’re going to have a hard time doing anything even if they can inflate away a bunch of their short-term obligations.  But how is this going to be any less of a problem if they stay in the Euro?  I suppose there’s less chance of a new monetary infrastructure becoming as Byzantine as… well, apparently, the rest of Greece’s public institutions.

Speaking of which:

A number of contacts described their experiences trying to open a business or buy property, which involved high fees, several trips to different tax offices and months of navigating bureaucracy. This gets at the very heart of how Greece landed up in its current condition and why rapid change is unlikely. Entire professions such as notaries, lawyers, tax men, architects and inspectors have for years had automatic income in that they have formed the layers of bureaucracy involved in doing business in Greece. At least half of the MPs in Greek parliament hail from these industries, and consequently are incentivized to perpetuate the bureaucracy that impedes opening up, running or finding investment for businesses.

Greece looks like a textbook example of rent-seeking.  This is, er, not making its odds of recovery any better:

Legislation in Greece has been set up on an ad hoc basis, with laws just layered over—and often contradicting—one another. No one has taken a holistic view of the system and consolidated it. Furthermore, if an investor were to need to turn to Greek courts, the case would not be heard for years. If the investor were foreign, the chances of a ruling in their favor would be extremely slim. It is hard to see how investment will return to Greece unless these issues are addressed, but the government is incentivized to obstruct progress in doing so.

(See also this apposite post from Kenneth Anderson on investments and local law.)

An anonymous commenter at Marginal Revolution (to whom I apparently can’t link directly; Feb. 27 at 2:14 PM) piles on:

Every single growth-inducing policy recommendation from the troika is ignored. Instead they cut the spending with the highest impact on the economy. In September 2010 they were supposed to have “opened up” various professions (like hairdressers, taxi drivers, pharmacy ownership, the list continues endlessly). They have still done no such thing, instead they let the special interests win after a couple small demonstrations. And Papademou shows no more negotiational skill than Papandreou.

And of course as all these things go on, the quid-pro-quo appointments to the public sector continue.

This reminds me of, oh, every other (mostly municipal) austerity campaign ever.  “Sorry guys, we’re low on cash so we’ll have to fire all the nurses and police officers and turn every public green space into a parking lot.  What?  You want us to cut salaries for City Councilcritters and mid-level bureaucrats instead?  Stop  building yet another high-speed rail link and run more buses in its place?  That’s crazy talk!”

It’s getting harder to see a happy ending for Greece, and it wasn’t exactly easy the last time I looked.

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3 Responses to “Still more on Greece and the Euro”


  1. February 28, 2012 at 03:26

    I’m sure they could have inflated their way out. If they can’t now, it is highly revealing.

    The modern nation-state lives on such a knife edge of accounting that a couple years without inflation is deadly?

    However, looking at the numbers, I don’t buy it. Greece’s debt is less than double its GDP. It’s sovereign debt is only ~100% of GDP. For comparison, Japan’s total is over 471%, USA has ~300%, and Canada’s 269%, and gov-only are respectively, 200%, 100%, and 30%.

    If paying it off would result in hyperinflation, Japan would go down first, and Greece would find american company in misery.

    Canada, as usual, is performing a skillful under-the-radar act.

    • February 28, 2012 at 03:37

      I need to learn to stop being so hasty with the post button…

      Relevant source: http://www.gfmag.com/tools/global-database/economic-data/10403-total-debt-to-gdp.html

      Also,

      Legislation in Greece has been set up on an ad hoc basis, with laws just layered over—and often contradicting—one another. No one has taken a holistic view of the system and consolidated it.

      What, you mean exactly like every legislature anywhere ever? Say it ain’t so!
      That’s a fancy bit of sophistry, though. When you want to play up the outrageous dysfunction of a state, go and notice perfectly normal aspects of democracy. Carefully refrain from checking whether your house is glass before throwing stones.

    • February 28, 2012 at 08:36

      Generally I think that hyperinflation is a chimera. Oh, sure, it’s possible to hyperinflate — Zimbabwe, for example — but it’s not like slightly looser monetary policy immediately leads to wheelbarrow-sized wallets. Half the problem is that people are so scared of hyperinflation (Germany being the most notable in this context, but it’s epidemic in the US as well) that monetary policy has been way too tight for the past four years.

      I’m sure they could have inflated their way out. If they can’t now, it is highly revealing.

      Greece’s debt is less than double its GDP. It’s sovereign debt is only ~100% of GDP. For comparison, Japan’s total is over 471%, USA has ~300%, and Canada’s 269%, and gov-only are respectively, 200%, 100%, and 30%.

      Exactly. The problem isn’t just inflation (or lack thereof): it’s market confidence and institutional quality. Or maybe market confidence in institutional quality. Everyone’s leaving the PIIGS because nobody can look at Greece or Italy with a straight face and say “These guys are going to grow at 3% a year once they get out of recession”. Japan, by contrast, has a lot of people in boring but expensive suits and a long history of civic order and cooperation, so investors are more likely to say “Japan’s going to get growing again real soon now, somehow”. (I think Japanese bonds are vastly overvalued, and I’m flabbergasted that they haven’t hit Italian levels of interest, but hey.)


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