It’s quite rare for me to agree with economist Paul Krugman on much of anything, or him with me.
Today, I think Krugman is essentially correct with his New York Times Op-Ed on Ending Greece’s Bleeding.
Europe dodged a bullet on Sunday. Confounding many predictions, Greek voters strongly supported their government’s rejection of creditor demands. And even the most ardent supporters of European union should be breathing a sigh of relief.
Of course, that’s not the way the creditors would have you see it. Their story, echoed by many in the business press, is that the failure of their attempt to bully Greece into acquiescence was a triumph of irrationality and irresponsibility over sound technocratic advice.
But the campaign of bullying — the attempt to terrify Greeks by cutting off bank financing and threatening general chaos, all with the almost open goal of pushing the current leftist government out of office — was a shameful moment in a Europe that claims to believe in democratic principles. It would have set a terrible precedent if that campaign had succeeded, even if the creditors were making sense.
What’s more, they weren’t. The truth is that Europe’s self-styled technocrats are like medieval doctors who insisted on bleeding their patients — and when their treatment made the patients sicker, demanded even more bleeding. A “yes” vote in Greece would have condemned the country to years more of suffering under policies that haven’t worked and in fact, given the arithmetic, can’t work:
Debate Over Austerity
I can accept the above paragraphs completely. I disagree with what comes after the colon.
Immediately after the colon Krugman writes “Austerity probably shrinks the economy faster than it reduces debt, so that all the suffering serves no purpose.“
My disagreement is over austerity. I do not label tax hikes in the middle of an economic depression ‘austerity’; I label them ‘stupidity’. And Greece did not do enough to reduce its bloated public sector.
What Greece most needs is reform of all sorts. There was virtually no reform in Greece on work rules, pensions, ease in starting a company or firing workers. Guaranteed pensions in Greece are higher than in Germany.
Chance of Escape
Krugman quickly gets back on track with his statement “The landslide victory of the ‘no’ side offers at least a chance for an escape from this trap.”
The key words are “at least a chance“.
That is precisely the idea I conveyed in Overwhelming “No” Vote; The Way Forward; Congratulations!
Krugman stays on track with a couple of ideas regarding manipulation backfiring.
The most immediate question involves Greek banks. In advance of the referendum, the European Central Bank cut off their access to additional funds, helping to precipitate panic and force the government to impose a bank holiday and capital controls. The central bank now faces an awkward choice: if it resumes normal financing it will as much as admit that the previous freeze was political, but if it doesn’t it will effectively force Greece into introducing a new currency.
Specifically, if the money doesn’t start flowing from Frankfurt (the headquarters of the central bank), Greece will have no choice but to start paying wages and pensions with i.o.u.s, which will de facto be a parallel currency — and which might soon turn into the new drachma.
I commented on manipulation backfiring in advance on at least three occasions. Krugman finishes with a bang and a whimper both.
And let’s be clear: if Greece ends up leaving the euro, it won’t mean that the Greeks are bad Europeans. Greece’s debt problem reflected irresponsible lending as well as irresponsible borrowing, and in any case the Greeks have paid for their government’s sins many times over. If they can’t make a go of Europe’s common currency, it’s because that common currency offers no respite for countries in trouble.
Virtues of Germany?
The preceding paragraph from Krugman is a very shortened version of what I stated in From ZIRP to NIRP: Virtues of Germany vs. the Vices of Greece; What About “Speece”?
If you are primarily blaming Greece for this mess, you are on the wrong path. Click on the above link to find out why.
Krugman’s finishing statement was “The important thing now is to do whatever it takes to end the bleeding.”
That statement is totally accurate. Yet, I label it a “whimper”.
Why? Because Krugman never stated what it would take.
I did. Here are the key snips from my post Overwhelming “No” Vote; The Way Forward; Congratulations!
The Way Forward
The good news stops with the revolt against servitude. The way forward requires three items, all of which seem rather unlikely with Tsipras and the radical left in charge.
- Reduced public service sector
- Free market reforms (pensions, work rules, ease in firing, ease in starting a business, retirement age, etc.)
- Fair, flat tax system
The only way Greece can quickly recover is if it takes steps along those lines. It’s possible, but I highly doubt Greece will come close to doing what needs to be done.
Should Greece fail, expect some to gloat “I told you so”.
They will be right for the wrong reason. Without a doubt Greece can recover much faster outside the shackles of Troika servitude.
Unfortunately, there is little reason to believe they will take the necessary steps. At least they have a chance. They had no chance under Troika servitude.
It’s rare to be in essential alignment with Krugman. Specifically I concur with Krugman on these ideas:
- The campaign of bullying with the almost open goal of pushing the current leftist government out of office was a shameful moment in a Europe that claims to believe in democratic principles.
- The central bank now faces an awkward choice: if it resumes normal financing it will as much as admit that the previous freeze was political, but if it doesn’t it will effectively force Greece into introducing a new currency.
- In absence of more ELA financing, Greece will have no choice but to start paying wages and pensions with i.o.u.s, which will de facto be a parallel currency and which might soon turn into the new drachma.
- If Greece ends up leaving the euro, it won’t mean that the Greeks are bad Europeans.
Actually, my articles went up first, so technically he is in agreement with me, at least in terms of what he stated.
However, I rather doubt Krugman and I see things eye-to-eye on the correct way forward.
I want to see free market reforms and an end to Greece’s bloated public service sector. Krugman did not state a course, and I am quite certain that’s where key differences begin.
Mike “Mish” Shedlock