Obama’s horrible advice to Germany
This caught my eye:
Greece’s pleas to stop the “fiscal waterboarding” of its devastated economy are substantively no different from President Obama’s repeated warnings to Germany to stop bleeding the euro area economy with excessive fiscal austerity. Sadly, the president’s reportedly more than a dozen phone calls to the German Chancellor Merkel in 2011 and 2012 urging supportive economic policies in the euro area fell on deaf ears.
These calls were not just brushed aside; they were plainly ridiculed as Chancellor Merkel kept telling the media that “it made no sense to be adding new debt to old debt.”
This advice would have merely added to the eurozone debt woes, without doing anything to promote recovery, Even worse, most of the countries lacked the ability to spend more, as the markets were worried they might default on their debts. Germany could have spent more, but any extra demand in Germany would have been offset by even less growth in the other countries, leaving total eurozone AD unchanged. That’s the real “beggar-thy-neighbor” policy.
People reading this will probably assume I’m making wacky market monetarist claims again. But unless I’m mistaken Paul Krugman agrees with me. After all, he has repeatedly said that when not at the zero bound, central banks determine the path of inflation. The eurozone was not at the zero bound in 2011, and indeed the ECB was repeatedly raising rates to slow inflation. Had there been more fiscal stimulus, the ECB would have raised rates even more, offsetting the effect. That’s what an inflation target means. If you don’t like it, then don’t target inflation.
There is one type of fiscal stimulus that would have been effective, employer-side payroll tax cuts. Oddly, in the past Krugman has been relatively skeptical of this approach, and I’ve been more supportive. So you could argue that I’m more supportive than Krugman of the argument that fiscal stimulus might have helped the eurozone in 2011, but only a very specific type of stimulus.
PS. I love the way the press acts as if the fiscal austerity was forced onto Greece, with the metaphor “fiscal waterboarding.” Greece could have said “we don’t want your emergency assistance with strings attached”, and left the eurozone. Maybe they should have done so.
PPS. Over at Econlog I catch Robert Shiller reasoning from a price change.
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16. February 2015 at 10:57
Michael Burda says Greece needs to stick to it;
http://www.voxeu.org/article/averting-greek-train-wreck
——–quote——-
The ‘New Deal for Greece’ would consist of the following steps:
1) Greece refrains from actions that would breach its commitments under the existing programme agreements, and formally asks for an extension to the deadline of the old programme in which details of a new follow-up deal are hammered out.
2) In exchange for continued product and labour market reforms, Europe eases the targets of the Greek primary surplus, focusing less on austerity and intrusive supervision, and more on supply-driven growth.
——–endquote——-
But recognizes the need for some window dressing;
——-quote——-
4) Greece sticks to its plans to make labour markets flexible.
Greece raises the minimum wage in stages and links these increases to an improvement in private sector employment, but maintains lower minimum wages for young people and exempts very small enterprises.
5) Privatisations that have already been slated are carried through.
——–endquote——
16. February 2015 at 11:38
“Greece could have said “we don’t want your emergency assistance with strings attached”, and left the eurozone. Maybe they should have done so.”
Indeed, that was probably exactly the right course of action. Krugman (like the entire financial and political establishment) is bizarrely fixated on “fiscal austerity” of a few percentage points of GDP that likely would have been forced on Greece by the debt markets regardless of what the EU did. Clearly that cannot explain all (or most) of Greece’s staggering decline in GDP and staggering unemployment.
Far more likely, it is the natural and proven result of holding to a highly inflexible currency. If the Euro were a currency peg rather than a currency in itself, is there really any doubt Greece would have devalued dramatically on its own years ago?
16. February 2015 at 15:16
Adam, “If the Euro were a currency peg rather than a currency in itself, is there really any doubt Greece would have devalued dramatically on its own years ago?”
Undoubtedly. But it seems to me a popular misconception that leaving the euro would provide the same benefit as breaking a peg. But to successfully introduce a new currency they would have to credibly peg it to the euro. So leaving the euro would not provide any relief.
16. February 2015 at 15:19
See JP’s article http://jpkoning.blogspot.com/2015/01/grexit-escape-to-more-of-same.html for a more detailed argument.
16. February 2015 at 19:40
Patrick, It seems to me that if they want a break on their debt, they need to do MORE structural reforms than the previous government, lower the minimum wage, etc.
Adam, Good point.
Max, I’m doubtful they would peg a new currency to the euro, I think it would depreciate sharply.
16. February 2015 at 20:28
“That’s what an inflation target means. If you don’t like it, then don’t target inflation.”
Wisdom for the ages.
16. February 2015 at 22:36
Scott, “I’m doubtful they would peg a new currency to the euro, I think it would depreciate sharply.”
What does “depreciate” mean for a currency that doesn’t exist? It doesn’t matter whether the initial exchange rate is 1:1 or 1:1000000, there’s no depreciation involved. The difference is only in the arithmetic, not the economics.
17. February 2015 at 02:05
One interpretation of the current Syriza negotiation strategy is that it is trying to get Greece thrown out of the eurozone (as per the wishes of many of its leaders, but against those of its voters).
@Max: the idea is that you introduce a currency, saying 1 New Drachma = 1 Euro as the conversion rate for existing contracts and let it float. Two seconds later, you will have 1 ND = 0.50 euro.
17. February 2015 at 05:13
Luis –
I agree with that interpretation. My recollection is that the EU treaty allows for any country to withdraw. Of course, they don’t want to leave the EU, just the euro, but I suspect they’ll end up out of both. Here’s my ranking of best to worst options for Greece:
1. Stay in euro, but ECB agrees to 5% NGDPLT for the Eurozone.
2. Leave euro and EU, issue Drachma and declare all contracts including government debt will be converted to 1 Drachma = 1 Euro. Drachma then set to NGDPLT at 2008 NGDP plus 5% per year.
3. Stay in euro with current ECB policy and another package of extend and pretend debt relief, and do this again in three years.
4. Stay in euro with current ECB policy and no debt relief.
So their strategy should be to say to the ECB “loosen policy or we will leave an have our own policy.”
17. February 2015 at 06:08
Thanks tesc.
Max, I mean a real depreciation, you are right that the nominal rate doesn’t matter.
Luis, That makes more sense to me than the other interpretations.
17. February 2015 at 06:41
No sovereign nation should give up a central bank. Greece is better off quitting the ECB and printing drachmas to the moon.
Yes they need structural reforms. All modern economies do. Think the USA can get rid of ethanol, the VA, the USDA or an elephant-sized military? Those are all serious structural impediments too.
A monetary noose does not get rid of structural impediments.
17. February 2015 at 08:35
‘…lower the minimum wage, etc.’
That’s what he’s recommending, only with window dressing.
17. February 2015 at 09:15
Ironically fiscal stimulus got Greece into its present straits — they increased government spending by around 10% per year leading up to the crisis.
The counterfactual in which Greece was never a euro country is interesting to consider.
17. February 2015 at 10:16
Originally, Syriza was negotiating to keep the Euro but it might be increasing clear Luis interpretation that Plan B is have to the “Germans” throw them out. (Then Greece can blame somebody else and they had to act.)
The Germans are negotiating that the Euro is a economic currency choice instead of political currency choice. So they are more willing to be a corporate leader who is shutting down a money losing division. (Than they were in 2011.) However, next European nation crisis is going to harder to keep on the Euro currency. The country might cut bait a lot quicker. (Notice Greece has able pushing for better Russian support.)
17. February 2015 at 10:38
“That’s what an inflation target means. If you don’t like it, then don’t target inflation.”
I’d like nothing better as I never liked the inflation target anyway. For me that’s just preaching to the choir-I’m in that choir.
What I don’t like about MM is monetary offset not the move from inflation targeting which I for one would have no reason to defend-I think that’s probably true of many who consider themselves Keynesians, though perhaps not the academic New Keynesian types.
17. February 2015 at 10:42
As to the demand that Greece trade structural reforms for debt relief, Tony Yates argues that what constitutes ‘structural reforms’ could be different than what it would be in stronger, more healthy democracies.
https://longandvariable.wordpress.com/2015/02/10/greece-acemoglu-and-robinson/
Paradoxically according to him-and Acemoglu and Robinson-structural reforms could mean stronger government at least in the short term to deal with the kinds of ‘oligopolists’ that have too much power in Greece.
17. February 2015 at 12:55
What a fascinating game of chicken.
The Greeks need loans, desperately. Abandoning the Euro doesn’t help them. They would still need to borrow Euros because they won’t be able to sell their own bonds.
But if Greece defaults, then the bond holders — Germans, apparently, in the main — will suffer losses.
So each has a strong reason to continue the arrangement whereby the loans to Greece continue and they kick the can further down the road and pretend that these loans will eventually be paid back.
However, both parties hate each other.
17. February 2015 at 14:50
Patrick, I thought they wanted a higher minimum wage.
Mike, A strong government is what gives them their power. Without it they’d be powerless.