What Greece needs

Yes, Greece should never have joined the euro.  But what about today?  What is their best option?  A letter written by 13 distinguished (Greek?) economists (including one Nobel Prize winner) is highly critical of the Syriza approach, and instead calls for neoliberal policy reforms.  Here’s an excerpt:

A Grexit and move to a new drachma would be a complete disaster for Greece. The banks would collapse as depositors would withdraw their euros not knowing whether they would be able to withdraw them later and at what exchange rate.

.  .  .

What would be crucial elements of a good agreement? Besides the fiscal issues of balancing the budget and making pensions proportional to contributions, a good agreement should emphasize microeconomic reforms. It should greatly simplify the procedures for running a business in Greece and reduce business taxes, in order to attract investment and create a productive, export-oriented sector, new jobs, and debt-repayment potential. It should reduce the huge and inefficient state sector that weighs down on the private sector and the taxpayers. The procurement mechanisms of the state should become competitive. Greece should proceed with privatization of trains, airports, ports, and the energy sector. The “closed sectors” of the economy (such as pharmacies and transportation) should be opened to competition. The labor market should be liberalized and the state should crack down on the underground economy that pays no taxes and no pension contributions.

Finally, an agreement must restructure the Greek sovereign debt to European countries and the European Stability Mechanism. Keeping the nominal value constant, the best way to restructure the debt is to elongate its maturities. If maturities are moved to 75 years and the presently variable interest rates are converted to fixed ones and slightly reduced, the net present value of the debt will be reduced by 50 percent. A 10-year grace period (during which interest is not paid but recapitalized) with the money saved invested would promote growth.

Growth is, in fact, the only guarantee that Greece will pay its debts.

Written by:
Marios Angeletos, MIT
George Constantinides, University of Chicago
Haris Dellas, Universitat Bern
Nicholas Economides, New York University
Michael Haliassos, Goethe University Frankfurt
Yannis Ioannides, Tufts University
Costas Meghir, Yale University
Stylianos Perrakis, Concordia University
Manolis Petrakis, University of Crete
Chris Pissarides, Nobel Laureate, London School of Economics and University of Cyprus
Thanasis Stengos, University of Guelph
Dimitris Vayanos, London School of Economics
Nikos Vettas, Foundation for Economic and Industrial Research; Athens University for Economics and Business

My own view is that Greeks should vote yes on Sunday to get rid of Syriza.  The new government should implement aggressive neoliberal reforms.  If that’s not possible, then perhaps they should leave the euro.  But only after attempting a supply-side solution first.



72 Responses to “What Greece needs”

  1. Gravatar of Tom Brown Tom Brown
    30. June 2015 at 07:30

    Interesting. What do you think of this?:

  2. Gravatar of financewhiz financewhiz
    30. June 2015 at 07:36

    Great post, thanks!

  3. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    30. June 2015 at 07:41

    Why not neoliberalism and leaving the euro?


    I’m pretty bullish on the Grexit scenario, actually. I think it’s possible to contain the chaos of the transition to a few weeks. If they do it now, they may even still get a bit of this year’s Summer holiday season on the newer, cheaper, Drachma.

    Syriza may mismanage it, but it could be done. It’d pack a few years of austerity into a single second of currency readjustment.

  4. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. June 2015 at 07:57

    Agree with Luis. Europe has plenty of experience with currency reforms since WWII.

  5. Gravatar of foosion foosion
    30. June 2015 at 08:08

    Cochrane makes a key an often overlooked point: ” Greece did not get bailed out; Greece’s creditors (mainly european banks) got bailed out.”

    The current program has been a disaster for Greece and I’ve yet to see a convincing case that continuing it would make things better.

    Aggressive monetary or fiscal stimulus or both seem the best course. Grexit is the only way to make that happen. You can have short-term chaos and the hope for a recovery or long-term pain.

    Greece’s creditors appear to be motivated more by politics than economics. Many of the EU governments would have major political problems if Greece improved by following another course.

  6. Gravatar of Tom Brown Tom Brown
    30. June 2015 at 08:13

    What do yo think of this?

  7. Gravatar of Jeff Jeff
    30. June 2015 at 08:19

    No one in their right mind is going to agree to suspending interest payments for ten years. That’s just repudiation in slow motion. Why would anyone think that the Greek government ten years from now is going to pay those debts?

    Krugman says Grexit. In this instance, he’s right. As for the Greek bank failures those 13 economists are worried about, they’ve already happened. Recognizing the failures is just a formality at this point.

    What the Greeks have done, by temporizing these past several years, is transform private bank debt into government debt. Like Krugman says, the bailout of the non-Greek banks has already happened, and there’s nothing much the Greeks can do about it. But at least they can burn the European governments who bailed them out.

  8. Gravatar of Grant Gould Grant Gould
    30. June 2015 at 08:26

    As a non-economist I have to admit I am somewhat confused by a lot of this. Surely Greece can default comprehensively and still use the Euro — if the ECB will no longer accept Greek government bonds, all that means is that Greece loses its Lender of Last Resort, right? The euro notes don’t all catch fire and disappear. So… it ends up just like plenty of other countries that use a foreign currency and have no lender of last resort. Panama or Monaco or what-have-you.

    Since the current bank runs seem to be a result of the prospect of losing ECB support, it really seems as though the lender-of-last resort function has failed here already, and there’s no great loss to chucking it.

    Is there a reason that a Greek default must mean that the Euro is no longer its unit of account? Is there a reason that a Euro-using country (as opposed to ECB-user) must never be permitted to default?

  9. Gravatar of Randomize Randomize
    30. June 2015 at 08:33

    What Greece needs more than anything is to put people back to work. Supply-side reforms can get there eventually (and are the only way to raise real GDP and real wages) but at what cost? A decade of double-digit unemployment? An entire generation who will have spent their 20’s unemployed?

    The medicine that Greece needs is inflation and they need it now and the ECB simply will not deliver. Greece, ditch the Euro and print! With sticky wages held down by the glut of workers, rising NGDP will mean the vast majority of new money will go to new jobs.

  10. Gravatar of Njnnja Njnnja
    30. June 2015 at 08:49

    Russ Roberts had a recent podcast about economic development in Africa but it’s applicable here too. The guest recalled an anecdote about an economist who was asked, in the 1990’s, what could Russia do to face the challenges of the post-Soviet era. The economist said “Get a new history.”

    As much as it might benefit Greece to have better institutions, they can’t make neoliberal reforms now because if those changes were possible, they would have made these changes already. This crisis has been going on in slow motion for half a decade and current Greek institutions have proven themselves to be remarkably resilient to the reforms that the creditors are demanding.

  11. Gravatar of ssumner ssumner
    30. June 2015 at 08:57

    Tom, How do IOUs differ from simply cutting public sector wages?

    Luis, Sure, I’d favor neoliberalism plus Grexit.

    Foosion, I agree on the need for monetary stimulus, but fiscal stimulus is out of the question. Greece simply can’t afford to do it.

    Jeff, You said:

    “Krugman says Grexit. In this instance, he’s right.”

    He also said Syriza won a big victory back in February. He also says their fiscal policy back in 2007 was not “wildly irresponsible.” Right now I don’t trust anything he says about Greece.

    Grant, I’m no expert here, but I can imagine that Greece might have trouble staying in the EU if they simply defaulted on all of their debt. Argentina can’t even send a ship to another country without it being seized by the courts. Now think about how Greece is entangled in the EU. I don’t know enough about this to comment, but I could certainly imagine the Europeans would not just accept Greek default lying down.

    You said:

    “Surely Greece can default comprehensively and still use the Euro “” if the ECB will no longer accept Greek government bonds, all that means is that Greece loses its Lender of Last Resort, right? The euro notes don’t all catch fire and disappear. So… it ends up just like plenty of other countries that use a foreign currency and have no lender of last resort. Panama or Monaco or what-have-you.”

    Yes, but your follow-up doesn’t necessarily hold. If they do a deal after the referendum then the ECB will protect Greek bank deposits.

    Randomize, Unless they get rid of Syriza I don’t see them ever getting back to full employment.

  12. Gravatar of Nick Rowe Nick Rowe
    30. June 2015 at 09:05

    Pity there’s no way they can vote to get rid of Syriza and get rid of the Euro at the same time.

  13. Gravatar of Peter K. Peter K.
    30. June 2015 at 09:08

    I agree with Randomize. After 5 years of neoliberal austerity policies with no end in sight, the Greeks elected Syriza because the economy had shrunk by a quarter and society was suffering a humanitarian crisis. It’s callous to ignore these facts. They’ll get back to full employment more quickly if they leave the Eurozone. Otherwise, what, it will take 20 or 30 years?

  14. Gravatar of Peter K. Peter K.
    30. June 2015 at 09:26

    What Krugman and others would discuss is the fact that before the Troika negotiations began in earnest – where the Troika refused to compromise at all – Greece had a primary surplus. That is, they were in the black except for interest payments. A default would clear them of having to pay for interest payments and so they would be in the black. This is never discussed by those trying to spin the situations against Greece and Syriza.

  15. Gravatar of policy_wank policy_wank
    30. June 2015 at 10:05

    “The banks would collapse as depositors would withdraw their euros not knowing whether they would be able to withdraw them later and at what exchange rate.”

    Isn’t this problem solved if they exit during the bank holiday? Isn’t that the main point of having the bank holiday? You trap the euros that are still in the bank and they’ve been replaced with drachmas when the banks reopen and the devaluation commences.

  16. Gravatar of Andrew Andrew
    30. June 2015 at 10:13

    I just wish my last name was as cool as Economides

  17. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. June 2015 at 10:18

    Anil Kashyap’s summary of the situation is pretty clear;


    Too much there to be able to select a representative quote, but this was interesting;

    ‘The Tsipras government wanted three types of changes. First, it wanted to restore some of the spending cuts that had been enacted. Second, it wanted to reverse some of the revenue hikes that the past governments had instituted. These first two requests would have widened the deficit and
    also reorganized priorities within the budget. (In fact, once it became clear that Syriza was going to win the election, tax revenues began shrinking as the public stopped paying some unpopular taxes).’

  18. Gravatar of Kailer Mullet Kailer Mullet
    30. June 2015 at 10:23

    You may have addressed this already, but isn’t Greece’s situation analogous to the US during the depression? Wouldn’t they be better off with a big devaluation? Isn’t this even the best way to do it? You pretend like you’re not going to devalue, so there aren’t really big outlfows and then before anybody has a chance to react bam back to Drachma. Or is the process of moving from Euro to drachma to complex to be instituted quickly enough to make this plan viable?

  19. Gravatar of Daws Daws
    30. June 2015 at 10:43

    I am distressed by the apparent suffering involved in neoliberal reforms, because I am a neoliberal. How is it that we are so imprudent about the timing of our demands? Europe needed and needs way more money printing before structural reforms could sound like anything but sadism

    It appears our reform program lost Russia and L. America. We seem to have lost the Democrats and maybe the US entirely. That’s bad because it disadvantages the West strategically and potentially makes the world less peaceable and predictable, and because it hurts the reputation of neoliberal reform

    Major Freedom is right: Market Monetarism is leftism. The proponents are in Boston, Canada and Scandinavia. National Review’s support of NGDP targeting came from smart S. Asian dudes posting in the online edition. take fellow travelers’ microeconomic lunacy for granted and support reflation, which might well have precluded Syriza’s rise to power in the first place, had it been carried out soon and seriously enough

  20. Gravatar of Scott Sumner Scott Sumner
    30. June 2015 at 11:46

    Nick, I agree, I don’t see any good choices here, at least that are politically feasible. It’s a lesser of evils situation.

    Peter, I agree that growth is the primary goal here. I just don’t see how handing the keys to Syriza will get Greece back on track. Venezuela has plenty of AD, but no growth. There’s more to life than AD.

    Yes, they had a primary surplus, and indeed they were recovering. But unless I’m mistaken that’s long gone, thanks to Syriza.

    Policy Wonk, I wonder how long it would take to print up drachmas. Banks might have to be closed for quite a while (although I’d guess they’d make do somehow.)

    Kailer, Yes, it is similar. Indeed another similarity is that FDR’s good demand-side policy (devaluation) was partly offset by bad supply side policies, which delayed the recovery for about 6 years.

    Daws, I’m surprised to hear you are a neoliberal, as you sound more like a fan of Naomi Klein. In both Latin America and the former Soviet bloc the countries that have adopted more neoliberal reforms have clearly done better than the more statist governments. It’s not even close. I can’t imagine why you believe otherwise. What’s a better model for Greece; Chile or Argentina? Venezuela or Colombia?

  21. Gravatar of Gordon Gordon
    30. June 2015 at 11:50

    “In fact, once it became clear that Syriza was going to win the election, tax revenues began shrinking as the public stopped paying some unpopular taxes.”

    I find this blurb interesting in light of something that Tyler Cowen posted on his blog last week. He linked to an FT article (which unfortunately I cannot access) in which a Greek banker claimed that 70% of restructured mortgages are not being serviced as many Greeks think that only the rich will have their assets seized for defaulting.

    If attitudes like this are prevalent in Greece, will reforms really help or is Greece a lost cause? Also, the M3 money supply in Greece is now lower than its low point in 2012. Ouch.

  22. Gravatar of Tom Brown Tom Brown
    30. June 2015 at 11:53

    “Tom, How do IOUs differ from simply cutting public sector wages?”

    I have no idea, which is why I asked you. 🙂

  23. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. June 2015 at 12:09

    Indiegogo bearing gifts;


    ‘An Indiegogo campaign started by London shoe shop marketing manager Thom Feeney has so far collected around $300,000 from 1,700 people. While Feeney is offering a range of awards for donations, he’s mainly appealing to Europeans’ sense of solidarity with a struggling neighbor.

    ‘”All this dithering over Greece is getting boring,” Feeney, 29, writes on the campaign’s page. “European ministers flexing their muscles and posturing over whether they can help the Greek people of (sic) not. Why don’t we the people just sort it instead? The EU is home to 503 million people, if we all just chip in a few Euro then we can get Greece sorted and hopefully get them back on track soon. Easy.”‘

    Problem solved…except that the Indiegogo website has crashed.

  24. Gravatar of TallDave TallDave
    30. June 2015 at 12:19

    I think Greece is better off alone on just general principle. I support Scottish independence as well, and perhaps even someday Texan. Self-determination, independence, and localized government are the future, it’s a trend that began in the early 1990s and will continue as long as the world remains on a path of increasing peace. Let a thousand ideologies bloom!

    Syriza can’t escape reality, they’ll quickly return Greece to high inflation. Lessons will be learned.

  25. Gravatar of Thanos Thanos
    30. June 2015 at 12:23

    I agree with the proposals of the 13 economists and the proposals of Scott Sumner. The problem is, no one in Europe mentions monetary policy. My country slid into deflation 27 months ago. We were cut off from Ecb monetary operations in the 11th of February (except ELA). What is the opinion of Market Monetarists about Greek monetary policy??

  26. Gravatar of dbeach dbeach
    30. June 2015 at 12:26

    For sure, whether they stay on the Euro or not, they need to take a bunch of steps to liberalize the economy, especially the labor market. And they need to shrink the public sector if for no other reason than that they seem incapable of collecting the taxes needed to pay for the one they have now. But as I understand it, this is all wildly unpopular in Greece. Even if they throw out Syriza I don’t see a new government implementing a neo-liberal program like these guys propose. Instead they will do just enough to get the bailout cash and then muddle along with low or no growth until the next bailout. I think Grexit is a better option than that.

  27. Gravatar of TallDave TallDave
    30. June 2015 at 12:37

    Wow, Stiglitz almost makes Krugman sound reasonable: everything is Europe’s fault, Syriza is awesome, Europe doesn’t need the money anyway, austerity is torture, the money loaned to Greece is just going to banks. Yeesh.

    But even he understands that an independent Greece controls its own fate in a way it can’t today, under an ECB that is way too obsessed with inflation.

  28. Gravatar of TallDave TallDave
    30. June 2015 at 12:39

    Thanos: What is the opinion of Market Monetarists about Greek monetary policy??

    Target a stable NGDP trend around 4-5% — that’s really the sine qua non of market monetarism. ECB monetary policy has been truly awful for Greece’s situation and bad for the euro area generally, much too tight.

  29. Gravatar of Thanos Thanos
    30. June 2015 at 13:46

    I am familiar with the Market Monetarists policy positions TallDave and i agree. But the ECB cant do that for us.

  30. Gravatar of benjamin cole benjamin cole
    30. June 2015 at 15:30

    Well, all well and good, but the fact remains that structural impediments are nearly permanent in a democracy.

    2008 was a bad recession in the United States. Did we eliminate the USDA, the VA, food stamps or cut defense spending in half? In fact, was anything done to reduce structural impediments?

    The time to cut structural impediments is in Fat City, not during a recession.

    The ECB, and the Fed are sadomonetarists to suffocate the economy and suggests structural impediments be cut—exactly when people are fearful.

    Monetary policy has to be made with the facts that are on the ground. In the United States for example, every pleasant place to live criminalizes new housing construction. This results in housing inflation. So the Fed can eliminate inflation by suffocating the economy.

    I hope a Grexit works.

  31. Gravatar of benjamin cole benjamin cole
    30. June 2015 at 15:49

    Also, remember the ECB will continue to suffocate Greece, as it is making monetary policy for a Utopia as defined by central bankers (who are safely ensconced in sinecures, btw) not the verious economies of Europe.

  32. Gravatar of Daws Daws
    30. June 2015 at 15:57

    @ Profe Sumner

    u taught me that good micro policy is easier under good macro policy. I’m adding that bad micro policy can ruin the reputation of good micro policy, and that the hostility to insider advantages common in good micro means that improvements will have to b large and obvious

    better to reform as much as possible during expansions, if the reformers have to win subsequent elections and trade earmarks/concessions. the sequence of reforms also seems important. fiscal responsibility will b less unpopular under highr employment

    every Chavista constituency believes itself to have suffered from efforts at neoliberal reform, as do Greeks and Russians. they’re not always right about “why” but it’s hard to argue with “what”

    Chile and Poland have had wonderful results. that’s y I’m a neoliberal. countries without their electoral/legislative situations will need to reform cunningly

  33. Gravatar of Beefcake the Mighty Beefcake the Mighty
    30. June 2015 at 16:23

    IMF is saying Greece is in “arrears”. Appropriate, no?

  34. Gravatar of Major.Freedom Major.Freedom
    30. June 2015 at 17:44

    I agree with Summer’s view that anyone who does their own saving, borrowing, and spending decisions should not be beholden by law to another person’s money.

    It is just not practical.

  35. Gravatar of Ray Lopez Ray Lopez
    30. June 2015 at 18:15

    Sumner is apparently unaware that as of late 2014 Greece is collecting more from taxes than it spend in revenue, so supply-side reforms of sorts have been carried out. But that don’t stop him from being an expert on Greece, anymore than it stops him from being an expert on the environmental impact of the American beaver.

  36. Gravatar of TallDave TallDave
    30. June 2015 at 19:07

    Thanos — Well, the ECB certainly could target Greek (or even just periphery or pan-European) NGDP trends, but I think we can agree they won’t. But I thought you were asking what Greece should do post-independence, so that was the question I tried to answer.

  37. Gravatar of Scott Freelander Scott Freelander
    30. June 2015 at 20:06


    I get your point that voting “yes” might mean the end of Syriza, but I think the Greeks should both adopt the reforms mentioned and leave the Euro. The two aren’t mutually exclusive, and I suspect that if Syriza reintroduced the drachma, they would be blamed for the crisis to follow and would probably lose their leadership anyway.

  38. Gravatar of Jeff Jeff
    1. July 2015 at 04:56


    Your reply to my comment is pretty weak. I said that Krugman was right about Grexit. Your response is to attack Krugman, as if I were making an argument from authority. You know better than that. You, Nick, me and most of your commenters all agree with Krugman that Germany’s monetary policy is a poor fit for Greece. So why the drive-by insult? Is it that you don’t like the rest of my comment, where I point out that the plan endorsed by the 13 economists has a severe credibility problem? If so, why not tell us why I am wrong about that?

  39. Gravatar of collin collin
    1. July 2015 at 05:14

    Watching the Greek vs. Puerto Rico, it appears the best solution is we need some kind of soverign bankruptcy court. For the most part, bankruptcy courts are quick, decisive and generally share the pain amongst all parties.

  40. Gravatar of ssumner ssumner
    1. July 2015 at 05:16

    Tom, I don’t know.

    Patrick, Interesting. Actually it would take $400 per European, or about $1600 per family of 4. Lots of luck collect that money through donations!

    Talldave, I also like the idea of lots of small countries. There are diseconomies of scale in governance.

    Thanos, You asked:

    “What is the opinion of Market Monetarists about Greek monetary policy??”

    I doubt whether any blogger in the world has more posts criticizing the ECB’s overly tight monetary policy that this blog. The blog was set up in 2009 to criticize the Fed and ECB for their monetary policies. That’s the root cause of this problem. Without those policies, there would be no Syriza.

    dbeach, In that case there is no hope for Greece.

    daws, You said:

    “every Chavista constituency believes itself to have suffered from efforts at neoliberal reform, as do Greeks and Russians. they’re not always right about “why” but it’s hard to argue with “what””

    I agree that it’s better to reform during booms. But Syriza isn’t going to reform.

    Ray, And now you don’t know the difference between fiscal reforms and supply side reforms. Pathetic.

    Scott, That’s actually the best argument I’ve seen for a no vote.

    Jeff, I’ll do a post today at Econlog that is a more complete reply to Krugman’s position. BTW, I fully concede that a no vote MIGHT turn out to be the better decision, it’s a very complex case. If the Greek public supports socialism, then they should vote no, as that’s the way to get it. If they favor capitalism then vote yes.

  41. Gravatar of John Thacker John Thacker
    1. July 2015 at 05:54

    I’m not sure that voting yes will actually get rid of Syriza. It may be the only way for Syriza to climbdown and accept the creditors’ offer. Of course a Syriza with different policies is sort of like getting rid of Syriza.

  42. Gravatar of John Thacker John Thacker
    1. July 2015 at 05:55

    Benjamin Cole–

    That’s why with the rest of the US economy recovering, now is the perfect time to eliminate the Jones Act to help Puerto Rico (or at least exempt them like the US Virgin Islands have been since 1922.)

  43. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    1. July 2015 at 06:23

    I don’t think it much matters whether they ayes or the nays ‘have it’, in the Greek referendum. At least not for the economy of Greece.

    For specific groups of Greek politicians it might be life or death, though.

  44. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    1. July 2015 at 06:51

    @ Prof. Sumner, Tom Brown

    IOUs that could be used to pay public workers’ wages and pensions could be allowed to circulate as currency, and be accepted as payment for taxes at face value. They would trade at a discount to the Euro, and the market forces would tell how much public sector wages and pensions should be devalued. The banking sector could receive back Euro deposits, and the monetary tightening that is crushing the private sector would be alleviated. Payments systems would be restored. Greece does not have to leave the Euro if it finds a way to devalue their entire “State sector” relative to the private sector.

  45. Gravatar of Scott Freelander Scott Freelander
    1. July 2015 at 07:05


    I’ve had many thoughts over the years about the option of internally running some sort of parallel currency in countries such as Greece, but I can’t figure out how to make it work. It seems to me that either that currency would have too little credibility to be used at all, or Gresham’s law would mean that the Euro ceases to be a currency at all in such countries, and that either would happen rapidly.

  46. Gravatar of Scott Freelander Scott Freelander
    1. July 2015 at 07:13


    It looks as if Syriza might be even less competent than many thought. I did not imagine Tsipras would begin to capitulate as he has, and so quickly. Merkel is now in position to get everything she wants and will likely force Tsipras to cancel the referendum to begin negotiations again, or wait until after Sunday. She has no reason to rush and she will likely be rid of him soon, which is probably her goal anyway.

    I think it’s safe to say that Syriza are nothing more than a bunch of clowns.

  47. Gravatar of Floccina Floccina
    1. July 2015 at 07:32

    I think that Luis Pedro Coelho’s solution is the only one that works and that is too bad because because the voters and politicians are not for it. My sympathies to the Greek people, their best solution is to get out of Greece which BTW makes the debt harder to pay back.

  48. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    1. July 2015 at 07:46

    @Scott Freelander
    I don’t disagree with you. But Greece is actually runnning out of options. And to be frank, in this case, it looks very unlikely that goods in greece will stop being priced in Euros, even if prohibited by government under a new currency. And if they try to enforce it, that will only mean more wasted resources (police, justice system, bribes) for a very impoverished population.

  49. Gravatar of Thanos Thanos
    1. July 2015 at 07:54

    Mr Sumner i read your blog frequently in the last few hears. I agree with most of what you say. I thnk you misunderstood my question.

  50. Gravatar of Scott Freelander Scott Freelander
    1. July 2015 at 08:20


    I suspect there are no cute options for Greece. If they stay in the Euro, they continue to give up control over much of their fiscal policy to idiots in the Eurozone, with the prospect of slowly grinding out a recovery for years more with gradual supply-side improvements. I frankly don’t see the point, except to avoid a more acute crisis now.

    Or, they can default, face a collapse/freezing of the banking system, watch inflation go up, lose access to lenders for at least a year or two, and have imports become more expensive and be forced into austerity in that sense, but at least they would have some control over the demand-side. And looking at the composition of their economy, there’s no reason to necessarily believe that increased exports and tourism can bridge the gap left by the fall in imports.

    They will face severe austerity either way, so they may as well have independence. Yes, the austerity with a Euro exit could be worse for a while, but if coupled with supply-side reforms, it might not be as bad as it now seems.

  51. Gravatar of Thanos Thanos
    1. July 2015 at 08:24

    “If the Greek public supports socialism, then they should vote no, as that’s the way to get it. If they favor capitalism then vote yes.”

    This is not the question posed by this referendum:


  52. Gravatar of Scott Freelander Scott Freelander
    1. July 2015 at 08:27

    I should also point out that no solution will work at this point with Tsispras in charge. He will have to resign, along with his finance minister, at the very least. They have little or no credibility left, having shown themselves to be basket cases. Syriza may have to lose power altogether.

    It may be all moot now anyway. Merkel is going to get what she wants, thanks to Syriza.

  53. Gravatar of Daws Daws
    1. July 2015 at 12:43

    @ Prof Sumner

    I agree that Syriza will not reform. I also think it’s important to note that Greece, with proper monetary policy, might never have picked Syriza. I think the second notion is more portable across borders and time, and that it’s crucial that “we” remember it so as to avoid future lose-lose situations

  54. Gravatar of ssumner ssumner
    1. July 2015 at 14:20

    Thanos, I know that’s not the question being asked, but it’s the practical implication.

    Daws, I totally agree.

  55. Gravatar of Thanos Thanos
    1. July 2015 at 15:14

    I can tell you that many Greek voters disagree. I personally know Clsssical Liberals that are in favour of the “No” vote. I also heard that many businessmen are in favour of the “No” vote. In a recent poll most people (almost 60%) were in favour of Euro but only 43,3% will definitely vote “Yes” in the referendum:


  56. Gravatar of Thanos Thanos
    1. July 2015 at 15:18

    And dont misunderstand me!! I just want to give you an accurate description of the situation here in Greece!!!

  57. Gravatar of Thanos Thanos
    1. July 2015 at 15:54

    Remember also that many politicians that are in favour of the “Yes” vote are the same corrupted politicians that destroyed Greece in the last 40 years.

  58. Gravatar of Beefcake the Mighty Beefcake the Mighty
    1. July 2015 at 16:14

    Truly, the Greeks are pathetic losers. They give welfare bums a bad name.

  59. Gravatar of Manos Manos
    1. July 2015 at 16:18

    Dear Scot,

    As a neoliberal/Friedmanite Greek just my 2 cents.

    Euro for Greece has been a calamity. Competitivess plunged, inflation was very high for too long, bubbles were created in the public(debt) and private sector(construction,houses).

    Once Greek was considered bankrupt the bailout came and essentially the bailout of FrancoGerman banks. IMF/ECB/EC measures included tax hikes/public spending cuts and the tiny and ineffective welfare state of Greece was smashed and unemployment went up to 25%.

    Now, that these policies have brought to power a populist left wing party the creditors had to give in to debt reduction and SYRIZA would give in to some more spending cuts/tax hikes. The total 10bn of new austerity measures would create a lack of demand and money circulation (not very technical but u get my point) leading to recession. Bear in mind that the ECB has failed considerable in its mandate for 2% inflation. Currently, Greece has a deflation of 2% or more and despite all these it has a primary surplus of approx 1%.

    The debt cannot be repaid and the primary surpluses that are projected by the IMF cannot be reached (more than 2-3% for the next 4-5 years).

    I prefer Grexit and neoliberalism but it wont happen since no political parties are neoliberal and pro-national currency. Centre right and centre left parties are pro crony capitalism and pro euro(essentially the same). But even if this party existed, you cannot be neoliberal and pro EU. EU was created exactly to fight markets despite the ordoliberal/mercantilist German influence in the last decade.

    Best Regards,


  60. Gravatar of Anand Anand
    1. July 2015 at 20:50

    Daws point about good micro policy better done during expansions is what I had also said before. People see the economy tanking and associate the tanking with the micro policy, and of course they are partly right: some supply side policies do have negative effects on many groups. And, of course the troika policies had the effect of deepening the depression.

    This is why I questioned in the insistence on supply-side reforms right in the middle of a depression, especially as the large increase in Greek debt since 2010 has more to do with the lack of demand rather than any supply side policies. This is more consistent with simply the creditors trying to recoup their money, rather than any concern about the Greek economy.

    By the way, the “moral hazard” here is not that profligate Greece should not be encouraged to spend other people’s money, since the money was largely used to bail out French and Germany banks (point 2 in Kashyap’s primer), but the point that if Greece gets its way, others in the PIGS will also demand similar treatment, and they are deeply invested in current policies. (point 8)

    One also has to see the realistic alternative. If you throw out Syriza to implement supply-side reforms, they will not be implemented by some angels. They will be implemented by the already hugely discredited opposition, and will be met with significant resistance.

  61. Gravatar of Beefcake the Mighty Beefcake the Mighty
    2. July 2015 at 02:54

    The German and French banks that were foolish enough to lend money to Greece deserve to go belly-up, no question. They deserve a lot of blame here. However, saying they’re the ones getting bailed out and not Greece is a stretch. Greece owes them money it can’t pay back, and while lenders have an interest in working with borrowers who can’t pay, the relationship is asymmetric. Greece wants the impossible: debt relief while having continued access to euro credit markets. They have to pay the piper somehow, be it structural reforms or whatever, and they seem unwilling to do so. They are the problem here, not the German banks.

  62. Gravatar of Njnnja Njnnja
    2. July 2015 at 05:45

    So it looks like it will be a choice between having monetary policy decided by the ECB versus monetary policy decided by whatever institution Syriza comes up with. Which is worse, remembering to account for second order effects such as, tight ECB monetary policy led to the election of Syriza and the stymieing of better fundamental economic policies?

  63. Gravatar of Scott Freelander Scott Freelander
    2. July 2015 at 06:53


    Yes, Eurozone is dumb on monetary policy and the political economics. In the case of Greece though, they will need the neoliberal reforms in any case, and it will help speed recovery whether in or out of the Eurozone. They’ll be better off though, in the long run with their own monetary policy and a reform agenda.

    Confidence in Greece as a debtor will be about zero for a while if they go back to the Drachma and default. They will have a hard time importing many of the goods they do now, due to inflation, and I have no reason to believe increased tourism and exports will make up the difference. So, a government with a reform agenda would win the confidence of creditors back more quickly to allow Greece access to credit markets again, eventually. Also, and more importantly, it would mean Greece would need credit markets less in the future.

  64. Gravatar of ssumner ssumner
    2. July 2015 at 10:12

    Manos, Unfortunately the current reporting is that Greece would stay in the euro even after a no vote. So a yes vote is their only hope.

    Anand, If Syriza gets its way, why wouldn’t the Spanish elect Podemos? And then how about Italy? It’s possible for Germany to bail out Greece, but no one believes they have enough money to bail out Spain and Italy, which have a combined population 10 times larger.

  65. Gravatar of Anand Anand
    2. July 2015 at 23:25

    Scott (Sumner),
    Indeed, as I said above, that is the issue. If you look at Spanish performance before 2008, its debt was about 25% of GDP and it was running a surplus. Since 2008, its debt has exploded and unemployment skyrocketed to 25%. This very similar path to Greece suggests (at the very least), that the main issue is the overall EU policies followed since 2008, not “structural” issues. The difference with Greece is that Greece was already very indebted before 2008, thus it was the first to crack.

    I am sure that Spain has all sorts of micro imperfections. But those imperfections are long-standing and hard to change overnight. Any rational macro response must take them as fixed in the short run. What does it say about the EU policy if their policies resulted in 25% unemployment in Spain? A miserable failure, by any standard, and in dire need of a rethink.

    The point I was making above is that the EU has been deeply invested in policies which have made the crisis worse. Any rethinking of the policies (which is all that Syriza offered) is anathema to them.

    One may think whatever of the tactics which Syriza employed, and one may think whatever of the fact that there are Maoists in it (and the fact the government coalition partner, the right-wing ANEL is pretty awful), but that does not change the fact that they are pretty much the only major actor in this saga who tried to force a rethink on the basic policies which have failed so miserably.

  66. Gravatar of ssumner ssumner
    3. July 2015 at 05:08

    Those are good comments, but I have several responses:

    1. I’m not so pessimistic about reforms. In 2004 Germany had 11% unemployment, now it’s about 6%, despite an even worse global climate. That was labor market reforms.

    2. In 1994 Spain had 24% unemployment, despite no euro and despite doing the preferred Krugman policy (multiple devaluations.) So don’t assume this is all the euro.

    3. This is from today’s FT, an article on how the IMF estimates that Greece will need another 60 billion euros due to Syriza incompetence:

    “Before Syriza took power in January, the Greek economy had returned to growth and Athens had begun to put its debts back on a sustainable path, the IMF said. But the anti-austerity government’s decision to halt reform and privatisations and renegotiate the terms of its European-led bailout had led to a significant deterioration. The calling of a referendum followed by the shutting of banks and introduction of capital controls had only made the situation worse, it added.”

    Meanwhile Spain is growing much faster that other eurozone countries and its unemployment is falling.

    I’m not saying you are necessarily wrong—it’s very possible that leaving the euro is the right move for Greece, it’s just that I see it as being more complicated problem than you do. But many of the arguments you use are ones I’ve used in other contexts, so it’s a fair point.

    BTW, The right wing coalition partner is unsavoury, as you say, but no comparison at all to a party named after one of history’s two or three greatest mass murderers. I understand that substantively it’s a very small point, but symbols matter. I am confident that if a center right party in Greece had a few Golden Dawn party members in its governing coalition, that fact would not be brushed off by Syriza supporters outside of that country.

    (Based on what I’ve read, Golden Dawn is far worse than ANEL, almost Nazi-like. I’m no expert on Greek politics, so correct me if I’m wrong.)

  67. Gravatar of Anand Anand
    3. July 2015 at 05:34

    A final, trivial point. Symbols do matter, but in my opinion this is really a case of the “floating signifier”.

    But then, I come from a country (India) where the Communist Party still keeps around pictures of Stalin. Nobody believes that they are about to institute collectivization or Gulags, and nobody cares. They were even in the government (well, supported from the outside), for a while. I realize India is not Western Europe, attitudes differ.

  68. Gravatar of Scott Freelander Scott Freelander
    3. July 2015 at 18:36


    I was rather dumbfounded today that the IMF decided to release it’s analysis that Greece needs so much more assistance now. It’s clear that the Germans and EC wanted to wait until after the referendum and hope to be rid of Syriza, or at least Tsipras and Varoufakis, before continuing with negotations, and my guess is they don’t appreciate the timing of the release of this analysis. They had no incentive to do anything, but campaign for a “yes” vote, so that they could present that identical offer Monday, without giving an inch. As a bonus, they might have been rid of the Greek PM and FM.

    This is IMF incompetence. Better to wait to see if they could get rid of the Greek irritants first, and then release the report. Reports have it that Germany and other EC constituents are not happy about this:


    This is amazing incompetence on all sides, but Merkel, at least for a few days, looked like she’d negotiated well.

  69. Gravatar of Scott Freelander Scott Freelander
    3. July 2015 at 18:49

    To be more explicit, how stupid is it to recommend rewarding Syriza’s crappy economic policies with additional bailout/haircut money, especially given the way they’ve negotiated? Christine Legarde should take some behavioral analysis classes, since her economics education hasn’t allowed her to see the obvious.

  70. Gravatar of ssumner ssumner
    4. July 2015 at 07:15

    Anand, The Congress party has done poorly, and their economic policies were a disaster for India, which is even more messed up than Greece. The fact that they once worked with the Indian Communist party says a lot about the dysfunctional Congress Party.

    Scott, I agree, amazing incompetence on both sides. Why did the Germans say that Greece might remain in the euro even after a no vote? That makes a no vote more likely.

  71. Gravatar of Scott Freelander Scott Freelander
    4. July 2015 at 12:19


    Yes, when I saw the Germans finished the job of letting Syriza out of the box… You’ll recall looking up in this thread that I originally predicted that the EC and IMF would yield, out of cowardice, but I thought I’d been wrong after seeing Tsipras fold in the middle of the week with the offer he stupidly sent them. I honestly thought Merkel and co. had won. lol

    If they’re this bad at negotiating with a country in the position Greece is in, what is Putin thinking right now? Or for that matter, Spain, Italy, Portugal, Ireland…? This is a slap in the face to the rest of the southern European countries and Ireland. They all have incentives to act like basket cases and demand better deals.

    They’re even worse negotiators than Obama was with Republicans for the first 5-and-a-half years.

  72. Gravatar of ssumner ssumner
    6. July 2015 at 05:28

    Scott, Never underestimate the incompetence of governments. And it’s not that the people are incompetent, the system is simply too unwieldy.

Leave a Reply