A victory for democracy? (Or revenge of the VSP?)
So the Syriza government told voters that a no vote would not mean exiting the euro. The Europeans would be so impressed by the will of the voters that they would cave in to Syriza’s demands. No euro exit. Here’s what happened today:
In the strongest language since the start of the six-month stand-off between the far-left government in Athens and eurozone lenders, EU leaders said the No vote in last Sunday’s referendum had severely constrained their ability to offer Greece aid and warned any new bailout deal would include much tougher terms than those that could have been reached just two weeks ago.
“I am strongly against Grexit but I can’t prevent it unless the Greek government do what they need to do,” said Jean-Claude Juncker, the European Commission president. “We have a Grexit scenario prepared in detail; we have a scenario as far as humanitarian aid is concerned.”
The decision to invite all 28 countries to Brussels to deal with the Greek crisis is unprecedented; since Greece first applied for a bailout five years ago, such euro-related summits have only been attended by heads of governments in the common currency.
Earlier on Tuesday, Greek negotiators had stunned eurozone finance ministers by arriving at their meeting without a revised economic reform proposal. (emphasis added)
Does it sound like Syriza was telling the truth? Will the Greeks now negotiate a better deal? Or did they not even bother presenting an offer because they knew the game is over and Grexit is approaching? I’m not sure, but within a week we’ll probably know the truth. My hunch is that a month from now this won’t be viewed as a “victory for democracy.”
Tags:
7. July 2015 at 15:10
Expect more bank closing, defaults, and withdrawal restrictions.
7. July 2015 at 15:33
The thing that surprises me in the writings of the American left is that their focus is primarily (solely?) on what would lead to the fastest growth in Greece. Of course a 100% debt write off is better for Greece than having to pay their debts, but how is that meaningful?
I hope that we in the US focus on forcing our states to have a better handle on their own fiscal situations before it ever comes to this. In fact, it’s amazing that no state has gone BK yet. Like Greece, they borrow in a currency that they can’t print too.
7. July 2015 at 15:39
One side note – one reason I have some sympathy for Greece. The ECB is beyond inept. If the ECB had kept Eurozone NGDP growth on track there might not have been a Greece crisis. Or, more likely, there would have been a crisis, but it would have been smaller and more manageable. At this juncture, Britain has grown more since 2008/2010 than all the Euro countries, even Germany.
7. July 2015 at 16:02
Sumner sounding out his ‘hunch’, mostly anti-Greece, anti-democracy, pro-fiscal union without the monetary union (aka EU) and pro-forcing countries to reform their economy when they may not want to. And Sumner’s esoteric writing shines: what is ‘VSP’? Acronym Finder indicates nothing sensible for this acronym. Virginia State Police? Another brilliant Sumner post.
7. July 2015 at 16:09
This is a very sad day for Greece. Unforunately my country is isolated within the EU.
7. July 2015 at 16:14
Voters do not choose free markets and capitalism in the middle of the worst depression since the 1930s.
In the United States, disability unemployment and food stamp rolls exploded after 2008, we had a huge deficit and the Fed printed up an extra $4 trillion dollars. Obamacare.
But the Greeks are expected to cut social outlays and live under very tight money.
This, is a microcosm of what central bankers globally are trying to accomplish: Suffocating economies and voters into liking free enterprise.
7. July 2015 at 16:15
Ray, Actually I’m pro-Greece, extremely pro-democracy, anti-fiscal union without the monetary union and anti-forcing countries to reform their economy when they may not want to.
Other than that great comment.
BTW, this story is about two men who obviously don’t read my blog:
http://www.usatoday.com/story/news/nation/2015/06/28/hikers-beaver-dam-oregon/29425497/
7. July 2015 at 16:39
Scott,
I still expect a deal offered in which Greece ends up better off fiscally in exchange for reforms.
Whether Syriza wants a deal remains to be seen. They haven’t shown much willingness to reform. In fact, it’s been quite the opposite. It seems there’s a clear, constructive path toward a deal for both sides of they want it; a relative win-win.
I hope you’re right though. Exit is best.
Whatever kind of deal that pursue, Greece of supposedly pushing for something long-term, which makes sense, but a lack of trust in Syriza might not allow for it.
7. July 2015 at 17:28
Greece has been threatening to run away from home for years. They should have been told long ago that the Eurozone would be only too happy to help them pack their bags.
Once the Greeks are out on their own in the cold cruel world, they might even wise up.
7. July 2015 at 17:30
Ray, you are disingenuous and obnoxious. You know full well what Scott means by VSP. See e.g. below.
http://marginalrevolution.com/marginalrevolution/2015/02/sentences-to-ponder-about-greece.html
7. July 2015 at 17:51
This is part of the tradeoff, tight money, deflation and dealing with communists at the doorstep. And the bonus is that the north of the EZ will end up paying for past Greek largess anyway while looking like a bunch of stooges. All for… what? I can’t think of an upside to all of this; and something tells me Greece is just the first domino to fall.
7. July 2015 at 18:01
benjamin cole
7. July 2015 at 16:14
Voters do not choose free markets and capitalism in the middle of the worst depression since the 1930s.
The rest of the Eurozone did. Of course, they didn’t lie to the extent Greece did and didn’t have such a ridiculous deficit to make up.
7. July 2015 at 18:26
Meets: huh?
France, Germany, Denmark, Spain et all—these are all examples of socialist democracies. No one picks capitalism and free enterprise in Europe. Germany has been called an “administrative state.”
If you want voters to pick free enterprise, shoot for boom times in Fat City and chronic “labor shortages.” Then voters will pull the lever for free enterprise.
While you are at it, legalize pushcart vending in every city in the country and decriminalize robust housing construction.
Oh man, don’t get me started. Wipe out rural subsidies and the VA and kill the food stamp program, cut defense spending in half and print money to the moon.
That’s in the first inning…
7. July 2015 at 18:28
I believe this is more of that weird political double speak on Tsipras’ part.
He can’t say articulate what needs to be done in order to appease the VSP’s and to appear “reasonable.”
(Even though the reasonable thing to do under the circumstances would be to leave the Euro.)
7. July 2015 at 18:47
Bonnie,
I think there’s truth to that. After all, we seem to see significant distress in European markets when news seems to make it more likely that a deal won’t be reached. Using Scott’s logic, we might have to conclude that a Greek exit is not good for the Euro zone either, thought Greece will be far more hurt by it, at least in the short run.
7. July 2015 at 19:23
Bonnie: I sometimes wonder if the old “commie threat” days were really good for Western democracies. Back then, leadership felt an obligation to improve economic performance and increase living standards for domestic populations.
A central bank that put a monetary noose on an economy would not be tolerated.
Too bad Greece cannot bolt to the old Warsaw Pact – – then you would see lots of cash pour into Greece.
7. July 2015 at 19:33
Scott, could you please explain how your attitude in this post relates to your attitude towards democracy in Switzerland? I was under the impression you thought highly of the use of referenda in Switzerland. What are the key differences that lead you to a critical stance toward the Greek referendum and a positive view on Swiss referenda?
(A bad part of me is guessing the answer is “the outcome”, but I’m sure you’ll prove me wrong.)
7. July 2015 at 19:43
So hearing the Greek people say that the conditions of the bailout are too harsh means that the bailout conditions will need to be much harsher? Why would the European leaders feel this way? Why is it assumed that Syriza would be able to predict that response?
7. July 2015 at 19:57
@Simon–good spot. A simple difference might be Sumner dislikes brown people, and favors white people, as the Swiss are more white than the Greeks. One time he made jibes about Mexicans in car washes. But relax, I’m not being a VSP. I would like to know however how Sumner makes the distinction. As for biting beavers, as the article says most beavers that attack are rabid, and it’s well known rabid animals will not let go when they bite (a rabid fox is like that) and you have to pry their jaws off you. More misinformation from Mr. Beaver, not to be confused with WWII historian, Spanish speaker and fiction writer A. Beavor.
7. July 2015 at 22:47
@benjamin cole
“But the Greeks are expected to cut social outlays and live under very tight money.”
Baltic states did, Slovenia did, Ireland did, Spain and Portugal are sure trying..but Greece… What is Greece? A mental case or the cutest kid in the orphanage so it deserves special treatment?
Is it cruel of the creditors to request their money not being wasted right away? Greece is asking for a transfusion but doesn’t want to stop the bleeding first. They are not trying to get better, they are not trying to improve their condition, all they want is to keep living off other people’s money without doing a shit on their part. They want to keep the flow coming so they can live beyond the means of their economy. And they keep blaming creditors for the state of their economy. How does it deserve anyone’s sympathy?!
There are voices from the Eastern European Eurozone members essentially meaning “how can anyone expect us giving money to a country, that’s richer than us; how can anyone expect us to pay their extraordinarily high state pensions.” Silly them, huh?
@Simon
I too have a problem with this referendum. In Switzerland and other places, such voting is usual and regular, good. But this one? First referendum in 41 years it was for Greece, that is not a democratic instrument (it even didn’t meet criteria for a proper referendum in Greek law!), but an extraordinary measure. A measure intended to deny government’s responsibility for the mess it got its nation into, and nothing else. And the cruelest thing is it did the very opposite of what government promised it would – it worsened the fate of Greece. A victory of demagogy and populism, not democracy.
8. July 2015 at 01:12
Post-referendum facts
The day after the referendum, Tsipras: sacks Varoufakis, asks for the first time to meet with the rest of the parties’ leaders, the ones he indirectly but very clearly had called traitors and had refused to meet formally as a group. He now tells them that he will pursue the proposal that was rejected with the referendum, with a few minor changes. Syriza fans claim that it is very different, but it is not, austerity measures of several bln again! So he acts as if the yes won!
Possible explanations
He either panicked as the world-wide catastrophic crash that Varoufakis had promised didn’t come, or he does have a hidden agenda and is putting the final strokes in the I-have-tried act.
@Simon, pre-referndum facts
It is the question of course: Juncher makes a proposal with austerity measures of 8 bln for 2015 and 2016. Tsipras says it is shocking and unacceptable. A slightly better proposal is discussed. However Tsipras, stops negotiations and puts the original propasal to referendum. He secretely sends a counter-proposal with minor changes, but even the original is now withdrawn from the creditors. The ref. is being held as planned, with the question being “do you accept the original proposal?” (which has been: changed, then withdrawn, and followed by a similar Tsipras counter-proposal). And no other choice put to question. A big part of the population believes it is answering to “do you like austerity imposed by foreigners?”, while a smaller part plus the creditors believe the question is about the euro.
So, yes I am wild guessing that the problem is the question.
8. July 2015 at 02:52
Mention of Switzerland is surprisingly relevant. The Swiss voted for immigration restrictions, contrary to their country’s treaty obligations with the EU market.
As far as I know, Switzerland has not abandoned its relationship with the EU.
8. July 2015 at 04:09
It is both a “victory for democracy” and “revenge of the VSP”. The only difference is that the VSPs have power. To take a “topical” example, it is Thucydides’ maxim: “The strong do as they can and the weak suffer what they must”.
It is interesting that all these topics, debt relief, austerity etc. are only discussed when there is a clear crisis. Nobody cared when Greece was suffering 25% unemployment for years. But, here Stein’s law holds. If something cannot go on forever, it won’t. The IMF now says the debt is unpayable, though it made ridiculous projections before.
From what I read, there were a few others, led by France, who did side with the point that Greece needed debt relief, though the German side is still very much in the majority.
I agree, beavers are indeed very dangerous. However: here is a counterpoint: http://www.monbiot.com/2014/07/04/beaver-baiters/
8. July 2015 at 04:50
Gallego-
Yes, there is something in what you have posted. All of Europe is suffering under tight money (though why is a great question).
But the effects of tight money are not equal across every nation. They hit Greece the hardest.
Anyway, at this point it is not about right or wrong. You can have an onboard argument about who should fix the hole In a ship hull—but after the hull is fixed.
You see stock markets? The Euro economy? The whole situation is turning into self-parody, except it is a lot of ordinary people who have their economic present and futures cramped.
The US would be better off if the Fed printed up $300 billion and paid off Greek debts. Europe would be better off if the ECB printed up $300 billion and gave it to the Greeks.
The Greeks could go back to the drachma, and lender beware. No more bailouts for lenders to Greece. Greece would have either finance national debts through drachma creation, or not borrow anymore.
Sometimes you have to fix the ship hull, even if it was the bozos in third-class who jammed an oar through the side.
8. July 2015 at 05:03
Brad DeLong criticizes Friedman and Sumner (a bit) in this new post:
http://equitablegrowth.org/2015/07/07/paul-krugman-notices-students-milton-friedman
Yglesias addresses Cowen and a recent Sumner post in this new post:
http://tinyletter.com/mattyglesias/letters/sounds-like-a-lot-of-money
8. July 2015 at 05:50
Scott, You said:
“Using Scott’s logic, we might have to conclude that a Greek exit is not good for the Euro zone either”
I don’t think that’s just my view, it’s also the widely accepted view in Europe, at least among sensible people.
Simon, I’m a huge fan of referenda, but the Swiss case is totally different. They would never pull a stunt like this. This was a rushed job in the middle of a complex negotiation and it wasn’t even clear what was being decided. If Greece had a simple clear referendum on the euro–in or out, and gave time for people to explain both sides to the public, I’d be fine with it. As it is, it wasn’t even clear what the vote was about, as the offer was not longer even on the table. In my whole life I’ve never seen a referendum like this. Imagine if the US did a referendum on some complex negotiation like TPA, right in the middle of the negotiation. How would our trading partners react?
This was the sort of thing you’d see in Latin America, not Switzerland.
I see lysseas later explains the problems even better than I can.
Tom, You said,
“Why would the European leaders feel this way? Why is it assumed that Syriza would be able to predict that response?”
Let’s see. You are in the middle of a complex negotiation over a painful issue. You are close to an agreement. Then you engage in a stunt that is never done in the EU, and blow up the negotiation with a populist appeal to voters. And after stabbing the EU in the back you expect then to return to the negotiating table in a friendly mood? The EU warned them not to do that. The EU said it would only make things worse for Greece. They said it would lead to Grexit. But Syriza paid no attention to what the EU said.
And now Syriza is shocked, shocked to find some angry negotiating partners? Syriza is living in a fantasy world.
Ray, You said:
“A simple difference might be Sumner dislikes brown people, and favors white people, as the Swiss are more white than the Greeks. One time he made jibes about Mexicans in car washes.”
No jibes about Mexicans in this blog, but in any case that’s a pretty funny comment. You are returning to form. It must explain my support for a massive increase in immigration from “brown” countries. And my wife.
8. July 2015 at 06:18
Politics:
America – Many Americans on the left and in the media are sympathetic to Greece, because they symbolize pensioners, Detroit and people “targeted” by “predatory lenders” aka banks. Sure maybe Greece lied about their income and monthly expenses when they applied for those loans, but that’s the fault of creditors. It is a “moral imperative” to give Greece more money or else they’ll suffer. BS. These arguments reverse cause and effect. The cause of the suffering was spending more money than could be sustained. Now comes the hangover after the party, and the hangover is NOT caused by the guy who cuts off the booze.
Europe – If the EU caves and bails out Greece then they’ll have to bail out countries like Spain, Portugal and potentially Italy. But the EU can’t afford to bail out Italy and definitely not France. If they refuse to bail out Greece then the taxpayers will face massive haircuts on all those Greek bonds that were bought from the banks a few years ago during the earlier debt crisis. I think this is the least terrible option, but it’s a very tough one.
Economics:
I think losing access to the debt markets could be very useful for the Greek government. They’ll be forced to balance their budget or close to it. A Greek central bank could pursue some debt monetization in the short term to boost NGDP, recapitalize the banks and devalue the drachma. However they must cut back on pensions and pursue at least some supply side reforms to encourage some business activity to increase the tax base.
8. July 2015 at 06:21
Oh and I think Syriza knows exactly what they are doing. I believe they want to anger their partners into kicking them out of the EU as opposed to Greece leaving. I believe this is the end game where Merkel tries to blame the Grexit on Greece while Syriza tries to blame Germany for kicking them out turning them into victims of a sort.
8. July 2015 at 06:43
Syriza was elected to push hard for a better deal from the creditors. The creditors didn’t respect that. Syriza went back to the voters for confirmation and got it. If the European leaders don’t want Greece to exit the euro, they’ll have to offer a better deal, no matter how angry it makes them.
Greece is losing. Why blame them for throwing hail Mary’s?
8. July 2015 at 07:22
Any deal that doesn’t include NGDPLT or at least a couple years with a higher inflation target from the ECB isn’t worth taking. Greece needs to put people back to work and it simply won’t happen with any expediency as long as the ECB’s monetary offset is waiting to choke out any supply-side reforms Greece implements.
8. July 2015 at 08:04
since it was famed as do you want to continue with the proposals from the EU which looked just like their earlier ones. i think they voted based on do i want to keep trying a failed economic program that doesnt seem to work, or4 try some thing different that might? also might be a way for the greek politicians to cover themselves because the euro was popular, but the economic program wasnt. which is contradictory.
8. July 2015 at 09:01
Scott (S),
About your point that Syriza was close to an agreement and then walked away: from what I’ve read, they were somewhat close on the structural reforms part (read: they had capitulated to many of creditors’ demands) but they were not close on the debt part. Varoufakis says this in a Bloomberg interview http://www.bloomberg.com/news/videos/2015-07-02/varoufakis-says-he-will-quit-if-greeks-vote-yes-.
Here is a note that Tsakalotos released after the negotiations broke down: http://www.mdb-klaus-ernst.de/wp-content/uploads/2015/07/Briefing-Tsakalotos.pdf
Quote: “So what does the Greek government think of the proposed flexibility of the institutions? It would be a great idea”
8. July 2015 at 09:24
Why isn’t Greece more like Detroit?
That is, Detroit can go bankrupt, forgo debt service or a period, reform its pensions, balance its budget, restructure its debts and emerge from bankruptcy without creating a “systemic risk.” Why can’g Greece do the same?
Greece and its economic power in the EU is a similar order of magnitude as Detroit. Greek debt, while a lot proportional to the size of the Greek economy is not a lot compared to the size of the EU economy. Why can’t Greece go BK without precipitating a crisis?
The lifeline from the Troika is just prolonging the pain.
8. July 2015 at 09:49
Doug:
“Detroit can go bankrupt, forgo debt service or a period, reform its pensions, balance its budget, restructure its debts and emerge from bankruptcy without creating a “systemic risk.” Why can’g Greece do the same?”
I think Greece can, but the voters there don’t want to do any of that. Detroit didn’t want to either. They fought the emergency manager who did all of those things the whole way. The emergency manager was installed by the Michigan governor. The EU does not have the authority to do something similar (I don’t think).
8. July 2015 at 11:12
Is the external Greek debt actually a red-herring, in the sense that going forward Greece simply cannot fund its bloated public sector and transfer payments? Without a permanent subsidy from the north, how is Greece going to pay its current bills (let alone repay debts)? The ruling class in Europe is probably fine with that, but I’m guessing the northern electorate is not.
Do Greeks actually know how dire their situation is? I sense no political will in Greece to undertake the necessary reforms. Throw in even worse demographics than other developed countries, and the picture is bleak. And external debt foregiveness isn’t nearly enough. Obviously, rapid real economic growth cures most fiscal problems, but is Greece too far gone and wed to a culture of government largesse?
8. July 2015 at 14:01
The ECB should offer 5 years of 5 percent inflation to Greece.
8. July 2015 at 15:13
@Sumner – your wife is brown? That’s cool. My defacto wife, a Filipina, is whiter than I am since she stays out of the sun. Everybody wants to be somebody else, it must be something related to the laws of scarcity and value. It applies in many fields. I myself want to be a world-famous economist, so I play one online. A wag once characterized it as everybody rises to their own level of incompetence. 🙂
8. July 2015 at 16:58
A month from now, no. A year from now, maybe not for democracy, but a victory nonetheless.
8. July 2015 at 18:22
Ray, She’s browner than most Greeks!
Everyone, The new Evans-Pritchard piece may make all of our speculation obsolete. Someone told me this a week ago but I was skeptical. Could this be true?
http://www.telegraph.co.uk/finance/economics/11724924/Europe-is-blowing-itself-apart-over-Greece-and-nobody-can-stop-it.html
9. July 2015 at 11:23
You can already say that it was a “victory for democracy” – in a purely technical sense: The Greek people got the vote they wanted and Tsipras got the result he wanted.
But keep in mind that Greeks are experts in Pyrrhic victories.
If they are “victorious” in one more vote like this, they are utterly ruined.