Geneza grške krize – VoxEU told you so

Grška kriza je bila predvidljiva, prav tako so bili predvidljivi učinki njenega “reševanja”. Richard Baldwin (skupaj s Charlsem Wyploszem avtor učbenika “The Economics of European Integration“, ki ga tudi sam uporabljam pri predmetu Evropski monetarni sistem) je naredil lep pregled prvih komentarjev o grški krizi, preden je do nje prišlo (2009) in nato komentarjev, zakaj tako oblikovani programi “pomoči” ne morejo biti uspešni. Gre za komentarje znanih ekonomistov, ki so jih objavljali na portalu VoxEU. Zanimivo branje.

The Greek crisis has rumbled along since 2009. Vox columnists have been analysing the situation with uncanny foresight right from the beginning. This column reviews a few of the contributions from 2009 and 2010 that predicted many of today’s challenges using nothing more than simple economic logic and a firm grasp of the facts.

Most economists, and even many EU leaders, now think the Eurozone’s handling of the Greek Crisis is a tragedy of poor policy. Much of the pain that has been and will be felt by Greeks and other Europeans could have been avoided. The folly of the Eurozone’s choices on Greece was pointed out clearly in early analysis by Vox columnists right from the beginning.

Early warnings

Early warnings came from economists writing for VoxEU using nothing more than basic economic principles and a firm grasp of the facts. They showed that it was possible to foresee many of the problems that tripped up Eurozone policymakers in 2010, 2012 and again in 2015.

In 2008, Carmen Reinhart posted three warnings on Vox that history tells us clearly that severe banking crises are often followed by sovereign debt crises: “Eight hundred years of financial folly” published on 19 April 2008; “The economic and fiscal consequences of financial crises” published on 26 January 2009; and “From financial crash to debt crisis” published on  9 April 2010. How right she was.

Barry Eichengreen added specificity to this in January 2009 with his insightful column “Was the euro a mistake?”, noting: “What started as the Subprime Crisis in 2007 and morphed in the Global Credit Crisis in 2008 has become the Euro Crisis in 2009. Sober people are now contemplating whether a Eurozone member such as Greece might default on its debt.” He wrote that the alternative to default was “fiscal retrenchment, wage reductions, and assistance from the EU and the IMF for the cash-strapped government.”

He predicted – again dead on – that “[t]here will be demonstrations against the fiscal cuts and wage reductions. Politicians will lose support and governments will fall. The EU will resist providing financial assistance for its more troublesome members. But, ultimately, everyone will swallow hard and proceed … In the end, the EU will overcome its bailout aversion.” The farsightedness is astounding. In January 2009, few knew the Greeks had a problem serious enough to require debt restructuring.

Six months before the first Greek bailout

Charles Wyplosz and Paul De Grauwe also gave early warnings, both in December 2009.

Wyplosz recommended: “The renewed financial market pressure should be taken as a signal that the party is over. It is time for Greece to adopt two simultaneous measures:

  • Immediate deep spending cuts;
  • Reform of its budgetary process to credibly enforce discipline.

When he wrote this, this Greek government bond spread over Germany’s was 2.3 percentage points.

De Grauwe used logic and history to explain why the Eurozone would bail out Greece eventually. “The other Eurozone governments are also very likely to bail out Greece out of pure self-interest. There are two reasons for this.

  • First, a significant part of Greek bonds are held by financial institutions in Eurozone countries.

These institutions are likely to pressure their governments to come to their rescue.

  • Second, and more importantly, a failure to bail out Greece would trigger contagious effects in sovereign bond markets of the Eurozone.

I conclude that the Eurozone governments are condemned to intervene and to rescue the government of a member country hit by a sovereign debt crisis.” At the time, a bailout was unthinkable – many thought it illegal. Six months later, De Grauwe proved to be right.

In early 2010, Wyplosz put his finger on the real hostage that was held by Greece’s problems. “The real worry is the banking system. … Many governments have simply not pushed their banks to straighten up their accounts, and they are now discovering some of the unforeseen consequences of supervisory forbearance.”1

Explaining why the first bailout would fail

After long claiming they would never bail out Greece, Eurozone leaders did exactly that in May 2010. The bailout package was a huge failure by any measure. Three months later, Greek spreads were back to pre-bailout levels. Worse still, the failure opened the contagion floodgates and set the monetary union on a five-year slippery slope that lead to today’s emergency meeting. This is not hindsight; Vox columnists spotted the flaws immediately.

  • The first sentence in Wyplosz’s 3 May 2010 column, “And now? A dark scenario“, was: “The plan will not work.”

But even more striking than his prediction was his analysis:

  • “The drop in public spending … will provoke a profound recession that will deepen the deficit. This, along with the social and political impact of the crisis, will undoubtedly prevent the Greek government from delivering on its commitments.“

He then predicts the exact slippery-slope mechanism that has bedevilled the Eurozone ever since.

  • “The EU governments, facing another loss of face (after letting the IMF into the den), may be tempted by forbearance. If they do, they will eventually to put in more money. If they don’t, the Greek government will default, precisely what the whole plan aims at avoiding.”

In closing, he points out that the situation could have been avoided, if EU leaders had faced up to the facts earlier. “It would have been very easy to let Greece go straight to the IMF months ago and reschedule its debt with the IMF’s assistance. This would have been a partial default, and the haircut could have been quite small. Most banks that are exposed to the Greek debt should have been able to withstand such losses. With a grace period of, say, three years, Greece would have had the breathing space that the latest plan tries so hard to organise, but much simpler and much, much less dangerous.”

Barry Eichengreen (2010) provided another penetrating insight on 7 May 2010 – just before the Eurozone finance ministers agreed to set up the European Stabilisation Fund.

  • “European leaders and the IMF have badly bungled their efforts to stabilise Europe’s financial markets. They have one last chance, but success will require a radical change in mindset.”

He ended with a stark call to action: “It’s not a pretty picture. The IMF botched its rescue. The ECB hesitates to erect the necessary ring-fence around Greece. Portuguese and Spanish policymakers underestimate the gravity of their position. German leaders are in denial. But although it may be too late for Greece, it is still not too late for Europe. That said, a solution will require everyone to wake up.”

Completing the Eurozone rescue

The rushed, emergency measures taken by Eurozone leaders in May 2010 were half measures, as many Vox writers pointed out. One of the first to lay out the economic logic of further steps was, once again, Charles Wyplosz.

  • “The debt crisis is unlikely to go away and the monetary union will have to be reconstructed to re-establish the principle of collective fiscal discipline.”2

This foreshadowed the rather massive increases on sovereignty-sharing that the Eurozone adopted over the coming years.

In June 2010, Daniel Gros, Luc Laeven and I gathered a dozen world-renowned economists to contribute to a eBook that was to answer the simple question: What more needs to be done? The eBook Completing the Eurozone rescue: What more needs to be done? (Baldwin, Gros and Laeven 2010), which has been downloaded over 60,000 times, argued that the Eurozone Crisis was not over. The May 2010 package was a palliative not a cure. Indeed, none of the underlying causes of the crisis was addressed.

Policymakers did nothing, but the markets did. As Wyplosz wrote in December 2010 in his aptly titled column “The Eurozone slides into a vicious cycle“, the May package “was the first step down the slippery slope.” He remarked: “It is amazing to observe European policymakers, having taken the wrong turn earlier this year, persevere in piling one mistake upon another. … they have brought the Eurozone to the point where it is contemplating a disaster of historical proportions.”

Here is his analysis of what should have been done: “First Greece was told not to go to the IMF since fellow governments would help out with a generous loan of €10 or €20 billion. The promise was, in part, designed to impress the financial markets and to discourage them from pressing on the embattled Greek government.

“The markets laughed. The amount was laughable indeed and the promise was an encouragement to step up the speculative attack in anticipation of even higher profits.

“The amount was raised, step by step, and Greece was finally told to go to the IMF, but not alone. A joint IMF-EU rescue operation eventually lined up €110 billion and a new fund of no less than €750 billion was cobbled together to really impress the markets.”

He posits that all this was in the interest of political expediency: “In one go, the no-bailout clause was wiped out and the ECB lost an important chunk of credibility. The reason? To avoid at all cost contagious runs on other countries’ public debts and preclude any threat of sovereign default. But, alas, that didn’t work.”

The drumbeat of a failed rescue continued in 2011. Uri Dadush and Bennett Stancil in their column, “Is the euro rescue succeeding?“, argued that: “Until leaders deal with the core issues – the periphery’s lost competitiveness and misaligned economic structures – Europe’s rescue will ultimately fail.”

Zsolt Darvas, Jean Pisani-Ferry and André Sapir clearly set out what needed to be done in their February 2011 column “A comprehensive solution for the euro crisis“. A complete plan had to do three things: clean up banks, reduce the public debt in Greece, and foster adjustment and growth in peripheral countries.

The first ‘rescue repairs’ come up short

In January 2011, EZ leaders set up the European Financial Stabilisation Mechanism (EFSM) to deal with future crises (remember that only Greece had been bailed out at this point). This lead to a very temporary reduction on interest rate spreads. Over the next few months they struggled to improve the plan, but to no avail.

As Daniel Gros wrote in his March 2011 column, “Pact for the euro: Tough talk, soft conditions?“, “…the package is merely the next step down the slippery slope of EU taxpayers sharing the burden with Greek taxpayers.”

“On 11 March 2011, the European Council has once more decided to kick the can down the road. Once again they have failed to think through the consequences of their actions from the perspective of the markets. They failed to think through what this weekend’s decision will mean for the options they will face in the future.

“Having come this far it becomes very difficult to change direction. All our leaders can do now is to hope that the road will take a decisive turn for the better; and that the new ‘Pact for the euro’ helps them avoid future accidents.”

Ramon Marimon put forth a similar judgement in his column, “A credible economic order for the Eurozone?“, posted on 17 March 2011: “…the current package being discussed fails to draw a line under this crisis. While the proposal is reasonable, it is not credible.”

The road to debt restructuring and its failure

By the spring of 2011 it was clear that half measures were making things worse. What had been obvious to many Vox columnists in 2010 was becoming obvious to policymakers in 2011. Greece’s debt was not sustainable – it would never be paid back in full.

Paolo Manasse used clear economic logic and basic facts to show that restructuring was the only way forward and was, in any case, inevitable (“Greece, the unbearable heaviness of debt“, 24 May 2011): “A new loan may perhaps buy some extra time for Greece, but it would hardly change the substance of things. At present, the only alternative to debt restructuring, ruling out an inflation bout that would require leaving the euro, seems to be a strong, albeit unlikely, rebound in growth.”

Jeffrey Frankel provided a post-mortem of the botched bailout in his column, “The Greek debt crisis: The ECB’s three big mistakes” (16 May 2011). The three mistakes were (i) admitting Greece to the Eurozone, (ii) allowing interest rate spreads on sovereign bonds issued by Greece to fall to almost zero in the 2000s, and (iii) failing to send Greece to the IMF early in the crisis.

Kai Konrad and Holger Zschäpitz pointed out more system failures in their column, “The future of the Eurozone” (10 June 2011), and Hans-Werner Sinn made the point forcefully in his 26 July 2011 column, “Greek tragedy“.

Debt restructuring

By the spring of 2011, interest spreads for Greece, Spain and Portugual were up to levels that triggered the first Greek bailout. The Greek Crisis, in short, was now the Eurozone Crisis. The number of related columns on Vox blossomed. To keep this column to a manageable length, I’ll simply list the key columns from mid 2011 to 2015.

The only exception is a column, again by Charles Wyposz, in 2013 that is likely to prove prescient in the very near future and helps cast the Greek Crisis as a problem for both those who borrowed foolishly and those who lent foolishly. On 23 September 2013, in his column “Next Greek package: Dangers for the EZ, he made a point that would seem to apply equally well in June 2015: “Greece is in dire straits; it will need more debt relief … Greece is suffering because northern EZ countries kicked the can down the road by forcing crisis countries to borrow rather than restructure their debts early on. It is time for the ‘generous’ lenders to face the consequences of their short-sightedness. The bad news that Chancellor Merkel ought to break now to her people is that official debt restructuring is inevitable.”

Vir: Richard Baldwin, VoxEU told you so

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