Saturday, February 21, 2015

Greece promises to Balance Budget: What the hell just happened?

If you want a vision of the future of the Eurozone, imagine a boot stamping on a human face – forever.

That is the lesson to be drawn from the results of the meeting between EU finance ministers and Greece, the details of which can be read here:
Jim Armitage, “Greek bailout: Germany claims victory as Greece agrees four-month bailout extension,” Independent, 20 February, 2015.

Phillip Inman, “Greece deal is first step on the road back to austerity,” Guardian, 21 February 2015.

Jennifer Rankin and Helena Smith, “Eurozone chiefs strike deal to extend Greek bailout for four months,” Guardian, 21 February 2015.

Raoul Ruparel, “Greece bends to Eurozone will to find short-term agreement,” Open Europe, 20 February, 2015.
An official summary of the agreement can be found here. It makes grim reading.

The Germans already rejected Greece’s plan of a moratorium of six months on loans and an end to austerity measures.

Instead, a four-month extension of the bailout has been agreed, but Greece is widely seen to be committed to much the same austerity as before, and must explain by Monday what measures and reforms it will take and how these will be in accord with the terms of the bailout.

Here is a crucial aspect of the agreement:
“The Greek authorities reiterate their unequivocal commitment to honour their financial obligations to all their creditors fully and timely.

The Greek authorities have also committed to ensure the appropriate primary fiscal surpluses or financing proceeds required to guarantee debt sustainability in line with the November 2012 Eurogroup statement. The institutions will, for the 2015 primary surplus target, take the economic circumstances in 2015 into account.

In light of these commitments, we welcome that in a number of areas the Greek policy priorities can contribute to a strengthening and better implementation of the current arrangement. The Greek authorities commit to refrain from any rollback of measures and unilateral changes to the policies and structural reforms that would negatively impact fiscal targets, economic recovery or financial stability, as assessed by the institutions.”
“Eurogroup statement on Greece,” European Council, Council of the European Union, 20th February, 2015
What does Greece get in return? It gets more time to renegotiate the burden of its debt, it may be able to avoid pension cuts and VAT hikes, but will try to balance its budget by cracking down on tax evasion.

In other words, what has occurred is that Greece is committed to a balanced budget, just by bringing in more tax revenue. No serious fiscal expansion can be done under these terms.

People on the left may like to put a brave face on it, but what has happened is simple: it is plain for everyone to see that a nation’s democracy means virtually nothing under the Eurozone. Greece is being forced to into the same basic policy, but with some minor concessions, and, given how weak its position is, it may well be forced into capitulation, despite the election of Syriza.

What will anti-austerity parties around Europe learn from the fate of Greece?

Being Eurosceptic and anti-austerity is not enough. Any government that promises to remain within the EU can do nothing. The government has to credibly threaten to leave the EU, and maybe even take unilateral steps like suspending loan re-payments and implementing capital controls. The EU can clearly humiliate poor little Greece, but what happens when voters in Spain, Italy or even France act on their hatred of the austerity and their governments start to listen?


  1. "..but what has happened is simple: it is plain for everyone to see that a nation’s democracy means virtually nothing under the Eurozone."

    Yup. Orwellian steps forward towards more concessions of sovereignty while remaining the poor debtor for a long time to come.

    Though, it'd be fun to just see them wantonly tear up the papers and leave the EU immediately, stabbing them in the back, lol.

  2. "The EU can clearly humiliate poor little Greece, but what happens when voters in Spain, Italy or even France act on their hatred of the austerity and their governments start to listen?"

    Galbraith noted that "stating raw truths in rooms full of self-serving illusions" was the main Greek achievement these past weeks. In hindsight, it may perhaps seem obvious that Greece was never going to twist Germany's arm this time, so they went 'all-in' by stating raw truths about austerity, EU and the eurozone as publicly as they could. It seems to me that Greece has now 'bought' four months and are hoping that the austerity discontent in the periphery will spread quickly during that time, in order to gain some leverage. Also, they now have more time to make a Plan B, C or whatever.

  3. I very much disagree. First, the *real* agreements have yet to be written and agreed on. Second, the goal of Greek gov will not be balanced budget but a sufficiently small fiscal deficit. No real (non symbolic) concessions from the Greek side so far. Third, short of sending German army to Greece, it's not that the Germany has much bargaining power in these negotiations. It's rather the opposite. Germany can only play the bank run card, Greece can play the total wiping out of Greek law debts.

  4. Not quite sure where this obsession with 'capital controls' comes from in the Post Keynesian mindset. You don't need capital controls in a modern banking system. Either TARGET2 absorbs the transfers, buffered via the Emergency Liquidity Assistance LOLR regime that is the competency of the National Centra Bank, or it doesn't in which case the NCB liability floats, you have a new currency and the outflow essentially ends.

    You don't control capital. You control real imports so that your exports are exchanged for the appropriate goods and services to keep the country operating.

    Is this why PKs don't really get MMT?

    1. Neil Wilson,

      Hmmm, Bill Mitchell:

      "Would Greece need to impose capital controls? It is likely that the Greek government would require some strict capital controls. Malaysia gained major benefits from adopting this strategy in 1997. The IMF has now demonstrated the conditions under which capital controls, previously eschewed by free market ideologues, can be highly beneficial to a nation making large currency adjustments. Greece would fall into this sample."

      That was in 2012.

      See also his views here:

      "However, financial flows that are speculative (especially short-term flows) and not connected with the real economy are unproductive and should be declared illegal. You may consider this is an extreme direct control. However the policy should be introduced on a multi-lateral basis spanning all nations rather than being imposed on a country-by-country basis. The large first-world nations should take the lead. I don’t see that leadership being forthcoming."

      Frankly, that is one of the most extreme forms of capital control imaginable.