A Greek Morality Tale

It is sometimes not very easy to admit to one’s mistakes, especially when principles are involved.

But that is what I am going to have to do!

Perhaps my error was not so much a mistake than a slight error of judgement. In my case, unlike a professional politician or economist, I can plead for forgiveness because of stupidity or even ignorance. And I am sure that I will be forgiven.

Based on all the information available to me and using my best judgement at that time, I came to the conclusion a few months back, that a Grexit in some form or the other was the “best solution” for Greece to be able to claw its way out of the economic mess that it’s in.

Now I am not so sure.

After a re-evaluation of the situation and finally coming to understand in a much clearer way what the real, fundamental issues are, I now realize that there is and always has been, a third option. And, if this third option could be made to work, it is a far better solution than a Grexit.

For the moment, lets rather say that I have changed from being pro-Grexit to Grexit-neutral. I realise that this 50/50 stance is not very satisfactory but it is only temporary until I have had time to present my case for the new alternative……and it is NOT pro-austerity either!

Before we embark on exploring this “Third Option”, I thought that it would be a good idea to set the scene first……to present a bit of a background story and to introduce Joseph Stiglitz to my blog. In some ways, the life history of Joseph Stiglitz has given me inspiration and courage to write this post today.

Here is a man, highly respected and brilliant in his field and with many years of involvement in academia and mainstream economics, who suddenly turned his back on everything that he once held dear in order to challenge the status quo and question conventionally held beliefs.

Joseph E. Stiglitz, is a Nobel laureate in economics and University Professor at Columbia University. He spent most of his early years as an academic in various American universities and received a PHD from MIT. Subsequently, up until 2000, Stiglitz was intimately involved, at the highest levels, in various economic institutions in the USA. From 1995 until 1997, he was the Chairman of President Bill Clinton’s Council of Economic Advisers and then served as Senior Vice President and Chief Economist of the World Bank until 2000. At about that time, he became an outspoken critic of the management of globalization, free-market economists and some international institutions like the International Monetary Fund and the World Bank. In the last fifteen years, he has written a series of highly popular books that have had an enormous influence in shaping global debates. Stiglitz considers himself to be a New-Keynesian economist.

Since 2008, he has played an important role in the creation of the Institute for New Economic Thinking (INET), which seeks to reform the economics discipline so that it is better equipped to find solutions for the great challenges of the 21st century. This article was first published by Project Syndicate:

A Greek Morality Tale

by Joseph Stiglitz (3 February 2015)

When the euro crisis began a half-decade ago, Keynesian economists predicted that the austerity that was being imposed on Greece and the other crisis countries would fail. It would stifle growth and increase unemployment – and even fail to decrease the debt-to-GDP ratio. Others – in the European Commission, the European Central Bank, and a few universities – talked of expansionary contractions. But even the International Monetary Fund argued that contractions, such as cutbacks in government spending, were just that – contractionary.

We hardly needed another test. Austerity had failed repeatedly, from its early use under US President Herbert Hoover, which turned the stock-market crash into the Great Depression, to the IMF “programs” imposed on East Asia and Latin America in recent decades. And yet when Greece got into trouble, it was tried again.

Greece largely succeeded in following the dictate set by the “troika” (the European Commission, the ECB, and the IMF): it converted a primary budget deficit into a primary surplus. But the contraction in government spending has been predictably devastating: 25% unemployment, a 22% fall in GDP since 2009, and a 35% increase in the debt-to-GDP ratio. And now, with the anti-austerity Syriza party’s overwhelming election victory, Greek voters have declared that they have had enough.

So, what is to be done? First, let us be clear: Greece could be blamed for its troubles if it were the only country where the troika’s medicine failed miserably. But Spain had a surplus and a low debt ratio before the crisis, and it, too, is in depression. What is needed is not structural reform within Greece and Spain so much as structural reform of the eurozone’s design and a fundamental rethinking of the policy frameworks that have resulted in the monetary union’s spectacularly bad performance.

Greece has also once again reminded us of how badly the world needs a debt-restructuring framework. Excessive debt caused not only the 2008 crisis, but also the East Asia crisis in the 1990s and the Latin American crisis in the 1980s. It continues to cause untold suffering in the US, where millions of homeowners have lost their homes, and is now threatening millions more in Poland and elsewhere who took out loans in Swiss francs.

Given the amount of distress brought about by excessive debt, one might well ask why individuals and countries have repeatedly put themselves into this situation. After all, such debts are contracts – that is, voluntary agreements – so creditors are just as responsible for them as debtors. In fact, creditors arguably are more responsible: typically, they are sophisticated financial institutions, whereas borrowers frequently are far less attuned to market vicissitudes and the risks associated with different contractual arrangements. Indeed, we know that US banks actually preyed on their borrowers, taking advantage of their lack of financial sophistication.

Every (advanced) country has realized that making capitalism work requires giving individuals a fresh start. The debtors’ prisons of the nineteenth century were a failure – inhumane and not exactly helping to ensure repayment. What did help was to provide better incentives for good lending, by making creditors more responsible for the consequences of their decisions.

At the international level, we have not yet created an orderly process for giving countries a fresh start. Since even before the 2008 crisis, the United Nations, with the support of almost all of the developing and emerging countries, has been seeking to create such a framework. But the US has been adamantly opposed; perhaps it wants to reinstitute debtor prisons for over indebted countries’ officials (if so, space may be opening up at Guantánamo Bay).

The idea of bringing back debtors’ prisons may seem far-fetched, but it resonates with current talk of moral hazard and accountability. There is a fear that if Greece is allowed to restructure its debt, it will simply get itself into trouble again, as will others.

This is sheer nonsense. Does anyone in their right mind think that any country would willingly put itself through what Greece has gone through, just to get a free ride from its creditors? If there is a moral hazard, it is on the part of the lenders – especially in the private sector – who have been bailed out repeatedly. If Europe has allowed these debts to move from the private sector to the public sector – a well-established pattern over the past half-century – it is Europe, not Greece, that should bear the consequences. Indeed, Greece’s current plight, including the massive run-up in the debt ratio, is largely the fault of the misguided troika programs foisted on it.

So it is not debt restructuring, but its absence, that is “immoral.” There is nothing particularly special about the dilemmas that Greece faces today; many countries have been in the same position. What makes Greece’s problems more difficult to address is the structure of the eurozone: monetary union implies that member states cannot devalue their way out of trouble, yet the modicum of European solidarity that must accompany this loss of policy flexibility simply is not there.

Seventy years ago, at the end of World War II, the Allies recognized that Germany must be given a fresh start. They understood that Hitler’s rise had much to do with the unemployment (not the inflation) that resulted from imposing more debt on Germany at the end of World War I. The Allies did not take into account the foolishness with which the debts had been accumulated or talk about the costs that Germany had imposed on others. Instead, they not only forgave the debts; they actually provided aid, and the Allied troops stationed in Germany provided a further fiscal stimulus.

When companies go bankrupt, a debt-equity swap is a fair and efficient solution. The analogous approach for Greece is to convert its current bonds into GDP-linked bonds. If Greece does well, its creditors will receive more of their money; if it does not, they will get less. Both sides would then have a powerful incentive to pursue pro-growth policies.

Seldom do democratic elections give as clear a message as that in Greece. If Europe says no to Greek voters’ demand for a change of course, it is saying that democracy is of no importance, at least when it comes to economics. Why not just shut down democracy, as Newfoundland effectively did when it entered into receivership before World War II?

One hopes that those who understand the economics of debt and austerity, and who believe in democracy and humane values, will prevail. Whether they will remains to be seen.”

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About Peter Smith

A "foot-soldier" in the wider Post Capitalism Movement. First task - keep spreading the words of change, hope & inspiration.
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