Europe's Populist Left

[Martinus]

Edit: On the other hand I'm alarmed at how the media have twice whipped up a storm about the Greek government in the last few days that seem to have been based on a mistranslation/misunderstanding of what was said. It's standard to an extent but it does seem important to try for clarity in this sort of situation.

Brits mistranslating Greek has a long-standing tradition in the Western civilisation. I mean, just look at the King James's Bible.

[Sheilbh]

Woe unto you scribe and pharisee!

[PJL]

It is amazing how much sympathy there is for the Greeks in the Anglo-Saxon media. When Marti mentioned naive lefties earlier I did think it doesn't seem to be a left-right thing so much as Anglo-Saxon/Euro. Even very right-wing commentators who think we need to cut spending a lot more and that Europe needs far, far more supply-side reforms broadly take the view, to quote Jeremy Warner - right-wing, of the Telegraph, 'we are all Syriza supporters now'

That's because the Euro position (or rather the German position) is so unreasonable that both Keynes AND Freidman would be spinning in their graves at what's happened there in the last 3-4 years.

[Monoriu]

The HK/Chinese media is more sympathetic to the Germans.  Not repaying your creditors and spending too much are no-nos.

[Tamas]

The HK/Chinese media is more sympathetic to the Germans.  Not repaying your creditors and spending too much are no-nos.

Well in England credit cards are a big thing and I get a letter(!) every month letting me know I could do credit transfer and get 0% interest on it, so it would seem that owing your soul to a bank because you couldn't stop spending may sound familiar to some Brits. 

[Sheilbh]

The HK/Chinese media is more sympathetic to the Germans.  Not repaying your creditors and spending too much are no-nos.

I wonder if there's something to do with certain monetary/economic crises.

In my opinion to an extent the Euro-crisis is a microcosm of the global financial crisis with Germany playing the role of the developing world/China in building up savings and reserves that then sloshed around the rest of Europe looking for a return and badly assessing risk. The Euro still hugely structurally flawed which exacerbates problems, but I think a lot of it was to do with capital imbalances.

My understanding is that East Asia and the developing world largely started developing those reserves and causing those imbalances as a very sensible response to the problems in the 90s. And it is striking how much of Germany's policies (especially on banking) seem very informed by a particular reading of the 20s and 30s.

[CountDeMoney]

The HK/Chinese media is more sympathetic to the Germans.  Not repaying your creditors and spending too much are no-nos.

Imagine that.

[Martinus]

The HK/Chinese media is more sympathetic to the Germans.  Not repaying your creditors and spending too much are no-nos.

Imagine that.

Yeah. The biggest creditor on the planet is concerned about people repaying their debt. Stop the presses.

[Sheilbh]

On the issues of the Troika and the dove-ish IMF I thought this, on their Ireland report was intersting:

THE IMF'S LAMENT FOR IRELAND
Add to Reading ListPosted by Frances Coppola on Feb 1st 2015,
The IMF has just produced a review of the Irish financial crisis and subsequent IMF/EU programme which concludes that the Irish financial crisis was badly handled by all parties, and especially by the institutions involved – the so-called Troika, made up of the European Commission, the ECB, and the IMF itself.

The IMF paints a picture of a Troika divided against itself and failing to understand the consequences of its decisions.  It observes that the EU was more concerned about systemic overspill than about the consequences for Ireland of having to shoulder the entire burden of bailouts:
...the Fund's objectives (focused on supporting its member country) may not necessarily always be aligned with those of the EC and ECB (generally focused more on EU and euro area wide concerns). An example here may be the bail in of senior unsecured bondholders, where European institutions focused on wider area concerns even if this resulted in a higher public debt burden for Ireland.

The IMF now believes that creditors should have shared the losses, and Ireland's Eurozone partners should have taken more responsibility for limiting systemic consequences. Senior unsecured bondholders should have been bailed in and insolvent banks should have been wound up, not bailed out.

The IMF is also severely critical of late and inadequate action by EU monetary authorities:
The Board noted that provision by the ECB of liquidity support was essential. But the issue went well beyond liquidity support for Ireland itself: it is difficult to see that the program, even if fully implemented by the Irish authorities, could have succeeded without further actions to stabilize the euro area and address tail risks. Such risks became increasingly apparent in the first half of the program period, as the euro area crisis intensified. In particular, absent euro area wide actions, there was little prospect of stabilizing Irish banks and establishing a sustainable funding base...and of securing public debt sustainability and regaining market access at sustainable rates.... For example, in mid-2012 Irish bond spreads, while coming off their highs in early 2011, remained still about 200 basis points above the levels required to secure debt sustainability.

The accompanying charts make it very clear that the IMF believes the ECB should have acted far sooner to stabilise the bond market. OMT worked, but it was far too late:


It is a tragedy that this is the verdict of hindsight, not a decision of foresight.

But the real tragedy for Ireland is of much longer standing. And to be fair, it is beyond the remit of the IMF's report - though it is evident from the IMF's analysis.

We often hear it said that Greece should never have joined the Euro. But no-one to my knowledge has ever said that Ireland's joining was a mistake. Yet it was. For Ireland, Euro membership was an unmitigated disaster, right from the start.

As the IMF explains, prior to joining the Euro, Ireland was a success story:
Ireland had a long history of exceptionally strong performance. Real GDP growth averaged around 5 percent and employment increased strongly for several decades prior to 2000, as the economy benefited from a successful integration into the world economy. Supported by high inflows of foreign direct investment (FDI) attracted by a competitive and business friendly environment, exports reached more than 100 percent of GDP and their structure changed towards high-value added products (IT, services, pharmaceuticals). Economic growth was accompanied by a marked decline in the public debt ratio, which fell in the three decades prior to the millennium from 110 (one of the highest among advanced countries at the time) to under 25 percent of GDP.

Then it joined the Euro. And its competitiveness promptly fell off a cliff. These charts show how as its GDP rose, giving the illusion of a booming economy, its exports collapsed:


The IMF explains why this happened:
Following euro entry, Irish interest rates fell markedly and, with some lag, the economy experienced a major boom in domestic demand. This was supported by a large credit expansion and a property price driven wealth effect. Rising wages and prices depressed Ireland's competitiveness (total factor productivity turned negative), leading the current account from balance in 2000 into deficits (-6 percent of GDP in 2008).

There is no doubt whatsoever that the sudden reversal in Ireland's fortunes was due to the Euro. All the hard work and enterprise of the Irish people over the preceding decades was destroyed by a disastrous decision to join a fatally flawed monetary union. THAT is the Irish tragedy.

But it didn't end there. The grey shaded areas in the above charts show the period of the IMF/EU programme. And it is clear to see why it was necessary. The collapse of GDP in 2007-8 is all too evident. But what these charts don't show is the role of banks in progressively wrecking Ireland's export-led economy – banks that were then bailed out by the Irish people whose prosperity they had destroyed. These charts show how, driven by volatile wholesale funding flows, credit growth expanded in the early 2000s then collapsed abruptly when the wholesale funding flows reversed, giving way to credit contraction (deleveraging) from 2008 onwards:


Had the banks remained solvent, even though suffering severe liquidity problems, the story of Ireland might have been different. But they were bust. One after another, Ireland's banks collapsed and were bailed out by the Irish sovereign at the behest of the EU. The consequences for Ireland's fiscal finances were disastrous:


For comparison, note that prior to the banking collapse in 2008 Ireland was running a primary fiscal surplus and had historically low debt/gdp of 25%. The large primary deficit that built up from 2008 onwards was entirely due to severe recession, as the IMF explains:
Real GNP contracted by 9½ percent in 2008–10 (GDP by 9 percent), led by a 41 percent collapse in investment, in particular in construction. The economic downturn and falling property prices resulted in a surge of payment defaults, rising bank losses, and growing difficulties for banks to secure wholesale funding.

Measures taken by the Irish authorities to contain the deficit only made matters worse:
The original 2008 budget had been expansionary, but amid collapsing revenues and the rising cost of supporting the financial sector, consolidation measures of 6.2 percent of GDP were implemented between 2008 and 2010. These included reductions in the public sector wage bill, cuts in capital expenditures, cuts and other restrictions on social welfare benefits, as well as revenue measures. In this period, expenditures in nominal terms shrank by over €5 billion. However, revenues continued to decline even faster, and the deficit (excluding financial sector support) reached 13.3 percent of GDP in 2010. Public debt jumped from 25 percent prior to the crisis to close to 100 percent of GDP in 2010. Overall, Ireland's fiscal position turned out to be much weaker than suggested by earlier headline balances of close to zero or positive and low public debt.

Yet despite the evidence that Ireland was never fiscally irresponsible, and the further (damning) evidence that Ireland's loss of competitiveness and associated credit bubble were due to its membership of the Euro, during the EU/IMF programme persistent accusations of fecklessness and profligacy were levelled at the Irish government and Irish citizens. This editorial from the UK's Independent newspaper is typical of the misinformation prevalent at the time:
The Irish plight is relatively straightforward: the government behaved fecklessly and now the country is broke....

The only feckless thing the Irish government did was to bail out its banks. Apart, that is, from the decision by another government, nearly a decade before, to join the Euro.

It is too late to reverse that decision now: leaving the Euro would simply inflict more pain on the long-suffering Irish people. It is essential, therefore, that the EU authorities learn the lessons that the IMF has identified. And it is also essential that Eurozone member states take on board the need for shared responsibility. Without commitment to sharing pain as well as gain, it is hard to see how the Eurozone would survive another crisis.

Ireland suffered for her own banks, Greece for European ones. It's absurd. The scary/sad thing is the Eurozone still hasn't really broken the link between sovereigns and banks which is alarming (and the mechanism for driving Greece out, if necessary).

[CountDeMoney]

As we all know, from Languish to life, it's always fuck the Irish.

[Admiral Yi]

Ireland suffered for her own banks, Greece for European ones.

Utter codswallop.  Ireland did suffer for her own banks; Greece suffered for spending more than it could repay. 

[Sheilbh]

Utter codswallop.  Ireland did suffer for her own banks; Greece suffered for spending more than it could repay.

Greece was the middle man between European governments and their banks. It would have been far more honest for them to default, Germany and France to bailout their own banks and there to have been European/IMF support for a reforming Greek government that can't devalue but that has defaulted.

I imagine they would have got more assistance than the €27 billion they've received in the last 5 years.

Both countries have gone through this because of the Eurozone's structural flaws. It was an attempt to end the risk of contagion that failed for two years until OMT was announced, which these countries are still paying for.

[Admiral Yi]

Greece was the middle man between European governments and their banks. It would have been far more honest for them to default, Germany and France to bailout their own banks and there to have been European/IMF support for a reforming Greek government that can't devalue but that has defaulted.

I agree with this.  However, this does not mean Greece suffered for German and French banks.  Greece did not suffer because they got bailed out; they suffered because lenders were no longer willing to finance their deficits because they had borrowed too much.

[Martinus]

I'm becoming more and more convinced that Poland probably did the right thing about cooling off its interest in joining the Eurozone asap. At least if we are hit by a crisis like that of Ireland (which we still may, given that the growth is bound to stop some day), we can quickly devalue zloty.

[Martinus]

Greece was the middle man between European governments and their banks. It would have been far more honest for them to default, Germany and France to bailout their own banks and there to have been European/IMF support for a reforming Greek government that can't devalue but that has defaulted.

I agree with this.  However, this does not mean Greece suffered for German and French banks.  Greece did not suffer because they got bailed out; they suffered because lenders were no longer willing to finance their deficits because they had borrowed too much.

German and French banks lent money to Greece beyond the point when they should have had. In a professional banking system, both the lender and the borrower should suffer the consequences of their irresponsible decisions. Instead, Greece was effectively forced by the Troika to take on loans needed to, effectively bail out German and French banks, that would have failed if Greece declared default back in 2008.

So yes, Greece was sacrificed at the altar of keeping German and French banks solvent.

The only thing Greece is doing now is refusing to accept being sacrificed again on the same terms (and, admittedly, with much less risk for German and French banks).