Tag Archives: troika

Chart of the Day, 26 Jan 2015: End of Greek Austerity?

So can Greece’s Syriza Party end austerity?  At least it starts with government finances in pretty good shape (Source: European Economic Forecast, Autumn 2014; click for larger image).

Greek Government Expenditures jpeg

Already, the Greek budget is showing a positive primary balance; that is, expenditures before interest payments are less than revenue. So if the government didn’t pay interest to its debtors, it could spend more on welfare. But we are not talking about a lot of money here: a few billion euro at most. Alexis Tsipras, Syriza’s leader, likes to point out that Greece still has an awful lot of debt even after the restructuring by the Troika (the European Commission, European Central Bank and IMF), but the debt that it has is very, very cheap.

Nonetheless, according to the EU forecast, Greece is poised to show an overall budget surplus even after interest payments in 2015. The purpose of this surplus is supposed to be to pay down the debt mountain. But if the Greek government won’t do that, then they would have even more to spend. So far so good. But actually what we obtain from these measures alone is still a government running along very Germanic lines; in short, only spending what it earns. Hardly a revolution.

Let’s look at a breakdown of general government operations in more detail (from the IMF’s Fifth Review of its funding facility; click for larger image)

Greek General Govt Operations jpeg

The pictures of poverty on Greek streets comes about through a combination of 25% unemployment and a safety net shrunken by the fall in social benefits from €47.2 billion in 2011 to ¢38.1 billion in 2014. If you ran the primary balance at zero in 2015 and growth stayed on the same course as the IMF projection, then Syriza may be able to restore a little over half of the social benefit cuts. Then each year after that (still assuming GDP growth holds up) you could claw back some more.

This, however, would do little to jump start the economy. To do that in a Franklin D. Roosevelt New Deal kind of way you would need to see a massive jump in public works spending (the lines in the chart above showing investment and compensation of employees ). But on the assumption that Syriza has defaulted on its debts, it will, at least for a time, be shut out of the capital markets, so it will be in no position to borrow to spend.

A good Keynesian like Paul Krugman would argue that 25% unemployment is incontrovertible proof of a massive gap between potential and actual economic output. In such a situation, the government should let the central bank buy its debt (through printing money), so allowing public spending to let rip. The risk that this raises inflation when you have massive underutilized resources is close to zero. But Syriza can’t do that since it doesn’t have a central bank to call its own; Syriza’s central bank, the European Central Bank, resides in Frankfurt, not in Athens. In short, it can’t print and spend.

How about redistribution? Are the Greek oligarchs quaking in their boots? Again the euro  restricts the government’s options. With no exchange controls and a common currency, the rich have maximum flexibility to flee as and when they wish.

Perhaps, this is why financial markets have reacted to the Syriza victory with such equanimity. For them, Tsipras may possibly be the Red Emperor with no clothes. Unless, of course, he drops the big one: a euro exit. Now that is what I would call a revolution.

Greece: A Tale of Two Consultations

The IMF certainly wasn’t responsible for Greece’s economic downturn; indeed, Greece only entered an IMF programme (jointly orchestrated with the European Commission and the European Central Bank—the so called Troika) through a Stand-By Arrangement (SBA) agreed in May 2010, 18 months after the collapse of Lehman Brothers in September 2008 (the fulcrum point for the credit crisis).

Nonetheless, the IMF’s track record in both evaluating Greece’s economic risk before trouble hit and in helping craft a set of coherent economic policies that would supposedly build the foundations for renewed growth has been abysmal.

Unfortunately for the IMF, we have a ‘before and after’ comparison in the form of the last two Article IV Consultations (the IMF’s economic health checks) of Greece, the first conducted on July 2009 before the recession bit (here) and the latest conducted in June 2013 after all hell had broke loose (here).

Let’s start with how we always keep score in economics: GDP growth. In the 2009 consultation, the IMF forecast that GDP would contract by 1.7% in 2009, followed by 0.4% in 2010, before seeing a return to 0.6% growth in 2011 and 1.2% in 2012. In their words:

Staff projects negative growth in 2009 and 2010. Greece is feeling the downturn with some delay. Moreover, even with the staff’s weaker outlook relative to the authorities, Greece’s growth decline from peak to trough would still be milder than for the euro-area as a whole.

Milder? The reality was far, far worse: -3.1% for 2009 and -4.9% for 2010. And then far from rebounding, the downturn picked up speed with the economy shrinking an extraordinary 7.1% in 2011. For 2012, the advance estimates have the economy down another 6% plus. This is a stunning forecasting failure: the IMF was off by around 20%—a fifth of GDP! Continue reading

The Remarkable Resilience of Greece

Back in February 2012, I wrote a post entitled “Greece as the Canary in the Coal Mine for Collapse?” in which I wondered whether the harshness of the Greek recession (perhaps better described as a ‘depression’) could unpick the socio-political order so as to push the country into collapse. After a two-week political tour of the country that stretched from the outlying islands to Athens, and took in both the elites and the underclass, the quick answer to my question has to be ‘no’.

It is easy to find examples of poverty and desperation: the photo I took below is of a stray cat sleeping on a homeless woman in the square of Athens’ central cathedral. The blog Zerohedge has assembled similar such photos to create a narrative of a country sinking into a state of impoverishment and despair. But you can play this game in any major city of the industrialised west: London certainly has a similar army of the down-and-out and destitute.


Yet what I saw in Greece was a society showing remarkable resilience. Take George, a bartender on the idyllic island of Samos. George is a live example of the IMF’s prescribed policy of ‘internal devaluation’. By ‘internal devaluation’, the IMF means the domestic resetting of wages and prices to restore the competitiveness of the Greek economy. Unfortunately, and as the IMF admits, most the adjustment has fallen to wages and little to prices. Continue reading