2015 July 02 Thursday
Northern European Responsibility For Greek Debts
Recognizing the obvious: I.M.F. Agrees With Athens That Greece Needs Debt Relief. A country with debt of 180+% of GDP with an aging population and an economy that has been in depression for 5 years can't grow its way out. Outside of Europe the IMF always expects lenders to take a hair cut when the debt is that high. But inside of Europe the IMF is dealing with Germany.
When lenders make really bad lending decisions they lose money. The lenders of northern Europe made really obviously bad lending decisions by lending to a country that joined the Euro currency already had high government debt. That's a government that should not have gotten still more money lent to it. Yet Greek government debt was already at 120% of GDP in 2001.
Greece should have been kept out of the Euro. Once in the Euro the German and other northern European banks shouldn't have lent it money. Once the financial crisis hit the Europeans propped up the Greeks by lending government money in order to protect northern European banks from big losses. So the Greeks went even deeper into debt but this time to governments. Now the northern European governments don't want to admit they've got to take big losses for their foolish decisions.
James Galbraith makes some pretty good points about the behavior of the rest of the European governments.
I say all this knowing that Greek politicians have been spendthrifts, that Greek retirement age eligibility is too low (though the average Greek man retires at age 63), that the Greek government needs to do more to introduce market forces into the Greek economy. But Greece is not the only problem here.
The northern Europeans even could have said "you must raise retirement ages, sell off these industries, and do these market-opening moves in exchange for debt relief". But pointedly they did not and they refuse to do so. Germany is in the wrong here.
By Randall Parker at 2015 July 02 10:31 PM
But the Northern European countries (even their banks) did achieve a long term net benefit even after factoring in the short term financial losses that they will incur due to the defaults: the depression in the Southern European regions caused the Southern European nations to lose their technological and entrepreneurial know-how because unemployed people became either obsolete or their best people immigrated to other countries, which means that on a long-term basis the potential competition of Southern Europe has been effectively crushed and annihilated, and this is a long-term economic benefit for the Northern Europeans even after taking into account their financial losses.
There is all a complete misunderstanding about Greece. The Northern European economies allowed those massive loans to Greece for the purpose of stimulating their own economies.
Consider what Greece spends its money on: the military, because it is paranoid, and infrastructure. So, Germany lends money to Greece and then says, "Gee, you want to buy weapons? Well, you have to buy it from us." So Greece does. Then Germany says, "Gee, it looks like you need a new subway system." Then Germany brings in German companies with German workers and German equipment to build Greece a subway. Every such expense is then debited from the amounts that Greece borrows, but spending is largely determined by the lenders.
And those Greek pensioners that retire at 51? Well, Greece has a policy that corporations must tilt their hiring toward the young, because Revolutions come from idle youth. The pensioners then retire and work at jobs off the books. A Greek pension pays about $1200 a month, which is nothing.
RP, The fact that the average Greek man retires at age 63 actually reduces the official unemployment rate. If they raise the retirement age to 70 (which is reasonable given the longevity and good health of the Greeks), this will increase the already dismal rate of unemployment: nearly half their young college graduates are unemployed. The real problem in Greece is that they do not have the infrastructure that generates the kind of jobs that can compete with northern Europe. On the contrary, the current depression actually caused the Greeks to lose their know-how. What Greece needs to do is to start a national Sputnik kind of emergency re-training program to become competitive. Incidentally, France and UK are also losing their know-how due to the free trade zone that is robbing their jobs (to Germany.) The Greek economy is just 2 % of the EU, and so Greece is just a drop in the bucket, but when France and UK start imposing tariffs against German imports, there will be big tension at the core of the EU. Both France and UK have trade deficits against Germany of the scale comparable to the trade deficit of the US against China (if measured as a percentage of their GDPs.)