3 Jul 2015

Greece crisis: a failure of economics in the face of politics

The IMF’s report yesterday got swamped amid the gloom, despondency and fractiousness of the Greek crisis.

It said, in short, Greece’s debt has become unsustainable. Greece needs an extra €50bn now, a twenty-year holiday from its debt repayments and a substantial write off.


It’s not quite a mea culpa, because the IMF says if Greece had followed the course dictated by the Troika the debt would have been sustainable.

But it comes close. Once you add in politics to the economics, the IMF’s document reads like an early autopsy on the policy of austerity first, debt relief maybe. And it contains a horrible sting for any government – right wing, technocratic or national – that succeeds Syriza if it loses the referendum on Sunday.

‘Whatever it takes’

Let’s first dissect the IMF’s assertion that the old austerity plan was working.

The first precondition was that long-term interest rates fell substantially below those expected in the original agreement. This was the result of global deflationary pressures and a co-ordinated policy of quantitative easing, and implicit state guarantees for south European debt after Mario Draghi’s 2012 “whatever it takes” speech.

Another way of putting this is: the Troika’s 2010 and 2011 austerity programmes for Greece are only sustainable because the ECB in 2012 exposed the governments of the entire Eurozone to the debt of the Eurozone.

But here’s the critical paragraph. To go on using 15 per cent of its GDP to pay down its €320bn debt until 2045 “would require primary surpluses of 4+ per cent of GDP per year and decisive and full implementation of structural reforms that delivers steady state growth of 2 per cent per year (with the best productivity growth in the euro area) and privatization”.

This is IMF speak for “it’s impossible” – for all the reasons the report then points out.

4 per cent surpluses are politically undeliverable by a democratic government in Greece. The conservative-led coalition fell because it could not deliver them. Nor could it deliver the “structural reforms” everybody wants – an end to bureaucracy, corruption and tax evasion – because the existing political establishment is mired in these problems.

Nail in the coffin

As to the solution, the IMF suggests doubling the time Greece gets to pay off it remaining debts, and a €36bn loan, with almost no conditions, to enable it to pay off any debts becoming due before 2018 (which is what the Greeks publicly asked for, presumably once they knew this report was coming).

The IMF’s call then for a write-off of the Greek debt equivalent of 30 per cent of GDP is the final intellectual nail in the coffin of the programme it imposed in 2010 and 2011.

The IMF’s report is not just a piece of analysis. It makes it virtually certain that the IMF will not sign up to any solution for Greece – or indeed the rest of the Euro periphery – that excludes a debt write-off.


But a debt write-off is exactly what the EU governments cannot deliver. As I’ve said here before: it’s not a question of political willpower but of democracy. The Eurozone now includes the perennially right-wing states of Estonia, Finland and Lithuania who will block with Germany; and a German people whose willingness to take the downside of the Euro deal along with the upside seems to be over.

Suppose now Syriza falls on Monday. A government of all the other parties takes over and, waving this IMF report, arrives in Brussels asking for €50bn debt relief, a doubling of repayment times and a €36bn short term loan to see it through to 2018.

That is a substantial hit for European taxpayers. But the same Greek government would also arrive with a bill for rescuing the banking sector – which will collapse as soon as it is reopened without a massive injection of assistance from the European Central Bank, again exposing taxpayers’ money by proxy to the Greek rescue.

After EU parliament President Martin Schulz effectively called for regime change yesterday, conspiracy theorists here are seeing the above as a likely scenario. Get rid of Syriza and we will hand over the cash – effectively improvising a fiscal union on the sly to prevent Greece collapsing into chaos.

Failed state?

But here’s where you begin to see the logic of the behaviour of Tsipras and Varoufakis. If the EU wants to avoid Greece collapsing into chaos, and defaulting on its €320bn debt in whole or in part, it has to do this for any government that turns up in Brussels on Monday.

It has to do so for material and moral reasons. Materially, a Greek collapse now comes on top of a Chinese stock market crash, Puerto Rico’s $72bn default and warning signs of a downturn in the USA. If Greece is “let go” it could trigger the final market rout the pessimists have expected ever since the 2008 crash.

Morally, leave aside all the national stereotyping and bitterness, if the EU allows one of its member states to become a failed state – and I am not exaggerating when I say that is possible – every small country in the union would sensibly begin behaving as if it were the next Greece.

Anti-EU protest in Athens

Geopolitically, the failure to save Greece – I stress again because of a failure of will by electorates as much as their politicians – would signal to America that Europe is a busted concept and, more ominously, it would create the cracked pavement onto which Vladimir Putin could scatter seeds of what he wants to grow there.

The IMF’s document is in the dry, clinical style of all analyst reports. Yet from here, amid the throbbing heat, the graffiti and the return of teargas, it shows the failure of economics in the face of politics.

The austerity programmes of 2010 and 2011 may have worked in a Greece made up of sans-serif numbers in a table. But they could not and did not work in a Greece made up of people: crony politicians, tax evading businessmen and a radical left party whose members are, even now, urging it to bring the whole Euro system crashing down.

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15 reader comments

  1. Philip Edwards says:

    “…a failure of economics…”

    Yeah, right.

    Nothing new there, then. 150 years ago Karl Marx warned what would happen. The “only” things that stopped an immediate manifestation of his warning was war, imperialism and genocidal looting empires. A new war is due any day – anywhere will do as long as the cowards who instigate it don’t get hurt or lose money in the process.

    So……it isn’t “…a failure of economics…,” it’s a failure of capitalism. And it always will be.

    Nor is it “a Greek debt.” It’s an IMF/ECB ripoff, the same thing being visited on Ukraine and anywhere else ready to tolerate it.

    The IMF, ECB and the World Bank are what they’ve always been: a protection racket run by a tiny cabal of bankers with nothing but profit and political control in mind, most of it administered by the Yanks, the last remnants of a corrupt warmongering Western establishment.

    But they can always rely on media puppets like you to peddle the party line. That’s why they employ you.

  2. Tom says:

    As usual, confusing Europe with Eurozone. Just when you seemed to grasp the difference between debt and deficit..

  3. Robert Crabtree says:

    It seems the Dutch are also not in favour of more money for Greece.
    The problem is also a refusal by Greece to implement logical and beneficial changes to its Receiver of Revenue / Tax Department and doing something about the huge arrear taxes it is owed.

    The eurozone needs Greece to leave the Euro in order to save the Euro. Greece’s way of administering itself is gangrenous for the rest of the eurozone. The rot will spread if Greece is bailed out again.
    A further bail out could also change the geopolitical landscape of Europe as the rightwing in France may gain enough ground to come to power and they are anti EU.

  4. Simon says:

    The system crashed in 2008 and we have been messing around with stop start performance and constant error messages ever since when what was really needed is to wipe the hard drive and start again with a new install.

    I still don’t see that happening though. We need more countries to drop out of the system and be successful (socially) within their own borders like Iceland for the illusion the current system is the only system to be shattered to allow construction of something fit for purpose in the modern world.

    My best hope is Greece proves to be another step along that path. I believe they can make it happen and I hope they do.

    Vote no.

  5. Margaret Eleftheriou says:

    Very powerful analysis of the present situation. I have never known such deep divisions in the parts of Greek society that I know (I am not Greek, though I have lived and worked here for many years). In Crete in the villages the rural population seems mostly very anti-yes. But the academic and scientific communities are very much divided as they are dependent on the EU for a lot of their funding. The business community is also in even greater difficulties than previously, because they are unable to meet their obligations through bank transfers and business is drying up. Having said that, the Cretaquarium was doing really good business today with lots of tourists.
    No idea what the next week will bring, after the referendum results.

  6. Buck Eldorado says:

    What complete and utter rubbish! The fact of the matter is Greece lied their way into the Eurozone and now they’re trying to lie their way out. This is a question of moral hazard. If Greece is not dealt with sternly, they will never learn fiscal responsibility. It would be better to let Greece fail completely then save it because the cost will be the same but letting it fail demonstrates to the rest of Europe that The Troika is serious and will not squander decent, hard working Taxpayer money on underwriting those who don’t want to pay their taxes or work past fifty. As for Greece embracing the arms of Putin. If Putin is willing to take “The Sh*thole of Europe”, then I say let him have it! Russia won’t put up with this crap for a second! If the Greeks want to live under the Russian yoke, I say: “Have at it, Hoss. Maybe the Russians can teach you the value of an honest day’s labour.” They certainly won’t wipe their bums with Rubles the same way the European Community has with Euros.

  7. Je says:

    If Europe won’t adapt to the reality the at the EU is proving detrimental to Europeans then Putin will have an easy sell because his allies will be led mad than the poor were that be

  8. Orla says:

    Hi Paul,

    Please could you or your colleagues mention somewhere that the German trade union federation has been strongly backing the Greek govt. throughout all this (see their website http://www.dgb.de for various positions taken).

    There’s a vocal section of German society (roughly, the manager-level), along with the whole of the press and broadcast media, that are screaming for the Greeks to get ‘punished’. But that is not the whole, or even necessarily the majority, of German public opinion. All the political parties outside the govt. are massively critical of the current German govt’s policy, criticising from positions on both left and right.

    The opinion polls I’ve seen muddy the waters by extrapolating more than is said and/or giving only minimal or leading choices. I can’t find a date on this one other than ‘2015’, but look:
    The majority is for the banks to pay up too, not just the state, but the headline is that (only) 23% support financial aid to Greece. If that was reported in Bild/Spiegel/et al., it would be classed as ‘majority against giving the Greeks more money’. Don’t believe the German press any more than you would the London press.

  9. Frank Wilson says:

    Great analysis and insight as usual, Paul, and good interviews.

    I guess after a ‘Yes’ vote there must be a government of national unity if Greece is to be saved.

    A ‘No’ vote will be brave, but politically unmanageable – unless your aim is a Grexit, the destruction of the EU, or the transformation of the EU into a massive Soviet.

  10. Winston Smith says:

    Actually there is a way out of this that does not involve bail-ins or an exit from the euro and hyperinflation. Everyone assumes a new drachma has to be in line with the way central banks have worked for years. If Greece adopted a cryptocurrency as its new currency, one that it could not arbitrarily print, their currency would likely become the most in demand in the world. Click on my website and go to the “Enter The Bitdrachma – The Eurocrat’s Worst Nightmare” to see the details.

  11. Tim Price says:

    In many ways Paul is right but behind this lies the difficulty we all face from time to time of admitting that we are wrong at a fundamental level. The Troika are having real problems doing this. The limitations of neo liberalism have been exposed but they can’t admit it. The true face of austerity is shown- further impoverishment of the poor to enrich those already rich. They have to destroy Syriza by any means necessary to keep back the potential tide of socialist opposition.

  12. Alan says:

    According to former US Assistant Treasury Paul Craig Roberts. The agenda of the EU and the central bank is to terminate the fiscal independence of EU member states by turning tax and budget policy over to the EU itself. Mr Varoufakis far from being as stated is actually aiding this process, refer recent analysis by Mr Engdahl. As for Mr Putins influence, how does such RU scaremongering vie with the Greek rejection of offer of prepayment of $5 billion towards the Greek participation in the Turkish Stream Gazprom pipeline? It would appear we are all being led a merry dance, not least by Mr Mason.

  13. James Smith says:

    After the Yes vote in Greece, Greek Finance Minister Varoufakis needs to make good on his promise to resign so this situation can have the best chance of being resolved.

    FACT: The amount of debt Greece owes is not sustainable because the tax level it would take to make payments on that amount of debt debt will choke the life out of the economy no matter how much austerity the Greek people accept. The ECB and the IMF know this.

    OPINION: Any creditor would provide a better deal to a borrower that was not confrontational and adversarial. No creditor wants a problem borrower they can’t trust. Greece needs to elect people who will take a different tact with its creditors, and then debt restructuring and even possibly debt forgiveness is a possibility if the creditors believe Greece will actually make an attempt make a positive contribution to the EU, rather than criticize, argue and fight as Tsipras and Greek Finance Minister Varoufakis have done since they took office.

    It would seem that Tsipras and his comrades never had any intention of of remaining in the Euro, and this has all been posturing to justify an exit.

  14. ken says:

    This bit of Mr Mason’s analysis is odd:

    “Morally, … if the EU allows one of its member states to become a failed state – and I am not exaggerating when I say that is possible – every small country in the union would sensibly begin behaving as if it were the next Greece.”

    If the small nations of Europe see a failed Greece, the logical reaction is to make sure you are not Greece by combating corruption, increasing productivity and reforming the economy. On the other hand, Podemos and the 5SM, if they see massive fiscal transfers to Greece and a triumphant Syriza, will begin spending and demanding more fiscal transfers. Thus on Monday, even if the Greeks run up the white flag, we can expect a tough negotiation and a lot of crossing of Syriza’s red lines – thanks to the incompetence of Yanis and Alexis the Greek economy is now in far worse shape than a week ago – meaning more cuts and more reforms. Any government that includes Syriza will end up being required to show good faith up front – reforms then cash.

    Both sides have behaved abominably, with Martin Schulz effectively threatening armageddon, and Varoufakis lying about a deal. How do we know he lied? Because he claimed that he had a deal based on a NO in the referendum. One of the first rules of negotiation is that you do not show your hand – not even the very incompetent Mr Juncker would have described his negotiating position in the event that the referendum did not go his way – because this would instantly shift the goal posts for a negotiation post-YES.

    In some ways, I’d be interested in seeing what happens if the Greeks vote NO, because there wont be a deal on Monday… But, I pity the Greek people, doomed to suffer either way.

  15. matt says:

    Two things to remember with the referendum one Greeks are prone to hysterical two procrastination.

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