The Logic and Fairness of Greece’s Program

By Olivier Blanchard

(Version in ελληνικά عربي)

To get back to health, Greece needs two things. First, a lower debt burden. Second, improved economic competitiveness. The new program addresses both.

Bringing down the debt

Some countries have been able to work down heavy public debt burdens. Those that were successful did it through sustained high growth. But in Greece’s case, it had become clear that high growth—let alone sustained high growth—was not going to come soon enough. Debt had to be restructured.

The process was long and messy. After all, bargaining between creditors and debtors is rarely a love affair. In the process, foreign creditors were often vilified in Greece as bad guys—rich banks, who could and should be willing to take a hit. But in the end, banks belong to people, many of them saving for retirement, who saw the value of their bank shares go down in value.

All said, the PSI (private sector involvement) dealthe largest ever negotiated write-down of public debt—has reduced the debt burden of every man, woman, and child in Greece by close to €10,000 on average, a sizable contribution on the part of foreign savers.

Greece now has to do its part―with sustained political commitment to implement the difficult but necessary set of fiscal, financial, and structural reforms that have been agreed as part of the program supported by Greece’s partners in the eurozone and the IMF. It is a huge challenge, no doubt. But it is also an opportunity–to take advantage of the economic space opened up by private and official creditors. Will Greece seize it?

Fixing public finances

First, it has to bring down its fiscal deficit further. Otherwise, this will simply negate the progress which was just made on the debt. The fiscal effort which has been accomplished already is truly impressive, with the primary deficit coming down from 10 percent to less than 3 percent. The reduction and the rescheduling of debt will help cut interest payments, but this will not be enough in itself to fix the hole in the public finances.

Greece is still running a primary deficit, and it will soon need to run a primary surplus. There is simply no alternative. Much spending will need to be cut. And, on the tax side, given the harsh measures that have to be taken, much of the focus of the program is on fairness, on making sure that richer people do indeed pay their fair share.

Reducing the current account deficit

Equally, or perhaps more importantly, Greece has to reduce its current account deficit. For two separate reasons. First, no country can run a large current account deficit and borrow from the rest of the world forever. Second, as fiscal austerity cuts into domestic demand, the only way to return to growth is to rely more on foreign demand to reduce the current account deficit.

And Greece still has a very large current account deficit, at close to 10 percent of GDP, despite the depressed level of output. To reduce a current account deficit, there is no secret: the country has to become more competitive, sell more abroad, and buy less from abroad. At the moment, Greece’s exports amount to only about 14 percent of the goods it produces.

By how much does Greece need to improve its competitiveness? It is difficult to be sure, but an improvement in competitiveness―or a real depreciation―of about 20 percent seems to be what is required.

Strategy for improving competitiveness

There are two ways to become more competitive: become much more productive, or reduce wages and nonwage costs. The first way is much more appealing. But there is no magic wand. While many sectors in Greece show a large productivity gap, the reforms needed involve changes in regulation and behavior, none of them easy to achieve. The program designed with the Greek government tries hard to identify where and how progress can be made. The list is long, but implementation is hard, results uncertain and, in any case, will not come tomorrow.

This leaves decreases in relative wages, at least until higher productivity can kick in. In countries with flexible exchange rates, this can be achieved through currency depreciation. In a country which is part of a common currency area, it has to be achieved by decreasing nominal wages and prices. In Greece, wages have increased faster than productivity growth for years, compounding the problem. Unit labor costs―which is a key measure of competitiveness―increased by over 35 percent during 2000-10, compared to just under 20 percent in the euro area. This has to be undone.

The best way forward would have been a negotiation between social partners to reduce wages and prices, and avoid a long and painful process of adjustment. This did not happen. The program tries to accelerate the process, while protecting the most vulnerable. The harsh reality is that the adjustment has to take place one way or the other; otherwise competitiveness will not improve, demand will not increase, the current account deficit will continue, and unemployment will remain very high. The faster it does take place, the less pain there will be.

No viable alternatives

Were there less painful alternatives? I do not believe there were, or are.

For example, the notion which is sometimes floated that large infrastructure projects might boost growth, increase productivity, and improve the fiscal and current accounts, is fanciful. The problem of Greece is not primarily a problem of physical infrastructure. Projects financed by state funds would do little to impact growth in the short term, would make the fiscal deficit worse, and would only delay the inevitable adjustment.

What about leaving the Eurozone? Euro exit followed by a sharp depreciation could achieve the relative wage and price decline that Greece needs, and achieve it faster. (Note: the relative price and wage decline would not be avoided; it would just happen faster). Indeed, if Greece had had its own currency to start with, this would surely have been part of the program. But Greece is part of the Eurozone. And, leaving aside the large costs of no longer belonging to the Eurozone, the dislocations from a disorderly exit—from the collapse of the monetary and financial system, to the legal fights over the proper conversion rates for contracts—would be very, very large.

Long climb

The bottom line: will the program work?  Greece will have to climb a mountain at least as high as the one it has just climbed and success will hinge crucially on the government’s sustained and strong implementation. In all programs, unexpected events will happen, and the program will no doubt have to be readjusted along the way. As Christine Lagarde has said, “the risks remain exceptionally high.”

All this is true. But it is also true that the program deals squarely with the two most fundamental issues facing Greece―not only high debt but also low competitiveness. And it is fair, both in asking for shared sacrifices, not only within Greece, but also between Greece and its creditors.  

41 Responses

  1. Even after the debt reduction, the remaining debt–the New Greek Bonds–will be hanging like a stone around the neck of Greece’s recovery, and since that debt is still worth only a fraction of its nominal value in the market, what about a-sovereign-Greek-debt-to-something-Greek-for-the-Greeks conversion that could be of interest for the wealthier Greeks, and who at this moment are rumored to take refuge in, as an example, real estate in other countries?

    For instance, what would a Greek pay for a New Greek Bond if it could be converted at 80% of its face value against his future income taxes? Yes of course, that will lose future tax income for Greece, but that income might be lost anyhow, and there is nothing like a very clean air of a bright new morning to get the any economy going.

  2. If Germans, and other Europeans, would come to understand what was really the primary cause Europe ran into trouble then they might be more sympathetic to help out.

    In this respect, IMF, why do you not do Europe a favor and run a regression between all the problem exposures of banks which caused this crisis, like to lousy securities disguised as splendid triple-A’s, loans to Icelandic banks, loans by the Spanish banks to the real estate sector in Spain, loans to a Greek government, and other similar, on the Basel II risk-weights of 20 percent or less, those which allowed the banks to finance what is mentioned holding only 1.6 percent or less in capital.

  3. Slides of a talk given by Panos Mantzaris at the Economic University of Athens on the 14th of May 2012.

    • Thanks, Panos. Amid all the media focus on the severity of the crisis, this video is a welcome contribution of data and facts. In the context of Mde. Lagarde’s call for taxation to be fairer, and in light of the opportunities for investment in sectors in which Greece has a competitive advantage, your video begs the question of how a new social contract in which Greeks ‘pull together’ (like Germans?), can be accomplished. One cannot help assuming that rich Greeks had, before the gross social entitlements were introduced in reaction, been “shafting” their poorer compatriots.

      Is there a leader in Greece who can bring a sense of mutuality into Greek politics, media, and finance? If not, what can the IMF do that it is not already doing to help fill the leadership vacuum?

      • Thank you for your kind comment Angus.
        You pose the Questions that everyone is trying to answer.
        The players in the Drama however, have particular interests, favorite points of view and limited information and knowledge about the different factors involved.
        Everyone wants simpler and fairer taxation. At this time with the system as is, further pressure is hurting those who instead should get a relief. A revamping of tax system including collection efficiency takes time even if all agree to do it, and have no disagreements about the details involved.
        Today one can argue that the main division in Greece is between those who work for the Public Sector and those in the Private one. The Public Sector is Unionized, while the Private Sector is not (not nearly to the same extent). Political Parties catering to the Public Sector win Elections, and further boost the growth of a bloated and inefficient Government. We have hit the Wall. One cannot say though that with the snap of a finger can displace many public servants (regardless if they are doing something useful or not) without giving them a credible opportunity to do something else in the Private Sector. This transition process needs a Plan and Nursing. Only then we can talk about “Pulling the Greeks Together”. Greeks are not quite like Germans. They do not obey orders from Authority as easily if they do not believe in the Goal (either because they accept the logic or are pulled by sentiment which a charismatic leader can create).
        It is true that a few “Special Interests” have been dominating Greek Economy for years, taking advantage of the influence they could exert to Government through Media and Banking, leading Development in directions which are not sustainable anymore.
        At present there is no visible “Leader” who could do the miracle.
        IMF can potentially do a lot and play the key role in leading the way out of this situation, but …
        I met Daniel Cohn-Bendit who came to Athens and gave a speech at a gathering of the local “Greens” Party. The German lady who I think is the VP, was saying that Investment in Renewable Energy Production could create many jobs like it had in Germany. After the speach I mentioned to Cohn – Bendit that since 80% of the cost in this Investment was to buy Generators from Germany, and the jobs will be created in Germany. They can take advantage of the Air we have, but they should be the ones to bear the cost of the Investment since we are in no position to subsidize jobs in Germany. He could not help but to agree with me and only commented that anyway Greece should start doing something in producing equipment to be used in this sector of the Economy.
        The devil is in the details unfortunately, and in this situation IMF must work harder to improve its ways in doing the job.

      • Panos Mantzaris, on May 31, 2012 at 5:19 am said (of Angus):

        “You pose the Questions that everyone is trying to answer.
        The players in the Drama however, have particular interests, favorite points of view and limited information and knowledge about the different factors involved.
        Everyone wants simpler and fairer taxation. At this time with the system as is, further pressure is hurting those who instead should get a relief. A revamping of tax system including collection efficiency takes time even if all agree to do it, and have no disagreements about the details involved.”

        Thanks very much for your analysis, Panos. I appreciate very much the care and scruples you put into your reply.

        A few days ago I read the following in The Economist:

        “Along street after street of opulent mansions and villas, surrounded by high walls and with their own pools, most of the millionaires living here are, officially, virtually paupers.

        How so? Simple: they are allowed to state their own earnings for tax purposes, figures which are rarely challenged. And rich Greeks take full advantage.

        Astonishingly, only 5,000 people in a country of 12 million admit to earning more than £90,000 a year — a salary that would not be enough to buy a garden shed in Kifissia.

        Yet studies have shown that more than 60,000 Greek homes each have investments worth more than £1m, let alone unknown quantities in overseas banks, prompting one economist to describe Greece as a ‘poor country full of rich people’.

        Manipulating a corrupt tax system, many of the residents simply say that they earn below the basic tax threshold of around £10,000 a year, even though they own boats, second homes on Greek islands and properties overseas.”

        I do not have the means to validate what The Economist says, but IF it’s even remotely true then I would think the most intelligent and wisest form of leadership for the IMF would now be to offer, VERY PUBLICLY, a special purpose loan in trust to the next Greek Parliament to be used solely to prosecute abusers of the taxation trust. It must be a crime in Greece to tell material lies, so I would assume such a loan would in due course be the very best investment that either the IMF, or the EU, or the Greek Government coukd make in either Greece, the Eurozone, Brussels, Portugal, Ireland, Spain, Italy, or France (to name just a few jurisdictional possibilities).

        So what about it, Mde. Lagarde?

  4. Question: What stops Greece from exiting the formal eurozone and still use the euro, as El Salvador uses the US$ dollar?

    • Because “Eurozone” means the 17 countries of EU who use the Euro. Exiting Eurozone means stoppping the use of Euro ! Get your facts straight …

      • Not necessarily Panos Mantzaris. Though Greece would obviously not enjoy any seigniorage benefits, it can very well use the Euro, or the yen, or the dollar, or any other currency for that matter. Just that it seems so much better and practical for them to stay with the Euro, so they at least do not have to waste money changing vending machines or feeding the fx exchangers.

        Yes, obviously, it would have to earn the Euros it needs and not survive on some Drachmas it can print, but, having to earn one’s livelihood seems like a reasonable point at which to start the reconstruction.

      • The reason people talk about Greece being forced to leave the Euro is the prospect of having its new currency devalued so domestic production costs can be lower and, perhaps in this case, exports can grow faster, with imports reduced. There are adverse consequences of that scenario for Greece, and for other EU countries like Germany who have a trade surplus with Greece. The ability of Greece to repay debt would be further reduced in the short term for sure. Can you describe the consequences of “Leaving the Eurozone and keeping the Euro as the official Currency in Greece”? What are the potential consequences? With a devalued Drachma and a standing huge trade deficit, Greece would have to work very hard indeed to pay for necessary imports. If instead of having the Drachma Greece continued to use the Euro while being out of the Eurozone they would have to work harder?

      • Mr. Panos Mantzaris. I am really no one to tell Greece what to do. I just know that if Greece is aware that it has the alternative of keep using the Euro, even if booted out of the eurozone, it might get itself into a better position than the one resulting from having to beg to remain in the eurozone or to beg for the support of a new Drachma. No matter what, Greece will have to work hard, but perhaps it is easier to regain some confidence in Greece alone than have to do so both for Greece and the Drachma.

  5. “… the largest ever negotiated write-down of public debt has reduced the debt burden of every man, woman, and child in Greece by close to €10,000 on average, a sizable contribution on the part of foreign savers.”
    When the greek crisis errupted, its debt to GDP ratio stood at about 150%. A default on 50% of its debt would have brought that down to 75%.
    The joint “rescue” efforts of the EU and the IMF now ensured that a 70% write down on private sector debt will leave it at about 165% of GDP. You rescued the private sector lenders, not the country.
    Competitiveness: a) I agree with people on Germany.
    b) By preserving the debt you also preserved the interst payments, which account for a sizealbe part of the current accout deficit.
    c) “protecting the vulnerable” If the Greek government can change wage contracts by degree (Minimum wage, employment protection), why cann’t it enact a reduction in domestic prices at the same time?

    • If private sector lenders are so insignificant as to let them sink, why not propose this for every lender? The Greek people were rescued from Argentina-style tanks guarding banks — only on a much larger scale. This is a very tangible rescue. True, they still owe much, but they also hold assets that they have obtained by borrowing. It is not fair to let them lose too easily. They have debts, true, but the interest they pay on them on them means they are receiving a huge subsidy.

      On competitiveness, how reasonable is it to punish hard work and fiscal responsibility in Germany for the sins of people in Greece?

      On protecting the vulnerable, lowering prices by decree for everyone, rich and needy alike, is just about the worst policy for protecting the truly needy. Unlike in most industrial nations, informal support networks are much more effective in Greece.

      • In 2009 /early 2010, Greek debt against provate creditors stood at €300 Billion. The effect of the rescue package was that a part of that debt was transformed into indebtedness against offical creditors and therefore removed from the table for a bail-out. In concequence of this — and the ensuing enforced recession, the Greek position after the bail-out is worse than it was before the rescue package.

        As far as the private lenders are concerned – if they have to be saved (because Europe didn’t recapitalize its banking system) bail them out directly and don’t mask this subsidy for banks as a subsidy for Greece. “lowering prices by decree for everyone, rich and needy alike, is just about the worst policy for protecting the truly needy.” Far from that:
        a) The most vulnerable will be hit most by the liberalizazion of the labour market
        b) Lower prices for domestically produced goods (i.e. rents) will be the long run result of lower nominal incomes. It’s just that the adjustment process is less harmful if it has not to work via a deep recession.

      • A deep recession was unavoidable with the public sector deficit at over 15% of GDP in 2009 and the current account deficit at 10% of GDP (for a number of years prior to 2010). The rescue packages have limited the cumulative GDP loss to 15% so far. So, the Greek people have had a good share of the benefits of the package: no anarchy and some limitations of their loss of income. Not all the gain was for foreign private lenders.

        I can see no reason why the Greek people should not have to pay a part of the debt they incurred by, eventually, selling some of the assets they accummulated by borrowing. True, they should not have been allowed to borrow, but research shows that they have invested a very significant part of that borrowing in good quality assets. Not all that borrowing has gone down the drain. In fact, they have started paying by limiting their overconsumption, paying more property taxes, and by exporting more.

        As for the distributional effects, the reforms insisted upon by the official lenders have made sure that the most pampered classes of Greek society are paying, for the very first time, the cost of fixing the public finances.

      • @George J. Georganas “how reasonable is it to punish hard work and fiscal responsibility in Germany for the sins of people in Greece?”

        Absolutely unreasonable, just like it is unreasonable to punish people in Greece for the fact that bank regulators allowed the banks to lend to Greece with minimum capital requirements, and thereby helped to finance the sins of Greece.

  6. The problem with the Euro is Germany’s gargantuan trade surplus, and the reasons for it.

    That you ignore it just smacks of cowardice.

  7. Surely, making private investors in Greek debt pay was not such a wise move. The signal this gave forced the European Central Bank to flood the market with dirt cheap liquidity in order to enable banks to hold on to their debt holdings of other weak Eurozone countries. This was not offered to Greek banks who, incidentallly, were holding a much smaller part of their assets in the form of public debt. Thus, they were punished for being conservative, while the more reckless ones outside Greece are being rewarded. Some management of incentives !

    Moreover, the reputed transfer of 10.000 euros per capita to Greece is not quite as generous a transfer from foreign savers. About half of that was held by Greek banks, pension funds, and savers.

    Next, there is the small matter of the delay between September 2011 and February 2012, most of it caused by ever up-ratcheting demands on the already prostrate and begging Greeks. The damage this did was compounded by fallacious (most probably intentional) accounting on the part of the IMF, ECB and European Commission troika. The income projections they presented in order to force the debt writeoff are clearly inconsistent. For example, exports are assumed to increase without any subsequent effect on income or investment. Some professionalism !

    All the same, the projections were forced through and, for a time, became self-fulfilling.
    On the matter of competitiveness, the Greek economy has ample experience of devaluations. Only the one of 1953 seems to have worked as advertised and only because there was a protracted period of austerity that preceded it. So, the great distortions of the Greek economy cannot really be remedied by skillful management of the exchange rate alone. The hard job of frustrating unrealistic standard-of-living expectations just has to be done. The troika seem to have gotten this right and Brad Delong wrong.

    Last, the good news. Exports from Greece are growing fast and imports shrinking faster. The current account deficit in 2011 was half the size it was in 2009. This improvement came before the dramatic reduction by 22% in the statutory minimum wage in mid-February 2012. The reforms in social security, although in place already, have not yet run through the system. Come 2014, this leak will have been plugged, too. Actually, if Greece could attract enough infrastructure finance (it has been getting nearly zero for the last couple of years, so some rapid increase is not “fanciful”) to balance out its oil imports and interest payments (admittedly reduced by the debt writeoff and generous interest rate), its current account deficit could be zero in 2012.

  8. [...] The Logic and Fairness of Greece’s Program: To get back to health, Greece needs two things. First, a lower debt burden. Second, improved economic competitiveness. The new program addresses both…. [...]

  9. [...] Blanchard expresses his view on the IMF blog: Equally, or perhaps more importantly, Greece has to reduce its current account [...]

  10. @Per Thank you! I agree completely. I’ve written much the same in my professional capacity. Check out pp. 4-5, 7-8 here: http://www2.accaglobal.com/pubs/general/activities/library/small_business/sb_pubs/pol-af-gtor.pdf

    • Indeed, one day soon all are going to wake up to the fact that official clearing in the capital requirements for banks of perceived risks of default already cleared for by markets and banks, which guarantees banks overdosing on perceived risks, was sheer pure unadulterated regulatory lunacy, of that kind which can only be explained by the groupthink which is guaranteed to happen whenever you allow a small group of mutual admirers to engage in an incestuous debate.

      You finalize your report stating “A wholesale review of Basel III may not be possible any time soon”. Though indeed transitioning out of Basel might take time and should be done with utmost care, what is needed is to get the current regulators out of the Basel Committee, and the FSB, since they are in many ways busying themselves more with hiding their own tracks of responsibility than solving the problems they created.

  11. [...] that would be good medicine for another neoclassical economist, Olivier Blanchard—to walk through the streets of Greece while the austerity policies he advocates are being [...]

  12. Purely for speculation:

    What would hurt the others the least, Greece or Germany, or both, leaving the Euro?

    If Germany stays and Greece leaves does not someone feel it could be doomed to become the next Greece?

    If Germany leaves and Greece stays could someone believe he will be the next Germany?

    If both Germany and Greece leaves would that not leave a much level playing field? Aren’t they both outliers?

    Or should Germany lease Greece a la Hong-Kong from the Greeks in order to average out the both outliers?

    • Referring to the Basel Committee for Banking Supervision (BCBS), Per Kurowski wrote in his blog (“Who did the Eurozone in?” – http://bit.ly/t3mQe0):

      “… the bank butlers only concerned themselves trying to make the banks safe, and did not care one iota about who the banks were lending to and for what purpose; they ignored that banks were already discriminating based on perceived risks so what they were doing was to impose an additional layer of risk-perception-discrimination; they completely forgot that no bank crisis in history has ever resulted from an excessive exposure to what was considered as “risky”, but that these have always been the consequence of excessive exposures to what, at the moment when the loans were placed on the banks balance sheet, was considered to be absolutely “not-risky”.”

      Per Kurowski has been making this point ever since the BCBS brought in the idea of risk-weighting in setting bank capital requirements. And he has been listened to on this point, on the surface respectfully, by at least the current and preceding IMF Managing Directors. Yet Olivier Blanchard, amongst many other economic technicians at the IMF, continue to ignore Per’s now very obvious point that risk-weighting formulae are not only absurd from the point of view of financial stability but GROSSLY UNFAIR AND DYSFUNCTIONAL from the point of view of everyone outside the ‘banking butlery’. Fortunately, at the Bank of England, Andy Haldane, its Executive Director for Financial Stability, has wised up in a paper of about a year ago on the subject. So is it too much to hope that the IMF executives who relate to the EU and the G20 and the ECB will also now wise up?

      A larger point is that in this article, Mr. Blanchard reveals his psycho-linguistics ignorance, and therefore proclivity for letting his emotions introduce error into his thinking and the thoughts of those paying him attention, by using the word ‘logic’ in defending the program for Greece. The word ‘logical’ refers to a truth-rooted concept in mathematics but in practical problem-solving, in which mathematics can only play a part, the larger idea of ‘rationality’ must dominate — as is explained in the distinctions set out at:

  13. This is quite similar to a plan which I submitted some time last year. Here it is.

    http://klauskastner.blogspot.com/2011/09/endgame-for-greece.html

  14. [...] 1. Στα Αγγλικά : The Logic and Fairness of Greece’s Program [...]

  15. Two important components for development are education and research. For each one of them there is only a small paragraph in the MoU for Greece of general nature. Why?

  16. Unit Labour Costs should not be interpreted as a comprehensive measure of competitiveness, but as a reflection of cost competitiveness. Unit labour cost measures deal exclusively with the cost of labour, which though important, should also be considered in relation to changes in the cost of capital

  17. [...] Olivier Blanchard provides an assessment of the challenges facing Greece in this IMF blog post. [...]

  18. “The program tries to accelerate the process, while protecting the most vulnerable”

    No, it doesn’t. It does no such thing. People are lining up in soup-kitchens around Greece in numbers that were last seen during the Nazi occupation of the country. The homeless population has shot up incredibly, to well over 25.000 in Athens alone, in a country where such phenomena were marginal before the troika’s advent, half the flats in downtown Athens could not afford heating petrol for the winter, mental health is in disarray, as is special education, public hospitals are pricing a large part of the impoverished pensioners out of the public health system by demanding a 5 euro ticket. Meanwhile teachers and nurses (a rarity in hospitals anyway now) are on subsistence wages and the trend is towards even lower nominal wages despite the fact that in purchasing power terms we are already, even before the IMF mandated cuts in the minimum wage and the destruction of labor law to the point where a SE Asian dictator would be comfortable with, well below most EU countries. In the meantime, the rich have sent their profits (and they had made incredible profits in the decade before) to Swiss and Cayman Islands Banks, as well as the London real estate market.

    So, no. The most vulnerable are left to the dogs.

    Also: “real” wages have been almost stagnant in Greece in the decade before the debt crisis, and this does not count the effect of informal work and pseudo-freelancers on that level. That is before a mandated by the IMF/ECB 22% horizontal nominal cut in the minimum wage, which is expected to diffuse up and affect all wages and of course on top of the already precipitous decline in real wages ever since the troika arrived in Athens (http://rwer.wordpress.com/2012/03/15/the-136-decrease-in-hourly-wage-costs-in-greece-after-the-third-quarter-of-2009/).

    I see no logic and certainly I see no fairness…

    • Has this story not played out in every country that has had an economic crisis since the Washington consensus took hold of the profession of financial economics? In asking this (rhetorical) question, for the answer is invariably ‘yes’, my point is not to add to the chorus of complaints that the IMF is guilty of imposing measures which fail to protect the vulnerable. The IMF is only a broker, in these contexts — albeit an expert and an exceptionally well-connected broker. No, my point is to bring to the IMF’s attention that its public announcemrents rarely do anything at all to point out that any such crisis is the consequence of BOTH a failing social contract AND large capital flows, in both of which the value discipline of honesty has been conspicuously absent.

      So, until the IMF addresses that issue publicly, its leaders will not be entitled to call their institution an honest broker.

  19. [...] who thought there is no logic and fairness, here is Oliver Blanchard trying to make a case for the [...]

  20. The Troika should have stepped in latest, March 2010, the EC/EU/EBA/ESRB, seizing the Ministry of Finance, (under a European Supervisory Authority), and started to clean house, after freezing all assets.

    1) COUNCIL FRAMEWORK DECISION 2003/577/JHA
    of 22 July 2003
    on the execution in the European Union of orders freezing property or evidence

    THE COUNCIL OF THE EUROPEAN UNION,
    Having regard to the Treaty on European Union, and in particular
    Article 31(a) and Article 34(2)(b) thereof,
    Having regard to the initiative by the Republic of France, the
    Kingdom of Sweden and the Kingdom of Belgium (1),
    Having regard to the opinion of the European Parliament

    Whereas:

    4. Cooperation between Member States, based on the principle
    of mutual recognition and immediate execution of
    judicial decisions, presupposes confidence that the decisions
    to be recognised and enforced will always be taken
    in compliance with the principles of legality, subsidiarity
    and proportionality.

    Article 3
    Offences

    The following offences, as they are defined by the law of
    the issuing State, and if they are punishable in the issuing State
    by a custodial sentence of a maximum period of at least three
    years shall not be subject to verification of the double criminality
    of the act:

    — corruption,
    — fraud, (including that affecting the financial interests of the
    European Communities within the meaning of the Convention
    of 26 July 1995 on the Protection of the European
    Communities’ Financial Interests),
    — laundering of the proceeds of crime,
    — forgery of administrative documents and trafficking therein,
    — forgery of means of payment

    * Any Lawyer worth his salt should be aware of this, it is no secret yet nobody wants to talk about it.

    ANY time there is a Bankruptcy or Insolvency issue, a Manager is named, and is ON-SITE for the duration of the event.

    In a word, COMPLIANCE.

    COMPLIANCE means submitting to authority, full stop.

    An Enforcement Division needs to be established under European Supervisory Authority to deal with such weaknesses in the future, WHEN (not if) they arise.

    The EBA already has the full power to step in a seize banks without prior notice under this authority.

  21. “In Greece, wages have increased faster than productivity growth for years”

    Meanwhile, in Germany, wages have not kept pace with productivity increases for years. There is no connection between the two?

    “Greece has to reduce its current account deficit”

    Within a common currency area, the current account surplus of one country will be mirrored in deficits in the others. As long as Germany runs a Eurozone current account surplus, other Eurozone countries will necessarily be sharing the corresponding deficits.

    Blanchard’s argument calls on the “common currency area” where it suits, but omits it where it doesn’t (on the current account deficit, precisely).

    “The harsh reality is that the adjustment has to take place one way or the other”

    Instead of applying “one way” as a drastic reduction in the incomes, employment, health and other essential public services of ordinary Greek citizens (talk of “fairness” is mere handwaving), how about the “other” being a rise in wages and prices in Germany?

    This article’s tranquil assumption of neo-liberal doctrine on “competitiveness” (crushing downwards adjustments applied to the wage-earning masses), and its avoidance of what are euphemistically called “imbalances”, amount to grovelling before mercantilism.

    Economics is indeed politics by other means.

  22. “But in the end, banks belong to people, many of them saving for retirement, who saw the value of their bank shares go down in value.”

    Oh, please.

    Like the rest of this ‘article’ this is so risible and embarrassing, on so many levels, it’s frankly shameful.

    The ECB could have ended the crisis years ago. It chose not to, for reasons of sclerotic ideological insanity.

    Perhaps someone should tell the ECB that it belongs to the people?

    Then it might stop acting like a medieval despot and start acting like an institution that belongs in the 21st century, instead of the 15th.

  23. Olivier Blanchard “Greece needs to become more competitive: The program designed with the Greek government tries hard to identify where and how progress can be made.”

    Why do you not let the small businesses and entrepreneurs find the way instead of government bureaucrats? That you could do better if at least regulators stopped odiously discriminating with their capital requirements for banks against those perceived as risky, and who are anyhow already discriminated against by the markets precisely because of being perceived as riskier.

    Do you really think that lending to small businesses and entrepreneurs, those because being perceived as risky have never ever caused a bank crisis, is something risky when compared to the mammoth risks Christine Lagarde refers to? And, by the way, in this respect, what goes for Greece goes for all Europe, and the USA.

    • @Per Kurowski:

      I could not agree more. No bank would have ever lent to Greece at the idiotic rates that they did if they weren’t high on Basel http://lolgreece.blogspot.co.uk/2011/12/lolgreece-christmas-carol.html

      • It is worse. Mario Draghi, whom has been directly involved since the ’80s in bank regulatory matters, and who was the chairman of the Financial Stability Forum, later the Financial Stability Board, and who said nothing or even approved such a preposterous idea of allowing banks to lend to Greece against only 1.6 percent in capital, meaning authorizing a 62.5 to 1 leverage of a very generously defined bank equity, is currently the president of the European Central Bank! Talk about lack of accountability!

        Who did the Eurozone in? http://bit.ly/t3mQe0

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