PROSTRATING

I have to throw myself at the feet of anyone who knows more about economics and international finance than I – what happens next now that Greece is defaulting on its loans?

I know that the current government is strongly anti-austerity, as is most of the population. I know that the Greek public wants to stay on the Euro somehow, although defaulting on the IMF loan and exiting the Eurozone should (on paper) make that impossible. The only situation I can recall from sort of recent history is the collapse of Argentina's currency and economy in the early 00s. However, in that case the debtor nation was not entwined in any international arrangement as complex, financially and politically, as the European Union.

It is well documented that when individuals end up in financial straits so dire that nothing they do will make it any better, defaulting becomes a more appealing option. "Fuck it, why not?" becomes a very appealing line of argument. If nothing helps, then in a sense nothing hurts either. To me it looks like Greece is heading toward a car accident and has decided its best strategy is to go limp and let the laws of physics take over.

So what happens next? With no political resolution possible and presumably no further deals with the IMF forthcoming, where does this put Greece six months from now?

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54 Responses to “PROSTRATING”

  1. Earl Says:

    I'm not an expert, but from what I've read, here's roughly the facts

    backstory:
    You can't have a currency union with massive internal productivity differences (greece, spain vs germany) and without internal subsidization. The US has this — huge permanent subsidies for the south, from medicare to eitc to straight up giant wads of cash to state governments. Monetary policy in the EU was ran for German's benefit, and cheap cash flooded Greece.

    Over the last 5 years, austerity policies in Greece have cratered the economy. Contra predictions from the imf (and it's hard to know if they lied, or are really stupid. And I mean that in the mathematical sense so it could be both) but Greece has had a 25% fall in economic output akin to the great depression in the US. They currently have 25% unemployment and 50% youth unemployment. This is how revolutions start. The EU is now demanding further pension cuts, after roughly 40% cuts already.

    Note also that Greece really hasn't had a bailout; of the "bailout" funds given so far, at least half went straight back out to German and other foreign banks that made loans to Greece. So the private creditors have largely been bailed out.

    So now we're roughly up to date, I think the real fears are threefold: (1) A Lehman Brothers situation unfolds: this gets catastrophically out of hand, cratering the world economy again; (2) Greece leaves, and all of a sudden, creditors start getting real worried about Spain and Italy; (3) Greece leaves, is doing ok in 5 years, and all of a sudden austerity looks like not an awesome policy. The rubes get uppity.

    What will happen to Greece? Nobody knows, but my personal best guess is idiotic Germans and Finnish politicians have stigmatized Greece enough that subsidization is politically untenable. Even though they've had massive benefits from the currency union, they will drive it into the ground. There's always the possibility that the EU will be able to disguise subsidies in some palatable way, but it's hard to understand how those can be ongoing. One-offs to get us past the current crisis maybe, but Greece's economy will be permanently less productive than Germany/ Finland, so there will need to be permanent ongoing transfers.

  2. zebbidie Says:

    If Greece leaves then it can devalue the drachma and its exports become much cheaper (a holiday in the Greek Isles will be cheap as chips). Germany will eventually have to face up to the problem that it is using the poorer nations in the EU devalue the Euro so it can pull in 200 Billion Euro trade surpluses. Eventually prices for German exports will have to rise which will pull them back to the pack. So BMWs will start to get very expensive.

  3. Xynzee Says:

    On one hand it's a bit scary to think that a country can default.

    On the other hand there's something encouraging about a government calling BS on the finance sector. Especially with the way it has forced numerous nations into a form of debt slavery over the years. Has the IMF ever been considered the friend of small nations or really been a front for corporate interests?

    Greece will certainly hurt, but if it can sound a wake up call to how these transnational deals are really playing out that could be a good thing. A backwater like Zimbabwe defaulting, enh who cares*. A country in the Eurozone. That's the little boy pointing out the king is naked.

    *I'm referring to global sentiment, not to diminish the hurt inflicted upon the avg Zimbabwean.

  4. Dave Dell Says:

    I've read that this is a classic case of privatized profit – socialized loss for the banks that loaned Greece money. I've read that, essentially, when things went badly for Greece the banks that loaned Greece money were able to foist those loans off on the EU and IMF. So rather than have the banks eat the loss, the rest of the EU is on the hook for the losses. Greece has already done what it can as far as crippling austerity can take it but it isn't enough.

    I've read an opinion piece similar to what zebbidie thinks. Greece could truly prosper with the Drachma as its fiat currency. It could be the cheapest place to manufacture almost anything without having long sea voyages or air transport to get the products to mainland Europe.

  5. Anubis Bard Says:

    What Earl and Zebbidie say jibes with what I've read. I'll chime in with the fact that there is also a political / ideological struggle underlying this that the media doesn't seem to want to touch. That is, the primary public narrative is a story of debtor and creditor; the secondary is as Earl describes – Germany and its minnows – but there is a third layer, which is the effort to impose right-wing economic reforms on a population that would prefer left-wing economic reforms.

  6. Talisker Says:

    Earl is largely correct. (Although I don't know where the dislike of Finland comes from, it's not that big or influential. Blame the French and Dutch for backing the German line.)

    A few of the "known unknowns":

    1) Greece is holding a referendum on Sunday, on whether to accept or reject a package of terms from its creditors. If there is a No vote, it will be extremely difficult for Greece to avoid default and exit from the Euro.

    2) Credit from the IMF has run dry, but it is just about possible the European Central Bank and European Commission could put together another financing package for Greece, to keep them afloat and within the Euro. But at this point default is looking more likely.

    3) Russia could play a part. They have long-standing cultural and religious ties to Greece, and might be willing to step in with financing for Greek debt… for a price. Putin would dearly love to destablise the EU and acquire an ally on the Mediterranean.

    So, the likely scenarios for Greece:

    1) It stays within the Euro and faces years of grinding economic depression, if there isn't a popular uprising first.
    2) It leaves the Euro and uses a drastically devalued drachma. Things get worse before they get better, but eventually it makes an economic recovery — similarly to Iceland in the last few years.

    Option (2) would have significant consequences for the Eurozone. That's not so much because of Greece itself, but the signal it sends to other members (Spain, Portugal, Ireland, maybe Italy) who have endured severe economic pain to meet the euro's requirements. Exit will start looking good to these countries as well.

    The whole project could unravel, and the Euro would be left as a currency for northern Europe (Germany, France, Netherlands, Austria et al), which possibly is what it should have been in the first place. It would take several years for that to play out. At best there would be severe financial disruption, at worst things could go horribly wrong (for "violent overthrow of national governments" values of wrong). German intransigence and Russian mischief-making will certainly not help matters.

  7. HoosierPoli Says:

    Where do we go from here? The answer is nobody has any fucking clue. There's a referendum in Greece on Sunday which will at least clear up the will of the people on the issue; they may have elected leftists but that doesn't mean they want to reject bailouts categorically. But the ECB/Troika has kicked out the supports from the Greek banking system after negotiations apparently broke down, the Greek economy is at a standstill, and we're all in sort of a holding pattern.

    All I'm certain of is that conventional wisdom will continue to point the finger at Greek leftists, profligate public debt, and a need for vaguely specified "structural reforms", because the only answer is more neoliberalism, regardless of what the question was.

  8. Jimcat Says:

    Don't feel bad that you don't know. Really, nobody else does either. The situation is unprecedented. Even the experts can offer nothing but speculation and contingent possibilities ("if X happens, then Y might happen…)

  9. Larry, The Barefoot Bum Says:

    The situation is primarily political, not economic.

    I have a BA in Economics, and I think that economists do not really understand finance very well. Most macroeconomic models just ignore money.

    The whole point of the Euro has been to establish and maintain German political-economic hegemony over the European periphery (Portugal, Italy, Ireland, Greece, and Spain: the PIIGS).

    What happens when and if the Greek government defaults on its Euro-denominated debt depends on Germa… er… the the "troika": the IMF, EC, and the ECB. Things could go relatively smoothly or they could go very badly indeed.

    Smoothly: The domestic Greek economy is not the most dynamic, but it's not completely verkacht. Greece defaults on its Euro debt, starts printing drachma, and recapitalizes its banks. Their banks would probably lose most of their Euros. Exports would probably drop considerably for a while, but domestic production would pick up. Absent political punishment, after a couple of years, Greece, like Argentina, could probably borrow again in international markets.

    Badly: the Germa… uh… EC and ECB (the IMF is already softening) decides to punish Greece and cut off its international trade for a long time. Greece is too small to be effectively autarkic, and its economy is considerably dependent on tourism, shipping, and oil refining. Without international trade, the outlook for the Greek people is very dismal indeed.

    The question is: how badly does Germa… er… fuck it, Germany, want to fuck up Greece's shit as a warning to Portugal et al. (especially Spain)? This is essentially the same question that the loan shark faces when he's considering action against a debtor: do I show some mercy and let him eventually repay his debt, or do I shoot him, lose the debt, but send a signal to the rest of my debtors.

    It looks like the Germans really do want to punish Greece severely, and there's little international pressure on behalf of the Greeks. If the Germans let Greece default with no consequences, Spain is right behind them.

    What happens to Europe again could be easy or hard. Easy: the ECB monetizes whatever debt gets defaulted on (prints money and buys and burns the debt), stabilizing the Euro. The debts of all the PIIGS are not so big relative to the core European economy; monetization would cause only moderate inflation. The chief danger of monetization would come in loss of investor confidence, which by itself could crash the Euro. Alternatively, if the ECB doesn't monetize the debt, we have a big drop in European bank assets, which will cause a severe economic recession, probably a 1936-like second dip to the Lesser Depression.

    The "rational" choice would have been to bail out Greece a long time ago, monetizing its (then relatively small) debt, and keeping them relatively happy in the Eurozone. That the troika did not do so then indicates that they have a larger political strategy, which may or may not be stupid.

    I suspect the Germans believe they can fuck Greece up enough to keep the rest of the PIIGS in line, save the Euro, and look badasses that aren't to be trifled with. They may yet win.

  10. vegymper Says:

    Greetings from Argentina. We're alive! The results after the default was a huge devaluation, a long term without access to external credit, low industrial salaries, a reliance on nationally produced goods with corresponding reduction of imports. However, the main resources of the country were intact, & agricultural exports -soybeans- were in high demand and with good prices. This allowed a slow trickling back of USD, and the economy started to move again, based mainly in the national market, and the opportunity to export a lot at very cheap international prices.
    I don't know in the case of Greece, as I don't think they have a strong source of hard currency, as tourism income might be overvalued for what it can bring in terms of foreign money.
    I think that Larry might be right with the loan shark metaphor; this was not possible in Argentina case, and creditors do accepted a fundamental reduction on the value of their assets. Not to mention that a huge part of the debt was acquired during the military dictatorship era, so from a democratic point of view it was morally right to repudiate it, even when that position is quite difficult to understand for foreign media that want to impose the mantra of "not paying is immoral" as a way to foster the agenda of creditors who made really bad loans and don't want to face the losses at the casino.

  11. dra Says:

    I see a lot of implicit / explicit finger-pointing at Germany and the other better-off EU nations. Let's not forget what got Greece to this point. They have one of the most obscenely generous pension systems in the world (you can take benefits well before retirement age, which is among the lowest in the EU), truly astounding amounts of tax evasion (30bn euros a year, which is >10% of GDP), and a completely ineffectual and corrupt government without the political will to enact necessary reforms (even beyond the current regime, who are a joke). Add all this up, and it's not hard to see how many Greeks feel "owed" a certain standard of living.

    Many of the points made about richer EU nations subsidizing and enabling this behavior in poorer ones and so on are absolutely accurate — but it's not as if Greece was an innocent by-stander in this mess…

    My best guess — the referendum on Sunday results in a "yes" and ultimately leads to elections that will remove the current government before the end of the summer. I don't think they leave the Euro, and I do think they will accept some version of the deal that has been offered by the creditors. Beyond those purposefully vague guesses — I have no idea. This is truly uncharted territory.

  12. TomW Says:

    Re: Finland – Finland isn't a big country, but I they have been pretty vocal in their opposition to various bail-out options. Also, the Finnish Prime Minister speaks excellent English and is very blunt, so he's been a good source of sound bites for the media.

  13. TomW Says:

    ** I believe they

    Ed, you really need to enable post editing on here.

  14. Talisker Says:

    @Larry: Well said. I'd take issue with just one point.

    The Euro was primarily a political project, but the original goal wasn't to secure German political/economic hegemony. It began as a primarily French/German initiative in the 1980s and 1990s.

    The French are the last people to want German dominance. But the French/German generation of leadership at the time had grown up in the aftermath of the Second World War. Their dream was a Europe with such close economic union that another war would be unthinkable.

    The Germans, then as now, were well known for fiscal rectitude. The German public was extremely reluctant to give up the deutschmark, one of the most solid currencies in the world, for this dubious new multinational currency. So their government insisted on very strict rules regarding national deficits and the like, which were written into the Maastrict Treaty and other agreements governing the euro.

    The rest is history. It has (for the time being) secured German economic dominance, but 20 years ago I don't think the Germans themselves anticipated the current situation.

  15. c u n d gulag Says:

    I don't have a clue.

    All I know, is that Ireland, who went along with the Austerity advice, is still in financial trouble, and Iceland, who told the European Banksters where they could shove their Austerity, if doing fine.

    Austerity if fine and fun, as long as you're not the one who's got to be austere.

  16. c u n d gulag Says:

    IS doing fine.

    We really do need an edit function!

  17. Anon Says:

    I think all this talk is pretty naive. No one has mentioned the possibility that the Greek govt. will be overthrown and the Golden Dawn installed as a dictatorship.

    It's not like the big dogs haven't done that to before- specifically to Greece, even. Plenty of you guys are talking about the "domino theory" fear that the other PIIGS will follow Greece, but no mention of the fact that installing dictatorships is the traditional way to keep the dominoes from falling.

    Don't you think it's a little suspicious that Golden Dawn's recent rise to prominence just happens to coincide with the rise of the possibility of a Grexit?

  18. Skippper Says:

    Well, if you want to throw yourself at anyone's feet to understand this mess, may I suggest Greg Palast. He's been following this project from the beginning and has written quite extensively on it.

    http://www.gregpalast.com/

    If someone wants to escape austerity but stay on the euro, it's not going to happen. It's like saying you want to play hockey, but you don't want to be bumped into by other players. It comes with the territory.

    The whole point of the euro, as Palast reports, was to create austerity. While the stated and publicized goal was to create a common currency to ease travel and commerce, that was a side effect and not the cause.

    The real goal of the neoliberals was to take monetary control out of the hands of politicians in members countries. Then, when a financial crisis occurred or was created, the country involved would have no choice but to lower wages, destroy the unions, eliminate social programs, lower taxes on the wealthy, sell off the public infrastructure, etc. We're seeing that now all across the Eurozone.

    Palast covers that here:

    http://www.gregpalast.com/the-euro-is-a-big-success-no-kidding/

    We've seen this in other countries. The neoliberals have been trying it out all over the world. Their greatest success has been in the US, where the working class has been coopted to participate in their own decline. Ever since the mentally ill huckster Reagan took the stage, working-class Americans have been sitting in front of their TVs, grinning, and shooting themselves in the foot – and stopping to reload.

    If anyone hasn't read Palast's 2003 book, "The Best Democracy Money Can Buy," I suggest they do. He predicted the current situation in detail. Everything he said has come true.

    As Palast says, the euro is just a deutschmark with stars on it. The current lie, which is emanating out of Germany — with Goebbels-like success — is that the Greeks are stupid, fat, and lazy and don't pay any taxes. It's the European version of "welfare queens" driving around in Cadillacs, buying caviar and prime rib with food stamps.

  19. Skippper Says:

    Why is my comment "awaiting moderation?" That's never happened before. Is this a new thing?

  20. Bill Says:

    Talisker is right about France and Germany. Germany actively fought to keep southern European countries out of the euro in the run-up to the launch in 1999. Southern Europe's tendency to tolerate higher rates of inflation and to devalue their currencies at the drop of a hat was anathema to the German Bundesbank and most German politicians, who feared their inclusion would make for a weak euro replacing the strong D-mark. France on the other hand wanted those countries inside the euro because they were tired of seeing their neighbors devalue their currencies, leaving France at a disadvantage. Germany rammed through very strict fiscal standards (deficit of no more than 3% of GDP, debt of no more than 60%) etc. that were to serve as criteria for joining the euro. But an economic downturn in 97-98 left Germany itself unable to meet those criteria and effectively opened the door to everyone else.

    Basically, the politics of the euro were that France thought it was putting one over on Germany in that it would water down the economic leadership of the Bundesbank and the German government, allowing France to consolidate its political leadership of Europe.

    The Germans thought they were putting one over on France in that the euro would allow Germany to call more of the shots in Europe at the expense of Paris. Looks like Kohl won that bet.

  21. Talisker Says:

    @Anon: Ahem. I did mention "popular uprisings" and "violent overthrow of government" in the context of Greece. Yes, a slide into dictatorship is one of the nightmare scenarios. But if it happens, I don't think it will be sponsored by the EU.

    Say what you will about the EU, its founding treaties have strict requirements regarding democracy and human rights. You can be a military dictatorship or an EU member, but not both. The Germans and everyone else want to observe the letter of the law, which means Greece must have at least the superficial appearance of democracy if it is to remain in the EU.

    Also, AIUI Golden Dawn is not in favour of austerity any more than Syriza is.

  22. Talisker Says:

    @Skipper:

    Palast may have some valid points. But Germany, France, and the other rich euro members continue to run strong welfare states with a not-at-all neoliberal ethos. I'm more inclined to consider the euro mess a colossal, politically-motivated fuckup rather than a grand conspiracy.

    BTW, I think posts with more than one link are held for moderation as an anti-spam measure.

  23. Skippper Says:

    @Talisker — wait for it. It will come to Germany and France in time. One country at a time. Once they get people used to the austerity idea, it will spread.

    It's just like the police in the US are now slaughtering black men with impunity. Once they get enough people on the side of the police, they will be able to move on to the "lower classes" of white people with less resistance.

    It's basically mission creep.

  24. Xynzee Says:

    I think Krugman had a pretty good synopsis over the weekend.
    He thinks the end game is to consolidate power.

    Dave D hit it with the privatised profit.

    One of the things that should worry the EU leaders is the rise of Golden Dawn. Last thing they want is boil full of fascists sitting on their arse.

  25. Anon Says:

    @Talisker: that changes everything, I guess. Thanks for the data!

  26. Mo Says:

    Michael Pettis has been my go-to genius for the best analysis of this problem, as he positions it in the context of the finance flow in the global economy, not just as a problem of German versus Greece…Spain…Portugal…Italy…etc.

    He, like Krugman and B. Eichengreen, demonstrates that it's not a moral issue of spendthrift Greek pensioners versus thrifty German housewives.

    Plus, it's always easy to blame debtors – Coolidge's "They hired the money, didn't they?" – and conveniently fail to recognize the failures of foolish or ignorant lenders greedy for easy gains. Pettis points out that balance sheet finance is a good tool for managing debt so that both creditors as well as debtors can prevent disaster, or at least salvage the most from the clusterfuck of the moment.

    A typically chewy read

    What kind of 2×4 is it going to take to get the political mule's attention?

  27. Skipper Says:

    Another guy worth following is Michael Hudson.mhe's writren extensively on this and in fact is speaking with the ECB about it. He had a good piece today on Counterpunch.

    http://www.counterpunch.org/2015/07/01/wall-street-and-the-greek-financial-crisis/

  28. Mo Says:

    ICYMI – Barry Eichengreen:

    It's the politics, stupid

  29. Mo Says:

    And I meant to add – good one, Skipper. Nice explanation of just what a pack of vampires the ECB is.

  30. geoff Says:

    @Everybody — proud to associate with you today! All good, knowledgeable comments. I have been following this fairly closely, and still have a hard time understanding what's really going on.

    The more left-leaning of us I think lean toward Skipper / Palast's position: the EU is a non-democratic creation of international capital designed to suck money out of the periphery and transfer it to the center, which is a figleaf for the big transnational banks and various financial interests.

    Per this article, Greece was assisted in fudging its books for its application to the EU by none other than the vampire squid itself, Goldman Sachs:
    http://www.counterpunch.org/2015/07/01/wall-street-and-the-greek-financial-crisis/ .

    When I'm feeling less paranoid, I realize that fairly conventional economics told us the monetary union would be unworkable: Germany cannot run permanent trade surpluses with other EU members without their economies going into deficit. It's pretty straightforward economic accounting as Krugman and Dean Baker can explain much better than I. (Because they understand it much better than I do!)

    So what's next? Well, ask me after the referendum. But I feel like the main tension here is between a) the desire of Germany to smack down any resistance to more and more austerity (There Is No Alternative) and make an example of the Greeks to the Spanish and the Portuguese and the Italians (for starters!) vs. b) the inability of the Greek government to pay short of selling off the whole country (Syriza says they will not do this) despite the apparent desire of the Greek people to stay in the EU vs. c) the possibility of a Greek default (which the Troika could possibly avoid with writedowns of Greek debt but don't want to do because see a)) which could result in anything from the dissolution of the EU to being the Lehman moment leading to a new global financial crash.

    Assume you econ nerds here are familiar with these, but my go to news sources on the Greek crisis are http://www.theautomaticearth.com/ and http://www.nakedcapitalism.com/ .

  31. J Banks Says:

    Having ignored the lesson they should have learned from Argentina's default, the neo-liberal market true believers decided that failure is someone else's problem.

  32. bobbyp Says:

    I second Geoff. Good discussion. My additions:

    1. Dean Baker points out that Greek, though "profligate" was not "that" profligate.
    2. Baker also points out that there is nothing that would prevent Greece from continuing to use the Euro as a currency (much like Zimbabwe uses the dollar). See his blog "Beat The Press" for details.
    3. It strikes me that with their shipping and their tourism they have very good generators of foreign currencies.

    You should be proud of your commenters, ed! (Mark excepted :)

  33. Dookie Says:

    Let's keep in mind…austerity is NOT what got Greece into this situation in the first place. This has been decades in the making. Austerity may not have worked as a solution to the many problems in Greece, but that kind of depends on what problems you are trying to solve. If you assume the problem the EU was trying to solve with austerity was how to make Greeks happy while their citizens foot the bill, well, you're not on the right track there.

    The problem of course is overspending. Debt to GDP of what, well over 100% since 2006…reaching almost 180%…that is the problem. Austerity did not cause that.

    I could go on here…about how the US is on a similar track…but what's the point…really?

  34. Rich Says:

    Greece can use the Euro all it wants just as several Latin American countries use the dollar or peg a local currency to it. they basically lose their tie to the central bank, not a currency. Austerity has crippled the country and Germany just wants more of it. they've already endured a lot in Greece and although this is step into the unknown, it doesn't have the same stakes or fear that it would have had five years ago.

  35. bobbyp Says:

    "I realize that fairly conventional economics told us the monetary union would be unworkable: Germany cannot run permanent trade surpluses with other EU members without their economies going into deficit."

    Yes, this is the crux of the matter. The only way to make up such deficits is (a.) borrowing; or (b.) a trade surplus with the rest of the world. However, a strong euro inhibits that path.

    As to a guess on the outcome, it seems it comes to this: Who will blink first?

  36. bobbyp Says:

    I could go on here…about how the US is on a similar track…

    You might, but you would be utterly wrong.

  37. quixote Says:

    I'm with most others here, trying to guess what's going on. The way I've framed it to myself, as I guess along, is that it's a rather parallel situation to the US subprime crisis. The same overeager lenders looking for sky-high returns. Sky-high because presumably these are risky loans. But nudge-nudge, wink-wink the government will step in if anything goes wrong, even though they're not officially government-guaranteed mortgages/European-guaranteed debt. Also the same hopefuls at the bottom, taking the money like there's no tomorrow because if somebody's shoving it at you, why the hell not?

    Also the same attempt to blame bad lower-class mortgagees / lazy or old Greeks for machinations happening way higher up than that.

    On a different point, the thing with the Greek pensions is actually not what it seems. Greece doesn't have the same level of social safety net as the rest of Europe. (Don't know if it's as bad as US.) They make up for that somewhat by funneling money to pensioners who then sometimes provide help to their extended families.

    The Big Boyz among the Europeans have wanted them to reform their whole safety net to be more in line with the rest of Europe. That's actually where the "pension reform" demand fits in, if I understood it right. Syriza was in favor of that when they were the opposition in 2011. Now? Not so much for some reason.

    And apparently the reason the Big Boyz aren't impressed with offers to up taxes on the wealthy is that the Greek government doesn't do anywhere near enough to collect taxes from the wealthy. So raising taxes and saying that's where you'll get the money to pay European debt strikes the staid members as a shell game. Which, maybe, it is. Or maybe not.

    As they say on Faceblot: it's complicated.

  38. Dave Dell Says:

    Right you are, Key Ho Tay. I've heard/read stories of the abysmal Greek tax system. I've even been led to believe that doctors in Greece only deal in cash.

  39. schmitt trigger Says:

    I read somewhere among the dozens and dozens of articles now flying the web, that compared Germany's failed 1914 and 1939 attempts to control Europe to the 2014 achievement.

    That….Without firing a shot.

    But as was proved then, early victories do not mean that it will end up well.

  40. Alex SL Says:

    I second what Earl wrote right at the beginning.

    Not sure if stupid or evil but leaning towards the former. I think many Germans, including influential ones like the finance minister, really believe (a) that austerity works to get out of any crisis, (b) that all countries in the world doing austerity at the same time to become more 'competitive' wouldn't be a zero sum game, (c) that all countries in the world can aim for a trade surplus at the same time if they only tried, and (d) that low inflation is the right answer under any and all economic conditions, even if you really need to inflate away a debt overhang. Because otherwise Weimar hyperinflation 10,000%!!!!1!1!!

    I am allowed to say that, I'm a German myself.

  41. Tim H. Says:

    Not so big a surprise, when the powerful go with their gut, we end up with a lot of shit…

  42. geoff Says:

    From today's Independent:

    "A Jubilee study has shown that since 2010, the IMF, European governments and the European Central Bank has lent €252 billion to Greece. Over the same period, €232.9 billion has been spent on debt payments, bailing out Greek banks and paying ‘sweeteners’ to speculators to get them to accept the 2012 debt restructuring. This means less than 10% of the money has been used for anything else.

    Back in 2010, nearly all government debt was owed to private entities such as banks. Today 78 per cent is owed to the public sector, primarily people in other Eurozone countries, but also throughout the world through the IMF’s loans."

    In other words, private debt (i.e. debt owed to banks) has been made public. Banks make bad loans, their government(s) bail them out, and then the citizens are on the hook for repayment. Nice work if you can get it.

    http://www.independent.co.uk/news/business/news/greece-crisis-how-has-greece-spent-its-money-and-who-does-it-still-owe-2428bn-to-10355847.html?icn=puff-1

  43. Katydid Says:

    On the national news last night, they were sure quick to blame the "greedy" pensioners for Greece's debt problem. It sounded an awful lot like the American right-wingnuts blaming food stamps (roughly a dollar per meal per person) for Bush's recession.

  44. Mo Says:

    VOX haters, avert your eyes:

    Greece's debt isn't about money

    Greece's debts really are unsustainable. This is just basically not a debatable point. The reason it's not genuinely shocking to hear that Merkel privately admitted this is that nobody really disputes it. Greece's creditors know that they aren't going to be paid back. But they want the debt to stay on the books anyway.

    Why?

    Well because as long as the debt is on the books, Greece needs to keep asking for permission to roll the debt over and failure to pay debts can be used as a political trigger for forcing Greece out of the Eurozone.

    That's what "everyone knows" about the situation, and it's what "everyone" knew last week, last month, and last year. European Union bureaucrats will tell you, the Greek government is well-aware, and it's all-in-all not exactly a big secret.

    [However] the stories that are being told to the population not just of Greece but also of Finland, Germany, Austria, the Netherlands, etc. are not that Greece's debt is a symbolic and legal token of political control whose purpose is to allow Greece to be governed by experts at the European Central Bank rather than elected officials in Athens. They are being told that Greece's debt represents real monetary value that is owed to Northern Europe's taxpayers, and that whether or not they get their money back is a huge point of contention.

    http://www.vox.com/2015/7/2/8883307/merkel-nsa-wikileaks-greek-crisis

    The last sentence is truly the money quote, pun unintentional. The fairy-money quality of debt is something that most of us don't get.

  45. Mo Says:

    OK, last post, I swear:

    Getting down to exactly how Grexit would likely be implemented:

    http://blogs.piie.com/realtime/?p=5073

  46. MS Says:

    German government has pretty much put its foot down as of today: Greece must overthrow its elected government or Germany will wreck the place. Nation-building is rarely so blunt.

    This worked really well in 1939-1945 that apparently Germany is going to try it again. I fear for the future of the world if Germany succeeds though. If Germany+Goldman Sachs get it into their heads that any time a non-right-wing government is elected, they can and should be toppled, there's no end in sight.

  47. Xynzee Says:

    @MS: sounds like the U.S. govt policy, without the CIA killing people ;)

  48. Phil Koop Says:

    Here is an excellent summary by Joe Gagnon of the risks and potential rewards to Greece of refusing the terms of the troika and going off the euro: http://blogs.piie.com/realtime/?p=5073.

    I have to take issue with your premises, though: on paper, there is no reason why default should cause euro exit. In fact, there is no paper mechanism by which euro exit is possible for any member. It is the discretion the ECB has to cease funding the shifting of Greek money abroad that makes it possible to effectively push Greece off the euro. There is no connection from this to Greece's government debt.

  49. Davis X. Machina Says:

    Talisker

    You can be a military dictatorship or an EU member, but not both.

    Don't tell that to Hungary…

  50. Chicagojon Says:

    Yeah this thread. I love me this site.

    I have lots of thoughts but none of them very educated — just my own version of common sense and speculation.

    One thing that I find fascinating in this is China's role. They have the ability to buy up all of Greece's debt or buy up all of Greece (they already have multiple ports). So far they're publicly saying that they'd rather pay in Euros, but I'm not convinced that it wouldn't be cheaper to pay in Drachmas. They're smarter than I am which makes me wonder why they would want Greece to stay in the EU.

  51. Barry Says:

    Talisker : "The Germans, then as now, were well known for fiscal rectitude. "

    IIRC, they were violating these rules in the 1990's, to integrate the former East Germany.

    Krugman has covered this repeatedly. Greece was in pretty good shape in2010; austerity has vastly increased the debt:GDP ratio.

    In addition, Germany has declared the existing Greek plan to be unacceptable, because it increases corporate taxes. This tells me that Germany's goal is total control of the Greek government.

  52. Ursula Says:

    Fascinating stuff, but I tend to get existentialist with this – ignore the hell out of me if you want. At the end of the day, is anyone going to starve to death because Greece misses an arbitraty date to give (as Mo explains, mostly symbolic) money to someone else? Will it cease to exist as a country and land mass? Will their homes fall apart? Will their doctors forget how the human body works?

    Maybe in the long term, and maybe a liitle in the short term, I have no idea. Usually, these things come and go with minor adjustments and life goes on, but maybe not this time. The loan shark analogy is really apt, because unless actual, physical pain is a potential consequence, what's the point of changing?

  53. cromartie Says:

    It's like saying you want to play hockey, but you don't want to be bumped into by other players.

    I don't see why that's not possible. It works for Sidney Crosby.

  54. Xynzee Says:

    This will get interesting.
    With the lights shining what will they do next?

    http://www.huffingtonpost.com/2015/07/12/thisisacoup_n_7781736.html