Italy--STAY or GO

This is a picture of one of the Cinque Terre towns--I've forgotten which. I was there in 2017.

One of the enduring debates in European politics is whether Italy will stay or leave the Eurozone and perhaps the EU. I don't think Italy is likely to leave. Nor do I think that most of Italy's ecoomic problems have much to do with the Eurozone or the EU. But, many disagree with me. Here are some examples: 

1. Samantha Fund

https://samantha.fund/why-its-time-for-italy-to-leave-the-euro/

2.  Schroders

https://www.schroders.com/en/za/intermediary/insights/economics/are-italys-days-in-the-eurozone-numbered/

I don't agree with either assessment, but they have great slides.

THE HISTORY OF ITALY"S PROBLEMS

[I wrote this in 2016--not a lot has changed. I will update 2016-2020 below after this long annotated bibliography.]

Perhaps the bleakest assessment of Italy's immediate prospects circa 2016/2017 comes from Ambrose Evans Pritchard (an arch Brexiteer and Europhobe). 

AEP fears the ending of QE (ECB bond buying, in short) more than the referendum results.  The key bit of his argument is here:

"The global reflation shock since the election of Donald Trump is bringing matters to a head faster than anybody could have imagined weeks ago. Italian borrowing costs have risen in lockstep with US Treasury yields, even though Italy is not reflating at all and is certainly not about to enjoy a fiscal shot in the arm.

Italy is in a sense the biggest casualty of the Trump effect and the tornado of imported monetary tightening. Its banks own €400bn of Italian government bonds and these are suddenly worth less. Some paper losses must be marked to market, further eroding core capital ratios.

It is our old friend the 'doom loop'. The banking crisis is driving up sovereign bond yields, and higher yields are in turn driving the banks into deeper trouble.

The painful saga of Italy is by now well-known. The country is stuck in a depressionary debt trap. Trend growth is below zero. GDP is still 9pc below its pre-Lehman peak. Industrial output is back to levels reached thirty-five years ago.

The contours are worse than the 1930s. It is a lost decade turning into a second lost decade. No large developed country in modern times has ever suffered such a fate.

Italy is the victim of a vicious cycle of labour hysteresis as economic stagnation and weak productivity reinforce each other. Its exchange rate is overvalued by 20-30pc against Germany.

How easily we forget that Italy used to run a big trade surplus with Germany in the old days of the lira, and its real growth rate tracked German growth almost exactly with the help of devaluations." 

Note: not all economists agree with the claim that Italy can recover with "the help of devaluations." See the exchange between Martin Sandbu (an elasticity pessimist) and Paul Krugman (devaluation will solve the problem).

 In order to understand the broader historical context that led to Renzi, it is necessary to understand the failures of Berlusconi and the German concern about Italy under Berlusconi's misrule.

The following series of articles in Der Spiegel from 2011 are especially useful here:

The Sweet Poison of Berlusconi: Italy's Downward Spiral Accelerates  and here and here and here and here and here

Perry Anderson, who is both a Marxist and a misery-guts, has written a couple of very long but perceptive analyses of Italian politics over the last 20 years.

Perry Anderson, The Italian Disaster LRB (2014)

Perry Anderson, Land Without Prejudice LRB (2002)

Some long and short news documentaries of the key political figures in recent Italian Politics

Matteo Renzi (2014)--John Mauldin, "When Hope is a Strategy"--a very interesting discussion of Italy's economic problems with lots of charts and an assessment of Renzi's ability to solve these problems.

Beppe Grillo (2008)

Beppe Grillo (2010)

For a bunch of scholarly articles on Grillo's M5S, see the Special Issue of Contemporary Italian Politics Volume 6 2015 (available online from the library); see especially Paolo Natale, "The Birth Early History and Explosive Growth of M5S"

Rachel Donadio Talk on Italy 2013

Berlusconi (BBC Documentary 2010) (see all parts here(2) and here(3) and here(4) and here(5) and here(6) and here(7)

Berlusconi (BBC DOCUMENTARY 2010)

The Last Days Of Silvio Berlusconi (2011)

Silvia Berlusconi and the Mafia (in French)

Girlfriend in a Coma (Bill Emmott--former ed. of The Economist. I have the DVD if anyone wants to watch the whole thing.)

Italy's Productivity Blues

Francesco Giavazzi Lecture (2013)--Italy's Future--Reform or Decline

--Giavazzi makes the interesting observation that Italy's output in 08/09 fell more than in other countries which experienced (unlike Italy) a housing bubble and a bank crisis (Spain, for example); and then recovered at half their rate in 10/11. He notes that no one has adequately explained this puzzle.

--Giavazzi offers four explanations for why Italy has stopped growing:

(i) The Size/Inefficiency of the Public Sector;

(ii) The Euro (unit labour costs rocket compared to Germany)--

(iii) Firms are too small, too family-run, and drawn to protected service sector.

(iv) Failed Transition from Imitation to Innovation (why is there no Apple and Facebook?)

In short, Italy suffers from too much economic activity in the unproductive sector and not enough in the productive sector.

Politics blocks any effective transition from the former to the latter.

Luigi Zingales Lecture on Italy's Economic Problems--slides here

Zingales' Conclusions:

1. The Italian disease appears to be an extreme form of a European disease:

2. This disease appears to be linked to the lack of meritocracy and professional performance-based management.

3. Inability to take full advantage of the ICT (basically the internet and computers) revolution–

4. We still need to explain why these practices are so rare in Italy and Southern Europe

5. Suppose that there is some institutional factor in Southern Europe that makes difficult to keep up with technological change.

6. Since Japan and the United States could never have maintained a fixed exchange rate from 1950 to 1990? [Why? Because Japanese growth rates were at least twice those of the US in that period], then it is no surprise that Italy could not live in a common Eurozone with faster growing Northern European countries.

7. Italy cannot survive in the Euro as presently constituted.


Two comments on Zingales' talk:

1. Even if he is right, the talk begs the question why Italy was never able to implement a more meritocratic political and administrative culture.  Why did Italy fail where France and Germany succeeded? To answer this question, one needs to look more deeply into Italian history and the nature of the Italian family and localism.

2.  So far as the Euro is concerned, there are three options:

(i) Fix it through centralization--turn the EU into a Superstate, a United States of Europe (my own preference);

(ii) Muddle-through--(although this presumes that the Germans will be willing to support more bond-buying);

(iii) Break it up--whether into two groups (NEURO/SEURO) or one big Northern group and the rest (NEURO and the rest) or a Europe of national currencies.

Since (i) is not likely to happen; the choice is really between (ii) and (iii)--my preference would be (iii) over (ii), which condemns Italy (and other Southern European countries) to years of economic misery and unemployment.

The trouble with (iii), however, is that it is far from clear whether devaluation will work--here we are back to the elasticity pessimist thesis discussed earlier--see Maria de Merzis, The Italian Lira for more on this.

The Social and Economic Background to the Crisis:


Italy has Horrible Demographics

Martin Sandbu, Europe's Orphan and his Critics.

One of the few people to think that there is not much structurally/institutionally wrong with the Eurozone, the problems are all bad policies, is Martin Sandbu, who wrote an interesting book last year called Europe's Orphan.  if you have time and are writing on the EZ crisis, I suggest you buy it on Kindle.

I have my misgivings about some of his argument. But it supplies a useful counter-argument to some of the OCT people (see the citations earlier on the blog entry for  Eurozone Crisis.) Indeed. it is well-worth juxtaposing the arguments of Sandbu, on one side, and Krugman and Stiglitz, on the other.


At the time the book came out, I wrote this:

"Been reading Martin Sandbu's book on the Euro Crisis--it's the best thing I've read on the topic, even if it begs more questions than it answers.

The thesis of the book: The Euro Crisis was not a consequence of structural problems with the Euro, but a consequence of (i) failure to allow Ireland and the Southern European countries--including Italy--to default; (ii) the misallocation of capital by debtor national governments (esp. Cyprus, Greece, Ireland, Portugal, and Spain) in the 2000s; and (iii) an unwarranted fixation on austerity.

Unlike most commentators--"austerity-obsessives"--he focuses less on (iii), less on reckless lenders, less on Germany, and more on (ii).

He dismisses (i)--somewhat too easily in my view--by invoking, what he terms, "Lehman Syndrome"--the exaggerated fear that defaults would blowup the European and global finance system.

The trouble with this thesis is that he has nothing to say in explanation of why the Southern European countries wasted all the low-interest money flowing into their economies in the 2000s on public-sector wages and housing booms. (He contrasts the Southern European countries here with Norway, which ran deficits in the 1990s to construct a globally-competitive energy industry.)

PS. I haven't yet finished the book; this is very much a comment (as much to myself) in media res.

{{In some respects, I was unfair in saying he didn't know anything about Southern European countries. he has written a couple of useful pieces on Italy that I link to in the Niall Ferguson blogpost.}}

There are good discussions of Sandbu's argument by the following:

Manos Matsanganis, Can Europe Have Both Monetary Union and Democracy? (Greek Perspective)

Patrick Honohan (Irish Perspective)

Wolfgang Streeck review (LRB)

Sandbu Public Lecture at LSE

Paul de Grauwe review (FT)

Paul de Grauwe Review:

Books that attack the con­ventional wisdom are refreshing. They force us to rethink. That is what Martin Sandbu’s Europe’s Orphan does — and what makes it stand out in the increasingly crowded field of eurocrisis analysis.

The main argument made by Sandbu, an economics commentator at the Financial Times, can be summarised as follows. The eurozone sovereign debt crisis that erupted in 2010 has little to do with the alleged design failures of monetary union. This crisis, rather, is the outcome of bad macroeconomic policies that were wholly avoidable. In particular, the abhorrence shown by the major policymakers (the European Central Bank, the European Commission, and German, French and other government leaders) towards debt restructuring, both of banks and sovereigns, is at the core of the crisis.

The failure to write down debts condemned these policymakers to choose the wrong policies — chief among them excessive fiscal austerity and monetary tightening. This approach produced a new recession in 2011-12, created misery for millions of unemployed people and only increased the debt burdens it was supposed to bring down.

Since it is not the euro but bad policy that is responsible for the crisis, it follows that no deep institutional changes are necessary to sustain the euro in the long run. In particular, there is no need for a fiscal and political union. What is needed are better macroeconomic policies, which can best be achieved by returning responsibility for fiscal policies to national governments while unshackling these governments from ill-advised rules such as the 2012 fiscal compact. Of course, some co-ordination of national fiscal policies is desirable. But the way to bring this about is through voluntary agreement between national fiscal policymakers.
There is much to agree with in this analysis. It is clear that the generalised fiscal austerity imposed on eurozone countries has made this crisis more intense and has led to a double-dip recession. In addition, ill-advised macroeconomic policies have created disunity by pitting creditor and debtor nations against one another. There can also be no doubt that, as Sandbu argues, the intrusive interventions by the ECB and the European Commission in fiscal programmes imposed on the debtor nations have been highly undemocratic, undermining the legitimacy of the monetary union.
But there is also a lot to disagree with in Europe’s Orphan. Let me focus on two points. First, there is the claim made by Sandbu that the sovereign debt crisis would have erupted with or without the euro: countries that accumulated too much private or public debt would at some point have experienced a bust and been forced to adjust. But I would also argue that the absence of the exchange rate instrument in the eurozone made this adjustment more difficult. It led to the need to apply deflationary demand policies in many eurozone countries, thereby creating a deflationary bias in the system as a whole — the result of which has been stagnation since 2008. This is not only the result of bad policies; it also follows from a systemic feature that makes the eurozone resemble the gold standard mechanism of adjusting to balance-of-payments crises.
Second, there is the claim that the eurozone does not need a fiscal and political union. I have my doubts. Surely, one of the things we have learnt about the eurozone is that when financial markets lose faith in one or more governments (and there will often be reason enough to do so), “sudden stops” in capital flows occur, leading to massive movements towards safe havens in the same currency area. This forces those distrusted by the markets into instant austerity and deflation. It is not enough to hope that, in the future, enlightened governments will prevent such a situation from arising. The institutional set-up of the eurozone makes it almost inevitable that this will happen again.
Only through a mutualisation of eurozone debt that introduces much greater risk-sharing — together with a willingness on the part of the ECB to step in at times of crisis — can this problem be tackled. Sandbu recognises the potential of debt mutualisation but argues that it is not really needed. I disagree. Insurance mechanisms are necessary and they can only be guaranteed in the framework of a political union.
Like Sandbu, I have no illusions; the willingness to move forward into a political union is extremely weak. And surely, trying to force such a unification from the top down would be undemocratic. The conclusion drawn by Sandbu is that this should not worry us: the eurozone can function without fiscal and political union. My conclusion is that this unwillingness will continue to make the eurozone fragile.

Whatever disagreements one may have, Europe’s Orphan is a stimulating and important book. It is stimulating because it forces us to question what many in Brussels and Frankfurt consider to be self-evident. It is important because such rethinking will surely lead to new insights.

Mark Harrison review

Sandbu's Review of Varoufaxis book is interesting too: the gist of his argument is here:

Yanis Varoufakis burst on to the British public consciousness in January last year when, as Greek finance minister-in-waiting, he quoted Dylan Thomas in a radio interview with the BBC.

By putting their trust in his radical leftwing party Syriza, Varoufakis said, the Greek people had resolved “not to go gentle into that good night, to rage against the dying of the light”. To many, it meant austerity-weary Europeans could now dare to hope for change. In retrospect, the quote suggests something more tragic. Thomas’s poem is not one of hope; it makes no suggestion that raging will do anything to delay the dying of the light. It is not about how you take back control of your destiny but how you suffer the inevitable without submitting to it.
Much the same can be said of Varoufakis’s five-month tenure as Greece’s finance minister. His intellectual rebellion (in many ways justified) against the eurozone’s consensus view of what needed to be done with his country often seemed an end in itself rather than a policy in the service of changing the world for the better.

It is with this in mind that I read Varoufakis’s new book. Readers may be disappointed to learn that there are few revelations about his time in office. Varoufakis had written most of the book before he became finance minister and has merely added a few anecdotes to illustrate his broader argument. The book is nonetheless highly readable. It is also important, outlining a perspective on global economics that influences policy thinking in broader circles than the radical left.
Varoufakis has spent much of his life as an academic economist, and his book is an opinionated history of the post-second-world-war international monetary system. It starts with the Nixon Shock of 1971, when the US president destroyed a pillar of the postwar Bretton Woods fixed exchange rate system by ending the dollar’s convertibility into gold. This marked the end of sustained global currency co-operation and ushered in Europe’s decades-long quest for a stable monetary system of its own.
In Varoufakis’s telling, the Nixon Shock foretold the problems that would bedevil the euro. Tying different countries’ exchange rates to one another, he writes, is bound to fail in the absence of a “political surplus recycling mechanism” — that is, policies to lend the net export earnings of surplus economies to those who buy their exports.
In good times, private markets take care of this. Banks channel the net exporters’ surplus earnings back to net importers in order to finance those very same trade imbalances. But when growth slows, these “fair-weather recyclers” freeze up, leaving deficit countries a choice between devaluing or suffering a harsh recession in order to close their newly unaffordable deficits.
Varoufakis sees not only Bretton Woods, but the failed European monetary systems of the 1980s and 1990s, and eventually the euro, as the all-too-predictable casualties of these economic laws. Or rather, of leaders either ignorant of the laws or maliciously intent on using them to force recession on weaker countries. It is not always clear which: Varoufakis generously attributes Machiavellian genius to some (Germans and Americans) and bottomless ignorance to others (the French and many others). That juxtaposition, so common in conspiracy theories, is apt to raise eyebrows among impartial readers.
The only fair way to maintain exchange-rate pegs, Varoufakis argues, is for governments to substitute for the fair-weather recyclers, and politically administer resource transfers to deficit countries (“surplus recycling”) to avoid the abrupt squeezing of trade.

This, the technically couched call for stabilisation loans, is where it all comes together: the monetary history; the critique of the euro; the implicit vindication of Varoufakis’s own time in office; and, of course, the rage quivering in the book from the start. (The title paraphrases the dialogue between the Athenians and the vanquished Melians in Thucydides’ History of the Peloponnesian War.)
Varoufakis’s thesis has some deep, but deeply instructive, problems. It does not work too well for Bretton Woods. The US was a political surplus recycler, its postwar trade surpluses financed by its foreign aid. The system didn’t collapse because Washington (or banks) stopped recycling surpluses but because the surpluses vanished. An expansive US monetary policy led dollars to accumulate abroad, and soon enough foreign central banks and private speculators preferred Washington’s gold over its paper promises. Once greenbacks were being exchanged for gold in earnest, the end of convertibility was a certainty. Europeans then had no desire to keep their money supplies chained to a dollar which, freed from the discipline of gold, would be managed to serve Washington’s domestic objectives.
The euro experience is different. The large post-2000 trade surpluses in Germany and other core economies, and the corresponding deficits in the periphery, did indeed cause the crisis. Yet it’s hard to blame the depth of the eurozone crisis on the absence of a political surplus recycling mechanism. Such a mechanism was after all precisely what the eurozone instituted through its various rescue funds. Varoufakis is right to criticise the policies that accompanied them, including excessive fiscal austerity and overly tight monetary policy. But the surplus recycling did happen. It was everything else that was badly done, in particular the policy on how to handle outstanding cross-border debts.
Varoufakis writes: “Debt was never Europe’s problem. It was a symptom of an awful institutional design.” But of course debt was a problem. The alternative to the bailouts Varoufakis rightly slams was to restructure unsustainable debts, which would have softened the slump and hastened the return of the private sector surplus recyclers.
Varoufakis himself says as much. He clearly, and correctly, thinks Greece should have defaulted on its sovereign debt and Ireland should have restructured its banks in 2010. But if alternative policies did in fact exist, which leaders could have pursued but chose not to, then a fatalistic monetary theory that blames everything on the euro’s design serves, paradoxically, to exonerate the mistakes of those leaders. That may not be his intention, but Varoufakis glosses over why national governments repeatedly declined to restructure debt before it was refinanced by the rescue funds. Above all he does not mention why he, as finance minister, did not restructure Greece’s banks early in his tenure, so as to undo their dependence on the European Central Bank, which last summer forced Athens to accept a third bailout by shutting down banking liquidity. This very partial focus is why Varoufakis’s literary references are so telling. The rage expressed by Thomas and Thucydides’ Melians is not a constructive anger but a cover for helplessness. Neither death nor the Athenians are moved by their rage. Nor, I suspect, will eurozone decision makers be moved by Varoufakis’s.
And The Weak Suffer What They Must?: Europe, Austerity and the Great Threat to Global Stability, by Yanis Varoufakis, Bodley Head, RRP£16.99/Nation Books, RRP$27.99, 320 pages

The Eurozone Crisis (PART FOUR)--AUSTERITY

One of the big debates unleashed by the EZC involved the policy of "austerity," which was imposed by the Troika on Greece and elsewhere.

The first thing to notice is that the word Austerity is used in multiple different ways. Unfortunately, the author or journalist or blogger often doesn't bother telling you which sense of the term they have in mind. (For an excellent book on the topic, see Mark Blyth, Austerity: The History of a Dangerous Idea)

I've come up with 6 different uses/definitions, which I've distinguished with names.

1. Consolidation-austerity.

Fiscal consolidation (or fiscal adjustment, as it is also sometimes called) involves the effort to lower a budget deficit by way of tax increases or public expenditure cuts. The expenditure-cut component of that fiscal consolidation might be referred to as "consolidation-austerity."

No economist--certainly no Keynesian economist--can be against consolidation-austerity, since it forms part of a well-timed counter-cyclical fiscal policy. 

As John Milton Keynes himself wrote (1937): “The boom, not the slump, is the right time for austerity at the Treasury.”

      Disagreements arise, however, over:

           (a) timing;
           (b) amount;
           (c) composition (tax increases v spending-cuts); and/or
           (d) the duration.

These disagreements are fed, at least in part, by the fact that fiscal consolidation is not the only way of removing a budgetary deficit. States can, in favourable circumstances, remove a deficit through economic growth and/or borrowing and/or devaluing their way out of the problem.

2. Perverse-austerity

These involve fiscal adjustment programs that fail in one or more of the dimensions (a-d) above. Most critics of austerity use the term in this pejorative sense, even though they might disagree on why austerity is an inappropriate or perverse policy.

One difficulty with any use of austerity in this perverse sense of the term is that economists disagree on the measure of austerity. Measurements might include:

(i) annual changes in public sector expenditure;
(ii) annual changes in government expenditure as a percentage of GDP; or
(iii) annual changes in the cyclically-adjusted primary balance.

(See here the different points of view of the critics of the austerity policies of the Troika like Paul Krugman and defenders like Bershidsky (and here) and Krugman; for a more technical debate, see the work of defenders of "fiscal contractionary growth" like Alesina and Ardagna (1998, 2013) and their critics.)

Because of these measurement disagreements, people can't always agree when a policy of austerity begins and ends. Thus the former UK Chancellor of Exchequer George Osborne announced an austerity policy in 2010, which, depending on how it is measured, eased up or even ended in 2013.

Reading the Alesina literature on fiscal contractionary growth, I sometimes think that the debate between him and his critics turns entirely on the question of relevant time-period and lags. It is hard to dispute the claim of the critics who believe that a fiscal contraction causes a short-term slump; the difficulty arises in assessing the subsequent medium or long-term growth (if there is any). Was that caused by fiscal contraction or by something else?

3. Outcome-austerity

Both consolidation-austerity and perverse-austerity refer to a process involving (typically) cuts in public expenditure. Some commentators (Simon Wren-Lewis, for example) use the term to describe the economically sub-optimal outcome (or state of affairs) that *necessarily* results from perverse-austerity (i.e. an austerity policy that is mistimed, too large, and/or badly designed) and *possibly* results from fiscal consolidation.

As SWL puts it: "Think of fiscal consolidation as an action and austerity as a state. Logically fiscal consolidation may or may not lead to austerity" ("Defining Austerity"). Elsewhere he writes: "Austerity may be defined as a large fiscal contraction that causes a substantial increase in unemployment (Dublin paper--later version here--praised by Krugman here)" In this latter sense--a fiscal consolidation gone wrong, as it were--this contraction (or tightening), would count as (in my terminology) "perverse-austerity."

Again issues of measurement complicate the attribution of the term austerity in this outcome sense. In its simplest form, outcome-austerity exists when high unemployment exists; in a more sophisticated form, outcome-austerity exists when an "output-gap" exists.

Thus Britain currently (early 2016) has a 5.1% unemployment rate, the lowest in 10 years--and unlike the US, a labour participation rate that is higher than pre-crisis--but Britain remains for Wren-Lewis and others in a state of austerity, because Britain has an output gap.

(See here Simon Wren-Lewis, "Defining Austerity," "The Austerity Con;" for the opposing UK Treasury View, see Nicholas Macpherson's recent Mansion House speech ("Keynes' General Theory at 80")and his earlier review of William Keegan's book on Osborne.)

Strictly speaking, Britain doesn't actually fit SWL's own definition of outcome austerity, simply because the British economy hasn't seen "a substantial increase in unemployment." (To be more precise: UK unemployment increased substantially from mid 2008 until last quarter 2012 and then decreased substantially to a level below pre-crisis levels.) See this table:

4. Consumption-austerity

Historically, some states--Britain in the 1940s and 1950s, for example--have repressed household consumption to divert resources elsewhere in the economy. (See David Kynaston's famous book Austerity Britain 1945-1951.)

5. Classical austerity

This describes the general presumption in favour of the markets and against the state. This line of thought traces back (allegedly) to Locke. It is present, albeit in a more tempered form, in the classical economists like Smith, Hume, Ricardo and Mill.

6. Neo-liberal austerity

This describes a general antipathy (usually on the part of others) to public expenditure and the social-democratic state.

It is worth noting--although no one does--that being anti-austerity is not exclusively a left-wing or social democratic position. In the early-2000s, the Bush/Cheney Administration announced that "deficits don't matter" and blew out the budget on useless wars.

Other Useful Papers:

Sebastian Dellepiane and Niamh Hardiman, The New Politics of Austerity: Fiscal Responses to Crisis in Ireland and Spain

Austerity, Non-Austerity, and the Eurozone Crisis Review of Mark Blyth

Austerity, Non-Austerity, and the Eurozone Crisis

Review of Mark Blyth

Glyn Morgan

Maxwell School, Syracuse University

Mark Blyth’s book on Austerity shows quite convincingly that sharp cuts in government expenditure haven’t solved the problems of the Eurozone. If anything, his argument is stronger now than when he first wrote this important and deservedly much-praised book more than five years ago.  The Eurozone Crisis certainly isn’t over. Greece is on the verge of another bailout; Italy totters; and the IMF, in an embarrassing mea culpa, now admits it got its sums wrong.  Blyth’s book actually defends two theses: one, that austerity doesn’t work; and two, that austerity isn’t fair. The ostensible unfairness of austerity policies lies in the fact that they hit hardest those who rely on government programs—the poor, pensioners, and the unhealthy.  If we care, as we should, about the least well-off, then we can scarcely support policies that target such people.

This brief review focuses exclusively on Blyth’s account of the Eurozone Crisis. No one can now plausibly dispute the inefficacy of austerity. The question remains only that of the efficacy of non-austerity. In other words, could a robust counter-cyclical fiscal policy restore economic prosperity to the faltering Eurozone periphery countries? Broadly stated, one can distinguish three answers to this question. First, the view of Mr. Schauble and the Bundesbank who are deeply skeptical of the rejuvenating power of fiscal policy. For them, what matters is business and consumer confidence, which is largely a function of sound public finances and growth-sustaining structural reforms (Weidmann 2015). Those countries incapable of meeting these requirements—Schauble has mentioned Greece—would be better off leaving the European Monetary Union (EMU).  Second, the view of Paul Krugman and others, who favor counter-cyclical policies but remain skeptical of the long-term prospects of the EMU, which they believe was never a viable endeavor (Krugman 1993, 2012). And third, the view of Martin Sandbu and others, who favor countercyclical policies and see nothing fundamentally wrong with the EMU (Sandbu 2015). The difference between the second and third perspectives is important, because on the second view an end to austerity might mean nothing more than a delay of the EMU’s still inevitable crack-up.

On Blyth’s telling of the story, the Eurozone Crisis is essentially a banking crisis exacerbated by a dysfunctional Monetary Union (“a financial doomsday weapon,” as Blyth calls it). Blyth is scathing about the failings of the EMU, which he describes as “a bit mad from the get go…an  exercise in insanity” (p. 77). Nor is he very impressed with the institutional efforts to improve the EMU taken in the last few years. “Europe, he concludes,” is not and still cannot be made into a single economy (p.263).”  Austerity policies, which are hopeless in solving a banking crisis, simply make things worse. They “harm not help” (p.252).

In terms of the three positions noted above, one might interpret Blyth as a defender of the second position. The EMU (with its Fiscal Compact) and austerity fit together, and both are harmful.  It remains unclear, however, what he thinks of the prospects of a reformed EMU (perhaps along the lines advocated by Sandbu) which would allow greater fiscal flexibility.  Given the harshness of his language (“financial doomsday machine”), it would seem that Blyth thinks that any type of  monetary union is unworkable and cannot but deliver the worst of all possible worlds for contemporary Europeans. That line of thought raises the paradoxical prospect that austerity might, if it led to the demise of the EMU, actually be a desirable policy, one that anti-EMU zealots should support. We can now see how austerity has bolstered the fortunes of anti-EMU and anti-EU political parties like Lega Nord, Front National, and Syriza. Perhaps with a bit more austerity, such parties would acquire sufficient power to sweep away for good not merely the EMU but the EU too.

Doubtless, Blyth would resist any suggestion that an EMU-destroying level of austerity would be desirable. The reason why is obvious. The EMU, even in its present deeply-flawed condition, might be replaced by something much worse—a Europe of nation-states governed by amateurs, protectionists and nationalists, for example.  This dismal prospect brings us back to the question posed at the start: what can Europeans expect from non-austerity?  Not much is, I think, the implication of Blyth’s argument. Perhaps non-austerity might delay the Eurozone’s break-up, but—absent fundamental reform in the institutional architecture of the EMU and in the periphery political economies—European unity would be purchased only at the price of permanent North-South transfers and ever-increasing intra-European enmity.

Another way of describing the problems contemporary Europe faces is that its peoples lack a shared conception of fairness. Political theorists interested in issues of transnational justice will find Blyth’s book a useful point of departure. He writes with the passion of a moralist and highlights the unfairness of current austerity policies in the Eurozone and elsewhere. But again to say that austerity is unfair isn’t to say non-austerity is fair. Without offering any solution to the problem here, let it simply be said that the Eurozone Crisis requires some consideration not merely of the claims of those suffering economic privation in, say, Greece, but also the claims of those living in other relatively poor Eurozone countries (Slovakia, for example). No less importantly, non-austerity in Europe immediately raises the tricky question of conditionality. In other words, what structural reforms (if any at all) must European countries accept before they are granted, say, debt relief? It’s partly because conditionality is so hard to justify and even harder to enforce that creditor countries resort to austerity.  Yet if we abandon austerity, does this mean that there will need to be more conditionality?  And doesn’t conditionality entail an insidious form of surveillance? Blyth doesn’t answer these questions. Anyone interested in pursuing them will find Blyth’s great book a useful place to start.

Krugman, Paul, (1993), “Lessons of Massachusetts for EMU” in F. Torres and F. Giavazzi, eds., Adjustment and Growth in the European Monetary Union, Cambridge University Press, New York, pp. 241-261.

Krugman, Paul (2012), “Revenge of the Optimum Currency Area,” New York Times, June 24 (https://krugman.blogs.nytimes.com/2012/06/24/revenge-of-the-optimum-currency-area/?_r=0)

Sandbu, Martin (2015), The European Orphan, Princeton: Princeton University Press.

Weidman, Jens (2015), “A Sound Footing for Monetary Union: Karl Otto Pohl Lecture,” Deutsches Bundesbank, March 12. (http://www.bundesbank.de/Redaktion/EN/Reden/2015/2015_12_03_weidmann.html#doc356864bodyText1)      

The Eurozone Crisis--GREECE--Annnotated Bibliography

The Eurozone Crisis--GREECE--Annnotated Bibliography  

The Eurozone Crisis began on October 18 2009--more or less 10 years ago.

That was the day that the newly elected Greek Prime Minister George Papandreou announced that the previous Conservative Government of Costas Karamanlis had been cooking the books and Greece was much more indebted than anyone realized. EU officials expressed shock and concern

As the FT of Oct 20 2009 reported:

George Papaconstantinou, finance minister in Greece’s new socialist government, disclosed that the nation’s deficit would soar this year to almost 12.5 per cent of gross domestic product, far higher than estimates provided by the former conservative government.

The news, delivered at a meeting of European Union finance ministers, came as an unpleasant but not entirely unexpected surprise to Greece’s 15 eurozone partners. They already suspected that the global financial crisis and recession would have a much more serious impact on Greece’s deficit and public debt than had been admitted in Athens.

Germany and other countries that emphasise fiscal rigour are determined that the eurozone’s stability, watched more closely than ever by markets since the eruption of the crisis, should not be jeopardised by the inability or reluctance of Greece and other less disciplined states to keep their finances in order.

Jean-Claude Juncker, chairman of the so-called Eurogroup of countries, declared: “The game is over. We need serious statistics.”

The extent of Greece’s troubles was underlined on Tuesday by the national central bank, which said Greece’s public debt had soared to 111.5 per cent of GDP in June from 99.2 per cent at the end of last year.

Some private sector economists predict that Greece’s debt will climb to as high as 150 per cent by 2016, a figure unmatched in any European country since the euro’s launch in 1999 and far above the 60 per cent level set for new eurozone entrants.

The uproar over the size of Greece’s deficit recalled an incident at the start of the decade, when Greece under-reported its deficit in order to qualify as the 12th member of the eurozone in 2001.

NB: These figures were to be further revised upwards in coming years. And the worst-case predictions in 2009 were actually quite optimistic--Greek Debt in 2016 reached 320 billion euros or 180% GDP. 
Everyone knew that the Greek economy was not doing well. But no one knew things were this bad. Papandreou had fought and won the election on the promise of boosting public expenditure (As a contemporaneous article observed: "The main challenge for PASOK [Papandreou's Socialist party] will be to deliver on its promises of wage increases, infrastructure investments, and sustainable development at a time when the economy is predicted to slide into recession.")

For some useful background documentaries: see:

Greece and the Euro Crisis(2012)  BBC Documentary (Michael Portillo) 

Greece Debt Crisis and the Future of Europe (I don't know the producer/writer--a socialist of some stripe which balances Portillo's conservative take). 

https://fieldofvision.org/this-is-a-coup (a very pro-Syriza documentary--a good balance to my very anti-Syriza lectures) Watch the documentaries mentioned earlier.

Timelines of the Greek Crisis can be found here and here and here.

Background:

The Requirements of the European Monetary Union Growth and Stability Pact:

1. Government deficit  less than 3% of GDP
2. Sovereign debt less than 60% of GDP
3.  If more than 60% it should decline each subsequent year at a satisfactory pace.

Greece's Difficulty in Meeting these Requirements

The Greek story can be summed up by following the story presented in graphs; see here:

The key event, mentioned earlier, was the announcement by the incoming Greek PM Papandreou in October 2009 that Greece's deficits were much higher than earlier announced.

Greece Deficit

Greek Debt:

Unit Labour Costs:

Broadly stated, there are five different (non-mutually exclusive) positions on the Greek chapter of the EZ Crisis:

1. The EMU is structurally flawed. (De Grauwe; Krugman)

2.  The Troika (EU/ECB/IMF) mismanaged the crisis--they chose to bailout Northern European Banks in 2010 rather than let Greece Default. (Sandbu--who thinks that there is nothing structurally wrong with EMU; and Eichengreen, Krugman, and Stiglitz--who thinks that there is).

3.  It's all the fault of the Germans (Simon Wren Lewis and John Weeks and Adam Posen and Peter Bofinger--for a more developed discussion of this topic, see Servaas Storm, "German Wage Moderation and the Eurozone Crisis: A Critical Analysis");

4.  It's substantially the fault of Greek politicians and policy-makers (German economists who hold this view include Jens Weidmann [Head of the Bundesbank], Hans Werner Sinn, and in a more nuanced version, the Greek Political Scientist Stathis Kalyvas);

Storm (a critic) summarizes this view as follows:

 In this narrative, rising unit labor costs are due to fiscal profligacy and “rigid” “over-regulated” labor markets, powerful unions, and strong employment protection. Rising relative unit labor costs supposedly killed Southern Europe’s export growth, raised current account deficits, created unsustainable external debts and reduced fiscal policy space, and hence, when the crisis broke, these countries lacked the resilience to absorb the shock. It follows in this story that the only escape from recession is for the Southern European countries rebuild their cost competitiveness—cutting wage costs (because Eurozone members cannot devalue their currency) by as much as 30% (as proposed by Sinn 2014), which requires in turn that their labor markets be thoroughly deregulated.

5.  It's a consequence of Greece's unfortunate history, but in no way the fault of contemporary Greeks.

My view, for what it is worth, is some combination of 1. and 4. and 5.

The 2010 Greek Bailout

Greece Accepts Bailout Package
From CNN May 2 2010

 Greece has accepted a bailout deal including tough austerity measures, Finance Minister George Papaconstantinou announced Sunday.

The international aid package, negotiated with the European Central Bank, European Commission and the International Monetary Fund, will be worth 110 billion euros (US $146 billion) over three years, Eurogroup President Jean-Claude Juncker said in announcing the agreement Sunday evening from Brussels, Belgium.

Of the overall amount, 80 billion euros will be made available through euro-area members, with up to 30 billion available in the first year, Juncker said.

The first disbursement of bailout money will be made before May 19, Juncker said.

The program will "help restore confidence and safeguard financial stability in the Euro area," Juncker said in praising the deal.

The package includes a promise by Greece to cut its budget deficit to 3 percent of gross domestic product, as required by European Union rules, by 2014, according to Papaconstantinou.

Greece had a choice between "destruction" and saving the country, and "we have chosen of course to save the country," Papaconstantinou said.

Olli Rehn, the commissioner of Eurogroup, said that "the steps being taken, while difficult, are necessary to restore confidence in the Greek economy and to secure a better future for the Greek people."

The head of the European Commission Sunday praised the Greek government for committing to "a difficult but necessary reform process."

The program "constitutes a solid and credible package," Commission President Jose Manuel Barroso said in a statement.

The planned austerity measures are unpopular among Greeks. Protesters clashed with police Saturday during May Day demonstrations, and strikes have been announced for later this week.

Papaconstantinou confirmed Sunday that the government would tighten its belt significantly, despite the protests.

"The expenses of the public sector will go down very considerably," he said.

The program includes cuts in the salaries of public-sector workers, including lawmakers, higher taxes on cigarettes, fuel, gambling and luxuries, an increase in the value-added tax consumers pay on purchases, and an increase in the retirement age for women in the public sector, Papaconstantinou said.

Prime Minister George Papandreou earlier Sunday tried to rally the country behind the government.

"I know that our compatriots are being asked to make big sacrifices, but the alternative way would be disastrous and painful for us," he said in a televised Cabinet meeting.

"It's not a pleasant decision for me, for any of us, but we are here to make the right decisions for our country," he insisted.

He spoke a day after Greek protesters clashed with police who fired tear gas during the annual May Day rally in Athens.

Waving red flags, the crowd at times surged toward the line of police, who wore helmets and carried riot shields. The police pushed them back each time.

Protesters threw objects toward police, and scattered fires were burning on the streets.

Seven police officers were injured, police said. Nine people were arrested -- three for attacks on police and six for theft from stores.

Twenty-seven people were questioned in connection with violence. A van belonging to state broadcaster ERT was set on fire.

About 12,000 people were protesting in Athens, and rallies were also taking place in the northern city of Thessaloniki, a police spokesman said.

Protesters there smashed two ATMs, the glass frontage of a bank, and a car, but no one was arrested or being questioned, the spokesman said.

The Greek government is facing a large deficit and massive debt, ultimately threatening the stability of the euro. The currency is used by 16 countries across Europe, including Greece.

Greece's national debt of 300 billion euros ($394 billion) is bigger than the country's economy, and some estimates predict it will reach 120 percent of gross domestic product in 2010.

Options available to EU in 2010:

1. Bailout Greece and Impose Austerity and require Structural Reform (the policy adopted). [Note much of the money loaned to Greece was used by Greece to pay off its debts to Northern European banks and other Eurozone Countries).

2. Bailout out as above but with much less austerity.

3.  Let Greece default within the EMU and use the money to bailout Northern European and Greek banks.

4, Encourage or force Greece out of the EMU-- use the money to bailout Northern European and Greek banks.

The bailout of 2010 did not work and further bailouts in 2012 (130 billion euros) and 2015 (86 billion euros) were necessary. It is likely that another bailout will be needed in a few years.

The 2012 Greek Crisis

Key Events:

November 11 Papandreou Resigns

Interim Govt. Nov 11-May 2012 under Loukas Papademou (MIT educated economist)

Feb 2012 Restructuring of Greek Debt (206Bn Sovereign debt)--haircuts to private sector

Feb 2012 Second Greek Bailout (185 Billion Loan package)

May Election --Coalition Govt. New Democracy/PASOK--Syriza wins seats.

Default fears arise in Southern Europe

July 2012--Mario Draghi (Head of ECB) "We will do whatever it takes."

--Mario Draghi introduces Outright Monetary Transaction (OMT) program that agrees to buy sovereign bonds on the secondary market. For assessments, see here and here.

"OMT is the program put in place by the ECB following Mario Draghi’s vow in the summer of 2012 that the ECB was “ready to do whatever it takes to preserve the euro.”  Under this program, the ECB can buy government bonds of a euro area member state in the secondary market, keeping the primary market for these bonds open and driving down the bond yields (Whelan)."

OMT presupposes signing up to European Stability Mechanism (ESM)--i.e. conditionality.

ESM--a bailout set up Sept 2012--all EMU countries to contribute.


GREECE IN COMPARATIVE PERSPECTIVE

Margarita Katsimi and Gylfi Zoega, Greece and Ireland IMF Programmes Compared VOX