Tuesday, August 25, 2015

From bailout to ballot box

by Yannis Palaiologos

Politico

August 21, 2015

There is no shortage of cynical, mordant commentary among Greeks — on Twitter and in conversation — about the fact that the country is going back to the polls for the third time in eight months. There is mock enthusiasm about being the most democratic country in the world, many references to Prime Minister Alexis Tsipras’ talent for electioneering as opposed to governing, as well as suggestions that the contested date be put to a referendum.

Amidst all that, there are certain key features of the new election, to be held most likely on September 20, that need to be kept in mind.

First and foremost, the stakes will be much lower than in January. Back then, the challenger, Tsipras, vowed to tear up Greece’s bailout agreement and promised Greek voters everything from blocking privatization and erasing a large part of the public debt to repealing unpopular taxes, preventing further pension cuts and delivering a major boost to social spending. His victory inevitably led to a dramatic showdown with the country’s creditors, which led it to the brink of Grexit and back to recession.

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Monday, August 24, 2015

Greece and Its Misguided Champions

by Michael G. Jacobides

Harvard Business Review

August 24, 2015

With the Tsipras government having resigned and Greece (probably) heading to the polls to vote on September 20, it may be time to consider how we got here. While much can be said about internal dynamics within Greece, we shouldn’t underestimate the impact of some global thought leaders who have shaped opinion not only internationally but also in Greece, making its crisis a cause célèbre for progressive economists. Pundits such as Paul Krugman, Joe Stiglitz, and Jeffrey Sachs have rushed to comment on the Greek crisis, eagerly using their considerable influence, followed by like-minded commentators. Yet, how much of this analysis is grounded in the causes as opposed to the symptoms of the Greek crisis?

Greece offered a tantalizing opportunity to socially minded critics to condemn the approach taken by the euro group under Germany’s leadership. Greece was seen as an exemplar of a country under assault, victim of the waning European sense of cohesion and social justice, and of ineffectual, neoliberal policies. The controversial style and substance of Yanis Varoufakis and the Tsipras government had come to be seen as a rare sign of defiance and of standing up to injustice.

Framing this as a case of a small country defying the bullies misses the point. It is too easy to view the Greek mess as a case of austerity policies gone berserk.

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Tuesday, August 18, 2015

Eurozone: The case against ‘cash for reform’

by Martin Sandbu

Financial Times

August 18, 2015

Angela Merkel will today urge the German Bundestag to support a new €86bn eurozone rescue loan for Greece, as long as the crisis-hit country undertakes further reform and austerity measures.

The moment will have a sense of déjà vu. Since the first Greek rescue loan was granted in May 2010, Germany’s chancellor and Europe’s most powerful politician has cajoled her parliamentarians into endorsing bailout deals for Greece, Ireland, Portugal, Spain and Cyprus, and backing the creation of a permanent rescue fund for the eurozone.

The Bundestag vote will also help to cement a narrative about what went wrong with the euro — one whose basic assumptions are more often taken for granted than measured up against the evidence.

From the start, Ms Merkel’s argument was that “there is no alternative” to a programme of bailouts — that the single currency would not survive without them. Defaults by euro members could unleash a wave of contagion, threatening the stability of the union. Strict policy conditions had to be attached to the loans to ensure that taxpayer money was well spent and would be returned.

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Wednesday, August 12, 2015

Greek debt sustainability: The devil is in the tails

by Andrea Consiglio & Stavros A. Zenios

VOX

August 12, 2015

Some experts view Greek debt as sustainable, while others claim it is not sustainable. This column argues that the distinction between tactical and strategic debt sustainability can explain this difference of opinions. Moreover, strategic debt sustainability analysis should account for tail risk. This approach shows that Greek debt is highly unsustainable, but sustainability can be restored with a nominal haircut of 50%, interest rate concessions of 70%, or a rescheduling of debt to a weighted average maturity of 20 years. Greece and its creditors should ‘bet on the future’ and embrace debt relief.

Who is right?

Holding a national referendum on a highly technical document on debt sustainability is indicative of the confusion among Greek (and EU) politics in the midst of a never-ending crisis. It is also indicative of some confusion over what debt sustainability analysis tells us.

How could we have conflicting conclusions on the sustainability of Greek debt by credible analysts with access to the same data? For instance, Paul De Grauwe argues that the “Greek debt is sustainable” (De Grauwe 2015), whereas the recent IMF report finds that the “debt could not be considered sustainable” (IMF 2015).

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Tuesday, August 11, 2015

Greece Ends One Crisis and Braces for the Next

by Yannis Palaiologos

Wall Street Journal

August 11, 2015

Who would have thought, as the results of Greece’s referendum on July 5 were coming in, that five weeks later we would be here? The Greek people responded to what was then the most recent offer from creditors with a resounding “no,” as they had been urged to by Prime Minister Alexis Tsipras. He promised that a “no” vote would strengthen his negotiating position and wouldn’t threaten Greece’s membership in the euro.

Things turned out very differently. Mr. Tsipras’s referendum success inspired other eurozone leaders to support German Finance Minister Wolfgang Schäuble’s proposal for a Greek “time out” from the euro. Confronted with this threat, Mr. Tsipras capitulated to demands that in some cases were more stringent than those that Greek voters had rejected days earlier.

Less than a month later, with surprisingly little fuss, the two sides have reached an agreement on a third bailout. Taking into account the Greek economy’s relapse into recession, the fiscal targets for 2015-17 have been weakened. The goal is to achieve a primary deficit (before debt-service costs) of 0.25% of gross domestic product this year and a primary surplus of 0.5% of GDP next year, rising to 1.5% in 2017. This is far off the targets of 3% in 2015 and 4.5% in 2016-17 under the previous deal.

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Greece debt crisis: Athens likely to vote through bailout deal despite rebellion by Syriza MPs

by Nathalie Savaricas

Independent

August 11, 2015

The protracted negotiations between Greek government officials and the international creditors are finally bearing fruit. Athens announced it has reached an accord on the broad terms of a new three-year bailout package saving it from defaulting on its debts and securing its future in the euro.

“There are difficult and even some very harsh measures [attached to the deal] but there was no other way: It was either an unruly bankruptcy or this deal,” Yiannis Balafas, an MP with the ruling Syriza party told The Independent.

The Syriza dissenter Costas Lapavitsas said he would not vote in favour of the new deal in parliament. “Left-wing governments must take left-wing actions,” he said on Mega television. Technical teams from the International Monetary Fund and European Union have been in Athens for nearly two weeks, locked in talks with the Greek officials in an effort to hammer out the conditions of the agreement which is expected to form a basis for a third bailout worth more than €86bn (£61bn).

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Greece says it has agreed outline of debt deal

Financial Times
August 11, 2015

Greece has struck an outline deal with creditors on terms of a new €86bn rescue package, marking a breakthrough before a crucial August 20 deadline for its next big debt repayment, Greek officials said on Tuesday.

“We have a deal,” Greek economy minister George Stathakis told the Financial Times.

Another official confirmed that the main points of a sweeping three-year fiscal and structural reform programme had been agreed with bailout monitors from the European Commission, the International Monetary Fund, the European Central Bank and the European Stability Mechanism, the EU’s own bailout fund.

Most of the so-called “prior actions” — reforms that the Greek government must implement immediately before creditors will begin to release funds from the new package — have been agreed but final details still need to be worked out on “one or two items”, an official said.

Among the prior actions expected to be legislated this week are a new €50bn privatisation programme, measures to tackle non-performing loans and the full liberalisation of energy markets, he added.

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Beware of American econ professors!

by Yannis Palaiologos

Politico

August 11, 2015

Since Alexis Tsipras made the difficult but responsible choice of arriving at a compromise with Greece’s creditors in mid-July, preventing an outcome that would have led his country out of the euro, a number of revelations have highlighted the radical nature of the proponents of rupture in his inner circle.

In countless public utterances and interviews since his resignation, former finance minister Yanis Varoufakis has spoken of how he urged the prime minister to authorize the issue of a parallel currency, to declare that Athens would default on €3.5 billion in Greek government bonds owed to the ECB on July 20 and to seize control of the Bank of Greece. Such an aggressive move would have led inevitably to the introduction of a new currency.

Recently, the newspaper I work for, Kathimerini, revealed excerpts of a conference call in which Varoufakis participated on July 16. In the call, the former minister tells an assortment of hedge-fund executives and other investors of plans he had to hack into the database of the general secretariat of public revenue at the ministry.

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Friday, August 7, 2015

Greece vs Bulgaria

by David Patrikarakos

Politico

August 7, 2015

The Greek-Bulgarian border is a bleak sight. A concrete slab of roof stretches across four lanes — two going into Bulgaria and two coming out. Beneath it sit several border control booths checking a line of slowly moving vehicles, mostly trucks, as they enter and leave Greece.

The drive here through northern Greece has been eye-catching. The Belles Mountains to my left and the Orvilos on my right, coming in from Bulgaria along with the river Strimonos, have made for a varied background of rolling green landscape and water: Hills smothered in thick foliage; fields of sunflowers and corn; houses covered in traditional red slate roofing (to protect against the damp, heat and cold); and, at various points along the road, boxes with crucifixes and candles — set up to remember those that have died in traffic accidents. It’s northern Greece at its most winsome.

Everything, though, ends in the concrete monotony of the border. It was once where Greece — and thereby NATO — met the Eastern Bloc’s Iron Curtain and its Warsaw Pact. But since 2007 Bulgaria has been a fellow EU state. Here on the border, where the two countries collide, the “old EU” meets one of its newest members. But not everything has changed. Greece is in crisis, but Bulgaria is still poorer — its GDP under half that of Greece. It remains far, far cheaper. And this difference, I will soon discover, is having a profound effect on this region of Crisis Greece. I have taken Alexis, a local man, along with me for the ride to find out exactly how.

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‘No one comes anymore’

by Helen Popper

Politico

August 7, 2015

For Greek Prime Minister Alexis Tsipras, the prospect of casting out left-wing comrades may be even harder to stomach than signing the country’s third and harshest bailout.

With a divisive parliamentary vote on the €86 billion rescue package fast approaching, a showdown with rebels in his Syriza party looks inevitable in September, if not sooner. Adding to the pressure, Greece must hammer out a deal with creditors before the next deadline for another loan repayment on August 20.

About a quarter of Syriza’s 149 lawmakers voted against initial bailout legislation and some analysts think an even bigger mutiny is possible when the final text is sent to parliament in the next few weeks.

Of Syriza’s 201-member Central Committee, more than half rejected the July 13 agreement. At the party’s grassroots, there is dismay at Tsipras’ acceptance of fresh austerity measures.

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Thursday, August 6, 2015

What Greece Needs to Prosper

by Edmund S. Phelps

Project Syndicate

August 6, 2015

Some economists overlook the modern idea that a country’s prosperity depends on innovation and entrepreneurship. They take the mechanistic view that prosperity is a matter of employment, and that employment is determined by “demand” – government spending, household consumption, and investment demand.

Looking at Greece, these economists argue that a shift in fiscal policy to “austerity” – a smaller public sector – has brought an acute deficiency of demand and thus a depression. But this claim misreads history and exaggerates the power of government spending.

Much of the decline in employment in Greece occurred prior to the sharp cuts in spending between 2012 and 2014 – owing, no doubt, to sinking confidence in the government. Greek government spending per quarter climbed to a plateau of around €13.5 billion ($14.8 billion) in 2009-2012, before falling to roughly €9.6 billion in 2014-2015. Yet the number of job holders reached its high of 4.5 million in 2006-2009, and had fallen to 3.6 million by 2012. By the time Greece began to cut its budget, the rate of unemployment – 9.6% of the labor force in 2009 – had already risen almost to its recent level of 25.5%.

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In Greece’s Wartime Economy, Tsipras Claims Mantle of Stability

by Nikos Chrysoloras, Eleni Chrepa & Christos Ziotis

Bloomberg

August 6, 2015

Rarely has a prime minister overseen so much financial destruction in so little time while tightening his grip on power.

After winning an election on a wave of populism in January, Greece’s Alexis Tsipras finds himself running a country in a state of economic emergency. His government rations money to the parts of society that need it most; bank stocks have collapsed more than 60 percent in three days; and some officials fret that Greece is still one accident away from leaving the euro.

And yet, Tsipras’s popularity remains unchallenged. While his critics say no one deserves more blame for playing a game of brinkmanship that he could never win, polls show his Coalition of the Radical Left, or Syriza, has as much as twice the support of its nearest rival.

One senior aide said his shift toward the center of the political spectrum makes him the only guarantor of stability ahead of another possible election in coming months.

“The only way he can survive politically is to move to the center-left, and the only moment he could do this is this very moment,” said Aristides Hatzis, professor of law and economics at the University of Athens. “Tsipras has to move forward to hold elections, come into collision with his party, escape the image of the ‘good kid’ and become a national leader.”

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Wednesday, August 5, 2015

GDP bonds are answer to Greek debt problem

by Charles Goodhart

Financial Times

August 5, 2015

It is clear that Greece cannot repay its sovereign debt as it is now structured, despite a generous dose of reprofiling, (extend and pretend), already granted by the country’s public sector creditors in the eurozone. The International Monetary Fund has endorsed this view.

But how can one lower the debt burden on Greece, and yet at the same time be fair to other eurozone countries with debt burdens enlarged by the global financial crisis, such as Ireland; and fair also to the taxpayers in creditor countries, some of which may well be still poorer than the Greeks? There is, I believe, a way to do so.

This mechanism is to restructure most, or all, of such Greek debt into real gross domestic product bonds. These pay nothing so long as real per capita income is below its previous peak, but, as a quid pro quo, they pay a multiple, say twice, of any percentage increase in real per capita income as it rises beyond its prior peak level. The maturity would be long, say 40 years, but there would have to be a fixed maturity, since otherwise, in a growing economy the burden could eventually become excessive.

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In Greece, Reliance on Public Funds Is the Central Problem

by Justin Murray

Mises Daily

August 5, 2015

Greece is a hot topic at the moment, mostly with the continued negotiations over bailouts from the European Union and, through institutions like the IMF, the world at large. Much of the discussion paints the image that Greece is only a debt-restructuring away from a stable economic situation. However, without understanding how Greece got into this problem in the first place and identifying the root cause of an over-indebted society, any plan or solution has a high probability of failure. To crack into this root cause, I had to develop an entirely new metric called “implied public reliance.”

Employment Data Doesn’t Tell the Whole Story

The main puzzle behind Greece is simple from a praxeological standpoint — you get more of what you subsidize and less of what you tax. Greece, being a nation with a high tax rate on production and a high subsidy rate on public assistance, will generate a population that finds greater preference toward public assistance and away from productive labor.

The problem with this is that the data doesn’t, on the surface, support the statement. Calculating the average annual hours worked, Greece actually ranks far ahead of nations with lower public sector subsidies and lower taxes:

If it were true that higher taxes dissuaded labor, then Greece shouldn’t report higher worker hours than much lower tax burden nations like the United States and Canada. This indicator would also identify Germany as the European Union’s economic basket case, not its economic powerhouse. Even nations like Spain and Portugal, which have a negative stereotype for sloth, both come ahead of Germany, but are suffering economically.

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Greece’s Ills Require a Banking Fix

by Andrew Atkeson & John H. Cochrane

Wall Street Journal

August 4, 2015

The crash in the Greek stock market when it reopened Aug. 3 reminds us that Greece’s economy and financial system are still in awful shape. Greek banks—whose stocks have been pummeled this week—reopened on July 20 with the help of the European Central Bank. But many restrictions, including those on cash withdrawals and international money transfers, remain. Greece suffered a run on its banks, closing them on June 29. Payments froze and the economy was paralyzed.

Greece’s banking crisis revealed the main structural problem of the eurozone: A currency union must isolate banks from sovereign debt. To fix this central structural problem, Europe must open its nation-based banking system, recognize that sovereign debt is risky and stop letting countries use national banks to fund national deficits.

If Detroit, Puerto Rico or even Illinois defaults on its debts, there is no run on the banks. Why? Because nobody dreams that defaulting U.S. states or cities must secede from the dollar zone and invent a new currency. Also, U.S. state and city governments cannot force state or local banks to lend them money, and cannot grab or redenominate deposits. Americans can easily put money in federally chartered, nationally diversified banks that are immune from state and local government defaults.

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What is making it so difficult for Greece’s ruling coalition to govern effectively?

by Ryan Bakker, Seth Jolly & Jonathan Polk

Washington Post

August 5, 2015

As everyone knows, Greece is in trouble. Among other things, its far-left and far-right parties have come together to form a government — even though one of the few things they have in common is skepticism about the European Union.

Greece isn’t alone in having its far right and far left united by their dislike of the E.U. That’s true across Europe. That dislike, however, springs from very different sources. Far left political parties oppose what they see as the E.U.’s neoliberal, deregulatory ideology. Far right parties see the E.U. as a threat to distinctive national identities and state power.

By contrast, mainstream left and right-wing parties have long supported the European Union, seeing it as a way to improve economic and national security. (Of course this short summary is an oversimplification, but if you allow for some exceptions, it’s roughly accurate.)

In Greece, the newly governing coalition of Syriza and the Independent Greeks (ANEL) shows how this opposition to the E.U. is affecting political competition in Europe. The Syriza/ANEL coalition, formed after the Greek January 2015 parliamentary election, is a surprising union. Syriza – which stands for the Coalition of the Radical Left – combines various labor, ecological and feminist movements. The Independent Greeks stand for less immigration, an increased role for the Greek Orthodox Church in family life and education, and opposition to multiculturalism.

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Tuesday, August 4, 2015

Greek businesses left gasping as capital controls bite

by Kerin Hope

Financial Times

August 4, 2015

After the Greek government imposed capital controls to prevent the country’s banks from collapsing, businessman Athanassios Savvakis feared exports of apricots, peaches and tomatoes would be the country’s next economic casualty.

“I was seriously worried,” said the chief executive of National Can Hellas, a private company that makes 300m cans a year for local fruit and vegetable processors. “The canning companies operate for only three months in the summer and controls were applied just as the season was getting under way.”

Mr Savvakis must import all of his raw materials, but he was hamstrung by rules severely restricting the funds he could transfer to foreign suppliers. The company ended up adopting what Mr Savvakis called a “triangular” payment system.

“We have plenty of exporters with bank accounts abroad among our customers. Instead of paying us they transfer funds they hold abroad to pay our regular metal suppliers in Spain, the Netherlands or the UK,” he explained.

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Greece and lenders strike upbeat tone, deal seen on bailout

Reuters
August 4, 2015

Both Greece and its lenders said on Tuesday they were optimistic they could broker a deal within days on a multi-billion euro bailout, striking a surprisingly upbeat tone on a process previously fraught with bitterness.

A bailout worth up to 86 billion euros ($94.5 billion) must be settled by Aug. 20 -- or a second bridge loan agreed -- if Greece is to pay off debt of 3.5 billion euros to the European Central Bank that matures on that day.

Wrapping up a day of talks in Athens, Greek Finance Minister Euclid Tsakalotos said negotiations were going better than expected. In Brussels, a Commission official said they were 'encouraged' by progress.

"We are moving in the right direction and intense work is continuing," Commission spokeswoman Mina Andreeva told Reuters.

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Lenders at Record Low Drag Greek Equities Down for Second Day

Bloomberg
August 4, 2015

Greek lenders fell to their lowest levels since at least 1995, sending the nation’s stocks lower for a second day.

Piraeus Bank SA slumped 30 percent, the daily maximum allowed by the Athens Stock Exchange. Eurobank Ergasias SA and Alpha Bank AE also tumbled that much, while National Bank of Greece SA fell 28 percent.


The benchmark ASE Index lost 1.2 percent to 659.94 at the close of trading in Athens, paring a retreat of as much as 4.9 percent. It closed at its lowest level since September 2012. The gauge tumbled the most since at least 1987 on Monday, after the exchange reopened following a five-week shutdown.

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Why Greece Declined a Euro Holiday

by Daniel Gros

Project Syndicate

August 4, 2015

For the entire first half of this year, since the far-left, anti-austerity Syriza party came to power in January, the Greek saga virtually monopolized the attention of European policymakers. Even as their country’s economy crashed, Greece’s new government remained adamant in demanding debt relief without austerity – that is, until mid-July, when they suddenly agreed to the creditors’ terms. Indeed, as of July 13, Greece’s staunchly anti-austerity government has been obliged to impose even tougher austerity and pursue painful structural reforms, under its creditors’ close supervision.

Why did the Greek government concede to terms that not only controverted its own promises, but also closely resembled those that voters had overwhelmingly rejected in a popular referendum barely a week earlier?

Many believe that Greek Prime Minister Alexis Tsipras was responding to an ultimatum from his European partners: Accept our demands or leave the euro. The question is why a Greek exit from the euro (“Grexit”) amounted to such a potent threat.

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A New Deal for Debt Overhangs?

by Kenneth Rogoff

Project Syndicate

August 4, 2015

The International Monetary Fund’s acknowledgement that Greece’s debt is unsustainable could prove to be a watershed moment for the global financial system. Clearly, heterodox policies to deal with high debt burdens need to be taken more seriously, even in some advanced countries.

Ever since the onset of the Greek crisis, there have been basically three schools of thought. First, there is the view of the so-called troika (the European Commission, the European Central Bank, and the IMF), which holds that the eurozone’s debt-distressed periphery (Greece, Ireland, Portugal, and Spain) requires strong policy discipline to prevent a short-term liquidity crisis from morphing into a long-term insolvency problem.

The orthodox policy prescription was to extend conventional bridge loans to these countries, thereby giving them time to fix their budget problems and undertake structural reforms aimed at enhancing their long-term growth potential. This approach has “worked” in Spain, Ireland, and Portugal, but at the cost of epic recessions. Moreover, there is a high risk of relapse in the event of a significant downturn in the global economy. The troika policy has, however, failed to stabilize, much less revive, Greece’s economy.

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Greek Stocks Fall 16% as Trading Resumes After Five-Week Closure

Wall Street Journal
August 3, 2015

After a five-week hiatus, Athens’s stock market reopened Monday—and promptly sank like a stone.

The steep decline shows investors are still concerned about Greece, even though the country and its creditors appear to have made some progress in recent bailout negotiations.

The benchmark Athex Composite fell more than 20% within minutes of the market opening. It later pared some of those losses but still ended the session down more than 16%, representing its biggest fall in percentage terms since at least January 1991, according to Thomson Reuters data.

In more bad news for Greece, a closely watched measure of manufacturing output Monday showed how deeply the crisis has affected the country’s economy.

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Monday, August 3, 2015

The nasty Greek outcomes that democracy precludes

by Niall Ferguson

Financial Times

July 3, 2015

In Anthony Burgess’s dystopian novel A Clockwork Orange, written in the invented language “Nadsat,” the degenerate hooligan Alex ultimately resolves to settle down. “Tomorrow is all like sweet flowers and the turning vonny earth,” wrote Burgess, “and your old droog Alex all on his oddy knocky seeking like a mate.” Burgess’s US publisher thought this ending too happy, and axed the final chapter.

I have come to the conclusion that Burgess was right and his publisher wrong. Most delinquent youths do eventually grow up, usually without the brutal aversion therapy inflicted on Alex. The same may be said of countries.

Take Greece, which for a century and a half after regaining its independence in 1830 had a dire political record marked by three top-level assassinations, two uprisings, the depositions of three kings, three coups d’état, five military conflicts, occupation by the Nazis and subsequent civil war. The remarkable thing about the current Greek crisis is not that it involves a financial default, which is the Greek norm; what is remarkable is how narrow the range of political outcomes is, compared with what it would have been in the past.

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Sunday, August 2, 2015

Berlin’s devotion to rules harms EU

by Mark Mazower

Financial Times

August 2, 2015

The proposed bailout settlement for Greece that Germany has crafted has been criticised in many quarters for its harshness. But it is a kind of harshness for which historical analogies are elusive.

Yanis Varoufakis, the former finance minister of Greece, called it a kind of Versailles Treaty for the 21st century — only worse. But there was no war, at least not a real one. Others have described it as turning Greece into an economic protectorate or a new kind of colony. But the language of imperialism was woolly even when Lenin used it.

In fact, Germany’s dominance of the EU is based neither on its army nor on a colonising impulse but on rules. Rules matter, of course, but rarely have they become so synonymous with leadership. Why do they now matter so much?

In the past the nation’s might was associated less with crafting rules than with breaking them. Kaiser Wilhelm II’s generals took the military suspicion of legal constraints to extremes. Hitler went much further. He did not believe in sharing power at all.

Contemporary German politics is built upon a deep revulsion from these ideas of leadership. Berlin’s commitment to Europe is heartfelt and so is its investment in institution-building. Constructing European institutions that make decisions jointly helps allay old suspicions and make the country’s economic supremacy more palatable.

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Friday, July 31, 2015

Greece: the Paradox of power

by Kevin Featherstone & Dimitris Papadimitriou

LSE

July 31, 2015


Why doesn’t Greece reform? Over the past few years the inability of successive Greek governments to deliver on the demands of international creditors has been a key feature of Greece’s bailout drama. Frustrated observers have pointed to various pathologies of the Greek political system to explain this underperformance: the lack of political will; entrenched sectoral interests resisting change; and the irrational allocation of resources skewed by clientelism and corruption. There is, of course, a significant element of truth in all these assertions. Yet, for many outsiders the real elephant in the room remains unnoticed. The endemic weaknesses of the Greek public administration are indeed crucial in understanding much of what has gone wrong over the past 5 years (and before). Back in 2010 the beleaguered Greek government had very little input into its own ‘rescue’. Lacking basic capabilities and running out of time, it almost entirely ‘sub-contracted’ the design of the bailout programme to the IMF, who, by its own admission, grossly overestimated the capacity of the domestic system to deliver. Unrealistic expectations were built on the assumption that an F1 driver will steer a Ferrari to perfection. In reality, it wasn’t a Ferrari but a rusty Trabant.

Since then there has been a depressing list of blunders that has exposed both the limits of Greece’s governability and the naivety of its creditors. Privatisation targets (set at 50 billion Euros) were pulled out of thin air, only to be discovered that many state assets were marred by legal uncertainties and bureaucratic blockages which greatly diminish their value. Some of the pension and salary cuts (particularly in the public sector) were so poorly implemented that their legality was subsequently challenged in court, resulting in huge bills for the Greek treasury. The control of central government over the finances (and staffing practices) of local authorities still remains sketchy. More worryingly the quality of the legislative process in the Greek Parliament has suffered greatly under the suffocating deadlines of ‘prior actions’ that accompany the release of funds by Greece’s creditors.

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The Greeks are not taking ownership of bail-out reforms

Economist
July 31, 2015

Ever since Greece and its European creditors reached a deal to keep the country from defaulting out of the euro zone in early July, two questions have loomed over Athens. The first is whether the Greeks will, or can, implement their end of an agreement that redoubles the very austerity measures the far-left Syriza government campaigned against. The second is whether trying to do so will fracture Syriza and bring down the government. Alexis Tsipras, the prime minister, prevailed over the rebellious hard-left faction in his party at a tense meeting of the Syriza’s central committee on July 30th, but the threat of a rupture remains.

The 200-member committee approved the prime minister's proposal to hold an extraordinary party congress in September. By that time, he hopes, the details of Greece's new €86 billion ($94 billion) bail-out—the country’s third—will have been agreed. But his earlier suggestion that Syriza should hold a referendum of party members immediately on whether to continue the bail-out negotiations was dropped. The key opponent was Panayotis Lafazanis (pictured at right), a former official in Greece’s Communist Party who was dumped as energy minister in a cabinet reshuffle earlier this month, and who leads Syriza’s mutinous Left Platform faction.

Holding an extraordinary congress would clear the way for Mr Tsipras to call an early election by the end of the year to consolidate his power. But it risks triggering a split with Left Platform. "The premier bought some time tonight, but that was all ," said one participant in Thursday's meeting. At one point Mr Lafazanis mocked the prime minister by comparing his referendum proposal to the national referendum held July 5th, in which most Greeks rejected a bail-out plan that had been offered by the European Commission—only to see Mr Tsipras accept a new rescue package on harsher terms a week later. "How many referenda are we going to have?” asked Mr Lafazanis. “We've already staged one and we won with 62% of the vote."

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Thursday, July 30, 2015

IMF cannot join Greek rescue, board told

by Peter Spiegel

Financial Times

July 30, 2015

The International Monetary Fund’s board has been told Athens’ high debt levels and poor record of implementing reforms disqualify Greece from a third IMF bailout of the country, raising new questions over whether the institution will join the EU’s latest financial rescue.

The determination, presented by IMF staff at a two-hour board meeting Wednesday, means that while IMF staff will participate in bailout negotiations currently under way in Athens, the Fund will not decide whether to agree a new programme for months – potentially into next year.

That delay could have significant repercussions – particularly n Germany, where officials have long said it would be impossible to win Bundestag approval for the new €86bn bailout without the IMF on board.

According to a four-page “strictly confidential” summary of Wednesday’s board meeting obtained by the Financial Times, IMF negotiators will “participate in policy discussions” to ensure the eurozone’s new bailout “is consistent with what the Fund has in mind”.

But they “cannot reach staff level agreement at this stage.” The Fund will only decide whether to participate during a “stage two” after Greece has “agreed on a comprehensive set of reforms” and, crucially, after eurozone bailout lenders have “agreed on debt relief”.

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Monday, July 27, 2015

Greece’s Problem Is More Complicated than Austerity

by Michael G. Jacobides

Harvard Business Review

July 27, 2015

It is easy to see Greece as a clash between “austerity” and “progressive economics,” with the Germans (and Finns and Dutch, alongside various international public servants and economists) on one side, and Keynesians and progressives on the other as Paul Krugman’s recent CNN interview suggests. This has certainly been the picture painted by Syriza, the left-wing political party of Greek Prime Minister Alexis Tsipras, and by many friends of Greece and progressive economists.

The reality, though, is more complicated. To be sure, excessive austerity is bad macroeconomic policy. But the issue at stake isn’t just austerity. The issue is that Greek “resistance”—not just Syriza’s, but also that of the previous government—takes the form of protecting rent-seekers. This is where the July 2012 memorandum of understanding between Greece and the Troika (the International Monetary Fund, European Central Bank, and the European Commission) failed miserably; the previous government, much like Syriza, wanted to preserve the status quo.

Greece’s main economic problem is structural and an exit from the Eurozone will not solve it. Besides the short-term costs of such a move, history shows us that Greece has never managed to benefit from currency devaluations. What’s more, the recent McKinsey study on Greek competitiveness shows that the country’s biggest challenge has been a lack of investment.

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The optimist’s guide to Greece

by Hugo Dixon

Reuters

July 27, 2015

There are so many ways things could go wrong in Greece that it’s easy to miss how things could also go right. The best-case scenario involves the European Central Bank including Greek bonds in its quantitative easing programme, the lifting of capital controls and a deal on debt relief – all by the end of the year.

This is not a prediction. Trust between Greece and the other euro zone countries has been all but destroyed. Hard-line creditors, led by Germany, will only help Alexis Tsipras, the prime minister, if he implements diligently what he has agreed. That is far from given, now that his radical-left Syriza party is splintering, even though that also gives him opportunities.

However, if Tsipras can rebuild trust and follow through on his commitments, there is a clear path out of misery.

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The Greek Warrior

by Ian Parker

New Yorker

August 3, 2015

In July 4th, the night before a referendum asked the Greek people to decide how far their debt-ridden government should accommodate the demands of its main creditors—the “troika” of the European Union, the European Central Bank, and the International Monetary Fund—Yanis Varoufakis, the country’s minister of finance, sat outdoors at an Athens restaurant, wearing a T-shirt with an outline of Texas on the front. In January, Varoufakis, an economist who had been teaching at the University of Texas at Austin, abruptly entered Greek politics, becoming the public face of the country’s defiant negotiations with European leaders. After months of fatigue, he had slept for much of the day, and he was in a good mood. Varoufakis, who is fifty-four, had the peace of mind of someone who was certain of an election result and already savoring the satisfactions to follow. His government, the left-wing Syriza party, would lose. The people would vote “yes”—that is, in favor of making more concessions than Varoufakis and Alexis Tsipras, the country’s forty-year-old Prime Minister and the leader of Syriza, had said that they could stomach. Varoufakis would resign as a minister, and would never again have to endure all-day meetings in Brussels and Luxembourg, listening to other European finance ministers scold Greece for its disobedience. And he would no longer need to marshal scant supplies of discretion to disguise the fact that he and Tsipras had, in recent weeks, lost significant faith in each other. Varoufakis had not given up his hostility toward the troika, or the economic arguments underpinning that hostility, but he spoke as if Syriza’s weeklong campaign of slogans and street protests in support of ohi—“no”—were already archived in Greece’s long history of resistance to external aggressors. A “yes” vote, Varoufakis declared, was “inevitable.”

He was with his wife, Danae Stratou, an artist whose work mainly involves installations and photography, and his friend James Galbraith, an American economist who is a professor at the University of Texas. Galbraith had been acting as an unpaid adviser on an informal international team that included Jeffrey Sachs, an economist at Columbia University. According to Varoufakis, Sachs had been sending “missives for the past two weeks, saying, ‘Demand debt relief. You need it. If it’s not granted, then default.’”

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Saturday, July 25, 2015

Greece, the Sacrificial Lamb

by Joseph E. Stiglitz

New York Times

July 25, 2015

As the Greek crisis proceeds to its next stage, Germany, Greece and the triumvirate of the International Monetary Fund, the European Central Bank and the European Commission (now better known as the troika) have all faced serious criticism. While there is plenty of blame to share, we shouldn’t lose sight of what is really going on. I’ve been watching this Greek tragedy closely for five years, engaged with those on all sides. Having spent the last week in Athens talking to ordinary citizens, young and old, as well as current and past officials, I’ve come to the view that this is about far more than just Greece and the euro.

Some of the basic laws demanded by the troika deal with taxes and expenditures and the balance between the two, and some deal with the rules and regulations affecting specific markets. What is striking about the new program (called “the third memorandum”) is that on both scores it makes no sense either for Greece or for its creditors.

As I read the details, I had a sense of déjà vu. As chief economist of the World Bank in the late 1990s, I saw firsthand in East Asia the devastating effects of the programs imposed on the countries that had turned to the I.M.F. for help. This resulted not just from austerity but also from so-called structural reforms, where too often the I.M.F. was duped into imposing demands that favored one special interest relative to others. There were hundreds of conditions, some little, some big, many irrelevant, some good, some outright wrong, and most missing the big changes that were really required.

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