To Yanis Varoufakis, the “EZ bed” is not comfortable!

The problem is simple: Greece’s creditors insist on even greater austerity for this year and beyond – an approach that would impede recovery, obstruct growth, worsen the debt-deflationary cycle, and, in the end, erode Greeks’ willingness and ability to see through the reform agenda that the country so desperately needs. Our government cannot – and will not – accept a cure that has proven itself over five long years to be worse than the disease.

Our creditors’ insistence on greater austerity is subtle yet steadfast. It can be found in their demand that Greece maintain unsustainably high primary surpluses (more than 2% of GDP in 2016 and exceeding 2.5%, or even 3%, for every year thereafter). To achieve this, we are supposed to increase the overall burden of value-added tax on the private sector, cut already diminished pensions across the board; and compensate for low privatization proceeds (owing to depressed asset prices) with “equivalent” fiscal consolidation measures.

The view that Greece has not achieved sufficient fiscal consolidation is not just false; it is patently absurd. The accompanying graph not only illustrates this; it also succinctly addresses the question of why Greece has not done as well as, say, Spain, Portugal, Ireland, or Cyprus in the years since the 2008 financial crisis. Relative to the rest of the countries on the eurozone periphery, Greece was subjected to at least twice the austerity. There is nothing more to it than that.

Not so fast Yanis! I concur that largely, the EZ crisis was mostly an NGDP (i.e. monetary crisis). The charts show that clearly. (Note: the scale is the same in all charts)

Yanis Complains_1

Greece has not done as well as Spain or Ireland mostly because initial conditions in Greece were much “worse”. While Spain and Ireland were forcefully reducing their government debt ratios before the crisis, reaching debt ratios of less than 40% and 30%, respectively, Greece´s debt ratio remained at the 100% level.

Also, Greece had the highest structural deficit relative to potential GDP going into the crisis, so naturally, Greece had to be more “austere” than either Ireland or Spain. There´s also the fact that Greece´s credibility is extremely low!

Yanis Complains_2

Later, YV writes:

Following Prime Minister David Cameron’s recent election victory in the United Kingdom, my good friend Lord Norman Lamont, a former chancellor of the exchequer, remarked that the UK economy’s recovery supports our government’s position. Back in 2010, he recalled, Greece and the UK faced fiscal deficits of more or less similar size (relative to GDP). Greece returned to primary surpluses (which exclude interest payments) in 2014, whereas the UK government consolidated much more gradually and has yet to return to surplus.

At the same time, Greece has faced monetary contraction (which has recently become monetary asphyxiation), in contrast to the UK, where the Bank of England has supported the government every step of the way. The result is that Greece is continuing to stagnate, whereas the UK has been growing strongly.

Not quite true. In 2010, Greece´s Structural Deficit relative to potential GDP was about 50% higher than Britain´s, but I agree that Greece has experienced “monetary asphyxiation”. The UK is fortunate to have an independent monetary policy!

Yanis Complains_3

Bottom Line: If Greece was willing to “get in bed” with the likes of Germany, now it must try to become more like them, and if that´s not palatable…

Lars Christensen has a post on Yanis.

2 thoughts on “To Yanis Varoufakis, the “EZ bed” is not comfortable!

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