Home > debt crisis > Greece and Those Wild and Crazy Guys at the ECB

Greece and Those Wild and Crazy Guys at the ECB

from Dean Baker

I have been following the European sovereign debt crisis since it first developed more than two years ago. It was evident from the beginning that the conditions on the debtor nations being demanded by the “troika” of the European Central Bank, the European Union, and the International Monetary Fund were both onerous and counterproductive.

This view has been confirmed by the fact that the debtor countries have missed target after target and that growth has consistently come in far below projections. (Actually, the crises countries have been contracting for much of the last two years.)  This could leave analysts guessing as to what economic reasoning lies behind the troika’s conditions.

Last week I got the answer when I had occasion to meet with a high-level EU official. There is no economic reasoning behind the troika’s positions. For practical purposes, Greece and the other debt-burdened countries are dealing with crazy people.  The pain being imposed is not a route to economic health; rather it is a gruesome bleeding process that will only leave the patient worse off. The economic doctors at the troika are clueless when it comes to understanding a modern economy.

The basic story of the crisis countries is simple. Their economies became uncompetitive with the rest of the eurozone in the last decade as inflation in these peripheral countries outpaced inflation in the core eurozone countries of northern Europe, most importantly Germany. This created a large gap in price levels that caused peripheral countries to run massive current account deficits.

In some countries, like Greece and to a lesser extent Portugal, the current account deficit corresponded to excessive public-sector borrowing. In Spain and Ireland the current account deficit was associated with a massive private-sector borrowing boom.

The remedy for this situation is obvious, even if getting from here to there may not be simple. The peripheral countries have to regain competitiveness by having their prices fall relative to prices in the core countries. If these countries still had their own currencies, this could be accomplished quickly through a devaluation of the currencies of the peripheral countries.

However, being part of the eurozone rules out this option. With a single currency the only route for the peripheral countries to regain competitiveness is to have a lower inflation rate than the core countries.

This would be a doable task if the core countries were prepared to run inflation rates in the range of 3-5 percent annually. If the peripheral countries kept their inflation rates in a range of 1-2 percent, they would soon be able to restore their competitiveness.

But the core countries have zero intention of allowing their inflation rate to increase from the current 1-3 percent range. As I learned from my conversations with this EU official, low inflation is viewed as the equivalent of a commandment from God. He could not even see the logic of deliberately allowing the inflation rate to rise.

He viewed the idea of 4-5 percent inflation as being like a dreaded disease, as though there was not a long history of countries experiencing robust growth with inflation rates in this range or even higher.

The alternative route suggested by this EU official was that Greece and other peripheral countries would bring about a restructuring of their economy. This would lead to lower costs and higher productivity, and thereby a return to competitiveness.

There is little doubt that there are many inefficiencies in the peripheral economies that should be eliminated or reduced. But the idea that this can be quickly done, in the context of economies that are rapidly contracting, is more than a little fanciful. There certainly is no precedent for a successful restructuring like this anywhere in the world.

The country that some proponents of this route hold up as a model is Latvia. Latvia has seen its economy contract by more than 20 percent, although it is now seeing respectable growth. Still, its unemployment rate is well into the double-digits. Furthermore, Latvia’s unemployment rate would undoubtedly be much higher if close to 10 percent of its workforce had not emigrated to other countries in search of work.

If people on the left proposed a set of economic policies that has so little theoretical or empirical support they would be laughed out of public debate. In this case, because the people pushing such policies hold the highest positions in government and the European economic establishment, they end up as official policy.

The people in Greece and peripheral countries must wake up to the fact that they are not dealing with reasonable people at the other side of the negotiating table. The notion of leaving the euro cannot be a pleasant one, but the troika is giving the peripheral countries little choice.

See article on original website

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Categories: debt crisis
  1. February 21, 2012 at 8:27 pm | #1

    Mr. Baker I disagree with your interpretation.
    The “troika” is not a bunch of “misguided” people. They have their plan, which is destroying the welfare state all over Europe and impose a wave of privatization.
    The impoverishment which is taking place in Greece, Italy, Portugal, Ireland, but also in France, etc is just what they are looking for.
    As wages and benefits go down, many companies, big and small become cheap targets for aquisition. This is not about “clever” or “dumb” economic policies. This is about enlarging dominancy and power for a small elite.
    And thus they create the conditions for the elite to master the whole economies and political power.
    They are clearly making good on the old say “crises are oportunities”. And of course, crisis is for the vast majority and “oportunities” are for them.
    A new Europe shall emerge, with a poor and discilplined working class, witho no benefits, but resorting to private sector corporations for health, education, communications, tap water and so on.
    Well, that´s their plan. They may succeed or they may fail. It´s up to the peoples to change or not the outcome.
    From the pure economic standpoint their calculations are that a temporary contraction of European markets can be offset by the long term consolidation of their enhanced property rights for whole advanced economies.
    It´s all about reversing the capitalistic socialdemocratic welfare states they were obliged to create to stand before the Socialist triumphant field after WW II

  2. February 21, 2012 at 9:31 pm | #2

    The Greek government has another option. It could follow the Georgist route ie low taxes on wages, goods, services and corporations, with the bulk of public revenue being raised on the annual rental value of land.

    This would restore competitiveness – indeed, it would make it a very attractive place to do business – and at the same time provide the country with a robust and unavoidable source of pubic revenue.

  3. February 22, 2012 at 10:15 am | #3

    Well, Henry, I agree, your proposal is more revolutionary thay mine.
    If rent of the land is expropriated, partially, but substantially with taxes there´s less money to pay interests and amortizations to banks.
    It should be a progressive taxation, based on tax rates growing with value of the land, otherwise it would fall on previously hit population by austerity measures.
    The political side would be thus covered, land taxes only hiting big landowners, a small part of the population.
    Anyway, forget about the troika, better, be prepared to fight a war against them

    • February 22, 2012 at 2:36 pm | #4

      A property taxed based on the rental value of land is not exactly revolutionary and they are quite widespread in Europe. If there is a culture of not paying tax, as seems to be the case in Southern Europe, then there is no alternative if governments are not to have recurrent debt crises.

      Yes there is less surplus to pay interest to banks so this reform also gets rid of the banking problem. Permanently.

      Land value tax should be levied on all land holdings in proportion to the value of the land. It is not intended to “hit” anyone. It is based on the principle that people should pay for what they get and get what they pay for.

  4. paolo leon
    February 22, 2012 at 10:34 am | #5

    It is not that the troika are so evil, although the end result might well be what Dosmildiez expects: thay are just blinded by their education and by the European set up; Europe is the only place where a Constitution-like treaty has as a founding principle free competition (but not pure and perfect: whatever competition is decided by the Court of Justice, not by law) and where a Central Bank does not issue money.If you remember Keynes and the Treasury in the twenties you could not say that the Treasury (and the Labour party at the time) were plotting to enlarge acquisitions and power. Ideology is a ferocious beast which does not want any dissenter alive…

  5. February 22, 2012 at 12:35 pm | #6

    Excellent comments!!!

  6. Pavlos
    February 22, 2012 at 4:01 pm | #7

    I also think that the austerity imposed on Greece (and the self-imposed on in Britain) is a deliberate act of capital consolidation.

    One has to wonder though, how short-sighted can Merkel and her political sponsors be? Yes, austerity enriches big capital in core countries, but it impoverishes the periphery both as a market and as a sort of symbiotic buffer zone where suppliers and skiled labor can come from. It makes the EU less like Germany or Finland and more like the US, where there are very wealthy people but also a large population segment of disenfranchised poor. Never mind the Greeks, is that the EU that Germans or Scandinavians want?

  7. February 23, 2012 at 9:28 am | #8

    the thing is that the taxation laws , in Greece at least, are terribly biased towards the poor, they introduced this special tax on “power connected surfaces” (ie shops and houses) and they force even the unemployed with no income to pay it or have their electricity cut off and at the same time they exclude all kind of big industrial buildings,

    Things are so bad here that the other day i had a discusion with a trucker about a particular business we both deal with & we were praising it saying how well managed it is and how it has only the staff it needs and so on and the trucker tells me:

    “Very good business, they’ll be one of the last to close”

    and he meant it as a copliment, like the best thing u can say for a business these days

    • February 23, 2012 at 10:30 am | #9

      Surely you mean “taxation laws are biased against the poor”? This is normally the case.

      There are two sorts of people. Those who own land and enjoy rental income from it, and those who pay rent and work for wages. The latter category includes many employers, who would fall under the heading of “Capitalists”. This is where Marx was so tragically wrong – he made the distinction between Labour and Capital, whereas the real division is between Land on one side and Labour and Capital on the other.

      One must assume he made this error because most capital was owned by landowners, but it was a category error nevertheless.

      Landowners have always tried to fix the system so as to dump the tax burden onto labour and capital. Everyone else has been fooled by their clever trick by convincing us that taxes should be based on “ability to pay”. The rich proprietors have always hidden behind the poor landowning widow to divert attention away from their undue privilege. Even members of the Occupy movement and outfits like the Tax Justice Network have fallen for the deception.

      All the benefits of public spending are ultimately absorbed into the rental value of land, and for this reason amongst many others, the natural and just source of public revenue is a tax on the annual rental value of land.

      The people of Greece need to wake up to this and get their rulers to make the necessary changes. If they cannot get themselves together to do this, then they deserve the misery that will come to them if they do not.

  8. Garrett
    February 25, 2012 at 8:59 pm | #10

    One problem with tax on the rental value of the land is the little old retired school teacher that could rent quite high for small parcel and corporate agriculture with relatively low yields per area unit. Perhaps agribusiness based economies calculating efficiency on capital and labor with large numbers of unemployed will need to tax on the efficiency of land farmed with eco-agricultural technology, which yields as much as twice per area unit and thus is more able to produce a living wage while absorbing some of the excess labor stressing urban areas.

    • February 25, 2012 at 9:52 pm | #11

      Little old retired school teachers do not own small valuable parcels of land. What would they be doing with them? This is an old excuse of a case against LVT. Land can always be let for its rental value and the income flow obtained from which to pay the tax, which is, after all, based on its renal value. Land suitable for agribusiness is valuable, if not on a per-unit-area basis, then on account of the extensive area used for the operation.

      • February 25, 2012 at 11:33 pm | #12

        Henry, You may have missed my point, slightly. A young school teacher buys property which appreciates in several capitalist bubbles (could be a fire fighter, plumber, carpenter etc). This happens all the time, my mom bought her house in the 50′s on a paved stretch of dirt road, now her place is surrounded by millionaires.

        My real point is that corporate agribusiness would pay it’s rent based upon the low productivity of that form of production per acre and my suggestion is that it should really be taxed based upon the rental value per acre that would accrue to the production of the land if it were repopulated by human farmers instead of capitalists using semi-slave migrant labor.

        I am attempting rather unsuccessfully to communicate a win-win variation upon your general theme. The taxing agency receives greater income which actual citizens could afford to pay because their yields are higher (assuming the tax is not set to destroy the advantage that makes it possible). Plus, these actual citizens would be enticed from the unemployed and would be transformed from being a burden to producers, plus, again, relieving stress upon urban infrastructure, which is often outstripped by migration from the land to urban centers.

        We no longer have any idea what an optimum urban/rural population ratio is, especially in the US where such a large portion of brown and blacks are locked away in expensive prison systems for petty street level drug infractions.

  1. February 22, 2012 at 1:48 am | #1

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