Home > Greece > Wolfgang Schauble, the hero of the Greek austerity crisis?

Wolfgang Schauble, the hero of the Greek austerity crisis?

from Dean Baker

Like many people following the negotiations between Greece and its creditors, I was inclined to see Wolfgang Schauble, Germany’s finance minister, as the villain of the story. After all, Mr. Schauble insisted on severely punitive measures for Greece as a condition for continuing support from the European Central Bank (ECB). He appeared to be the bad cop relative to others in the negotiations, such as German Chancellor Angela Merkel, who was willing to make at least some concessions to keep Greece in the euro. But a more careful analysis arguably leads to the opposite conclusion.

Schauble did not argue for throwing Greece out of the euro simply as a punitive measure, although he quite obviously disapproved of the way Greece had run its budget and its economy. He argued, quite possibly sincerely, that at least a temporary departure from the euro zone would be the best path forward for Greece. 

Schauble argued that a departure from the euro zone would have facilitated a restructuring of Greek debt. He also pointed out that a decline in the value of the new Greek currency would allow its economy to regain competitiveness. In particular, its tourism industry would suddenly be hypercompetitive as prices would possibly be 30-40 percent lower relative to other tourist spots in the region.

Schauble proposed an orderly disengagement from the euro that would allow Greece to reestablish its own currency with as little disruption as possible. He also proposed humanitarian assistance to ensure that supplies of food, medicine, and other essential items were available through the transition process.

This divorce process was clearly not the first best solution. That would have involved restructuring Greek debt while keeping Greece in the euro, but none of the major actors among the creditors seriously considered such proposals. The Schauble option looks quite good in comparison with the route Greece eventually took: a bailout with harsh terms that kept the country within the euro.

There are two major benefits from the Schauble plan. First, it would put Greece in a position to restructure its debt. While there would be many battles with creditors over the extent and conditions of any write-downs, the immediate outcome would be to free Greece from the obligation to run large primary budget surpluses to pay interest on its debt. This could provide a substantial boost to its economy as money that would be flowing out of the country for debt service could instead be used for domestic purposes like sustaining infrastructure and paying for health care and pensions.

The other major benefit would be that a lower valued currency would make Greek goods and services more competitive internationally. This should provide a substantial boost to its net exports, which would lead to growth and jobs.

The impact of a more competitive currency was hugely important in the case of Argentina, which is often viewed as a model for this sort of default/devaluation. Back in the early 1990s Argentina reached into the basket of really bad economic ideas and rigidly tied its currency to the dollar. While this put an end to the country’s problem with inflation, the tie to the dollar put Argentina into an economic straight jacket by the end of the 1990s.

Rising interest rates made its debt burden unmanageable. At the same time, a higher valued dollar made Argentina’s goods less competitive in the world economy. As a result, its trade deficit soared, pushing the country into a severe recession.

After the country finally broke with the dollar at the end of 2001 Argentina’s trade situation quickly improved. Argentina had a trade deficit of more than 4 percent of GDP before the recession began in 1998. In 2005, when it had more than recovered all the ground lost in the recession, Argentina had a trade surplus of 2.0 percent of GDP.

This shift from deficit to surplus of more than six percentage points of GDP would have add more than 9 percent to Argentina’s GDP in 2005, assuming a spending multiplier of 1.5. In the U.S. economy in 2015, this would be equivalent to $1.6 trillion in additional output. And this improvement in the trade balance was not the story of a boom in soy bean prices, Argentina’s principle export, as is often claimed. Soy bean prices in 2005 were little changed from their 1998 level.

Argentina had to go through the ordeal of a disorderly break with the dollar, which meant months of financial and economic chaos before it got its banking system back in working order. If Mr. Schauble was proposing a process that would smooth this transition for Greece, the prospects for a quick recovery and renewed growth would be hugely increased.

The Greek government had not prepared itself for the process of leaving the euro. Perhaps the world will be surprised and the deal it reached with its creditors will provide a basis for renewed growth. But if not, it may want to get back in touch with Mr. Schauble.

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  1. July 21, 2015 at 12:57 pm

    Possibly the considered as bad for Greece Mr. Schauble proposes the best possible solution fot the country

  2. July 21, 2015 at 12:57 pm

    Reblogged this on iGlinavos and commented:
    What do Drachma lovers have in common with Schaeuble? Perhaps a lot more than you think…

  3. mike
    July 21, 2015 at 2:40 pm

    OTOH, researchers who aren’t traditional economists and who understand the importance of actual implementation feasibility have looked at the “Plan B” and “Greece is just like Argentina” fantasies that have been propounded here and elsewhere have concluded, as Varoufakis did, that Syriza inherited a “non-state” that wasn’t equipped to pull off a Grexit. Had YV been able to assure Tsipras that it could, he might have, might have decided differently. Instead we just have these blithe conclusions that defaulting could have been done by Greece without any additional problems than other nations have had.

  4. mike
  5. July 21, 2015 at 3:43 pm

    I’m not so sure about Mr Schäuble’s other policies, but his suggestion and offer of Grexit was the best proposal anyone has put forward in ages. Honestly it’s the best way. Greece turned out to be too inward-focused an economy to take advantage of the Euro. Being in the Euro causes it to run a trade deficit by consuming too many imports, and leaving will fix this problem by making imports expensive (I think the small added export competitiveness is a moot point).Leaving the Euro is essentially a protectionist measure that the weak Greek economy needs.

    A disorderly Grexit would indeed be a mess, with either the ECB or the Greek state confiscating Euro deposits and replacing them with Drachmas. There would also be a short term choice between shortages of imports (caused by hard capital controls) and rapid devaluation/inflation. All of that could be avoided if a cooperative Europe instructed the ECB to maintain Euro deposits and payments in Greece for a transitional period, and to maintain Euro access for businesses thereafter.

    • Blissex
      July 22, 2015 at 10:01 pm

      «The gold standard framing, the framing that the ECB has to be solvent, is wrong.»

      Oh please, anybody, even I, would like an unlimited never-to-be-repaid overdraft at the ECB. It just is a dream.

      The euro, the EU are indeed political projects. You probably know that very undemocratically the french government was going to veto german reunification unless the german government agreed to the euro. Pure and simple blackmail. However the german government extracted the concession that the new euro would be like a gold standard, and all 19 eurozone countries agreed to that; in practice they agreed to adopt the mark as their currency.

      The populations of 19 euro states were very happy about including the greek one, especially the poor.

      Because the drachma and other “weak” national currencies were instruments of upward redistribution in the eternal cycle of kleptocracies: the government borrows a lot abroad to feed their ravenous patronage networks, when the bill comes due they devalue and/or default (depending on whether the the debts were in national currency or not) in order to make the poor pay the costs by devaluing their wages, pensions and tiny savings, while the kleptocrats and their patronage network keep their untaxed loot in bank accounts abroad; in the case of Greece let’s not forget the Lagardere list.

      That’s why the lower income greeks want to stay in the EU and the eurozone, even at a high temporary cost, while the middle and upper classes who have huge accounts in swiss banks would rather have an exit from the euro.

      • July 23, 2015 at 5:18 pm

        I think you ascribe to the Greeks a better awareness of the steady state of Euro membership than they could reasonably possess. For Greece, the Euro has meant several years of consuming free money in a credit bubble, followed by the mechanical burst of that bubble and punitive governance imposed by creditors on top of it. Maybe my compatriots have deduced that the average of these two extremes is a state of relative contentment, better than the cycles of inflation and devaluation they had with the drachma. You say the Greeks prize stability. I don’t think so, I think they liked the free money.

        I mean sure, stability and low inflation would be nice, all other things being equal. If you asked a moderately wealthy Greek in the 80s would you like to convert your drachmas right now to Deutschmarks or Swiss Francs they’d say yes. That’s why rich people converted their drachmas to Swiss Francs. But if you ask the same people would you like to earn Deutschmarks or Swiss Franks from now on, in a German or Swiss economy, even the naive would think twice. Greece wasn’t competitive enough to enter that type of currency zone, and I think the people instinctively knew it.

        The misgiving is that Greeks thought, not unreasonably given the political climate in the 90s, that the Euro would soften and become like the dollar before their credit bubble would burst. That before crisis hit we would have a proper central bank undergoing QE, that ever expanding debt would be mutualised and parked at the central bank, and that any fiscal misadventures would be quietly monetised. Again, not an unreasonable world view. The US and Japan are like that. It’s just that thanks to German dominance the Eurozone didn’t turn out like that.

  6. July 21, 2015 at 3:57 pm

    There is a lot to be said in its own right for quitting the Euro. But there is no basis I law or economics for the Schaueble claim that default is incompatible with membership of the Euro. The Maastricht Treaty certainly contains nothing which says this. There is no reason to say that a currency area precludes default. The dollar will survive whatever Puerto Rico does to reduce its debt. The Euro could do the same if Greece defaulted.
    Nor is there any reason to think Schaueble’s proposal has benefits for other countries which might have debt problems. If Italy, say, gets into trouble, holders of Italian debt will not be reassured by the thought they face not only debt restructure but also currency depreciation.
    It might be that the idea is to raise the stakes, to make it more painful for countries that choose the easy way out. There is a long history of trying to ensure that disaster will follow if the right policies are not pursued. Such stories rarely end well.

  7. July 21, 2015 at 6:46 pm

    The Schaeuble proposal is nonsense.

    He says that only after exiting the eurozone can debt be restructured. That is frankly BS.

    If all creditors agreed that Greece should have 120bn of debt relief tomorrow, that could be granted. In the Eurozone, as well as out of the Eurozone.

    Schaeuble’s idea is frankly stupid. Instead of granting, say, 120bn debt relief, he suggests Greece exits the Eurozone,. devalues, and then gets granted even more debt relief. Greece will need debt relief of at least 250bn after exiting, as it will have a much smaller GDP (i euro terms)

    A finance minister in the biggest economy in Europe, who wants to double the losses for his taxpayers by refusing debt relief, and Dean Baker thinks it is a good idea!

    Please have a look at this blog full of alternative proposals for Greece:


  8. Blissex
    July 21, 2015 at 10:02 pm

    «Mr. Schauble insisted on severely punitive measures for Greece»

    Is not giving Greece an even bigger huge fiscal transfer a “severely punitive” thing? When fiscal transfers are excluded by the euro treaties that the greek government was so eager to sign that they committed fraud?

    What are the “severely punitive measures” then? In what way are they “punitive”? A list of facts would be nice to see.

    «as a condition for continuing support from the European Central Bank (ECB).»

    That support is also arguably illegal under the same Treaties that the greek government wasso eager to sign it committed fraud.

  9. July 22, 2015 at 11:32 am

    There is a subtle change in framing going on. The Eurozone is designed like a gold standard, and the unvoiced corollary of this philosophy is that central banks cannot take balance sheet losses. If central banks do take balance sheet losses, in order to preserve the gold standard ideology the losses must be transferred as real money loses to taxpayers. Before 2008 people did not think so! It takes a huge shift of framing to constrain central banks to be solvent, and it is profoundly damaging.

    The only reason issues such as Eurobonds or even Greece’s debt are divisive is this new framing of the central bank that has to be solvent. Notice how people complain that Germans would be on the hook for Eurobonds, or that Finns resent paying for the Greeks. Of course if you recast monetary policy as accounting it’s divisive. The conversation should never have been at that level. Eurobonds should be a debate about the proper rates of monetary expansion and interest. Peripheral debt should have been absorbed silently by the ECB and turned into a non-issue, leaving only constructive debate about competitiveness, subsidies, and institution-building.

    The gold standard framing, the framing that the ECB has to be solvent, is wrong. It doesn’t have to be that way. I think most of Europe doesn’t want it that way. It’s hard to challenge and overturn a framing, but we must.

    • Shirley
      August 25, 2015 at 11:40 pm

      Dr Schäuble qualified as a lawyer and he worked as an auditor before he went into politics. This background seems to constrain his thinking and makes it impossible for him to take the wider picture into consideration. Monetary policy is accounting for him and this is part of the trouble. This is apart from all the domestic political pressure on him.

  10. July 22, 2015 at 12:31 pm

    “He says that only after exiting the eurozone can debt be restructured. That is frankly BS.”

    Here is another view that it is BS:


  11. graccibros
    July 23, 2015 at 12:51 pm

    I think Dean, and all of us, need to take into account this interview with a close aide of Yanis Varoufakis, which puts Schauble’s scheme into perspective…


    In essence, it is not a friendly halfway gesture , five year trial or whatever form, with maybe debt relief dangled as the reward after more punishment. It’s meant to punish and make an example of Greece, much the way the American attitudes toward the black ghetto have worked out…: “they” are in the predicament they are in because they live in places where bad characters congregate. This is nothing “structural” about the economic system…either the changing pattern in Southern agriculture which American blacks (and whites) left, or the cruel fact that industrial jobs were beginning their anti-union migration west and south just about the time black migration into the cities crested.

  12. Alfonso S
    July 24, 2015 at 11:37 pm

    To be a hero, Schaüble should have made remaining in the Euro easier for Greece. Hadn’t been for the Euro, France, Spain, Italy would have all devaluated by now and Germany would have seen its wonderful trade surplus disappear overnight. So, enough for the German whining.
    In case that Schaüble’s “temporal” exit were feasible, countries will be tempted to do the same, so it will be a return to the European Echange Rate Mechanism…and countries devaluating cyclically to recover competitiveness. Therefore,a ridiculous idea for Germany.
    Schaüble and most of the current European establishment have no clue about geostrategy. We will awfully regret these years…provided that leaders were better in the future…a big if…
    Maybe Europe will end as a big Venice, a wonderful theme park of past glories for the enjoyment of American and Chinese Tourists…

  13. graccibros
    July 25, 2015 at 3:06 pm

    Things get complex Dean, very complex; Herr Schauble could have sincerely been an advocate for Greek Exit (I had the contraction) but been so very dark punitive motives, “lesson teaching.”

    But I want to use this occasion to explore some of the broader economic and ecological questions surrounding the Greek “situation,” which extends to the nature of modern economies and the governing orthodoxies, ideas behind them, at least the Western ones, and that would be neoliberalism. I’m going to suggest everyone take a look at James Surowieki’s one pager on Greece, very recent, here at http://www.newyorker.com/magazine/2015/07/27/how-can-greece-take-charge
    because it covers so well the terrain I want to examine, even brings in James Galbraith’s role as advisor to Yanis Varouvakis over the past year, mostly kept out of sight. Surowiecki is a straddle, not in any one camp, perhaps slightly left of center, but at times here he sounds like a milder version of Mrs. Thatcher: “there are no alternatives” for Greece under current power relationships (he does not explore leaving) so what can they do if debt forgiveness is off the table and they have to live with the deflationary and truly neoliberal power arrangements as to who suffers (where taxes, wage cuts, labor market reforms and pension pain fall).

    His recommendations are logical and we’ve heard them before and I doubt, based on what I’ve heard from James Galbraith earlier, Greece does have these problems about being business friendly, especially small business friendly and taking rational steps to enhance their own advantages in tourism and climate especially. In just two years Greece has begun to reform the bureaucratic obstacles to small business formation and jumped 111 “places” on the World Bank index “ease of starting b…” But if that’s true, that it could have a “big impact,” where is it, has it registered? It should be done, even this writing social democrat leaning strongly towards exist can agree to that, but this is the universal boilerplate in the West, was in conservative Mike Hogan’s Inaugural address in Maryland and duplicated almost word for word in Hillary Clinton’s Four Freedoms Park Speech and again in front of the New School. If everybody does it, how do the current laggards get ahead?

    Unsurprisingly, the two words at the heart of business and labor market reforms (Surowiecki stresses the former and doesn’t want to get his hands dirty in the ugly inevitability of the later, in true neoliberal globalizing form…just like the fate of labor has unfolded in the US, 1975-2015, with the winds just shifting over the past two years…) are “productivity” and “efficiency,” two good German neoliberal words as at home in Frankfort as in Chicago, Cambridge and Silicon Valley. These words are surely at the heart of the neoliberal mindset, at the preaching and theoretical level, but let’s not forget the full history of the Southern periphery laggards…Spain, Portugal, Greece, the Balkans and yes, other parts of Eastern Europe, including the Ukraine. As J.L. Talmon reminded us in “Romanticism and Revolt: Europe 1815-1848, surely not on any economic syllabus that I know of except maybe Robert Skidelsky’s, Greece spent three centuries under Ottoman rule before its revolt in the early 19th century, which thrilled Romantically inclined (and broader) parts of Europe…and a member of good European royalty was installed…but deep habits had been formed against governments…evade and conceal, as Surowiecki reminds us on the low level of trust and tax collection…and as Michael Lewis also stressed in his Vanity Fair article about his trip to a wheeling and dealing ancient monastery (2010)…As I’ve written before, a good portion of Greek society is not fully in the modern world, has been opposed like good portions in Spain, Italy and Portugal, to the liberal political movement that goes along with liberal economics (conservative economics in today’s translation), the same impulse of opposition which for so long delayed the Vatican’s acceptance of the secular-scientific, atomistic individualism at the heart of liberal and neoliberal world views. And I don’t see many reruns of “Zorba the Greek” on my cheap movie channel…for a more colorful presentation of Greek idiosyncrasies, at odds with the modern counting house. For better or worse…

    Don’t get me wrong, I think Surowiecki has some sound proposals, which Galbraith would agree with, and they have to be done stay or leave. But either way, and this comes back to Dean Baker’s, and other’s glibness on the costs of exiting and going it alone. Surowiecke hints at some of the potential troubles, or more accurately, leaves me the necessity of teasing out some different conclusions, questions at this point. Olive oil; yes, I knew Greece raises the olives, along with citrus fruits, dates…and other Mediterranean ag produce, but that sector has shrunk from its pre-entry side, as all the studies for the plunge were urging it to do, urging it in good neoliberal-globalizing “form,” to specialize and open itself fully to international cost advantage – at least the Euro form of it, which does, it is true, still heavily subsidize ag but is moving away at US urging…

    Back to the olive oil, and I didn’t know that Greek was best, not Italian, but the Greek oil goes to Italian firms, marked up with little or no credit to Greece; Surowiecki says “take it back” but I have to wonder about the power relationships that led to this arrangement in the first place. Banks are involved in trade like this, perhaps Greek and Italian…under the drift of globalizing and internal Euro rules, bigger firms have capital and marketing power, and who knows, it may have been Greek banks who urged Greek growers and exporters to take advantage of Italian processing and marketing…

    So is Surowiecki, restrained as he is in his grudging acceptance of current Greek realities, really understanding the modern economic trends away from self-sufficiency…how much globalization undercuts old specialties that nations had, with Greek olive oil following the same logic higher economic advice from Cambridge and Chicago and the financial centers in NY and London, the same pathway that our sages here delivered for our de-industrialization, and leaving us, as in yesterday’s front page NY Times story about confronting Chinese economic diplomacy around the world…confronting the full effects of the logical outcome of the prevailing economic theories of the past 30-40 years?

    I’ll leave it at that, this is getting too long but I think you see my challenge to Surowiecki’s advice – even as I might be offering much of the same…and isn’t the US caught up in soliciting the world’s unappreciated new economic talent, whether from Ireland, recently fleeing, India, China…everywhere…so that this good advice on this score to bring back and keep native Greek entrepreneurial and technical talent, also runs against the prevailing trends, and certainly doctrines of the world’s last great Utopian project from the Enlightenment – one grand market under globalization and neoliberalism, as John Gray has presented. And where is he in this debate?

    • graccibros
      July 25, 2015 at 3:27 pm

      Sorry folks, that first paragraph from Gracci Bros above should read:

      Things get complex Dean, very complex; Herr Schauble could have sincerely been an advocate for Greek Exit (I hate the contraction) but also, at the same time, done so for very dark punitive motives, “lesson teaching…”

      My editor has been on an extended vacation. Herr Schauble might say “Greek like vacation.”

  14. graccibros
    August 2, 2015 at 8:37 pm

    I thought this posting, interview with Yanis Varoufakis speaks directly to your hopes Dean Baker, because it addresses what Yanis believes Herr Schauble is up to:


  15. Baryn
    August 28, 2015 at 10:48 pm

    Speaking about Dr. Wolfgang Smeagol
    I am not so sure about his intentions.

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