Thursday, 9 July 2015

Greece: a response to Martin Wolf

A response to Martin Wolf's Financial Times article "Grexit will leave the Euro fragile" published on 8 July 2015 (

Dear Martin,

banks / private creditors shouldn't have been bailed-out and should have suffered the full losses of a Greek debt restructuring. Agreed. 

However, you are missing a few points: 

(i) there was a bail-in of banks / private lenders in 2012. The net present value of the resulting debt relief amounts to Eur 100bn, i.e., around 50% of Greek GDP.

(ii) you argue "the financing provided by the Troika was of negligible benefit for Greece". You are wrong. 

Greece was running both a public deficit and a current account deficit of over 10%. Even if the banks/ private lenders had borne the full burden of a Greek debt restructuring, Greece would still have had to deal with this twin deficit. Without the financing provided by the Troika the adjustment would have had to take place in a few weeks or in a few months at best. The resulting massive spending cuts in such a short period of time would have led to a rapid collapse of the Greek economy (assuming a public spending multiplier of 2 - a conservative assumption in an economy cut off from external financing - public spending cuts accounting for 10% of GDP would have led to a 20% sudden collapse in GDP).

The financing provided by the Troika gave the Greek authorities the chance to adjust more slowly. The consolidation of public finances - the so-called austerity - would always drag the GDP down. Structural reforms (reform the judicial system, open up protected sectors to competition, fight tax evasion....) would push up GDP by attracting foreign direct investment (FDI). To be fair, Greece has implemented a massive austerity programme. But it barely delivered on structural reforms. The unwillingness to touch vested interests is not the Troika's or Eurozone's member countries fault.

(iii) you implicitly state that the Troika hasn't so far provided any meaningful debt relief to Greece. You are wrong again. As Paul De Grauwe shows: And as I had written in 2014: 

On a different note, the risk of financial contagion from a Grexit is now zero. It would be very different in 2010 or even 2012. But in the meantime the Eurozone has put mechanisms in place that make a contagion impossible. As a result, only countries that do not want to stay in the Eurozone will leave. There is no way that financial market forces can push a country out. Here is why:

The time has come for Greece to ask itself why it wants to stay in the Eurozone. You cannot impose reforms on a sovereign state unwilling to be reformed. And If Greece doesn't really want to reform, its Eurozone membership turns into a mere political prestige project. It has much more costs than benefits. In this case, let's face reality and be honest with oneself: EU membership outside the Eurozone is the best option for Greece. As well as for the Eurozone, and European Union, as a whole.

1 comment:

  1. Thank you. I've kept wondering about the often repeated claim that banks/private investors suffered no losses and Greece received no actual debt relief in 2010 -2012. I guess Martin Wolf would dispute the findings of e.g. this paper:

    It's quite demoralizing how little agreement there is about ANY numbers with regard to Greece -- starting with the supposed primary surpluses in 2013 and 2014 that economists and journalists ( Krugman, Wolf ) are touting while even Varoufakis (writing in 2014 and now IMF dispute them.

    Given Greece keeps its official books on cash basis, it is of course fairly easy to create all kinds of illusions, if need be. And you can always have police investigate your chief accounting officer for fraud if he reports his figures the way Eurostat wants him too, and not the customary Greek way.