Economics

Europe’s Greek Failure

Jul 9, 2015 Daniel Gros

Narratives matter, especially when they are intertwined with hard interests. As Greece and its creditors court catastrophe, we are getting a clear picture of how conflicting narratives can lead to a lose-lose result.

BRUSSELS – Narratives matter, especially when they are intertwined with hard interests. As Greece and its creditors court catastrophe, we are getting a clear picture of how conflicting narratives can lead to a lose-lose result.

The facts are indisputable. In early 2010, when the Greek government could no longer finance itself, it turned to its European partners and the International Monetary Fund for financial support. And they delivered: not only did other eurozone countries issue loans to Greece, but the IMF provided its largest-ever loan to the country. Later, Greece received even more support through the eurozone’s bailout funds. The result was hundreds of billions of euros worth of assistance.

But, as time progressed, Greece and its creditors came to view these facts very differently. As Greece’s economic situation deteriorated, its citizens got the sense that the loans were not really intended to help them, but rather to bail out German and French banks. With this narrative, Greeks could avoid admitting the role of their own government’s policy mistakes in thrusting them into recession.

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0 Comments on this paragraph, 25 Comments on this article

Stamatis Kavvadias Jul 15, 2015

For the author's information From the recently leaked IMF document:
"If Europe prefers to again provide debt relief through maturity extension, there would have to be a very dramatic extension with grace periods of, say, 30 years on the entire stock of European debt, including new assistance. This reflects the basic premise that debt cannot be assumed to migrate back onto the balance sheet of the private sector at interest rates close to the current AAA rates before debt levels have been brought to much lower levels; borrowing at anything but AAA rates in the near term will bring about an unsustainable debt dynamic for the next several decades. Other options include explicit annual transfers to the Greek budget or deep upfront haircuts. The choice between the various options is for Greece and its European partners to decide."

This clearly mrans there's still repayments to the European private sector, important enough to be mentioned as a problematic factor for sustainability onwards. In effect, the author is as deaf to numerous assessments of less than 10% of the bailout reaching the Greek government and biased in his interpretation that losses of French and German banks suffered losses adequate to counter the supposed Greek "narrative".

If you add to that the 50 billion of the SMP program of the ECB that Greece has been paying in face value, supposedly returned to Greece but at the lenders' convince and conditionality, this is a very partial analysis of the Greek arguments.
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Peter J. Sträter Jul 13, 2015

What -also- this article ignores that both Greece and the other Euro-members refuse to reform. They both live since many yeras beyond their means, as evidenced by ever increasing sovereign and private debt. As a consequence, we will see in a not so farr future old-age poverty as still existed untill 1945.
Peter J. Sträter
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A C Jul 12, 2015

exactly.. we have european problems but local politics
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Jules Pierre Jul 12, 2015

Well Merkel's running for the German electors and Tsipras's running for the Greek ones so it wasn't in their personal interest to conclude the deal.

The Greek don't want to pay taxes and neither do the German. That's as stupid.
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Erikwim During Jul 12, 2015

The Great Narrative of the Neutral Party, the Third Narrative. That is what Gros produced, and it is simply flawed. He nkows very well the story starts much earlier in time, with the early concepts of the euro and then the failed ERM, an dfinally the Euro we have today. Connolly wrote in 1995 the script for teh Euro that is now playing out. It was completely foretold and foreseen the peripheral countries would first boom and then suffer tremendously, as they did with the ERM. Germany and France new this very well or shoudl have known and decided to go ahead anyway. They new the Euro would provide temptingly cheap money to peripheral countries, they new this would foster booms and corruption, they knew this could only end in loans turning bad. They hoped and still hope the unavoidable crisis would force further European integration. The Greek people were screwed by all: the European elite first, their own politicians second, private banks third, the Trojka fourth.

With your moderate narrative you are forgetting we are talking about the lives of millions of unemployed, indebted, evicted people, not just in Greece but also in Spain, Italy, Portugal, Ireland. The ERM experience should have been enough, there was no need to repeat the exact same mistakes with the Euro. Implementing the Euro should have come with a much better transition plan, if at all. Now that the damage is done, the right thing to do is to clean up the mess together.
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Hans Suter Jul 12, 2015

reads like the story of a clash between equal partners. It's the world's largest economy vs. a rounding error.
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John Doyle Jul 12, 2015

There is an element in the room here that no one is touching. It is the nature of debt. Bankers are keen for us to believe their debts have moral force, but they do not. Moral force applies to interpersonal debts, where no repayment costs real assets. Bank create loans from thin air, but expect real assets to be deposited to defray their loans. However the loans are not ever real money in their books , just numbers in accounts. both setting up and repayments are just adjusting numbers in accounts. Ne money changes hands in either direction. It's only real money outside the bank. Consequently the bank earns nothing on the capital only on the interest received can they earn any money. That is all they miss out on if a loan defaults or not. It makes little difference. So, if Greece only paid the interest, the creditor banks would be just as well off as if it all went according to plan!!!
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Marinus Huizer Jul 12, 2015

Why is there talk of "saving Greece". That is not what is happening. It does not matter what happens to the Greek economy, because it is basically a rounding error. What matters is that the EU needs a mechanism to deal with insurgencies by states who fail to meet their obligations under the various treaties, ie adhere to the loss of sovereignty inherent in Uniom membership. If the government of the day is as unreliable as Greece's it does not belong in a community where all enforcement mechanisms are non-military. Of course it would have been better to have an EU without the UK and Greece, and have only all the smaller states that are closely connected to Germany in the single currency. Unfortumately, it was a French concept (when a currency board-style arrangement like what Austria and Holland used to have was politically unfeasible for a country with pretensions to Grandeur) and part of the price for German reunification. Maybe a break in the EUR group would achieve a more logical arrangement. Unfortunately, the recurrent episodes of EUR weakness are a boon/drug for the manufacturing industries of Greater Germany (just imagine where the EUR/USD would have been without the various crises of the past seven years), much like Asonomics is for Japan.
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George Rosenberg Jul 11, 2015

The one element here (which perhaps reflects the author's employment experience) is his description of why the talks broke down over how the fiscal targets might be reached. In fact they broke down over the fiscal targets themselves when the Greek side realised (in my view correctly) that however they were achieved they could not be sustained. On the EZ side this was probably also recognised, so there was a perhaps unspoken relief that the talks had broken down - on a conspiracy theory even a desire they might break down. The Greek economy is in such a slump that any increase in the burden, wherever distributed will only contribute to the spiral. All solutions which leave repaying debt in the equation at least for the immediate future are impossible. The deal which may be done today or tomorrow will not work for this reason. A primary surplus, if achieved, is only primary. How do the debt repayments get paid except by more debt?
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hari naidu Jul 10, 2015

Now, 3rd Bailout will be approved, methinks, on Sun 12 Jul on geopolitical grounds more than fundamental economic raison d'etre. Because geopolitical consequences have now become more than manifest for Brussels. They have to suck it & accept the reform & adjustment program of Tsipras.

Both sides now need a breathing space for a couple of years while Athens desperately needs to retool its national fiscal and administrative reforms.
- yancey simon Jul 10, 2015
  
  Excellent post and precisely on target.
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hari naidu Jul 10, 2015

Dr Jens Weidmann (President of the Deutsche Bundesbank)
was from 2006 - 2011 - Head of the Department for Economic and Fiscal Policy at the Federal Chancellor's Office Latterly also personal representative of the Federal Chancellor charged with preparations for the world economic summits of the G8 and G20 countries ----

*2010 Greece Bailout was in his court to advise Merkel what to do and why.

* under existing treaty language bailout was not allowed; so Merkel decided not to bailout Greece.

*Euro 10 Billion would have done the job at the time, according to most informed experts.

*Daniel also knows it!

There was no one capable of changing the political paradigm and making the unexpected decision to bailout Greece, at the time. Instead Berlin's propaganda against Athens reached a crescendo...including Greek retirement @ 50!

#Failure was not only Merkel's but her economic advisor - Jens. He has to come out of his cobwebs and finally explain his raison d'etre why not to bailout Greece at the time. And why he finally agreed to support it later...
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Marc Laventurier Jul 10, 2015

Since everyone is so comfy in their little nested narratives, try this one on for size:
According to UNICEF, 22,000 children die each day due to poverty. And they “die quietly in some of the poorest villages on earth, far removed from the scrutiny and the conscience of the world. Being meek and weak in life makes these dying multitudes even more invisible in death.”
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Ed Jansen Jul 9, 2015

It's a relief to read an article that tries to look at both 'narratives' and judging them on their value without, one-sidedly supporting one, and attacking the other.
I agree with the last two sentences:

"This highlights a larger problem: the European Union lacks a unifying narrative strong enough to prevent the emergence of conflicting – and highly destructive – narratives within its borders. In this sense, the failure to save Greece amounts to a failure of Europe"

The main reason for the conflicting narratives, as already hinted at in the previous, is the cultural diffference between North and South. The North feels it has all the right to impose whatever on Greece, as Greece is the debtor, and as such should just execute the orders given.
The South (Greece in this case) do not see so sharply that they as a debtor should do whatever they are told; they don't see debt as much as a moral issue as the North sees it
This difference of looking at debt (and other issues) is at the core in my view of the differing narratives
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Léonard Lovallo Jul 9, 2015

There is another narrative; the unspoken narrative, which being that Germany needs the common currency more than the common currency needs Germany. Briefly to explain: Germany is a country that is incapable of internally consuming its economic output which requires that Germany export the surplus, roughly 50% of what it produces in the round numbers (lest Germany suffer lots of unemployment). The common currency zone comprised of countries of differing efficiency and productivity levels facilitates the German export business model in a manner that has brought prosperity to the German economy for three reasons. First it creates a free trade zone for highly efficient and productive Germany composed of 18 European countries that in the aggregate are less so. Second given that Germany is at present the strongest economy in the Euro zone and that market theory would imply the Euro exchange rate is based on the aggregate economic strength of the 19, Germany has the benefit of an artificially undervalued currency in export markets worldwide. Third, those countries in Europe less competitive than Germany but in the common currency cannot devalue their currency to better compete with Germany.
Thus it is an imperative for Germany to keep the common currency from unraveling, and if necessary as a last resort in the emergencies to effectively write the checks to do so. Likely Angela understands this. Tsip’ and Var’ likely counted on this (would explain their expressions of confidence throughout the process). What the dynamic duo overlooked was that inasmuch as Angela had not explained this narrative to the German public it would not be politically possible to do so. The second likely miscalculation by the dynamic duo was their failure to realize that a good day for Angela is one that ends with no one pointing the fingers of blame at her and thus her strategy would be one to insure this outcome. Reason Greece now finds itself in a position of either having to work within the confines of political reality in Germany or drive itself off of the cliff.
- Stamatis Kavvadias Jul 15, 2015
  
  Indeed, much more to the point. Also explains the undemocratic outcome that would emerge, no matter what the deal was, for any such conflict in the Eurozone,since it lacks the federal institutions to address it.
  
  One more thing. In my view, trust to Eurozone and the euro has been breached; if not, it totters. It will not be long before consumers become biased against German products -- which I am already. This would be an appropriate response to the economic situation of German money flooding southern EZ, but might not be enough or be exaggerated. Thus, instability will likely become the norm.
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- yancey simon Jul 10, 2015
  
  Excellent analysis and spot on.
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M M Jul 9, 2015

There are elements in this article that are correct but many elements that are missing. The EU/EZ/NATO in their current form, are not ready for any crises, albeit financial, political, natural, etc. The EU/EZ/NATO should go back to their true founding principles and then work things through, but for this to happen one shall need to have the right type of leadership first. Nations / Populations do not make policies. This is the responsibility of the leadership of these nations.
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Sarantos K. Aivaliotis Jul 9, 2015

An excellent article. May I make a comment and a suggestion.

First the comment: Everyone knew probably as early as 2010 that Greece's debt was unsustainable, certainly Mrs. Merkel admitted it is 2011 as IMF did in 2013, let alone the most recent INF report three days before the Greek referendum. The fact that some Europeans don't want to admit it even today can only be regarded as hypocritical and irresponsible towards not only the Greeks but Europe at large including their own electorate who remains misinformed.

Second my suggestion: Most people do not know how the 100B Euro PRIVATE debt was piled on to Greece's PUBLIC debt in 2009/2010. This potentially illegal addition was purely for the purpose to safeguard irresponsible Greek, German and France banks who lent irresponsibly at low interest rates to non-deserving borrowers (analogous to what happened in the US in 2008/2009). It would be educational for all if you could please explain how the Greek deficit was suddenly inflated in 2009 by Papandreou leading to extraordinary interest rate increase which subsequently ked to the private debt transfer to the Greek state. Please educate us on how and why this was done then (my sources tell me there was an agreement by the Greek, German and French governments then) but I am sure you know better.

Thank you!
Sandy K. Aivaliotis
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Curtis Carpenter Jul 9, 2015

"By the time the eurozone governments intervened decisively, most French and German banks had largely unloaded their holdings at a loss to hedge funds and other investors with a greater appetite for risk. "

Yet a third narrative at work perhaps? It would be interesting to have some more details as to its story line.
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Adrian Lucas Jul 9, 2015

I do not agree with this analysis, because it suggests that each side (creditors, debtors) has a unitary narrative of "what happened". But this is simply not the case. The whole problem is that neither side has a unitary narrative, hence compromise is doubly difficult. Amongst Greeks, there is a spectrum of narratives of "what happened", and no unitary narrative is representative of the Greek demos. This has been Tsipras' problem since January: even amongst Syriza supporters, there is a diversity of narratives that cannot be brought together into one consistent narrative, and Tsipras' zig-zagging (it reminds one of Hamlet?) is not utter madness, but has the goal of "keeping everyone on board" but of course risks "everyone going overboard". And on the side of the creditors, things are equally complex: there is no unitary narrative, not even between heads of governments (consider the differences between ministers of governments of France/Italy versus ministers of governments of Germany/Finland/Slovakia). Tsipras is a Hamletian character: Tsipras/Hamlet wants to avenge a wrong (murdered father = Greek sovereignty; usurper king = Troika; Hamlet's mother = Greece), Tsipras/Hamlet means well, but fails. The referendum has the same function as the play-within-the-play of Hamlet.
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Michael Public Jul 9, 2015

It was a negotiation in public. So narratives were dragged into it to gain an advantage. Like you say, they probably had the opposite effect to what was intended.
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Seamus O'Brien Jul 9, 2015

Thanks for the well written piece. It seems to me that one of the main elements missing from the reforms is a strategy for creating jobs in the private sector. Have the stronger economies in Europe given any incentives to employers to invest in the weaker countries until they get back on track.
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Cam Jennings Jul 9, 2015

Daniel thank you for your insightful piece and finally someone has spoken above the chattering masses.
Yes Greek tragedy still exists and the Greeks may have done a Faust movement as characters playing out a scene from a modern production, but the executive directors and producers of this tragic crisis have been mentioned in you article. Now if we are about to have further global issues then let us get on with the show and learn from these mistakes and set about cleaning up America first and then the rest of the world with the required structural reforms. The systemic flaws in global economics has one origin and that is the morally and ethically bankrupt USA. Sorry for all you eagle supporters out there and I would rather back the eagle than a bear or a dragon...but let's face it Chuck... the buck stops there.
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