Paul Krugman's column today looks at Greece and the nations insisting on debt repayments that are counter-productive. Weimar on the Aegean draws parallels between the treatment of Germany after World War I, and Greece today.
In the end, and inevitably, the actual sums collected from Germany fell far short of Allied demands. But the attempt to levy tribute on a ruined nation — incredibly, France actually invaded and occupied the Ruhr, Germany’s industrial heartland, in an effort to extract payment — crippled German democracy and poisoned relations with its neighbors.
Which brings us to the confrontation between Greece and its creditors.
Dr. Krugman is arguing that the levels of debt repayment the rest of the E.U. is insisting Greece meet are counter-productive and impossible to sustain. And yet, the determination to squeeze blood from a stone is showing no signs of weakening.
More below the Orange Omnilepticon.
There is a continuing cry from certain quarters that easing up on Greece will lead to hyperinflation; currency will be debased, and so on. As Dr. K notes:
Try to talk about the policies we need in a depressed world economy, and someone is sure to counter with the specter of Weimar Germany, supposedly an object lesson in the dangers of budget deficits and monetary expansion. But the history of Germany after World War I is almost always cited in a curiously selective way. We hear endlessly about the hyperinflation of 1923, when people carted around wheelbarrows full of cash, but we never hear about the much more relevant deflation of the early 1930s, as the government of Chancellor Brüning — having learned the wrong lessons — tried to defend Germany’s peg to gold with tight money and harsh austerity.
And what about what happened before the hyperinflation, when the victorious Allies tried to force Germany to pay huge reparations? That’s also a tale with a lot of modern relevance, because it has a direct bearing on the crisis now brewing over Greece.
The point is that now, more than ever, it is crucial that Europe’s leaders remember the right history. If they don’t, the European project of peace and democracy through prosperity will not survive.
emphasis added
Some Background
The conventional narrative, as I understand it, is that Greece got into trouble by borrowing heavily to support government spending, and got in over its head. Widespread tax evasion, government fiscal irresponsibility and too generous social programs led to economic collapse. it's certainly a story that seems readily understandable - we are constantly hearing dire warnings about the same danger in the U.S. and elsewhere.
What gets less attention is that Greece got into trouble because joining the European Union and adopting the Euro as a currency played a critical role. For one, giving up the ability to control its own currency meant that Greece could not adjust for trade imbalances by letting its money become cheaper or more expensive as needed. There's no effective mechanism for balancing countries that are doing well at the expense of those that aren't, some way of transferring revenue to compensate. There's a common currency, but not a common fiscal policy. (Here and here.)
What's also a factor is that the financial sector played a role in setting up the Greek debt crisis that has been largely swept out of sight. The same kind of financial 'innovation' that led to the Great Recession helped magnify Greece's debt problems.
As in the American subprime crisis and the implosion of the American International Group, financial derivatives played a role in the run-up of Greek debt. Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere.
In dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books. Greece, for example, traded away the rights to airport fees and lottery proceeds in years to come.
Critics say that such deals, because they are not recorded as loans, mislead investors and regulators about the depth of a country’s liabilities.
Some of the Greek deals were named after figures in Greek mythology. One of them, for instance, was called Aeolos, after the god of the winds.
The crisis in Greece poses the most significant challenge yet to Europe’s common currency, the euro, and the Continent’s goal of economic unity. The country is, in the argot of banking, too big to be allowed to fail. Greece owes the world $300 billion, and major banks are on the hook for much of that debt. A default would reverberate around the globe.
While the Times article from 2010 mentions Goldman-Sachs only in passing,
a more recent Alternet write up is a bit more damning.
Goldman’s role in the Greek crisis goes back to 2001. The vampire squid, smelling money in Greece’s debt problems, jabbed its blood funnel into Greek fiscal management, sucking out high fees to hide the extent of Greece’s debt in complicated derivatives. The squid then hedged its bets by shorting Greek debt. Bearish bets on Greek debt launched by heavyweight hedge funds in late 2009 put selling pressure on the euro, forcing Greece into the bailout and austerity measures that have since destroyed its economy.
Before the December 2014 parliamentary vote that brought down the Greek government, Goldman repeated the power play that has long held the eurozone in thrall to an unelected banking elite. In a note titled “From GRecovery to GRelapse,” reprinted on Zerohedge, it warned that “the room for Greece to meaningfully backtrack from the reforms that have already been implemented is very limited.”
Goldman-Sachs essentially made a series of loans and other financial deals with Greece that were designed to fail, helped cook the books to hide them - and then bet against them to make money from that failure. Which brings us up to today.
(For more on Goldman-Sachs, Matt Taibbi's 2010 Rolling Stone article is a Must Read.)
Beyond Weimar
The problem of Greece is being treated as a morality play - they behaved badly and should expect consequences. What this narrative excludes is that there were others who behaved badly, are NOT suffering consequences, and are in a position to benefit from tightening the screws. Then there are those who have already experienced consequences, the political parties in Greece that got the country into the mess and have been voted out of power. (Which is kind of what democracy is supposed to be about.) That might be considered a real reform - except the parties in the E.U. that contributed to the situation for the most part have not suffered a similar reversal.
Also not mentioned is the extent to which problems with the way the Euro is set up tilt the playing field. Further complicating matters is that governments in Spain, Ireland, Portugal, who have been suffering from imposed austerity policies for their own debt problems are in no mood to let Greece off the hook - or let their voters see there might be alternatives. (They definitely don't walk to talk about Iceland's recovery, which was helped by the country keeping its own currency and imposing controls on capital flows.)
Dr. Krugman points out that the levels of debt repayment being asked of a Greek economy, given the economic devastation, are unreasonable.
You can argue that Greece brought its problems on itself, although it had a lot of help from irresponsible lenders. At this point, however, the simple fact is that Greece cannot pay its debts in full. Austerity has devastated its economy as thoroughly as military defeat devastated Germany — real Greek G.D.P. per capita fell 26 percent from 2007 to 2013, compared with a German decline of 29 percent from 1913 to 1919.
Despite this catastrophe, Greece is making payments to its creditors, running a primary surplus — an excess of revenue over spending other than interest — of around 1.5 percent of G.D.P. And the new Greek government is willing to keep running that surplus. What it is not willing to do is meet creditor demands that it triple the surplus, and keep running huge surpluses for many years to come.
What would happen if Greece were to try to generate those huge surpluses? It would have to further slash government spending — but that wouldn’t be the end of the story. Spending cuts have already driven Greece into a deep depression, and further cuts would make that depression deeper. Falling incomes would, however, mean falling tax receipts, so that the deficit would decline by much less than the initial reduction in spending — probably less than half as much. To meet its target, then, Greece would have to do another round of cuts, and then another.
emphasis added
The danger, as Dr. Krugman warns, is that E.U. insistence on repayment at a rate the Greeks can not sustain, is the collapse of the European idea - that shared prosperity from the bottom to the top was the best way to avoid war. The Euro was intended to tie the countries of the European Union together even more firmly, for advantages in trade and so on. Alas, shortcomings in the framework the Euro is based on are contributing to the problems now stressing the union.
What Was Different After World War II?
As Dr. Krugman implies, intransigence on the part of the victors after World War I and their insistence on reparations were ultimately self-defeating. It's instructive to look at the aftermath of World War II and consider the differences.
The United States came out of World War II with the domestic infrastructure largely intact. It was faced with the huge problem of reintegrating millions of returning veterans into an economy that was winding down after the massive government spending for the war effort was coming to an end. Given the debt from the war, it would have been reasonable for the government to keep cutting spending. But... several things happened.
The G.I. Bill enabled millions of veterans to get a college education, buy homes, and enjoy other benefits. It was fought by the usual suspects, but it passed, partly because of lessons learned from World War I. Granted, these were not extended to women or minorities, but it was still a massive social expenditure for a country recovering from war.
A further difference was a huge investment in the international community, known as the Marshall Plan. The United States, beginning in 1947, took steps to deal with a devastated Europe.
The European Recovery Program
Sixteen nations, including Germany, became part of the program and shaped the assistance they required, state by state, with administrative and technical assistance provided through the Economic Cooperation Administration (ECA) of the United States. European nations received nearly $13 billion in aid, which initially resulted in shipments of food, staples, fuel and machinery from the United States and later resulted in investment in industrial capacity in Europe. Marshall Plan funding ended in 1951.
Results
Marshall Plan nations were assisted greatly in their economic recovery. From 1948 through 1952 European economies grew at an unprecedented rate. Trade relations led to the formation of the North Atlantic alliance. Economic prosperity led by coal and steel industries helped to shape what we know now as the European Union.
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Japan too became the object of a program to rebuild its economy following its defeat.
It's necessary to note that the humanitarian efforts and social spending were not entirely based on pure altruism. The expansion of the Soviet Union and the Iron Curtain served notice (as if the rise of Nazi Germany hadn't been enough lesson) that allowing countries to fall into economic collapse and alienation from their neighbors was a recipe for further conflict and a danger to the very idea of democracy. Rebuilding these economies - including those of former belligerents - was seen as an essential part of national defense and an investment in the future. The decades since have seen how well those investments have paid off.
But it's also useful to look at some different aspects of the era. The depression had shown that unregulated capitalism and market forces could not be trusted to produce prosperity or economic stability; the needs of the few sacrificed the good of the many. Going into World War II, the United States had seen the American people look to government as the means to improve their lives, where the markets had failed and failed miserably.
The war years saw the role of government increase even more; it was not longer about rebuilding the economy - it was about survival. The private sector entered into partnership with the government to win the war and rebuild afterwards. It did not hurt that the worshippers of capitalism had seen that their excesses were making communism look like a real alternative for too many who had been failed. The financiers who had put the U.S. through a long cycle of booms and busts had been reined in with things like the Glass-Steagall Act; the progressive tax rates put in place to deal with the depression and pay for WW II also helped ensure that growth in the economy was shared, as did the role of unions in fighting for that share.
(A 2010 piece at the Booman Tribune gives a great recap of the real impact FDR and the New Deal had on America.)
Huge investments by the public sector for the public good both at home and abroad paid off with prosperity for decades. Public investment resulted in private growth - as well as a better world for everyone where it reached. And then things began to go wrong.
So WTF?
Conservatives have never been in favor of government working to build general prosperity or the public good; they see its proper function is to simply preserve their own private and personal prosperity, and the devil take everyone else. They looked at the triumph of the West over the fall of the Soviet Union, and took it as proof that total government control of the economy was a disaster. They drew the conclusion that the answer was to remove government control entirely and cut both government spending and taxes, while making the private sector supreme.
They fail to see that total rejection of a role for the government in the economy is as big a fallacy as a total embrace of it. They see what they want to see, and are busy re-writing history to conform to their beliefs.
The success of big investments in the public sphere and the policies that led to decades of economic growth have had the paradoxical effect of allowing people to forget why they were both effective and necessary. We've seen the rebirth of a moneyed-elite who never experienced the Great Depression or World War II, and who assume that markets 'just happen'. All they can see about government is that it gets in the way of them piling up more money in a world they see as a zero-sum game. For them to win, someone else has to lose; public gain can only come at private expense; less government = freedom - for them.
And so we see the war on labor and rising inequality. We see a country where things are falling apart while our competitors invest in their countries. We see a country where freedom to make obscene amounts of money comes at the expense of freedom from the public good, freedom from insecurity, freedom from poisoned food, air and water, and freedom from consequences of bad behavior on the part of the wealthy. We see a country where a business can be "too big to fail" - but millions are left by the roadside.
The Business Insider article linked above in reference to progressive taxes has a number of conclusions, two of which seem apropos:
• Contrary to what Republicans would have you believe, super-high tax rates on rich people do not appear to hurt the economy or make people lazy: During the 1950s and early 1960s, the top bracket income tax rate was over 90%--and the economy, middle-class, and stock market boomed.
• Super-low tax rates on rich people also appear to be correlated with unsustainable sugar highs in the economy--brief, enjoyable booms followed by protracted busts. They also appear to be correlated with very high inequality. (For example, see the 1920s and now).
In contrast to the philosophy and facts backing up the ideas behind the New Deal, we got
Thatcherism (There is no such thing as society"),
Reaganomics ("Trickle-down" voodoo economics, and "The government isn't the solution to our problems - the government IS the problem.") And now we have
leaders whose understanding of economics is based on the skewed world view of a writer of
appallingly bad fiction, who had
serious social issues.
Attitudes towards Greece might be more charitable if it had actually suffered an invasion with physical destruction*; destruction of the economy by bad financial actors, politicians with flawed economic policies, and serious consequences for those with the least responsibility for the mess apparently don't count. There might not be the body count an armed conflict would have produced, but the toll of blighted lives is an not inconsiderable burden. Neither is the loss of faith in democratic government or the international community.
(* Considering the reflex reaction of conservatives to natural disasters "We can't afford to do anything. You're on your own, because freedumb," well maybe not.)
Treating Greece as a morality play where There Must Be Punishment is a phenomenon being seen everywhere there is economic stress; always it seems to be the victims who must bear the costs of their misfortunes, while those who made it possible walk, even profit. Impoverishing Greece to make debts balance on a balance sheet at the cost of any viable economic future for the country is insane on the face of it; people whose world view is based on the private instead of the public fail to understand the real differences between the two, and fall back on wrong analogies.
While Dr. Krugman is looking at the inability of European leaders to remember the real lessons from the Wiemar Republic, the bigger problem is their disregard for the larger history - the stuff we should have learned from the Great Depression, World War II - and the recovery after it.