How not to intervene in a crisis: Bank of Greece version

This was my reaction to reading this document, circulated on Twitter today by Ambrose Evans-Pritchard.

It makes some controversial forecasts, for a start, including predicting that Greece would be booted out of the European Union, not just the Euro, if there is no agreement leading to another bail-out.  Without substantiating this.  And really?  I can see scenarios where that happens, but many where it doesn’t.  Predictions like this are set against other statements – far more believable – that it’s actually very hard to forecast what would happen to Greece.

It makes many statements that are intensely political in the current climate.  Including, for example, asserting its  belief in further liberalising structural reforms, a matter on which central banks are not paid to be experts, even if, by dint of general knowledge, they might think they have their own views.  The likely response from many will be ‘oh, you central bank neoliberals with your connections to the networks of the Greek right, of course you would say that’, weakening the BoG’s ability to do its regular job.

An even more central example is the urging of continued Euro membership come what may.  Whether or not Greece stays in the Euro or sets up its own currency arrangements again is a decision not for the central bank of Greece, but for the Greek polity.  BoG might mount a defence pleading that its recommendations are the best for achieving its mandate of financial stability for Greece.  But agreement on harsh terms might not necessarily be better for that mandate.

If Greece were to leave the Euro, [when the executive could do whatever it likes with the Bank of Greece], and perhaps even if it does not, these political interventions bode ill.  They are highly likely to lead to pressure to make sure that the next round of appointments over which there is political discretion to be made on the basis of fealty and not economic and financial expertise.  Or at least that this will be expected.  And many bad things flow from that.  Central bank independence works best, and is most likely to be enduring, if it is, as far as possible, ‘instrument only’ independence, and questions of what central banks do and are for are left, at least in public, to the electorate and its representatives.

The report also a strange tactic, because has the effect of weakening the bargaining position of the BoG’s political masters.  If Grexit could be executed smoothly for Greeks, the Eurozone would feel under more pressure to offer more favourable terms.  And it’s a tactic that makes the bad things it fears would happen more likely to happen.  If you run around screaming ‘FIRE’ in a peacefully operating blast furnace, there’s more chance of a fire in the ensuing panic.

Conspiracy theories flourish in crises, and this report is likely to encourage the view that its implicit criticism and weakening of Syriza is a calculated political tactic.  Maybe it  isn’t, but the risk that it would be seen this way is surely plain, and makes the text all the more regrettable.

You can see that these concerns constrain the author.  For example, it’s not clear who they are urging to do what.  Are they saying Syriza should budge?  Or the Eurogroup?  Or are they urging a split the difference?  And on what criterion?  But this holding back only serves to make the document seem all the stranger and more desparate.


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6 Responses to How not to intervene in a crisis: Bank of Greece version

  1. iGlinavos says:

    Saying that Greece may be booted out of the EU is designed to freak the Greeks out (and trust me, it does freak all of us here with a Greek passport). It is not a firework though. My analysis (I have a whole chapter in my book about this) is that EU exit is the only ‘legal’ way to leave the Euro unilaterally (see here ). The operative word here is ‘unilaterally’. A Union decision to let them leave (by treaty amendment) may be another choice, but unlikely.

  2. Tony Yates says:

    Why unlikely? And anyway what about the possibilities of subsequent re-accession? Or ad-hoc agreements to replicate features of the EU in the meantime?

  3. C Milas says:

    Hi Tony,
    Very interesting post. If I were cynic, I would argue that the BoG intervened today because they don’t have the logistics (let alone the willingness) to take on board more tasks by printing drachmas (for instance). Nevertheless, again in my view, it makes sense for them to raise the alarm especially in light of the continuous withdrawal of Greek deposits…That said, your last paragraph is indeed spot on!

  4. toby_n says:

    I’m with you on this Tony. But worth reflecting the pretty much universal view of folks I’ve discussed this with today: they reflect that it would be irresponsible for passengers to effectively remain silent as the bus driver speeds towards the cliff. I get this, but think that this would probably also have been the argument used in defence of the colonels in 1967. That is to say, potentially contra-polity and contra-democracy. Thankfully we are speaking pens, not swords this time.

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