Some disorganised thoughts about what is going on.

It baffles me why Krugman/Paul Mason and others on Twitter view the referendum as logical, or a masterstroke.  It will be a referendum on an out of date document.  That was not even current at the time of the end of the negotiations.  It’s called on a complex set of questions and issues that it’s normally the purpose of elected representatives to decide.  And Tsipras is continuing to insist that it isn’t about exiting the Euro, obscuring the consequences of a ‘No’ for the Greek people.  This probably should not be surprising, since it’s an echo of the ‘have your cake and eat it’ platform on which they stood, which emphasised the paramount importance of staying in the Euro, and cancelling debt and austerity.  Which were not obviously achievable.

If the referendum was a genuine tactic to help deliver or shape an agreement, why call it so late, after the program has expired?   And this after months of having it revealed to them that other peripheral spreads were not widening, and would therefore be forecast not to react to capital controls/bank holidays, etc..  [‘Threatening to cut my nose off to spite my face doesn’t seem to be working, so I’ll actually go ahead and slice and that will really show them!’].

What I conclude is either this is incompetence by Syriza, since they did not apprehend the weakness or consequences of this play.  Or it’s a ploy to stiffen their own political position in the next few months.  Syriza is a party with roots in revolution and protest.  If they can create chaos, and pin that on malign foreign conspiracy [aided and abetted by a surprisingly willing commentariat], then they will profit from it.  In this sense, it’s a ploy that follows in a pattern of behaviour since they campaigned for office.

I hope for  a ‘Yes’ vote, even if it will be a symbolic gesture on an out of date document.  It might start some momentum toward the creation of the formation of a more benign and competent administration in Greece.  Though this must be considered a faint hope given the tainted records of New Democracy and PASOK and their leading personalities.

I don’t buy PK’s analysis that since this much pain has been endured, they may as well set off down the path of exit.  Because the Greek economy from here may well not behave like an open economy sticky price, rational expectations model with a flexible exchange rate.  There is much probability on other dynamics and outcomes which these analysis abstract from.  Involving more extreme political economy dysfunction, barter, starvation, hyperinflation tax, and much more.

Some seem to think that all problems would be over once the new currency is created and Greece has control over the printing presses.  But in fact, a new set of problems will have begun.  Sound new fiscal and monetary regimes born out of sovereign insolvency are not going to emerge quickly, if ever.  People will expect the government to try to substitute for lack of market access by using the printing presses, and this will choke off the majority of the fiscal benefits from using them, and could lead to a self-fulfilling and disastrous inflation surge.

In the past I’d forecast in a hand-wavy sort of way that there would be no contagion.  My analysis wasn’t that deep.  But it consisted of this:  i) concluding that Greece would not constitute a lesson for the larger troubled countries like Spain and Italy.  Because if a concerted run on those countries got underway then OMT/QE would be revealed to be bluffs for which there was not the political will to tolerate the risks involved in taking on the markets.  That was true before Greece, and remains so.  ii) concluding that there was no lessons for the smaller troubled countries either.  For those countries by sticking to ‘good’ behaviour [as perceived by ECB etc]  had earned the solidarity necessary for the fiscal risks involved in saving them to be undertaken by the larger more liquid cousins in the union.  This is still my forecast.

A caveat is that this is a description of healthy game-theoretic fundamentals.  Or rather, fundamentals not altered by Grexit.  So, it doesn’t follow that there is no probability of contagion, just as it does not follow that there can be no run on healthy bank.  Contagion to other peripheral sovereigns would get going anyway, even if I see it right, if enough people see things differently and decide to forecast that there will be contagion, or foreast that others will forecast that they will forecast that….

Much was made before this week of the disastrous consequences of Grexit for the sanctity of the ‘irreversible’ nature of Euro membership.  I always felt this was greatly overdone, and made forecasts of a Troika climbdown [doing whatever it took to bring Syriza round] unsound.  Because a the benefits of – the liquidity services conferred by – a currency do not flow solely or even primarily from a membership list  They flow from the nature [and the expected durability of] the rules that membership implies.  The Troika could relatively easily have preserved [and might still do] the original membership list.  But they clearly had a mind that the usefulness of the currency involved not changing the rules by too much in order to do that.

Many of the rules stink, of course.  (I hope Eurozone countries accelerate at least a Banking Union, if not a full fiscal transfer union, and surrender as much individual fiscal sovereignty as possible.  I wish the ECB’s mandates could be tightened up, to relieve it of the discretion it has over ELA and other matters; and so that it’s monetary policy mandate is more properly under the control of the committee of fiscal authorities).  But we should not be surprised at the attempt to stick by them.


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10 Responses to Greece

  1. Maybe the entire Troika & Greece negotiation process is all part of developing further strands of brinkmanship via Game Theory?

  2. Eleftherios Athanasiou says:

    These are dangerous times for sure, but I cannot understand the true motives of the EU. Their proposals and their agenda in general has so far suggested that they are more interested in attacking the political integrity of Tsipras than proposing something that is remotely feasible. It is simply absurd to brand the tax increase of 3% (from 26% to 29%) to the firms exceeding the 500,000 euros profit plateau as a “recessionary measure” and request further cuts from pensions. This, to my eyes is a matter of credibility and trust to the Greek government, not a rational economic argument. By definition of Newton’s third law, this referendum is as fraudulent a political strategy as the strategy adopted by the Eurozone the past few months.

  3. econ man says:

    Interesting… we’ll have to see how this all works out long term. It doesn’t really seem like anyone in Greece or the EU really has any idea what is going on, but if people are saying it’s all part of the master plan…

    • Yes, because if there is ‘no plan’ everyone panics?

      Maybe we should actually strip things back to an Adam Smith philosophy of ‘The Invisible Hand’ and let Spontaneous Order ‘intervene’.

      A few weeks of market speculation and the ‘Natural Order’ might be re-established at a new equilibrium, rather than a forced (and botched) political outcome that potentially plays into Political Society’s hands and ‘proves’ that you need politicians to ‘save the world order’.

      We can only live in hope that this experiment will be left to its own natural conclusion, or not?

  4. Feanor says:

    Through all of this I haven’t seen any discussion of the issues raised in this article 5 years ago:

    I don’t know how accurate this is; it’s odd that it comes from Vanity Fair. It seems sound though and is one of the best pieces of journalism I’ve seen.

    Surely the question we should be asking isn’t about reforms that, if Greece’s institutions are indeed little more than facades with no functioning contents, are unlikely to achieve much. Surely we should, instead, be asking – how can Greece restore its institutions and civil society?

  5. Nice post. Greece sure is messed up isn’t it. Is there any way Greece can get out of this without being totally messed up for the future?

  6. Nicholas Martin says:

    There is one aspect to the timing of the referendum decision that seems particularly striking/amazing: Tsipras chose the days immediately before pensions & salaries are paid to institute capital controls. This should bring the costs of the move home to the Greek people in a particularly sharp way — not only can you not get (much) money out of the bank, but the salary/pension that you were about to get and which you might well have been planning to use to cover some bills/make some larger purchases/take a chunk out and stick under the mattress is suddenly unavailable. Esp. poor people — and the majority in Greece is today very poor, esp. pensioners & the families depending on a couple of pensions — tend to find themselves with little money at the end of the month & possibly some credit to cover. So Tsipras appears to have decided to do the Referendum (which, he must have understood, was extremely likely to lead to capital controls) at the worst point in time for a large part of the population & his base in particular. This is bizarre, unless he was trying to bring home the cost of rejecting the creditors’ offer to the people, a possibility that can presumably be excluded. That suggests that the referendum decision was a further incompetent cock-up, taken on the fly and with little thought beyond surviving to the next political day.

  7. Luis Enrique says:

    I find it hard to make sense of all this. According to the venerable RJW, the Greeks had already offered a deal substantially the same as the one they have now put out to referendum:
    which makes a nonsense of half of (the little ) I read

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