Tuesday, June 30, 2015

The Greek Saga (already) Revisited

I've been thinking that I need to sort things out on the Greek crisis at some point not because I would seriously work on it in the near future (I barely know about the EU) but mostly because I will be asked about this anyway in classrooms.

My understanding is generally consistent with this Vox article as well as Johnston et al. (2014).

The common currency zone was a bad idea particularly for the EU where the a great deal of heterogeneity exists amongst its members. By heterogeneity, I don't mean culture, public opinion, or even social structure. They may matter, or maybe not; it is the different level of competitiveness that pretty much pre-determined the fate of Greece along with other PIIGS (seriously though, are they really okay with being called this?).

Without really delving into the whole debate on productivity, the sectoral structures of the European economies are already self-evident about the root of this cataclysm.

The European South simply lacks the industrial sectors that can earn cash as opposed to their northern counterpart, particularly Germany. Many point to tourism, but, really? How can the seasonal and volatile supply of foreign cash keep the economy sustainable?

As the graph here shows, when an economy has little means of export and constant (actually increasing) level of import: a perfect formula for current account deficits (and mounting debt problems as the Greek government tried to borrow abroad to fill in the gap as any other government would do).

Selected macroeconomic indicators for Greece (blue) and the eurozone (red).
Sorry for the mess in the legend and axis. The slacker inside me prevails this time. Source: WDI

Of course the textbook solution is devaluation and keep the currency undervalued for a while as everybody would suggest. This option disappeared off the table as soon as Greece joined the eurozone, a timing at which Greece actually needed it so badly.

I wouldn't agree with many, however, on the fact that simply having monetary policy autonomy, the Greek economy would've been fine. The positive, growth-enhancing effect of devaluation hinges upon the assumption that it boosts price competitiveness of the economy's exports while, in the same logic, restrains the purchasing power of the imported goods.

But how much long-term positive effect of devaluation on growth (such as the heavily refuted J-curve) can one expect from an economy where exporting sectors are relatively small while the price elasticity of importing goods are low? Maybe not much.

There might be several implications coming out of this argument.

1. It's not a new crisis that came out of nowhere
What this indicates is that it's not like the Greek economy was as sound as many other European ones and the crisis kicked in all of a sudden with joining of the eurozone. Rather, the problem had been there all along. The deeper integration into the common market might have served as a tipping point in the process, but was hardly a sole source of the problem. The Greek economy had been all along (except the brief period immediately following their joining the zone, which actually exacerbated the problem).

2. Tax evasion and corruption might have played a role, but only a small role.
Many media outlets have been fighting the conservative commentators' assertion that the crisis is yet another breed of `welfare disease'. I am with them. It wasn't welfare expansion that brought about the problem. But I am not with them on the idea that tax evasion and corruption of the elites feeding on a large sum of government spending was the centerpiece of the crisis. Again, it was the lack of competitiveness combined with market integration that really drove the situation into the abyss. Tax evasion and corruption, though definitely contributed to the debt burden of the Greek government to a certain degree, weren't really THE cause.

3. Syriza is not responsible for the crisis; but they lied to the Greek people
Syriza is of course not responsible for the crisis. They came into power AFTER the whole thing erupted. Nor did they terribly mismanage the negotiation with the Troika. It was already a long shot and the Trokia seemed pretty much resolute about what they want--furthering the austerity--even before Syriza won the election. As the Vox article above points out, however, Syriza won the election by promising the Greek people that there was a reasonable exit out of this misery and it could make it happen; as long as the problem is structural, there is NO reasonable exit. If Greece leaves the common currency zone, which is increasingly likely, it's going to be a complete meltdown following a massive capital flight. If it stays, well, what awaits them is the endless agony of austerity that doesn't lead the country anywhere. A complete overhaul of the economy was necessary but the party wasn't level about it with its electorates. Okay, all political parties lie. But by lying that there's a way out, Syriza made it that much harder to reach a consensus among the Greek people for taking the hardship and embarking on a real restructuring (not useless austerity).

4. The only solution might be debt forgiveness, which is politically impossible.
All these problems wouldn't be problems, if the creditors, most of whom are the foreign governments now, simply write off the debt. This isn't a simple solution as opposed to many have suggested citing the cases of the post-war Germany, because it's all political. The West German case was unique in that the creditors -- the US -- had a strong interest to keep the economy rolling and therefore were willing to give in pretty much anything, including debt forgiveness. And this strong interest was the Cold War and the Containment policy; to contain Russians in their own empire, the allies sitting at the frontline should be helped. This wasn't a strategic doctrine; there was also a consensus among ordinary Americans (rooted in fear) on it. No such feasibility exists in the Greek case. The creditors don't have a strong interest to save the Greek economy any more (they used to, when the Grexit was seen as extremely contagious and consequential). Nor do the domestic audience of the creditors--Germans--seem to care about the case. In fact, they seem to believe that they have been helping the Greeks excessively.

I think, for now, this is enough for classroom discussions.

Tuesday, June 2, 2015

[Book Review] The Lords of Finance

Link to Goodreads.

I should never taken this book as one of those easy reads for `that 15-minutes extra time slot for which there isn't anything productive I could do'. Jumping back and forth along the timeline, the first half of the book carries a complex network of unfamiliar information, which my idle brain simply resits to remember longer than 30 minutes. Coming back to it every few weeks heavy parenting as well as the graduate school, I was always starting the book all over again, agonizingly flipping through the first 40 pages. 

That's why it took 4.5 years for me to finish the book. I bought it in Chicago O'hare Airport right after dropping off my mother-in-law, who was with us just for about two months when Alex was born, at the gate as I learned the flight was would be delayed. No wonder I am a bit emotional now.

Turning to the book itself, it's about four central bankers who attempted to save their national economies that were at the verge of collapse in the inter-war period. As with any hero stories, there's a good, masterful one (Montagu Norman of the Bank of England), a brilliant but perhaps too cool one (Benjamin Strong of New York Fed), a maverick (Emile Moreau of Banque de France), and the antagonist who survives way too long and thus sort of gets romanticized at the end of the story (Hjlmar Schaat of the Reich Bank).

Some of the things either I newly learned or found important from this book:

- While factors leading to the Depression were stacked up high already, it was really the American politicians who wanted to rein in the illusionary bubbles in the stock market who really instigated the bubbles, which bursted and started the panic.

- No less blamable was the British who longed for restore London's financial supremacy and thus hastily came back to the gold standard, at which point the depression kicked in even before the panic across the Atlantic began.

- Keynes was all cool and right about everything.

- Despite the tumult, the central bankers took extensive periods of vacations. I mean like at least several months a year.

I think I need to come back to this book again at some point after taking in some history books about the inter-war period. Hopefully, by then, I can just enjoy reading it.