The Troika’s big mistake

2 July, 2015 at 12:13 | Posted in Economics | 4 Comments

The OECD estimates that Greece has unused resources worth at least 10 per cent of GDP. A pause in austerity would allow demand to increase, reducing unemployment and generating more taxes. The Greek government could use some of the additional revenue to start repaying its loans.

So why does the Troika insist on continuing with austerity? The Troika contains many different views and interests. Some may still not believe, despite all the evidence, that austerity hurts growth. Perhaps others are happy to see a left-wing government fail, because it does not accept the received wisdom from Brussels and Frankfurt on what good economic policy involves.

Another explanation is that eurozone governments have become victims of their media’s rhetoric. The impression the media conveys is that all of the Troika’s loans have gone to cover Greek government spending. In fact, most went to bail out Greece’s previous creditors and any further loans will just repay existing loans. But to people in the eurozone it seems as if the Troika is transferring more of their money to Greek citizens. In these circumstances, the politicians need to appear to be tough on Greece. They fear that to change policy now would lead their electorates to ask why previous policies have failed, which would expose the Troika’s big mistake.

Simon Wren-Lewis



  1. At last one mainstream economist is saying something informed and sensible about Greece:

    In particular Eichengreen explains why in a US dollar denominated trading system a devaluation will not work in Greece, but increase its problems because of its industrial and trade structure. (A point a few of us on blogs have tried to point out in vain for years now.)

    Now Mr Krugman and SWL can we please move on from neo-classical gadget analysis and do some properly informed analysis.

  2. It is nice, I suppose, for Simon Wren-Lewis to make sympathetic noises, but, as an economist, shouldn’t he be able to articulate an alternative policy path? The neoliberals, including IMF chief economist Olivier Blanchard, are on record as asserting that there is no alternative. SYRIZA was elected on a platform promising an alternative, but failed to find one.
    Barry Eichengreen (at the link supplied by Nanikore in the comment above) speaks flippantly of the SYRIZA political platform as attempting to “square the circle”, but doesn’t explain why he thinks their aspirations amounted to an impossibility — he just says they should have expected to compromise in negotiations. But, what compromise was ever on offer? What was the alternative?
    If hitting your head against a wall is causing a headache, maybe you should stop hitting your head against the wall. That is an alternative. But, what alternative has Greece? It is a fine thing to be opposed to austerity, but what is the alternative? How is Greece to finance stimulus spending? Much has been made of the demand for a primary surplus, to enable paying debt service. Would it have made sense to impose import tariffs to accomplish this desideratum? Oh, wait — Greece in the Eurozone because it is in the EU — it is not allowed to collect a tariff.
    Greece is embedded in a set of economic institutions and norms that leave it, and its government, unable to defend its economic interests. Should economists acknowledge that this is the fact: that there is, by design, no alternative? By the design of economists, we might add.
    It is remarkable to me how thoroughly obscured by mainstream economics is an outcome of economic policymaking and institution building. I can remember when economists proudly boasted that they had learned the causes of depression, and there need never be a repeat of the trauma of the Great Depression. But, here we are: economists and economic policymakers claiming the mantle of orthodoxy have caused a Depression — in Greece (and Spain and Portugal and several other countries), all the while proclaiming there is no alternative.

    • Although neo-classical gadget analysis has complicated the discussion by wrongly asserting that with your own currency you can get out of this problem, I do believe in the end common-sense will prevail. The US is sooner or later going to step in. It will instruct Germany, the IMF and European Central Bank that Greek debt is to be written off. The immediate problems associated with foolish austerity problems will be temporarily relieved.

      It does not solve the long term problem though of Greece’s trade and industrial structure. That requires a centralised European infrastructure where capital can move from surplus countries to where it is needed and where both surplus and deficit countries have a stake and say in how it is invested.

      For that the Eurozone must push ahead with fiscal, political and financial union. This should initially only include present Eurozone countries, and must for now exclude the UK and much of Eastern Europe if it is to be feasible.

  3. Simon Wren Lewis blames the media, which is rich, considering the media generally just repeats the neo-classical nostrums they learn at Oxford in his class. But, really, what media is he talking about? The German media that implies the loans go to the Greek government? We would expect what from the German media? That they’d be honest truth tellers like the British media under Cameron? Huh? Only economists can claim to study human behavior and then, presented with an example of human behavior, say “You’re doing it wrong.”
    His comment is also strange considering what “The Economist” has been saying since the beginning. Before I finally got sick of their visceral hatred of President Obama, I was reading that “newspaper” weekly, and from the very start of the Greek tragedy they were saying that–one way or another–they would be allowed to write down most of their debt and begin to issue Eurobonds, whether de jure or de facto, where the currency union would move toward a fiscal union of mutually guaranteed debt.
    In other words, the most important popular journal of neoclassical propaganda has been advising a far more humane course than that proposed by the actual
    Neoclassical economists from the very beginning.
    All of which is to say: economics–all of it–is empty of content. Two people run the same machine twice with the same inputs. The first run of the machine by Oliver Blanchard generates the policy demand: “kill Greek people”. The second run of the machine by Simon Wren Lewis says “save the lives of Greek people”. The two men are standing there next to the machine. They know no body has touched it. The same machine generates what ever answer the operator wants. Yet some how these two men look at each other and say, “Well one thing is for sure: it’s not the machine!”
    Then critics like Lars come by and say: “Use a different machine!”
    I say: “What if the actual problem is not the operators or the machine but the idea that a machine (that is to say, a science of humans that follows Newton and not Darwin) can tell us anything about humans and how to run a human society?”
    People like Romer and Cochrane–both undergraduate physics majors–disagree violently with each other, but can’t see that it’s the common belief that physics=science that causes them both to be wrong. Even the heterodox like Syll still seem to think mechanics is the way to go.

    So more dead Greek people.

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