Let’s talk about debt. We’re all awash in it – credit cards, student loans, the mortgage and all the rest – and we can’t print our own money. We’re stuck with it. We’ll never pay it off. We live lives of low-level dread because that wall of debt is always there in the background. How did this happen? This shouldn’t have happened. And then we vote Republican, or some do, because government debt is the same thing – an awful mistake. Live within your means. If none of us can do that ourselves, at least the government should do that – debt is a killer. Maybe we’ll go bankrupt, the government shouldn’t.
That’s not how things work. As the British first figured out under Disraeli, any government with its own currency – like us, but not the Greeks – can give itself unlimited ability to create as much of its currency as it wants, and give that currency any value it chooses – and governments now and then have actually reduced the value of their currency to stimulate exports. The unlimited ability to create its own currency means a government with its own money, like the United States with our dollar, can never be forced into bankruptcy or run short of money. That government can just print some more, by selling Treasury Bonds as we do, which means that they can pay any debt of any size, so long as that debt is denominated in their own currency – and having the unlimited ability to give that currency any value, that government (we) have total control over inflation. That’s what the Federal Reserve is all about – controlling the money supply, to keep the economy humming along, no matter what Congress might do.
Yes, our government does “print money” and incur “debt” – but so what? That debt can always be paid off in the blink of an eye – unless Congress finally goes crazy and for the first time in our history decides to forbid that. Over the last six years, our Republicans have threatened to refuse to raise the debt limit when it bumps up against an arbitrary amount – we’re the only modern economy, besides Denmark, with a formal and statutory debt limit. We have too much debt! We cannot borrow any more, anymore! How will we pay it off?
The Republicans always cave. We’ll pay it off by selling more Treasury Bonds, which may devalue our currency a bit – one must be careful – but a weak dollar makes out exports cheaper. That gooses the economy. National debt, sovereign debt, is a useful tool – a useful mechanism for building and sustaining and growing a modern economy. It’s actually essential to a modern economy.
Republicans don’t agree. They have been saying for five or six years now that national debt, sovereign debt, is a very bad thing, and no one should have thought it up in the first place. The concept bothers them. We could end up like Greece – but debt, while it can pose problems, doesn’t make the nation poorer, because it’s money we owe to ourselves. Sometimes, when things are tough, the government needs to create some more money, to create jobs, to get money in people’s pockets, to get things going again. That’s what the American Recovery and Reinvestment Act of 2009 was about – spending over seven hundred billion new dollars to goose the economy. The Republicans argued long and hard for the opposite – cutbacks in public spending, especially cuts in public investment, justified in the name of protecting the future from the threat of excessive debt. They argued for austerity.
They lost that one. That was when the Democrats held both houses of Congress, before the 2010 Tea Party midterms, the same two years that gave us the Affordable Care Act, and in this case we were told that Greece was an object lesson for us all. Greece had run up incredible debt they could never pay off at all. By insisting on providing infrastructure and basic social programs for their citizens they had just borrowed too much money, and now they could sell no more bonds to keep it all going – no one would buy those and the whole thing would come crashing down in a massive default and disaster, taking down all of Europe too. This is an awful scenario and the Republican line was that we would surely end up like Greece if we didn’t stop spending on infrastructure and basic social programs, and most everything else.
That spending must be the wrong thing. We are doing what the Greeks have been doing. So full austerity is the answer – we really should shut down all government spending, or as much as we can, and lay off all those government employees and deny them unemployment benefits, because we’d have to sell more treasury bonds to pay for that too. Yes, all those corporations that rely on government contracts to stay afloat, providing everything from paper clips to janitorial services, would go under, and of course the number of unemployed would then skyrocket. But we have to live within our means. That is the way to prosperity – cut and grow, as the Republicans liked to call it.
Almost all economists, or at least more and more of them, thought this was nonsense – shut down spending and collapse demand and you plunge the nation into a deep recession. But it sounded good politically. Yes, just stop spending money you don’t have and learn to live with the consequences – tough it out. Be responsible, damn it!
The alternative view was that it was fine to accept a bit of inflation and deficits for five or ten years and spend that money you don’t really have, as an investment in growth. Build roads and dams and schools and whatnot. In classic economic theory you actually grow your way out of such crises. The Republicans argued long and hard that this just wasn’t so. Austerity leads to prosperity. Britain tried it and it didn’t work – but it should have worked, so then they talked about Greece. They still talk about Greece. Debt is bad, very, very bad.
Now they’ll talk even more, because this was the day Greece hit the wall:
With the collapse of negotiations between Greece and international lenders, the Mediterranean country is in danger of a default that could plunge the 19-nation euro currency bloc and global markets into crisis.
Greece is close to bankruptcy, and the bailout packages it has received will expire Tuesday. Without a last-minute deal to keep the country afloat, it will almost certainly fail to make a $1.8-billion payment to the International Monetary Fund that is due the same day. …
Greece’s leftist government surprised its European partners Saturday by announcing that it would hold a referendum on their proposals next week and would urge voters to reject them. The other Eurozone nations closed ranks, warning that they would not extend Greece’s current bailout package past its expiration Tuesday.
To prevent another run on euro deposits in Greece’s crippled financial system, a weeklong bank closure began Monday, and residents were limited to about $66 in cash withdrawals from ATMs per day.
European officials are now openly discussing the possibility that Greece could be forced out of the Eurozone, a prospect that until recently they were not willing to entertain.
That’s the situation and here’s the background:
Greece was forced to seek loans from its European partners when its economy imploded during the recession in 2009. It could no longer borrow on international markets after it became known that the country had been understating its deficit for years.
With markets still reeling from the collapse of Wall Street in 2008, the International Monetary Fund, the European Central Bank and the European Commission in 2010 issued the first of two international bailouts for Greece to avert another financial crisis.
In exchange for loans exceeding $270 billion at today’s exchange rate, Greece was required to impose deep budget cuts and steep tax increases along with other reforms aimed at reducing the government’s bloated payroll, curbing tax evasion and making the country an easier place to do business. However, Greek officials and many analysts contend that the painful austerity measures have also caused the economy to contract by 25% in the last five years.
Austerity didn’t restore prosperity:
Greek Prime Minister Alexis Tsipras and his Syriza party won election in January on promises to scrap the bailout agreement unless Athens was given a significant reduction in its obligations and the latitude to invest in jobs in a country with an unemployment rate topping 25%. But creditors feared any bending of the rules would encourage other bailout recipients, such as Portugal and Ireland, to demand similar concessions.
The dispute is with the creditors, who still believe in austerity economics, the European version of “cut and grow” – even this has never worked anywhere. It ought to work, so we are where we are:
With Greece already on the verge of bankruptcy, the government struck a deal with European officials in February to extend its repayment program for four months. But the two sides have failed to agree on what Greece must do to raise revenue and cut spending if it wants access to the $8.1 billion in remaining rescue loans.
Paul Krugman wonders how it came to this:
In 2007, Greece had public debt of slightly more than 100 percent of GDP – high, but not out of line with levels that many countries including, for example, the UK have carried for decades and even generations at a stretch. It had a budget deficit of about 7 percent of GDP. If we think that normal times involve 2 percent growth and 2 percent inflation, a deficit of 4 percent of GDP would be consistent with a stable debt/GDP ratio; so the fiscal gap was around 3 points, not trivial but hardly something that should have been impossible to close…
So yes, Greece was overspending, but not by all that much. It was over indebted, but again not by all that much. How did this turn into a catastrophe that among other things saw debt soar to 170 percent of GDP despite savage austerity?
The euro straitjacket plus inadequately expansionary monetary policy within the Eurozone are the obvious culprits. But that, surely, is the deep question here. If Europe as currently organized can turn medium-sized fiscal failings into this kind of nightmare, the system is fundamentally unworkable.
Krugman then identifies the fatal flaw here:
It has been obvious for some time that the creation of the euro was a terrible mistake. Europe never had the preconditions for a successful single currency – above all, the kind of fiscal and banking union that, for example, ensures that when a housing bubble in Florida bursts, Washington automatically protects seniors against any threat to their medical care or their bank deposits.
Leaving a currency union is, however, a much harder and more frightening decision than never entering in the first place, and until now even the Continent’s most troubled economies have repeatedly stepped back from the brink. Again and again, governments have submitted to creditors’ demands for harsh austerity, while the European Central Bank has managed to contain market panic.
But the situation in Greece has now reached what looks like a point of no return. Banks are temporarily closed and the government has imposed capital controls – limits on the movement of funds out of the country. It seems highly likely that the government will soon have to start paying pensions and wages in scrip, in effect creating a parallel currency. And next week the country will hold a referendum on whether to accept the demands of the “troika” – the institutions representing creditor interests – for yet more austerity.
Krugman says Greece should vote “no” and to leave the euro folks:
To understand why I say this, you need to realize that most – not all, but most – of what you’ve heard about Greek profligacy and irresponsibility is false. Yes, the Greek government was spending beyond its means in the late 2000s. But since then it has repeatedly slashed spending and raised taxes. Government employment has fallen more than 25 percent, and pensions (which were indeed much too generous) have been cut sharply. If you add up all the austerity measures, they have been more than enough to eliminate the original deficit and turn it into a large surplus.
So why didn’t this happen? Because the Greek economy collapsed, largely as a result of those very austerity measures, dragging revenues down with it.
Austerity didn’t work – it never does – and they couldn’t print money, because the euro is not their currency:
This collapse, in turn, had a lot to do with the euro, which trapped Greece in an economic straitjacket. Cases of successful austerity, in which countries rein in deficits without bringing on a depression, typically involve large currency devaluations that make their exports more competitive. This is what happened, for example, in Canada in the 1990s, and to an important extent it’s what happened in Iceland more recently. But Greece, without its own currency, didn’t have that option.
So have I just made the case for “Grexit” — Greek exit from the euro? Not necessarily. The problem with Grexit has always been the risk of financial chaos, of a banking system disrupted by panicked withdrawals and of business hobbled both by banking troubles and by uncertainty over the legal status of debts. That’s why successive Greek governments have acceded to austerity demands, and why even Syriza, the ruling leftist coalition, was willing to accept the austerity that has already been imposed. All it asked for was, in effect, a standstill on further austerity.
They were never going to get that:
It’s easy to get lost in the details, but the essential point now is that Greece has been presented with a take-it-or-leave-it offer that is effectively indistinguishable from the policies of the past five years. This is, and presumably was intended to be, an offer Alexis Tsipras, the Greek prime minister, can’t accept, because it would destroy his political reason for being. The purpose must therefore be to drive him from office, which will probably happen if Greek voters fear confrontation with the troika enough to vote yes next week.
But they shouldn’t, for three reasons. First, we now know that ever-harsher austerity is a dead end: after five years Greece is in worse shape than ever. Second, much and perhaps most of the feared chaos from Grexit has already happened. With banks closed and capital controls imposed, there’s not that much more damage to be done.
Finally, acceding to the troika’s ultimatum would represent the final abandonment of any pretense of Greek independence. Don’t be taken in by claims that troika officials are just technocrats explaining to the ignorant Greeks what must be done. These supposed technocrats are in fact fantasists who have disregarded everything we know about macroeconomics, and have been wrong every step of the way. This isn’t about analysis; it’s about power – the power of the creditors to pull the plug on the Greek economy, which persists as long as euro exit is considered unthinkable.
Greece should just leave:
Otherwise Greece will face endless austerity, and a depression with no hint of an end.
That’s what our Republicans offered us, by the way.
Catherine Rampell offers a different twist on this:
Once upon a time, Europe had a dream. It would yoke neighbor to neighbor under a common economic system and thereby end a centuries-long tradition of the states destroying one another with bombs and bayonets, cannons and crossbows, machine guns and mustard gas. But instead the countries just gave themselves a new weapon to use against each other: debt.
That noble European economic experiment seemed to have promise. The “capitalist peace” theory – which can be traced back at least to Kant and Montesquieu – asserts that trade is a prophylactic for war. Commerce can both humanize the barbarians beyond the border and, more important, make taking a share of their booty substantially easier and less risky.
What better way, then, to broker a perpetual peace than to grease the wheels of commerce among Germany, France, Greece and more than a dozen other once-enmity-filled economies?
Enter the euro. Establishing a common currency was meant to facilitate the cross-border flow of goods, services, people and capital, and thus bond disparate countries through the mutual benefits of trade. But, unfortunately, such numismatic gymnastics made little sense given Europe’s fractured cultural and regulatory landscape. Milton Friedman, among other Cassandras, explained why nearly two decades ago in an essay detailing the best (the United States) and worst (Europe) conditions under which to create a currency union. In Europe, where countries are divided by language, customs, regulatory regimes and fiscal policies, a common currency would inevitably prove disastrous, he wrote. Shocks hitting one country would heave themselves across the continent if individual countries could not easily adjust prices through their exchange rates.
Rather than promoting political unity, Friedman argued, “The adoption of the Euro would have the opposite effect. It would exacerbate political tensions by converting divergent shocks that could have been readily accommodated by exchange rate changes into divisive political issues.”
This was doomed long ago:
When Greece adopted the euro in 2001 it benefited enormously by suddenly being able to borrow far more than it should have ever been allowed to. But this wild, boom-time overborrowing left it destitute when credit and demand dried up during the financial crisis. Thanks to the currency union, Greece no longer had the means – currency devaluation – to inflate away its debts and export its way out of a deepening recession. Instead, its euro-zone family members – particularly Germany, the effective patriarch – insisted on keeping inflation in the shared currency ultra-low, which was precisely the opposite of what Greece needed.
And so it goes, and Kevin Drum sees this alternative:
If Greeks vote no on the European proposal, it’s basically a vote to abandon the euro and recreate a new version of their old currency. Call it the New Drachma. They would then devalue the ND, making Greek exports more competitive in the international market. That would mean more tourists, more olive exports, and more fish exports. At least, that’s what it would mean in the long term.
In the short term it would mean chaos. Banks would close, and capital controls would be put in place until the new currency could be put in circulation. Imports would skyrocket in price, and this would effectively mean pay cuts for everyone. Savings would be lost, and pensions would be effectively slashed.
In other words, Greece would almost certainly suffer more short-term austerity by leaving the euro than by staying within in it. The payoff, hopefully, would be control of their own currency, which would allow them to rebalance their economy in the long run and begin a true economic recovery. In the meantime, however, I’d be skeptical of Krugman’s belief that leaving the euro would cause a bit of chaos, but not much more than Greece is already suffering.
He says one would expect bank runs and “losing access to not just their savings but also imported petrol, medicines and foodstuffs” and “attracting more tourists won’t be easy against a drumbeat of political unrest” and so on:
A lot of people think it’s a no-brainer for Greece to leave the euro at this point. This is why it’s not. Make no mistake: it will cause a lot of pain. Greek incomes will effectively be slashed, and it will take years to recover on the backs of improved exports. It’s quite possible that this is the only good long-term solution for Greece, which has been treated badly by its European creditors – for which you should mostly read “German creditors” – but it is no easy decision. There will be a lot of suffering for a lot of years if Greece goes down this road.
And there’s the other side of this:
For Europe, the problem is different. If Greece leaves the euro, it probably won’t affect them very much. The Greek economy is simply too small to matter, and most Greek debt is now held in public hands. However, the political implications are potentially huge: it means the currency union is not forever and ever, as promised. If the pain of using a currency whose value is basically dictated by the needs of Germany becomes too severe, countries will leave. Perhaps later they will be let back in. Instead of a currency union, it will become more of a currency board, with countries coming in and out as they need to. This will be especially true if observers like Krugman are right, and the short-term pain of Greece leaving is mild and long-term recovery is strong. That would send a strong lesson to any future country stuck in the web of German monetary policy and finding itself in a deep and long economic depression.
The whole Euro Experiment might have been a mistake. Angela Merkel is calling the shots, and she seems to believe that austerity creates prosperity, and now the euro in Germany’s currency, not Greece’s – but Greece needs some stimulus, some spending to goose its economy, not an order from Berlin to shut everything down and then somehow find new funds to pay everyone on time, in full. This is imposing Teutonic discipline on Zorba the Greek – it’s not going to work. But a word of caution – no matter what the Republicans say, we are not Greece. We have our own currency. We can print money. We can use what might seem like absurd levels of debt in building and sustaining and growing a modern economy – and we should.
You, on the other hand, can’t print your own money. Pay your bills.