The Greek people have already paid highly for their own governments’ mistakes. Photo: Getty
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The Greek people have paid for their governments’ mistakes – and for the errors of the Troika

The meltdown in Athens and the mistakes of the IMF.

To make sense of the confrontation between the Syriza government in Greece and the Troika (the European Commission, the European Central Bank and the International Monetary Fund), it is vital to understand the one big mistake that each side made. The mistake on the Greek side is well known. In the years following the formation of the eurozone, the Greek government borrowed far more than it should, sometimes secretly. When the full extent of that fiscal profligacy became known, the financial markets realised that default was a distinct possibility, and the government was no longer able to borrow from them.

Over the next few years the Troika provided large sums of money to “bail out Greece”. The minor share of that provided new loans to the Greek government so that it could gradually balance its books. When Greece complains about the austerity imposed on it by the Troika, it is important to understand that without Troika assistance it would have had to endure something even worse and far more immediate. The government was spending much more than it received in taxes, and from the moment it stopped being able to borrow from the markets it would have had to end this. Almost certainly the banking system would have collapsed, and the government would not have had the resources to support its banks.

The Troika’s big mistake was what it did with the larger part of its rescue package. If it had done nothing, the Greek government would have been forced to default on its debt, and those who owned that debt (Greece’s creditors) would have received very little or nothing. Instead, the Troika partly bailed out these creditors, who included many of their own leading banks, in Germany and France in particular. In effect, what the Troika did was to buy much of the Greek government debt owned by these private-sector institutions, at discounted prices. From the Greek government’s point of view, this replaced private-sector debt with debt owned by the Troika.

Why was this partial bailout of Greece’s private-sector creditors a mistake? It meant that the remainder of the rescue package, designed to ease the Greek government’s transition to balance, was far too small. The Troika thought that the Greek government could quickly cut spending and raise taxes with little consequence for the rest of the Greek economy. It was completely and predictably wrong. Sharp and intense austerity played a great part in reducing GDP by 25 per cent and creating mass unemployment.

Imposing less austerity on Greece, producing a more modest decline in Greek output, would have required additional loans from European governments. If this had been available in addition to the existing package, it would have saddled Greece with a debt it surely could not have repaid, and may have been unacceptable to European voters. This is why the partial bailout of Greece’s original creditors was such an error. If it had not been done, and some of that money had been used to allow less austerity to be imposed on the Greek people, we would not be at the present impasse.

Over the past year the Greek government has managed to achieve approximate primary budget balance: its taxes cover all its spending, excluding interest payments. It is no longer asking for more money to cover spending, but simply additional loans to pay back interest and maturing loans. In short, it needs money from the Troika to repay the Troika. As the price of these loans, the Troika is demanding yet more austerity. The Syriza government wants to avoid this to give the economy a chance to recover.

From a macroeconomic viewpoint, this is reasonable, because it would probably be in the long-term interests of the Troika. 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.

The Greek people have already paid highly for their own governments’ mistakes before 2010. Now it seems they must suffer as a result of the Troika’s errors. That the governments of the eurozone continue to display a macroeconomic understanding of fiscal policy equivalent to that of Angela Merkel’s imagined Swabian housewife is perhaps not surprising – it has been a consistent pattern since the eurozone began. More surprising is the behaviour of the IMF, established to represent the international community and full of hundreds of economists. That it had the means to stop this happening but chose not to do so is equally tragic.

Simon Wren-Lewis is Professor of Economic Policy in the Blavatnik School of Government at the University of Oxford

 Simon Wren-Lewis is is Professor of Economic Policy in the Blavatnik School of Government at Oxford University, and a fellow of Merton College. He blogs at mainlymacro.

This article first appeared in the 01 July 2015 issue of the New Statesman, Crisis Europe

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Why do the words “soup, swoop, loop de loop” come to mind every time I lift a spoon to my lips?

It’s all thanks to Barry and Anita.

A while ago I was lending a friend the keys to our house. We keep spare keys in a ceramic pot I was given years ago by someone who made it while on an art-school pottery course. “That’s er . . . quite challenging,” the friend said of the pot.

“Is it?” I replied. “I’d stopped noticing how ugly it is.”

“Then it’s a grunty,” she said.

“A what?” I asked.

“A grunty. It’s something you have in your house that’s hideous and useless but you’ve stopped noticing it completely, so it’s effectively invisible.”

I was much taken with this idea and realised that as well as “grunties” there are also “gruntyisms”: things you say or do, though the reason why you say or do them has long since been forgotten. For example, every time we drink soup my wife and I say the same thing, uttered in a strange monotone: we say, “Soup, swoop, loop de loop.” How we came to say “soup, swoop, loop de loop” came about like this.

For a married couple, the years between your mid-thirties and your late forties might be seen as the decade of the bad dinner party. You’re no longer looking for a partner, so the hormonal urge to visit crowded bars has receded, but you are still full of energy so you don’t want to stay in at night, either. Instead, you go to dinner parties attended by other couples you don’t necessarily like that much.

One such couple were called Barry and Anita. Every time we ate at their house Barry would make soup, and when serving it he would invariably say, “There we are: soup, swoop, loop de loop.” After the dinner party, as soon as we were in the minicab going home, me and Linda would start drunkenly talking about what an arse Barry was, saying to each other, in a high-pitched, mocking imitation of his voice: “Please do have some more of this delicious soup, swoop, loop de loop.” Then we’d collapse against each other laughing, convincing the Algerian or Bengali taxi driver once again of the impenetrability and corruption of Western society.

Pretty soon whenever we had soup at home, Linda and I would say to each other, “Soup, swoop, loop de loop,” at first still ridiculing Barry, but eventually we forgot why we were saying it and it became part of the private language every couple develop, employed long after we’d gratefully ceased having soupy dinners with Barry and Anita.

In the early Nineties we had an exchange student staying with us for a year, a Maori girl from the Cook Islands in the southern Pacific. When she returned home she took the expression “soup, swoop, loop de loop” with her and spread it among her extended family, until finally the phrase appeared in an anthropological dissertation: “ ‘Soup swoop, loop de loop.’ Shamanistic Incantations in Rarotongan Food Preparation Rituals” – University of Topeka, 2001. 

This article first appeared in the 21 July 2016 issue of the New Statesman, The English Revolt