Monthly Archives: July 2015

Greece: Taking Stock

The third bailout of Greece is in progress. What can be said?

First, beware those forecasting what politicians will do. The Greek Prime Minister, Alexis Tsipras, got a 61-39 vote against an austerity program offered by other eurozone countries. He then promptly agreed to a more demanding program just a week later.

There are a variety of ways to view Tsipras’s about face. I find it most plausible that the other eurozone countries held fast and he found himself staring into an abyss with serious hardships for Greek people. And he did not want to be responsible for that. Whatever the reason, the real lesson is that politicians’ actions are hard to predict.

What can be learned more broadly?

It is worth starting out with a basic observation: This is a road that should not have been travelled in the first place. As part of the bailout programs, Greece has defaulted on private creditors already. It would have been better for Greece if this had been done immediately without piling on yet more debt.

Being in a monetary union does not require that member states not default. U.S. states defaulted in the 1840s and the commonwealth of Puerto Rico is very likely to default in the near future. Cities in the United States have defaulted on their debts as well. A default by Puerto Rico will not provide any evidence about the willingness of the U.S. government to service its debt and will have at most a negligible effect on the U.S. dollar or its use anywhere in the world.

A beneficial result of an immediate default by Greece might have been a widespread recognition in Greece that things could not continue as they were.

That said, bygones are bygones. That is not the path the eurozone has been on for several years.

Still, Greece will not have growth leading to incomes similar to other European countries without major changes in the economy, whether Greece defaults explicitly or it defaults implicitly by a restructuring of the debt.

There has been a lot of ink spilt about pensions in Greece. Government pensions in Greece allow people to retire and receive checks when people are younger than in Germany or the United States. Pensions currently are equal to one-quarter of Greek GDP and are expected to grow faster than even relatively high long-term predictions of GDP growth. Tsipras made the point that change was inevitable as part of a speech in Parliament this week. To the best of my knowledge, politicians in Greece have avoided even suggesting changes were necessary until now. Previous governments have blamed changes on the insistence of eurozone governments lending funds to the Greek government.

Instead of necessary reforms, politicians in Greece have been good at raising taxes, maybe lowering spending some but have made too few reforms that can have long-lasting effects.

While not suggesting it’s the most serious problem, Greece’s railroads are a good example of problems that affect much of Greece’s economy. Greece’s railroads are government owned and have a substantial debt and deficit. The railroads have borrowed a lot in the past leading to a large debt and they add to it every day they operate. The railroad union has secured relatively high pay and pensions.

One part of the proposed reforms in Greece is privatization of the railroads. Short of changing union contracts, it is hard to see Greek railroads having a positive value in a sale. Changing union contracts would be likely to mean a costly strike, and the difficulties facing the owners would only be worse if the new owners of the railroad were foreigners.

It is hard to see privatization of the railroads being successful without widespread support by Greek citizens. As things stand, there is no evidence such support is there.

It is hard to see the current bailout being more successful than the earlier two agreements. The major issue for Greece’s long-run growth is not taxes and government spending, although government spending and taxes are quite high even by European standards.

The major issue in Greece is an economy with little scope for private enterprise, which is the driver of long-term growth.

A note: I have not posted in while but will be more systematic now.