Recently I attended a German economic conference where the Euro crisis was hotly debated. What really shocked me was that economists almost unanimously agreed that the crisis countries’ recessions are necessary. These economists argued that the ensuing social hardship may be deplorable but necessary to throw unproductive firms out of the market and then allow high productivity firms to prosper, a pre-requisite for future economic growth.
This was the philosophy of Herbert Hoover’s treasury secretary Andrew Mellon who in the Great Depression thought that the solution to economic hardship was to increase it and to “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate” – a “solution” that plunged the world economy and indeed Western civilisation into its deepest crisis. 80 years later, German economists seem to have unlearned the lessons from the Great Depression, the economic meltdown that especially Germans heavily suffered from.
This forgetfulness (or ignorance) has dire consequences. German economists and the German government are adamant in demanding fiscal austerity in the crisis countries, the most extreme case being Greece. But they should know better: There are uncanny parallels between today’s Greek depression and Weimar Germany’s in the late 1920s / early 1930s: Both economies were trapped in the straitjacket of a fixed exchange rate regime – the gold standard then and the euro now; both economies had huge foreign debts – the Germans mostly with the US, the Greeks with Germany and France. Both economies faced tremendous pressure from international financial markets. And both governments made matters worse by relying on severe austerity.
Figure 1 shows public expenditure in both countries before and after the economic crisis. For better comparability, the first crisis year – 1929 for Germany, 2008 for Greece – is normalised to 100 (data for Greece comes from AMECO, data for Germany comes from Albrecht Ritschl’s book Deutschlands Krise und Konjunktur (http://personal.lse.ac.uk/ritschl/AppendixA_and_B.xls).
Government expenditure rose in both countries when the crisis had already started since higher unemployment means that more has to be spent, for instance on unemployment insurance. But in the second crisis year, both governments switched to dramatic cuts in public expenditures which directly depressed economic performance: Government consumption and investment are part of the gross domestic product and cuts in expenditures on social security impact private households’ ability to keep up consumption when they are unemployed – which depresses business income.
The effects of austerity on economic performance were dramatic as figure 2 shows. The figure compares Weimar Germany’s economic performance (its gross national product) in the 1920s and 1930s with Greece’s in the 2000s (Data for Greece again comes from the AMECO database and for Germany from historical data by the Bundesbank (http://www.digitalis.uni-koeln.de/Geldwesen/geldwesen_index.html). Again, the two countries’ economic performance is set to 100 in the first crisis year.
The data show that Greece’s economic slump is even deeper than the Weimar Republic’s. Since the first crisis year, Greece lost almost a fifth of its output, Weimar’s output contracted by “only” 15 % – which was enough to bring down the first German democracy. Then as now, people suffer from hunger in a supposedly civilised society (see http://www.huffingtonpost.com/2012/03/13/greek-debt-crisis-greek-children-hungry-exercise_n_1342868.html, http://library.fes.de/jportal/servlets/MCRFileNodeServlet/jportal_derivate_00020744/afs-1987-145.pdf).
Did the austerity induced depression “free” the economy from unproductive firms and allowed productivity to increase afterwards, as today’s German economists believe? Almost, if you think that the whole of German industry was unproductive. In his masterful book on the Nazi economy, The Wages of Destruction, the economic historian Adam Tooze shows that the Great Depression brought the Weimar Republic’s entire heavy industry to the brink of collapse. German industrial giants like AEG were threatened by bankruptcy in the early 1930s and the big banks that financed industry – Deutsche Bank, Commerzbank and Dresdner Bank – would have been bankrupt if they had not been nationalised.
German industry was only saved by the Nazi government’s rearmament policies after 1934. This was one of the reasons why Germany’s big business supported the Nazis until the bitter end. Those can be the political consequences of a “liquidate everything” ideology that plunges entire economies into the economic and social abyss.
All Content
I wasn’t alive during the Weimar Republic but from what I have read, Germans – in sum – were not all that wealthy then. Greeks – in sum – are a very wealthy people. Greece’s upper class (including, above all, the nouveau riches) is probably one of the wealthiest in Europe, if not in the world. I don’t know whether, during the Weimar Republic, one could see there all the tremendously good life which one can still see in some places of Greece today? Yes, some Greeks, quite a lot, actually, go through terrible economic strains. Strains beyond a level which can be justified. On the other hand, sales of mobile handsets (regular and smart phones) are expected to increase to a record level of 3,4 million units in 2013. Someone is buying those 3,4 million units. Had mobile handsets existed during the Weimar Republic, I doubt that many Germans would have had the money to buy mobile handsets.
The major problem of Greece is the totally uneven and unfair distribution of pleasures/burdens. If those Greeks who are financially in good shape honored their responsibility to their society, a lot of people in other EZ-countries would not have to do that on their behalf.
The mobile phone of Weimar Republic was the car and for more normal people the cinema. And beside the poor there were quite a few very rich people who made a fortune in the first world war or with speculations. So even in Germany a better income and wealth distribution was very possible, but not a reality. Instead we had an obscene display of wealth next to starving people.
The uneven and unfair distribution of pleasures and burdens is not an accident. We have the same in Germany. In the past 2 decades there was huge shift in income and wealth distribution in Germany in favour for the rich. No wonder, that Germany uses the same recipe on Greece.
The strains put on Greece are completely nuts and the Greek are perfect victims, since they have made some faults. I guess, most economists were so happy about the greek to admit their faults at the right time, since until to that moment we had a huge private debt crises (ok, we still have), but now it was possible to turn it into a huge sovereign debt crisis. It would have been dead simple to help Greece, since Germany easily did the same to east germany after the reunion. Both countries are about the same size, but Greece had by far less problems than east germany after the breakdown of the comunism. So the EU could have solved that problem within a week or two.
But economists favored to do the opposite, since a private debt crises was impossible due to their understanding of markets and they would have forced to admit how faulty their science is and that it is mostly an ideology. And due to their ideology, there is only one actor, which can make an economy fail: the state. The second luck they had, was the faulty design of the Euro: the Eurozone has a central bank, which is completely useless in case of a crisis.
So today we are only talking about souvereign debt, even in Spain or Ireland, where by far the most debt came from saving the private sector from its private debt problem.
So what are all the problems of our economies? We have big faults in our balance sheets as a result of criminal speculation and fraud. But instead of wiping them all out and start all over again, we try to correct those sheets by fullfilling those numbers. We destroy companies, tell people to stop working, and then we tell them to stop consuming because they are not working anymore, only because of false numbers in balance sheets.
This is absolutely brain dead.
You think the Greek problem could have been solved in a week or two? You think the problem of the former DDR is solved today after over 20 years?
It depends on what you define as the ‘problem’. If you belong to those who have issues like sovereign debt, its sustainability, etc. at the top of your mind, then I can see your conclusion.
To me, the debt is only the derivative while the underlying is the real economy. You will never solve the problem of an underlying by playing around with the derivative. If you solve the underlying, the derivative will solve itself. The former DDR was never given a real chance to develop its own value-creating economy (primarily, but not only, because of the 1:1 exchange rate; but I do realize that, at the time, any other solution might have entailed political problems). The Southern Periphery was given a real chance when they joined the Euro. The didn’t/couldn’t use the chance for the oldest reason in the world: when money is thrown at you like there is no tomorrow, you tend to use it for consumption and increases in benefits instead of investment in longer-term projects.
To me, this is not a matter of crime & punishment. It’s primarily a matter of balancing the flows of investment, production, services, etc. within the Eurozone. If those flows are not balanced, the migration of people will achieve the balance at the end of the day (or a Euro-exit). By mandate this won’t work. There will have to be some real incentives. But as long as the intra-EZ current accounts drift as much out of balance as they did in the heyday of the Euro, it is clear than one area will eventually do all the producing/exporting and another will do all the importing. And the exporters will have to also export their capital to the importers so that the latter can pay for the former’s exports. That is mathematics, not economics.
Now to Greece. By the late 2000s, Greeks had turned their economy, with the help of the Euro, into a zombie economy (“selling each other souvlaki at inflated prices and paying for it with money borrowed abroad”). As Thomas Friedman of the NYT once put it so nicely: “Greece, after it joined the European Union in 1981, actually became just another Middle East petro-state — only instead of an oil well, it had Brussels, which steadily pumped out subsidies, aid and euros with low interest rates to Athens”.
If you know how to turn something like that around in a couple of weeks, you deserve the Nobel Prize for Economics (or more!). The Chicago-Boys in Chile applied a rather brutal ‘shock therapy’ and it still needed at least 5 years until a turn-around could begin to be seen. And mind you, Chileans – as different from Greeks – are a very open-minded people who love to seek advice and assistance from abroad. To turn the Greek economy around into a stand-alone, value-generating economy is, to me, the project of a generation. And it is much more than an economic project. Just as much a project of Social Sciences, TQM and so forth.
I argue that the major reason why Greece is now in such big (and unacceptable!) trouble is that virtually all the effort so far has been directed at the derivative and very little, if anything, at the underlying. The underlying says, and we can see that most clearly today, that as Greece approaches balanced internal and external accounts, the economy cannot employ its people.
From 2001-10, Greece registered a net inflow of foreign debt of 283 BEUR. That’s about 30 BEUR annually for an economy with an average size during that period of probably less than 200 BEUR. If you throw that kind of money into the middle of the desert, you will get growth there!
The Greek economy so obviously needs the savings of other countries that it hurts to see that this is not being understood by political elites. From 1950-72, the most important source of foreign savings were the remittances of guest-workers. With EU membership, the grants/subsidies became important and we all know what happened since the Euro.
Greece now faces the challenge of attracting those foreign savings in the form of non-interest paying direct investment instead of interest-bearing debt. There is really no other workable solution in sight (unless Greece wants to return to living standards of 50 years ago).
Greece ranks the lowest in the EU as regards the attractiveness for doing business and the highest as regards corruption. Turn those two rankings around and Greece has a fair fighting chance to become the economic tiger of the Eastern Mediterranean. And guess what? Only Greeks can accomplish that.
To me, it is irresponsible that after 3 years of panicky crisis, no one in Greece has really come up with a long-term economic development plan. So difficult that is not. Below is a link of a suggestion which I as a non-economist wrote up a couple of years ago. If you look at my blog inventory, you will see lots of suggestions.
For myself, I have defined 3 ‘early promising signals’. I will know that Greece is headed for a good future when I sense the following:
* an obsession with import substitution
* an obsession with export expansion
* an obsession with making tourism/shipping competitive
* an obsession with private foreign investment; and, last but certainly not least:
* an obsession with the EU Task Force to do everything possible to modernize Greece’s public administration and to make Greece a governable state
http://klauskastner.blogspot.co.at/2012/09/an-economic-development-plan-for-greece.html
Errmm do you care to cite any statistics about your claims that “Greeks – in sum – are a very wealthy people”? All statistics pointed that Greek “wealth”, measure either in per capita GDP or purchasing power, was constantly below the European average, and above only Portugal, when compared to the EU-15. 3,4 million mobile phone-sets, mean that 2/3 of the population don’t have a mobile phone. Hardly conclusive.
Sortiris
Greece, before the crisis and before deposit flight, had almost 250 BEUR in domestic savings. Compare that to other countries.
I don’t have the figures available right now but I have read in several authoritative sources that private indebtedness in Greece was relatively modest compared to other EZ-countries. Above all, private ownership of real estate (from regular homes to palaces) was relatively unencumbered by mortgages compared to other countries.
The Greek state (i. e. Greek citizens/tax payers) holds enormous properties. If I recall, about 70 operating companies in the real economy alone. At the beginning of the crisis, the near-term privatization potential was stated with 50 BEUR. Medium-term, I remember reading indications up to 200-300 BEUR in marketable state properties. If I compare that to my country, Austria, the value of marketable state assets is probably in the very low double-digit BEUR figures.
I suppose one cannot totally ignore the enormous properties of the Church because, after all, the Church are Greeks, too.
And, last but certainly not least (!), the offshore assets of Greek residents, financial as well as real estate assets. From the various reports, it seems that such financial assets are clearly in the 3-digit BEUR figures (some have even suggested up to 500 BEUR, which I doubt, but certainly more than 100 BEUR).
The real estate assets of Greeks, particularly the prime real estate acquired by Greek residents in the most expensive areas of the most expensive capitals of Europe since the crisis, certainly add another big chunk to that ‘Greek wealth’.
That’s what I mean when I say ‘in sum’. Regrettably, while the ‘sum’ is most impressive, its distribution is not. First of all, much of that wealth has left the country (i. e. sovereign debt which had entered the country as debt of all Greeks left the country as private equity of some Greeks). And the wealth which remains in Greece is unbelievably unfairly distributed. Even today, I can drive through areas of Thessaloniki where the living standard clearly exceeds that of Austria and I can also drive through areas where people don’t have money to buy food.
If you think that two-thirds of Greeks don’t have mobiles phones, then I take it you don’t live in Greece. And if you want to read about iPads, read this:
http://klauskastner.blogspot.co.at/2012/05/travelling-through-greece.html
Hmmm, lots of people in Africa have mobile phones . . . guess Africa must be rich.
Not that I’d disagree about the terrible distribution, but it doesn’t seem like a distinguishing feature of Greece.
Purple Library Guy
I am sure you know that I did not mean to say that ownership of mobile phones is proof that a country is rich, and I certainly hope that you don’t believe that.
The distinguishing feature about Greece is that the country has, beginning with EU membership and accelerated by the Euro-party, lost it ‘business model’, so to speak. It was not the victim of a one-time real estate and/or sub-prime bubble; it lost its business model (which makes it a lot worse).
If a factory worker hits a jackpot and decides to spend all the money on consumption, he may live extremely well for, say, 10 years. When the money is spent, he has to go back to factory work and to the standard of living of ten years ago. So much worse for Greeks because they didn’t hit a jackpot but, instead, incurred debt which is still there.
Please do not misinterpret me that I say that all Greeks are factory workers! All I am saying is: Greeks had a certain living standard before joining the EU. That living standard skyrocketed (at least until the crisis broke out). One has to differentiate between that part of skyrocketing which was due to increased productivity and the part which was due to nearly unlimited inflow of cheap funding. I would venture to say that the bulk is, bar far, in the latter category.
Much of the money which flowed into the country left the country right away as payment for imports. If Greece didn’t have much of an industrial base before, it was further decimated due to this process. And when you don’t have some form of an industrial sector, no stimulus will work. All it does is increase imports again and, perhaps, create some economic activity among importers.
This is now the great opportunity for Greece. It is essentially a re-deployment of human resources. The resources are already ‘available’ (I don’t want to be cynic!) – the unemployed. The new activity must be domestic production; domestic value generation. First for domestic consumption (import substitution) and then for exports.
Any money which is sent to Greece for the purpose of driving this re-deployment process along is money well spent!