Thoughts on the Design of Grexit

Paul Krugman has a thoughtful op-ed piece in today’s New York Times in which he reluctantly calls for Greek exit from the euro. I share his view on the desirability of Grexit at this juncture, but not his reluctance in expressing that opinion. How could Grexit best be designed, for Greece, for Europe, and for international interests? Below are a few modest thoughts on this.

1. The European Union (through the EFSF) should agree to accept payment on its holding of outstanding Greek sovereign debt in drachma. The agreed swap from euro into drachma debt payments should be set using some reasonable income-based metric. So, for example, the debt-payment exchange rate could be set so that the Greek debt/GDP ratio is 80%. The debt payment swap should not be based on the market’s drachma/euro exchange rate, since this would leave the Greek debt burden unsustainable. Greece should emerge with a modestly high, but sustainable, sovereign debt burden in drachma. The debt payment exchange rate should be GDP-linked going forward, not tied to the market’s euro/drachma rate, but with the option for the Greek government to switch back to the originally-contracted euro payments if it so wishes (not likely). This is a tricky design problem, but there is no immediate rush in completing it. A few weeks or months of debt payments can easily be rolled over until the plan is finalized.

2. The European Union or EFSF should make good on Greece’s debts to the International Monetary Fund. The IMF was wrong to allow its capital to be misused in the 2010 bailout, but it should not, and probably would not, accept anything less than full payment without exacting painful retribution against Greece. IMF capital is intended to aid financially-distressed emerging markets in sovereign debt crises rather than to bail out private-sector banks in Europe.

3. The domestic assets and liabilities of Greek banks will need to be redenominated into drachmas, at a rate that is sustainable for private and business debt within Greece. The redenomination of bank liabilities (savings and demand accounts) will contribute to the capital flight risk of peripheral euro-area banking systems. That is a euro design problem which is not solved. Pretending Grexit does not need to happen is not a viable solution to this unsolved euro design problem.

4. I am not sure what mechanism or rate the ECB should require on drachma repayment of outstanding euro-denominated Emergency Liquidity Assistance.

68 replies on “Thoughts on the Design of Grexit”

There are two absolute constants i.e. both the IMF and the ECB must get their money back (Noyer of the ECB has just publicly confirmed the last point).

The position viewed from Berlin (courtesy AFP).

“Finance Ministry spokesman Martin Jaeger said Monday the rules underpinning the fund, the European Stability Mechanism, clearly specify that all aid is subject to conditions.

He said that “it is simply not legally possible to back away from this principle.”

Chancellor Angela Merkel’s spokesman, Steffen Seibert, echoed that sentiment: “We are stressing the principle that solidarity is inseparable from (a country’s) own efforts, and we see that this principle has brought significant success in the past few years.”

Seibert says Germany will wait and see what proposals Greece makes to its European partners.”

Grexit is not on the table, at least for the moment.

The caravan has moved on and Tsipras and Co., even without their most damaging loose cannon, are on a different deck. Their existing programme has expired and what happens now in terms of additional aid is governed by an inter-governmental treaty.

Syriza may have chosen to play fast and loose with the legal circumstances surrounding the holding of a referendum. More mature democracies do not allow for such action. This difference in culture lies at the heart of the Greek crisis.

There are two absolute constants: Greece must refuse to pay back either the ECB or the IMF. What’s the point of a Grexit if it doesn’t reduce the debt load?

DOCM seems to think the Greeks are going to leave the euro and then pay back all those euro-denominated debts with the newly devalued new drachma. Newsflash: if they can’t pay back the debts now (and they can’t) they aren’t going to be able to pay them post-Grexit.

In fact, the Greeks’ hand has been strengthened. All they need to do now is play hardball: either we get significant debt relief beyond even what the IMF said was necessary or we exit the euro and none of you get a penny.

@Ernie Ball — To be fair to DOCM I think that you mis-quoted him. He said the IMF should get its money back, but not necessarily from the Greek sovereign. Also, you are wrong if you think that most of the outstanding debt is with the IMF/ECB it is mostly with the EFSF.

You are correct of course that Greece cannot pay in drachma at the market exchange rate for euro/drachma – that is the same payment stated in a different numeraire. Greece needs a concessionary exchange rate for its debt payments (at least to the EFSF).

The one great fear uniting all Greeks, rich and poor, left and right is the Drachma.

Paul Krugman et al may fanaticise all they like with their devaluation models but the Greek pensioner knows that a 50% devalued Drachma is far worse than whatever further austerity it was that she voted against yesterday.

@ The Second:

You say: “the Greek pensioner knows that a 50% devalued Drachma is far worse than whatever further austerity it was that she voted against yesterday”.

But the Greek pensioner may well (in effect) have voted for a 50% devalued Drachma yesterday. And what are the chances of a Greek Central Bank delivering a monetary policy which limits the devaluation to 50%?

@ Gregory Connor

You are, of course, correct. The point I was making is that, however they are financed, the payments for these two institutions are sacrosanct.

The EFSF is also an international treaty, in effect, but any shortfall is governed by different rules (see Section 6 at page 19). The financial pain of any shortfall for the other participants is almost immediate. The implications for Irish budgetary policy are obvious.

A major point, which can probably be analysed only well after these events, is that we are seeing is a new form of European politics.

@ GC

I can’t really get my head around your model Grexit, in which you talk of a euro design fault (no exit mechanism).

The problem with coming up with an efficient exit mechanism is like designing the perfect ejection mechanism for the crew of a passenger aircraft – who would want to fly on that plane?

The euro will survive precisely because exit is unthinkable. Grexit is closer but still unlikely according to my old stalwarts, the betting markets.

As the prospect of a Greek exit increases, it’s attraction may diminish.

I have my doubts that Europe would pay-off the IMF debts as some euro states would likely see that a shut-off of a recourse to the Fund as a pressure on the Greek government. Why didn’t the IMF in the first place agree to be an adviser rather than a party to the bailouts?

The Irish Times is in holiday mode – at least the FT and Guardian are providing good coverage.

Greece’s two main exports — refined petroleum and tourism require imports and international payment systems to remain open.

When exit from the euro by Ireland was proposed at the height of the crisis, I did raise the issue of indigenous exporters requiring vital imported material, at a time when they were already in emergency mode.

Privatisation proceeds would in the medium-term provide some foreign exchange.

To paraphrase Mario Cuomo, the Greek government needs to move from poetry to prose. This is a time when it needs to also engage with local experts outside its own camp.

In the short-term it is unlikely that a euro-drachma rate can be agreed as there is lack of trust on both sides and political leaders have to sell a package to their own parliaments.

Calling people “terrorists” and “blackmailers” one day and a few days later trying to convince the same people that you’re going to keep your word, is not a good backdrop for progress in the real world.

It’s interesting that Tsipras had a chat again with Putin today but it’s the Chinese he should be talking to about investment.

Miro Cerar, prime minister of Slovenia, said Monday that Greece should make fresh proposals at the summit of the Eurozone’s 19 leaders on Tuesday. The proposals, he said, should be bolstered by “a convincing plan of structural reforms.”

Cerar said “any attempt by the Greek government that does not have a sincere and constructive intention to reach an agreement … is unacceptable for the government of Slovenia.”

Sigmar Gabriel, Germany’s vice chancellor said there is a danger that Greece will suffer a shortage of essential goods such as medicine.

“The people there need help, and we shouldn’t deny it to them just because we’re not satisfied with the outcome of the referendum,” Gabriel told reporters in Berlin.

He echoed earlier statements from across Europe that it’s up to the Greek government to make a new bailout proposal to its creditors.

Finland’s finance minister says Greece will need to conduct extensive reforms no matter what happens next and says that “the ball is now in Greece’s court.”

AP reports that Alexander Stubb said on his website Monday that’s it up to the Greek government to decide what Sunday’s referendum vote against creditors’ previous proposals means in practice. He stressed that “the instruments and rules for the stabilization of the Eurozone remain unchanged.”

Stubb says that the near future will be very difficult for Greece and mending the economy will require extensive reforms.

You are not understanding, DOCM.

This has nothing to do with any rules. Nobody cares about any law or treaty.

This is a simple power game. Grexit must happen and no debt should be paid back, ever. Then Greece is debt free.

So the Greek government likely wants to stay with the euro as it has appears to have no plans to avoid the chaos that would follow a sudden exit.

It’s also likely that there will be no third bailout until an elapse of time to see what happens on the ground during possibly an extension of the second bailout.

The payback for the referendum is that Tsipras may well have less room for manoeuvre than he would have had if he had not called it.

Critics focus on Germany but Slovenia, a Balkan neighbour of Greece and one of the smallest countries in the Euro Area, has also had enough.

Presumably the EFSF will also have to make the ECB whole on its loans and ELA, and then accept drachma repayment of same from Greece at some feasible exchange rate.

@ Nuclear Russia

“Then Greece is debt free.”

In the real world it’s not as simple as that and becoming a vassal of Putin’s Russia is not everyone’s cup of tea or notion of being free.

It wouldn’t even have the IMF as a backstop,

There is a need to distinguish the Greek banking system ELA debt which is owed to Bank of Greece from ECB holding of Greek government bonds.

Some perspectives on Bloomberg…

“Greek Prime Minister Alexis Tsipras probably has 48 hours to resolve a standoff with creditors before civil unrest breaks out and ATMs run out of cash, hedge fund Balyasny Asset Management said.”

“I don’t see a good resolution any time soon,” Colin Lancaster, senior managing director with Balyasny, a $9 billion fund based in Chicago, said in an e-mailed statement. “The big question is whether the EU adopts a strategy of waiting them out. The hope would be that the unrest leads to a unity government or change in government.”

Bruce Richards, co-founder of U.S. hedge fund Marathon Asset Management, said last week Tsipras will be gone within 30 days regardless of the outcome of the nation’s referendum.

A “no” vote would cause “rioting in the streets come weeks from now when the banks are closing and you have drachma,” he said in an interview on the television program “Wall Street Week.”

The outlook for Greece is scary in or out of the euro area, judging by the figures quoted by the IMF in their DSA. Total factor productivity growth has averaged 0.1% per annum since 1980 and if that continued real GDP would contract by 0.6% per annum in the medium term, given the fall underway in the working population. Reforms boosting TFP growth to the euro average would yield GDP growth of 0.8% per annum. The DSA is predicated on 2% economic growth in a steady state , which assumes Greece somehow inherits the highest TFP growth in the euro area.
The IMF also assumed Greece would generate €50bn from privatization proceeds between 2011 and 2015. The actual figure was €3.2bn so the fund is now assuming €0.5bn per annum.

New face on the block!!!

By Mathew Campbell

Euclid Tsakalotos was named finance minister to replace Yanis Varoufakis,

“Time is running short: Greek banks are almost out of cash and commerce is grinding to a halt in the absence of a new bailout deal and lifeline from the European Central Bank.”

His most recent book, written with Christos Laskos, was titled “The Crucible of Resistance: Greece, the Eurozone and the World Economic Crisis” and printed by self-described “radical publisher” Pluto Press.

It criticized “permanent austerity” and argued that Syriza represents a model for other European countries to emulate. The book was endorsed, among others, by Varoufakis.

How long will he last… before he too is rotated out?

With Greece’s recent history of fudged statistics, how would you judge the value of a GDP-linked bond, and who would hold them?

Tsakalotos is kinda cute! Not in the rock star mode of his predecessor but cuddly academic. Is someone plotting a graph measuring attractiveness and effectiveness of finance ministers? If he blows up I recommend a plain looking alternative to test the theory…

@SH: Some random hedgie from Chicago? Really? Is that the best you or BBG got? Did you look up the performance numbers of these guys you quoted? Probably underperformed the S&P for the last 10 years. A tax on stupidity.

@ Sarah

He is described in the Telegraph as the “brains behind Syriza’s economic policy”.

With reference to Dan’s observations, the employment rate is so low among the working age population that any serious recovery in employment would swamp the impact of the shrinking population on Greece’s economic performance.


He’s a crazy* Marxist.

However, what we challenge here is the claim that that the EU essentially a construction which serves the interests of the Northern economies – as if there are no class relations within northern economies.
The exposure to international competition, effected through the single market programme and monetary union, imposed significant restructuring to the benefit of capital in all member states. Significantly, this integration
secured higher rates of profit, satisfactory rates of growth, and a rise in average productivity, for the less competitive countries, before 2008 at least, went a long way towards closing the gap in per capita GDP that separated them from the more advanced countries of the European north. And all this in an environment of “free” movement of goods and capital is an index of

*crazy=a lot of people would benefit from reading his work.


We shall see if he is informed of his “unhelpfulness to the
process” too. If so my current conflict between romantic support for the revolution and pragmatic acceptance of real politique will shift in favour of the revolution.

Has anyone done up a basic econometric model of Grexit vs Deal …even just an Excel one ?

Frank Galton,
If you read that densely written but interesting article, one concludes that Syrizia want to leave the EZ? Is that a correct interpretation?
In which case, do we conclude from the ultimata from other MS combined with the actions of the ECB that other actors have come to the same conclusion.
So,is everything that is going on just a ritual dance?

@ Sarah
I know you will find this hard to believe but I find Angela Merkel kinda cute.


Sigh. Which of us should send the memo informing him SF are opportuntists not socialists?


“We will be seeking to negotiate a new deal to address Greece’s nonsustainable debt,” Mr. Tsakalotos, an Oxford-educated economist, said in March. “No economy that has lost a quarter of its G.D.P., has 25 percent of its population unemployed and over 50 percent of its young people unemployed, and has one-third of its population facing extreme poverty can be expected to repay its debt with a succession of years of very high primary surpluses.”

“Some European governments will be arguing that we should not give problematic Greeks special treatment, but you know that we are not asking for special treatment,” Mr. Tsakalotos said. “Greece has had the biggest per capita fiscal adjustment of any economy since the crisis began; hardly special treatment, especially when you consider that the bailout was more to serve northern banks than southern peoples.”

Speaking of the European governments that have insisted on austerity in the face of a recessionary spiral, Mr. Tsakalotos told Sinn Fein activists, “Their fear of Syriza has more to do with the aspirations of their own people for social justice and a new model of socially inclusive development; it is you that they fear, not us.”

“I am sure that the Irish people will draw the right conclusion about not only the desirability of change, but its feasibility,” he concluded. “You have nothing to fear but fear itself.”


‘The ECB sticks to the rules’. More likely, ‘ the ECB is desperately scouring its rule book, and those of the other institutions, to find some way to provide aid to Greece ‘off balance sheet’.

Mario is, after all, the one who said he will do ‘whatever it takes’, so perhaps the Greeks are just taking him at his word. Extend and pretend is what all central banks are doing these days.

As you might say, this is senior hurling, and the Greeks have turned up with an unusual kit. Contagion can happen through a lot more channels than monetary ones.


It’s a complex article that doesn’t lend itself to a single punchline; indeed one of its points is unease about the TINA approach to economic policy, with everyone having their own version of TINA. Instead I read it as saying (from their perspective) there needs to be new forms of social mobilization that can be more credibly (more credible than the state, vested interest trades unions) behind whatever “leftist” alternative is eventually chosen. From that perspective, the referendum makes perfect sense — if it leads to a genuine new coalition. Of course that’s just my summary. I’m sure Richard Quest will enlighten us all with a thorough discussion of capitalist modes of alienation the next time he interviews him.

Factual Query

What is happening to today’s German current account surplus. We know what happened a decade ago as the Greek government and Spanish and Irish developers soaked up a good deal of it. But what is today’s situation? It has to be going somewhere. But where?

References appreciated.

Some bank failures roll on without a murmur.

And resolution is straightforward.

VIII. Priority of Claims
In accordance with Federal law, allowed claims will be paid, after administrative expenses, in the following order of priority:

General Unsecured Creditors
Subordinated Debt

Wolfgang Munchau is back on form with this analysis.

Both sides will have a good idea of what is in the Greek proposal. The question then is whether Tsipras still believes that the vote of the Greek people strengthens his negotiating hand, an idea of which he should be disabused already. A double bluff situation then exists, not between Tsipras and the other side of the table but between him and the 61% of the population that – supposedly – rejected the deal which was within 60 million euro – according to Juncker – of common ground and a compromise.

If he has good sense, and represents the interests of all Greeks, he will call the popular bluff. If he does not, he either has no sense or he has an entirely different agenda.

Totting up the +s and -s for the EU in their negotiations with Greece. Seems very hard to make a case for a deal being struck given what we know they do and don’t care about…

What they don’t care about:
• 25% drop in GDP since 2010
• Fiscal adjustment in budget deficit from 16% to 3.5% since 2010
• The core principles enshrined in the EU treaties around solidarity, social justice and employment for all
• 30% unemployment
• 50% youth unemployment
• 180% Debt:GDP ratio
• Profligate lenders
• IMF’s verdict that Greece need €50bn debt write down
• The extraordinary generosity shown to Germany in the last century on debt write downs
• The Euro was an ill-concieved, poorly implemented experiment – the collateral damage associated with these FACTS is to be ignored.

What they do care about:
• Moral hazard – as it applies to nations (not lenders)
• The domestic political implications for allowing any far left government to make progress in negotiations.

@ Sarah

You’re surely in line for the prize for ‘Most Politically Incorrect Contributor to IE Blogsite 2015’ (?). For sure, charisma is a vital element for individual success in the age of celebrity politics, particularly at the campaign stage; and power, or the whiff of it, indeed may be the ‘ultimate aphrodisiac’, as Henry Kissinger put it. But there’s the rub. Personal style, debonair good looks and all the rest that confer a veneer of charisma make a poor substitute for competence, integrity and negotiating skills. That’s the real stuff of politics, and responsible exercise of power, even if it is tedious, boring and rarely satisfactory to the visionary idealist.

As an ordinary citizen, I’m against so-called ‘Grexit’. Whatever the economic arguments that favour it, politically it tears up the social and humanitarian values on which the EU project was originally based. So I live in the hope that out of the current debacle, and missed opportunities of the past six months, lessons will have been absorbed by all sides and the real values of the European project will reassert themselves. Reform of the EU institutions, eliminating the democratic deficit which is woven in to fabric of those institutions and the way they do their business, has to be the next big item on the agenda. Hardly romantic, but there you have it!

Just some thoughts following Veronica’s comments a couple of threads back.

I think the current crisis, as well as exposing different and at least partially incompatible modes of capitalism within the EZ is also exposing different ideas of democracy.

I think the majority of governments see themselves as representative in a Burkean way. That is, the idea of the representative is not to fully enact the choices of the voters but to use their judgement in their best interests – and not just their immediate electors’ best interests but that of the whole polity. Usually this means that the general ideological framework of the party is important (‘best little country to do business in’) but not so much the detail of the manifesto. That is, the politician offers the kind of thing they think is best but then asks to be let get on with it.

The problem here is that it tends towards politicians saying things they believe they need to say to get elected with the view that the voters would like to hear certain things – aren’t up to understanding the full complexity of a situation – and then very quickly do another ‘what needs to be done’. Pat Rabbitte, “isn’t that what you tend to do during an election” being a prime example. And that leads to people being disenchanted. It also leads to a kind of, at best, benign contempt for the public. When the public very clearly votes against a politician from a Burkean perspective, as that politician takes it as read that he (I’ll say ‘he’ from here) knows best, then the public, lovable though they are, must have been mislead, or must have been uninformed or similar. We can see this on the blog in relation to the Greek referendum. Another weakness for Burkeans is that when they’re left alone with other politicians who disagree with them (and who indeed may be irrational) they have nothing much to fall back on other than their native integrity and intelligence, such as they have, and thus are more bulliable into doing what is now being explained to them as the best interest of their citizens who can’t be expected to understand.

Elected socialists see themselves as much more tightly bound to the manifesto or key decisions of the party. So they are far less at liberty to decide ‘on behalf of’. This came through early on when, from memory, Varoufakis attended a Eurogroup meeting and announced he would bring back proposals to his government, whilst the others couldn’t see what he was there for if he couldn’t just sign things. The specific mandate is thus very important for Socialists.

With the negotiations with Tsipiras the Troika tried to (not passing value judgement here) push Tsipiras off his mandate. Faced with this a socialist has the following options.

* Cave. Bring it back, try to get a new mandate and resign, possibly anyway. This sort of happened with the leader of the Green party who went off their mandate to go into government with FF.

* Flatly disagree, in which case there is no deal and take the consequences.

* Aim for some sort of compromise and then seek to get a fresh mandate behind it. In this case the referendum can be seen as statesman-like as Tsipras realised he needed more than just a Syriza mandate to turn down new offer (as he is in government) and so got one from the general public, at the very clear risk of destroying his own government.

Put it another way, if Tsipras had been a strong Burkean he would have turned down the offer (his view of the best interests of the country), probably taken a stand on the denouncement of tyranny in line with the founders of the USA and attempted move towards independence.

But as a socialist he doesn’t think the people are not competent to make major decisions for themselves and so, like the Icelanders before he will go with the will of the people. In this case a substantial part of the middle classes has gone with the Syriza position which is a strong sign to the Eurozone that the Greek population really, really want a better deal on the table.

Some more speculation. I think now the cycle will reiterate, possibly very quickly.

Tsipras (and new Finance Minister) will try to use his new mandate to get a better deal for Greece. He will compromise from the party line but will look for a longer-term package and if it offers hope of recovery will take it and thank the people for helping get a better deal.

Eurogroup, Troika, etc., can easily torpedo this by saying ‘no, we don’t like your stinking mandate.’ If they then counter-offer more austerity (to reflect worsening conditions) and no potential debt re profiling than I can’t see how Tsipras can accept.

Then there are more consequences.

Data on Germany’s BOP is available on the Bundesbank’s website. The current account surplus is rising and amounted to €220bn in 2014. That was broadly offset by Direct investment outflows (€83bn) and Portfolio outflows (€127bn).The latter appears to have replaced bank lending as a conduit for German foreign asset accumulation.

@ GK

If you will forgive me for saying so, there are two major logical holes in your argument, the first in relation to democratic forms, the second in relation to negotiation in an EU context.

The problem is not between the form of representative democracy and direct democracy but the mixing of the two in conflict with whatever the constitutional arrangements actually are. The Greek referendum is a classic example,the wording of the constitution actually appearing to prohibit such in relation to fiscal matters. In relation to the conduct of Ireland’s international arrangements, the relevant section of the constitution is by now a confusing series of sub-articles dealing with particular international agreements when it is clear that the drafters of the original constitution intended – and there is an opening article to that effect – that the conduct of country’s affairs internationally was a matter for the executive; except when such agreements were seen to require a constitutional amendment, something which has almost become the norm after the initial dubious Crotty judgement.

The TEU makes specific reference to the member states being representative democracies.

On the second point, there is an article in the Treaty on the Functioning of the EU that ministers at the Council (of Ministers) must be able to commit their governments. It is hard to see how negotiation could function otherwise. Mutatis mutandis, the same logic applies to the European Council and the Eurogroup although the arrangements are different, the former being precluded from adopting legislation, for example, and the latter carrying the word “informal” (on UK insistence) in its job description in the relevant treaty protocol.

Before he departed the scene Varoufakis was making various threatening noises about legal breaches in relation to Greece’s possible ejection from the euro and his ejection from the Eurogroup. What Syriza have to grasp is that calling for the referee when your team is ignoring the rules of the game is simply plain stupid.


It’s all part of war against earnestness – a scourge of our times. I only trust those with a sense of humour. Those without are the kind of morally superior beings who do terrible damage justified by their conviction that they are right about everything.

@the second

Angela – I get that! I can how a hardline trouser suited granny whose capable of smiling could do the trick. Was
just reading this earlier. I don’t hold with the conclusion since Merkel, la garde and Clinton haven’t brought anything to the table that a man wouldn’t – but the notion that a woman has worth after menopause is comforting to this ageing sprite.
(On phone and can’t copy properly – add on the www etc to link)

Varoufakis was on Morning Ireland last week, who was attending rallies before the vote and press conferences after the vote. There is no way he has any work done on contingency plans. The Greeks need to do a temporary deal up to October at any cost and to have the showdown re debt restructure then. The reason is that their tourist season is about to go down the tubes with people afraid that there will be food and medicine shortages, a lack of cash and a serious risk of being mugged. I think that Tsipras will be allowed political leeway to do whatever he thinks is necessary, no matter how harsh, to get to October. I expect that the Greek opposition will row in fully behind him at this time of extreme peril. I think that the people will accept that any such deal is not a betrayal but a necessary evil.

The problem is how to get the deal when nobody in the EU trusts him not to walk away from reforms in October. What can he agree to deliver over the next week, and not just promise, that will be accepted as demonstrating real bone fides to the other countries.

@ Gavin Kostick

In another lifetime, I knew of a veteran TU official whose opening line in every negotiation was: ‘Gentlemen – [they were always gentlemen in those days] – you have me by the b***s!” Thing is, he never got up from the table until he had a better agreement in his pocket than anyone had assumed he was going to get when he sat down.

So whether you are a socialist, liberal, conservative, communist or any other denomination you care to think of, three options – ‘cave’, ‘reject’, or ‘compromise’ – are open to you in negotiations with others whose vision of the world may not be quite the same as your own.

I don’t regard the Greek referendum as a ‘referendum’ in the sense in which experience these things i.e. where there is open debate for a period of time before the vote, an indpendent referendum commission to set out the arguments ‘for’ and ‘against’, and engagement by a wide range of groups in civil society as well as political parties. The Greek ‘referendum’ was more akin to a ‘back me or sack me’ plebiscite.

Strategically, a few good things come out of it: securing all-party endorsement for wherever renewed negotiations with the EU institutions may lead; a chance to change tack in those negotiations through a change in personnel, e.g. the Finance Minister; an opportunity for Greece to put forward its own package for change, reflecting what is politically feasible and which is now backed by a decisive mandate. But it also has entailed a significant cost, not least to ordinary Greek citizens, whose economy has been brought to the brink of an abyss.

Representative democracy in the 21st century is a very different beast to what Burke envisaged in the 18th century.Globalised economic integration, instant global communications and the transnational political governance processes that arise therefrom means that a ‘closed’ national polity – such as we ourselves, arguably, tried to create in the first half of the twentieth century – is no longer possible if internationally recognised fundamental human rights of citizens are going to be observed to any reasonable extent. Twenty-first century socialism/communism must also take a different form to its 20th century varieties if it is to provide a necessary alternative. It’s only an opinion, but I think that a populist-oriented brand of socialism based on absolute rejection, and denigration, of all the values of representative democracy quite cuts it. But there’s a long way to go…

European leaders could well be accused of trying to orchestrate regime change in Greece but it may also be the case that if creditor governments sought a democratic mandate from their own electorates to give Greece new money it would not be forthcoming. Debtor fatigue in Greece appears to being matched by creditor fatigue.

The Greek referendum provides the creditors with the required democratic mandate to pursue Grexit.

DOCM wrote:

The problem is not between the form of representative democracy and direct democracy but the mixing of the two in conflict with whatever the constitutional arrangements actually are. The Greek referendum is a classic example,the wording of the constitution actually appearing to prohibit such in relation to fiscal matters.

Apparently our own DOCM knows more about the constitutional limits on Greek plebiscites than does the Greek Council of State. Or is it that it doesn’t matter what the actual law or constitution say because what they say is what the eurocrats say they say?

@ Ernie


Extract Article 44.2 Greek Constitution.

“A referendum on Bills passed by Parliament regulating important social matters, with the exception of the fiscal ones shall be proclaimed by decree by the President of the Republic, if this is decided by three-fifths of the total number of its members, following a proposal of two-fifths of the total number of its members, and as the Standing Orders and the law for the application of the present paragraph provide. No more than two proposals to hold a referendum on a Bill can be introduced in the same parliamentary term.”

It would have been a brave Council of State that blocked the holding of the referendum. “With the exception of fiscal ones”, however, must mean the same thing as it does in English in the original Greek.

On the conditions in which the referendum was held cf.

@ Nocence

Calling on the IMF report to justify Syriza’s stance on debt write-down will be a bit unpalatable to those who will have to pay for it. Quoting from the report:

“By late summer 2014, with interest rates having declined further, it appeared that no further debt relief would have been needed under the November 2012 framework, if the program were to have been implemented as agreed.”

“If the program had been implemented as assumed, no further debt relief would have been needed under the agreed November 2012 framework.”

“However, very significant changes in policies and in the outlook since early this year have resulted in a substantial increase in financing needs.”

No doubt the IMF staffers have to cover their backsides to some extent for participating in the previous bailouts. Nevertheless very funny to see Tsipras touting the IMF report as justification for the Syriza policy of seeking write-downs.

@ GC

Re Paul Krugman’s latest op-ed.

In the words of Basil Faulty it is bleeding obvious that devaluation of an exchange rate is more effective than internal price adjustments in addressing external competitiveness issues (at least in the short term).

But a currency you can trust brings many other benefits, not least being the security of those who are no longer economic active and who have saved during their working lives or maybe who have been relying on the promises of the State to keep them reasonably comfortable in retirement. The Greeks are fully aware that the euro beats the drachma on almost all counts except the short term competiveness one.

Here again we see Paul’s hypocrisy as he bemoans the “terrible suffering” of austerity; for pensioners this suffering would be in the halfpenny place compared to the situation where the State able to effectively welch on its promises to them with a massive devaluation.

In any event Friedman’s comments on exchange rates are obviously in the academic context where there is a reasonable choice in the matter. Possibly this was highly relevant when considering whether to join a currency union. But exiting a currency union is a whole different ball game and the fact that Paul cites Friedman’s “bleeding obvious” shows that he has adopted a very simplistic analysis to this issue.

Separately, Paul notes that Irelands’ Debt/GDP ratio is higher after our dose of austerity than before. So let me consider the counterfactual. If Ireland had continued with double digit deficits for the last several years, I presume Paul would agree that our nominal debt would be much higher – that seems basic math to me. Is Paul so in thrall to Keynesian alchemy that he believes our GDP growth would have outstripped these double digit deficits?

@The Second

A gift for you – a little tutorial.

Within moralistic ould lutheran deutsche ideology Keynes is on a par with Lucifer … wo_man is bad, baad, BAAD and debt is a mortal heinous sinn!

@ All

FYI an absolutely brilliant piece by Martin Sandbu of the FT.

He has it in one, even if unintentionally. The ECB is behaving like a private bank. Given the heterogeneity of the EU and the clear unwillingness of the sovereign states involved to institutionally integrate their countries further, that is the way it must behave. And that is how the treaties state that it should behave (even if the drafters can have had little real understanding of what they were doing other than the mantra “no bail out” or, more accurately, no EU government in any circumstances accepting the financial obligations of another).

@The Second

What the Krugmans and their ilk have forgotten is that the working classes depend on the State. Bankrupt States damage the working classes. If you run insane deficits now you steal from tomorrow’s working classes. And if the State defaults on money borrowed from other countries or internationally funded organisations like the IMF you steal from the working classes in other countries. And if a State defaults on debts from private creditors then you also steal from the future of your working class – because private creditors won’t lend to you in the future.

In none of these scenarios is defaulting on your debts a progressive solution – it always ends up screwing those who most need assistance from the State.


I guess you missed Sandbu’s previous column where he accused the ECB of acting entirely illegally.

We must draw the rather dramatic conclusion that the ECB is violating its mandate and making a bad economic situation worse. And note that this is a relatively generous assessment.

The column you cite favourably is meant to respond to objections to that argument.

Are you sure you want to endorse it as “brilliant”?

@ Ernie

Read my contribution again, with particular reference to the adverb “unintentionally”.

The ECB is acting entirely within its legal mandate. What the misunderstanding is about is the assumption that it should behave – a value judgement – as the central bank of a sovereign state. For this to be true, you, and those that subscribe to that belief, will have to demonstrate where this sovereign state is to be found. Hy-Brasil?


Bernard-Henri Lévy is a buffoon and an authority on exactly nothing. You might as well be citing Bono (who can at least warble passably).

Meanwhile, this is just high-flown window dressing for your real objection to the referendum: that it strengthened Tsipras’s hand.

@Ernie; DOCM

Bernard-Henri Lévy …. a ‘dangerous buffoon’ …cheerleader for Sarkozy as he wrecked North Africa and provide the head-the-balls with serious armaments …. of course, the French have a bit of form in N. Africa …

Read this instead:

‘This ascendency of technocratic values among French progressive elites is itself reflective of a wider intellectual crisis on the left. The singular idea of the world (a mixture of Cartesian rationalism, republicanism and Marxism) that dominated the mindset of the nation’s progressive elites for much of the modern era has disintegrated. The problem has been compounded by the self-defeating success of French postmodernism: at a time when European progressives have come up with innovative frameworks for confronting the challenges to democratic power and civil liberties in western societies (Michael Hardt and Antonio Negri’s notion of empire, and Giorgio Agamben’s concept of the state of exception), their Gallic counterparts have been indulging in abstract word games, in the style of Derrida and Baudrillard. French progressive thinkers no longer produce the kind of sweeping grand theories that typified the constructs of the Left Bank in its heyday. They advocate an antiquated form of Marxism (Alain Badiou), a nostalgic and reactionary republicanism (Régis Debray), or else offer a permanent spectacle of frivolity and self-delusion (Bernard-Henri Lévy). The sociologist Bruno Latour clearly had this syndrome in mind when he observed: “It has been a long time since intellectuals were in the vanguard. Indeed it has been a long time since the very notion of the avant-garde …passed away.” But we should remember that in France especially, there is always the potential for a sudden reversal: regeneration is one of the essential myths of French culture.’

a permanent spectacle of frivolity and self-delusion (Bernard-Henri Lévy). Quite Wonder who else on the blog fits this bill?


Unfortunately, you can’t refute someone’s argument by saying “I refute you.” Similarly, you don’t refute Sandbu’s argument for his conclusion that the ECB has acted illegally (or “outside its mandate” if you prefer) by stating that “the ECB is acting entirely within its legal mandate.”

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