Guest post by Marios Zachariadis: On the Greek Crisis and German Imbalances

Policies undertaken from a narrow national perspective that encourage systematic fiscal surpluses coupled with a national consensus on wage suppression between unions and industry facilitated by the state, impact negatively upon domestic spending while increasing national saving and may lead to mercantilist outcomes of systematic policy-induced positive trade balances with large financial flows going the other way. This mechanism in relation to export-dependent countries like Germany has been recognized for a while by leading American economists like Obstfeld (the IMF’s new chief economist succeeding Blanchard) or Bernanke, while many have also pointed out low domestic investment, consumption taxes, and rigidities in the service sector as additional policy-related reasons for this German systematic phenomenon.

It is therefore no wonder, given also the American similar experience with China, that American mainstream economists and in effect the leading economists in the world have been taking a strong stance towards Germany as of late, amplified by the understanding that German economic moralism is more akin to Kantian absolute ethics than to the outcome-based pragmatic Utilitarianism which forms the basis of mainstream economics. Having witnessed German rigidity and attitudes of the last few weeks, this last point is not as much of a perceived threat to mainstream economic philosophy but a threat to the stability of the monetary union and the global interconnected economy whose stability depends on sustainable bilateral trade and financial flows.

It is imperative that the above economic understanding filters down towards European decision-making bodies as nations with positive imbalances, unlike economies with negative imbalances, will not be disciplined by markets that have the general tendency to ignore long-run consequences. This then calls for coordinated policy and regulatory action at the level of the Monetary Union to discipline systematic offenders like Germany as it does with offenders of the opposite sort. This economic understanding is also crucial in order for German-led EZ to come to a mutually beneficial consensus regarding the now generally accepted non-sustainable Greek debt burden accumulated over the past decades via the above described mechanism, one side of which in this case were populist clientelistic Greek governments and a big-state socialistic attitude by Greek governments and society at large alike, which had led to a Greek appetite for policy-induced spending, systematic negative fiscal and trade balances and borrowing.

In addition to the above understanding of international trade and financial flows and of German economic moralism demonizing one side of the trade flows equation, it is generally accepted by the economics profession that Greek fiscal adjustment has been extreme and has not been combined with sufficient product and other market oriented reforms over the past half decade. The latter would have made the Greek economy more flexible in terms of price and wage adjustment and would have thus brought about much smaller declines in real output in response to the initial crisis and in response to the subsequent fiscal adjustment shocks that hit the Greek economy. In fact, such flexibility characterizing the Cypriot economy (with a main exception being the Banking sector) can largely explain the much smaller drop in real output facilitated by speedy internal devaluation at much faster rates than was the case in a Greek economy captured by Oligopolies in e.g. Food and Petrol, and a myriad of Professional groups including Pharmacists, Lawyers and others. The lack of necessary reforms is again mostly due to successive clientelistic Greek governments but also due to inadequate supervision and misplaced emphasis on mere fiscal targets by the Troika, which is currently repeating the same mistake in Cyprus in relation to much needed reforms in Justice and other institutional reform that would effectively break the link between politicians, lawyers and bankers that had led to the Cypriot Banking Crisis.

The remaining rigidities in the Greek economy, in the absence of speedy reforms to be undertaken in this front, make another often suggested piece of economic advice by American economists, the adoption and subsequent depreciation of a national currency, more relevant in the case of Greece than was the case for Cyprus. This author had taken a strong stance against this advice for the case of Cyrpus e.g. here and in a co-authored confidential report of the Cypriot National Economy Council to the Cypriot president two years ago. I believe that the main arguments against a new currency outlined in the above article and report largely hold for Greece. For example, Greece like Cyprus is an economy that imports a lot of what it needs in order to produce its exports or even services such as its tourist product, so that a depreciation would actually initially increase costs of production in Greece due to imports such us oil and raw materials, before wages had to adjust downwards even more to attain competitiveness. One can safely assume that Paul Krugman has never taken a look at the Greek input-output tables (or the Cypriot ones two years ago for that matter) before theorizing on the matter. Any gains in competitiveness and reductions in unemployment would then come about via devastating reductions from current real wage levels. Coupled with the fact that higher income individuals have transferred fortunes in euro abroad, we would likely observe the single biggest redistribution from poor and middle income to the highest of income classes in modern Greek history. Moreover, unlike Cyprus, Greece does not have a history of responsibility when it comes to money creation and it would be unlikely that a new Greek currency would do better than the Drachma’s abysmally bad record in terms of inflation and instability. Given also the poor Greek reform record, it is unlikely that much needed reforms would ever by implemented by a Greek government outside the EZ and without supervision. For a number of other economic reasons listed in the above article for the case of Cyprus, but also for political reasons Greece would be better off to try to reform within the Eurozone than outside it.

One failure of the current Greek government is that via a series of miscalculations and delays and also due to lack of capacity plus a touch of rigid ideology and unprofessionalism, it failed to take advantage of the consensus that existed on the Greek problem in mainstream economic thought but also among a number of governments including those of the US, France and Italy as of early 2015. A related failure of the Greek government is that it was unable to foresee that 1) delays would have severely and adversely impacted the Greek economy, and 2) that this deterioration would have weakened its negotiating power as its Prime Minister came to appreciate on July 12th.

Moreover, the high-risk Varoufakis-Tsipras strategy followed during the first half of the current year was built on the premise of increasing the cost of non-agreement for Greece’s EZ partners/creditors by letting Grexit surface as a realistic scenario, without realizing that their actions were at the same time reducing the benefits of a co-operative solution for the others with Greece nor that an important core within the EZ was beginning to view Grexit as a preferred outcome. For example, Fabio Ghironi explains Schauble’s preference for variable geometry with a core that excludes Greece in a recent post.

As we now stand, Greece is faced with an impossible deal which is nevertheless the best deal it can currently have. Building its credibility by implementing reforms would put Greece in a better position to strike a sustainable deal as EZ partners came to trust the Greek state more. At that future point, it would be important for Germany to view improvements in the currently negotiated unsustainable deal (that includes unrealistic fiscal goals and automatic fiscal destabilizers) as a necessary fix and not as a broken contract Greece should be punished for not enforcing. It will again come to be a choice between economic moralism versus economic Utilitarianism, and Greece would in that case foreseeably have all the support it could possibly hope for by mainstream economic thought and most level-headed governments around the world.

107 replies on “Guest post by Marios Zachariadis: On the Greek Crisis and German Imbalances”

“Building its credibility by implementing reforms would put Greece in a better position to strike a sustainable deal as EZ partners came to trust the Greek state more.”

Thank you. This calmly reasoned and informative piece is like a breath of fresh air here. It could be even harsher on Germany’s cosseting of its export sector with generous cross-subsidisation of its utility costs by ordinary households and small businesses, the protection of rent capture by high-earning professionals in closed sectors, the exploitation of workers forced in to low-wage, precarious mini-jobs and the resulting ‘dualisation’ of the economy. (Forcing the CDU-CSU to accept a token minimum wage is poor compensation for constraints of this ‘grand coalition’.)

But Germany’s apparent mercantilism is a strategic response to the behaviour of the other major economic actors on the global stage. It is not directed deliberately at other EZ members. If they are unable to provide some sensible economic and democratic governance that allows them to function effectively within the club, then they have a choice. Some might describe it the presentation of this choice as the exxercise of economic moralism. But it is focused more on ensuring the engendering of mutual trust.

This contribution is a bit muddled. Global imbalances – where Germany is now the champion – are certainly a problem. But what this has to do with the crisis in Greece is unclear. The one thing that is increasingly clear, however, is that Greece is a rather unique phenomenon with not very much relevance to what is happening elsewhere, despite valiant efforts in many quarters to make it so.

On the road ahead for the EU, if not Greece, this paper to which I linked some time ago is of interest.

What is missing is any reference to the fact that Monnet’s reasoning was much broader than that suggested, most notably his insistence on the supranational aspect of European integration i.e. that it was in the form of exercising in common activities which had previously been sole sovereign prerogative, with the institutions to match, and not just another exercise in intergovernmental cooperation.

It can be argued that the major error made by Germany was to insist that the financial aspects of the euro crisis be dealt with outside the EU’s institutional framework which was, in any case, already weakened by it in the context of the changes effected by the Lisbon Treaty (notably that of reducing the role of the Commission). The country is now left with not just a financial but also a considerable political cost.

This is what Europe ended up with in departing from what Monnet had in mind, a report on its future known generally as the “Five Presidents’ Report”.

Among the recommendations – which tiptoe around the current national political sensibilities – is one to the effect that the ESM should – eventually – be incorporated in the EU institutional structure. A lot of water will have to flow under the bridge before this happens.

Actually, small EU countries are all in trouble, via similar mechanisms. Despite proposing a Common market, the market barriers in the EU are so enormous that smaller enterprises have no access to this declared Common market. Having small national market, companies can only rely on trade outside EU to grow, whereas the EU Common market is swallowed by German monsters. A typical example for Latvia is the pharmaceutical industry which despite having all possible GMP GLP and every possible G…, has no access to EU Common market, whereas Latvian market is flooded by medicines from big EU countries. The demise of Finland is also an example of that – Nokia lost in competition because they did not have the large national market where to make the wintering during crisis. Now Finland is in permanent endless recession. In Sweden there was grade 10 psychosis when Pfizer offered to purchase AstraZeneca and liquidate base in Sweden, because losing their largest company will leave an empty space not to fill with. And any demand can be filled by heavy subsidized German goods; subsidization occurs via intellectual property gifts and makes 10% of German economy.

Your link to Cyprus report is in Greek.
I have a lot of doubts as to your conclusion that Greece would be economically better off inside the euro.
From the point of view of cost of exported product, the imported portion of cost remains the same, while the domestic portion (valued added domestically) would fall substantially. There would also be a substantial fall in imported products incl energy, and a very substantial exchange gain on flown capital.
Combined with a hard default, it is difficult to see how exit from the euro, would not be preferable to the grinding and uncertain benefits of so called reforms, while the lifeblood of the country lies idle or emigrated.

Sorry.Report not yours. Working off mobile.The points made should have been directed to author of report.

@Marios Zachariadis

You mention Kant but it is patently obvious that deutsche ordoliberalism has a little problem with his Categorical Imperative and even more so with its development to Discourse Ethics as formulated by Apel and Habermas.

Unable to handle principles such as The Shattered Solidarity Principle we are left with imposed, often nonsensical, ‘ruules’ as in Angela’s Corset (SGP) and her finance minister’s obession with balanced budgets while the houses and EU states around him fall down due to lack of real investment and the burden of odious financial system induced debt.

Greece is but a pawn in this game … as is Ireland. Time to coordinate the forces …

It is impossible to trust you when you say Greece needs “reforms” but you refuse to specify what reforms you want.

When I hear “reform” in the Greek context it seems to usually be about banning labor unions or selling vital public utilities to private monopolies. When I hear “reform” in the United States it is about abolishing Social Security. If you are unwilling to specify what “reforms” you have in mind, you cannot object if my default assumption is that you are a right wing agent speaking in bad faith.

In addition, even if I grant you the benefit of the doubt, it is impossible to tell what you are actually advocating.


Dead right. “Structural Reform” is the name of a particular set of political positions promoted by the 1% to advance their own special interests.

As Joe Stiglitz points out in today’s New York Times:

As I read the details, I had a sense of déjà vu. As chief economist of the World Bank in the late 1990s, I saw firsthand in East Asia the devastating effects of the programs imposed on the countries that had turned to the I.M.F. for help. This resulted not just from austerity but also from so-called structural reforms, where too often the I.M.F. was duped into imposing demands that favored one special interest relative to others. There were hundreds of conditions, some little, some big, many irrelevant, some good, some outright wrong, and most missing the big changes that were really required.

Greece having a competent and pragmatic government is likely more important than its choice of currency.

Cars and car parts are top goods exports of UK, Spain, Portugal, Czech Republic, Slovakia, Hungary and Romania and the automotive industry in each country is led by German manufacturers with the exception of the UK where Japanese manufacturers are in the lead.

Improving the dismal inward investment record is key to a Greek recovery and whether it was Nokia in feebly responding to Apple’s move into phones, or shoe and textile manufacturers in Italy, Spain and Portugal, responding to competition from China and Vietnam, the ones that did not change died.

VW purchased Skoda from the Czech government in 1991 when it had an output of 187,000. In 2011 the output exceeded a million for the first time.

“It was VW or Renault, and even I, not an expert in cars, was thinking: I buy my cheese in France and my cars in Germany,” Vaclav Klaus, the Czech president, said.

Daimler chose Hungary for its first Mercedes factory in central Europe and Audi invested almost €1bn to expand its factory there in recent years. The value of its car exports rose 165.3% from 2010 to 2014; Slovakia is up 64.2%, followed by the UK at 59.7% and United States at 56.9%.

Output from the various European countries is exported direct to both the EU and other markets and in several countries the decision of German manufacturers to locate attracted other manufacturers. For example SEAT of Spain exports cars to China

The UK is Europe’s second biggest manufacturer at about 1.5m units and according to Bernstein Research at BMW’s plant in Oxford, England, each worker produced around 46 Minis on average in 2013 compared with roughly 23 vehicles per PSA worker at the Sochaux plant in France.

In 2013 the number of cars manufactured by German firms in foreign countries climbed to more than 8.6 million units – an increase of 133.7% compared with the level in 2000. By contrast, domestic car output in 2013 (5.4 million) was just 6.1% higher than in 2000 (equivalent to an annual increase of 0.5%). The automotive industry accounted for 18% of German goods exports in 2014 and taking recession year 2009 as the basis for comparison, the sector’s exports were up by 65% or close to €80 billion.

The collapse of the British car industry was once viewed as a national catastrophe but it has returned from a near-death: BMW now owns Rolls-Royce Motors and India’s Tata owns Jaguar and Land Rover and it’s expected the record peak output of 1.92 million cars in 1972 will be overtaken in 2017.

Germany has the highest manufacturing wages of the big manufacturing nations.

That article sums up the dilemma facing Greece. To survive as a functioning state, either within or without the Euro requires a competent political and civil class. There is nothing to suggest it has either. Rather it is a failed state. Pouring another 100bn of EZ taxpayers credits into the black hole will not solve that. Better to leave the country to its own devices,


Possibly! What the latest totally farcical revelations confirm is that Tsipras was either not paying much attention to what his genius of a finance minister was up to or was negotiating in bad faith. The delayed start to the negotiations on the third bailout must, one assumes, be seen against this background.

I do not subscribe to the – luckily diminishing – school of thinking with regard to the euro that is summed up in the Irish joke “if I were you, I would not start from here”. Not that it does not contain an element of truth. However, it provides no guide to the road ahead.

Greece is not symptomatic of anything much other than Greece.

The one essential reference for me in this debate is the book “Fragile by Design”.

The speech by Weidmann to which I linked above could equally well be titled “Of Governments and Banks” rather than “Of Credit and Capital”.

To quote the most relevant review.

“One reason why economists did not see the financial crisis coming is that the models most macro and financial economists deal in are free of politics. Fragile by Design offers a much-needed supplement.”–Martin Sandbu, Financial Times

And when these economists attempt to insert politics, belatedly, into their analyses, they invariably get it wrong.

It seems to me that the ECB plan to shut down the Greek economy, and its expert execution of that plan in a matter of a few weeks, puts the smaller EuroZone countries in far more real danger, than any surreal ‘Odessa File’ type plan dreamed up by EuroZone spooks.

“An end to the euro would indeed provoke an immense crisis.”

It would of course, but viewed from Greece, how much worse than the present disaster, particularly if the ECB was shorn of its power and destructive role in reducing the Greek economy (or other targeted economies) to paralysis.

“As for economists like me, who have balked at advocating an end to the failed euro experiment and favored reform, perhaps it is time to admit defeat and move on. If only anti-Europeans oppose EMU, the EU baby could end up being thrown out with the euro bathwater.”

Personally, I found it hard to distinguish between the EU and the Eurozone, during the sustained 6 month attack on Greece, an attack that is nowhere near being called off yet; with Tusk, the Council of Europe, the President of the European Parliament and various other European bodies being co-opted to reinforce the assault against Greece.
Thankfully, Britain managed to keep its distance from the attacking mob, although I suspect those watching from Britain will be a good deal less enthusiastic about the EU, after watching the debacle from across the channel.

Thanks Paul Hunt, Paul W and others. DOCM: German Global Imbalances are the other side of the coin of the Greek problem. Greek clientelism and German mercantilism hand in hand although the first a more direct cause of Greek problems.
Tullmcadoo: although I am not a Greek citizen or live in Greece, from the Greek perspective leaving Greece on its own will devastate further an already devastated economy and society. From a EZ continuation perspective, this would also be short-sighted due to the creation of a precedent reversing euro irrevesibility! Finally, From a global humanistic (human cost) perspective unacceptable.

The recent experience at Nation Building by the west has been a manifest disaster. You only have to look at Libya, Iraq, Syria to see where this movie is going to end. Billions will be sunk into Greece and it will probably benefit a few oligarchs and Swiss private bankers.
The irreversibility of the euro is also a major flaw of the system. The constituent countries should be offered a one time amnesty to remain or exit. The costs and benefits of both should be put on the table.
Lastly the concept of ever closer union should be binned forever.

“Greece is not symptomatic of anything much other than Greece.”

You’ve truly outdone yourself this time….snore, ZZZzzzzzzzzzz!

@ MZ

We will have to agree to differ on that point. (I am also not blind to the negative impact of the excessive reliance of Germany on its export sector. Indeed, I have had many a debate with Michael Hennigan on the topic. I advance a number of linked explanations; (i) the high level of quality industrial production in Germany (rising and twice that of of its main European competitors, notably France and the UK, which is falling); which (ii) leads to an alliance between capital and organised labour that has no equivalence elsewhere (and explains the high level of industrial wages); which, in turn, (iii) leads to an intransigent German political position made up of the centre-right and the centre-left e.g. the governing coalition currently in power. In short, one high-performing sector allows Germany the luxury of failing, in breach of agreed EU rules, to carry out the structural reforms that it is urging on everyone else cf. the comment by Paul Hunt above).

But back to Greece.

One of the most interesting features of the present situation is the increased role being played by what may be described as the few stable institutions in Greece, notably the Central Bank, as headed by a former finance minister of a previous government (I forget which one).

Tsipras has the Teflon factor. This leads one to the belief that he will soldier on rather than have a pointless election in the Autumn or, if he does, solely to confirm popular support for a de facto alliance of the centre-left and the centre-right that has negotiated a reform programme with the country’s creditors that will actually be carried out.


Bernake’s judgment is a fatal blow to the academia-phobes on this website. What excuse will be come up with to dismiss him or did he not live in the ‘real world of adults’.

John’s sums it up best:

“Bernanke is not the first to say this. But nobody else carries his authority. The extraordinary thing is nobody in charge in Europe will pay him the slightest attention.”

@ MZ et al

This extract from the NYT piece by Professor Sinn is also of interest.

“One-third of the public credit that has flowed to Greece since 2008 has been used to bail out private creditors; one-third went to finance the Greek current account deficit (the excess of imports and net interest payments to foreigners over exports and transfer payments from abroad); and one-third vaporized by financing the capital flight of Greeks.”

Stopping the “vaporization” is the overwhelming political imperative for creditor governments vis-a-vis their own electorates. The governments hiding behind Germany’s skirts, those of France and Italy being the main culprits, deserve IMHO little respect.

In sum, the government/banking nexus seems to have become the dominant arena for the conduct of relations between the countries of the EU and of the EZ in particular. Whether this is a good or a bad thing remains to be seen.

How did we get here.

The ECB is adding €1trillion to a EA already experiencing substantial excess liquidity in order to distort bond markets and to encourage the private sector to take on more debt while EU governments have lent money to an EA member (Greece) so it can repay bonds previously bought by the ECB.

@ JR

The effectiveness of devaluation is essentially an elasticity play. Put simplisticly, say Greece were to devalue by 50%, it would require e.g. oil imports to reduce by 50% in volume and twice as many tourists to visit (or the equivalent) just to stand still. As the following quote from the Nobel Laureate indicates, Paul Krugman believes in the latter.
“Suppose that a greatly devalued new drachma brings a flood of British beer-drinkers to the Ionian Sea, and Greece starts to recover.”
However, we are where we are and even if PK is right about the elasticity play there would be other devastating implications for Greece in a Grexit. For example, Marios points out that with all the rich guys having already got their euros out a devaluation would amount to a massive wealth transfer to the Greek rich.

The great majority of Greeks are aware of this and that includes Mr. Tsipras.

@ Nocence

no peaking – but take a stab at what the average Greek fiscal deficit was between 1990 and 2007. Also have a stab at average unemployment levels in this period. Hint: they’re both surprisingly high. The question is, why? Where did the money go? Austerity did not cause the Greek crisis, and nor will it solve it. It’ll be long an painfull regardless.

The weakness in Dr John’s argument is the hypothesis that the combination of fiscal and monetary policy in the EZ is contractionary. It is highly stimulatory & yet there is not much growth. Fiscal policy is also probably expansionary unless you do the structural mumbo jumbo. Yet growth has been sub par in France, Italy etc. Should we not begin to question the article of faith of the cargo cult that is Keynesianism. Is it all a cod?


The question you and DOCM and others continue to ignore is what was the Greek deficit in 2007 versus 2014? What do you want it to be in 2015- 2020 – when we hear there are no reforms in Greece how did they manage to get from deficit to surplus and once they are at surplus why does it make a blind bit of difference how that pain has been spread across the economy be it in spending cuts or tax collection. If Greece is to move forward then what level of budget is it fair and reasonable to ask them to maintain going forward.

I raised this issue previously with you when you derided Stiglitz in his Hendry debate for maintaining a debt to GDP ratio of 130% at rates of 2% was sustainable….of course you presented it merely as him saying Greek debt was sustainable back in 2012 rather than qualifying what exactly he said and you have your reasons for that.

Maybe you can answer – DOCM clearly just plays blind to mountain of evidence that continually undermines his ramblings so not expecting anything there.

There was a guy used to write on this website continually about railways in Ireland (can’t remember his moniker) to the point he sadly became a laughing stock and was either censored or no longer posts – sadly DOCM appears to have come in and taken up his mantle. Like the railway fanatic, when he first starting making posts I found many of them interesting and entertaining but they quickly lost, first their lustre and soon after any credibility, so that no one really read them any more. I should probably have reached that point some time back with DOCM but for many I’m sure they are there already.


An imbalance in the EA is that 3 countries account for two-thirds of GDP and two of them are struggling — France has not managed to balance its annual public finances once in the past 40 years and Italy in 60 years.

Not only has Germany a lot more exporting firms per head, the bigger ratio of large and medium size firms makes exporting success more likely.

German manufacturing labour costs are much higher than the US levels and innovation is more successful in Germany according to a paper by Brookings and JPMorgan Chase economists.

Germany at full-employment: Lessons for low-pay US manufacturing

The automotive sector is Germany’s biggest domestic exporting sector but most of the growth in production since 2000 has been overseas, which now accounts for almost two-thirds of output.

While it would be positive to have more capital investment and services reform, there are mantras trotted out by the conventional wisdom on the exchange rate (a lower rate maybe a bonus but it’s not a key issue for companies operating global supply chains) and the assumption that a big rise in German spending would be a boon for other countries in Europe.

These claims are generally made because someone else made them and when for example Italy’s biggest consumer products company Pirelli has a rank of 97 in the top 250 in the world and there are only 3 others, then it is difficult to make a impact.

European Commission economists calculated in 2013 that a 1% rise in German domestic demand would mainly benefit domestic production and its effect on the German trade balance would amount to about 0.2% of GDP; the greatest benefits would be for the Czech Republic, followed by Slovakia, Hungary, Austria, and the Netherlands.

The trade balances of Spain, Italy and Portugal would gain 0.02% of GDP, and the Greek balance would be less.

Germany has had a goods trade surplus every year since 1952 and following reunification in 1990, it has run a goods and services trade surplus every year since 1993.

Prof Hans-Werner Sinn, outgoing president of the Ifo institute, on the jacket of his 2003 book: ‘Ist Deutschland noch zu retten?’ (Can Germany be Saved?) had the summary: “Taxes keep rising, the pension and health insurance systems are ailing. More and more companies are going bankrupt or are leaving the country. Unemployment has reached alarming levels. Germany is outperformed by its neighbours. It’s growth rates are in the cellar, and it can’t keep up with Austria, the Netherlands, Britain or France. Germany has become the sick man of Europe.”

Change usually only comes during a crisis if at all.

Airbus is Europe’s most successful commercial collaboration and in a globalised world a lot of countries benefit — in 2010 40% of the procurement came from the US.

@ The Second

In one recent year 40% of goods exports were fuel but Greece has to import crude oil.

If the euro will fail, the failure will be never attributed to small countries. The guilt of euro failure will stick with Germany, this will be Versailles 2 guilt clause.

@ MH

As we have never seen eye to eye on this issue, I doubt if we will do so now, especially given the credence attached to the views of Bernanke. Put simply, now is not the moment for Germany to be seeking the Schwarze Null or Black Zero i.e. a balanced budget,including debt servicing.

@ Nocence

Out and about so can’t give u the substantive response right now you would like. But my point re Stiglitz, and so many other US economists, is that the don’t get the real politik of the Eurozone, why the ECB was so slow to enact QE, and why certain Eurozone governments (North and South) act the way they do. The Eurozone is complicated and immature. It is not comparable to the US system at this time, so comparisons with the US crisis management are not that apt (though they can be useful)

Really interesting behind-the-scenes article about Varoufakis in the New Yorker. The most revealing passage, though, doesn’t involve Varoufakis at all:

But it was interesting, at Brookings, to hear Schäuble say that “France would be happy if someone could force” its parliament to pass unpopular labor-market reforms. It wasn’t quite clear what Schäuble meant by “France,” if it was neither its people nor its parliament.


I find it interesting that you think obvious hatchet jobs are worthy of our attention.

I mean, there are rank propagandists and then there’s you.

Joseph Ryan: imported cost of exports does not remain fixed upon devaluation because a lot of these imported inputs are not perfectly substituable with domestic inputs into production. Far from that. E.g. Fuel.

Shaz: reforms alluded to in the article relate primarily to 1) Law and Order where Greece ranks 155th among 189 countries with 1580 days needed for legal process 2) product market reforms to enforce competition in oligopolistic markets like petrol and supermarkets 3) closed professions 4) 1 to 3 and other measures to hit clientelism.

Michael Hennigan: on Germany having highest manufacturing wages. This in part depends on the type of manufactures (their value) of what one produces relative to other countries say other EU or US. But the comparison should be between productivity growth versus wage growth, and Germany (and some other industrialized economies) has had a huge gap in this measure for a while.

” Put simplisticly, say Greece were to devalue by 50%, it would require e.g. oil imports to reduce by 50% in volume and twice as many tourists to visit (or the equivalent) just to stand still.”

Not true. On tourists, with a 50% devaluation, we would expect drachma denominated prices to rise, so the euro-equivalent reduction in earnings would be much less than 50%. But while we would expect the drachma-denominated cost of living in Greece to rise, we would expect the euro-equivalent cost of living to fall. In real terms, therefore, a 10% rise in visitor numbers could well be plenty to produce a net positive impact from devaluation through the tourism channel.

On oil, the majority of what Greece imports is re-exported in some form or other. For this part, one would expect imports to increase as devaluation makes processing for export more competitive. On the part of oil imports that is for domestic consumption, if there is a 50% fall in the value of the drachma one would expect to see price inflation on goods and labour offsetting this to a significant extent, so that for the same share of expenditure of the proceeds of labour the fall in consumption would be much less than 50%. One would also expect the share of expenditure that goes into oil products to rise, further offsetting the proposed 50% fall in consumption.

@ bct

Well I did caveat my point as “simplistic” as it was meant to counter JR’s initial simplistic point.

You describe more complicated transmissions. I think it is estimated that Greek prices are 25% too high. So let us say that competitiveness is achieved by a 50% devaluation followed by a 25% hike in prices in the export sector. Simple math says export volumes would need to increase by 25% to stand still. I don’t have any stats on the elasticity of demand of British lager louts and it may well be greater than that.
But you do point to one obvious losing constituency in such a scenario – those who are not in the export sector like pensioners and the public service.


Given that the whole point of propaganda is to create others that “agree” with you, I’m not surprised to hear that some of them exist.

That doesn’t mean I have to read what you tell me to read.

Lest anyone think that those who exercise political and economic power in Ireland have turned their faces against employing the combination of low cunning, greed and stupidity that brought us the triple fiscal, banking and property blow-out (and that the Greeks are now the only unrepentant culprits), the Irish Water fiasco exhibits the same combination of low cunning, greed and stupidity – though, mercifully, the impact is much, much less. This is Eurostat’s summary indictment:

More detail on the decision will be provided on Thurs.

It has taken particular skill on the part of the Government and its apparatus to deliver what is probably the most inefficient, inequitable and ineffective means of funding water and waste water services. And the Eurostat officials are clearly in awe of the deployment of this skill.

Some of the outrage around Varoufakis ‘plan b’ is truly laughable. As Krugman pointed out not to have a plan would have been the treasonable act.

The treason that was perpetrated on the European project by the Schauble agenda is something that has done significantly more damage. Interesting to see how dramatically Schauble’s plan seems to have back fired – he never counted on the depths to which the Greeks would stoop to keep themselves in the sacred “euro”. It reminds me of the line in Gladiator when Joquain Phoenix says to Rusell Crowe…”what am I to do with you, you simply refuse to die”….I think Mr. Smith in the Matrix was similarly exasperated with Mr. Anderson!

@ Second,
I think we are agreed that simplistic calculations that devaluation is bad for the exporting sector are weak, even if we do not agree on the exact likely balance of advantage.

Regarding pensioners and the public service, I think that we are really looking at a distributional issue – what share of national income goes to pensioners and public sector employees? At one level of approximation, if prices in the economy increase by 25%, then taxes are likely to also increase by about the same percentage, and government is free to raise public pensions and public salaries proportionately.

In practice, I think the cost of living for low income pensioners would be likely to increase by less than general inflation, as they would be likely to spend most of their income on locally produced food and services. The government could therefore simultaneously cut the share of taxation that goes into pensions while improving living standards among pensioners.

A weaker version of the same logic can be applied to the public service. I think it would be a big win for the Greek economy if they took advantage of a wave of inflation driven by devaluation by giving pay increases to the public sector that look big in nominal terms but are less than the rate of inflation.

Most of the storm of criticism of Varoufakis plans is incoherent. As a sovereign state, Greece clearly has the right to seize control of its own public institutions. If it is to do so, this clearly requires forward planning, and who better to lead this than the Finance Minister? It is unfortunate that he had to do this under the radar, so as not to be observed by hostile forces, but only because the secrecy and the small size of the team that could be involved made the planning and preparation ineffective, not because there was anything remotely discreditable about it.

To be honest – the site is becoming a bit redundant given the lenght it takes to moderate comments. Not expecting it to be a live commentary blog but half a day updates kinda kills the concept.

@ PH

Looking on the bright side, the decision by Eurostat, or rather Ireland’s participation in the EU which creates the legal framework within which it could be taken, is another, and major, example of the beneficial impact of such participation on governance standards (of which there are many examples).

On the comparative experiences of the countries that needed a bailout cf. Martin Sandbu (one of the best commentators around IMHO).

The difficulty is that Greece, courtesy of Syriza, is facing a major recession in 2015 rather than modest growth.


This site is being provided without charging you. There is an opportunity cost for the contributors if they devote time to moderating or a direct cost to the proprietor if people are hired to moderate. Cost minimisation will result in delayed moderation.

In addition, the law of libel in Ireland is excessively draconian – and many people who abuse the economic or political power they enjoy are often quick to resort to the law to defend their ‘good name’ if any allegations of impropriety are made against them. The proprietor is wise to be extremely cautious.

Finally, for a variety of reasons, some good, some bad, Irish academics are more prickly and quick to take offence than academics elsewhere. That too means comments require careful policing and this slows moderation.


Greece is an independent sovereign nation right? If they want to prosecute one of their own citizens because of a suspicion that he broke the law then that is their business. What happened to all that faux outrage about foreign meddling in Greek affairs?

It is clear that many people, particuarly in the financially illiterate eurogroup, were put off by the intellectual fire power that vaurofakis brought to the table. For all the sniping from the sidelines about him being out of his depth politically, that he is a mere academic etc…I have not in a single interview seen him either shown up by any of the commentariat be they political/academic/financial analysts etc…nor has he shied away from any difficult questions. [please provide links if you believe you can find one to the contrary!] – I don’t want to hear the lazy line that fine rhetoric should not be over rated…the fact is if the people who know better (the adults) are on the side of right, they ought to have the intellectual and linguistic ability to lay out their positions and convince us of them. They have all failed terribly in this regard when confronted by Vaurofakis who they clearly fear taking on head to head. His account of EG meetings therefore seems highly credible…no one wanted to talk economics or finance…they were simply afraid to.

It is indeed ironic that there is now suggestion of criminal charges being brought against him while Schauble still sits in office after plotting to violate and promote the violation of european treaties.

it is fair to say that Vaurofakis is only party that has come out of the Greek debacle with his reputation not just intact but in fact well enhanced. There will of course be the usual petty snipes about selling books and the mans arrogance certainly irritates many…but the fact remains the man was and is right about what is going on wrt to the bail out in Greece and after a short passage of time his prescience will be borne out again. There will be plenty of his detractors at that point saying discrediting the outcome as anything to do with YV’s prognosis. “well yes the patient died from Austerity but its because it didn’t take its medicine i.e. more Austerity”


“Most of the storm of criticism of Varoufakis plans is incoherent. As a sovereign state, Greece clearly has the right to seize control of its own public institutions.”

Well, it might have a right via constitutional amendment or via parliamentary voting, neither of which appear to have taken place here. That’s kinda the part that people were complaining about. Also, the whole “parallel currency” thing would be illegal v-a-v their European treaties obligations. There’s this weird assumption that Sovereign’s don’t have to follow the law. Not entirely sure where that fallacy evolved.

@ Nocence

“it is fair to say that Vaurofakis is only party that has come out of the Greek debacle with his reputation not just intact but in fact well enhanced.”

This a bizarre reading of events. His reputation with the Left and with fringe parties will indeed be enhanced, but within mainstream politics it will be destroyed, and within markets it will be annihilated. For a Minister for Finance, who, like it or not needs to have a level of respect from the markets, even if not liked, this is a very bad thing to have taken place.

I would suggest the common guy on the street of no political persuasion will think that there was some mad and bad politics taking place in Greece, for which Varoufakis takes most of the blame.

In Greece his popularity ratings have plummeted since the referendum etc debacle. They are now at 28%, from 54% before the referendum, and 75% back in Feb (Tsipras remains around 60%). So his reputation has in fact been hammered there.

I suspect when u refer to his reputation being enhanced, you are referring to a large element of academia and left-leaning journalists (as well as politicians/political followers noted above), and not the rest of the planet.

On your first point, to an extent, I agree. But I’m getting a bit fed up with a major plank of the case justifying the EU and its institutions being the provision or enforcement of governance that should be provided or enforced locally, but isn’t.

However, I was taken aback by how scathing the Eurostat officials were. As I suspect the Government was. It seems the Eurostat officials have identified all of the key elements of this special interest group-pleasing and politically convenient scam. The Government has become too used to getting away with this “words mean what I say they mean” approach (it would be hard to beat this “Water Conservation Grant”) in its dealings with the Troika and with the IMF and DG EcFin officials reviewing Ireland’s post-programme performance. Occasionally, when these officials have muttered about rank policy stupidity that favours powerful special interests at the expense of the vast majority of citizens, the Government has cut up rough and the officials have backed down. (The Government has also exploited its support programme ‘poster-boy’ role and the desire of the major member-states to keep Ireland in the EZ 18 v Greece.) In this instance, the CSO, which risks prejudicing its independence and credibility, has been sent in to defend the indefensible and the Government cannot directly apply its usual mixture of bullying and bluster. The credibility of the CER has also been totally blown and, in a recent decision on gas transmission tariffs, it has blown it even more.

The Government should back down, drop household water charges, locate IW as an implementing agency in DECLG, complete the metering programme and use the billing system to administer the “Water Conservation Grant” (WCG) on the basis of actual reductions in household consumption. By encouraging the reduction of water consumption the WCG might become self-funding! But, of course, the Government won’t. The only factor in the Government’s favour is that, in terms of concealing their defence of the powerful special interests comprising the staff and unions in the local authority water sector and in the semi-states involved, SF and the left-wing headbangers are being even more deceitful than the Government.

On Greece, I’ve highlighted on another thread the masterclass Alexis Tsipras has provided on acquiring and retaining power. PASOK has been totally eclipsed, the ND decapitated, all opposition parties forced to support him and the academic incompetents and leftwing headbangers in Syriza isolated. And yes, Greece’s economic situation is much worse, but it appears that a majority of Greek people appreciated Syriza’s doomed antics since January’s election and had to express the howl of pain and defiance that Tsipras’ referendum provided before knuckling down to the difficult task of repairing their economic well-being.


I think the ‘plan B’ initiative undertaken by Vaurofakis and a very small team shows the depth and capability of the man. His action shows the extent to which he had Greece’s best interests at heart – Schauble’s position highlights just how important a ‘plan B’ was – it would have been catastrophic if Merkel’s intent was fully aligned to Schuables and there was no plan b – the need for it was not beyond the realms of possibility. I can’t think of single Irish political figure (or european for that matter) that would have been capable of even understanding the initiative he devised let alone getting it realistically on a path to implementation.

Good politics/bad politics – all nonsense. Greece were to be filleted no matter how they conducted themselves at the EG/EU gatherings…if you are telling me the the core of what underpins european treaties can be interpreted according to the ‘feelings’ in the room then we have truly out done ourselves on how bad we have all got it.

I’d be interested in where these opinion polls you refer to come from? I would be surprised if there was an election tomorrow if he didn’t romp into office again.

Finally I find it one of the greatest testaments to the art of spin on the whole euro crisis that people who advocate private creditor buy ins to be labelled as having a ‘left wing’ ideology. I have been described as left wing on this site myself and nothing could be further from the truth. I wholeheartedly support the laissez faire doctrine…what I absolutely oppose is an a la carte approach to the doctrine that is skewed entirely against the citizen in favour of private institutions with not just the support of the public institutions but through their active intervention and often contrary to the democratic mandates as transcribed in the european treaties. How terribly left wing of me??

@ PH
trigger happy prima donnas to be avoided for sure, but prickly academics? I find half of my posts are censored, I presume because they fall foul of the PA rule.

One notable omission in the general coverage of the Greek crisis is the failure to recognise that, while bailouts nos. 1 and 2 resembled one another in terms of their political context (apart from the PS write-downs under the second), bailout no.3 will be quite a different animal because of the closure of the Greek banks and the introduction of capital controls.

Frances Coppola has a very informative blog post on the situation of these banks.

The HFSF (not a misprint!) had a new CEO appointed on 16 July!

Future analysts are likely to be comparing, not the experiences of the peripheral bailout countries in general, but those of Iceland, Cyprus and Greece.

It is also being reported that no new ELA was sought by the Greek Central Bank. Maybe the elusive confidence fairy is on the way back!

It is completely legitimate and normal for a government to prepare to do something that needs legislation, or even a constitutional amendment, to implement.

Under circumstances where it was implicit – and partly explicit – that the Greek government was threatening to establish a parallel currency, it would have been utterly astonishing if they had not done anything to prepare for this. The only real new information to be shocked about is that their preparations were so ineffective as to be incapable of being implemented.

No one was shocked, or complained about treaty obligations, when we heard at the Banking Inquiry that the Irish government had made contingency plans for Ireland leaving the euro.

@ Nocence

“I suspect when u refer to his reputation being enhanced, you are referring to a large element of academia and left-leaning journalists (as well as politicians/political followers noted above), and not the rest of the planet.”

Where did i call u left wing?

Though, as a reminder, they’re not called “Syriza – the Coalition of the Radical Left” for nothing. It’s not unfair to make assumptions that people impressed by them may in fact also be left wing in nature. Can i ask who you would be voting for in an Irish election?

Opinion polls: Kapa Research in Greece. Again, its all great u saying “i think he’d romp home”, but I am bringing actual Greek-evidence to the contrary of your Irish-domiciled opinion. Maybe you and Ernie (who suggests similar gut feelings on these issues) know better, but the least you could do is do a straw poll of actual Greek people to back it up.


contingency plan vs hacking their own computer system and planning constitutionally dubious acts such as taking over the Central Bank. Not really the same thing. Btw, im not complaining that they shouldnt have had contingency plans, im simply noting that “oh a sovereign can do things like this” is neither accurate nor compelling logic.

I’m starting to think we need a hashtag #ECB-muddies-the-waters to stick on a lot of DOCM’s posts.

As even the press department at the ECB should know by now, the “confidence fairy” idea is that if governments cut their deficits, the confidence fairy will reward them by stimulating private spending more than the cuts depress it. Which is quite distinct from the idea that when the ECB loosens the garrotte it has around the necks of the Greek banks their customers will be less desperate to keep their money some place else.

@ PH

I would not greatly disagree but I find that your second paragraph rather contradicts your first. However, relying on your reading of the Eurostat decision, it seems to me that we are witnessing a sea change in the EU institutional approach. The bluff of national politicians is being called in a manner which reflects a change in the overall EU political climate. This is also true with regard to Greece and your reading of both what Tsipras has managed to achieve in retaining public support and the likely reaction of the Greek electorate confirms it. It is a pity that so much damage had to be done in the latter case.

As I have endeavoured to demonstrate, what is new, at least to me, is the increased meshing of the Greek and creditor official structures, especially in realtion to the management of the Greek banking sector. The new term (apparently coined by Juncker; who is not having a good war) is the “Quadriga” i.e. ECB/Commission/ESM/IMF. The first two form part of the formal structure of the EU, the ESM unfortunately not. And the IMF is, of course, a law unto itself.


‘Irish government had made contingency plans for Ireland leaving the euro.’

Discussing a possible option over a few pints down the local is not really the same as hacking into a computer system and attempting to set up a parallel system.

To be honest… I think it is all academic really, if Varoufakis is a master at Game theory…. he did not stay in the game for very long.

Perhaps he will be back?

Varoufakis II …..Judgement Day!

Sadly I fear the only course of action I can choose in good conscience is not to vote in next election. It would be an act of registering my lack of faith in the political class – I am not sure a low turn out would be taken as such by them but one must try.

I vote 1&2 in last election for FG. They utterly betrayed the electorate on the position they would take with our European masters (see previous posts on Kenny’s fine rhetoric pre election not to mention varadkars “not one more cent” speech). Their abject failure on political reform also major disappointment. Labour are a laughing stock in having abandoned everything the party is supposed to represent as was confirmed in their quisling-esqe approach to greece. FF are….well FF! Ditto SF. I’d like to think Lucinda offers an alternative but she was all in with her mates until an issue of conscience arose….which at least I suppose shows she has some scruples….misguided or not. Alas!

When the files are opened we will find out what measures were considered across the EZ in the event of collapse of the EMU. Some of the propsoals will no doubt prove hair brained and amusing. So VFAK was probably right to consider all options.
The mistakes he seem to have made are I) his evil mastermind hacker seems not to have been very good II) his blabbed about it too soon & gilded the Lilly. In short like everything with these clowns they did not have the courage or the capability to implement anything. This is straight out of the Judean Peoples Front.
Also the idea to the idea to high jack the mint and arrest the CB guvvnor was not VFAK idea but that of the even zanier JPF wing of Syrizia..splitters.
I really don’t know why the Shinners still hang with these guys. They would have figured out the currency angle.

@ Paul Hunt

Thanks for that link to the Eurostat summary re Irish Water. Do you think this whole farce has undermined the professionalism and political independence of the CSO (both recently lauded on this site)? It seems to me that, for some reason, the CSO (perhaps due to political pressure?) tried to argue the indefensible.

@ all

As someone who loves arguments (“… vulgar and frequently convincing”), I welcome the breadth of opinions on this site. Vive Ernie and DOCM! I’d hate to see a time when everyone would have the same opinion.


In defence of Yanis Varoufakis

Mohamed El-Erian

It is now fashionable to disparage the former Greek finance minister. For some he showed too little politesse, but the essence of his agenda remains largely correct.

From blaming him for the renewed collapse of the Greek economy to accusing him of illegally plotting Greece’s exit from the eurozone, it has become fashionable to disparage Yanis Varoufakis, the country’s former finance minister. While I have never met or spoken to him, I believe that he is getting a bad rap. In the process, attention is being diverted away from the issues that are central to Greece’s ability to recover and prosper – whether it stays in the eurozone or decides to leave.

That is why it is important to take note of the ideas that Varoufakis continues to espouse. Greeks and others may fault him for pursuing his agenda with too little politesse while in office. But the essence of that agenda was – and remains – largely correct.

Wonder who this El-Erian guy is? Probably some left-wing trotting marxist … spose DOCM or BEB might enlighten us ….

‘Moving on From the Euro’
Kevin Hjortshøj O’Rourke
Project Syndicate

“In the short run, the eurozone needs much looser monetary and fiscal policy. It also needs a higher inflation target (to reduce the need for nominal wage and price reductions); debt relief, where appropriate; a proper banking union with an adequate, centralized fiscal backstop; and a “safe” eurozone asset that national banks could hold, thereby breaking the sovereign-bank doom loop.

“Unfortunately, economists have not argued strongly for a proper fiscal union. Even those who consider it economically necessary censor themselves, because they believe it to be politically impossible. The problem is that silence has narrowed the frontier of political possibility even further, so that more modest proposals have fallen by the wayside as well.”

@ Nocence

El-Erian on Varoufakis. Note, though he is certainly sympathetic to VF, he definitely does not suggest that “it is fair to say that Vaurofakis is only party that has come out of the Greek debacle with his reputation not just intact but in fact well enhanced.” He suggests that simply he shouldn’t be apportioned as much blame or scorn as he is currently receiving (which fits well with what i noted above, that so far his reputation has been hurt, not helped).–el-erian-2015-07

Great economic news from the Central Bank yesterday. Stellar growth, unemployment dropping fast, State finances rapidly being repaired. Never mentioned at all on left-wing twitter, despite the fact that all the academics/trade union leaders/think-tankers suck at the teat of the State and should be delighted to see that their only source of income has stabilised. The grown-ups who have taken charge of the Irish economy over the past 5 years can’t expect any praise. It’s like parenting – sulking teenagers always have something to complain about it.

Meanwhile the romance between Eamon de Varoufakis and left-wing twitter seems to be slowly fizzling out. They all went mad together, but now they are regaining their sanity one by one.

DOD put up the El-Erian post.

…but seen as you raised YV – i would comment that i can’t help but see certain paralells between himself and our own Morgan Kelly…and it is about Jan-2007 in the life cycle.

@ DoD

El-Erian saying “lay off the guy” is somewhat less than “this guy had it bang on”. Ultimately, effectively implementing policy is the top priority of a MoF, and he failed abysmally on that score. Great talking points don’t run a nation.

This just post on twitter by Holger Zschäpitz, economics editor of WELT Newspaper in Germany

“#Germany’s tough love approach has worked: #Spain economy powering ahead to Pre-Crisis Growth.”

Where does one begin when dealing with such breathtaking (misguided) arrogance…this guys makes YV look like Ally Sheedy in the Breakfast Club.

@ JF

It is not surprising that attention is moving away from what is yesterday’s news. Insofar as any future attention should be paid to it, the real test will be how long the supposedly “heavy-hitter” academic luminaries stick with their hero. Paul Krugman’s short blog post suggests that the answer is not for very long.

“People are apparently shocked, shocked to learn that Greece did indeed have plans to introduce a parallel currency if necessary. I mean, really: it would have been shocking if there weren’t contingency plans. Preparing for something you know might happen doesn’t show that you want it to happen.

Someday, maybe, we’ll know what kind of contingency plans the United States has had over the years. Plans to invade Canada? Probably. Plans to declare martial law in the event of a white supremacist uprising? Maybe.

The issue now becomes whether Tsipras was right to decide not to invoke this plan in the face of what amounted to extortion from the creditors. I think he called it wrong, but God knows it was an awesome responsibility — and we may never know who was right.”

So now we know! Or don’t know as the academic case may be!

On planet earth, the immediate question is will Syriza splinter, an outcome seen almost as inevitable by the FT in what appears to be a very informed leader.

I’m bemused by this continued focus on Varoufakis. It was clear from the start that he was politically expendable – and so it proved. Tsipras eventually sidelined him and then finally removed him from office. Like many economists before him appointed too rapidly to high office he provided some entertainment value – and the way he discombobulated those occupying the corridors of power in the EU played well in Greece, but, unlike some economists of this ilk (and we can think of some in the Irish context) he was removed before he could do any lasting damage. In my view what is far more important is that Tsipras appears to have chosen the second of the options Guy Verhofstadt offered him on 8 July: do you wish to be remembered as an electoral accident or as a real, revolutionary reformer?


When an Irish Government has dug itself in to a serious hole politically there is never any thought of putting away the shovel. Any statutory body that can be used to avoid, deflect or resolve the political problem will be used and abused. For example, the Commission for Aviation Regulation has effectively been dispensed with because neither DAA nor Aer Lingus and Ryanair would accept its decision on passenger charges made under pressure from the Minister for Transport. The Minister has commissioned a comprehensive review of aviation regulation being perfromed by Indecon which means that any decisions can be kicked in to the long grass until after the election. Anyone who thinks that the Commission for Energy Regulation makes regulatory decisions independently of government would need a head examination. It has persisted for nearly 15 years promoting this fiction, but the popular rejection of its decision on water charges last October and the subsequent panicked response of the Government finally exposed the reality. Yet the CER continues to dig itself deeper in to a hole – and the Government is implicitly directing it to do so.

The CSO is simply the latest victim. The Eurostat unit which issued the summary on Tues. indicated that more detail on the decision will be published today. We might learn a bit more about how the CSO was forced to defend the indefensible. In most other established democracies this abuse of statutory bodies established to operate independently of the politcal process would provoke an outcry by the media, by academics and by civil society. In Ireland, silence.

Greece is an example of what happens when every statutory body is totally corrupted by the political process.


The central bank release was a forecast and I felt it was not a wise move to release it one day ahead of the official data for q1, which was set to include revisions and incorporate aircraft leasing. In the event the revisions are vey significant: the recovery is now stronger, with growth in every year staring in 2010, with the result that GDP in q1 is now 3.8% above the pre-crisis high. Annual GDP growth in q1 was 6.5% which will prompt a very significant change in the consensus, while external trade is much stronger than the CB or the consensus envisaged.

“To be honest… I think it is all academic really, if Varoufakis is a master at Game theory…. he did not stay in the game for very long.”

Methinks one side had a hissy fit and walked. Game – if one should class it as such – over! Unless one enjoys playing solitaire.

What is entirely missing is a meaningful intellectual engagement with the matter to hand: global economic activity. Global economic rates-of-growth have declined below the long-term trend of 3% (p/a) level needed to sustain debt payments (even at 0.5% compound interest rate). So, what are the causal factors at the source of the decline – and the decade-long attempts to raise the rate-of-growth, to little effect? If your debts become unpayable – what do you do?

“Great economic news from the Central Bank yesterday. Stellar growth …”

Indeed. I still do not believe that this (4% p/a, compounding) rate-of-growth is actually possible. I’d be a lot more convinced if I observed incomes, salaries and pensions were also ‘growing’ at the aforementioned rate. Are they? No. Interesting.

Global commodity and shipping costs are somewhat lowish. Global rate-of-growth is between 1% – 2% (p/a). So where is this ‘Irish growth’ originating from? Domestic spending? On static incomes? Declining value of currency? Something is missing: what?

Now we would not be due an General Election sometime soon? Would we? Yeah, I thought so.

For anyone interested, the detail underpinning Eurostat’s decision on the classification of Irish Water is here:

The redactions, presumably demanded by the Government, are particularly annoying since most of the numbers or estimates of the numbers are in the public domain, but are scattered in various locations to discourage detailed analysis. Despite this attempt to evade proper scrutiny of the scam the Government is trying to pull, the Eurostat decision effectively closes the door on a revised classification of IW outside the government sector for the foreseeable future.

It is sad though to see the CSO being sent in to defend the indefensible. And it is even sadder to contemplate the pressure that will put on it down the road to tweak the numbers to save the Government’s skin in what will be a futile attempt to persuade Eurostat to change its mind.

I fail to see the point of this entry by MZ. If the objective of economic policies is to tend towards full employment (as it should be), there is absolutely no way that Greece can achieve a decent and sustainable pace of growth within the EZ. Precisely because of the fact that the core’s trade surplus prevents any meaningful rebalancing from taking place. Having acknowledged this, as MZ does, one must conclude that there’s no realistic way through which Greece can achieve full employment in the EZ – let alone move significantly in that direction. Advocating “reforms” (whatever they are) within the EZ as a solution is at best hypocritical – given the premises of the article.

Whatever the external influences, a failed state is usually home-grown:

“As the 12th largest oil producer in the world, with the largest reserves, and a beneficiary of the most sustained oil price boom in history, Venezuela ought to be well placed to ride out the recent collapse of the international price of crude.”

International Crisis Group – Venezuela: Unnatural Disaster

Remember when Venezuela was was a poster-boy of a new ism?

Brian Woods Snr. / Dan McLaughlin

The first estimate of annualised Q2 growth in the US published today was 2.3% after 0.6% in the first quarter and there have also been revisions of past data.

The Wall Street Journal says that since the recession ended in June 2009, the economy has advanced at a 2.2% annual pace through the end of last year. That’s more than a half-percentage point worse than the next-weakest expansion of the past 70 years, the one from 2001 through 2007. While there have been highs and lows in individual quarters, overall the economy has failed to break out of its roughly 2% pattern for six years.


In May the ESRI issued 2 notes on distortions to national accounts data and while several indicators show that the recovery is strong, it is likely that some of the headline data are not as strong as suggested – the CB made that pint yesterday about contract manufacturing.

Two big US companies became Irish in Q1 with a combined market cap of $228 billion, possible net of $140bn — impacting GNP and Balance of Payments.

Neither the CSO which took 4 months to produce the results (OK – they had to include a change involving aircraft leasing) nor anyone else provide any caveats.

Today’s CSO figures show Ireland is now well and truly into Celtic Tiger II.

I see no reason to change what I posted here on March 12 (although the 3rd paragraph may have been overly-pessimistic)

What I said then:

“I’d be very confident that the final growth figures (for 2014) will eventually be revised up to 6% plus. They nearly always are revised up and the revisions are particularly marked during periods of high growth. During the Celtic Tiger Mark 1 years, the initial estimates for GDP/GNP growth were invariably revised up by anything from 1% to 3%.”

“I can’t see for the life of me the slightest indication that GDP/GNP growth will be lower in 2015 than in 2014. All indications so far are that growth accelerated in the early months of 2015.”

“It looks as though real GDP/GNP will be 3% to 5% higher in 2015 than in the previous peak year of 2007.”

“A good bet with Paddy Power would be on Ireland having the highest growth in western Europe over the decade 2007-2017. What would the odds on this happening have been in 2010? But, it looks very possible now.”

And. for good measure, what I posted on March 19:

“Thus, the NERI forecast of a slowdown in growth from 5% to approx 3.5% this year has been widely discussed in the media and, apparently, the fact that they forecast a significant slowdown is deemed to be bad news. In fact, as I said above, its not a ‘forecast’ in any scientific sense, but simply a figure plucked from the air. All we know about the economy now is (a) Initial CSO estimates put growth at 5% in 2014 (b) the CSO are adamant that this estimate is correct and not due to ‘contract manufacturing’ (c) as this IFC paper shows, the initial estimate is more likely than not to be revised UP in coming years (d) all indications are that so far in 2015 economic growth has accelerated (due to falls in oil price, euro etc). Therefore, without making a forecast as such, in the absence of some dramatic malevolent external event, I’ll be amazed if economic growth in Ireland in 2015 is not significantly higher than in 2014.”


The idea that the economy was slowing down in the first half of 2015 (as NERI seemed to believe) was always bananas. Of course, its only July, so there is still time for things to go wrong in 2015. If Fermanagh were to beat Dublin at Croke Park, it is possible that it could trigger a recession south of the border. This would come under the heading of ‘dramatic malevolent external event’ referred to in my final paragraph of the March 19 post. But, failing that, it looks like GDP/GNP growth in 2015 will again be pretty sensational.


“Never mentioned at all on left-wing twitter.”

What’s amusing is the number of left-wing commentators on twitter managing to get through today without any mention of this morning’s CSO figures.

The anti academia slant of so many posts on this site is truly mind boggling. The irony of course appears to be lost on everyone that the genesis of this site is academia.

The casual dismissal of vaurofakis is borne of nothing but pure ignorance and fear. That anyone could suggest that if their life relied on it that they would not abide the counsel of vaurofakis over Kenny on economic or financial matters is inconceivable . Any position taken by the blittering financially illiterate politicians that, greek ones excluded, extol the eu position are regarded as political masters of their art. Their art of course involves swallowing the dictates of their behind the scenes academics…go figure!

That economics is a science is not in dispute by anyone that is on this site and if it is then it begs the question as to what they are doing here! But it is a science that will never attain the precision of physics or biology etc….gravity was and remains a static phenomenon in so far as the life span of man can observe. Once discovered and understood it is wholly predictable and applicable….economics alas is not…but there is no doubt that beyond current human reasoning and our inherent dynamism economics could be entirely predictable and consistent……the search for answers must continue in a this ever hanging terrain that is far more challenging than the world of physics and it’s constants.

So while economists will always make mistakes, deriding highly trained and experienced economists as fools by comparison to irish primary school teachers or lawyers on matters economics is just plain idiocy…and there is plenty of it on show here. As I said the clowns from Limerick or mayo that make big economic calls rely on the very same ilk behind the scenes… when a brilliant mind….comes into the sphere of politics and puts legitimate cases forward wrt the folly on greece, it ought to be welcomed or challenged based on reason and debate….neither happened in the case of vaurofakis…the earth is flat my friends….the earth is flat and the heretical economists that say otherwise should be barbaqued at the altar of the parish pump!


Thank you. It’s interesting, but not one bit surprising, that on a blog titled Irish Economy there is no formal post on Eurostat’s IW classification decision.

The letter from the director of the Eurostat Directorate to the CSO highlights every suspect and dodgy feature of the Government’s cunning, politiically convenient and special interest group-pleasing plan. In addition to the damage to the CSO the credibility of the energy regulator, the CER, has been totally shredded. And there is no way in the foreseeable future that sufficiently robust objective evidence will emerge that might compel this Eurostat directorate to change its mind. In actual fact, since most of funding will now come from general taxation, households have even less of an incentive to pay the water bills. Anyone paying will be cross-subsidising non-payers. There was always a bit of a fiction about this Market Corporation Test because subsidies for IW’s excessive operating expenditures are coming out of general taxation, but not appearing in the EU’s measurement of the Government current fiscal balance. The principal benefit would be shifting borrowing outside the calculation of the national debt.

The Government should take IW back in to the DECLG as an implementing agency, drop the water charges for households, continue with the metering programme and use the billing system to pay out this “words mean what I say they mean” Water Conservation Grant to reward households that reduce their metered consumption from one year to the next. But, of course, it won’t. And it looks like there will be a heavy political price to pay. The delicious irony is that the two ministers responsible for this debacle, Hogan and Rabbitte, are, resp., in verdant Brussels pastures and looking forward to a well-padded retirement.

On Greece, the IMF is finally doing what it should have done some time ago. Chancellor Merkel has ruled out explicit haircuts, so it’ll have to be a postponement of debt service for 30 yrs+ (or some equivalent combination of measures) – and only for EU/EZ funding providers (neither the IMF nor ECB will take a hit). Governing politicians in the creditor nations will have an interesting task explaining to their voters that the Greeks were hosed to bailout their banks and that the Greeks need some relief. They might also need to explain that in addition to the Greeks’ glorious incapacity to provide or accept even limited measures of competenet governance their resistance to externally imposed changes was to be expected and proportional to the extent they were being hosed.

A basic deal comprising some demonstration of a Greek commitment and capacity to provide ameasure of senisble goverance and of credible debt relief from the creditor nations should allow Tsipras to call an election in the autumn and copper-fasten his position.

@ MH: “That’s more than a half-percentage point worse than the next-weakest expansion of the past 70 years …”

Thanks. Any way to estimate the Labour Participation (18- 66 year olds) in Ireland? Are there differences between male and female participations and more crucially, between younger and older age cohorts?

@ nocense: “That economics is a science is not in dispute by anyone that is on this site and if it is then it begs the question as to what they are doing here!”

As a scientist, I would most certainly dispute the ‘sciency’ bit of economics. Its actually Political Economy – but whose looking?

The different and various theoretical ‘laws’ of economics are nothing more than ideological rhetoric with a veneer of mathy stuff to give the pretense that some ‘science’ is actually involved. And before anyone gets their boxer-shorts in a twist – science is not about predicting outcomes – its about explaining why certain outcomes are probable given the immutable properties and characteristics of matter, the known effects of the known physical laws (esp the Thermodynamic ones) and the rigid rules of math.

Economics fails miserabily in each of these three ares. But whose looking? Generally, (the usual headbangers excepted) the economic commentary on this site is about what I would expect from persons who cannot get their mindsets around the physical facts: our economy is a physical enterprise, governed and controlled by the physical law – but hijacked by politicians and their fellow travellers aided and abetted by the occassional mad, bad and dangerous economist. Cheers.

Better go and have my morning coffee 🙂

A very good overview in the NYT.

The difference this time, as I have pointed out earlier, is the introduction of capital controls which have the effect of turning off the siphon used by Greeks pulling their money out of their own country but also the very undesirable impact of handicapping legitimate business, especially the vital export sector.

The likelihood of the controls being lifted in the short term is nil. Their administration to minimize their negative impact will be a test of the sea change in Greece’s governance standards that is required.

Meanwhile, Tsipras continues to demonstrate the central talent of a successful politician i.e. appearing to go in one direction while actually going in another cf. Bloomberg.

@ Brian Woods Snr.

Persons 15 and over

Overall LP March 2015: 59.4% – Males 67.1% and women 52.0%

Overall LP Dec 2007: 63.8% – Males 73.3% and women 54.50%

The 20-24 year rate is 61%

25-44 is 82%

45-54 is 78%

55-59 is 68%

60-64 is 50%

over 65 is 10%

The US LP over 16 was at 62.6% in June 2015 – the lowest since the early months of 1978.

The rate for men was 69% and for women was at 56.7%

The rate for 20+ men ex-men in prison was 71.6%.

The US rate peaked in the late 1990s at over 67%.

The Labour Force data is becoming harder and harder to interpret these days. As well as all the baby boomers retiring in the US you now have an enormous group of people working in a new economy that is difficult to capture in surveys (and hard to tax!).

@ nocence

“The casual dismissal of vaurofakis is borne of nothing but pure ignorance and fear. That anyone could suggest that if their life relied on it that they would not abide the counsel of vaurofakis over Kenny on economic or financial matters is inconceivable .”

You’re seeing a conspiracy that doesn’t exist. Here are the facts: his abilities as a politician are truly horrific. It is essentially impossible to den this. Given that he is the Minister for Finance for a country that required a new support program, these seem like pretty important skills to have. He singularly failed in his goal of securing either a better program for Greece, or perhaps his favoured route of exiting Greece from the Euro. He ended up with, from the Greek point of view, the worst of all worlds: a tougher program of austerity, no movement on debt relief (it will happen eventually, but it was always gonna happen), the destruction of the Greek banking system, capital controls in a developed democracy, and a near-annihalation of trust from the rest of the EU/EZ. Name something positive which Varoufakis has achieved for Greece? Restoration of pride? Christ, anyone peddling that sort of feel-good bollox deserves nothing but contempt.

People do not “fear” him because he is an academic. He’s not bloody Indiana Jones for god’s sake. People dislike him because of the blatant narcissism and ego which he has brought to the table, and the pompous way he has delivered his message to the people (i.e. EU government and taxpayers) he is hoping to borrow more money from. How do you think Italians would have taken his jibe that they were bankrupt? Well? How do you think the EU would take his suggestions that they were terrorists? Are you as tone deaf as he is?

Absolutely, in a heart beat, i would accept his council on economic matters over Enda Kenny. But that does not mean he should have been the lead negotiator or the Minister for Finance for Greece over the last six months. His tenure has been an unqualified disaster, and to suggest that his reputation has been enhanced is a bizarre misunderstanding of how non-academics or non-left-wing-politicos view his abilities and how he has conducted himself since coming into office.

Again for anyone who’s interested, I asked the relevant Eurostat Directorate to reconsider the extent of the redactions in its letter explaining the classification of Irish Water and they’ve reissued the letter with fewer redactions:

Document No. 15003 on the CER’s web-site contians some of redacted data, but one can’t be sure to what extent the redacted data have been revised or updated. The Government, the CSO and all of the other agencies are determined to pursue the usual ‘mushroom approach’ – keep us in the dark and feed us plenty BS.

@ MH: Thanks again. Much obliged for those estimates. Interesting.

@ JF: Hard to tax persons in the New Economy? Must have learned the lessons of the oligarchs of industry. Now, how did Google, Microsoft and a few others make out here in Ireland? Quite well it would appear.

Maybe those folk inhabiting the NE in Ireland will have to be like Avis: “Try harder!” Hmmmm

Newsflash to JF and Dan McLaughlin:

“Let them eat GDP growth!” is the new cry of the 1%.


Reading you most recent post, I think you are failing to distinguish between the value of ‘expert’ opinion, whether that of science experts on issues of contentious politics or, more frequently these days, of economists on policy options,and the value of political expertise.

Yes indeed, our own cohort of respresentative politicians may emanate from diverse backgrounds, from as lowly as unskilled farm labourers, to the sons and daughters of shopkeepers, to primary school teachers or failed lawyers, to highly successful personages from the fields of business or the media who occassionally assume they can do the job of politics better than any of the current incumbents, to highly educated fourth level experts drawn from a particular field who find themselves impelled into the political domain in moments of crisis.

The main claim of ordinary elected representatives of the public to expertise lies in the realm of politics itself and in their capacity to make decisions on policy positions that secures a balance between the immediate interests of those whom they factionally represent and the greater good of society. It’s a tough old business. It involves many uncomfortable compromises, a fair dose of personal vanity and self-belief, and an ability to greet mistakes and failure with the same aplomb as triumphs of political will.

Expert ‘advice’ is ever only part of the political feasability of any policy direction. In respect of science expertise and policy decision making, the work of Daniel Sarewitz is instructive, particuarly his 2004 paper which is freely available on the internet. Sarewitz argues that decisions about conflicts of values – which are inherently political – need to be thrashed out before scientific expert advice enters the domain of policy decisions.

Personally, I would only go a bit of the road with him – like Mother MacCroi’s dog – but I also think that political expertise is frequently underestimated and undervalued, especially by ‘experts’. The point is that most politics is about grinding and boring processes of decision-making, replete with the tedium of constitutional detail and constraints on the possibilities of ‘doing’. It involves fine judgements in which the risks of being wrong are often greater than the likelihood of being right.

Whatever about Varoufakis’s analysis of austerity economics, especially as they applied to Greece, he might have been better placed as an economic adviser than an active politician – a bit like the role played by Colm McCarthy in the early stages of our own economic crisis. I’ve never met anybody who disputes the value of McCarthy’s contribution to public discourse on the options available to us at that time, or his recongnition that ultimately political decisions lay in the realms of what was politicall feasible, which was neither his function nor within his expertise. I couldn’t even pretend to comprehend the mindset of Varoufakis except to say he was obviously not cut out for politics and might best have stayed out of it, not just for the sake of his own reputation but for the sake of his fellow countrymen.

Debate about the attitudes and capacities of the players is interesting but what matters is the outcome of the game.

Courtesy of Guardian blogs, this contribution (31 July)

Holger Schmieding, chief economist at Berenberg Bank, has just sent his thoughts on the Greece saga and the IMF’s role.

“IMF versus Europe? The IMF wants to provide new credits to Greece only if Europe grants much more debt relief to Athens first. Major parts of Europe will only ratify a third support programme for Greece if the IMF is on board from the very beginning and if Athens meets the first reform targets in such a programme. On a good day, this dispute as to who needs to move first, the IMF with a contribution to a new bailout programme or Europe with more debt relief, could be solved by wily diplomats in an hour. On a bad day, it could potentially scupper a deal.

Scary logic. The scariest aspect of the dispute is that the IMF is starting to sound almost like disgraced Greek finance minister Yanis Varoufakis: “It’s about debt relief.” Nothing could be more wrong than that.

Remember the big mistake? The worst mistake Europe has made so far in the Greek crisis was the decision in mid-2011 to heed bad advice from the IMF and restructure privately-held Greek bonds. Unfortunately, nobody had put adequate defences against contagion in place beforehand. The resulting turmoil in Italian and Spanish bond markets pushed the entire Eurozone into recession within three months. The escalating crisis in its major trading partner scuppered Greece’s chance to recover early from its malaise. Only when the ECB stepped in decisively in the summer of 2012 could confidence in Greece and the Eurozone turn upwards again (see chart).

Once again, debt relief is a big fat red herring. Egged on by celebrity economists from the US and elsewhere who do not seem to understand Europe at all, Greece’s radical left finance minister preached to the world from January onwards that Greece needs massive debt relief, while he started to reverse key supply-side reforms at home. The result of Syriza’s policy reversal is obvious: in late 2014, Greece was on track for Spanish-style growth of 3%. After Varoufakis, the economy has fallen back into deep recession, the banks are bust and Greece’s debt-to-GDP ratio looks set to reach 200% in 2016 instead of 165% as it would have without the Syriza follies.

Policies matter much more than debt. If bad policies can raise the projected debt burden by 35 points and push Greek corporate confidence from above average back towards almost record lows (see chart) within seven months, the conclusion is obvious – it takes good policies rather than debt relief to contain and reverse the damage. That the IMF puts so much emphasis on upfront debt relief is outright dangerous. It gets the priorities wrong. And by causing an unnecessary new dispute, it adds to the pervasive uncertainty that is crippling Greece.

Europe is right. Greek debt should be re-profiled if and when Greece returns to sensible policies. Prime minister Alexis Tsipras is showing signs that he has finally understood that. Dear IMF, please support it as well.”

An even bigger mistake was the infamous Deauville declaration!

The data backing the view of Schmieding from his blog.

I think he is exaggerating the position being taken by the IMF. It has not, up to this point at least, ever spoken of debt write-down.

Tsipras availed of the “Krugman defence” when attempting to explain what he had sanctioned Varoufakis to do, glossing over what he had actually gotten up to.

Schaeuble’s view of Krugman is one which many in Europe would share.

“SPIEGEL: The US economist Paul Krugman has a clear position on this. The new aid program for Greece was “a document of revenge”, he claims, that destroys the “sovereignty of the country”. Share his conception?

Schäuble: Krugman is an important economist who received the Nobel Prize for his trade theory. But he has no idea of the structure and foundations of the European Monetary Union. Unlike in the US, in Europe there is no central government, here, all 19 Member States of the euro zone must agree. Mr. Krugman does not seem to know this.”


The full Spiegel interview is essential reading.


I don’t think anyone believes debt relief,per se,will solve Greece’s economic problems but the IMF have already admitted (sort of) that it made a mistake in not accepting much earlier on that Greece’s debt burden was not sustainable without a debt write-down. I would also not underestimate the competing pressures on the Fund, with US and French insistence on a ‘solution’ that keeps Greece in the euro fold set against a resentment from developing economies that the Fund is bailing out a relatively rich developed economy and in doing so bending its own rules in a way it would not do for an emerging economy. Lagarde’s contentious appointment also reflects the latter dynamic.

@ DMcL

I do not subscribe to any view of the IMF other than that it is the sum of the member countries that make it up, just as in the case of the EU. The US has an effective veto. The major European countries (the Bundesbank represents Germany) are the other decisive voice. (The lone voice of protest has generally come from Canada).

If it made a “mistake”, it boils down to who foots the bill.

The US has problems closer to home.

Puerto Ricans are, after all, citizens of the US.

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