This week’s Economist Magazine (May 16, 2011) carried a headline – Sell, Sell, Sell – which referred to renewed calls for an even more expansive privatisation program in Greece than is already under way. The initial program of asset sales was projected to net more than 20 per cent of GDP in funds. But now the EU bosses want more. There appears to a group denial in Europe at present which is being reinforced by the IMF and the OECD and other organisations. They seem to be incapable of articulating the reality that if you savagely cut government spending while private spending is going backwards and the external sector is not picking up the tab then the economy will tank. Under those conditions policies that aim to cut the budget deficit will ultimately fail. But in the meantime the reason we manage economies – to improve the real lives of people – are undermined and living standards plummet and the distribution of income and wealth move firmly in favour of the rich. But if the price is right I’ll buy the Acropolis (and give it back to the people)!
The German press have been baying under the moon for the Greeks to sell islands and even the Acropolis. But now this mantra is standard IMF/Europe Finance minister’s talk. The Euro bosses are telling Greece that it will only bail them out further if they sell more public assets and impose harsher “structural” reforms.
After the emergency meeting in Luxembourg recently, the Prime Minister of that nation was quoted as saying:
Urgent measures are needed in Greece in order to reach its fiscal targets … [including an] … increase the volume of privatisation ..
The normally liberal Dutch were garnering support for:
… more radical measure: creating an external agency run by the EU to take charge of selling the assets.
Haven’t they ever heard of democracy? Even the Economist notes that this would constitute “an erosion of sovereignty that is likely to run into fierce resistance, and not just from Greece”.
All of this is to avoid having to “reprofile”, “reschedule” or debt default. All these buzz words are being bandied around at the moment. My estimate is that the Greek government will not be able to repay its current debt load given the state of its economy and its loss of currency sovereignty (which effectively makes these debt – foreign-currency denominated).
Meanwhile, the IMF has had a team in Greece recently and their conclusion is that the Greek government has to “speed up reforms”. In this Sydney Morning Herald article (May 18, 2011) – IMF warns Greece over sluggish reforms – a senior IMF official (one that is not in prison) was quoted as saying:
The programme will not remain on track without a determined reinvigoration of structural reforms … Privatisations make a real difference … there would be a very substantial change in debt sustainability.
Privatisations typically fail especially if they involve assets that yield revenue to the government.
Mainstream economists claim the price will be driven by competition to reflect the discounted lifetime income flow from the asset. They are usually wrong about that. The price offered is almost always discounted to ensure the politicians are not embarrassed by a “non-sale”. So the private sector effectively steals the assets and the government loses the revenue stream.
The point is that a budget deficit is an accounting result of flows of spending and revenue. Those flow occur day-in day-out. Selling an asset is selling a stock and the pay down of debt is a once-off event.
The SMH article also reports that the Greek people are now resisting their government’s attempt to demolish their economy which is frustrating the IMF. It is always a nuisance for the Washington-based, non-elected organisation when a bit of democracy gets in the way.
While on the IMF, here is a snippet from a Press Conference that the IMF Director of External Relations Department gave on May 12, 2011. She was asked whether the IMF adjustment demands for Greece were too severe and replied:
MS. ATKINSON: The program when we designed it was designed so as to address the financing problems that Greece had and obviously we and others can provide a certain amount of financing, but to make the books balance you also need to have adjustment and that’s the judgment incorporated in the program.
The question that the journalists should have then asked was: Why should Greece run a budget balance?
I went back through my records (notes, text archives etc that I have built up over the years) to see what I knew about Atkinson. Prior to joining the IMF, Atkinson wrote an article in the Financial Times (May 17, 2002) – Forget Sovereign Bankruptcy Plans – which you might be excused for thinking was her application letter for her job at the Fund.
In that article you read:
Question: when is a country not like a company? When it has run out of money. A company can declare bankruptcy. A country cannot. Debt work-outs for companies are guided by domestic bankruptcy laws. Debt work-outs for countries are not. They can be long and messy.
Correct answer: A country is never like a company because regardless of any (imprudent) voluntary arrangements the government has entered into – such as pegging its currency, borrowing in foreign currency, dollarising, euro-ising (I just invented that term), the nation can withdraw from those arrangements – by floating, restructuring loans in domestic currency, reintroducing its own currency etc.
A company that goes broke does not have that option.
A nation can never be bankrupt in its own currency despite the IMF working hard over the years to blur and obfuscate that fact. It never faces a solvency issue in its own currency.
So even before she joined the IMF, Atkinson was spreading lies about the essential nature of monetary systems as they pertain to governments.
In that same article she made the following extraordinary statement:
When crisis hits, it is hard to tell whether policy reform and temporary official financing will be enough to restore investor confidence. In a few cases, debts may have to be restructured. Tough judgments are involved in deciding when restructuring is the only option and how to share the pain between debtor countries and their creditors.
The IMF is the only body with political legitimacy and the technical ability to make such judgments.
Which brings me to this interesting article in the Financial Times (May 18, 2011) – Fund must turn away from DSK’s economic mistakes which was written by a fellow at the right-wing American Enterprise Institute.
The article says that unlike those who have praised Dominique Strauss-Kahn as a progressive who placed the IMF at the centre of the European recovery effort the reality is that:
History … is more likely to remember him as the man who put the IMF on the road to decline, by his misguided handling of the eurozone debt crisis.
I rarely agree with a right-wing author but in this case – as they say in the classics – I couldn’t have written it better myself!.
But the agreement is fleeting.
Lachman (the author) says:
Mr Strauss-Kahn’s decision to treat the crisis as a matter of liquidity rather than solvency led the IMF to eschew any notion of debt restructuring, or exiting from the euro, as a solution to the periphery’s public sector and external imbalance problems. Rather, he opted for draconian fiscal tightening and radical structural reform as a cure-all for Greece, Ireland and Portugal.
Experience with such policies in Argentina in 1999-2001 and in Latvia in 2008-09 should have informed the IMF that, under the euro – the most fixed of exchange rate systems – such a policy was bound to produce the deepest of economic recessions. The fund should also have anticipated that deep recessions would erode those countries’ tax bases and undermine their political willingness to stay the course of adjustment.
The poor economic performance now evident in Greece and Ireland therefore risks blackening the IMF’s reputation in Europe in the same way as its programmes in Asia and Latin America rendered the fund a pariah in the 1990s. At the same time, economic programmes for Europe’s periphery that had little chance of restoring public debt sustainability have torn the IMF’s credibility in the financial markets.
In that quote there is an underlying theme – about public debt sustainability – that I would not entertain. But the general point is sound – the IMF and OECD and other non-elected organisations tout prescriptions to national problems based on economic theories that are faulty. They typically never make forecast errors on the “pessimistic” side.
So when they impose “conditions” on nations accepting funds, the IMF typically projects a more rapid recovery than a reasonable assessment of the situation would warrant.
As an exercise, go back through the years and match the IMF forecasts for nations that they have under Standby arrangements or Extended Fund Facility (or similar programs relevant to the historical period) with the reality.
The “conditions” they impose scorch the Earth and generally fail to achieve their stated goals – to improve living standards etc. They certainly redistribute a lot of national income from poor to rich. They certainly alter the wealth distribution in favour of those rich interests who buy discounted state assets. But the IMF don’t admit that or provide analysis of it.
It is no surprise that the Greek deficit as a proportion of GDP is not falling. It is not because the government is being slack in implementing the structural adjustment program. Perhaps it is slack but that misses the point. When you cause real economic growth to contract sharply and sustain that contraction over several years the automatic stabilisers will guarantee a budget deficit.
I also agree with Lachman that Greece is effectively “insolvent” under present arrangements. It has debt that it is struggling to service denominated in a “foreign-currency” (the Euro) and the private bond markets which it depends on because it entered the EMU and gave up its sovereignty are not particularly willing to go on lending to it.
In the IMF’s Third Review Under the Stand-By Arrangement (the bailout) which they published in March 2011, we read:
The authorities remain focused on putting in place a critical mass of structural reforms to support an investment and export led recovery … Overcoming Greece’s legacy of weak market contestability and high administrative burdens necessitates a broad and deep agenda, unprecedented in Europe, covering far reaching labor market reform, product and service market liberalization, and reforms to encourage entrepreneurship.
It is clear that the hoped for export-led recovery and private investment boom has not materialised. It was an ideological hope that it would. The conditions that the Greek economy faces – especially with other nations also pursuing austerity – makes it near impossible that the external sector would grow fast enough in conjunction with private investment to replace the plunge in consumption.
The IMF know that. In the same Review they admit that in the last year Greek “household consumption faltered” – “Building permits have continued to decline” – “Industrial production is still declining” – “economic sentiment remains poor” and despite unit labour costs falling (wage costs falling faster than a dramatically declining productivity) – “Greece has continued to lose world export market share”.
Moreover, the IMF concludes that “Household credit growth has turned negative…” and “corporate credit growth continues to slow”.
Please read my blog – Fiscal austerity – the newest fallacy of composition – for more discussion on this point.
I agree with Lachman that “one year after the European Union and IMF’s $150bn loan package, the Greek adjustment programme is not working”.
I also agree that:
At the heart of the IMF’s failures to date in Greece was the prescription of a policy approach that had little chance of success within the constraints of a fixed exchange rate system that precludes devaluation as a means to promote export growth, which is an offset to radical fiscal policy tightening.
Even with a flexible exchange rate, the Greek economy would not be able to withstand the extent of discretionary fiscal tightening that is going on. But in saying that, a flexible exchange rate would have been beneficial.
But then if you are going to advocate a flexible exchange rate you are endorsing an exit from the EMU which then changes the way we think of Greece altogether. Then the so-called “government funding problems” evaporate into thin air. Governments can rearrange the never-ending increase in the prices. The Greek government could ignore the ECB and the private bond markets and introduce public employment programs immediately.
The adjustments involved in re-introducing their own currency would be tough and there would be an inflation risk but my assessment (as the gratuitous outsider) is that the net costs involved in the next five years would be less than what they will have to endure by staying in the EMU.
Either way, they will have to default on the debt. But in my assessment it is much better to do that Argentina-style – by restoring your own currency sovereignty.
Lachman is also correct when he says:
However, what is difficult to understand is why, with the poor economic performance of Greece, the IMF chose to repeat the same conceptual policy mistake in its adjustment programme for Ireland in November 2010 and in its proposed programme for Portugal right now. What is even more difficult to understand is why the IMF is now also proposing that Greece should apply more of the same policy prescriptions that have brought its economy to its current parlous state.
To put the preceding discussion into perspective, I updated some of my databases today.
The following table used data from that publication and shows the main Labour Force aggregates as at February in each year (2006-2011). I computed the cumulative change since the crisis really started to impact (2009-11). You can see that the economy has lost (net) 356,997 jobs which as a percentage of current employment (February 2011) is around 8.5 per cent. 393,060 extra people are officially unemployed.
Note the inactivity changes. These could be demographic in nature but are likely – especially in 2010 and 11 – be motivated by cyclical events. If we assume that the 80,984 who left the official Labour Force between February 2010 and February 2011 were discouraged workers – that is, people who would prefer to work but had given up looking and therefore failed the activity (search) tests built into the Labour Force survey instrument – and add them back into the Labour Force as “unemployed” then the unemployment rate would be 17.2 per cent in February 2011 rather than 15.9.
Either way it is intolerable that an advanced nation would tolerate an official unemployment rate of 15.9 per cent and be endorsing and introducing policies that will make that rate climb even higher and stay high for some years,
The most recent Labour Force data (published May 12, 2011) for February 2011 shows that the:
Unemployment rate in February 2011 was 15.9% compared to 12.1% in February 2010 and 15.1% in January 2011.
Official Greek data is available from the Official Hellenic Statistical Authority (EL.STAT).
If we think back to the June 2010 OECD Employment Outlook, at a time when that organisation was berating the Greeks and demanding ever tightening fiscal policy, the OECD forecast that the unemployment rate in Greece would rise to 12.1 per cent in 2010 and 14.3 per cent in 2011. So their projections were short of the mark by a very large 2 per cent in 2010 and 2011 will prove them to be even less accurate.
The OECD also projected (in June 2010) that employment would “ease” by 2.8 per cent in 2010 when the Table shows that it plunged by 5.1 per cent in the period February 2010 to 2011.
Given these forecasts are used by these agencies to frame their positions and influence the policy debate you would think their opinions would be ignored after getting it so wrong so often.
One question I have: why does the Greek Statistical Authority take so long (3 months) to publish their monthly Labour Force Survey data? A quarter lag is often the case for National Accounts data because it is more complex but the Labour Force data should be available within a few weeks of the survey instrument being executed.
You might also consult the IMF’s Third Review Under the Stand-By Arrangement (the bailout) which they published in March 2011.
The following table (is taken from their page 9 Table) and reports the various real GDP growth forecasts for Greece. All but Piraeus (a Greek Banking Group) understated the extent to which the Greek economy went backwards in 2010. Note that all are more optimistic than Piraeus in 2011.
The National Accounts flash estimates (provisional estimates) for the first quarter 2011 which were released on May 13, 2011 show that real GDP fell by 7.7 per cent over the last year.
What all this means is that living standards continue to fall in Greece. The following graph shows the Annual Growth in Per capita Net National Disposable Income for Greece from 2001 to 2010. In 2009 it plunged 3.1 per cent and in 2010 it fell a further 5.3 per cent. The estimates available for the first quarter 2011 indicate that it will continue plunging. The real figures would be similar in direction given the inflation rate is low and stable.
And on that note I read the the ABC News headline today (May 19, 2011) – Embattled IMF chief resigns. That was good news for the afternoon.
And in closing, the IMF’s March 2011 Review had this graph (page 36) which carried the title “Greece had a legacy of high labor market regulations – OECD overall Employment Protection Indicator, 2008”.
Note the status of Luxembourg and reflect back on the statements made by the Prime Minister of that nation after the emergency meeting in Brussels the week before last. Hypocrisy abounds.
Also note that the “least regulated” labour market (the US) has one of the worst unemployment rates at present.
Takis or Vassilis, please let me know when the Acropolis is up for sale.
That is enough for today!