Rashomon at the Financial Times
By Scott Sumner
A crime has been committed in Brussels. But who is the victim? Gideon Rachman of the Financial Times says Germany is the victim:
Europe woke up on Monday to a lot of headlines about the humiliation of Greece, the triumph of an all-powerful Germany and the subversion of democracy in Europe.
What nonsense. If anybody has capitulated, it is Germany. The German government has just agreed, in principle, to another multibillion-euro bailout of Greece — the third so far. In return, it has received promises of economic reform from a Greek government that makes it clear that it profoundly disagrees with everything that it has just agreed to. The Syriza government will clearly do all it can to thwart the deal it has just signed. If that is a German victory, I would hate to see a defeat.
As for this stuff about the trashing of democracy in Greece — that too is nonsense. The Greek referendum on July 5 was in essence a vote that the rest of the eurozone should continue to lend Greece billions — but on conditions determined in Athens. That was never realistic. The real constraint on Greece’s freedom of actions is not the undemocratic nature of the EU. It is the fact that Greece is bust.
Much of the comment about the loss of Greek sovereignty, in the outline deal just agreed, has focused on the idea that Greece will now have to privatise €50bn worth of assets, and that foreigners will supervise the Athens-based fund. Given the record of corruption and clientelism of successive Greek governments, that sounds like a very good idea. But Syriza’s deep opposition to privatisation makes it unlikely that anything like €50bn will be raised.
In contrast, here is the Financial Times editorial page:
Even if the deal succeeds in restoring some stability to the shattered Hellenic state, the experience of recent days has been a searing one — not just for Mr Tsipras but for the entire eurozone.
Germany’s approach has left deep scars, enforcing harsh terms on the hapless Greeks and exposing divisions with other more conciliatory voices such as France. Berlin’s rigid stance raises questions about the functioning of the eurozone and the compatibility of Greece’s dire situation with democracy. It prompts deeper concerns about the future of the EU project itself.
Mr Tsipras has been his own worst enemy. He needlessly threw away whatever goodwill Greece might have enjoyed, pursuing an erratic strategy of bluff and bluster as his country’s economy slid back into depression and its banks went into slow-motion collapse. By the time he changed his tune, most sympathy for Greece’s plight had gone.
Even so, the deal forced on the capitulating Greek prime minister is extraordinarily severe. The terms are less palatable than the ones available a fortnight ago, which the Greek people rejected in a referendum, and Mr Tsipras denounced as blackmail.
There is no let up in austerity and no clear language offering acquiescence to debt relief. Athens has just days to pass a raft of laws dictated in Brussels that cover everything from the regulation of bakeries to tax rises and fundamental reform of the Greek administration. The lenders have insisted on establishing a trust to hold assets with a value of up to €50bn that will be sold to pay for bank recapitalisation and to repay debt. The hated troika will not only return; it will take up unfettered residence to monitor the terms of the deal.
These are both reports from well informed (British) observers. Why do they see things so differently?
1. Baseline for “action”. Is the thing being done “deeper austerity.” Or are the things being done, “more bailouts, throwing good money after bad.” What is the alternative? Is it Grexit and a default and a zero primary surplus? Or is it staying in the eurozone and paying one’s debts?
2. Just deserts vs. left utilitarianism vs. right utilitarianism. Greece behaved very irresponsibly by running massive budget deficits during the boom years, and then again after reckless actions by Syriza plunged Greece back into negative growth, and then again when Syriza called a poorly worded referendum in the middle of delicate negotiations. Does that bad behavior “deserve” to be punished?
Elsewhere I’ve argued that utilitarianism is what underlies liberalism. There is no concept of just deserts. What’s done is done, and you make the best plans you can devise for making the future a happier place. But there is still moral hazard, which links responses to past behavior to future actions. Left liberals tends to dismiss moral hazard as being relatively unimportant. I think this is a cognitive illusion. For instance, they miss the way that FDIC encourages reckless lending by smaller banks in high growth cities of America. Right wing liberals like me think moral hazard is extremely important, and provides a justification for “toughness”, even in a world of no just deserts.
It seems to me that the eurozone was motivated by both just deserts and moral hazard fears. (And by the way, it makes more sense to talk about the eurozone than Germany. Almost the entire eurozone was extremely hostile to the Greek position.)
3. Attitude toward socialism. The Socialists in France were the one group that clearly had some sympathy for Syriza. They viewed the forced privatization and deregulation as harsh conditions imposed on Greece, whereas I view those terms as a gift to the Greek people.
4. Self interest. In this case both sides are British observers, but Rachman also makes this observation:
It is certainly striking that the most vocal denunciations of the eurozone’s meanness, in refusing to write off Greece’s debts, have come from economists based in countries whose own taxpayers are not on the hook.
5. Role of the ECB. A person (like me) who believes the ECB caused the eurozone depression is likely to be more sympathetic to Greece that someone who believes the depression was caused by bad policies in the most severely affected countries.
6. Standard of living. There is more sympathy for Greek pensioners in countries where pension benefits are larger than Greece. Eastern Europe is quite unsympathetic to the plight of Greek pensioners.
7. Trust in Greek officials. Rachman is skeptical that Greece will actually carry out the painful reforms called for in the agreement.
8. The big bully fallacy. The idea that big means bully and small implies victim. (This one’s really popular with the American left, who for some bizarre reason think there was “predatory lending” during the housing boom, not “predatory borrowing.”)
9. I see lots more fault lines exposed in this Roger Cohen piece in the NYT:
But the euro was a poisoned chalice. Conceived to bind Germany to Europe, it instead bound far-weaker European countries to Germany, in what for some, notably Greece, proved an unsustainable straitjacket. It turbo-charged German economic dominance as Berlin’s export machine went to work. It wed countries of far laxer and more flexible Mediterranean culture to German diktats of discipline, predictability and austerity. It produced growing pressure to surrender sovereignty — for a currency union without political union is problematic — and this yielding was inevitably to German power.
a. I disagree that the euro “turbo-charged” the German export machine; exchange rates don’t explain trade balances. However most others disagree with me on that point, and that makes them see Germany as a lucky country.
b. The middle sentence of the paragraph subtly mocks German virtues, and is somewhat indulgent toward Mediterranean vices.
c. The last part raises the question of whether “force” is being used here. Is Greece free to reject the deal? Paul Krugman and I say yes, Grexit is an option. Most people say no, making them see Greece as a sort of colony of the eurozone.
What else have I missed?