The “troika”: an intellectual and political bankruptcy

As a Greek who lives and works in Germany, has friends and family in Greece and last but not least, has a child whose heart is split between the two countries I am appalled by the incompetence displayed by both the German and the Greek governments in dealing with the current debt crisis.  A recent trip to Greece showed me that while economic activity is dangerously slowing down and obligations are running rampant across the entire economy, the social fabric is being torn in ways not seen for decades: successful and talented construction businessmen are selling their homes and their company assets for close to nothing  and look to migrate to Australia or turn to farming, schools are without books two months into the school year, the government is essentially not paying its suppliers, more and more people are dumpster diving, the list is long.

In the early stages of the current debt crisis the German government found itself confronted with an interesting dilemma. If it took the lead to solve the European debt problem it would run the risk of being the smart aleck who tells other Europeans what to do.  If it did not it would risk jeopardizing the country’s own long term economic well being as it depends heavily on the future of the European construct. The conundrum was (and remains) non-trivial considering Germany’s recent history on the one hand and the benefits the country reaped and reaps from a unified Europe and in particular the Eurozone.

It soon became clear that Mrs. Merkel’s government could not possibly continue to live in denial, an option naively tried early on. The solution eventually chosen was to essentially hide behind the “troika”, a pseudo-institution which consists of the European Union, the International Monetary Fund and the European Central Bank. The troika as an instrument has some interesting properties. First it has a name and can play the role of the bad cop functioning as a kind of heat sink for the people’s frustration, second it still allows the German government to stir it and third it brings in “technical know-how”.

It has now become clear that none of these three properties worked as expected. The strategy of hiding behind the troika worked only partially as anyone who recently breathed Greek air can testify. To that end it did not help that Mrs. Merkel herself, scandalously ignoring OECD data which disproved her, repeatedly attempted to demonize the Greeks (and the rest of the European South) as lazy and morally guilty of a world economic and financial crisis. The incompetence of the German government in dealing with this crisis competes head to head with that of the Greek government. The approach of the troika to the problem is to dispatch three middle ranked, second rate officials to the country whose work methodology boils down to a single item: make the Greeks as poor as possible. This is not so because these three people, the troika or its constituent organizations are governed by anti Hellenic sentiments  (as public sentiment has it in Greece) but because their excel sheets say that this is the only way to achieve the positive effects of a unilateral currency depreciation (an effective instrument used to swiftly adjust an economy’s competitiveness and hence the trade balance – an instrument however which is unavailable to the Greek government due to the euro).

The painfully naive excel sheets of the bean counters are so poor in explanatory or descriptive power of economic reality that they are more voodoo than science. If politicians, economists and bean counters could be sued for malpractice they would be buying malpractice insurance at extremely high premiums these days.  A pragmatic policy maker whose aim is to keep the European economy away from uncharted territories so that conventional policy instruments remain effective does not use pseudo-moral assessments, shock and awe tactics and populist rhetoric, all of which appeal to his constituency’s lowest instincts.

Such a pragmatic policy maker also knows that the overnight elimination of the large indeed Greek informal economy is a catastrophically bad idea: a virtuous but frozen economy is as desirable over a sinful but booming one as a dead patient whose death eliminates his viral infection is preferable to the patient staying alive with a viral infection.

A gradual nudging of the economy to more formal ways would have been wiser and could have helped avoid a debt crisis. This is partly one of the sins booked on the current Greek government’s account but also on the past ones which repeatedly failed to recognize the oncoming dangers.

The Greek government has to, at long last, stop pretending the troika is the bad guy and go after corruption and restore fairness in paying for the crisis. Failure to do both convincingly will lead to long forgotten types of social unrest and radicalization. The fact that so much capital has been flowing out of the country as a result of the incompetence of the two governments shows not that the Greeks who take their money out of the country fear a Greek default but that they are betting on one. Their faith in the country is not shaken one bit. Their plan is to buy the country for pennies after it defaulted! Perhaps the policy maker should tax this type of speculation as if it were a normal business transaction.

The German government has to eventually explain to the German people that life is not 90 minutes at the end of which the Germans always win and that some of the options with attractive long-term properties cost money in the short run.

It is absurd of the German people to expect and its politicians to falsely promise that Germany’s presence in the EU will only have benefits for Germany. Furthermore the idiocy of making the Greek people bleed so badly as to avoid moral hazard and push Italians, Spaniards and Portuguese to a self-administered, self-mutilating austerity has to stop. It has to at least be balanced with the consideration that:

moral hazard did not prevent the American Marshall plan or the French Schuman plan without which Germany would have never recovered from the wreckage it found itself in after the war.

To keep things in perspective there is no scale in which the Greek sin of over-consumption, tax evasion and creative accounting is in any way quantitatively comparable with the liability of Germany in the last war. In order to determine how much Greek bleeding is necessary now to avoid moral hazard we need to ask ourselves how much bleeding should have been imposed on the German people after the war in comparison and proportion. Given that the world forgave the Germans after the war as generously as it did it is hypocritical and disproportionate to push the Greeks on the verge of their dignity and their physical well being for what is essentially a misdemeanor in comparison.

 

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