Wednesday, December 28, 2011

The Eurozone Crisis: Market Correction?

The Eurozone crisis is about markets behaving like markets again. Since 1999, when the euro was launched, markets have systematically mispriced sovereign debt by assuming that all Eurozone countries were equally credit worthy. Markets thus lost their self-corrective character: when countries borrow heavily, they are punished through higher bond yields. But when all countries borrow at the same rate, there is no penalty for profligacy. Our current crisis is a result of markets trying to price debt properly again. 

The graph below shows the cost of borrowing for Eurozone countries. In the early 1990s, there were two types of countries. There was a core whose governments borrowed at +/- 8% a year, and there was a periphery which borrowed at +/- 13% a year. There was also Greece, in a category by itself, with interest rates around 20%. Over time, however, that discrepancy disappeared and what used to be a 100% difference between the two extremes turned into a 15% difference by 2001. Everyone was more or less the same. 


In theory, this convergence in yields was due to converging fundamentals: low inflation, stable exchange rates, shrinking budget deficits and declining public debt levels. But in truth, there was no such convergence, not even superficially. Debt, for example, was highly variable as early as 2001 with Luxembourg boasting a debt over GDP ratio of 6.3% and three countries (Greece, Belgium and Italy) being over 100%. Debt levels remained too variable throughout the decade to justify such a convergence in yields. 


Not only were debt levels variable but so were deficits: in 2001, there were countries such as Luxembourg (+6.1%) or Finland (+5.1%) with high surpluses and countries such as Greece (-4.5%, revised) or Portugal (-4.3%) with large deficits. Such discrepancy again persisted throughout the decade with some countries running chronic deficits and others running chronic surpluses. 


Convergence thus made no sense. Even without knowing anything about the 17 countries that make up the Eurozone, a casual look at the most basic public finance statistics would suggest that these countries should have different credit ratings and different borrowing costs. Yet they did not – at least not until late 2008. That’s when markets started being markets again, except that it was also a time when markets were very cautious and risk averse. So rather than a return to pricing risk correctly, markets just went berserk. But fundamentally this is a crisis of markets trying to figure out how to price sovereign debt properly. 

Why does this matter? For two reasons. First, it is important to conceptualize the Eurozone crisis properly and to understand that it is essentially a correction after a decade of debt mispricing. Second, it is heartening to know that markets are functioning again, even though in their present mind, they are probably excessively risk averse. In a time when European politicians are trying to design new institutional structures to control budget deficits and to punish profligacy, markets are showing that they can perform this task. When markets were asleep on the wheel, political controls would have been worthwhile. But markets are awake now and, while they may make other mistakes, they are unlikely to assume again that all European debt is the same. And so the challenge that so vexes Europe – how to lend money to the periphery with proper strings attached – may soon end up being a moot point as long as markets behave like markets again. 

Friday, December 23, 2011

Ten Questions for Greece in 2012

As we go into 2012, here are the biggest questions on my mind for the next 12 months. 

#1. When will elections happen? Perhaps the biggest question. Will elections happen, as initially agreed upon, by the end of February? Or will this transition government be given a mandate to govern for longer? And if it does govern longer, will it continue to enjoy wide parliamentary support? Another way to ask the question is: will Antonis Samaras put country above personal ambition?

#2. Will Loukas Papademos continue to be popular? So far, the newly appointed prime minister has enjoyed good ratings. In fact, over the past month, he has managed to win over many of the people who had no opinion of him before November, meaning he is making a good first impression. Will this last or will the friction of power take its toll? And if remains popular will he be able to do things that George Papandreou could not? 

#3. Will progress on reform be stronger? After a strong start in 2010, progress on reform slowed in 2011. Will the reform program be adhered to better? Will the government stand up to special interests and unions? Will the bill to open up professions truly open them up or will exemptions water it down significantly? Will the government bite the bullet and fire people from the public sector? 

#4. What kind of participation will there be in the haircut? The government is reporting good progress in its discussions with the private sector over the haircut. What will the participation rate be? Will there be holdouts or any conditions attached to the haircut? 

#5. What conditions will Greece commit to get a second bailout? Besides implementing the first bailout better and besides negotiating a haircut, the government also needs to negotiate a new bailout agreement. What will those conditions be? What new areas will come under the troika’s jurisdiction? What are the new areas of reform? 

#6. Will privatizations happen? The government has budgeted to raise €6 bn from privatizations in 2012. Will those privations happen? Already the targeted privatizations for 2011 have mostly slipped. Will that change? And what price will various assets fetch under these tough economic conditions? 

#7. Will Greece hit its revenue target? Greece’s fiscal plan for 2012 is heavily weighted towards increasing revenues, which will be tough to do in an ever contracting economy. Much depends on better tax collection. Can the government raise revenues in an economy that will shrink by 2.8%? 

#8. Will the economy rebound? Almost every forecast for GDP during this crisis has proven to be optimistic. The economy is expected to grow in 2013, but then again, it was supposed to grow in 2012 as well. Will Greece continue to experience a deepening recession or will the economy hit bottom in 2012 and then start to recover? 

#9. Will Greek society implode? Greek society is at a breaking point. Tensions are high, protests are continuing and frustration is mounting. Violence, at least at the criminal level, is growing. Mental and physical health is deteriorating and suicide rates are rising. Will society keep making sacrifices or will it give up? Will the government have the leadership and vision to keep the country together for another one or two years until the economy turns? 

#10. Will the Eurozone implode? The final big question for Greece is the future of the Eurozone. With Italy in trouble and with markets being generally skeptical of new measures that Europe’s leaders promulgated in December 2011, what happens to the Eurozone is a big question mark. More and more economists are betting on the breakup of the Eurozone. Are they right? What happens to Greece then? 

Lots of questions for 2012. Stay tuned on www.greekdefaultwatch.com/ for answers. May 2012 turn out better than 2011. 

Δέκα Ερωτήματα για την Ελλάδα του 2012

Καθώς μπαίνουμε στο 2012, αυτά είναι τα μεγάλα ερωτήματα που μου έρχονται κατά νου. 

#1. Πότε θα γίνουν εκλογές; Αυτό ίσως είναι το μεγαλύτερο ερώτημα. Θα γίνουν, όπως είχε αρχικά συμφωνηθεί, στο πρώτο τρίμηνο; Ή θα πάρει η μεταβατική κυβέρνηση εντολή να κυβερνήσει περισσότερο; Και αν παραμείνει παραπάνω, θα εξακολουθεί να στηρίζεται και από τα τρία κόμματα; Για να το θέσουμε αλλιώς το ζήτημα: θα βάλει ο Αντώνης Σαμαράς το συμφέρον της χώρας πάνω από τη προσωπική του φιλοδοξία; 

#2. Θα συνεχίσει να είναι δημοφιλής ο Λουκάς Παπαδήμος; Μέχρι στιγμής, ο νέος πρωθυπουργός έχει απήχηση και έχει καταφέρει να κερδίσει το κόσμο που δεν τον ήξερε καν πριν το Νοέμβριο. Άρα, έχει κάνει καλή πρώτη εντύπωση. Πόσο θα κρατήσει αυτή η εντύπωση και πόσο θα τον φθείρει η τριβή της εξουσίας; Και αν παραμένει δημοφιλής, θα μπορέσει να κάνει αυτά που δε μπορούσε να κάνει ο Γιώργος Παπανδρέου; 

#3. Θα προχωρήσουν πιο γρήγορα η μεταρρυθμίσεις; Μετά από ένα καλό ξεκίνημα το 2010, οι μεταρρυθμίσεις επιβραδύνθηκαν το 2011. Θα τηρηθεί το μεταρρυθμιστικό πρόγραμμα; Προτίθεται η κυβέρνηση να αντισταθεί στα διάφορα συμφέροντα και τα συνδικάτα; Το νομοσχέδιο για το άνοιγμα των κλειστών επαγγελμάτων θα τα ανοίξει ή όχι; Προτίθεται η κυβέρνηση να απολύσει δημόσιους υπαλλήλους; 

#4. Τι συμμετοχή θα έχει το κούρεμα; Η κυβέρνηση μιλά για μια καλή πρόοδο στις συζητήσεις με τον ιδιωτικό τομέα σχετικά με το κούρεμα. Ποιό θα είναι το ποσοστό συμμετοχής; Θα υπάρξουν κάποιοι που θα αρνηθούν να συμμετέχουν ή άλλοι που θα βάλουν προϋποθέσεις για τη συμμετοχή τους; 

#5. Με τι όρους θα πάρει η Ελλάδα το δεύτερο πακέτο από τη τρόικα; Πέρα από την εφαρμογή του πρώτου μνημονίου, και πέρα από τη διαπραγμάτευση για το κούρεμα, η κυβέρνηση πρέπει να διαπραγματευτεί ένα νέο μνημόνιο. Με τι όρους θα πάρει το νέο πακέτο διάσωσης; Ποια κομμάτια θα υπαχθούν στην αρμοδιότητα της τρόικας και ποιες θα είναι οι νέες μεταρρυθμίσεις που θα ζητήσουν οι ξένοι; 

#6. Θα γίνουν ιδιωτικοποιήσεις; Στον προϋπολογισμό του 2012, η κυβέρνηση έχει προβλέψει έσοδα €6 δις από ιδιωτικοποιήσεις. Αλλά ήδη τα πλάνα για το 2011 έχουν ως επί το πλείστον καθυστερήσει. Θα πάει καλύτερα το 2012; Σε τι τιμή θα πουληθούν τα περιουσιακά στοιχεία και οι εταιρίες εν μέσω των τόσο δύσκολων οικονομικών συνθηκών; 

#7. Θα αυξηθούν τα έσοδα; Ο προϋπολογισμός του 2012, όπως και το ευρύτερο σχέδιο δημοσιονομικής προσαρμογής, βασίζεται κυρίως στην αύξηση των εσόδων, κάτι δύσκολο σε μια οικονομία που είναι σε βαθιά ύφεση. Πολλά εξαρτώνται από την πάταξη της φοροδιαφυγής και από τη καλύτερη είσπραξη των φόρων. Μπορεί η κυβέρνηση να αύξηση τα έσοδα σε μια οικονομία που θα συρρικνωθεί κατά 2,8% το 2012; 

#8. Θα ανακάμψει η οικονομία; Σχεδόν κάθε πρόβλεψη για το ΑΕΠ σ’ αυτή τη κρίση έχει αποδειχθεί αισιόδοξη. Το ΑΕΠ αναμένεται να αυξηθεί το 2013, αλλά, από την άλλη, αναμενόταν να αυξηθεί και το 2012. Θα συνεχίσει να εμβαθύνεται η ύφεση ή θα πιάσει πάτο η οικονομία το 2012 και στη συνέχεια θα αρχίσει να ανακάμπτει; 

# 9. Θα αντέξει η ελληνική κοινωνία; Η κοινωνία είναι σε οριακό σημείο. Οι εντάσεις είναι υψηλές, οι διαμαρτυρίες συνεχίζονται και η απογοήτευση κορυφώνεται. Η βία αυξάνεται, ενώ η ψυχική και η σωματική υγεία επιδεινώνεται και οι αυτοκτονίες πληθαίνουν. Θα συνεχίσει η κοινωνία να κάνει θυσίες ή θα εγκαταλείψει τη προσπάθεια; Έχει η κυβέρνηση την δύναμη και το όραμα για να κρατήσει τη χώρα για άλλο ένα-δύο χρόνια μέχρι να ανακάμψει η οικονομία; 

# 10. Θα αντέξει η Ευρωζώνη; Το τελευταίο μεγάλο ερώτημα για την Ελλάδα είναι το μέλλον της Ευρωζώνης. Με την Ιταλία να αντιμετωπίζει προβλήματα αναχρηματοδότησης, και τις αγορές να είναι επιφυλακτικές για τα μέτρα που ανήγγειλαν οι ηγέτες της Ευρώπης τον Δεκέμβριο του 2011, το τι θα συμβεί στην Ευρωζώνη είναι μεγάλο ερωτηματικό. Όλο και πιο πολλοί οικονομολόγοι πιστεύουν στη διάλυση της Ευρωζώνης. Έχουν δίκιο; Τι θα γίνει στην Ελλάδα τότε; 

Πολλά τα ερωτήματα για το 2012. Μείνετε συντονισμένοι στο www.greekdefaultwatch.com/ για τις απαντήσεις. Ας ελπίσουμε ότι το 2012 θα είναι καλύτερό από το 2011.

Wednesday, December 21, 2011

Are Greeks Lazy?

For a country whose pride is wounded by the economic crisis, there is immense satisfaction in one piece of data: that the average Greek person worked 2,109 hours in 2010 versus a German who worked only 1,419 (data from OECD, here). Doesn’t this prove that the stereotype of the lazy Greek is just that: a stereotype? Sadly, it does not. As always, reality is more complicated.

The data shows hours worked per worker – and the numbers show that a Greek employee worked 20% more hours than the OECD average. But what exactly does this mean? The key word here is “per worker.” Think of the following example. Family A has four members of which two are adults. The man works for 40 hours a week while the woman stays home. In that family, the average hours per worker is 40. Family B also has four members of which two are adults. The man works 40 hours a week, as above, but the woman has a part time job for 30 hours a week. Now the average hours worked per worker is 35. So which family works more hours? Clearly Family B works longest but the data gives that family a lower value (35 vs. 40).

Could it be that this is what the OECD data is showing? To test this assumption, I tried to match hours worked per employee versus the prevalence of part-time employment (see here). I only looked at countries that had data for 2010 and I excluded non-European countries to control for cultural variety (this excludes, for example, Japan, Korea and the United States). The results, shown below, support the hypothesis: more hours worked tends to be correlated with less part time employment. If you have few part time workers, you work more hours on average. That is all the data is saying.

 
Of course, this only tells us how long people work – it does not tell us how hard they work, nor if they are productive. Just visit any government agency in Athens and you see people who are nominally “working” but are just chatting on Facebook or are painting their nails. Nor should we discount that longer hours are often the result of an incentive system that rewards overtime pay. The evidence supports this by the way: when it comes to productivity, Greece ranks 24th in the OECD (out of 34) for GDP per hour worked, bracketed by Portugal and Slovakia. In other words, Greeks create less GDP for each hour they work than every other EU-15 country besides Portugal. That’s a poor return on investment.

Does this mean that Greeks are lazy? Of course not. What the data shows is that Greece has a rigid labor market with fewer people who work part time. It also shows that even though Greeks work 20% more hours per employee than the OECD average, they produce 25% less for each hour they work. This is a productivity challenge that Greece will have to solve.

More generally, however, the question of whether Greeks are lazy is the wrong one. As in every society there are people who work hard and there are people who are lazy. What distinguishes Greece is the skewed relationship between work and reward. There are people who do little work and get paid nothing; and there are people who work immensely hard and are paid well (they may not pay taxes, but that’s another story). So far, so good. The problem is that there is also a large share of the private sector that works very hard for terrible pay. And there are also many people who are paid lots of money to sit on their assess and do nothing – while getting to retire early and enjoy other perks.

So there are indeed Greeks who are lazy. The problem is that they are richly rewarded by the hard workers. And that makes no sense.

Monday, December 19, 2011

Remembering the Big Picture on the Greek Crisis

From day to day it is easy to get lost in the noise of the news cycle. It is easy to read too much into events that in retrospect matter very little. And so as 2011 ends, I wanted to step back and refocus on the big picture; to do so, I wanted to restate the five foundational principles that guide my thinking on the Greek crisis:

#1. This is largely a Greek crisis. It was, of course, triggered by seismic changes in the global financial system, but the roots of the crisis can be found in the choices that Greek society has made over the last thirty years. The bankruptcy of Lehman Brothers, the straightjacket of the common currency, and the lack of centralized fiscal powers in Europe – these factors affected how the crisis has been played out, but they did not cause the crisis, nor can they solve it.

#2. This is largely a political and social crisis whose most apparent manifestation is debt. When a country has a lot of debt it is easy to think that it faces a debt crisis, and Greece does face a debt crisis. But debt is a symptom of a sick political system. Debt was the price Greece paid for political normalcy when our government in the 1980s sought to heal political wounds by spending money on those who had been disenfranchised. Over time, profligacy created and perpetuated practices and institutions that made sustained fiscal consolidation impossible.

#3. Greece should be judged not just on its fiscal targets but on broader measures of reform and change. In a fiscal and debt crisis, a country needs a credible path to a sustainable debt level. Such targets are easy to measure. But in a country facing a deep social and political crisis, the yardstick for success has to be wider. A plan that pays off debt with no reform – for example selling off state assets – is like giving aspirin to someone with a toothache: it provides relief but not a cure. So Greece should be judged by whether its political economy and its political philosophy are changing. A changed country, not just a less indebted one, is the goal.

#4. The best option for Greece to achieve reform is a program along the lines negotiated with the International Monetary Fund, the European Commission, and the European Central Bank (in Greek lingo, the program is called the “memorandum” with the “troika”). This is hardly a popular view. Two-thirds of Greeks (or more) think the memorandum is a bad idea. In some ways, they are right to distrust a program that is inflicting enormous pain, is seen as imposed from abroad and does not offer a clear path out of the crisis. But before judging the program we need to ask two questions: are the alternatives better? And is the memorandum failing because its conception is bad or because it is not being implemented properly.

When it comes to options, Greece has two: an outright repudiation of its debt; or a debt default coupled with an exit from the Eurozone. Many economists see the merits of these two options as so self evident that they are puzzled by why Greece would pick to inflict such suffering on the people to implement a program that is sure to fail. However, these economists tend to think of the crisis too simplistically. If debt is the problem, removing debt is indeed a solution. But in a country where there is endemic corruption, constant protests and civil strife, chronic tax evasion, a weak state whose chief purpose is to dole out patronage, and a private sector that is so heavily protected as to mock basis notions of meritocracy, it is hard to see how a default or a new currency are a “solution.” These recommendations start by asking “how can Greece lessen its debt burden” rather than, “what kind of crisis does Greece face?” Different questions, different answers.

A second issue is whether the memorandum is doomed to fail or whether it is failing because it is not being implemented well. In some ways, the memorandum is not failing: for example, it is producing big changes in political economy, institutions and practices. But more generally, the government has made its position worse through its lack of political will. By failing to shrink the public sector quickly and by being too slow in reforming the private sector, it has fallen back on repeated tax hikes to plug its fiscal hole. As a result, society’s disposable income has collapsed. It need not be that way, and the government has options to rectify this condition. It could offer a tax break that it could pay for by cutting more jobs in the public sector and by allocating some money raised from privatizations towards tax relief rather than merely paying down debt. More importantly, slow progress on reform has amplified the public’s frustration from a perceived return to preferential treatment and favoritism. No society has much patience for such enormous pain so unevenly spread.

#5. Greece is moving in the right direction, albeit slowly and unevenly. This seems counter-intuitive but if one looks above the fray of the everyday noise and onto the big picture, it is easy to see that Greek society is changing extraordinarily quickly. Not all the change is good, of course. There is more crime and civil tension. Health, mental and physical, is deteriorating. Xenophobia could easily mix with loose immigration controls to produce an explosive keg.

But the true measure of reform is to assess Greece’s social and political dialogue. Few subjects are taboo any more. A country pushed the brink has no time for political correctness or for niceties; it has no time for diplomacy or for doublespeak. It has to confront reality and it has to deal with it. Of course, reality is not universal – different people have different views about how Greece got into this mess and what is best way to get out of it. But the dialogue has been enlarged in big ways and it is now possible to say things that would have been unthinkable even two years ago. Society is more open to ideas than ever before. This openness can be dangerous of course, and not all ideas floating around are constructive. But there are many ideas that are constructive and several of them are contained in the memorandum that the government has pledged to follow. And that is a promising sign.

In a way, Greece is in Purgatory. Our country is divided into those who think that we were in Paradise and are on our way to Hell. The people who benefited from the old system fall into that group. There are those who think we came from Hell and are going back to Hell – these are the pessimists and they have reason to be so. I doubt anyone thinks we came from Paradise and are going back to Paradise. My view is that we came from Hell and have a good shot at reaching Paradise. Oddly enough, Purgatory looks and feels like the reform program that the troika has put in place. Purgatory is no fun but it’s worth going through because of what lies on the other end. At the end of the day, I remain optimistic that we can end up in Paradise. But I won’t be surprised if we do not.

Να Μη Ξεχνάμε τα Βασικά Για την Ελληνική Κρίση

Είναι εύκολο να χαθεί κανείς στο θόρυβο της καθημερινότητας και να εστιάσει σε ειδήσεις που έχουν τελικά, μικρή σημασία. Έτσι, στο τέλος του 2011, θα ήθελα να σταθώ λίγο στα πιο βασικά σημεία και να επαναλάβω τις πέντε αρχές πάνω στις οποίες βασίζονται οι σκέψεις μου στο θέμα της ελληνικής κρίσης: 

#1. Η κρίση είναι, κυρίως, μια ελληνική κρίση. Προκλήθηκε, βέβαια, από σεισμικές αλλαγές στο παγκόσμιο χρηματοπιστωτικό σύστημα, αλλά οι ρίζες της βρίσκονται στις επιλογές της ελληνικής κοινωνίας τα τελευταία τριάντα χρόνια. Η πτώχευση της Lehman Brothers, το κοινό νόμισμα και η έλλειψη δημοσιονομικής πολιτικής σε Ευρωπαϊκό επίπεδο επηρέασαν την τροπή της κρίσης, αλλά δεν την προκάλεσαν, ούτε και μπορούν να τη λύσουν. 

#2. Η κρίση είναι μια πολιτική και κοινωνική κρίση της οποίας το πιο προφανές σύμπτωμα είναι το χρέος. Όταν μια χώρα έχει πολύ υψηλό χρέος είναι εύκολο να σκεφτεί κανείς ότι αντιμετωπίζει μια κρίση χρέους, και η Ελλάδα αντιμετωπίζει όντως μια κρίση χρέους. Αλλά το χρέος είναι ένα σύμπτωμα ενός άρρωστου πολιτικού συστήματος. Το χρέος είναι το τίμημα που πλήρωσε η Ελλάδα για να επιτύχει πολιτική ομαλότητα και προέρχεται από τη προσπάθεια του ΠΑΣΟΚ στη δεκαετία του 1980 να κλείσει πολιτικές πληγές και να ξοδέψει χρήματα σε εκείνους που ένιωθαν αποκλεισμένοι από το πολιτικό σύστημα. Με τον καιρό, η πολιτική αυτή δημιούργησε και διαιώνισε πρακτικές και θεσμούς που έκαναν αδύνατη τη δημοσιονομική εξυγίανση. 

#3. Η Ελλάδα να κριθεί όχι μόνο από την τήρηση των δημοσιονομικών στόχων, αλλά βάση ενός ευρύτερου προγράμματος μεταρρύθμισης και αλλαγής. Σε μια δημοσιονομική κρίση, μια χώρα χρειάζεται ένα αξιόπιστο πρόγραμμα που να φέρνει το χρέος σε βιώσιμο επίπεδο. Οι στόχοι αυτοί είναι εύκολο να μετρηθούν. Αλλά σε μια χώρα που αντιμετωπίζει μια βαθιά κοινωνική και πολιτική κρίση, επιτυχία σημαίνει κάτι ευρύτερο. Το να πληρώσεις το χρέος χωρίς αλλαγή – για παράδειγμα με την εκποίηση της κρατικής περιουσίας – είναι σαν να δίνεις ασπιρίνη σε κάποιον με πονόδοντο: αποτελεί ανακούφιση, αλλά όχι λύση. Η Ελλάδα θα πρέπει να κριθεί από την αλλαγή της πολιτικής οικονομίας και της πολιτικής φιλοσοφίας. Ο στόχος είναι μια καλύτερη Ελλάδα όχι μόνο μια λιγότερο χρεωμένη Ελλάδα. 

#4. Η καλύτερη επιλογή της Ελλάδας είναι ένα μεταρρυθμιστικό πρόγραμμα στη κατεύθυνση του μνημονίου με τη τρόικα. Αυτή δεν είναι δημοφιλής άποψη. Τα δύο τρίτα των Ελλήνων (και άνω) πιστεύουν ότι το μνημόνιο είναι κακό για τη χώρα. Έχουν δίκιο βέβαιο να δυσπιστούν για ένα πρόγραμμα που έχει προκαλέσει τόσο πόνο, που είναι ξενόφερτο και που δε φαίνεται να προσφέρει έξοδο από την κρίση. Αλλά πριν κρίνουμε το πρόγραμμα πρέπει να θέσουμε δύο ερωτήματα: έχουμε καλύτερες εναλλακτικές λύσεις; Και το μνημόνιο φταίει στη σύλληψή του ή στην εφαρμογή του; 

Η Ελλάδα έχει δύο εναλλακτικές επιλογές: μια απάρνηση του χρέους ή μια απάρνηση του χρέους σε συνδυασμό με έξοδο από την Ευρωζώνη. Για πολλούς οικονομολόγους αυτές οι δύο επιλογές είναι τόσο αυτονόητες που προβληματίζονται γιατί οι Έλληνες δεν τις επιλέγουν, αλλα προτιμούν αντίθετα να εφαρμόσουν ένα πρόγραμμα που σίγουρα θα αποτύχει. Αλλά αυτοί οι οικονομολόγοι βλέπουν τη κρίση πολύ απλοϊκά. Αν το πρόβλημα είναι το χρέος, τότε η αφαίρεση του χρέους είναι όντως λύση. Αλλά σε μια χώρα όπου υπάρχει διαφθορά, συνεχείς διαμαρτυρίες και απεργίες, χρόνια φοροδιαφυγή, ένα αδύναμο κράτος με κύριο σκοπό το μοίρασμα χρημάτων και ένας ιδιωτικός τομέας τόσο προστατευμένος που να γελοιοποιεί την έννοια της αξιοκρατίας, πως μπορούμε να δούμε τη χρεοκοπία ή το νέο νόμισμα ως «λύση»; Οι προτάσεις των οικονομολόγων ξεκινούν από την ερώτηση «πώς μπορεί η Ελλάδα να μειώσει το δανειακό της βάρος» αντί να ρωτούν «τί είδους κρίση αντιμετωπίζει η Ελλάδα»; Άλλες ερωτήσεις, άλλες απαντήσεις. 

Δεύτερον, το μνημόνιο είναι καταδικασμένο να αποτύχει ή απλώς δεν έχει εφαρμοστεί σωστά; Βεβαίως το μνημόνιο δεν είναι μια ολική αποτυχία: για παράδειγμα, έχει βοηθήσει στη δημοσιονομική εξυγίανση και παράγει ήδη αλλαγές στην πολιτική οικονομία, στους θεσμούς και στις πρακτικές. Αλλά η κυβέρνηση έχει χειροτερεύσει τη θέση της επειδή δεν έχει πολιτική βούληση. Επειδή φοβάται να συρρικνώσει το δημόσιο τομέα και επειδή έχει αργήσει στο άνοιγμα των κλειστών επαγγελμάτων, έχει υποχωρήσει σε επανειλημμένες αυξήσεις φόρων για να κλείσει τη δημοσιονομική τρύπα. Ως αποτέλεσμα, έχει πέσει κατακόρυφα το διαθέσιμο εισόδημα της κοινωνίας. Δεν χρειάζεται να είναι έτσι τα πράγματα και η κυβέρνηση μπορεί ακόμα να τα διορθώσει. Θα μπορούσε να μειώσει τους φόρους και να δώσει λεφτά πίσω στο κόσμο – για να το κάνει όμως αυτό θα πρέπει να απολύσει κόσμο από το δημόσιο για να πέσουν οι δαπάνες. Ή θα μπορούσε να χρησιμοποιήσει τα έσοδα από τις ιδιωτικοποιήσεις ή από το κούρεμα για τη φορολογική ελάφρυνση και όχι απλώς για την αποπληρωμή του χρέους. Το κυριότερο, αν η κυβέρνηση έκανε μεταρρυθμίσεις πιο γρήγορα θα μείωνε την απογοήτευση και την αγανάκτηση του λαού από την προνομιακή μεταχείριση κάποιων κοινωνικών ομάδων. Καμία κοινωνία δεν έχει υπομονή για πόνο τόσο άνισα κατανεμημένο. 

#5. Η Ελλάδα κινείται προς τη σωστή κατεύθυνση, έστω και με αργούς ρυθμούς. Αν εστιάσει κανείς στο θόρυβο των καθημερινών ειδήσεων, είναι δύσκολο να διακρίνει την αλλαγή, αλλά η ελληνική κοινωνία έχει ήδη αλλάξει. Φυσικά, δεν είναι όλες οι αλλαγές καλές. Υπάρχει αύξηση της εγκληματικότητας και της πολιτική έντασης. Η ψυχική και σωματική υγεία των πολιτών επιδεινώνεται. Και η ξενοφοβία σε συνδυασμό με το χαλαρό έλεγχο της μετανάστευσης μπορεί να δημιουργήσει ένα εκρηκτικό μείγμα. 

Το μέτρο με το οποίο πρέπει να αξιολογείται η Ελλάδα είναι από την εξέλιξη του κοινωνικού και του πολιτικού διαλόγου. Δεν υπάρχουν πια θέματα ταμπού. Μια χώρα στο χείλος του γκρεμού δεν έχει χρόνο για λεπτότητα, διπλωματία ή διγλωσσία. Έχει να αντιμετωπίσει την πραγματικότητα. Φυσικά, δεν βλέπουν όλοι την ίδια πραγματικότητα – διαφορετικοί άνθρωποι έχουν διαφορετικές απόψεις για το πώς η Ελλάδα κατέληξε σ’ αυτό το χάλι και για το πως μπορεί να βγει απ’ αυτό. Αλλά ο διάλογος έχει διευρυνθεί και μπορούμε να συζητάμε θέματα που ήταν αδιανόητα πριν από δύο χρόνια. Η κοινωνία είναι πιο ανοικτή σε νέες ιδέες. Το άνοιγμα, φυσικά, μπορεί να είναι επικίνδυνο αφού κυκλοφορούν αρκετές κακές ιδέες. Αλλά υπάρχουν και πολλές καλές ιδέες, και πολλές απ’ αυτές περιέχονται στο μνημόνιο που έχει δεσμευτεί η κυβέρνηση να ακολουθήσει. Και αυτό είναι ελπιδοφόρο. 

Η Ελλάδα είναι στο Καθαρτήριο. Υπάρχουν εκείνοι που πιστεύουν ότι ερχόμαστε από το Παράδεισο και πηγαίνουμε στη Κόλαση. Σ’αυτή την ομάδα ανήκουν αυτοί που ωφελήθηκαν από το παλιό σύστημα. Υπάρχουν εκείνοι που πιστεύουν ότι ήρθαμε από τη Κόλαση και επιστρέφουμε στη Κόλαση – και έχουν καλούς λόγους για να είναι απαισιόδοξοι. Αμφιβάλλω αν κάποιος νομίζει ότι ήρθαμε από τον Παράδεισο και επιστρέφουμε στον Παράδεισο. Η άποψή μου είναι ότι ήρθαμε από την Κόλαση και να έχουμε μια καλή ευκαιρία να πάμε στο Παράδεισο. Το Καθαρτήριο φαίνεται να μοιάζει στο μνημόνιο. Δεν είναι κάποιο χαρούμενο μέρος, αλλά αξίζει να το περάσεις για όσα θα βρεις στην άλλη μεριά. Παραμένω αισιόδοξος ότι μπορούμε να καταλήξουμε στον Παράδεισο. Αλλά δεν θα εκπλαγώ αν δε το κάνουμε.

Saturday, December 17, 2011

Is the Greek Bailout Failing?

The IMF has just released its fifth review of the Greek program, delivering a sharply negative assessment of the outlook for Greece. In a midst of an ever deepening recession, fiscal and other targets are being revised downward, while 71% of Greeks are against the “memorandum.” If this is not a failing program, then what is? This is, by far, the most common way to look at the Greek crisis. But it has been and it remains the wrong way to look at it. To judge whether the program is failing we have to ask two questions, what is success; and what are the alternatives? When put in that context, it is clear that the IMF-led program is a good thing for Greece, and that Greece is best served by a stricter implementation of its provisions.

The Three Levels of Success

We can judge success on three levels: economics, political economy and political philosophy.

Economics is about Greece’s finances being put on a sustainable path. The relevant metrics are the budget deficit, the debt level, the amount of government revenue and spending, the country’s ability to borrow money from financial markets at reasonable rates, etc. On that level, the program is a failure. Yes, Greece cut its budget deficit in 2010, but it could not keep up on that path in 2011. The target level for debt in 2020 has been revised upward many times: from an initial 118% of GDP estimated in May 2010 to 130% in July 2011 and then to 152% of GDP without the haircut agreement. Government revenues in 2011 were meant to rise by 8.5%; they have instead fallen by 3.1% even after the Medium Term Fiscal Strategy (MTFS) bill passed this summer; similarly, spending was supposed to rise by 6.6%; in fact, spending so far in the year has risen by “only” 6.2% but this is due to the MTFS which targeted a smaller increase of (5.7%). Yields on Greek 10-year bonds have reached 18% - an imperfect but sure sign that markets have yet to buy into the Greek program. As a result, Greece wants to secure a second bailout coupled with a haircut in its existing debt.

A second level on which to judge success is by the extent to which Greece’s political economy is changing. Greece faces three political economy challenges: First, it needs to shrink the public sector and to stop it from being a platform for political favors. Second, it needs to deregulate the economy by abolishing the restrictive and quasi-monopolistic measures that protect a large number of professions (from lawyers to pharmacists to taxi drivers). And third, it needs to crack down on tax evasion by corporations and by individuals in order to boost revenue and enhance the legitimacy of the Greek state.

How is Greece doing on these fronts? On the first, employment in the public sector is supposed to fall by 150,000 from 2010 to 2015 (a 22% reduction). While positive, this will be achieved chiefly through attrition and a more selective reduction in contractual and political employees. However, there no guarantee that once the fiscal pressure dissipates, politicians will not turn, once again, to the state sector to gain political favor. What Greece needs is a system of true accountability coupled with systematic dismissals – as well as a strategy to upgrade the quality of people in the state sector in order to ensure better service provision. Auspiciously, the Greek government, for the first time in a long time, actually knows how many people it employs, which will hopefully make the use of public sector jobs for political gain easier to track and attack. On this front, there is some but limited progress.

How about restrictions in the private sector? On paper, parliament passed a law liberalizing regulated professions in July 2011. But ministries are entitled to ask for exemptions which will be then reviewed by the Hellenic Competition Commission. At best, the exemptions will be mostly about time, giving professions a grace period before new rules kick in; at worst, they will keep protections for politically important professions. It is hard to know what exactly will come from this process but two things are clear: first, the number of regulations will decrease; and second, several professions will remain, in one way or another, restricted.

How about tax evasion? Two realities are clear when it comes to tax evasion: first, the Greek government has not done enough to collect taxes that are owed to the state; and second, that the failure to collect taxes remains one of the most politically explosive issues that continues to feed public discontent and distrust. On paper, there are a number of steps that the government is taking; in reality, few people believe enough is being done. That said, fighting tax evasion requires not just political will but also an upgrading of capabilities, and the government is clearly enhancing its ability to collect taxes by merging functions to boost efficiency, developing its IT infrastructure, simplifying judicial procedures to resolve disputes, and focusing its auditing powers. While these measures may not yield revenue quickly, there is clearly an improvement in the ability to collect taxes – although whether these abilities are deployed properly will depend on the willingness to collect taxes going forward.

From a political economy perspective, therefore, it is hard to call this program a failure – surely, the pace of change is slow and erratic, but reforms are mostly moving in the right direction. Given the scale of change, it would have taken exceptional leadership for things to have moved much faster – leadership that, alas, is in short supply.

The third level is political philosophy, which I define as “the set of boundaries that the body politic places on public life. [Political philosophy] defines what is and what is not acceptable; it delineates what the public can tolerate and what it cannot; and it contains the language and symbols that the public uses to make sense of political life.” This is a battle for the under-40 generation – these are the people whose expectations, values and beliefs will determine what kind of country Greece will be in 2030. The evolution of political philosophy will hinge on how the public answers two questions: first, how did this crisis come about; and second, was getting an IMF bailout a good idea?

“How did this crisis come about?” is the most important question facing the Greek public today, at least from political philosophy perspective. And broadly speaking, the Greek public can seek blame either externally or internally. External blame means to find the roots of the crisis in the international financial system and the greed of bankers in New York and London; or it means seeing the crisis as the result of structural deficiencies of the Eurozone and in the straightjacket that a common currency imposed on smaller countries such as Greece. Internal blame can take many forms but it can focus either on elites (corrupt politicians and the “rich”) or it can focus on the public at large whose chief question has always been “what can the country do for me?”

The second big political philosophy question deals with the assessment of the bailout. The bailout is, in many ways, failing to achieve its objectives. It has pushed the economy into an ever deepening recession and it offers no clear blueprint for regeneration. It is inflicting on society an immense amount of pain through increased crime, physical violence, mental agitation and even outright depression. That much is virtually indisputable. What is debatable is why. Here again, the public can lay blame either externally or internally. External blame would put the onus on the recipe of recommendations proposed by the IMF and the Europeans; it would say that their “austerity” program was doomed to fail and that the results we now see were predictable. By contrast, internal blame would say that this program could have worked if the government was more willing and more capable; and that the Greek public would have supported reforms and would have tolerated pain as long as they saw that it would be evenly distributed.

There are, in other words, four possible outcomes for Greece. The first is a scenario where both the roots of the crisis and failure of the program are judged to have been external: in this case, the Greek crisis was really a European crisis and the Greek people had no real chance to escape it. The other extreme is that crisis was born in Greece and the solutions put in place could have saved Greece if it had been blessed with a better government. This is a view of the crisis that says “made in Greece, broken in Greece.” The other two options would mix internal with external blame: either the crisis was created by foreigners but the Greeks messed up the fixing or the crisis was generated by Greeks but the foreigners prevented us from solving it.

From a political philosophy perspective, the “made in Greece, broken in Greece” point of view is the most desirable one because it is the view most likely to produce change (it is also my own view). If Greece thinks its crisis was created abroad, it is unlikely to do much soul-searching; it is unlikely to probe and ask deep questions. And why should it? If the crisis was born overseas, it can hardly blame itself. In that case, the crisis would produce little change in attitudes, perceptions and beliefs and so little political change.

Of course, it is hard to know where the Greek public will end up – insofar as this battle will be a battle of historical interpretation, there will never be a definitive answer. My view is that a close read of the facts produces a “made in Greece, broken in Greece” view of history – this is a crisis made in Greece, and the bailout could have succeeded with a more resolute and competent government that was faster to cut spending and collect taxes and that really helped trigger a supply-side revolution by opening up markets.

There is also evidence that the Greek public is sympathetic to this view. There is recognition, for example, that chronic corruption and a clientelistic political system helped drive up debt. There is recognition that the rich and even the middle class systematically evade taxes and hence worsen the government’s finances. There is talk of ending lifelong tenure in the public sector, and there was a law to reform (however, meekly) the governing of universities. There is outrage at the excessive salaries in public sector and in state-owned enterprises, and there is growing frustration at the restrictions that certain professions enjoy. And there is also, perhaps most importantly, a strong anchor in the form of external auditors from the IMF and the European Union to ensure that these structural deficiencies remain at the forefront of the public debate.

Therefore, when assessed from a purely economic angle, the bailout is a failure. But Greece’s political economy is changing, however slowly, as its political philosophy. There is a growing constituency that is willing to debate and that wants to change some of the absurdities that pushed Greece into this crisis. The public is talking about issues that it would never raise five years ago. And there is more receptivity that certain long-standing practices need to change. In that sense, this is not a failing bailout.

What Alternatives?

Even if one deemed the bailout to be a failure, we ought to ask ourselves “compared to what?” The alternative to the bailout is a (greater) restructuring of Greek debt coupled with a possible exit from the Eurozone. The oddity about this alternative is that it would have likely produced a better outcome from an economic perspective. The recession would have been deeper but shorter. Wealth would have shrunk by a considerable amount, and for a short period of time, basic goods would have been scarce. But sharp currency depreciation would have stimulated economic activity as would have government spending (by printing money). After a period of greater pain, it is likely that by now Greece’s economy would have stabilized and perhaps even started to grow.

But from a political economy perspective, it is unlikely that Greece would be changing. In a crisis, political interests retrench to protect their privileges – the only force that prevents them from doing so in the current crisis is the IMF and the Europeans. Without such an auditor, it is hard to see Greece pushing for a systematic effort to shrink the public sector, trying to dismantle regulations and restrictions in the private sector, or working to upgrade its capacity to collect taxes. If anything, these practices would become more entrenched as special interests lobbied for protection against the free-fall of an economic crisis.

A similarly bleak outlook would await the country’s political philosophy. A default in mid 2010 would have been seen as being caused by the global financial crisis. The Greek people would have resented the unwillingness of the Europeans to help them out, perhaps triggering anti-Europeanism similar to the current strand of anti-Americanism. In the panic of an economic crisis, it would have had less time to ask questions such as “why did this happen?” It would have had no external pressure to reform and so it would have no chance to have the debate it is currently having – if nothing else, the IMF-led program has forced Greece to catalog many uncharted ills such as the number of public sector employees, the extent of tax evasion and arrears, the amount owed by sectors such as hospitals, and the nature and composition of the state’s assets?

The reason that the bailout is succeeding more than people give it credit for is that it is lifting a mirror that allows Greek society to see itself – and to do so in bad but not catastrophic conditions and to do so also in the company of outsiders who are there constantly and are willing to help. To judge the bailout by this month’s budget deficit or next year’s debt level is necessary, but it is also too narrow and too insufficient. We need a bigger scale and a broader one, and on that scale, the bailout is not as bad as it seems. In fact, it is perhaps the greatest hope for a better Greece.

Thursday, December 08, 2011

How Could Greece Approve the 2012 Budget?

My last post was a scathing review of the 2012 budget and its reliance on a big revenue hike to cut the deficit. The post prompted one reader to ask a great question: “How is it possible for a person to find so many obvious problems with the budget plan, just looking at some plots only one day after data on this plan were released, while a whole government [and its] advisors (from inside or outside Greece) who work on this for weeks (?), months (?) do not notice the issues?” This is an excellent question and it deserves a lengthy answer.

Three explanations come to mind. One is that my analysis is wrong. Budgets are based on projections, which are based on qualitative assessments of a very large number of variables. Different people will see different outcomes, and this is especially true in the midst of a deep recession where so many forecasts have proven wrong. What I tried to highlight is my natural skepticism when numbers are projected to deviate significantly from long-term averages. But deviations are possible and do happen – for example, stricter enforcement of tax collection could indeed raise taxes. Even so, I maintain a healthy skepticism for outcomes that are outside historical ranges without adequate justification.

A second explanation is that the government made a politically convenient choice. When a country has a budget deficit, it has two ways to cut it: raise money or cut spending. In Greece, raising money has been politically easier than cutting spending – it is easier to tax everyone a relatively small amount than to cut the livelihood from a smaller number of politically entrenched supporters. A budget that is more heavily weighted towards revenues rather than spending is a budget that sacrifices economic logic for the sake of political expediency. And it is a signal that deep, structural reform is not a serious priority.

A third explanation is that the pendulum is switching too much towards cutting the debt versus reforming the country. I wrote about this danger in March and in September. The idea is this: there is some tension between paying down debt and reforming the country – there are some policies, such as cutting the number of state employees, that do both. But there are also measures – for example selling state land – that may help pay down the debt but not reform the country. And there are some measures that might help reform (streamline the tax system) but that would make debt dynamics worse. For me, the question has always been: if there is tension what do you pick? I have feared that outsiders (the “troika”) would opt for paying down debt, which is not necessarily what is good for Greece. Greece’s real problem is not debt but the political economy that made debt accumulation possible – that is why I had titled my March post “Debt is a symptom, not the disease for Greece.”

The 2012 budget, for example, has a target to raise €6 bn from privatizations. But this is put in the debt reduction bucket. In some sense, that is reasonable – Greece does need to reduce its debt. But in an economy crippled by high taxation that is killing economic activity and prolonging a recession, the country also needs tax relief to allow families to spend again. Cooler minds could have said, let’s put this revenue not towards paying down debt but towards reducing the VAT and other taxes to return money back to people. The same can be said about the debt service reduction that will come as a result of the haircut (€3.1 bn). In a narrow-minded way, it is being used to cut the deficit – but perhaps it could be used to provide tax relief and hence help kick-start the economy rather than allow for another recession in 2012 (-2.8% is the forecast).

Explanation one says the problem is with me; explanations two and three say the problem is with the Greek government. Either way, the signals that this budget conveys are overall negative – negative for the commitment to reform and negative for the ability to craft economy policy that goes beyond “let’s pay down as much debt as quickly as possible.” And that is no way to start 2012.

Wednesday, December 07, 2011

Does Greece’s 2012 Budget Make Sense?

On December 6, the Greek parliament approved a budget for 2012. The goal is to shrink the deficit from a projected 9% of GDP in 2011 to 5.4% in 2012. But this €8.2 bn adjustment is primarily driven by more revenues – and as such, it is more likely to fail.


For 2011, the Ministry of Finance has projected a €19.6 bn budget deficit; the target for 2012 is to lower this deficit to $11.4 bn. First, the Greek government is negotiating a reduction in its private sector debt (see here); the Ministry of Finance estimates that this haircut will lower interest expenses by €3.1 bn. There is a also category labeled “adjustments” that will *increase* the deficit by €1.6 bn, thus offsetting some of the gains from the haircut. If we assume that these adjustment are a given, on a net basis, the Greek government is left with a need to raise revenues and/or cut spending by €6.7 bn (€8.2 – €3.1 + €1.6 = €6.7 bn).

Of that €6.7 bn, two thirds (€4.6 bn) will come from a revenue increase versus a third that will come spending cuts. On the revenue side, the increase comes from three sources: (a) a 29% rise in direct taxes from individuals; (b) a 217% increase in property taxes; (c) and a 24% reduction in tax returns. On the spending side, the two main sources of reduction come from (a) lower salaries and (b) the unhelpfully named “other spending.”

Let us focus a bit on the revenue side of the equation. In a shrinking economy (GDP is forecasted to fall by 2.8%) collecting more taxes will be a great challenge. What is more, the property tax remains hugely contentious and many people want to not pay it as a form of civil disobedience. As for the budgeted €3.8 bn in tax returns, this is exactly what the government budgeted for 2011 – except that the actual figure out turned out to be €5 bn, which the government attributes to one-off effects.

But if you step back and look at the revenue side more broadly, two figures stand out – both of which are included, by the way, in the budget document itself. The first is the ratio of direct taxes to GDP: since 2004, this number has averaged 9.1% and it has ranged from 8.9% of GDP to 9.5% of GDP. In 2012, the government expects this number to increase to 11.4% of GDP, a full two percentage points higher than at any point since 2004 (and much before that).
The second is tax buoyancy, which is effectively an elasticity which measures how much taxes increase relative to GDP. From 2004 to 2008, buoyancy averaged 1.14 which means a 1% increase in GDP led to a 1.14% increase in tax revenue. That makes sense. Then came 2009 where tax revenues fell at a much higher than GDP, followed by 2010, when buoyancy turned negative because tax revenues rose despite a contraction in the economy. By 2011, however, the relationship returned to a more normal 0.7. By contrast, the 2012 budget is forecasting a -3 buoyancy – which means that not only will tax revenues increase when GDP is shrinking but the tax elasticity will be twice as much as it was in 2010 when the government institute a myriad new tax measures. As I said, these two figures are generated using data directly from the budget – so there is no much ambiguity.
If there is one common theme in the literature of fiscal consolidation is that spending cuts work better than tax increases, a lesson that the Greek government seems progressively intent to ignore. In the case of Greece, of course, this ignorance has both economic ramifications (by deepening the recession) and political ramifications by signaling to the public that higher taxes will take precedent over cutting spending in the inefficient public sector. Neither of these two signals is positive.

When Greece first announced that it would reach an agreement to shave off some of its debt, I noted that the true implications of that decision would depend on what the government did with the reprieve it got: I wrote, “Ideally, the government can put this windfall to good use by providing some tax relief that can stimulate consumption and hence economic growth. Or, it can waste the chance by only relaxing its resolve to reform.” In truth, the government has wasted it by sticking by its plan to keep taxes high rather than cut spending more aggressively. And by signing a budget that tries to squeeze more revenue from an atrophying economy, it is laying the seeds of its own failure. What a shame.

Thursday, December 01, 2011

Markets and Politics in the Eurozone Crisis

Pressure on Italian bond yields is putting the future of the Eurozone in doubt. But with varying diagnoses, and equally varying prescriptions, it is to worth to step back and ask, what kind of a crisis is Europe facing? I see four (overlapping) views with varying validity that translate into drastically different solutions. 

View #1: This is a crisis generated by markets. The international investment community, otherwise known as the "electronic herd" in Thomas Friedman's words, is plunging the Eurozone into a self-defeating cycle: by demanding higher yields to lend money to Europe's sovereigns, it undermines their capacity to repay their debts, fueling a never-ending cycle where higher yields produce even higher yields until a country seeks either a bailout or is forced to default. Embedded in this worldview are two more propositions: the first is that there is an enormous bet on who will default and when, creating speculative pressure on governments; and the second is that markets are impatient and are forcing policy that tries to tame the stock market rather than deal with underlying problems. In that worldview, a solution will hinge on a strategy that contains this yield-rising spiral and will restrain the use of credit default swaps and other speculative bets on the collapse of individual countries. 

View #2: This is a crisis generated by timid European leadership. From the start of this sovereign debt crisis, around March 2010 when Greece started coming under pressure in the bond market, European leaders have taken plenty of little decisions but no big one. In that worldview, the sin is the refusal by Europe (read Angela Merkel) to step in and provide sufficient firepower to quell this crisis before it gets out of hand. Broadly speaking, the demand for leadership takes two forms: one option is to issue Eurobonds that will commit the richer European countries to assume the debt of the more indebted ones and hence bring down yields because markets will focus on German's ability to pay rather than Greece's or Spain's or Italy's. The second option is to let the European Central Bank print money to buy the debt of the sovereigns under pressure. And alternative option, which is less attractive but which certainly has supporters, is to create a proper framework for debt restructuring, similar to the haircut that the Greek government is negotiating. 

View #3: This is a crisis generated by bad economic policy. This view is the Keynesian critique of the crisis and it has no advocate more erudite and more eloquent than Paul Krugman. Simply put this critique says we're worried about the wrong thing. The problem in the Western world is a lack of private demand as economies deleverage from their credit binge - in that world, the obsession with deficits and with debt is misplaced. We should instead be worried about growth - and to generate growth, governments should be running deficits. Otherwise, countries will be caught in an austerity-generated low growth trap from which they will take very long to escape. In that worldview, this is a battle for economic theory and reality - and if the right people could accept the logic of Keynesian economics, perhaps some of our obsession with deficits and debt would dissipate. 

View #4: This is a crisis of credibility towards reform. This is my view. Before getting to this worldview in itself, it is worth thinking about the other three worldviews from the context of the fourth one. 

First, markets are surely being counter-productive and perhaps self-defeating. I am no romantic when it comes to markets – I know too many financiers to be a romantic – but I also know that markets feed on fundamentals. Market can amplify, distort, exaggerate but they rarely create realities. To say that the markets “created” the Greek debt crisis is silly. Blame markets for not waking up sooner but otherwise, this is akin to shooting the messenger. 

Second, it is true that Europe’s leaders have no grand plan to quell the crisis – but it is not clear to me that there is indeed a grand plan (see also here and here). Europe faces a multi-faceted crisis and the challenge is how to solve this crisis without creating the foundations for the next one. If Germany or the ECB were to alleviate the borrowing pressure from the periphery, then what would happen to reform in these countries? The answer is that it could come to a halt. With no reform, these problems will resurface again – ironically those who accuse Germany of merely pushing the resolution to the future are urging it to do the same by postponing the hard political choices that Greece, Italy, Portugal and Spain need to make. 

Third, the Keynesian critique makes sense but with a caveat – macro-economic solutions work better when you have solid microeconomic foundations. When a country is indeed faced with an aggregate demand problem (like the United States) deficit spending that will create growth makes sense even if it adds to the debt. But in a country with several micro-economic deficiencies – rigid labor markets, protected industries, lagging productivity, etc. – the challenge is not to create demand but to make markets work better. And in several countries – certainly in Greece – government spending is a big part of the problem, and markets are right to look at reining in spending as the barometer for the country’s commitment to reform. In other words, the Keynesian critique works but is of limited use for many countries. 

So the problem is that markets are looking around Europe and they see a bunch of politicians who cannot force change in their countries. They doubted Papandreou – and they should have. They doubted Berlusconi – and they should have. Now Papandreou said recently that, “it is unacceptable that [markets] are the ones driving the countries, day after day, hour by hour, not giving their governments the time that democratic institutions need.” 

That’s rubbish – markets are indeed pressuring but they are demanding a commitment to change – if they expected an overnight resolution, they would indeed be unreasonable. But what they crave for it some directional commitment by governments to tackle unions, to collect taxes, to cut down their public sectors. They want commitment and they want seriousness. And as long as they cannot see it, they will not be convinced. In that sense, the European crisis is indeed a leadership crisis – but not a crisis of leadership in Berlin, Brussels and Paris but a crisis of leadership in Athens, in Rome and in Madrid. And that’s where the solutions need to start.