Greece, austerity and reform

One of the ironies of the Greek predicament is that thanks to the previous Greek government the state deficit there reached low levels, beneath the EU ceiling and considerably better than some of the countries judging the Greek response. Unfortunately for Greece the election of a higher spending government coincides with the need to repay debts and to recognise that a low deficit was reached only after the most massive build up of debt which is now difficult to afford.

In the Eurozone France, Portugal and Spain are unable to get their state deficits down to the 3% maximum permitted, though they are more  hawkish over what to do about Greece. Germany has eliminated her deficit, just as many wish she would spend and borrow more to reduce her surplus and provide some stimulus to other parts of the zone.

The so called negotiations are bizarre. Greece says she does not want any more debt and wishes to make her own decisions about social and economic policy. The troika, renamed the “institutions”, remind Greece that she is borrowing more and needs  permission to do that under the Euro scheme. The price of more borrowing, to repay old debts and pay local bills, must be that Greece accepts the reform agenda of the Eurozone. Greece responds that she will not follow Euro austerity policies, labour market reforms and the rest which Syriza sees as damaging to the Greek chances of growing again.

The European Central Bank wishes to stop Greek commercial banks buying Greek government bonds and demanding financing from the ECB to help them do so and to pay for the deposits that are being withdrawn. The institutions want the ECB to go on  financing Greece – or allowing Greece to finance herself by selling more Treasury bills – whilst they see if they can broker an agreement.

The troika briefs that they can live with Greece leaving the Euro if she will not  accept the old medicine of the zone and the loan agreements. Few believe them. The Greek government briefs that they do not need new loans and are planning to do only what they want to do, which is mainly to spend more. Few believe them.

The truth is the two sides are locked in an acrimonious marriage where neither seem to believe in divorce. Both think they need each other, whilst disliking each other and telling the outside world they are just fine leading their own lives and having separate bedrooms.

How much longer can this go on? How much more damage will this scheme do? All the time the two sides bicker, half of all Greek young people remain out of work. None of it is a great advert for people to take a holiday in Athens this summer.


  1. Lifelogic
    March 22, 2015

    Indeed, is there no end to the insanities of the EU and politicians? Just how may jobs and lives do they want to destroy, how may more years will they continue?

    1. Hope
      March 23, 2015

      What has Cameron said to speak out about the lunacy of the EU? Why has he allowed changes without anything in return? I can only recall one party that has, UKIP.

  2. Lifelogic
    March 22, 2015

    JR what/who on earth is driving this subletting nonsense in the budget? How can anyone be so stupid as to make such a totally moronic proposal? Where is the insanity coming from?

  3. Richard1
    March 22, 2015

    Clearly it would be better for all if Greece left the Euro. There would be an initial shock, and of course losses for creditors as debt is re-denominated. Greeks would be much poorer but at least they could stand on their own two feet and start selling yogurt, holidays, boats or whatever else they think they can do competitively. They could stop begging and there would be no point blackmailing.

    Of course they would need to pursue policies which enabled them to access capital markets. And here we should remember that its not the euro as such which has caused these problems, it’s governments building up debt and failing to implement supply side reforms in the past. The euro just brings the problem to a head. Britain would have gone the same way had Gordon Brown and the Labour Party continued with their tax spend and borrow policies. Let’s not risk that again.

  4. agricola
    March 22, 2015

    Your acrimonious marriage simile is most apt. You might have added that in reality the EU is the demanding mistress rather than the wife. The partnership under strain is between the Greek government and the Greek people even though they were trying again by electing Syriza. I would suggest the mistress has to go along with her Euro.

    Greece and her people have great assets in terms of tourism. Were these assets to be at half the price they are now, due to a reversion to the Drachma, Greece might get back a thriving economy from which, if they choose, they could pay for the lifestyle they aspire to.

    It is just a matter of having the political courage to do it.

  5. Mark B
    March 22, 2015

    Good morning.

    And how is the tiny island nation of Iceland doing these days ? We do not seem to be hearing much about them, do we ? I wonder why ?

    The Greeks want their cake and eat it ! They cannot, as it is not their currency. Someone really needs to tell them this. Their government needs to tell them this. They also need to be told, to pay their taxes. If they want all these goodies, then they will have to pay for it. It is not like it is here in the UK or the US where the central government will step in, Germany does not want to be lender of last resort and, until the project is completed and we have FULL UNION, this will go on and on.

    Why is it that I, and many of the people that contribute to this ‘diary’ can see this, yet, the whole of Greece cannot ?

    The German’s believe in sound money, which both I and the late Lady Thatcher did. Everyone else, including the UK, do not.

    1. agricola
      March 22, 2015

      Iceland did not bail out it’s banks. Exactly what it did I know not, but assume that it treated banks like any other insolvent business and let them go to the wall. Who suffered because of this again I know not, but since the bank defaults, their deficit to GDP percentages look much better than those of the UK.

      2008 -13.5%
      2009 -9.9%
      2010 -10.1%
      2011 -5.6%
      2012 -3.8%
      2013 -2.1%
      2014 -2.0%
      2015 -2.1%

      The UK achieved the same percentage in 2010, but we remain at around double the Iceland percentage all the way to 2015 at -4.1% which I assume is a forecast.
      It is more than likely that choosing to bail out our failed banks might have something to do with this.

  6. Alan Wheatley
    March 22, 2015

    Is not one factor in this farce the fact that poor performing countries in the Eurozone help keep the exchange rate for the Euro low, and there by help exports, which is an ideal condition for Germany?

    I recall Gordon Brown (when Chancellor) telling the North of England to stop complaining that the Pound was too high as it was at the right rate for the UK as a whole (i.e. for the London and the Home Counties). But, typical of Brown, rather than going himself to the hard done by regions to tell them that they had to take one for the team, he delegated the job to Eddy George.

  7. agricola
    March 22, 2015

    I am somewhat confused when you quote France, Portugal, and Italy as having Deficits in excess of 3%. According to the published OECD figures:-

    France was -2.5 in 2014 and -1.4 in 2015
    Portugal was -2.4 in 2015
    Italy was -2.9 in 2012, -2.8 in 2013, -2.7 in 2014, -2.1 in 2015

    It seems strange to me to publish figures for 2015 but then they may be for the year up to 2015.

    Incidentally the UK and Spain have never come anywhere near -3.0% We in the UK have managed to come down from a peak of -11.0% in 2009 to -4.1 % in 2015

    Can you clarify matters.

    Reply France is over 4%. Spain also. Italy may stay below 3% so have amended.

    1. agricola
      March 22, 2015

      Sorry I miss-typed France. According to the OECD Government Surplus/ Deficit figures as a percentage of GDP France is :-

      2010 -7.0%
      2011 -5.2%
      2012 -4.9%
      2013 -4.3%
      2014 -3.8%
      2015 -3.1%

      Yes Spain is :-
      2012 -10.6%
      2013 -7.1%
      2014 -5.5%
      2015 -4.5%

      Yes Italy looks good at below -3.0% since 2012

      You need to always remember that in Spain and Italy there has always been a sizeable black economy and no doubt more so of late, so it should be a case of caveat emptor when looking at official figures.

      Greece is even more suspect. In 2013 they were -12.7% but miraculously dropped to 2014 -2.5% and 2015 -1.4%. Up to 2013 they should never have been allowed into the Euro, but I imagine the political imperative in Brussels overcame logic.

      Reply France will not be at 3.1% this year, and have just been given more grace over their excessive deficit (under EU rules)

  8. Brian Tomkinson
    March 22, 2015

    The EU ‘project’ cannot be allowed to fail. Whatever misery is inflicted on the people of any EU country, the bureaucrats and politicians in the EU and that country will collude to ensure that the overriding ambition is not derailed. That includes the UK under any of the current three main Westminster parties.

    1. Lifelogic
      March 22, 2015

      Indeed that is the position and Cameron is very clearly signed up to it.

      Why else would Cameron & Osborne be putting such a pro EU, socialist, greencrap agenda to the country when he must know that with a visionary agenda of cheap energy, lower taxes, far less EU, less government and a fair deal for the English the Tories would romp home.

      The budget for a pre election budget was totally pathetic, the only positive is just how useless Miliband & Balls are. To lose to Miliband and the Scot Nationalists would be quite an achievement even for Cameron – but then he could not even beat sitting duck Brown conclusively.

      1. ChrisS
        March 23, 2015

        Why else would Cameron & Osborne be putting such a pro EU, socialist, greencrap agenda to the country when he must know that with a visionary agenda of cheap energy, lower taxes, far less EU, less government and a fair deal for the English the Tories would romp home.

        Lifelogic, you put this so well.

        I simply can’t understand Conservative policy being so at odds with the mostly right of centre English heartlands. I find it extraordinary that the majority of English MPs from the party either think the same as Cameron or lie down quietly and vote through all this crap, green and otherwise, through the division lobbies.

        Never was the term Lobby Fodder more true. ( present company accepted, of course. )

    2. Timaction
      March 22, 2015

      Indeed. I’m just at a total loss to understand why the cartel legacy parties are so overwhelmed with being in the EU dictatorship as the costs v benefits argument was lost years ago. We now all know the “project” is to create a United States of Europe against the peoples wishes. We don’t have to be in the EU to trade with its members!

    3. Barry Sheridan
      March 23, 2015

      Quite right Brian.

  9. Denis Cooper
    March 22, 2015

    I still hold that the chance of Greece leaving the euro is low, just as a guess maybe 10% or even less. Not only do almost all of the Greek politicians want Greece to stay in the euro, so do most of the Greek people; but much more importantly almost all of the political leaders in other EU countries – and I do mean EU, not just eurozone, countries – want Greece to stay in the euro. And the reason for that is very simple: “ever closer union” is by definition meant to work in one direction only, it would be anathema for a country to join the euro and then later leave it, and so every effort will be made to prevent that from happening. In the end there will be some kind of fudge which does a little to alleviate the hardship of the Greeks but preserves the present eurozone intact so that it can continue its expansion, and eventually engulf us as well. Whether or not it is true that the UK government has already started preparations to join the euro in 2018, as claimed by one person commenting on this blog, there is no doubt in my mind that despite any denials this is what those leading all of the old parties really want to happen eventually.

  10. William Long
    March 22, 2015

    The way this has been allowed to drag on by both sides, apparently without any concern for the sufferings of the Greek people, and in particular its youth is indeed a terrible tragedy. It encapsulates everything that is wrong with the EU and the Euro: two institutions based on nothing but wishful thinking and the greed for power of a gang of bureaucrats, most of whom have failed to make the grade in their own countries.
    The one thing that has arguably been gained for Greece by the delay is an improvement in the environment in which she would leave the Euro if she did so now as opposed to a year ago. The price of oil, which is one of Greece’s major import costs, has fallen significantly, and the Euro itself is lower.
    The question that interests me is how long it will be before the Greek people wake up to the fact that they elected a government on a false manifesto and what they will do when that light dawns. The best that can be hoped for is that the Greek government will realise before that happens, that their only hope of saving the Greek economy is to go it alone outside the Euro.

  11. Denis Cooper
    March 22, 2015

    Off-topic, this made me laugh:

    “The attack is part of efforts “to dispel the myth” that an SNP vote will bring in a Labour government, Labour sources say.

    Discussions are also underway to commemorate the 28 March anniversary of 11 SNP MPs joining the Tories to help vote down Jim Callaghan’s government in 1979.

    The historic vote led to the election which brought in Margaret Thatcher and heralded 17 years of Conservative rule. Proposals to mark the day include wearing a black arm band and laying a wreath at the miners’ memorial.”

    Now, I’m not a Thatcher fan, in fact I think her enthusiasm for the EEC/EC/EU project did enormous harm and that is not somehow cancelled just because she later came to regret it, but on the other hand she also did a lot of things which were good; and frankly I think that the people behind this black arm band proposal are not just taking a rather unbalanced historical view, but are probably rather unbalanced themselves.

    1. Richard1
      March 22, 2015

      Margaret Thatcher believed in a trade focused EC/ EU, believing freer trade means more trade and that’s good for prosperity. In the context of the 1970s / early 80s, she probably also believed the single market would act as a bulwark against the threat of quasi-soviet socialism represented by the Labour Party. If I’d been a citizen-slave eg in East germany, I would have been quite happy to make some sacrifices of sovereignty (meaningless anyway in a socialist dictatorship) for freedom.

  12. Lindsay McDougall
    March 22, 2015

    The Greeks must be made to understand that, if they want to reinstate some of the old unnecessary public expenditure, they must raise more taxation and/or sell off assets. It’s still austerity, just a different type. There is a lot of tax evasion / avoidance in Greece – start by tackling that.

  13. Bert Young
    March 22, 2015

    I had to grin when looking at the photograph of the Greek Finance Minister’s House – it was a luxurious contemporary mansion with large swimming pool ; it was available to rent for a large sum of money !.Presumably the income from this property would be made available to offset some of the country’s debt .

    The hypocrisy of the Greek position is the fact that the discipline required for them to change their ways is unlikely to happen balanced by the intransigence of the German attitude to retain their surplus . Stalemate is the most likely result with the stand-off of both sides rattling the entire EZ .

    Greece must exit the EZ and return to their own comfortable laid back way of life . No supervising discipline will be able to sustain the period of time necessary for Greece to meet the standards required . There are other parties in the Southern sector of the EZ| flexing their muscles and wanting a bigger slice of the pie . I don’t believe in miracles – the only solution to the EZ mess .

    1. Richard1
      March 22, 2015

      Yes – Typical Marxist humbug

  14. Andy
    March 22, 2015

    Greece is bankrupt. End of story. The EU are foolish to advance this new administration a single Euro as they have no respect for agreements already made.

    Greece needs radical reform and that reform (much as here) should start with the stupid tax system. Many of my friends in Greece are taxed on ‘assumed income’ so they get idiotic tax demands in one case for more then their income. This is mad and unjust.

    1. waramess
      March 22, 2015

      You have taken the words from my mouth.

      Lots of fancy words but, they are broke, busted, a basket case and, the only answer is default, sooner or later.

      How can a government with such a small tax revenue base repay such a big percentage of GDP? They can’t; but the EU will continue to kick the can down the road to avoid the ultimate conclusion. And, the Greeks know it.

    2. Iain Gill
      March 22, 2015

      Plenty of developed economies living way beyond their means, in massive debt, reliant on people being prepared to extend their credit line every single day…

      The UK being one

  15. Leslie Singleton
    March 22, 2015

    Especially given the very significant conflict of interest that the overpaid and pensioned boneheads in Brussels have, nothing is likely to happen that might involve the smallest risk of the EZ, and then the EU, unravelling. Trouble is it becomes more and more obvious that Greece doesn’t belong. This has not been surprising for a long time. Germany produces BMW’s and Greece olives (second grade, behind Italy). Apart from expansion come what may (aka further self aggrandisement for those in Brussels) there was no (actually negative) reason for Greece to join. Exactly how badly is Turkey doing (or not) outside the EU? And Greece I would have thought would be streets ahead of Turkey in terms of tourism.

    1. Leslie Singleton
      March 22, 2015

      Postscript–And then there is the not so small matter that the Greeks and the Germans simply hate each other

      1. ChrisS
        March 23, 2015

        Leslie, I think you’re only half right here :

        The Germans don’t hate the Greeks they just think that they don’t matter and should be able to ignore them. Obviously in a club like the Eurozone where each country has a vote, the Germans are gradually being outvoted on issues and that does not go down at all well in Berlin – or Dusseldorf or Munich for that matter.

        Greece, like all the smaller countries in the EU, has come to expect the Germans to continually put their hands in their pockets and hand over huge wads of Euros.

        No taxation without representation goes the cry :

        Well, if you’re a German and are expected to pay up, you surely feel you should have a right to have a majority say in how your money is being spent. Not see it disappear down the black hole that is Greece.

        The problem is that, despite all the sneaky mechanisms they come up with that provide a fig leaf to keep Greece afloat, everyone including the youngest German Apprentice knows it will never be able to repay what it has already borrowed, let alone any more.

        Whether she likes it or not, sooner or later the Germans are going to force Frau Merkel to say No.

    2. stred
      March 23, 2015

      Greek olives second grade? The Ed should have put in a word for Kalamata olives, which are grade 1.

  16. forthurst
    March 22, 2015

    Syriza is a breath of fresh air, its finance minister wears a bomber jacket, after all; things are going to be quite different this time; outcomes that is. Unfortunately, without fundamental change to the system which has brought Greece to where it is now, i.e. membership of the Eurozone, the new Greek government is finding that phantasising about a different outcome and selling their castles in the air to the electorate is worlds away from creating the conditions under which a meaningful turnaround in Greek fortunes can be achieved.

    The Euro was sold to us, as to elsewhere, as the magic mix that would change behaviour by enforcing good governance from the top and with compliant populations to work towards the common goal of a Europe of nations that would gradually coalesce into one new nation called Euroland in which the strivings of Greeks and Spaniards became as productive as those of the notoriously productive Germans, (although we were not actually told about the intended end game). Nothing like this has happened, anywhere. On the contrary, some countries and their populations have behaved with less discipline under the Euro, less Germanically, borrowing enormous sums from banks to buy German cars whilst building nothing more than housing bubbles and piles of debt whilst maintaining their own regional variants of Spanish practices, which the Troika, sorry, Institutions would like back. Now a large part of Euroland is saddled with an enormous burden of debt which they are expected to pay off by having half their youth unemployed.

  17. petermartin2001
    March 22, 2015


    The situation in Europe is bizarre as you point out out. But if we look at the sectoral balance equation we can start to make some sense of what’s going on there.

    Government Deficit = Savings of Private Sector + Current Account (Trade) Deficit.

    ” thanks to the previous Greek government the state deficit there reached low levels”

    Yes that’s because Greeks, in general, are too poor to save very much or afford many imports right now.

    Germany has eliminated her {Govt budget} deficit

    Yes. That is because , even though the Germans are big savers, they also run a large trade surplus. The two counteract each other.

    France, Portugal and Spain are unable to get their state deficits down to the 3% maximum permitted

    That’s because things perhaps aren’t quite so bad there. The population (companies and individuals) are still managing to save and still manage to buy slightly more imports than the “instutions” would like.

    The key point to notice that Governments can’t control their deficits (or supluses), as they think, by the process of spending and taxation adjustments. Ultimately, what defines those deficits and surpluses, is the desire of the population to net spend (reducing Govts deficit) and net import (increasing Govts deficit). Cutting spending and raising taxes can only work, as its only worked in Greece, by making the population poorer.

    Any arbitrary limit on the Government’s deficit, like 3%, is absurd. Why 3%? What is special about that number? The Euro governments cannot control their trade with either tariffs or adjustment of their currencies’ valuations. The euro countries, as Paul Krugman patiently explains, are being asked to do the impossible. That’s why it’s a multiple marriage from hell (its not just Greece and Germany) at the moment.

    The alternatives are to scrap the euro or apply some sensible economics to the problem.

    1. Edward2
      March 22, 2015

      I don’t agree with your statement that Governments cannot control their deficits.
      They can.
      They can set their policies on tax and borrowing and spending and allow a little in reserve for unforseen problems.
      Its all about budgets and sticking to them.
      The problem is MPs need to be re elected every few years and they resort to bribing us with money they haven’t got to gain our vote.

      1. petermartin2001
        March 22, 2015


        Most classical economists would agree with you. But, on the other hand most classical economists haven’t changed their view on what money actually is since the days when a unit of money was a fixed weight of gold.

        The euro rules, written in the so-called Growth and Stability Pact, were their creation. They should work according to their theory. They don’t work according to the experimental results of the euro system.

        Modern money hasn’t anything to do with gold any more. It is just an IOU of sovereign government. Governments create them when they spend -they destroy them when they tax. To run a surplus means they have to destroy more than they create.

        Is this really possible? I’d say it isn’t – at least not sustainably.

        So if we consider the money flow from government to the population and back again we only need to ask what might impede that flow. What stops all issued money from coming back? It’s savings. If I put a £5 note in my piggy bank it’s fully protected.Unless the government forcibly stop people from saving their money, which I for one would not agree to, then they are bound to have less IOUs coming back than go out.

        There’s nothing they can do about that.

        1. Edward2
          March 23, 2015

          You assume money only travels back and forth between the State and citizens.
          It does not.
          Most transactions are between citizens. They have access to cash, they can borrow, they can sell assets, they can offer goods and services to others which creates wealth. Or they can barter.
          Independent from the State.

          “to run a surplus they (the Govt) have to destroy more than they create”, you say.
          Well I don’t agree because if you were correct, deficits would make nations more wealthy and nations with surpluses would be poor. Plainly that doesn’t happen now or in the past.

          Perhaps we disagree on Keynes’s definition of long term and short term. In that whilst in the short term Govts can run deficits but in the long term they cannot.
          Just printing money without equivolent growth in the value of wealth in the economy will just bring about a gradual dilution of the value of the paper money you hold.
          It would be nice if the magic money tree existed but it does not.

          1. petermartin2001
            March 23, 2015

            You assume money only travels back and forth between the State and citizens.

            No. State money starts off its life when Govt spends, and ends it when it is collected by the State in taxation. Of course there can be many intermediate transactions as part of that process.

            The lower the level of taxes the more intermediate transactions there will be and vice versa. Too many transactions can cause inflation. Too few will bring about recession and unemployment.

          2. Edward2
            March 24, 2015

            Only some of it.
            Tax is always less than 100%

          3. petermartin2001
            March 24, 2015

            Yes of course tax is always less than 100%. That just means that there’s a chance that any particular unit of money won’t be destroyed by government taxation on any one particular transaction.

            It might live to see another day and another transaction. But, sooner or later, it will come to grief! Pounds don’t live for ever!

      2. Narrow Shoulders
        March 22, 2015


        The solution to the problem – budgets (structural and fiscal) must be balanced over the lifetime of the parliament. If the five year rule is repealed (as it should be) a government can not voluntarily go to the country with an unbalanced budget.

        An opposition would need to be fairly sure of its policies to bring a no confidence vote on deficit cycle.

        1. Narrow Shoulders
          March 22, 2015

          For the Keynsians on the site a sensible forward thinking government will build up a surplus in the first few years in case of a recession needing stimulus. Without a recession there would be plenty to give away in the fourth and fifth years.

          1. Edward2
            March 23, 2015

            I think thats a decent idea but worry if 4 or 5 years is enough time to do this.

        2. petermartin2001
          March 23, 2015

          @ Narrow Shoulders,

          Your idea that the govt surplus should be in surplus, part of the time, and in deficit, some of the time, is fine for an economy which also has balanced trade.

          However, if the trade is in deficit, on average, then so must be the government’s budget. If money is net leaving the economy it needs to be replenished to prevent recession.

          Conversely, if trade is in surplus then, on average the govt’s budget must be in surplus too. On average. If money is net entering the economy, it has to be removed in taxation to prevent inflation.

          1. Edward2
            March 24, 2015

            As usual you confuse money supply with State spending

  18. alan jutson
    March 22, 2015

    Afraid the simple answer is John, many politicians are in politics for the wrong reasons.

    Hence the reason why we have the EU and National States almost at Financial war with each other.

    I see we have another scandal today, this time with a Conservative candidate.

    During the last decade we have been surrounded by so many scandals involving all political Party’s, I really do wonder if it is time to set some benchmarks for both capability and honesty before you can apply to become an MP.
    Clearly the individual Party’s appear not to be attracting the right people of late, so perhaps it should be a case of vetting (same rules for all Party’s) all newcomers who wish to apply.

    Clearly self regulation is not working.

  19. bigneil
    March 22, 2015

    I’m only surprised we haven’t heard of thousands of Greeks turning up here and sticking their hands out, for their free lives on the taxpayer. Everyone else does. We pay for it – everyone else can use it. I would love to know how many people have turned up, contributed nothing, but costs us God knows what. I don’t suppose those figures would ever be published due to the amount of votes it would cost your party.

    1. Anonymous
      March 22, 2015

      Big Neil – It’s not just those turning up with their hands out. There are those getting sought after jobs with training and pensions that Brits are desperate for.

      There are also rents being driven up in university towns by foreign students. Pardon me. But I thought our universities were for educating our children.

      Dr Redwood. Does being British actually count for anything here anymore ?

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