Tuesday, 26 January 2010


It's official - Joseph Stiglitz has come to our rescue, in an article that we are sure to see cited and re-cited ad nauseam for the next few days. His argument goes like this:
  • Greece is not alone in having broken the Stability and Growth Pact. Everyone has, except this once we're not important or powerful enough to get away with it.

  • The EC can afford to disregard some poor conduct from Greece because Greece is nowhere near as systemically important as other members.

  • The EC's hawkish statements and its failure to acknowledge the progress we are making are compounding Greece's fiscal woes by increasing bond spreads.

  • Greece's deficit is not entirely its fault  It's party Europe's fault for not giving us more money

  • Greece has confronted its heritage of dodgy statistics and owned up to its poor practices

  • Greece is a relatively poor country that will be plunged into a very deep recession if we're not allowed to run whatever deficit we want

  • Credit rating agencies are useless at rating debt and they should not be trusted with this role when the stakes are so high.

  • Yorgo personally is a great guy and the EC should back him up. 

I disagree with a great deal of this, and in this I know I am letting down many friends who have welcomed Stiglitz' messianic intervention with much relief. With respect, here are my arguments:

First, the issue of whether anyone plays by the rules anymore. Obviously they don't. But what exactly is Stiglitz' argument? The SGP was the guarantee that underpinned whatever type of solidarity there was between Eurozone economies. That it isn't worth the paper it was written on only suggests that there can be no solidarity between member states. He is right, however, that since nobody gives a hoot about the SGP, bitch-slapping Greece with it is not entirely fair. Why not just allow states to run whatever deficit or debt levels they want?

Credit where it's due. The SGP was rubbish and I agree that as a country we should have opted to set our own rules any way we want. Except of course we signed a treaty to the effect that we would respect the SGP, so perhaps it sets a very poor precedent for the EC to signal it will tolerate the breaking of treaty obligations.

More to the point, we have in the past used the SGP straitjacket as an added guarantee so we could borrow money cheaply. To this day, the suffocating stranglehold of the Eurozone ministers on our finances is the only thing that stands between us and a junk bond rating. What credible guarantee of self-discipline will we be able to offer if the Europeans cannot make us bleed for maxing out our overdraft? And if our own Ministers can't be bothered to bolster our image by refraining from alarmist bull, why should the ECB or the EC supress their thoughts on the actual facts?

So, far from making Greece less creditworthy, hawkish Europeans actually make us more so in the long run. But Stiglitz himself has managed the opposite. As I've argued before, the final guarantee our creditors have is that there is more political capital to be made in Greece from cutting the debt than from adding to it. Stiglitz' remark, on the other hand, has handed anyone who wants to increase the Greek deficit a get-out-of-jail card with at least the liberal part of the political establishment (which, in Greece, is easily 50% of it). This means that it is now politically that much easier for our government to justify an enormous deficit.

Greece's woes, it would appear, are unlikely to cause an EU-wide meltdown - just as Stiglitz argues. Although Europe's banks have lent us some pretty big wads of money, there is no evidence of infection from Greece to our neighbourhood. The point is irrelevant, however. If Spain, Portugal and Ireland were to be given the same amount of slack that Stiglitz wants us to be give (and why not?) they might take it. And if they do, the share of European GDP at risk from massive government deleveraging would skyrocket. The PIGS together account for 14% of the EU's GDP.

The new government has made some very good proposals for restoring credibility. But already the Stability and Growth Programme update shows that we're quite nonchalant with statistics. Our PPP debt, for instance, is largely unaccounted for. And while the EC has applauded us for coming clean with the dodgy practices of the departing government, they also applauded us for our honesty 6 years ago when said government came clean with the dodgy practices of the previous administration. One in which, if any reminder were needed, our own Prime Minister was a Cabinet member. What would be a rational response? Give advice, issue a stern warning, then wait and see. Which is what they've done. The EC can lie on our behalf but that doesn't mean creditors will buy it.

Which brings us to the worst Stiglitz argument of all - it's the EC's fault for not giving the periphery more money. First, in our case that would clearly be throwing good money after bad. We know this and the EC knows this and Stiglitz knows this because our own data show we are amazing at wasting EC infrastructure funds. That is, when we manage to use the funds at all. Second, it's been proven that unless we can shift our budget to investment rather than government wages (which we're not good at doing, especially with other people's money) government spending actually slows economic growth. Finally, we're already prey to the malaise that afflicts all aid-dependent countries: a version of the Dutch Disease where government itself is the bloated export industry, coupled with a perfect environment for corruption. To add to this now would consign the country to stunted growth and financial instability forever.

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