Home > EMU Crisis > It’s the Politics, Stupid!

It’s the Politics, Stupid!

Update: 6/30:  A very interesting piece by BrankoMilanovic, made the same point before me

I have been silent on Greece, because scores of excellent economists from all sides commented at length and in real time on the developments of negotiation, and most has been said.

But last week has transformed in certainty what had been a fear since the beginning. The troika, backed by the quasi totality of EU governments, were not interested in finding a solution that would allow Greece to recover while embarking in a fiscally sustainable path. No, they were interested in a complete and public defeat of the “radical” Greek government.

The negotiation has not been one. The two sides were very far in January, as it is and it should be, if two radically different views about the engines of growth confront each other. Syriza wanted the end of austerity, that was much harsher on the country than expected, while failing to bring the promised benefits, even in terms of public finances’ sustainability. And it wanted the burden of debt to be lifted The troika wanted get its money back (well, not all of it; the IMF has always been open to debt restructuring), and more of the policies imposed to Greece since 2010, because, well, “eventually they will work”. (no need for me to remind with whom I have been siding).

But there was a common ground that, had the negotiation been real, could have allowed to reach an agreement, in just a few weeks of discussion. Both sides agreed that the Greek economy is broken, and that it needs radical reform. While Syriza focused on reorganisation of the State, on putting together a functioning tax collection system, at closing inefficiency loopholes, the troika demands were more “classic” and somewhat ideological: pension cuts, labour market reform, and the like. A continuation of the memorandum, in fact.

If we look at the economics of it, Sequencing is crucial: implementing structural reforms in bad times, when the economy is not able to absorb the short run costs of such reforms, imposes excessive disruption and risks hampering the potential long run benefits. This is why the joint implementation of austerity and structural reforms is particularly pernicious. Their short run contractionary effects reinforce each other and may be self-defeating, leading to no improvement in productivity or in public finances’ health. The dire state of Greece’s economy stands as a reminder that such an outcome is all but impossible. Troika reforms and cuts to public spending were doomed to fail since the beginning.

What happened since then? Well, contrary to what is heard in European circles, most of the concessions came from the Greek government. On retirement age, on the size of budget surplus (yes, the Greek government gave up its intention to stop austerity, and just obtained to soften it), on VAT, on privatizations, we are today much closer to the Troika initial positions than to the initial Greek position. Much closer.

The point that the Greek government made repeatedly is that some reforms, like improving the tax collection capacity, actually demanded an increase of resources, and hence of public spending. Reforms need to be disconnected from austerity, to maximize their chance to work.  Syriza, precisely like the Papandreou government in 2010 asked for time and possibly money. It got neither.

Tsipras had only two red lines it would and it could not cross: Trying to increase taxes on the rich (most notably large corporations), and not agreeing to further cuts to low pensions. if he crossed those lines, he would become virtually indistinguishable from Samaras and from the policies that led Greece to be a broken State.

What the past week made clear is that this, and only this was the objective of the creditors. This has been since the beginning about politics. Creditors cannot afford that an alternative to policies followed since 2010 in Greece and in the rest of the Eurozone materializes.

Austerity and structural reforms need to be the only way to go. Otherwise people could start asking questions; a risk you don’t want to run a few months before Spanish elections. Syriza needed to be made an example. You cannot  survive in Europe, if you don’t embrace the Brussels-Berlin Consensus. Tsipras, like Papandreou, was left with the only option too ask for the Greek people’s opinion, because there has been no negotiation, just a huge smoke screen. Those of us who were discussing pros and cons of the different options on the table, well, we were wasting our time.

And if Greece needs to go down to prove it, so be it. If we transform the euro in a club in which countries come and go, so be it.

The darkest moment for the EU.


  1. RepubAnon
    June 27, 2015 at 8:19 pm

    It seems obvious that one of the Troika’s goals is to virtually eliminate the Eurozone’s social safety net programs. Thus, it is imperative for the Troika to force Greece to a straight austerity-only policy. When Greece eventually recovers, the Troika could loudly proclaim that this was only possible due to “reforming” (i.e. gutting) Greece’s social programs.

    The one thing the Troika cannot allow is for Greece to recover while retaining its social safety net. They’ll do anything to stop this.


  2. jpd
    June 27, 2015 at 8:49 pm

    Reblogged this on DAMIJAN blog.


  3. john
    June 27, 2015 at 9:05 pm

    “Tsipras had only two red lines it would and it could not cross: Trying to increase taxes on the rich (most notably large coroporations), and not agreeing to further cuts to low pensions. if he crossed those lines, he would become virtually indistinguishable from Samaras and from the policies that led Greece to be a broken State.”

    It seems there may be too many negatives in here. I’m confused about the meaning.



    • Bart Rademakers
      June 29, 2015 at 12:39 pm



  4. nemobis
    June 27, 2015 at 10:55 pm

    Curiously found today, may mean something or not: «Economics is in high degree a pedagogical discipline, and an economist must be in close touch with popular psychology in order to know what ought to be said at any particular moment».


  5. PierGiorgio Gawronski
    June 27, 2015 at 11:55 pm

    By the way, how did the Italian government vote in the eurogroup on Greece?
    ‘ Funny how the electorates of individual eu countries are not told what stand their own governments are taking in the eu negotiations


  6. stearm74
    June 28, 2015 at 1:44 am

    It was clear already in 2010 when Merkel, worried for a local election, turned her back to to Greece at the first signs of a confidence crisis. But this is a total feature of the post-Cold War generations of politicians in Europe: they simply have no idea whatsoever of what they are doing and, hence, of what politics is. Angela Merkel is probably the most ignorant politician of the last 2.000 years.


  7. juhavs
    June 28, 2015 at 7:27 am

    Actually the positions of Syriza Government and those of the Troika have been farther from each other. It is true that Tsipras et al. made many painful concessions as far as the short-term agreement was concerned. But this all was for “building trust” however macabre this may now sound, so as to get the “partners” to finally discuss seriously the absolutely vital longer-term issus of debt restructuring and support for an investment program. Tsipras et al. have been perfectly aware that the Toika offers would mean continuing the austerity, but with a sound longer-term agreement and with their own priorities (redistribution in favour of poorer Greeks etc.) this ordeal migth be tolerable in the end. But they were given nothing,

    Troika was simply hell-bent on destroying the political mandate the Syriza governement had acquired in the elections. Having a referendum is a vital step in defeating any de facto (or even de jure, say, suspending the Membership of Greece in European Union) coup attempt from the Troika side. If Syriza now gets an even stronger democratic mandate, this will create problems for Troika, because then Troika’s means of punishment will be shown much more limited than what appear to be at first sight.

    For while the legal frameworks of Euro and European Union support in a way the relentless austerity policies the Troika has been demanding, they do not provide any effective tools to force the Greeks to capitulate. After all, there is no way a Member State can be forced out of the Euro, short of a voluntary exit from the European Union. So, no matter how much the Troika wants to punish the obnoxious Greek rebels, the Euro and European Union legal framework still legally obliges (at least) the Eurozone and the ECB to contribute to monetary, financial and economic stability in Greece. As long as the Syriza government can retain the active support of enough Greeks for resistance, the Troika will face problems it is not well-prepared to meet.


  8. Serge d'Ago
    June 28, 2015 at 9:19 am

    alas, it’s not politics, it is technocraty, stupid! Or stupid technocraty! And of course, not Democracy.


  9. June 28, 2015 at 2:39 pm

    Austerity as a cure for recession is not unlike leeches as a cure for fevers.


  10. hanno achenbach
    June 28, 2015 at 4:59 pm

    Conspiracy theories. O si tacuisses… Much better to let other economists do the talking.


  11. Patrick VB, Brussels
    June 29, 2015 at 11:32 am

    The EU institutions, and even more so the Euro Area ones, are in fact a “Select Club” where decisions are taken by consensus on the basis of politics, with no room for technical analysis like economics. Politics are about opinions and since the 1980s, the prevailing ones in the EU are budgetary orthodoxy, in reaction to the turbulence of the 1970s. This molded the institutions and framed the policy debates, leaving next to no room for diverging analyses; politics ruled and economics was expected to submit to politics. Greece was expected to abide by the decision of the Consensus, largely built around the views of the large Member States. Syriza chose to give primacy to the voice of the Greek people and contested the principles of EU governance, invoking the primacy of analysis and economics before consensus opinions. It is this that caused the “breakdown in trust” and decision to make Syriza pay for breaking ranks. Dijsselbloem (chair of the euro group) and colleagues are furious at Syriza for choosing Greek people instead of the Euro Area colleagues and their opinions.


  12. hanno achenbach
    June 30, 2015 at 6:21 pm

    As the link to Branko Milanovic shows, it’s always nice to have others that believe in conspiracy theories.

    And northern Europeans will be struck by the fact how popular conspiracy theories are with economists, journalists etc. with southern European names.

    Cultural differences?


    • July 1, 2015 at 1:59 pm

      Mr Achenbach, I never reply to comments to my posts, not even when they are full of trivialities and false claims as yours are. Or when you mistake the exposure of a clear political agenda with a conspiracy theory (I understand the nuance is too difficult for your mind full of certainties to grasp).
      I make an exception for your latest, that is borderline racist. I expect your public apologies, or you’ll have the honor to be the first commentator I ban in my life. This will, I am sure, confirm your opinion that the southeners are lazy and dangerous.

      By the way, would you mind telling the readers of this blog what are the academic credentials that allow you to insult Prof Milanovic, one of the most respected and well published experts in the field of macroeconomics and development economics? I am sure those you inflict your comments upon, will be happy to know on what second rate magazine you form your opinions.
      (not) cordially
      Francesco Saraceno


      • hanno achenbach
        July 2, 2015 at 9:33 am

        Mr. Saraceno,

        Branko Milanovic is a highly respected economist in his line of work – the greater my surprise when he dabbled in conspiracy theories. It showed a view of the world surprising in one who worked with the World Bank. Your views are less surprising, but I greatly appreciate your very well-made graphs.

        I am not aware that discussing cultural differences is racist – after all, that is a current explanation for Greek (and Italian etc.) attitudes to paying taxes (Ottoman domination and all that). And northern Europeans are supposed to be so protestant.

        As for my reading: Frankfurter Allgemeine Zeitung, New York Times, Le Monde, Der Spiegel, London and New York Reviews of Books. I follow the blogs of Paul Krugman, Simon Wren-Lewis, Brad Delong (the best of all) and Greg Mankiw (the latter being less instructive because it is not so frequent). What further second-rate magazines would you recommend?

        I studied a year in Paris and am fully aware that Southerners can be very hardworking. It is well known that Greeks work much longer hours than Germans. That, by the way, is the reason why structural reforms are necessary so they can reach the same results.

        I do not think that southern Europeans are dangerous. (Actually, nobody in northern Europe believes that – is that racist?)

        It was not my intention to overstep the very wide limits of criticism usual in blogs. If I have done so, I fullheartedly apologise to anyone whose feelings I have hurt.


  13. nemobis
    July 14, 2015 at 11:10 pm

    http://www.esm.europa.eu/pdf/ESM%20Treaty%20consolidated%2013-03-2014.pdf and https://www.consilium.europa.eu/en/press/press-releases/2015/07/pdf/20150712-eurosummit-statement-greece/ are an interesting read. Funny how the ESM assets and staff are extraterritorial; curious how the eurosummit statement uses the harshest words and measures possible to make sure it’s seen as a protectorate, while being very generic on the austerity measures (e.g. no surplus numbers, only the adjective “ambitious”). How weird.


  1. June 29, 2015 at 5:56 pm
  2. July 2, 2015 at 3:39 am
  3. July 5, 2015 at 11:00 pm
  4. July 5, 2015 at 11:08 pm
  5. July 6, 2015 at 1:03 pm
  6. July 9, 2015 at 4:03 pm

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