Big Deal? Try “No Deal” on the Greek Debt

No Relief for Greece

There is a famous joke about Stalin and Trotsky, in which sometime in the early 1930s, the former receives a telegram from the latter with the message “I should congratulate you. You have built socialism.” Overjoyed, Stalin calls in an advisor to show evidence of the great traitor’s recantation. The advisor looks at the telegram and says, “Comrade Stalin, there are a question marks at the end of both sentences”.

I was reminded of this story when I saw the headline in the Guardian of an article by Larry Elliot, “The Greek Deal is a Classic Fudge – but should work for now” (EconomicsBlog by the Guardian Team, 27 November 2012). A question mark at the send would be singularly appropriate. “Fudge” and “work for now” are serious misinterpretations. The agreement reached by “European governments and the IMF” (“EU and IMF agree tentative deal to cut Greek debt”, Guardian, 27 November 2012) is not a “fudge”, nor will it work, now or ever.

The putative fudge in question results directly from the German government blocking the effective solution, which is forgiving the vast majority of the Greek debt and ending the austerity conditionality on the Greek and other euro zone governments. For example, we read in the Guardian article, “German finance minister Wolfgang Schäuble told reporters that a debt cut was legally impossible”, a position consistently taken by his government and advocated with zeal by the Bundesbank. They are not fudging, they are consciously blocking.

The agreement does not work because it fails to address the Greek fiscal imbalance, aka “deficit”. This word does not appear in the Guardian main article and only once in Elliot’s commentary. It is the essential issue. Public debts result from public sector fiscal deficits. Reducing, refunding or rescheduling debts achieves little if the deficits that generate them do not decline.

Fiscal balances improve when economies grow, because 1) growth increases business and household income and, therefore, the taxes they pay; and 2) growth reduces unemployment and poverty, lowering counter-cyclical benefit payments. At the end of 2011 the Greek fiscal balance registered about minus nine percent of gross national product. A sustainable debt requires that this deficit-GDP ratio reach a level consistent with a falling debt-GDP ratio. Early next year an academic journal will publish a paper of mine in which I estimate that the growth rate necessary to lower the Greek deficit-GDP ratio must be greater than four percent (paper available on

Growth itself, at any pace, requires an end to the draconian austerity packages imposed on the clearly reluctant Greek government (not to mention the suffering Greek people). Budget cuts and tax increases do not reduce deficits when the private sector is in recession, deep depression in the Greek case. The new agreement on Greek debt reinforces and intensifies austerity measures. Far from a solution or even temporary relief, it intensifies the basic problem.

The mechanics are simple: cut expenditure and raise taxes; domestic demand falls with no export compensation because the Euro zone itself is in recession; and GDP declines, the denominator of the deficit/GDP fraction. At best the deficit goes no deeper into the red.

The new agreement is not fudge, it is the conscious pursuit of ideologically driven austerity. As a result, the deficit will persist close to its current level, inexorably replenishing the public debt and inexorably deepening the crisis of the European Union.

The Message from Catalonia

Simultaneously with the faux relief of Greek debt, we received a clear and powerful message from Catalonia about how unstable the European Union is and the transmission of that instability to its suffering members. In a vote on Sunday, separatist parties won over half the seats in the Catalonian regional assembly, 74 of 135. The major electoral shift was not to separatism as such but to the Esquerra Republicana de Catalunya (ERC). Even more important than its call for an independent Catalonia, this left-of-center party ran an unambiguously anti-austerity campaign.

Why now? Why the ERC rather than the center-right Convergencia i Unio (CiU)?  For the CiU the election was a serious loss, dropping from 62 to 50 seats. The answer is obvious. Spaniards are sick of suffering from an unnecessary austerity package imposed from Brussels and Berlin and a majority of Catalonian Spaniards have decided to do something about it. Independence, little more that the long-term hope of separatists until recently, offers itself as the otherwise unlikely vehicle to escape a dysfunctional and draconian economic regime.

The message from Catalonia is clear: get out any way you can. Whether an independent Catalonia could “successfully go-it-alone” is beside the point. Whether outsiders are for it or against it is also beside the point (and I am not for it). The electoral shift was a cry of revulsion against the austerity policies that have devastated Greeks and brought hundreds of thousands into the streets in Italy, Portugal and Spain itself. As such, it is a rational response in a Union gone mad.

Greece demonstrates the consequences of sticking with the Brussels/Berlin program, and Catalonian are not having it. Who will be next threatening to bail out via separatism?  Flanders? El Pais Vasco?  Scotland? Watch that separatist space.