Can Greece Survive?

By L. Randall Wray

(Cross-posted with

It was obvious to those who understand Modern Money Theory that the set-up of the European Monetary Union was fatally flawed. We knew that the first serious financial and economic crisis would threaten its very existence. In a sense, it was from the beginning much like the US in 1929, on the eve of the Great Depression—with excessive lender fraud, household and business debt, and a boom that had run on too long. Anything could have set off the crisis that followed—just as discovery that Greece had been cooking its books sealed Euroland’s fate. And like the US post-1929, Euroland has struggled to understand and to deal with the crisis. Meanwhile, it is slipping into another great depression.

Many economists and policy-makers—even fairly mainstream ones—have come to recognize that the barrier to resolution is the inability to mount an effective fiscal policy response. And that is because there is no Euro-wide fiscal authority. Hence, the half-measures undertaken by the ECB and other authorities to put band-aids on the debt problem.

To be sure there is a conflict among authorities over the solution—given absence of a fiscal authority. Many want to impose austerity—equivalent to medieval blood-letting. These argue that the real problem is the lack of self-discipline in the periphery countries. Note that this view is shared by the elites in those countries! Many of them would be happy to throw their countries into deep depressions that wipe out all resistance to wage-cutting and slashing of all social programs that benefit working people. That is always the preferred solution of unenlightened elites. Through this method, wage costs in the periphery nations can be cut, making production more competitive.

This of course is also the position of the most powerful member of the EU. Prudent Germany had held wages in check over the past decade while ramping up productivity. As a result, it became the low cost producer in Europe and can even go toe-to-toe and win against Asia. Mind you, not in the production of cheap labor intensive output, but where it really counts in the high value added export sector.

And this view is also common among working classes in the central countries—that share the view of periphery populations as lazy and over-rewarded. While untrue, what is most shocking about this attitude is that if the blood-letting and crushing of wages in the periphery actually does work, the factories will be moved out of Germany seeking lower cost workers. In other words, success in the periphery would shift the burden back to Germany’s workers, who would have to accept lower wages to compete. That will be fueled by job losses if Germany cannot find sales outside the EU that will be lost as the periphery nations fall farther into depression. The result will be a nice little rush to the bottom, benefiting Europe’s elite. How nice.

To be sure, I do not think there is a snowball’s chance in hell that the EU will squeeze sufficient blood out of the Greeks (and Spanish and Italians and Irish and Portuguese) for this to work. What actually makes far more sense is to raise German wages—to achieve competitiveness within the EU by leveling up. But that snowball does not have a chance, either, because Germany is looking far outside the borders of Europe—and mostly in an eastern direction. As a result, it will remain focused on cutting its own labor costs—so the periphery nations will never catch Germany on the way down.

That leaves two alternative approaches. First, continued debt restructuring, ECB purchases through the back door (allowing central banks to buy the debt), guarantees, and lending. The hope is that the financial institutions holding all the periphery government debt can either move it off their balance sheets, or use the American method of “extend and pretend” to avoid recognizing the institutions are insolvent. The problem is that almost all the economic data in recent weeks are bad—almost globally—and that makes it likely there will be some financial hiccup somewhere that will spread as quickly through financial markets as it did in the Global Financial Crisis of 2007.

Many European banks will be recognized to be hopelessly insolvent—with PIIG government debt only adding to the problem. Further, the ECB legitimately worries about the “precedent” and “incentive effects”. This is not really a matter of rules governing what the ECB can do—it has leeway much as the Fed has to intervene in a crisis to essentially buy or lend against virtually any type of asset. It has to do with what the ECB sees to be its independence. Markets would view a US-style bail-out of the European financial system (and by extension, guaranteeing individual government debts) as a loss of its independence. In truth, the ECB already gave that up, but clings to the hope it can somehow get its virginity back.

The third approach is to create the necessary fiscal authority. This would allow the ECB to stick to monetary policy, while giving a European Treasury the purse strings to deal with the crisis. I’ve been arguing since 1996 that is really the only way to make the EU project viable. The economics behind that is simple, adopted in developed countries everywhere. Indeed, the US is effectively an American Monetary Union (AMU) but one properly set up with both a central bank and a treasury. However for political reasons, that ain’t going to happen in the EMU. We are actually further away from that than we were in 1996 because the crisis has increased hostility among the members. No one wants to cede power to the center.

Well, none of those is going to work. What is left? Exiting the union.

10 responses to “Can Greece Survive?

  1. According to OECD outlook Germany did have about 1 % productivity growth and Greece about 2.4% from 1997 to 2007. And the wages in Greece did grow less than the productivity. During the period in the Euro from 2002 to peak year 2008 Greece export in constant US dollar did grow with 40%. German export did grow 51%. Of course from vastly different levels and type of export and absolute amounts. Of course it had been preferable if Greece had climbed to a high value added export sector. But that will hardly bee achieved by austerity.I did recently see one chart that had divided the German export surplus in EU part and how much was achieved external, I don’t remember the numbers but Germany did have al large part from the internal export surplus inside EU.1987 – 2008 Export growth in inflation adjusted dollar:Argentina 267%, Germany 284%, Greece 197%, Sweden 208%.The Argentina curve have a small notch 1999 but that is all, Greece have a setback 2002 when adopting the Euro. But despite Carlos Menem or the euro the curve pint steep upwards overall. As it seems their troubled current accounts is not due to export plummeting but more to imports and maybe other variables in the current account. Of it could be argued that their exports could have grown more and climbing to a high value added export sector.

  2. Yes, Germany has been an export success.It has achieved this through the restraint of consumption (high taxes, blue laws on shopping,restraints on shopping outlets (no big box stores, etc.), labour flexibility, a rigourousemphasis on worker education, and government-directed emphasis on higher value-added (HVA)industrial production – something for which Germany has been famous for over a century.While German products are in demand all over the world, Germany's predominant export markets are within the EU itself – and it faces potentially crippling competition from China for HVA manufactures, much of that backed by American capital.Should the EU fade, the world could yet see another outbreak of "Furor Teutonicus" – only this time we could well see many nations, including a post-revolutionary USA, fighting alongside Germany, directed mostly against Asia.

  3. The headline says investors could lose $100B if the US loses its triple A rating? True?

  4. Isn't the problem with Germany that it is far too export focused and allowed to get away with it because of a constantly weak currency.Germany has exported the costs of its productivity paradox rather than it being absorbed by more German public servants. Excessive exports are as much of a problem as excessive imports when there is insufficient money flowing to rebalance things out.

  5. I'm all confused.At the 7th paragraph you talk about "That leaves two alternative approaches." . Then describe the first option as debt restructuring. No mention of a second approach.9th paragraph starts with "The third approach…" and you take about a fiscal authority.Then you end with nothing is going to work except exiting the union.So basically there are no alternates. Everything being thought of won't work and the only solution you propose is to leave the union?

  6. I am a MMT supporter, and I am a "Mom" I have created a blog in response to your invitation: where I can add some Italian translations of New Economic Perspectives articles and invite readers of other forums to copy or reference these articles.The first article I translated was the one from Paolo Rossi Barnard. With great pleasure I can say it has been read by 6000 people in an Italian forum. While my translations may not be grammatically correct in some respect, ( because living outside Italy for so long I forgot Italian) I hope to improve my Blog with some help of other Italians MMT sustainers. Thank you for your great work Regards M.

  7. I think anonymous, two posts up is right – surely "thirdly" should read "secondly"?

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  9. don't agree w some of the conclusions. Lower pay will help to stabilize the perifery but will not constitute a challenge to Germany nor spur a race to the bottom. Rather, it will help Germany in subduing inflationary pressures there and thus allow the eurozone as a whole to adjust and stabilize.Before the Euro, perifery workers were in real terms also getting lower pay vs their German counterparts, as their currencies depreciated against de DM. And that was stable and never presented a challenge to the german worker's salary for the simple reason that a Spanish car was never the same value as a Mercedes. German salaries in real terms have always been significantly higher for good reason. The problems started when the Euro allowed the perifery nations to catch up through stronger nominal wage growth. The only caveat to an adjustment through internal deflation is in fact debt loads in perifery countries. Debt deflation would emerge. That's why default for at least Greece, Portugal, Spain and Italy seems unavoidable.