Wednesday, July 8, 2015

Piketty's argument about Greece's debt has 3 massive holes in it

By Mike Bird of Business Insider. Excerpts:
"Piketty examines the German situation and sees a big reduction in national debt. He says: "After the war ended in 1945, Germany's debt amounted to over 200% of its GDP. Ten years later, little of that remained: public debt was less than 20% of GDP."

But for starters, Germany's debt was not meaningfully worth 200% of its gross domestic product, because it wasn't servicing it. In fact, it hadn't been doing so for about two decades. In the early years of the Nazi government, Germany defaulted on most of its foreign loans.

What's more, a huge event is completely ignored here. In 1948, Germany reformed its currency in a spectacular fashion, giving birth to the Deutsche mark. The change wiped out "approximately 90% of Germany's cash holdings and deposits," according to economist H. J. Dernburg, who was writing in 1954. It was that event, not the 1953 agreement, that provided the most dramatic reduction to German debt levels — but not without the extreme pain for anyone with any savings.

The equivalent for Greece would be returning to the drachma (or some other new currency) and enacting colossal haircuts on private deposits, the very thing the current discussions are aimed at avoiding."

"Yale economic historian Timothy Guinnane noted in his own paper that "from the viewpoint of 50 years later it is probably difficult to imagine that Germany was viewed at the time as an international deadbeat." One of the reasons a 50% reduction in debts appears so large is precisely because the government had been in a state of nonpayment for so long, and the creditors didn't ask for 20 years of compound-interest payments. 

Greece has not been in default for 20 years, and the actions of its creditors, even when misguided, have been directed toward resuming the Greek government's access to international capital markets (while reducing what they are owed as modestly as possible) on much the same terms as it did before 2010."

"One element of the deal with Germany certainly looks inviting from the Greek perspective. Repayments were intended to be loosely tied to Germany’s ability to produce a trade surplus.

So the idea was that Germany would repay debt only so long as it was internationally competitive.
But unlike in Greece, that was a realistic prospect. German exports by 1953 were already 58% larger by volume than they had been in 1938, the last prewar year. The country had started to generate surpluses (and still does), and it kept repaying."

"By contrast, Greece is a deficit monster. That's something that was undoubtedly exacerbated by the euro (which is too strong for Greece and encourages the country to import goods from countries with cheaper currencies). Even after five years of severe depression has slashed the country's import demand, it is still running a trade deficit — importing more than it exports —because the euro is so strong.
  But even when the country had the drachma, its economic history was plagued by a chronic and constant imbalance that favours imports over exports. It would be fair to conclude from the perspective of Greece’s creditors that, with drachma or without drachma, the country will not turn itself into a trading powerhouse.

West Germany didn't even get a clear guarantee on the fact that it would repay only if it ran a trade surplus."

"Piketty argues that the post-WWII period can be compared with the post-financial-crash period today:
To deny the historical parallels to the postwar period would be wrong. Let's think about the financial crisis of 2008/2009. This wasn't just any crisis. It was the biggest financial crisis since 1929. So the comparison is quite valid. This is equally true for the Greek economy: between 2009 and 2015, its GDP has fallen by 25%. This is comparable to the recessions in Germany and France between 1929 and 1935.

But Guinnane rightly argues there were two unique circumstances in 1953, neither of which are true of Greece today:
  • "Increasing tension with the Soviet Union had led to a strong desire to rebuild a sound, democratic Germany. Harsh repayment terms would not serve that end."
  • "Prior to World War I, the German economy was central to the European economy as a whole; a healthy Europe could not exist alongside a sick Germany. The same held true after World War II."
West Germany would prove to be a useful ally, economically and politically, against the Soviet Union. Greece's international position is of no such use — even if its European creditors had significant geopolitical goals, which they don't seem to. The creditors in 1953 were reaping a benefit in kind by reducing the debt, because German economic growth could be funneled into military expenditure. They were the country's occupiers, and to defend Europe they would otherwise have to make that spending themselves.

On the second point, though ministers in the current government believe a Greek exit from the eurozone would be disastrous for the entire union, that's extremely dubious. Greece is not at all central to the health of Europe's economy in general."

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