Cohen and Krugman

In “Soften the Greek Deal” Mr. Cohen says give Tsipras what he wants and see how long he lasts. It’s the only way to stop this government using a German scapegoat to hide its incompetence.  Prof. Krugman, in “End Greece’s Bleeding,” says if Greece can’t live with the euro, it will be because the currency offers no respite for countries in trouble.  Here’s Mr. Cohen:

Syriza, the left-wing party governing Greece, was elected early this year to bring change to a country suffering one of the sharpest peacetime economic declines in modern history. Turns out doing things differently in a currency union that is not also a political union is almost impossible. So there is a fundamental question about democracy in the eurozone. The degree to which it exists is questionable.

None of the amateurish cavorting of Alexis Tsipras, the Greek prime minister, and his crew should be allowed to obscure this troubling fact.

Tsipras is now trumpeting his democratic mandate to negotiate a better deal after Greeks, in a hastily organized referendum, voted overwhelmingly to reject the austerity package that the European Central Bank, the International Monetary Fund and the European Commission insisted was needed to justify plowing further piles of public money into Greece. In essence, Greeks told Germany to get lost.

It is safe to say that Wolfgang Schäuble, the German finance minister who, unlike Chancellor Angela Merkel, has essentially had it with Greece, will be unimpressed by this democratic claim. A vote cannot undo a debt or obscure colossal Greek irresponsibility. Greeks were not asked in the referendum whether they wanted to remain in the euro (in which case they would certainly have voted “yes”), but the effect of their 61.3 percent “no” vote is to bring a Grexit much closer.

Should European leaders now allow this to happen — keep the cash spigot from the European Central Bank turned off, watch Greek banks become insolvent in short order, see medicines and imported foods disappear from pharmacies and supermarkets within a week or two, force Greece to start printing i.o.u.s or eventually drachmas that might allow the country over time to devalue its way back to competitiveness? Should Europe gamble that as this scenario unfolds — and Greeks see they were hoodwinked by Tsipras into voting on an austerity proposal when in fact they were voting on whether to keep the euro or not — the majority will rise up and throw out the leftist government for one more amenable to a deal?

Or should creditors, headed by Germany, now cave to Greece — persuaded at last that austerity has its limits and the Greek people have evidently reached theirs, that grievous mistakes have been made by all sides, that the euro may never recover from the loss of one its members, and that, as the International Monetary Fund concluded last week, Greece is almost certainly going to need some debt relief at some stage anyway? Should the troika swallow its pride and say to Tsipras and his ministers that — despite their incompetence, their amateurishness, their arrogance allied to childishness (fatal combo), their insults and their game playing — they have proved their point and won the day and more money is coming?

The decision is not easy. The abrupt resignation on Monday of Yanis Varoufakis, the finance minister, suggests that Greece may now be more serious about negotiation. Much hinges on how expendable Greece, which accounts for just 2 percent of the eurozone’s economic output, is seen to be. In the end currencies are more expendable than countries. Greece will survive without the euro, initially in great misery. The euro may survive without Greece. But, because trust is the foundation of any currency, and joining the euro was an “irrevocable” decision of all its adherents, the euro will have suffered a body blow. It will become little more than a fixed exchange rate system awaiting the next defector.

On balance, Merkel’s concerns about the destabilizing influence of a “Grexit” should prevail over the tough position of her finance minister. The troika should accept the Greek vote, however flawed, and ease the terms of a deal to include some debt relief. This gets back to my initial point about democracy. Europeans want something to give in the austerity that has been the response to the financial crisis since 2008.

Schäuble would see such a decision as surrender — and an open invitation to Spaniards, Portuguese and others to vote for populists who will in turn demand concessions from creditors. But it’s the only way to stop Tsipras blaming everything on his favored German scapegoat. If Greece gets a better deal, this incompetent government will have to prove to Greeks it is competent enough to turn the economy around. I doubt that will happen. Tsipras may not survive long.

The alternative — casting Greece to its fate — will see Tsipras turning Greece into Venezuela, railing against the Germans as Hugo Chávez used to rail against the Yankee imperialists responsible for all his country’s woes. Only this will be Venezuela-on-the-Med, with refugees flooding in from the Middle East and North Africa, and President Vladimir Putin doing his worst to suck Greece into his orbit.

It was a sentimental illusion to allow Greece into the euro in the first place, but sometimes terrible decisions have to be managed rather than brutally reversed. This is still such a case.

Now here’s Prof. Krugman:

Europe dodged a bullet on Sunday. Confounding many predictions, Greek voters strongly supported their government’s rejection of creditor demands. And even the most ardent supporters of European union should be breathing a sigh of relief.

Of course, that’s not the way the creditors would have you see it. Their story, echoed by many in the business press, is that the failure of their attempt to bully Greece into acquiescence was a triumph of irrationality and irresponsibility over sound technocratic advice.

But the campaign of bullying — the attempt to terrify Greeks by cutting off bank financing and threatening general chaos, all with the almost open goal of pushing the current leftist government out of office — was a shameful moment in a Europe that claims to believe in democratic principles. It would have set a terrible precedent if that campaign had succeeded, even if the creditors were making sense.

What’s more, they weren’t. The truth is that Europe’s self-styled technocrats are like medieval doctors who insisted on bleeding their patients — and when their treatment made the patients sicker, demanded even more bleeding. A “yes” vote in Greece would have condemned the country to years more of suffering under policies that haven’t worked and in fact, given the arithmetic, can’t work: austerity probably shrinks the economy faster than it reduces debt, so that all the suffering serves no purpose. The landslide victory of the “no” side offers at least a chance for an escape from this trap.

But how can such an escape be managed? Is there any way for Greece to remain in the euro? And is this desirable in any case?

The most immediate question involves Greek banks. In advance of the referendum, the European Central Bank cut off their access to additional funds, helping to precipitate panic and force the government to impose a bank holiday and capital controls. The central bank now faces an awkward choice: if it resumes normal financing it will as much as admit that the previous freeze was political, but if it doesn’t it will effectively force Greece into introducing a new currency.

Specifically, if the money doesn’t start flowing from Frankfurt (the headquarters of the central bank), Greece will have no choice but to start paying wages and pensions with i.o.u.s, which will de facto be a parallel currency — and which might soon turn into the new drachma.

Suppose, on the other hand, that the central bank does resume normal lending, and the banking crisis eases. That still leaves the question of how to restore economic growth.

In the failed negotiations that led up to Sunday’s referendum, the central sticking point was Greece’s demand for permanent debt relief, to remove the cloud hanging over its economy. The troika — the institutions representing creditor interests — refused, even though we now know that one member of the troika, the International Monetary Fund, had concludedindependently that Greece’s debt cannot be paid. But will they reconsider now that the attempt to drive the governing leftist coalition from office has failed?

I have no idea — and in any case there is now a strong argument that Greek exit from the euro is the best of bad options.

Imagine, for a moment, that Greece had never adopted the euro, that it had merely fixed the value of the drachma in terms of euros. What would basic economic analysis say it should do now? The answer, overwhelmingly, would be that it should devalue — let the drachma’s value drop, both to encourage exports and to break out of the cycle of deflation.

Of course, Greece no longer has its own currency, and many analysts used to claim that adopting the euro was an irreversible move — after all, any hint of euro exit would set off devastating bank runs and a financial crisis. But at this point that financial crisis has already happened, so that the biggest costs of euro exit have been paid. Why, then, not go for the benefits?

Would Greek exit from the euro work as well as Iceland’s highly successfuldevaluation in 2008-09, or Argentina’s abandonment of its one-peso-one-dollar policy in 2001-02? Maybe not — but consider the alternatives. Unless Greece receives really major debt relief, and possibly even then, leaving the euro offers the only plausible escape route from its endless economic nightmare.

And let’s be clear: if Greece ends up leaving the euro, it won’t mean that the Greeks are bad Europeans. Greece’s debt problem reflected irresponsible lending as well as irresponsible borrowing, and in any case the Greeks have paid for their government’s sins many times over. If they can’t make a go of Europe’s common currency, it’s because that common currency offers no respite for countries in trouble. The important thing now is to do whatever it takes to end the bleeding.

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