Greece and Taxes

An interview for the Greek Reporter, in English, perhaps cheering the like-minded and sure to infuriate some conventional wisdom.

I agree with the "anti-austerians" on one point: Raising taxes was a bad idea. In my emphasis what counts are marginal tax rates on growth-producing activities, rather than Keynesian pump-priming, however, which is an important distinction.

The article says "A recently released study by the Economics Department at the National Kapodistrian University of Athens revealed that Greece has the third highest taxation rate among 21 European countries." If anyone has a link, especially if it's in English, send it in the comments.

Greece and Banking, the oped

Source: Wall Street Journal; Getty Images

A Wall Street Journal Oped with Andy Atkeson, summarizing many points already made on this blog. This was published August 5, so today I'm allowed to post it in its entirety. You've probably seen it already, but this blog is in part an archive. If not, here is the whole thing, with my preferred first paragraph.
Local pdf here.

Greece's Ills [and, more importantly, the Euro's] Require a Banking Fix 

Greece suffered a run on its banks, closing them on June 29. Payments froze and the economy was paralyzed. Greek banks reopened on July 20 with the help of the European Central Bank. But many restrictions, including those on cash withdrawals and international money transfers, remain. The crash in the Greek stock market when it reopened Aug. 3 reminds us that Greece’s economy and financial system are still in awful shape. 


Greece’s banking crisis revealed the main structural problem of the eurozone: A currency union must isolate banks from sovereign debt. To fix this central structural problem, Europe must open its nation-based banking system, recognize that sovereign debt is risky and stop letting countries use national banks to fund national deficits.

If Detroit, Puerto Rico or even Illinois defaults on its debts, there is no run on the banks. Why? Because nobody dreams that defaulting U.S. states or cities must secede from the dollar zone and invent a new currency. Also, U.S. state and city governments cannot force state or local banks to lend them money, and cannot grab or redenominate deposits. Americans can easily put money in federally chartered, nationally diversified banks that are immune from state and local government defaults.

Depositors in the eurozone don’t share this privilege. A Greek cannot, without a foreign address, put money in a bank insulated from the Greek government and its politics. When Greece’s banks fail, international banks can’t step in to offer safe banking services independently of the Greek government.

European bank regulations encourage banks to invest heavily in their own country’s bonds, even when they have lousy ratings. The flawed banking architecture of Europe’s currency union pretends that sovereign default will never happen. Wise Europeans have known about these flaws for years, but the system was never fixed because it allows indebted countries to finance large debts.

This is the euro’s central fault. A currency union must treat sovereign default just like corporate or household default: Defaulters do not leave the currency union, and banks must treat sovereign debt cautiously. When Europeans can put their money into well-diversified pan-European banks, protected from interference from national governments, inevitable sovereign defaults will not spark runs, or destroy local banks and economies. And government bailouts will be far less tempting.

That is the long-term fix, but how does the eurozone get out of its current mess? The ECB’s latest Greek bailout deal is focused on long-run structural reforms, asset sales, budget targets and illusory tax increases. It might at best revive growth in a year or so.

But without well-functioning banks, Greece’s economy will collapse long before such growth arrives. To revive the banks and the economy, Greeks must know their money is safe, now and in the future. So safe that Greeks put money back in the banks, pay debts and seamlessly make payments—with no chance of a euro exit, tightened capital controls that impede international payments or depositor “bail-ins,” a polite word for the government grabbing deposits.

The United States offers a precedent. The U.S. economy ground to a standstill in the banking panic of 1933. The administration of Franklin D. Roosevelt closed America’s banks with a national banking holiday to stem the bank run. It then took immediate steps to restore confidence with the clear promises of the Emergency Banking Act of 1933 to resolve insolvent banks, promises backed up by the remarkable rhetoric of FDR’s first fireside chat and the intact borrowing power of the federal government. When banks reopened, Americans lined up to redeposit their money. In the 1980s, the U.S. deregulated banks to allow extensive branch and interstate banking, further isolating local banks from local troubles.

Europe is headed toward bailing out both the Greek government and Greece’s struggling banks. Instead, Europe should resolve and recapitalize the banks alone, put them under private European ownership and control, and insulate them from further Greek government interference. Then Europe can let Greece default, if need be, without another bank run.

Then move on to Italian and Spanish banks, which are similarly larded up with government debts and are threatening the euro. These banks can still be defused slowly, selling their government debts, without huge bailouts.

Europe needs well-diversified, pan-European banks, which must treat low-grade government debt just as gingerly as they treat low-grade corporate debt. Call it a banking union, or, better, open banking. The Greek tragedy can serve to revive the long-dormant but necessary completion of Europe’s admirable common-currency project.

Too much debt, part II

"China to flood economy with cash" reads today's WSJ headline. When you read the article, however, you find it's not quite true. China to flood economy with debt is more accurate.

The expected move to free up more funds for lending—by reducing the deposits banks must hold in reserve—is directly aimed at countering the effects of a weaker currency,

The People’s Bank of China’s latest planned move, which could come before the end of this month or early next month, would involve a half-percentage-point reduction in banks’ reserve-requirement ratio, potentially releasing 678 billion yuan ($106.2 billion) in funds for banks to make loans.

I had hoped the world learned this lesson in the financial crisis. Equity is great. When things go bad, shareholders lose value by prices falling, but they cannot run and the firm cannot fail if it does not pay equity holders.

Financial crises are always and everywhere about debt, especially short term debt. Lending more, encouraging more bank leverage, reducing reserves and margin requirements, means that when the downturn comes a needless wave of runs and defaults follows.

Inevitably, it seems, another downturn will come, another set of books will have been found to have been cooked, and then we will find out who lent too much money to whom. US investment banks, 2008, strike one. Greece, 2010, strike 2. China, 2015, strike 3? Do we no longer bother closing the barn doors even after the horse leaves?

This story should also give one pause about the wisdom of "macro-prudential" policy, by which wise central bankers are supposed to presciently open and close the spigots of leverage to manage asset prices.

Europa hat die Banken missbraucht

An editorial in Süddeutche Zeitung, on Greece, banks and the Euro, summarizing some recent blog posts.

I don't speak German, so I don't know how the translation went, but it sounds great to me:

Die jüngste Griechenland-Krise rückt das größte Strukturproblem des Euro in den Vordergrund: Unter dem Dach einer gemeinsamen Währung müssen Staaten genauso wie Firmen pleitegehen können. Banken müssen international offen sein, sie dürfen nicht vollgepackt sein mit den Schuldtiteln lokaler Regierungen. So war der Euro ursprünglich konzipiert. Leider haben Europas Politiker die erste Prämisse vergessen und sind zur zweiten gar nicht erst vorgedrungen. Jetzt ist es Zeit, beides in Angriff zu nehmen.... 

The English version:

Greek Lessons for a Healthy Euro

The most recent Greek crisis brings to the foreground the main structural problem of the euro: Under a common currency sovereigns must default just like corporations default. And banks must be open internationally, not stuffed with local governments’ debts.

This is how the euro was initially conceived. Alas, europe’s leaders forgot about the first and never got around to the second. It’s time to fix both.



If Volkswagen defaults on its debts and goes bankrupt, nobody dreams that it therefore has to leave the euro zone and start paying its workers in Volkswagen marks. In a currency union, governments cannot print their way out of trouble, so they are just like companies.

When Greece got in to trouble, the first bailout went to the German and French banks who had bought lots of Greek debt. Those debts were all transferred to official holders, meaning, indirectly the German taxpayer.

Why, with the 2008 financial crisis already in the rear view mirror, were European banks — too big to fail, apparently — allowed to load up on Greek debt, to the point that they had to be bailed out? Why did europe’s bank regulators let banks hold sovereign debt as a risk free asset?

The problem has only gotten worse. Greek banks are stuffed with Greek government debt. That’s why there was a run. Greeks, knowing their banks will fail if the government defaults, rush to get money out. They have stopped paying their mortgages, as they have stopped paying taxes, and stopped paying each other. The economy is plummeting. Even with the banks now supposedly open, capital controls remain in place so Greeks cannot pay for imports. And savvy Greeks know there is still a chance of Grexit, deal failure, depositor “bail-ins,” and tightened capital controls. They would be fools to put money back in banks.

A modern economy cannot function without banks. Greece will not restart its economy, restart its tax collections, and restart any hope of paying its debts without completely open and trustworthy banks.

Banking across Europe should be open, and divorced from local government debt. A Greek should be able to put his or her euros in a pan-european bank, whose assets are diversified across Europe and will not even hiccup if Greece’s government defaults. A Greek business should be able to borrow from the same bank, whose deposits come from all over Europe. If a Greek bank fails, any European bank should be able to come in and operate it the next morning. And the Greek government should have no right to grab deposits, force banks to buy its debts, or change the currency of those deposits.

If this had been the case, there would have been no run. The Greek economy would not have collapsed. And then Europe could have been a lot tougher with the Greek government about repayment.

This is how the United States works. When states and cities in the U.S. default — such as Detroit, Puerto Rico, or, possibly Illinois — there is no run on the banks, and banks do not fail or close. Why? Because nobody dreams that defaulting states or cities must secede from the dollar zone and invent a new currency.  State and city governments cannot force state banks to lend them money, and cannot grab or redenominate deposits. Americans can easily put money in Federally chartered, nationally diversified banks that are immune from state  and local government defaults.

As a result, when one of our state governments gets in fiscal trouble, nobody thinks they need to rush to their bank to get their money out, there is no “contagion,” and much less pressure for bailouts.

This was how the euro was supposed to be set up. Many economists have been warning about it for years. But governments like to use their banks as piggy banks, and it never happened.

Greece is not the end. Italian and Spanish banks are just as loaded up with their governments’ debts, and just as prone to a run. There is time to de-fuse this bomb slowly, but that time will run out.

Sovereign default without exit and open banking are the key requirements for the european currency union. A currency union does not need “fiscal union.” The US did not bail out the city of Detroit, or states when they failed. A currency union does not require similar economies. Panama uses the US dollar. A currency union does not need countries to have similar cultures, values, economic development, or productivity. A currency union does not need political union.  Europe used gold as the common currency for centuries, centuries when Kings defaulted frequently.

Many people say that small countries need their own currencies, so they can artfully devalue. But a century’s worth of devaluations and inflations did not produce a Greek growth miracle. There is no exchange rate at which Greece’s government workers will start exporting Porsches to Stuttgart.  Rather, it was binding themselves to the euro that produced a boom, only sadly wasted.

Greece off the euro will be a disaster. Drachmas will surely not be convertible, so Greece will end up like Cuba or Venezuela, with government workers and pensioners paid in worthless local currency, and everyone who can get paper euros operating on a cash basis.  No efficient large businesses can work in such an economy.  Greece’s only hope is to liberalize its economy, open to Europe, grow strongly, and pay back its debts.

The euro is a great and worthy project, and a necessary precursor to healthy open economies in small countries of a globalized world. It’s time to finish building it as originally conceived, not turn it into a bailout union.

Mr. Cochrane is a Senior Fellow of the Hoover Institution at Stanford University.

The wrong austerity

Bailout deal brings wave of tax hikes - Ekathimerini.com

A barrage of new tax measures are contained in the new bill presented to Greece’s Parliament

...diesel fuel tax for farmers going from 66 euros per 1,000 liters to 200 euros/1,000 liters from October 1, 2015, and to 330 euros by October 1, 2016. Farmers’ income tax to be paid in advance will rise from 27.5 percent to 55 percent. Income tax for farmers is set to rise from 13 to 20 percent for 2016 and to 26 percent for 2017.

Freelancers will be subject to a gradual increase from 55 to 75 percent in advanced tax payments for income earned in 2015, increasing to 100 percent in 2016. The 2 percent tax break for single payments on income tax is also being abolished from January 1, 2015.

Private education, previously untaxed, will be taxed at 23 percent, including the tutoring schools (frontistiria) that most Greeks send their children to but excluding preschools.

Greece’s vital shipping industry will also be subject to new tax rises. Among other measures, tonnage tax is to increase by 4 percent annually between 2016 and 2020. A special contribution by foreign cargo carriers will remain in place until 2019.

"Austerity" has been a contentious and vague word, descending to an all-purpose insult from the pen of Krugman et al.

But on one point I think we can agree. Steep tax increases, especially steep increases in marginal tax rates on people likely to work, save, invest, start new businesses, and hire others, are an especially bad idea right now. The only hope to pay back debt is growth, and this sort of thing just kills growth. Part of growth is also keeping smart young Greeks in the country, which they are leaving in droves.


Sure, I look at the margins,  incentives, and "supply," while Keynesians look at taxes as just "money in pockets" that drives consumer spending and "demand."  But looked at either way, this is really counterproductive.

In practical terms, there is a Laffer curve, whether of supply side incentives or demand side multipliers. And for paying back debts, the long-run Laffer curve matters:  the effect of taxes on business formation, expansion and growth; on people moving to and from a country. The contentious short-run Laffer curve is on the question whether people with jobs work fewer hours at high taxes. Maybe yes, maybe no, but that's not the issue for Greece or for her creditors.

I think the Europeans think they can just raise tax rates and produce more interest payments. Alas, you have to let a garden grow before you harvest the fruit.

Greece and Banking

Source: Wall Street Journal; Getty Images

A Wall Street Journal Oped with Andy Atkeson, summarizing many points already made on this blog.

Greece suffered a run on its banks, closing them on June 29. Payments froze and the economy was paralyzed. Greek banks reopened on July 20 with the help of the European Central Bank. But many restrictions, including those on cash withdrawals and international money transfers, remain. The crash in the Greek stock market when it reopened Aug. 3 reminds us that Greece’s economy and financial system are still in awful shape. 

Greece’s banking crisis revealed the main structural problem of the eurozone: A currency union must isolate banks from sovereign debt. To fix this central structural problem, Europe must open its nation-based banking system, recognize that sovereign debt is risky and stop letting countries use national banks to fund national deficits.

If Detroit, Puerto Rico or even Illinois defaults on its debts, there is no run on the banks. Why? Because nobody dreams that defaulting U.S. states or cities must secede from the dollar zone and invent a new currency. Also, U.S. state and city governments cannot force state or local banks to lend them money, and cannot grab or redenominate deposits. Americans can easily put money in federally chartered, nationally diversified banks that are immune from state and local government defaults.

Depositors in the eurozone don’t share this privilege....

For the rest, you have to go to WSJ, Hoover (ungated) or wait 30 days until I'm allowed to post it here.

Lucrezia Reichlin and Luis Garicano have an excellent Project Syndicate piece on the same topic.

Writing contest: This is our first paragraph. The Journal's editors thought it was better with latest news first. Which works better?

Ben-Gad and the Minotaur

Michael Ben-Gad has a smashing review, "Into the Labyrinth", of Yanis Varoufakis' The Global Minotaur (Disclaimer: I have not read it and don't intend to.) It's a great piece of writing as well as a cogent analysis. Some excerpts:

"The idée fixe that dominates The Global Minotaur, and apparently dominated Mr Varoufakis’s squabbles with the other Eurogroup ministers of finance, is that some countries are inherently more productive than others and therefore always generate current account surpluses, while others always generate deficits, and fixed exchange rates or monetary unions only exacerbate this imbalance. Hence, for the world economy to function, the surpluses need to be recycled though a system of regular transfer payments from the core to the periphery.

Why do these imbalances emerge? According to the theory of comparative advantage as formulated by David Ricardo in the early 19th century, different countries specialise in the production of particular goods and then exchange them for others, and trade is mutually beneficial even if some countries are more efficient at producing all goods. Mr Varoufakis’s theory rejects all this. Instead, he argues, some countries are destined to specialise in the production of goods and services, while others on the periphery will forever specialise in consuming them. Put into layman’s terms, what this means is that the people of Germany, the Netherlands, and Finland produce cars, wooden clogs, or mobile phones and sell them to the people of Greece, who pay for it all with money – and to make this trade sustainable the cash needs to be regularly replenished in an endless loop by the people of Germany, the Netherlands, and Finland.

This is a story we hear quite often beyond Mr. Varoufakis -- that a currency union requires countries to be similar, with similar productivity. I'm glad to see it so effectively skewered. In Ricardo's famous example, Portugal sells wine to Britain, which sells wool to Portugal, even if one is better at both than the other. They were on a common currency, gold.

On predictable US-bashing:

In Mr Varoufakis’s world the biggest villains are companies such as Walmart that exploit their efficiency to immiserate communities by making them pay less And of course the worst thing about Walmart is that it is American.

....Apparently, between the end of the war and the collapse of the Bretton Woods agreement in 1973, the Americans had a global plan, helpfully labelled ‘the global plan’, to dominate the world by permanently running current account surpluses and paying down its debt. Then this ended and was replaced by a new global plan to dominate the world by running permanent current account deficits and letting its debt soar. Devious Yanks. 

This last paragraph gets the golden skewer award for prose.

First,  he would have all remaining government debts still owed to banks written off. Why? Well, everyone hates banks, and it is apparently a neoliberal myth that their shares are owned by pension funds, university endowments or just ordinary people saving for retirement. Banks are really owned by Bond villains who live underneath hollowed-out volcanos.

Second, a substantial part of the remaining debt – about 60 per cent of GDP – would be mutualised across the eurozone so that, whenever the spirit moved them, governments could costlessly default on their bond payments, each one safe in the knowledge that any repudiated debt would immediately become an obligation for the taxpayers in the 18 remaining countries – unless, of course, they defaulted first. This is a variation on the prisoner’s dilemma game, but on steroids. 

Oh, I give up, just go read the whole thing.

Then read his equally good review of Thomas Pikettty, from a year ago, which starts

Reading Thomas Piketty’s Capital in the Twenty-First Century from front to back was a mistake.

Better to read the last hundred pages first, with their recommendations for the confiscation of wealth and marginal income tax rates nearing 100 per cent, and then read the preceding 470 pages to decide whether the flimsy evidence, conjecture and questionable theories the author offers justify such draconian measures....

Greece again

I read this morning's news of a deal -- we'll see how long it lasts -- with interest. Here's a video exchange with Rick Santelli on the subject on CNBC (I can't seem to get the embed to work, so you have to click the link.)

My main thought: what about the banks? The minute Greece reopens its banks, it's a fair bet that every person in Greece will immediately head to the bank and get every cent out. The banks' assets are largely Greek loans, which many aren't paying -- why pay a mortgage to a bank that's already closed and will probably be out of business soon anyway -- and Greek government debt; mostly Treasury bills that only roll over because banks hold them. They can't sell either, so the banks will instantly be out of cash.

The deal reported in today's papers really barely mentions that problem. But that is the problem of the hour.


Greece is basically off the euro now. Being in the euro does not mean that restaurants take euros. Being in the eurozone means that banks use euros, that you can take euros out and arrange international transfers using euros.

The economy is paralyzed. The main thing a deal needs is a way to reopen banks in a matter of days. Privatization and labor laws are fine, but that generates growth a year from now at best. And raising taxes? They must be kidding.

I've read with interest some proposals that the EU take over the banks. The EU takes on the bad assets, gives or sells the rest to large international banks, and these operate under EU rules -- not Greek regulators; they can't buy any Greek debt, and Greece can't tax them.  It's expensive, yes, but it's basically as shoot-the-hostage approach. A functioning economy would help Greek finances. And then the EU can let the Greek government default if it wishes.  Saving the banks might be a lot cheaper than saving the Greek government and the banks.

There are two original sins in the euro, neither having to do with fiscal union. The first is that each country has its own banks, and each government uses its banks as piggybanks to stuff with government debt. European bank regulators and Basel regulations treat sovereign debt as risk free. Then, if the government defaults, the whole banking system is dragged down with it. The second is the endlessly repeated fallacy that government default means the country must change the units of its currency. If Chicago defaults on its debts, nobody thinks it must introduce a new currency, or that Chicago's banks will fail.

A currency union needs a banking union, or at least banks that are not stuffed with government debt. A currency union needs to let sovereigns default without changing currencies or paralyzing the banking and payments system. A currency union needs a banking union.

What next?

Source: Deutsche Bank Research 

The lovely flow chart comes from Deutsche Bank Research

It emphasizes the central point I am taking from all this -- how Greek banks are hostages in this negotiation. With banks closed and capital controls, the Greek economy can't function.

Can Greece Leave?

Is Grexit even possible?

It strikes me that the best Greece can do with a Drachma is to create a two-currency system, sort of like Cuba or Venezuela, or at best Argentina; countries whose politics the Greek government seems to admire, and whose economies its may soon resemble.

If the government brings back the Drachma  as a way to pay pensions, government salaries, and bank accounts, Euros will still circulate in Greece.

18% of Greek GDP is tourism. That number may be understated -- I don't know if it includes tourist spending at restaurants, stores, transport, and other places that mix tourists and locals. Tourists will spend Euros, not Drachmas. So hotels, gas stations, restaurants, grocery stores, clothes stores, airlines, car rentals, etc. will likely still gladly take euros and euro credit cards, and from locals as well as tourists.

I looked up Greek GDP at the OECD.  Of 157 billion euros value added, agriculture is a tiny 6, industry 18, of which manufacturing 13.  However, services are 130, 80% of the total.  Here, the big items are  "distribution, trade, repairs, transportation accommodation and food" 41, real estate activities 34, and public administration 39.   Exports and imports are each about 60 out of 180 billion euros.

Now, anyone exporting -- 60 out of 157 -- has access to euros and likely invoice in euros thank you very much. Anyone importing will need to get their hands on those euros.

(Interestingly most exports are services, most imports are goods. I can't get a handle on what services Greece exports, and thus whether devaluation would make much difference.)

The 41 billion of "distribution, trade, repairs, transportation accommodation and food" services will surely take euros as above, to convenience the tourist trade.  I can't fathom how 34 billion euros are real estate services -- not construction -- so I can't guess really if that is euros or Drachmas.  The 39 billion of public administration gets Drachmas.

So, the Drachmaized Greece that I see is not the cleanly devalued newly competitive powerhouse that some on the left seem to envision.  Instead I see a two-currency economy. Pensioners and government workers and anyone unlucky enough to still have a Greek bank account get Drachmas. Hotel owners, restaurant owners, and exporters get euros, above or under the table.

In this scenario, I can't imagine a freely convertible currency. Will the government really give 100 Drachmas to someone who used to get 100 Euros, with an exchange rate below half? The point of not cutting salaries was political. So we are almost sure to see capital controls, exchange controls, and a fictional overvalued exchange rate, so Greece can pretend to pay pensioners and government workers.

It's not a pretty thought. Sticking with the euro seems a far better option, just like sticking with the meter.

Calomiris and sticky prices

Charles Calomiris has a very interesting Forbes oped on Greece, with a much deeper insight.

My proposal begins with government action to write down the value of all euro-denominated contracts enforced within Greece. This “redenomination” would make all existing contracts – wages, pensions, deposits, and loans – legally worth only, say, 70% of their current nominal value. This policy would kill several birds with one stone. It would significantly reduce pensions, relieving fiscal pressure and satisfying troika demands for fiscal sustainability. It would do so in a way that would also mitigate the purchasing power consequences for pensioners, because an across-the-board redenomination would lower prices throughout the economy, making the reduction in nominal pensions more bearable. By applying redenomination to deposits and loans, banks’ health would be revived – their loans would now be payable and therefore more valuable, and their net worth would consequently rise. The 30% wage reduction would further reduce fiscal problems and make Greek producers competitive, and operate as an “internal devaluation” to raise demand for Greek products and tourism. Most importantly, this internal devaluation – by solving the problems of fiscal deficits, non-competitiveness and bank insolvency – would inspire confidence in Athens’ ability to stay within the eurozone, which should bring deposits back into the banking system to fuel a rebirth of lending.

I think this is about half right, but a very good idea lies in here.

"an across-the-board redenomination would lower prices throughout the economy"? Not necessarily. Why would any store lower prices just because it gets to lower wages and rent? Prices are not a "contract."

Thus, the redenomination should probably come with a (say) one week price control. Every price must be lowered 30% over what it was the previous day, for a week,  Just long enough for each store to see that its competitors and suppliers has also really lowered prices.  Then stores can do what they want.

The deeper issue here is just what is the price and wage stickiness that so infects macroeconomic thinking. Why is "internal devaluation" by price and wage adjustment so much harder than "external devaluation" by exchange rate adjustment? Our formal models have costs of changing prices. Yet the actual costs of changing prices are tiny.

I think a "coordination problem" is more likely. The baker doesn't want to lower his price because he still pays the same price for wheat and yeast; the farmer doesn't want to lower his price because he pays the same price for fuel, and so forth. This web of prices is of course thousands of times more complex than that story. That's why it takes so long for everyone to agree on lower prices together.

At times, however, prices and wages do change, overnight, with no cost at all. When countries join the euro, every store changes price -- and the symbol next to it -- overnight. That fact alone should tell us that menu costs, though a nice formalism, are not the real microeconomic foundation of price and wage stickiness. And there is a potential role for a government to coordinate price changes.

What Charles is proposing, then, is exactly the same sort of overnight price and wage change that happened on admission to the euro. If you think prices and wages are "overvalued" in Greece, and a "devaluation" is all it takes for Thessaloniki to start exporting Porsches to Stuttgart, then an overnight, coordinated, price and wage change is a very nice alternative policy that we might start taking more seriously.

This is a bit of a "thesis topic" suggestion. I think we need a model of price stickiness as a coordination failure that is as simple and tractable as the standard, but false, Calvo fairy or menu cost models. Coordination failure models might also result in the sort of backward-looking stickiness that Phillips curves in the data seem to show.

Why just a week? Well, the macroeconomic presumption here is that Greece is suffering some sort of "imbalance" or "overvaluation" or "sticky wage." If that's right, one week at the right prices and wages should stick. Each individual store or person would then be reluctant to raise prices without the others going along. If prices jump right back up again after a week, however, without the help of government coordination, then we weren't so imbalanced to begin with, and the problem is really structural not monetary.

I rather suspect that tourist prices are set by competition with Sicily, not local wage stickiness, but it would be interesting to see. Prices of imported goods will also likely jump right back up. Fine.

Charles doesn't mention prices, but he does mention debts. This is a lot harder, as a debt "redenomination" is not just a method to solve a coordination problem and lower all prices and wages relative to German ones going forward, it is a huge transfer of wealth and a technical default.

If you run a coffee shop and charged 2 euros for a cappuccino yesterday, having all the coffee shops change to 1.5 euros overnight (for a week) is one thing. But changing the mortgage payment is another. One is a price. The other is a default.

Charles sneaks off into the economic passive voice here  "By applying redenomination.." which is always a sign of trouble ahead.  Most lenders, especially international ones, will go straight to court on that one.

I also do not follow how "applying redenomination to deposits and loans, banks’ health would be revived – their loans would now be payable and therefore more valuable, and their net worth would consequently rise." Before redenomination: Assets: 50 euros mortgages, 50 euros greek government bonds. Liabilities: 99 euros deposits, 1 euro equity. After redenomination: all numbers cut by 1/3. How is the bank any healthier? All ratios (capital, leverage) are the same.

So I think the proposal has the right spirit but a slightly wrong focus.

Charles continues

Although redenomination would accomplish a great deal, by itself it is not enough. As simple economic theory (formally known as the the Balassa-Samuelson Theorem) tells us Greece will only be a viable long-term member of the eurozone if it can match the long-term productivity growth of Germany and other members. To do so requires it to undertake major reforms to labor laws and competition policies, and to wage a credible war on corruption. 

I disagree pretty strongly here. If "eurozone" means a free trade agreement and a common currency, that can survive just fine with vastly different productivity levels (it already does) and consequently different productivity growth rates. Productivity across locations in the US varies enormously. Ricardo and absolute vs. comparative advantage was all about free trade under the gold standard (common currency) between countries of different "competitiveness" or productivity levels. Perhaps he means eurozone as an area that promises fiscal transfers to produce an equal standard of living everywhere. If so, good luck.

But that Greece's only hope to avoid becoming the next Venezuela is  "major reforms to labor laws and competition policies, and to wage a credible war on corruption" is spot on. In or out of the euro, in our out of the EU, in the end money and trade freedom are small parts of economic growth.

Kashyap on Greece

Anil Kashyap has an excellent summary of the Greek debt crisis.

He sees government printed IOUs as a much better solution to the banking and payments crisis than for Greece to exit the euro and try to reestablish the Drachma. I agree entirely.

His summary goes back to the beginning, and reminds us that Greece did not get bailed out; Greece's creditors (mainly european banks) got bailed out.

Last Greek thoughts

A few salient points that don't seem to be on the top of the outpouring of Greece commentary.

1. Greece seems to be coming to a standstill.  Kerin Hope at FT  (HT Marginal Revolution):

... many [Greeks] have simply stopped making payments altogether, virtually freezing economic activity.

Tax revenues for May, for example, fell €1bn short of the budget target, with so many Greek citizens balking at filing returns. 

The government, itself, has contributed to the chain of non-payment by freezing payments due to suppliers. That has had a knock-on effect, stifling the small businesses that dominate the economy and building up a mountain of arrears that will take months, if not years, to settle.

“Business-to-business payments have almost been paused,” one Athens businessman says. “They are just rolling over postdated cheques.”

 Around 70 per cent of restructured mortgage loans aren’t being serviced because people think foreclosures will only be applied to big villa owners,” one banker said.

2.  If a Greek goes to the ATM and takes out a load of cash, where does that cash come from? The answer is, basically, that the Greek central bank prints up the cash. Then, the Greek central bank owes the amount to the ECB. The ECB treats this as a loan, with the Greek central bank taking the credit risk. If the Greek government defaults, the Greek central bank is supposed to make the ECB good on all the ECB's lending to Greece.  It's pretty clear what that promise is worth.

Some observations on what these stories mean.

1.  The argument is not about "lending" to Greece, i.e. covering this year's primary surplus. The argument is whether the IMF, ECB, and rest of Europe will lend Greece money to... pay back the IMF, ECB, and the rest of Europe. This is a roll over negotiation, not a lending negotiation.

The loans were not intended to be paid back now. The loans were intended to go on for decades. But with conditions. The negotiation is about enforcing or modifying the conditions for a roll-over.

Rolling over short term debt with periodic reviews is a nice incentive mechanism. Foreign policy should try it.

2. The latest proposed agreement includes sharp increases in tax rates.  Now? Are you kidding?

Source: theguardian.com

I am reminded of the story of a town, that had a bridge, that had a 50 mph speed limit. A drunk driver, going 85, caused  horrific crash. The town lowered the speed limit to 25.

What Greece needs is to get going again. That is, to persuade anyone that this is a good country to start a business, invest, hire people, and so forth.  In particular, if Greece is to pay back debts, it has to become an export-oriented growth economy, and run trade surpluses Higher VAT, higher corporate taxes, and higher taxes on successful entrepreneurs are hardly the way to go about attracting investment.

I think of taxes in terms of incentives. Keynesians look at aggregate demand. Either way, raising tax rates, now, in an economy where nobody is paying much of anything because they see the big explosion ahead seems destined, pragmatically, to raise no revenue. And, incidentally and humanely, to further crater the economy.

Despite cuts, the Greek government is still spending north of 50% of GDP. If you want to get primary surpluses, that seems the place to cut.

But with an economy at a standstill, major structural reform (like, go back and put back in the structural reforms that Syriza scuttled on arrival) seems like a more promising short-term set of conditions. And we'll see you on the next big roll-over.

3. Rolling over post-dated checks is a fascinating story to a monetary economist. Money is created when needed, apparently.

4. The bank run, or "jog." Remember, the big Greek bailout already happened. Private investors, largely European banks, who held Greek government debt got to sell their debt to government and IMF. Bailouts are creditor bailouts.

One way of viewing the current slow motion crisis is an invitation for ordinary Greeks to join these investors. Take euros out of the bank. The government default will happen, possibly with bank closures, capital controls, currency exit, and expropriation. But lending to Greek banks is now bailed out, with the losses sent to Europe via the ECB, just as German bank's lending to Greek banks was bailed out in the first round. Too clever, maybe, but that is the effect.

Too clever, really, to describe the situation. It only works if the government actually does exit, and soon. Getting money out of the banks and then defaulting is one thing. But a frozen economy can't go on long.

I repeat: the run and non-payment, freezing the economy, happen largely because people see capital controls, bank account expropriation, grand all-around default (your mortgage might get redenominated to Drachmas too, and forgiven once the bank goes under, so why pay now) and Grexit in the future.  The simplest way to stop the run and economic cratering would be a solid commitment from both sides that government default will not mean Grexit,  capital controls, etc.

5. Without the banks, this would all be simple. Greece could default, stay in the Euro (unilaterally if need be) and Euro zone. One government defaulting on debts to other governments is not a crisis.
All along though, the involvement of the Greek banking system makes it much harder.

Greece has 11 million people, $242 billion GDP and 51,000 square miles. That's as many people as Ohio, the GDP and land area of Louisiana. Why does Greece need its own banking system in a common currency and free market zone?

Think how much easier this would all be if Europe had gotten around to integrating its banking system. In any city in the US, the major banks are all national. If California defaults on state bonds, your Chase bank account is safe, and not because of Federal deposit insurance. Because the bank has no exposure to California bonds.

Imagine if Greeks deposited money in a local branch of a large pan-European bank, backed by assets spread throughout Europe. Imagine if Greeks borrowed money from the same bank, funded by deposits spread throughout Europe. Imagine if, when a remaining Greek bank defaults, the European equivalent of Chase could sweep in, and take over loans and deposits seamlessly. A default by the Greek government on its bonds would be inconsequential to Greek banking.

Why not? Well, such banks would not hold vast amounts of Greek government debt. Such banks would not have Greek ownership, or be controlled by the Greek regulatory system. Such banks would not be available targets of Greek capital controls, or a currency change.

Greece needs an independent, national, banking system about as much as Ohio or Louisiana need independent, state banking systems.

6. And currency. Many economists keep saying how wonderful it is for tiny countries to have their own monetary policy, so they can devalue their way out of crises like these. They advocate "capital controls" (English translation: expropriation of savings). That's how Argentina, say, is such a success story. We may be about to see.

Greek roll-over

The latest Greek debt "crisis" poses an interesting puzzle. (Quotes because it's hard to call something that's been going on this long a "crisis.") Greece needs to come up with $300 million euros by Friday to pay off the IMF. And the most likely source of this money is... the IMF.

What's going on here? Obviously, Greece was going to need decades to pay off loans, in the sense of running primary surpluses to actually work down debt. Why lend Greece money for a short amount of time, then institute regular "crises" about rolling over the debt?

This is part of a larger question. In "A new structure for U. S. Federal debt" I thought about the same question for the U.S. Why does the U.S. continually issue new debt to pay off the old debt? Why not just issue perpetual debt, which automatically rolls over? For the U.S., I couldn't come up with a decent reason.

For Greece, there is a good reason. Yes, in the end, the IMF will most likely lend Greece the money to pay back the IMF. Or maybe the ECB will lend Greece the money to pay back the IMF. But both sides will renegotiate the terms.

The IMF and Europe lent money to Greece with conditions that are politically painful, but that are be beneficial for Greece and for the chance of the money being paid back eventually, at least in the IMF and Europe's eyes. (I don't agree with all the conditions, especially tax increases, but the point here is the negotiation not the wisdom of the terms.) By lending for a year and then renegotiating, they can enforce that Greece actually follows through on the conditions.

If you are going to lend money to a spendthrift relative you might want to do the same thing. Limit the time of help, and in a year we'll see if you're really cleaning up your act.

But this is a two-sided renegotiation. They can only impose conditions if the costs to them of allowing a default are not too large. And Greece will only take the conditions if the costs of default to them are large.  So it is to Greece's interest to make its default as painful to the rest of Europe as possible.

Also by calling it a roll over, though, Greece had an interesting option -- if it didn't like "austerity," it could try other means of reviving their finances and paying off the debt. It's too late for that one.

Doug Diamond and Raghu Rajan in a series of papers have been arguing that short-term debt allows lenders to monitor and discipline the borrowers. "Short" here can mean years, any debt that has to be rolled over a few times before being eventually paid off. This situation seems like a good instance of their theory.

Back to the U.S., though, this does not strike me as a good argument that the U.S. should voluntarily issue debt that needs to be rolled over. So I'm still in favor of perpetuitites for the U.S.

The Wall Street Journal's Greek Debt Timeline is an interesting perspective on this issue. I excerpted the full set of payments, and the payments due in 2015 and 2016 below. Of course, as debt is rolled over, new payments take the place of old ones.

 Except "treasury bill holders," the debt until 2020 is almost all due to governments. A small slice of "private investors" starts showing up after that. So for the next 5 years, this really is about IMF and ECB lending money (presuming nobody else wants to) to pay back loans to the IMF and ECB.

The 2015 and 2016 graphs make it even clearer. All the loans are to IMF, ECB or EIB.

But..What about these Treasury bill holders? There is this huge slice of debt that needs to be rolled over this summer. Who is going to do that? Who is holding this debt?

Betting on Grexit

A capital flight mechanism I hadn't thought of, from  Hans-Werner Sinn (HT Marginal revolution)

Basically, Greek citizens take out loans from local banks, funded largely by the Greek central bank, which acquires funds through the European Central Bank’s emergency liquidity assistance (ELA) scheme. They then transfer the money to other countries to purchase foreign assets (or redeem their debts),... 

 In January and February, Greece’s TARGET debts increased by almost €1 billion ($1.1 billion) per day, owing to capital flight by Greek citizens and foreign investors. At the end of April, those debts amounted to €99 billion. 

I knew Greeks are taking money out of bank deposits, and parking it abroad, and that in the end this money came from the ECB. When a Greek depositor wants his or her money, the Greek bank gets it from the Greek central bank, who gets it from the ECB, which prints it (metaphorically). It had not occurred to me that of course borrowing every cent you can from a Greek bank and parking it abroad is just as smart.

Of course, If Greece leaves the Euro, the Greek central bank goes bust, the ECB loses and Greek borrowers or ex-depositors keep their euros.

Hans-Werner seems to think capital controls are a good idea to stop this run. I think the likely imposition of capital controls is just why people are running in the first place. Similarly, if both Greece and Europe were to credibly say that Greek government default will not mean leaving the euro that would also stop the run.

But news for the day is this interesting run on the borrowing side, not just the depositor side.

Gdefault needs not Grexit

The little grumpy cartoon usually represents me pounding my coffee down in agreement as the WSJ exposes some idiocy. Last week, alas, I spilled my grumpy coffee in disagreement with a little part of its otherwise excellent  "The case for letting Greece go."

Thursday marks another deadline in Greece’s struggle to avoid default, as a €450 million payment to the International Monetary Fund comes due. Athens says it will meet this obligation, but sooner or later Prime Minister Alexis Tsipras and his government will miss a payment to someone if it doesn’t agree with creditors on a new bailout. An exit from the euro would then be a real possibility.

Please can we stop passing along this canard -- that Greece defaulting on some of its bonds means that Greece must must change currencies. Greece no more needs to leave the euro zone than it needs to leave the meter zone and recalibrate all its rulers, or than it needs to leave the UTC+2 zone and reset all its clocks to Athens time. When large companies default, they do not need to leave the dollar zone. When cities and even US states default they do not need to leave the dollar zone. A common currency means that sovereigns default just like large financial companies. (Yes, a bit of humor in the last one.)


Sure we can have an argument about whether it would be a good idea. The first 147 devaluations and currency confiscations didn't produce Singapore on the Mediterranean, but maybe the 148th will do the trick. The canard is the logical necessity of Grexit.

This is a particularly dangerous canard too. Greece is undergoing a slow motion bank run. Greeks are wisely taking their euros out of Greek banks and either holding cash or taking it abroad. So, how to Greek banks give them euros without selling all their assets -- loans and Greek government bonds? Answer, they get the money from the Greek central bank, which gets the euros from the ECB. The ECB is getting antsy about funding not just Greek government debt, but the whole Greek banking system.

Sooner or later Greeks will translate all this central banker speak about "capital controls" "liquidity management" and so forth to "there is a good chance that tomorrow morning your bank account will be frozen or converted to Drachmas." Then the run of all time starts and the whole thing unravels.

How do you stop that from happening? By shouting from the rooftops that the currency remains the euro, no matter if the government defaults on its loans to the IMF. At least we can shout from the rooftops that changing currencies is a separate decision, and that stiffing the IMF does not imply the logical necessity of grabbing Greek bank accounts.

To be sure the article gets much right. It's main thesis: Letting Greece default might be the right thing to do

But if Athens won’t implement reforms that would return Greece to growth and sustainable finances, allowing the country to leave would be the least bad outcome.

And if the WSJ understood that "allowing the country to default" is not the same thing as "allowing the country to leave" the case is even stronger. (Though who does this "allowing" is a bit muddy. One more subject-less sentence infects the forlorn English language of policy-speak)

No one should cheer a Greek exit, which would be a disaster for the Greeks.

Yes. Yet another reason to separate sovereign default from a change of monetary units.

Greece’s main contagion threat now would be if it is bailed out again without reform. 

This is the article's central point, and a good one. In financial as in foreign policy, people take important lessons from discovering that threats are empty.

The strongest argument against allowing Greece to leave the euro is that it would dent the bloc’s appearance of permanence, making the euro more like a currency peg that members could leave at will.

Exactly. And if we would all go back to the original Instruction Manual For the Euro, that says sovereign default can happen, just like corporate default, and does not require a change of currency, that permanence would be all the more assured.

Beware of Greeks Bearing Bonds

Once again, the news is full of opinions that Greece might be forced to leave the Euro. Once again, it makes little sense to me. U.S. corporations, municipalities, and even states default, and do not have to leave the dollar zone as a result.

Most recently, the story goes, if Greek banks can't use their Greek government bonds as collateral with the ECB, the Greek government will have to leave the euro so it can print Drachmas to bail out the banks. There are of course many ways in which this makes little sense -- if the bank has promised Euros, then a Drachma bailout does not stop a default. The government would have to pass a law "converting" euro deposits to Drachmas. But consider the story anyway.

Another common story right now: If Greece were to default, it would have a hard time borrowing to fund primary deficits. By leaving, it can print up Drachmas to pay bills.

OK, here's the obvious solution: Greece can print up small-denomination zero-coupon bearer bonds, essentially IOUs. They say "The Greek government will pay the bearer 1 euro on Jan 1 2016." Greece can roll them over annually, like other debt. Mostly, they would exist as electronic book entries in bank accounts, but Greece can print up physical notes too.


Who will buy? Most of Greece's spending is transfer payments, to pensioners, health care, government workers, and so on. Greece can pay all of these with IOUS. It can "recapitalize" or lend to banks with these.

Sure, they'll trade at a discount. Probably a hefty discount.  If Greece accepted the IOUs at face value for tax payments, however, the discount might not be that large.  Mostly, the discount would reflect risks that Greece either change its mind about accepting its own debt for tax payments, or that it would suspend the roll over, essentially defaulting on this new class of debt.

Yes, this proposal amounts to creating a separate or dual currency, while staying on the euro. That is exactly the point. Not only does a country in default not need to change currencies, in modern financial markets, a country doesn't even need the right to print money in order to, well, print money! Bonds are money these days. There's the Drachma conversion, devaluation and inflation so many commenters desire, can happen (the latter when promises are inevitably broken) all  without leaving the Euro.

I gather California did something similar recently, paying bills with transferable IOUS and thus avoiding the prohibition on states printing money. Commenters let me know if you remember the details.

To be clear, I don't recommend this path! This is a theoretical-possibility blog post, not an advice-to-Greece blog post. (Advice remains, stop fooling around, massive structural reform tomorrow morning, grow like crazy, pay off debt.) And yes, it would be a horrible fate for government workers and pensioners. However, maybe better than the alternative: "leaving the euro" means having bank accounts (what's left after the run) transformed to inconvertible drachmas, and being paid in drachmas, with the whole point is to inflate away the value of the same government claims. So promises for euros might be better. Who knows, maybe eventually the Germans and the IMF might pay these off too.

This works nicely as a matter of economics. If readers know what would stop Greece from doing it legally, I would be curious to know. Of course, "the Germans aren't that dumb" is one good answer, and such debt would count against the debt and deficit limits. But that doesn't really get at the question. The question is, do the legal restrictions against Greece printing money and spending it in the euro would stop Greece from printing up "debt" and paying bills directly with such debt rather than raising euros on capital markets?  Opinions?

Update

There are lots of different ways to market the same thing, and skirt pesky laws and international agreements. Another: sell "tax indulgences." For 95c today, you can buy a transferable coupon that is acceptable for 1 euro of tax payments next year. This is nicer actually as there is no need to default or roll over. The "roll over" happens automatically. Taxpayers cash in this year's indulgences, the government sells next year's.

SNB, CHF, ECB, and QE

The last two weeks have been full of monetary news with the Swiss Franc peg, and the ECB's announcement of Quantitative Easing (QE). A few thoughts.

As you have probably heard by now, the Swiss Central Bank removed the 1.20 cap vs. the euro, and the franc promptly shot up 20%.

To defend the peg, the Swiss central bank had bought close to a year's Swiss GDP of euros (short-term euro debt really) to issue similar amounts of Swiss Franc denominated debt.

This is a QE -- a big QE. Buy assets, print money (again, really interest-paying reserves). So to some extent the news items are related. And, it's pretty clear why the SNB abandoned the peg. If the ECB started essentially the opposite transaction -- buying debt and selling euros -- the SNB would soon be awash.

A few lessons:


A peg depends on credibility. The dollar is pegged to 4 quarters. The Fed is not racking up huge dollar for quarters QE, because everyone knows it will always be thus. The fact that the SNB had to buy euros at all is a great signal that everyone knew the peg was temporary. As, in fact, the SNB had made pretty clear. Sometime or other, probably when it's most important, investors thought, Swiss Francs will shoot up again. Might as well buy more of them.

An exchange rate peg is fiscal policy.  Really, the "credibility" a country needs is fiscal credibility.

The peg fell apart because the SNB was trying to do it alone. On the day of abandonment, the SNB lost about 20% of its balance sheet, since it owns Euros and owes Swiss Francs. Had things gone on any more before the plunge, they would have had to go begging to the Treasury for a recapitalization. "We just lost 20% of GDP, could you please send us some fresh government bonds to back our CHF debt issues?" That works seamlessly in economic models, but would be a political nightmare for a central bank.

So, if you want to run a peg, it should be done jointly with the Treasury. The central bank buys euros, sells francs, but immediately swaps the euro debt to the treasury for CHF debt. That at least is removes the first fragility, by taking the fiscal risk off the central bank balance sheet.

From the point of view of the nation as a whole, a strong demand for your government debt (that's what this is) is an invitation to profligacy, not a fiscal danger. That's why pegs usually break in the other direction: The central bank tries to peg a currency, let's call them pesos, against another, let's call them dollars. (Or gold.) People start to ask for dollars in exchange for pesos, the central bank starts to run out of reserves. At this point the treasury has to either tax, reduce spending, or credibly promise future taxes or spending reductions to borrow some dollars, and given them to the central bank in exchange for the bank's government debt. When that can't happen, the peg breaks. The essential problem is fiscal.

Switzerland had this in reverse: The Swiss were too darn thrifty.  Americans and Greeks know what to do if world capital markets come knocking and want to buy boatloads of your government debt. Print debt, give it to them, and send us Walmarts full of goods, or driveways full of Porsches.  Norway had a similar issue, with the world wanting to buy its oil. Norway decided not to go on a consumption binge, so their sovereign wealth fund buys equities; rights to future consumption.

Switzerland could have done the same: sell CHF bonds, use the proceeds to go on a consumption binge or buy about a year's GDP of foreign stocks. Instead, a referendum threatened a return to the gold standard.

Or, they could have said, "and by the way, we declare that we have the right to pay off our government debt in euros at 1.20, or to swap CHF debt for euro debt at that rate." Now that would have really enforced the peg. Devaluing the currency means engineering a partial default on government debt. Its fiscal policy and can't be done by the central bank alone.

QE and the ECB

Ben Bernanke famously said that QE works in practice but not in theory.  What that means, of course, is that the standard theory is wrong, and to the extent it "works" at all, it works by some other mechanism or theory. Permanent price impact by changing the private sector portfolio composition is the "theory" that Bernanke acknowledges really makes no sense. So why might a QE work?

In the US case, QE was arguably a signal of Fed intentions. Buying a trillion dollars of bonds and issuing a trillion dollars of, er... bonds (reserves are floating-rate debt) is a way for the Fed to tell markets that it will be years and years before interest rates go up. As I chat about QE with economists, this pretty much surfaces as the most plausible story for QE effects (along with, there weren't any long lasting effects.) Greenwood,  Hanson, Rudolph, and Summers make this point nicely, showing that Fed-induced changes in maturity structure have about twice the effect that Treasury selling more bonds does -- though exactly the same portfolio effect.

But what is the signal in ECB QE? Well, a decidedly different one. The signal is, I think, not about interest rates, but that the ECB will buy government debt. "What it takes" is now taken. Yes, there is this lovely pretense that national central banks buy the bonds, so the ECB doesn't hold credit risk. But if a country defaults, where is the national central bank going to come up with funds to pay the ECB?

So, when we think of what expectations people derive from ECB QE, and with that how it might or might not "work," the obvious conclusion is that the Eurobonds are now being printed. Like all bonds, they will either be repaid, inflate, or default.

Torsten Slok sends on this interesting graph. 80% of Greek debt is now in the hands of "foreign official." Now you know why nobody is worrying about "contagion" anymore. The negotiation is entirely which government will pay.

Slok on Greek Wages

Source: Torsten Slok

Torsten Slok, prodigious producer of graphs, sends this one along.

A section of macroeconomics holds that nominal wages are sticky, pretty much forever. Hence, countries like Greece need their own currencies so they can depreciate them. Somehow this didn't produce great prosperity the first, oh, 147 times Greece tried it, but anyway, it's common to bemoan how terrible it is for Greece to be part of the euro because wages can't fall and it can't depreciate.

Or not, as the graph shows.


Now, obviously, it took 5 years, and those haven't been pleasant 5 years. A devaluationist might counter that an exchange rate could have fallen 25% overnight. But this graph hides the composition. I would guess that not all Greek wages went down by the same 25% -- that some are going down more than others, and that like all prices the dispersion is more interesting than the average. That process -- moving out of inefficient businesses (and government, where wages have also fallen) and into better ones -- is always painful and would not happen under a quick depreciation.

So, before critics go all nuts, I'm not making a case that wages are as flexible as exchange rates -- clearly not. But the common view that nominal wages may never fall, and eternally sticky wages account for years or decades of stagnation, just isn't true per the graph.

A slight complaint -- the graph title is "competitiveness," not "relative wages." There is a lot more than wages in "competitiveness," like, say, productivity. You can be "competitive" with very high wages if you have a dynamic, efficient, high-productivity economy. And "competitive" is a terrible word anyway -- it has a very mercantilist ring, which is not how trade works.