The Lessons of Greece

There seems to be a nascent argument brewing in the blogosphere, as the folks who gleefully declared that the events of 2007 constituted the final, damning indictment of market capitalism discover that sovereign debt crises can also trigger massive financial panics.  Meanwhile, the right, as Dave Weigel notes, has started to use Greece where it used to deploy France:  as the ultimate example of everything that goes wrong with government.  Needless to say, this does not sit well with the folks who were busily writing obituaries for the anglo-saxon, neoliberal, capitalist, etc economic models.

All of this is a bit overwrought.  Claiming that the Greek crisis has not mainly been caused by the euro and its own government profligacy is like claiming that the 2007-8 crisis sprang full blown from the heads of various government regulators--it just looks desperate to everyone who didn't already agree with you.  Likewise, trying to turn the experience of one peripheral EU member into a blanket indictment of all welfare states makes no more sense than concluding that the events of the last few years leave no alternative but communism.  You cannot blame the Greek government without blaming all the private sector idiots who lent them the rope to hang themselves.

The issues Greece illustrates seem to me to be rather more subtle:

  • You cannot graft rich-world policy onto emerging markets.  Conservative fiscal and monetary policy--by which I mean reasonable deficits and low inflation, not "conservative" policy in the American sense--emerges from the social and political institutions of a country; it cannot be imposed.  Countries frequently try to borrow the benefits of these policies by tying their policies to those of some more creditworthy nation, but these efforts generally seem to end in tears unless the country already has a pretty high level of institutional support for this sort of fiscal and monetary policy--at which point, the currency unions and dollar pegs and so forth aren't so necessary.  I used to be a fan of dollar pegs and other attempts to make a credible commitment to fiscal rectitude, but after Greece and Argentina, the scales have fallen from my eyes.
  • As Tyler Cowen says, "The fundamental cause of the financial crisis has been people and institutions thinking they are more wealthy than they are; this spread to Europe as well and now we are seeing the comeuppance."  To which I'd add, the problem is often less the overall level of spending, than the fixed commitments.  People who end up in bankruptcy not infrequently were living well within their means until they had some major income shock, such as a long-term job loss.  What they had was too many debt payments of various sorts, so that when their income fell, they could not adjust their spending accordingly. 

    "Thinking you're richer than you are" includes spending right up to the edge of your earning potential.  And to the extent that this does suggest problems with the European welfare state, it's not because there's some "scientific" reason that government spending is inherently bad, but because the European welfare states have grown to near the top of the state's ability to collect taxes.  Because these obligations are very hard to adjust in downturns, their governments are, like individual debtors, more vulnerable to individual income shocks.  It also makes the coming pensioner problems harder to deal with.  If European countries had relatively high levels of spending on things like roads, which would allow them to fiscally contract if necessary with relatively less pain, it wouldn't be such a problem.

    But this shouldn't be taken to say that "the European welfare states aren't sustainable" because frankly I have no idea whether they are or not; the way to find out is to wait until they are, or are not, sustained.  This is as true of people who put their lavish vacations on Mastercard, as it is of governments.
  • As Felix Salmon says, banking crises often become sovereign debt crises, and vice versa.  There is no neat separation between "the government" and "the free market" in a financial crisis, and attempts to impose such a separation in your mental models is bound to lead your analysis astray.  The ECB and other EU members are committing phenomenal amounts of money in an attempt to prevent a banking crisis in their own countries; if it fails, and they have to bail out their banks anyway, they may well end up in trouble.  I'm not sure it matters whether chicken or egg came first.
  • The fact that some moron is willing to lend you money is not a good reason to borrow it.  The market does get it wrong, either because it's in the grip of some momentary stupidity, or because it doesn't have all the information, like knowing that the prior Greek government was cooking the books.  When sentiment or information changes, you can end up in trouble too fast to do much except pray.
  • The demographic transition in the rich world is not going to be pretty.  I was recently speaking with Phillip Longman, who noted that Greece is one of the older countries in the EU, and that this is making everything about this crisis much worse.  Pensioners have a harder time absorbing austerity measures than other groups, for a number of reasons too obvious to run through.  Unfortunately, they're going to have to bear the majority of the cuts that governments make in the future, because at this point, they're becoming the largest beneficiaries.

But that's not what you wanted to know, is it?  What you wanted to know is how this current crisis could prove that everyone who disagrees with you is wrong, wrong, WRONG!!!  Sorry, but I'm fresh out of certainty.  All I have is a whole bunch of shopworn doubts.