
IMF staff made misjudgments in Greece, became cheerleaders for the euro (2016) - walterbell
https://www.telegraph.co.uk/business/2016/07/28/imf-admits-disastrous-love-affair-with-euro-apologises-for-the-i/
======
abduhl
"At root was a failure to grasp the elemental point that currency unions with
no treasury or political union to back them up are inherently vulnerable to
debt crises. States facing a shock no longer have sovereign tools to defend
themselves. Devaluation risk is switched into bankruptcy risk.

“In a monetary union, the basics of debt dynamics change as countries forgo
monetary policy and exchange rate adjustment tools,” said the report. This
would be amplified by a “vicious feedback between banks and sovereigns”, each
taking the other down. That the IMF failed to anticipate any of this was a
serious scientific and professional failure."

This is so obvious it boggles the mind how it could be ignored or not seen.
Anti Eurozone people have been saying it since the formation of the Eurozone.

~~~
muro
People making the decision had no cost to themselves if they were wrong.

~~~
RobertoG
It's deeper than that. The adoption of the Euro without a fiscal capacity at
the Euro-area level means that the Euro countries are basically working with a
foreign currency. That means that monetary issues are beyond political
control. That means beyond democratic control. Some people consider that is a
good thing.

Another issue is that the Euro is not a bad thing for all the countries in it.
Germany, for instance, as a big exporter, get a currency devaluation for free
an unencumbered access to a huge market. Interestingly, this success of the
German economy have not reflected, for the best, in the quality of life of
most of the Germans, but maybe, this is a discussion for other day (even if in
my opinion is really the same issue, see first paragraph).

~~~
TheOtherHobbes
Germany made €2.8bn from the Greek debt crisis - so not a bad deal for
Germany.

~~~
matt4077
That's like €25 per person. It's basically meaningless.

Meanwhile, Germany's annual net contribution to the EU is €220 per person. I'm
not pointing this out to complain–the EU is worth far more than that, and
seeing the giant improvements these transfers have supported in Eastern
Europe, or Ireland, or Portugal makes their usefulness obvious.

But suggesting that Germany (and the other countries involved) took on
billions and billions in risk hoping to earn what are obviously below-market
returns is laughable. Not everything is motivated by money.

~~~
RobertoG
You are forgetting that at the start of the Greek crisis, the debt was owned
by private banks (mostly German and French), now it's owned by the Europeans.

So, basically we saved those banks, make the life of the Greeks worse in the
process, and now they owe even more money than before.

------
RobertoG
"At root was a failure to grasp the elemental point that currency unions with
no treasury or political union to back them up are inherently vulnerable to
debt crises. States facing a shock no longer have sovereign tools to defend
themselves. Devaluation risk is switched into bankruptcy risk."

This is the fundamental issue. It's not a surprise. It has been explained by
many commentators even before the Euro existed (see, for instance: [1]).

[1] [http://www.bondeconomics.com/2015/07/book-review-eurozone-
dy...](http://www.bondeconomics.com/2015/07/book-review-eurozone-
dystopia.html)

------
economistrator
If you are curious about the policies forced on Greece and how Greece is doing
today, Macro Affairs had a good article on it recently.

[https://macroaffairs.com/ten-years-after-the-financial-
crisi...](https://macroaffairs.com/ten-years-after-the-financial-crisis-the-
problem-for-greece-is-the-same-but-bigger/finance-economics/)

~~~
claudius
With wisdoms such as:

> There were two decent solutions that would have ended this crisis within a
> year or two. One would have been that Greece default on its debts, paying
> back for example 30% of outstanding loans. Another would have been for
> Greece to leave the Euro Zone and go back to using the drachma (their
> currency before the Euro), and pay its creditors in the new currency. This
> new drachma would quickly fall in value as the Greek central bank would
> print more drachmas, making it easier to repay the devalued drachma loans.

How would defaulting on debts have solved any problems? Still nobody would
have bought new Greek debt and since Greece was running at a deficit before it
still would have run at a deficit, just without any additional funds. They
still would have had to get their administration in order to actually collect
taxes etc.

The second proposition is even more ridiculous, nobody would have bought the
new debt, the Drachma would have been entirely worthless and any sort of
import (of, e.g., medicine) would have been impossible.

Edit to add: And what happened of course _proves_ that these two
"alternatives" would have been ridiculous. Greece could easily have (on its
own) decided to default or switch to a new currency. No outside power could
force them to stay in the euro or pay their incurred debts. Yet somehow they
decided against these measures and instead took the horrible low-interest
loans offered to them.

~~~
spiralx
The Greek Government would buy the debt, assuming that we're talking about
bonds. That's how you run a deficit.

------
axilmar
Greek here.

The sufferings of Greece is first and foremost due to Greece's own faults and
less due to the Euro.

Greek pensioners had very generous pensions. The Greek pension organizations
had a deficit of around 10 billion euros each year, and the Greek state
covered that through borrowing.

In 2001, Giannitsis, then minister of the greek government, suggested a
pension system reform, which was ferociously opposed by every part of the
Greek society.

Lots of people in Greece ended up getting pensions of around 1200-1300 euros
(after taxes/insurance), which was extremely above what these people have
given as insurance when they worked.

The end result was the Greek deficit was getting larger and larger and
therefore the Greek economy blew up.

Had it been a different case, where the Greek governments made the necessary
reforms, not only in the pension system but also in other sectors of the
economy, Greece would never have this crisis.

------
Arnt
Please read [http://www.ieo-
imf.org/ieo/files/completedevaluations/Execut...](http://www.ieo-
imf.org/ieo/files/completedevaluations/Executive%20Summary%20Print.pdf) before
you comment.

The best of many good sentences IMO: "Lessons from past crises were not always
applied, for example when the IMF underestimated the likely negative response
of private creditors to a high-risk program".

------
jvkersch
Reminds me of another turbulent IMF intervention: South Korea's bailout in
1997. See [https://www.koreaexpose.com/imf-economy-south-korea-asian-
fi...](https://www.koreaexpose.com/imf-economy-south-korea-asian-financial-
crisis/)

------
nutjob2
Seeming ignored in these discussions is that right up to the bailout Greece's
problems were entirely self inflicted. When you're unable to take
responsibility for or support yourself you suffer the whims of others. That's
the real lesson here.

~~~
rsj_hn
That's just not the case.

When Greece had its own currency, it could devalue against the Deutsche Mark
and keep people employed. That devaluation would cause some inflation and it
would also raise interest rates a bit -- no debt bubble, no collapse of Greek
industry. Rather, German industry finds that it's currency is more expensive
to counteract increased Germany productivity and Germany fails to export more,
and thus does not accumulate excess savings. There is no flow of jobs from
Greece to Germany -- Greece keeps its jobs, Germany keeps its jobs, Greece is
forced to consume a bit less with the lower Drachma relative to Germany, and
Greece is forced to borrow a bit less with the higher interest rates.

With a forced peg against the DM, money was just being vacuumed out of Greece,
which created a recycling problem in which excess German savings could be used
to purchase Greek bonds. That lowers the interest rate in Greece artificially,
creating more debt in Greece even while Greek production becomes less
competitive and Greek jobs leave for Germany. That never ends well, and was
only caused by the Euro.

The crisis was just the unravelling of the above unsustainable trends, but
these trends were created by the Euro. You can't "until the crisis, Greece was
creating these problems" \-- the problems were created by the Euro.

The same thing for Greece's problems collecting taxes. When governments can't
collect taxes efficiently, they print more money, creating more inflation,
which is basically a tax on financial assets. So the money is still collected
by the Greek government. Now that the Greek government was no longer able to
print money, it was at the mercy of financial markets -- international
financial markets, which of course can't help the Greek government collect
money in the same way that an inflation tax can.

Greece simply has never been in a position where it could give up its own
currency and join a pegged regime with Germany. All of this was foreseen as
part of the folly of the European project. There are other bad effects, too.

~~~
tormeh
Well, the Greek government cooked the books in order to be allowed to join.
This is clearly Greece's fault.

The real lesson is that weak and corrupt governments are bad for most involved
with them and very hard to fix, even if you try very hard. So, if you can,
keep them at arm's length. They should never have been allowed to join the
euro. In fact, given their conflicts with Turkey and Macedonia, they shouldn't
have been allowed to join the EU at all.

~~~
StavrosK
> their conflicts with Turkey

What conflicts are these, pray tell? If you think Erdogan is just sitting
quietly, minding his own business, while the evil Greeks plot to expand their
empire into Turkey, you're either dangerously misguided or a troll.

~~~
mikeash
Nothing about that comment implied anything about which side is right or which
side is the aggressor.

~~~
StavrosK
That's what "they shouldn't have been allowed to join the EU at all" means.
Unless you're saying that countries bordering aggressive nations should be
banned from joining.

~~~
mikeash
Why not say that? International relations isn’t a morality play. Joining into
a union with a nation likely to get pulled into a conflict you don’t want
isn’t a good idea.

EU membership isn’t an award for good behavior, it’s a strategic choice made
to achieve certain goals.

~~~
StavrosK
Why have allies, if you're going to be obliged to help them if they get
attacked? Because the relationship is beneficial in other ways, of course.

~~~
mikeash
Sure, but if they’re likely to pull you into a conflict you don’t want and
would otherwise avoid, it’s usually a better idea to avoid it.

See, for example, Ukraine joining NATO.

~~~
StavrosK
So there isn't a hard and fast rule of "don't let countries bordering on
aggressive nations" join, which is my initial point. The benefits and
downsides of Greece joining the EU were weighed, and it was allowed to join.

~~~
mikeash
I thought your initial point was that the other commenter implied that Greece
was an aggressor against an innocent country, and that they were either
misinformed or trolling. My point, in turn, is that nothing about their
statement implied this.

~~~
StavrosK
Their statement could be taken in two ways: Either aggressors should never be
allowed, or countries with a risk of receiving aggression should never be
allowed. Since the latter is extreme, I can only assume the commenter meant
the former.

~~~
tormeh
That's not what I meant. Greece and Turkey doesn't have any military conflicts
currently, and are unlikely to get any in the near future. What Greece does
have are dumb and immature gripes with Macedonia and Turkey. Cyprus should be
a solved problem by now. There's no reason to have it hanging around as this
diplomatic pain point. The Macedonia conflict is stranger than parody, and is
about to be solved because Macedonia is showing itself to be slightly less
stubborn than Greece.

------
nutjob2
The Europeans are a crafty bunch. This arrangement is by design, not by
accident or ignorance.

The main problem among EU members is the lack of reforms. Devaluation has been
used as a panacea for all manner of economic ills, but devaluation achieves
nothing except inflation and decimation of income, savings and assets.

Without the ability to devalue, members are in a vice, and the only way out is
much needed reform.

In the case of Greece, things are so broken that reform is very hard, but at
least their suffering serves as a warning to others who thing they can get
away with it in the long term.

~~~
RobertoG
What those 'reform' means? Are you suggesting that Greece should become
Germany? What about Portugal or Spain?

Should all the countries to be net exporters at the same time? Sounds
mathematically impossible.

More interestingly, should Greece to become Germany without making any
investments? only by reducing their economy? All this is craziness.

In any currency union is going to be imbalances, that's unavoidable. I don't
think I have to cite examples here, only think in your own country, whatever
it is, and you will see that it's true. The solution is a fiscal capacity that
compensate those imbalances. If you are not ready to finance those lazy
Greeks, then you can't be in the same currency union that they are. So simple
like that.

I agree that the arrangement is probably by design. It makes it even more
evil, in my opinion.

~~~
Kurtz79
Reforms are generally intended as addressing overly generous social security
programs, corruption, tax evasion.

Portugal and Spain (and Ireland) implemented some of these reforms and, lo and
behold, a few years later are some of the fastest growing economies in the
Eurozone.

[https://qz.com/1207039/portugals-economy-is-growing-at-
its-f...](https://qz.com/1207039/portugals-economy-is-growing-at-its-fastest-
rate-for-17-years/)

[https://www.ft.com/content/be9d3fdb-d2fd-335c-929a-09b69752e...](https://www.ft.com/content/be9d3fdb-d2fd-335c-929a-09b69752efff)

[https://www.irishtimes.com/business/economy/irish-economy-
gr...](https://www.irishtimes.com/business/economy/irish-economy-growing-
three-times-faster-than-any-other-european-country-1.3383307)

Why Greece should be any different (as an Italian, why Italy as well?)

~~~
TheOtherHobbes
Ireland's GDP lost almost an entire decade of growth. It may be growing
relatively quickly now, but that's only after some very serious shrinkage.

And let's not forget that to orthodox economists, _any_ social security
program is overly generous.

~~~
sergiosgc
Ireland's GDP growth is a fiction. Any serious economist would only have to
look at the 25% GDP growth rate, in 2015, to state that something fishy is
going on. And indeed it is:

[https://www.irishtimes.com/business/economy/ireland-s-gdp-
fi...](https://www.irishtimes.com/business/economy/ireland-s-gdp-figures-
why-26-economic-growth-is-a-problem-1.2722170)

Ireland is a tax haven.

------
raesene9
I would think this needs a (2016) tag, as it's a couple of years old now.

------
sbt
Note that the Telegraph backed Brexit.

~~~
addicted
Anyone suggesting this as a reason Greece would have been better off outside
the EU is out of their mind. As poorly as the EU performed during the
financial crisis, nearly every member of the EU was better off inside rather
than outside. There is a reason Turkey is so keen to get into the EU even
after the crisis.

Also, while it’s correct the British media has been using the mistakes the EU
made during the financial crisis (which were the same as the mistakes the
British made, who self-imposed austerity and continue to do so), the reality
is none of these actually apply to the UK which has its own currency and as a
result has/had dramatically more financial freedom.

The UK essentially had the best of the EU and had avoided the worst of it.
It’s amazinf that they voluntarily gave up that deal.

~~~
StavrosK
> nearly every member of the EU was better off inside rather than outside

Is this true of current-day Greece (and future Greece, since things are only
getting worse)?

~~~
tonyedgecombe
The Greeks seem to think so.

In fact if I was Greek I would want to stay in the Euro zone (but keep my
money in a German bank).

~~~
AnaniasAnanas
Remember this?
[https://en.wikipedia.org/wiki/Greek_bailout_referendum,_2015](https://en.wikipedia.org/wiki/Greek_bailout_referendum,_2015)

A "no" vote was seen as a "leave from the Euro zone" vote by the average
citizen. It was the Greek government that ignored the referendum, not the
Greeks.

~~~
tonyedgecombe
_A "no" vote was seen as a "leave from the Euro zone"_

That wasn't what was on the ballot paper.

