Tag Archives: Reform

“Austerity,” EJ, forthcoming

Economic Journal, forthcoming, with Harris Dellas. PDF.

We study the optimal debt and investment decisions of a sovereign with private information. The separating equilibrium is characterized by a cap on the current account. A sovereign repays debt amount due that exceeds default costs in order to signal creditworthiness and smooth consumption. Accepting funding conditional on investment/reforms relaxes borrowing constraints, even when investment does not create collateral, but it depresses current consumption. The model contains the signalling elements emphasized by creditors in the Greek austerity programs and is consistent with the reduction in the loans issued by Greece and their interest rate following the 2015 election.

The Demand for Cash

On his blog, J P Koning discusses Kenneth Rogoff’s proposal to abolish high denomination notes (discussed earlier). Koning concludes:

I agree with Rogoff’s general point that it makes sense to burden cash users with ever more work since this burden disproportionately falls on heavy users like criminals. But Rogoff hasn’t yet convinced me that the status quo policy of gradually increasing the workload involved in cash usage (via inflation) needs to be sped up by a sudden removal of every bill above the $10. After all, the Swedes are setting an example of how a policy of gradualism can be twinned with tax policy in order to get some of the very effects that Rogoff advocates, namely pulling people out of the underground economy into the legal economy.

Koning refers to Martin Enlund’s post on the Nordea blog; Enlund suggests that decreased cash demand in Sweden may partly be due to policy reforms that rendered tax evasion less attractive.

Figure from Enlund blog:


MoU between Greece and its Creditors

In the Guardian, Heather Stewarts reports about the contents of the memorandum of understanding that the Greek government and its creditors have agreed on. It contains four pillars:

  • Fiscal sustainability, including pension reform and social welfare review;
  • Financial stability, including bank recapitalization;
  • Growth, competitiveness, investment, including liberalization of consumer markets, labor markets and professions;
  • Modern state and administration, including judicial reform and anti corruption measures.

Did Greece or “Germany” Surrender?

Social networks blame the German negotiators at the recent Euro summit for trying to humiliate Greece and dictating policy. This does not make any sense if one views the agreement as a loan contract between parties that are free to choose. But does it make any sense from a broader, political perspective?

According to Open Europe,

Italian Finance Minister Pier Carlo Padoan told Il Sole 24 Ore, “Almost all [Eurozone countries] were against a new [bailout] programme. Only the French, tiny Cyprus and we were in favour of a compromise. Maybe this isn’t well understood.”

In the FT, Gideon Rachman writes:

What nonsense. If anybody has capitulated, it is Germany. The German government has just agreed, in principle, to another multibillion-euro bailout of Greece — the third so far. In return, it has received promises of economic reform from a Greek government that makes it clear that it profoundly disagrees with everything that it has just agreed to.

German taxpayers seem to agree. According to Open Europe,

a snap Infratest Dimap poll for ARD found that 52% of respondents supported the agreement and 44% opposed it, while 62% said they want Greece to remain within the Eurozone compared to 32% who want it to leave. However, 78% of respondents said they did not trust the Greek government to fully implement the agreement.


The Economist’s Buttonwood column: “Even More on Debt and Democracy.”

Lars Feld’s comment in the FT.

Lee Jong-Wha’s comment on Project Syndicate.


Greece Will Default …

… or so it seems. Kerin Hope reports in the FT that

[t]he Greek parliament has approved a law proposed by the leftwing Syriza-led government overturning civil service reforms by the previous government aimed at streamlining the country’s inefficient public sector.

13’000 civil servants are to be rehired. The “institutions” have not been consulted. The municipal police force will be revived.

Greece vs Eurozone vs IMF

Peter Spiegel reports in the FT that

Greece is so far off course on its $172bn bailout programme that it faces losing vital International Monetary Fund support unless European lenders write off significant amounts of its sovereign debt, the fund has warned Athens’ eurozone creditors.

Update (May 6, 2015)

According to other reports the IMF downplays disagreement among lenders. Peter Spiegel and Stefan Wagstyl report in the FT:

Officials involved in the talks said the IMF was not seeking large-scale debt relief immediately. Instead, it was warning that any concessions to Athens that allowed the government to post lower budget surpluses — the likely trajectory of the current talks — would require debt relief to make up the difference.

And Ht reports in the NZZ: According to an IMF spokesperson

Poul Thomsen, der Chef der Europaabteilung des Fonds, [hat] in jener Sitzung darauf hingewiesen, dass der Bedarf an zusätzlicher Finanzierung und an Schuldenerleichterungen zur Sicherstellung der Schuldentragfähigkeit umso grösser werde, je mehr man in den Verhandlungen von den ursprünglichen, 2012 vereinbarten Massnahmen und Zielen (des zweiten Hilfspakets) abweiche.

… Doch Moscovici betonte am Dienstag, über die Schulden werde man erst nach einer Einigung über das Reformpaket reden können. Es ist ein offenes Geheimnis, dass dannzumal auch über ein drittes Hilfspaket gesprochen werden muss.

Richtig ist laut Verhandlungskreisen, dass der IMF an den Treffen der «Brussels Group» eine besonders harte Haltung gegenüber Athen einnimmt. Er muss seine eigenen Regeln unter anderem bezüglich der Schuldentragfähigkeit einhalten, um weitere Gelder auszahlen zu können. Am anderen Ende des Spektrums der beteiligten Institutionen steht die EU-Kommission, die ein Auseinanderbrechen der Euro-Zone um fast jeden Preis verhindern will. Werde deren Irreversibilität angetastet, komme sofort die Frage auf, wer der Nächste sei, sagte Moscovici.

In the meantime, the Greek government argues that disagreement among “institutions” makes it impossible to find a compromise. Panagis Galiatsatos reports in the NZZ:

… der Internationale Währungsfonds (IMF) bestehe mit Vehemenz auf strukturellen Reformen (Rentenreform, Liberalisierung des Arbeitsmarkts) und mehr Flexibilität bei der Bestimmung der Primärüberschusses, weil er von einem weiteren Schuldenschnitt ausgehe. Im Gegensatz dazu verlange die EU-Kommission, die einen Schuldenschnitt partout nicht wolle, hohe Primärüberschüsse. Das beweise, dass die Gläubiger in keinem Verhandlungsfeld kompromissbereit seien, während die griechische Regierung Kompromissbereitschaft signalisiert habe.

Syriza’s Left Wing

In the FT, Kerin Hope and Tony Barber portray left-wing members of the Greek Syriza government. These include:

Panayotis Lafazanis, minister for productive recovery, energy and the environment. He is quoted as saying “My way is no memorandum [Syriza’s term for the bailout agreement], no euro”.

Nikos Voutsis, minister for the interior and administrative reconstruction. He has reversed hiring restrictions; performance evaluation; wants to reinstate the municipal police force; and favors softer policing and more lenient treatment of prisoners.

Aristides Baltas, minister of culture and education. He is quoted as saying that education “should not be governed by the principle of excellence . . . it is a warped ambition.” He wants to eliminate restrictions on the duration of undergraduate studies; abolish university entrance exams; ban police from campuses; and grant students decisive powers to elect university officials.

Parallels between Argentina and Greece

On Project Syndicate, Raquel Fernández and Jonathan Portes offer four lessons from the Argentinian default in 2001 for Greece:

… if the economics are on your side, you can and should ignore politicians prophesying disaster. … a short period of political turmoil can cost surprisingly little compared to a long period of mindless pursuit of misconceived policies. But … Greece must acknowledge that its fundamental problems are of its own making. … Greece is unlikely to enjoy the breathing space provided by a commodity boom. If it is to place itself on the road to a sustainable recovery, it has no time to lose.

“Austerity,” CEPR, 2014

CEPR Discussion Paper 10315, December 2014, with Harris Dellas. PDF. Also published as CESifo Working Paper 5146, Study Center Gerzensee Working Paper 14-07. PDF, PDF.

We shed light on the function, properties and optimal size of austerity using the standard sovereign debt model augmented to include incomplete information about credit risk. Austerity is defined as the shortfall of consumption from the level desired by a country and supported by its repayment capacity. We find that austerity serves as a tool for securing a more favorable loan package; that it is associated with over‐investment even when investment does not create collateral; and that low risk borrowers may favour more to less severe austerity. These findings imply that the amount of fresh funds obtained by a sovereign is not a reliable measure of austerity suffered; and that austerity may actually be associated with higher growth. Our analysis accommodates costly signalling for gaining credibility and also assigns a novel role to spending multipliers in the determination of optimal austerity.