There was nothing new on this blog yesterday because

1. On Wednesday evening I accidentally hit “publish”, went I meant to schedule it for release yesterday, on the post about the striking anomalies between the fairly heavy penalties the Reserve Bank Act provides for breaches by bank directors of the Reserve Bank’s disclosure requirements, and the somewhat derisory penalties the Superannuation Schemes Act provides for scheme trustees for breaches of the disclosure obligations under that Act, and
2. Because I’ve been dealing with a bunch of historical events, which included what has now been established to have been a breach of the disclosure requirements of the Superannuation Schemes Act by past trustees of the Reserve Bank staff superannuation scheme.  Unfortunately, this involved, inter alia, some people with strong (and otherwise well-deserved) records on issues around transparency and disclosure.    Current trustees have now issued an apology.  As I noted on Wednesday, “You wouldn’t want to be in a scheme where the rules could be changed without you being aware of it”.

But this post is about Greece.

I’ve just finished reading Mark Mazower’s book, Salonica: City of Ghosts.  the story of Greece’s second largest city, and its hugely varied past. In Christian history, it was the first city in which the apostle Paul is recorded as having preached the gospel.  Little more than 100 years ago it was still a major city in the decaying Ottoman Empire, birthplace of Mustafa Kemal, with a population that was much more heavily Jewish and (to a lesser extent) Muslim than it was Greek. Earlier in the year, I reading Twice a Stranger, an account of the brutal and murderous expulsion of hundreds of thousands Greek Christians from Turkey to Greece, and of the (rather less brutal but just as effective) removal of the Muslim population of Greece to Turkey, in and around 1923.   We might think of Greece as an ancient country, and it certainly has many ancient places, but modern Greece became independent only in 1832 – just a few years before the Treaty of Waitangi and the British annexation of New Zealand. Greece’s current borders weren’t settled until the 1920s.

And within whatever boundaries it had, Greece’s history has hardly been a settled one. Reinhart and Rogoff have documented the history of sovereign debt defaults. But I had in mind foreign wars, occupation, civil war, political assassinations, suspensions of democracy, and a military junta that gave up power little more than 40 years ago.

And yet…. as Scott Sumner pointed out recently, in some ways it is remarkable that Greece has done as well economically as it has.  Add to the turbulent history, scores in any of the global competitiveness indices that are really very bad

The Heritage Foundation publishes an annual ranking of 178 countries, in terms of economic freedom.  This ranking has some flaws, but it gives a ballpark estimate of how “market-oriented” an economy is.

The three countries directly above Greece in economic freedom are Niger, India and Suriname, the three right below are Bangladesh, Burundi and Yemen. It’s a strange neighborhood for a developed European country.

Here are the Angus Maddison estimates of GDP per capita for Greeece and New Zealand since 1913.  They are only estimates, and no doubt could be contested on many details, but the general picture seems plausible.

I found the chart striking for two reasons.  The first is that in 1913, Greece is estimated to have had GDP per capita less than one-third that of New Zealand.  That is a really large gap.  Of course, at the time New Zealand had some of the very highest living standards in the world.  But, by comparison, the poorest EU and OECD countries today (Mexico, Turkey, Romania, and Bulgaria) now have incomes about half those of New Zealand’s.

On this measure, at peak, in 2007/08, Greece’s GDP per capita is estimated to have been around 80 per cent of ours.  On other (better) measures,  but for which there is no comparable long-term time series, Greece is estimated to have had higher GDP per capita than New Zealand by then.   Of course, New Zealand has been one of the worst performing advanced economies in the last 100 year, but even last year the Conference Board estimates that Greek GDP per capita was around half that of the United States.  Greece has managed a great deal of convergence

The other thing that struck me about the chart was the variability in the estimates of Greek GDP.  For New Zealand, the Great Depression of the 1930s was the largest dip.  Greek GDP fell then too, but it is barely noticeable.  And even the catastrophic fall in Greek GDP in the last few years is shaded by the earlier falls –  those associated with, first, World War One, and then with World War Two, the occupation, and the subsequent civil war.  Other occupied countries experienced a sharp fall in GDP per capita during World War Two –  France’s fell by around 50 per cent, but had surpassed 1939 levels by 1949.  Greece didn’t get past 1937 levels of GDP per capita until 1957.

Perhaps depressions of the magnitude Greece is experiencing now feel different with those sort of historical memories in mind?

My other recent reading about Greece was last week’s New Yorker profile of Yanis Varoufakis (here), until recently Minister of Finance in the Syriza government.  I didn’t find Varoufakis a sympathetic character, at all, but the profile is well worth reading, as background to the continuing crisis.  But it was some of the biographical stuff that really caught my eye.

As we drove, Varoufakis talked of his father, George, whose example of stubbornness had helped shape him. In 1946, during Greece’s civil war against Communist insurgents, George Varoufakis was arrested as a student leftist, and refused to sign a denunciation of Communism. He was imprisoned for four years, and repeatedly tortured. His signature would have freed him. I later met the senior Varoufakis—the courtly chairman of a steel company who, at ninety, still goes to the office every day. He told me that for years after he was freed he couldn’t listen to Johann Strauss: his torturers had “put on waltzes, very high, in order not to hear our voices, our screaming.”

After George Varoufakis returned to college, a female student kept an eye on him for a paramilitary right-wing group—“Stasi stuff,” as Yanis put it. But she fell in love with George, and they married. Yanis was born in 1961. During the military dictatorship of 1967 to 1974, Varoufakis’s uncle, a libertarian, was imprisoned for participating in small-scale terrorism. Varoufakis recalled his excitement when charged with smuggling notes to him on prison visits.

What a country.

Of course, plenty of other European countries had a bad time in the 20^th century –  Spain, Portugal, and most of eastern Europe.  But it helps make more sense, to me at least, of why the Greek population seems so unwilling to leave the euro, despite the peacetime economic disaster they are now living through.

I’m now reading a contemporary account of the political situation in Europe written in 1936. It is widely recognised now that countries that came off the Gold Standard and devalued their currencies recovered fastest from the Great Depression.  France was one of the last to do so.  This book was written just after France had finally gone off the Gold Standard in mid-1936.  The author, John Gunther, observes

“Why did the rentiers, the small capitalists, the peasants with savings, swallow such a [deflationary] programme when devaluation of the franc might much less painlessly lighten the burden?  The reason is, of course, largely psychological.  The terrors of deflation were comparatively known; those of inflation [rife in France in the 1920s] were known and doubly feared”

And if I were a Greek voter today, remembering the extreme instability of my own country, perhaps I too might cling to the euro and the EU, even amid all the humiliation and economic dislocation, rather than risking a leap into what might reasonably be seen as an abyss.  It is easy for macroeconomic analysts to talk of real exchange rate adjustments, unemployment rates etc. But what are they against the memories of torture, betrayal, civil war, military government, occupation, forced mass relocations – a precariousness that is difficult for those in the handful of countries who’ve had settled boundaries, no military conflicts on our territories, and stable democratic government for the last century [1] to fully grasp.

The current arrangements, limping from month to month, seems no way to consolidate that 20^th century closing of the Greece/New Zealand income gap. Staying on the Gold Standard until 1936 wasn’t that wise for France either, but it happened. History is context.

[1]  A list no longer perhaps than Australia, New Zealand, Switzerland, Sweden, Canada, and the United States?

Gideon Rachman’s column in today’s FT suggests (if he doesn’t quite directly say) that for Greece to leave the euro would now be the best way forward for everyone. He uses the analogy of a struggling marriage in which both parties might be happiest apart, however traumatic the breaking up might be. Where I come from marriage is “until death alone parts us” and my reading of the literature suggests that many unhappy couples who chose to stay together end up happier than those who separate. But the euro isn’t a lifelong covenant. It is an act of foreign economic policy among a group of sovereign states. While it serves the interests of their respective peoples it should last, and when it doesn’t it should be dissolved or slimmed down.

Rachman’s line is similar to ones I’ve run in a couple of recent posts (here and here), although my focus has been more on the idea that there is no politically saleable path (saleable in Greece, and in the other eurogroup countries) that offers both a robust Greek recovery and the whole euro group of countries remaining together. There is no guarantee that exit would be in the long-term best interests of Greece, but the status quo looks pretty awful.

Everyone knows how large the fall in real GDP has been, and how high the unemployment rate now is, years on from the start of this crisis. With no scope for discretionary monetary policy, and limited fiscal room even if the sovereign debt is mostly defaulted on (since the near-term appetite of new lenders is surely going to be limited), the source of any sustained boost to demand must either domestic innovation and productivity, or external demand.

Those wanting to put an optimistic gloss on the data can certainly produce real exchange rate measures that seem to show some gains in competitiveness. Perhaps, but it is difficult to adjust for compositional effects (the least productive people will have lost their jobs, but presumably want to be employed again one day).

These two charts just look at some of the key aggregates, drawing from the OECD’s quarterly national accounts database.
Exports have been recovering somewhat since the trough after the global recession of 2008/09, but the volume of exports is only now back to 2007 levels. In an economy with unemployment in excess of 25 per cent, there is no crowding out of the export sector.

Import volumes have certainly fallen, very substantially. That might reflect competitiveness gains, and greater opportunities for domestic import-competing tradables producers. But it looks a lot more likely to mostly reflect a severe compression in demand. The collapse in real investment is particularly telling.

It is not quite all bad news. Greece has experienced an improved terms of trade over the last few years. But there is no sign of it translating into the sort of robust export growth, or business sector investment, that might enable the external sector to begin to pick up the huge slack in Greece’s economy. Whether that is because firms just aren’t competitive or because of rising uncertainty (or some combination of the two, as seems more likely) isn’t immediately clear. But note that these data go up only to 2014q4 – this was what things were looking like under the previous government and the old programme (for all its limitations). Any uncertainty has only become greater since then.

WIth almost nothing going well in Greek economy, and limited tolerance in the rest of Europe, the status quo surely can’t go on much longer.  One piece of good news today is reports that the IMF is no longer willing to extend and pretend, in this case at least.