Wednesday, 11 February 2015

'Good hunches': Predictions on Greece

On a few previous occasions I've found myself praising 'good hunches' of certain economists on being right about a number of predictions for the future (see here and here for example). There's also been a few not so good hunches (like when Paul Krugman asked Alan Greenspan to create a housing bubble in 2002 to offset the IT bubble) and a few downright terrible ones (like when Paul Samuelson predicted that the Soviet Union GDP will surpass that of the US by 1984(!), but more realistically by 1997). 

Now it's time to blow my own horn. I've been covering the eurozone sovereign debt crisis and in particular the Greek situation since I started writing this blog. After all, the crisis was a sort of an inspiration.

I was rather content to see how precise I was back in October 2011 to describe the possible outlook for Greece in the next few years, after the policymakers have devised their first draft of the Greek bailout plan. Here is what I wrote back then: 
"First of all is the Greek ‘rescue’ plan. It’s hard to see how this plan can actually help Greece stabilize. Keeping the status quo is not going to make investors ready to invest into the Greece economy. Pushing more money into an insolvent country and keeping it on ‘life support’ will make its economy more and more vulnerable and dependent on foreign aid. The policymakers are turning Greece into a long term problem for Europe. This will have negative implications on all fronts – it will ruin confidence around Greece for a long time, disabling it to achieve any growth whatsoever, it will create massive social instability in the country, and it will give further rise to euro-scepticism around the continent. The country’s future seems to be a lock-down in debt, social turmoil and inability to create growth. Greece at this point doesn’t only need a debt restructuring, it needs a restructuring of its entire economy, starting from the labour market, public sector, industrial policy and so on. This is what the policymakers should have focused on, instead they choose to short-fix Greece until 2020. According to all of this, I fail to see how Greece will be able to grow at all until 2020." (28th October 2011)
 In April of the following year, when Greece made the infamous debt swap the situation was even worse:
"...there is no sign of improvement: consumer confidence is hitting a new low, unemployment is reaching a new high, industrial production is still falling as is the manufacturing PMI, while the growth outlook never looked worse. The only two things showing improvement are government gross debt and the budget deficit, both due to the foreign enforced austerity reforms and as a part of the recovery strategy of the Troika (ECB, IMF, EC). Well, as anticipated it doesn't seem the enforced austerity did much help so far."
"The program of debt restructuring is that Greece needs to do a whole bunch of austere reforms which aren’t likely to jump start the economy or create a sustainable path for growth. They are expected to decrease their debt-to-GDP ratio from 160% to 120% in 2020, which is still a burden far too heavy for Greece, or anybody for that matter. The 120% threshold is too high, and has no economic justification. It’s a politically chosen goal made up to resemble the current Italian debt-to-GDP ratio, which is still deemed to be sustainable." (2nd April 2012)
And in the same month I proposed which reforms in particular Greece should focus on:
"Institutional reform starts with political stability. Greeks have little confidence in their government. In order to address this, the politicians need to restore belief in the system and the rule of law. The government must act as an enforcer of contracts to signal greater stability to both domestic businesses and foreign investors. After this, it has to continue with public sector reforms and liberalisation of the labour market (both are closely tied since the public sector unions are the ones with the highest level of rigidity). It must show strength in the bargaining process and create favourable incentives for businesses. Signals for new specialisation, trade and production should be left to the market - to bring about the necessary restructuring process supported by the new institutional setting. This is the only way to enable an efficient allocation of resources, removed from any distorting signals and able to attract capital. The banking system will benefit from positive signs of confidence and stability in the economy, which will reduce capital flight and slowly but gradually improve balance sheets. A euro exit could threaten this process by making it harder to achieve political stability. It would take Greece much longer to consolidate.  
Greece should turn to pro-market institutional reforms that will reduce distorting signals in the economy and create space for market led specialisation and investment. And these institutional reforms should not be limited to Greece. They are applicable to a series of countries which find themselves constrained by their unsustainable welfare state models of debt accumulation, high current account deficits, fiscal profligacy, corruption and high levels of state intervention." (23rd April 2012)
Pleas such as this one, advocated by many economists at the time, went unnoticed unfortunately.

In January 2013, I discussed why I don't think the euro will perish, despite Greek woes:
"Even though some are still not convinced that Greece will stay much longer in the euro (Roubini has given them a deadline sometimes in the next 5 years - a much careful prediction this time), nor that the euro itself would survive. Some see austerity, some see lack of real reforms as an eventual end to the euro project. It's hard to argue against this, since austerity is done in a completely wrong fashion, without any emphasis on labour market rigidities (sacking public sector workers just won't do it) or the regulatory and bureaucratic burdens. However, investor sentiment is a delicate creature, and an event such as a euro failure may destroy all hopes for recovery for as much as a few decades. In an ageing continent, with a risingly unsustainable welfare state system, this could be a trigger for a great deal of social unrest and new (old) conflicts. Political stability of the Eurozone, a system that became irreversible, is crucial in sustaining it. This is why it will never perish no matter how faulty were its initial foundations." (27th January 2013)
So far so good (in terms of the predictions that is). However the Greek woes continue. In the next few days I'll have a comment on the recent developments. Stay tuned. 

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