Debt-financed consumption caused the Greek crisis, not the bank bailout: Spengler
Mark Blyth, a Brown University economist, claims in a Foreign Affairs essay this morning that “Greece was a mere conduit for a [bank] bailout. It was not a recipient of funds in any significant way, despite what is constantly repeated in the media.” That’s misleading, because Greece (as well as Italy) used their membership in Europe’s common currency to finance huge wage increases with borrowed money through the 2000’s. Blyth’s essay, in many ways informative, misses the elephant in the parlor–Greek unit labor costs. It’s true that the rescue loans after 2012 went to Greece’s creditors rather than to the Greeks, but that is because Greece had borrowed massively to finance consumption before that.
It’s certainly true that the 2011-2012 operations of the European Central Bank rescued the creditors of profligate southern tier European sovereigns after a decade of debt accumulation. That was Europe’s subprime crisis, and like the 2008 rescue of American banks, none of the bailout money went to the original debtors. But southern Europeans and American homeowners had already had a decade of debt-financed consumption, and had to suffer the consequences. Should the US government have bailed out homeowners who took out “liar’s loans” with little or no down payment to speculate in the housing market, and paid for the bailout by taxing citizens who prudently declined to do so? Why should Eurozone taxpayers pay for the debt-financed consumption in the Club Med countries?
Unit labor costs in Greece soared in 2010 to 130% of their March 2000 level, the highest growth margin in the whole Eurozone. Of course, they have come crashing down since then (the OECD series stops in 2011). Italy’s unit labor costs rose almost 25%, and Frances by 10%–while German unit labor costs fell by 10%.
To gauge the Greek consumption ekstasis of the 2000’s, I divide the total wages and salaries number from the Greek GDP by the total number of employees. This gauge of wage income per employee nearly doubled, from EUR 21,000 in 2000 to EUR 38,000 in 2010, before falling back to EUR 32,000. Total employment, to be sure, has fallen from a peak of nearly 4.6 million in 2008 to just 3.5 million today, but that is because Greece spent the preceding ten years pricing its labor out of the world marketplace.
A great deal of the wage boom came directly from the public sector, where salaries were 50% higher than in the private sector. “Government spending on public employees’ salaries and social benefits rose by around 6.5 percentage points of G.D.P. from 2000 to 2009, while revenue declined by 5 percentage points during the same period. The solution was to borrow more,” John Sfakianakis wrote in the New York Times.
If you pay people more without increasing productivity, they will buy more from other countries, for the simple reason that you aren’t increasing production as fast as consumption. That is precisely what occurred in Greece and Italy. As unit labor costs soared, current account deficits in both countries plunged into extreme negative numbers. When countries run current account deficits, they increase their foreign debt.
That set the stage for the Eurozone crisis of 2011-2012. At that point, the European Central Bank concentrated its efforts on a bank rescue. As Prof. Blyth reports, “European banks’ asset footprints (loans and other assets) expanded massively throughout the first decade of the euro, especially into the European periphery. Indeed, according the Bank of International Settlements, by 2010 when the crisis hit, French banks held the equivalent of nearly 465 billion euros in so-called impaired periphery assets, while German banks had 493 billion on their books.”
At that point, the “troika” of the European Union, European Central Bank and IMF, resuced the banks. Blyth notes:
In March 2012, the Greek government, under the auspices of the troika, launched a buy-back scheme that bought out creditors, private and national central banks, at a 53.4 percent discount to the face value of the bond. In doing so, 164 billion euro of debt was handed over from the private sector to the EFSF. That debt now sits in the successor facility to the EFSF, the European Stability Mechanism, where it causes much instability…As former Bundesbank Chief Karl Otto Pöhl admitted, the whole shebang “was about protecting German banks, but especially the French banks, from debt write-offs.”
The European Community also gave spain EUR 40 billion in December 2012 to rescue its banks, on top of a EUR 100 billion credidt line the previous June. That also bailed out the French banks, who had huge holdings of Spanish bank bonds. One can debate the wisdom of this action (at the time, I opposed it). But the Greek economy, such as it is, can’t be patched up: it has to become a different economy. It could become a much poorer economy, emulating Argentina after its default; it could become a distant satrapy of China; it could try to recast itself as an entrepreneurial enclave and attract back some of legions of talented Greeks working in other countries. Whatever the outcome, Greeks will have to consume less for some time to come.