"Deprived" My Foot

Greece, ECB, Euro

Greece, Euro, ECBI don't know about you, but I'm tired of hearing  that  Greece is being "deprived of fresh Euros" by the ECB, or by the European Commission, or that those bodies are "moving toward cutting off its money supply."  That's to say nothing of the Greek government's suggestion that Greece is being "blackmailed" by these authorities.

Such talk seems to suggest that Eurozone members are like so many helpless hatchlings, their outstretched beaks agape in anticipation of the ECB's regular and solicitous regurgitations of liquid sustenance.

At the risk of belaboring the obvious, I'd like to take a stab at putting this misguided metaphor to rest.

Consider for a moment, then, how two other Balkan states — Kosovo and Montenegro — manage to get hold of the euros they need to support their economies.  Although the euro is their official currency, neither is part of the Eurozone, and neither has had a formal agreement of any sort with ECB such as could allow it to count on being able to borrow euros from that institution, strings or no strings, in a pinch.

Yet neither territory complains  of being "deprived" of euros by European authorities, much less of being "blackmailed" by them.  Nor do Panama, Ecuador, and El Salvador — all dollarized Latin American nations — complain that the Fed isn't sufficiently forthcoming with dollars.  (Panama did once have reason to complain of blackmail, when the U.S. blocked paper dollar shipments there as part of its effort to topple Manuel Noriega.  But that was a special case.)  If the ECB and the Fed won't deal directly with these countries, on any terms, how do they manage to get their hands on the euros or dollars they need to keep their banking systems and their economies functioning, if not  thriving?

The answer is that both the euroized states of the Balkans and the dollarized ones of Latin America  have no choice but to get hold of euros and dollars the old fashioned way: by earning them.  That means that, to add to their stock of currency, they must bring in, through exports, remittances, and tourism, more euros or dollars than they spend on exports, remittances, and tourism, or else they must get foreigners to invest more in their country than they themselves invest abroad.  In other words, euros flow into Kosovo and Montenegro when they have a surplus balance of payments, and flow out when they have a deficit.  The same goes for Panama and dollars.  Ditto, for that matter, for Alaska and dollars.  In still other words, these states import their currency, and must pay for it, in the same way that they and other states import automobiles, and have to pay for those.

In principle, Greece could have imported all the euros it needed, without having to get them directly from the ECB, provided it exported enough goods, or attracted enough foreign capital, to end up with a sufficiently large balance of payments surplus.  For some years, while newlywed Eurozone members were still enjoying their long honeymoon, Greece did just that, relying mainly on foreign capital inflows to stay flush.  The trouble is that the flows in question consisted largely of revenue earned on sales of Greek government debt, and that the Greek government, instead of employing that revenue productively, so as to be able to collect taxes sufficient to keep its credit afloat, used the money it borrowed to further fatten an already bloated public sector.  The subprime crisis, to be sure, confronted Greece — along with much of the rest of the world — with tight money.  But with the help of a more responsible government Greece might eventually have gotten through its debt crisis, as Spain and other formerly debt-crippled Eurozone members have managed to do.  European authorities, it's true, contributed to Greece's spending spree, by giving Greece's creditors reason to assume that they'd never let any eurozone state default and that they'd never let the eurozone shrink.  Those authorities may also be faulted for not recognizing the futility of their attempts to make a Greek bailout conditional upon severe austerity measures.  Still, the Greek government is ultimately to blame for having borrowed, and then squandered, so much.

Now Greece, its credit in shambles, is on the verge of collapse.  For some time now it has had to depend on direct ECB support of its monetary system, and unless Greece's latest reform proposal is accepted by the EU, that support will run out.  Yet it blames its predicament, not on its own government's profligacy, and not on its resulting inability to raise the euros it needed to stay solvent through the normal operations of international exchange, but on the strings the ECB and other lenders have attached to their offers of emergency funds.

Stuff and nonsense.  When an entire multi-national currency area runs short of money, it is presumably some central bank's fault.  But when one country alone runs short, the blame rests squarely on that country's own misguided policies.

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  • Max

    The ECB wasn't lending directly to Greek banks. Rather, the Bank of Greece was lending money to Greek banks. Although the Bank of Greece was accumulating euro liabilities, there was little risk to the euro system, given that Greece wanted to remain in the system. If the ECB had allowed the BoG to function, the bank run would have stopped, and euros would have flowed back into Greek banks (reducing the BoG's euro liabilities).

    Essentially the ECB crippled the Greek economy in order to deprive the Greek government of negotiating leverage that it would otherwise have, given that it was running a primary budget surplus.

    • George Selgin

      Max, the ECB lent and continues to lend directly to the Greek government through its acquisitions of that government's securities. And it has lent to Greece's central bank so that that bank might in turn lend to Greece's commercial banks. ( ECB lending to banks is generally conducted via national central banks of the Eurozone.) Yes, the ECB could have kept Greek banks from closing by sending more ECBs their way–at the risk of encouraging more of the very same behavior that got Greece into its present fix. But the fact remains that neither the Bank of Greece nor Greek commercial banks need ever have found themselves short of Euros had the Greek government not behaved so recklessly and irresponsibly.

      To say that the ECB "crippled the Greek economy" is absurd: Greece was crippled by its own government. It is a basic principle of ethics, and of law, that a mere refusal of aid, when there is no strict obligation to render such, doesn't amount to negligence, let alone to an intentional tort.

      • Max

        My contention is that the ECB's actions were motivated by affinity with Greece's creditors, and not by concern for the integrity of the euro system. If that is true, then it seems quite appropriate to say that they crippled the Greek economy.

        • George Selgin

          I don't think so, Max. You may say that they have acted irresponsibly in not taking a larger view of the situation, or that they have been ungenerous, or that they have been mean spirited. All of these things are perhaps true. Yet the fact remains that Greece alone is to blame for having put its economy at the mercy of European authorities.

          • IndySpiral

            Doesn't the you provided of Kosovo and Montenegro (and Panama) being able to run their economies with a foreign currency demonstrate that a central bank, such as the Federal Reserve, need only restrict itself to bond auctions and purchasing bonds (open market operations)? Isn't what Kosovo, Montenegro and Panama doing an example of "free banking." Banks that do not rely on having a "lender of last resort."

          • George Selgin

            Yes, that is correct. The CB should limit itself to seeing to it that the general market is sufficiently liquid. Of course, it's ability to do that depends on the presence of a reliable operating system. On this see my paper, "L Street."

  • Justin Merrill

    George, wouldn't you agree though that Greece is currently experiencing monetary disequilibrium and not just a fiscal crises? Should we distinguish between short run and long run, because in the long run Greece's price level will fall/interest rates rise to make their money supply equilibrate? But if that's the case, aren't we throwing out the whole monetary disequilibrium project because in the very long run, money is neutral?

    • George Selgin

      Greece is experience disequilibrium owing to a run on Greek banks prompted by justifiable fears of a Greek exit from the Eurozone and the implicit devaluation that might entail. But it doesn't follow that there is a general shortage of euros. It isn't the business of central banks to control against regional monetary contractions; there responsibilities concern the overall currency area over which they preside. (Whether the Eurozone is an optimal currency area is another question altogether.) Concern about avoiding monetary disequilibrium is, moreover, only one part of a larger equation, another part of which must involve a desire to stem moral hazard, and Greece today exemplifies moral hazard _in extremis_.

  • Max

    Incidentally, you could argue that Greece should be required to pay a risk premium on its euro liabilities. Because Greece. But that's not part of the design of the euro system; everyone is treated the same (or was until recently).

    • Justin Merrill

      Doesn't the ECB conduct policy with repos so the credit of their counter-party isn't an issue? But I agree that the ECB's collateral policies have been stacked against Greece.

  • Q46

    But that is the ultimate result of welfare whether it be doled out to individuals or Countries, they become increasingly dependent on the dole because the dole does not involve that 'work' thing required for earning and the notion of entitlement to live at the expense of others settles in.

    Greece has a large poor, agricultural sector with no industrial base to speak of…. ditto Spain, Portugal, Italy and even France, although in these cases industry is a bigger proportion, but the agricultural population is large and reliant on subsidy aka welfare.

    Greece was then bribed to join the let's pretend we are a United
    States of Europe fantasy, and the money flowed in from EU grants, subsidies and cheap debt.

    Greece has no established wealth generation base because this takes decades to build up. Greece won the lottery and spent, spent, spent until the winnings were gone.

    The rest of the eurozone is not much better as debts mount, economies stagnate, the will to make the structural reform to provide an alternative to a poor agricultural sector not there.

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  • Benjamin Cole

    1. The time to settle an onboard argument about who put the hole in the hull is …after the hole is patched. Forget blame, and get Greece going.

    2. The goal now should be to get the Greek economy cooking red-hot, by almost any means necessary. Having the Fed digitize a few hundred billion dumping it into the Greek economy would actually benefit them and us. ECB sam thing. Moral hazard? Dudes, they are running a primary surplus in a 25% unemployment rate. Moral hazard, moral schmazard.

    3. Voters do not pull the lever for free enterprise and capitalism in the bottom of a depression or recession. History shows otherwise. Ponder this: Would voters like free enterprise and capitalism if there were deep and chronic "labor shortages." Or permanently high unemployment?

    Democracy is a crappy way to run an economy until you try the second-best way. Like it or not, we have to keep voters somewhat happy. Robust economic growth does that. In weak economies, people and industry gravitate towards structural impediments and government employment and sinecures.

    4. End sinecures at central banks! Central bank staffers actually get "pay raises" in deflationary recessions. Ever wonder why there is such a monomania about inflation at central banks? Central bankers do not risk capital in the economy. They are not venture capitalists or real estate developers. Central bankers are almost the worst people to decide monetary policy.

    • George Selgin

      Benjamin, the Greek voters have already "pulled the lever" more than once for something other than capitalism and free enterprise. And now they have got it and are experiencing the consequences.

      As you know, I am no friend of central banks of any sort. But it is precisely for that reason that I get goose pimples at the thought of the Fed, it's mandate already so ill-defined as to make its power to intervene in the U.S. economy virtually unlimited, involving itself in the Greek crisis. And surely to do so would be to take an action quite inconsistent with NGDP targeting or just about any rule-based policy.

      Imagine arguing for such a rule, and having some Fed official say, "Oh, if we were bound by that, how could we prevent Greece from descending into anarchy and socialism? We need to have the flexibility to save democracy!"

    • George Selgin

      Another follow-up, Benjamin, for there is a more important point I wish to make. You ask me to consider the political and ideological ramifications of having or not having the ECB (or the Fed) come to Greece's aid; or perhaps you assume that I am concerned with those ramifications–with doing whatever serves to promote "capitalism and free enterprise," for example, and believe that I have not thought them through sufficiently in arguing as I have. In fact, I abhor the treatment by any government or group of governments of money and monetary institutions as political tools, to be employed for the sake of achieving political goals, such as the unification of Europe or the preservation of democracy in Greece or the promotion of free enterprise. I am utterly convinced that Europe's economic troubles today, and many of the economic troubles of the past there and elsewhere, are consequences of this very way of treating money and monetary institutions. So long as money is treated as a tool of politics, whether domestic or international, so long shall it remain incapable of delivering macroeconomic stability. Because I believe this, I also do not believe that ending sinecures at central banks will accomplish much. It isn't the sinecures that have to go: it is the very idea of centralized and politically-influenced management of either national or multinational money stocks.

  • Benjamin Cole

    George Selgin–As always your commentary is friendly and intelligent. An example for all.

    But I wonder if we do not have a little too much reverence for money supplies and central banks etc. Maybe the voters should have their hands on the money press levers, almost directly, through referendum. Voters will learn in time about inflation and recession.

    The purpose of a central bank should be to promote sustained prosperity, not zero inflation (as measured, another can of worms).

    Well, it is another very long discussion on whether central banks are a good or evil!

    After a too-long career as a financial journalist, I fear that private actors lack the gravitas, authority and often honesty to make a permanent financial system.

    AIG is the private sector's idea of financial insurance.

    The ratings agencies are paid by the issuers? Are you kidding? No, that is standard.

    Wall Street will sell whatever it can package and sell.

    I do not believe in bubbles, but there may be a subset in there when you have a gullible investing public, and a Wall Street facing off….

    Anyways, I always enjoy reading your commentary, and especially your highly intelligent response to inquiries.

    I guess I am an old-fashioned "Arthur Burns." Run the presses and pump up the economy.

    However, I think the US economy is far less inflation-prone today than 40 years ago. We could have this place cooking red-hot and not much inflation. Was there much inflation in oNorth Dakota or Texas in the boom days. No…..

    Without a central bank, a bust can turn into a panic, can turn into a bottomless recession….

    • George Selgin

      Benjamin, I assure you that I am no fan of inflation targeting–though I am also not one to imagine that central banks can do more for "prosperity" than to keep total spending flowing as steadily as they can. As for them being "evil," that is not the language I prefer. They are unfit for the task, and that makes them dangerous and frequently destructive.

      You say that private actors cannot make a permanent financial system. That may be true, if only because governments won't let them. But such actors have made stable and long-enduring systems, like those of Scotland (1750-1845, roughly) and Canada (1850-1935, again roughly). There are other examples as well.

      Finally, I hold no brief for "Wall Street." Entrenched interests there, and especially at Goldman Sachs and Citygroup, are the worst sort of crony capitalists.

  • mackelby

    Until socialism is killed dead, Greece will never recover. It will just keep getting worse.

  • Robert Thorpe

    I mostly agree with George Selgin.

    I think the political situation is a bit more complex though. Let's say, for example, that the ECB refused funding to the Central Bank of Ireland tomorrow. As far as I understand it, the Irish commercial banks are in a reasonable condition these days, so they wouldn't have to worry. But, the depositors certainly would worry, it would be a sign that the EU government and the German government want to cause trouble for them. I think that by itself would cause runs on all the banks. The EU government are not likely to do that, but if they did I doubt the banks would be able to survive it. The same is probably true of most Eurozone countries except the larger ones.

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  • chavoy

    Another interesting point is that part of the liquidity problems faced by Greek banks today are due to the Greeks themselves.

    They voted with their wallets, and, in contradiction with their own emotional side that voted a far-left group into power and said OXI to the reforms required to stay in the eurozone, their rational side moved their money out of the Greek banks and, sensibly, out of the reach of their government.

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