One of the ongoing debates both among economists and policymakers is over the failure of the Greek bailout programs. Why is Greece still in a deep recession six years after it got shut out of global private credit markets and had to be “bailed-out” by the European Union and the International Monetary Fund (IMF)? Are the creditors expectations of a Teutonic shift in Greek political economy simply unrealistic or is Greece simply unfit to be a member of a union with a hard currency? Why is the IMF refusing to take part in the new Greek bailout, thereby delaying the review process which would release new funds to the Greek government? Are Greece’s creditors playing games at the expense of the country’s recovery prospects? How is the refugee migration crisis going to affect Greece and the rest of Europe?
The writer addressed the above questions to Tyler Cowen, widely regarded as one of the most influential economists of his generation and hailed by Bloomberg BusinessWeek a few years ago as “America’s Hottest Economist.” Tyler Cowen occupies the Holbert L. Harris Professor of Economics at George Mason University and has studied Europe’s bailout programs.
Asked about what has gone wrong with Greece’s bailouts, Professor Cowen commented that “the bailout programs were never going to work in the first place. The debt is too high and is more of a political weapon than anything which can be paid back. And the Greek economy requires very serious structural reform, more than the Greek people seem to wish to accept. That is two impossibilities in the situation right there, and then on top of that we have a dysfunctional EU, slow global growth across the board, and the refugee crisis. In that setting, can one expect anything other than failure?”
Professor Cowen also does not share the view of those who see a failure only behind the Greek bailout but “success stories” with the other bailed-out countries.
“Cyprus has gone better than expected, but that is mainly because the expectations were so low,” he said. “Spain didn’t have a formal bailout program, and Portugal is looking weaker than it had been, both economically and politically.”
“The big success is Ireland, which has had some quarters of seven percent growth and is definitely back on its feet. But the country still has a long-term debt sustainability problem under the current numbers,” he added.
In terms of what should be done about the extremely high levels of sovereign debt that many eurozone countries carry, Professor Cowen said this: “I’d like to see the European Central bank monetize a big chunk of the Eurozone debt, though at this point that doesn’t seem so likely.”
When I posed the question to him as to why the International Monetary Fund has not yet committed itself to taking part in the third Greek bailout program and whether there are really fundamental differences between the Fund and Brussels/Berlin, Professor Cowen said this:
“It’s all a big bargaining game, and at the end of the day pulling the plug will have to be up to the Greeks. Everyone’s expectations are unrealistic, and everyone knows that, including the IMF and EU and many others too. But who will pull the plug? Tsipras almost did, and then backed away. In my view, sooner or later Greece will leave this arrangement because it simply isn’t workable. I don’t look forward to the resulting economic carnage.”
Asked why he thinks Europe has been unwilling to consider a debt-write off for Greece, Cowen said that “because Italy above all would be next in line, but of course Spain too and others as well.”
When I commented that the Greek debt problem has been overshadowed lately by Europe’s unprecedented refugee migration crisis and whether Europe can manage the refuge/migrant crisis under its present architecture, Cowen offered a grim picture of what may lie ahead.
“No. Europe cannot solve this problem,” he said. “And ultimately it is the same difficulty, namely that the EU isn’t close to having the capabilities to manage the problems it faces. And Europeans have now shied away from institution-building and they are more or less moving back to “every country for itself.” Schengen is breaking down, there will be a vote on Brexit, and heaven knows what will follow when Merkel steps down.”
Asked to what extent he thinks a massive influx of migrants into Europe’s economies can provide a boost to economic growth, Professor Cowen said that “European labor markets are too tightly regulated, and benefits systems are not structured to encourage work. Populations are not so tolerant of Muslims. So, although my general stance is pro-immigration, I don’t see this particular episode as going well. It doesn’t have a lot of the objective conditions on its side. And right now the EU is cutting a deal to keep the migrants bottled up in Turkey, perhaps other locales as well. Greece and the Balkans will bear the brunt of this, Turkey and Lebanon too.
With regard to the question on whether large scale migration may suppress local wages, Cowen said that there will be a problem all around as “most likely the immigrants will be unemployed and underemployed for quite a while. They also need to learn languages. Most of Europe doesn’t have anything close to a free labor market and that is part of the problem.”
Lastly, when I asked Tyler Cowen what policies he would recommend for Greece so the country can re-boost its economy and put people back to work, “America’s hottest economist” said this:
“Do you know the old punchline? “Well, I wouldn’t start from here.” Greece has been deindustrializing for a long time, there isn’t enough to take the place of manufacturing, and tourism just isn’t enough. The interest groups seem intractable. I’d like to see Greece have much more of a free market economy, but that’s begging the question, isn’t it? And there is the ongoing distraction and stress of having to renegotiate the agreements every few years. By the way, I can’t bench press 600 pounds.”
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