Some thoughts on institutional capacity in South-Eastern Europe

Now everyone’s seen the title and stopped reading…Nouriel Roubini has a simple plan for Greece:

Grezxit path: election, default, exit, capital controls, deposit freeze, drachmatization of euro claims, depreciation, return to growth/jobs

Bada bing, bada boom, and it’s peace and jobs and freedom all the way up. Dr Doom makes it all sound so simple, stuffed into 140 characters. Now, I’m sympathetic to the Greeks here, and I think that, for example, the idea of imposing nominal wages cuts across the private sector is not just counterproductive but getting on for gratuitiously cruel. But I think we could do without 140 character eurozone exit plans.

What is being suggested here is a stupendous exercise in sheer administration and logistics. Apart from the problem of issuing a new currency, it’s probably going to be necessary to pull this off as a surprise. Obviously nobody will be very surprised, but there is such a thing as tactical surprise as well as strategic surprise, and although the capital flight is inevitable, less of it would be much better. All kinds of contracts must be re-written, and it’s important to get it right first time in order to minimise the amount of vulture-fund tiresomeness down the track.

Setting up capital controls basically means shutting off international payments, and without fucking up so badly that it will be impossible to start things going again. There are all sorts of trappy administrative details – what happens to OTE’s balance with their roaming partners? Olympic Airways aircraft down-route? And there’s the oil question. Some people seem to think motor fuel rationing is literally the worst thing in the world, some would disagree, but nobody would argue that a good, solid, tested contingency plan is vital.

These are all the kinds of questions Sir Humphrey Appleby would have asked. I was wondering what the Greek equivalent of Sir Humphrey was, until I realised that of course the concept is absurd. Humph is a satire of a powerful, independent, professional, and highly competent civil service, and if Greece had anything like that, it might not be in this mess.

J. K. Galbraith remarked that poverty is an equilibrium state. Now, a government that literally can’t bring in the taxes with a gun to its head isn’t something that arises by accident. There is a qualitative difference between one that could perhaps do more to collect on super-rich individuals who go to expensive and inconvenient lengths to pay no tax (like, for example, Sweden), but generally collects every damn penny it can, one that is a bit flaky but which will, by default, collect your income tax routinely (like France), and one that makes it harder to pay your taxes than not. Being that perverse takes effort, and it happens for a reason, that being “keeping the political nation together and keeping politics mostly non-lethal”.

We could go on, and we’d discover that the history of how things got this way places a lot of responsibility on the UK, Germany, the Soviet Union, and other major world powers with highly effective civil services. But none of this is going to solve anyone’s problems. Neither is barking at the Greeks to bring in the taxes, because their institutions weren’t designed that way. Trying to convert the Parthenon into a supertanker is an insane project no matter how much you need another tanker.

So much for the austerity plan.

But Dr. Doom’s plan-in-a-tweet could be expanded to Jim Hacker sending Sir Humphrey an e-mail like so:

“All the economic policy decisions since 1979. I want you to reverse them, over a Bank Holiday weekend. Can I have a brief on one side of A4 for the Cabinet? Thx xoxo PS THIS MUST NOT LEAK”

Now, well, quite a few people would say that rolling back every economic decision since ’79 sounds great. Some of us have had that feeling for much of the intervening period. But I think everyone would agree that it’s quite the project. In fact, if it came from a left-wing political party we’d probably think it unrealistic, romantic, and impractical. Which of the French Trotskyist presidential candidates was it who wanted to use war emergency powers to requisition the banking sector in its entirety? These days, it’s hard to tell them apart from Roubini and I for one think this is an improvement.

I reckon the UK civil service might be able to come up with a roughly workable contingency plan, and shut up about it. I think this because, at least into the 1970s and possibly later, they regularly maintained an economic analogue of the military’s War Book mobilisation and transition-to-war plan covering the case in which the UK had to quit the multilateral clearing system, never mind the ERM. (And they didn’t leak it.) With all due respect, I’m not so sure about the Greek civil service.

As a result, I’m forced to consider that this might be more bish bosh, loadsa money than bada bing, bada boom. And any half decent civil servant would point out that if your policy advice is impossible to implement, that’s not something you can just laugh off. Plans that cannot be implemented are so much wind, whether they come from Roubini, Syriza, or the European Central Bank.

If you want a one sentence answer-in-a-tweet, Greece doesn’t need the EU to send it a tax commissioner. It needs the EU to send it a default commissioner.

11 thoughts on “Some thoughts on institutional capacity in South-Eastern Europe

  1. I am afraid there is a bit of a logical contradiction here. If the apparatus of the state is so weak, how can the exit plan be anything but very simple?

  2. Well, if you want to avoid a bank run, you need secrecy. That means that you cannot plan for long or in public.
    So what would you propose? Running a plan simple enough to be executed or abandoning security? Just predicting failure is not productive.

  3. I recently heard an interesting way of looking at the problem:
    For countries with problems the Euro has become the new Gold Standard.
    In the 1920′s economies that needed more liquidity just could not issue it because for that they needed to deposit gold. We live now the same problem. The fact that the ECB has not stated clearly that it will provide all and any necessary liquidity to maintain credit flowing and target economic growth, together with the bond and inflation vigilantes that advise the bank not to do it, makes the perfect field for speculators and hoarders just as happened when there was a fixed gold standard.
    Mean while in other places, in the us or in the uk, their central banks have issued unlimited funds and we are still waiting for that explosion of inflation that mr. dooms of the world keep announcing .
    We don’t even need the ECB to issue more money, it would be enough if it would stop paying interest in its deposit facility or, even better, if it would charge a penalty to depositors of liquidity (modern day hoarders). About a trillion euros would flow the markets the following day.
    As soon as countries abandoned the gold standard in the 1930′s their economies started growing. There is no need to abandon the euro, the only need is for the euro issuer to stop encouraging hoarding.

  4. Solution: Greece should print 0% interest, 1 yr Bearer Bonds, and pay all its bills in a combination of Euros (as collected by taxes) plus printed drach-Bonds.
    It should also accept drach-Bonds at 100% value for tax payments.

    Acceptance of drach-Bonds for private debts would be option — they would specifically be NOT legal tender for all debts. But it would be allowed for all businesses to collect Bonds and use them to pay taxes.

    Greece should increase land taxes, with a flat rate non-taxed “basic 200 square meters”, and begin foreclosures on non-taxpaying land owners — this reduces the price of land, but also makes it difficult to avoid taxes.

    This solves the problem for a couple of years — after the first year, a new issue of bonds is created. Over some time, Greeks will be using “not quite legal tender” Bonds as money, and contracts will have adjusted.

    Bankruptcy is avoided because the Greek gov’t pays in bonds instead of euros.

  5. I’m not sure I buy the whole argument, although it points to a very real problem.
    First, the Greek government is NOT incapable of collecting taxes. It does not have, and it never had a 100% budget deficit, after all. It’s incapable of collecting ENOUGH taxes, but that’s a different problem. You could argue that the USA is, right now, and will be in the predictable future, incapable of collecting “enough” taxes, since there is a major political party which sees everything as justification for tax cuts, but that says nothing about the quality of the USA civil service.
    The second point is that the Greek civil service can’t be worse than Argentina’s, right?
    And yes, I’m aware than a Grexit would be much more complex than Argentina’s abandonment of the convertibility peg, but its civil service HAS to be more competent and honest than the Argentinian, too (if you don’t believe me, you don’t know Argentina well enough).

  6. It may be so obvious that speaking of it is a faux pas, but I’ll do so anyway.

    Greece has one group that is tolerably well able to plan in secrecy and execute swiftly: its military.

    Perhaps Roubini had not the room for the words “end of democracy” in his 140 characters. These words seem more important to emphasize than “drachmatization of euro claims” though.

  7. Could Greece execute its own monetary policy, on a modest scale, without leaving the Eurozone? It seems to me that the government might issue drachmas, while announcing that the government itself will accept drachmas one-for-one with euros in payments to itself—tax payments, fines and court costs, payments for government goods and services, etc. If they didn’t issue *too many* drachmas, the ones they issued might trade at or close to parity with euros. The goal would be to expand the money supply in Greece, at least somewhat. Perhaps Greece, and other countries in the Eurozone, have committed themselves not to do such things; but, after all, treaties were made to be broken, and here there seem to be strong reasons of state for Greek defiance of Brussels. And isn’t it likely that they would get away with it?

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