Is it possible to have inflation and deflation at once, and for an extended period? Yes, it is. Since 2009 there has been a period of a secular credit deflation in the eurozone. At the same time, the ECB has pumped money into the financial system to avoid a protracted slump. Has it helped a lot?
There is no force in the whole universe which that could stop a credit deflation once it begins. Yet the inflationary policy of the ECB may have had some effect. It may be observed in the prices of stocks and property. Without the monetary inflation, both stocks and property in the eurozone would be much cheaper now.
Two major waves of debt boosted the Greek economy from 1981 to 2008. For almost three decades, the credit growth created the pretence of prosperity.
Then the financial crisis stroke in 2008. Suddenly it turned out there was no more room for both government and private credit growth. The rest is the most recent history of failure and helplessness.
Source: World Bank
While the 1980's government debt spree is a relatively well known phenomenon (though I suspect that most Greeks and Paul Krugman conveniently forget that part of modern history), the 1998-2008 bank credit boom has been largely neglected.
Did I forget something important? Oh, yes. The huge inflow of financial transfers that formed the culture of dependency in Greece. If there's something more destructive than tanks or carpet bombing, financial transfers come to mind.
By far the best cartoon on Greece:
Source: Samizdata.net - do read the whole thing.
By far the best comment on Greece:
...But pleaaaaase stop calling less state spending of other people’s money “austerity”. Taxing you less and borrowing less money that you and your children are underwriting is not “austere”.
Every time you get the urge to write “austerity”, remember that is it a term the other side want you to use. Might I suggest substituting “less profligacy” or some such for an equally ideologically loaded term that they would not like you to use. (Perry de Havilland, London)
Shout it from the rooftops.
By the way, Greece does have a very expensive welfare state in case you had some doubts.
In spite of the Greek crisis being extinguished (again), the root of the problem remains. It's the euro. While good for Germany and bad for most other member economies, the euro is the reason why German exports keep booming (because the euro is somewhat weaker than a Deutschmark would be), whereas the South has been in a permanent depression (because the euro is significantly stronger than national currencies of those countries would be.)
No, there's no remedy. Even if there was a federal EU budget, in no way it could boost the industrial production of southern states, including France.
This is not about Greece, even though the description of the state of affairs seems eerily similar:
“The twelve years 1920–1932, during none of which was the budget balanced, were characterized by an outflow of public funds on a scale as ruinous as it was unprecedented, fostered by a continuous stream of willing lenders. A new era of industrial expansion, easy money, and profitable contact with the American continent was looked for and was deemed in part to have arrived. In the prevailing optimism, the resources of the Exchequer were believed to be limitless. The public debt of the island, accumulated over a century, was in twelve years more than doubled; its assets dissipated by improvident administration; the people misled into the acceptance of false standards; and the country sunk in waste and extravagance. The onset of the world depression found the island with no reserves, its primary industry neglected and its credit exhausted. At the first wind of adversity, its elaborate pretensions collapsed like a house of cards. The glowing visions of a new Utopia were dispelled with cruel suddenness by the cold realities of national insolvency, and today a disillusioned and bewildered people, deprived in many parts of the country of all hopes of earning a livelihood, are haunted by the grim specters of pauperism and starvation."
This is the Lord Amulree Commission report of 1933 on Newfoundland. This is how the government finance looked like from the fiscal year 1920-21 to 1931-32:
"For a period of twelve years, until the depression overtook them, successive Governments indulged in a prolonged gamble with public funds, in the course of which the debt of the country was doubled, its resources dissipated and its true interests neglected. A dispassionate survey reveals that none of the objects so financed has proved remunerative; the gamble has in no case succeeded. The new edifice which the people imagined was in course of erection has been shown to have been founded on sand, and the period has closed in disillusionment and distress."—noted the Commission report.
The report concluded that—
"It will be seen from what has been said above that we do not regard default by Newfoundland on her loan obligations as providing a solution of her present problems; and we are satisfied that any of the proposals or suggestions last mentioned, if accepted, would offer only a temporary alleviation of existing difficulties. There are no other measures which Newfoundland can herself take to avoid default on the 1st January, and we turn now to alternative possibilities the fulfilment of which would be dependent on external assistance. The first of these is the possibility of negotiating some form of political union with Canada."
The story ended only in 1949 when Newfoundlanders voted in a repeated referendum to end their country's sovereignty and join Canada as a province.
So much for extremely indebted countries and their sovereignty.
Yes, chaos is a Greek word...
Historically in Greece there has never been a unified public pension system that covers all individuals. Instead, the Greek system developed through the efforts of separate professional groups to create occupational-based pension schemes supported by the government. Even as late as 1997 there were 28 primary pension funds and over 200 supplementary pension funds. The relationship between the pension funds and the government has been murky. While the pension funds resemble private occupation-based schemes, they have been administered by legal bodies of public law and have been regulated and monitored by different government ministries.
The responsibility for overseeing the pension funds has itself been fragmented across various government agencies. Nine different government institutions were responsible for overseeing the 174 Social Insurance Funds that existed in 2004. For most of their history, the pension funds have carried the implicit backing of the government and have periodically received cash infusions from the central budget. Despite governmental oversight, each has had its own administrative structure.
For over 28 years international organizations have been warning Greece that its expenditure on pensions is too high. In 2007 the European Commission reported that Greece’s pension expenditure, at 11.5 percent of GDP, was the fourth highest among the EU-27 and was projected by 2060 to approach 25 percent of GDP—by far the highest projected estimate among the EU-27. The bulk of the rapid expansion of pension expenditure, as a percent of GDP, occurred between 1960 and 1985. There are three main reasons for these increases.
First, the relative value of pension benefits to average income across Greece fell precipitously. Between 1973 and 1985, inflation averaged 18.6 percent per year, yet pension benefits were not indexed to inflation. The government substantially increased the number of direct financial injections into the Social Security Funds and increased pensions several times over the years to help restore their purchasing power.
Second, in 1962 the government expanded pension coverage to farmers. Over the decades the benefit paid out to farmers was increased substantially. While the pension itself was low, the large proportion of farmers in the population caused the government’s pension bill to increase rapidly.
Third, low eligibility requirements meant that the number of pension payments began to exceed the number of people over age 65, as individuals were eligible to draw upon multiple pensions due to the fragmentation of the system. The government lowered eligibility requirements because, in the 1970's, increasing numbers of farmers went to work in the cities. Pensions were not portable across professions, however, which meant that accumulated pension rights were lost as urbanization increased. At the same time, the government also wanted to encourage mobility during periodic labor shortages. The government dealt with these problems by easing restrictions on pension qualification.
(...) By 1990 the Greek government grew alarmed at pension expenditure, which stood at 15 percent of GDP and 50 percent above the OECD average, and decided to pursue a two-stage pension reform strategy. Moderate reforms were passed in 1990, followed by a deeper overhaul of the pension system in 1992. (...) Implementation was to be staggered over many years, some measures as late as 2007. (...) The reforms emphasized raising revenues over cutting benefits, even though it had long been known that Greek social security contribution rates were already high and that the proper balance must be achieved through benefit reduction.
Source: A. Gupta — Greek Pension Reforms
... and what was the result of all that chaos? Uncontrolled, reckless spending:
Now this is from a recent Guardian article on Greek pensioners:
According to a study last year by an employer’s association, pensions are now the main – and often only – source of income for just under 49% of Greek families, compared to 36% who rely mainly on salaries.
With a jobless rate of about 26% – youth unemployment is at 50% – and out-of-work benefits of €360 a month generally paid for no longer than a year, pensions have become “a vital part of the social security net for many, many people,” said Vovou [a Greek retiree interviewed in the article]. “Retired parents are having to help their adult children everywhere. And now they’re demanding we cut them even more? It’s just so very wrong.”
Wow. Pensions are the main source of income for almost 49 per cent of Greek families, while salaries only for 36 per cent. Meet Greece, the world's first gerontocracy.
ADDENDUM: Welcome to gerontocracy-cum-bureaucracy:
Every political party, whether in the coalition government or in opposition, fears the consequences of losing the support of a voting bloc of more than 700,000 government employees and their families.
So today, for every seven private employees who have been laid off, only one has left the public sector. This leaves fewer and fewer workers in a country where the unemployment rate now hovers around 25 percent to pay the taxes that provide the salaries for the people who work for the government.
Source: The New York Times
Regardless of the bailout deal, Greece is doomed.
There is one underrated aspect of the Greek crisis.
The fat years before the crisis were financed by private credit for the most part.
The crisis has not been caused by some sort of a self-imposed austerity madness. Quite on the contrary. Austerity has been caused by the circumstances. No human effort could have saved Greece from a downfall in 2008 or 2009. Only a fool—or a supra-national organisation—would continue lending to Greece at that time. No other solution but austerity was possible.
Sorry, Greece. You can't have a first-world welfare state with a third-world economy.
A 2007 analysis of Greek economy. Priceless.
There is one very common opinion about the eurozone. Especially Americans tends to think that--
No—and no. It's exactly the other way round.
Did I mention reckless spending?
The build-up of the debt burden began in the 1980's under the Socialist Prime Minister Andreas Papandreou:
The default of 2012 (aka 'Private Sector Involvement') didn't help much:
Defaults are rather common on the recent Greek history:
Just by the way, the artificial, euro-induced credit boom didn't really help Greece either. Credit bubbles tend to be followed by busts in the least suitable moments:
A white male with some professional experience in finance and investing.