Scott Sumner  

Rashomon at the Financial Times

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A crime has been committed in Brussels. But who is the victim? Gideon Rachman of the Financial Times says Germany is the victim:

Europe woke up on Monday to a lot of headlines about the humiliation of Greece, the triumph of an all-powerful Germany and the subversion of democracy in Europe.

What nonsense. If anybody has capitulated, it is Germany. The German government has just agreed, in principle, to another multibillion-euro bailout of Greece -- the third so far. In return, it has received promises of economic reform from a Greek government that makes it clear that it profoundly disagrees with everything that it has just agreed to. The Syriza government will clearly do all it can to thwart the deal it has just signed. If that is a German victory, I would hate to see a defeat.

As for this stuff about the trashing of democracy in Greece -- that too is nonsense. The Greek referendum on July 5 was in essence a vote that the rest of the eurozone should continue to lend Greece billions -- but on conditions determined in Athens. That was never realistic. The real constraint on Greece's freedom of actions is not the undemocratic nature of the EU. It is the fact that Greece is bust.

Much of the comment about the loss of Greek sovereignty, in the outline deal just agreed, has focused on the idea that Greece will now have to privatise €50bn worth of assets, and that foreigners will supervise the Athens-based fund. Given the record of corruption and clientelism of successive Greek governments, that sounds like a very good idea. But Syriza's deep opposition to privatisation makes it unlikely that anything like €50bn will be raised.

In contrast, here is the Financial Times editorial page:

Even if the deal succeeds in restoring some stability to the shattered Hellenic state, the experience of recent days has been a searing one -- not just for Mr Tsipras but for the entire eurozone.

Germany's approach has left deep scars, enforcing harsh terms on the hapless Greeks and exposing divisions with other more conciliatory voices such as France. Berlin's rigid stance raises questions about the functioning of the eurozone and the compatibility of Greece's dire situation with democracy. It prompts deeper concerns about the future of the EU project itself.

Mr Tsipras has been his own worst enemy. He needlessly threw away whatever goodwill Greece might have enjoyed, pursuing an erratic strategy of bluff and bluster as his country's economy slid back into depression and its banks went into slow-motion collapse. By the time he changed his tune, most sympathy for Greece's plight had gone.

Even so, the deal forced on the capitulating Greek prime minister is extraordinarily severe. The terms are less palatable than the ones available a fortnight ago, which the Greek people rejected in a referendum, and Mr Tsipras denounced as blackmail.

There is no let up in austerity and no clear language offering acquiescence to debt relief. Athens has just days to pass a raft of laws dictated in Brussels that cover everything from the regulation of bakeries to tax rises and fundamental reform of the Greek administration. The lenders have insisted on establishing a trust to hold assets with a value of up to €50bn that will be sold to pay for bank recapitalisation and to repay debt. The hated troika will not only return; it will take up unfettered residence to monitor the terms of the deal.

These are both reports from well informed (British) observers. Why do they see things so differently?

1. Baseline for "action". Is the thing being done "deeper austerity." Or are the things being done, "more bailouts, throwing good money after bad." What is the alternative? Is it Grexit and a default and a zero primary surplus? Or is it staying in the eurozone and paying one's debts?

2. Just deserts vs. left utilitarianism vs. right utilitarianism. Greece behaved very irresponsibly by running massive budget deficits during the boom years, and then again after reckless actions by Syriza plunged Greece back into negative growth, and then again when Syriza called a poorly worded referendum in the middle of delicate negotiations. Does that bad behavior "deserve" to be punished?

Elsewhere I've argued that utilitarianism is what underlies liberalism. There is no concept of just deserts. What's done is done, and you make the best plans you can devise for making the future a happier place. But there is still moral hazard, which links responses to past behavior to future actions. Left liberals tends to dismiss moral hazard as being relatively unimportant. I think this is a cognitive illusion. For instance, they miss the way that FDIC encourages reckless lending by smaller banks in high growth cities of America. Right wing liberals like me think moral hazard is extremely important, and provides a justification for "toughness", even in a world of no just deserts.

It seems to me that the eurozone was motivated by both just deserts and moral hazard fears. (And by the way, it makes more sense to talk about the eurozone than Germany. Almost the entire eurozone was extremely hostile to the Greek position.)

3. Attitude toward socialism. The Socialists in France were the one group that clearly had some sympathy for Syriza. They viewed the forced privatization and deregulation as harsh conditions imposed on Greece, whereas I view those terms as a gift to the Greek people.

4. Self interest. In this case both sides are British observers, but Rachman also makes this observation:

It is certainly striking that the most vocal denunciations of the eurozone's meanness, in refusing to write off Greece's debts, have come from economists based in countries whose own taxpayers are not on the hook.
5. Role of the ECB. A person (like me) who believes the ECB caused the eurozone depression is likely to be more sympathetic to Greece that someone who believes the depression was caused by bad policies in the most severely affected countries.

6. Standard of living. There is more sympathy for Greek pensioners in countries where pension benefits are larger than Greece. Eastern Europe is quite unsympathetic to the plight of Greek pensioners.

7. Trust in Greek officials. Rachman is skeptical that Greece will actually carry out the painful reforms called for in the agreement.

8. The big bully fallacy. The idea that big means bully and small implies victim. (This one's really popular with the American left, who for some bizarre reason think there was "predatory lending" during the housing boom, not "predatory borrowing.")

9. I see lots more fault lines exposed in this Roger Cohen piece in the NYT:

But the euro was a poisoned chalice. Conceived to bind Germany to Europe, it instead bound far-weaker European countries to Germany, in what for some, notably Greece, proved an unsustainable straitjacket. It turbo-charged German economic dominance as Berlin's export machine went to work. It wed countries of far laxer and more flexible Mediterranean culture to German diktats of discipline, predictability and austerity. It produced growing pressure to surrender sovereignty -- for a currency union without political union is problematic -- and this yielding was inevitably to German power.
a. I disagree that the euro "turbo-charged" the German export machine; exchange rates don't explain trade balances. However most others disagree with me on that point, and that makes them see Germany as a lucky country.

b. The middle sentence of the paragraph subtly mocks German virtues, and is somewhat indulgent toward Mediterranean vices.

c. The last part raises the question of whether "force" is being used here. Is Greece free to reject the deal? Paul Krugman and I say yes, Grexit is an option. Most people say no, making them see Greece as a sort of colony of the eurozone.

What else have I missed?

Comments and Sharing

COMMENTS (27 to date)
Don Geddis writes:

Small typo? In the title text you spell the reporter's name "Rashomon", but in the post it seems to be "Gideon Rachman".

Scott Sumner writes:

Don, Actually that was a reference to the Japanese film "Rashomon." (Too obscure a reference on my part, I forget that not everyone in the world is a old Japanese film buff.)

The film (from the 1950s) presents the same crime from the perspective of four different characters. The events look radically different from each perspective.

I never noticed the name similarity.

ThomasH writes:

The ideal outcome was one no one seemed to actually be pressing for: Greece carrying out a bunch of market reforms (I'm not sure that the Troika's list was exactly the right ones) AND leaving the Euro to do so at lower cost. [I include in "leaving the Euro" some kind of dual currency/capital controls regime that mimics a devaluation even if preserving formal use of the Euro.]

Capt. J Parker writes:

Great list. I can't add anything other than to comment that subscribing to the Big Bully Fallacy seems to require willful ignorance of the fact that Greece is actually demanding more loans and would still be demanding more loans if all prior debt was forgiven. Left liberals (using Dr. Krugman's blog comments as the sample) seem to think that the Big Bully should just forgive Greek debt and that would fix everything. This poses the question of exactly what would a "no austerity" fiscal bailout for Greece look like (assuming Greece does the right neoliberal reforms) and would the size of the bailout be a tad off-putting to otherwise Greek sympathizers?

R Richard Schweitzer writes:

Perhaps it has been there in buried paragraphs or inferential references but something seems to have been missing in all the cavil to obligations.

What were the motives, reasons, objectives or what have you of those lending or providing credits to the successive sovereignties of Greece?

The Goldman Sachs Kabuki staging was well known years ago.

Did the creators of credits for Greeks and Greece attain their *then* objectives. Were nominal interest rates and debt service payments obtained for whatever purposes of lenders and sellers of goods a reason?

None of that changes consideration of the motives or attitudes of the borrowers, sovereign or not; political or altruistic.

But, it would be of more than passing interest, and of some possible future guidance, to understand that over indebtedness only occurs where there are willing creditors. That willingness derives from objectives or motives.

What were they?

Anon writes:

Rashomon is one of the most famous movies ever made, not obscure in any sense. I have a feeling Don's comment was in jest.

Vivian Darkbloom writes:

Lawrence Durrell borrowed the "Rashomon technique" in his Alexandria Quartet, the first novel of which (Justine) was written in 1957. The Financial Times is a bit late to the game. One lesson is that "reality" should always be written within quotation marks.

Gordon writes:

"... that makes them see Germany as a lucky country."

Scott, did you ever read Robert Hetzel's paper comparing the situations in Greece and Germany?

Paul Krugman has tried to blame Germany by saying that German unit labor costs did not keep pace with inflation in the Eurozone between 2000 and 2015. But Hetzel points out that Germany went through something similar to Greece in that capital inflows caused above average inflation. Germany then paid for that over a number of years with a high unemployment rate and below average inflation.

Andrew_FL writes:

Rashomon is an obscure reference? It's the trope namer for it's particular style of story telling!

Also, points deducted from Roger Cohen for implicitly Godwin invocation.

Blair writes:


Re just deserts, isn't it the case that Deutsche Bank and the others who lent to Greece should have been thrown to the wolves after 2007? I was always struck by the cynicism, in the mid-2000s, of European bankers who lent freely to parties they knew to be uncreditworthy, but who they thought would be bailed out. If this had been done, arguably the ECB would have had to confront its intellectual failings with respect to maintenance of nominal demand.

Rachman does nothing to explain how Greece is going to get back to full employment, which would increase its debt servicing capability. The reform package will move the supply curve outward but do nothing for demand in the short term. In some ways the best outcome is for Greece to pass the reform package on Wednesday, then default and exit.

mbka writes:

Grexit: I never understood how will this would help since all their debts are denominated in Euro. So it's not the Grexit part that would help, it's the default part.

"It turbo-charged German economic dominance as Berlin's export machine went to work."

When the Euro was enacted, Germany was seen as the sick man of Europe. As Gordon said, it was their slow and methodic reworking of labour costs that improved their lot, not the Euro magic. Another burden was Germany's previous taking over their own bankrupt Eastern half in the 90's at monetary 1-to-1 terms which most economists then and now say was also a mistake. And guess what, Germany did it. They got out of both predicaments under a "strong" currency.

Furthermore, a good half of EU countries live very well under the "dikat of the Euro straitjacket". The ones that don't had double digit inflation AND unemployment well before the Euro (Spain anyone? Greece herself. etc).

Personally I see a pattern here that is not at all the fault of the Euro. As I said before, and you finally said elsewhere too, Scott, the Euro was and is much more of a tool to align EU countries than a consequence of some already achieved convergence. That was and is the political point of the Euro. It is also the point that most (anglo-saxon mainly) commenters miss.

Lorenzo from Oz writes:

mbka: "The ones that don't had double digit inflation AND unemployment well before the Euro (Spain anyone? Greece herself. etc)." And before the Euro was the ERM, which also generated a lot of unemployment.

Brian writes:


Rashomon is not an obscure reference. It's one of the all-time great Japanese films. I got the reference immediately, though I confess to doing a brief double-take when I saw the similarity to Rachman. I didn't know if you intended a pun or not. Judging by your response, I guess not.

Scott Sumner writes:

Everyone, Lots a good comments. A few replies:

1. I often have trouble telling when people are joking. I will say that I know many younger people who never watch black and white films. My daughter calls films from the 1990s "old movies." I've seen about 50 old Japanese films at the movie theatre, some of them silent. So I think it's fair to say I'm atypical, and I don't assume that others share my passion. It's good to know lots of people know of Rashomon.

2. I agree that the banks should not have been rescued.

3. I consider myself a moderate on the eurozone depression. There's no reason why Europe cannot have both serious structural problems and serious demand side problems. In my view they clearly have both. The demand side failure is especially regrettable, as it's so easy to fix. Just don't set up a euro. But yes, you'd still have high structural unemployment in Europe, and lots of economic problems in Greece.

mbka writes:

Lorenzo, just checked unemployment data using . So don't take my word for it. It's all there.

- Spain joined the ERM in 1986. Prior to that, unemployment rose steadily from 8% (1979) to 22% (1986). After ERM adoption it actually fell to a low of 16% in 1991.
- Portugal too joined the ERM in 1986. Unemployment: rose slowly in the early 80s to a high in 1986 (9%). Unemployment fell upon adoption of the ERM, later became cyclical until the 2008 crisis.
- Greece joined the ERM in 1996. Unemployment slowly declined from 12%ish (late 90's) to about 8%ish right until 2008 (!)
- Ireland, always was part of the ERM throughout the 80's, then the Euro. Unemployment early 80's: around 15%. Declined with some ups and downs until it dropped drastically upon the introduction of the Euro to a low of 4 % pre-2008.
- Don't even mention countries like Austria who pegged their currency to the D-Mark long before the ERM, ECU, and Euro, and have kept their unemployment at 2-8% for the past 40 years, most of these below 5%.
- Germany meanwhile had steadily rising unemployment right until 2007. Then it fell to now 4-5%ish.

A lot of the anti Euro hand wringing is just not based on data. A lot of the problems are completely independent of the Euro.

AntiSchiff writes:


Can you explain more about what you mean about the Euro not helping German exports? My assumption, like that of many others, is that Germany would have had a rising currency vis-a-vis many countries like Greece, if not for the Euro, hence Germans benefited.

Mikk writes:

Different observers have different biases. Gideon Rachman has a strong pro-EU bias (and pro-Germany). I am not talking abot just Greece crisis, Rachman has been pro-EU (pro-Germany) for years and years.
Ambrose Evans-Pritchard, for instance, has a strong anti-EU (and anti-Germany)bias and again I am not just talking how he writes about Greece crisis, but his overall attitude.

Lorenzo from Oz writes:

On Lars C's recommendation, I read Bernard Connolly's "Rotten Heart of Europe" and have posted a review.

mbka: fair enough, though the post 2008 record has dramatically increased the negative ledger.

Mat writes:

Hi Scott,

Great list indeed.

Is something missing? Maybe the peculiar position of France, which is for al long time trying to piggyback on Germany's strength (and of a couple of other countries) to amplify the french policies.

It seems this pattern is broken now, and that is a huge change.

Sean writes:

Scott said: "exchange rates don't explain trade balances"

This is a bit puzzling for me. Any chance of a link? Is this something Scott has written about before?

Scott Sumner writes:


The CA surplus is the excess of domestic saving over domestic investment. Those two factors are not determined by the exchange rate, rather the real exchange rate adjusts to reflect movement in investment and consumption. If the nominal exchange rate is too high, the price level adjusts to bring the real exchange rate into equilibrium.

That's basically what happened in Germany after 2004. The nominal exchange rate was too high for Germany, so they brought their price level down relative to other European countries.

Mikk, Good observation.

Mat, That's something we'll have to watch.

Sean, I have done posts like that over at moneyillusion--sometimes discussing the Chinese situation. Also see my reply to Antischiff.

Many people mistakenly reason from a price change, and don't ask why the price changed.

Emerson writes:

I like the point about predatory lending v. Predatory borrowing.

It is my opinion that when Greece accepted the Euro as a common currency, it's borrowing costs were reduced, which enabled it run up huge debt.

All of this was done-I suppose- with the implicit knowledge that a IMF/Eurozone bailout would be worked out.

Predatory borrowing

AntiSchiff writes:


That's interesting. If true, many, many people have it very wrong. I wonder how much that has to do with some of the animosity toward Germany vis-a-vis southern Europe and Ireland.

Wrt point #4: in the UK, the government quickly went from urging the eurozone to find a sustainable solution to saying it won't contribute a cent to a bailout when the eurozone tried to fold it in []. Sweden is taking the same position []

If the European Commission ends up alienating Britain and Sweden to keep Greece in, it'll be a massively stupid trade-off.

Mr. Econotarian writes:

I blame labor regulation for the most of Europe's problems.

Let's not forget that Germany was recently "the sick man of Europe," with unemployment rates over 9% from 1994 to 2007, peaking at 12%.

The Hartz reforms were what allowed German unemployment rates to drop to their current levels.

Also one has to explain why Ireland was able to bounce back so quickly from its bail-out. The reason is that it is ranked almost the highest in Economic Freedom in the Eurozone, whereas Greece is dead last. Google has its foreign HQ in Dublin, not Athens, for a reason.

Finally you'd think a bunch of self-avowed Marixsts like the Syriza leadership would have the guts to lead and upon taking office immediately default on all loans, leave the Eurozone, and sail on to becoming a workers paradise instead of groveling with the capitalists. I guess they don't really believe their own political fantasies.

Scott Sumner writes:

Emerson, Good example of predatory borrowing.

AntiSchiff, See my new post.

Luis and Mr. Econotarian, Good posts.

Sam Izzo writes:

Hey Scott,

Have the soothsayer been consulted yet?

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