Sorry for dominating this board, but it's amazing that this has to be stated

[Burke]

You cannot draw the conclusion that there isn't a debt crisis by looking at social spending alone. The point is whether spending plans can be credibly funded, either through taxation or the bond markets. The high bond yields for periphery countries reflect the fact that there is doubt as to whether these countries can find this funding and hence close their deficits. Therefore the crisis is only "political" in the sense that current bond yield spreads are not factoring in full cross-subsidisation between member states. Otherwise, it is entirely economic and depicts the relative fiscal strength of each country.

[Burke]

No - the fact that countries struggled to fund themselves in the first place is because of their poor fiscal situation. The crisis is still economic even if a intervention (or lack of) could act to shorten or lengthen it.

If the crisis were political then the political dimension would be sufficient to account for the problems, such that the economic starting point of any member state prior to the crisis would be irrelevant. But this was clearly not the case. Greece was singled out by markets because of its underlying economic situation, deficits owing to deep-rooted structural problems. The country's tax infrastructure is more akin to that in developing country rather than a developed country. Its Treasury did not even forecast its budgets beyond a single year until 2010.

So Greece would have faced tough choices regardless of whether they were in the euro or not when the recession hit. It was not singled out because it was in the euro zone - i.e. the political dimension.

Your argument is that the crisis is ongoing because of the lack of a political resolution, therefore the crisis is political. But if you accept the crisis was initiated by economic factors, then regardless of whether the solution is domestic, pan-European or through the IMF is irrelevant. The crisis is economic. A political solution (or lack of) may cut the crisis short (or prolong it) - but the crisis is still economic.

[Burke]

To restate the paragraph above in a pithier sense : if the crisis is purely political and not economic, then why are Greek bond yields higher than those in Germany?

[Burke]

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Greece has been a serial defaulter since the 19th century: 1843, 1860, 1893, 1932, 1944, 1964. There is nothing new about their problems. Let's not pretend they had some modicum of economic credibility before the most recent crisis started.

To restate the point I made earlier: Greece's current imbalances would be toxic whether they were in the euro area or not. Their imbalances are toxic because of their economy's structural vulnerability and lack of resilience to economic shocks. This is why markets doubt their ability to close their deficits and why the spread between their yield and Germany's matters: the crisis is economic.

The Japan/Australia comparisons are uncongenial. Japan's debt is manageable because they have a credible plan to slow down the rise in outstanding debt in the near future (reducing deficits) without an austerity spiral. The opposite applies for Greece. And Australia is only able to sustain a current account deficit because of its prospects for growth through an increased population and more effective exploitation of land and natural resources. Again, not possible for Greece.

Now, can political problems compound this crisis? Sure. Prolong the crisis? Absolutely. But they are not the crisis itself. In Greece's case, their economic problems are both necessary and sufficient conditions for a crisis of some kind, with or without currency union. Currency union complicates the problem, but it is not the problem itself.

[Burke]

You're completely missing the thrust of the argument. I am not saying that no crisis has political overtones. What I am contending with you is the absurd notion that somehow Greece's situation, and that of other periphery countries too,  is somehow manageable when considered outside of the context of the currency union - i.e. you believe the crisis itself is political not economic.

Greece had a tremendous record before the crisis? Well yes, when you are spending beyond your means and making your deficits look artificially small using swaps from the vampire squid, I suppose it does look pretty good on the surface. The point about an economic crisis is that the veil is removed and credit risk becomes relevant again; sovereign debt is no longer risk-free. Greece's bond yields reflect this risk relative - to say - Germany. This is entirely economic, whether bond yields converge again in the future or not due to a political intervention post de facto.

It is simply risible to assume that Greece would be fine if it entered the crisis without the euro. Even with a massive currency devaluation - which is effectively a default anyway via debt inflation - there would be no way it would be able to support itself. Again, the spread in bond yields reflects domestic credit risk - this point cannot be stressed highly enough. Why? Because it hints at the domestic economic problems.

Now, you added Japan and Australia into the equation to try and demonstrate that current account deficits are sustainable without a debt crisis. You conclude that the difference between, say Japan and Greece, is the absence/presence of a monetary union without a fiscal union. Hence, since this also corresponds with the absence/presence of a debt crisis, you conclude that monetary union without fiscal union (the politics) causes the debt crisis. This is an extremely lazy argument to make because it says nothing of the mechanisms through which such a causation could operate, what you call "excuses". This is why I called on you to differentiate between Germany and Greece bond yields, because if the crisis were purely political, then the relative economic positioning of these countries wouldn't matter.

The fact that it DOES matter when determining domestic credit risk shows that the crisis is inherently economic. You are absolutely right that a political intervention could cut short the crisis, but the crisis is still economic. If the Greeks had sorted out their structural problems long ago, then they would not have been targeted by the markets. If all peripheral countries had sorted out their structural problems, there would be no crisis at all - and the political questions as to potential interventions would not even be relevant. This points to only one conclusion: the crisis is economic.

[Burke]

They have run deficits for expanded periods because they have prospects for growth. I have already covered this.

Foreign investors are willing to fund the trade deficit of Australia because they have a fast growing population and a natural resource base that they can exploit in the future for exports. This is why Australia's case is sustainable. Conversely, Greece's population growth is negative and their projected population growth is stagnant. Their overall economic growth prospects are negligible because of deep-rooted structural problems. That's the reality, and that's why they have a sovereign debt crisis. Investors are not willing to lend to Greece because they have no means of paying the money back. Why? Because they believe that Greece will not be able to export enough to raise the necessary funds.

Even if Greece had the ability to print their own currency, they would have an economic crisis by other means: hyperinflation and a fall in investment and employment due to the uncertainty it creates. Having your own currency isn't some magic wand which allows you to shirk your obligations pain-free. Look at Argentina and Brazil ten years ago. So whether the crisis came in a fiscal form through austerity, or a monetary form through hyperinflation, the cause is identical: Greece's ex ante structural problems.

What were these problems? To name just a few:

- Over-reliance on consumption rather than investment.
- Poor tax infrastructure with the highest rates of tax evasion in Europe.
- Low labour productivity compared with the EU average.
- Over-regulation of business activity and excessive bureaucracy.
- Poor scale in the domestic economic sector, impeding inefficiency.

Greece was able to ignore some of these problems temporarily by making use of the glut in credit markets before the crisis. Now, however, it is having to face economic reality. Its fiscal situation is unsustainable because it does not have a credible plan to rectify it without applying pain of some kind. This is due to the problems I have just outlined. This is why the Australia/Greece comparison is nonsensical.

Again, it's not as simple as saying here are two countries that run large trade deficits: one has a debt crisis, one doesn't; one has the ability to issue new currency, one doesn't; therefore this ability causes the presence/absence of an economic crisis. As I said before, if Greece did not enter the crisis with structural problems, then the currency question would not even be relevant. In fact, the inability to issue more currency is not relevant for those countries in the euro area which don't have similar structural problems, i.e. Germany et al. This is, in effect, a natural experiment which shows that it isn't the lack of fiscal union which is the fundamental cause of the crisis, but the structural problems of individual countries.

And that's the key point.

[Burke]

On the eve of the crisis (2009) Greece had a fertility rate of 1.5 per woman; Australia had a fertility rate of 1.9 per woman. Australia's was higher, but not by a dramatic amount. Australia's fertility rate is below the replacement level. Further, in 2004, Australia's fertility rate was only 1.75 per woman.

Immigration.

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Not sufficient to close its trade deficit, otherwise it would be not be facing a crisis. This is what bond investors are saying by voting with their feet, and why European partners in the north are not facing similar problems.

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Correct, but let's tease this out a bit further. The question is whether the depreciation would be pain-free. Compared to the euro, a counterfactual drachma would need to depreciate an additional 60-75% further against the dollar. The reason why the depreciation would be so drastic is that their export sector is so inflexible - their price elasticity of supply is inelastic - due to the structural problems I have already outlined. Even a drastic depreciation of this kind would likely be not enough to close the trade deficit in sufficient time due to supply-side constraints so a debt crisis would still exist in a different form.

An additional option would be to accelerate depreciation further by expanding the money supply to deflate the debt burden. First, this only reduces the real value of debt, not the real value of the deficit which will incorporate inflation expectations into the yield - so the question of how to close the deficit is still present. Secondly, import prices would go through the roof, pushing the economy into recession and leading to a sharp fall in standards of living. Thirdly, by defaulting in this way, it essentially kicks the can down the road. The central bank crowds out all private investment, it drives away foreign investors; in short, it lets structural problems continue without a decisive solution.

There is no pain-free option precisely because of the ex ante structural problems present in Greece. This is the fundamental problem.

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This is an ignoratio elenchi. The argument is whether the crisis is economic, not about the fairness of it. The historical record is that Greece is a serial defaulter, as i have already mentioned, which only had a temporary reprieve by using credit. Lastly, your final sentence is irrelevant, since the question is not whether there are political overtones, but whether the crisis itself is economic.

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Actually, the final paragraph may not as irrelevant as I suspected, in the sense that it could explain your willingness to argue that Greece's fundamentals are solid. It appears as though you are trying to deflect attention away from the fact that European states have welfare states, and instead blame the crisis entirely on the currency union.

If this is your motivation, then I agree with you that the welfare state is not the cause of Europe's problems. But to defend this position, you do not need to defend every country with a welfare state. Greece has a welfare state, but it also has unsustainable structural and fiscal arrangements. Sweden has a welfare state, but it has sustainable structural and fiscal arrangements. If you really believe in the welfare state, then you should not have to argue for impossible positions to defend it.