Krugman and Salmon: The new Greek bailout is doomed

Just as Chris in Paris wrote here, Paul Krugman and Felix Salmon are saying, in effect, that the current EU bailout of Greece is doomed. (Click the links above for their articles; my emphasis everywhere.)

Here are some selected comments. First, Salmon. Problem one is that the Greek plan is going to eliminate Greece's independence as a state:

Greece is now officially a ward of the international community. It has no real independence when it comes to fiscal policy any more, and if everything goes according to plan, it’s not going to have any independence for many, many years to come.

Are Greeks going to stand for that? Unlikely, says Salmon:

More to the point, the plan assumes that Greece’s politicians will stick to what they’ve agreed, and start selling off huge chunks of their country’s patrimony while at the same time imposing enormous budget cuts. Needless to say, there is no indication that Greece’s politicians are willing or able to do this, nor that Greece’s population will put up with such a thing. It could easily all fall apart within months; the chances of it gliding to success and a 120% debt-to-GDP ratio in 2020 have got to be de minimis.

Notice the part in bold? That's the part where the bankers not only impoverish the victim, but start carving off his flesh.

For Salmon, the plan is fiscally unworkable as well. It assumes, in effect, magic results — similar to Paul Ryan's "medicare" plan, for example. ("We do X and Y and Z, magic happens, and we get the result we want.")

The effect of all this fiscal tightening? Magic growth! A huge amount of heavy lifting, in terms of making the numbers work, is done by the debt sustainability analysis, and specifically the assumptions it makes. Greece is five years into a gruesome recession with the worst effects of austerity yet to hit. But somehow the Eurozone expects that Greece will bounce back to zero real GDP growth in 2013, and positive real GDP growth from 2014 onwards.

Check the chart that Salmon provides. Do you see that deep dip at the bottom? That's "now." Every thing after is the effect of assumptions. For the record, Greece now as negative GDP growth of greater than 6%.

Salmon's one note of optimism is that Europe's leaders know that they're just buying time:

[A]t the very least they’re buying time: this deal might well delay catastrophic capital flight from Greece, and give the Europeans more time to work out how to shore up Portugal if and when that happens. Will they make good use of the time that they’re buying? I hope so.

Now Krugman, who seems to think that if Europe's leaders don't learn, they will never solve this problem:

The problem with all previous rounds here has been that austerity policies depress the economy to such an extent that it wipes out most of the topline fiscal gains: revenue fall, so does GDP, so the projected debt/GDP ratio gets, if anything, worse.

Now we have another round of austerity — which is assumed not to do too much damage to growth. The triumph of hope over experience. ... What’s happening is that nobody is prepared to take the plunge into either of the paths that might eventually lead out of this: sustained aid (not loans) to Greece, or departure from the euro, leading eventually to higher competitiveness and faster growth. Both options would be politically catastrophic, which means that they can’t be taken until there is literally no alternative.

And there's your prediction, from the Professor (and also yours truly).

European leaders are buying time alright, but they want the crisis to mature to the point where it dictates the solution, and they, like Pilate, can wash their hands of it. It's a Bankers Rebellion — no banker takes a loss — and the bankers have European elites by the hearts and minds. No European leader will cross the line that forces a banker-loss until that line crosses itself.

What does this mean for Greece? They get to suffer even more before they fail. As Krugman says: "Greece will be strung along some more." What does this mean for Portugal, Spain, Italy? No one wants to look that far, it seems.

The Euro is up as I write, above $1.32 from its recent bottom of $1.26. In my view, graphic evidence of the "triumph of hope over experience." Unless you're traveling, I wouldn't touch it with a pole until Greece defaults. (Mes petits sous, of course — heh.)

GP