Greece: Micro-Reality Trumps Macro-Fantasy in Riga

I did not attend the European Finance Ministers summit in Riga last Friday. Reports, however, chronicle how the Greek finance minister, Yanis Varoufakis, gave his European counterparts a lecture in macro-economics. Specifically, Varoufakis extolled the fantastic way that government spending ‘stimulates’ the economy, and how his government should be unshackled from debt to spend its way out of recession…
The reports from Riga expose a double-irony.

The first irony is that Varoufakis was preaching to the converted. European governments, in general, are dominated by Keynesians who view government spending as a form of ‘stimulus’ (ie – it makes GDP get bigger). No-one in the room was going to argue that point (despite the facts – it was a pity that I wasn’t there!). His condescending tone, however, managed to turn the room of sympathisers against him.

The second irony is that the Finance Ministers wanted their interest payment. That is, despite their collective belief in the fantasy macro-stimulus story, they still adhered to the grubby micro-business of getting paid the coupon on the loan contracts they wrote fouryears ago. Varoufakis’s argument that not paying the coupon will be more than multiplied in additional GDP did not resonate. The Finance Ministers wanted their money.
In 2012, the same group of Finance Ministers collectively agreed that “Greece would be better off” if the private sector wore the debt reduction haircut imposed by the PSI, while ‘”official creditor nations” retained their full entitlements.

When it came to cutting their own hair in Riga last week, so that “Greece would be better off’, they baulked. Micro-reality trumped macro-fantasy where their own money is involved.