Tuesday, July 7, 2015

GREECE: Tsakalotos Faces USA-in-1933 Issues

Incoming Greek Finance Minister Euclid Tsakalotos.
Oxonian Euclid Tsakalotosis is the new Greek Finance Minister.

He replaces game theorist Yanis Varoufakis, an alumnus of the University of Essex. Describing himself as a "libertarian Marxist",
Varoufakis has been combative toward  European negotiators.

First, in April Prime Minister Tsipris replaced Varoufakis as lead negotiator for Greece on the euro with lower-key Tsakalotos.

Tsakalotos has been negotiating with the European Commission-European Central Bank-IMF "Troika", which is defining and enforcing Greece's agreements with beleaguered members of the eurozone.

Varoufakis abruptly resigned on Monday at Tsipras’s request, the day after the Oxi ("No") vote on the European Commission Union bailout terms.

Tsakalotos was born in Rotterdam in 1960 and attended St. Paul’s School in London before studying politics, philosophy and economics at Queen's College, Oxford, where he also earned a D.Phil. Since 2010, he has been professor of Economics at the National and Kapodistrian University of Athens and has authored six books.

Comment: Echoes of 1933 in the USA

Although Tsakalotos is a quieter person than his predecessor, he is as formidable a negotiator and is (even) further to the left politically.

I am reminded of the situation facing William H. Woodin when he was appointed by FDR as his first Treasury Secretary in March 1933.

He took over on a Monday morning. The first thing FDR and Woodin did was close all the banks - the so-called "bank holiday". (Many in March 1933 were already closed by state officials.)

Then, as in Greece now, a central issue was honoring debts. The question was whether the United States could ever recover from its Depression without starting fresh, declaring the equivalent of bankruptcy and writing down its gold-linked debts.

Woodin, as a major beneficiary of the capitalist system (he had headed a huge company, ACF, that manufactured railway locomotives and rolling stock), favored honoring its obligations to its creditors at any cost. Whenever FDR brought up going off the gold standard by imposing controls on ownership of gold or raising the dollar price of gold – i.e., devaluing the dollar – Woodin would say: "Oh no, Governor, not that again!" (Woodin called him Governor even after FDR became President.)

In due course, FDR prohibited private ownership of gold and in 1934 devalued the dollar, a lot.

Tsakalotos has taken the position that Greece is better off staying within the eurozone. For Greece, that is the equivalent of staying on the gold standard.

Paul Krugman has just challenged this strategy, arguing that "Greek exit from the euro may be the best of bad options," because it gives Greece more flexibility to establish job-creating policies.

If you go along with the analogy and think Greece 2015 is like USA 1933, then Krugman's argument makes sense. If you are negotiating for Greece, however, it makes sense to start quietly with the idea that you personally want your country to stay in the eurozone – and all you need from the Troika is a deal generous enough that it approximates the benefits to the Greek economy of going back to the drachma.

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