by Neil H. Buchanan
In his post here yesterday, Professor Dorf asked, "What Demands May Greece's Creditors Make, Consistent With Democracy?" That is an important question, and how it is answered has important implications. As Professor Dorf was careful to note, however, the answer to that question does not resolve the broader questions about how the Greek crisis is being handled by the political and economic leaders of Europe. Although he argued persuasively that Greece's creditors actions were not per se anti-democratic, he nonetheless concluded "that European demands for more austerity from Greece are 'merely'
stupid, cruel, and counterproductive, but not contrary to principles of
That post sparked a lively and informative discussion on the comment board, some of which concerned Professor Dorf's specific question, but most of which concerned the broader issues raised by the Greek crisis. Here, I will explain the boundaries of Professor Dorf's contract analysis -- that is, the limits that he deliberately imposed on his analysis, to make the question tractable -- in order to show how the analysis changes when those boundaries are altered. Indeed, because there are now facts available that show that those boundaries do need to be expanded, this strengthens his description of Europe's position as "stupid, cruel, and counterproductive."
What are the boundaries that Professor Dorf set up, to clarify his analysis? Importantly, even though he worked within a standard contractual mode of analysis, he did NOT say anything remotely along the lines of the "sanctity of contract" nonsense that is now pouring forth from orthodox politicians and pundits. For example, the German journalist Jochen Bittner was given space on yesterday's New York Times op-ed page, and he offered this dollop of condescending moralism: "No bank clerk here would be impressed if a family told her that they had
voted to have the terms of their housing loan renegotiated — that’s not
how loans, either personal or international, work."
That is nonsense, of course. Although I doubt that most borrowers would bother to tell a bank clerk that they were asking for debt relief because of a family vote (or for any other reason), the fact is that they would bypass the clerk to talk to the bank manager, to tell her that they cannot meet the terms of the existing loan. This is exactly how things work all the time. When a loan is negotiated, everyone (certainly commercial lenders) knows that the loan might ultimately be renegotiated. Suggesting that somehow the Greek government is asking for unheard-of forbearance is simply crazy. Times economics reporter Eduardo Porter helpfully pointed out earlier this week that the German government received a significant bailout in 1953, canceling half of the country's debt. I would bet that the bank clerks were impressed.
Professor Dorf's analysis was an important antidote to such silliness. His question was whether people like Paul Krugman are right that the European elites are illegitimately trying to de facto overthrow a democratically elected government, by insisting on terms that they know are unacceptable to the governing party in Greece. In other words, does it matter whether Greece's counter-parties in the negotiations know that they are insisting on bailout terms that are directly contrary to the platform on which the current Greek government was elected only months ago? And if they are, does that mean that they are illegitimately trying to force that government to sign its own political death warrant?
I confess that my initial answer to both of those questions was yes. Professor Dorf's analysis changed my mind, however, in large part when he posed the following hypothetical: "Now imagine that a Keynesian IMF offered Greece a bailout but only on
the condition that Greece abandon austerity in favor of fiscal stimulus
and low interest rates (bankrolled externally). I very much doubt that
the people who are currently (rightly) critical of Europe's approach to
Greece would say that such externally-mandated Keynesianism was
anti-democratic." Perhaps he is wrong, and there are people who would be consistent in condemning both types of conditions as anti-democratic. For me, however, his point clarified that the issue is not whether the lenders are imposing conditions that are contrary to the will of the people in the relevant country, but only whether those lenders are within their rights to say, "We know that we are risking having you default entirely, but if you want us to renegotiate, this is the best we can do. Sorry."
Even if they do not say (or mean) that they are sorry, it seems clear that a lender can legitimately make a take-it-or-leave-it offer that the other side will not like. Doing so exposes the lender to the risk of default, which is surely not the general preference for lenders. In any event, Professor Dorf convincingly argues that, even when the external stakes are high for the parties involved, there is nothing inherently anti-democratic about insisting on conditions that a borrowing government will find excruciating.
That, however, is only the beginning of the story. Writing on the comment board of yesterday's post, Jed Stiglitz offered the following additional facts: "[A] troubling aspect of the negotiations is that the europeans appear to
have rejected greek proposals that were (roughly) deficit equivalent to
what they wanted; greeks wanted to maintain pensions and increase
corporate taxes, europeans wanted reduced pensions.
Recently, the europeans also seem to have adapted their bargaining
behavior in an attempt to unseat the greek government (and hence get a
new, presumably more compliant bargaining partner)." Readers might want to peruse the ensuing discussion in full, but I think that it is clear that at least the second new fact (that the Europeans are deliberately trying to unseat the Greek government), and probably both of them, change the conclusion of Professor Dorf's analysis, without in any way challenging his mode of analysis.
The crucial point to remember, after all, is that the title of Professor Dorf's post addressed the conditions that Greece's creditors (qua creditors) may demand, consistent with democracy. His stylized analysis was based on commercial, contractual thinking, with the identities of the creditors entirely irrelevant to the analysis. Once we relax that assumption, however, we are able to see that perhaps these creditors have more of an agenda than simply trying to figure out the best way to maximize profits on a portfolio of loans. A bank might reasonably say, "We want to hold a hard line on mortgages, even for sympathetic borrowers, lest we be seen as a soft touch." Greece's tormentors sometimes admit that part of their hard line on Greece is a matter of setting an imposing precedent for Spain, Italy, Portugal, Ireland, and someday others. Yet if Greece is being given extraordinarily tough treatment because the creditors do not like the current Greek government, that does begin to look like meddling in Greek affairs.
After all, the "creditors" here are not merely commercial entities with shareholder value on their minds. They are very much political institutions and political actors. When lenders stop acting like disinterested creditors and start acting like agents of a political agenda, then they have moved themselves outside of Professor Dorf's frame of analysis. At that point, the answers can change.
Stiglitz's comment included the point that the Greeks having already offered to engage in further austerity, but that the Europeans rejected it because it was based on the "wrong" approach, that is, on tax increases rather than spending cuts. A later comment by Paul Scott pointed out that the French had also been criticized by the Germans and others for being similarly too willing to tax and too unwilling to impose further pain on pensioners and others.
Any thought, then, that the Germans and their backers are uninterested in the internal political outcomes in European countries is simply wrong. The cover story is that they want euro-member countries to be fiscally responsible, but the fact is that at this point, either approach to austerity (spending cuts or tax increases) is self-defeating, even for the creditors. Krugman has shown on his blog recently the arithmetic of this, with debt relief being the only way that the Greeks will ever again see something resembling prosperity (after many more years of pain). That the Europeans are not only pushing for austerity, but austerity of a particular type, exposes their true game.
And it is not as if this game has ever been well hidden. In a Verdict column that I wrote after Chancellor Angela Merkel's reelection in 2013, I noted that Merkel had been making a nonsensical claim, which I quoted from a news source: "Merkel never tires of expounding on three big numbers: 7%, 25% and 50%.
Europe, she notes frequently, has 7% of the world’s population and 25%
of its total GDP. But it accounts for 50% of its social welfare
spending. This, she says, is uncompetitive and unsustainable." I then showed that this was a complete non sequitur, because there need be no connection between the three numbers at all.
The point, however, was that Merkel was making clear that she wants European countries to shrink their social welfare spending. That is a defensible political position (with which I strongly disagree), but the point is that it is political. If the Europeans showed any signs that they were acting on their concerns as creditors, rather than as powerful political players, then the story might be different. As it is, they are being
stupid, cruel, and counterproductive, and they are deliberately acting contrary to principles of