Korea 1997 & the Greece mess today


Here is a good article on Korea and other near-defaulters or defaulters, and what lessons they might have Greece now. Greece can in fact recover if it leaves the euro, and increasingly, I think both it will and it should. However, one important element Greece should not pass up, is using the crisis to force discipline on the parts of the economy that caused the currency run to begin with. The Korean government was partially able to discipline the out-of-control chaebol who had caused the crisis by wildly over-borrowing on Wall Street in the mid-90s. Koreans hate to hear it, but their political economy got substantially cleaner and less corrupt because of the 1997 brush with default. Greece should do the same; it should not leave the euro just so it can go back to its bad old ways. That would be a catastrophe and turn Greece into a prototypical Middle Eastern patronage state.


Last year, I bet my IPE students that Greece would be out of the Euro by the end of 2012. Increasingly I can’t even imagine how Greece will survive if it doesn’t leave. Not only will austerity cause punishing deflation for years, maybe a decade, to restore competiveness, the withdrawal of government spending will almost certainly cause a semi-permanent recession, as there is no other source of demand in the Greek economy now. So Greece gets locked into a downward spiral: huge uncertainty is caused by all the turmoil, so consumers stop spending to hedge the less certain future; the government can’t spend because it’s already wildly indebted and can’t inflate because it’s in the euro; crashing demand in the system feeds through into terrible unemployment (because if no one is buying anything, no one is needed to go to work) and other social stresses, thereby encouraging people to save (and not spend) even more as a hedge against yet further uncertainty. And the cycle goes on. Without a huge, countercyclic influx of outside money (i.e., the much unloved German bailout), it’s hard to see a way out within the euro. Worse, constant economic chaos like this eventually leads to political chaos on the streets; hence that nut-case neo-Nazi party that just got 8% in the Greek elections and wants to put landmines on the border with Albania.

The ideal way to get Greece and the other southern states out of this is to work out their imbalances with the northern states in the ‘natural’ or market way. Northern demand for southern products would rise, while southerners would clamp down to work hard meeting that demand and so generating the revenue needed to climb out of their hole. In other words, the Germans should go on a huge spending spree, buying lots of southern imports like Italian wines and Greek vacations. Korea did this after 1997; it exported its way out of its debt, as did Mexico after 94. (The article is good on this, btw.) No one seems to mention this much in the Greece debate though – German and northern niggardliness on importing makes it all but impossible for these countries to work off their debts. If the Germans don’t buy anything from Greece, how are the Greeks to pay them back? Rising German spending would make all of this so much easier.

More generally, this is the big problem with the global economy as a whole – nobody is buying anything: low demand –> low supply –> unemployment. In the pre-Great Recession days, the US was the motor of global demand. We bought everything at Walmart; we couldn’t have enough plasma TVs, home redecorations, and metrosexuals telling us we needed 8 hair gels. Obama called us the ‘importer of last resort.’ So today, at the global level, what the world really needs is someone else to fill that role for awhile, Specifically, surplus-obsessed mercantilists like Germany, China, Japan, and, yes, Korea, need go a on huge trip to the global mall, buying everything in sight, wearing down their reserves to fire global growth through higher demand and hence employment. The old importers, like the US, Spain, Britain, and Greece most obviously, are just tapped out. But Asian states, like Germany in the EU, are obsessed with a current account surplus, and refuse to help (i.e., shop) even when it’s painfully obvious to everyone that world needs rebalancing, and when it would very obviously benefit German and Asian consumers (because they could buy cheap imports). I find this so annoying; we wouldn’t need all these Keynesian hijinks of quantitative easing if China would just import for awhile…

I’ve written a lot about this before here.

10 thoughts on “Korea 1997 & the Greece mess today

  1. despite being painfully obvious, I don’t think that an increase in vacations in Greece is easy to accomplish. Although the Acropolis is really one of the world’s must see places (I have been there myself), at the moment, I would hesitate going to Athens, even if I would be invited.

    The reason is simply that the current environment makes everybody feel unsafe. Stories of banks, cars, … on fire, tourists and journalists getting robbed are certainly not going to attract tourists. As long as the headlines of Greece in the news are about demonstrations, violence, crime, and strikes shutting down the country for weeks, almost nobody will want to come to Greece.

    Considering that even the small farmers on Greek islands brewing liquor and raising a dozen of goats got used to have a 60k+/year income, of which 10% the state actually knows of, I highly doubt that the economy will get back down to firm grounds anytime soon.

    Furthermore, I disagree with the fact that Korea’s crash of 97 is so comparable. The simple reason is that Korea had a reliable industry at that time. Greece has almost no industry worth mentioning. Only tourism, ships, and farming contribute significantly to the GDP. Building up an industry is something that cannot be done quickly and requires stable conditions and a worth infrastructure. Greece doesn’t have both. To make it worse, Greek bureaucracy is insanely blown up and inefficient. It took a friend of mine 20 years to get electricity in his family home in Crete (officially).

    As long as things in Greece don’t change dramatically to the better, nobody will be interested in investing there unless getting lots of EU or Greek subsidies.


    • I agree. All the turmoil creates huge uncertainty which creates K flight, which just makes it all worse. But tourism is weird sort of ‘export,’ because people come to your country and bring their forex. But other more traditional exports might be less vulnerable to the kind of bad news on TV you are referencing.

      That said though, I wonder what Greece does export, besides tourism. Food perhaps, like cheese? There you are certainly on to something.

      But a currency depreciation would make whatever Greece could export super-cheap overnight. Korea exported its way out of its crisis in the following years. Greece *might* be able to do the same, especially after a huge devaluation. I agree that it sounds risky, but isn’t that better then so much economic chaos that nazis get into the parliament of a NATO/EU member?

      It’s hairy. No doubt.


      • Hi Robert,

        Greece produces lots of olives and wine. Also the sponge industry has a long tradition there. From what I saw on TV, the textile industry is currently ruined by China. Cheese is exported a little but that’s not really worth mentioning.

        The problem is that Greeks very often are not good businessmen. E.g. much of the Italian olive oil you can buy in Europe is made of Greek olives. The Greeks simply didn’t want to press the olives themselves and make more money that way. I think that this example says a lot about the attitude problem.

        As long as the state doesn’t manage to cut down on administration – any government has created more jobs in administration to buy votes – and doesn’t change the “laissez faire”-life style of the Greeks, they cannot have a 1st world life standard.

        The young people have a very good education, but at the moment, no new jobs are created, which you would be willing to take, as the salary is horribly bad. So the “lost generation” goes to other better off EU-countries. The Goethe-Institute has reported the highest ever demand for German lessons in Greece.

        Furthermore, currently EU-politicians and even more so the population is getting increasingly reluctant to help Greece, as the Greek politicians have done little but to say “it is your fault that we spent too much money, so you must give us more money so that we can continue our life style of spending way more than we will ever be able to pay back”.

        About the tourism: Turkey’s west coast offers almost the same package as Greece – sun, beach, Greek and Roman ruins. But the cost are about half as much for the same holiday package. So Greece only gets so many tourists for a couple of reasons:
        1. Greeks have a much better reputation that Turkish. They are the cradle of European civilization and not the invaders, which were stopped at Vienna in the 17th century.
        2. Greece has the Euro
        3. Greeks are Christian
        4. there are frequent horror stories of tourists being kept in prison for months for petty reasons (one boy was wrongfully accused of raping a teenage girl, who probably simply wanted to avoid the embarrassment of having to admit of being too drunk to say no to her evening love).
        5. Greece has a lot of famous cultural sights that Europeans learn about in school history. Turkey has them, too, but they are less famous but not less attractive.

        So, there are a couple of reasons to come to Greece and not to Turkey as a tourist. But when the Euro is no longer the currency in Greece on of the advantages is gone. Lowering the prices – Greece must go down by 50% to match with Turkey. That’s a really tough call.


      • I agree that structural reform is necessary. I have been to Greece too, and yes, it was a slow, inefficient mess that reminded me more of the Middle East than Europe. Indeed, this is the choice Greece faces, and I tried to say that in the OP. It would be a terrible shame if the corruption and labor market problems that caused this were not fixed under such pressure.


      • I 100% agree to you. The question is whether the Greek people are willing to see the truth and send their politicians to hell and not their country.


    • about the Nazi problem. I don’t think that this will depend on the devaluation.

      Clearly, the life standard of the Greeks will go down, one way or the other. They don’t produce a lot themselves, so the import cost will go up dramatically. When that happens the guys having the “easy ways” always gain power. Let’s only hope that they will make themselves ridiculous enough to not get elected again before they can do too much harm.

      In any case, I think that a Nazi-party cannot do so much damage outside Greece. They simply don’t have the weapon industry to do too much harm.


  2. Some nerdy IR questions…

    In your opinion, does the breakdown of EU cohesion along with Germany’s insistence on policies benefit that itself (at least in the short-term) provide some verification of realism’s contention that international institutions are merely intervening variables at best? Would a hypothetical regression/breakdown of the EU project serve a blow to liberal institutionalism as a research program as many (certainly not all) of its theoretical development has sprung from EU studies? Would you consider Germany a “most-likely case” to subvert national interest/relative gains concerns for the greater good/absolute gains of the EU? And if so, should we expect a triumphant realist retort to Moravcik asking “Is anyone Still a liberal?”

    Very interested in your thoughts..


    • I should note that I realize Moravcik separates himself from the LI school of thought, that said I always loved the title..


    • Wow. Are you from my dissertation committee? 🙂 You could write a whole IO article around those questions if you took the time.

      My bumper-sticker answer to all those questions is, yes.

      I like the idea of Germany, because of its history and vulnerability due to encirclement, as a most-likely case to forego relative gains thinking. To their credit, they’ve supported two bailouts while the Greeks continue to flounder. They made a pretty good faith effort to date I think. But yes, I agree that liberal internationalism has not yet overtaken realist nationalism in Europe – which is a huge personal normative disappointment to me. I really like the EU as an counter-example to the Bush era in the US. But this is what realists always say, right? Deal with the world as it is, not as you want it to be.

      As for realist retorts, I wouldn’t say Walt is gleeful or celebratory, but if you follow his blog, he has identified this crisis several times as a high-water mark for the EU. And if the EU really does go into some kind of serious reverse, it will be a major boon to realism. I agree with you there too. Just like realism was implicitly built on the Cold War and suffered badly when it ended in a way realism did not predict, liberal institutionalism is built (less so though) on the EU and will suffer correspondingly.

      Finally, in my own thinking, I will admit that living in Asia has made me far more ‘realist’ than ever before. It’s the 19th century out here, and IOs are most definitely as talk-shop icing on the cake: http://asiansecurityblog.wordpress.com/2009/11/06/under-institutionalization-in-asia/.

      Are you writing a paper or something? I’m flattered you ask my opinion – EU stuff is not really my area.


      • Thanks for your thoughtful response. I agree it would be a good paper to write..but I’m just an old hack trying to finish my dissertation, we met in your office several months ago…I’m the guy from Temple..I was just curious in how you see this development affecting the field and I always love IR shop talk (something I miss living in Korea). I am particularly interested in the theoretical implications since most of the IR/CP folks at Temple where Europeanists so I am very familiar with the LI-EU literature. What I find particularly interesting and notable about Germany’s behavior is that even as it becomes increasingly clear
        that it will be impossible to just wash their hands of Greece and move on, they continue to promote price stability and deficit reduction. At some point, if the EU crisis continues to accelerate, it will boomerang back on the German economy. Thus, it seems to me to be becoming more of a German domestic politics story in regards to the lack of political will to lay out some serious cash to save states such as Spain and Italy from going off the deep-end, and in a way saving themselves.


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