Thinking the unthinkable
All eyes are on Brussels, as we await more details of the "co-ordinated measures" on offer to help Greece. There's just one problem. Even a bail-out - if that is what it turns out to be - won't solve the basic problem facing Greece, or the eurozone.
Let me explain. Greece has two big problems: a debt problem and a competitiveness one. A "bail-out" won't solve either - at least, not a bail-out that any self-respecting German would be willing to consider.
We may get a bit more clarity today on the support that Germany and others are planning to offer Greece. More likely, as I said yesterday, we will have to wait until the next week's meeting of European finance ministers. That is what today's statement suggests.
But we can be fairly sure that whatever deal is struck, it will not make Greece's debt problems go away.
The best that Greece can expect from its eurozone partners is a promise to underwrite Greek debt, or some form of bilateral loan to tide Greece over. The first would cut the risk premium on Greek debt and make it easier to service. The second would give them cash to get them through the next few months, when nearly 10% of their debt comes up to maturity.
But neither would do much to lower the stock of debt hanging over the economy. Or lessen the need for swingeing cuts in public services and tax rises over the next few years. Indeed, if Berlin has anything to do with it (and we know it will) - Mr Papandreou's government could come out of this with an even tougher schedule for cutting the deficit than it had before.
So, it won't make the debt problem go away. It probably won't make the burdens on the Greek government - or its people - that much easier. It just goes from being 'impossible" to merely "intolerable".
It goes without saying that it won't solve Greece's competitiveness problem either. I promised a post today on the long-term structural problem underlying this eurozone crisis. Happily - or perhaps unhappily - Martin Wolf beat me to it, in a superb column in yesterday's FT. As he says:
"So long as the European Central Bank tolerates weak demand in the eurozone as a whole and core countries, above all Germany, continue to run vast trade surpluses, it will be nigh on impossible for weaker members to escape from their insolvency traps. Theirs is not a problem that can be resolved by fiscal austerity alone. They need a huge improvement in external demand for their output."
As I showed in my piece for yesterday's BBC News at Ten, it's no accident that the countries in the firing line in this crisis are also the ones whose competitiveness has deteriorated the fastest within the eurozone since the single currency began.
This chart tells the story, from Janet Henry at HSBC.
German unit labour costs have barely budged since 2000, and German inflation has been lower than the eurozone average. As a result their exports have gradually become more and more competitive in world markets. Whereas Greece, Spain, Portugal and the rest have had relatively higher inflation, faster wage growth, and thus growing unit labour costs - and falling competitiveness.
This is why there is no comfortable route of this for the Pigs (Portugal, Italy, Ireland, Greece and Spain) - though for some the path is tougher than others.
As I've said many times in the context of the UK, it's tricky to cut borrowing as a share of GDP when your GDP is itself shrinking or stagnant. It is more or less unthinkable that Greece would manage to do this and achieve the real cuts in wages and living standards that would be necessary to seriously improve their competitiveness within the eurozone.
Martin Wolf says that higher German domestic demand is the solution (or a big part of it). That would certainly help. So would a weaker euro - though remember, in the current situation, the biggest beneficiaries of a weaker euro would be German exporters.
But imagine you were coming to the situation for the first time. You knew nothing of the Bundesbank. Or the history of the single currency project. Or even the market impact of the failure of Lehman brothers.
If you were such an unworldly creature, you might come up with two, more ambitious proposals for tackling Greece's fiscal and competitiveness problems head-on: debt restructuring for Greek bondholders; and a higher inflation target for the ECB - say, 4%, instead of 2%.
I touched on the first of these, briefly, on the Today programme this morning.
If you could pull it off, restructuring Greece's debt (with some suitable "haircut" for private bondholders) would actually lower the real burden of its debt, making the path out of this more plausible. Of course, Greece would pay a price for it in the markets. For a long time. But it's not as if it's never been done. And it's not as if the alternative path for Greece is much brighter.
"Unthinkable", you may say. "Remember what happened after Lehmans was allowed to go bust - and everyone in the world holding private bank debt started wondering whether they were next?"
The memory of that is indeed one of the many reasons that a debt-restructuring is not being seriously considered. You could be looking at Lehmans, cubed, if the markets started seriously questioning every developed country sovereign bond.
But the international community has now accepted that we need ways to restructure private debt without all hell breaking loose - ways to make private bondholders bear some of the burden when banks get into trouble, not just taxpayers. A few years from now, I wonder whether we will be saying the same about sovereign debt problems as well.
So much for unthinkable number one. What about unthinkable number two - a higher inflation target for the ECB?
This post is so long already - and this is so unlikely to happen - that I won't belabour the point. But this is something that was discussed, a little, when the euro began, and especially when the membership extended beyond the European "core".
Arguably, a higher inflation target for the eurozone would help the less developed economies on the periphery grow faster in real terms, not just nominal. It could also make it easier for countries at the periphery to cut labour costs in real terms - without actually lowering people's nominal wages or suffering deflation. And it could weaken the euro, which might help growth as well.
A 4% inflation target for the ECB wouldn't solve the problems at the periphery. You would still need more domestic demand in Germany, and some tough structural reforms in Greece and the rest. For all these reasons, the short-term benefits of slightly higher inflation could easily be frittered away. But it might, just might, move things in the right direction.
Pity that the eurozone members cannot even raise the question. Let along make it happen.
~RS~q~RS~~RS~z~RS~21~RS~)
I'm 
© MMXI
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Stephanie
You stole my thunder! I quoted Wolf from yesterdays FT at #75 on your earlier blog, minutes before this appeared. Let's hope Germany learns to go shopping sometime very soon!
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If things are so bad I cannot see the German people allowing the Eurozone and all its failings to bring down Germany.
We all know the German attitude to inflation from their past experience so although it may be a good idea to run with a slightly higher level of inflation as you said it will be an impossible task trying to get this through.
Inflation is like QE so when it takes hold it becomes difficult to stop.
Seeing so many EU politicians floundering around in the dark not knowing what to do shows us clearly that the Eurozone was never set up with the possibility of recession in mind.
I always thought that trying to put a false botton under a recession would only put off the inevitable until another day.
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Arguably, the ECB are to blame for the 'PIIGS crisis' for not enforcing the debt/defict criteria under the Maastrict treaty?
If the ECB are as much use a as 'Kraft Chocolate fireguard' what is the point of having a 'union' and a central bank?
With this kind of 'trough-enomics' and 'troffiteering' the 'little 'gilt edged' pigs' might be avoiding the market altogther?
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Your section:
German unit labour costs have barely budged since 2000, and German inflation has been lower than the eurozone average. As a result their exports have gradually become more and more competitive in world markets. Whereas Greece, Spain, Portugal and the rest have had relatively higher inflation, faster wage growth, and thus growing unit labour costs - and falling competitiveness.
A quick question - is this not predicated on the assumption that all things were equal in 2000. I cannot imagine the unit costs for production in Greece or Portugal - especially wages - being the same as in Germany.
So their relative competitiveness may have declined but not their absolute?
Just a question.
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Hi Stephanie
Your post is interesting but does not seem to address the moral hazard issue raised on http://notayesmanseconomics.wordpress.com today. Both restructuring Greece's debt or a higher inflation target have considerable moral hazards involved in them.
It looks to me that your thoughts are heading in the direction of Greece needing a currency devaluation. Of course unless the Euro falls in value this would mean Greece leaving the Euro. Is this what you are trying to imply?
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The 4% inflation target sounds sensible, but at what target level does inflation become uncontrollable?
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I guess this is an Economics blog, but some mention of the fundamentals of the social environment in Greece is surely appropriate. From reading some of the comments about the country, they are starting to look on the edge of 3rd world, with a barely functioning tax regime, wide-spread tax evasion, bribery and corruption, government accounting irregularities... You can do all the restructuring and inflating you want, but until the citizens and government get a grip on themselves and collectively realise the mess they've all made together and find some common ground amongst themselves for how they are going to sort their mess out, then I don't think anything the ECB or European Council, IMF or anyone else does will make one jot of difference.
BTW, how were they accepted into the Eurozone in the first place!?
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Good article, and I wholeheartedly agree.
Yes, you did mention Martin Wolf on 10/2.
But before that:
56. At 6:26pm on 09 Feb 2010, onward-ho wrote:
Of course PIGS profligacy is not the only problem in the Eurozone, it is also the "virtuous" exporting BAFLNG countries who are too mean to buy anything from the PIGS or they already own the companies there.
and there is only so much Mateus Rose, Guinness,Prosecco and Retsina you can sell in Frankfurt.
There is a growing realisation that the real imbalance is that some countries like Germany,China and USA want trade to be a one-way affair In Europe,for PIGS and for the UK it's not much fun driving the wrong way down a one-way street:
WE BUY THEIR STUFF, WE PAY TWICE THE RATE OF INTEREST FOR OUR DEBT THAT THEY DO,WE GET INTO DEBT AND THEY LECTURE US FOR BEING PATHETIC.
IF THE BAFLNG COUNTRIES WANT TO KEEP ENJOYING THE SINGLE MARKET THEY ARE GOING TO HAVE TO PAY FOR IT ........
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Stephanie,
The way this is going we will see German tanks on the Parthenon within the next six months. Plus ca change plus ca meme chose! I would not be surprised if the euro and EU had collapsed within the year. The markets will test this to destruction and the licence fee funded BBC will fail to report this. Its the beginning of the end for the EU and this is the defining date. Richly deserved.
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Let me take you all below the surface appearance.
Why are the Greeks, the Irish, etc being told that they have to face cuts in real wages & work longer?
Are these ordinary working people consuming more than they produce, living off the labour of the more hard-working Germans, Chinese, etc?
Off course this is how the ruling class want to play it.
To divide workers, to make them think they need to 'live within their means'.
Is the average Greek, Irishman, Briton, etc really having an easy life?
Did our mothers & fathers, grandparents work harder, work more productively?
Of course, the average person knows they are being exploited but don't have the economic theory to make sense of whats going on.
The economic theory is actually quite difficult.
Part of the reason why the mainstream economists can't adequately explain the workings of the system & the nature of the crisis.
The first point to remember is the capitalist system only produces for profit.
The capitalist (those few who invest millions/billions) requires a positive return on his capital.
Whilst this can be done through ever increasing asset prices, it ultimately rests upon commodities being produced that when sold return a greater sum of money than the initial outlay.
If a positive return is not expected there is no reason for the capitalist to produce.
The credit crunch was essentially the hoarding of money, into gold for example, instead of into production, loans to businesses.
But what determines the rate of profit - why does it sometimes fall?
Well there are many reasons, but the one that it the essential contradiction of capitalism, is capital accumulation (economic growth) is actually a cause of a fall in the rate of profit.
To understand this requires equations & a deep understanding of the concept of value.
This takes us to the second important point to note - today's economists have no objective basis for the concept of value.
About 150 years ago they gave up Ricardo flawed labour theory of value for the subjective marginalist concept of value.
Hence when they look at the aggregate they are effectively trying to explain prices with prices.
A labour theory of value that takes the market determined socially necessary labour time into account restores an objective foundation for value & enables an explanation of crises - falls in profit rates that requires the destruction of capital value to restore the rate of profit & the next upward part of the cycle.
We are therefore all subject to crises & the consequent loss of jobs, loss of houses, & the unpleasant spin-offs, marriage break-up, drug abuse, etc. all because the system itself creates its own crises.
Previous systems of production only had crises as a consequence of natural disasters, plagues, war, or the like.
Already through the government bailouts the workers are paying the price to save the capitalist shirts. Now because the goverments can't borrow enough from the banks (the capitalists) to cover the debts, we all have to earn less & work longer.
The rich need to pay not the workers.
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Back in the closing months of the last century, I was working in Bonn. Then we were discussing the soon to come Euro, and it was put to me that all EU countries ought to join. I asked the question, with hindsight very prophetic, "would you like to be held accountable for an economy like Greece?"
At the time it seemed like a joke.
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stephanie using the word pigs to describe some countries in the eu i asume u r trying to b funny so pple like me do not find it one little bit funny indeed i find very rude
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Greece has a large debt and other nations won’t like bailing Greece out.
So does that mean there is a problem.
Answer = No not really.
What other nations do or do not like is largely irrelevant because they are not going to decide what happens. Politicians on the other hand will decide.
They will ensure that Greece stays afloat, because is she sinks the E.U. may well fall apart as she does so. And if that means spreading some of Greece’s debt around or engaging in a spot of QE, then that’s what they’ll do.
The politicians will distort the true nature of the bailout so that the average person will either not understand it, or not wish to.
The people of Greece have done an admirable street protest job, and by doing so have forced the hand of the politicians.
From a politician’s point of view, it matters not whether people go bankrupt, or suffer hardship, the most important thing is staying in power.
Because if you’re not in power, you don’t get the rich pickings that come with it.
And from the point of view of the E.U. politicians, you can’t stay in power if member countries fall apart.
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# 3. At 2:24pm on 11 Feb 2010, nautonier wrote:
This comment is awaiting moderation. Explain.
>>>>>>>>>>>>>>>>>>>>>
Perhaps 'you' could explain why the moderation is delaying the post - Are Liberty on strike today?
>>>>>>>>>>>>>>>>>>
'There's just one problem. Even a bail-out - if that is what it turns out to be - won't solve the basic problem facing Greece, or the eurozone.'
Is this because the ECB are themselves incompetent and are fully responsible for this 'Greek crisis/PIIGS crisis' by not enforcing the debt/GDP limits set out under the Maastrict Treaty?
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Come on Stephanie, you can do it. Just take a long deep breath and say it... Greece needs to leave the Euro.
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#13. gino wrote:
"stephanie using the word pigs to describe some countries in the eu i asume u r trying to b funny so pple like me do not find it one little bit funny indeed i find very rude"
Gino, does yr mummy no ur using her computer?
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Surely Greece's problems are just like UK except complicated by membership of the Euro.
In fact when you consider the size of the stimulus packages across the world and then you look at how deep in trouble so many countries still are it makes you wonder where we are all heading.........
Greece (appropriately) may just start us all sliding back down the cliff again.
A lot of people have talked about a double dip recession shaped like a 'W'
I think it is more likely to look like a lightning bolt shape!
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........I am not really sure what Greece has done that is so wrong, after all aren't they just "supporting" the economy until the crisis is over, which once achieved will then lead to the economic growth that will allow repayment to take place? After all, we in the UK make it difficult to make the case for moral hazard bearing in mind our own inability to match spending and income over the last 10 years or was that the former Tory Govt's fault as well?
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@ duvinrouge #11: theoretical arguments are just words: propping up Greece is reality. What do you know of the Greek social economy, for example. What are the Greek workers' costs, wages and benefits? How do these relate to the current problems in Greece (against, inter alia, numbers of civil servants, "black economy" earnings, tax-dodging, etc)?
These latter are said to be amongst the problems the Greek Government is facing. The EU has no powers to insist that Greece indeed tackles these proposed problems. Each EU member-state still has fiscal control: and, to me, that is the root of many of the continuing imbalances within the Eurozone.
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11. At 2:53pm on 11 Feb 2010, duvinrouge wrote:
I'm not an economist, but I agree the numbers don't add up.
If I, a manufacturer, live forever, and always make a profit and don't spent it, then eventually I will have all the money in the world. If I grow (i.e make more profit each year) then the time it takes me to have all the money decreases exponentially.
There is no other possible outcome, unless the world banks print extra free money every year to allow for my growth.
It's the same for countries: Germany can only get rich if other countries (Greece) get poor. The only middle ground is if nobody makes a profit, but break even instead, or if central banks print money each year equal to the net profit of the world for free.
The world as a whole has to balance. If China is to make a profit, America must get poorer, and so on.
Within the EuroZone, the only way to get Greece to be more profitable is for the rest of the Eurozone countries to be less profitable. Or for central banks to print money for free.
I can't see any way around it, the system relies on a balance of one mans profit= another loss.
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It is typical of economists to impose on their theories the limits of their understanding of people. How can you square such circles as the loathing of the Irish (I am one myself) and Greeks to pay taxes or the Germans to spend ? These phenomena do not have neat answers. The worlds economy would however be better all round if wealth was more evenly spread, that is something we should be able to fix.
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I can't help but laugh when economists complain about Germany running a surplus, as though its some sort of unspeakable crime. Germans make things that people in the rest of the world want to buy. To compete with them you have to make things that people want. The Germans are not about to start buying things that they don't want,(apart from greek bonds).
The Germans have a work ethic and are efficient, they do not overpay themselves and spend beyond their means and they remain competative. Why should they bail out Greeks, or anyone else, who have the opposite ethics.
Like Lehmans, Germany should let economics take its course, let the PIIGS crash and burn and learn the hard way. They have all lived beyond their means and now its crunch time, they need to work harder for less, their standard of living has to fall, and then they may become competative.
Like the PIIGS, the UK is in a very similar predicament, we pay ourselves too much for doing little or in a lot of cases nothing, what do we do to justify our standard of living. Our government says we must keep borrowing to sustain a recovery, but its just more of what's got us into this mess. There is no easy way out, so stop looking for it.
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No matter how much Greece manages to export, the problem will not go away until the Greek Government learns to only spend what it can afford based on actual revenues received, and the Greek population (especially the higher paid professions) are forced to pay their taxes. These are old habits which , before the Euro, were compensated for by a combination of inflation and currency devaluation. The same basic problem is there for all the GIPS (sounds kinder than PIGS as the people in all those countries are really nice), their culture of endorsing a large black economy does not fit with the Germanic rules of the Euro. The jury is out as to which will break first - the culture or the Euro?
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#20 frenchderek
The theory does attempt to show what is the root cause.
Black market, tax evasion, etc are not.
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Comment 4 - Yes, you're right, this is about relative competitiveness. If you think about it, competitiveness is an inherently relative concept - you're either comparing to the situation at some earlier date or that of another country. There is no "absolute" measure, independent of what other countries are doing.
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#21 Crookwood - exactly - I completely agree - see a post below I made last week. [PS Stephanie has just replied to a post - WOW - is that the frist time that has ever happened on a business post? - I notice she seems to have got past the moderators quickly!]
7 billion people in world and growing
Estimate of proper jobs in world 2 billion (maybe less) - most of us are just pushing paper around and the fact we receive money for doing it which we can exchange for things makes it seem like a useful function.
There are too many people in the world - Asia, India, Africa, South America, USA, Australasia and Europe can not all be busy building and producing things for people to consume because the planet does not have enough resources.
Conclusion - there are a few options.
1) Some people in the world need to live in desperate poverty - the Africans, some Indians, some Asians and some South americans fulfil this requirement quite nicely at the moment.
2) We need to equalise standard of living so that those of us in the West become what we would consider to be extreemely poor by today's standards to enable other areas of the world to raise their standard of living. I think this is happening but by running at a deficit every year USA and Europe are being able to maintain their standard of living at an artificially high level - this won't last much longer.
3) Everybody gets rich at the same time and then the world collapses spectacularly as we consume the worlds resources far too fast - everybody then gets spectacularly poor - so that we all live in the equivalent of Ethiopia or similar.
At the moment all three options seem possible but I would aim for somewhere between 2 and 3 as most likely outcome.
How many generations will this take is probably the question my children would be most concerned with.
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#21 Crookwood
Think about what money is.
Is it not that special commodity that allows us to quantify the value of all other commodities?
This then brings us back once again to the concept of value.
Isn't the only think that all these commodities have in common labour?
So how does value increase?
Labour is the only commodity that receives less value than it creates.
That is, the wage paid for labour power is less than the value created in the commodity (the transformation of nature) that is then realised at market.
This realisation of the greater value is the profit, hence all profit derives from labour - the exploitation of the workers by those who control the means of production.
Hence the class relation of workers having to sell their labour to those who control the means of production (machines, raw materials, land).
It is the end of this class relation that is required for liberty.
We need a classless society.
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#21 Crookwood
" I can't see any way around it, the system relies on a balance of one mans profit= another loss."
This assumes that it is a zero sum game and clearly cannot be true. There is such a thing as "Value add" whereby all our activities (mostly) add value and thereby add wealth to the economy. There is clearly greater wealth in the world now than 100 years ago - The cake is larger now and as long as GDP grows, so does the size of the cake.
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Woe to the UK.
The pound is rising as the spin-side to the rapidly falling Euro.
The UK is in enough trouble as it is, and the only, only, only way out is a weakening pound and a slowly rising export led sector (with a lot of pain for quite a few years). And the pound needs to drop another 20% at least over the next couple of years to allow us to survive economically.
But if the pound rises, then we can enjoy ourselves for a few months in a temporary sunny economic blip, maybe at most for a year or couple, and then absolute economic devastation and oblivion for this country.
Woe to the UK if the Euro drops against the pound.
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Perhaps the best solution would be to allow Greece to leave the euro-zone and use devaluation of their currency to help their difficulties. Or expel them if they don't get their act together?
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Pretending for a moment that the Germans would ever allow a higher inflation target - it's not quite the solution you propose.
When inflation is higher the rates charged on borrowing also goes up as otherwise the bank's assets (your debt) erode - and the banks aren't in the business of giving money away.
Also gilt rates would rise as foreign investors would want a higher yield - so making the servicing of the existing debt harder when it's rolled over.
So in a higher inflation/interest rate environment there would be pressure on asset prices (housing in Spain/Ireland is already vunerable) and unless wages also rose (and freezes are the order of the day) whilst the debt would be diminished with respect to prices the abilities of people to service those debts would be compromised.
This is why the UK has such a problem. If you combine personal debt (about the highest in the world) and government debt (not the highest outstanding - but getting there with Greek levels of deficit) we have a mountain to service - and inflation would make it worse for many as interest rates would also be pushed up.
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Stephanie,
can you please stop referring to Portugal, Ireland, Greece and Spain as the Pigs? I found it rude and offensive, specially in a public corporation blog
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It certainly beats me that countries like China, Germany and Japan can be blamed for making things that other nations want to buy. It is OK to blame China for its low wages structure but neither Germany nor Japan fit the low wages picture. These people are inventive logical and prudent. Blaming them for the imbalances is rather like athletes who finish second or third blaming the competition for training too hard. Are they to be blamed because the Anglo Saxons set up a system which is consumer based and they supplied the goods? As I say it beats me.
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"Arguably, the ECB are to blame for the 'PIIGS crisis' for not enforcing the debt/defict criteria under the Maastrict treaty?"
The ECB is not responsible for enforcement of the Maastrict treaty, the Council is.
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Good article with good points raised. The author does not go to the next level though. Greece in itself might be containable with some support from the stronger and larger EU countries like Germany that could afford to lend some relief to Greece's debt problem. However, simply throwing some money at the problem will not make it go away. Without a sustainable plan which somehow stimulates import demand for Greek products (think olive oil, wool, and tasseled slippers), the Greek economy will continue to pile on debt. It should also be noted that Greece's economy has been a mess since they joined the EU, and there is good reason to believe that the only reason they were allowed to join back then at such a generous currency conversion rate, was because they misled the rest of the EU countries about their financial well being.
This is all neither here nor there however. Greece's problem is just one of a larger problem that faces multiple countries (PIGS) in the EU. Perhaps Greece gets a nice fat loan with few strings attached (VERY unlikely). What happens then when Spain, Italy and Portugal come to the table in Brussels begging for money???? At some point, the word NO will be used. And when that happens, the EU confederation will be tested. Since a binding treaty was never signed, I would find it hard to believe that a country like Germany or France would not find it politically expedient to separate themselves from the EU crisis and find it better to go it alone.
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Has the moderator gone to dinner?
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I am sure you are right, the Greek national debts will be underwritten in some way, probably by the ECB, as this would not cost non Greek taxpayers anything.
Commentators seem to forget that deficits can be turned into surpluses by increasing taxes as well as by cutting expenditure. Remember that the Greek government is sovereign in Greece, and has the power to tax anything Greek.
I have the impression that there are some very wealthy people living in Greece, eg shipowners. The national emergency could be used to justify a sudden heavy tax on such people, so sudden that they would not have time to arrange avoidance, or if the tax were on property ownership, then it would be difficult to avoid or evade anyway.
The political attractions of such a measure are considerable. Provided it only affected a small minority, it would probably very popular. Very rich people only spend a proportion of their wealth on consumption, so taxing at this end of the wealth spectrum would not reduce demand significantly. Indeed if it were part of a package in which some of the extra tax was offset against extra expenditure, its effect om demand could be neutral.
A desperate situation calls for desperate, perhaps unconventional measures. When Germany was in even greater trouble in the 1930's, the Nazi government created a new currency and declared that it was backed by the land of Germany. The implication being that if necessary they would simply use private property as collateral.
It worked, they were able to end recession in Germany and their economy became strong enough to survive six years of war, without the financial help that Britain received from the US.
Mrs Merkel should remember this piece of history before she tries to impose too unpleasant terms on the Greek government.
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Re: 28. At 5:09pm on 11 Feb 2010, duvinrouge
I don't disagree with your comments, I'm just pointing out that if I sell a comodity for more than I paid for it(in labour or materials) then that money has to come from somebody else, making them poorer.
It has to be a zero sum game, as soon as I make a profit, somebody has to make a loss, or money will have been created out of thin air, with no strings attached to it.
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Re 29. At 5:10pm on 11 Feb 2010, Voter_Graham
It has to be a zero sum game, the books have to balance. If you buy a gizmo from me, your bank balance goes down, mine goes up. The amount of "money" in existance is the same.
Our growth over the last N years can only come from extra "money" being introduced into the economy by central or lending banks. The lending banks will want it back over a limited 1 - 25 yr period, so you can only get a temporary growth, while you borrow, the bust we've got now is us (the world) coming to terms with not being able to continue borrowing to repay the repayments.
Central banks can print money without needing it back.
I'd love to be wrong about this, but I can't see how it can be otherwise.
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#33 FEYDA77
"Can you please stop referring to Portugal, Ireland, Greece and Spain as the Pigs?"
I agree - in my post #24 I have suggest using GIPS as a more polite alternative. However the term PIGS (or sometimes PIIGS) is being used throughout the internet and it may be too late to get people to change. It is not just Stephanie, who I am sure meant no offence.
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The problem with 'imposing' anything on anybody is the very obvious one - if you want them to do you had better do it too.
This is a question of mainly political dimensions. My suggestion is to let any European benefit from the best interpretation of the same law in any member state. Pension age for example would be the lowest age anywhere in Europe. The pension would be the highest payable in any state. The tax rate payable the lowest payable in any state. Simple legislation but dramatic consequences! No European state's citizen could grumble about a level playing field. The other side would of-course force all governments to rapidly become as fair as any other state towards its citizens. Now that would be a very simple piece of legislation that the vast majority of Europeans would support!
I would also advocate a European Maximum Wage for a period of five years so as the make Europe more equal as it have been shown that the more equal a society is the more prepared they are to suffer - and we will all suffer. (This QE /zero interest rate nonsense is just putting off the evil day and making things worse - it has to stop and we must take the hit so that we can get back to rational economics and a stable monetary system.)
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39. At 6:13pm on 11 Feb 2010, Crookwood wrote:
So if a farmer plants a crop, who exactly is now poorer?
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I'm not convinced regarding the zero sum one mans profit is another mans loss arguement.
It maybe more of a case of relative values. If I have something in abundance (which means it is not particularly valued in my locality) but is scarce in yours what is the problem?
Surely this is the real basis of trade.
Similarily the Marxist theory of profit through labour is not necessarily valid in the world today as most of the really profitable enterprises are not based on this model (think software, music, books etc)
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This article points to another big challenge in the EU: underlying Germany’s huge trade surplus is what I see as a major structural problem with the Eurozone and the EU as a whole. Before German reunification you had four roughly equally sized and equally developed countries - GB, France, Germany and Italy - and companies in all of them could compete with each other on roughly equal terms. But since German reunification, Germany is now about a third bigger than the rest. Now, the size of a company depends mainly on the size of its home market - cf. Kraft’s takeover of Cadbury. Kraft is not better run or more profitable in terms of return on investment etc. It is simply bigger - how could an American manufacturer of ketchup not be bigger than an English chocolate maker? In the same vein German companies have far better economies of scale than their neighbours and can undercut them to take a greater share of their home markets. Subjective, but I certainly see a lot more Müller Milch products in UK supermarkets than before 1990. And we can look forward to this growth in German pre-eminence going on and on.
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I would not view the probelems the problem of Greece in such a limited way as you, Stephanie, becuase you speak "only" of a problem of "debt" and "competitiveness". Greece has a fundamental problem, a crisis of the state, with corruption and social inequality, the schools, the social infrastructure is out of order, the citizens don´t trust in the political structures, it goes far beyond your limited economic view, the crisis of Greece is much deeper.
Let me point out that there has been a parallel case with Hungary with an extreme debt and almost bancrupt, they also got credits from the IMF and the EU and - it has worked! There will certainly be strict controls with that money handed over to the Greek government - if that would not work in a sustainable way, the crisis will most probably extend as a crisis of the EU as the ordinary citizen of the EU will not tolerate everything, especially one sided support that is failing.
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38. At 6:07pm on 11 Feb 2010, stanblogger wrote:
You mention taxing hte very wealthy in Greece. This is certainly an option, but it carries long term risks. The rich are no different really to you or I (except they have loads-a-money). If they feel threatened financially they will look at their options. One of which is to seek out a more favourable environment.
Hence why switzerland negotiates tax rates with it's wealthier denziens.
Oh and the reason it does so? Because they tend to create jobs wherever they go.
PS if you'd like to send them over here, we could sure do with the help, but I'm guessing you'd prefer to keep them.
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stephanie,
a few questions to chew over:
- how much of the inflation differential in 1999-2009 was due to the samuelson-balassa effect and therefore nothing to do with "competitiveness" (i.e. price of tradable goods is same across the whole eurozone, yet higher productivity gains in piigs tradable sector => higher wage inflation in PIIGS tradable sector => higher wage inflation in piigs non-tradable sector => higher overall inflation in piigs)?
- how much of the inflation differential was due to convergence of price levels, given that piigs currencies generally traded cheap to the dm up to 1999 due to the "currency risk premium" associated with countries that had illiquid markets and/or weaker track records for fiscal / monetary discipline? there was a lot of talk about germany's "lack of competitiveness" in 1999, if you remember.
- how much of the piigs current account deficits was actually driven by the capital account (i.e. the euro suddenly gave piigs households access to much lower interest rates and a much bigger source of (german et al) financing, leading to private sector credit bubbles, most notably in spain)? now these bubbles have burst, would this not suggest that the piigs' current account deficits will be addressed by collapsing private sector demand, rather than by improvements in "competitiveness"?
- if "competitiveness" refers to the relative unit costs of labour, is the solution wage deflation in the piigs, or is it simply for piigs workers to increase productivity by e.g. working longer hours? if i were a spanish employee with a large mortgage, i know which i would prefer.
- why do german households save more? is it cultural? is it regulatory? or is it because of the low level of home-ownership (and therefore the absence of a housing bubble in recent years like the ones that led to "fake wealth" effects on consumption in the piigs)?
- if the piigs' experience represents an "asymmetric shock" then won't the retrenchment by the piigs be offset by rising export demand from the rest of the eurozone, given that intra-eu exports comprise a large share of the piigs' gdps? if the piigs' retrenchment is not offset by rising export demand from the rest of the eurozone, then surely ipso facto it cannot be an "asymmetric shock", in which case wouldn't the ecb respond with monetary stimulus?
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#40. At 6:21pm on 11 Feb 2010, Crookwood
If I buy a pile of building materials for £50,000 and use them to build a house which I then sell for £100,000 then I will have added value. The BofE can create money to match the growth in net asset values across the country created by the net result of all our activities as represented by the GDP. I agree that just buying and selling on its own will not add value - that will just make someone richer at the expense of others (eg as per investment banks - ha ha) . However if value is added then it is no longer a zero sum game.
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I, like most people I suspect, don't understand much about economic theory - do the economists?
It has, however, been clear for a very long time that huge trade imbalances exist with the UK and the USA importing goods in huge excess while the "virtuous" countries like Germany, Japan and China export to us. It would seem obvious that this couldn't continue for ever but just as we are addicted to borrowing and buying so the "virtuous" countries are addicted to making and selling. When we mend our wicked ways then they will have to change too - either they start buying or they stop making excess products.
I live part of the year in Portugal, there every small town has several Chinese emporia selling cheap and often rubbishy goods - the same phenomenon occurs in Spain. Most of this "stuff" is unnecessary. More than half our homes are filled with goods we do not need and often hardly use. Last year, until the governments across the world stimulated the car industry, people and industry stopped buying new cars and commercial vehicles - it is not a great inconvenience to make a German or Japanese vehicle last 6 years instead of 3. It is certainly better for the world!
What I'm trying to point out is that it is very much in the best interests of the so-called virtuous countries to consider what they are doing. They cannot continue to depend on the debt junkies to keep their factories running.
Germany needs Greece as much as Greece needs German help
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Good blog and some excellent observations.
The 'bailout' for Greece won't be the warm and fuzzy kind. Tough love is required otherwise, there is no incentive for the rest of SPIG to get their houses in order. Also, equal help should be offered to Ireland who shouldn't be left out of any rescue package just because they are not living in denial.
On a side note, did anyone see Mervyn King's cheery assessment of the UK economy yesterday? We are still 'bumping along the bottom' and growth this year will be lower than expected. (Not sure why this wasn't mentioned anywhere today on the bbc though). Is anyone worried about a Japanese style lost decade? Unbelievably, I think we will have more QE to look forward to.
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Let´s ask the UK as Europe´s financial powerhouse with the top banker´s place London to hand over some money to the Greek government...How about that?
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#50 states:"They cannot continue to depend on the debt junkies to keep their factories running." Is this true? I think you may just find that countries like Germany, Japan, and China export more than just gizmos. Especially a country like Germany exports a great deal of tooling machinery and machinery of all sorts to countries who value reliability. The US and UK used to do this very thing until they found it more profitable to export financial time bombs to the unsuspecting.
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Just a thought - if Greece was going to drop out of the Euro, it will be denied by all politicians until the day it actually happens. I wonder what happened to all the old Drachma notes and coins ? Is there a printer somewhere in Europe with a nice new order from the Greek government?
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Can we put this into perspective.
The Greece deficit/bailout is dwarfed by the bailout required by the state of California or the bailout received by Lloyds and RBS.
The Euro is a young currency and passing every test thrown at it. This crisis will speed full fiscal union.
Who will bailout sterling when the days comes - as it surely will.
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#39 Crookwood
Again, think about what money is.
If you accept that it allows us to quantify commodities by the amount of labour (socially necessary, i.e. realised in the maket) then the more hours worked the more value.
Now if money is gold (or all the paper money is convertable into gold) the actual amount of money will only change if more gold is dug out of the ground.
But with more labour hours, more commodities the nominal price in gold will fall.
Profits can be realised without any more money being printed as the money can buy more commodities because more hours are worked.
The actual situation today though is not one where paper money is convertable into gold (or anything else for that matter).
Hence governments do print money to artifically maintain profit rates, e.g. quantitative easing.
But this then takes us onto the concept of fictitious capital, i.e. capital put into circulation without any basis in production.
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#44 StephenBlencowe
So software, music & books just magically come into existence do they?
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#47
You mention taxing hte very wealthy in Greece. This is certainly an option, but it carries long term risks. The rich are no different really to you or I (except they have loads-a-money). If they feel threatened financially they will look at their options. One of which is to seek out a more favourable environment.
Hence why switzerland negotiates tax rates with it's wealthier denziens.
Oh and the reason it does so? Because they tend to create jobs wherever they go.
========================================================================
"The rich are no different, except they have loads-a-money".
By definition this is what makes them rich. You suggest that taxing them, or rather "making them feel threatened" they will go somewhere else.
Isn't that what a parasite or a virus does ? They kill the host, then flee to new environments where they can feast. I'm intrigued to know where is left for these people to flee to and equally why they cannot face up to the reality they have created.
Switzerland ? The land of immigration ? Isn't this the country that bans mosques, has no exports other than the vampiric banking sector and is supposedly neutral towards other countries ? If Switzerland continues to become a haven for the financial-terrorists that create decimation wherever they pass then at what point does the rest of the World look upon them in the same unfavourable light that we view any other rogue state ?
The "rich" have made their bed and now they must lie in it.
If the "rich" were taxed heavily and had no refuge, aside from such financial-terrorist states as Switzerland, perhaps it would be possible to extract back some of the value that the workers have created.
I support everything the Greek workers are protesting about. They deserve better and no media lies about people being corrupt, lazy or being accused of a porcine nature will suggest that this is not a ploy by the very "rich" that maintain the status quo.
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We should not forget that the Southern European countries carry the bulk of the burden for the East European expansion: both structural funds and tourism have been redirected to a large extent.
On top of that, they have to deal with immigration from Eastern Europe and Africa. Last time I was on Crete, I was surprised by the large amount of foreigners and the dilapidated state of the island.
In Spain and Portugal the real estate bubble has bursted after years of euphoric over-investment.
And Ireland is also the victim of the US economic downturn, with less transnationals able to use it as a bridge to Europe.
Different problems require different solutions. But we do need an overall vision of how to get out of this depression. Eco-technology can give the economy new oxygen: solar energy, wind energy, zero emission cars on electricity and air pressure... The European Commission should steer investments for solar energy in Spain, Portugal and Greece. And there's lots of wind energy potential in Ireland and Portugal.
Let's waste less money on oil and gas, and invest more in renewables. It may even defuse some geopolitical conflicts that are financed by petro-dollars.
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35. At 5:48pm on 11 Feb 2010, Hesketh wrote:
"Arguably, the ECB are to blame for the 'PIIGS crisis' for not enforcing the debt/defict criteria under the Maastrict treaty?"
The ECB is not responsible for enforcement of the Maastrict treaty, the Council is.
>>>>>>>>>>>>>>>>>>>>>>>
Really! (?)
You may be right in terms of constitutional approval but under the original Treaty I understand that the ESCB was given a very strong set of responsibilities:
See
http://www.eurotreaties.com/
THE MAASTRICHT TREATY
TREATY ON EUROPEAN UNION
AND
THE TREATIES ESTABLISHING THE
EUROPEAN COMMUNITIES
PROTOCOLS
OBJECTIVES AND TASKS OF THE ESCB
ARTICLE 2
Objectives
In accordance with Article 105(1) of this Treaty, the primary objective of the ESCB shall be to maintain price stability. Without prejudice to the objective of price stability,it shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2 of this Treaty. The ESCB shall act in accordance with the principle of an
open market economy with free competition, favouring an efficient allocation of resources, and in compliance with the principles set out in Article 3a of this Treaty.
ARTICLE 3
Tasks
3.1. In accordance with Article 105(2) of this Treaty, the basic tasks to be carried out
through the ESCB shall be:
- to define and implement the monetary policy of the Community;
- to conduct foreign exchange operations consistent with the provisions of Article
109 of this Treaty;
- to hold and manage the official foreign reserves of the Member States;
- to promote the smooth operation of payment systems.
3.2. In accordance with Article 105(3) of this Treaty, the third indent of Article 3.1
shall be without prejudice to the holding and management by the governments of Member States of foreign exchange working balances.
3.3. In accordance with Article 105(5) of this Treaty, the ESCB shall contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system.
ARTICLE 4
Advisory functions
In accordance with Article 105(4) of this Treaty:
(a) the ECB shall be consulted:
4
- on any proposed Community act in its fields of competence;
- by national authorities regarding any draft legislative provision in its fields of competence, but within the limits and under the conditions set out by the Council in accordance with the procedure laid down in Article 42;
(b) the ECB may submit opinions to the appropriate Community institutions or bodies or to national authorities on matters in its fields of competence.
>>>>>>>>>>>>>>>>>>>>>>>>>>>
It looks like the 'ECB' has failed to keep proper regulatory control to me?
I'm not really interested in the ins and outs of EU bureacracy - just 'cause and effect'
By the way does anyone know what the ESCB's 'field of competence' is supposed to be?
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#55 Richard Dingle wrote:
Can we put this into perspective.
The Greece deficit/bailout is dwarfed by the bailout required by the state of California or the bailout received by Lloyds and RBS.
The Euro is a young currency and passing every test thrown at it. This crisis will speed full fiscal union.
------------------------------
Wanna have a bet on it?
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61. freemarketanarchy wrote:
Wanna have a bet on it?
Keep your money - the UK has a national debt of £800bn, rising to £1trn in 2011. The less-indebted eurozone will live to fight another day and currency traders will move on to sterling as it becomes clear how ill-prepared the UK is for peak oil and the retirement of the baby boomer generation.
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The main Greek problem is not the bloated public sector: Greek public servant salaries and pensions are the lowest in the Eurozone, with the exception of Portugal. Nor is it the non existant welfare state, which only serves its employees and its contractors. It is the parasitic private sector: enjoying billions in contracts, commissions, tax evasion, price fixing and, finally, EU and state funding, including a 30bn € pumped into the "economy" (ie the banks) by the last government. Where is all the money gone? In private acccounts abroad.
Now Greece has to face the brunt of its cleptocratic political culture. I know that Greece-bashing has become popular nowadays. Do not get us wrong for protesting, though; everybody knows it easier to tax the salaried classes now than fix a broken system and - heaven forbid - challenge professionals and industrialists to give back, even in the form of investment, some of their bounty.
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The article seems like an advocacy of or for 'Goldilocks inflation'--- the Germans might be more disposed to try it if they hadn't undergone non-Goldilocks inflation in the 20's and then seen what resulted.
We have been through a lot of 'thinking the unthinkables' in Economics in the last couple of years...and serious as the effects of miscalculation of effects may be, they won't be as serious as the effects if indulging in Designer inflation is miscalculated.
But I wouldn't rule it out in an age seemingly addicted to easy options...even when they aren't (easy ) any more.
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Interesting that people still insist on putting Italy in the same group as the PIGS/GIPS countries. Last time I checked they are one of the few net contributor contries to the EU (to the tune of 7 Billion Euros/yr "lost" to the EU), with a lower deficit than most (1/3 that of the UK for instance). Italy's public debt is quite high, but when you combine it with their private deficit the figures are close to those of the US.
I suspect pretty soon the UK will ring up their Finance Minister to ask for suggestions on how to handle the rapidly balooning debt the UK is building up. Way to go Gordon!
I do find it laughable to think the France would help bail out Greece(and with what money I ask?) out of the goodness of their heart. If they do help out greece, it will be for a (sizeable) return I'm sure.
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At 7:10pm on 11 Feb 2010, the_nutty_dragon
What I'm trying to get at is that the money used to pay for the goods has to come from somewhere.
In your example, if the farmer charges and gets more money than the cost of growing their crops (seed cost, land rent, labour, fuel, his labour charges etc), that money has to come from someone else, making them financially poorer. Wealth is added, yes, but that wealth comes from somebody else.
Take this globally, and for Germany to get wealthier, another set of countries have to get equally poorer. You can exchange asset for cash (I've got a BMW, BMW have got 30K), but the asset usually depreciates.
If we keep buying the farmers crop, he will amass wealth, and we will lower our wealth. As a country, Germany spends less than they generate in wealth, and this excess is paid for by everyone who buys a German product. The have less cash, Germany has more. Can you see what I'm getting at?
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All that goes to show that countries like Greece should not have been accepted in the Euro zone. Most of the Mediterranean countries have a history of high inflation, budget deficits often exceeding the 3% threshold and debt/GDP ratios significantly higher than 60%. Yet at the same time, some Eastern European countries who are fiscally prudent, such as Bulgaria and Estonia have been told that they should expect membership anytime soon.
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#10 mrdtv
"Plus ca change, plus c'est la meme chose.
Your optimism knows no bounds. How did you forget to mention that, "the end of the world is nigh?" and "nuclear war is about to break out?" A Plague of locusts anybody?
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It is often said that Greeks live beyond their means. But if we look at the figures showing total indebtedness which includes both public and private debt, Greece's debt is 179% of the GDP whereas the EU average is 175% of the GDP. The Netherlands have a total indebtedness of 234%, Belgium 219% and Spain 207% of the GDP.
Private debt is a serious problem in the UK too, where the external debt, that is, the sum of public and private debt owed to nonresidents repayable in foreign currency, goods, or services amounts to 365.44% of the GDP.
Now, let's not forget that Greece spends huge amounts of money on defence. Greece has a serious security problem with Turkey, since Turkey invaded Cyprus in 1974 occupying the North part of the island.
Greece is the only EU country with an official threat of war declared against it by the Turkish Parliament in 1995. The so-called "casus belli" (reason for war)decree declared that if Greece extended its territorial waters to 12 miles - as it is entitled to do under international law - the Turkish government would regard it as a cause for war.
Since the 1970s, Turkish military aeroplanes fly over Greek islands in demonstration of the military might of Turkey. Since the 1990s, Turkish politicians talked of "grey zones" in the Aegean Sea, by saying that those rocky islands that were not cited in the Treaty giving Greece sovereign control over the Aegean islands remained under the Sultan's jurisdiction, and are therefore claimed by Turkey.
Now, despite the terrible mistakes by its politicians, Greece is a dynamic country and managed to become one of the 30 most advanced economies in the world, despite being located in a troublesome neighbourhood. Until 1990 it was cut off from its communist neighbours in the north, then the Yugoslav wars began and lasted for a decade.
So, stop blaming the Greeks who were hit by the worst economic crisis in living memory for which they were not responsible. All of us who feel the pain in our pockets should be reminded that the crisis did not start in Greece but it was caused by mistakes by US Federal Reserve and the Banks which our governments eagerly bailed out with our money.
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I Don't understand much of all the economic terminology but can anyone explain
1. What would the situation in Greece be if they were never part of the eurozone? i.e. if they still operated using the Drachma?
2. The Greek Government insists that speculators are attacking Greece, because they see it as the weaker link in the Eurozone, in order to attack the Euro. Who are the speculators? is it possible that e.g. institutions who were recently bailed out by tax payer money in various other countries be gambling these amounts against the Euro?
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Basically Stephanie is saying 70's style stagflation is the 'cure' for Europe (including the UK) and the US. Meanwhile, economic power will continue to shift eastwards towards China.
That is the inevitable consequence of any sovereign debt bailout.
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44. At 7:15pm on 11 Feb 2010, StephenBlencowe
I agree, it doesn't seem obvious, but if we all moved pennyless to another planet and gave everybody a pound, no person could ever be richer than 5 billion pounds. Banks could generate false money, but the books still have to balance, and eventually that false money will be taken out of the system again.
Of course you could increase the rate of false money generation until we couldn't afford the repayments, and then the growth would dissapear until the system rebalanced. Sort of sounds like where we are now.
From this I conclude that central banks have injected money for free into the system for many many years to account for the growth we think we've had for the last few centuries.
I'm not an economist, and I could be wrong, but going back to the thread, the wealthier Euro countries are going to have to share their Euro wealth with Greece, one way or another.
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An interesting article Stephanie. However, I think a visitor from Mars who had analysed the social/political/economic and cultural dimensions of Greece without knowledge of Lehmans, etc. would probably say that you are never going to solve the Greece problem by economic measures alone. Rather one must recognise that Greece has been dogged by political and economic corruption in most areas of its commerce for a long time. These are cultural issues. No doubt there are those in Greece who yearn for a better way (as in Italy) of running the country and managing commerce. However, the reality is that (as mentioned by another commentator on this site), Greece should never have been allowed into the EU in the first place until full due diligence had been observed by the EU on their accounts. Now that they are there, the richer nations will simply have to pay the costs. Another victory for irresponsible government and management of economic affairs!
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#55 Richard Dingle wrote:
Can we put this into perspective.
The Greece deficit/bailout is dwarfed by the bailout required by the state of California or the bailout received by Lloyds and RBS.
The Euro is a young currency and passing every test thrown at it. This crisis will speed full fiscal union.
Amen Richard - along German lines. Within a generation we will have sixteen Germanys, stretching from the Atlantic to the Russian borders.
A word of warning. We in Europe, not just the Eurozone, need to force hedge funds out into the cold clear light of day. It is not acceptable that the masters of these morons are bailed out with tax payers money, whereon they then turn and mercilessly savage the hands that propped them up in their hour of need, and probably with the same cash!!
They may target Greece today for relatively small sums of money as Richard indicates. Who next? Countries are not abstract notions, they are societies, they are expressions of their people and their cultures. In Europe they are the successors of great civilizations. We will not permit their extirpation, financially or otherwise.
Hedge funds are financial Talebani - seek out and destroy!
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#62 Ravenseft wrote:
61. freemarketanarchy wrote:
Wanna have a bet on it?
Keep your money - the UK has a national debt of £800bn, rising to £1trn in 2011. The less-indebted eurozone will live to fight another day and currency traders will move on to sterling as it becomes clear how ill-prepared the UK is for peak oil and the retirement of the baby boomer generation.
-------------------------------------
I've got an even bigger bet on that one already!
Trust me....my bet will come in.
I can't lose! ;o)
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The Greek solution is simply another government sponsored Ponzi scheme. So long as the governments in the US and Europe can keep printing money and increasing their debt burdens, they can try and imagine they can keep the tide at bay. However, like all Ponzi schemes, sooner or later things are going to go pear shaped and then the financial crisis of 2008 will look like a walk in the park.
The Greek problem is simply another phase of the ongoing game of 'pass the debt'. So long as governements continue to be pathetic in their fear of facing up to this fact, the inefficient companies (banks and car companies, etc.) plus inefficient countries will continue to be bailed out.
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42. At 7:05pm on 11 Feb 2010, John_from_Hendon wrote:
So are we approaching a decisive moment? Does the Eurozone crisis precipitate the creation of the United States of Europe or the break up of the Euro zone? It seems to me that you can't all share the same currency and spend it by different rules.
I do like the idea that we can all pick the best of breed, so to speak throughout the EU, that is a particularly empowering idea, for the people, which I can imagine really upsetting the EU bureaucracy, heck they didn't even want referenda! Implement that and I may even change my opinion of the EU.
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Everyone is discussing this as if it is an economic issue. It isn't. It is entirely political. Firstly, go back to the Euro's creation. Plenty of non-economists knew that Greece had not met the Euro conversion requirements. I think we can assume those advising the EC knew this too, and advised their political masters accordingly. Yet Greece was allowed to join the Euro: an entirely political decision.
Monetary and fiscal policies are inextricably linked. Consider the USA, and imagine a Greece-type problem there. A mid-size state is in danger of default. We all know what would happen. The President would simply tell the Chair of the Fed to honour the debt in order to preserve the USA's creditworthiness. To minimise this risk, individual states are limited as to the deficits they can run. If they breach these rules, the federal government just steps in and takes over their administration. Now put this in an EU context. Sure, their is the laughably named "Growth and Stability Pact" (who says the Germans have no sense of humour?). But there is no body that can provide temporary liquidity to an individual Euro-member state in the way the Fed can in the USA. The ECB is specifically precluded in its charter from doing this. So who does Rumpole of the Belgians (aka the EU President) call on to help the Greeks? He can't call on the Commission or Council of Ministers, as non-Euro states have said, quite rightly, this isn't their problem. So there is nobody with either the fiscal or monetary power in the EU/Eurozone to resolve this problem. The EU/Eurozone cannot provide monetary or fiscal support, and the Greeks cannot devalue.
SF has provided us with the solution to Greece's problem: debt restructuring and higher inflation. However, the former implies quasi-default at the Eurozone level, and the latter is anathema to the Euro's chief user, Germany, for understandable reasons. Therefore for either or both parts of SF's solution to work, there is a precursor, namely Greece's withdrawal from the Euro. Given that it should never have been allowed in to begin with, this is not as big a deal as it may sound.
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When I visit Greece I am always amazed at the lack of public services rather than the excess of them .....the lack of quangoes and public organisations and palaver about some things....though there is a lot more red tape in other areas.They do not have the social workers, the equality and carbon obsessionality, the diversity bodies,the legal aid and the overseas functions, the governance bodies, the environmental agencies, the four million cctv cameras and disclosure obsessions etc that UK has.
They are being lectured by Northerners about waste when actually we should be learning from tham about lean government.
Local government services, which do not I think, come under the public spending percentages of GDP we use for comparison , are much leaner affairs in Greece than here.The Greeks do not really pay much in their equivalent of council tax for instance.
They have not built the horrid council estates, they have not the infrastructure of comparable Western Governments.
The other interesting thing about Greece is that given their annual deficit is similar to UKs, they are spending 52% of their public spending on pensions and benefits .....I am not sure what the comparable figure is in UK but I suspect it is about half of this.So the Greek pensioners are paid a lot more than their UK counterparts despite a GDP which is 1/3 less, and at a much younger age ....which strikes me as being a fantastic use of public money rather than a waste.
I also suspect that Greece has a lot of workers classed as public servants who are doing jobs which we used to class in the same way ,but whom we have hived off to the Sercos of the world in the private sector with lower pay and poor pension provision but arguably higher costs to the public sector and less value for money . ......ie the Greeks are only spending 48% of their government spending on non-pensions and non-benefits ....... which makes the provision of these services look like a pretty mean and keenly budgeted affair.
I also suspect that the Greeks have not gone down the privatisation road as much as we have but have a lot of sellable things in the public sector which we now lack, and the sale of which assets massaged UK public spending figures the way that burning furniture saves heating bills.
The other factor is that I expect the Greeks have indulged less in sleight-of hand PFI and other accounting measures, splitting off government functions to Quangoes and other bodies capable of raising finance not directly attributable to government debt, whose budgets do not show up in public sector estimates . ....... rather like we have done here.
We need to send our boffins over there to show them how to airbrush their figures to make things look a lot better. Perception is as they say reality.
Nonetheless it is still the case that their deficit is high and, given the above factors, it must largely due to the non-levying of and non-payment of tax. We could send over our tax inspectors,VAT men and compliance/money laundering detectives , or better still the Germans whose snitchy culture must guarantee higher tax compliance.If you get reported for crossing the road when there isn't a green man I wouldn't like to be doing a homer extension build in Bonn.....but is that not why we like Greeks and going there rather than to Bonn for our hols?
And I doubt the Greeks would thank us for sending over our tv license enforcers,parking wardens and bin inspectors, thoughI would dearly love to do so.
It maybe that if Greece were to insist on plastic rather than cash for transactions the tax take would increase to the point of wiping out the annual deficit.
One solution for Greece is for its debt to be rolled over into new loans at ECB rates c 3% rather than expensive credit-scored Greek rates @ c 7%. That way there is no actual cash being given , but a Euro wide sovereign loan rate, which could be under-written by the Germans and the French which would decrease the burden of the interest payments due on these loans down to affordable levels.
So the biggest thing we can help them with is in the presentation of spending and making the big figures,the ones that determine how much interest you get charged for public borrowing,look better.
Perception is reality.
BEFORE THE GREEKS GOT REAL THEIR FAKE FIGURES LOOKED QUITE RESPECTABLE.
THEIR ECONOMY GREW FROM A QUARTER TO TWO THIRDS OF OURS PER CAPITA IN 15 YEARS.
NOW THEY ARE BEING SO HONEST ABOUT THEIR DEFICIT ,LOOK WHERE IT HAS LANDED THEM.
WE THINK THE GREEKS ARE LIVING IN CLOUD-CUCKOO LAND, BUT REALLY, WHO ARE THE NUTTY ONES?
THEY NEED TO BE A BIT MORE BRITISH AND WE NEED TO BE A BIT MORE GREEK!
Yiassou!
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"You could be looking at Lehmans, cubed, if the markets started seriously questioning every developed country sovereign bond."
If this is Lehmans reloaded, then...
Germany = Lloyds TSB
Greece = HBOS
I think Germany are too smart to put their money behind Greece, hence the deliberately vague but ostentatiously stern announcement today: apparent support without any substance. Besides, it would be as politically unacceptable in Germany as 10% spending cuts over two years and without deflation will be in Greece.
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IS IT POSSIBLE THAT THE IMPORTING PIGS v BAFLNG EXPORTERS CONUNDRUM IS DIRECTLY ATTRIBUTABLE TO THE FACT THAT GREENIES ARE MEANIES...... THEY DO NOT BUY RENT CARS AND THEY DO NOT APPROVE OF PACKAGE HOLIDAYS TO PIGS COUNTRIES AND WHEN THEY DO GO THEY HARDLY SPEND A CENT.And Greenie airport taxes did not help either.
Ask a Faliraki Taverna owner who he prefers when it comes to counting the cash at the end of the night.... Wayne n Stacey or Hansel und Gretel?
It is also true that the Greek woes have been brought on partlY by the collapse and/or emasculation /takeover of British package tour companies like First Choice , and budget UK Airlines like Globespan,EXCEL etc whose cheap flights brought millions of Brits to Greece; and the drying up of UK remortgage funds which was the major source of UK expat property investment and turnover in Greece as NORTHERN ROCK,RBS, DIRECT LINE, INTELLIGENT FINANCE,HALIFAX, BRADFORD AND BINGLEY,C+G,BANK OF IRELAND etc etc ALL HIT THE FLOOR AND THAT LITTLE BEACHSIDE DREAM ESCAPE DIDN'T GET BUILT, BOUGHT OR SOLD, THE SUZUKI JEEP DID NOT GET RENTED,THE OUZO WAS NOT POURED, THE KEBABS SHRIVELLED AND BURNED,EVEN THE HILLSIDES BURNED .
The fancy new apartments and restaurants were empty.
The Brits were THE big spenders and housebuyers in Greece and with a cup of tea costing five Euros in Rhodes we stayed at home and caressed our carbon emission profiles.
No wonder their economy crashed.
IT WOZ US WOT DID IT TO 'EM!
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81 Onward-ho
Blimey - optimism never sleeps ;O)
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83 Stephanie, give that Penguin a job!
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Penguins do it standing up!
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EDGE540 hit the bulls eye and Stephanie is being surprisingly un-insightful. Greece's problems are totally cultural. We could bail out their debt tomorrow and this time next year they would be in exactly the same fix. Greece is an endemically corrupt society. They gained entry to the EU with a set of national economic statistics that they now admit were completely fraudulent. They are a nation of tax cheats, people who only take short cuts in life and whose young people want to do nothing more than work in a life time guaranteed job for the Gov't. (1/3rd of the work force is civil servants!). Until there is a substantial re-work of the Greek national character and culture (the work of at least a century, I suspect) they will continue to career from one self made crisis to another while selfishly and self indulgently looking to the rest of Europe to bail them out.
Stephanie, this has nothing to do with debt levels or economic competitiveness.
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CROOKWOOD - in the teeth of all the evidence you obviously believe that economic development is a zero sum game. If this were so we would be no more prosperous today than we were 500 yrs ago. Clearly, let me point out to you, Crookwood, we are. Intel makes huge profits designing and manufacturing incredibly advanced computer CPU's. Other companies make huge profits using these same computers to guide and control their manufacturing and service processes. Everyone comes out ahead. How could you possibly be communicating with us on this web site if this was not so? Whose pocket did you pick in order to access the internet?
Adam Smith spotted this 260 years ago. Where have you been since then?
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#48
Were you a speech-writer for the politburo? Still haven't gotten over the defeat of communism? As a citizen I can assure you that Switzerland is very interested in immigrating that world-class heart surgeon or successfull entrepreneur from Greece. So while we have a shot at getting the next Bill Gates into the country, you will get to... ??? Oh right, ramble on about evil rich people! Besides if Switzerland doesn't take them, there is a 100 countries besides us that will (including, of course, the UK).
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#74:
Your comparison between a legal financial occupation and the trainers of the murderers of almost 3'500 New Yorkers is not nearly as funny as you think.
In the run-up to the US mortgage crisis several hedge-funds in fact exposed your beloved government employees and their Wall-Street paymasters as the liars that they are.
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I am a manufacturing businessman in the UK. We do the R&D and then we make things and then sell them in the UK and overseas. If a company in the same or a similar business to me got into trouble for what ever reason I would have big problem reconsiling myself to using my companies money to assisting them through their problems. If I went to my workforce and said " look guys that wage increase I promised you has to go on hold because we are helping out another company" I think I can hear ,quite loudly ,the response. No matter how much ducking and diving the euro politicians do to save the Euro mantra there is no escaping the fact that its the workforce Europewide who will suffer for the egos of the politicians and the systemic waste in the Euro zone.
It does make one wonder if Nigel Farrage is actually onto something!
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86. At 02:03am on 12 Feb 2010, racoleoptonlinenet
Err, I don't remember saying we don't make a profit, I run a business and I make a profit every year: I was trying to figure where this continuous, amazing profit comes from.
Presumably before currency, we bartered. The base product must have been food, becuase everybody needs it. But food is grown, and is created every year. You can grow more food and create more currency. It needed to be grown every year.
At some point currency was invented. It was made, if there wasn't enough, more was made. Probably like the barter food before it, more was made every year.
Now in the 21st century, all the western world makes profit, great profit, year on year growth. We save the money, we don't spend it all: where is it coming from? Are we printing it to order, are we in fact spending all of it in one way of another? This is what I'm trying to figure.
I'm not disputing reality, just trying to explain it without magic.
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Why is it that the PIIGS countries in the Eurozone must make public sector spending cuts yet the Gravy Train in Brussels is racing along at full speed ahead?
Corruption in the EU is the problem.
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46. At 09:37am on 11 Feb 2010, you wrote:
Once again we have our heads down in the weeds rather than looking at the whole picture. Yes, Greece is in difficulties and Yes, it will need propping up. However it is not just Greece we need to be looking at, it is all the so called other PIIGS. As Stephanie correctly pointed out last night on the the 10 o'clock news and was reiterated by her colleague on newsnight, it is not the 3% of Greece that is of concern, it is the 20+% of the group as a whole that is cause for concern.
Can the ECB / EU support all of these countries, the answer is no. So there is grave concern of a run starting. If Greece is shored up, who will be the next? There are also other countries outside the group of PIIGS who could soon be following suit.
Can Germany and France stand behind all of these countries, once again I fear not. For both have a number of issues that need attention and along with their commitment to maintain a significant stimulus package. There is just not enough to go around. Also you would have to question the support they will have from home, "robing Peter to support Paul".
Then we need to look further afield, those in the EU but outside the Eurozone. How many of these club members are on the edge, does the EU turn it's back on these in favour of the Euro member states. Question; Does that mean there is now a two tear membership of the EU. Answer; If yes does it mean the end of the club for a number of members as they will breach the membership rules. If No then who will stand up for these?
Finally you may all be questioning why do they all not want the IMF to step in. Well the answer is simple, the IMF will expect action to be taken. Action that would not be accepted by those receiving the aid. There are already, I was going to say undertones but that would be the understatement of the decade, resentment from the public in Greece. They are questioning what has been proposed by their own Government, does anyone expect them to agree to guidelines set out by Germany and France or the IMF. They have been sold a dream by their Government and the EU that the Euros would keep on rolling in, but the tap has been shut. This is the same as Ireland who, while the grants Etc were pouring in from the EU had a Tiger gold rush. One built on an economy with no foundations. The people living off a housing boom that was doomed to crash. The Euros stopped flowing in and the property market became unsustainable. There were issues with all of these countries prior to the banking crisis. It is just that the larger countries were enjoying the good times so much they chose to ignore the signs.
The question has to be asked, where to now? I fear that is back to the drawing board as there have been too many cracks shown up during this debacle.
The Euro if it is to survive has to have a strong single government supporting it. There are conflicts as not all EU members are in so would have little appetite as has been show to take action to support the Euro at any to themselves. The only other option is for Europe to become a federal group, hence member states would relinquish control of fiscal matters to the central Government. How many countries are ready to sign up to this?
I still stand by this as there is little if any appetite for any of the major players to actually put their money where their mouth is. In fact I will go a little further we could be seeing the end of the Euro experiment in it's current form unless we have a revolution and a Federal States of Europe is declared. And with Germany's recovery now being reported as faltering what chance of that?
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You say: "Whereas Greece .... had relatively higher inflation, faster wage growth, and thus growing unit labour costs - and falling competitiveness."
What a nice piece of ideological thinking unburdened by the shackles of empirical evidence!
What makes you think that there has been a rising trend in Greek wages?
How about failure of the Greek businessmen to invest in new technology in line with the rest of Europe? If that is the case, the classic neoliberal prescription of wage cuts is not much smarter than prescribing bleeding to those suffering from anemia, much like the medieval doctors.
I don’t know about the rest of the herd, but this pig has been on diet for almost a decade now.
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88. At 03:46am on 12 Feb 2010, andreasr wrote:
#74:
Your comparison between a legal financial occupation and the trainers of the murderers of almost 3'500 New Yorkers is not nearly as funny as you think.
In the run-up to the US mortgage crisis several hedge-funds in fact exposed your beloved government employees and their Wall-Street paymasters as the liars that they are.
Andreasr -
I don't use the term Talebani lightly. You rightly point out the intolerable loss of life the Taleban caused in New York. Let us not forget also attacks and loss of life in Madrid and London - Europe suffered too. I resent the implication that I am frivolous about the loss of life.
If hedge funds are the sources of munificence your post seems to suggest, then let them come forward and operate plainly and visibly where societies can scrutiny their actions. No? Then I strongly assert my belief that these 'legal' entities are financial terrorists, andreasr.
Like New York their actions have struck deep and hard in the cores of societies they have targeted, causing fear and misery in their wake - London and Rome after the collapse of ERM1, and in this incarnation andreasr, Budapest, Riga, Kiev, Athens, Dublin, Madrid, Lisbon, Rome, all other Eurozone capitals - and where else, where next?
Do these attacks on citizenries not also merit defensive action?
I recall no society being asked to accept hedge funds as their financial police, juries, judges and jailers or executioners. Perhaps you can refresh my memory?
I repeat - extirpate them, and sanction centres that give them succour.
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Some interesting thoughts. But your (and Wolf’s) emphasis on the loss of competitiveness by the PIGS versus Germany in the Eurozone is a little misleading. It just looks at the rate of change in ULCs. But the level also matters and Spain etc started at a much lower level than Germany in 1999. You would expect faster wage growth etc in the poorer EMU countries as they catch up – they may well still have lower costs than Germany even if the gap has narrowed.
Also the idea that Greece should default to clear the decks or the Eurozone should inflate its way out of the problem are just ways of profligate countries avoiding the consequences of their failures and putting the cost onto bondholders or others.
Such solutions mean lower productivity down the road and weaker Eurozone growth. There is no way round deleveraging if Europe wants better growth.
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92 Chris.
We all mistype, but was your idea of a ''two tear EU'' an
intentional or Freudian slip?
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87. andreas
It's still the case that if individual countries, such as
Switzerland,continue to court the world's wealthy with minimal tax
rates, plus financial anonymity - most handy when your gains are ill- or dubiously-gotten - there's going to be fiscal deficiencies
elsewhere. Such fiscal gaps will be filled by Joe Public, one way or
another, since most of us are not courted by Zug, Liechtenstein,
or Guernsey.
Or, are you suggesting we could all be multi millionaires, and our
countries in healthy surplus if only we'd leave the politburo and
ask our governments to cut / abolish taxes on Formula 1 drivers,
shipping magnates, hedge fund gurus, dictators etc?
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#13. gino wrote:
[PIIGS is rude and not funny]
I agree, PIIGS is a bit rude, and suggests a totally different group (of people) to me anyway.
Perhaps GIPSI's would be a little more appropriate ;-)
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93. At 08:51am on 12 Feb 2010, Philip
I have for a number of years had the pleasure of holidaying in Greece and on a number of its Islands. I would point out that things changed greatly when they joined the Euro. It was if they had no longer had to worry about economics as that would be taken care of from Brussels. In fact I was in Create the summer of 2008 and had an interesting conversation with a business person who I have known for some time. She on the one hand complained that business was not as good as it once was and blamed it on the Brits for not coming in their numbers as it was now seen as too expensive. The Germans she stated came on the all inclusive packages and did not spend a cent outside their complex. She did state on any number of occasions that Greece was well placed and prosperous also citing a grant she had just got to extend her business property. A property that was only half full at that time. When I asked her what would she have done prior to the Euro to drum up business, she replied cut prices. What had she done that summer, raise prices. Greece signed up for a dream that was just not there as did Ireland and Portugal. The other two are just down to pure greed and mismanagement.
Unfortunately all must pay for the sins of the ruling class as we here in the UK will see in the coming months and years.
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96. At 10:14am on 12 Feb 2010, U14313657
A bit of both.....
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What a lot of old tosh from Stephanie and most of the bloggers. To listen to them one would never imagine that the UK is itself almost a basket case and has a gaugantuan debt problem bigger pro rata than that of the euro zone. The current strains in the euro zone are not just the result of some reckless public spending in countries like Greece but are largely due to an a overvalued euro which has had severe consequences for weaker countries like Greece, Portugal and Ireland, dependent as they are on much more price sensitive exports and competiveness. The euro is now weakening rapidly and will largely resolve the immediate issues. Of course countries like Greece will always be in the shadow of Germany but, hey, that's the real world and Europe has always been like that. At least the eurozone is tackling these problems (see action by Ireland and now new stringencies in Greece) rather than sweeping them under the carpet as this incompetent and complacent Labour goverment is doing in the shambles of the UK economy.
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This is all nonsense. Here's why:
Greece should move a fortune into a fund shorting the Euro, secretly. Then it should declare it's debt to be even higher. Then it should reap the profits, put half of them into a long position on Euro, and use the other half to clear some debt.
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98. At 10:30am on 12 Feb 2010, Beatsy wrote:
Perhaps GIPSI's would be a little more appropriate ;-)
Hey, Beatsy. I beat you to it!
#80 on the last thread:
GIPSI?
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A strange sensitivity, that the term PIGS is so offensive but the potential undermining of a currency used by many - by acts of fraudelent self accounting - is much less offensive. Is this the Achilles Heel, keep it small and potentially xenophobic words rather than big and costly. Mr Brown has gone all Grecian 2010 and says the UK will not be involved. This may be true directly but will not be true indirectly. The debt the Greeks have built and left at the gates is not going away on its own, the gates will have to open to deal with it. The point of global ecomonies and continental trading blocks is they are interconnected. Your neigbours problems are your own. If your neighbours behave entirely selfishly then they pass the bill to you in time. Anybody getting excited about a description should look at the fundimental problem first. How is debt to be paid, how is tax to be collected. Usually things the good ol' boys drinking whiskey and rye singin' that'll be the day that I die, object to.
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This is just another symptom of what is becoming an immutable reality. Standards of living are going to drop considerably in the West for our childrens generation. The baby boomers need to start handing back some of their wealth to the next generation before the young decide to take it for themselves.
Why not look at the bigger picture. There is now 6.7 billion people on earth. The population will probably rise to 10 billion by the middle of this century before stabilising. It is the very same places with the most people that are industrialising the fastest and they also control so much of the worlds natural resources. They make most of the worlds goods and largely live within their means.
Quoting Martin Wolf's cure is somewhat like quoting an African Witch doctors cure for headache 500 years ago - smash a hole in the skull to let out the evil spirit.
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#94:
The term "financial Taliban" makes no sense and only serves to demonize a particular (legal!) enterprise that you don't happen to like by comparing it to a bunch of murderous thugs. If you don't like the implication, don't make the comparison.
The article doesn't mention hedge funds as the reason for Greece's rising cost of debt at all. For all I care it's your Grandma's pension fund that insists on a higher return to compensate for increased risk. In any case, hedge funds didn't run up Greece's budget deficit, prevent structural reform nor did they fudge the numbers reported to the EU for past years. Okay, get rid of hedge funds. What exactly changes in this crisis? Nothing, except politicians and government officials may be able to keep their lies afloat a little bit longer, making the outcome that much worse. Engaging in predatory trading practices like short-selling carries a huge risk, exposing these funds to potentially unlimited losses. So what is the defensive action if you're under attack? Sound fiscal policies! In fact if you have your financial house in order there won't be an attack. If they're stupid enough to bet against it, enjoy watching them go down in flames.
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79. At 00:14am on 12 Feb 2010, onward-ho wrote:
Some things that made sense.
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So many comments and so little evidence
In USA if a state or even city gets into trouble the US Pres does not bail them out they are left to srt out their own problems - in New Yorks case several times, the dollar does not suffer because everyone knows it is isolated to the particular state or city but then again all govt, state or city debt is viewed much as normal corporate debt and priced according to risk of default (to the extent bankers ever understand risk)
For the Euro we have now a situation where no country will be allowed to go bust so all govt debt can be priced accordingly - makes for massive moral hazard.
My view is that Greece should not have been bailed out but left to either sort out its own problems or default. Greece is not a huge country, it would have been painful but not excessively so for EU.
Now we have a situation where the Olive states (much nicer phrase than PIIGS and Ireland does not deserve to be part of the group as they are doing something about their problem) have a positive incentive to carry on increasing their borrowings - investor will lend because ultimately they know France and Germany will bail them out.
At the end of the day Greece is a country with a population of only about 12 million and an economy smaller than SE England (including London), if the Greeks default on their govt debt they will probably be better off
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101 jerry.
The UK's position is much healthier than that of many if not most
Eurozone members. Our currency has taken the strain over the last
couple of years, making us more competitive and decreasing our debt
in Euro / Usd / Yen terms. The austerity measures to be taken by
whichever UK political party after May 2010 will be less radical
than those suggested for Greece etc. We are talking slight trim
versus Duncan Goodhew.
Eurozone countries have all become less competitive, with greater
debts over the last couple of years, simply because of the flight
to the Euro. Germany, the strongest member, would struggle with
Euro Usd at 1.45 for any length of time, so countries such as
Greece have no chance. Their only response can be to boost
competitiveness by increasing unemployment. The most likely
result in several Eurozone countries is civil unrest and the
advance of far-right and far-left extremism. I know unemployment
was 3.5 million here under Mrs T. and we avoided lurching further
right or to the likes of Scargill or Hatton, but the situation in
several Eurozone countries is already worse than 80s Britain, and
plenty of them have recent form for Civil Wars, Dictatorship, rule
by Generals etc.
If the Mediterranean crisis kicks off properly, the political
situation could change in those countries very quickly indeed.
Without being complacent, the UK has a track record of not
resorting to the streets unless things get really bad - and then
it's a few petrol bombs not full-scale lynching revolution and
coups.
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106. andreasr,
ok, hedge fund are legal... to be more precise, the attack is directed to short-term trading - which is certainly 99% of the revenue of your legal hedge fund and since 97 the banks.
Short term trading is a very bad bad thing but for the very few already incredibly wealthy people.
Markets fundamentals did never foresee/plan for short term trading - they are just a perversion of the system.
I would even add terrorists as they are so called over here (ie Taliban) are people drove to extreme measures by external elements... Or do you still think the appaulling Western foreign policy for the last decades has nothing to do with it? These terrotists are fighting back the only way they can (a heads-on battle is not an option for them... depsite we would of course love they were stupid enough to try..).
Short traders are not 'disrupting' as a retaliation - they are only there for the quick buck....
So I would even say short traders (Hedge Funds) are worst than terrorists...
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109. U14313657
This will only work if the financial system comes back to 'normal' (2007)... In the UK, we have only seen a tiny tiny fraction of the pain... and I would take any bet now the whole financial system will be regulated very soon (at the grand despair of the UK gvt)
The Eurozone did protect their manufacturing. Yes they also have to adapt to the wake up call of the promesses of the 'extra - liberal' countries - but their pain will be dwarfed compare to the UK (which will suffer even more than the states in the next 12 months.. direct result of "let's hide it until after the election" policies)
The only problem of the Eurozone is to have let its guard down - pushed by the seemingly 'growth for ever' of the US/UK (the fact the system was on the hedge for so long did somehow push aside all the 'clever' people that understood it was not sustainable.
The problem of the UK... is to have been one of the main drive of this system and put most of its eggs in the basket... this was done to push away the previous manufacturing crisis (80-90's).
Now all we have left is pop music... another very sain environment... 8-)
The US 'may' get away with it this time ($ is still the reserve currency) - but this will not save them much longer / I am quite sure if it was not for the international popularity of Obama, this would already have broke down (very very few people outside the US were keen on them before Obama arrived)
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81. onward-ho
I think I agree with one of your statement for the first time...
Yes - this is to a very large extend the result of the UK/US model finding its way more or less in a few countries (Greece, Spain, Portugal were all very big UK 'cheap' destinations - creating artifical bubbles over there...)
The good news for the Eurozone - the damage is not irreversible yet (not sure if we were 5-10 years down the line, as even Germany and France were thinking of slowly moving to more liberal systems -- it is now out of the question... good on them!)
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As always I enjoy reading Stephanie Flanders but if she is going to raise the concept of thinking the unthinkable why not start with the PIGS leaving the Euro ?
It's clear from the competitiveness chart she provided that the Euro has not impacted the "old" national boundries we call countries evenly. This uneven Economic growth is exactly what happens to different States within America, the difference really is a political one. The Greek people think of themselves as Greek and expect the Greek Government to solve the Economic problems of Greece. While all of that remains to be true belonging to a single currency will always be a hinderence in times of Economic strain.
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Greece has to consider the implications of leaving the EURO. Then make sure that any other deal/bailout etc is better. It won't be so they should leave the EURO, but they won't. MAD (mutually assured destruction)
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Oh dear, the Greeks are in a one way street catch22 .....WHERE THE BROKE IMPORTING PIGS PAY HIGH INTEREST WHILE THE SOLVENT BAFLNG EXPORTERS PAY LOWER INTEREST .....AND IT IS NOT GOING TO HAPPEN THAT THEY GET A LOW INTEREST ECB LOAN:
http://uk.finance.yahoo.com/news/greece-must-resolve-crisis-itself-ecb-chief-economist-afp-fc9fb118f2a5.html?x=0
WHAT ON EARTH IS THE POINT OF A SINGLE CURRENCY ( with no money printing options, and near zero inflation) IF THERE ARE DIFFERENTIAL SOVEREIGN BORROWING RATES WITHIN THE CURRENCY ?
If I was Greek I would tell the Germans I was going to be ok ,staying in the Euro, and start printing on the sly!
(BAFLNG = Belgium, Austria, France, Luxembourg ,Netherlands + Germany)
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I'd like a higher inflation target for the UK as well. 2% is too low when the economy shrinks by 4% in a year. Who cares if we have low inflation if the economy goes down the toilet?
A higher rate of inflation would discourage excessive saving, encourage borrowing and reduce the value of the pound, thereby increasing aggregate demand both through increased internal demand and additional exports.
Countries such as as China would be encouraged to spend their vast forgein currency reserves before their real earning power was inflated away.
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The proposal of a major inflation in Euro-zone is not workable.
We need more investment, export and develop ourselves in those countries (Asia) where the economy grow up.
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In looking at the US versus the European situation (see above) there are indeed great differences between states as there are between countries.
However, there is one key difference and that is labour mobility, which is far greater in the US. While there is some movement in Europe (Polish plumbers etc), this is nothing to the USA. When cotton became mechanised, vast numbers migrated to the factories of the north USA, for one example.
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At 07:47am on 12 Feb 2010, Crookwood wrote:
"I was trying to figure where this continuous, amazing profit comes from."
Wealth creation or wealth manipulation, that is the question!
This distinction has troubled some of the greatest minds for centuries, nay millenia. One thing is clear though, that it is not strictly the same thing as money or profits.
In my brief amateur investigation into the nature & causes of wealth I posit (again) three key criteria for genuine wealth:
1) Creating wealth involves an irreversible transformation of something into a more useful form. The growing of a plant, the rearing of an animal, burning wood or coal for warmth or transport etc. Only one-way processes yield something beneficial - if it is reversible then it is not really "value adding", just flipping back and forth.
Therefore trading a good is not the value adding activity, but the making of a good is.
2) Real wealth is physical. Food, medicine, warmth etc. I have serious doubts that knowledge, information etc. are really wealth. Certainly some aspects of information are useful (e.g. technical know-how) but most (especially modern media / entertainment) is worthless from a true value creation process (i.e. it is just non-productive consumption)
3) Real value adding activity comes from Win/Win co-operation / collaboration. This can manifest in two ways. Firstly, a task may not be possible unless people collaborate (either because it will take too long or because it would be impossible without some form of co-operation). Secondly, it could work if one person is better at something than another and they reciprocate individual specialities. This is the basis behind Smith's emphasis on division of labour and industrialisation. A real win/win is when something qualitatively different occurs through collaboration
Only by adopting a framework such as this can we truly asses whether what we do as a society / nation / international community is actually wealth creating. Unfortunately the spurious antics of modern finance will fail each of these tests.
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"Martin Wolf says that higher German domestic demand is the solution..."
Although consumerism might appear to be a solution, in the long run it leads to credit-card-debt misery, and that leads to precisely this kind of economic crisis. Life in Germany is more enjoyable than in the UK, for instance, partly because of their (relative) lack of spend-spend-spend culture.
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2. At 2:20pm on 11 Feb 2010, virtualsilverlady wrote:
If things are so bad I cannot see the German people allowing the Eurozone and all its failings to bring down Germany.
http://uk.finance.yahoo.com/news/merkel-cool-on-greek-aid-as-voters-and-fdp-resist-reuters_molt-217686641756.html
With friends like these.....etc.
Someone oughta tell the Merk that it's not just the European Coal Board anymore ......with the benefits Germany has enjoyed come responsibilities, and if Germany stuffs its best customers and ignores their plight, it will stuff itself!
IF YOU STEP OUTSIDE YOU NEED A SUNHAT AND AN UMBRELLA, BUT IF YOU DON'T SHARE YOUR BROLLY IN THE RAIN ,NO-ONE WILL WANNA PLAY WITH YOU WHEN IT'S SUNNY!
ONWARD-HO says NO to the One Way Street!
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Seeing your graph has suddenly made me realise one stark fact.
Germany,France & Austria are the same country.
It works like this :
Germany and Austria are in any case more or less the same,common language,common costumes, very similar politics, virtually interchangeable social attitudes.
France knew this and constucted the ECC accordingly. In fact dare I say it. "France is to Germany what Athens was to Rome"
We in the UK have fallen for the three card trick; We are Carthage
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#119 Hawkeye_Pierce
Good suggestions for testing whether certain economic activities are worthwhile.
But these only make sense in a post-capitalist society.
Today's society measures value with money.
Money is that special commodity by which all other commodities can be compared against.
Everything becomes quantifiable by the same unit of measure (OK, there's many different monies all are linked by exchange rates).
But the point I want to make is today's unit of value is money & value is not a universal, a priori, concept.
When we get to a post-capitalist society we can consider Aristole's concept of the good life (where there is no single unit of measurement) & believe it or not actually do anyway with money.
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Our European enterprises invest their money and time in Asiatic countries taking advantage from low cost of labour. This vantage is used by our enterprises, but also by Chinese enterprises.
Our industrial leader didn’t understand that in this way they’ll fail their attempt to win the challenges on those markets, because in long term in their origin countries (Europe) there won’t be a good industrial relations, in Europe there will be the desert.
One necessary thing to do is: apply international labour law around the world.
In future the challenge won’t be how to organize our societies to rules of Asian countries, but how we should help Asian countries to respect the international labour law, that is unknown today.
The definition of a suitable and fair international labour law for all countries of the Asia and the world mean to create strong bases for a long way of developing around the world.
If we want to stop financial crisis and solve problems of competition of weak countries of Euro-zone, a reliable international labour law for all countries around the world will be the key.
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"Now in the 21st century, all the western world makes profit, great profit, year on year growth. We save the money, we don't spend it all: where is it coming from? Are we printing it to order, are we in fact spending all of it in one way of another? This is what I'm trying to figure."
It is borrowed into existence.
If a bank has a 10% reserve requirement, it can effectively lend out 90% of any deposits it has. Person A has £1000 in bank 1, so the bank can lend £900 to person B, who puts it in bank 2, who can in turn lend £810 to person C... and so forth. It's no coincidence that immediately prior to the credit crunch, reserve ratios globally were at all time record lows. The lower the ratio, the more you can lend into existence, and the more 'profit' everyone can make.
The downside is that due to interest payments, there is no way all the debts outstanding can ever or will ever be paid off. The only way to keep up repayments is with bigger and bigger loans, and therefore ever expanding money supply. Which is exactly what we've experienced in the last century.
To ensure you get 'growth' instead of 'inflation', all you need to is fiddle the national inflatation figures, since these are used to determine 'real' growth in GDP. Borrow 5% into your economy, ensure inflation looks like 2%, and you have growth.
Sooner or later though, you'll run into a point where the repayments are just too high to borrow your way out of - like trying to pay off existing credit cards with more and more new ones, you eventually reach breaking point. At this stage, there are two options. Find a way to reduce your interest payments so you can continue growing your debt pyramid for a little while longer, or else the system falls apart and a reset is necessary.
And what's happened to global interest rates these last couple years, since we hit the breaking point? Oh yeah, that's right. I wonder where we go next.
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121. At 2:50pm on 12 Feb 2010, jon_toronto wrote:
"Martin Wolf says that higher German domestic demand is the solution..."
WHEN THESE GUYS MOVE HOUSE THEY RIP OUT THEIR KITCHENS AND TAKE THEM TO THEIR NEW FLAT.
WHEREAS MY WIFE WANTS TO RIP OUT HER KITCHEN THE MINUTE IT'S BEEN INSTALLED AND COLIN AND JUSTIN TELL HER CHERRYWOOD IS DEAD!
THEIR SANDALS LAST A DECADE,THEIR CARS 2 DECADES, AND THEIR BREAD 3 DECADES .....
CONSUMPTION IS NOT A GREAT GERMAN TRAIT .......THINK LIDL NOT M+S !
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As a simple engineer it defeats any normal equation to comprehend how any sort of monetary union can be effective in the long term without the essential fiscal and political similarities. I am only thankful that for whatever reasons the UK managed to avoid this disparity. Residing in Cyprus I have observed with a tragic regret the collapse of our competitiveness in the tourist market through joining the Euro for all the wrong reasons.
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Germanic discipline over the finances does not suit the culture of the Greeks. The relaxed culture is one reason that we all like to holiday there. Perhaps the decision to get out of the Euro has already been made either by Greece, or for Greece. Given that the logistics of preparing for a changeover to the New Drachma would take several months to implement, everyone would have to play for time. Greece have stated that they will not require financial support for several months and the EU have done nothing but put out reassuring words - sound like everyone is playing for time. My money is on fewer Euro countries by year end.
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126. At 3:46pm on 12 Feb 2010, Andy K , and others,
Thank you for an answer. I figured that fractional reserve lending had something to do with it, but couldn't beleive that it was the sole generator of these sprouting profits. Perhaps it is.
I guess 2 world wars last century also allowed the world to re-start the growth bubble. Certainly in the scope of this blog, Germany has benfitted greatly from being made essentially bankcrupt 50-6 years ago, and being able to have a fresh start. Not unlike Japan me-thinks.
This places Germany as a unique case in Europe, they are at the top of the pyramid, and we are all feeding them. If the Eurozone is to balance it's books, Germany will have to pay ( along with France, Austria & Finland).
The Olives will also have to do their bit. Pain all round.
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123. At 3:35pm on 12 Feb 2010, peterbolt wrote:
Seeing your graph has suddenly made me realise one stark fact.
Germany,France & Austria are the same country.
It works like this :
Germany and Austria are in any case more or less the same,common language,common costumes, very similar politics, virtually interchangeable social attitudes.
France knew this and constucted the ECC accordingly. In fact dare I say it. "France is to Germany what Athens was to Rome"
We in the UK have fallen for the three card trick; We are Carthage
===============
That would account for all the Elephants in the room whenever Gordon and Mandelson speak.
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Surely it is not the Greek people who are spending too much but the Greek Government. This is the same as UK. The only way forward is for the government to only spend what it has. If the people dont like paying taxes then they wont get any welfare or state funded jobs. But like here if the state stop employing people the GDP reduces and the money available for them to spend reduces in a spiral. So we borrow and cross our fingers. If we can no longer borrow- game over.
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Andy K, Crookwood et al.
That's right. "It's the debt, stupid"
Steve Keen is probably the closest to fully understanding, modelling & demonstrating this. For a taster, I recommend his recent video talk at Google:
http://www.debtdeflation.com/blogs/2010/01/22/google-lower-bandwidth-version/
It's about an hour and the player is a bit annoying / fiddly, but well worth listening to.
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I am not an economist, but a businessman. I trade all over Europe, and for me the Euro has been a big advantage, mostly in the way that it simplified my life (I still have a large coin bag of Deutschmarks, Francs, Drachma, Lira, Escudos etc :-) )
However, I think one thing is true. A sovereign Nation with its own currency has several tools to manipulate its economy. Some which come to mind are: exchange rates, interest rates, credit supply, taxation, government spending, government subsidy to industry and property developments etc, planning laws, immigration control (for access to cheaper labour or prized skills).
I find it interesting to observe how many of these tools are NOT available to a member of the Euro Zone, meaning a disproportionate reliance on the remaining tools - the key ones left are government spending/subsidy and national taxation. This is why we in the UK must NEVER enter the Euro - we give away too much control of our own destiny and become subservient to the vested interests of a Franco-German dominated economic axis that has little interest in matters outside of their own borders, for that is where their electorate reside.
I believe (and have done so for 10 years) that the structural cracks now appearing result from a fundamental mismatch in economic drivers between the Euro nations, and were inevitable without much more onerous central control of economic and financial activity within each Eurozone nation to force and, more importantly, maintain convergence. Unfortunately, the "common good" for which this central control function would be needed, is not always to the "local good" of a peripheral nation, so it is rightly to be viewed with suspicion by the potentially subject nations.
You simply cannot run a balance of trade deficit year after year without the money coming from somewhere. Maybe the German govt could subsidise holidays in Greece?
an obvious example of entrenched economic divergence?
Greece, highly dependent on agriculture and tourism, v's Germany, industrial powerhouse...
"Greece's main exports are fruit, vegetables, olive oil, textiles, steel, aluminium, cement, and various manufactured items such as clothing, foodstuffs, refined petroleum and petroleum-based products. Greece remains a net importer of industrial and capital goods, foodstuffs, and petroleum. The Trade with European Union countries (Germany, Italy, U.K.) accounts for 65% of Greek trade"
Read more: http://www.tradingeconomics.com/Economics/Balance-of-Trade.aspx?Symbol=GRD#ixzz0fLPwWSlk
For a clear graph of the continuous Greek balance of trade deficit over 15 years, see p2 here:
[Unsuitable/Broken URL removed by Moderator]
"German economy is heavily export-oriented (the world's biggest exporter), with exports accounting for more than one-third of national output. Its principal exports are: motor vehicles, machinery, chemical products, electrical devices and telecommunications technology. German’s principal imports are motor vehicles, chemical products, machinery, oil and gas and computers. European Union makes 60 percent of the total trade. Other major partners are: U.S. China and Russia"
Read more: http://www.tradingeconomics.com/Economics/Balance-of-Trade.aspx?Symbol=DEM#ixzz0fLRPUsrx
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The UK , Greece , The US , The Middle East , France , Japan , and the whole world , all of us are facing a real and stubborn economic crisis.The best solution for that is how to cooperate with eachother and think how to develop and create new methods to get out of this. Also to gather the efforts to enhance the economy worldwide and boost its status.
Thiking of the weakest and the most suffering is also required regarding these international problems.
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Hello Stephanie
Your comments are to the point (within the bounds of what you are allowed to disclose, in the way in which the system actually works)
You are the best at tell "It as it is" Ed Marrow/Joseph c harsh/ etc
Keep your integrity with in those confining dictatorial limits.
Good luck ,you cheer the heart, keep at it!!
best
A
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Steph,
I have a new acronym which the BBC censors will have to contend with. What happens when the East European block (which is even more indebted) starts to cause trouble for the Euro. I have coined the term BULLSHITE.....
B-Bulgaria
U-Ukraine
L-Latvia
L-Lithuania
S-Slovenia
H-Hungary
I-Iceland
T-Turkey
E-Estonia
Any comment on when these countries might come into the attention of international speculators?
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116 David..
You are correct...as long as inflation could be trusted to stay at 4%,
and not 40%, or 4,000,000%
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131 Devils-Advocate wrote:
"That would account for all the Elephants in the room whenever Gordon and Mandelson speak"
Unfortunately they are invisible to Clown and Mandy and more confusingly all answer to the same name - Truncate Government Debt!
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Good post #119
This distinction has troubled some of the greatest minds for centuries, nay millenia. One thing is clear though, that it is not strictly the same thing as money or profits.
1) Creating wealth involves an irreversible transformation of something into a more useful form. The growing of a plant, the rearing of an animal, burning wood or coal for warmth or transport etc. Only one-way processes yield something beneficial - if it is reversible then it is not really "value adding", just flipping back and forth.
Therefore trading a good is not the value adding activity, but the making of a good is.
***
Not necessarily. If an item is traded then the value can be added by the reduction of, for example, cost of transportation. It is important when assessing value addition to remember the amount of labour added to the item. In the purest sense a merchant who uses his labour to travel between 2 places to secure a product is adding value by diminishing the cost of transportation. His (or her) labour is adding the value.
In the modern sense an item bought on a computer screen, then sold across the world for a profit, as you say adds no value.
***
2) Real wealth is physical. Food, medicine, warmth etc. I have serious doubts that knowledge, information etc. are really wealth. Certainly some aspects of information are useful (e.g. technical know-how) but most (especially modern media / entertainment) is worthless from a true value creation process (i.e. it is just non-productive consumption)
***
It's not necessarily true that real wealth is materialistic, but your doubts are not unfounded.
Knowledge is shared wealth built up over hundreds of years. It has a value and hence is a commodity, much as coal is. Information falls into the same category, but is more short term, it's still a commodity though.
****
3) Real value adding activity comes from Win/Win co-operation / collaboration. This can manifest in two ways. Firstly, a task may not be possible unless people collaborate (either because it will take too long or because it would be impossible without some form of co-operation). Secondly, it could work if one person is better at something than another and they reciprocate individual specialities. This is the basis behind Smith's emphasis on division of labour and industrialisation. A real win/win is when something qualitatively different occurs through collaboration
***
I suspect this is where people disagree. I personally don't think Adam Smith had much more to offer than a description of formative Industrial processes. He had the Invisible Hand, a nebulous term to describe "I don't really know".
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Crookwood has set off a discussion which exposes why a capitalist system produces things that are of dubious 'value' to humankind.
Of course we need be careful because terms are being used in different ways here.
Value/wealth is being used as a term of usefulness, something worthwhile.
This encourages people to search for universal definitions.
But value in a capitalist system is measured by money.
So if we analyse money we can see that the only thing that all commodities have in common is labour.
Whilst individual prices are determined by many things, such as the tendency for the rates of profits to be equalised, as an aggregate they are dependent upon the amount of socially necessary labour time.
The market for commodities determines whether the labour time invested is justified.
But the realisation of the value of a commodity in a market is dependent upon who has the money.
Hence the determination of what is produced is dependant upon labour wage rates across different occupations as well as how much goes in rent to landowners & interest & profits to capitalists.
Hence the production of hugely expensive boats whilst people starve to death.
How should we collectively determine what is produced, using various notions of what is good for humanity?
Some kind of direct democracy?
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All interesting comments so far; although some clarification may be necessary:
PIIGS: Convenient acronym of member eurozones currently in economic difficulty - Portugal, Ireland/Italy, Greece, and Spain.
Pigs: Plural, 3rd person present of "pig"; a genus of even-toed ungulates within the family Suidae. A common farm animal bred for human consumption. "Pig", singular, used informally is derogatory; however, the plural is derogatory slang for the Police. So in context, "pigs" is not rude unless you shout it at a group of coppers...
If you understand this you have a sense of humour...
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