17 January 2015

Cloud cuckoo land

Yesterday I posted a piece here on a cuckoo clock (Swiss Fanc) that chimes for Angela Merkel and Alexis Tsipras (on an election victory) to do "realpolitik".  The explanation I liked on yesterday's global spasms (and the Greek story) comes from Paul Mason's Channel 4 post .  American readers might also want to check "Welcome to the Currency Wars"

"In Switzerland, they had brotherly love, they had five hundred years of democracy and peace – and what did that produce? The cuckoo clock.” ― Orson Welles (from "the Third Man")

.....But now Switzerland is famous for something else. This week its central bank abandoned a currency peg with the Euro with all the suddenness of a film noir plot reversal.
To explain. During the euro crisis, with money flowing into Switzerland driving the value of its currency up, the Swiss National Bank announced a currency cap. It would intervene in the markets, and print money, so that the Swiss franc’s value stayed pegged to the euro.
Given the money of the global rich is stored in Swiss francs, and quite a lot of east European mortgages also, the sudden rise in value after the cap was lifted works like this:

a)   The value of people’s savings held in Swiss francs rises
b)   The value of people’s debts in Swiss francs also rises, especially people in east Europe who took out mortgages with Swiss banks
c)    The big Swiss manufacturing and export sector will get hammered
d)   The central bank itself will lose a lot of money, because some of the money it printed was used to buy assets in euros and dollars, and these are now worth less in Switzerland. And that means Swiss cantons, including Graubunden where the Davos jamboree is held, will lose money – because they lose or gain from central bank profits.......

....The SNB’s move came, simply, because it could not go on financing the cost of pegging its own currency. The central bank’s balance sheet had grown to 80 per cent of GDP.
Next week, it is probable that the European Central Bank will make an equally dramatic move, announcing between €500bn and €1tr worth of quantitative easing, in a move designed to end stagnation in the eurozone.

What we’re seeing, then, is three central banks engaged in an attempt to use monetary policy and bank regulation against a tide of deflation and low growth. You could think of it this way: there is very little growth available in this corner of the world and one way of competing for it is by stimulating your economy with QE, and letting your currency fall against others.
The ECB’s gambit next week is a kind of “join the club” move – because everyone else will do it. Switzerland’s move was really an admission that: we can’t do anymore. And the Greek situation is being driven by voters signaling – via the poll lead of the far left Syriza party – that “we can’t do anymore”..... "The cuckoo clock chimes for the Swiss franc" 
 As for the EU, and its rationalized* foolishness, here's something from Aristophanes (the Birds ): - "the perfect city in the clouds, named Νεφελοκοκκυγία, (Cloud cuckoo land)" comes crashing down. 

I didn't even mention the crows..

PS -  I was tempted to make a more respectable post with some random terms.  These are a few terms that I might have failed* to exclude:

*rationalized -- the world does not makes sense; make the world smaller until it does.

endogeneous - nothing exists outside the box

lower (and zero) bound interest rates -  we can't find the box

exogenous  -  god help us

The Impossibility Trinity 

Black S̶w̶a̶n̶ Wednesdays 

25 November 2013

German Macho-economics - Wolf gang pacts 1 and 2

"The road up and the road down is one and the same."  Heraclitus 535 BC–475 BC 
Not all countries can run trade surpluses at the same time; someone's exports is someone else's imports.
"The world should rejoice at the positive economic signals the eurozone is sending almost continuously these days".  Wolfgang Schäuble 

Wolf-pact version one - German Surpluses
"Take Germany. In the late 1990s it was the undisputed “sick man” of Europe – seen by domestic and international commentators alike as uncompetitive and condemned to decline ...... A first wave of adjustment, starting in 2003, focused on strengthening employment incentives, streamlining the public sector, fixing social security and raising consumption taxes. Down to shop-floor level, companies and unions worked together to make labour more flexible........"  Wolfgang Schäuble 
Germany’s external balance deficits became substantial surpluses after the creation of the Euro. In effect, this was underpaying the German worker's contribution to output and overcharging the German consumer.

Why? Here's a slightly classical (not Keynesian one to scare German readers away) account

When the sales value generated by the demand for a country's exports exceeds the sales value of its demand for imported goods, the excess value appears as surpluses in the country's trading account. The surplus is an excess demand (for exports relative to imports) and, as such, a pressure for prices of exports to rise relative to imports.  There is no internal eurozone system of exchange rates to do this in one movement. Hence the argument for economic reforms to ensure perfectly working competitive markets.  However, if the price mechanism works then this excess demand transmits a demand that leads to higher prices of resources producing German exports ie it ought to be signaling a rise in wages.

However, here lies Schäuble's "down to shop-floor level, companies and unions working together to make labor more flexible" - a strange meaning of flexibility that restricts German wages from being upward flexible.

When the price of labor is suppressed then the demand for other inputs (producing any given level of output) and other production mixes are suppressed,  This undermines real investment, distorting the production mix to screw up the economy's 'production function". Keeping wages down below their "market values" damages the efficiency and growth potential of an advanced industrial economy.

Thus to persistently maintain trading account surpluses is to perpetuate a disequilibrium; one that screws up the price mechanism in a way that doesn't allow the excess demand for German exports to be translated as a demand for investments in technology factories, etc.  To do it persistently, is to  move the economy towards a cheap labor one and away from the traditional German capital intensive one.

And so trading imbalances create investment problems (for a different way of looking at this see a previous post  National Output for Mummies 101)  and this is what the statistics show -  Germany has a huge private investment gap.
"The share of investment in gross domestic product is one of the lowest among industrialised countries. It has been declining rapidly, from an average of 23 per cent in the 1990s to less than 17 per cent today" Investment, not the surplus, is Germany’s big problem Fratzscher 18th Nov 2013
via CA Surplus and investment are highly negatively related.
Given the distortions on investment, it can be foolish to see trading surpluses as an improvement in competitiveness (which, by its nature, is a static measure).  There's an inefficiency problem, International competitiveness is measured by the relative prices of domestic goods to foreign goods.  The word 'prices' is then replaced by the word 'wages'. BUT this is something that we really shouldn't being doing when economies are in disequilibrium (trading surpluses is a disequilibrium) and have an investment crisis.  It creates the foolish notion that interfering in a country's labor markets to reduce wages will create a  "competitiveness" that automatically restores growth.  If it destroys the economy's investment mechanism, it can't - at least by peaceful civilized means. It threatens economic growth and the economy's future competitiveness.

A second foolish idea, is the macho idea that surpluses reflect a superior method of production or product: the German brand.  There are better cars in the world than Mercedes; but they don't dominant sales. There are worst cars in the world than Mercedes, but they can dominate.  It all a question of price. And if Indian (Land Rovers) and China invest better than Germany, then even Mercedes won't be cheap enough.

German trade surpluses is also a German investment problem but, unfortunately, it is far more than this. An imbalance does not exist by itself.  It breaks the European investment mechanism and, as a massive trading block, damages global investment markets. A system that leads to a gross mis-allocation of  resources cannot be considered to be an efficient one.  The levels of idle resources (unemployment and under-investment) scatter around the continent of Europe are a reflection of the trading imbalances and the foolish beliefs that are attached to them.

How did this work? By definition, Germany's trading account surplus means the country is a massive net lender to others. A surplus in one place implies a deficit in another place.  Up to the Euro crisis, these capital outflows were based on financial returns and guarantees that did not reflect economy's actual economic returns, They were based on balance of payments funding needs.  The surplus led to over-lending that fueled property and  bond (trading deficits have to be financed) bubbles that burst as unsustainable debt crises in the periphery. When the bubble burst, the risks were were minimized by lenders exerting political control - by doing whatever it takes - to extract measures on the borrowers.

The dark side of the trading imbalance was that  the resulting profits were private and the resulting risks and losses were public.  The only argument circulated at the time of the Euro crisis was which 'public' (eg the German or Greek) should pay.

So one way to see German trading surplus is as losses to the very Germans that produced them.  At one level it is the result of  underpaid effort in producing excess output on the part of German workers who are also overpaying for the imports they consume.  At another level, it is answered by asking what returns and benefits did such a sacrifice bring?  Let me put it another way, where's the investment?

Trading surpluses exited the German economy, disappear and bubbled into the financial markets and very little , if any, of that has its way back into German workers' pocket. If the agreements made in the German labor market were supposedly for the public good, then the trading surpluses also represent funds and lost opportunities in social expenditures and public investments.  Schäuble is very proud "in streamlining the public sector, fixing social security and raising consumption taxes".

Germany is becoming a cheap wage rather than an investment economy.  Trade surpluses eventually manifest themselves as losses the German people.  They are not good.  They don't represent how well you are doing, but how well you could have been doing.

Wolf-pact version Two - from German to Euro-wide surpluses
"Everything flows and nothing stays." Heraclitus of Ephesus  
When the Eurozone stopped working, austerity was applied on the periphery.  The solution offered to deficits countries, was to do what Germany did ie repress wages and, thereby, destroy their own internal investment mechanisms.
"A second wave of expenditure restraint and reforms followed once the financial crisis was past its peak....Thanks in part to its education system, which is attuned to the needs of business, Germany has a youth unemployment rate below 8 per cent – the lowest in Europe" Wolfgang Schäuble 
Has there been a revolution in the German education system? Or is it really the case that talented, skilled labor resources are flowing in from the periphery economies where youth unemployment exceed 50%? What is happening to the education system in the countries they are coming from?
"The adjustment was ambitious and sometimes painful but its implementation was flexible and adaptive. The European safety nets have provided a well-calibrated mix of incentives and solidarity to cushion the pain." Wolfgang Schäuble 
There is no European safety net or solidarity to cushion the pain.  These have been systematically ripped out in the periphery.  The "well-calibrated mix of incentives and solidarity to cushion the pain" refers to pain of credits rather than debtors.
"In just three years, public deficits in Europe have halved, unit labour costs and competitiveness are rapidly adjusting, bank balance sheets are on the mend and current account deficits are disappearing. In the second quarter the recession in the eurozone came to an end."  Wolfgang Schäuble 
Again this is the cheap wage model and its meaning of competitiveness.  "Bank balance sheets are on the mend"  as they are not lending and investing in businesses.  "Current account deficits are disappearing" as this what would happen when consumers become too poor to buy imports. "The recession in the eurozone came to an end" or rather, lets redefine structural and natural unemployment rates in each eurozone country and not call it a depression.

 There is no end to the recession in the periphery and  there is no liquidity in the periphery

Euro core economies, having learned some lessons from the euro crisis, have freed themselves from financing periphery trading deficits.

Imperfect monetary unions worked by population movements.  Populations are being made to suffer or migrant.  The periphery economies of the Euro are forced, unwillingly but bonded by debt.  to apply internal devaluation.  The only real intent (excluding the increasingly but interestingly contradictory IMF) is not a major internal political and market reform of oligarchical and cartel market structures, but wage suppression (unit wage costs).

The obsession to create surpluses emphasizes cheap wages rather than sound economic investment.  As a result the core economies have a greater and greater appetite for labor resources.  In paricular
"Germany is ageing and shrinking. France and Britain will overtake it soon, in terms of population. Too few women enter the workforce and they have too few children. Germany is over-reliant on industry and underperforms in services. Over half of every generation leaves school after 10 years, often with only a rudimentary knowledge of English and similar cultural skills. Immigrants are still not welcome. Most of these problems could be fixed with quotas for women in senior management and for immigrants in the civil service and the police; allowing dual citizenship; and encouraging kids to stay at school. But these reforms are unlikely to happen." Guardian: Why Germany's strength is an illusion
This shortage not cleared (by demand and supply) by wages increasing, but by draining and selectivity picking from a large pool of idle labor resources from an increasingly poor periphery.

Again it is not good for the German worker. It is keeps German wages low, but this time by labor resources (immigration) flooding in from the periphery to increase competition for jobs.  Its a toxic mix that will increase nationalism and racial tensions.

Thus Europe moves, disastrously, en mass towards a cheap wage model economy.  Even more disastrous, when one realize that the EU raises taxes from its working population to finance a system (Common Agricultural Policy CAP) that creates artificially high foods prices. A policy of lower wages with 38% of EU budget for the next five  years going to CAP.  Yet, only 5% of the EU population work on farms.  Something has to give.  Even without the political chaos and under investment, a cheap wage model of the economy is not sustainable when also coincides with a system that keeps food prices high.

Suppose somehow it does hold together, and labor flows back and forth between the core and the 'homelands' in the periphery in tune with the demands of  core's economy.  As cultural and national loyalties and prejudices increase, the pressure  (governments are forced to balance their  budgets) will increase on richer EU member to tighten up immigrant residency, voting and social benefits rights.  It then not that great a step for the European labor market to fragment into a kind of apartheid system with different class of rights and conditions in each of the 'euro homelands'.  Unless you are one of the fortunate few that will be reaping profits from such a system, it is good for no one....of any nationality.

12 November 2013

The four finger government

Greek PM Samaras' first comments after this week's vote of confidence were: "the Government has been strengthened". In reality they lost a MP and the majority is now only four:

A workable majority

but its quite big 

Where you can meet Greece's new media (take you for a) spin doctors 
Which translates as

the one-finger government: as  'partner' Venizelos realizes from the latest PASOK percentage in the polls

Which is a lesson, as discussions with the Troika tend to devour political parties one by one

And then there were none

.....which leaves someone a little Dazed and Confused - Hanging on by a Thread:

14 October 2013

Its a miracle!

The miraculous recoveries of Spain and Greece

with a little bounce off the bottom. 

And even better, the economies are being stabilized. 

and "aren't we lucky the most expensive machine in the hospital" still goes ping

but then it was about saving the machinery, not the patient.  

IMF Documents Excerpts May 9, 2010 meeting at which the IMF board approved Greece’s first bailout. (published in the Wall Street Journal and copied below)
Swiss executive director Rene Weber :  We have “considerable doubts about the feasibility of the program…We have doubts on the growth assumptions, which seem to be overly benign. Even a small negative deviation from the baseline growth projections would make the debt level unsustainable over the longer term…Why has debt restructuring and the involvement of the private sector in the rescue package not been considered so far?”
Brazil’s executive director Paulo Nogueira Batista :  “The risks of the program are immense…As it stands, the programs risks substituting private for official financing. In other and starker words, it may be seen not as a rescue of Greece, which will have to undergo a wrenching adjustment, but as a bailout of Greece’s private debt holders, mainly European financial institutions.”
“Our decision to go along with this problematic and risk-laden program should not be taken to mean that we will support it in the future. Going forward, we will consult with our authorities and other chairs to make sure that the fund is not led along the path of endorsing a program that may prove to be ill conceived and ultimately unsustainable.”
Argentina’s executive director Pablo Andrés Pereira : “The alternative of a voluntary debt restructuring should have been on the table…The European authorities would have been well advised to come up with an orderly debt restructuring process. The bottom line is that the approved strategy would only have a marginal impact on Greece’s solvency problems…It is very likely that Greece might end up worse off after implementing this program.”
Iranian executive director, Jafar Mojarrad : “We would be interested in staff clarification regarding the option of debt restructuring. We would have expected such an option to be discussed in the staff report, even if the intention were not to retain it.”
Egyptian director Shakour Shaalan : “We would be grateful for further elaboration on the assumptions…underlying staff’s medium-term growth projections. They appear to us to be rather optimistic…We would be interested to learn from staff whether debt restructuring was among the options considered in the assistance package. Debt restructuring may be looked upon disfavorably, but it should be envisaged.”
India’s executive director Arvind Virmani : “The scale of the fiscal reduction without any monetary policy offset is unprecedented…(It) is a mammoth burden that the economy could hardly bear. Even if, arguably, the program is successfully implemented, it could trigger a deflationary spiral of falling prices, falling employment, and falling fiscal revenues that could eventually undermine the program itself. In this context, it is also necessary to ask if the magnitude of adjustment…is building in risk of program failure and consequent payment standstill…There is concern that default/restructuring is inevitable.”
China executive director He Jianxiong : “The risks to the program are significant…The growth projection appears optimistic.”
 Also from the minutes of the May 9, 2010 board meeting on the Greek bailout:
“The exceptionally high risks of the program were recognized by staff itself, in particular in its assessment of debt sustainability.”
“... according to the Brazilian ED, ‘a bailout of Greece’s private sector bondholders, mainly European financial institutions.’ 
The Argentine ED was very critical at the program, as it seems to replicate the mistakes (i.e., unsustainable fiscal tightening) made in the run up to the Argentina’s crisis of 2001. 
Much to the ‘surprise’ of the other European EDs, the Swiss ED forcefully echoed the above concerns about the lack of debt restructuring in the program, and pointed to the need for resuming the discussions on a Sovereign Debt Restructuring Mechanism.”
The Swiss ED (supported by Australia, Brazil, Iran) noted that staff had ‘silently’ changed in the paper (i.e., without a prior approval by the board) the criterion No.2 of the exceptional access policy, by extending it to cases where there is a ‘high risk of international systemic spillover effects.’”
Christine Lagarde, IMF Managing Director, in June 2013:
“In May 2010, we knew that Greece needed a bailout, but not that it would require debt restructuring…We had no clue that the overall economic situation was going to deteriorate as quickly as it did.”
And where's that "Le Grand European Investment plan"?

And that super big recovery? ... Remember the medicine.

Got the picture?
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30 September 2013

National Output and Disintegration For Mummies

1. Mummified and Buried with debt
2. National Output for Mummies 101
3. Europeaness and the Bubble-gum card
4. Bleak House
Recent economic news seems to justify optimism.  The summer saw well-behaved sovereign interest-rate spreads, a strengthened euro and a recovery in equity markets. Very superficial.  
Part one: - mummified and buried with debt for the afterlife:
The underlying crisis in the euro-zone is still there and very real. Many economies in the Euro-zone face very poor growth prospects. Debt overhang and balanced-book repression still haunts investment - private 'capital' that could go to productive investment remains 'flighty'.

Euro-zone's self-inflicted macroeconomic disequilibrium will persist - a cycle of internal trading imbalances, bubbles, financial repression, deflation and uneasy peace (global upturns and elections). Press one button to restore a member's import-export trading balance and create internal imbalance. Press the other to restore its internal balance and create an external trade imbalance.

Without growth prospects, unfortunate economies are mummified and entombed. A one trillion euro Pyramid (that give liquidity to banks to buy government bonds) to ensure a safe journey to the afterlife (in 2020) is not enough.  Euro tribes may still revolt and seek a new promised land.

Solving the euro-zone trading imbalances (caused by misspecified fixed 'terms of trade') by destroying trade (depression) is (fiscal compact) madness. There is still no flexible mechanism to adjust a members' terms of trade to the constantly changing conditions of global trade. Instead, adjustment is by sluggish corruptible unfair structural reforms and population movements that (works in the USA but) destabilizes euro member's political systems.

The resolution to this very European economic disequilibrium (reoccurring internal trading imbalances and more potential 'debt overhang') is politically unfeasible.  It doesn't take much to stir up a new crisis.  Successful monetary unions follow political unions, not the other way around.

But "We are all Europeans. I'm European. You're European"
"We're all mad here. I'm mad. You're mad."  How do you know I'm mad?" said Alice.  "You must be," said the Cat, "otherwise you wouldn't have come here."  Alice-in-Wonderland
Germany elected a Mummy ('Mutti' Merkel ), trusted by her voters to handle Euro crises. The 'Home' and "Mummy knows best" comes first. But why should Germans care about Greeks more than Germans?  How can European policies not be dominated by national media and prejudices?  How can voters not worry more about their own economy and livelihoods than elsewhere?  How can voters, suffering years of economic repression, not worry about their livelihoods, not resist and not change policies and not create another Euro-zone crisis?  Does Greece having a primary budget surplus make it bolder, more independent and freer ... to do what?

Debt repayments:  "Two Tens for a Five"

Greece still needs a real restructuring of its debt, including deep write-offs. To do this in any real meaningful way, Greece will still face a stand-off with the creditors and will again be threatened by euro exit. Without real debt relief and sustained economic recovery, a choice becomes even more clearer to voters. Either leave your country (and move to other increasingly xenophobic countries) or make it leave (euro exit).

Debt Overhang
Greece's debts is currently higher than it was in 2010. Its economy has collapsed by 25% and its debt to GDP approaches 180%. It is maddening ratio that stubbornly refuses to go down.  On the other hand, policies that reduce a denominator to (pay and) reduce a numerator (Debt / GDP) will do exactly what to the actual size of the ratio?

Unmanageable debt burden compromises economic growth. It is a ghost that haunts any Euro-zone country finding itself on the wrong side of the trading balance. It distorts and crowds out investment, with an economy's funds increasingly managed by feudalistic principles rather than by economic returns.  "Debt overhang" (debt is so large that it threatens ability to repay its past loans) scares off potential investors who will need to deal with the unpredictable actions of a government prioritizing impossible debt-servicing obligations.  The returns from investing in the economy are effectively "taxed away" by the repression imposed by existing creditors who had over-lent.  Bad investments, that are not allowed to fail, drives out good investment. When investors do appear, projects with quick returns rather than for long term projects that make growth sustainable are more likely to be chosen.

Debt per se is not a 'bad'. The addition of debt can finance and enhance the country's capital stock and productive capacity and restore a country's competitiveness. In Greece, the additions of debt to maintain (rather than write off) bad debts perpetuates 'bad' lending and a rotting system. It attracts vulture funds more than real investors. Debts should have been written off back in 2010 to restore the confidence of investors in the real economy - not the confidence of 'failed' lenders to a failed system. It was bad capitalism not to write off bad debt and to disable the reboot button.

The flaws in the Euro system are still there.  There is still no flexible mechanism to replace the role of exchange rates - instantaneous adjustments to a country's competitiveness. Recovery and short to medium term attempts to stimulate the European economy will regenerate new, if not old, trading imbalances.  As for long run solutions, Europe does not seem able to coordinate any 'agreed' and meaningful  policy. An adjustment (in the absence of internal exchange rates) of economies by population movements or depopulation leads to more political uncertainty, economic and regional inequality and nationalism and political extremism.  Poorer regions will lose more of its taxpayers and human capital whilst at the same time be faced with an aging population and rising health and welfare costs.  

Government budgets crisis, even if it is enshrined as the 11th commandment "thou shall not overspend",  will not go away

Part Two: National Output for Mummies 101 (you may want to jump to Part 3)

Or you might read Credit Writedown's  Why can’t people understand national accounting?
"the whole framing of the problem presented in the media is wrong because it gets cause and effect totally backwards. The question the media asks is "how can government cut the government deficit?" The real question is "why are deficits high to begin with and what should we do about it?" And it’s this question that gets people into trouble."
An economy's output cannot simply be measured by adding the monetary value of each producer's output -  the output of one (wheat) is another's input (baker) - but it can be measured by adding the differences between the value of output (bread sales) and inputs (wheat purchases) - "Value Added",

If a producer's balance sheet profits appear as:
Profits  =  Sales  - Purchases From others  -  Depreciation  - Wages  -  Interests
then a producer's "Value Added" is
(Sales - Purchases from others )  =  Depreciation  +  Wages   +  Interest  +  Profits
 'Value Added"  =   (S - PF)    =         DP        +      W      +      IN      +      P
and the "Value Added" for all producers is:
GNP at factor cost  = Σ (S - PF)  = Σ (DP + W + IN + P)

Allowing for depreciation, the monetary value of an economy's output (Net National Product NNP)
NNP = GNP - Σ DP  = Σ (W + IN + P)
is equal to all the possible ways of earning income - National Income (Y).
NNP  =  Y 
Output, including imports, goes to consumption (C), investment (I), government (G) or is exported (X)
IM + NNP  = C + I + G + X
Available resources  =  Resource use
NNP  =  C + I + G + (X - IM)
Incomes (wages, profits/interest and rents) are used to pay taxes (T), saved (S) or spent (C)
 Y = C + S + T
Savings is postponed consumption, stored under a mattress, bank account or as "financial investments" (stocks and bonds) with various degrees of liquidity or risk, that lay claim to income from future production. 

The national income accounting identity (NNP = Y) gives
C + I + G + (X - IM)  = C + S + T
I + G + (X - IM)  = S + T
(X - IM) = (S - I) + (T - G)
Current Account (Trade) balance  = Private sector net savings + Government budget account

This [ (X-IM) = (S-I) + (T-G) ] is the Euro-zone default line

Persistent trading deficits (X - IM) < 0 will always be accompanied by accumulating (private or public) debts ie
 (S - I) + (T - G) < 0. 

The trade imbalances (X - IM) do not easily clear, as there is no simple mechanism to adjust relative prices (domestic to foreign prices). There is no exchange rate, nor domestic currencies, to do this job.  The impact of these surpluses and deficits (and a political 'tragedy of the common' euro debts), has distorted the European investment mechanism
I = S  -  (G - T)   -   (X -  IM)
net investments =  private savings +  govt budget  +  trade account

In Spain this manifested itself  in a construction property bubble.; in Greece, net imports was offset by government deficit; and in Ireland the government debt replaced banking debts.  

It is the current account balance which drives the flow of wealth and employment within the Euro-zone. The tail that wags the government doggy budget deficits.  Even if the EU's Fiscal Compact works (T- G = 0), trading deficit will be accompanied by private sector debts as
(X - IM) = (S - I)
This could be resolved by either exchange rate or by efficient financial markets on the other side of the above equation. Euro-zone has neither:  no internal exchange rates, a financial system (that allows the 'bad' not to fail) and, in turn, an inefficient or corrupt investment mechanism. Using internal devaluation to adjust domestic to foreign prices (international competitiveness) fails when the internal markets are themselves monopolistic. Getting a corrupt system to reform itself doesn't get the intended results.

Net investment (I) in the national accounts may increase but, in a macroeconomic disequilibrium, this can be an illusion. There are three main components of net aggregate investment: 1)  'real' economic investment (additions to the stock of capital - machinery and equipment) with returns from future output),  (2) construction (factories, offices AND residential ) AND (3) inventories (intentional or not eg unsold goods).  

When the system fails, this mix can become very toxic. Real economic investment (1) is overwhelmed by (2) construction and property bubbles that eventual show up as (3) unsold goods and stocks.

Part Three:  'Europeaness' and the original Bubble-gum card 

Bubbles are shared fantasies, pricked by reality. Scrams are getting enough people to believe in the fantasy to pay for it. Euro-zone convergence was myth.  The euro crisis has been a story of more and more dealings in government debt, insider trading, bribes to politicians, and debts backed debts to spend on purchasing more debts.

The trade benefits of convergence turn out to be as mythical as the South American Trade benefits were to South Sea Company (UK early 1700s).  The company's stock rose (S. American trade was under Spanish control) with more and more dealings in government debt fueled by insider trading, bribes to politicians, and loans backed by those same shares to spend on purchasing more shares. The renewal of war with Spain in 1718 did not prevent its collapse in 1720.  
The South Sea Bubble Card - 1720 
The South Sea Company was created as a public-private partnership to reduce the cost of national debt under the disguise of a monopoly of South American trade (which was under Spanish control).  In 1718 war broke out with Spain. The bubble burst in 1720. The only real trade that occurred was in people (slaves)

Effective financial markets ought to mean that the returns to investment (future profits and output) are related to borrowing costs (debts) where the risk of failures sold and brought in derivative markets. A rise in net investment ought to indicate an increase in the productive capacity with profit-taking accruing from wealth creation. The risk of returns failing to meet lending/borrowing costs ought to be dealt with by the secondary markets (buying and selling of risk, insurances and the pooling of risk etc). When profit-taking, risk-taking and borrowing costs become increasingly disconnected from the economy's actual returns and risk, increases in aggregate investment are illusory.

Net investment (and GDP) in the euro zone periphery flowed into bond, construction, real estate and asset bubbles. Trading surpluses were fed into a slot of a bubble-gum vending machine that fed deficit countries forced to operate on 'bad' Terms of Trade. Like Gresham's Law, a debased currency of circulating debts leads bad investment (debts) driving out good investment (debt).  

Once the bubbles burst, trading deficits (X- IM) fall by the private sector (S-I) imploding - investments, output, consumption (and hence imports) and savings and investors run for cover.  The trading deficit economy, is then subject to a viscous circle of underdevelopment, buried by the weight of accumulating debts that become increasing larger in real terms as its future income and GDP falls.  

The Abbott & Costello Multiplier 

The result is a macroeconomic disequilibrium where consumption, savings, investment, government expenditure and tax plans will collapse upon each other. The economy does not grow but shrinks its way out of financial crises.  

Part four: Bleak House
"Suffer any wrong that can be done you rather than come here!"
Jarndyce v Jarndyce  a large inheritance entrapped in a case dragging on for many generations that is finally resolved by the legal costs devouring the entire estate. (Charles Dickens' Bleak House)
Europe is threaten with long-run stagnation. Its investment engine over-flooded with toxicity, the funds of trading surplus economies' channeled into poor investments and pyramid schemes whilst deficit economies are asset-stripped of their human capital.  A flawed monetary union adjusts by population adjustments (emigration, lower quality of life, lower birth rates, lower life expectancy etc).  The periphery's young migrate to the core keeping its wages costs low and its relative competitive advantage. Human capital (education, healthcare, etc) that was paid for in the periphery yields its returns to the core. Left behind is an increasingly unskilled, aging and unhealthy population tied to debt repayments struggling on third world wages to meet European food prices (distorted by a flaw Common Agriculture Policy). 

You cannot have the holy trinity of stable current accounts, sustainable debts and balance government budgets.  They could be sustained by a permanent system of European-wide transfers. Something like the original Marshall Plan, that laid the foundations to the original European Community, would do. But this would imply a degree of "European-ness" that does not exit.

Without debt forgiveness and real investments, a small indebted country should keep a euro-exit card up its sleeve and not be afraid to play it.
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26 October 2012

Bye Bye Democracy Hello Bond-Age

Greekistan: latest proposals leaked on how to deal with the troublesome colony German Finance Minister wants Greece’s Tax and VAT revenues place in an Escrow Account. 

So if Greece makes a primary budget surplus then a dedicated receipt (such as part of VAT income)  transferred monthly to the trust account. And if Greece doesn't make a surplus, then automatic budget spending cuts equally divided through all spending programs. If it Greece refuses bring in officials who will make them as democracy is a form of cheating.  And if all this is unpopular with the natives, throw in some sweeteners.

But not too sweet.  "Growth and job-enhancing measures" (or the further reduction of wages costs livings standards) and "the release of some structural funds dedicated to the 181 projects of high priority,” (feed the local Oligarchs - usual conditions of having funds to match EC funds will probably apply)

The Road to Serfdom or Bond slavery 

The debt / GDP ratio?
 It gets worse all the time.  As long as interest payments on public and private debt remains greater than the rate of investment and the ability to pay, the economy will be entrapped in a dynamic ‘vicious cycle’ of debt.  Debts are "excessive" due to the inability to pay (not size per se). Just throw in another forecast, who cares if they miss the targets?
“Yes, but shouldn't the arrows being getting closer?” asked Alice,
“Off with their heads!” roared the Queen
 "... Look, fewer misses"
So the external balance (Greek exports to imports) was positive. The poor are too poor to buy imports  and the middle classes are being eradicated  “In Greece right now, to be unemployed means death”  - less heads to be counted in the future unemployment statistics.  As for Youth employment, call it Youth-anasia.  An Export recovery? The latest Industrial orders statistics are not so pretty ("Are there signs of a turn in the Greek economy?")

"It is clear that Greece is off track and there is no chance they will cut the debt to 120 percent of GDP in 2020 as envisaged."  (a euro zone official, who insisted on anonymity).

Austerity undermines the ability to pay, driving more and more people into debt and poverty.  "Creating the 'conditions of growth"by doing the opposite.  Asset stripping is not economic development.  Turning bad debts into a (bad taxes) fiscal problem, and passing debt burdens on to taxpayers, means less income and revenues. A shrinking domestic market, rising cost of subsistence (wages) and an increasing ugly political environment for investment, are not exactly ideal conditions for making a local producer  more competitive in global markets.

Share photos on twitter with Twitpic
Euro crisis in a bin  - note the desperate advertising leaflets
photo via @asteris
Anyone really believing in this Austerity nonsense? Even IMF economists show that the damaging multiplier effect of austerity is very severe (The IMF and the End of Austerity)

Instead of growth, citizens are burdened and enslaved by debts, who are then told that they are not poor enough to be competitive, are cheats and are then asset-stripped.  Local oligarchies can then move their capital back in, buy everything on the cheap.  

A transfer of wealth from those not poor enough to those not rich enough. 'Perfect Markets' are only for the few with 'Rentiers' rather than producers

All this for our children's children's welfare? Younger generations suffer the most, can't afford children, and more and more families in Greece are forced to surrender their children to charities.  (One surplus that Greece is producing  - re: Swift's Modest Proposal)

Generation X debt reduction.  The present generation sacrificing supposedly for the next by sacrificing the next (jobless youth/at 58%). Taking away someone's future to secure someone else's today. Inverse / Perverse investment may secure today, but  no one safe tomorrow. 

There are three basic ways to reduce the debt-to-GDP ratio/ fraction
1) reduce the numerator e.g Debt forgiveness / default 
2) increase the denominator e.g. growth or/and inflationary increases in GDP or 
3) remove the statistic - remove the sovereign state. 

When debts cannot be paid or rolled over, foreclosure time arrives and Government is removed. Welcome to "More Europe - less democracy," Don't bother voting on this; you can't. 

Economic growth may come with pain, but the idea that pain (or torture) generates growth is perverse.

Medicine?  "Now the drugs don’t work; They just make you worse" Verve (via )

And the goals of economic policies are ?
Human Happiness? Welfare? Efficiency? Competitiveness?

RT : Efficiency is a highly developed form of laziness <<<--or an unit of output produced with the least effort.   To be 'efficient' at producing something that no one wants is meaningless. So whose wants/welfare are we referring to?

The 1% Pareto Optimal rule
Efficiency defined as where no gains can be made without making a very wealthy person worse off.

Does it now mean increasing the number of poor, reducing numbers of small business enterprises and increasing the relative power of oligarchs and monopolies?  Are we (with the help their media outlets) confusing "enhancing the conditions" for making abnormal / excessive profits with  'competitiveness'?

"Trying to makes ends meet, you're are a slave to money and then you die" Verve  - Euro's Bitter Sweet (drug related) Symphony
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22 October 2012

Its Capital, not Labour, Stupid

The Greeks are not drinking medicine; they are drinking hemlock

In any monetary area (be it the US, UK or USA or Eurozone) there will always one area or region which will have a competitive advantage over another. Industry, finance and businesses concentrate in areas that confer to each other economics of scale and advantages over others.  There is always a risk that disparities between regions (economic growth rates & living standards) will lead to separation and breakup. A monetary area peacefully avoids this by either (1) moving funds from its core to its periphery (2) or by its people and resources willingly moving from the less prosperous to more prosperous regions (prices/costs fall in the periphery and rise in the core). When neither happens, the monetary area descends into war, dictatorship, repression, unrest, civil wars, independence movements and revolutions.

Europe is a collection of diverse economies and cultures which, by their very nature, imply structural rigidity; a place where common currency is accepted but a common debt cannot be, without some form of deception; a place where labour mobility gets lost in translation and generates racial tensions; a place where member economies do not share a common growth path; a place, which therefore cannot share a common dream or future. There was and will be no real convergence. There is no legitimate central fiscal authority and no democracy at the centre.  

The mechanism for relocating resources and investment funds across the Eurozone members mis-fired from day one (moral hazard, too big to fail over-lending poor investment decisions). -- Primer on the Banking crisis: (Prof Karl Whelan's Lecture notes - Incentive Problems in Banking)   Euro-leaders responded with ridiculous rescue attempts to save financial institutions that deserved to fail. The effect: zombie institutions stand; countries fall, facing depression and regional (or country) depopulation.  The  'Psuedo Macroeconomics' of debt management and debt collecting policies is destructive and self-defeating.

Fiscal compact agreements will lead to the break up of the Euro-zone and even the breakup of member countries themselves.  Capital does not move to a political unstable declining region. It moves the other way.

The Competitiveness buzzz, Aggregates, Averages and Unit Wage Costs

The crisis began as a financial one. But somehow a switch has been done: from market failings of Global and Europe's financial system  to the market failing in labour markets, repackaged, dished out as medicine in unit labour costs.  Productivity and efficiency are problems, but what are they and where do they lie?

Aggregates and statistic averages can hide, blur and distort many things. Productivity and efficiency is not just about unit labour costs, the number of hours worked or how hard a Greek or German works. Its what these costs represent, or how productive or non-productive these hours of effort are.

OECD figures may be questionable - that the Greeks worked in 2008 on average worked 2120 hours per year (second only to Korea in the OECD but then what do all these extra hours produce?  Armies of bureaucrats, corruption, lawyers, accountants ....  in Greece and in Europe. The system in Greece is inefficient, but it is more than just about the actual persons who clocks in the hours.

Meet Alex, the ‘Lazy Greek Bastard’ behind this crisis

58% of youth unemployment is unjustifiable "'Capital" punishment

Statistics, Lies and Sadistics

Should we speak about incomes in general or wages costs?  In Greece, nominal incomes from property rents and dividends  (excluding corruption, undeclared offshore accounts) rose four times as fast as wage incomes (and 'real incomes' is another story).

The average wage is not  the wage the 'average person' receives. Income distribution (inequality) is not a 'Normal Distribution with a few poor people, a few rich people and the rest in the center. The averages wage is not what the average person earns. When the distribution is not symmetric, the average can be misleading.

What does average incomes, wages, costs, etc mean in real terms to the average person? Inflation in Greece has always been significantly higher than many other Euro Zone countries. Rich and poor have different experiences of it eg basics  rising faster than luxury goods.  There are market distortions to add to this. 

Inefficiency losses here are due a lack competition caused by local cartels, monopolies (and a weaker buying power for smaller business in wholesale markets). These market distortions are more damaging to efficiency than private sector unit labour costs. Consumers suffer higher prices as cartels and monopolies are more able to pass them on. To buy certain quantity of goods, a consumer would need to be paid more in Greece than in other EuroZone countries.

Aggregates hide many things. The effects of changes are not felt equally.  Greece's entry into the Euro meant that the prices of basics went up, while the prices of luxuries fell. The rich saw the price of their "basket of goods" fall;  the poor (and those not employed by the state) had a very different experience of this 'inflation' rate.

The percentage of income spend on rent and food by those depended on wages increased. Worst, credit cards were thrown them promising the 'European Dream."   The basket of the typical Greek Mediterranean lifestyle, so desirable in Western European supermarkets, is now too expensive for most Greeks. It is exported. The other side of this trade imbalance is represented with (a new Greek law legalizing) the sale of rotten food and debt.

What exactly is competitiveness? A economic textbook explanation would look like 
Competitiveness is a measure of a country's advantage or disadvantage in selling its products in international markets. - the price of foreign goods relative to domestic prices.

It is a massive leap of faith to jump to unit labour costs,  the ratio of nominal wage growth to labour productivity.

Confining ourselves to using only unit labour costs would suggest that an economy is more competitive the smaller the share of GDP/National Income that wage earners receive.  So countries like Greece must need to implement policies that pressure wages (and without economic growth, living standards) downward.  Except, in Greece, it is not only about the wage / profit share divide of the cake but rentier incomes that seem to be almost immune and embedded in a corrupt political system.

The concept of international competitiveness encompasses many factors that do not lend themselves readily to quantification eg the capacity for technological innovation, degree of product specialization, the quality of the products involved, or the value of after-sales service are all factors that may influence a country's trade performance favorably.  Unit labor costs, by themselves do not say much.  It is just one factor in the production mix. Efficiency depends on the mix of factors and the scale of the operation - size matters.

Attaining high rates of productivity is often seen as a way of improving competitiveness, but it does not necessarily mean that the possession of such nice statistics will boost sales. (a silly example:  sacking every one apart from the most productive worker in a country would produce very good average productivity figures and an output that no one in the country can afford to buy).  Productivity and efficiency, remembers needs to relate also to what people also want and the ability and access to buy it.  Mass unemployment and idle resources is wasteful and inefficient

Reducing the income generated by labour by reducing nominal wages may even hamper economic growth.  Kaldor’s paradox showed that the fastest growing economies in the post-war period also experienced faster growth in unit labour costs, and vice versa. Low unit labour costs causing higher economic growth rates is far too simplistic.

Reducing wages share of national income, that is increasing productivity (increasing output per euro spent on a worker) increases profits (and according  to neoclassical theory) kicks off recovery and economic growth.  If investment does not happen (and remember that the whole mess began in the financial markets)  then, like the 1930s , we are in deep trouble. The issues returns back to capital. With everyone playing a 'beggar-thy-neighbour' unit labour cost game, there is no demand and markets to safely invest in.

European policy makers (and as they are un-elected officials often with connections with the Banking community) too easily assume efficient financial markets and, when things go hopelessly wrong, too easily blame the labour market.  'Correcting' the labour markets will not save a flawed EuroZone financial system. It will not created the economic growth to save it.

Euro-leaders and politicians sit happily trapped in a euro-bunker of their own making, protected by the best firewalls money (or rather the Euro) can buy (symptoms of Groupthink).
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18 October 2012

Plan 9 from Outer Space

Euroland Check List 

1) Pass toxic debts on to households (✔)

2) Save Zombie financial institutions  (✔)  

3) Buy time for the capital mobile to escape (✔)

4) Currency overlords to enforce payment on those who can't ship money out (in progress -  Germany shocks EU with fiscal overlord demand)

5) Protest  -   encourage infighting (North/South, Greeks, German, garlic, migrants) (✔) and blame the alien next door (✔) Local media (✔). 

6) Compensate for bad investment decisions (in fact don't mention them) by lowering wages  (✔) and

7) Export led growth to the alien next door  ( Newly discovered planet is just 4.4 light-years  ).

8)  EZ implodes. Neo-nazis try to take over but Eurocrats save the day with the EZ superstate ( Progress (?) Risky, but they want a superstate too ).

8b) EZ unrest (IMF riot variation).  Peace-keeper role -  expelled rowdy non- complying members (nearly there).

9) Members say "we are not Greece" (✔)  & sign up for the Super State. Blame populism and democracy for the crisis and praise Technocrats for restoring order .....

10) and launch to loud cheers,  Le Grand European Investment plan - the ESA's mission to Mars.

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21 March 2012

Special Offer: Fage Total Muppet

The ever-expanding Evangelos Venizelos ran unopposed in the leadership race of ever-shrinking PASOK party on Sunday.  PASOK is for all purposes financially bankrupt with 120 million euros of debt and staff unpaid for months. Voters were required to pay 2 euros (see Veni, vidi, vici). Some chose to spend their 2 euros more wisely (Frustrated Pensioner Hurls Yogurt At FinMin Venizelos - "I came, I saw, I got splattered").

Get the two for one Venizelos+Fage yogurt. Buy now!
Product Update: Greek dairy company FAGED introduces it's new Total(itarian) yogurt. A velvety rich yogurt. Now with even bigger chunks of raspberries and repression.

Importance Notice (24.01.15)
Due to customer complaints this yogurt has now been removedInspectors confirm there were problems with improper cleaning at the plant, but say the yogurt contained only mold. Health officials say there nothing to worry about as they don't eat it. It only affects people with normal immune systems. They were keen to stress that it did not damage the operation of the plant."Though it can make people very sick, it did not damage machinery and therefore there is no reason to stop production. 
The matter is now being referred to the European Court of Justice. One elected official complaint "They are not abiding agreed rules. It sets a bad example.. Its a question of moral hazard. It means that other customers can get away with not eating it. What do I tell my voters?"

Total muppet Book offer (Why I Am Leaving - Goldman Sachs' “muppet" clients). 

Introducing  "Muppet-O-nomics for Dummies" - International Muppet Fund 2012 

The International Muppet Fund 2012 update includes a foreword by Venizelos

25 February 2012

Second Greek Deal: an Exercise in ComPact StuPIGidty

Ministry of Truth:  Strength is Ignorance; Slavery is Freedom; Austerity is Growth

The Second "Greek 130 billion "euro bailout" is not about saving Greece. The numbers and projections were incredible, designed as counters in a "let's make a deal" PSI game.

The Eurzone is an unbalanced monetary union whose economies are in persistent divergence.  The crisis exposes the structural problems of individual economies.  If Greece was the only one facing the threat of insolvency, it would have been bailed out by now. In a monetary union of contradictions, the stress of Eurozone economies moving in different directions, comes apart at the weakest link.  If it Greece wasn't in the eurozone, it would be some other member of the periphery that would be this position.

Greece may have a bloated State sector and a clientelism system ruled by political dynasties, but it is not the cause of the Euro crisis. The world is littered with incompetent, corrupt regimes ruling inefficient economies. In the Eurozone, there is no exchanges rate (or alternative) mechanism to adjust competitiveness and compensate for economies that share very little in common with each other. The "too big to fail" dream is not bringing Europe together, but destroying it. Like other failed monetary unions, this one threatens dictatorships, wars and revolutions.

The Second Greek Bailout Deal

Greece has now been in recession for five years. Greece's GDP fell by 7% last year (17% since 2009) and unemployment now stands at 20%. Youth unemployment (under 25 years) is dangerously close to 50%. Economic growth must be a priority, but it isn't . It only appears in EC communiques.

Reforms without growth are deforming. Austerity, the reaction to 2008 like that in 1929 is creating a monster. Everything, from democracy, freedom, and even humanity itself is being threatened. For what?

A 1930s comedy?
""Well, here's another nice mess you've gotten me into!"

A 1948 nightmare?
with the great powers of global finance in a state of waging permanent war; national cheer leaders (and she who must not be named Tart | KTG) demanding greater competitiveness for their national export effort against each other; populations tuning into national TV 'Hate Weeks' blaming each other; officialdom churning out EuroSoc contradictions; and, new historical agreements each day that erase the previous ones.

Compact StuPIGidty?
The new "Stability and Growth Pact.  At best it is Stupidity Pact 2.0 riddled with holes, rendered useless as each member breaks the fiscal and deficits rules.

But, made effective, it a suicide pact that condemns the periphery economies that sign up for it. It   renders democratic constitutions and civil rights null and void - a 'Find and Replace' button to zap out  the word 'citizens' to replace it with 'creditors' in each nation's constitution.

It means that in a global downturn (imagine a supply-side shock such as a jump in crude oil prices e.g Iranian crisis), a governments will either have to cheat, or cut and deepened its own economy's recession. Trying to cut the budget deficit will lead to lower tax revenues, increased expenditures (more unemployment payments) and yet more missed targets. The country is then placed in a debtors' jail with their finances placed under stringent watch to enforced deeper more bloodier cuts. And once off-track, if you are a small country, there is no way back.

Here's a view from Punk Economics

And a lighter take (from @GTCost on twitter)
The whole Pact can be replaced by the Hitchhikers Guide with no loss of functionality and like the EU, the Deep Thought never computed the actual question it attempted to answer. 
A Carthaginian deal on Greece? ( H/T Fabius MaximusAmbrose Evans-Pritchard 

The Greek deal is a template for the new "Stability and Growth Pact. - a template for an accounting book dictatorship where rules and agreements are made behind closed doors, by unfamiliar officials and  technocrats guaranteeing the rights of creditors above those of citizens. It is served as a austere lesson to discipline all other 'sinners'.  Hardy any of  the "Greek 130 billion "euro bailout" is going to the Greek people. It locks them up in a debtors prison, and then throws away the key.
  1. Exchanging of existing bonds — issued mostly under Greek law — for bonds issued under creditor-friendly UK law will both diminishes their sovereignty and makes the eventual default far more difficult.
  2. Exchanging bonds issued to private investors for loans from quasi-governmental agencies will make the eventual default far more difficult.
  3. The pledging of gold reserves will eliminates a vital resource needed to buy imports during a default and devaluation process.
These will make any future defaulting or exiting of the euro more expensive and more painful.

Here is the second lesson from Punk Economics

The reward for the hardships imposed by the "Second Greek bail-out", is that Greece's sovereign debt will become sustainable at debt/GDP ratio of 120% by the year 2020.

The deal forecasts Greek GDP to fall until some point in 2013 but somehow magically pops up at 2% in 2014 and continues at growth rate that achieves a 120% debt to GDP in the year 2020.  Greece is  a weak economy that has just suffered five years of hard recession with still more austerity cuts to come. How can it return to growth by 2013?  What makes 120% the magical number of debt sustainability? 20/20 EuroVision.

Within hours a IMF leaked Debt Sustainability Report (find here) stated a worse (more likely) case scenario of the debt being 160% of GDP in 2020.  Here is the Greek Debt sustainability analysis  as annotated (by G Jenkins, Swordfish Research Ltd via FT's Alphaville)

“Strictly Confidential” (It has already appeared on Wikileaks so give away as you like)
“Baseline assumptions…the 2011 outturn was worse than expected…the macroeconomic outlook has deteriorated significantly…Medium term potential growth assumptions have been maintained” (Yes, I know it doesn’t make any sense not to alter the growth assumptions when all the inputs have deteriorated but unless we keep the figures the same then even we can’t fudge this one)
“Fiscal path has been adjusted…still bring Greece to a primary general surplus of 4.5% of GDP by 2014, although additional measures will need to be identified to secure this outcome” (I can’t get it to add up)
“… uncertain whether market access can be restored in the immediate post-programme years…” (I mean, would you lend your own money to this lot?)
“For the purpose of constructing the DSA baseline Greece is assumed to maintain good policies post-programme” (Yeah, knew that one would make you chuckle!)
“…if the primary balance gets stuck below 2.5% of GDP” (which it probably will), “then debt would be on an ever-increasing trajectory” (I am working on the Bail-out III paper this weekend...)
“Debt dynamics under an alternative unchanged policies scenario” (Think of it like alternative comedy…it all becomes mainstream in the end, so this is the more likely outcome. It’s not the wrost case scenario — jeez, you definitely don’t want to see that…)
“The Greek authorities may not be able to deliver structural reforms and policy adjustments at the pace envisioned…” (Hey, can you blame them? They have to live there…)
“Greater wage flexibility may in practice be resisted by economic agents” (Turkeys don’t vote for Christmas…)
“Service market liberalisation may continue to be plagued by strong opposition from vested interests” (Expect more riots…)
This was quickly followed by the EC admitting its own prediction from last Nov for 2012 is now "markedly" wrong, with economic activity being much weaker than anticipated. The new EC forecasts (23/02/2012 click here ) exploded the numbers in the Greek bailout deal that had projected the new measure realizing a 120% Debt/GDP ratio for 2020.  Just the headings alone in the report reveal how messed up the Eurozone is. The new forecasts now also show negative GDP growth rates for Belgium, Spain, Italy, Cyprus, the Netherlands, Slovenia and Hungary.

So, after years of suffering, having loss of its independence and being taken over by unelected Trioka officials, the best the Greek economy can hope for is to be in the same unsustainable place as where it is now.

The agreements to cut minimum wages, health care, pensions and "whatever it takes" will reduce domestic demand and deepen the recession.  Cartels and power interest groups, buffered by funds aboard will survive.  Small competitive  businesses won't.  423,000 businesses have shut down while People live of the garbage and sleep on pavements. Ignore the semantics of default, citizens will default everyday on their mortgages, loans and bills. The Troika does not offer a bailout for ordinary citizens or save small businesses from bankruptcy. Greeks are asked (in fact they are being ordered) to do it for their children....

Internal devaluation (replacing the role of exchange rates in adjusting international competitiveness) is proving to be a disaster of epic proportions for the Greek economy. Competitiveness in the Greek economy is not simply measured by a macroeconomic 'real wage level' to be adjusted in neoclassical or simplistic Keynesian versions of the world. Wages cannot be cut off from productivity, productivity cannot be cut off from the structural inefficiencies of the Greek economy, and this in turn cannot be cut off from the political regime in Greece. The much needed restructuring of the Greek economy has to go hand-in-hand with a much needed restructuring of the political and legal system.

Competitiveness in the Greek economy is about cartels, monopolistic market structures and a system of clientelism that kills off development and innovation. Foreign and domestic Cartels, collude, carve up markets, fix prices while regulators look the other way. Innovation retreats to the black and grey economy. Lower incomes groups, struggle to escape a system that tries to make them pay more in an increasingly regressive tax system. The wealthy have off-shore accounts, lawyers and accountants that cut through a complex legal system. Austerity and reforms are applied to the weakest first. A turkey does not vote for Christmas.

To inflict this monstrous deal, the Greek Constitution has to be changed to give creditors first priority to take any revenues that "Greek" government can squeeze from its own population. The money to pay these creditors must be placed in a so-called "escrow account" so that it can't be diverted to other purposes. Any leftover spare cash raise from government revenues will be used to run whatever remains of the country. Unless Greece manages to achieve primary surplus (tax revenues exceeding expenditures excluding interest payments on debt), which is proving to be practically impossible, it will either have to borrow yet more money or break even more obligations to its citizens. More exasperated taxing and expenditure cuts, will slash against those designed for economic reform as the economy spins further into its death spiral.

Think of Greece as a 19th Century UK rotten borough in desperate need for more not less democracy. Think of Europe as not even pretending to be one, enforcing rules that make governments accountable to the creditors, not their citizens.

Here is yet another take on the Greek scam

Debt servitude not investment is the priority in an up-side-down economic development model that reduces the economy to Third World conditions. Eurocrats land in Athens to ensure the serfs don't cheat in making their tributes. The increasing numbers of people exiting the euro to  arrive at soup kitchens, shows how far the third world colonialism has entered into Europe.

Who is the deal really bailing out? The private holders of Greek sovereign might be hit with a loss (in Net Private Value) of up to about 75%. - but these were junk bonds of an insolvent economy a long time ago. The Institute of International Finance representing 50% of private sector bondholders has agreed to this debt swap, but, as  hedge funds and potential vulture funds have resisted participate, the Greek government is trying to enforce participation (Collective Action Clauses, CACs). In effect, it ought to trigger a credit event, so that insurances can be collected on the bonds. The ECB and members Central Banks tries avoid losses by not being in the debt swap. The private sector is rests this and in the end blackmail or coercion will be used. 

This new Greek "bail out " and the Stability and Growth Pact is really an attempt to bailout of the Euro dream.  All means possible are used to prevent its break-up. Democracy and freedom do not count.
.... the sacrifices demanded of ordinary people to preserve the single currency are a huge threat to European union. As externally-imposed austerity bites, not only in Greece but in other countries too, there is a real risk that Europe will fracture along historic lines and people will seek to settle old scores. The single currency is the biggest threat to European peace since the Second World War................ And then there is Spain.....at which point the wheels come off. Spain is much too big to bail out. (Frances Coppola: False Dawn)
In the same light Yanis Varoufakis describes the deal as Crisis Appeasement, using the words (apart from one in red) of Winston Churchill's response to the Munich "Peace in Our time" deal: 
"I do not grudge our loyal, brave people, who were ready to do their duty no matter what the cost, who never flinched under the strain of last week – I do not grudge them the natural, spontaneous outburst of joy and relief when they learned that the hard default [ordeal] would no longer be required of them at the moment; but they should know the truth. They should know that there has been gross neglect and deficiency in our defences; they should know that we have sustained a defeat without a war, the consequences of which will travel far with us along our road; they should know that we have passed an awful milestone in our history, when the whole equilibrium of Europe has been deranged, and that the terrible words have for the time being been pronounced against the Western democracies:" Winston Churchill on the Munich-Agreement Oct 5, 1938. House of Commons
Internal devaluation does not work. Greece is not a neoclassical macroeconomic model. Legal, political, and not just economic restructuring are necessary -  but ones that move towards democracy to motivate ordinary citizens to participate and share in the reforms. This no longer possible without a regime change. Europe is edging towards war, dictatorship or revolution. The choice is yours. 

Thought I had something more to say