14 January 2012

One and 1/3 speed Europe

Two-speed Europe? One part trying to go forward, the other part going backwards sentenced to serve as Europe's Third World. Without a simple mechanism to replace exchange rates and to re-cycle surpluses to cover trading deficits, the Euro-zone core and periphery has pulled apart.

Once an Eurozone member had established a competitive advantage, other members could not easily adjust their competitiveness by lowing exchange rates. This inability to adjust was sustained by an imperfect financial system, with trading surpluses in the core financing the periphery's deficits via French and German banks. One currency, one interest rate provided cheap money to periphery. 'Being too big to fail' meant that Banks were willing to over-lend and undertake riskier debts. This could then be leveraged, chopped up into financial salads, by new exotic financial products. The failure of reckless 'investments' could be socialized, passed on via governments to citizens in the periphery and, if that failed, the German taxpayers was the payer of last resort.
"You've got insolvent banks supporting insolvent sovereigns and insolvent sovereigns supporting insolvent banks" Bridgewater (one of the World's biggest hedge funds)
The Euro was an idea 'too big to fail'. This was shattered in 2009/10.  The imbalance in members' trading accounts and the corresponding capital account imbalances were sustained by the illusion that common currency implied a common debt - German and Greek Sovereign debts could be treated equally.  Euro leaders resisted any form of an euro-bond that would treat members' deficits equally, unless it were to include the effective removal of deficit countries' governments (Fiscal Compact) - a fiscal authority with fiscal rules dictating terms to the periphery.

So all debts are equal, but some debts are more equal. Countries, with no control or access to their money 'printing presses', could become insolvent.  In the periphery, the costs just to service debts soared whilst attempts reduce debts undermined growth and the ability to repay them. The periphery, Greece in particular, is in desperate need of investment.

A lack of co-ordination, Lehman type solutions and 'kicking the can down the road' has brought time for the strongest to untangle and pull their capital out. Worse, Euro leaders has misdiagnosed the crisis, addressed the symptoms and focused on fiscal discipline. Austerity programs have driven economies into a debt/GDP death spiral.  Euro leaders have 'kicked the can (and the periphery economies) down the wrong road'.

Greece is country in the fifth year of a recession. The country is insolvent. EU/IMF has succeeded in making Greece is a special case: a third world economy second only to Sudan in global recession (Economist Intelligence Unit).  The Greek economy will shrink by 7% in 2012.  Austerity has increased the government budget deficit to 21.64bn cancelling out even the desperate emergency taxes. Greece, nevertheless, is instructed to honour its promises.

Greece has slashed everything. Small businesses are collapsing everywhere. In one year unemployment has jumped from 13.3 % to 18.8 %. The Public hospitals are facing acute shortages of everything. Pregnant women are turned away. Diseases are on the rise. Parents find children too expensive to keep and surrender them to the authorities. 1,000s don't have any form of insurance and access to benefits. Rates of homelessness, suicide, crime, HIV, drugs, crime and domestic violence are increasing. This is still not enough.  If this was a war, the country could surrender. I'm not even sure if it is a country anymore.

Yet, almost 3/4 of government expenditures are spent on serving sovereign debt and "bailout cash" is to be spent on European military purchases. (Zerohedge).
"If Greece gets paid in March the next tranche of funding of € 80 billion is expected, there is a real opportunity to conclude new arms contracts." says a mysterious man in a cafe new the Defense Ministry  
A fixed (internal exchange rate) gave some a competitive advantage in the Euro. Some were just 'fixed'
Germany is one of Greece's leading trading partners. Last year, Germany exported goods worth €6.7 billion ($8.5 billion) to Greece -- compared to a volume of imports of only €1.9 billion. But what methods are used to achieve this enormous surplus? (How German Companies Bribed Their Way to Greek Deals -Der Spiegel 5th Nov. 2010)
European leaders tell youth to leave ( http://blogs.wsj.com/brussels/2012/01/13/eu-to-jobless-youth-leave-home/ ).  The youth could tell their leaders to leave, hand over keys and seek work elsewhere. The state may run out of petrol or medical supplies, but it ensures it doesn't run out of tear gas. 

The Wealthy and the capital mobile escape. The poor are blamed for not being poor enough. Those left standing have to pay the creditors.  The EC is pressing governments to change their constitutions to look like debt-collecting agencies, taking whatever, whenever it can. When collecting taxes revenues fall short the country is asset-stripped.

 The Simpsons
To call the administrators of European governments “technocrats” is too polite. There is nothing scientific, in outlawing by constitution all economic policies and beliefs that disagree. Austerity forces the economies deeper into debt, lowering local assets prices that allow local oligarchies to move back in and buy everything cheap. It is a robbery of massive proportions.

All this is still not enough. Angela Merkel and Nicolas Sarkozy insist turning the screw more. The constitution will be changed and future elections will be designed to be decide whose turn it is to turn the screw. Don't pretend this is a democracy. Don't pretend all this is saving Greece. Don't pretend this is creating growth. Don't pretend it is working. And when that all fails, just say Greece is a special case and admire the beauty...
'I think the EU remains the most beautiful construction put in place by humanity' Italian PM Monti  
Meanwhile another work of art,  Picasso’s "Woman’s Head", donated by the artist himself  to honour Greek resistance during the World War II, went missing.
Stolen Picasso’s “Woman’s Head“,  painted in 1934 and donated in 1949 by the artist himself  to honour the Greek resistance against the German occupied forces during the World War II. Estimated to be worth €2-3m.
Godfather: "i'll make you an offer you can't refuse"
And back in the surreal world of finance, in an Athenian barbershop, voluntary PSI haircuts are .......- someone might remember to bring the scissors. Why would this happen voluntarily?

Even the IMF, it seems has had enough of "counterproductive set of austerity measures' imposed by EU:
The senior IMF sources in Washington noted that there were "unprecedened delays" in the proper implementation of fiscal and structural reforms linked to the first 110bn euro bailout programme. Instead, "horizontal austerity measures are constantly being adopted that are leading nowhere, whilst further wage and pension cuts are unjustified because the only way to improve competitiveness is through growth-creating market liberalisation, the opening of closed professions and productive investments". (Athens News 12/01/12)
Even S&P, in explaining their downgrade of Eurozone Sovereign Governments, argue that Euro leaders have got it wrong:
“Financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the eurozone’s core and the so-called “periphery.” As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.”  Credit FAQ: Factors Behind Our Rating Actions On Eurozone Sovereign Governments (FRANKFURT (Standard & Poor's) Jan. 13, 2012)
'Fiscal austerity alone' has been downgraded. 

Neoclassical economics would argue that private investment would fill in the space left vacant by government. It would argue that consumer spending would increase anticipating lower taxes in the future.  Microeconomics reforms ought to create better conditions for growth - but where's the belief and demand.

The post-2008 world is one of uncertainty, 'systematic risk', bankruptcies, insolvencies and survival. The NPVs and life cycles theories are have had their horizons chop off. The multiplier rules, triggered by austerity generating successive rounds of falls in incomes and spending. The result is a domino effect with liquidity & quantity constraints knocking everything off their curves.

Demand does not equal supply. This is what excess supply and the real economy looks like in the EuroZone:
EuroZone under 25 year old unemployment is now at Spain 49.6%, Greece 46.6% Portugal 30.7% Italy 30.1% Ireland 29.3% France 23.8% and Germany 8.1%
Is anyone claiming that this is voluntary unemployment; or is it the fault of millions of European youth for refusing to get on their bikes to cycle to Germany or on the plane to Brazil or Australia ?
Europe without λόγος - all will flow & nothing will stay (misquoting Heraclitus of Ephesus, c.535 BC - 475 BC).
We are in disequilibrium. Standard neoclassical theory and solutions do not work in this space.

Investment and growth is needed. Macroeconomic policy has to create the the right environment to make microeconomics and structural reforms work. It is doubtful that the current European political elite, who have amassed fortunes that created and perpetuated the crisis, are willing to do this. Europe is faced with a political crisis that is blocking any solution to the economic crisis.

Austerity is not a solution that ends the crisis for ordinary people.  It is a solution that only ever considers saving the creditor at the expense democracy, as the majority would reject the payments of debts that they did not create or feel responsible for.

It is a robbery of massive proportions. Democracy needs to be restored to re-balance the system in favour of debtors.  
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4 comments:

  1. A splendid rant. But depressing as it is spot on.

    This struck me:

    Neoclassical economics would argue that private investment would fill in the space left vacant by government. It would argue that consumer spending would increase anticipating lower taxes in the future.

    Here we have a perfect example of how austerity even fails the neoliberal test. Austerity has meant HIGHER taxes and those taxes are killing SMEs as much as collapsing demand. Thus austerity strangles the private sector and its prospect for entrepreneurial growth at the same time it slashes the public sector. It is an act of suicide.

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  2. Lots of serious distortions in this story. The Euro contracts explicitly say that no government shall be liable for the debts of another! And the German government never ever fed the Illusion that all debts are equal. So, the German state and its people are not responsible for Greek debt! They still help the Greek nation now, but out of solidarity, not because of any political or ethical obligation.

    Secondly, the EU/IMF have kept Greece from defaulting, because the elected Greek government (and don't tell me that Papandreou allegedly fooled the voters, that's not OUR fault!) wishhed to avoid bankruptcy. They could have decided differently, but even the new, legally elected (it's a PARLIAMENTARY democracy!) government still doesn't wish to do so. So, the troika supported Greece with credits, but of course only under the condition that the systemic problems that led to the misery will be solved. It should be self evident that reforms are necessary, since without changes new credits would only recreate the same old bubble!

    Of course, this led to the government slashing many of the overblown and unsustainable expenses. And also to a tax increase. The problem with that is that the politicians only engaged the easy targets, the burdened the working class (who can't escape taxation) even more, but didn't effectively syphon the rich, which were alllowed to bring their money out of the country instead. For this, the totally screwed up administration is to be blamed, too, but the political leadership didn't dare to fight the corruption and inefficiency there yet. Only temporary workers unfairly became the victims of administrative "reform", without any regard to their performance at the job. Also, the government shied away from privatizing state assets, even though those 50 billions coould have been used to buy up to 160 billion Greek bonds (trade at 30c/€) and seriously reduce the debt burden. Virtually nothing happened, and those assets constantly lose value in the recession. it's a scandal.

    All those socially unbalanced actions and inactions led to a dire decrease of domestic demand, worse than in other nations who engaged in similar reforms. But both the politicans and the people mostly blame the troika for that, as if reforms were unnecessary, and as if it wasn't the screwed up implementation that made the mess much worse! A shocking case of collective delusion.

    But still, the facts remain the facts, and they are:
    - Only fiscal responsibility is sustainable in the long run.
    - Stimuli are a good idea to stabilize an economy during a downturn, but they shouldn't be applied during boom years (like Greece did) and you can't use them when you run a deficit and exhausted your credit line.
    - Competiveness doesn't only depend on wages, but also lots of other important factors (infrastructure, education, quality of government, etc) and a nation that has huge structural problems in those fields has to address them. Stimuli don't work as a replacement for reforms.
    - A political culture where the politicians essentially buy their elections with favors to their constituency is not stable in an enconomical crisis and has to be changed, by pressure from the outside or (preferrably) from the inside.
    (to be continued)

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    Replies
    1. No I never did say that.

      I am arguing that the act of creating a Monetary union with a its own central bank has created this illusion. I agree with you that the German government did not feed this illusion. German voters were right to be suspicions of the union prior to entering (given their unification experience).

      Nor am I attacking the German people. Indeed I think that one part of the crisis is the sacrifices (keeping real wages low and Germany's working poor) that Germans made prior to and following the formation of the Euro. I made an earlier post on this: "Unfair for one, unfair for all"

      I'm attacking the failed ideology behind the European project and Euro leaders inability to deal with it. Germany happens to be a key player. Its in an awkward position.

      I would also dispute how much of parliamentary democracy Greece really is, but I agree with your view of the political culture. This cannot not be changed from the outside - there are questions concerning the underlying motives of the Trioka and because of Greek history). The change has to come from within.

      I agree with some of your other points - but some of your fact are opinions. Basically, while we agree on microeconomics, we disagree completely with respect to macroeconomics and economics of development - which you can find else where on my posts.

      And also, of course, we disagree on Budget Balance indiscipline being the cause, rather than being a symptom of the euro crisis

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  3. Now, who's to be blamed for the sad state of affairs in Greece? Certainly the politicians and the powerful interests, and to a large degree the voters, too, since they tolerated this irresponsible situation for way too long. But other European governments did only pay a minor role (by not vetting the Eurozone candidfate thoroughly enough), if at all. After all, foreign nations shouldn't engage in regime change in a country, and neither should do intelligence gathering on the state of its economics and politics. the European Union necessarily has to rely on trust and confidence that all member nations will act responsibly. Or else it would have to become a centralized police state with total control of the citizen. Wo wants that?

    So, excuse me pls, but imho the fingerpointing at other EU governments is not only unfair, but also diverts attention from the very real issues and offenders. And if other Europeans are painted as scapegoats by the Greek, this will only make them less inclined to offer more solidaric help. But when all is said and done, it's still the Greek people who decide on their own fate. It's their choice, and they will have to live with the consequences. If they want change, they have to work to make it happen, the EU can't do that for them!

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