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Craig Willy: Turning Points & Bargaining Power: What primary deficits tell us about the eurozone crisis (November 18th, 2012)
Primary deficits are incredibly important in the crisis' constant negotiation because:

  • A country with a primary surplus, strictly speaking, does not need foreign help. It can theoretically default and not have to institute further spending cuts.
  • A country which can show it has a reliable primary surplus is more likely to benefit from the financial solidarity of other countries (such a guarantee can then in turn reassure financial markets and allow the country to cheaply refinance itself through private lenders).

Primary deficits are then critical to assessing the balance of power between countries and the moment (if ever) at which we will reach a salutary "turning point" in the crisis. ...


Category I: Financial bubbles, high primary deficits and submission to the Core

[Spain and Ireland]

Category II: Primary surpluses and some leeway

[Italy, Portugal, Greece]

Category III: Not in the euro & "fiscally irresponsible"

[Great Britain]

Category IV: Top of the World

[Germany, Austria, Netherlands, Luxembourg]


Germany will continue to set the tune on eurozone policy and the elaboration of the new permanent "federal" structures. France is in a precarious position. Spain has no choice but to submit completely and wholeheartedly to Berlin and Frankfurt's demands, whatever they might be, and it's not even sure then that they will risk helping the country. The rest of the crisis countries - Italy, Portugal and Greece - have achieved much with their efforts and theoretically, with their primary surpluses and the passage of the "Six Pack" and the Fiskalpakt, the way should be open for wholehearted aid by the ECB, with Germany's consent. This would bring down refinancing costs and massively reduce the need for austerity, thus easing them and the eurozone as a whole out of the crisis.

According to this, Spain is a weak point in your argument.

In the Neurozone, there can be only one.
by Migeru (migeru at eurotrib dot com) on Tue Sep 24th, 2013 at 03:58:44 PM EST
[ Parent ]
It would be, if the argument did not confuse sovereign and foreign balances, and if it took account of the calorie and BTU balances of the foreign trade.

As it is, meh.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Sep 25th, 2013 at 01:27:22 PM EST
[ Parent ]
I am glad I read this comment before I read the piece, since at the outset one would think it was discussing current account deficits, but then it turns out it is discussing budget deficits.

It would seem that the main premise applies to whether a nation has a current account surplus aside from external interest rate reparation payments to German and other external Banks, since given the current depressed state of labor markets, nations with current account surpluses post default on external obligations can largely monetize their domestic government deficit.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Thu Sep 26th, 2013 at 03:21:59 AM EST
[ Parent ]
Turning Points & Bargaining Power: What primary deficits tell us about the eurozone crisis | Craig Willy | EU affairs writer

These countries, including Greece, have far more bargaining power relative to the European authorities and the Core. This is because they could, theoretically, default tomorrow on their existing debts and not require any external aid. They would be in no worse a position than they are now and could cease paying interest.

In practice, this is politically difficult because it is frowned upon by the ECB and other euro countries, because it would undermine banks in the rest of the continent. This would no longer be problematic if one left the euro which, while legally problematic, would mean the country regains total sovereignty in monetary and fiscal affairs. The only problem then is "political" (the loss of face for the country as "non-European savages" unworthy of the eurozone and, more speculatively, the fear that this would provoke some kind of return to warring dictatorship).

But if a periphery country would default tomorrow, then ECB would not frown, they (unless they blink, which is a possibility) would no longer accept state debt as collateral, which would mean that banks crash. Or to put it in the articles terms, ECB has the means to destroy that precious primary surplus.

In general the author seems to think that the problem for the countries in the periphery is that they can't fund their public sector, ie the running a state as a business falacy. While the real problem is that while they are running a current account deficit, they can't leave without large immediate pain, and the EPP-PES politicians prefer to kick the bucket down the road while accepting some (ever increasing) pain for the forseeable future.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Wed Sep 25th, 2013 at 04:19:07 PM EST
[ Parent ]
In the case of Greece there is a geo-political card that could be played -- Russian support. Russia could easily supply Greece with oil and gas as well as refined petroleum products if needed, or arrange for them to be supplied. A similar possibility exist with Iran, especially if there is some measure of normalization with Rouhani now in office.

As to banking, during the Civil War in the USA Salmon P Chase arranged a massive loan in gold backed dollars from the big New York banks. Once the loan was granted he demanded the gold, which he withdrew. This put the civilian economy of the US onto a fiat currency basis but gave the US Government the means to finance needed imports of military goods. Foreign exchange became much more difficult for the private sector, which discouraged imports. A year later he created 2% Federal bonds, the purchase of which by banks gave the bank the right to issue bank notes up to the amount of the bond. The Congress also passed a tax on private bank notes. This created the National Banking system which, ignoring the return to the gold standard and the problems of a bi-metalic standard, essentially endured until the Fed became operational in the fall of 1914. It is true that the issue of Greenbacks directly by the Treasury during the Civil War did result in an approximately 50% loss of value compared to gold, but there were many who benefited from this inflation. There are ways a savy Central Banker can deal with FX problems, but I still maintain it would be easier were Greece to be able to help found an alternative currency union operated according to the needs of countries more like itself. Most southern peripheral countries in the Euro would qualify under that definition.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Sep 25th, 2013 at 05:49:47 PM EST
[ Parent ]


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