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I'm wary of Greeks bearing debts

by Colman Thu Feb 11th, 2010 at 07:01:13 AM EST

The media are widely reporting that today's EU "Informal meeting of the Heads of State or Government" will be focusing on how to effect a rescue of the Greek economy, which seems to have been left in tatters by the previous right-wing government who manipulated statistics to hide the damage until after they left power.

I feel we should be covering Greece's problems and the possible solutions much better - this could be a pivotal time for EU economic governance - but I haven't been able to make the time to disentangle the layers of propaganda that are being woven around it. Is anyone able to explain it to me?


Display:
I've been able to determine that everyone says the Greeks are in big trouble, and that someone needs to come and save them, but beyond that it's all getting lost in the fog of ideological war.
by Colman (colman at eurotrib.com) on Thu Feb 11th, 2010 at 07:23:45 AM EST
Quidquid id est, timeo Danaos et debita ferentes...

"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char
by Melanchthon on Thu Feb 11th, 2010 at 06:36:11 PM EST
[ Parent ]
No one is going to save a country which has 8 times as many teachers per pupil as Finland and where everyone retires at 61 with 89 % of their finishing salary. Methinks they need a massive austerity reform, just like we had back in 1991-1994.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Fri Feb 12th, 2010 at 12:59:04 PM EST
[ Parent ]
When I was in Athens about 4 years ago,  A woman I was talking to was saying that paying for the Olympics had pushed up local taxes, and was going to result in higher taxes for 20 years. She also said that this was on the reported costs and that "everybody knew" that the actual costs had been massaged and at some point the real costs would emerge when another government took power. It appears that it wasn't just being done with the Olympics, but with other parts of the Government budget.

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Thu Feb 11th, 2010 at 07:44:50 AM EST
In London will this mean that the true costs will emerge when Cameron takes over, or when his successor does?
by gk (gk (gk quattro due due sette @gmail.com)) on Thu Feb 11th, 2010 at 07:47:36 AM EST
[ Parent ]
I presume when Ken Livingston wins again in London. (It'll be just like old times, Red Ken running London and the Tories in power) so that Labour can be held responsible for all of the problems. and of course it will be the Olympics rather than the city responsible for the financial crisis

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Thu Feb 11th, 2010 at 07:53:30 AM EST
[ Parent ]
That was the pattern in Mexico for years. A five year term for a president and the first thing the new president did was to update and acknowledge all of the bad economic news that had accumulated under his predecessor, and that was when the presidents were all from the PRI, the only ruling party for 50 years.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Feb 11th, 2010 at 12:19:38 PM EST
[ Parent ]
Red Herring. Even doubling the stated costs, you're talking a miniscule amount.
by Upstate NY on Thu Feb 11th, 2010 at 03:30:30 PM EST
[ Parent ]
  1. how some banks and funds have apparently specifically bet on Greek debt (through CDSs) and have a vested interest in things happening with that debt (altough what exactly is not necessarily clear);

  2. how financial players that we bailed out (analysts in investment banks), or that caused the earlier crisis by their incompetence (ratign agencies) are allowed to lead the narrative on economic policies today;

  3. how everybody accepts as a fact that Greece defaulting would cause a crisis for the euro. Why should Greece defaulting be embarrassing for Germany? (see point 2) above again);

  4. how the economic debate on recovery (not really happening yet as jobs are still being lost) has been hijacked by the debate on public debt and deficits;

  5. how somehow the only way to cut debt and deficits is to cut social services or spending, and not to increase taxes or change economic policies.

It's a full scale exemple of the Anglo Disease. It's a contagion of the minds.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Feb 11th, 2010 at 08:04:50 AM EST
The fog of war I mentioned ...
by Colman (colman at eurotrib.com) on Thu Feb 11th, 2010 at 08:32:52 AM EST
[ Parent ]
Would it be possible to find out information about 1)?

Money is a sign of Poverty - Culture Saying
by RogueTrooper on Thu Feb 11th, 2010 at 09:35:15 AM EST
[ Parent ]
how some banks and funds have apparently specifically bet on Greek debt (through CDSs) and have a vested interest in things happening with that debt (altough what exactly is not necessarily clear);
Oh, it's apparently worse than that!
According to Eurointelligence's translation of Der Spiegel's story: 'Greece's debt managers agreed a huge deal with the savvy bankers of US investment bank Goldman Sachs at the start of 2002. The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period -- to be exchanged back into the original currencies at a later date.'

...

'But in the Greek case the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than  the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion [£642m] for the Greeks.'

This credit disguised as a swap didn't show up in the Greek debt statistics. The reporting rules at Eurostat -- the European Commission agency for statistics -- don't comprehensively record transactioins involving financial derivatives:'The Maastricht rules can be circumvented quite legally through swaps,' says a German derivatives dealer.



En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Feb 11th, 2010 at 12:28:49 PM EST
[ Parent ]
And this debt is not repudiated as being an illegitimate circumvention of the EU accounting rules because?

I mean, clearly Goldman knew what they were doing here: Aiding and abetting a debtor in fooling the rest of the world (read: his other creditors) into thinking that hid debt was smaller than it really was. Why shouldn't they be punished for this disservice?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Feb 11th, 2010 at 02:28:56 PM EST
[ Parent ]
National Review: The Trojan Horse Meets the Vampire Squid
A little background: Governments in the European Union cannot just go borrowing money willy-nilly, at least in theory. Under the terms of the Maastricht treaty, which established the European Union and led to the creation of the euro, EU states are supposed to keep their government deficits below 3 percent of GDP, and total government debt is not to exceed 60 percent of GDP. Greece has never been particularly good about meeting its Maastricht obligations, but even the Mssrs. Magoo in Brussels could not ignore Athens's profligate ways forever. So the Greeks needed a way to borrow some money without having to issue bonds or engage in other conventional debt-financing measures that would put the debt on the national books.

...

As the Spiegel reports, Goldman simply made up exchange rates, which allowed the Greeks to swap an amount of one currency for a different amount of another currency -- taking about $1 billion out of the transaction. This money will have to be paid back, but it did not show up on the books as sovereign debt. There's nothing illegal about that, but there's plenty that's sneaky. The European authorities do not keep a very close eye on financial derivatives of this sort, so this Trojan Horse financing didn't show up for some time.

Greece isn't alone in doing this: Italy apparently has been doing this for years. Felix Salmon reports that Goldman helped create something with the deliciously Wagnerian name of Aries Vermoegensverwaltungs to help Germany hide some sovereign debt. And the guys at Goldman Sachs are no fools: They sold those Greek swaps to a Greek bank back in 2005.

This is fantastic - considering that a cross-currency swap is the same thing as exchanging a bond in one currency for a bond in another currency, the fact that a bond shows up as debt and a swap doesn't is just stupid. But stupid is as regulator does.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Feb 11th, 2010 at 02:53:07 PM EST
[ Parent ]
taking about $1 billion out of the transaction

That's about 1/3 of 1% of Greece's GDP, FWIW.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Thu Feb 11th, 2010 at 03:33:21 PM EST
[ Parent ]

 the fact that a bond shows up as debt and a swap doesn't is just stupid.

Today, banks are still allowed to book the net present value of (plain vanilla interest rate) swap margins going into the future as immediate revenues and profits.

The "DOP" (day one profit) from interest rate swaps are the single biggest source of profits for banks in most of their lending activities. These swaps are very basic exchanges of fixed rate interest payments vs variable rate payments; this is probably the single most liquid market of all and it did not suffer during the crisis; the "swap curve" tells you at any time what's the market rate for a fixed rate loan of a given duration. What banks are booking are the margin on top of the swap rate that they charge to clients; given that in principle the swap rate is neutral, this is indeed a source of income, and profit, for the banks, but it does suppose that the counterparty will not default or the market will not be transformed; more importantly, these profits will only be paid out over time, and are not cashed in today - butt hey are  counted as profit today in the banks' accounts.

On my offshore projects, that margin bears the same risk than the construction financing itself; we certainly do not book the interest we expect to get in one year's time, let alone in 10 years' time, but the swap guys do...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Feb 11th, 2010 at 04:03:22 PM EST
[ Parent ]
given that in principle the swap rate is neutral, this is indeed a source of income, and profit, for the banks, but it does suppose that the counterparty will not default or the market will not be transformed

The swap rate is hedgeable, not neutral. Well, it is "risk-neutral". And the assumption is that the market will evolve towards the forward rates, which is not observed and would lead to absurdly high interest rates if it did happen.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Thu Feb 11th, 2010 at 04:08:48 PM EST
[ Parent ]
Why shouldn't they [Goldman] be punished for this disservice?

Because they are very savvy businessmen.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Fri Feb 12th, 2010 at 01:02:38 PM EST
[ Parent ]
EU president Herman Van Rompuy has announced a deal has been reached to help Greece cope with its deficit crisis.

Mr Van Rompuy emerged from two hours of intense negotiations in Brussels to say, alongside German Chancellor Angela Merkel and French President Nicolas Sarkozy, that they were joining a full summit of EU leaders 'to announce the deal that we have reached'

Mr Sarkozy and European Commission President José Manuel Barroso nodded but refused to expand when pressed on the detail of their accord.

The euro zone will take coordinated action if necessary to safeguard the financial stability of the single currency area, President Herman Van Rompuy said.(RTÉ)

by Colman (colman at eurotrib.com) on Thu Feb 11th, 2010 at 08:05:26 AM EST
I would like to have our Greek friends' point of view. I hope talos will write a diary about it.

Meanwhile, I find this graph shows the limited correlation between the level of debt and the markets' actors opinion (as seen through the CDS spread).


(click to enlarge)

Also I doubt we have a clear idea of the real level of public debt in most of the countries, especially given the components of the public debt must vary from one country to the other. I suspect it would require the kind of deconstruction/reconstruction we did for the employment figures. Does the public debt include sub-national public entities (US states, French regions...)? How is included quasi-public debt (i.e. in the USA, the huge debt of the GSE (Fannie Mae, Freddie Mac, Ginnie Mae...) ?

"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char

by Melanchthon on Thu Feb 11th, 2010 at 08:27:49 AM EST
This is a debate about the stories being told about statistics that are semi-attached to the real economy.

We all know GDP is a crock and that government debt figures are distorted in all sorts of ways. So we compare one to the other and it's a disaster? There is no reality there, is there? It's all about perceptions - Belgians are hard working and Protestant, so their debt is good, but Greeks are lazy and Mediterranean, so their debt isn't.

by Colman (colman at eurotrib.com) on Thu Feb 11th, 2010 at 08:57:54 AM EST
[ Parent ]
Belgians are hard working and Protestant,

Wait until the bankers discover that the Belgians are (nominally) Catholic and their debt collapses....

by gk (gk (gk quattro due due sette @gmail.com)) on Thu Feb 11th, 2010 at 09:04:58 AM EST
[ Parent ]
Huh. I never get these things right. I thought France was largely Protestant until recently for some reason.

I should just have said "hard working and white".

by Colman (colman at eurotrib.com) on Thu Feb 11th, 2010 at 09:08:55 AM EST
[ Parent ]
I sure hope you haven't made that mistake in Ireland...
by gk (gk (gk quattro due due sette @gmail.com)) on Thu Feb 11th, 2010 at 09:10:18 AM EST
[ Parent ]
will be blamed on the profligate French speaking part, which absorbs heavy social transfers from the hard-working Flemish part.

There, we're back in the narrative.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Feb 11th, 2010 at 09:39:41 AM EST
[ Parent ]
The top portion of the graphs is the increase in CDS prices since the beginning of 2010. The bottom portion is the change in total public debt since 1999 (ie over a period about one hundred times longer).

Very bad graphic.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Feb 11th, 2010 at 09:38:13 AM EST
[ Parent ]
Thanks. I was wondering how Ireland's CDS spreads could be so static as the debt was exploding.  Talk about a graphic being misleading...

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Feb 11th, 2010 at 10:22:43 AM EST
[ Parent ]
So looking at that graph, apart from the pink lines at the end , there's no reason for Greece to be in dire straits, before the pink I assume projected section, government debt was actually decreasing over the years and show a much better ability to restrain government finances than any of the quoted non-eurozone

The US, UK and especially Japan look much more likely to have a financial crisis than Greece or any of the other nations quoted

Any idiot can face a crisis - it's day to day living that wears you out.

by ceebs (ceebs (at) eurotrib (dot) com) on Thu Feb 11th, 2010 at 09:58:29 AM EST
[ Parent ]
In Anglo-land, you lose a good few credit rating points just for being foreign.
by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Feb 11th, 2010 at 01:22:58 PM EST
[ Parent ]
has a pretty explicit article: A Greek crisis is coming to America:


Yet the idiosyncrasies of the eurozone should not distract us from the general nature of the fiscal crisis that is now afflicting most western economies. Call it the fractal geometry of debt: the problem is essentially the same from Iceland to Ireland to Britain to the US. It just comes in widely differing sizes.

What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not "save" us half so much as monetary policy - zero interest rates plus quantitative easing - did. First, the impact of government spending (the hallowed "multiplier") has been much less than the proponents of stimulus hoped. Second, there is a good deal of "leakage" from open economies in a globalised world. Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect

I don't like his snide comment about "Keynesian free lunches" and I think he is wrong here in that the monetary easing worked ONLY because governments were able and willing to take on that debt burden and step in to replace incapacitated private sector actors. Without public borrowing (and spending), there would have been no borrowing at all and a much more savage crunch.

But he's right that it was still a new pile of (public) debt to try to limit the impact of too much (private) debt in the first place.

And he makes this point about the US:


Although the US household savings rate has risen since the Great Recession began, it has not risen enough to absorb a trillion dollars of net Treasury issuance a year. Only two things have thus far stood between the US and higher bond yields: purchases of Treasuries (and mortgage-backed securities, which many sellers essentially swapped for Treasuries) by the Federal Reserve and reserve accumulation by the Chinese monetary authorities.

But now the Fed is phasing out such purchases and is expected to wind up quantitative easing. Meanwhile, the Chinese have sharply reduced their purchases of Treasuries from around 47 per cent of new issuance in 2006 to 20 per cent in 2008 to an estimated 5 per cent last year. Small wonder Morgan Stanley assumes that 10-year yields will rise from around 3.5 per cent to 5.5 per cent this year. On a gross federal debt fast approaching $1,500bn, that implies up to $300bn of extra interest payments - and you get up there pretty quickly with the average maturity of the debt now below 50 months.

Unless checked before, the financial markets will turn on the US and the Obama administration quickly, and they will of course want blood, ie severe cuts in Social Security and Medicare.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Feb 11th, 2010 at 08:34:46 AM EST
Everyone has a book to sell, which is my problem with the coverage. Keynes got us into this mess so he can't get us out?
by Colman (colman at eurotrib.com) on Thu Feb 11th, 2010 at 08:43:49 AM EST
[ Parent ]
It solved a first order problem by creating a second order one. People (markets) are behaving as if only the second order problem mattered, and are trying to "solve" it in a way that will re-start the first order problem...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Feb 11th, 2010 at 09:41:00 AM EST
[ Parent ]
There is, as Henry Liu points out, a general and fundamental misconception as to the nature of fiat money. Almost all schools of economics appear to think that it is a debt instrument, when in fact it is a credit instrument more akin to a redeemable share.

Deficit is not remotely a problem if governments actually understand that it is their duty - either individually, or collectively in the case of the EU - to ensure that the credit necessary for a vibrant economy is created - eg by QE or by refinancing existing debt through unitising it - as what is essentially a form of quasi national equity.

There is no reason at all - other than the self interest of the banking industry - why the function of credit creation must necessarily be privatised.

Governments, either directly or through central banks, can and should create public credit ie 'print money'. More to the point, they should not just print it and let it prop up financial asset prices, but they should ensure that it is invested directly - in a process managed by service providers formerly known as banks - into the productive assets which are desperately needed globally. Investing in peoples' health and education is one of the investments necessary.

Private banks are, and will continue for decades to be, systemically short of capital. It's time to transition from private credit intermediation to private management of public credit creation.

The alternative is a Japanese style zombie economy, or worse.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Feb 11th, 2010 at 10:08:13 AM EST
[ Parent ]
Ferguson is first and foremost a historian. He may have studied economics in order to write its history but he has no formal training in the discipline and so, while he can report on the opinions of others with a certain modicum of understanding, his ability to provide any profound analysis of what is obviously a highly complex situation should be considered extremely marginal.

keep to the Fen Causeway
by Helen (lareinagal at yahoo dot co dot uk) on Thu Feb 11th, 2010 at 03:21:35 PM EST
[ Parent ]
He's a propagandist and an ideologue.

I was going to make your same argument but then I realised I would be making "formal training in economics" sound like a net positive when I believe it isn't...

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Thu Feb 11th, 2010 at 03:26:54 PM EST
[ Parent ]
I realised I would be making "formal training in economics" sound like a net positive when I believe it isn't...

rotflmao

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Thu Feb 11th, 2010 at 03:53:14 PM EST
[ Parent ]
I don't like his snide comment about "Keynesian free lunches"

I don't know if he is discussing the Samuelson NCE compatible Keynesian" approach or Keynes. I find virtually incomprehensible condemnation of Keynes so many places, especially financial blogs, that it is pathetic and I suspect they think Samuelson invented Keynes. And Keynes' critics never seem to distinguish between the uses to which borrowing is put. Perhaps they don't see any difference in new debt to prop up bad debt held by banks and new debt used to fund a self-liquidating investment, such as a wind farm. Indeed, the investment folks may prefer using the money to prop up banks, as they expect it would have a higher yield.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Feb 11th, 2010 at 03:26:18 PM EST
[ Parent ]
American governments have acquired a vital interest in maintaining an international pattern or monetary and financial relations which is extremely volatile, unstable and crisis-prone, because it is these features of the international economic system which maintain the vast inflows of funds into New York. And it is in this context that we can see the way in which the big US hedge funds are not an aberration but are rather financial institutions in the (deeply distorted) American national interest. Every international act of hedge fund financial warfare in any part of the world acts like a shot in the arm for the liquidity of the US financial markets, maintaining downward pressure on interest rates and stoking the stock market boom. (Peter Gowan, The Global Gamble, p. 124)

As the Independent reported yesterday:

Analysts said much was riding on how EU leaders responded but those speculators betting on a fall of the euro will have to rush back to the market to cover up their "short" positions to limit their losses.

"If a deal is done and Greece is rescued, we could see a rally because a lot of people are short and they will have to wind up their positions," said Neil Mellor, a Bank of New York Mellon currency strategist.



A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns
by Alexander on Thu Feb 11th, 2010 at 12:49:15 PM EST

Germany, Forced to Buoy Greece, Rues Euro Shift

As Europe edges toward emergency guarantees to stem market panic over one of the most profligate members of the euro bloc, the country that the region turns to for leadership, Germany, is suffering from growing doubts about the European experiment it long championed.

ohhh, [Europe.Is.Doomed™ Alert]


The apprehension in Germany runs much deeper than a single crisis. It comes in the same week that Germany gave up its most cherished title, world export champion, to China, heightening fears of a declining stature and importance globally.

Germany also faces a demographic challenge, managing a population that is not only graying but shrinking. Last month the government announced that the population dropped below 82 million last year for the first time since 1995. That means fewer people trying to pay off a growing national debt, with a projected budget deficit of $118 billion this year.

ohhh [Europe.Is.Doomed™ Alert]

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Feb 11th, 2010 at 12:58:51 PM EST
Good old NY Times...

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Feb 11th, 2010 at 01:35:24 PM EST
[ Parent ]
Another recent classic NY Times "news analysis" was this:
For Kremlin, Ukraine Election Cuts Two Ways.

You see, for the Kremlin, the candidate they wanted to win winning had an upside and a downside. The upside was that Ukraine comes back into the Russian orbit. The downside is that the Ukrainians have shown the Russians that they are capable of democracy (since the pro-US candidate didn't steal the election), something the Russians themselves are not, according to the Times.

Yes, it must be so depressing to be a Russian these days, having to ruminated about how you don't have a vigorous democracy. Russians must be so envious of the Americans in this regard...

A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns

by Alexander on Thu Feb 11th, 2010 at 03:02:39 PM EST
[ Parent ]
Allow me to throw some gasoline on this fire:

Doomed from the start  Billy blog

From the outset, as I have noted in several blogs the initial structural design of the Eurozone was never compatible with a federal arrangement that could cope with large asymmetric shocks. The selection of EMU nations never formed an optimal currency area despite the bevy of lackey economists who wrote a plethora of mathematical papers purporting to "prove" that it was. Please see the blog - España se está muriendo for a detailed discussion on that specific aspect of the EMU debacle.

Not having an OCA was one thing. But then the neo-liberal ideologues entered the fray, driven in part by political prejudices that go back into time (particularly World War 2), and conjured up the Stability and Growth Pact (SGP). The restrictions imposed by the SGP were claimed to reflect economic sense but there is nothing in any economic theory that tells us that the design principles of the SGP were optimal.

In fact, from the perspective of modern monetary theory (MMT) the 3 per cent budget deficit to GDP rule is nonsensical. It would be an extraordinary coincidence for a 3 per cent ratio to be consistent with full employment - that is, taking into account the saving preferences of the households and the trade accounts for each country.

In a 2006 book I published with Joan Muysken and Tom Van Veen - Growth and cohesion in the European Union: The Impact of Macroeconomic Policy - we showed that it is widely recognised that these figures were highly arbitrary and were without any solid theoretical foundation or internal consistency.

The current crisis is just the last straw in the myth that the SGP would provide a platform for stability and growth in the EMU. In my recent book (published just before the crisis) with Joan Muysken - Full Employment abandoned - we provided evidence to support the thesis that the SGP failed on both counts - it had provided neither stability nor growth. The crisis has echoed that claim very loudly.


At least Bill Mitchel is not a neo-liberal, but he does use undefined acronyms. I don't know what he means by an OCA. But he does provide a wealth of alternative views. More below:
As a result of the establishment of the European Central Bank (ECB), European member states now share a common monetary stance. The SGP was designed to place nationally-determined fiscal policy in a straitjacket to avoid the problems that would arise if some runaway member states might follow a reckless spending policy, which in its turn would force the ECB to increase its interest rates. Germany, in particular, wanted fiscal constraints put on countries like Italy and Spain to prevent reckless government spending which could damage compliant countries through higher ECB interest rates.

The indisputable empirical reality is that the EMU countries have never got close to achieving full employment in the period they have had to succumb to the SGP. And the blowout in unemployment in some nations during the crisis is certainly clear evidence that the SGP is incapable of attenuating the magnitude of a serious crisis.

There is a very interesting article published by Lars Jonung, Eoin Drea in the January 2010 edition of Econ Journal Watch, 7(1), 4-52 entitled - It Can't Happen, It's a Bad Idea, It Won't Last: U.S. Economists on the EMU and the Euro, 1989-2002.

It examines how US economists viewed the development and implementation of the EMU from the time of the Delors Report in 1989 through "to the introduction of euro notes and coins in January 2002″. They trace the evolution of ideas on whether the system would work. Most "were skeptical towards the single currency" although they "adjusted their views as European monetary unification progressed."

I don't agree with its conclusions but it is an interesting methodology (tracing the evolution of argument) and many of the skeptical comments were prescient.


I did not copy the many links he provides in the original.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Feb 11th, 2010 at 01:00:48 PM EST
When the euro first debued  around 1999 the exchange rate was 1.17 usd  to buy one euro. About two years after that you could buy a euro for about 85 American cents. Then a long period of strengthening of the euro over several years led it to about 1.50 usd to buy one euro which was about two months ago. Today it takes 1.37 usd to buy a euro.

So, what's the big deal?

Assuming that the rate of exchange the rate of exchange reflects the soundness of an economy it seems like the eonomies of the eurozone are in a hell of a lot better shape than the economy of the U.S. And I'm guessing that a tour of the 50 states of the U.S. compared to the countries of the eurozone would substantiate this.

Hey, Grandma Moses started late!

by LEP on Thu Feb 11th, 2010 at 01:30:36 PM EST
[ Parent ]
When the euro first debued  around 1999 the exchange rate was 1.17 usd  to buy one euro. About two years after that you could buy a euro for about 85 American cents.

The Euro lost value as long as it didn't circulate. When it became a currency rather than just a unit of account, it started going up.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Thu Feb 11th, 2010 at 01:34:45 PM EST
[ Parent ]
It was about a year after it's beginning of circulation on Jan. 1, 2002 that the euro really started its long climb v. the usd. But the fact of its circulation was not the reason for its rise. It was the unsound economic policies of the Bush/Greenspan regime.

Hey, Grandma Moses started late!
by LEP on Thu Feb 11th, 2010 at 01:58:26 PM EST
[ Parent ]
Mitchell is post-Keynsian, if any label would stick, and his concern, as I read it, is less about exchange rates than about employment rates. From his point of view the Stability and Growth Pace, which seeks to constrain budget deficits to 3% is incompatible with the needs of the Mediterranean countries to provide adequate levels of employment. I suspect his recommendation would be to allow certain countries to run higher deficits, but how this is to be reconciled with other requirements, such as reasonable bond rates, I have no idea. I can see that we all are likely to be in trouble if we let the bond traders run fiscal policy through the rest of this crisis, but that is likely to be the ends towards which much policy is directed.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Feb 11th, 2010 at 04:01:22 PM EST
[ Parent ]
it seems like the eonomies of the eurozone are in a hell of a lot better shape than the economy of the U.S.

Mitchell is an Australian and like Keen he keeps a close eye on the USA mostly because it is the 800 lb gorilla. He is definitely not partisan of US interests.

I agree that many, perhaps most, economies and societies in the eurozone are in much better shape than the USA, if taken as a whole and if the counter-cyclical effects of social welfare programs are considered. But as we have repeatedly seen on ET, there is a lot of NCE mind capture amongst governing elites.

Given that the current problems with Greece, Spain, Portugal, Ireland and, probalbly next, Italy appear largely to consist of trees being shaken by powerful financial corporations, such as Goldman Sachs. But it is precisely such powerful financial corporations that "Anglo Disease" NCE theories are designed to nurture and protect. Unless governments intervene Greece and other countries might not just get shaken down, the trees could be broken as well.

To make matters worse, apparently GS has sold the CDOs they wrote around the debt with which they fitted Greece out to Greek banks. Perhaps they have also sold short some of these instruments. I agree with MFM that the speculators, especially GS, need to get the living shit burned out of them. One way might be to declare the CDSs unenforceable due to fraudulent conveyance or other pretexts and then let Greece default on the loans. Not total repudiation but perhaps a 30% haircut. The important thing is that more pain falls on GS and other financial institutions than on the bottom 90% of the Greek population. If they blew up GS that would be a very good thing from my point of view.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Feb 11th, 2010 at 04:23:46 PM EST
[ Parent ]
Yes. I've been dreaming about how Europe can stick it to GS and friends. But that might bring the UK down ;)

Hey, Grandma Moses started late!
by LEP on Thu Feb 11th, 2010 at 04:34:19 PM EST
[ Parent ]
But that might bring the UK City down ;)

Fixed it.  Then the rest of the country could breathe.   :-)

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Feb 11th, 2010 at 05:02:58 PM EST
[ Parent ]
he does use undefined acronyms. I don't know what he means by an OCA
The selection of EMU nations never formed an optimal currency area despite the bevy of lackey economists who wrote a plethora of mathematical papers purporting to "prove" that it was. Please see the blog - España se está muriendo for a detailed discussion on that specific aspect of the EMU debacle.

Not having an OCA was one thing.

EMU is European Monetary Union, the precursor to the Eurozone.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Feb 11th, 2010 at 01:38:24 PM EST
[ Parent ]

It is interesting that Denmark, which did not enter the EMU, maintained strong growth in real hourly earnings and has not been damaged nearly as much by the crisis as some of the EMU nations.

Denmark has pegged its krona to the euro. This is a silly argument.


First, the nations' leaders agree to surrender their currency sovereignty - they didn't have to but chose to. They largely mislead their citizens with spurious arguments about optimal currency areas and the rest of the sophistry that the neo-liberal economists happily fed them.

They had no currency sovereignty to start with. Monetary policies were driven by the Bundesbank's already (under the watchful eye of the markets) - today the ECB has policies that are designed for the whole area - somehow nobody remembers when the Germans were complaining that the ECB policy was too tight for them...


Fifth, when the whole things meltdowns due to its design and the German strategy, the nations which are now in extreme crisis are told they have to introduce harsh pro-cyclical fiscal policies to savage living standards of their citizens.

As if the current crisis had anything to do with the eurozone and was not caused by the global meltdown and, now, worries about public debt started in the US and UK that somehow end up blaming the Greeks and the euros.

So, bah.

Again: don't trust anything written in English about Europe or the euro.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Feb 11th, 2010 at 02:45:20 PM EST
[ Parent ]
The Nordics in the global crisis | VoxEU
The Nordics have all had different monetary regimes since the euro. Given their similarity in other respects, a comparison of Finland and Sweden is especially interesting. It is almost a laboratory experiment. Sweden has a floating exchange rate and an independent central bank geared to price stability, while Finland is part of the Eurozone. Who has made the better choice?

The krona was mostly stable and developments in Finland and Sweden were strikingly similar during the first decade of the euro. Once the crisis erupted, however, the krona fell significantly relative to the euro, thereby strengthening the price competitiveness of Sweden relative to Finland and the euro area. One might expect this to help Sweden come through the crisis at less cost than Finland, arguably benefitting at the expense of its neighbour by capturing market shares.

The decline in exports and output in 2009 was indeed smaller in Sweden than in Finland, and GDP growth is forecast to be somewhat faster. However, the differences do not seem large. Also, manufacturing output shows little response to the change in competitiveness, and unemployment is rising in parallel with developments in Finland.

Either the effects of the improved competitiveness are relatively modest or the lags are long, or a depreciation of a floating currency has less effect on export and output volumes than a devaluation of a pegged currency used to have. What is clear is that the floating exchange rate does not insulate an economy from external shocks, and the economic differences between the two exchange rate regimes seem smaller than often claimed in the heated debate about the Eurozone.



"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char
by Melanchthon on Thu Feb 11th, 2010 at 04:28:08 PM EST
[ Parent ]
That's only because Sweden is a net exporter.

If it were a net importer, Sweden's foreign debt would have blown up with the falling Krona.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Thu Feb 11th, 2010 at 04:32:03 PM EST
[ Parent ]
Yes, but what they say is, despite being a net exporter, the falling Krona didn't boost the Swedish economy as the dominant theory narrative claims...

"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char
by Melanchthon on Thu Feb 11th, 2010 at 05:12:01 PM EST
[ Parent ]
Denmark has pegged its krona to the euro.

And, more importantly, so has the Bundesbank.

The DKK is overvalued (based on my experience with the relative purchasing power of DKK and €, it should be trading at roughly €:DKK 1:10 rather than 1:7.5) and we have a structural current accounts problem, so it's not so much a case of Nationalbanken pegging to the € as the Bundesbank guaranteeing the DKK.

(Of course the picture is complicated somewhat by the oil revenues which permit us to maintain what looks like a balancing foreign trade when we are actually selling out our assets hand over fist.)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Feb 11th, 2010 at 06:54:34 PM EST
[ Parent ]
Sorry for the massive post, but--if I may be so bold as to suggest--the small size of Greece's economy as well as its lack of diversification is actually a good thing in the middle of this crisis. And indeed, the structure of its economy may make workers less willing to bear the brunt of the cuts. Greece is not a failed state, economically, as much as it is a state hurt by its own profligacy and a global market system it was not prepared to compete in. In this respect, Greece is more like Argentina than, say, Haiti.

Over 50% of the Greek economy relies on tourism and shipping, external industries both very susceptible to recessions. But it does mean that Greece does have a natural means to bring money into the country OTHER than foreign investment or local industries competing against the world (Greece has an abysmal lack of foreign investment and its industries hardly compete ESPECIALLY after entering the Eurozone).

Greeks got a stable currency, great rates for borrowing, and lots of infrastructure (bridges, airports and subways) since joining the Eurozone. Lots of money went into these projects and all three of them were undertaken by German contractors. That's the bonus of joining. The problem has of course been currency swaps that racked up prices and forced normally non-indebted Greeks to go into debt. And still, the rate of private debt in Greece is at 50% which is much lower than the rate in the UK and Spain. The recession should presumably hurt banks a lot more in those countries since Greece's decline is not as bad and the private sector owns less. Greece fails, however, because of its massive gov't deficit which exceeds all but one country in the zone, and this deficit coupled with the second highest gap in the current year (which of course drove up the interest on the bonds needed to service that debt).

Without a doubt, Greece has created many of its own problems (statistical reporting, inability to align federal bureaucracy with budget reality, corruption and failing tax system) but one wonders if the system itself would have inevitably produced the same problem for Greece. In the midst of a recession, tourism and shipping went south. Because of the Euro and the EU's rather loose monetary policy (I'm referring to a lack of integration between economies), Greece is not able to devalue currency nor is it able receive EU handouts as per the Maastricht Treaty. This produces negative effects for the economy.

As I see it, the options for the EU are to integrate the poorer countries more with a strong eurozone (meaning more German and French taxpayer money to the poorer areas) or else to cut the poorer areas loose.

Check out this story on who owns most Greek debt:

http://www.guardian.co.uk/business/2010/feb/11/greece-debt-france-switzerland

This could be another Lehman-like scenario.

I found this article to be among the best to describe the situation from a Greek perspective:

http://www.independent.co.uk/news/world/europe/sick-man-of-europe-seeks-remedy-from-wary-neighbours- 1895831.html

As for my own cynical perspective, I just see more neo-liberal economics at work.

First, it should be noted that the EU invoked new powers under Article 121 of the Lisbon Treaty, allowing it to reshape the structure of pensions, healthcare, labor markets and private commerce in Greece (the first time this power was invoked).

Note the broad new powers the EU is assuming in this case, the power to take over Greece's economy and install austere fiscal measures. The new powers make me wonder about the set of economic circumstances that brought this about, what percentage of it is Greece's fault for corruption, fudging statistics, tax evasion, etc., and how much of it is an attack on social welfare systems in general. Rich countries can afford them, poor countries cannot. Is there a political will in Germany to pay for Greek social welfare? In a closed system such as that in the USA, we see richer states such as New York (itself highly taxed, itself heavily in debt, itself with many problems) shelling out $2 to the Feds for every $1 it gets back, and its the reverse in poorer states. A lack of such support would be problematic. From my understanding of the EU, this is not happening because the political will isn't there. There are structural funds of course moving from net-donor states to the poorer states, and Greece has been a huge recipient of structural funds in the past. No longer since 2004 of course, since Greece now has a higher standard of living than Baltic and Balkan states.

To reiterate, Greece's economy was always susceptible to recessions because of the lack of diversification. Its biggest industry shipping  accounts for almost a third of Greek GDP, and last year it saw day rates for Cape and Panamax vessels (Greek companies own the largest fleets in the world) drop from $135k a day to less than $10k a day, which forced the shipping companies to keep their ships in drydock (because not shipping was cheaper than shipping when you consider the costs of fuel and repairs) while still paying their unionized sailors and longshoremen. Next for Greek GDP is tourism at about 20%, and that too has fallen off the cliff (mainly due to the recession), followed by agriculture (cotton, dairy, citrus, olive oil, etc.) and banking. With this lack of diversification, a recession can make a budget look painful.

But there are additional reasons Greece is hurting that have nothing to do with a recession. In this light, a recession is a great tool of fear for restructuring, and Greece certainly needs that. The gov't is indeed trying to capitalize on the crisis. Greece was always a poor country in the EU, and other than its shipping industry which could bring back hordes of funds, it maintained competitiveness through cheap labor and cheap tourism. Greeks forever complained that they could not see the world because the drachma exchange rate allowed them to travel to Bulgaria or Turkey at best. Then came the Euro, and overnight Greece lost its edge. Budget travelers stopped coming when they could get what they wanted (sun & sand) in Turkey anyway. Labor and materials were no longer cheap. Fledgling industries vanished overnight. An already poor country was losing competitiveness to even poorer countries far afield. On the other hand, the Euro was a blessing for Greeks since money came pouring in from EU coffers for structural improvements (i.e. Greece's infrastructure improved greatly with new roads, a huge bridge spanning the Peloponnese and Mainland, a subway system for Athens, etc.) but along with new infrastructure came high costs for basic needs. As the Greeks were losing competitiveness, they could not adjust so quickly to the higher cost of living, and then something unheard of in Greece occurred: families went into debt, bank debt and especially credit card debt, because the change in the standard of living had been so swift (Greeks passed down homes through families for generations, and home ownership in the country has been at something like 85% for a century now). Essentially, the EU promised Greeks that they would modernize the country and give it the tools to compete in a more skilled economy, but the change happened so quickly that the reactions of everyday people were unforeseen. Previously seen as a quirky backwater, Greece held a sunny disposition before the Euro, but afterwards, without being able to control its own currency, it had to compete against the best of the best. The people were not ready.

The key, however, is that wholesale shifts in the standard of living, and a lack of training (i.e. education) for the global economy, forced a change overnight. Now they have a form of shock therapy on people's psyches and their physical sense of well being (the Greek diet has changed overnight from one of the healthiest diets in the world to one of the unhealthiest, from fresh organic foods to processed foods). The Greek wealthy, like the wealthy everywhere, did well in the last decade. As the citizens took on higher loans to maintain their standard of living, the rich made exponential profits. The problem Greeks face now is that the government is trying to deliver some hard news about the realities of the global markets. The Prime Minister complains that Greece has been attacked by speculators--and he's right. The problem is that, when banks and so-called investors are involved in the greater part of your economy, you cannot give them a reason to attack you and create the kind of psychological doubts (really, warfare) that will make you vulnerable. Greece has given the speculators ample ammunition, by fudging statistics and losing control of their social security system. When you enter this global market run by bankers, you must protect your flank. You must cut the social welfare system, because the race to the bottom is swift. So, austere measures will be taken, at the EU's behest. People will lose jobs, have their pensions cut, salaries cut (and these are the measures the people have already grudgingly agreed to, the EU has a lot more austerity in mind).

But the EU may yet be surprised by the eternal Greek stubbornness, because the Greek people are not stupid and they know very well what has befallen them. They will protest, and the EU will be left to wonder if dictates from Brussels will actually be followed by the people.

One wonders how much convergence with global markets and the world economy is really pre-planned by our banking system. Those who are lucky enough to get a great education may escape this central fact of middle-class life in the EU and the USA: average salaries for workers are dwindling and have been for a decade.

In the USA, the recession will create an ever bigger gap between not only rich and poor, but between an ever smaller middle class and a quasi-permanent underclass competing for work with 3rd world nations. When you see our prison population, our impoverished, our unemployed, and you realize the huge number of people that have been added to those classes, it becomes increasingly obvious that a social safety net in America is harder to maintain. Indeed, my thesis is that global markets practically dictate that our social system is dismantled, that a new division between working classes be created.

The power grabs, the shift of labor and capital, it all seems so darn preplanned that it takes my breath away. Did they need a horrific recession to do this? Probably, after all, listen to all the people going on and on about taxes and spending. I'm not saying it was purposely triggered, but I do think the plans were already in the vault to take advantage of the chaos. Kind of like how the plans for Iraq preceded 9/11.

by Upstate NY on Thu Feb 11th, 2010 at 04:16:12 PM EST
outstanding analysis!

way too pithy for just a comment. utterly diary-worthy...

Thanks indeed.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Thu Feb 11th, 2010 at 04:45:00 PM EST
[ Parent ]
I'd like to comment on this:


France and Switzerland most exposed to Greece's debt crisis, say analysts

The French bank Crédit Agricole was singled out by analysts at the research firm CreditSights as being particularly exposed. "It owns Emporiki Bank in Greece, which has been floundering away, and has about €23bn in loans there," Credit Sights analysts said.

This is a local bank, that mainly lends to local clients, and happens to be owned by Crédit Agricole. This has almost nothing to do with Greek sovereign debt! That banks certainly owns Greek government bonds, so does have a bit of exposure to sovereign debt, but it's unlikely to be a large part of its balance sheet.

So the actual exposure of Crédit Agricole here is unknown (there are risks associated with the recession, but Greece's is not worse than elsewhere), and this article is just stupid scaremongering.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Feb 11th, 2010 at 04:51:28 PM EST
[ Parent ]
Thanks Jerome.

Obviously, it's quite difficult to determine what's going on for someone not in the know.

by Upstate NY on Thu Feb 11th, 2010 at 05:06:26 PM EST
[ Parent ]


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