Home > Uncategorized > Breaking: ECB states that Euro is reversible and not irrevocable

Breaking: ECB states that Euro is reversible and not irrevocable

Why all tis attention for Greece and not for Croatia or Slovenia? Because Greece is where the main battle is fought. But on this blog more attention will be paid to other countries. Anyway: a Greek referendum about the euro is a very good idea – but this might be the worst time to hold one. You can do this when you still have a lot of cash somewhere. Or when you’re already in default. But announcing a referendum when you’re on ELA – it’s not a good idea. Surely when the creditors have one overriding goal: they want you out of government. And they play to win. Which means that you have to kill them. Or lose. Inflicting a wound and crippling them (which surely happened) is not enough.

Some links:

A) Breaking (and I can’t stress enough how important this is): the wound is really deep, as the ECB changed its mind in a fundamental way. Up till now the ECB has been adamant. THE EURO IS IRREVERSIBLE, adopting it is irrevocable. But they changed their mind (and historians of course knew better all the time). Yesterday, an interview with Benoît Cœuré, one of the highest ranking civil servants of the ECB, started with this sentence: La sortie de la Grèce de la zone euro, qui était un objet théorique, ne peut malheureusement plus être exclue. Translation: Grexit can’t be excluded, anymore. See also Charles Wyplosz about this (aside – the eight year non-renewable mandate of ECB board members mentioned by Wyplosz reminds me of proposals made by Hayek about how we should change our parliamentary system – can’t remember exactly where he wrote this).

Some additional links

B) It’s not just about lazy Greek (oops, longest workweek in EU): these guys saw it coming as they look at the Euro institutions:

Wynne Godley in 1992

Milton Friedman in 1997

Paul Krugman in 2010

See also Adam Posen in 2015

All share at least to an extent the same basic analysis. A Monetary Union also needs to be a transfer union (including deposit insurance) and a lender of last resort union. Mind that the Friedman stance which implies that even USA levels of labour mobility and price flexibility are not enough to stabilize the economy on the state level is, at the moment, considered ‘radical left’ in Europe.

C) Barry Eichengreen did not see it coming. And explains why: “Never underestimate the ability of politicians to do the wrong thing. I will try to remember next time.” (He’s talking about Tsipras c.s. but especially about the other politicians). My view: if the ECB had really tried to prevent a bank run it should not have limited the possibilities of Greek banks to raise money on February 4, 2015. From that moment on it was clear that it had the Greek economy in a stranglehold (and the ECB did not exclude Grexit) – a situation a Central Bank should avoid. But maybe Eichengreen sees the ECB civil servants as politicians.

D) Dean Baker has an interesting take. Even when Greece is kicked out of the Euro Area – they can still use the Euro. Imo this however requires a sizeable current account surplus while people and companies also neither should start to hoard money or  wire it abroad. Hmmm… even in a country like Greece with about ten million inhabitants households love to hoard tens and even hundreds of billions of Euro (including saving accounts at banks).

  1. June 30, 2015 at 9:10 am

    Reblogged this on alittleecon.

  2. June 30, 2015 at 1:47 pm

    Are there people in this blog knowledgeable on the Hanseatic League? It looks like our German-inspired Eurozone is attempting to reproduce something similar. A mercantilist club of trading states, essentially in competition with each other and using gold or an equivalent hard currency. The league concerns itself with safeguarding the currency and occasionally punishing states for infarctions, but there is no concept of solidarity or anything beyond open trading routes and competition.

    Is that the Europe that we want?

  3. Blissex
    June 30, 2015 at 2:45 pm

    «Why all this attention for Greece and not for Croatia or Slovenia? Because Greece is where the main battle is fought.»

    Because the greek leftists are sexy and know to make PR.

    Even after a (largely deserved) fall of GDP by 20% Greece has a GDP-per-capita and median income higher than 7 (SEVEN) other EU countries.

    The 7 EU countries with worse standards of living than Greece don’t get attention because they have always been poor and don’t have loveable leftists good at PR as their government.

    Bulgaria, at the bottom, is so poor that Bulgarians even today emigrate to Greece as jobs are more plentiful and wages are higher in Greece.

    But who cares about Bulgarians who haven’t yet borrowed a few hundred billion euros from the germans, and who haven’t like rich greeks a few hundred billions of euros in swiss accounts.

    Also Greece is a bit like relative-poverty porn for the middle classes of richer EU countries: the greek middle classes have tasted the good life thanks to a huge consumer import boom before the crisis fueled by enormous borrowing, and now that boosting imports by borrowing is no longer possible they whine and scream.

    Bulgarians have always been poor, and who cares about that? They never tasted the good life, and they don’t whine and scream about cruel germans no longer lending them the money to enjoy it.

  4. Blissex
    June 30, 2015 at 2:50 pm

    «fall of GDP by 20% Greece has a GDP-per-capita and median income higher than 7 (SEVEN) other EU countries.»

    Currently GDP-per-capita in Greece is 80% of the peak greek GDP-per-capita, and if that is a tragedy, what about GDP-per-capita in Bulgaria that is 50-60% of peak greek GDP-per-capita and has never been that high?

    What about the desperate and poor bulgarians who go to work as exploited and often ill-treated casual workers in today’s Greece?

    • Georgia Pappas
      July 2, 2015 at 2:06 pm

      Since when the comparison is with former communist countries in Europe? I enter these blogs to be informed on economy issues and I find these sort of illogical comparisons that are actually heard on Greek media as well. Bulgaria is a country which became capitalistic after 1990. Greece went through a civil war in order to prevent such fate and is the 10th member of EU for whatever reasons. How long is Bulgaria’s history of economy sizes? After 1990? Later? How are they comparable?

  5. merijnknibbe
    June 30, 2015 at 3:36 pm

    Dear Blissex,

    thank you for bringing up Bulgaria. First, it’s maybe good to read Edward Hugh on the asset boom in countries like Bulgaria, Estonia, Latvia and Lithuania before 2008. It’s not entirely true that Bulgaria did not take part in this pre 2008 lend- and borrowfest http://fistfulofeuros.net/afoe/bells-in-hell-that-dont-go-ting-a-ling-a-ling/

    And look also at my blogpost about current account deficits on this blog. While the Greek current account deficit reached a ridiculous 16% of GDP at its max, the Bulgarian deficit increased to an incomprehensible 26% of GDP https://rwer.wordpress.com/2012/03/02/current-account-deficits-in-europe-5-charts/

    Also, wages in Bulgaria are the lowest in the entire Eurozone, you’re right about that. According to austerian ideology this should lead to rampant growth – but it doesn’t. I’m not sure about the Bulgarians working in Greece but (though I’m surely not an expert on this) as far as I know much more Bulgarian than Greek women are working in the ‘low price prostitution sector’ in countries like the Netherlands and Germany. Which is consistent with your remarks. The best way to change this is however not to impover Greece but to boost economic development, employment and wages in Bulgaria.

    I take issue with you when you say thet 20% declines of GDP are ‘largely deserved’. Please, explain yourselve.

    I also take issue with you when you state that it’s not bad that Greek GDP declined with 25% (not 20%, as far as I know) because other people are poorer

    I totally agree with you, however, that poor countries should not refinance the debt of Greece. In the European Union, there are about one or two trillions of zombie debts. Parts of these debts have to be written of while other parts will only become good debts again when the money starts to flow again. In Greece. And in Bulgaria. I take this to be your main point so it seems we basically agree.

    • Larry Motuz
      June 30, 2015 at 9:04 pm

      Spot on, merijnknib!

    • Blissex
      July 2, 2015 at 8:27 pm

      «The best way to change this is however not to impover Greece but to boost economic development, employment and wages in Bulgaria.»

      Nobody is thinking in Germany etc. of impoverishing Greece, far from it, Greece is still receiving €5 billion a year of free-gift net contribution from the richer countries of the EU, mostly financed by Germany, and Greece has many roads, public buildings etc. built with german taxpayer money, and has been receiving that kind of free gift for decades.

      That’s around 2-3% of greek GNI, and since greek citizens pay in income taxes around 4-5% of GNI, the richer taxpayers of the EU in effect pay around 30-40% of greek income taxes, which seems pretty generous to me.

      Are the greek voters unhappy with a gift of mere 2-3% of GNI per year? Do they feel that the richer countries of the EU owe them to go back to being able to afford importing 16% of GNI per year, so that total greek GDP can go back up by the 20% it has dropped?
      Isn’t that their democratic will, as expressed in electing SYRIZA?

      In case a lot of people haven’t understood this yet, the “institutions” have indeed been undemocratic, but not against Greece, but against the citizens of the richer countries of the EU, where probably a large majority of voters just want to acknowledge the loss on the loans to Greece and forget about Greece, and let the greeks “deal with it”. If the referendum for YES or NO were held in Germany on the same day as in Greece, Germans would certainly vote NO for making *any* offer to Greece for further rollover of greek debts, even a harsher one than the one the institutions are making and the greek government rejected.

      It is wishful thinking otherwise to imagine a huge surge in the flow of free gifts from the richer EU countries to empower Greece and other countries to import a lot more to boost their living standards.

    • Blissex
      July 2, 2015 at 9:18 pm

      «If the referendum for YES or NO were held in Germany on the same day as in Greece, Germans would certainly vote NO»

      The “eurocrats” certainly know this, and want to avoid *any* referendum, and obfuscate the situation, because they want to avoid any chance of it being clear that the greek voters expect bigger free gifts from german voters, and german voters don’t want to give any bigger free gifts to greek voters, because this likely would rather embitter on both sides what is already a difficult situation.

      SYRIZA have done the extremely stupid thing of letting the 3rd bailout agreement expire on Tuesday, and this is extremely stupid because any new bailout agreement would have to be resubmitted to the german (and dutch and finnish and bulgarian etc.) *parliament* (not government) for approval, and the vote there is likely to be against *any* new bailout agreement, because german (etc.) politicians would like to be re-elected, and any new greek bailout is extremely unpopular in both the creditor and poorer countries, right or wrong.

      A lot of the theater by the “institutions” as to being harsh on SYRIZA was for the benefit of german voters, to enable a deal to bailout the greeks to be reached without the german voters protesting against it.

      Tsipras has decided, given the conflict between his government’s desire to be re-elected, and the german government’s desire to be re-elected, to make that conflict totally explicit by calling a referendum.

  6. Blissex
    July 2, 2015 at 10:01 pm

    «Nobody is thinking in Germany etc. of impoverishing Greece, far from it, Greece is still receiving €5 billion a year of free-gift net contribution from the richer countries of the EU, mostly financed by Germany,»

    Plus let’s not forget over €240 billion (currently) of loans to a bankrupt government at extremely low interest rates over a long repayment period. The implicit subsidy is a pretty colossal sum. Several months ago it cost around €2m to insure €10m of greek debt, or 20%, *per year*, arguably the “institutions” have already made a further (even if conditional, not free) gift to Greece of of a few dozen € billions *per year* for the duration of the crisis.

    And all that the voters in Germany and other EU countries want is to stop rolling over that debt, in practice making an €300 billion free gift to Greece, as long as Greece just is never mentioned again, and they “deal with it” on their own.

    But it is not enough for loveable, stylish, greek leftists, and the EU left is spending a lot of political capital supporting them; while the ugly bulgarians and the other 6 countries with a lower GDP per capita, well, too bad for them, they have always been poor, let them get on with that.

  7. merijnknibbe
    July 3, 2015 at 7:37 am

    Dear Blissex,

    A) you know darn well that it’s not about keeping Bulgarians poor but about prventing Greek from getting poor. It’s a good thing when Bulgarians get richer – i.e. when they get better houses, better health care and better education. Wich has always be the stance of this blogpost. Not all growth is good – but especially in poor countries like Bulgaria it often is.

    B) “And all that the voters in Germany and other EU countries want is to stop rolling over that debt, in practice making an €300 billion free gift to Greece, as long as Greece just is never mentioned again, and they “deal with it” on their own.” Hmmm…this seems to be closer to the Varoufakis stance than to the ‘German voter’ stance.

    C) Considering deflation in Greece even a 1% nterest rate translates in a sizeable 3% real rate.

    D) I have to take issue with you about the Bulgarians: they are NOT ugly. Though it made me happy when some years ago a Bulgarian employee (a cleaning lady, to be precise) of a non-profit I was involved with was able to let a Dutch dentist fix her teeth (which was really necessary). Growth in Bulgaria has to become inclusive, which will enable people to raise families and become prosperous in a sustainable way (which, for Bulgarians, is more easy than for some other countries, considering their demographics). And to pay the dentist. That’s the stance of this blogpost

  8. July 3, 2015 at 11:20 am

    From economics to politics to idiotism
    Comment on ‘Breaking: ECB states that Euro is reversible and not irrevocable’

    Remember how it all started? The majority of Europeans wanted one Europe, do away with this ridiculous borders, and they wanted — and still want — it democratic and prosperous. At the latter point economics comes in. What is the economist’s task? Roughly this:

    “A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision.” (J. S. Mill)

    The economist’s task is to figure out how a prosperous Europe can be realized (as a step between The Wealth of Nations and The Wealth of the World). The decision about the political future of Europe has been taken by the legitimate political bodies. For the economist qua economist this is a fixpoint. What is required is his professional competence for a successful realization.

    Here the problem starts. Economists have no clear idea about how the actual economy works. What they have produced so far under the label of Walrasianism, Keynesianism, Austrianism, etcetera, is scientifically worthless. The representative economist cannot tell the difference between profit and income. This is like physics before they had figured out such elementary things like the difference between velocity and acceleration.

    The great scandal of economics is that without deeper knowledge but much opinion economists turn to politics. The scandal consists in speaking with scientific authority of which not much exists. One of the many low points had been reached, for example, when Hayek volunteered as academic fig leaf for Thatcher’s rather straightforward power politics. To be sure, Hayekian economics never satisfied the scientific criteria of material and formal consistency and never will. His economics was not good enough for science but enough for politics. This example can easily be multiplied.

    The Greek crisis has to be seen in the context of the initial plan. The economist’s task at this juncture is to find a solution that helps to realize the initial political decision. Of course, every economist qua citizen is free to abolish the eurocrats, but then he has to put his political hat on and his scientific hat down.

    Where has heterodox economics landed in the grand scheme of things? After leaving economics proper and taking part in the idiotic good guy/bad guy discussion they landed in a quarrel about whether Bulgarians are ugly.

    That’s economics at its best.

    Egmont Kakarot-Handtke

    • July 3, 2015 at 1:34 pm

      Thats a great quote by j s mill. However i disagree that it is the economist’s or scientist’s task is to figure out how a prosperous europe can be created.

      (When i was there, at louvain-la-neuve in belgium (where van parijis teaches—‘basic income, should surfer’s eat?) , geneva (family), and up in the alps around evolene/zermatt working in the raclette (swiss cheese) industry above treeline it seemed prosperous–though the mountain people were the poorest cashwise).

      Economist’s task, following Mill is to explore all possible trajectories. Somewhat like engineering—‘if you use this design for a rocket, you will end up on mars. If you save a little money and use this other design, your rocket will go up about 3000 feet, explode and come back to earth’. So economists should attempt to show what happens if you use one set of policies, versus other sets—one could end up prosperous, impoverished, recreating feudalism and theocracy—maybe even caliphate, living in a desert or under water, or other possibilities.

      The legitimate poltical authorities who decide, with some help from voters and referendums, which policy to take, often are quite divided. They are not without self-interest (except perhaps Thatcher and Donald Trump, or president of ISIS).

      Some policies will make europe prosperous in some senses—for example France has had 2 Fields medal winners (‘noble prize’ of mathematics) since 2000, both in fields i have followed.; but the people in the slums outside of paris (eg malakoff) might disagree (heavily descendents of algerian immigrants).

      One view is this situation is essentially noncomputable–economists can come up with many alternatives, and legislators can then maneuver through them to end up with some sort of ‘consensus policy’ —a compromise—like a rocket design that will get half way between 3000 feet above earth and mars, so everyone will be happy before it explodes.

      The other view is there is actually a way of dealing with this complexity—if you take a step back, the data can be organized—but its a political and economic unification, somewhat like ‘political economy’.

      We have this issue in the USA—one has many scientists who say ‘we need to do such and such policy to save the environment, and economy’ based on economic analyses (eg Paul Erhlich of stanford) but then they say thats a political problem out of our hands now; so they go advise companies about how to make money and then buy politicians to further policies for that end.

      Scientists also are divided–they all push their own model and analyses–orthodox, heterodox, neo/classical, marxist, libertarian or anarcho-capitalist, green, superintelligence, etc—and refuse to notice and acknowledge most of these are actually more like brands or logos.

      But that is the way it is—like ecology–theoretically lambs and lions may have similar interests, but thats only in the infinite limit.

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