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Can Greece do a ‘Münchhausen’ and pull itself out of the monetary mire?

February 28, 2015 Leave a comment

1. “Receivables” as Percentage of GDP, Non-Consolidated Data for Ireland and Spain. Source: Eurostat.

A Cyprus style money destruction ‘solution’ for Greece is still in the cards – and I’m afraid that the continued monetary inaction of the ECB brings it closer. One might cry ‘moral hazard’ about guaranteed ‘Emergency Liduidity Assitance’ (ELA, or QE which actually works) from the ‘Eurosystem’ to the Greek banks but on this blog we did warn about the dire consequences of ECB inaction in 2011 and 2012. And we were right: these consequences – increasing deflation and crisis, higher debts compared with income – materialized and the ECB has to face its responsibilities for its inaction. Mind that, at this moment, Greece has a surplus on the current account and a primary government while it leads the other austerity countries by a lap when it comes to cutting wages, employment and entitlements and reforming the labour market. It did do its austerity homework (which is of course why its economy is in tatters). Be that as it may: until the ECB comes to its economic senses the already gasping Greek economy is increasingly smothered. And Greece will have to do a ‘Münchhausen’ to pull itself out of the monetary mire. Which is not entirely impossible, though the banks won’t like it. See graph 1.

A relatively quick short- as well as long-term fix is to increase the ‘moneyness’ and liquidity of ‘receivables’. Irish companies managed, compared with Spanish companies, to mitigate the Irish liquidity crunch by increasing the amount of receivables on their balance sheets (remember, interest rates are very low, which helps). In the end these debts have to be paid but a monetary easing of 70% of GDP, as in the Irish case, would not be bad, in Greece. The Greek government can increase the moneyness of ‘receivables’ by moving them up in the bankruptcy pecking order (they will have to get preferential treatment compared with bank debts), by enabling companies to use them (with a ‘haircut’) to pay tax arrears, by using smart technology and algorithms to enable ‘clearing’ (a matching problem). This increase of moneyness will also increase the asset value of receivables, which will make Greek companies more willing to keep them on their balance sheets.In the end, Euro’s will still be needed, but that’s why ELA was invented.

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Kicking the can up the road… Pension wealth in the Netherlands

February 27, 2015 Leave a comment

Since 2007, the increase of the wealth of Dutch pension funds has been much larger than the value of the entire government debt. The Dutch are however still cutting pensions as the ‘risk free rate’ used to discount future obligations is decreasing. Between 1992 and 2014, average return on investment was a whopping 7,9%. In the future, this will be quite a bit lower (Back of the envelope: lower inflation:-2%. Lower increase of population: -0,5% Lower economic growth: -0,5%). The ‘risk free rate’ (which is hardly risk free, as it changes all the time) is however supposed to be 1,9% – while the real rate of return in 2014 was 14,5%….The point is that many households or building corporations (who, in the Netherlands, own a lot of houses), are eager to re-finance their mortgage and loans with a 3% new loan (which is about 50% higher than the 1,9% rate). No, that’s not risk free either. But helping households to refinance might be a less risk strategy, in a macro-economic sense, than cutting pensions. Read more…

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Minimum wages in European austerity countries: Greece is different (but not as you are made to expect)

February 27, 2015 Leave a comment

In Januari 2015, Germany introduced a new economy wide minimum wage of Euro 1473,–, about the same level of the Irish minimum wage and slightly higher than the French level. The mimimum wage in Greece is 684,–, considerable higher than the 390,– Estonian level but clearly below the 757,– Spanish level. See these Eurostat data. The Eurostat statisticians point out that Greece was the only country to decrease its minimum wage between 2008 and 2015 (-19%). It is interesting to compare Greece with other austerity countries, which are supposed to be a shining example for Greece. Lowering the minimum wage is clearly not a  silver bullet when it comes to job growth. Read more…

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The list with the Greek reform proposals

February 24, 2015 1 comment

Here, you will find the list with the Greeks government reform proposals.

Update (14:21 CET):

(A) There is no such thing as a blueprint for an effective ‘mixed’ economy. The effective functioning of markets and the government (including taxes and spending) is based upon consistency with historically contingency. What works in the West-Germany might not work in (former) East-Germany.

(B) With this in mind, the Greek proposals seem better designed than the measures in the Cypriot Memorandum of Understanding. The Greek proposals are much less bank centered – and therewith more balanced (more bluntly: the Greek plan admits that there are actually people living in Greece).They also take the crisis into account, not just as a shock to the banking system but to the entire Greek society (and therewith the eurozone…)

(C) At least to me the Greek measures seem to be more practical and to the point than the Cypriot ones which are either incredibly vague or overly precise (see points i and m on p. 46: abolishing the siësta, with a table with office times attached). But this requires a thorough point by point comparison.

(D) The Greek proposal is less depenndent on the use of phrases like ‘comprehensive reforms’, ‘sustainable improvement’, ‘relevant elements’, ‘necessary amendments’, ‘appropriate level’, ‘effective intervention’, ‘appropriately differentiated’, ‘promptly published’ (nice one!), ‘adequate and accurate information’ etcetera, etcetera. Whisfull phrasing.

(E) The Greek proposals are more revolutionary than the Cypriot MoU, surely when it comes to taxes, the efficiency of government and the broadening of the tax basis. They may, however, also be more consistent with historically contingency – and therwith with the evolutionary survival of Greek society.

And the Cypriot government of course has: “to allow for efficient seizure of property collateral”. Please, read Dean Baker on ‘right to rent‘.

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The largest ‘Bild’ lie ever? Factchecking Bild-zeitung

February 23, 2015 4 comments

We wanted to make sure that the … money for Greek bank recapitalisation is for that purpose, not for recapitalisation of the government,” Dijsselbloem said.

Bild-Zeitung, the largest newspaper of Europe, owned by Axel-Springer press, tells its readers that the money used to bail out Greece is used ‘for instance’ to pay pensioners and teachers. It does not tell its readers that  by far the larger part of it is used to bail out creditors and refinance debts… Inspired by a weekend during which I did not have internet but did have  Bild-Zeitung acces (and therefore learned nothing about the macro-econmics of the situation), Inspired by the multi-layered writing of Bild, I thought this might be a way to state the Bild-framing:


(Look here for Günter Walraff, who wrote a ‘reality beats satire’ book about his stint at this journal which portrays a cynical, nihilist world. This is the way Walraff ‘celebrated’ fifty years of Bild). Read more…

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Minutes of a meeting of civil servants employed by the ECB Eurosystem: some snippets.

February 20, 2015 Leave a comment


There is a meme-war going on. One of the meme’s is that the new Greek president hired 850.000 new civil servants when he was minister of the interior in a former Greek government. And though the man clearly isn’t a new broom it is sobering to look at the graph. The total amount of employees in the Eurostat ‘Mainly government’ sector at its peak hardly surpassed 900.000. Which may have been too high but to anybody stating  this: please, show me that Greek health workers and teachers are worthless leeches instead of trusted, dedicated public workers. Which is indeed something the ECB should do more carefully, as its minutes show that fuzzy memes as the statement above (not even a half-truth) do influence the discussion. Yes, the ECB is, finally, publishing its minutes. Read more…

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Link of the day. The ‘mark-to-market’, household and business centered plan of the Greek government

February 18, 2015 2 comments

You can trust a con man to double down on his lying and cheating whenever something – or someone – is exposing his lies. Which is exactly what Schauble, minister of finance of Germany does. And I don’t mind. He is a politician – it is what he is supposed to do. But that’s the point. Much of the press believes him, for instance when he – or somebody from his coterie around him, like mr. D. – is talking about Greece. And he will only be as honest as the press forces – forces! – him to be. At one point, even the existence of Greek ideas and plans was put into question. Well, here they are, via a part of the Greek press which, by the way, is owned by the oligarchy. The failure of the press clearly is not caused by any kind of class struggle. It’s just bad reporting. An excerpt (mind the realist ‘mark-to-market’, non-dogmatic and even bourgeois nature of the piece): Read more…

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Reforms in Greece. An exemplary record. But the wrong track. 3 graphs.

February 17, 2015 3 comments

Greece is champion reformer. According to austerity mythology, we did not have a financial but a ‘rigidity’ crisis, aggravated by uncompetitive price levels. Which had to be solved with structural reforms and by bringing the price level (read: wages) down. Which is what Greece did, much more than any other country. But, as we do not have a rigidity crisis but a monetary crisis this did not work, of course. Some data: via Frances Coppola we learn that Greece has been the most ardent reformer of the entire Eurozone (graph 1, OECD data). Via Paul Krugman we learn that no country cut government expenditure as much as Greece (by a long shot: graph 2, Eurostat data). And Eurostat also teaches us that no country has been as succesful as Greece in lowering relative and even absolute prices (graph 3, Eurostat data). Coppola and Krugman are, understandable, aghast about the hypocrisy of the prime ministers of Ireland and Finland, who are lecturing Greece about something which it did much more succesfully than they did. And then there is the argument: “the Irish suffered for nothing, so the Greek have to suffer too“. Sigh.

Remark: the Krugman graph jpg has a lot of white below the actual graph.

Graph 1. OECD shows that Greece did reform


Read more…

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Chronicle of a Grexit foretold

February 16, 2015 8 comments

Update (CET 21:00). The ‘negotiations’ have broken down. Let’s quote Varoufakis (considering the way the ‘negotiations’ broke down some people are genuinely afraid of something, maybe it is this, emphasis added):

I am often asked: What if the only way you can secure funding is to cross your red lines and accept measures that you consider to be part of the problem, rather than of its solution? Faithful to the principle that I have no right to bluff, my answer is: The lines that we have presented as red will not be crossed. Otherwise, they would not be truly red, but merely a bluff.

But what if this brings your people much pain? I am asked. Surely you must be bluffing.

The problem with this line of argument is that it presumes, along with game theory, that we live in a tyranny of consequences. That there are no circumstances when we must do what is right not as a strategy but simply because it is … right.

Against such cynicism the new Greek government will innovate. We shall desist, whatever the consequences, from deals that are wrong for Greece and wrong for Europe. The “extend and pretend” game that began after Greece’s public debt became unserviceable in 2010 will end. No more loans — not until we have a credible plan for growing the economy in order to repay those loans, help the middle class get back on its feet and address the hideous humanitarian crisis. No more “reform” programs that target poor pensioners and family-owned pharmacies while leaving large-scale corruption untouched.

Our government is not asking our partners for a way out of repaying our debts. We are asking for a few months of financial stability that will allow us to embark upon the task of reforms that the broad Greek population can own and support, so we can bring back growth and end our inability to pay our dues.”

In ‘Chronicle of a death foretold‘ Gabriel Garcia Marquez tells the story of twins who, as they have to save their face, have to kill another man. Or at least have to show in a credible way that they intend to do so. So they set up an ambush. And tell everybody that they will kill this other man, hoping – trusting, as they live in a small village – that somebody will tell this other man to change his normal ways and to avoid the place of the ambush. An unbelievable but true string of coincidences however prevents this from happening. And the other man walks, like every other day, towards the place of the ambush. Which makes the twins run out of options and they have to kill him…

The Eruozone saga increasingly reminds me of this story.  Read more…

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Links. Drowning job seekers, fuzzy asset prices, the trouble with real estate banking.

February 15, 2015 3 comments

1) More than 300 people searching for work and a better life drown in the Mediterranean.

“The UN’s refugee agency, UNHCR, says more migrants are dying because search and rescue efforts have been reduced. Italy’s major patrol and rescue operation ended last year. A smaller scale EU operation, Triton, took over. The UNHCR says about 3,500 migrants died trying to cross the Mediterranean Sea to Europe in 2014.”

2) The problem with NIIP (Net International Investment Position). Does running a current account surplus for decades make a country richer? Not necessarily so. For one thing, it is quite difficult to estimate the value of ‘NIIP’. For another, the net position is the result of large gross positions, which means that a limited decline of the value assets may turn a positive net position into a negative position despite positive current account flows, which is what happened in the Dutch case. For quite some time, the decline of the value of international financial assets was larger than the (whopping) current account surpluses of the Netherlands.

3) Real-estate banking crowds out productive investment: “We also find some evidence of a financial Dutch disease – the faster the growth of financial services and the larger the lending-deposit interest spread, the slower the growth of the manufacturing sector”.

4) During the housing busts the number of houses sold often declined faster and more than prices. Why? Read more…

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Über-unemployment in the Eurozone: a question of design

February 13, 2015 6 comments


It’s always difficult to explain the glaring obvious.  Read more…

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Does Germany bail out Southern Europe? Or did Southern Europe bail out the Buba

February 11, 2015 2 comments

One of the imbalances of the Euro system are the Target2 claims. These claims are a kind national, non-government American Express credit card debts owed to foreigners which were paid down using the overdraft facility of the national private banks at the national central bank. To be able to do this, the national central bank borrows from a foreign national. These imbalances are large: many hundreds of billions of Euro. Interest rates on Target2 debts are low but as the total amount of money is huge total interest still is quite a bit of money. Germany is the main ‘foreign’ national bank. And the Bundesbank did earn a huge amount of interest:

* 3,3 billion Euro in 2011
* 6,0 billion Euro in 2012
* 4,5 billion Euro in 2013
Read more…

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Debt Deflation in Greece: a textbook example.

February 8, 2015 3 comments


Diogenes, always ready to mock ‘social contrivances’ (to quote a famous Paul Samuelson definition of money), was kicked out of Sinope because he debased the currency. In Greece, at this moment, the opposite is happening: the price level is declining.   Read more…

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Links. The emerging markets merits of statehood, manufacturing, UK trade, Germany 1871-1873 vs. present day New York

February 8, 2015 Leave a comment

A) My latest from ‘De Vrije Fries’ (in Dutch). The state, the church and the price of land. Rents of clerical land in Frriesland, 1511-1543. Or: ‘pay for the dikes or for the ferryman’. After the Habsburgers bought (!) Friesland they started establishing a state. As a consequence, the area was pacified and coastal levees were improved while, even more important, the financing of these levees was, finally, improved and communalized. As a results, there was an end to the washing away of Friesland and land rents increased quite a bit, much more than can be explained by the sixteenth century price revolution. A tantalizing question:did the growth of a state (including an early transition to Roman law) enable/force people to transform into ‘burghers’ which, according to their increasingly detailed probate inventories, possessed quite a number of note books which enabled them to keep track of all kinds of ‘petty debts’, (Knibbe, 2007)? Did this give preponderance to the ‘economic motive’, as opposed to the ‘honour’ motive of the medieval Friesian clan society (in the fifteenth century, the only brick buildings in Friesland were churches and small castles. After about 1530, many of these small castles were broken down and a rapidly increasing number of farms were at least partly made of bricks)?  Read more…

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Should senior economic advisors feel they can loose their job to make them do their homework?

February 7, 2015 3 comments

I’m afraid I’ve got to react to Antonio Fatas, who shows that (A) Spanish productivity increased relatively fast after 2008 while (B) German and UK and Dutch productivity actually declined. This explains a lot of the differences in unemployment in these countries: when GDP declines with about 6% and GDP per worker increases with 10% employment (measured in workers) will decline by 16% (as happened in Spain). When (as happened in the UK) GDP declines with 2% but GDP per worker declines with 5% – employment will actually increase. The regular reader of this blog is aware of this. It’s good that Fatas points this out.

But that’s not why I react. In a twitter reaction, @miotei, “Senior Analyst, International Political Economy, Elcano Royal Institute. Author of ‘The Euro, the Dollar and the Global Financial Crisis‘”, states: ‘Yes, sadly Spanish workers seem to work a lot harder when they feel they will lose their job“.

Sadly, @miotei, who has a job as an economic advisor with serious responsibilities and can make people lose their job when he gives the wrong advise, clearly did not do his homework and should have worked a lot harder. The large arithmetical increase of Spanish productivity is NOT caused by ‘reforms’ but by the epic decline of low productivity construction, which arithmetically led to a rise of average productivity of the entire economy. Look here. A more generalized critique of using macro productivity data as indicators of competitivety can be found here. Macro-economics is to an extent the science of weighted averages of weighted averages which is pretty compicated complicated as the weights shift all the time. @miotei should have known this. He didn’t. Should he loose his job? Or might it be better when he feels that he, a spanish economist, has a mission: working to restore Spanish prosperity and employment by giving sound advises aimed at employing people and the journey to an economy were Spanish people are treated with dignity by at least senior economic analysts?

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Money in Greece. Five graphs and some problems.

February 6, 2015 Leave a comment

Straight from the Bank of Greece: some data on Greek money. Can there be a bank run? How much money do the banks owe the public? How about securitization? Some highlights:

1) The Greek were, before 2008, quite thrifty.

2) By far the larger amount of money is owned by households, largely in the shape of time deposits. Which means that these households have a problem when the unaccountable civil servants of the ECB halt ELA (Emergency Liquidity Assistance). The households will often have to pay a haircut when they withdraw their money.

3) The government has, at this moment, a sizeable amount of money in the banks. It is remarkable that so much government money is in private banks. It means that the government, pressed by the Troika, did not only fund these banks with billions upon billions of direct aid but also funded them with deposits. Will the government have to pay a haircut, too, when the ECB halts ELA?

4. Recognition by the bankers and the accountants that money owned by (probably) shadow banks is money, too, led to a 30 billion increase in the measured amount of money. Mind that these are debts owed by the normal banks to the shadow banks. In a sense the 25 billion or so of government aid to the bank served to enables the banks to honour the deposit debts they owed to the shadow banks.

. Read more…

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Dear Greek, take the Euronotes and run

February 5, 2015 3 comments

Update (20:56 CET): Rumor has it that the ECB has 59,5 billion in Emergency Liquidity Assitance available. But, to be credible, it should be willing to provide backing for every single Greek deposit Euro.

The ECB is preparing a ‘Cyprus’ for Greece. So, dear Greek, exchange your deposit money for cash.

1) According to the ECB the European system of central banks still guarantees the 1:1 exchange rate of Greek bank deposit money and Cash. But the Eurosystem is preparing for a ‘Cyprus scenario’, i.e. it wants to have the possibility to renege on its promise of a guaranteed 1:1 exchange rate between Euro notes and Greek deposit money: the first line of funding of Greek banks has been cut loose  (emphasis added)

4 February 2015 – Eligibility of Greek bonds used as collateral in Eurosystem monetary policy operations

  • ECB’s Governing Council lifts current waiver of minimum credit rating requirements for marketable instruments issued or guaranteed by the Hellenic Republic
  • Suspension is in line with existing Eurosystem rules, since it is currently not possible to assume a successful conclusion of the programme review
  • Suspension has no impact on counterparty status of Greek financial institutions
  • Liquidity needs of affected Eurosystem counterparties can be satisfied by the relevant national central bank, in line with Eurosystem rules” 

Read more…

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Links. Ireland, Unemployment does exist, Greek taxes, Uber stinks, the IMF gets data driven

February 2, 2015 3 comments

1) Frances Coppola: “The IMF has just produced a review of the Irish financial crisis and subsequent IMF/EU programme which concludes that the Irish financial crisis was badly handled by all parties, and especially by the institutions involved – the so-called Troika, made up of the European Commission, the ECB, and the IMF itself….We often hear it said that Greece should never have joined the Euro. But no-one to my knowledge has ever said that Ireland’s joining was a mistake. Yet it was. For Ireland, Euro membership was an unmitigated disaster, right from the start. “

2) Roger Farmer (slightly scrambled):

The twin hallmarks of the DSGE agenda are the assumptions of continuous labour market clearing and rational expectations. These assumptions were made in the first RBC models and were incorporated into almost every DSGE model since. That includes almost all of the work on New Keynesian economics that predates the 2008 crisis. … households are still assumed to be able to find as much employment as they would like at existing wages and prices. In New Keynesian DSGE models, just as in RBC models, there is no involuntary unemployment … In both classical and New Keynesian theories, employment variation over the business cycle occurs through intertemporal substitution, by rational forward-looking households, of leisure today for leisure tomorrow. In both theories, households can work as many hours as they choose and the demand and supply of labour are continuously equated by adjustments of the money wage. The facts contradict this assumption. Read more…

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Will the ECB push Europe over the deflation cliff?

February 2, 2015 5 comments


Technical detail: ’72 per. Zw. Gem’ is ’72 month running average’

Inflation in the Euro Area is getting lower and lower – the Euro Area is only one shock away from ‘ugly’ deflation, a persistent and self reinforcing decline of incomes and expenditure which, for one thing, disables debtors to pay back their debt. Greece is already experiencing considerable income deflation – thanks of course to persistent deflationary policies aimed at cutting wages, pensions and employment. And we’re all aware of the consequences… I’m not a believer in the omnipotence of monetary policy. But a Grexit might pull the Eurozone over the deflation edge into unpredictable financial turmoil – and the ECB is totally able to prevent a Grexit. Read more…

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A back of the envelope calculation of the Greek output gap: very large.

February 1, 2015 5 comments

Tourism in Greece is did very well, in 2014. I’ve seen growth estimates of between 13 and 22%, let’s stick to this 17%. As tourism is Greece most important economic sector, this is massive.To an extent, this double digit growth was a recovery from the deep slump in 2013, caused by the Troika induced panic about the Greek monetary system. But numbers of tourists have reached record levels – part of the increase is genuine growth. However – even double digit growth of the main sector of the economy did not get Greece out of the economic doldrums. Employment went up with 74.000 people (October 2013-October 2014) while unemployment declined with 104.000 people (also because of a considerable decline of the total labour force) but the unemployment rate is still 24% rate, which (as people flow in and out of unemployment) means that as much as 40% of the entire labour force might be unemployed during a sizeable part of the year. And broad unemployment is even about 30%… Also deflation is gathering steam, despite this double digit growth. Which is very bad news for the creditors of Greece. Read more…

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