I guess I have to speak out – not as and advise to the Greek but because it’s too easy to easy and comfortable to stay silent.
NO is the answer.
In the end, it is a question of trust. And I do not trust you, mister Dijsselbloem:
A) Proposing a quadrupling of VAT rates in (large parts of) the main economic and export sector of a country (tourism) in a deeply depressed country is the dumbest micro and macro economic idea of the year. Even taxing deposits is a better idea.
B) Willfully letting a deal explode over a little bit of money which is used to top up income of the poorest pensioners (who increasingly need this money as their health is deteriorating) is the dumbest social idea of the year and shows the explicit cruel intent of the Institutions (hey, mister Dijsselbloem, didn’t mister Drees, your proverbial prudent and teetotaler social democratic predecessor, in 1953 sign the debt relief program for Germany while he also introduced state pensions, especially for the poorest in Dutch society, in 1956, albeit with the caveat that the pension age might have to be raised in the future?). A higher profit tax or a land tax on privatized harbours or whatever are much better ideas.
C) Wasting the once in a generation chance to, together with Syriza, crush corruption and instead sucking up to Schauble will be on your record for ever. Nothing was a better idea.
NO won’t solve the Greek economic and social problems. I’m not aware of any plan B, the banks will stay closed, emergency money will have to be issued and the economy is already nosediving. To me, it’s all incomprehensible, even after reading interfluidity about the stupidity of this all and this zerohedge post about the super seniority of IMF debts (will the ECB have to tolerate a haircut on Greek debts when Greece defaults on IMF debts…?) about it and taking account of the fact that Malta, Cyprus, Italy, Spain and Portugal of course love to see much higher VAT rates in the competitive Greek tourist industry. Greece already had the worst economic crisis of any rich world economy post 1945 – and it is becoming much worse. Because we make it so. Whatever the answer. A YES will reopen the banks – but Schauble will not like that and he will continue to burn Greece – you can trust that guy!
Creditors might have burned something like 40 to 60 billion Euro of their wealth by “maintaining ELA (Emergency Liquidity Assistance) to Greek banks at the current level”. Greek banks need ELA to be able to buy Euronotes to put in the ATP machines and to enable Greek to wire money abroad. Greek are not able to do anymore, or only to a very limited extent and turning off the ELA tap has sent the Greek economy into a downspin. Again. GDP might decline with another 5 to 10% (even when we reopen the ELA tap today), the grey and black economy will increase, taxes will dwindle and unemployment might top 30 or even 35%. While, using the creditor logic, Greece did not do worse than other indebted countries (graph). To he contrary. As I see it, Greece has become a failed state already Read more…
After 2008, GDP growth in almost all Eastern European countries disappointed. Greece is in a class of its own, Poland and Slovakia did well (graph).
Between 2007 and 2014, economies like those of China and India were spurting ahead – but in countries like Lithuania and Romania production was barely at the 2008 level while in countries like Latvia, Croatia and Slovenia (austerity darlings, by the way) it was below the post crisis peak… Not all growth is good – but Read more…
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.
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. Read more…
Update: Yannis Varoufakis about the Syriza mandate (and Grexit is not a legal option). Too bad that Jeroen Dijsselbloem doesn’t even try to be his intellectual opponent.
Mario Draghi, president of the European Central Bank and a natural born winner, lost.
It is a bitter loss.The Euro project as it was supposed to be is in tatters. The Euro turns out to be reversible. Since the introduction of the Euro macro economic volatility in the Eurozone increased, growth declined, unemployment reached levels not seen for seventy years and banks have still not been properly regulated. Also, Eurozone wide income transfers (pensions, unemployment benefits, deposit guarantees), which are needed for social reasons as well as to stabilize the Euro and the economy, are a more distant dream than ever. Reckless private money creation of the Irish/Dutch/Baltic type still can happen anywhere at any moment. And grotesque imbalances persist: the Dutch current account surplus is, at the moment of writing, supposed to be 13% of GDP. or 21 billion Euro in the first quarter of 2015.The Euro was designed to decrease national differences and to curtail governments by invoking market discipline. The opposite happened (but democracy was curtailed). Read all about it: Wynne Godley, in 1992 (!):
I am driven to the conclusion that such a view – that economies are self-righting organisms which never under any circumstances need management at all – did indeed determine the way in which the Maastricht Treaty was framed. It is a crude and extreme version of the view which for some time now has constituted Europe’s conventional wisdom (though not that of the US or Japan) that governments are unable, and therefore should not try, to achieve any of the traditional goals of economic policy, such as growth and full employment. All that can legitimately be done, according to this view, is to control the money supply and balance the budget. It took a group largely composed of bankers (the Delors Committee) to reach the conclusion that an independent central bank was the only supra-national institution necessary to run an integrated, supra-national Europe. Read more…
On Voxeu Arvind Subramanian, India’s chief economic advisor, argues that: “for monetary transmission to work, both consumer prices and producer prices are relevant, but for different sets of agents.” while consumer prices show, in India, a much higher increase than producer prices.”. Which means that the central bank should not just look at consumer price inflation but also at producer price inflation. In the June issue of The Journal of Economic Issues I stress a similar point in “Metrics Meta About a Meta Metric: The Consumer Price Level as a Flawed Target for Central Bank Policy”, though going one step further (fifty free downloads here). From the abstract:
Inflation targeting is currently the policy of choice for central banks. This policy invariably targets consumer price inflation, which is only one of many available price level indices (such as prices of new investments and house prices). As there is no stable relationship between these price levels, and as differences in developments between the different price levels might induce destabilizing behavior, there is no reason why “low and stable” consumer price inflation should guarantee monetary and financial stability. Following John Maynard Keynes, a “low and stable” increase of average nominal wages might do a better job. As price levels are designed to estimate the purchasing power of spending power and as income, and spending power are used to not just consume or invest but also to pay down many kinds of (gross) debt, it is advisable to use a joint definition of monetary and financial stability, which combines stable purchasing power of monetary income with a stable ability of households and companies to pay off debts.
Jens Weidmann, boss of the Bundesbank, wants to restrict the power of the Greek central bank to provide Emergency Liquidity Assitance (ELA) to the Greek banks as he is afraid that Greek banks will use these reserves to purchase short-term government debt (at this moment total assistance is about 89 billion). Sigh. Greek banks indeed own some short-term government debt. But the Greek government was, as late as april 2015, in fact still funding the banks too, with as much as 9 billion euro (graph 1). Which comes on top of the tens of billions of income transfers from the Greek government to the Greek banks. And the Greek banks do not need ELA to purchase government debt but to be able to provide the ATP’s with cash (which they have to buy from the central bank) as especially Greek households are exchanging deposit money for cash (between november 2014 and april 2015: about 21 billion, at this moment it might be about 30 billion). This bank run is clearly triggered the lack of credibility of the European Central Bank (look here). Restricting ELA will disable households to take their money out of the banks and will therewith cause a large problem for Greek households in case of Grexit, when deposit money will be redominated (unlike Euronotes). It’s hard to believe that Weidmann does not understand this (though I’m not too impressed with his accounting skills, to put it mildly). Which means that he is trying to engineer a severe, unnecessary and cruel haircut of Greek deposits – the opposite of debt relief. First, you trigger a bank run, than you disable people to take their money out of the bank – while the very bankrun you engineered increased the risk that this bankmoney will loose value….
Links. Reviving cities, declining international trade, the accounting side of Grexit and the trouble with credit rating agencies.
Remco Schrijvers about the accounting side of Grexit (ELA is created by the bank of Greece and not a Greek liability to the Eurosystem…). Draft!
Henri de Groot e.a. on Voxeu about the revival of cities (and Henry George)
Why have cities emerged as hubs of economic activity in this era in which the internet seems to be the ‘cul-de-sac’ of physical distance? .. Several authors point in the same direction, namely spill-overs and the agglomeration of human capital. Gennaioli et al. (2014) show how within countries, human capital clusters in a small number of regions. The premium in regional GDP per capita is 20% and more per year increase of the mean education level in a region. This return is far above any reasonable estimate of the private return to human capital. Desmet and Rossi-Hansberg (2008) focus on the role of general purpose technologies. In the 1920s and 1930s, that was electricity. Since 1990 it is information technology….Knowledge spill-overs imply that cities are a focal point of location-driven externalities. Land rents are the expression of these externalities. A location’s rent is high not because of the characteristics of the location itself, but because of what happens at locations in their direct proximity. This is a clear example of an externality, the value of your property depends on the actions taking by the owners of neighbouring property. These externalities provide a textbook argument for developing public policy at the level of the city and why a Henry George tax on the value of land is most efficient.
The Syriza proposal to The Institutions has been published by Ekhatimerini. Some quick remarks (from the top of my head, I did not check):
A) The Institutions could have seized the opportunity to combat corruption and rent seeking behaviour by oligarchs and banksters (some tax exemptions are supposedly enshrined in the Greek constitution…) but they did not put pressure Syriza to do what Syriza wanted to do and clearly wasted the opportunity.
B) The financial proposals are not sound as they are ‘parameteric’, i.e. as they do not take all kind of macro (and micro!) economic consequences into account.
C) As B) was the most important (and totally right) criticism of Syriza of existing measures this means that the proposals indeed surrenders (but see below). FYI: the macro economic failure of earlier programs is clearly shown by the extremely large difference between the calculated and the (much larger) real consequences of austerity. The micro economic insufficiency is clearly shown by the weird insistence of The Instiutions that average, economy wide labour costs are a measure of competitiveness – which leads to the idea that cutting wages of teachers enhances the competitiveness of manufacturing. The lack of macro (and micro!) economic logic of the proposals is a hallmark of all Eurozone austerity programs: so called ‘reforms’ of the labour market and the lack of reform of financial markets consistently both do not have a sound economic basis.
1) Regarding privatisations and tax evasions and a fiscal council the proposals are pretty much the same as earlier proposals from about three months ago.
2) On the labour market there are no real proposals
3) There are some very explicit remarks about banks in the sense that the government has to respect the private management of the banks blablabla and ‘no fiscal policies actions would be taken that will undermine the solvency of the banks’ (no need to, of course, we can leave that to the bankers themselves. And didn’t the Greek government veryu recently inject about 24 billions of tax payers money into these same banks – but that’s of course not disrespecting ‘private management’). This feels a bit like the Greek government has been forced to write this.
4) There is a remarkable lack of new wealth taxes (a little regarding yachts, but that’s peanuts).
5) Vague but extremely important: “The authorities will further develop and swiftly implement a comprehensive strategy for addressing the issue of non-performing loans”. This is a very important issue which indeed has to be addressed. But Ireland and Cyprus show that The Institutions have a clear idea about such policies: creditors come first and second (in Ireland in fact first, second, third, fourth, fifth, sixth and seventh – there are seven ‘experimental’ stages to squeeze money from creditors before a creditor can default). In combination with point 3 and accepting the idea that point 3 has been forced upon the documents by The Institutions it seems that The Institutions try to impose a very creditor centered system of dealing with non-performing loans on Greece, just like they try to do in Cyprus and Ireland. The Europe of the banks. Somebody seems to have forgotten that ‘bank‘ and ‘bankrupt‘ have the same historical etymology: when a moneylender couldn’t pay he did not get loads of government money but his bench was broken and his licence revoked.
6) The tax increases (VAT) and spending decreases (pensions): complicated. You have to know a lot about the details of the Greek VAT end pension system to be able to make a clear assessment of these proposed measures. With that in mind: as I see it the increase in the pension age is a necessary step which, by the way, is totally consistent with traditional socialist ideas about labour: jobs can and have to be decent and work can be dignified – no reason for early retirement. But such measures are at the moment not urgent from a macro economic point of view, as the unemployment rate is 27%. It might however help people with low pensions as they can work longer. Increasing VAT on the islands (tourist destinations!) is bonkers – tourism is very price sensitive. Increasing other VAT rates is, in a deeply depressed economy, very counterproductive: tax wealth (land?) instead. Increasing (medical) costs for rich pensioners might be fair but considering the fact that most pensioners are poor it’s just another hit to their purchasing power (though generic medicines may become cheaper) it does seem as if the vulnerable are hit. Which is of course the explicit political intention of The Institutions: weaken the core constituency of Syriza!
Aside: The Institutions want countries to install an independent ‘fiscal watchdog’, like the Dutch Centraal Planbureau (CPB) or the USA CBO. Though the Dutch CPB is decreasingly independent, it still takes heed of micro and macro consequences of policy measures. It won’t be long before The Institutions will notice this and start to press for an increasingly legal instead of economic nature of these watchdogs.
The Levy Institute. Back in 2008 the Fed did not have a clue about shadow banking (though shadow banks are called ‘banks’ for a reason…), according to Matthew Berg who scrutinized the 2008 minutes of the meetings of the Fed. Aside – in Europe, at least part of securitized mortgages (which were shifted from the balance sheets of the official ‘MFI’ banks to the balance sheets of shadow banks) were even removed from the estimates of money and credit, as they were not visible on the balance sheets of the official banks anymore, which means that monetary statistics underestimated the growth of money and credit in those days. Clueless in Frankfurt.
The Worldwatch institute. About a two months ago it published its ‘flagship’ The state of the world in 2015 report about the interplay between economic and environmental issues. An excerpt:
“The very pillars of contemporary success—among them, high degrees of specialization, complexity, and manifold interconnections—could very well turn out to be humanity’s Achilles heel. Specialization works well only within certain tightly controlled parameters, but it could be useless under changed circumstances. Complexity and interconnections multiply the strengths and advantages of a viable system, but they also make it susceptible to a rapid cascade of destabilizing impacts. Such a highly productive system is actually low on resilience because it focuses on constantly reducing any slack or redundancy—the exact features that allow for resilience to materialize. Author Thomas Homer-Dixon quotes Buzz Holling, a leading Canadian ecologist, who has warned that the longer a system is locked onto a trajectory of unsustainable growth, “the greater its vulnerability and the bigger and more dramatic its collapse will be.” Seen through this broader lens, it is clear that the challenge for humanity today is no longer anything like what it faced in the 1960s and 1970s, when developing pollution abatement technologies and lessening the degree to which resources were wasted provided a more-or-less adequate answer to the most pressing problems of the day. The world now needs to adopt solutions that change the entire system of production and consumption in a fundamental manner, that move societies from conditions of energy and materials surplus to scarcity, and that develop the foresight needed to recognize still-hidden threats to sustainability. This goes far beyond the realm of technical adaptations, and instead requires large-scale social, economic, and political engineering—in an effort to create the foundations for a more sustainable human civilization.”
Today, the presidents of five European Institutions presented a “Roadmap for the future of the Economic and Monetary Union“. According to Mario Draghi,
“The report describes how we can move from the current system of coordination by rules to joint decision-making within common institutions … We need a quantum leap in European integration. We need to address the fragilities of our economies; to ensure that divergence will become convergence again; and to safeguard the irreversibility of monetary union. Our report provides the roadmap for this.”
* The ideas are not new. Look at this post from over three years ago.
* The ideas will lead to the de facto abolishment of independent nation states in the Euro area. A quote from a three year old speech from José Manuel González-Páramo, member of the board of the European Central Bank (emphasis added):
In other words, the euro area is responding to the crisis by creating a new and more comprehensive model of economic governance. This is aimed at preventing imbalances in all policy areas before they can trigger crises – and managing crises more effectively when they do arise. In many ways, this response is sui generis and departs from the template we associate with political federations. For example, the “two pack” gives the Commission the power to demand the kind of reforms that the U.S. federal government could not demand of a U.S. state. Moreover, the federal government would not be able to sanction a state if, for example, its tax code was leading to a local housing bubble. This is now not excluded in the euro area under the Macroeconomic Imbalances Procedure.
From: David Ruccio
Seven years after the global financial crash, we’re still in the midst of a full-scale war of finance.
On one side of the Atlantic, U.S. Court of Claims Judge Thomas Wheeler found that former AIG head Hank Greenberg was indeed correct in claiming the government overstepped its legal boundaries in its “unduly harsh treatment of AIG in comparison to other institutions” that was “misguided and had no legitimate purpose.” The ruling basically confirmed the Fed’s right to create a gigantic bailout of Wall Street but denied its ability to actually determine the use of the funds by the “taking of equity” in essentially worthless financial institutions like AIG.
Finance thus continues to win the war in the United States.
And, as Ambrose Evans-Pritchard [ht: sw] explains, finance is engaged in all-out war in Europe.
Rarely in modern times have we witnessed such a display of petulance and bad judgment by those supposed to be in charge of global financial stability, and by those who set the tone for the Western world.
The spectacle is astonishing. The European Central Bank, the EMU bailout fund, and the International Monetary Fund, among others, are lashing out in fury against an elected government that refuses to do what it is told. They entirely duck their own responsibility for five years of policy blunders that have led to this impasse.
They want to see these rebel Klephts hanged from the columns of the Parthenon – or impaled as Ottoman forces preferred, deeming them bandits even if they degrade their own institutions in the process.
The European Central Bank is actively inciting a bank run in Greece and threatening to throw that country out of the euro zone if it resists the demands of the creditors, represented by the troika, without ever seriously considering the proposals put forward by the democratically elected Syriza government.
The truth is that the creditor power structure never even looked at the Greek proposals. They never entertained the possibility of tearing up their own stale, discredited, legalistic, fatuous Troika script.
The decision was made from the outset to demand strict enforcement of the terms agreed in the original Memorandum, which even the last conservative proTroika government was unable to implement regardless of whether it makes any sense, or actually increases the chance that Germany and other lenders will recoup their money.
At best, it is bureaucratic inertia, a prime exhibit of why the EU has become unworkable, almost genetically incapable of recognising and correcting its own errors.
At worst, it is nasty, bullying, insistence on ritual capitulation for the sake of it.
The troika, in other words, is acting like a unified debt collector, and is willing to go so far as to threaten to topple a democratically elected government to set an example that, in Greece and elsewhere in Europe, finance is willing to do anything and everything to win the war.
Unemployment in Poland is depressingly high. But quite a bit lower than in most other Euro Area periphery countries. Only Romania, Hungary and the Czech Republic (not included in the graph) do better and of these three only the Czech Republic seems to have had a kind of stable development since the middle of the nineties. The other countries did not only see very high levels of unemployment but often also enormous changes in the level of unemployment. In the long run you will be unemployed – again. The Polish and the Czech example however shot that it does not have to be like that. Countries can also pursue policies aimed at stabilizing the flow of spending instead of increasing prices of existing financial and real assets (houses!) by maximizing the stock of private debt. All data Eurostat.
One of the most astonishing recent developments is the breakneck speed with which the Italian employment rate for the 55-64 generation has been increasing (graph 1). For people who are not too familiar with these statistics: the Italian change is extremely fast.
Employment rates in countries like Sweden and Iceland are, respectively, about 70 and 80% (this is the highest rate of Europe), which means that the Italian rate is still quite low (graph 2).To quite an extent the difference can be explained by low Italian employment rates for 54+ women. But the flexibility and dynamism Italy shows comes at a cost. Employment of the 25-54 generation is declining (graph 2). This contrary to the situation in Spain, where employment rates for the younger as well as the old are still pretty low but increasing. Italy does not need job swapping dynamism and musical chairs flexibility at this moment – it needs jobs.
In the fourth quarter of 2014 employment (measured in persons) in the Euro area was still 4,5 million below the level in the fourth quarter of 2008. In the non-Euro countries, employment has increased a little in this period. The main difference between the two areas: considering the fact that the population of the non-Euro area (dominated by the UK, Poland and Romania) is (very roughly) half the size of the population of the Euro area the graph shows that the decrease of employment in sectors like manufacturing and construction was, relatively, roughly as large in the non-Euro area as in the Euro area. The increases in employment in sectors like hospitality and education were however much larger than in the non-Euro area – sometimes even in an absolute sense! Only the health and social sector did really well, in the Euro area. Mind that the growth sectors shown in the graph are, except for hospitality, mainly dependent on domestic demand.
Employment in Europe is growing – but at a somewhat disappointing rate (graph 1). Around 2006, when unemployment was quite a bit lower than today, the rate of employment creation was about twice the present rate – which indicates that there are labour supply is not a significant constraint for a much higher rate of increase. Europe might however chose to follow the German example. In recent years, most of German job growth was caused by shorter work weeks. Job growth for women was consistently higher than job growth for men (graph 2), which is connected to ‘Schumpeterian’ changes in the economy. Employment in male dominated sectors like manufacturing and (after 2008) construction declined, employment in female dominated sectors like health care and education increased. More on this tomorrow. All data: Eurostat. Mind that employment growth in the non-Euro block has been positive since 2021Q3, despite the austerity slump in the Euro area.
Looking at neoclassical macro-models through the lens of economic statistics. Today: consumption.
According to a Eurostat headline, “In 2014, CO2 emissions in the EU estimated to have decreased by 5% compared with 2013“. It is important to know if this decline was caused by technological progress or by lower consumption and/or investment. Alas, these data are too vague and fuzzy to answer such questions, as the article also states:
It should … be noted that imports and exports of energy products have an impact on CO2 emissions in the country where fossil fuels are burned: for example if coal is imported this leads to an increase in emissions, while if electricity is imported, it has no direct effect on emissions in the importing country
One of the stated goals of the Euro Area institutions (including the ECB) is a high and stable level of employment. Male employment in southern European countries is however way below historical levels and showed large swings, while male employment in ’emerging europe’ is sometimes even lower than around 2000, when levels were pretty disastrous. To state it otherwise: in 2007 and 2008 no country had a male employment level below 75%, in 2014 only tiny Estonia had a level above 75%.
In the curious case of the Icelandic economy the admirable economist Tyler Cowen misses the wood for the trees. The situation is simpler than he indicates:
A) Thanks to financial machinations of out of control banks Iceland experienced a terrible financial crisis from which it has not yet fully recovered (graph), despite capital controls and the right sizing of debts and devaluation ( Mind: devaluation does not seem to increase exports. See this recent ECB study, look here for J.W. Mason on this. Devaluation might however direct domestic demand from imported to domestic goods).
B) It did, however much better than, for instance, the Baltic states (and Ireland, see below), Read more…
1) Greece. According to my Twitterstream the proposal of The Institutions aims for Grexit. An offer you can refuse. In a country where unemployment increased to about 26% and wages have been cut with 15 to 20% the low VAT rate (food, medicine,…) seems to have to increase from 6,5 to 11%. At the same time, pensions have to be cut. Mind that during the last three years banks received government transfers of about 25 billion – and The Institutions only welcomed this. My advise to Greece: transform the country into a bank (latest: seems that the proposal to decrease especially the purchasing power of the poorest Greeks has been refused). miscellaneous Read more…