The Economist recommends the following:
- Facilitate an orderly Greek default
- Support other Eurozone countries in the bond markets through necessary purchases
- Cut interest rates
I think that the first recommendation is a no-brainer. The Greeks are hopelessly over-extended and will never be able to meet all their debt obligations at face value. It is also unreasonable for Greek debt-holders to expect to not take losses on their investments. No one likes losing money, but investments are inherently risky. These risks are typically factored into the cost of the investment. Risks associated with Greek debt may not have been factored in correctly, but there the fault lies with the ratings agencies and the investors themselves, who obviously did not do their due diligence. Yes, we understand that independent due diligence is expensive and time-consuming, but why should tax-payers now recompense investors who cut corners? The tricky bit will be in ensuring that the default is orderly.
The second recommendation should work towards preventing risk contagion from destroying other vulnerable economies. It is a commendable action in the sense that it aims to prevent further defaults and to protect citizens in vulnerable economies from the depredations of financial markets. It is problematic because it implies the use of taxpayer money to placate market sentiment. It was market over-optimism and financial chicanery that contributed to the debt overhang in the first place.
The third recommendation is geared towards providing monetary stimulus to a spluttering European economy. Rates are already low at 1.5%. Europe is already in a liquidity trap. I don’t see an interest rate cut as being useful, but then, on the other hand, it can’t hurt in the short run. In the long run there may be inflationary pressures, but given the weakness of aggregate demand and the timidity of the investment community, this is not a foregone conclusion. We may see long term deflationary trends a la Japan instead.
I never realized that the situation on the ground was quite so dire. The international media covers only the money. The social cost remains buried.
- One third of the country’s 165,000 commercial firms shut down; a third can no longer pay wages
- The billions of euros in tranches from the EU actually flow back immediately into the EU – reportedly, 97 percent of it – as annual loan repayment instalments to the banks and as new interest charges
- There have been no textbooks in the public education system for months, since the state owes huge sums of money to the publishers and the publishers have stopped the deliveries
The question that arises is: where did all that money go? Did the powerful and politically well-connected manage to siphon off everything? Or were all Greeks living beyond their means, as goes the primary narrative?
After much noise over the past week in the German press about German preparations for a Eurozone sans Greece, Fr. Merkel comes along and stresses that the possibility kicking the Greeks out does not arise.
What we have here is a high-stakes game with a multitude of players positioning themselves to benefit most or lose least no matter what the final outcome. (I was tempted to draw an analogy to a poker game, but the analogy fails because the rules are rather murkier here.)
Yet, I would say that slowly but inexorably the Greeks are being pushed out of the Eurozone.
The WSJ piece that inspired this rumination is here.
Margaret Thatcher and her party members expressed reservations about joining a common currency way back in 1990. Some arguments used to buttress those reservations seem remarkably prescient today.
… the imposition of a single currency, as opposed to a common currency, would rule out for all time the most effective means of adjusting for national differences in costs and prices … that in turn would cause widespread unemployment, which would probably exist on a perpetual basis, and very serious financial imbalances …
… there would have to be enormous transfers of money from one country to another … poorer countries … would get those big transfers of money …
… this was not really about monetary policy at all but about a back door to a federal Europe, taking many democratic powers away from democratically elected bodies and giving them to non-elected bodies …
The full piece is here.
From Spiegel Online.
The rest of Europe is losing patience with Athens. And after 18 months of crisis in the country, there is still no improvement in sight … there are growing doubts over whether the Greek government truly understands how serious the situation is.
Greek government has been unable to meet its fiscal responsibilities and promises. The failures have been on multiple counts. Tax evasion remains widespread. Worse, some tax departments have stopped working, protesting their 20% salary cuts.
Greek citizens and companies owe the state a total of almost €40 billion in taxes. The sum would more than cover the government’s budget deficit for 2011 … Some 17 tax offices did not perform a single audit in the first seven months of the year.
There have also been problems with proposed privatizations because of fears regarding labor union intransigence.
Union organizers at the electricity monopolist DEI are seen as especially radical. They have already threatened to cut off electricity if the company is privatized.
The German finance ministry has been working on a how to minimize the pain for the Eurozone.
The German plans focus on two instruments … preventive credit lines, which would involve the EFSF issuing bridge loans to financially weak countries … [and] financial injections for banks …
Care is being taken to build a fence around Greece. The current message is that only the Greek situation is irredeemable. The other vulnerable economies have been able to push through EU or IMF recommended measures, or at least seem more serious about implementing said measures.
The Irish … [are] regaining the confidence of financial markets, as evidenced by a significant decline in the risk premiums on Irish government bonds in recent weeks.
Portugal… is cutting back healthcare services and salaries for government employees. Hardly any government expenditure has remained untouched. At the same time, Coelho is raising taxes … There has been some grumbling so far, but they have largely tolerated the government’s decisions
But the Greeks also promised higher tax revenues and lower expenditures. Will Portugal be able to deliver? Or will we hear the same words spoken to another country next year?
Who wants to bet against the event that Greece defaults?
Germany has been steadily increasing the buzz around such an event, with well-placed quotes in the media about the inevitability and, indeed, the desirability of such an event.
From Ambrose Evans-Pritchard at The Telegraph. As always, he is a little sensationalist, but after controlling for that factor, it’s still a worrying read.
Clearly, the Germans are losing patience with the foundering EU project, as well as the importunate southern states that are threatening to drag Germany into the quicksands of fiscal crisis. Living in Germany, I can attest that these sentiments are fairly widespread.
I feel that the break with the EU bureaucracy will have to come about sooner or later. It is a question of timing and the repercussions are unknown, but will probably be rather destabilizing. Will the eurozone break up? Will each country retreat into its own currency, or will we be looking at two currency blocks: a northern and a southern? What will the implications for debt liabilities be? And what about the sheer mechanics of switching currency?