Category Archives: policy

What should Mario Draghi do?

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.

Oh Bureaucracy!

As The Economist reports, the apparatchiks in Brussels are again arguing about wording and phraseology while Europe collapses around them.

At issue is a disagreement over who should speak on a particular subject – the member-states, the European External Action Service (EEAS, the EU’s newish “foreign ministry”) or the European Commission (the EU’s civil service)? And on whose behalf should they claim to speak – the member states collectively, the EU as a whole, or just as a particular body, eg, the Commission?

I read this and I have an image of a melee where every one attacks each other with deadly intent and feather dusters.  No one ever wins or loses and there is no denouement, but the contrast between the contrast and the intent is rather amusing.

Maggie Thatcher, Hard ECUs, and the Eurozone shambles

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.

Greece en route to default

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?

Greece on the precipice

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.

More here.

German endgame for EMU draws ever nearer

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?

Arundhati Roy makes sense (for once)

For all her bleeding heart liberalism and idealism, one cannot doubt her intelligence.  She’s written a cogent and damning critique of Anna Hazare and his Lokpal movement.

First, the Lokpal sturm und drang is analogous to the Maoist insurgency, in that both seek the overthrow or severe curtailment of the Indian state. But,

One [is] working from the bottom up, by means of an armed struggle, waged by a largely adivasi army, made up of the poorest of the poor. The other [is working] from the top down, by means of a bloodless Gandhian coup, led by a freshly minted saint, and an army of largely urban, and certainly better off people.

Second, althought he professes himself to be Gandhian, there is nothing Gandhian about his demands.

Contrary to Gandhiji’s ideas about the decentralisation of power, the Jan Lokpal Bill is a draconian, anti-corruption law, in which a panel of carefully chosen people will administer a giant bureaucracy … with the power to police everybody from the Prime Minister … down to the lowest government official.

Third, he does not really seem to be concerned about the travails and tribulations of the dispossessed masses he claims to champion.

Oddly enough we’ve heard him say nothing about … the farmer’s suicides in his neighbourhood, or about Operation Green Hunt further away. Nothing about Singur, Nandigram, Lalgarh, nothing about Posco, about farmer’s agitations or the blight of SEZs.

Fourth, we seem to have forgotten about his connection with and admiration for the Hindu right wing.

He does however support Raj Thackeray’s Marathi Manoos xenophobia and has praised the ‘development model’ of Gujarat’s Chief Minister who oversaw the 2002 pogrom against Muslims.

And finally, and perhaps most damning of all, where is all the money for his movement coming from?  It seems that Indian and foreign corporates have been very generous.

The campaign is being handled by people who run a clutch of generously funded NGOs whose donors include Coca-Cola and the Lehman Brothers. … Among contributors … there are Indian companies and foundations that own aluminum plants, build ports and SEZs, and run Real Estate businesses and are closely connected to politicians who run financial empires that run into thousands of crores of rupees.

But why?  To find out, you can read the original piece in The Hindu.  To give you an inkling, it has to do with the corporate takeover of the Indian state.