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.

Is China trying to “lock up” the world’s natural resources?

Got your attention didn’t I?  Here more:

The rapid emergence of China as a major industrial power poses a complex challenge for the world’s natural resources. This column argues that the Chinese government-backed investments in natural resource supplies are predominately in areas that will help expand, diversify, and improve competition in the global supplier system. But potential geopolitical consequences remain a reason for concern.

In non-jargon-speak, Chinese actions will actually benefit non-Chinese buyers of natural resources by increasing potential supply.  This is because China invests in the smaller resource extractors, who now have the capital to explore and develop virgin fields.  We need not fear or resent aggressive Chinese moves towards resource procurement.

But as always, the devil is in the details.  T.H. Moran makes his cheery prognosis only with respect to physical supply and not with respect to the attendant political machinations, where the elites in poor, but resource-rich nations jockey for a share of the spoils in an orgy of violence and corruption.  But then, one cannot single out the Chinese in this regard.  US and European resource extraction is similarly dogged by political violence and / or corruption all over Africa and Asia.  Angola, Equatorial Guinea, Nigeria and Tajikistan immediately come to mind.

The full article is here.

Notes on the Euro Debt Crisis

The Euro project is in deep trouble as contagion spreads to Spain and Italy, the big southern countries.  Alarm bells are also going off in France as, like early swallows in late winter, reports and opini0n pieces are appearing on the likelihood of France losing its AAA rating.  The bond spread between French and German bonds had spiked to about 90 basis points and is now simmering at about about 48.  Indeed, the commentariat is of the opinion that the EU’s ‘Lehman moment‘ is fast approaching.

In a valiant attempt to forestall Spanish and Italian fiscal crises, the ECB has shed its habitual reticence in all matters fiscal and has been intervening in the bond markets at an unprecedented rate.  Last week, it bought €22 billion in bonds.  By contrast, its intervention in bond markets since the start of the Greek crisis had been a mere €74 billion.  This trend cannot last.  The volume of bond purchases needed to keep the spread of Italian and Spanish bonds at affordable levels would result in the ECB significantly exceeding its limited fiscal mandate.

Edward Hugh at A Fistful of Euros puts it well.

… the issue involved is no longer one of the mechanics … The current crisis is an existential one, which if left unresolved will rapidly become a matter of life of death for the single currency.

The reason the ECB is impelled to intervene is because of the run on Italy.  More Hughes:

With something like 1.9 trillion Euros in outstanding debt, Italy is the planet’s third largest issuer of sovereign bonds … and although the relatively high savings rate of the Italian private sector (both families and corporates) means that much of the debt is in Italian hands, the deep interlocking of Europe’s financial system … means that a considerable portion is not …

He has more to say on why Italy has escaped attention so far.

The high profile given to the Greek issue meant that to a large extent Europe’s problems were perceived as being fiscal deficit ones, with more fundamental issues like lack of convergence, current account imbalances, cumulative debt and low economic growth all being pushed well into the background.

And these macroeconomic problems are harder to tackle in the Eurozone than in a country like a national currency because of difficulties in synchronizing monetary and fiscal policy.  In the recent words of Gordon Brown, the Euro, when created had

no crisis-prevention or crisis-resolution mechanism and no line of accountability when things went wrong.

After arguing against moving towards three outcomes for the Eurozone, i.e.

  1. Fiscal union
  2. Muddling through through, for example, piecemeal expansion of the EFSF
  3. Complete break up of the Euro, with each member going back to its original currency

Hugh argues for a fourth option, the creation of a 2-Euro zone.  The first zone would consist of the northern countries; Germany, Austria, Holland, Finland and perhaps a couple more.  The second zone would consist of the big southern countries and France.  He then goes on to describe the benefits of this separation, as well as tackle some of the details.  These include the problems faced by northern banks holding southern assets, due to a sudden devaluation of said assets. While inevitable, Hugh argues that the devaluation could be made more palatable by likening it to the haircut being currently proposed for all Greek creditors.

An interesting read.  Recommended.

Riots and the European Welfare State

This one is from Chan Akya at Asia Times Online.  The impetus for this article is the recent rioting and looting in London and other British cities.  The focus, however, is on the European welfare state in general.  While undoubtedly polemical in tone, it’s an entertaining read and I came away with a few points that merit further rumination.

  • These riots have nothing in common with the Arab Spring uprisings.  While, in the Arab world, the masses agitated for a greater voice, in England, the rioters chose to snatch flat screen TVs and other social identifiers of a consumerist society.
  • The supply of free housing, healthcare and housing has served to spoil a large segment of the underclass (from which the rioters came) rather than just ensure a basic quality of life.  The social state has created a sense of entitlement, which has bred a resentment among those without the products in the ads that finally erupted in violent orgy of consumerism.
  • The riots are just the first among many.  Indeed, one might argue that these riots were not even the first.  I do recall car burnings and urban unrest in the banlieues of Paris a couple of years ago.
  • The welfare state is a critical factor, prima facie, behind the European fiscal crisis, in that it contributed to unsustainable debt dynamics.
  • Yet, perhaps symptomatic of how far the notion of social welfare has seeped into the European psyche, there has been no discussion of its pruning.  Instead, the policy discourse has been about technical details:  the size of the EFSF, the timing of the Greek default, the ECB rate policy etc.
  • The social welfare state is unsustainable.  There is no reason for rising Asian powers to continue paying for European social welfare through bond purchases.

In the abstract, a welfare system can be thought of as an institutionalized transfer mechanism from the wealthy to the poor.  The benefits to the poor are obvious.  The mechanism also benefits the rich, in that it co-opts the poor into the existing system of economic relations: the poor now feel that they too gain from the existing arrangements.  They are less likely to challenge the status quo.

The welfare state can then also be used as a stalking horse for other ideas to distract the poor.  For example, the immigration debate can be framed in non-racial and non-exclusionary terms.  Rather than use far right rhetoric, politicians of all stripes can now talk in economese: about how immigration is too expensive through its impact on the welfare state.  The argument is specious.  The basic problem is adverse demography.  There are too many people living on the public dole and too few people paying into the system.  The outflows into pension schemes, healthcare, unemployment benefits and education are much higher than tax inflows from workers.

As always, the article has some entertaining images:

A lazy and semi-educated Chinese man will probably not get married given the country’s ratio of males to females; and even if he did, life would be made hell by the curses of his mother-in-law. A lazy Indian is likely to decline in society to the point where all support systems fail him. leading to an early death or a violent one. There are no lazy Africans because they wouldn’t survive to adulthood.

A lazy European on the other hand, gets to sit at home and watch television while receiving benefits from his government.

The point is valid.