Hard News: European Horror Stories
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Mechanically, it would be very hard for Greece or any other Eurozone state to leave the Euro and create a new currency.
- it would be a legal minefield. If I have a contract to be paid Euros, then will that be enforcable if one side is Greek?
- assuming that Greek bank deposits were to be forcibly converted to "new Drachma" the necessary legislation would take months to pass. In the interim, there would be a run on the banks, a bank shutdown, or both.
- all the systems would need to change, which would require IT contractors to be hired. And paid in Euros. Lots of Euros. In advance. [rubs hands]
- once a new currency got created, Greece would have to pay high interest rates to compensate for the currency risk of using a weak, lightly traded currency with an expectation of devaluation.
A much better approach would be for them to keep using Euros but (partially) withdraw from the ECB. That would put Greece in the same position as neighbouring Kosovo and Montenegro, who use but don't issue Euros.
It should be remembered that the most important job of a currency is to act as a medium of exchange for people's daily lives. The secondary role of acting as a form of stored value for capital owners has been allowed to eclipse this. (And the Euro has been very effective at the former - it enables a European to trade in their own currency in a block of 17 states with over 300 million people).
[Some of this I posted on the grauniad previously]
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A recent news item detailed the hours worked in various ECC countries,Greek workers
did signifigantly more than the Germans !
I have been talking with friends in Moldova, no govt for 3 years,despite food in the markets -no jobs, mean MANY are vitually living on water,despite no rent,but gas for cooking & hotwater , 200euros per month many cant pay,I'm told 10,000 have died of stavation,kids to weak to go to school, so teachers are being fired,much suffering ! -
Recent New York Times Magazine article "The Way Greeks Live Now" was useful for an insight into the experience of the Greek people. It includes this: "Even the guy selling you souvlaki in Athens can quote statistics from the Organization for Economic Cooperation and Development showing that the average Greek worked 2,116 hours in 2008, while the average German worked 1,426 hours."
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Rhetoric that would once have been deemed unacceptable is now becoming more mainstream here. A recent demonstration in Athens involved a performance with an actor dressed as Hitler and another as an SS officer pretending to rape a woman representing Greece.
There's a context to this. the last time the Germans ran the Greek economy, they looted the place so thoroughly that 300,000 Greeks starved to death.
The great achievement of the European Union was to bury all that and let Europe move on as a settled continent. German moralising and subversion of democracy has ripped off that scab and brought all the nationalistic pus bubbling to the surface again.
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The Euro was a load of bollocks from day one, you can't have one monetary policy with multiple different fiscal policies, it can't and never will work over a period of time, it is an impossibility. Either countries with fiscal policies different (looser) from the majority leave the zone or all countries adopt the same fiscal policies, it has to be one or the other.
The Euro project is and always was an ego driven political construct about creating a European super state to enable Europeans to collectively still be internationally significant and relevant and be able to challenge the US global "hegemony". The Eurocrats were never shy about expressing this as their objective and they never gave a damn about democracy and the will of the people of the various European countries, whether they wanted to participate in this grand project or not. A cynic would say that the Germans are trying to achieve with the Euro what they couldn't achieve with Panzers and Stukas 60 years ago.
The troika's 'austerity" medicine being forced down Greece's throat only partly addresses Greece's problems. Without a doubt the Greek government spent for too much money for far too long without undertaking necessary reforms while they had the time, to address, for example demographic change by raising the age when pensions kick in (paging John Key...), and that needs to be addressed, but like in a business, you can't cut your way to prosperity, you need to grow the top line, to generate revenue / economic activity and tax revenues. Nothing that I am aware of that the troika is making Greece do is growth oriented. The poor bastards in Greece are in for a miserable time for quite a while.
A sobering example of the consequences of bad political and economic policies. Unfortunately there are plenty of such examples of disastrous policies around the world in recent times. The Fed's easy money policy of the 2000s and continuing today, the US Congress in the 1990s making banks give housing loans to people who couldn't afford them, land use restrictions that force up the price of real estate to absurd levels, the current US Administration’s “money grows on trees” approach to its budget. Sadly the list goes on... Even if you could get rid of these bad policies tomorrow, their impacts will be with us for a quite some time. -
"The Euro was a load of bollocks from day one, you can't have one monetary policy with multiple different fiscal policies, it can't and never will work over a period of time, it is an impossibility"
"The US dollar was a load of bollocks from day one, you can't have one monetary policy with multiple different fiscal policies, it can't and never will work over a period of time, it is an impossibility"
Something like a third of US spending is by state and local government. Also, the variation in GDP per capita in US states (excluding DC) is 3:1 - the Eurozone variation is 2:1 (excluding Luxembourg).
Truly, the US dollar should have collapsed by now. How can you have Washington and West Virginia in one currency union?
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Ian MacKay, in reply to
.......but like in a business, you can't cut your way to prosperity, you need to grow the top line, to generate revenue / economic activity and tax revenues.
Isn't that what is happening in NZ at this time? Hugely different in scale but the same in principle?
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giovanni tiso, in reply to
"The US dollar was a load of bollocks from day one, you can't have one monetary policy with multiple different fiscal policies, it can't and never will work over a period of time, it is an impossibility"
James has a point, and there is every indication that the architects of the union were aware of the problem from the start, but counted on a crisis to force governments to accept the necessary greater political integration. It's just that the crisis turned out to be rather more catastrophic than predicted. But as things stand, as Michael Burke has written, it is as if the existence of the US dollar were under threat because Rhode Island had a big deficit.
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the average Greek worked 2,116 hours in 2008, while the average German worked 1,426 hours.”
That’s about labour productivity. German workers are much more productive than Greek workers, so they earn more, so they work less.
The US dollar was a load of bollocks from day one, you can’t have one monetary policy with multiple different fiscal policies, it can’t and never will work over a period of time, it is an impossibility
But voters in places like California and New York seem happy with permanent wealth transfers to places like Alabama and Mississippi, while German voters don't seem so taken with the idea.
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Mr Magoo, in reply to
Isn’t that what is happening in NZ at this time? Hugely different in scale but the same in principle?
Why yes Ian, yes it is. And NZ (aka idiots inc.) just voted in the guy who promised to not only keep it up but cut deeper and make us even poorer as a country.
That is exactly what is going on...
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giovanni tiso, in reply to
That’s about labour productivity. German workers are much more productive than Greek workers, so they earn more, so they work less.
It's more that they don't work at the same jobs. And needless to say, but I'm going to say it anyway, having a lower productivity doesn't make you lazy or mean you work less hard.
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No that thing that makes intuitive sense does so because it is sensible.
But this ... conveniently overlooks the imbalances that this conduct causes elsewhere in the system, as well as that the strategy works – to a point – precisely because of these imbalances.
Unfortunately that point to which the system "works" can be seen (with hindsight) as being 2008. At which point the system ground to a halt. As opposed to:
If everyone behaved like Germany, overall economic activity would grind to a halt.
Really? It might I suppose, but it hasn't actually been tried so we don't know for sure.
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I subscribe to John Mauldin's excellent e-letter. (Hat tip to Bernard Hickey). He provides a lot of insight to the problems we face and, while conservative in outlook, he is a pragmatic person who doesn't like entrenched ideologies.
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Sofie Bribiesca, in reply to
I'm going to say it anyway, having a lower productivity doesn't make you lazy or mean you work less hard.
Thank you.
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As unfathomable as the European debt crisis can seem, one clear moral narrative has never been far from the surface: the feckless Greeks had it coming. Their explosion of debt-fuelled public spending, their workshy, tax-dodging ways got them where they are and they're just going to have to wear the consequences.
That narrative is totally correct.
The source of most of the bailout funding is, of course, the German taxpayer...
The average German taxpayer can't afford to bail out the Greeks and expect to have any sort of retirement pension payments from the German government when she retires.
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This TAL radio documentary on the Eurozone crisis ought to be required listening.
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And on a less funny note, Metafilter user "costas":
We Greeks are not blameless; heck, I'll go ahead and say that we brought this crap on ourselves, by over-borrowing for decades, electing politicians who never even tried to explain finance to the population instead opting again and again for borrowing money to buy votes, etc.
But: at this point, the Greek economy has been running on steroids (cheap money) for 20-30 years (depending at which point you start counting). The actual productivity of the country is very low (even if you exclude the massive, bloated, public sector). Most of manufacturing has left the country for our cheaper neighbors to the north and the east. The youth is over-educated and unable to find any jobs anyway (under-30 unemployment is nearly 50%).
Foreigners draw parallels with Argentina: bullcrap; Argentina was a growing economy with a strong exporting public sector. Greece at this point imports basic staples, even ones we shouldn't need to be importing, like olive oil and tomatoes. Our ruling class, and I count private sector businessmen, are clueless. For decades they've opted out of basic productivity changes (IT, supply chains, outsourcing, healthy banking) so that at this point they themselves are lacking the knowledge and skills to actually manage their way out of this crisis. And of course, the new generation hasn't had the exposure to real work to have built up any skills yet.
Bottom line: there is no way out of this crisis without massive structural changes that will span at least a generation and most likely longer. Our GDP drop has already exceeded that of the Great Depression in the US and it will keep going.
Let's not get into the usual red herrings of tax avoidance, etc. Payroll withholdings for those that do have jobs are at this point over 50%, even for entry-level jobs. At the same time, you can't go into a public hospital and expect service without bribing someone; public schools are crap; crime is rising. We have Scandinavian-level taxation with North-African level public services. You'd be avoiding taxes too.
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Mr Magoo, in reply to
While I am sure John Mauldin is a smart guy his front page photos did make me throw up a little in my mouth...
I could not find the open letter on his page or on interest.co.nz. Probably did not know what I was looking for...
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Russell Brown, in reply to
We have Scandinavian-level taxation with North-African level public services. You’d be avoiding taxes too.
Ouch.
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nzlemming, in reply to
We have Scandinavian-level taxation with North-African level public services. You’d be avoiding taxes too.
Ouch.
It's okay. 3 more years of Key and we can catch up.
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Aidan, in reply to
Truly, the US dollar should have collapsed by now. How can you have Washington and West Virginia in one currency union?
I didn’t even know there was a term “optimal currency area” until a year ago, but even I know that this is silly. The US has a federal government. It redistributes taxes into social programs, amongst other things.
It also has a bank of last resort that will print money if it has to.
Edit: Ooops .. did I misunderstand, was that the point of your comment? If so, sorry.
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Ah. I’m finding the Greek Default Watch blog quite useful.
Ten Surprising Facts About the Greek Economy is quite … surprising.
These two:
Fact #7. When you add private debt, Greece’s overall indebtedness is low in Europe. Everyone knows that Greece’s problem is debt. But it is, in fact, public debt that is the problem. A graph shown in a presentation by the former minister of finance adds public and private debt – when the two are combined, it is clear that Greece is at the low end of the spectrum. What distinguishes Greece is not high debt overall, but high government debt.
Fact #8. Greece’s debt was mostly accumulated in the 1980s and early 1990s. Greek society has yet to have a serious debate about how it got into this mess. What is amazing is to see just how recent this debt accumulation is: in 1980, Greece’s public debt was merely 22% of GDP; by 1993, it was 98% where it stayed (plus or minus) for over a decade before going higher in this crisis. In other words, Greece’s debt problem was mostly created over a 13-year period and it was perpetuated thereafter.
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Nathaniel Wilson, in reply to
The great achievement of the European Union was to bury all that and let Europe move on as a settled continent. German moralising and subversion of democracy has ripped off that scab and brought all the nationalistic pus bubbling to the surface again.
Nationalistic pus? Germany's largest tabloid suggesting Germans are not happy doesn't really mean much eh, but I'd be moralising too if it was me having to pay for the bailout.
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Since the Germans can't pay, the money to finance Giovanni's socially progressive wonderful future would have to come from somewhereelse.
China, Brazil and India are possibilities, but even an Italian communist might balk at the counter-intuitiveness of having some peasent in the Amazonian rainforest pay more tax so a Greek hairdresser can retire at 45.
The Gulf Arabs have lots of petrodollars and there are quite a few muslims in Europe so that could work, but socially progressive might be off their agenda.
The eurozone could monetise their debt (print lots of money) and then in a few years we can have essays looking at the tracking of 10,000 euro notes near to the Swiss border. Probably much of southern Europe (Giovanni included) is angling for this print lots of money option, but the Germans have very deep cultural misgivings about it.
Austerity seems preferable to all of those.
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