Category: Greece (Page 1 of 2)
Nobody really knows what will happen. Nobody even wants to talk about it.
Spanish banks are carrying a lot of bad debt from the construction bubble there. The banks have not properly acknowledged this debt in their books, and this has sapped investor confidence in them.
The new Spanish Government has introduced sweeping labour market reforms that will improve Spanish growth potential in the next few years, but that is not immediate enough to kick start the Spanish economy today. The true financial position of many Spanish regional governments is obscure, and that saps confidence too.
Greece, despite all the austerity, still has a big balance of payments deficit. In other words, Greeks are buying more abroad than they are selling there. Until that is tackled, nobody will want to lend to Greece. It seems Greek banks are using cheap ECB money to lend to some Greek consumers who are spending it abroad.
Meanwhile, other Greeks have experienced big wage cuts, but, because the distribution system in Greece is riddled with monopolies and restrictive practices, Greek prices have not come down along with wages. This is why many Greeks are angry.
Portuguese banks have a big exposure to a possible Greek collapse. Total Portuguese exposure to Greek debt comes to 7% of Portuguese GDP, as against a comparable exposure of 5% for France, 4% for Germany, and 2% for Ireland. Relative unit labour costs in Portugal have hardly come down at all since 2007, whereas they have come down substantially in Ireland and Greece. All this makes Portugal particularly vulnerable to a loss of confidence that might come, if Greece defaults again.
The recent decline in voter confidence in the government of Mario Monti in Italy is also a big worry. His reform programme is only beginning to take effect, and the fear has to be of a return to populist politics, of a kind that would stop long overdue action Monti is taking to clear the arteries of the Italian economy, and lift its growth potential .
Two issues, growth potential and political capacity to implement decisions, are at the centre of our present dilemma.
The OECD has done some calculations on the growth potential of various countries from 2016 to 2025, making assumptions based on growth or decline in the working age population and likely productivity growth. These estimates show huge differences between euro area countries. OECD thinks Ireland has a growth potential in that period of 2.7% per year, whereas Germany only has a growth potential of 1.2%! This is explained by the likely decline in Germany’s working age population.
Interestingly, Spain has a growth potential of 2.3%, whereas Greece and the Netherlands are deemed to have a potential of just 1.4%, and Italy 1.5%, almost as low as Germany. These figures, if valid, may explain why Germany is emphasising productivity and is unwilling to underwrite the debts of other countries, unless and until it is first fully convinced that those countries will achieve or, better still, improve their growth potential.
The other part of the problem is capacity to make and implement decisions at EU level. A currency depends on confidence, and confidence comes from knowing that quick action can be taken in a crisis.
The EU system is designed for deliberative and consensual legislation, not speedy crisis management.
To make decisions, the EU has to bring along countries that are in the euro, countries that are not yet in the euro, and also countries that never want to be in the euro at all but want to share in all the benefits of the single market.
If an unforeseen problem comes up, the EU has to amend its treaties, and that requires ratification in 27 countries (and a referendum in at least one of them!).
Increasingly, because no European leader, like the President of the Commission, has a direct mandate from the European people, the really important decisions are being made by the 27 heads of Government, who each do have such democratic mandates in their own countries.
I believe the crisis is of a seriousness that it requires us to step outside the conventional ways of thinking, and tackle the economic and political problems of Europe together in one package. If necessary, leaders should continue meeting until they have worked out a global blueprint, covering the present banking crisis, the Greek issue, structural reforms to lift growth potential, and enhancing democratic decision implementation. Sometimes, the more issues are in the mix, the easier it becomes to find balancing compromises.
But Germany is being blamed for the unwillingness of the EU and the IMF to sign off on this second bailout , without , what some Greeks see as, humiliatingly detailed assurances that
- the money will be used properly ,
- Greece will adopt specified policies to cut back state spending and raise taxes and that it will
- liberalise its economy, so that it can grow fast enough to be able to repay the extra money it is now to be lent.
The trouble is that Greece has a poor record in presenting honest accounts, and in implementing in practice, changes it has agreed to in principle. The extra assurances are being sought so that more good money is not poured down a black hole along with the debts that are now being partially written off.
Without this loan, Greece would default and it would leave the euro.
In fact, what Germany is really doing is defending the interests of savers, including Greek savers, from what would happen, if Greece defaulted and left the euro. If Greece left the euro, its banks would collapse, and Greeks would see their savings, whether in the form of bank deposit accounts, life assurance policies, or claims on pension funds, disappear.
THE CHOICE FOR GREECE IS BETWEEN PLANNED AUSTERITY, AND SUDDEN INDISCRIMINATE, AUSTERITY
Some argue that “austerity” is a mistake, because the cuts in spending and tax increases dampen confidence so much that the economy stops growing. In the short term, this is true. But those who criticise on that basis, have no realistic alternatives to offer.
Where can Greece get the money on better terms than it is getting from the EU/IMF?
There really is no Keynesian alternative for Greece. The Greek economy is too elderly, too inward looking and too riddled with restrictive practices, to benefit from a Keynesian stimulus, even if someone could be found to finance it. Greece must modernise first. The EU/IMF programme gives it some breathing space (perhaps too little) in which to do that.
Keynesian economics might have been relevant in the 1930s, when the European population was much younger and could respond to an economic stimulus. Europeans today are much older, many are retired, and their priority is saving for their old age, rather than going out shopping in response to a boost in government spending. It is not going to get easier. The age dependency ratio in the EU in 2007 was 25%, by 2050 it will be 50% ! What people are looking for now, is stability.
Greece faces an alternative of two forms of austerity
- austerity through planned cuts and tax increases under the EU/IMF programme or
- austerity through indiscriminate inflation, of the kind that would occur, if Greece left the euro and devalued.
But the price of this inflation/devaluation option would be high. If Greece left the euro, its banks would collapse and the savings of ordinary Greeks, who were patriotic enough to leave their money in Greek banks, would disappear. Inflation is hard to keep in check once it starts, and Greece also lacks big export industries ready to boost exports quickly on the back of a devaluation.
THE REAL POLITICAL DIVIDE………SAVERS VERSUS BORROWERS
It is true that current EU policies are favouring savers over borrowers. This is so because the ECB, unlike the US Federal Reserve and the Bank of England, is not willing to engage in “quantitative easing” ,printing money indiscriminately, to revive the economy temporarily.
It is between savers, who do not want their savings devalued or confiscated, and borrowers, who would like to be allowed to pay back less than they owe.
“ORDINARY PEOPLE”, SOMETIMES THE SAME PEOPLE, ARE ON BOTH SIDES OF THIS DIVIDE
But if borrowers pay back less than they owe, someone somewhere else has to take the hit.
If borrowers are helped by having their debts being written off, or having their debts are devalued by inflation, someone else will lose.
Who would lose?
- The losers would include taxpayers, who now own many of the banks, and who would see the value of those banks go down
- Other losers would be pension funds and insurance companies who own bank shares, and the people who rely on these pension funds and insurance companies to pay their pensions, or insure them against risk.
- Yet other losers would be the people who have deposits in banks, who would see the value of those deposits reduced by inflation, and who could even lose those deposits if the bank collapsed.
Greeks bashing Germans, or all of us bashing bankers, may give emotional satisfaction, but it will not pay our bills.